BCom 3rd Year Indian Banking Legislation Regulation Act 1949 Study Material notes In Hindi
Table of Contents
BCom 3rd Year Indian Banking Legislation Regulation Act 1949 Study Material notes In Hindi: Brief History of banking Legislation India Banking Regulation Act 1949 Special Powers of Reserve Bank Important Amendments Exercise Questions Long Answer Questions Short Answer Questions Objective Type Correct Option :
BCom 3rd Year Nature Importance Financial Money Study Material notes in Hindi
INDIAN BANKING LEGISLATION: BANKING REGULATION ACT, 1949
Just as human life passes through the phases of birth, childhood, adolescence, youth, old age and death; similarly a country is under-developed in its initial phase and then becomes developing and finally comes in the category of developed countries. These days banks play a vital role in the development of developing and developed countries.
However the banking sector is the service sector, but it works on the basis of people’s money and faith, There is a need of the legal support for acquiring people’s support in any field. The history of banking in India is old but the case is not so in the matter of banking regulation. In the beginning, there was no interference from the government in the banking system. So the native bankers used to operate banks according to their own choices. Many banks collapsed from time to time and it attacked people’s faith. Moreover, there was no expansion of banking system. In this condition there was the need of the government interference as it took place in many other countries. By the passage of time, banking regulation developed in India too.
BRIEF HISTORY OF BANKING LEGISLATION IN INDIA
The Banking Sector faced many problems in the beginning of the 20th century. Many banks collapsed leaving people frustrated. Then a need for the banking regulation by the government was felt in India too. Consequently, in the Indian Companies Act of 1913 some regulations regarding banks were included with those of other companies. But this regulation was not so strong that it could have a complete control on the banking system. Many economists suggested the need of making separate regulation for the banking companies but there was no interest shown by the government. Again in the light of the report of Central Banking Enquiry Committee set in 1929, the Reserve Bank of India Act was passed in 1934 and Indian Companies Act, 1913 was amended and Indian Companies Act, 1936 was passed. Sections were added to it. It was expected from this section that the banking sector would be fully controlled, but it didn’t happen so. The Reserve Bank of India put a proposal before the government of India in 1939 that a separate banking Companies Act should be made for a strong banking system in the country. But due to the onset of the Second World War, the government could not consider the proposal. Some amendments were made in the Companies Act in 1942 and 1944 and some more sections were
Indian Banking Legislation : Banking Regulation Act, 1949 69 dded to it. These amendments increased the jurisdiction of the RBI and the control of banks came under it. Through an ordinance in 1966, the RBI was
ven the right that the scheduled banks neglecting the rules should be outlisted. the country got independence in 1947 and in March, 1948 the Banking Companies Act, 1949 was presented before the Constituent Assembly and it was passed.
Indian Banking Legislation Regulation
BANKING REGULATION ACT,
1949 Banking Regulation Act came was implementated on 16th March, 1949 in the form of Banking Companies Act, 1949. Again on 1st March, 1966 through an amendment it was renamed as Banking Regulation Act, 1949. Its detailed knowledge can be obtained by the study of its different sections. Some important sections can be described as follows:
(1) Definition of Banking: According to Section 5(i)(b) of the Act, Banking! refers to accepting demand deposits from people with the objective of granting credits or investing and paying demand deposits through cheques, drafts or any other modes as and when demanded. According to this Article 5(i) (c), A Banking Company refers to such a company that performs the banking business.
(2) Banking Business : In different sub-sections of the section 6 of the Banking Regulation, there is description of business to be performed and not to be performed by the banks. It is said in the section 6(1) that the business of banking companies include accepting deposits, advancing loans, providing locker facilities, issuing letters of credit and issuing travelers cheque etc. In section 6 (2) it is said that any banking company can’t perform the tasks which are not mentioned in the section 6(1).
(3) Bank, Banking and Banking Company: It is said in Section 7 that a company dealing in banking business must use one term out of Bank, Banking and Banking Company with its name.
(4) Prohibited Functions: In section 8 and 9 those jobs are mentioned which are prohibited for banks. According to section 8, a bank can’t be involved in sale and purchase of goods. Similarly, according to section 9 any bank can’t retain the non-usable immovable property for more than 7 years without the prior permission from RBI. The RBI can extend this period up to 5 years.
