The Banking Regulation Act, 1949 is India’s principal law for banks. It sets who may run a bank, how a bank must be capitalized and governed, what business it may and may not conduct, and how the Reserve Bank of India supervises, rescues, or winds up a bank in trouble.1India Code. The Banking Regulation Act, 1949 Originally enacted as the Banking Companies Act and renamed in 1966, it consolidates and amends the law on banking and controls everything from deposit-taking to liquidation.2India Code. The Banking Regulation Act, 1949
Who the Act Covers
Section 5 defines the perimeter. “Banking” means accepting deposits from the public for lending or investment, where those deposits are repayable on demand or otherwise and withdrawable by cheque, draft, or order. A “banking company” is any company that carries on this business in India.3India Code. The Banking Regulation Act, 1949 – Section 5 A company that only accepts money to fund its own manufacturing or trading is not a banking company under this definition.
Foreign banks with branches in India are covered too. Section 22 adds a specific check for companies incorporated outside India: before licensing, the RBI must be satisfied that the bank’s home country does not discriminate against Indian-registered banks.4India Code. Banking Regulation Act 1949 – Section 22 Licensing of Banking Companies
Cooperative banks are also within the Act’s reach through Section 56, which applies the Act to them with modifications suited to cooperative society law.5Deposit Insurance and Credit Guarantee Corporation. Banking Regulation Act, 1949 – Section 56 A 2020 amendment tightened this further by making core governance provisions such as Sections 10, 10A, and 35B directly applicable to urban cooperative banks.6Press Information Bureau. Banking Regulation Amendment Act 2020
Licensing a Bank
No company can carry on banking business in India without a license from the Reserve Bank. Section 22 sets both the application route and what the RBI must be satisfied about before granting one. The RBI may inspect the applicant’s books, and it looks at:
- Whether the company can pay present and future depositors in full as claims fall due, and whether its affairs are being conducted in a way that would harm depositors.
- Whether the proposed management is fit and not detrimental to the public interest or to depositors.
- Whether the capital structure is adequate and earning prospects are reasonable.
- Whether the license would serve the public interest without destabilizing the existing banking system in the proposed area of operations.
- Any other condition the RBI considers necessary to prevent operations that would harm depositors or the public.
These conditions come from Section 22(3).4India Code. Banking Regulation Act 1949 – Section 22 Licensing of Banking Companies A rejection must be in writing and give reasons.
What Banks Cannot Do
Section 8 draws a hard line against trading. No banking company may buy, sell, or barter goods, for itself or for others. The narrow exceptions are realizing collateral it already holds and handling bills of exchange for collection.7India Code. The Banking Regulation Act, 1949 – Section 8
Section 20 closes the door on insider lending. A banking company cannot grant loans or advances secured by its own shares. It also cannot lend to its own directors, to firms in which a director is a partner or guarantor, to companies in which a director holds a substantial interest, or to individuals for whom a director acts as partner or guarantor.8India Code. Banking Regulation Act 1949 – Section 20
Board and Management Rules
Section 10A sets a floor for board composition. At least 51 percent of a banking company’s directors must have specialized knowledge or practical experience in accountancy, agriculture, banking, cooperation, economics, finance, law, or small-scale industry. Within that group, at least two directors must have backgrounds specifically in agriculture, cooperation, or small-scale industry. The RBI can also recognize expertise in other useful fields.9India Code. Banking Regulation Act 1949 – Section 10A Board of Directors
Section 36 gives the RBI a direct lever over how a bank is run. If it believes a bank’s affairs are being conducted in a way that harms depositors or the public, the RBI can order management changes within a specified timeline. It can also caution a bank or prohibit it from entering into particular transactions.10India Code. The Banking Regulation Act, 1949 – Section 36
Capital and Reserve Requirements
Section 11 sets minimum paid-up capital and reserves that scale with a bank’s geographic reach:
- A bank with branches in more than one state must hold at least five lakh rupees. If any branch is in Mumbai or Kolkata, the minimum is ten lakh rupees.
