Background and Structure of the Banking Regulation Act 1949

The banks in India were governed under the provision of the Indian Companies Act 1913. The act was found inadequate and unsatisfactory to regulate banking companies in India. Many banks have failed due to inadequacy of capital and a need was felt to prescribe a minimum capital requirement for banks. As there was no licensing system for opening bank branches and changing the location of existing branches banking companies were indiscriminately opening and shifting branches in a cutthroat competition among them. Therefore a need was felt to have specific legislation having comprehensive coverage of banking business in India to safeguard the interest of the depositors and to control the abuse of powers by controlling the banks by any means necessary and to the interest of the Indian economy in general.

The Government legislated the Banking Companies Act of 1949, to enable the Reserve Bank to regulate, licence, and manage financial institutions in India to guarantee their seamless and effective operation Passed as the Banking Companies Act 1949, it came into force on 16 March 1949 to safeguard the interest of bank customers and the general public. The Banking Companies Act was later renamed the Banking Regulation Act 1949 from 1 March 1966. The act was initially applicable to the whole of India except Jammu & Kashmir. It became applicable to Jammu and Kashmir in 1956.  In 1965, certain provisions of the Banking Regulation Act, 1949 (BR Act) were made applicable to cooperative banks. This gave the Reserve Bank of India (RBI) some powers to regulate cooperative banks. This was done to protect the interests of depositors and extend deposit insurance coverage to these banks. In 2020 it was amended to bring the cooperative banks under the supervision of the Reserve Bank of India. RBI may supersede the Board of Directors of a co-operative bank after consultation with the state government. The Bill allows RBI to undertake reconstruction or amalgamation of a bank without imposing a moratorium.

The Banking Regulation Act provides controlling authority to the Reserve Bank of India (RBI) the ability to permit banks, have regulation over shareholding and casting ballot rights of investors; oversee the arrangement of the sheets and the board; manage the activities of banks; set down guidelines for reviews; control ban, consolidations, and liquidation; issue mandates in light of a legitimate concern for public great and on banking strategy, and force punishments.

The Banking Regulation Act, of 1949 empowers the Reserve Bank of India to inspect and supervise commercial banks. These powers are exercised through on-site inspection and off-site surveillance. The Banking Regulation Act brought in certain minimum capital requirements for banks. The act protects the interest of depositors and the public at large by incorporating certain provisions, viz. prescribing cash reserve, and statutory liquidity reserve ratios. This enables banks to meet the demands of depositors. Further, banks cannot open new branches or shift branch premises indiscriminately without permission from RBI. The act also assigns power to RBI to appoint, reappoint, and remove the chairman, director, and officers of the banks. This could ensure the smooth and efficient functioning of banks in India. Compulsory amalgamations are induced or forced by the Reserve Bank, under Section 45 of the Act, in the public interest, or the interest of the depositors of a distressed bank, or to secure the proper management of a banking company, or in the interest of the banking system. Minimum capital (Section 11): Section 11 (2) of the Banking Regulation Act, 1949, states that no bank will initiate or carry on business in India, except if it has the least settled up capital and money held endorsed by the RBI. The licences of weak banks may be canceled when they are unable to continue further or amalgamate with other banks.

To strengthen the corporate governance and internal control function in the banks, several steps have been initiated by the Reserve Bank of India. Introduction of a concurrent audit system, the constitution of an independent audit committee of the board, the appointment of RBI nominees on boards of banks, creation of a post of a compliance officer, such are some steps. Besides, the Reserve Bank monitors the implementation of recommendations of the Jilani Committee relating to internal control systems in banks on an ongoing basis during the annual financial inspection of banks.

The Reserve Bank has taken several other supervisory policy initiatives. These include quarterly monitoring visits to banks displaying financial and systemic weaknesses, appointment of monitoring officers, and direct monitoring of certain problem areas in housekeeping. In addition, the department provides secretarial support to the Board for Financial Supervision and acts as its executive arm. It is the BFS that evolves policies relating to supervision. It also attends to the appointment of statutory central auditors/branch auditors for all banks, selected all Indian financial institutions, and complaints against banks. The department monitors cases of fraud perpetrated in banks and reports to it.

Based on the recommendations made by an in-house group, the monitoring of the financial institutions first started after 1990. This was done through prescribed quarterly returns on liabilities/assets, source and deployment of funds, etc. The objective of this monitoring was to obtain a macro-level perspective for evolving monetary and credit policy, to assess the financial system’s quality of assets, and to improve coordination between banks and FIs. In 1994, these institutions were brought under the prudential regulation of the Reserve Bank.

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