Banking Regulation Act 1949

Banking Regulation Act 1949

Introduction:

  • The Banking regulation act came into existence in 1949. This act contains two categories of provisions –a) built in safeguards and b) power and consequential functions and responsibilities of the reserve bank of India. The other important provisions were pertaining to the suspension of business by and winding up of the business. 
  • The first provision namely of built-in safeguard was related to the organization, management and operation of a banking company. The second provision was related to the power and functions of RBI. 

Objectives:

The objective of this act is as follows—
  • The provisions of companies’ act 1913 were unsatisfied and inadequate to regulate banking companies in India. So, a need for the special legislation which was going to regulate banking business in India came up. 
  • Due to inadequate capital many banks became failed and hence the banking regulation act brought out the minimum capital requirements for banks. 
  • The one important objectives of this act were to avoid cut-throat competition and regulated the opening of new branches and changing the location of existing branches. 
  • This act had ensured the balanced development of banking companies’ by the system of licensing which would lead to preventing indiscriminate opening of new branches. 
  • This act had provided powers to RBI to appoint, reappoint and removal of chairman of the RBI which would lead to ensure the smooth and efficient functioning of banks in India. 
  • This act was a provider of compulsory amalgamation of weaker banks with senior banks. 
  • This act had introduced some provision for foreign banks to restrict in investing funds of Indian depositors outside India. 
  • This act had provided easy and quick liquidation of banks when they were unable to continue or amalgamate with other banks. 

Important Provision: 

Organisational Safeguard: The business of banking company might be engaged in any one or more of following forms of business:----
  • The borrowing, raising and taking up of money; the lending or advancing of money; the drawing, making, accepting, discounting, buying, selling and discounting of bills of exchange, hundis, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scripts and other instruments; the granting and issuing letter of credit, travelers’ cheques and circular notes. 
  • Acting as an agent for any government or local authority or any other persons. 
  • Contracting for public and private loans and negotiating and issuing the same. 
  • Carrying on and transacting every kind of guarantee and indemnity business. 
  • The guaranteeing, underwriting, participating in managing and carrying out of any issue, private/public of state or municipal or other loans or of shares, debentures, stocks of any corporation, company or association and the lending of money for the purposes of any such issue. 
  • Managing, selling and realizing of any property which may come into possession of the company in satisfaction of any of its claims. 
  • Acquiring, holding and generally dealing with any property or right, title or interest in any such property which may form the security for any loans and advances. 
  • Undertaking and executing trusts. 
  • Establishing and supporting or aiding in the establishment and support of association, institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees of the company or the dependents or connections of such persons; granting pensions and benevolent objects or for any exhibition or for any public, general or useful object. 

Disposal of Non- Banking Assets:

The banking company should not hold any immovable property except such as it was required for its own use, for any period exceeding 7 years from the acquisition or from the commencement of this act, whichever is later. And such property should be disposed of within the stipulated period. The banking company have to be traded in any such property for the purpose of facilitating the disposal thereof within the period of seven years. The RBI could also extended that seven years period into not exceeding five years period in which that extension should be in the interest of depositors’ of the banking company.

Restriction on Nature of Subsidiary Companies:

A bank should not form any subsidiary company except a subsidiary company formed for one or more of the following purposes namely--- 
  • the undertaking of any business, 
  • with the prior permission in writing of the RBI, the carrying of the business exclusively outside India, 
  • the undertaking of such other business in which the reserve bank might with prior approval of the central government. The banking company should not hold shares in any company as pledgee, mortgagee or absolute owner of an amount exceeding 30% of the paid-up share capital of that company or 30% of its own paid up share capital and reserves whichever is less. 

Operational Safeguard:

Operational safeguard are as follows: --
  • Maintenance of cash reserves assets in India, 
  • Grant of unsecured loans and advances and
  • Opening of new branches. 

Unsecured Loans and Advances:

The banking company should grant loans and advances against the security of its own shares or of any specified types or writing offer remitting advances. The banking company should not allow unsecured loans and advances to its directors, to firms in which that director was a partner or guarantor, a private limited company in which a director is managing, agent or guarantor, to any company in which the chairman of that company is a chairman or managing director or managing agent or partner of such company.


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