Every banking company incorporated in India has to create a reserve fund as per Section 17 of the Banking Regulation Act, 1949. The Reserve Fund of banking company should be created out of the balance of profit of each year as disclosed in the profit and loss account before any dividend is declared by bank.
The government of India on the recommendation of the Reserve Bank of India may exempt a banking company from maintain the reserve fund for such period as it specify in the order in writing. However RBI must be satisfied about the adequacy of the paid-up capital and reserves of a banking company in relation to its deposit liabilities. While passing such order, it must be ensured that the amount in the reserve fund together with the amount in the share premium account is not less than the paid-up capital of the banking company.
In case a banking company appropriates/utilizes any amount from the reserve fund or the share premium account, it must report to RBI explaining the circumstances relating to such appropriation within twenty-one days from the date of such appropriation. The RBI can extend the mandatory period of twenty-one days by such period as it thinks fit or condone any delay in the making of such report.
The amount not less than twenty per cent (26%) of such profit should be transferred to reserve fund.
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