Overview Of Banking Regulation Act, 1949

Overview Of Banking Regulation Act, 1949

Sarthak Verma_JudicateMe


This Blog is written by Sarthak Verma from Symbiosis Law School, NoidaEdited by Anumeha Jain.



Banking Sector in India is by far one of the most dynamic sectors with regular changes and innovations taking place. Being so dynamic yet so stable is a characteristic feature of or banking sector that makes it a prominent one. According to the Reserve Bank of India [1], India’s banking sector is well – regulated and adequately capitalized, it was also emphasized that the financial and economic condition of our country is way too better than other countries of the world. Indian banks have always withstood the global turnovers very well establishing their resilience.

The banking sector emphasizes on providing better service to the customers through technological advancements systems like bringing forward the mobile or internet banking systems and improvising the technological edge to have competitiveness. Despite being so dynamic, variant, and subjected to changes, there’s always a scope for development and improvement and the banking sector also has a pathway and road ahead to attain what is needed. But being the heart of all the economic activities, even a minor or slight change in the banking sector has a major effect on the economy of the country. Therefore, to have monetary stability in India RBI was formed with the enactment of 50 of the Reserve bank of India Act, 1934 [2].

Indian Banking required reforms to cater to the difficulties it faced relating to the uncertain political scenario, inflation, payment crisis, etc. Their reforms were aimed to lead to transformational changes and innovations to efficiency and stability to the Indian banks and integrate them at the International level.

Banking Companies Act, 1949 was passed and came into force on 16.03.1949; gradually it was renamed and changed to Banking Regulations Act, 1949 [2] w.e.f. 01.03.1966. This Act aimed at the interest of the Indian economy by safeguarding the interests of customers and controlling the abuse of power.


The enactment of the Banking Regulation Act, 1949 holds a great significance for India which was politically, economically, and socially unstable yet was emerging as a new superpower post its independence. Therefore, it was the need of the hour to strengthen the measures that target at minimizing the vulnerability of the banks due to the fluctuations in the economic environment inclusive of the inadequacy of the capital, income recognition, assets and liabilities clarification, the improved level of transparency and the disclosure standards. This act also brought in certain minimum capital requirements for the banks during the inadequacies of capital and during the times when most of the banks collapsed and henceforth, it was necessary to have or prescribe the minimum capital and resource requirement.

This Act empowers the Reserve Bank of India to license the banks and regulate the shareholding. It also gives the power to RBI for the conduction of the appointments of the board as well as management members of the bank, further laying down the guidelines for the audits to be managed by the Reserve bank of India with their controlling and the liquidation tactics.

Power is given to RBI to issue directives on banking policy in good faith and public interest whereas it can also impose the penalties as and when needed. This act incorporated under it with the amendment of 1965 the Co-Operative Banks. This act includes detailed provisions relating to the various businesses that a bank in India is permitted to engage in. Two new sections (viz. 35AA and 35AB) are inserted in the Banking Regulation (Amendment) Ordinance, 2017 [7].


The Banking Regulation Act, 1949 extends to the entire nation and is not just pertinent to the primary agricultural societies, non-agricultural primary credit societies, and cooperative land mortgage banks. The act impacts and applies to Nationalized, Non- Nationalized, and Cooperative banks.

Impact On The Reserve Bank Of India

The act impacts the power given to the Reserve Bank of India to directly intervene in the bad loan cases. After this, the central bank will be able to directly ask banks to sit down with defaulters and reach a settlement as part of the package. The plan will be begun with banks being advised to determine the main 40-50 cases. Under the altered demonstration or the law, if banks can’t discover an answer for the issue by the predetermined time, the national bank will step in legitimately. RBI had been impacted and now it has the power that will ensure the timely completion of the settlement processes.

Impact On The Bankers

A banking company transacts business banking in India. This act defines in the business of banking by stating the essential features and functions of bankers and the providers with the list of businesses banking companies can engage in whereas it prohibits some. There have been complaints by the bankers on the prospective interrogation by the vigilance committees. Thought the central bank had already addressed the issue and had taken care by increasing the standards of the questions to be asked from the bankers but no assurance can be given for the protection from the investigation.


Section 6(1) and 6(2) when read with section 56(b) describe the businesses that banking companies can indulge in like borrowing, raising or taking of Money, giving advances, guarantees, indemnity. The provisions of the Banking Regulation Act,1949 cannot be used as the substitute to the laws applicable unless explicitly mentioned ( Section 2 (56)(b)) i.e. the act does not apply to the primary agricultural society, cooperative land mortgage and any other cooperative society that is not provided in Section 56 of the Act.

The main provisions vis-à-vis Banking Regulation Act, 1949 includes, Prohibition of trading (Section 8) wherein it has been mention that a banking company cannot be involved in buying or selling or bartering goods. Section 9 relating to Non – Banking Assets prohibits banking company to hold any immovable property, howsoever gained, aside from its utilization, for any period surpassing seven years from the date of securing thereof. The organization is allowed, inside the time of seven years, to arrangement or exchanges any such property for encouraging its removal. Furthermore, Section 10 of the act states Management related provisions whereas Section 11 relates to minimum capital and reserves required for a banking company to carry its business in India and even in foreign companies and Section 12 relates to the Capital Structure and conditions relating to banking companies to carry out business in India. Where on one hand Section 17 relates to the Reserve Fund or the Statutory Reserve on the other hand Section 18 have Cash Reserves and maintenance by cash flow. The Liquidity Norms are discussed in Section 24 of the action whereas the restrictions on loans and advances are discussed in Section 20. Section 29 and 34A have provisions relating to Accounts and Audit. The provisions of the act are clear instructions for a banking company and this act can be considered as a superior act to the other acts like Negotiable Instruments Act, 1881 [5] or Companies Act, 2013 [6], etc.


