Sunday, June 12, 2016


The important legal provisions under the Banking Regulation Act, 1949 are as follows:

(a) Licensing: Banking company has to obtain license from the Reserve Bank of India before starting banking business in India. The license is also required for opening a new place of business or changing the existing place of business in India, or outside India. The RBI has to ensure the financial soundness of the proposed banking company. 

(b) Prohibiting Trading: A banking company is prohibited from carrying out any other business or deal directly or indirectly in buying and selling of goods.

(c) Non - Banking Assets: A banking company is not allowed to acquire assets for trading purposes. However, it can acquire assets for its own use. For example, land and building, furniture, vehicles, etc. It is also allowed to grant loans or advances against the security of such assets. In case of default by the borrower, such assets may be possessed by the bank. Such assets are known as "Non - banking assets". A banking company must dispose of such assets, within a period of seven years from the date of acquisition of such assets.

(d) Capital structure: The share capital of banking company should include only ordinary or equity shares. A banking company cannot carry on business if the subscribed capital is less than 50% of its authorized capital or paid up capital is less than 50% of its subscribed capital.

(e) Management: The management of banking company shall be in the hands of duly constituted Board of Directors. One of the directors, shall be the chairman, appointed for a period of 5 years. 51% of directors of the banking company must have specialized knowledge of accountancy, agriculture, banking, cooperation, economics, finance, business and law.

(f) Commission on sale of shares: A banking company is not allowed to pay commission on sale of shares exceeding 2.5 % of the paid up value of share.

(g) Statutory Reserve: Section 17 of the Banking Regulation Act, 1949 provides that at least 20% of the profits prior to declaration of dividend must be transferred to the statutory reserve. The percentage has increased to 25% in the year 2007. It should be shown separately from other reserves. However, the Central Government on recommendation of RBI, may exempt any bank from this restriction if the amount of reserve fund together with share premium is at least equal to the paid up share capital. As required by RBI, the Scheduled Banks have to transfer 25% of their disposable profits after adjustment/provision for bonus with effect from the year ended March 31, 2001. The Central Government, in consultation with RBI can change this provision depending on the economic situation.

(h) Restriction on payment of dividend: Section 15 of the Banking Regulation Act, provides that, no bank shall pay any dividend on its shares until all its capital expenses such as preliminary expenses, commission on issue of shares, losses incurred and other expenses, commission on issue of shares, losses incurred and other expenses not represented by tangible assets are completely written off.