Banking Regulation Act of India
The Banking Regulation Act 1949 (the Act) is the primary legislation governing the banking sector in India. The Act provides the framework for regulation and supervision of banks in India. It aims to consolidate and amend the laws relating to banking. The Act is divided into four parts.
Part I contains general provisions relating to incorporation, regulation and supervision of banks. It also provides for the reserve bank’s powers to inspect banks, call for information and to direct the manner in which a bank is to be managed.
Part II contains banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and provides for the transfer of the undertaking of a banking company to another banking company.
Part III contains reserve bank of India (Transfer of Undertaking and Repeal) Act, 2003 and provides for the repeal of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.
Part IV contains the Miscellaneous provisions and repeals certain enactments.
The Banking Regulation Act, 1949 was enacted to consolidate and amend the laws relating to the regulation of banking in India. The Act provides for the reserve bank’s powers to inspect banks, call for information and to direct the manner in which a bank is to be managed. The Act also provides for the registration of banks, the minimum paid-up capital and reserves, the prudential ratios to be maintained by banks, the manner of conducting business by banks, restrictions on loans and advances, and inspection of banks by the Reserve Bank.
The Act defines a banking company as a company which transacts the business of banking which means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdraw-able by cheque, draft, order or otherwise.
A banking company may be either a scheduled bank or a non-scheduled bank. A scheduled bank is a bank included in the Second Schedule to the Reserve Bank of India Act, 1934. As on March 31, 2020, there were 27 public sector banks, 31 private sector banks, 45 foreign banks, and 56 regional rural banks in India which are scheduled banks.
A non-scheduled bank is a banking company which is not a scheduled bank. As on March 31, 2020, there were 715 non-scheduled commercial banks in India.
The business of banking is regulated by the Banking Regulation Act, 1949. The regulation and supervision of banks in India is vested in the Reserve Bank of India (RBI). The RBI is empowered to issue directives to banks from time to time and also to inspect the banks.
The objective of the Act is to ensure the safety and soundness of the banking system in India and to protect the depositors. The Act lays down the Prudential Regulations for banks which are to be followed by banks while carrying on their business.
The Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital to its risk-weighted assets. The CAR is a measure of a bank’s financial strength and its ability to absorb losses. As per the Basel III norms, the minimum CAR for a bank is 8%.
The CRAR is the ratio of a bank’s capital to its risk-weighted assets. The CRAR is a measure of a bank’s financial strength and its ability to absorb losses. As per the Basel III norms, the minimum CRAR for a bank is 10%.
The Reserve Bank of India has issued guidelines on capital conservation buffers (CCBs) and countercyclical buffers (CCBs) for banks in India. The CCB is to be maintained by banks over and above the minimum CAR of 8%.
The CCB is to be utilized by banks during periods of stress to maintain the CAR above the regulatory minimum. The CCB is to be maintained in the form of Common Equity Tier 1 (CET1) capital. CET1 capital is the core capital of a bank consisting of equity and retained earnings. As on March 31, 2020, the CCB for banks in India was 2.5%.
The objective of the Act is to promote the orderly growth of the banking sector in India and to ensure the safety and soundness of banks.
10 important topics to study in “Banking Regulation Act”.
The Banking Regulation Act 1949 is an Act of the Parliament of India enacted to regulate banking firms in India. The Act is divided into two parts. Part I of the Act contains preliminary provisions and defines certain important terms used in the Act. Part II of the Act contains provisions regarding licensing and registration of banking Companies, professional misconduct, penalties and liquidation.
1. Appointment of Directors: The Act requires that at least half of the directors of a banking company must be resident in India.
2. Limitation on Shareholding: The Act prohibits any person from holding shares in a banking company if the total value of the shares exceeds 10% of the paid-up capital of the banking company.
3. Issue of Extraordinary Shares: The Act empowers the Reserve Bank of India to direct a banking company to issue extra-ordinary shares to the Central Government if the Reserve Bank is of the opinion that it is necessary to do so in the public interest.
4. Prohibition on Paid-up Capital: The Act prohibits a banking company from accepting deposits if its paid-up capital is less than Rs. 5 lakhs.
5. Reserve Bank of India to be Informed of Changes in Shareholding: The Act requires a banking company to intimate the Reserve Bank of India of any change in the shareholding which results in any person holding shares in excess of the prescribed limit.
6. Maintenance of Liquid Assets: The Act requires every banking company to maintain a certain percentage of its total demand and time liabilities in the form of cash, gold or unencumbered approved securities.
7. Creation of Charged on Assets: The Act empowers the Reserve Bank of India to direct a banking company to create a charge on its assets in favour of the Reserve Bank for the purpose of securing the repayment of any money borrowed by the banking company from the Reserve Bank.
8. Appointment of Statutory Auditors: The Act requires every banking company to appoint a statutory auditor who shall hold office for a term of three years.
9. Submission of Annual Accounts and Balance Sheets: The Act requires every banking company to submit to the Reserve Bank a copy of its balance sheet and profit and loss account, duly audited by the statutory auditor, within two months of the close of every financial year.
10. Provision for Inspection: The Act empowers the Reserve Bank of India to appoint inspectors for the purpose of investigating the affairs of a banking company.
