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Banking Regulation Act, 1949 – Part-II – Section 17 to 24 (Updated as on April 15, 2025)

The Banking Regulation Act, 1949 (BR Act, 1949) governs the working of banks in India. In a series of articles, we will briefly go through some of the important provisions of the BR Act, 1949. This is the second article in the series.

Section 17 – Reserve Fund 

  • Every banking company incorporated in India shall create a reserve fund and shall transfer to the reserve fund at least 20% of profit (before any dividend is declared) each year.
  • On the recommendation of RBI, the Central Government may declare that the provisions of section 17(1) shall not apply to the banking company for specified period provided the reserve fund together with the share premium account is not less than the paid-up capital of the banking company.
  • Where a banking company appropriates any sum from the reserve fund / share premium account, it shall report the fact to RBI within 21 days of such appropriation.
  • RBI may extend the period of 21 days by such period as it thinks fit or condone any delay in making such report.

Section 18 – Cash reserve (updated as on April 15, 2025)

  • Every banking company (not being a scheduled bank), shall maintain in India on a daily basis (by way of cash reserve with itself or balance in current account with RBI or net balance in current accounts, etc.), a sum equivalent to such percent of the total of its demand and time liabilities in India as on the last day of the second preceding fortnight as RBI may specify.
  • The banking company shall submit to RBI before the 20th day of every month a return showing the amount so held on the last day of the fortnight during month with particulars of its demand and time liabilities in India on the last day of the fortnight (if the last day of the fortnight is a public holiday under the Negotiable Instruments Act, 1881, at the close of business on the preceding working day).
  • If the balance held by such banking company at the close of business on any day is below the minimum specified, such banking company shall be liable to pay to RBI –
    • Penal interest (@ 3% + bank rate) on the shortfall amount, for that day.
    • Penal interest (@5% + bank rate) for each subsequent day during which the default continues.
  • If any question arises as to whether any transaction / class of transactions shall be regarded as liability in India of a banking company, the decision of RBI shall be final.
  • Fortnight shall mean the period from the 1st day to the 15th day of each calendar month or 16th day to the last day of each calendar month, both days inclusive.

Section 19 – Restriction on nature of subsidiary companies

A banking company shall not hold shares in any company, whether as pledgee / mortgagee / absolute owner, of an amount exceeding –

  • 30% of the paid-up share capital of that company, or
  • 30% of its own paid-up share capital and reserves, whichever is less.

Section 20 – Restrictions on loans and advances 

A banking company shall not – 

  • Grant any loans / advances on the security of its own shares.
  • Enter into any commitment for granting loan / advance to / on behalf of – 
    • Any of its directors.
    • Any firm in which any of its directors is interested as partner / manager / employee / guarantor.
    • Any company not being a subsidiary of the banking company or a company registered under section 25 of the Companies Act, 1956, or a Government company or the subsidiary / holding company of which any of the directors of the banking company is a director / managing agent / manager / employee / guarantor / holds substantial interest.
    • Any individual in respect of whom any of its directors is a partner / guarantor.

Section 21 – Power of RBI to control advances by banking companies 

RBI may give directions to banking companies as to the purposes, margins, amount, rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given.

Section 22 – Licensing of banking companies 

  • A company shall not carry on banking business in India unless it holds a licence issued by RBI.
  • RBI may cancel a licence granted to a banking company.
  • Any banking company aggrieved by the decision of RBI cancelling a licence, may appeal to the Central Government, within 30 days from the date on which such decision is communicated to it.
  • Where an appeal is made, the decision of the Central Government shall be final. Where no appeal is made, the decision of RBI shall be final.

Section 23 – Restrictions on opening of new, and transfer of existing, places of business 

Without obtaining the prior permission of RBI –

  • A banking company shall not open a new place of business in India or change otherwise than within the same city / town / village, the location of an existing place of business in India.
  • A banking company incorporated in India shall not open a new place of business outside India or change otherwise than within the same city / town / village in any country or area outside India, the location of an existing place of business in that country or area.
  • Any regional rural bank requiring the permission of RBI shall forward its application to RBI through the National Bank which shall give its comments on the merits of the application and send it to RBI. Regional rural bank shall also send an advance copy of the application directly to RBI.

Section 24 – Maintenance of a percentage of assets (updated as on April 15, 2025)

  • A scheduled bank (in addition to the average daily balance which it is required to maintain under section 42 of RBI Act, 1934), and every other banking company (in addition to the cash reserve which it is required to maintain under section 18), shall maintain in India, assets of such percentage (not exceeding 40%) of the total of its demand and time liabilities in India as on the last day of the second preceding fortnight  as RBI may specify.
  • Every banking company shall furnish to RBI a monthly return within 20 days after the end of the month to which it relates. Every regional rural bank shall also furnish a copy of the return to the National Bank.
  • If on the last day of any fortnight (if the day is a public holiday, on the preceding working day), the amount maintained by a banking company at the close of business on that day falls below the minimum prescribed, the banking company shall be liable to pay to RBI –
    • Penal interest (@3% p.a. + bank rate) on the shortfall amount, for that day.
    • Penal interest (@5% p.a. + bank rate) on the shortfall amount, for each succeeding fortnight (if the last day of the fortnight is a public holiday, on the preceding working day), in which the default continues.
  • The penalty shall be paid within 14 days from the date on which a notice issued by RBI demanding payment of the same is served on the banking company.
  • When penal interest (@5% + bank rate) has become payable by a banking company, if thereafter the amount required to be maintained on the next succeeding fortnight (if the last day of the fortnight is a public holiday, the next preceding working day) is still below the prescribed minimum, every director / manager / secretary of the banking company, who is knowingly and willfully a party to the default, shall be punishable with fine up to Rs.500 and further fine up to Rs.500 for each subsequent fortnight (or the preceding working day) on which the default continues.


References

Reserve Bank of India. (2021, April 19). 'The Banking Regulation Act, 1949'. Retrieved from https://rbi.org.in/Scripts/OccasionalPublications.aspx?head=Banking%20Regulation%20Act

The Gazette of India. (2025, April 15). 'THE BANKING LAWS (AMENDMENT) ACT, 2025'. Retrieved from https://thc.nic.in/Central%20Governmental%20Acts/Banking%20Laws%20(Amendment)%20Act,%202025.pdf


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