Banking Laws — RBI Act 1934 & BR Act 1949
The two mother laws of Indian banking. Every section number, every power, every prohibition — from Section 3 (establishment of RBI) to Section 56 (cooperative banks). If it governs a bank in India, it’s in one of these two Acts.
Two Laws — Overview
The RBI Act governs RBI; the BR Act governs banks
🏛️ Reserve Bank of India Act, 1934
Structure: 5 Chapters + 2 Schedules. Commenced business: 1st April 1935 as a private bank with paid-up capital of Rs 5 crores. Nationalised: 1st January 1949 under Reserve Bank (Transfer of Public Ownership) Act, 1948. Governs: How RBI is organised, its powers as central bank, its monetary policy functions, its role as banker to government, currency issuance, NBFC regulation.
📗 Banking Regulation Act, 1949
Originally called Banking Companies Act. Renamed to Banking Regulation Act. In force: 16th March 1949. 56 sections in 5 Parts + 5 Schedules. Governs: How banks in India operate — licensing, capital, management, deposits, loans, SLR, inspection, supersession, nomination. Made applicable to cooperative banks from 1 March 1966 (Section 56, Act 23 of 1965).
Key Sections — RBI Act 1934
Every important section number with its subject
Definition of Scheduled Bank
A “scheduled bank” means a bank included in the Second Schedule of the RBI Act, 1934. Minimum paid-up capital + reserves: Rs 5 lakhs. Eligible to borrow from RBI at Bank Rate and to join clearing houses.
Establishment of RBI
A bank to be called the Reserve Bank of India shall be constituted to take over currency management from Central Government and carry on banking. RBI is a body corporate with perpetual succession and a common seal.
Capital of RBI
The capital of the Bank shall be Rs 5 crores. (As on 31st March 2022, total capital reserves of RBI stood at Rs 6,741 crores.)
Management — Central Board of Directors
General superintendence entrusted to a Central Board. Board: Governor + max 4 Deputy Governors + 4 directors from Local Boards (one each) + 10 directors from various fields nominated by Central Govt + 2 Govt officials (amendment 2012). Governor and Deputy Governors are whole-time officials. Tenure: fixed by Central Govt, not exceeding 5 years, eligible for reappointment.
Local Boards
A Local Board for each of the four geographical territories (Western, Eastern, Northern, Southern — as per First Schedule). Each board has 5 members appointed by Central Government. Members represent territorial/economic interests + cooperative/indigenous banks. Tenure: 4 years, reappointable for max two terms (total 8 years).
Meetings of Central Board
Central Board meetings shall be convened at least 6 times in each year and at least once in each quarter. Governor presides; in absence, an authorised Deputy Governor. In case of equality of votes, Governor has a second/casting vote.
Business RBI Can Do (Permitted)
Accept deposits without interest from Central/State Govts, banks, local authorities. Purchase/sell foreign exchange, securities, rediscount bills. Accept money as deposits under Standing Deposit Facility Scheme for liquidity management.
Business RBI CANNOT Do (Prohibited)
RBI CANNOT: Engage in trade or have direct interest in commercial/industrial undertaking | Purchase shares of any banking/other company | Grant loans/advances | Draw/accept bills payable other than on demand | Allow interest on deposits or current accounts | Advance money on mortgage of immovable property (except for own business premises/residences).
Banker to the Central Government
RBI shall undertake to accept monies for account of Central Government, make payments up to credit, carry out exchange/remittance and other banking operations, including management of public debt of the Union.
Banker to State Governments (By Agreement)
RBI may, by agreement with any State Government, undertake all money/remittance/exchange/banking transactions — including deposit (free of interest) of all cash balances and management of public debt and issue of loans by that State.
Sole Right to Issue Bank Notes
RBI shall have the sole right to issue bank notes in India. From implementation, Central Government shall cease to issue any currency notes.
Denomination of Currency Notes
Denominations: Rs 2, 5, 10, 20, 50, 100, 500, 1000, 5000 and 10,000 rupees or such other values not exceeding Rs 10,000 as the Central Government may specify on recommendation of Central Board.
Legal Tender Character
Every bank note shall be legal tender at any place in India. Central Government (on recommendation of Central Board) may declare any series of bank notes to cease to be legal tender.
Re-issue of Notes — Prohibited
RBI shall NOT re-issue bank notes which are torn, defaced or excessively soiled.
CRR — Scheduled Banks to Keep Cash Reserves
Every scheduled bank shall maintain with RBI an average daily balance not less than such percentage of total demand and time liabilities (DTL) as RBI may notify. No minimum or maximum percentage is mentioned in the Act — RBI decides the level. This is the legal basis for CRR.
