Unit-2
Financial Regulators in India
BANKING REGULATION ACT, 1949: FEATURES,
OBJECTIVES AND PROVISIONS
The banking regulation act was passed by the Indian parliament in 1949. The banking
regulation act, 1949 is like a rulebook for banks in India. It sets out the important
rules they have to follow to keep things running smoothly.
WHAT IS BANKING REGULATION ACT, 1949?
The banking regulation act, 1949 supervises the banks that have been established in India.
This acts as in charge of regulating and managing the operations of all banking corporations
in India.
The RBI is the governing body that regulates the banks. The introduction of section 56, gave
the reserve bank of India the authority to regulate its operations in the same way other banks
in the country are functioning. This act also gives RBI, the authority to license banks,
regulate shareholder voting and shareholding, oversee board and management appointments,
and set auditing instructions. RBI is also involved in mergers and liquidations of the banks .
Features of Banking Regulation Act, 1949
The Act has been divided into five parts and comprises 56 sections. The main
features of the act are mentioned below:
• It prevents non-banking enterprises from taking demand-repayable deposits.
• It restricts trading related to non-banking entities to remove potential risks.
• It also establishes minimum capital requirements for the bank.
• This act gives the Reserve Bank the right to examine a bank’s books of
accounts.
• It helps in implementing an extensive licensing program for banks and their
branches.
• It increases the capability of the Reserve Bank of India to assist banking
institutions when emergencies arise.
Objectives of the Banking Regulation Act, 1949
• To ensure the balanced growth of banks through a licensing system and to
stop the indiscriminate openings of additional branches.
• To assign RBI the authority to appoint, remove, and reappoint the chairman,
directors, and bank officers. This might help in the effective and smooth
functioning of Indian banks.
• To strengthen India’s financial system by mandating the merging of weaker
banks with senior banks.
• To safeguard the interests of depositors and the general public by
implementing certain measures which include maintaining ratios for cash
reserve and liquidity reserve. This enables the bank to meet the demand of
depositors.
• To assist banks in quick and easy liquidation when they are unable to
continue or merge with other banks.
Important Provisions of the Banking Regulation Act,
1. Definitions 1949
The Banking Regulations Act, 1949 provides definitions for several terminology,
including branch offices, banking companies, and banking. Under this act, a company
engaged in banking activities within India is called a Banking Company. Bank includes
the acceptance of public deposits of money for lending or investment that can be repaid
on demand. As per the State Bank of India (Subsidiary Banks) Act, 1959, subsidiary
banks are defined in the same way. An advance or loan secured against the security of
assets is a secured loan or advance.
2. Business which can be undertaken by the Banking Companies
A banking company may engage in the following activities under Section
6(1): borrowing or lending money; purchasing or disposing of bills of exchange,
promissory notes, coupons, drafts, railway receipts, warrants, and debentures; trading in
stocks and funds; and buying or selling foreign exchange bonds, debentures; managing
agency activities such as clearance and shipment of goods; managing guarantee and
indemnity, etc.
3. Licensing of Banking Companies
Banking companies are not permitted to conduct business in India unless they hold an RBI
license. The RBI can grant the license after the books of accounts have been inspected. If the
company stops conducting banking operations in India, RBI has the authority to terminate the
license.
4. Accounts and Balance Sheet
On the last working day, the banking companies must create a balance sheet and a profit and
loss account.
5. Inspection
RBI has the authority to order a banking company inspection and is required to send the
company a report. The directors must bring all books, accounts, and documents related to the
banking company must be submitted for investigation.
6. Powers and Functions of RBI
The powers of RBI are mentioned in Section 36. The Reserve Bank has the authority to advise
banking companies and prevent them from engaging in certain transactions. Further, as
per Section 18, it can help the banking institution by providing advances or loans. Reserve
Bank of India can also order the banking company to organise a meeting of its directors to
consider company issues. It may also designate officials to look after the operations
of a banking company.
RBI Act 1934
Under the RBI Act of 1934, the Reserve Bank of India was established in1935.
The central office of the Reserve Bank of India was first established in Kolkata.
In 1937 it was established in Mumbai in its permanent form, and it also extends
to the whole of India. In 1936, this act and the companies act were meant to
provide a structure for the overseeing of banking firms in India. The RBI Act,
1934 gives the lawful ground of the functioning of the Bank, which started
operations on April 1, 1935. In 1949, the bank, which was basically built up as
shareholders banks, was nationalised.
It is mentioned in RBI Act 1934 that under RBI Act 1934, the Bank should be
called the Reserve bank of India, which should be established for the motive of
taking over the management currency from the central bank and taking the
business of banking in line with the provision of this act.
In this, the meaning of central board of directors of the bank is the central board, the meaning
of deposit insurance corporation is deposit insurance corporation, which established under
section 3 of the deposits insurance act, 1961, export-import bank of India act means Exim
bank, foreign exchange regulation act 1973 has assigned the meaning to foreign currency and
foreign exchange.
