Regulation of Banking Companies under the BR Act: Complete Notes

The Banking Regulation Act, 1949 governs a bank from birth to death. It decides who may be a bank, how much capital it must have and who may own it, who may manage it, what business it may do and to whom it may lend, how it must account for itself, and how the Reserve Bank may inspect, direct and punish it. This note brings those six subjects together and shows how they interlock, since a question in this area almost always requires more than one of them.

The scheme of the Banking Regulation Act

Figure 1: The scheme of the Banking Regulation Act

1. Licensing and Branches

The licence (Section 22(1)): no company may carry on banking business in India without a licence from the Reserve Bank, which may be issued subject to such conditions as it thinks fit.
What the Bank must be satisfied of (Section 22(3)): that the company can pay its depositors in full as their claims accrue; that its affairs are not detrimental to depositors; that the general character of the management is acceptable; that its capital structure and earning prospects are adequate; that the public interest will be served; and that the grant will not prejudice the operation and consolidation of the banking system. Section 22(3A) adds the public interest in its Indian business and non discrimination in the home country for a foreign company.
Cancellation and appeal: the licence may be cancelled under Section 22(4) where banking ceases, a licence condition is breached or a statutory condition is no longer fulfilled, with an appeal to the Central Government within thirty days under Section 22(5), whose decision is final under Section 22(6).
Entry capital: fixed as a licence condition, at ₹500 crore for a universal bank under the on tap guidelines of 2016, ₹200 crore for a small finance bank under those of 2019, and ₹100 crore for a payments bank. In November 2021 the Reserve Bank accepted a recommendation to raise the first two figures to ₹1,000 crore and ₹300 crore.
Branches (Section 23): the prior permission of the Reserve Bank is needed to open a new place of business or change its location otherwise than within the same city, town or village, except for a temporary office for not more than one month on the occasion of an exhibition, conference or mela. Since 2013 domestic scheduled commercial banks other than regional rural banks have general permission under a board approved plan, subject to twenty five per cent of new outlets being in unbanked rural centres.

2. Capital, Shareholding and Reserves

The numbers that run through the Act

Figure 2: The numbers that run through the Act

Minimum capital (Section 11): ₹15 lakh for a foreign company, ₹20 lakh if it has a place of business in Mumbai or Kolkata, and a graded scale up to ₹10 lakh for Indian companies. The figures are archaic; the real threshold is the entry capital set under the licence.
Capital structure (Section 12(1)): subscribed capital at least half of authorised, paid-up at least half of subscribed, with up to two years allowed to restore the ratios after an increase. Since 2012 the capital may consist of equity shares alone or with preference shares issued under Reserve Bank guidelines, which carry no voting rights.
Voting ceiling (Section 12(2)): no shareholder may exercise voting rights on a poll in excess of ten per cent, with a proviso permitting the Reserve Bank to raise the ceiling in a phased manner to twenty six per cent, which it did by notification of 21 July 2016.
Acquisition (Section 12B): the previous approval of the Reserve Bank is required to acquire five per cent or more of the paid-up capital or voting rights, alone or acting in concert, and the Bank applies a fit and proper test.
Commission, charges and dividend: Section 13 caps issue commission at two and a half per cent; Section 14 bars a charge on unpaid capital; Section 14A bars a floating charge without the Bank's certificate; Section 15 bars a dividend until capitalised expenses are written off.
Reserve fund (Section 17): not less than twenty per cent of each year's profit must go to the reserve fund before any dividend is declared, and an appropriation from it must be reported within twenty one days.
Capital adequacy: by direction, nine per cent of risk weighted assets, with common equity tier 1 of 5.5 and tier 1 of seven, plus a capital conservation buffer of 2.5 taking the effective requirement to 11.5 per cent.

