Banking Regulation Act: Important Elements

In any country the major portion of monetary resources lies with banking institutions. They regulate the flow of money throughout the economy. Any economy needs these banking institutions to facilitate the normal conduct of the day to day industry, trade and commerce activity of the country. The Banking Regulation Act contains the provisions & rules necessary for the conduct of healthy banking business and to safeguard the interest of the economy of the country and the interest of depositor.

The business of banking is defined in the act as follows “Accepting for purpose of lending and investment of deposit of money from the public repayable on demand or otherwise withdraw able by check draft order or otherwise.” Other than this the other business of banking companies is also regulated by section 6. Section 6 provides the other businesses in which a banking company can indulge in itself. Section 8 of the act provides that any bank cannot directly or indirectly enter into trade of goods whether as agent or otherwise. The act does not want the banking institution to take risks other than the banking risks it take. The provision was given because of the reason that the banks where found indulging in trading practices. The banks used there resources in these activities. Section 8 though provides certain exemptions to this rule, as in case of realization of securities and in case3 of bill of exchanges.

It also prohibits the banking institutions other than a company to transact business under the name of “bank” “banker” or “banking company”. And prohibits the use the banking company to transact business without it [section 7].   It also prohibits banks to acquire any immovable property that is not of its use and provide for its speedy removal after 7 years of acquisition. [Section 9]. 

Section 10 clearly states that the bank cannot appoint any person who:

1] Is declared insolvent.

2] Compounded with creditor or suspended payments.

3] Got convicted in any Criminal charge involving moral turpitude.

Section 11 & 12 of the cat provide for the minimum requirement of capital that a company must have. Section 12 provides that a company shall not have any other shares than the Equity share. So the act wants no person to have preferential rights. It also regulates the voting rights of the holders. According to the section no person irrespective of the number of shares he hold shall not hold voting rights in respect of more than 10% of total holding. It also states that the managing officials shall furnish there shareholding information to the Apex bank. These are to regulate that a person shall not control the bank’s business.

The underwriting commission on issue of shares I been limited to 2.5 %. There is a restriction on creation of charge on the unpaid capital of any banking company. The banking company cannot create a floating charge on its fixed assets.

Section 15 restricts that the company cannot pay dividends to the holders till the capital losses are written off.

Section 16 is very important it states:

1] The banking company cannot have a director common to another banking company.

2] The banking company cannot have three directors who are director in other company and there holding is 20% in banking company in aggregate.

The act doesn’t want the directors to use the resources wrongfully.

Section 17 provides for a compulsory reserve fund and transfer of 20% of profit to it each year. Non schedule banks shall maintain cash reserves.

Section 19 states that a banking company shall not make subsidiaries for any reason other than:

1] Undertaking of any business section 6 permits.

2] For banking business outside India subject to rbi permission in writing

3] As government and RBI thinks fit.

They do not want the bank to indulge in any other business and take risks. It also states that the bank shall not hold shares of another bank of an amount exceeding 30% of the capital.    Banking regulation act wants the depositors to be safeguarded. 

Section 20a states that before the company can remit there debts due to director’s prior approval of the RBI are necessary.

Akash Kapoor.

Ca final llb 3^Rd year.