Banking Regulations in India

• Banking in India is governed by the Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934.
• Banking is defined as accepting deposits of money from the public for lending or investing, repayable on demand and withdrawable by cheque, draft, order, or otherwise as per Section 5(b) of the Banking Regulation Act, 1949.
• Only banking companies, Reserve Bank of India, State Bank of India, or other institutions notified by the Central Government can accept deposits withdrawable by cheque, as per Section 49A of the Banking Regulation Act.
• The Reserve Bank regulates deposit acceptance by non-banking financial companies under the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998.
• According to Section 22 of the Banking Regulation Act, a license from the Reserve Bank is required to commence or carry on banking business in India.
• Every banking company must use the word "bank" in its name, and no other company can use "bank," "banker," or "banking" in its name, as per Section 7 of the Act.

Constitution Of Banks

• Banks in India can be:
  • A body corporate constituted under a special statute
  • A company registered under the Companies Act, 1956 (Companies Act 2013) or a foreign company
  • A co-operative society registered under a Central or State enactment.
• Public Sector Banks (excluding SBI) are formed under the Banking Companies (Acquisition) and Transfer of Undertakings) Acts of 1970 and 1980.
• The State Bank of India was established under the State Bank of India Act, 1955, and its associate/subsidiary banks under the State Bank (Subsidiary Banks) Act, 1959.
• Regional Rural Banks (RRBs) were established under the Regional Rural Banks Act, 1976, and are governed by their establishing statutes, the Banking Regulation Act, and the Reserve Bank of India Act.
• Private Sector Banks and Foreign Banks are constituted under Section 3 of the Companies Act, 1956 or the Companies Act, 2013. Foreign Banks are foreign companies under Section 2(42) of the Companies Act, 2013.
• Co-operative banks conduct banking business on a co-operative basis, and are governed by the Multi-State Co-operative Societies Act if operating in multiple states, or by respective State Co-operative Societies Acts.

Reserve Bank Of India, 1934

• The Reserve Bank of India Act, 1934, established the Reserve Bank of India and went into effect on March 6, 1934.
• The Central Board of Directors is responsible for the general superintendence and direction of the bank's affairs, consisting of:
  • A governor and up to four deputy governors appointed by the central government.
  • Four directors nominated by the central government, one from each of the local boards.
  • Ten directors nominated by the central government
  • Two government officials nominated by the central government.
• A Scheduled Bank is defined as one included in the Second Schedule of the Reserve Bank of India Act, 1934, meeting the criteria in section 42 (6) (a).
• The RBI can act as lender of last resort under Sections 17 and 18 of the RBI Act, providing funds to banks or financial institutions facing financial difficulty or near bankruptcy.
• Chapter VI of the Finance (No. 2) Act 2019, effective from August 9, 2019, amended the RBI Act 1934 to give the regulator (RBI) more control over Non-Banking Finance Companies (NBFCs).
• The limit of net owned funds for NBFCs was increased from Rs. 2 crores to Rs. 100 crores.
• Under sections 45-ID and 45-IE, the RBI can control NBFC management by replacing directors or superseding the board.
• Section 45MAA gives the RBI the power to remove or debar an auditor for up to 3 years for non-compliance.
• Under section 45MBA, the RBI can frame schemes for amalgamation, reconstruction, or splitting of an NBFC to ensure the smooth functioning of the financial system.
• Under section 45NAA, the RBI can direct an NBFC to furnish statements and information about its group companies and order inspection or audit.

Banking Regulation Act, 1949

• The Banking Regulation Act, 1949, regulates all banking firms in India, initially passed as the Banking Companies Act 1949, and came into force on March 16, 1949, and was renamed on March 1, 1966.
• The Act applies to Jammu and Kashmir from 1956.
• In 1965, the Act was amended to include cooperative banks and introduce other changes, and in 2020, it was amended to bring cooperative banks under RBI supervision.
• The Act does not apply to:
  • A primary agricultural credit society
  • A Co-operative society whose primary object and principal business is providing long-term finance for agricultural development.
• The Banking Regulation (Amendment) Act, 2017, inserted sections 35AA and 35AB, authorizing the Reserve Bank to direct banking companies to initiate insolvency resolution under the Insolvency and Bankruptcy Code, 2016.
• The RBI conducts Annual Financial Inspections (AFI) of banking companies under Section 35 of the BR Act.
• An amendment in 2012 introduced the Depositor Education and Awareness Fund (DEAF) to take over inoperative deposit accounts unclaimed or unoperated for ten years or more.

Objectives of Banking Regulation Act

• Provide specific legislation to the business of banking in India
• Prevent bank failures by prescribing minimum capital requirements
• Ensure balanced development and growth of banking companies
• Give specific powers to RBI
• Safeguard the interest of Depositor.

Reserve Bank As A Central Bank And Regulator

• The Reserve Bank was constituted under Section 3 of the Reserve Bank of India Act, 1934.
• Originally, under the RBI Act, the Bank had the responsibility of:
  • Regulating the issue of bank notes
  • Keeping of reserves for ensuring monetary stability and
  • Generally, to operate the currency and credit system of the country to its advantage.
• The Banking Regulation Act 1949 empowers the RBI to act as a regulator and supervisor of banking activities in India, including powers to issue licenses, control voting rights/shareholding, and manage personnel.

Major powers of the Reserve Bank as regulator and supervisor include

• Power to issue banking licenses
• Power of appointment and removal of banking boards/personnel
• Power to regulate the business of banks
• Power to give directions
• Power to inspect and supervise banks
• Power regarding audit of banks
• Power to collect, collate and furnish credit information
• Power relating to moratorium, amalgamation and winding up and
• Power to impose penalties.

Government As A Regulator Of Banks

• The Reserve Bank is the primary regulator of banks, but the Central Government also has extensive powers under the RBI Act and BR Act to regulate banks either directly or indirectly.
• The Governor and Central Board members of the RBI are appointed by the Government of India (GOI), which is also the sole shareholder.

Areas of Government power to regulate/supervise Banks

• Appeal against removal of managerial personnel of a Bank exercised by RBI, under Section 10B and 36AAof the Banking Regulation Act.
• Appeal against cancellation of banking license (under Section 22) and refusal of certificate regarding floating charge on assets (under Section 14A), may be preferred by the aggrieved banks, with the Government
• Suspension of operations and exemption from any of the provisions of the BR Act (under Section 4 and 53 respectively of the Act) may be permitted by the GOI on representation/ recommendation of the RBI.
• Under Section 6(1) of the Act the GOI notifies which other business a banking company may engage, in addition to the business of banking.

Control Over Co-operative Banks

• A co-operative bank is a co-operative society engaged in banking, including primary, district central, and state co-operative banks.
• Since 1965, with the introduction of Section 56 in the Banking Regulation Act, 1949, Co-operative banks are under the regulatory purview of the Reserve Bank.
• Formation and management are controlled by State Governments, while licensing and banking regulation are controlled by the Reserve Bank, leading to dual control.
• The Banking Regulation (Amendment) Act 2020, effective June 26, 2020, gives more powers to the RBI to restructure Co-operative Banks.
• Provides more control over management through powers of Supersession of Board of directors of a Cooperative Bank (Section 36AAA as amended) etc. and allow RBI to frame the revival plan for these Banks and protect the interests of the depositors.
• Co-operative Banks have also been permitted to raise capital through public/private issues, preferential shares, debentures etc.
• Amendments do not affect the existing powers of State Registrars of co-operative societies under State laws.
• The Reserve Bank can order the winding up of Co-operative banks registered under the Deposit Insurance and Credit Guarantee Corporation Act.