For commencing banking business in India, every banking company is required to obtain a licence from the Reserve Bank of India, under the provisions of Section 22 of the Banking Regulation Act, 1949. No company can carry on banking business in India unless it holds a license issued by the Reserve Bank of India. Every banking company inexistence on the commencement of this Act, before the expiry of six months from such commencement, and every other company before commencing banking business, shall apply in writing to the Reserve Bank for a license. The Section 22 of the Banking Regulation Act, 1949 deals with the Licensing of Banking Companies in India.
Conditions to be satisfied for Licensing of Banking Companies
Before granting any license, the Reserve Bank may have to be satisfied by an inspection of the books of the company or otherwise the following conditions are fulfilled:
- The company is or will be in a position to pay its present or future depositors in full as their claims accrue
- The affairs of the company are not being, or are not likely to be, conducted in a manner detrimental to the interests of its present or future depositors
- The general character of the proposed management of the company will not be prejudicial to the public interest or the interest of its depositors
- The company has adequate capital structure and earning prospects
- The public interest will be served by the grant of a licence to the company to carry on banking business in India
- Having regard to the banking facilities available in the proposed principal area of operations of the company, the potential scope for expansion of banks already in existence in the area and other relevant factors the grant of the licence would not be prejudicial to the operation and consolidation of the banking system consistent with monetary stability and economic growth
- the fulfillment of any other condition which is necessary to ensure that the carrying on of banking business in India by the company will not be prejudicial to the public interest or the interests of the depositors
Additional Conditions for foreign Banks
Before granting any banking license to a company incorporated outside India, the RBI may seek fulfillment of following additional conditions:
- The carrying on of banking business by such company in India will be in the public interest
- The Government or law of the country in which it is incorporated does not discriminate in any way against banking companies registered in India
Cancellation of Banking License
The Reserve Bank may cancel a licence granted to a banking company under sub-section 4 of Section 22 of the Banking Regulation Act, 1949:
- If the company ceases to carry on banking business in India; or
- If the company at any time fails to comply with any of the conditions imposed upon it under sub-section 1 of Section 22 of the Banking Regulation Act, 1949
- if at any time, any of the conditions referred to in sub-section (3) or 3(A) of Section 22 of the Banking Regulation Act, 1949
However before cancelling a licence on the ground that the banking company has failed to comply with or has failed to fulfill any of the conditions referred to therein, the Reserve Bank, unless it is of opinion that the delay will be prejudicial to the interests of the company’s depositors or the public, shall grant to the company on such terms as it may specify, an opportunity of taking the necessary steps for complying with or fulfilling such condition
Any banking company aggrieved by the decision of the Reserve Bank cancelling a licence under this section may, within thirty days from the date on which such decision is communicated to it, appeal to the Central Government
Read Next: Branch Licensing
Download this article as PDF
Click to go to JAIIB Preparation Page
Tags: Licensing of Banking Companies, Licensing of Banking Companies JAIIB