Bank Regulatory

Environment in India
Relevant provisions of the Banking Regulation Act, 1949
• In India there was till 1949 no comprehensive legislation governing
banking business and banking institutions. The Central Legislature
enacted the Banking Companies Act of 1949 (later called 'The Banking
Regulation Act') to consolidate and amend the law relating to certain
matters concerning banking.
5 b Banking
c Banking company
6 a to o Forms of business in which banking companies may
engage
7 Usage of the word ‘Bank’ in the name of the company
8 Prohibition of trading.
9 Disposal of non-banking assets.
11  Requirement as to minimum paid-up capital and reserves.
12 Regulation of paid-up capital, subscribed capital and authorised capital
and voting rights of shareholders
17 Transfer to Reserve Fund
18 Maintenance of cash reserve by non-scheduled banks
19 Restrictions on holding of shares in other companies
20 and 21 Restrictions on loans and advances:

22 Licensing of banking companies:

23 Control on the opening of new business

24 Maintenance of a percentage of liquid assets

25 Maintenance of Assets in India

29 Maintenance of Accounts and Balance Sheets

35 Inspection of books of accounts
35A Giving directions to Banking Companies:
35AB Prior approval from RBI for appointment of Managing Director, etc.
36 Removal of managerial and any other persons from office:
37 Moratorium under the orders of High Court (Suspension of Business)
Section 37
44 Power of the High Court in voluntary winding up
45 Power of RBI to apply to central government for suspension of business
by a banking company
Section 5

By Section 5(b) of that Act, 'banking' was defined as meaning 'the accepting, for
the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise'; and by Section 5(c) a 'banking company'
meant 'any company which transacts the business of banking in India’.
Section 5(d) defines the term company to mean, “any company as defined in
Section 3 of the Companies Act, 1956 and includes a foreign company”
The BR Act was amended in 1965 , to extend the provisions of the Act to
Cooperative societies Act, 1965) ( cooperative banks run by societies are also
governed by Banking Regulation Act and Banking Laws (Co-operative Societies)
Section 6
 Section 6(1) in Part II says that in addition to the business of banking, a banking
company may engage in any one or more of the forms of business enumerated
in clauses (a) to (o). It covers borrowing, lending, advancing of money;
acquiring and holding and dealing with property (security) or right, title and
interest therein; selling, improving leasing or turning into account or otherwise
dealing with such security; doing all such other things as are incidental or
conducive to the promotion or advancement of the business of the company
and any other form of business which the Central Government may notify.
Thus, Section 6(1) is a general provision and the provision which enumerates
topics/fields in which the banks can carry on their business.
Sub-section (2) of Section 6 prohibits banks from engaging in any form of
business other than those referred to in Sub-section (1)
Section 8
Prohibition of trading.—Notwithstanding anything contained in section 6 or in
any contract, no banking company shall directly or indirectly deal in the buying or
selling or bartering of goods, except in connection with the realisation of security
given to or held by it, or engage in any trade, or buy, sell or barter goods for
others otherwise than in connection with bills of exchange received for collection
or negotiation or with such of its business as is referred to in clause(i) of sub-
section (1) of section 6,  [Provided that this section shall not apply to any such
business as is specified in pursuance of clause (o) of sub-section (1) of section 6.]
• Explanation.—For the purposes of this section, “goods” means every kind of
movable property, other than actionable claims, stocks, shares, money, bullion
and specie, and all instruments referred to in clause (a) of sub-section (1) of
section 6
Section 9
Disposal of non-banking assets: No banking company shall hold any
immova­ble property howsoever acquired, except such as is required for its
own use, for any period exceeding seven years from the acqui­sition thereof
Provided that the banking company may, within the period of seven years
as aforesaid deal or trade in any such property for the purpose of
facilitating the disposal thereof
Provided further that the Reserve Bank may in any particular case extend
the aforesaid period of seven years by such period not exceeding five years
where it is satisfied that such extension would be in the interests of the
depositors of the banking company..
• ICICI Bank Limited vs Official Liquidator of Aps Star … 30th September,
2010