In 1934, banks included in the second schedule were called the scheduled bank, small industries development bank of
India is known as small industry bank under the state bank of India act, Unit trust of India means a unit trust, built
under the section3 of the unit trust of India act, 1963. National bank for agriculture and rural development act 1981 has
given separate meaning to agriculture operation, central cooperative bank, co-operative society, crops, marketing of
crops, pisciculture, regional rural bank, and state co-operative bank.
Provisions of the Reserve Bank of India Act, 1934:
• Contribution by the Central Government to the Reserve Fund
• Allocation of surplus profits
• Exemption of Bank from income-tax and super-tax
• Publication of bank rate
• Auditors
• Appointment of special auditors by Government
• Powers and duties of auditors
• Returns
Role of RBI as a Central banker
The Reserve Bank of India is the backbone of the Financial System of the country. It
has been entrusted by the people and the Government to control, supervise and
promote the flow of money in the market. It also takes part in planning and
development to maintain economic stability of the country and take the country
towards growth.
Reserve Bank of India was established in 1935 and since then it has regulated the
flow of Indian rupee in the country. The Reserve Bank is also responsible for
managing other commercial banks through its various policies and directions.
Every bank is entitled to keep an amount of money with the RBI which serves as the
limit to the amount of money that bank can lend to the public. There are various
other policies and rules through which RBI keeps a check on the economy of the
country.
Functions of RBI
According to the RBI act 1934 RBI has various functions to serve. Some of them include:
1. Monetary Authority: It plans and supervises the monetary policies designed for the country.
The objective behind this is that every policy should be designed keeping in mind the idea of
growth and at the same time should also maintain price stability.
2. Financial System Supervisor: It designs the parameters under which all the banks of the
country should work. The main aim here is to maintain the trust of the general public in the
financial system of the country and provide them services which are cost-friendly.
3. Foreign Exchange: All the foreign exchange that happens between the countries is
maintained and looked after by RBI. This is done so that easy and smooth foreign trade can
happen and also foreign market remains maintained.
4. Issuer of currency: RBI is the authority who issues notes, destroys the old notes and decides
which currency is fit for circulation among the people. Demonetisation was done after taking
advice from RBI and the new notes of 2000 came into circulation.
5. Development: various national projects are funded by RBI. It undertakes development of the
country as its objective and invests at various places in national interest.
NBFCs & Financial Institutions
Meaning of NBFCs
An NBFC (Non-Banking Financial Company) is a financial institution that
provides financial services similar to banks but does not hold a banking
license.
NBFCs play an important role in the economy by providing credit and other
financial services to parties usually not served by traditional banks.
The concept of an NBFC emerged in the early 1960s when the financial
needs of the population were not being met by traditional banks.
Functions of an NBFC
• Retail Financing to individuals, households and businesses who may not
qualify for traditional bank loans.
• Infrastructure financing for projects essential for economic growth and
development, such as roads, bridges, power plants, and
telecommunication networks.
• Hire Purchase Services to help individuals and businesses acquire assets
such as vehicles, machinery, and equipment without upfront payment.
• Providing venture capital funding to early-stage and high-growth potential
businesses.
• NBFC-MFIs (Microfinance Institutions) provide microloans and other financial
services to low-income individuals and small businesses in rural and unbanked
areas.
• Asset Management services enable individuals and institutions to invest in
various asset classes such as equities, debt, and real estate.
• Insurance services provide individuals and businesses with risk protection and
financial security against various contingencies.
• Investment Banking Services to assist businesses in raising capital and executing
strategic transactions.
Non- Banking Financial Institutions – Types
1. Mutual Funds
Mediators between people and stock exchange
Money collected from people by selling their units is called the corpus
Oldest Mutual Fund company in India is UTI (Unit Trust of India)
Mutual Funds nearly provides all the considerations
2. Insurance Companies
Collect money from the public through the sale of insurance policies
There are two types of Insurance – Life Insurance and General Insurance
o General Insurance includes Loss of property, car, house etc.
o It also includes Health Insurance
3. Bajaj Finance Limited: Bajaj Finance is a prominent NBFC offering a wide range of
financial products, including consumer loans, personal loans, home loans, and vehicle
loans.
4. Mahindra & Mahindra Financial Services Limited: Mahindra Finance is an NBFC
specializing in providing financial services to rural and semi-urban areas.
5. L&T Finance Holdings Limited: L&T Finance is a subsidiary of Larsen & Toubro, focusing on
providing a comprehensive range of financial products and services.
6. Shriram Transport Finance Company Limited: Shriram Transport Finance is a leading NBFC
in the commercial vehicle financing segment.
7. HDFC Securities Limited: HDFC Securities is a subsidiary of HDFC Bank and operates as an
NBFC providing brokerage services, investment advisory, and other financial services in the capital
markets.
8. Muthoot Finance Limited: Muthoot Finance is a well-known NBFC specializing in gold
loans, providing quick and convenient financing.
9. Tata Capital Limited: Tata Capital is the financial services arm of the Tata Group and offers
diverse financial solutions.
