Banking Company as per section 5 of Banking Regulation Act, 1949 means “accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawn by Cheque, Draft, Order, or otherwise.”
Now, we all know that Indian economy is a bank based economy. The economic status of our country depends upon the working of banks. Since, the banking network is so important and so wide it is important to regulate them.
In India, primarily the banking companies are regulated by Banking Regulation Act, 1949 and Reserve Bank of India Act, 1934.
BANKING COMPANY AND BANKING REGULATION ACT
This act was introduced for
- safeguarding the interests of depositors
- controlling the abuse of powers by bank personnel in control of bank
- interest of Indian economy.
This act does not supersede with the Companies Act.
Some main provisions under the Act are:
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Type of Activity-
As per section 6 of the Act there are restrictions on the type of activity taken over by the banking companies such as acting as an agent for government or local authority, carrying on guarantee or indemnity business, undertaking and executing trust etc.
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Restriction on Trading
As per section 8 of the Act, the banking company cannot directly or indirectly involve itself in buying and selling or bartering for goods except in connection with realising the security. Also, not involve in any trading or buying and selling or others.
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Reserve Funds
As per section 17 of the Act, the banking company whose incorporation is in India has to maintain a reserve fund of not less than 20% of its net profits.
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Cash Reserve
The banking company shall maintain a cash reserve with itself or by balance in current a/c with RBI. The reserve must be equal to % of its time and demand liabilities in India on the last Friday of the second preceding fortnight.
They shall submit to RBI before 20th day of every month.
BANKING COMPANY AND RBI ACT
The Reserve Bank of India is the regulator of all the banks in India. It formulates all the policies and rules for the functioning of banking industry. Every banking company which wants to establish itself in India has to take a license of the same from RBI.
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BANKING COMPANY AND LICENSING REQUIREMENTS
The RBI has a discretionary power to grant a license. The following factors will be considered before granting a license. They are-
(1) The company’s affairs must not be conducted in any manner detrimental to interest of its present or future depositors.
(2) The general character of proposed management should not be prejudicial to the public interest or depositors.
(3) Banking company must have adequate capital structure and earning prospects.
(4) The public interest must be served by granting of licence.
(5) Minimum paid up equity capital at the initial level must be INR 5 billion.
- CASH RESERVE RATIO AND STATUATORY LIQUIDITY RATIO
In India, banks are required to keep minimum 4% of net demand and time liabilities (NDTL) with RBI in form of cash. The CRR needs to be maintained on fortnight basis.
A minimum of 22% and maximum of 40% of net demand and time liabilities needs to be maintained which is known as SLR in the form of cash, gold or approved securities.
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