Most Asked — Every Year Q2Salient Features of the Banking Regulation Act, 1949
Very Important — Frequently Asked Q3Activities Permitted under the Banking Regulation Act, 1949
Very Important — Frequently Asked Q4Powers of RBI over Non-Banking Companies
Important — Asked Multiple Times Q5Objectives & Features of the DICGC Act, 1961
Important — Asked Multiple Times
- Establishment: RBI established in 1935 under RBI Act, 1934; nationalized in 1948; HQ: Mumbai; Central Board of 20 members headed by Governor
- Monopoly of Currency Issue: Sole right to issue bank notes in India; Issue Department kept separate from Banking Department; denominations from ₹2 to ₹10,000
- Banker to Government (S.20): Banker to Central Government statutorily and State Governments by agreement; handles all money, remittances, exchange, and banking transactions; manages public debt
- Banker's Bank & Lender of Last Resort: All scheduled commercial banks maintain accounts with RBI for CRR and clearing; RBI provides emergency loans when banks run out of cash
- Custodian of Cash Reserves: Banks must maintain CRR — minimum 3% of demand and time liabilities (can be varied up to 15%) under S.42 RBI Act
- Custodian of Foreign Exchange: Maintains external value of rupee; authorized to enter into foreign exchange transactions
- Controller of Credit: Quantitative methods (bank rate, open market operations, CRR, SLR) + Qualitative methods (margin requirements, credit rationing, moral suasion, direct action)
- Control of Banks: Licensing (S.22), inspection of books (S.35), directions to banks (S.35A), power to remove directors and appoint additional directors
- Promotional Role: Encouraging rural branch expansion; establishing DICGC; mobilizing savings; establishing Discount and Finance House of India Ltd; promoting agricultural credit (NABARD) and industrial finance (IDBI)
- Credit Information: Power to collect credit information from banking companies and furnish it to banks; can direct banks to submit statements relating to credit information
| Provision | Content |
|---|---|
| RBI Act, 1934 | Established RBI as the central bank of India; provides for composition, management, powers and functions |
| S.20 RBI Act | RBI is the banker to Central Government — handles all money, remittances, exchange, banking transactions |
| S.42 RBI Act | Cash Reserve Ratio — scheduled banks must maintain minimum 3% of demand and time liabilities with RBI (variable up to 15%) |
| S.22 BR Act | Licensing of banking companies — no company can carry on banking business without RBI license |
| S.35 BR Act | Power of RBI to cause inspection of any banking company at any time |
| S.35A BR Act | Power to give directions to banking companies in the public interest or to prevent prejudicial conduct |
- RBI: Est. 1935 (RBI Act 1934), nationalized 1948, HQ Mumbai, 20-member Central Board
- 7 Traditional Functions: Currency issue, Banker to Govt (S.20), Banker's bank, Custodian cash reserves, Custodian forex, Lender of last resort, Credit controller
- CRR: Min 3%, max 15% of demand & time liabilities (S.42)
- Credit Control: Quantitative (bank rate, OMO, CRR, SLR) + Qualitative (margin, rationing, moral suasion)
- Bank Control: Licensing (S.22), Inspection (S.35), Directions (S.35A)
- Promotional: Rural branches, DICGC, NABARD (agri credit), IDBI (industrial finance), bill market, savings mobilization
- Issue Dept: Separate from Banking Dept; assets not subject to other liabilities
The Reserve Bank of India was established in 1935 under the RBI Act, 1934 and nationalized in 1948. It is governed by a Central Board of 20 members headed by the Governor. HQ: Mumbai.
Traditional Functions: (1) Monopoly of currency issue — sole right to issue bank notes; (2) Banker to Government (S.20) — handles all money, remittances, public debt; (3) Banker's Bank & Lender of Last Resort — scheduled banks maintain CRR accounts; RBI gives emergency loans; (4) Custodian of cash reserves — CRR min 3%, max 15% (S.42); (5) Custodian of foreign exchange; (6) Controller of credit — quantitative (bank rate, OMO, CRR, SLR) + qualitative (margin, moral suasion); (7) Bank of central clearance.
Promotional Role: Encouraging rural branch expansion; establishing DICGC for deposit insurance; promoting agricultural credit (NABARD); promoting industrial finance (IDBI); developing bill market; mobilizing savings; establishing Discount and Finance House of India Ltd.
Conclusion: RBI combines traditional central banking with developmental activities, playing a dynamic role in India's economic growth, monetary stability, and financial inclusion.
