Banking Regulation Act, 1949

Context:

Banking Regulation Act, 1949 completes 75 Years.

Provisions of the Banking Regulation Act, 1949:

• Licensing and Operations –
  • Licensing: Banks must obtain a license from the Reserve Bank of India (RBI) to operate.
  • Branch Operations: The Act regulates the opening and closing of branches, ensuring that banks expand in a controlled and sustainable manner.
• Management Oversight –
  • Board Composition: The RBI has control over the composition of the board of directors of banking companies.
    • At least 51% of the board members must have special knowledge or practical experience in fields such as accountancy, agriculture, banking, economics, finance, law, and small-scale industry.
  • Appointment of Directors: The Act mandates that banks must have a chairman of the board of directors, and the RBI has the authority to approve or remove directors and appoint additional directors if necessary.
• Financial Stability –
  • Cash Reserves and Liquid Assets: Banks are required to maintain a certain percentage of their deposits as cash reserves with the RBI. They must also hold liquid assets to ensure they can meet their obligations.
  • Capital Adequacy: The Act sets minimum capital requirements for banks to ensure they have sufficient capital to absorb losses and protect depositors’ interests.
• Prohibition of Trading – According to Section 8 of the Act, banking companies are prohibited from directly or indirectly dealing in the buying, selling, or bartering of goods. However, they may engage in transactions related to bills of exchange received for collection or negotiation.
• Non-Banking Assets – Section 9 of the Act states that a banking company cannot hold any immovable property, except for its own use, for a period exceeding 7 years from the date of acquisition.
  • The RBI may extend this period by up to 5 years if necessary.
• Public Disclosure – The Act promotes transparency in banking operations through mandatory audits and the public disclosure of financial statements.
• Payment of Dividend – The Act imposes restrictions on the payment of dividends by banks to ensure that they retain sufficient earnings to maintain their financial stability and meet regulatory requirements.
• Prompt Corrective Action (PCA) Framework – The PCA framework, introduced by the RBI under the Act, helps identify financial distress in banks early and mandates corrective measures.
• Digital Banking and Financial Inclusion – The Act has been adapted to meet new challenges such as digital banking, financial inclusion, and global financial standards.
  • For example, the introduction of Payment Banks in 2014 and Small Finance Banks in 2016.
• Capital Adequacy and Liquidity Coverage: Regulatory measures under the Act, such as capital adequacy requirements and liquidity coverage ratios, have helped insulate Indian banks from the effects of global financial crises

Source: EPW

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Previous Year Question

With reference to the Indian economy, “Collateral Borrowing and Lending Obligations” are the instruments of:

[UPSC Civil Services Exam – 2024 Prelims]

(a) Bond market
(b) Forex market
(c) Money market
(d) Stock market

Answer: (c)

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