3. Management

Restrictions on employment (Section 10): no managing agent, no remuneration by way of commission or share of profits, no insolvent or person convicted of moral turpitude, no excessive remuneration, and no management by a person who is a director of another company, is engaged in another business, or holds office for more than five years at a time.
Board composition (Section 10A): not less than fifty one per cent of the board must have special knowledge or practical experience in accountancy, agriculture and rural economy, banking, cooperation, economics, finance, law or small scale industry, with at least two from agriculture and rural economy, cooperation or small scale industry; no substantial interest in a trading concern; and a maximum continuous tenure of eight years for a non executive director, extended to ten years in cooperative banks from 1 August 2025.
Chief executive (Section 10B): a whole-time chairman, or a part-time chairman approved by the Reserve Bank with a managing director, entrusted with the management of the whole of the affairs, appointed for not more than five years at a time, with the Reserve Bank empowered under Section 10BB to fill a vacancy for up to three years.
Common directors (Section 16): prohibited between banking companies, with not more than three directors who are directors of companies holding over twenty per cent of the votes, to prevent coordinated lending and shared confidential information.
Prior approval (Section 35B): amendments relating to the number of directors or to the appointment or remuneration of the chairman, managing or whole-time director or chief executive, and such appointments themselves, need the Reserve Bank's previous approval.
Reserve Bank powers: removal of a chairman, director or officer under Section 36AA, for recorded reasons and after an opportunity of representation, with appeal to the Central Government in thirty days and a bar of up to five years from any bank; additional directors under Section 36AB; and supersession of the board under Section 36ACA for up to six months at a time and twelve months in all, with an administrator.

4. Business, Advances and Assets

Permitted business: Section 6(1) lists it, Section 6(2) bars everything else, Section 8 bars trading in goods and Section 9 the holding of immovable property other than for its own use beyond seven years, extendable by five.
Holdings (Section 19(2)): no more than thirty per cent of a company's paid-up capital or thirty per cent of the bank's own paid-up capital and reserves, whichever is less, whether as pledgee, mortgagee or absolute owner.
Connected lending (Section 20): an absolute bar on advances against the bank's own shares and on any commitment to lend to a director, a firm in which he is partner, manager, employee or guarantor, a company in which he is a director or holds substantial interest, or an individual for whom he is partner or guarantor. Since 1 August 2025 substantial interest is measured against ₹2 crore instead of ₹5 lakh. Section 20A makes a remission of such a debt void without the Bank's prior approval.
Control of advances (Section 21): the Reserve Bank may determine the policy on advances, fixing purposes, margins, the maximum amount to a borrower, the maximum guarantees and the rate of interest and other terms, and every bank is bound to follow it.
Interest not justiciable (Section 21A): a transaction between a bank and its debtor may not be reopened by any court on the ground that the rate of interest is excessive, notwithstanding the Usurious Loans Act, 1918 or State debt relief laws.
Liquidity and assets: Section 18 for non-scheduled banks, Section 24 for the liquid asset requirement of not exceeding forty per cent, and Section 25 requiring assets in India of at least seventy five per cent of demand and time liabilities in India.

📖 Central Bank of India v. Ravindra, (2002) 1 SCC 367

Facts: A Constitution Bench of five judges, deciding on 18 October 2001, considered whether a bank may capitalise unpaid interest at periodical rests, and whether the resulting figure is the principal sum adjudged on which interest may be awarded under Section 34 of the Code of Civil Procedure.

Held: Subject to a binding contract or an established banking practice, interest may be charged at periodical rests and capitalised, and once capitalised it ceases to be interest and becomes part of the principal, on which pendente lite and future interest may be awarded. Penal interest may not be capitalised, which would be opposed to public policy, and no interest may be claimed on penal interest.

Ratio: Directions of the Reserve Bank under Sections 21 and 35A have statutory force and bind the banks to which they apply, and serve as a benchmark of what is excessive where they do not directly apply. Interest charged in breach of them is disallowed, the court retains a discretion under Section 34 over interest after suit, and a bank suing on an account must plead and prove compliance and file a statement of account.

5. Accounts, Audit and Disclosure

Accounts (Section 29): a balance sheet and profit and loss account at the end of each year in the forms of the Third Schedule, Form A and Form B.
Audit (Section 30): by a person qualified to audit companies, whose appointment requires the previous approval of the Reserve Bank, with power in the Bank to order a special audit at the bank's cost and additional matters to be reported under Section 30(3).
Returns (Sections 31 and 32): publication and three copies to the Reserve Bank within three months, extendable by three more, and three copies to the Registrar. A foreign bank must display its last audited accounts by the first Monday in August (Section 33).
Confidential documents (Section 34A): in a proceeding under the Industrial Disputes Act, 1947, no compelled production of confidential material disclosing reserves not shown as such or undisclosed provisions for bad and doubtful debts; whether such amounts may be taken into account is referred to the Reserve Bank, whose certificate is final.
Unclaimed deposits (Sections 26 and 26A): a return within thirty days of year end of accounts not operated upon for ten years, and the credit of such amounts to the Depositor Education and Awareness Fund within three months, the depositor's right to claim from the bank surviving the transfer.