Introduction
The Reserve Bank of India is the central bank of India, established in 1935 under the Reserve Bank of India Act, 1934. It was nationalized in 1948. Its headquarters are in Mumbai. The RBI is governed by the Central Board of Directors consisting of 20 members: (i) a Governor and not more than 4 Deputy Governors appointed by the Central Government; (ii) 4 Directors nominated from local boards of Mumbai, Kolkata, Chennai, and New Delhi; (iii) 10 Directors nominated under S.8(1)(c); and (iv) one Government official nominated by the Central Government. The Governor is the Chief Executive Authority and Chairman of the Bank.
I. Traditional Functions of RBI
1. Monopoly of Currency Issue
RBI has the sole right to issue bank notes in India. The Issue Department is kept separate from the Banking Department, and its assets are not subject to any other liabilities. The denominational values range from ₹2 to ₹10,000. The design, form, and material of bank notes are recommended by the Central Board and approved by the Central Government.
2. Banker to Government (Section 20)
RBI is the banker to the Central Government statutorily and to the State Governments by virtue of agreement. The Central Government entrusts RBI with all its money, remittances, exchange, and banking transactions. RBI conducts the banking business of the Government free of charge. It also manages public debt and provides advisory services to the Government.
3. Banker's Bank and Lender of Last Resort
RBI serves as banker to all scheduled commercial banks. Banks maintain their accounts with RBI for maintaining Cash Reserve Ratio (CRR) as well as settlement of clearing transactions. RBI holds cash reserves of banks and thus acts as custodian of the ultimate reserves. When a bank runs out of cash, RBI steps in as the lender of last resort providing emergency loans.
4. Custodian of Cash Reserves
Under Section 42 of the RBI Act, every scheduled bank must maintain an average daily balance with RBI not less than 3% of total demand and time liabilities. RBI has been empowered to vary this rate up to a maximum of 15%. RBI can also ask for additional cash reserves under S.42(1A) and may pay interest on excess reserves under S.42(1B).
5. Custodian of Foreign Exchange
RBI is under obligation to maintain the external value of the rupee. It is authorized to enter into foreign exchange transactions and acts as the custodian of the nation's foreign exchange reserves.
6. Controller of Credit
RBI exercises control over the volume of credit created by commercial banks through:
- Quantitative Methods: Bank Rate Policy, Open Market Operations, Cash Reserve Ratio, Statutory Liquidity Ratio
- Qualitative Methods: Fixing margin requirements, credit rationing, moral suasion, direct action against erring banks
7. Control of Banks
RBI acts as supervisor and controller of banks. Each bank must obtain a license before conducting business (S.22), prior permission is necessary for opening new branches (S.23), RBI is empowered to inspect books of accounts (S.35), issue directions (S.35A), remove directors, and appoint additional directors.
II. Promotional and Developmental Functions
Beyond traditional functions, RBI plays a dynamic developmental role:
- Rural Branch Expansion: Encouraging commercial banks to extend branches in semi-urban and rural areas to promote financial inclusion
- Deposit Insurance: Establishing the Deposit Insurance and Credit Guarantee Corporation (DICGC) to instil confidence among depositors against bank failures
- Mobilization of Savings: Promoting the habit of saving among the public through accessible banking
- Discount and Finance House: Establishing Discount and Finance House of India Ltd to provide securities to depositors
- Appointment of Committees: Setting up committees for inquiry and recommendations on banking reforms
- Agricultural Credit: Promoting institutional agricultural credit through NABARD (National Bank for Agriculture and Rural Development)
- Industrial Finance: Promoting industrialization through industrial finance institutions like IDBI
- Bill Market Development: Developing an active bill market for short-term credit instruments
- Securities Market: Issuing directions to the securities market for orderly functioning
III. Credit Information Functions
RBI may collect credit information from banking companies in such manner as it thinks fit and furnish information to any banking company. For this purpose, RBI may direct any banking company to submit statements relating to credit information. Banks are bound to comply notwithstanding any law relating to secrecy of dealings with customers.
Conclusion
The RBI combines traditional central banking functions with developmental activities, playing a dynamic role in India's national economy. It has been instrumental in planned development of the country — from monetary stability and credit control to financial inclusion and institutional development. With privatization and globalization, RBI's role in stabilizing inflation and controlling the flow of money has become even more significant.
