The Banking Regulation Act, 1949

What it does

The Act is the statute of the banking business. It defines a banking company by what it does, which is accepting deposits from the public for lending or investment, repayable on demand or otherwise and withdrawable by cheque, draft or order. It then says that such a company may not carry on that business without a licence from the Reserve Bank of India, and it regulates what a licensed bank may and may not do.

Much of the Act is a list of constraints. It restricts the other business a bank may undertake, controls how it lends to its own directors and to companies in which they are interested, limits the voting rights a single shareholder may exercise, and sets out how accounts are to be prepared and published. It also prohibits any person other than a banking company and the other bodies it names from accepting deposits repayable on demand, which is the provision that keeps ordinary deposit-taking inside the regulated sector.

The Reserve Bank's supervisory powers sit here. It may inspect a bank, call for information, and issue directions to banks in the public interest, in the interest of banking policy or in the interest of depositors. It may also apply to the court to wind up a bank, and may seek a scheme of moratorium, reconstruction or amalgamation where a bank is in difficulty.

Who it binds

Banking companies, whether in the private, public or foreign sector, and the people who run them. It also reaches the shareholders of a bank through the limits on voting rights and on the acquisition of shares. Co-operative banks are covered by a version of the Act with modifications, brought in by an amendment in 2020. A non-banking finance company is not a bank for this purpose and is regulated under the Reserve Bank of India Act, 1934.

What has changed, and when

• The Banking Laws (Amendment) Act, 2012 revised the limits on shareholder voting rights and strengthened the Reserve Bank's hand over bank governance and amalgamation, so an older description of those limits may no longer be accurate.
• An amendment of 2017, made alongside the Insolvency and Bankruptcy Code, 2016, empowered the Reserve Bank to direct banks to initiate insolvency resolution against defaulting borrowers and to issue directions on the resolution of stressed assets.
• The Banking Regulation (Amendment) Act, 2020 extended the Reserve Bank's supervisory powers over co-operative banks, including powers over amalgamation and reconstruction, and it was framed to protect depositors after a run of failures.

What turns on it in practice

The Act sits behind the work this practice does in debt recovery and the enforcement of security. A lender's standing to sue, to enforce a security interest or to be treated as a bank or financial institution is a question that begins with whether it is a banking company under this Act. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and the recovery statute give their remedies to banks and financial institutions as those terms are defined, so an entity that falls outside the definition may find those remedies unavailable to it.

It also decides what a bank may do in the borrower's account. The loan restrictions on directors and their companies, the limits on how a bank deals in shares and property, and the directions the Reserve Bank issues under the Act each become the subject of a borrower's defence or a regulatory proceeding. Regulatory banking matters before the Reserve Bank and before tribunals often turn on whether a direction was within the power the Act gives, and on whether the process before it was followed.

Finally, the Act matters to anyone raising money from the public. A business that takes deposits without being a bank, or without the exemption the law allows, is exposed to the prohibition in the Act, and the question of what is a deposit is a recurring one in disputes over loans from the public, from shareholders and between group companies.