Control over banking companies: management, accounts, lending, reconstruction and winding up

Banking Law · Unit I · Topic 3 of 21 · 7 min read

How the Banking Regulation Act, 1949 lets the RBI and the Central Government control a bank from licence to liquidation: licensing, board and management, capital and reserves, accounts, audit and inspection, lending and credit policy, moratorium and reconstruction under s.45, amalgamation under s.44A, suspension and winding up, with the 2025 amendments.

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On this page

1. Entry: licence, capital, name
2. Control over management
3. Reserves, accounts, audit and inspection
4. Control over lending and credit policy
5. Reconstruction and amalgamation
6. Suspension and winding up
How this is examined

Cases checked to exist. Read the judgment before quoting a holding.

Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.

Think of it as a life cycle. The Banking Regulation Act controls a bank at every stage: it cannot open without a licence, cannot choose its board freely, must keep reserves and publish audited accounts, can lend only within limits, and when it fails it is reconstructed or wound up on the RBI's initiative. Write the answer in that order and give the section for each control.

1. Entry: licence, capital, name

Licence (s.22). No company shall carry on banking business in India unless it holds a licence issued by the RBI, which may attach conditions. Before granting it the RBI considers whether the company can pay its depositors in full, whether its affairs will be conducted in the interest of depositors, its capital structure and earning prospects, and the public interest. The licence can be cancelled if the bank ceases to carry on banking or fails to meet the conditions.
Minimum capital and reserves (s.11) and regulation of paid-up, subscribed and authorised capital and voting rights (s.12).
Name (s.7). Only a banking company may use “bank” in its name, and every banking company must.
Branches (s.23). No new place of business, and no transfer of an existing one, without RBI permission.

2. Control over management

Board composition (s.10A). At least 51 per cent of directors must have special knowledge or practical experience in accountancy, agriculture and rural economy, banking, co-operation, economics, finance, law, small-scale industry or another field the RBI considers useful. A director (other than a whole-time chairman or whole-time director) may not hold office continuously for more than eight years. The Banking Laws (Amendment) Act, 2025 (16 of 2025) raised this to ten years for a co-operative bank, with effect from 1 August 2025.
Whole-time chairman or managing director (s.10B), whose appointment needs RBI approval. Section 10 prohibits managing agents and restricts the kind of persons a bank may employ.
Common directors (s.16). A director of one banking company may not be a director of another. The 2025 Act adds an exception for a director of a central co-operative bank elected to the board of the State co-operative bank of which it is a member.
RBI's powers over persons. Removal of a chairman, director, chief executive or other officer in the public interest or in the interest of depositors (s.36AA); appointment of one or more additional directors (s.36AB); and supersession of the board for up to six months, extendable to a total of twelve, with an administrator in charge (s.36ACA).

The definition of “substantial interest” in s.5(ne), which decides when a director is treated as interested in a company for the loan restrictions, used to turn on a shareholding of ₹5 lakh. The 2025 Act raised it to ₹2 crore or such other amount as the Central Government notifies (from 1 August 2025).

3. Reserves, accounts, audit and inspection

Reserve fund (s.17). Before declaring a dividend a bank incorporated in India must transfer at least 20 per cent of each year's profit to a reserve fund. Section 15 restricts dividends until capitalised expenses are written off.
Cash reserve and SLR. Non-scheduled banks keep a cash reserve under s.18; scheduled banks keep it with the RBI under s.42 of the RBI Act. Every bank must maintain liquid assets — cash, gold and unencumbered approved securities — at the percentage the RBI fixes (s.24), the statutory liquidity ratio. The 2025 Act moved the reporting dates in ss.18 and 24 from “alternate Fridays” to the last day of each fortnight (from 15 December 2025).
Accounts (s.29) in the prescribed form at the end of each financial year, audit (s.30) by a qualified auditor approved by the RBI, which may also order a special audit, and returns (ss.27, 31).
Inspection (s.35). The RBI may at any time inspect a bank and its books, and must do so if the Central Government directs. On the report the Government may prohibit the bank from receiving fresh deposits or direct the RBI to apply for its winding up (s.35(4)).