- Origin: Originally Banking Companies Act, 1949; renamed Banking Regulation Act from 1-3-1966; amended by Act 58 of 1968 for social control
- Definitions: S.5(b) — "Banking" means accepting deposits for lending/investment, repayable on demand, withdrawable by cheque; S.5(c) — "Banking Company" means any company transacting banking business in India
- Prohibition on Trading (S.8): Banking companies cannot trade in goods — only deal in securities, bills of exchange, and negotiable instruments
- Management Restrictions (S.10): No managing agents; prohibition on employing insolvents or persons convicted of moral turpitude; MD term max 5 years
- Restrictions on Loans (S.20): Prohibits banking company from granting any loan (secured or unsecured) to its directors, firms/companies in which directors are interested, or individuals guaranteed by directors
- Licensing (S.22): No company can carry on banking business without RBI license; RBI may cancel license for non-compliance
- Branch Control (S.23): Prior permission of RBI required for opening new branches or changing location of existing branches
- SLR (S.24): Banks must maintain liquid assets (cash, gold, approved securities) of not less than 20% of total demand and time liabilities
- RBI Power to Control Advances (S.21): RBI can determine lending policy; give directions on purposes, margins, maximum amounts, interest rates
- Returns (S.27): Banks must submit monthly returns showing assets and liabilities to RBI; RBI can publish information in public interest (S.28)
| Section | Content |
|---|---|
| S.5(b) | Defines "banking" — accepting deposits for lending/investment, repayable on demand, withdrawable by cheque/draft |
| S.5(c) | Defines "banking company" — any company transacting business of banking in India |
| S.8 | Prohibition on trading in goods — only securities, bills, NIs allowed |
| S.10 | Restrictions on employment — no managing agents, no insolvents, MD max 5 years |
| S.20 | Restrictions on loans to directors — prohibits loans (secured/unsecured) to directors or their associated firms/companies |
| S.21 | Power of RBI to control advances — determines lending policy, directions on purposes, margins, rates |
| S.22 | Licensing — no banking business without RBI license; cancellation for non-compliance |
| S.23 | Restriction on opening/transfer of branches — prior RBI permission required |
| S.24 | SLR — maintain liquid assets not less than 20% of demand and time liabilities |
| S.27 | Monthly returns of assets and liabilities to RBI |
- Original name: Banking Companies Act 1949 → renamed BR Act from 1-3-1966
- S.5(b): Banking = deposits + lending + cheque | S.5(c): Banking company = company doing banking in India
- S.8: No trading in goods | S.10: No managing agents, MD max 5 yrs
- S.20: No loans to directors (secured or unsecured) — social control provision
- S.21: RBI controls advances — purposes, margins, amounts, rates
- S.22: Licensing | S.23: Branch opening needs RBI permission
- S.24: SLR min 20% | S.27: Monthly returns to RBI
- S.28: RBI can publish info in public interest
- Social Control: Act 58 of 1968 — NCC set up 1967, 14 banks nationalized 1969
The Banking Regulation Act, 1949 (originally Banking Companies Act) is the primary legislation regulating banking companies in India. Renamed from 1-3-1966. Amended by Act 58 of 1968 for social control.
Key Features: (1) S.5(b) & (c) — define "banking" and "banking company"; (2) S.8 — prohibits trading in goods; (3) S.10 — no managing agents, MD max 5 years; (4) S.20 — prohibits loans to directors (secured/unsecured) — major social control provision; (5) S.22 — licensing by RBI; (6) S.23 — prior RBI permission for new branches.
(7) S.21 — RBI controls advances (purposes, margins, rates); (8) S.24 — SLR minimum 20% of demand and time liabilities; (9) S.27 — monthly returns to RBI; (10) S.35 — RBI inspection power; S.35A — directions in public interest.
Social Control: National Credit Council set up in 1967; 14 banks nationalized 1969. The preamble of Act 58 of 1968 provides for "extension of social control over banks" — priority sector lending, restrictions on director influence.
Introduction
The Banking Regulation Act, 1949 was originally enacted as the Banking Companies Act, 1949 to consolidate and amend the law relating to banking companies. The need for this was felt owing to abuse of powers by persons controlling some banks and the absence of measures for safeguarding depositors' interests. With effect from 1-3-1966, the Act was renamed the Banking Regulation Act. It was further amended by Act 58 of 1968 to provide for "social control over banks."
Social Control Background
The expression "Social Control" in relation to banks came into vogue since December 1967. Complaints arose that bulk of bank advances were directed to large and medium scale industries and big business houses, while priority sectors — agriculture, small-scale industries, and exports — were neglected. The Government took two main steps: (1) setting up a National Credit Council (NCC) in 1967; and (2) introducing legislative controls by amending the BR Act. Within six months, 14 major banks were nationalized in 1969.