Whether inter se transfer of NPAs by Banks is illegal under Banking

Regulation Act, 1949 .
Does a Bank selling its loan portfolio to another Bank tatamount to
trading in debt
Section 11
 Requirement as to minimum paid-up capital and reserves.—
(1) Notwithstanding anything contained in  section 149 of the Compa­nies
Act, 1956 (1 of 1956), no banking company in existence on the
commencement of this Act, shall, after the expiry of three years from
such commencement or of such further period not ex­ceeding one
year as the Reserve Bank, having regard to the inter­ests of the
depositors of the company, may think fit in any particular case to
allow, carry on business [in India], and no other banking company
shall after the commencement of this Act, commence or carry on
business  [in India]  unless it complies with such of the requirements
of this section as are applicable to it.
Section 11
(2) In the case of a banking company incorporated outside India—
(a) the aggregate value of its paid-up capital and reserves shall not be less than fifteen
lakhs of rupees
and if it has a place or places of business in the city of Bombay or Calcutta or both, twenty lakhs of
rupees; and
(3) In the case of any banking company to which the provisions of sub-section (2) do not apply, the aggregate value of
its paid-up capital and reserves shall not be less than—
(i) if it has places of business in more than one State, five lakhs of rupees, and if any such place or
places of business is or are situated in the city of Bombay or Calcutta or both, ten lakhs of rupees;
(ii) if it has all its places of business in one State none of which is situated in the city of Bombay or
Calcutta, one lakh of rupees in respect of its principal place of business, plus ten thousand rupees in
respect of each of its other places of busi­ness situated in the same district in which it has its
principal place of business, plus twenty-five thousand rupees in respect of each place of business situated
elsewhere in the State other­wise than in the same district:
Section 12
Regulation of paid-up capital, subscribed capital and authorised capital and voting rights of
shareholders.—
• (1) No banking company shall carry on business in India, unless it satisfies the following
conditions, namely:—
• (i) that the subscribed capital of the company is not less than one-half of the
• authorised capital, and the paid-up capital is not less than one-half of the
• subscribed capital and that, if the capital is increased, it complies with the
• conditions prescribed in this clause within such period not exceeding two years as the
• Reserve Bank may allow;
• (ii) that the capital of the company consists of ordinary shares only or of ordinary shares or equity
shares and such preferential shares as may have been issued prior to the 1st day of July, 1944:
Provided that nothing contained in this sub-section shall apply to any banking company
incorporated before the 15th day of Janu­ary, 1937.
• (2) No person holding shares in a banking company shall, in respect of any
shares held by him, exercise voting rights  on poll in excess of ten per cent
of the total voting rights of all the shareholders of the banking company.
• (4) Every chairman, managing director or chief executive officer by
whatever name called of a banking company shall furnish to the Reserve
Bank through that banking company returns containing full particulars of
the extent and value of his holding of shares, whether directly or
indirectly, in the banking company and of any change in the extent of such
holding or any variation in the rights attaching thereto and such other
information relating to those shares as the Reserve Bank may, by order,
require and in such form and at such time as may be specified in the order.
Section 17
Transfer to Reserve Fund

Under Section 17, Banking companies incorporated in India are

obligated to transfer to the reserve fund a sum equivalent to not less
than 20% of the profit each year, unless the amount in such fund
together with the amount in the share premium account is more than
or equal to its paid-up capital
Section 18
Maintenance of cash reserve by non-scheduled banks
( note that this is for non scheduled banks while for scheduled banks
there is a similar requirement as per the RBI Act – Section 42)

