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The Banking Companies Act, 1980, governs the acquisition and transfer of banks’ undertakings. This Act was enacted in India to ensure that banking companies acquire their interests in an orderly manner. According to this Act, all banks must get approval from the Reserve Bank of India before acquiring, amalgamating, or transferring an undertaking. The RBI takes decisions on proposals of acquiring, amalgamating, or transferring the undertakings of a banking company. The Act was enacted on 11th July 1980 and was deemed to have come into force from 15th April 1980.
Rules and Regulations
This Act is done under the powers vested in the Central Government by the provisions of article 19 of the Constitution of India and section 8A of the Banking Regulation Act, 1949 (10 of 1949), which was inserted by clause (vii) and clause (ix) respectively to article 19 by the 43rd Amendment Act, 1978 with effect from 14-3-1980.
This Act enables legislation intending to enable banks to acquire their interests in an orderly manner so that they do not face any difficulties. Banks must get approval from their shareholders or members before acquiring their financial subsidiaries. The authority of the RBI to approve such proposals is contained in section 2 of this Act.
This Act allows for proposed branches, subsidiary banks, and non-banking financial companies (NBFCs) to be set up and amalgamated or transferred to other banks.
Schedule
Schedule 1 is the list of banks proposed by the central Government and approved by RBI.
Schedule 2 is the list of subsidiaries proposed by the bank and approved by RBI.
Schedule 3 is the list of non-banking financial companies (NBFCs) proposed by the bank and approved by RBI.
Until all related approvals are in place, no proposal for any amalgamation or transfer can be considered till all related approvals are in place.
Important Sections
Section 2 of this Act provides that the Central Government shall constitute a committee consisting of the following persons, namely:
Its Secretary represents the RBI. The Governor of the Reserve Bank is usually a member. The Chairperson or any other member can also be appointed if so desired.
The committee assists the Government in controlling the size and development of the banking industry and demands for the merger, amalgamation, etc.
Under section 3 of the Act, the Central Government declares the size and development of the banking industry in India.
The Reserve bank can issue directions to banks if any directions are issued from time to time. Banks that fail to comply with these rules are liable for monetary penalties and other actions.
Under Section 4 of this Act, a bank proposing to acquire its subsidiary or amalgamate or transfer the undertakings of such subsidiary should apply to RBI specifying therein particulars thereof and enclosing all relevant documents. The application shall be accompanied by the fee prescribed in the Third Schedule.
Cash Reserve Ratio:
The Cash Reserve Ratio (CRR) is the minimum capital requirement. Banks must maintain cash reserves on their books, which should not be less than Cash Reserve Ratio. In the case of a subsidiary, its parent bank shall also maintain the same Cash Reserve Ratio. In case of amalgamation or transfer of an undertaking, the ratio of aggregated liabilities and maximum capital requirements shall be such as may be prescribed.
Liquidity:
Schedule 3 of the Act allows for the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) to be set up. The SLR is a mandatory minimum percentage of deposits that banks must invest in certain Government approved securities. CRR is the cash reserve a bank must maintain with itself.
Liquidity can be defined as the ability to pay debts on time, know your customer (KYC) norms, repayment capacity, security available for loans, profit potential, etc.
These companies require a lot of liquidity, and thus a higher CRR is needed to maintain the liquidity. A higher Cash Reserve Ratio also ensures a sense of safety for the bank and the depositors.
Policy Formulation
In the early stages of its implementation, banks and NBFCs were not fully aware of how the Act could be misused. The RBI formulated rules to ensure their implementation properly. The RBI also issued guidelines that would be followed to make sure the Act was implemented correctly.
RBI also took steps to regulate the banking industry in India very strictly and has issued many rules under the Act. The RBI has also delegated the responsibility of enforcing this Act to the Authorised Dealer (AD) Program. The ADs are companies that are registered with the Securities and Exchange Board of India (SEBI)
Conclusion
The Banking Companies Act 1980 allows the purchase of undertakings through open market bidding. In this case, the concerned bank should first obtain permission from the RBI. The cash reserve ratio is a vital policy tool that makes it possible to maintain a stable currency value without changing the credit risk. This will encourage industries to invest in India because they can invest in safe and profitable Indian securities.
The Act promotes further growth and development in non-banking financial companies for the banking sector to grow and ensure fast development of efficient management, thus contributing to economic development in India.