Salient Features
1. Definitions (Section 5)
S.5(b) defines "banking" as accepting deposits of money from the public for the purpose of lending or investment, repayable on demand or otherwise, and withdrawable by cheque, draft, order, or otherwise. S.5(c) defines "banking company" as any company transacting the business of banking in India.
2. Prohibition on Trading (Section 8)
No banking company shall directly or indirectly deal in the buying or selling or bartering of goods. Banks can only deal in securities, bills of exchange, and negotiable instruments.
3. Management Restrictions (Section 10)
No banking company shall employ or be managed by a managing agent. No person who is or has been adjudicated insolvent or convicted of an offence involving moral turpitude shall be employed. The Managing Director's term cannot exceed 5 years at a time, renewable for further periods.
4. Restrictions on Loans to Directors (Section 20)
Section 20 (amended by Act 58 of 1968) is a key social control provision. It prohibits a banking company from granting any loan — secured or unsecured — to its directors, or to any firm, company, subsidiary, or holding company in which a director is interested, or to any individual for whom a director stands as guarantor or co-partner.
5. Power of RBI to Control Advances (Section 21)
Where RBI is satisfied it is necessary in the public interest, it may determine the policy on advances. RBI may give directions on: (a) purposes for which advances may/may not be made; (b) margins for secured advances; (c) maximum amounts for guarantees; (d) rates of interest and terms. All banking companies are bound to comply.
6. Licensing (Section 22)
No company can carry on banking business without a license from RBI. Before granting, RBI must be satisfied that: (a) the company can pay depositors; (b) affairs are not conducted detrimentally; (c) management is not prejudicial to public interest; (d) adequate capital structure and earning prospects. RBI may cancel the license if the company ceases banking, fails conditions, or if conditions are no longer fulfilled. Appeal lies to the Central Government within 30 days.
7. Branch Control (Section 23)
No banking company can open a new place of business or change the location of an existing one without prior permission of RBI. RBI may require inspection under S.35 before granting permission.
8. Maintenance of SLR (Section 24)
Every banking company must maintain in India in cash, gold, or unencumbered approved securities, an amount not less than 20% of its total demand and time liabilities.
9. Submission of Returns (Section 27)
Every banking company must submit to RBI a monthly return showing assets and liabilities as at the close of business on the last Friday of every month. RBI may also direct specific statements and information (S.27(2)). Regional Rural Banks must also submit copies to NABARD. Under S.28, RBI may publish information in consolidated form if necessary in the public interest.
10. Inspection and Directions (Sections 35, 35A)
S.35 empowers RBI to cause inspection of any banking company. S.35A empowers RBI to give directions to banking companies in the interests of the public or to prevent affairs from being conducted prejudicially to depositors.
Conclusion
The Banking Regulation Act, 1949 provides a comprehensive regulatory framework for banking companies in India — covering definitions, prohibited activities, management controls, licensing, lending restrictions, reserve requirements, and supervisory powers. The social control amendments of 1968 and subsequent nationalization (1969, 1980) transformed Indian banking from private profit-oriented institutions into instruments of national economic development.
- (a) Borrowing & Lending: Borrowing, raising, or taking up money; lending or advancing money either upon or without security
- (b) Agency Business: Acting as agent for government, local authority, or any person; clearing and forwarding of goods; receipts and discharges; acting as attorney — but excluding managing agent or secretary/treasurer of a company
- (c) Public & Private Loans: Contracting for, negotiating, and issuing public and private loans
- (d) Underwriting: Effecting, insuring, guaranteeing, underwriting, managing any issue of state/municipal loans, or shares/stock/debentures of any company or corporation; lending money for such issues
- (e) Guarantee & Indemnity: Carrying on every kind of guarantee and indemnity business
- (f) Managing Property: Managing, selling, and realising any property which comes into possession in satisfaction of claims
- (g) Acquiring Property as Security: Acquiring, holding, and dealing with property forming security for loans or advances
- (h) Trusts: Undertaking and executing trusts
- (i) Estates: Undertaking administration of estates as executor, trustee, or otherwise
- (j) Employee Welfare: Establishing and supporting associations, funds, trusts for benefit of employees; granting pensions; subscribing to charitable/benevolent/public objects
- (k) Buildings: Acquisition, construction, maintenance, and alteration of buildings for the company's purposes
- (l) Property Dealing: Selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of company property and rights
- (m) Acquiring Business: Acquiring whole or part of the business of any person/company of a nature described in the section