(5) Prohibition of Employment of Managing Agents : According to section 10(1), no banking company shall employ or be managed by a managing agent or shall employ or continue the employment of any person (I) who is, or at any time has been, adjudicated insolvent or, has suspended payment or, has compounded with his creditors or who, is or has been cnvicted by a criminal court of an offence involving moral turpitude; or If whose remuneration or part of whose remuneration takes the form of commission or of a share in the profits of the company. According to section 10(c), a chairman of the board of directors who is appointed on a whole time basis or a managing director of a banking (by whomsoever designation he is appointed) and a director of a banking company (appointed by RBI under section 10(A) shall not be required to hold qualification shares in the banking company.
(6) Minimum Paid-up Capital and Reservers: According to the Section 11 of the act if the offices/branches of the bank in more that one states excluding Kolkata and Mumbai. If the offices/branches of the bank are in Kolkata or Mumbai or both the places the minimum amount of capital and reserves should be rupees 10 lakhs. Similarly, every foreign bank, having branches in India should have 15 akns and 20 lakhs rupees as the amount of capital and reserve in the above mentioned conditions.
(7) Regulation of Paid-up Capital, Subscribed Capital and Authorised Capital: According to the Section 12 of the Banking Regulation Act a bank can operate only when its subscribed capital is not less than half of the Authorised and the paid up capital is not less than half of the subscribed capital. Among the shares, only ordinary or equity shares have been considered. About preference shares it has been said that these shares have been issued before 1 July, 1944
(8) Commission Brokerage and Discount on Sale of Shares : It is mentioned in the section 13 of the Act that any banking company can’t give more than 2.5 percent of the paid up capital of its shares directly or indirectly as commission, brokerage, concession or wages.
(9) Reserve Fund : According to the Section 17 of the Act every banking company incorporated in India must keep 20 percent of its net profit in Reserve Fund.
(10) Power of Reserve Bank of India to Control Advances : According to the section 21 of the RBI has been authorised to keep an eye on advances granted by other banks. The RBI can ban advances if it is not satisfied.
(11) Licensing of Banking Companies : According to section 22 of the Act any banking company can’t start its function unless it takes the letter of permission from the RBI in this regard. The Banking Company has to apply to the RBI for this.
(12) Restriction on Opening of New Office of the Bank: According to section 23 of the Act any bank can’t open a new branch at any place in India and abroad. It can’t even transfer its branch office from one place to another without the prior permission. The objective of RBI behind it is to check the unnecessary competition among banks.
(13) Assets in India : Accroding to section 25, the assets in India of every banking company at the time of closing of the business on the last Friday of every quarter or if that Friday is a public holiday under the negotiable act, 1881, shall not be less than 75 percent of its demand and time liabilities in India. It has been essential for the banks in this Act that they should submit the details in this regard on the prescribed format before the RBI within one month from the end of every quarter.
(14) Profit & Loss Account and Balance Sheet: According to the Section 29 of the Act it is essential for every bank to prepare a Profit & Loss Account and Balance Sheet at the end of the calendar year or on a particular date at the end of the 12 months as decided in the Gazetteer of the Central government for this consideration. Profit & Loss Account and Balance Sheet have to be prepared on prescribed formats only.
(15) Audit: According to the section 30 of the Act, the Profit and Loss Account and Balance Sheet prepared according to the section 29 have to be audited by a capable person. The Auditor has been given so many rights in this regard.
(16) Copies of Balance Sheet and Profit and Loss Account to be sent to Register : It is the provision in the section 32 of the Act, where a banking company in any year and balance sheet in accordance with the provision of section 31, it shall at the same time sent to the Registrar three copies of such accounts and balance sheet and of the Auditors report, and where such copies are so sent, it shall not be necessary to file with the register in the case of a public company, copies of the balance sheet and the auditors ren by some section (1) of section 220 of the companies Act 1956.
(17) Inspection of Banks : In the Section 35 of the Act, of RBI has been diven right that it can inspect the accounts of any bank. If the RBI is dissatisfied with any account or working-system, it can instruct the bank to make necessary
(18) Appointment of Additional Directors: According to the Section 36 (ab) of the Act, the RBI has the right that it can appoint additional directors from time to time in the interest of the people or the banking company, the RBI can appoint one or more directors, but this appointment will be for the maximum period of three years.
