Banking Regulation Act 1949 — Notes & Key Sections for Bank Promotion Exam
Quick Facts — Banking Regulation Act 1949
- Enacted: 10 March 1949 | Total sections: 56
- Regulates: All banking companies in India; cooperative banks included since 1965 (strengthened by 2020 Amendment)
- Not applicable to: Primary Agricultural Credit Societies (PACS), cooperative land mortgage banks
- Key authority: Empowers RBI to license, inspect, regulate, and issue directions to banks
- Exam weight: 3–6 questions in most bank promotion exams; questions focus on section numbers, definitions, and restrictions
The Banking Regulation Act 1949 (BR Act) is the primary law governing banking companies in India. It defines what banking is, what banks can and cannot do, what RBI can direct banks to do, and what happens when a bank fails. For bank promotion exams, BR Act is one of the highest-weight laws — questions cover specific section numbers, definitions, and operational restrictions.
For the complete exam context — how BR Act fits within the full syllabus and how many questions to expect at each scale — see the Bank Promotion Exam Syllabus 2026.
What does the BR Act govern?
The BR Act supplements the Companies Act (which governs all companies generally). Its scope is specific to banking: it lays down rules that only banking companies must follow, in addition to general company law. The act gives RBI overarching supervisory authority over banking companies — from licensing them to inspecting them to directing their lending and investment policies.
Key definitions — Section 5
Section 5 is the most exam-tested section because it defines the core terms. The definition of “banking” is particularly important.
| Term | Definition (Section 5) |
|---|---|
| Banking [5(b)] | Accepting deposits from the public, for the purpose of lending or investment, repayable on demand or otherwise, withdrawable by cheque, draft or otherwise |
| Banking company [5(c)] | Any company which transacts the business of banking in India |
| Approved securities [5(a)] | Securities in which a trustee may invest under the Indian Trusts Act, or securities expressly authorised by the Central Government |
| Demand liabilities | Liabilities payable on demand — current accounts, demand drafts, unclaimed deposits |
| Time liabilities | Liabilities not payable on demand — fixed deposits, recurring deposits, cash certificates |
| Secured loan [5(n)] | A loan against security of assets whose market value is at the time of loan not less than the loan amount |
| Unsecured loan [5(o)] | A loan not so secured |
Permissible and prohibited business
Section 6 — What banks can do
In addition to core banking, Section 6 permits banks to carry out the following business:
- Borrowing, raising money, lending or advancing money
- Granting and issuing letters of credit, travellers’ cheques and circular notes
- Buying, selling, and dealing in bullion and species
- Buying and selling of foreign exchange
- Acquiring, holding, issuing on commission, underwriting, and dealing in stocks, funds, shares, debentures, bonds
- Purchasing and selling of bonds, scrips, or securities on behalf of constituents
- Carrying on and transacting guarantee and indemnity business
- Managing, selling, and realising any property which may come into the bank’s possession
- Collecting and transmitting money and securities
- Acting as agent for any government or local authority
- Carrying on agency business of any description not involving any liability on the bank’s part
- Safe deposit vaults, locker facility
Section 8 — What banks cannot do
A banking company cannot directly or indirectly deal in buying or selling of goods, except in connection with the realisation of security held by it. This is the prohibition on trading activity.
Section 7 — Use of the word “bank”
No company (other than a banking company) can use the words “bank”, “banker”, “banking” or “banking company” as part of its name. Only licensed banking companies may use these terms.
Section 9 — Immovable property
A banking company cannot hold immovable property (other than for own use) for more than 7 years from the date of acquisition. RBI may extend this by a further period not exceeding 5 years.
Capital and reserve requirements
Section 11 — Minimum paid-up capital
Section 11 prescribes minimum paid-up capital and reserves for banking companies to be eligible for a licence. Note: The figures in the original BR Act (₹5 lakh for domestic, ₹15 lakh for foreign banks) are historical; actual RBI licensing guidelines prescribe much higher capital requirements — ₹500 crore for new universal banks. Exam questions typically test the principle (the section number and the differential between domestic and foreign banks) rather than the exact amounts.
Section 17 — Statutory reserve
Every banking company must transfer a sum equal to not less than 20% of its net profits to a reserve fund (statutory reserve) before declaring any dividend. This is a mandatory transfer — not discretionary.
Statutory reserves — CRR and SLR
Section 24 — Statutory Liquidity Ratio (SLR)
Every banking company must maintain a minimum proportion of its net demand and time liabilities (NDTL) in the form of cash, gold, or unencumbered approved securities. This is the SLR. The maximum SLR that can be prescribed is 40% of NDTL. The current SLR is set by RBI and changes periodically — always verify the current rate from the latest RBI notification before your exam.
Section 42 — Cash Reserve Ratio (CRR)
Section 42 of the RBI Act (not BR Act) governs CRR. The BR Act’s Section 18 requires scheduled banks to maintain average daily balances with RBI. Exam note: CRR is often tested alongside SLR — remember CRR is governed by the RBI Act, not the BR Act.