- (n) Incidental: Doing all things incidental or conducive to the promotion or advancement of the company's business
| Section | Content |
|---|---|
| S.5(b) BR Act | Defines "banking" — accepting deposits for lending/investment, repayable on demand, withdrawable by cheque/draft |
| S.6 BR Act | Lists 14 forms of permissible business (a) to (n) — borrowing, lending, agency, underwriting, trusts, property, etc. |
| S.8 BR Act | Prohibition — no banking company shall engage in any business other than those in S.6; no trading in goods |
- S.6: 14 types of permissible business (a) to (n)
- Core: Borrowing + Lending (a), Agency (b), Public/Private Loans (c), Underwriting (d)
- Support: Guarantee & Indemnity (e), Property Management (f, g, l), Trusts (h), Estates (i)
- Other: Employee Welfare (j), Buildings (k), Acquiring business (m), Incidental (n)
- S.8 Prohibition: Cannot trade in goods — only securities, bills, NIs
- Agency exclusion: Cannot act as managing agent or secretary/treasurer of a company
S.6 of the BR Act, 1949 lists activities a banking company may engage in, in addition to the business of banking (S.5(b)):
(a) Borrowing and lending money with or without security; (b) Acting as agent for governments or persons — clearing, forwarding, receipts, attorney (excluding managing agent); (c) Contracting for public and private loans; (d) Underwriting issues of state/municipal loans, shares, debentures; (e) Guarantee and indemnity business.
(f) Managing property received in satisfaction of claims; (g) Acquiring property as security for loans; (h) Executing trusts; (i) Administering estates as executor/trustee; (j) Employee welfare — pensions, charitable objects; (k) Buildings for company purposes; (l) Property dealings; (m) Acquiring business of similar nature; (n) Incidental activities.
S.8 Prohibition: No banking company shall engage in any business other than those in S.6. Specifically, no trading in goods — banks can only deal in securities, bills, and negotiable instruments.
Introduction
Section 5(b) of the Banking Regulation Act, 1949 defines "banking" as accepting deposits from the public for the purpose of lending or investment, repayable on demand or otherwise, and withdrawable by cheque, draft, order, or otherwise. In addition to this core business, Section 6 lists the forms of business in which banking companies may engage.
Permitted Activities under Section 6
A banking company may engage in any one or more of the following forms of business:
(a) Borrowing and Lending
The borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security.
(b) Agency Business
Acting as agent for any government, local authority, or any other person. This includes the clearing and forwarding of goods, giving of receipts and discharges, and otherwise acting as an attorney on behalf of customers. However, this excludes the business of a managing agent or secretary and treasurer of a company.
(c) Public and Private Loans
Contracting for public and private loans and negotiating and issuing the same.
(d) Underwriting Capital Issues
Effecting, insuring, guaranteeing, underwriting, participating in, managing, and carrying out of any issue — public or private — of state, municipal, or other loans, or of shares, stock, debentures, or debenture stock of any company, corporation, or association. Also includes lending money for the purpose of any such issue.
(e) Guarantee and Indemnity
Carrying on and transacting every kind of guarantee and indemnity business.
(f) Managing Property
Managing, selling, and realising any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims.
(g) Acquiring Property as Security
Acquiring, holding, and generally dealing with any property or any right, title, or interest in any such property which may form the security or part of the security for any loans or advances, or which may be connected with such security.
(h) Executing Trusts
Undertaking and executing trusts.
(i) Administration of Estates
Undertaking the administration of estates as executor, trustee, or otherwise.
(j) Employee Welfare and Charitable Objects
Establishing and supporting or aiding in the establishment and support of associations, institutions, funds, trusts, and conveniences calculated to benefit employees or their connections. This includes granting pensions and allowances, making payments towards insurance, subscribing to or guaranteeing money for charitable or benevolent objects, or for any exhibition or public, general, or useful object.
(k) Buildings
The acquisition, construction, maintenance, and alteration of any building or works necessary or convenient for the purposes of the company.
(l) Property Dealings
Selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of, or turning into account or otherwise dealing with all or any part of the property and rights of the company.
(m) Acquiring Business
Acquiring and undertaking the whole or any part of the business of any person or company, when such business is of a nature enumerated or described in this sub-section.
(n) Incidental Activities
Doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company.
Prohibition — Section 8
Section 8 provides that no banking company shall engage in any form of business other than those referred to in sub-section (1) of Section 6. Specifically, banking companies are prohibited from directly or indirectly trading in goods through barter system. They can only deal in securities, bills of exchange, and negotiable instruments.
