India Banking Regulation Act

The law governing the working and functions of banks in India was .passed in 1949 and named as the Banking Regulation Act, 1949. Before passing this Act, the banking companies were governed by the Indian Companies Act, 1913. Since banking as a business has its own distinctive features, it was felt necessary to have a separate Act concerning only the banking companies. Hence an Act was passed in 1949, regulating the banking companies. In order to cover the cooperative banks also, the name of the Act was changed as the “Banking Regulation Act, 1949”.

 The Banking Regulation Act, 1949 was passed in February 1949 with the following objectives in view:

  1. Comprehensive Legislation: The Indian Companies Act, 1913 was inadequate and unsatisfactory to regulate and control the business of banking in India and therefore, there was a need to have specific legislation containing comprehensive provisions, particularly to the business of banking in India.
  2. To Prevent Bank Failures: The bank failures were common in those days due to the inadequacy of capital and hence prescribing minimum capital requirements was necessary. The Banking Regulation Act, 1949 was enacted to prevent such bank failures by certain minimum capital requirements.
  3. To Avoid Cut Throat Competition: The Act passed aims for avoiding cutthroat and wasteful competition among the banking companies. The Act also regulates the opening of branches and changing the location of the existing branches.
  4. Ensuring Balanced Development of Banks: In order to avoid indiscriminate opening of new branches and thereby ensuring the balanced development of banking companies, the system of licensing is provided in this Act.
  5. Regulation of Bank Credit and Working of Banks: The RBI has been given powers to approve the appointment, reappointment, and removal of the chairman, directors, and officers of the banks. This will ensure the efficient and smooth working of banks in India.
  6. Safeguarding the Interests of Depositors: The Act protects the interest of the depositors at the public at large by incorporating certain provisions such as prescribing cash reserves and liquidity ratios. This would enable the banks to meet the demand of the depositors.
  7. Strengthening the Banking System: This Act provides for compulsory amalgamation of weaker banks with stronger ones to facilitate strengthening the banking system of our country.
  8. Controlling Foreign Banks: The Act contains certain provisions which restrict the foreign banks to invest funds of the Indian depositors outside India.
  9. Providing Quick and Easy Liquidation: The Banking Regulation Act also provides for quick and easy liquidation of the banks if they are not able to continue further or amalgamate with other banks.

The Banking Regulation Act, 1949 as amended up-to-date is divided into five parts and contains five schedules. This Act is applicable to all banking companies including co-operative banks. The provisions of this Act provide for achieving the above-mentioned objectives for which the Act was enacted.

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