According to Section 18, every banking company not being a scheduled

bank (i.e., a non-scheduled bank) has to maintain in India by way of
cash reserve with itself or in cur­rent account opened with the Reserve
Bank or the State Bank of India or any notified Bank or partly in cash
with itself and partly in such account or accounts a sum equivalent to at
least 3% of its total time and demand liabilities.
Section 19
Restrictions on holding of shares in other companies
Section 19 of the Act restricts the scope of formation of subsidiary companies
by a banking company, as well as the holding of shares in other companies.
That is, this section prevents banking companies from carrying on trading
activities by acquiring a controlling interest in non-banking companies. This
section restricts the scope of formation of subsid­iary companies by a banking
company, as well as the holding of shares in other companies.
A banking company may form a subsidiary company for the purposes
referred to in the section, as well as for other purposes as are incidental to
the business of banking, subject to the previous permission in writing of the
RBI.
Section 20
Restrictions on loans and advances
Section 20 lays down the restrictions on banking companies from
entering into any commitment from granting any loan to any of its
director or to any firm in which a director is interested or to any
individual or whom a director stands as a guarantor. Further the
banking companies are prohibited from granting loans or advances on
the security of its own shares.
Section 21
Restrictions on loans and advances
• Under Section 21, the RBI has been empowered to determine the policy to be
followed by the banks in relation to advances. Thus, RBI gives directions to
banking companies on the following matters:
 The purposes for which an advance may or may not be granted
 The margins to be maintained in case of secured advances
 The rate of interest charged on advances, other financial accommodation and
commission on guarantees ( since decentralized)
The maximum amount of advance or other financial accommodation that a bank
may make to or guarantee that it may issue for, a single party, having regard to
the paid-up capital, reserves and deposits of the concerned bank.
Section 22
Licensing of banking companies

• According to this section, no banking company can commence or carry on

• banking business in India unless it holds a license granted to it by the Reserve
• Bank for the purpose. ( can be cancelled at any time for any violation of conditions)
• Before granting any license under this section, the Reserve Bank may require to be
satisfied by an inspection of the books of the company that the following conditions
are fulfilled
Solvency to pay its present or future depositors in full as their claims accrue;
Conduct of the affairs – not detrimental
Conduct of affairs in conformity with government laws and in public interest
 Section 23
Control on the opening of new business:

• This section has been materially revised in May 2016.

• Now domestic banks can open banking outlets in tier 1 to tier 6
centres without RBI permission. However 25% of the branches should
be in rural areas
Section 24
Maintenance of a percentage of liquid assets (SLR):
Under this section, every banking company shall maintain in India in
liquid assets for an amount not exceeding 40% of the total of its time
and demand liabilities at the close of business on any day.
 The liquid assets include cash, gold or unencumbered approved secu­
rities and they are valued at a price not exceeding the current market
price.
Section 26
Submission of Returns of unclaimed Deposits
According to this section, every banking company shall submit a
return in the pre­scribed form and manner to the RBI, giving
particulars, regarding unoperated accounts in India for 10 years. This
return is to be submitted within 30 days after the close of each
calendar year.
In the case of fixed deposits, the 10 years period is counted from the
date of expiry of such fixed period. RRBs are however required to
forward such returns to NABARD.
Section 26A
•  Pursuant to the amendment of the Banking Regulation Act, 1949, section 26A has been
• inserted in that Act, empowering Reserve Bank to establish The Depositor Education
• and Awareness Fund (the Fund).
• Under the provisions of this section the amount to the credit of any account in India with any bank
which has not been operated upon for a period of ten years or any deposit or any amount remaining
unclaimed for more than ten years shall be credited to the Fund, within a period of three months
from the expiry of the said period of ten years.
• The Fund shall be utilized for promotion of depositors’ interest and for such other purposes which
may be necessary for the promotion of depositors’ interests as specified by RBI from time to time.
• The depositor would, however, be entitled to claim from the bank her deposit or any other unclaimed
amount or operate her account after the expiry of ten years, even after such amount has been
transferred to the Fund.
• The bank would be liable to pay the amount to the depositor/claimant and claim refund of such
amount from the Fund.
Section 27
Submission of Return, Forms, etc., to RBI
Under this section, every banking company shall submit to be RBI a
return in the prescribed form (form 13) and manner showing its
assets and liabilities in India on the last Friday of every month, (if that
Friday is a public holiday under the negotiable instruments Act, 1881,
on the preceding working day.)
Besides, the RBI if it considers necessary or expedient, may at any
time direct a banking company to furnish the statements and
information relating to the business or affairs of the banking company
within the speci­fied period mentioned therein.
Section 29
Maintenance of Accounts and Balance Sheets:

