What are the important rules of the Banking Regulation Act, 1949?

Updated on 24.06.2024

The Banking Regulation Act, of 1949 is legislation in India that regulates all banking firms in India. Initially, the law applied only to banking companies. But, in 1965 it was amended to make it applicable to cooperative banks. The Banking Regulation (Amendment) Bill, 2020 amends the BR Act to expand RBI’s regulatory control over co-operative banks in terms of management, capital, audit, and liquidation.

The Act has been divided into five parts comprising 56 sections. The main features of the Act are mentioned below:

1. Section 5(b) of the Banking Regulation Act, of 1949, provides that “banking” means the accepting, for lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, and order or otherwise.
2.  section 5(n) of the Banking Regulation Act, 1949, provides that secured loan or advance means the loans and advances made on the security of assets the market value of which is not at any less than the amount of such loan or advances.
3. Section 6(1) of the Banking Regulation Act, of 1949, provides that a banking company in addition to the business of banking engage in one or more of the following forms of business. (i) Acting as agents for any Government or local authority or any other person (ii) persons or contracting for public and private loans and negotiating and issuing the same or (iii) undertaking and executing trusts.
4. Section 9 of the Banking Regulation Act, of 1949, no banking company shall hold any immovable property howsoever acquired, except for its use for any period exceeding 7 years.
5. Section 11  defines requirements as minimum paid-up capital and reserves.
6. Section 12 provides regulation of paid-up capital, subscribed capital and authorised capital, and voting rights of shareholders.
7. Section 14A (1) of the Banking Regulation Act, 1949, prohibits allowing advance against its own shares.
8. Section 16 of the Banking Regulation Act, 1949, a person is prohibited from being appointed as director of more than one banking company.
9. Section 18(1) of the Banking Regulation Act, 1949 (10 of 1949) read with section 56 thereof,  confers power to the Reserve Bank, to decide the cash reserve ratio to be maintained by the banks.[Cash Reserve Ratio is valued under the method of valuation specified by the Reserve Bank from time to time based on Cash, or Gold valued at a price not exceeding the current market price, or Unencumbered investment in approved securities as defined in section 5(a) of the Banking Regulation Act, 1949 (10 of 1949)].
10. Section 21 provides that RBI has the power to control advances by banking companies.
11. Section 21A provides that rates of interest charged by banking companies are not to be subject to scrutiny by courts.
12. Section 22 defines the procedure for providing licences to banking companies.
13. Section 23 of the Banking Regulation Act, 1949, prohibits banks from opening a new place of business(branches) in India or abroad, change of premises otherwise than within the same city, change otherwise than within the town or village, without prior approval of RBI.
14. Section 26 of the Banking Regulation Act, of 1949 states that every banking company submits an annual return to RBI in respect of all accounts in India which have not been operated upon for 10 years.
15. Section 29 of the Banking Regulation Act, of 1949, states that every banking company is required to prepare its final accounts (Balance sheet and Profit and loss account) in the form prescribed in the third schedule to the Banking Regulation Acts.
16. Section 35B  inserts amendments of provisions relating to appointments of Managing Directors, etc., to be subject to previous approval of the Reserve Bank.
17. Section 35(ii)(b) of the Banking Regulation Act, 1949, confers the right of inspection to be carried out by RBI of branches of Indian banks situated abroad.
18. Section 36AA states the power of the Reserve Bank to remove managerial and other persons from office.
19. Section 36AB states the power of the Reserve Bank to appoint additional Directors
20. Section 36 AD of the Banking Regulation Act, 1949, provides that no person shall (i) obstruct any person from lawfully entering or leaving any office or place of business of a banking company or from carrying on any business there or hold within the office or place of business of any banking company, any demonstration which is violent or which prevents or is calculated to prevent, the transaction of normal business by the banking company or act in any manner circulated to undermine the confidence of the depositors in the banking company.
21. Section 36AE provides the power of the Central Government to acquire undertakings of banking companies in certain cases.
22. Section 37 provides  Suspension of business & Section 38  provides winding up by the High Court.
23. Section 45 provides the power of the Reserve Bank to apply to the Central Government for the suspension of business by a banking company and to prepare a scheme of reconstitution or amalgamation
24. Section 45Y of the Banking Regulation Act, of 1949, provides the rules specifying the period of which a bank may preserve its books, accounts, instruments, documents, etc. are made by the Central Government.
25. Section 45Z (1) of the Banking Regulation Act, 1949, provides that while returning a paid instrument to a customer the bank must retain the true copy of all relevant parts of such instruments.
26. Section 45ZA provides rules for  Nomination for payment of depositors’ money.
27. Section 45ZB provides procedures of notice of claims of other persons regarding deposits not receivable.
28. Section 45ZC provides rules for Nomination for the return of articles kept in safe custody with the banking company.
29. Section 45ZE provides the procedure for the release of contents of safety lockers.
30. Section 45ZF  provides procedures of notice of claims of other persons regarding safety lockers not receivable.
31. Section 56: No co-operative society other than a co-operative bank shall use as part of its name or in connection with its business any of the words “bank”, “banker” or “banking”, and no co-operative society shall carry on the business of banking in India unless it uses as part of its name at least one of such words.

Key Features of Banking Regulations (amended) Bill  of 2020

The Banking Regulation (Amendment) Bill, 2020 amends the BR Act to expand RBI’s regulatory control over co-operative banks in terms of management, capital, audit, and liquidation.   While introducing the Bill, the Finance Minister discussed the need for the Bill to protect depositors’ interests, highlighting the crisis in the Punjab and Maharashtra Co-operative (PMC) Bank.  The Bill replaces the Banking Regulation (Amendment) Ordinance, 2020 promulgated on June 26, 2020.[5]  A Bill, seeking to make similar changes, was introduced on March 3, 2020, and withdrawn on September 14.

The Act gives 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. In 1965, the Act was revised to incorporate cooperative banks under its domain by adding Section 56. Cooperative banks, which work just in one state, are shaped and run by the state government. Yet, RBI controls the permitting and directs the business operations. The Banking Act was an enhancement to the past acts connected with banking.

Key Features :

The Bill makes two kinds of changes: (i) extending previously omitted provisions of the BR Act to cooperative banks, and (ii) amendments to certain provisions of the Act that apply to all banks.

Co-operative banks are exempted from several provisions of the Banking Regulation Act, of 1949.  The Bill applies some of these provisions to them, making their regulation under the Act similar to that of commercial banks.

​Co-operative banks may raise equity or unsecured debt capital from the public subject to prior RBI approval.

RBI may prescribe conditions on and qualifications for employment of Chairman of co-operative banks.  RBI may remove a Chairman not meet ‘fit and proper’ criteria and appoint a suitable person.  It may issue directions to reconstitute the Board of Directors to ensure a sufficient number of qualified members.

RBI may supersede the Board of Directors of a cooperative bank after consultation with the state government.

The Bill allows RBI to undertake reconstruction or amalgamation of a bank without imposing a moratorium.

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