Conclusion
Section 6 of the BR Act provides an exhaustive list of 14 categories of permissible activities for banking companies — from core banking operations (borrowing, lending, agency) to ancillary activities (trusts, property management, underwriting). The prohibition in S.8 ensures that banks remain focused on financial intermediation and do not diversify into commercial trading, thereby protecting depositors' interests and maintaining the stability of the banking system.
- Definition: "Non-banking institution" means a company, corporation, or cooperative society — excludes industrial concerns (IDBI Act), agricultural operations, purchase/sale of goods, and immovable property dealers
- Excluded Activities: (I) Insurance business; (II) Managing/supervising chits or kuries; (III) Collecting money through subscriptions, units, or prize/gift schemes
- Firm Definition: "Firm" as defined in the Indian Partnership Act, 1932; "Non-Banking Institution" includes companies, corporations, and cooperative societies
- Registration: NBFCs must register with RBI before accepting deposits from the public
- Deposit Restrictions: RBI can prescribe limits on the amount of deposits NBFCs can accept, the period, and the interest rates
- Reserve Fund: NBFCs must maintain a certain percentage of deposits as reserve fund
- Inspection: RBI has the power to inspect the books and accounts of non-banking companies receiving deposits
- Directions: RBI can issue directions to NBFCs in the interest of depositors; can prohibit acceptance of deposits if norms are violated
- NBFC: Non-banking institution = company, corporation, cooperative society (not a bank)
- Excluded: Industrial concerns (IDBI Act), agricultural operations, goods trading, immovable property (if no financing income)
- Prohibited: Insurance, chit funds, prize/gift schemes — without authorization
- RBI Powers: Registration, deposit limits, interest rate control, reserve fund, inspection, directions
- Purpose: Protect depositors from fraudulent non-banking deposit schemes
- Source: RBI Act deals with provisions relating to non-banking institutions receiving deposits
The RBI Act deals with provisions relating to non-banking institutions receiving deposits. A "non-banking institution" means a company, corporation, or cooperative society that is not a bank but accepts deposits from the public.
Excluded from definition: (a) Industrial concerns under IDBI Act, 1964; (b) Entities whose principal business is agricultural operations, or purchase/sale of goods, or immovable property (if no financing income from others).
Prohibited activities: (I) Insurance business; (II) Managing/supervising chits or kuries; (III) Collecting money through subscriptions, units, or prize/gift schemes.
RBI Powers over NBFCs: (1) Registration — must register with RBI before accepting deposits; (2) Deposit limits — RBI prescribes amount, period, and interest rate limits; (3) Reserve fund — must maintain prescribed percentage; (4) Inspection — RBI can inspect books and accounts; (5) Directions — RBI can issue directions to protect depositors; can prohibit deposit acceptance for non-compliance.
Purpose: To protect depositors from fraudulent non-banking deposit schemes and ensure financial stability.
Introduction
The Reserve Bank of India Act contains provisions relating to non-banking institutions receiving deposits. These provisions were introduced to protect depositors from unregulated financial entities that accept public deposits without adequate safeguards. A "non-banking institution" means a company, corporation, or cooperative society that is not a banking company but engages in accepting deposits from the public.
Definition and Exclusions
The definition of non-banking institution excludes the following:
- (a) An Industrial concern as defined in clause (c) of Section 2 of the Industrial Development Bank of India Act, 1964
- (b) Entities whose principal business is:
- (I) Agricultural operations; or
- (II) Purchase or sale of any goods (other than securities) or providing services;
- (III) Purchase, construction, or sale of immovable property — provided no portion of income is derived from financing such transactions by other persons
"Firm" is defined as per the Indian Partnership Act, 1932.
Prohibited Activities
Non-banking institutions are prohibited from:
- (I) Insurance business — carrying on any class of insurance business without proper authorization
- (II) Chits and Kuries — managing, conducting, or supervising chits or kuries as defined in state laws, or any similar business
- (III) Collection schemes — collecting money in lump sum or otherwise by way of subscriptions, sale of units, or other instruments, and awarding prizes or gifts in cash or kind — commonly known as prize chit and money circulation schemes
Powers of RBI over Non-Banking Companies
1. Registration
Non-banking financial companies (NBFCs) must register with RBI before accepting deposits from the public. RBI may grant or refuse registration based on the financial condition and management of the company.
