Banking Regulation Act

Top Law Firm in India

The Banking Regulations Act was passed to protect the interest of the people who deposit and to regulate the misuse of capabilities by operating the banks by any norms essential and to the interest of the Indian economy in common. There are a number of provisions of the Banking Regulation Act 1949 and we will discuss the topic about the business of banking companies.

Objectives of the Banking Regulation Act 1949:

The provision of the Indian Companies Act 1913 was found inappropriate and undesirable to govern banking organizations in India. Thus a requirement was felt to have certain laws having detailed content on banking business in India.

Due to the deficit of capital many banks failed and thus specifying the lowest capital requirement was felt essential. The banking regulation act carried in specific minimum capital regulations for banks.

One of the main objectives of this act was to prevent hard competition between banking companies. The act has rectified the beginning of branches and transforming the location of the old branches.

To avoid the indiscriminate commencement of new branches and assure the stabilized improvement of banking corporations by a policy of licensing.

Allocate power to RBI to appoint, reappoint and removal of chairman, director, and officers of the banks. This will assure the better and productive working of banks in India.

To conserve the interest of the people who are depositing and the public at large by integrating specific provisions, viz. specifying cash reserve and liquidity reserve ratios. This facilitates the bank to fulfil need depositors.

Provider mandatory amalgamation of smaller banks with senior banks and this enhances the banking system in India.

Bring up some provisions to prohibit foreign banks in investing funds of Indian depositors out of India.

Give fast and simple liquidation of banks when they are incapable to proceed further or amalgamate with other banks.

History of Banking Regulation Act 1949:

Banking in India originated within the last decades of the 18th century. Prior to Nationalization, the bulk of the banks were private banks. Private Banks were class-based and there would be monopolies that might only benefit a couple of people. With the nationalization of the banks, the credit scenario changes benefitted all Sections of society and contributed to overall prosperity.

The Indian government recognized the necessity to bring the banks under some sort of government control, to be ready to finance India’s growing financial needs. On 19th July 1969, 14 major Indian commercial banks of the country were nationalized. After independence, the govt of India came up with the Banking Companies Act, 1949, later changed to Banking Regulation Act 1949 as per the amending Act of 1965, under which the Federal Reserve Bank of India was bestowed with extensive powers for the supervision of banking in India because of the central banking authority.

The Main Features Of The Banking Regulation Act Are As Follows:

Prohibition of trading (Section 8): consistent with Section 8 of the Banking Regulation Act, a bank cannot directly or indirectly affect buying or selling or bartering of products. However, it’s going to barter the transactions concerning bills of exchange received for collection or negotiation.

Non-banking asset (Section 9): A bank cannot hold any immovable property, howsoever acquired, apart from its own use, for any period exceeding seven years from the date of acquisition thereof. The company is permitted, within a period of seven years, to deal or trade any such property for facilitating its disposal.

Management (Section 10): This rule states that each bank shall have one among its directors as Chairman on its Board of Directors. It also states that not but 51% of the entire number of members of the Board of Directors of a bank shall contain persons who have special knowledge or practical experience in accountancy, agriculture, banking, economics, finance, law, and co-operatives.

Minimum capital (Section 11): Section 11 (2) of the Banking Regulation Act, 1949, states that no bank shall commence or keep it up to the business in India unless it’s minimum paid-up capital and cash reserve prescribed by the RBI.

Payment of commission (Section 13): consistent with Section 13, a bank isn’t permitted to pay directly or indirectly by way of commission, brokerage, discount, or remuneration on problems with its shares in excess of 2.5% of the paid-up value of such shares.

Payment of dividend (Section 15): consistent with Section 15, no bank shall pay any dividend on its shares until all its capital expenses (including preliminary expenses, organization expenses, share selling commission, brokerage, amount of losses incurred and other items of expenditure not represented by tangible assets) are completely written-off.

Importance Of Banking Regulation Act 1949:

Banking Regulation Act gives the facility to RBI to license banks and also the regulation of the shareholding.

It grants power to RBI to conduct the appointment of the boards and management members of banks.

It also lays down directions for audits to be managed by RBI, and control merging and liquidation.