Restrictions on advances — Sections 19 and 20
| Section | Restriction |
|---|---|
| 19(1) | Banking company cannot form a subsidiary except for specific permitted purposes |
| 19(2) | Cannot hold shares in any company exceeding 30% of its own paid-up capital + reserves, or 30% of paid-up share capital of that company — whichever is less |
| 20(1) | Cannot grant any loan or advance on the security of its own shares |
| 20A | Cannot remit (waive) interest on bad or doubtful debts except with prior RBI approval |
RBI’s supervisory powers
| Section | RBI Power |
|---|---|
| 21 | Issue directions to banking companies regarding loans and advances (interest rates, purpose, margins, security) |
| 21A | Rate of interest charged by a bank cannot be called in question by any court on the ground that it is excessive |
| 22 | Grant licence for carrying on banking business in India — RBI is the licensing authority |
| 23 | Prior RBI permission required for opening new branches, shifting or closing branches |
| 35 | Inspection of banking companies — RBI may inspect any bank, its books and accounts at any time |
| 35A | Issue directions to banking companies in the public interest, or in the interest of banking policy, or to prevent affairs being conducted in a manner detrimental to depositors |
| 36 | Caution or prohibit banking companies; advise them; recommend government to grant moratorium |
| 36AA | Remove the chairman, director, or any other officer of a banking company — added by 2020 Amendment |
| 45 | Power to apply to Central Government for moratorium; prepare scheme of amalgamation or reconstruction |
Nomination — Sections 45ZA to 45ZF (amended 2025)
Sections 45ZA to 45ZF govern nomination for deposits, lockers, and safe custody articles. The Banking Laws (Amendment) Act 2025 (effective November 1, 2025) significantly expanded nomination rights — this is a high-probability exam topic for 2026 promotion cycles.
Two types of nomination now available:
- Simultaneous nomination: Up to 4 nominees designated at the same time; the depositor specifies the share/percentage for each nominee (must total 100%). All nominees receive their share simultaneously on the depositor’s death.
- Successive nomination: Nominees are ranked 1 to 4. The second nominee becomes operative only on the death of the first, the third only on the death of the second, and so on.
Scope of sections:
- 45ZA: Nomination for deposits
- 45ZB: Cancellation or variation of nomination by depositor
- 45ZC: Nomination for safe deposit lockers
- 45ZD: Nomination for articles kept in safe custody
- 45ZE: Release of safe custody contents in favour of nominee
- 45ZF: Release of locker contents in favour of nominee
Banking Laws (Amendment) Act 2025 — Key changes for exams
The Banking Laws (Amendment) Act 2025 was enacted on 15 April 2025 (passed as the Banking Laws Amendment Bill 2024). Provisions came into effect in two stages: 1 August 2025 (governance, IEPF, auditor) and 1 November 2025 (nomination). These are live exam topics for all 2026 promotion cycles.
| Change | Before 2025 | After 2025 (current law) |
|---|---|---|
| Nominees per account/locker | 1 nominee only | Up to 4 nominees — simultaneous or successive (effective 1 Nov 2025) |
| Substantial interest threshold | ₹5 lakh (unchanged since 1968) | ₹2 crore (effective 1 Aug 2025) |
| Director tenure — cooperative banks | Maximum 8 years | Maximum 10 years, aligning with 97th Constitutional Amendment (effective 1 Aug 2025) |
| Unclaimed amounts — PSBs | No provision to transfer to IEPF | PSBs can transfer unclaimed shares, interest, bond redemption to IEPF — aligned with Companies Act (effective 1 Aug 2025) |
| Statutory auditor remuneration — PSBs | Government-prescribed rates only | PSBs can set their own remuneration for statutory auditors to attract quality professionals (effective 1 Aug 2025) |
Substantial interest — a person has substantial interest in a company if they alone, or with relatives, hold shares with a paid-up value exceeding the threshold. Raising it from ₹5 lakh to ₹2 crore reflects economic reality (the ₹5 lakh limit had been unchanged since 1968). This threshold determines related-party exposure and lending restrictions.
The 2020 Amendment — Cooperative banks under RBI
The Banking Regulation (Amendment) Act 2020 brought cooperative banks under RBI’s supervisory framework — a significant change worth remembering for exams at Scale II and above:
- Multi-State Cooperative Banks now come under RBI supervision (previously under respective state registrars)
- RBI now has power to supersede the board of directors of cooperative banks
- Primary Agricultural Credit Societies (PACS) and cooperative land mortgage banks remain excluded
- Cooperative banks now need RBI prior approval for new share issues and board appointments
Section 26 — Unclaimed deposits
Every banking company must submit a return to RBI of all deposit accounts that have not been operated for 10 years or more. Such unclaimed deposits are transferred to the Depositor Education and Awareness (DEA) Fund maintained by RBI.