RBI Exempt from Income Tax
RBI shall not be liable to pay income-tax or super-tax on any of its income, profits or gains.
Publication of Bank Rate
RBI shall make public from time to time the standard rate at which it is prepared to buy or rediscount bills of exchange or other commercial paper. This is the Bank Rate (also called Discount Rate).
Definition of NBFC
Defined in Chapter IIIB. An NBFC is: (i) a financial institution which is a company; (ii) a non-banking institution which is a company having as its principal business receiving deposits or lending; (iii) any other class of non-banking institutions as RBI may specify with Central Govt approval.
NBFC Registration
NBFCs must obtain Certificate of Registration (CoR) from RBI and have minimum net owned funds. Currently minimum NOF: Rs 2 crores (amended 2019 — but original Rs 25 lakhs mentioned; Rs 2 crores is current requirement for commencing business).
Monetary Policy Committee (MPC)
Constituted by Central Government. Determines policy interest rate to achieve inflation target. 6 members: 3 RBI officials (Governor as Chairperson) + 3 external members. First MPC constituted September 29, 2016. Meet at least 4 times per year.
Liquidation of RBI
Nothing in the Companies Act shall apply to RBI. RBI shall not be placed in liquidation except by order of the Central Government and in such manner as it may direct.
Key Sections — Banking Regulation Act 1949
All critical sections — definitions, capital, management, SLR, inspection, supersession
Title and Commencement
Called the Banking Regulation Act, 1949. Extends to whole of India. In force: 16th March, 1949. Does NOT apply to primary agricultural credit societies and cooperative land mortgage banks.
Definition of Banking
“Banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise. A company only engaged in manufacture that accepts deposits merely for financing its own business is NOT a banking company.
Banking Company
A “banking company” means any company which transacts the business of banking in India. A “branch” or “branch office” means any branch at which deposits are received, cheques cashed or moneys lent.
Business Banks May Do
Permitted businesses include: borrowing/raising money; lending/advancing; dealing in bills of exchange, promissory notes, debentures; issuing letters of credit, traveller’s cheques; buying/selling foreign exchange; acquiring/underwriting/dealing in shares, bonds, securities; collecting/transmitting money; safe deposit vaults; acting as government agent; executor/trustee services; and any other business specified by Central Government (leasing and factoring have been specified).
Use of “Bank” in Name
Every banking company, and no other company, shall use the words “bank”, “banker” or “banking” as part of its name. No firm, individual or group of individuals shall use these words in their name for carrying on any business.
Prohibited Activities for Banks
Banks CANNOT: (1) directly or indirectly deal in buying/selling/bartering of goods or engage in any trade; (2) buy/sell/barter goods for others; (3) hold any immovable property for more than 7 years from acquisition (except for own use). No managing agent allowed.
Management of Banks
Board must include not less than 51% of directors with professional/practical experience in accountancy, agriculture, banking, cooperation, economics, finance, law, small-scale industry. Every banking company must be managed by a whole-time chairman who shall be one of the directors. No managing agent permitted.
Minimum Capital
Aggregate value of paid-up capital and reserves shall not be less than Rs 5 lakhs for banks established after 16th September, 1962. Amount varies with number of places of business.
Capital Requirements
Subscribed capital ≥ 50% of authorised capital. Paid-up capital ≥ 50% of subscribed capital. Capital must consist of ordinary shares (equity shares) only. A shareholder cannot exercise voting rights in excess of 10% of total voting rights (RBI may increase to 26% in phased manner).
Dividend Restrictions
No bank shall pay any dividend on its shares until all its capitalised expenses (preliminary expenses, share-selling commission, losses, intangible assets) have been completely written off.
Statutory Reserve Fund
Every banking company shall create a Statutory Reserve Fund and transfer at least 20% of its net profit each year before declaring any dividend. When Reserve Fund + Share Premium equals paid-up capital, Central Govt (on RBI recommendation) may permit not to transfer. If appropriated, must report to RBI within 21 days.
Cash Reserve for Non-Scheduled Banks
Every banking company NOT being a scheduled bank shall maintain a Cash Reserve with itself or in current account with RBI equal to such percentage of total DTL as stipulated by RBI. (Scheduled banks maintain CRR under Section 42 of RBI Act.)
Restrictions on Loans and Advances
No banking company shall: (a) grant loans/advances on the security of its own shares; or (b) enter into any commitment for granting loans to (i) any of its directors; (ii) any firm in which its director is a partner/manager/guarantor; (iii) any company in which a director is a Director/Managing Agent/Manager/guarantor; (iv) any individual in respect of whom a director is a partner/guarantor.