This section provides for the preparation of Balance Sheet and Profit
& Loss Account as on the last working day of the year in respect of all
business transacted by a banking company incorporated in India and
in respect of all business transacted through its branches in India by a
banking company incorporated outside India. It is prepared in the
forms set out in the Third Schedule.
Section 35
Inspection of books of accounts:
This Section was incorporated with a view to safeguard the interest of
shareholders and depositors of banking companies, as a result of
which bank directors and managers are likely to be cautious in
employing the funds of their institutions.
This section provides wide powers to RBI to cause an inspection of
any banking com­pany and its books and accounts.
Section 35A

Giving directions to Banking Companies:

The Reserve Bank may caution or prohibit banking companies generally
or any banking company in particular against entering into certain types
of opera­tions.
Class to decide on this issue
Scene 1
XYZ is a proprietary concern of Anand. He had availed financial
assistance from Central Bank of India, for running his respective
businesses of manufacture of quartz related powders against the
collateral security of his house. He took quartz mines on lease from the
government of Andhra Pradesh and the loan proposals were sponsored
by the Khadi Village Industries Corporation (KVIC). The credit facilities
were judiciously utilised. At no point of time was there any case of
default during the first 2 years of the business. Then because of the
policy decision of the Government, the lease licenses were terminated.
The business came to a standstill. The account became NPA.
• Scene 2
The Reserve Bank of India had issued guidelines ( not direction) on a one
time settlement scheme for SME accounts ( small and medium enterprises).
These guidelines stipulated that having regard to the economic conditions,
it was found necessary to offer support to the SME units. Banks were asked
to put in place an OTS scheme applicable to that set of borrowers.
Central Bank not only devised this scheme and also gave wide publicity for
the scheme. The borrower applied under the scheme. He was called for a
discussion and was asked to make an offer under this scheme. The borrower
submitted his proposal. But it was rejected by the bank as inadequate.
Class to decide on the following points :
Whether the bank is bound to have an OTS scheme
Whether it is mandatory for all the eligible borrowers to be covered
by the scheme ( whether banks have the discretion to select )
Whether these guidelines come within the ambit of Section 35 A
Whether bank was right in refusing the proposal of the borrower
Having refused can the bank proceed against the security
Is it just and equitable
• Federal Bank Ltd vs Sagar Thomas and others – September 2003

Point tested :

• Whether Private Banks fall within the jurisdiction of RBI

• If so, are they State Authorities to whom writ jurisdiction under
Article 22 should apply
 Section 35AB
Prior approval from RBI for appointment of Managing Director, etc.
• According to this section, prior approval of RBI should be obtained for
the appoint­ment, re-appointment, remuneration and removal of the
chairman or a director of a banking company. And for the
amendments of provisions in the Memorandum or Articles or Reso­
lutions of a General Meeting or Board of Directors, the prior approval
of RBI is necessary.
• Lot of dust raised after the PNB Scam regarding the authority of the
regulator vs the Ministry of Finance over the banks.
Section 37
Moratorium under the orders of High Court (Suspension of Business)
• According to this section when a banking company is temporarily unable
to meet its obligations it may apply to the High Court requesting an order
for staying the commence­ment or continuance of all legal actions and
proceedings against it for a period of not exceeding 6 months. Such stay is
generally called a moratorium.
• For such requisition, the banking company should submit an application
along with a report of the RBI in this re­gard. In that report the RBI
indicates that the banking company is able to pay its debts if the
application is granted. If such report is not obtained from the RBI, the
banking company cannot get the grant of moratorium.
Section 45

The section deals with Power of Reserve Bank to apply to Central

Government for suspension of business by a banking company and to
prepare scheme of reconstitution or amalgamation.
Ganesh Bank, Kurundwad Ltd and … vs Union of India
and others on 28th August, 2006

On 7.1.2006 , GoI, MOF imposed a moratorium on GBK on a period of 3

months
No granting of any loans or advances without permission of RBI.
Withdrawal of deposits was also restricted
RBI put two nominee Directors on the Board
On 9.1.2006, by virtue of a notification, the Bank was amalgamated with
Federal Bank

GBK challenged this order on two grounds- the moratorium and the
amalgamation – both decisions ultravires