Synetic College Logo
Unit 1 of 4 · M.Com Sem 4

Unit 1: Banking Regulation Act, 1949

Banking Laws notes · PTU syllabus (MCOPBI421-18)

4 min read7 topics10 exam questions
On this page
  1. Unit summary
  2. Concept of bank and banker; functions and classification
  3. Functions and classification of banks
  4. Banker–customer relationship
  5. Government and RBI control over banking companies
  6. Management of banking companies
  7. Reconstruction, reorganisation, suspension and winding up
  8. Social control over banking
  9. Key terms
  10. Quick revision
  11. Important questions

Unit summary

The Banking Regulation Act, 1949 is the core law governing banking companies in India. This unit covers the concept of bank and banker, functions and classification of banks, the banker–customer relationship, government and RBI control over banks, management of banking companies, reconstruction and reorganisation, suspension and winding up, and social control over banking.

After this unit you can

  • Explain the concept of bank and banker and classify banks
  • Explain the banker–customer relationship
  • Explain RBI and government control over management of banking companies
  • Explain reconstruction, suspension, winding up and social control of banks

PTU syllabus topics

  • Concept of bank and banker
  • functions and classification of banks
  • bank-customer relationship
  • government control
  • management of banking companies
  • reconstruction and reorganization
  • suspension and winding up
  • social control over banking
ClassificationBanking Regulation Act, 1949: key controls
RBI control over banks

  • Licensing

    Section 22: licence to do banking

  • Management

    Board, CEO appointments

  • Cash reserve and SLR

  • Inspection and directions

  • Amalgamation and winding up

1

Topic 1

Concept of bank and banker; functions and classification

  • Banker: a person or company carrying on the business of banking; the Banking Regulation Act defines banking (Section 5(b)) as accepting deposits from the public for lending or investment, repayable on demand or otherwise and withdrawable by cheque, draft or order.
  • Tests of a banker: accepts deposits from the public, withdrawable by cheque, lends or invests, banking is the main business.
2

Topic 2

Functions and classification of banks

ClassificationTypes of banks in India
Banks

  • Commercial banks

    Public sector, private sector, foreign banks, RRBs

  • Small finance banks

    Small loans to unserved sections; 75% priority sector lending

  • Payments banks

    Deposits up to ₹2 lakh, payments and remittances, no lending

  • Co-operative banks

    Urban co-operative banks, state and district central co-operative banks

  • Development banks

    NABARD, SIDBI, EXIM Bank, NHB, NaBFID

TypeOwnershipExamples
Public sector banksGovernment holds majoritySBI, PNB, Bank of Baroda, Canara Bank (12 PSBs)
Private sector banksPrivate shareholdersHDFC Bank, ICICI Bank, Axis, Kotak, IndusInd
Foreign banksIncorporated abroad (branches or WOS)Standard Chartered, HSBC, DBS Bank India (WOS)
Regional Rural BanksCentre 50%, sponsor bank 35%, state 15%Punjab Gramin Bank
Small finance banksPrivateAU SFB, Ujjivan, Equitas
Payments banksPrivate/GovernmentAirtel Payments Bank, India Post Payments Bank
Co-operative banksMembersSaraswat Co-op Bank, Punjab State Co-op Bank
  • Scheduled vs non-scheduled: scheduled banks are in the Second Schedule of the RBI Act — eligible for RBI facilities.
3

Topic 3

Banker–customer relationship

ClassificationTypes of banker–customer relationships
Banker–customer

  • Debtor–creditor

    Customer deposits money — bank is debtor

  • Creditor–debtor

    Bank lends — bank is creditor

  • Trustee–beneficiary

    Valuables or money held for a specific purpose

  • Agent–principal

    Collecting cheques, paying bills, buying securities

  • Bailee–bailor

    Safe custody of valuables

  • Lessor–lessee

    Safe deposit lockers

  • Pledgee–pledgor / mortgagee–mortgagor

    Loans against security

  • Special features of the debtor–creditor relationship: the customer must demand repayment; at the branch where the account is kept; demand in writing (cheque).
  • Obligations of the banker: honour cheques (if funds available), maintain secrecy of accounts (exceptions — law, public duty, bank's interest, customer's consent — Tournier v. National Provincial Bank, 1924), follow customer's mandate, give notice before closing accounts.
  • Who is a customer: a person who has an account with the bank (Great Western Railway v. London and County Banking Co.); duration of dealing is not essential.
4