RBI Control over Advances
Where RBI is satisfied that it is necessary in public interest or depositors’ interest, it may determine policy with regard to advances to be followed by banks. Banks must follow such policy regarding: purpose of advance, margins to be maintained, maximum quantum to a single entity, and rate of interest.
Licensing of Banks
A banking company cannot carry on banking business in India without a licence from RBI. RBI grants licence after being satisfied about the bank’s ability to pay depositors, soundness of management, adequate capital, public interest considerations. RBI may cancel licence if bank ceases banking or fails to comply with conditions.
Opening New Branches
Without prior permission of RBI, a banking company cannot open a new branch or change location of existing branch. A temporary branch may be opened (max 1 month) for exhibitions/conferences/”melas” if bank already has a branch in that city.
Statutory Liquidity Ratio (SLR)
Every bank shall maintain a liquid reserve in cash, gold or unencumbered approved securities at least 25% (ceiling 40%) of total demand and time liabilities. This is the SLR provision — maintained by the bank itself (unlike CRR which is with RBI).
Return of Unclaimed Deposits
Every banking company shall, within 30 days after the close of each calendar year, submit a return to RBI of all accounts not operated upon for 10 years. For term deposits, 10-year period reckoned from date of expiry of deposit.
Depositor Education and Awareness Fund
RBI shall establish the “Depositor Education and Awareness Fund”. The amount of accounts not operated for 10+ years shall be credited to this Fund within 3 months from expiry of the 10-year period.
Inspection by RBI
RBI, on its own or on direction by Central Government, can cause an inspection of any banking company and its books and accounts. Officers must fully cooperate. RBI shall supply a copy of inspection report to the banking company and to Central Government (if directed).
Power of RBI to Give Directions
Where RBI is satisfied that in public interest or banking policy, it may issue directions to banking companies generally or to any particular banking company. Banks are bound to comply.
IBC Powers — Stressed Assets
RBI can direct banks to initiate insolvency proceedings against specified stressed corporates under the IBC 2016 (Section 35AA) and to give directions for initiation of resolution process of stressed assets (Section 35AB). These Sections were invoked during RBI’s Asset Quality Review (AQR) in 2015.
Supersession of Board of Directors
Where RBI (in consultation with Central Government) is satisfied that it is in public interest or to prevent affairs conducted detrimentally, RBI may supersede the Board of Directors of such banking company for a period not exceeding 6 months. Extendable to a total of 12 months. RBI may appoint an Administrator (experienced in law, finance, banking, economics or accountancy).
Nomination in Deposit Accounts
Depositor(s) may nominate one person to whom — in the event of the death of the sole depositor(s) — the amount of deposit may be returned. Payment to nominee constitutes full discharge of banking company’s liability.
Nomination in Safe Custody
A person leaving any article in safe custody may nominate one person to whom — on death — such article may be returned.
Nomination in Lockers
An individual who is sole hirer of a locker may nominate one person to whom — on death — the bank may give access to the locker and liberty to remove the contents.
Deposits Withdrawable by Cheque
No person other than a bank shall accept deposits of money withdrawable by cheque.
Application to Cooperative Societies
With introduction of Section 56, cooperative banks have come under the regulatory purview of RBI with effect from 1 March, 1966 (Act 23 of 1965). The 2020 amendment (Banking Regulation Amendment Ordinance) gave more powers to RBI to restructure cooperative banks, control management, and frame revival plans.