RBI issues directives on banking policy within the interests of public good and may impose penalties if required.

Co-operative Banks were incorporated under this act within the amendment of 1965.

Section 6 Of The Banking Regulation Act:

Section 6 of the banking regulation act comprises of the permitted business of banks. The act consists of the following points:

  • Banking for borrowing, raising or taking over of cash, selling, collecting, and dealing within the bills of exchange, promissory notes, railway receipts.
  • Acting as agents on behalf of the Government.
  • Contracting for public and private loans and issuing the same.
  • Managing the selling and realizing any property which can inherit the possession of the corporate.
  • Undertaking and executing trusts.
  • Dealing with the acquisition, construction, and maintenance of the building.

The Act Is Applied To The Following Types Of Banks:

  • Nationalized banks
  • Non-nationalized banks
  • Co-operative banks in the manner and to the extent specified in the act

The Business Of Banking Companies

In the banking regulation act 1949, section 6 gives a whole list of activities in which a banking corporation may work in the business of banking. 

The Main Functions Are As Follows:

Working as agents for any Government or local authority or any other person having the agency’s business of any inscription but excluding the management agent or secretary and treasurer of a company.

Arranging the public loan and personal loan and unraveling difficulties respectively.

The ensuring, guaranteeing, underwriting, having a part in the management and carrying out of any problem public or private of the State municipal or other loans or of shares, stock, debentures, stock of any company, corporation, or association, and the lending of money for any objective.

May carrying on every kind of guarantee business.

Managing, selling, and realizing any property which can inherit the possession of the corporate in satisfaction in any of its claims.

Can acquire, hold, and affect any property or any right, title, or interest in any such property which can form the safety for any loan or advance which can be connected to any of that security.

Undertaking And Executing Trusts

Undertaking the administration of estates as executor, trustee.

Establishing and supporting associations, institutions, funds, trusts, and conveniences calculated to benefit employees or ex-employees of the company.

The acquisition, construction, maintenance, and alteration of any building or works necessary for the needs of the corporate.

Selling, improving, managing, developing, exchanging, leasing, mortgaging, removing, or turning under consideration or otherwise handling the property and rights of the corporate.

Acquiring and undertaking the entire or a part of the business of a person or a corporation, when such business is of a nature enumerated or described within the act.

Doing all these things as are incidental or conducive to the advancement of the business of the company.

Any other sort of business which the Central Government fixed within the Official Gazette, and specified as a sort of business during which it’s lawful for a depository financial institution to engage.

The above list of activities is exhaustive but not comprehensive. There are several sorts of services listed above both under main business also as an ancillary business, some are agency services and general utility services

Agency Services

Carrying and transacting guarantee business on behalf of its clients, collection of bills, securities, etc. purchasing and selling of shares, bonds, debenture, etc. on behalf of constituents negotiating of loans and advances, mail transfer, etc. and many more agency services are grouped as follows

Non-Fund Business 

  • Collection of instruments and securities on behalf of customers
  • Portfolio Management or Merchant Banking
  • The facility of remittance of funds
  • Money Exchange business as Authorized dealer under exchange business
  • Other agency business on behalf of state or local body

Factoring Services 

  • Special Purpose Vehicle(SPV) services for the securitization of assets under securitization and reconstruction of Financial Assets and Enforcement of security interest act
  • Collection of taxes on behalf of the people
  • Collection of various dues of the people like telephone, electricity, municipal taxes 

General Utility Services

  • Providing Safe-custody facility to its customers for keeping their valuables
  • Providing the facility of Safe deposit vault under the lease agreement to its customers for keeping their valuables
  • Technology-based utility services like Tele-banking, Mobile banking, Online banking, DEMAT services for securities trading, ATM services, etc.

Consultancy Services

  • ECS services for payment of various dues of the people
  • Payment of pension
  • Payment of salaries of the employees


Some of the activities mentioned both under agency services and general utility services are of latest generation activities particularly after reforms within the financial sector and growing adoption of technology-based banking. These are the important facts that are given in the 6th section of the banking and regulations act 1949 regarding the Business of banking companies. free legal advice online in delhi


Please enter your comment!
Please enter your name here