4. Control over lending and credit policy

Prohibited loans (s.20). No loan on the security of the bank's own shares, and no loan or commitment to its directors or to firms or companies in which they are interested. Section 20A bars the remission of debts due from directors without RBI approval.
Control over advances (s.21). The RBI may determine the policy on advances for banks generally or for a particular bank: the purposes for which advances may be made, the margins on secured advances, the maximum to any one borrower, and the rate of interest. This is the statutory source of selective credit control.
Interest not open to scrutiny (s.21A). A transaction between a bank and its debtor cannot be reopened by a court on the ground that the interest is excessive, which takes banks outside the Usurious Loans Act and State moneylending laws.
Directions (s.35A). In the public interest, in the interest of banking policy, to protect depositors or to secure proper management, the RBI may issue binding directions to banks generally or to one bank. Sections 35AA and 35AB let the RBI, on Central Government authorisation, direct banks to start insolvency proceedings against defaulting borrowers and issue directions on stressed assets.

5. Reconstruction and amalgamation

Compulsory reconstruction or amalgamation (s.45). Where there is good reason, the RBI may apply to the Central Government for an order of moratorium. The Government may stay all actions and proceedings against the bank for a fixed period, extendable, but not exceeding six months in total. During the moratorium the bank may not pay depositors or creditors except as directed. In the public interest, in the interest of depositors, to secure proper management or in the interest of the banking system, the RBI may then prepare a scheme of reconstruction or of amalgamation with another bank, which the Government sanctions. The scheme can reduce the claims of depositors and creditors, reorganise capital and transfer employees. The moratorium and reconstruction of Yes Bank in March 2020 was done under this section.

Voluntary amalgamation (s.44A). Two banking companies may amalgamate only if the scheme is approved by a majority in number representing two-thirds in value of the shareholders of each company, and sanctioned by the RBI.

6. Suspension and winding up

Suspension (s.37). A bank temporarily unable to meet its obligations may apply to the High Court, which, on an RBI report, may stay proceedings against it for up to six months.
Winding up by the High Court (s.38). The High Court shall order winding up if the bank is unable to pay its debts, or if the RBI applies. The RBI must apply when directed under s.35(4), and may apply where the bank fails to meet s.11, loses its licence under s.22, is prohibited from receiving deposits, or where its continuance is prejudicial to depositors. Voluntary winding up needs the RBI's certificate that the bank can pay all its depositors (s.44).
Liquidator (ss.38A, 39). On the RBI's application, the RBI, the State Bank or another notified bank is appointed official liquidator.
Depositors first (s.43A). Insured deposits are paid preferentially, and Part IIIA (ss.45A–45X) gives the High Court summary powers to settle debtors and assess damages against delinquent directors. The DICGC pays insured depositors first and then stands in their place (see the note on the DICGC Act).

The constitutionality of s.38 was upheld in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India, 1962 INSC 87, AIR 1962 SC 1371, which arose from the winding up of the Palai Central Bank on the RBI's application. The majority held that the RBI's opinion that continuance was prejudicial to depositors, on which the High Court was bound to order winding up, was not an unreasonable restriction under Article 19 nor arbitrary under Article 14, given the RBI's expertise and the need to act quickly to protect depositors.

Trap. Do not mix up s.45 and s.44A. Section 45 is compulsory and begins with a moratorium ordered by the Central Government on the RBI's application; the scheme is prepared by the RBI. Section 44A is voluntary and begins with the shareholders of both banks; the RBI only sanctions.

How this is examined

As essays: “What are the activities permitted by the Banking Regulation Act to be taken up by a banker?” (February 2025, answered from s.6 in the previous note together with the controls here); “Explain the main features of the Banking Regulation Act, 1949” (August 2024); “Discuss the powers of the RBI under the Banking Regulation Act” (January 2026). As short notes: “Reconstruction and reorganisation of banks” (June 2025) and “Banking Regulation Act, 1949” (June 2025). For the RBI's-powers essay, arrange the RBI's powers under the heads above: licensing, management, inspection, directions, credit control, reconstruction and winding up. Mention the 2025 amendments in one paragraph; it shows the answer is current.

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