Principal Provisions of the Banking Regulation Act, 1949

Restriction on Business

The Banking Regulation Act 1949 imposes certain restrictions on the business of a banking company. These are as follows:

• No banking company shall directly or indirectly deal in the buying, selling or bartering of goods, except in connection with the realisation of security given to or held by it;

• No banking company can engage in any trade, or buy, sell or barter goods for others otherwise than in connection with bill of exchange, received for collection or negotiation or such of its business or is referred to in clause (i) of sub-section (I) of section 6.

Non-banking Assests (Section 9)

Non banking assets are the assets acquired in satisfaction of claims. According to Section 9 “A banking company cannot hold any immovable property how so ever acquired, except for own use, for any period exceeding seven years from the date of acquisition thereof . The company is permitted, within the period of seven years, to deal or trade in any such property for facilitating its disposal.” Of course, the Reserve Bank of India may, in the interest of depositors, extend the period of seven years by any period not exceeding five years.

Management (Section 10)

Section 10(a) states that not less than 51% of the total numbers of the Board of Directors of a banking company shall consist of persons who have special knowledge or practical experience in one or more of the following fields:

(a) Accountancy (b) Agriculture and Rural Economy (c) Banking (d) Co-operation (e) Economics (f) Finance (g) Law (h) Small Scale Industry

Minimum Capital and Reserves (Section 11)

As per the provision of Section 11(2) of the Banking Regulation Act, 1949, the aggregate amount of Paid-up Capital and Reserves of a banking company incorporated outside India shall not be less than Rs.15 lakhs, and if it has a place or places of business in the city of Bombay or Calcutta or both, then it shall not be less than 20 lakhs of rupees. It is also stated that such sum and 20% of the profit of each year shall be kept deposited with Reserve Bank of India in cash or in the form of unencumbered approved securities, or partly in the form of such securities.

However, in case of a banking incorporated in India, the aggregate value of capital and reserve shall not be less than the stated amounts according to the places of business. The provisions may be clear from the following diagram.

Capital Structure (Section 12)

According to Section 12, no banking company can carry on business in India, unless it satisfies the following conditions:

• Its subscribed capital is not less than one-half of its authorised capital, and its paid-up capital is not less than one-half of its subscribed capital.
• Its capital consists of ordinary shares only or ordinary and such preference shares as may have been issued prior-to 1st April 1944. This restriction does not apply to a banking company incorporated before 15th January 1937.
• The voting right of any share holder shall not exceed 5% of the total voting right of all the share holders of the company.

Restriction on Commission Brokerage, Discount etc.
on Sale of Shares (Section 13)

No banking company shall payout directly or indirectly by way of commission, brokerage, discount or remuneration in any form in respect of any shares issued by it, any amount exceeding in the aggregate two and one-half percent, of the paid up value of the said shares.

Restriction on Payment of Dividend (Section 15)

No banking company shall pay any dividend on its shares until all its capitalised expenses (including preliminary expenses, organisation expenses, share-selling commission etc.) have been completely written off.

However a banking company may pay dividends on its shares without writing off:

• the depreciation if any, in the value of its investment in approved securities in any case where such depreciation has not actually been capitalised or otherwise accounted for as a loss.
• the depreciation, if any, in the value of its investments in shares, debentures or bonds (other than approved securities) in any case where adequate provision for such depreciation has been made to the satisfaction of the auditor of the banking company;
• the bad debts, if any, in any case where adequate provision for such debts has been made to the satisfaction of the auditors of the banking company.

Statutory Reserve (Section 17)

Every banking company incorporated in India shall create a reserve fund and transfer to it atleast 20% of its annual profit as disclosed in the Profit and Loss Account prepared under Section 29 and before any dividend is declared. The Central Government may, however, on the recommendation of Reserve Bank of India exempt it from this requirement for a specified period. The exemption is granted if its existing reserve fund together with share premium account is not less than its paid-up capital.

Cash Reserve (Section 18)

Every bank, not being a scheduled bank, has to maintain a cash reserve of atleast 3% of the total of its demand and time liabilities in India as on last Friday of the second proceeding fortnight. The Reserve Bank has the power to regulate the percentage between 3% and 15% (in case of scheduled banks). The cash reserve can be maintained in cash by itself or in current account with Reserve Bank of India or the State Bank of India or any other bank notified by the Central Government in its behalf.

Restrictions on Loans and Advances (Section 20)

No banking company shall -

• grant any loans or advances on the security of its own shares, or
• enter into any commitment for granting any loan or advance to or on behalf of -

1. any of its directors
2. any firm, in which any of its directors is interested as partner, manager, employee or guarantor, or
3. any company of which any of the directors of the banking company is a director, managing agent, manager, employee or guarantor or in which he holds substantial interest or
4. any individual, in respect of whom any of its directors is a partner or guarantor.