(19) Liquidation of Banks : According to the section 39 of the Act if a bank loses its ability of paying its liabilities, the RBI can apply to the court for the permission for its liquidation. After getting the permission from the court, the RBI can carry on the process of liquidation.
(20) Power of Central Government: According to the Section 52 of the Act, the Central government retains the right of making rules and regulations for every aspect of the Reserve Bank of India. The Central government publishes these rules in official gazette also.
SPECIAL POWERS OF RESERVE BANK
In the other sections of the Banking Regulation Act, the Reserve Bank has been given certain privileges. Some of these are :
(1) It retains the all rights to accept or reject the scheme of integration/ merging of banks. Court also accepts such schemes only after the Reserve Bank has accepted it.
(2) With the objective of controlling and monitoring other banks the Reserve Bank of India can make enquiry into different matters from time to time and can give proper directions if it considers it essential.
(3) The Reserve Bank can allow any bank to keep immovable property for more than 10 years.
(4) It can warn banking companies in a general way against specific practice(s).
(5) If the RBI considers it proper it can instruct any banking company to call a meeting of directors to consider the issues related to banking companies.
(6) It can instruct an officer/official/authority to held discussion with an officer/official/authority of the RBI.
(7) The RBI can give the responsibility to its one or more officials to observe the business practices or office management of a banking company and submit its report.
(8) The RBI reserves the right of controlling the loans and advancing policies of all the banks.
(9) The RBI can instruct a bank to change the management or close its business if it finds its financial and working condition dissatisfactory.
(10) The RBI reserves the right to formulate laws and ask the banks accept them with regard to the appointment and salaries of the senior officials of banks.
IMPORTANT AMENDMENTS
Many amendments have been made in the Banking Regulation Act from time to time. Some important amendments are as follows:
(1) Amendment in the Reserve Bank of India Act, 1963: Through this amendments, Non-banking and financial institutions have been brought under the control of the RBI. It is worth mentioning here that non-banking institutions are that which accept deposits from people but don’t grant loans. On the other hand financial institutions are those which accept deposits from people and grants should not accept Regulation Act, the Banking loan to traders and entrepreneurs/industrialist on the basis of certain bonds. After this amendment the RBI instructed non-banking companies on 7th January 1966 that they should not accept ‘Deposits Repayable on Demand’ from public.
(2) Amendment in Banking Regulation Act : The Jurisdiction of the RBI has been widened after the amendment of 1963 in the Banking Regulation Act with the objective of controlling the commercial banks. According to this amendment :
(i) The unsecured Loans which were given by the commercial bank to their directors has been restricted now.
(ii) Any shareholder of a commercial bank has been prevented from the right of casting more than 1 per cent of some voting.
(iii) The RBI can remove any director or official on the basis of proper reasons.
(iv) The RBI can appoint some additional directors on its will in any commercial bank.
(3) Banking Regulation Act, 1965 : According to this act it was proposed that State Cooperative banks should be included in the second schedule. So, according to this act state cooperative banks will also get facilities similar to scheduled banks.
(4) Amendment of Reserve Bank of India Act, 1974: After getting the acceptance of the President for the Reserve Bank of India (Amendment) Act, 1974 it took the form of the law. According to the amendment:
(i) To grant refinance to the scheduled banks and state cooperative banks the juridiction of RBI was widened.
(ii) Changes were made in the rules related to bonds of note issuing department.
(iii) The Scope of RBI was increased to look into the deposits from the public by non-banking companies.
(5) Banking Regulation (Amendment) Act, 1983: Following things were included in this Amendment Act :
(i) Statutory Liquidity Ratio of the Reserve Bank of India was raised from 25 per cent to 40 per cent.
(ii) The provision of penalty was made for the scheduled banks failing in maintaining a fixed legal Liquidity Ratio.
(iii) The rule related to giving nomination facilities related to the acounts of the account holders were made.
(iv) Following the limits of deposits accepted from private individuals and firms as determined by the government.
(6) Amendment in State Bank of India Act: By issuing an ordinance in October, 1993, in the State Bank of India Act the List price of every share ws reduced from 100 to 10. The restriction of possessing 200 shares per person was removed. At the same time, the limitation of voting was raised from 1 percent to 10 percent.
