IMPORTANT PROVISIONS OF BANKING REGULATION ACT, 1949.
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.
