JAIIB Paper 1 • Indian Economy & Indian Financial System (IE&IFS)
Banking Regulation Act, 1949 & RBI Act, 1934
The two foundational statutes of Indian banking law — one that creates and empowers the regulator (RBI Act), and one that regulates the regulated (Banking Regulation Act). This guide covers both Acts' structure, chapters, schedules and the specific sections JAIIB tests most — licensing, branch expansion, capital & reserves, RBI's directions power, moratorium/reconstruction, and application to Co-operative Banks — with 50 exam-style MCQs with hidden answers.
📅 Updated: September 2026 • 30 min read
📊 At a Glance
Statute
Enacted
Core Purpose
RBI Act, 1934
1934; commenced 1 April 1935
Establishes and empowers RBI as India's central bank
Regulates the business, licensing and functioning of banking companies
Note: For RBI's monetary policy powers (repo, CRR, SLR, MPC) under the RBI Act, see our RBI & Monetary Policy guide; for the structure of Indian banks these Acts regulate, see Banking Structure of India.
1 Background: Why Two Separate Acts?
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RBI Act, 1934 — The "Regulator's Charter"
Creates RBI itself: its capital, management, Central Board, and its core central-banking functions (currency issue, banker to government, credit control).
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Banking Regulation Act, 1949 — The "Rulebook for Banks"
Governs how banking companies — the entities RBI regulates — must be licensed, capitalised, managed and operated.
Before 1949, banking companies in India operated largely under the general Companies Act, with limited specialised banking regulation — a gap exposed by a wave of bank failures in the 1930s-40s. The Banking Companies Act, 1949 (renamed the Banking Regulation Act in 1966) was enacted to give RBI dedicated statutory powers to license, supervise and, where necessary, restructure banking companies.
2 RBI Act, 1934 — Structure (Chapters I–V)
The RBI Act is organised into chapters, each covering a distinct facet of the central bank's constitution and functioning:
Chapter
Subject
Chapter I
Preliminary — short title, extent, definitions
Chapter II
Incorporation, Capital, Management and Business of the Bank — Central Board of Directors, Governor & Deputy Governors, Local Boards
Chapter III
Central Banking Functions — sole right to issue bank notes, banker to the Central/State Governments, banker's bank, credit control
Chapter IIIA/B/C/D
Later insertions — Collection of Credit Information, regulation of NBFCs and deposit-taking institutions, prohibition of deposit-taking by unincorporated bodies
Chapter IV
General Provisions
Chapter V
Penalties
JAIIB tip: Chapter IIIB (Sections 45H onward), inserted later, is the legal foundation for RBI's regulation of NBFCs — covered in depth in our forthcoming NBFC guide.
3 Central Board & Local Boards
Under Chapter II, RBI's affairs are managed by a Central Board of Directors, comprising the Governor, Deputy Governors, government-nominated directors, and directors nominated from four Local Boards — one each for the Western, Eastern, Northern and Southern regions of India, representing local/regional economic interests.
JAIIB tip: The Local Boards' areas of jurisdiction are listed in the First Schedule to the RBI Act (Section 4).
4 Schedules to the RBI Act
🗺️
First Schedule
Lists the four Local Areas (Western, Eastern, Northern, Southern) for the Local Boards under Section 4.
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Second Schedule
The list of Scheduled Banks — banks satisfying RBI's specified criteria (capital, reserves, conduct) and included in this schedule. This is the legal basis of the term "Scheduled Commercial Bank."
Very high-yield JAIIB fact: A bank becomes a "Scheduled Bank" only upon inclusion in the Second Schedule to the RBI Act, 1934 — this single fact is one of the most frequently tested points across JAIIB and other IIBF exams. Scheduled status entitles a bank to borrow from RBI at the Bank Rate and access other RBI facilities.
5 Banking Regulation Act, 1949 — Background
1949Enacted as the "Banking Companies Act, 1949," giving RBI dedicated powers to license and supervise banking companies.
1965Extended (with modifications) to Co-operative Societies carrying on banking business, via a new Section 56.
1966Renamed the "Banking Regulation Act, 1949" to reflect its now-wider scope beyond just "companies."
1969 / 1980Major public sector banks nationalised; specific provisions (Section 51) extend applicable parts of the Act to SBI, nationalised banks and RRBs.
2020 & afterBanking Regulation (Amendment) Act, 2020 brings all Co-operative Banks more comprehensively under RBI's regulatory ambit, post the PMC Bank crisis.
The Act contains 56 Sections, spanning definitions, capital/licensing requirements, management restrictions, RBI's supervisory and directions powers, and provisions for winding-up, reconstruction and amalgamation of banking companies.
