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7 mons ago

Banking Regulation Act In India.

Author: EA Digest
Category : Banking law

We are well aware of the fact that the banking sector is one of the most important sectors of our economy. With the increasing opportunities in lending, savings, insurance sectors etc, banking has an outreach better than ever before. The banking sector is made up of several state banks, nationalized banks, private and international banks, each having different fundamentals and operations. It thus becomes necessary to regulate the sector and that is why the Banking Regulation Act, 1949, was introduced. Read on to know more.


The Banking Regulation Act in India regulates the banking sector in India. Initially passed as Banking Companies Act, 1949 it came into force on March 16, 1949, and its name was later changed to Banking Regulation Act, 1949 on March 1, 1966. The act was amended in 1965 to make it applicable to cooperative sector banks too along with the banking companies. This amendment also introduced other changes in the Act. The Act became applicable to Jammu and Kashmir from 1956, making it applicable to the entire country.


The banking sector can be considered as the backbone of the economy and hence it is extremely important that it is regulated properly as any malpractice can directly affect the nation’s economy and credibility.  The Banking Regulation Act, 1949, is considered to be significant as at any given time a chunk of a country’s currency lies in the bank and citizens need to have faith in the banking system. Banking Regulation Act, 1949, ensures that the banking companies abide by the fair rules safeguarding the interest of both the business and the customers.


As discussed the main objective of the Banking Regulation Act, 1949, is to regulate the banking sector. It does so by putting the following directives in place for banking companies. Some of these sections and their objectives are listed down below:-

  1. Section 11 and 12 ensure that the banks meet the criteria of minimum paid up capital.
  2. Section 14 prohibits the banking company to create a charge on its unpaid capital.
  3. Section 15 governs the process of dividend payment.
  4. Section 17 refers to the requirement of the reserve fund to be met by banks which is not less than 20% of the profit every year.
  5. Section 18 deals with the maintenance of the cash reserve by non-scheduled banks.
  6. Section 19 deals with the restrictions on holding shares in other companies.
  7. Section 20 and 21 deal with the guideline and restrictions on loans and advances by the banking companies.
  8. Section 21 deals with the licensing requirements of the banking companies.
  9. Section 31 deals with the directives for submitting returns to RBI.
  10. Section 38 to 44 deal with the winding up of the banking companies.


Main provisions

  1. It directs the ideal business practices to be followed by the banks.
  2. It clearly states the line of businesses allowed to be done by the banks.
  3. It prohibits banks from trading.
  4. It gives clear directives for the disposal of non-banking assets.
  5. It gives guidelines for the reserve fund which is the most important aspect of the banking business.
  6. It lays down directives regarding cash reserves, accounting, auditing etc.
  7. It ensures the safety of the banking assets.



The Banking Regulation Act, 1949, ensures fair and right business practices and keeps a close eye on malpractice in banking business which helps keep the citizen's faith alive in banking and also aids economic growth.

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