6. Supervision, Directions and Sanctions

How the Reserve Bank escalates

Figure 3: How the Reserve Bank escalates

Inspection (Section 35): the Reserve Bank may at any time inspect a banking company and its books, and scrutinise it under Section 35(1A), with a duty on every officer to produce documents and submit to examination on oath. On the report, and after an opportunity of representation, the Central Government may prohibit fresh deposits or direct a winding up petition under Section 38.
Directions (Section 35A): binding directions on four grounds, the public interest, the interest of banking policy, prevention of conduct detrimental to depositors or prejudicial to the bank, and proper management, to banks generally or to one bank.
Prompt corrective action: a rule based ladder, revised from 1 January 2022, keyed to capital, asset quality and the leverage ratio, with three risk thresholds restricting in turn dividends, branch expansion, and capital expenditure and management compensation, and exit after four continuous quarters without a breach.
Offences (Section 46): up to three years, a fine up to ₹1 crore, or both for a wilfully false statement; up to ₹20 lakh and ₹50,000 a day for refusing production; twice the deposits for deposits taken in breach of an order; and ₹1 crore or twice the amount involved, whichever is greater, with ₹1 lakh a day, for any other contravention.
Cognizance (Section 47): only on a written complaint by an authorised officer of the Reserve Bank or NABARD, and before a court not inferior to a Chief Metropolitan or Chief Judicial Magistrate.
Adjudication (Section 47A): the Reserve Bank may itself impose the penalty for contraventions under Section 46(2), (3) and (4) after a show cause notice and hearing, payable in fourteen days and otherwise recoverable on a direction of the principal civil court, and once imposed it bars a complaint for the same contravention.

📖 Joseph Kuruvilla Vellukunnel v. Reserve Bank of India, AIR 1962 SC 1371

Facts: A banking company was ordered to be wound up on the Reserve Bank's petition under Section 38(3)(b)(iii), founded on the Bank's opinion that its continuance was prejudicial to the interests of its depositors, which the court was bound to act upon. A director challenged the provision under Articles 14 and 19(1)(g) as conferring unguided power and denying banking companies the protections available to other companies.

Held: The provision was upheld. Banking companies are a reasonable class because they hold public money and their failure affects the financial system. The Reserve Bank is an expert body whose satisfaction rests on periodical inspection and statutory duty, not unguided discretion, and the restriction was a reasonable restriction in the interest of the general public.

Ratio: Where a statute entrusts a technical financial judgment to a specialised regulator, courts will not substitute their own assessment. Review survives on grounds of jurisdiction, natural justice, mala fides and manifest arbitrariness, since the Bank is State under Article 12, but the merits of the regulator's judgment are its own.

7. How the Provisions Fit Together

The Act works as a single mechanism. The licence under Section 22 is the gate, and most of what the Reserve Bank requires is imposed either as a condition of that licence or as a direction under Section 35A, both ultimately enforced by the threat of cancellation. The capital provisions decide how much loss the bank can absorb, the shareholding provisions who may control it, and the management provisions who may run it, because the three together determine whether the depositors' money is in safe hands. The lending restrictions address the specific way in which bank money is most often lost, which is lending to people connected with those who decide. The accounts provisions make the position visible, and inspection verifies what the accounts say. When something goes wrong, the Bank escalates from a direction, to the removal of an individual, to the supersession of the board, to reconstruction and finally to winding up.