Exam Angle Points
All 5 PYQs answered plus critical section-number facts
✅ Must-Know Facts — Section Numbers to Memorise
- RBI commenced business: April 1, 1935 as private bank with paid-up capital Rs 5 crores (Q1 PYQ: answer = 1935)
- RBI became public entity: Under Reserve Bank (Transfer of Public Ownership) Act, 1948, effective January 1, 1949 (Q2 PYQ: answer = 1948)
- Central Board meets: At least 6 times per year, at least once per quarter (Q3 PYQ: answer = 6)
- Banker to Government power: RBI Act (not Banking Regulation Act) — Section 20 (Central Govt) and 21A (State Govt by agreement) of RBI Act (Q4 PYQ: answer = RBI Act)
- BR Act applicable to cooperative banks: 1 March, 1966 — through Section 56, Act 23 of 1965 (Q5 PYQ: answer = 1 March, 1966)
- RBI Act structure: 5 Chapters + 2 Schedules
- BR Act structure: 56 sections + 5 Parts + 5 Schedules | In force 16 March 1949
- Section 4 RBI Act: Capital of RBI = Rs 5 crores
- Section 7 & 8 RBI Act: Central Board (Governor + max 4 Deputy Governors)
- Section 9 RBI Act: Local Boards (4 territories, 5 members each, 4-year tenure, max 2 terms = 8 years)
- Section 13 RBI Act: Meetings at least 6 times/year, once per quarter
- Section 19 RBI Act: What RBI cannot do — no loans, no shares, no trade, no immovable property, no interest on deposits
- Section 20 RBI Act: Banker to Central Government
- Section 21A RBI Act: Banker to State Governments (by agreement)
- Section 22 RBI Act: Sole right to issue bank notes
- Section 24 RBI Act: Max denomination = Rs 10,000
- Section 26 RBI Act: Legal tender character of currency notes
- Section 27 RBI Act: RBI shall NOT re-issue torn/defaced/soiled notes
- Section 42 RBI Act: CRR — scheduled banks maintain cash reserve with RBI (no min/max in Act)
- Section 49 RBI Act: Publication of Bank Rate (standard rate for rediscounting bills)
- Section 59 RBI Act: RBI cannot be liquidated except by order of Central Government
- Section 5(b) BR Act: Definition of banking (the classic definition)
- Section 7 BR Act: Only banking company can use “bank”/”banker”/”banking” in name
- Sections 8 & 9 BR Act: Banks cannot trade in goods or hold immovable property > 7 years
- Section 10 BR Act: Board must have ≥51% directors with professional experience; whole-time chairman
- Section 17 BR Act: Statutory Reserve Fund — transfer 20% of net profit before dividend
- Section 20 BR Act: No loans against own shares; no loans to directors or their firms
- Section 24 BR Act: SLR — maintained by bank itself in cash/gold/approved securities
- Section 26 BR Act: Unclaimed deposits return within 30 days after close of calendar year (accounts not operated for 10 years)
- Section 26A BR Act: Depositor Education and Awareness Fund — credit unclaimed deposits within 3 months of 10-year period
- Section 36ACA BR Act: Supersession of Board — up to 6 months (extendable to 12 months)
- Section 45ZA BR Act: Nomination in deposit accounts
- Section 45ZC BR Act: Nomination in safe custody articles
- Section 45ZE BR Act: Nomination in lockers
- Section 49A BR Act: Only banks can accept deposits withdrawable by cheque
- Section 56 BR Act: Cooperative banks under BR Act from 1 March 1966
📝 All 5 PYQ Answers from PDF
Memory Tricks
Trick 1 — RBI Act Key Years
Trick 2 — Sections You MUST Know (BR Act)
Trick 3 — RBI Cannot Do (Section 19)
Trick 4 — Unclaimed Deposits Chain
Flash Cards and Summary
⚡ Chapter 22 Complete — Banking Laws: RBI Act 1934 & BR Act 1949
- RBI Act 1934: 5 chapters + 2 schedules | RBI commenced business April 1, 1935 as private bank with capital Rs 5 crores
- RBI nationalised January 1, 1949 under Reserve Bank (Transfer of Public Ownership) Act, 1948
- Central Board: Governor + max 4 Deputy Governors | Meets min 6 times/year | Quorum: Governor has casting vote on tie
- Local Boards: 4 territories | 5 members each | 4-year tenure | Max 2 terms (8 years)
- Section 20: Banker to Central Govt | Section 21A: Banker to State Govts (by agreement)
- Section 22: RBI has SOLE right to issue bank notes | Max denomination Rs 10,000 (Section 24)
- Section 27: RBI shall NOT re-issue torn/defaced/soiled notes | Section 26: Legal tender
- Section 42: CRR for scheduled banks (no min/max in Act) | Section 49: Bank Rate publication
- Section 59: RBI cannot be liquidated except by Central Government order
- BR Act 1949: Originally Banking Companies Act | In force 16 March 1949 | 56 sections, 5 parts, 5 schedules
- Section 5(b): Definition of banking | Section 7: Only banking company can use “bank” in name
- Section 17: 20% profit to Statutory Reserve Fund before dividend | Report appropriation to RBI within 21 days
- Section 20: No loans against own shares; no loans to directors or their firms/companies
- Section 24: SLR — cash/gold/approved securities, 25%-40% of DTL | Maintained by bank itself
- Section 26: Unclaimed deposits (10 years) reported within 30 days | Section 26A: credited to DEA Fund within 3 months
- Section 36ACA: Board supersession — up to 6 months, extendable to 12 months
- Section 56: Cooperative banks under BR Act from 1 March 1966 | 2020 amendment widened RBI’s power
Banky says: “Now when a customer asks about their rights — I can cite the exact section!” ⚖️
All 5 PYQs answered, all critical RBI Act and BR Act sections memorised with meanings! 💪