This is regulatory act
Its purpose is to:
1) Provide safety in the interest of depositors
2) Prevent misuse of powers by managers of banks
Act does not supersede but supplement to Companies Act, 1956
Initially named Banking Companies Act, 1949 but from March 1, 1966, the name of the Act was changed to Banking Regulation Act, 1949.
Initially, the law was applicable only to banking companies. But, 1965 it was amended to make it applicable to cooperative banks and to introduce other changes. Primary Agricultural Credit Society and cooperative land mortgage banks are excluded from the Act. The Act provides a framework using which commercial banking in India is supervised and regulated. The Act supplements the Companies Act, 1956.
The Act gives the Reserve Bank of India (RBI) the power to license banks, have regulation over shareholding and voting rights of shareholders; supervise the appointment of the boards and management; regulate the operations of banks; lay down instructions for audits; control moratorium, mergers and liquidation; issue directives in the interests of public good and on banking policy, and impose penalties.
In 1965, the Act was amended to include cooperative banks under its purview by adding the Section 56. Cooperative banks, which operate only in one state, are formed and run by the state government. But, RBI controls the licensing and regulates the business operations. The Banking Act was a supplement to the previous acts related to banking.
The requirements regarding the minimum paid-up capital and reserves for commence mint of banking business. Prohibition of charge on unpaid capital. Payment of Dividends only after writing off all Capitalized expenses.
1) Transfer to reserve fund out of Profits. (Minimum 20 per cent) Maintenance of cash reserves by the non- scheduled banks. (Minimum 3 per cent) Restrictions on holding shares in other companies.
2) Restrictions on loans and advances to directors and others. Licensing of banking companies. Licences for opening of new branches and transfer of existing place of business. Maintenance of a percentage of liquid as sets (SLR). (Minimum 25 per cent and maximum 40 per cent)
Objectives of Banking Regulation Act 1949
The Banking Act was enacted in February1949 with the following objectives:
(i) The provision of the Indian Companies Act 1913 was found inadequate and unsatisfactory to regulate banking companies in India. Therefore a need was felt to have a specific legislation having comprehensive coverage on banking business in India.
(ii) Due to inadequacy of capital many banks failed and hence prescribing a minimum capital requirement was felt necessary. The banking regulation act brought in certain minimum capital requirements for banks.
(iii) One of the key objectives of this act was to avoid cut throat competition among banking companies. The act was regulated the opening of branches and changing location of existing branches.
(iv) To prevent indiscriminate opening of new branches and ensure balanced development of banking companies by system of licensing.
(v) Assign power to RBI to appoint, reappoint and removal of chairman, director and officers of the banks. This could ensure the smooth and efficient functioning of banks in India.
(vi) To protect the interest of depositors and public at large by incorporating certain provisions, viz. prescribing cash reserve and liquidity reserve ratios. This enable bank to meet demand depositors.
(vii) Provider compulsory amalgamation of weaker banks with senior banks, and thereby strengthens the banking system in India.
(viii) Introduce few provisions to restrict foreign banks in investing funds of Indian depositors outside India.
(ix) Provide quick and easy liquidation of banks when they are unable to continue further or amalgamate with other banks
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