(7) Banking Regulation (Amendment) Act, 2003 : The Finance Minister presented an ordinance in the parliament on 13th August, 2003 for the amendment of Banking Regulation Act. After the passing of this ordinance the regulating powers of the Reserve Bank increased. According to this amended Act, like other banks, co-operative banks also came under the direct control and supervision of the RBI. The governor of the RBI has got the authority of removing the chairpersons of co-operative banks on finding mismanagement in their functionary.
DRAWBACKS OF INDIAN BANKING LEGISLATION
There have been many reforms in the banking management after the mation of banking regulation act. There have been many amendments in is act after the finding of drawbacks. But still there are some shortcomings. emain drawbacks of the Indian Banking Regulation are as follows:
(1) Lack of Control on Indigenous Banks : The major portion of the edit in the country is met by the native bankers, but the RBI has no control er them. That is why the credit control policy of the RBI doesn’t become much Successful .
(2) Lack of Control to Co-operative Banks : The work culture of cooperative bank is getting closer to the work culture of commercial banks. But there is not similar control over these two.
(3) Centralisation of Banks in Urban Areas : There is no satisfactory policy regarding the centralisation of banks in the urban and industrialised areas. This increases competition among banks on the one hand, and on the other hand there is no full justice with rural areas.
(4) Definition of Banking: Some critics held that there should be change in the definition of Banking and a banking code should be determined including all the institution accepting deposits.
Conclusion : It is true that there has been much improvement in the banking management in India after the formation of Banking Regulation Act. The shortcomings of this act are being removed one by one through amendments. There is a need of paying attention to those drawbacks that still persist. For a healthy banking an awareness of banking management is needed because instead of good laws, good management will lead to the development of banks and it would be in the interest of the nation.
Indian Banking Legislation Regulation
EXERCISE QUESTIONS
Long Answer Type Questions
1. Write a brief history of Banking Legislation in India.
2. Explain the important Provisions of Banking Regulation Act, 1949.
3. Explain the important Amendments of Banking Regulation Act, 1949.
4. Explain the special powers of Reserve Bank in Indian Banking Legislation.
Short Answer Type Questions
Write short notes on the following:
1 Banking Business.
2. Minimum Paid-up Capital.
3. Drawbacks of Indian Banking Legislation.
4. Banking Regulation (Amendment) Act, 1983.
Indian Banking Legislation Regulation
III. Objective Type Questions
Choose the correct option
1 Banking Companies Act was implemented in:
(a) March 1934
(b) March 1949
(c) March 1954
(d) March 1959
2. Banking Companies Act, 1949 was renamed Banking Regulation Act, 1949 in:
(a) March 1961
(b) March 1963
(c) March 1966
(d) March 1974
3. The First Banking Act was passed in India in :
(a) 1929
(b) 1934
(c) 1949
(d) 1954
4. According to which Section of the Banking Companies Act, 1949 a Compar performing the banking business must use the term ‘Bank’, ‘Banking’, ‘Banki Company with its name?
(a) Section 5
(b) Section 7
(c) Section 8
(d) Section 9
5 According to Section 12, the Subscribed Capital should be………….per cent of Authorised Capital.
(a) Minimum 50
(b) Minimum 25
(c) Minimum 20
(d) No
6. According to Section 12 the paid-up capital should be………..per cent of a ban Subscribed capital.
(a) 100
(b) 50
(c) 40
(d) 25
7. A bank can grant a maximum of………. per-cent of the paid-up capital of its shares
commission on sale, brokerage or concession.
(a) 2
(b) 2.5
(c) 3
(d) 5
(Ans. : 1. (b), 2. (c), 3. (C), 4. (b), 5. (a), 6. (b), 7. (b).]
State whether the following statements are True or False :
1. Banking companies Act, 1949 was renamed as Banking Regulation Act, 1949 1st March, 1966 through an amendment.
2. Reserve Bank has the special right to accept or reject the scheme of merging ban
3. Reserve Bank of India Act was passed in 1935.
4. For a banking company audit of its books and accounts is not compulsory.
5. According to Banking Regulation Act, 1949 every banking company incorporated India must keep 20 percent of its not Profit Reserve Fund.
[Ans. : 1. True, 2. True, 3. False, 4. False, 5. False.)
Indian Banking Legislation Regulation
