The Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934 governs the Banking system in India. The Reserve Bank of India and the Government of India are bestowed with the power to control banks. Example – they control the functioning of the banks from opening of banks to their winding up by virtue of the powers conferred to them.
Note, all the regulatory provisions are not uniformly applicable to all banks. The applicability of the provisions of these acts to a specific bank depends on its constitution i.e., whether it is a statutory corporation, a banking company or a co-operative society.
Definition of Banking
As per Section 5(b) of Banking Regulation Act, 1949, banking refers to the acceptance of deposit from the public for lending or investment purposes, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.
The essential functions performed by a bank are acceptance of public deposits and lending or investment of such deposits. These deposits are repayable on demand or after a period of time as agreed by the banker and the customer. The banker can accept deposits of money and not anything else, here accepting deposits from the public indicates that a banker accepts deposits from anyone who offers money for such purpose. The opening of accounts is subject to certain conditions like proper checking and identification. However, a banker can refuse to open account for an objectionable entity.
Banking Licence
Under most jurisdictions, a banking licence is a prerequisite for a financial institution that wants to provide banking services, such as taking deposits from the general public, lending of such deposits etc.
Under Section 22, of the Banking Regulation Act obtaining a licence is a precondition for banking in India, attained from the Central Bank of India (RBI) for commencing or carrying on the business of banking. Every banking company has to use the word “bank” as part of its name (Refer, Section 7 of the Act) and no company, firm or an individual other than a banking company can use the words “bank”, “banker”, “banking” as part of its name. But Subsidiaries of banks and association of banks in certain cases are exempted from this restriction.
The Banking Regulation Act, 1949 was enacted to provide a suitable framework for regulating the banking companies and to consolidate and amend the law relating to banking system. Initially, the Act provided for regulation of banking companies only, but in 1965 the Act was amended to cover co-operative banks as well with certain modifications. The provisions of the Act are applicable to banking companies in addition to other laws which are applicable to such companies, unless otherwise specifically provided in the Act.
The Companies Act, 1956 which deals with the incorporation and working of companies is applicable to banking companies except where special provisions are made in the Banking Regulation Act in that regard.
The Act regulates entry into banking business by licensing (as per Section 22 thereof). The Act also puts restrictions on the shareholding, directorship, voting rights and other aspects of banking companies. There are several provisions in the Act regulating the business of banking such as restriction on loans and advances, rates of interest to be charged, requirement as to cash reserve and maintenance of percentage of assets, etc. There are provisions regarding audit and inspection and submission of balance sheets and accounts. The Act provides for control over the management of banking companies and also deals with the procedure for winding up of the business of the banks and penalties for violation of its provision.