Need To Amend The Act 

Indian bank has been experiencing NPA, Bad credits, and focused on resource issues from numerous years. This issue has been exacerbating with the time despite a few endeavors made by the banks and the administration of India. In the beginning phases of the issue, the explanations behind this issue were credited to the supposed arrangement loss of motion with numerous enormous ventures being stuck as a result of crude material flexibly and land securing issues.

The RBI’s December Financial Stability Report 2016 said that large borrowers (the central bank defines these as debtors to whom lenders have an exposure of at least Rs. 5 crore) account for 56% of bank debt and 88% of their NPAs. Despite a number of schemes launched by the Reserve Bank of India (RBI), this growing stock of toxic debt continue to elude resolution. Therefore, something was needed to have more stability in the Indian banking system. Hence the amendment of 2017.

Amendment Of 2017

Two new sections (viz. 35AA and 35AB) are embedded in the Banking Regulation (Amendment) Ordinance, 2017. Section 35A of the Banking Regulation Act, 1949, this demonstration empowers the Central Government to approve the Reserve Bank of India (RBI) to guide banking organizations to determine explicitly focused on resources by leading the bankruptcy goals process, where required. This law likewise enables the RBI to give different headings for goals, and affirm or designate or for arrangement, specialists, or boards of trustees to prompt financial organizations to focused on resource goals.

Impact Of Amendment Of 2017

The amendment in the banking regulation act which is being set up by the administration will enable the Reserve Bank of India (RBI) to legitimately mediate in settling awful advance cases. After this, the national bank will have the option to legitimately request that banks plunk down with defaulters and arrive at a settlement as a feature of the bundle. Directly, there is an arrangement for an oversight council comprising of “prominent people under the Scheme for Sustainable Structuring of Stressed Assets (S4A) which is suggested by the Indian Banks’ Association in an interview with RBI. Under this mandate, Section 35 of the Banking Regulation Act, will be changed which right now manages forces of examination for RBI.


The learner feels that many acts used for commercial uses and cooperate use can be considered as subordinate to this very act. This act is very heart and soul of the Indian Economy since it relates to banking which is directly proportional to the economic growth of the country. This act and the 2017 amendment were required for this activity since there were requirements for the stability and reforms were considered as the need of the hour. The reforms in the banking sector in India intended to enhance the stability and efficiency of banks. To remove the operational rigidities in the credit delivery system to ensure allocation efficiency and achievement of social objectives. To place the Indian banking system on par with international standards in respect of capital adequacy and other prudential norms. The strengthening measures aimed at reducing the vulnerability of banks in the face of fluctuations in the economic environment. These included capital adequacy, income recognition, asset classification, provisioning norms, exposure norms, improved levels of transparency, and disclosure standards.


After an away from the arrangements of the BR Act on the bank mergers it very well may be presumed that the financial division is controlled by RBI. Its inclusion is growing as the requirement for the guideline of mergers is getting significant in this profoundly serious corporate world for getting different advantages by a company. RBI practices its capacity to control mergers and acquisitions in the private part banks to ensure the enthusiasm of the contributors and open. It is to be noticed that regardless of the forces of the High Court on the trade-off or course of action regarding the amalgamation of banking organizations, just RBI has the last power to affirm the plan of amalgamation. Segment 44A makes the prior conflict apparent and it appears that the High Court isn’t given the forces to concede its endorsement to the plans of a merger of banking organizations. Further after digging profound into the arrangements of the BR Act with respect to the bank mergers it very well may be seen that if any plan of amalgamation of banks doesn’t include two banking organizations then the arrangements of BR Act won’t be relevant. In such cases, the arrangements of Companies Act [4] will be relevant and the Tribunal will have a ward to engage such courses of action. Bank mergers are removed from the domain of the administrative arrangements under the Companies Act in every other case. Private part banks additionally need the RBI’s endorsement for merger and procurement with non-banking 68 Section 10FB of the Companies Act, 1956, 1969 Section 396 of the Companies Act, 1956 money organization. The last is anything but a proper necessity under the arrangements of the Banking Regulation Act and is case explicit. Before, RBI has opposed numerous mergers in light of the fact that it had concerns about the forerunners of the procuring substance, for example, Indusland Bank with Ashok Leyland Finance and that of limiting Chrys Capital from putting resources into the Centurion Bank. To formalize this plan, the working gathering of the Indian Banks. The affiliation has prescribed to the Finance Ministry that the RBI ought to be the last position to settle on all mergers and acquisitions issues, including trade proportions. This is to guarantee severe money related order.


(1) Wikipedia

(2) Jagranjosh.com

(3) Ibef.org

(4) globallegalinsights.com

[1] https://www.rbi.org.in/

[2] https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIAM_230609.pdf

[3] https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/BANKI15122014.PDF

[4] https://indiankanoon.org/doc/1353758/

[5] https://indiankanoon.org/doc/1132672/

[6] http://ebook.mca.gov.in/default.aspx

[7] https://www.prsindia.org/billtrack/banking-regulation-amendment-ordinance-2017

One Thought to “Overview Of Banking Regulation Act, 1949”

  1. Vedika Ghai

    Very informative!

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