2. Control over Deposits
RBI has the power to prescribe:
- The maximum amount of deposits an NBFC can accept
- The period for which deposits can be accepted
- The maximum rate of interest that can be paid on deposits
- Conditions subject to which deposits may be accepted
3. Reserve Fund Requirements
NBFCs receiving deposits are required to maintain a reserve fund as prescribed by RBI — a certain percentage of deposits must be kept as liquid assets to ensure they can meet depositors' claims.
4. Inspection Powers
RBI has the power to inspect the books of accounts and other records of non-banking companies receiving deposits. This enables RBI to verify compliance with regulations and assess the financial health of the institution.
5. Power to Issue Directions
RBI can issue directions to NBFCs in the interest of depositors. If any NBFC violates RBI norms, RBI can:
- Prohibit the NBFC from accepting further deposits
- Direct the NBFC to repay deposits
- Cancel the registration of the NBFC
- Take such other action as may be necessary to protect depositors
6. Returns and Information
NBFCs are required to submit periodic returns to RBI containing information about their deposits, assets, liabilities, and business operations. This enables RBI to monitor their functioning on an ongoing basis.
Conclusion
The regulatory framework for non-banking companies is essential to protect depositors from fraudulent and unregulated financial entities. RBI's powers — registration, deposit control, inspection, and directions — ensure that NBFCs operate within a framework of financial discipline and transparency, complementing the regulation of banking companies under the BR Act, 1949.
- Commencement: Came into force on 1-1-1962; extends to the whole of India; HQ: Mumbai
- Objective: Insurance of deposits and guaranteeing of credit facilities — protection to small depositors against risk of bank failure
- Historical Context: High rate of bank failures during the first half of 20th century (two world wars + Great Depression); need to instil confidence in depositors for savings mobilization
- Capital: DICGC established with fully paid-up capital of ₹1 crore by RBI under S.4(2); authorized capital can be increased in consultation with Government
- Management (S.5): Board of Directors — (a) Governor of RBI or nominated Deputy Governor as Chairman; (b) a Deputy Governor or officer nominated by RBI; (c) one Central Government officer; (d) two Directors with special knowledge of industry
- Disqualification for Directors: Removed/dismissed from govt job, adjudged insolvent, unsound mind, convicted of moral turpitude
- Registration: All existing banks registered immediately (S.51); new banks registered after licensing; co-operative banks eligible for registration; cancellation if bank stops accepting deposits, goes into liquidation, transferred, or wound up
- Premium (S.35): Every insured bank must pay premium on its deposits at prescribed rates; default attracts interest up to 8% per annum
- Deposit Insurance Fund: Separate fund credited with — (a) premiums, (b) amounts from liquidators, (c) transfers from General Fund, (d) RBI advances, (e) investment income
- Inspection: DICGC may request RBI to inspect insured banks; inspection reports furnished to DICGC only — not to the bank inspected; no court can compel disclosure of inspection reports
| Section | Content |
|---|---|
| S.4(2) | DICGC established with paid-up capital of ₹1 crore by RBI; can be increased with Government consultation |
| S.5 | Management vested in Board of Directors — RBI Governor/Deputy as Chairman + Government + industry nominees |
| S.26 | DICGC can borrow from RBI up to prescribed limit (originally ₹5 crores) |
| S.35 | Premium — insured banks pay premium on deposits at prescribed rates; default attracts interest up to 8% p.a. |
| S.51 | Registration — all existing banking companies immediately registered as insured banks |
- DICGC Act 1961: In force from 1-1-1962; extends to whole of India; HQ Mumbai
- Purpose: Insurance of deposits + credit guarantee — protect small depositors from bank failures
- Capital: ₹1 crore by RBI (S.4(2)); can borrow up to ₹5 crores from RBI (S.26)
- Board: RBI Governor (Chairman) + Deputy Gov + Govt officer + 2 industry directors
- Disqualification: Dismissed, insolvent, unsound mind, moral turpitude conviction
- Registration (S.51): All banks registered immediately; co-ops also eligible; cancellation for liquidation/winding up
- Premium (S.35): Insured banks pay premium on deposits; default → 8% p.a. interest
- Deposit Insurance Fund: Premiums + liquidator amounts + General Fund + RBI advances + investment income
- Inspection: DICGC requests RBI; reports to DICGC only; courts cannot compel disclosure
The DICGC Act, 1961 came into force on 1-1-1962. It provides for insurance of deposits and guaranteeing of credit facilities to protect small depositors against the risk of bank failures.
Establishment: DICGC established with paid-up capital of ₹1 crore by RBI (S.4(2)), HQ Mumbai. Can borrow up to ₹5 crores from RBI (S.26).