Topic 4

Government and RBI control over banking companies

Key termsKey definitions (Section 5)
Banking (5(b))
Accepting deposits for lending or investment, repayable on demand or otherwise and withdrawable by cheque, draft or order
Banking company (5(c))
A company transacting the business of banking in India
Demand liabilities (5(f))
Liabilities payable on demand
Secured loan (5(n))
Loan secured by assets of value not less than the amount
Approved securities (5(a))
Securities in which trust money may be invested and other notified securities
  • Section 6 — forms of business: borrowing, lending, discounting, dealing in bills, guarantees, collecting, safe deposit, acting as agent, underwriting, managing property for satisfaction of claims, leasing (with approval), etc.
  • Section 7: use of the words "bank", "banker", "banking" restricted to banking companies.
  • Section 8: prohibition of trading (buying/selling goods) except as part of realising security.
  • Section 9: disposal of non-banking assets within 7 years.
  • Section 10: management restrictions — no managing agents.
  • Section 11: minimum paid-up capital and reserves.
  • Section 12: capital structure — only ordinary shares (and preference shares as permitted).
  • Section 15: no dividend until capitalised expenses are written off.
  • Section 17: transfer of at least 20% of profit to reserve fund (RBI requires 25%).
  • Section 18 and 24: CRR for non-scheduled banks and SLR (up to 40% of NDTL).
  • Section 20: restrictions on loans to directors and their interests.
  • Section 22: licensing of banking companies by RBI.
  • Section 23: RBI permission for opening new branches.
  • Section 35: inspection by RBI; Section 35A: RBI directions; Section 36AA: removal of managerial personnel.
5

Topic 5

Management of banking companies

  • Board of directors (Section 10A): at least 51% of directors must have special knowledge or practical experience in accountancy, agriculture, banking, co-operation, economics, finance, law, small-scale industry or other areas useful to banks; no director (other than whole-time chairman) to hold office for more than 8 continuous years.
  • Chairman/MD/CEO: appointment, reappointment and removal of private bank CEOs need RBI approval (Section 35B); RBI may remove managerial personnel (Section 36AA) or supersede the board (Section 36ACA).
  • Prohibitions: no managing agents (Section 10), restrictions on remuneration, loans to directors (Section 20), voting rights cap (26% in private banks).
  • Fit and proper criteria for directors and significant shareholders (RBI directions).
6

Topic 6

Reconstruction, reorganisation, suspension and winding up

  • Suspension of business and moratorium (Section 45): RBI may apply to the Central Government for a moratorium and prepare a scheme of reconstruction or amalgamation (e.g., Global Trust Bank merged into OBC, 2004; Lakshmi Vilas Bank into DBS, 2020).
  • Winding up by the High Court (Section 38 onwards): on RBI's application if the bank cannot pay debts, licence cancelled, or it is detrimental to depositors; RBI or DICGC may be appointed official liquidator (Section 38A).
  • Preferential payment to depositors (Section 43A): depositors paid up to the DICGC insured amount first; DICGC pays insured deposits within 90 days (amendment 2021).
  • Voluntary winding up only with RBI certification that the bank can pay all depositors.

Exam tip

Since banks are excluded from the IBC, bank failures are resolved under the BR Act — usually by amalgamation rather than liquidation, to protect depositors.

7

Topic 7

Social control over banking

  • Social control (1968): amendments to the BR Act to make banks serve social objectives — National Credit Council, board representation of agriculture, SSI and co-operation, restrictions on loans to directors' concerns, priority to agriculture and small industry.
  • Followed by nationalisation of 14 banks (1969) and 6 banks (1980) under the Banking Companies (Acquisition and Transfer of Undertakings) Acts — to extend banking to rural areas and weaker sections.
  • Present-day equivalents: priority sector lending (40% of ANBC), lead bank scheme, financial inclusion mandates (PMJDY), service area approach.

Key terms

Banker
One who carries on the business of banking
Section 10A
Requirement of experts on a bank's board
Section 35B
RBI approval for appointment of private bank CEOs
Moratorium
Suspension of a bank's business by the Central Government on RBI's request
Social control
1968 measures to direct banks towards social objectives

Quick revision

  • Banking under Section 5(b); tests of a banker.
  • Classification: commercial, co-operative, RRBs, SFBs, payments banks.
  • Banker–customer relationships; secrecy.
  • Control: licensing (22), branches (23), CRR/SLR, inspection (35), directions (35A).
  • Management: Section 10A boards; RBI approvals; moratorium (45) and winding up; social control 1968.

Important exam questions

Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).

Short-answer questions

  1. Q1.Define banking under the BR Act.
  2. Q2.Who is a banker?
  3. Q3.What does Section 10A provide?
  4. Q4.What is Section 35A?
  5. Q5.What is a moratorium on a bank?
  6. Q6.What was social control of banks?

Long-answer questions

  1. Q1.Explain the concept of bank and banker and classification of banks.
  2. Q2.Explain the banker–customer relationship.
  3. Q3.Explain the control of RBI and government over management of banking companies.
  4. Q4.Explain reconstruction, suspension and winding up of banking companies and social control.

Stuck on this unit?

Message SBS on WhatsApp for help with Banking Laws, or to ask about studying M.Com at Synetic.

WhatsApp us