⚠ Key point

Section 22 requires a licence, granted on the matters in sub-section (3), cancellable under sub-section (4) with an appeal in thirty days; Section 23 controls branches. Section 11 fixes archaic minimum capital, Section 12(1) the half and half capital ratios, Section 12(2) the ten per cent voting ceiling, raised to twenty six in 2016, Section 12B the five per cent approval threshold, and Section 17 the twenty per cent reserve fund transfer. Section 10A requires fifty one per cent professional directors and two with rural experience, Section 10B a whole-time chairman, Section 16 bars common directors, and Sections 36AA, 36AB and 36ACA give the Bank powers of removal, appointment and supersession. Section 6(2) confines business, Section 19(2) caps holdings at thirty per cent, Section 20 bars connected lending, Section 21 lets the Bank fix the policy on advances, Section 21A protects the rate of interest from judicial reopening, and Section 25 requires seventy five per cent of assets in India. Sections 29 to 34A govern accounts, audit and disclosure. Sections 35, 35A, 46, 47 and 47A supply inspection, directions, offences and penalties.

8. Quick Revision

✦ Points worth fixing

Section 22 licenses, Section 23 controls branches, Section 35 inspects and Section 35A directs.

Solvency, conduct, management, capital, public interest and the banking structure are the matters in Section 22(3).

Subscribed at least half of authorised and paid up at least half of subscribed; voting capped at twenty six per cent since 2016; five per cent needs approval.

Twenty per cent to the reserve fund, twenty one days to report.

Fifty one per cent professional, at least two rural, eight years maximum.

Thirty per cent of the company's capital or of the bank's own funds, whichever is less. Section 19(2).

Director, firm, company, individual. Section 20, and guarantor appears in three of the four.

Seventy five per cent in India, forty per cent liquidity cap, seven years for property.

Three months plus three for the accounts; first Monday in August for a foreign bank.

Three years or a crore or both; twenty lakh and fifty thousand a day; twice the deposits; a crore or twice the amount and a lakh a day. Section 46 in four lines.

Fourteen days to pay a penalty, thirty days to appeal a removal.

9. Frequently Asked Questions

Which provision requires a banking licence, and on what grounds may it be refused?

Section 22(1). The Reserve Bank may refuse where it is not satisfied on any of the matters in Section 22(3): that the company can pay its depositors in full as their claims accrue, that its affairs are not detrimental to depositors, that the character of the management is acceptable, that its capital and earning prospects are adequate, that the public interest will be served, and that the grant will not prejudice the operation and consolidation of the banking system.

How much voting power may a single shareholder of a bank exercise?

Twenty six per cent of total voting rights on a poll. Section 12(2) fixes ten per cent, whatever the size of the holding, but the proviso inserted by the Banking Laws (Amendment) Act, 2012 allows the Reserve Bank to raise the ceiling in a phased manner to twenty six per cent, and it did so by notification of 21 July 2016. Separately, Section 12B requires the Bank's previous approval for acquiring five per cent or more.

Can a bank lend to a company in which one of its directors is interested?

No. Section 20(1)(b)(iii) bars any commitment to lend to a company of which a director of the bank is a director, managing agent, manager, employee or guarantor, or in which he holds substantial interest, along with that company's subsidiary or holding company. Government companies, charitable companies and subsidiaries of the bank are excepted.

What is the significance of Section 35A?

It is the source of most operative banking law. Where the Reserve Bank is satisfied that it is necessary in the public interest, in the interest of banking policy, to prevent conduct detrimental to depositors or prejudicial to the bank, or to secure proper management, it may issue directions which banks are bound to comply with. The Master Directions on capital, asset classification, know your customer and customer service all rest on this power.

Can the Reserve Bank punish a bank without going to court?

Yes. Section 47A lets the Bank adjudicate and impose a penalty itself for contraventions of the kind described in Section 46(3) and 46(4), after giving the bank a reasonable opportunity of being heard. The penalty is payable within fourteen days, failing which it is recovered on a direction of the principal civil court, and once a penalty is imposed no complaint lies in court for the same contravention.

Will courts interfere with the Reserve Bank's regulatory decisions?

Rarely on the merits. Joseph Kuruvilla Vellukunnel v. Reserve Bank of India, AIR 1962 SC 1371 treated the Bank as an expert body whose technical judgment about a bank's condition courts will not displace, and Central Bank of India v. Ravindra, (2002) 1 SCC 367 gave its directions statutory force. Judicial review nonetheless remains available on grounds of jurisdiction, natural justice, mala fides and manifest arbitrariness.

10. Related Topics and Provisions

Reconstruction and amalgamation of banks (Section 45)
Winding up of banking companies
Deposit insurance
Priority sector lending
Non-performing assets and the recovery statutes
Instruments of monetary control