A look at the 1949 Banking Regulations Act and its revisions

A look at the 1949 Banking Regulations Act and its revisions

An overview of the Banking Regulations act of 1949 and its recent amendments

Banking plays a crucial role in any economy, involving monetary policies and exchanges between various parties in an economic system. So, regulation of such a system becomes even more crucial. This article will be an insight into the banking regulations act of 1949 and the recent amendments made to the act of 1949.

Objective and interpretation of the act:

Before looking into different parts of the banking regulations act, let us understand the main objective, the interpretation, and the applicability of the act.

As per the preamble of the act, the act of 1949 aims to consolidate and amend the laws relating to banking in India, and the same came into force on March 16th, 1949.

Section 2 of the statute states that the 1949 act must be interpreted in conjunction with the Businesses Act of 2013 and any other laws relating to banking companies or banks.

The intention of the legislation is to regulate the functioning of every bank and corporation and make amendments to banking in India.

How does the act classify banks in India?

The act classifies banks into three categories – Nationalized banks, regional rural banks, and any subsidiary banks; Non-nationalized banks; lastly, co-operative banks.

Applicability?

It is important to note that the act of 1949 shall apply to all non-nationalized banking companies except section 56. Similarly, section 51, along with section 3(5) of the banking companies (Acquisition and Transfer of Undertakings) Act, speaks about nationalized banks in India.

Section 56 applies specifically to co-operative banks, which include those present in the state and the union co-operative banks, whose paid-up share capital values more than I lakh rupees.

Meaning of Banking and functioning under the act:

One of the most important provisions under the Banking regulations act of 1949 is the interpretation of the term ‘banking’ and ‘banking company.

When deciding whether or not to classify a business as a bank, three primary criteria must be met.

Section 5(b) denotes the pre-requisites, which include – acceptance of deposits of money from the public, repayment on demand, and withdrawal by cheque, draft, order, or otherwise.

So, any company which transacts the business of banking is a banking company.
Section 6 permits or allows the banks to engage in certain forms of business.

No company other than bank under this act shall use the words such as banker, banking company, or bank as part of the company’s name.

Section 8 prohibits the bank from involving in any trade relating to properties deposited to it, except in the realization of loan amounts, etc.

Control and Management:

We know that RBI plays a major role when it comes to the regulation of banks in India, and the basis of this can be traced from the structure of the banking regulations act.

Few of the provisions under part II of the act place RBI as a regulatory body and give the power of control and management of banks to RBI, including internal matters which might influence the interests of the public or depositors.

Section 10 of the act provides for the appointment of the board of directors to a banking company for which approval is required.

Sections 11 and 12 deal with the requirement of minimum paid-up capital, subscribed capital, and authorized capital of the company, whereas section 12(1)

(i) provides the conditions to be maintained by the banking company.

The act also requires the banks to maintain the cash reserve and the reserve fund. As per section 17, the bank should maintain the reserve fund whose ratio should not be less than 20 percent of the profit earned.

The union government shall set the percent of cash reserve from time to time after RBI’s consultation with respective banks.

Section 21A of the said act states that notwithstanding anything contained in the Usurious Loans Act, 1918 or any other law for the time being in force, the transactions between the banking company and the debtor shall not be re-opened by any court of law on the ground that the rate of interest levied by the bank is excessive.

Section 22 talks about licensing of banks and empowers the Reserve bank of India to take action such as licensing, and closure of banks in case of any actions that contravene the interest of the public, depositors, or the banking system in India.

Also, Section 36AC states that all the actions of the banking company relating to the director’s appointment, etc., under the act of 1949 shall supersede the provisions contained in the companies act, 2013.

Suspension and Winding-up:

Part III of the act deals with the suspension of business and winding-up of the banking companies. Under this part, the High Court of each state shall have the jurisdiction for the purpose of suspension and winding up of the company.

Section 37 states that all the actions or proceedings against the banking company shall have stayed if an application mentioning the inability of the bank is authorized by the RBI.

The court shall grant such a temporary stay only if such an application is accompanied by approval from RBI. Section 38 to 44 provides the option of winding up the company either voluntarily or with the application from RBI stating the actions which are detrimental to the interests of depositors or the public.

Section 44 deals with the voluntary winding up of the company.

Amalgamation and restructuring of banks:

Section 44A and 44B under part 3 talk about the amalgamation or restructuring of the banks and a specific restriction on the compromise between or within the banks.

A recent amendment to the act of 1949:

The most recent amendment bill to further amend the act of 1949 was introduced in the parliament by the ministry of finance on March 3rd, 2020.

The main focus of the bill was to make changes specific to cooperative banks.

Firstly, the bill sought to exclude certain cooperative banks that function as part of the agricultural system from applying this act of 1949.

These banks were required not to use the terms such as banks, bankers, etc. The bill also allows the cooperative banks to issue shares and securities such as bonds and debentures.

It provides superseding power to RBI when it comes to BOD of co-operative banks registered with the registrar of co-operative banks in the state.

Lastly, the bill omits certain provisions such as restrictions on loan advances by any co-operative banks, conditions relating to grants of unsecured loans, etc.

It is important to note that this recent bill was reported to have been withdrawn in the lower house on September 22nd, 2020.