- A bank operating within a single state starts at one lakh rupees for its principal office, plus ten thousand rupees for each additional branch in the same district and twenty-five thousand for branches in other districts, capped at five lakh rupees in total.
- Banks incorporated outside India must hold at least fifteen lakh rupees in aggregate capital and reserves, or twenty lakh rupees if they operate in Mumbai or Kolkata.
These are the figures in the statutory text and represent the statutory floor.11Indian Kanoon. Banking Regulation Act 1949 – Section 11 Requirement as to Minimum Paid-Up Capital and Reserves In practice, current RBI licensing guidelines require much higher capital for new banks.
Section 17 requires every banking company incorporated in India to maintain a reserve fund. Before declaring any dividend, the bank must transfer at least 20 percent of its annual profit to that fund.12India Code. Banking Regulation Act 1949 – Section 17 Reserve Fund
Section 18 requires non-scheduled banks to hold a daily cash reserve, as cash on hand or as a balance in a current account with the RBI. The percentage is fixed by the RBI through gazette notifications, and shortfalls attract penal interest.13India Code. Banking Regulation Act 1949 – Section 18 Cash Reserve
Section 24 adds a statutory liquidity ratio, requiring banks to hold liquid assets equal to a percentage of their total demand and time liabilities. The Act caps this at 40 percent; the exact figure is set by the RBI.
RBI’s Supervisory Powers
Section 35 gives the Reserve Bank broad inspection authority. It can send officers to inspect any banking company’s books and accounts at any time, without a specific trigger. The Central Government can also direct an inspection. Section 35(1-A) authorizes a separate scrutiny of a bank’s wider affairs. Every director, officer, and employee must cooperate, produce documents on demand, and may be examined under oath.14Indian Kanoon. The Banking Regulation Act, 1949 – Section 35
Section 35A is the fast-acting tool. When the RBI is satisfied that the public interest, banking policy, depositor protection, or proper management requires it, the RBI can issue written directions that a bank must follow. Directions can target a single bank or the whole sector, and the RBI can modify or cancel them later with conditions attached.15India Code. Banking Regulation Act 1949 – Section 35A Power of the Reserve Bank to Give Directions
When a Bank Is in Trouble
The Act gives regulators a graduated set of interventions, from temporary freeze to full liquidation.
Moratorium
Under Section 45, the RBI can apply to the Central Government to impose a moratorium on a banking company. During a moratorium, legal proceedings against the bank are stayed, and the bank generally cannot pay depositors, discharge liabilities, or grant new loans. The moratorium cannot exceed six months in total, including any extension.16Indian Kanoon. The Banking Regulation Act, 1949 – Section 45 The pause is usually used to arrange a rescue, often through amalgamation with a stronger bank.
Amalgamation
Section 44A covers voluntary mergers between banking companies. A scheme must first be approved by shareholders of each bank, requiring a majority in number representing two-thirds of shareholder value at a specially called meeting. The scheme then goes to the RBI for sanction. On sanction, the merger binds both banks and all their shareholders, and property and liabilities of the merging bank transfer to the acquiring bank by operation of law. Dissenting shareholders can claim the value of their shares as determined by the RBI, and that valuation is final.17India Code. Banking Regulation Act 1949 – Section 44A Procedure for Amalgamation of Banking Companies
Winding Up
Section 38 is the last resort. The High Court must order the winding up of a banking company if it cannot pay its debts or if the RBI applies for winding up. The RBI is required to apply when directed following an adverse inspection under Section 35. It may also apply on its own if the bank has failed to meet minimum capital requirements under Section 11, lost its license under Section 22, been barred from accepting fresh deposits, or if its continued operation would harm depositors.18India Code. Banking Regulation Act 1949 – Section 38 Winding Up by High Court A court-appointed liquidator then realizes assets and distributes proceeds to creditors in the statutory priority order.