Management (S.5): Board of Directors — RBI Governor/Deputy as Chairman, a Deputy Governor, one Government officer, and two Directors with industry knowledge. Disqualified: dismissed persons, insolvents, unsound mind, moral turpitude.
Registration: All existing banks registered as insured banks immediately (S.51). New banks registered after licensing. Co-operative banks also eligible. Cancellation for liquidation/cessation/winding up.
Premium (S.35): Insured banks pay premium on deposits at prescribed rates. Default attracts interest up to 8% p.a. Separate Deposit Insurance Fund maintained — credited with premiums, liquidator amounts, RBI advances, and investment income.
Inspection: DICGC requests RBI to inspect insured banks. Reports given to DICGC only — not to the inspected bank. No court can compel disclosure.
Introduction
The Deposit Insurance and Credit Guarantee Corporation of India Act, 1961 came into force from 1-1-1962 for the purpose of insurance of deposits and guaranteeing of credit facilities. This Act extends to the whole of India. The Act aims at giving a certain measure of protection to depositors against the risk of bank failures.
Historical Background
For over a hundred years of evolution of modern banking in India, the rate of bank failures was very high. During the first half of the twentieth century, two world wars and a great depression had caused a sense of uncertainty in the minds of people. Traditional Indian banking was more familiar and trustworthy, but the adoption of planning necessitated speeding up economic development, for which capital formation was crucial. Deposit mobilization was necessary, which called for the establishment of DICGC to instil confidence among depositors.
Establishment and Capital
The Corporation was established with fully paid-up capital of ₹1 crore by the Reserve Bank of India under Section 4(2). The authorized capital can be increased in consultation with the Government of India. Under Section 26, DICGC is empowered to borrow from RBI up to a limit which was originally ₹5 crores. The head office is at Mumbai.
Management (Section 5)
The general superintendence, direction, and management of affairs and business of the Corporation are vested in a Board of Directors consisting of:
- (a) The Governor of RBI or a Deputy Governor nominated by him — as Chairman
- (b) A Deputy Governor or any other officer nominated by RBI
- (c) An officer of the Central Government nominated by the Government
- (d) Two Directors nominated by the Central Government in consultation with RBI — having special knowledge of industry
Disqualification: A person cannot be nominated as Director if (a) removed/dismissed from a government job; (b) adjudged insolvent; (c) of unsound mind; (d) convicted of an offence involving moral turpitude. The Board can constitute executive and other committees and delegate powers and functions.
Registration as Insured Banks
Under Section 51 (Banking Companies Act), all existing banks were to be immediately registered. All new banks are registered after being licensed. Every eligible cooperative bank is also registered as an insured bank. Within 30 days of registration, the Corporation must send written intimation to the concerned bank.
Cancellation of registration occurs if: RBI prohibits the bank from accepting deposits; the bank goes into liquidation; deposits are transferred to another bank; it ceases to be a banking company; it is ordered to wind up; or it is amalgamated with another bank.
Premium (Section 35)
Every insured bank, so long as it remains registered, must pay premium to the Corporation on its deposits at such rates as may be notified in the Official Gazette with prior approval of the Central Government. The premium is payable for such period, at such times, and in such manner as prescribed. If an insured bank defaults in payment, it is liable to pay interest up to 8% per annum for the period of default.
Deposit Insurance Fund
A separate Deposit Insurance Fund is maintained, to which are credited:
- (a) All amounts received as premium by the Corporation
- (b) All amounts received from liquidators
- (c) All amounts transferred from the General Fund
- (d) Advances given by the Reserve Bank
- (e) All investment income resulting from investments made out of this fund
Inspection of Insured Banks
The Corporation may request RBI to cause an inspection of the books and accounts or investigation of the affairs of an insured bank. On such request, RBI shall cause the inspection by one or more of its officers. The inspection report is furnished to DICGC only — neither the bank inspected nor any other bank is entitled to a copy. No court, tribunal, or authority can compel the production or disclosure of the inspection report or any information gathered during the inspection.
Cooperative Banks
Every eligible cooperative bank is also registered as an insured bank, extending the deposit insurance protection to the cooperative banking sector as well.
Conclusion
The DICGC Act, 1961 provides a vital safety net for depositors in the Indian banking system. By insuring deposits against bank failures, it instils public confidence in the banking system, encourages savings mobilization, and contributes to capital formation for the country's economic development. The Corporation's management under RBI supervision ensures its operations align with the broader objectives of monetary stability and depositor protection.