Exam one-liners — Banking Regulation Act
Key one-liners for revision
- BR Act enacted: 10 March 1949 | Total sections: 56
- Definition of banking: Section 5(b) — accepting deposits for lending/investment, withdrawable by cheque
- Section 7 — only banking companies can use the word “bank”
- Section 8 — banks cannot carry on trading activities (exception: realisation of security)
- Section 9 — immovable property cannot be held beyond 7 years (RBI can extend by 5 more)
- Section 17 — minimum 20% of net profit to statutory reserve before dividend
- Section 19(2) — shareholding limit in any company: lower of 30% of own capital+reserves or 30% of investee’s capital
- Section 20 — no loan against security of own shares
- Section 21A — interest rate of a bank cannot be questioned in court as excessive
- Section 22 — RBI grants banking licence
- Section 23 — RBI permission needed for branch opening/shifting/closing
- Section 24 — SLR (max 40% of NDTL); Section 18 — CRR maintenance
- Section 35 — RBI’s power to inspect banks
- Section 35A — RBI’s power to issue directions in public interest
- Section 26 — unclaimed deposits of 10 years → submitted to RBI (DEA Fund)
- Sections 45ZA–45ZF — nomination: up to 4 nominees now allowed (simultaneous or successive) — effective 1 Nov 2025
- 2020 Amendment — Multi-State Cooperative Banks brought under RBI supervision
- 2025 Amendment (effective Aug–Nov 2025): 4 nominees | substantial interest ₹5L → ₹2 crore | cooperative bank director tenure 8 → 10 years | PSBs can transfer unclaimed amounts to IEPF | PSBs set own auditor remuneration
BR Act vs RBI Act — common exam confusion
| Aspect | BR Act 1949 | RBI Act 1934 |
|---|---|---|
| Governs | Banking companies — what they can/cannot do | Reserve Bank of India — its constitution and functions |
| CRR provision | Section 18 (maintenance requirement on banks) | Section 42 (RBI’s power to prescribe CRR) |
| SLR | Section 24 | Not in RBI Act |
| Bank licensing | Section 22 — RBI grants licence under BR Act | Not in RBI Act |
| Monetary policy | Not in BR Act | Section 45ZB — Monetary Policy Committee |
Test yourself — MCQs on BR Act
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Concept notes tell you what the law says. MCQs test whether you can apply it under exam pressure — case-based, section-identification, exception questions. All with full explanations.
Get BR Act MCQs — Join the WaitlistFrequently Asked Questions
What is the Banking Regulation Act 1949?
The Banking Regulation Act 1949 is the primary law governing banking companies in India. It defines banking, prescribes what banks can and cannot do, sets capital and reserve requirements, and empowers RBI to license, inspect, and regulate banks. It came into force on 10 March 1949 and has 56 sections.
What is the definition of banking under the Banking Regulation Act?
Section 5(b) defines banking as: accepting deposits from the public, for the purpose of lending or investment, where such deposits are repayable on demand or otherwise, and withdrawable by cheque, draft, or otherwise. All three elements must be present — accepting deposits, for lending/investment, and withdrawable by cheque.
Under which section of the BR Act does RBI have power to inspect banks?
Section 35 empowers RBI to inspect any banking company, its books and accounts, at any time. Section 35A empowers RBI to issue directions to banking companies in the public interest or in the interest of banking policy. These are two frequently confused sections in exams.
Can a bank grant a loan against the security of its own shares?
No. Section 20(1) of the BR Act explicitly prohibits a banking company from granting any loan or advance on the security of its own shares. This prohibition is absolute — there is no RBI permission or exception clause.
What was changed by the Banking Regulation Amendment Act 2020?
The 2020 Amendment brought Multi-State Cooperative Banks under RBI’s supervisory framework. RBI gained power to supersede cooperative bank boards, approve share issuances, and remove management. Primary Agricultural Credit Societies (PACS) remained outside RBI’s purview. The amendment was triggered by the Punjab and Maharashtra Cooperative Bank (PMC Bank) crisis of 2019.
What percentage of profit must a bank transfer to statutory reserve under the BR Act?
Under Section 17, every banking company must transfer a minimum of 20% of its net profits to the statutory reserve fund before declaring any dividend. This is mandatory — it cannot be waived or reduced by the bank’s board.
How many nominees can a bank account holder appoint after the 2025 amendment?
Under the Banking Laws (Amendment) Act 2025, effective 1 November 2025, a depositor can appoint up to four nominees per account or locker. Two modes are available: simultaneous nomination (all nominees receive a specified share simultaneously) and successive nomination (each nominee becomes operative only on the death of the higher-ranked nominee). Previously, only one nominee was permitted under sections 45ZA–45ZF of the BR Act.
What is “substantial interest” under the BR Act and what changed in 2025?
A person is said to have substantial interest in a company if they alone, or together with relatives, hold paid-up shares exceeding a prescribed threshold. This threshold determines related-party exposure limits and lending restrictions under the BR Act. The Banking Laws (Amendment) Act 2025 raised this threshold from ₹5 lakh to ₹2 crore, effective 1 August 2025 — the first revision since 1968.
Related study material: Negotiable Instruments Act · RBI Act 1934 · All Bank Promotion Study Material · Bank Promotion Exam 2026 Complete Guide
Disclaimer: Banking laws are amended periodically. Verify current figures (SLR, CRR, capital requirements) from the latest RBI notifications before your exam. This page is for educational reference only.
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