1. Use of words ‘bank’, ‘banker’, ‘banking’ or ‘banking company’ (Sec.7): According to Sec. 7 of the Banking Regulation Act, no company other than a banking company shall use the words ‘bank’, ‘banker’, ‘banking’ or ‘banking company’ and no company shall carry on the business of banking in India, unless it uses the above mentioned words in its name.
2. Prohibition of Trading (Sec. 8): According to Sec. 8 of the Banking Regulation Act, a banking company cannot directly or indirectly deal in buying or selling or bartering of goods. But it may, however, buy, sell or barter the transactions relating to bills of exchange received for collection or negotiation.
3. Disposal of banking assets (Sec. 9): According to Sec. 9 “A banking company cannot hold any immovable property, howsoever acquired, except for its own use, for any period exceeding seven years from the date of acquisition thereof. The company is permitted, within the period of seven years, to deal or trade in any such property for facilitating its disposal”.
4. Management (Sec. 10): Sec. 10 (a) states that not less than 51% of the total number of members of the Board of Directors of a banking company shall consist of persons who have special knowledge or practical experience in one or more of the following fields:
a) Accountancy
b) Agriculture and Rural Economy
c) Banking
d) Cooperative
e) Economics
f) Finance
g) Law
h) Small Scale Industry.
5. Requirements as to minimum paid-up capital and reserves (Sec. 11): Sec. 11 (2) of the Banking Regulation Act, 1949, provides that no banking company shall commence or carry on business in India, unless it has minimum paid-up capital and reserve of such aggregate value as is noted below:
(a) Foreign Banking Companies: In case of banking company incorporated outside India, aggregate value of its paid-up capital and reserve shall not be less than Rs. 15 lakhs and, if it has a place of business in Mumbai or Kolkata or in both, Rs. 20 lakhs. It must deposit and keep with the R.B.I, either in Cash or in unencumbered approved securities:
(i) The amount as required above, and
(ii) After the expiry of each calendar year, an amount equal to 20% of its profits for the year in respect of its Indian business.
(b) Indian Banking Companies: In case of an Indian banking company, the sum of its paid-up capital and reserves shall not be less than the amount stated below:
(i) If it has places of business in more than one State, Rs. 5 lakhs, and if any such place of business is in Mumbai or Kolkata or in both, Rs. 10 lakhs.
(ii) If it has all its places of business in one State, none of which is in Mumbai or Kolkata, Rs. 1 lakh in respect of its principal place of business plus Rs. 10,000 in respect of each of its other places of business in the same district in which it has its principal place of business, plus Rs. 25,000 in respect of each place of business elsewhere in the State.
(iii) If it has all its places of business in one State, one or more of which are in Mumbai or Kolkata, Rs. 5 lakhs plus Rs. 25,000 in respect of each place of business outside Mumbai or Kolkata? No such banking company shall be required to have paid-up capital and reserve excluding Rs. 10 lakhs.
6. Regulation of capital and voting rights of shareholders (Sec. 12): According to Sec. 12, no banking company can carry on business in India, unless it satisfies the following conditions:
(a) Its subscribed capital is not less than half of its authorized capital, and its paid-up capital is not less than half of its subscribed capital.
(b) Its capital consists of ordinary shares only or ordinary or equity shares and such preference shares as may have been issued prior to 1st April 1944.
(c) The voting right of any shareholder shall not exceed 5% of the total voting right of all the shareholders of the company.
7. Restriction on Commission, Brokerage, Discount etc. on sale of shares (Sec. 13): According to Sec. 13, a banking company is not permitted to pay directly or indirectly by way of commission, brokerage, discount or remuneration on issues of its shares in excess of 2½% of the paid-up value of such shares.
8. Prohibition of charges on unpaid capital (Sec. 14): A banking company cannot create any charge upon its unpaid capital and such charges shall be void.
9. Restriction on Payment of Dividend (Sec. 15): According to Sec. 15, no banking company shall pay any dividend on its shares until all its capital expenses (including preliminary expenses, organisation expenses, share selling commission, brokerage, amount of losses incurred and other items of expenditure not represented by tangible assets) have been completely written-off.
10. Reserve Fund/Statutory Reserve (Sec. 17): According to Sec. 17, every banking company incorporated in India shall, before declaring a dividend, transfer a sum equal to 25% of the net profits of each year (as disclosed by its Profit and Loss Account) to a Reserve Fund. The Central Government may, however, on the recommendation of RBI, exempt it from this requirement for a specified period.
11. Cash Reserve (Sec. 18): Under Sec. 18, every banking company (not being a Scheduled Bank) shall, if Indian, maintain in India, by way of a cash reserve in Cash, with itself or in current account with the Reserve Bank or the State Bank of India or any other bank notified by the Central Government in this behalf, a sum equal to at least 3% of its time and demand liabilities in India.
The Reserve Bank has the power to regulate the percentage also between 3% and 15% (in case of Scheduled Banks). Besides the above, they are to maintain a minimum of 25% of its total time and demand liabilities in cash, gold or unencumbered approved securities.
12. Liquidity Norms or Statutory Liquidity Ratio (SLR) (Sec. 24): According to Sec. 24 of the Act, in addition to maintaining CRR, banking companies must maintain sufficient liquid assets in the normal course of business. The section states that every banking company has to maintain in cash, gold or unencumbered approved securities, an amount not less than 25% of its demand and time liabilities in India.
This percentage may be changed by the RBI from time to time according to economic circumstances of the country. This is in addition to the average daily balance maintained by a bank.
13. Restrictions on Loans and Advances (Sec. 20): After the Amendment of the Act in 1968, a bank cannot:
(i) Grant loans or advances on the security of its own shares, and
(ii) Grant or agree to grant a loan or advance to or on behalf of:
a) Any of its directors;
b) Any firm in which any of its directors is interested as partner, manager or guarantor;
c) Any company of which any of its directors is a director, manager, employee or guarantor, or in which he holds substantial interest; or
d) Any individual in respect of whom any of its directors is a partner or guarantor.
14. Accounts and Audit (Sees. 29 to 34A): The above Sections of the Banking Regulation Act deal with the accounts and audit. Every banking company, incorporated in India, at the end of a financial year expiring after a period of 12 months as the Central Government may by notification in the Official Gazette specify, must prepare a Balance Sheet and a Profit and Loss Account as on the last working day of that year, or, according to the Third Schedule, or, as circumstances permit.
According to Sec. 30 of the Banking Regulation Act, the Balance Sheet and Profit and Loss Account should be prepared according to Sec. 29, and the same must be audited by a qualified person known as auditor. Moreover, every banking company must furnish their copies of accounts and Balance Sheet prepared according to Sec. 29 along with the auditor’s report to the RBI and also the Registers of companies within three months from the end of the accounting period.