In this article, Asmita Topdar pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on penalties under banking regulations.

Introduction

The Banking Regulation Act, 1949 was passed by the parliament in the year 1949 with the aim to regulate all banks along with consolidating and amending the banking laws in India. It regulates and supervises the functioning of the commercial banks in India. Before 1965, the Act only took into cognisance the banking firms but in the year 1965, the Act was amended making provision for the inclusion of cooperative banks. Primary Agricultural Credit Society and cooperative land mortgage banks are excluded from the Act. The Act confers powers on Reserve Bank Of India (RBI) to regulate and control voting rights of shareholders, to provide the license to the bank, to supervise over the appointment of management and board, to regulate bank operation along with mergers and liquidation along with issuing directives and imposing penalties.  

Objectives behind the passing of this Act

The Banking Act was enacted in February 1949 with the following objectives:

1. It was becoming difficult to regulate the functioning of the banking sector in India due to the insufficient and inadequate provisions of the Indian Companies Act 1913. Hence, there was an urgent need for a proper legislation to regulate the same and therefore this was one of the main objectives behind passing the Act.
2. Due to inadequacy of capital many banks failed and hence prescribing a minimum capital requirement was felt necessary. The banking regulation act brought in certain minimum capital requirements for banks.
3. In order to avoid cut-throat competition in the banking sector.
4. Certain provisions were incorporated so as to ensure the protection of shareholders and the public at large. 
5. In order to ensure smooth functioning, the Act was introduced which conferred power on Reserve Bank of India (RBI) to appoint, re-appoint and removal of chairman, director and officers of the banks.
6. The Act introduced licensing which helped in regulating the indiscriminate opening of new branches and at the same time promoting a balanced development in the said sector. 
7. Provide quick and easy liquidation of banks when they are unable to continue further or amalgamate with other banks.
8. In order to restrict investments outside India by Indian investors, certain specific regulations were introduced.
9. Provide necessary and mandatory merger of weaker banks with established ones thereby strengthening the banking system in India.   

Penalties Provided

Penalties provided under Section 46 of the Banking Regulation Act, 1949 for any irregularity are as follows:

• A person who willfully misrepresents facts or omits material facts in the balance sheet or while filing any return or while furnishing any other document, or presents such facts which is known to be false by the concerned person, is liable for imprisonment of up to three years along with fine.
• If a person fails to furnish documents, books, accounts or any statement which he is liable to produce under Section 35 or if he fails to answer any question which he was asked to by any inspection officer, he shall be punished with fine extending up to Rs. 2000 per offence and if he refuses to follow the procedure fine may extend to Rs. 100 per day during which the offence continues.
• If a banking company receives any deposit which is in contravention of any order under Section 35(4)(a), all officers and directors will be deemed guilty and shall be punishable with a fine which may extend to twice the amount of the deposits so received unless the person proves that he was unaware of the contravention or that he exercised all due diligence to prevent the occurrence of the contravention. Further, a person will be punishable with fine which may extend to Rs. 50,000 or double the amount of default or contravention along with an additional charge of Rs. 2500 per day will continue until the contravention or default ends, if
  • the person does not comply with the orders, direction or any rule made or imposed
  • any default has been made in carrying out the terms or obligations given under Section 45(7).

• Where a company has defaulted any terms or order, every person employed by the company or responsible to the company or was in charge of the company at the time of occurrence of the contravention shall be punished.
• Notwithstanding anything mentioned under sub-section 5 of Section 46, where a company has committed a default or contravention and if it is proved that the default took place with the consent of or due to any gross negligence on part of any director, secretary or another officer, such officers or directors shall be punishable.

Power of RBI to impose penalties

The Banking Regulation Act, 1949 confers power on Reserve Bank of India under Section 47(A) to impose penalties if there has been any default or contravention. Such powers are explained in details hereunder.

• If there is any contravention or default of the same nature as discussed above and given under Section 46(3) and Section 46(4) on part of the banking company, RBI has the power to impose a penalty not exceeding twice the amount of the deposits in respect of which such contravention was made [where the contravention is in line with the default specified under Section 46 (3)] and  a penalty not exceeding Rs. 5,00,000 or twice the amount involved in such contravention or default where such amount is quantifiable, whichever is more, and where such the contravention or default is a continuing one, a further penalty which may extend to Rs. 25,000 until the default comes to an end.
• One cannot file a complaint in any court of law against any banking firm with respect to any contravention or default against which the RBI has imposed a penalty.
• The banking firm, against which the RBI has imposed a penalty, is liable to proceed with the payment within 14 days of issuance of notice by the RBI for making the said payment. In case of any failure in making such payment a principal court having jurisdiction over the area where the registered office of such banking company is situated or in the case where the firm is incorporated in foreign lands, that court will have jurisdiction where the principal business of the company is situated, in order to levy the defaulted payment.
• A certificate shall be issued by the court making such direction under Section 47(A)(5) specifying the amount payable by the banking company which shall be enforceable in the manner same as an order from a civil court.
• No proceedings can be initiated against the imposition of any penalties on the banking company if any complaint has been filed against any contravention.

Case Examples

In a recent case we found that the Reserve Bank of India (RBI) has imposed on State Bank of Bikaner and Jaipur a penalty of Rs. 20 million under the scope and power conferred by Section 47(A)(1)(c) and Section 46(4)(i) of the Banking Regulation Act, 1949 for irregularity with regards to advance import remittance.

In another case, RBI had filed a complaint against Gandevi peoples’ cooperative Bank Ltd. for various breaches in the functioning and running the bank, maintenance of accounts etc.  provided under Section 20, 21, 35(A), 46 and 47 of the said act. In order to revoke the same complaint, the bank filed a petition in Gujarat High Court [Gandevi peoples’ Cooperative Bank Ltd. v/s State of Gujarat] who later dismissed the same and ordered for the continuation of the original trial.

Conclusion

Before the passing of the Banking Regulation Act, there were many discrepancies prevalent in the banking sector. With the introduction of this Act, the functioning of the banking firms has been regulated. It has ensured a developed and balanced growth of the concerned sector. The major breakthrough was the conference of power on RBI to regulate along with the appointment and dismissal of the directors of the banking firms. In nutshell, this Act has brought all the banking firms under one umbrella with RBI being the governing body.  Besides, the Act also provides for penalties for any irregularity in the functioning of any banking company thereby ensuring a smooth functioning of the same. Therefore, we can conclude that the introduction of the said Act has helped in strengthening the root level of the banking structure within India.