Analysis of Banking Regulation Act 1949

Analysis of Banking regulation act 1949
The Banking Regulation Act, 1949 is Central legislation that regulates all banking firms
based in India. Passed as the Banking Companies Act, it is one of the most important
legislation for banks. It was first enforced from 16 March 1949 only to be later changed
to the Banking Regulation Act in 1966. It is applicable in Jammu and Kashmir since 1956.
Initially, the provisions of this legislation applied only to banking companies. But, after
the 1965 amendment, it applied to cooperative banks as well.
It must be noted that the provisions of the Banking Regulation Act, 1949 (previously
known as the Banking Companies Act, 1949) are in addition to, and not in the derogation
of the Companies Act, 1956 unless expressly provided.
The banking business may be carried on by a sole trader, a partnership, or by a company.

The Companies Act, however, provides that if an association, company, or partnership of
more than ten persons is to carry on the banking business, it has to be registered as a
company under the Act.
The Banking Regulation Act empowers the Reserve Bank of India (RBI) to license banks
and regulate their shareholding. It also empowers the RBI regarding the appointments
and management of the boards. RBI can also lay down instructions for audits, control
mergers and liquidation as well as issue directives on banking policy.
Critical analysis
There are many advantages and disadvantages of regulating the banking sector. These
advantages and limitations depend upon the financial conditions, economic policies, and
existing legal framework of the country on the subject.
Regulating the banking business can bring fairness through government control. It can go
a long way in safeguarding the interests of the depositors. But, most importantly, it can
help build the confidence and trust of the public in banks. However, on the other hand,
unnecessary control and heavy regulation can also restrict the banks. It can prevent them
from performing their tasks freely and ultimately stop them from earning adequate
profits.
Now, if we look at the Banking Regulation Act, 1949, it was enacted to organize the
banking business in India to better serve the interests of the public. It gave several
powers to the RBI including the power to license banks, regulate the shareholding and
other operations, and control mergers among others.
This Act has seen multiple amendments over the years. The 1965 Amendment Act
brought cooperative banks under the purview of the Banking Regulation Act. The 1994
Amendment Act introduced the post of Chairman. An amendment in 2004 empowered
RBI to supersede the board of directors of cooperative banks. The amendment in 2007
made it mandatory for scheduled banks to maintain cash reserve while the one in 2017
focused on stressed assets.
Many blank spaces were filled by these amendments. The primary objective was to free
the banking system from its lacunas and promote its growth and development. The recent
amendment of 2017 came as a result of the sufferings faced by the banking system of the
country due to stressed assets.
The banks were comfortable in lending to customers without a thorough background

check and this led to serious credibility issues. Estimates tell that a humongous amount of
Rs 9.64 trillion was stuck under stressed assets. The 50 major defaulters included some
well-known companies as well as some banks. The 2017 amendment allowed RBI to deal
with the situation. It empowered RBI to initiate insolvency proceedings on certain
stressed assets and issue directives for the same.
However, the ground reality is different. The newly introduced provisions fail to solve
the underlying issues. As per an RBI official, the Banking Regulation Act does not
wholly apply to state-owned banks as much as it does on private banks. It lacks the
essential powers that render it helpless when it comes to dealing with certain errant banks
and bankers.
Scope for reform
The Banking Regulation Act dates back to the year 1949 and contains certain rules and
regulations that do not fit well with the current banking system. There have been many
amendments to ensure the same but certain lacunas still exist. The issue of NPAs and
other stressed assets has haunted the banking sector of India for years now. And with the
major cases of defaulters coming out in the open over the last few years, it brings forth
the question—Is the 2017 Amendment enough?
RBI has many powers including supervisory ones. Though, it has to consult the
government before taking any action against the public sector banks. The Finance
Ministry maintains that the RBI has adequate powers to resolve the issues. It has even
identified 13 sections of the Banking Regulation Act in this regard.
The newly introduced amendment has tried to leverage the stressed assets burden from
the financial system. But it doesn’t seem enough. The stressed assets and NPAs are
allowed to linger on for years to the extent it is too late and the defaulters make a run out
of the country. It not only hampers the banks but also puts a dent in the public’s
confidence and trust. The need of the hour is not just strong provisions but also a more
vigilant attitude from the RBI. The present laws are not sufficient to deal with the NPA
crisis and they have not been sufficient for years. The Indian banking sector needs reform
not just on paper but also in reality.
Conclusion
Before the passing of the Banking Regulation Act, 1949 there were many discrepancies
prevalent in the banking sector. It was highly unorganized and a failure. With the
introduction of this Act, the functioning of the banking firms has been regulated. This Act
has ensured developed and balanced growth in the banking sector. The breakthrough was
the conferring of powers on RBI to regulate banks and their functioning. In a nutshell,
this Act has brought all the banking firms under one umbrella with the RBI being the
governing body.
However, we are still witnessing the poor status of the banking sector. The burden of
NPAs and stressed assets has choked the system. In recent years, we have witnessed
cases such as the case of Rs. 13,000 crore fraud with PNB. We have also witnessed bank
mergers on a large scale. This must be seen as a cry for help. The Banking Regulation
Act was introduced to help strengthen the root level of the banking structure within India.
If the Act is not equipped well, it will not be able to serve its objectives.

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Analysis of Banking regulation act 1949

The banking business may be carried on by a sole trader, a partnership, or by a company.

The banks were comfortable in lending to customers without a thorough background

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