6 Key Sections of the Banking Regulation Act (Sections 1 to 56)
JAIIB does not expect you to memorise all 56 sections verbatim — but a specific subset comes up repeatedly:
Section
Subject
5(b)
Definition of "Banking"
5(c)
Definition of "Banking Company"
6
Forms of business a banking company may engage in (besides core banking)
8
Prohibition on trading — a bank cannot directly engage in trading activities
9
Restriction on holding immovable property (beyond own-use requirements, for a limited period)
11 & 12
Minimum paid-up capital & reserves; regulation/capping of shareholder voting rights
17
Reserve Fund — banks must transfer at least 20% of profits to a Reserve Fund until it equals paid-up capital
18
Cash Reserve requirement for non-scheduled banks
19
Restrictions on nature of subsidiary companies a bank may set up
20
Restrictions on loans and advances to a bank's own directors
21 & 21A
RBI's power to control advances by banking companies; rate of interest not to be reopened by courts
22
Licensing of banking companies (Section 7 below)
23
Restrictions on opening new/transferring branches (Section 7 below)
24
Statutory Liquidity Ratio (SLR)
26
Return of unclaimed deposits (10 years+ inactive) to RBI's DEA Fund
29
Preparation of annual Accounts and Balance Sheet
35
RBI's power of inspection of banks
35A
RBI's power to issue binding directions to banks in the public interest
36AA / 36AB
RBI's power to remove managerial personnel / appoint additional directors
45
Moratorium and Scheme of Reconstruction/Amalgamation (Section 8 below)
45ZA–45ZF
Nomination facility for deposit accounts and articles in safe custody
51
Applies specified provisions of the Act to SBI, nationalised banks and RRBs
56
Modified application of the Act to Co-operative Banks (Section 8 below)
No company can carry on "banking business" in India without a licence from RBI. RBI examines financial soundness, management quality and public interest before granting a licence — and may cancel it for violations.
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Section 23 — Branch Licensing
A banking company must obtain RBI's prior permission before opening a new place of business (branch) in India or abroad, or changing an existing branch's location — ensuring orderly, need-based branch expansion.
JAIIB tip: Section 22 licenses the bank itself; Section 23 licenses each individual branch/place of business — don't confuse the two when a question asks "which section governs opening a new branch."
Where a banking company is in financial difficulty, Section 45 empowers RBI to apply to the Central Government for an order of moratorium (temporarily suspending/limiting withdrawals and payments, for up to six months) while RBI prepares a scheme of reconstruction or amalgamation — the legal mechanism used in real-world bank rescues (e.g., YES Bank's 2020 reconstruction, and various UCB/PMC-style resolutions).
Section 56 — Application to Co-operative Banks
Section 56 extends the Banking Regulation Act's provisions to Co-operative Societies carrying on banking business — but with modifications reflecting their dual character (regulated by RBI for banking functions, and by the Registrar of Co-operative Societies/State Government for incorporation, management and administration matters).
JAIIB tip: The Banking Regulation (Amendment) Act, 2020 — enacted after the PMC Bank crisis — strengthened RBI's direct regulatory powers over Co-operative Banks (capital, board supersession, audits), while co-operative management matters largely remain with State Registrars.
✓ Key Takeaways
The RBI Act, 1934 creates and empowers RBI (Chapters I–V); the Banking Regulation Act, 1949 regulates the banking companies RBI supervises (56 Sections).
A bank becomes a Scheduled Bank only on inclusion in the Second Schedule to the RBI Act.
Section 22 licenses the bank; Section 23 licenses each branch — a frequently confused pair.
The Banking Regulation (Amendment) Act, 2020 strengthened RBI's powers over Co-operative Banks after the PMC Bank episode.
📝 Top 50 JAIIB-Style MCQs on the Banking Regulation Act & RBI Act
Test your understanding with these 50 practice MCQs, closely modelled on the JAIIB (IE & IFS) exam pattern. Each question has 5 options — the correct answer is hidden by default; tap "Show Answer" to reveal it along with a short explanation.
🏦 RBI Act, 1934 — Structure
1 The RBI Act was enacted in 1934 and RBI commenced operations on:
A. 1 January 1935
B. 1 April 1935
C. 26 January 1950
D. 15 August 1947
E. 1 April 1949
Answer: B. RBI commenced operations on 1 April 1935.
2 Which chapter of the RBI Act deals with the Bank's Central Banking Functions?
A. Chapter I
B. Chapter II
C. Chapter III
D. Chapter IV
E. Chapter V
Answer: C. Chapter III covers Central Banking Functions.
3 RBI's affairs are managed by a Central Board of Directors, with directors also drawn from how many regional Local Boards?
A. 2
B. 3
C. 4
D. 6
E. 8
Answer: C. There are 4 Local Boards — Western, Eastern, Northern, Southern.
4 The chapter of the RBI Act that provides the legal foundation for RBI's regulation of NBFCs is:
A. Chapter I
B. Chapter II
C. Chapter IIIB
D. Chapter V
E. Chapter IV
Answer: C. Chapter IIIB governs RBI's regulation of NBFCs.
5 Chapter V of the RBI Act deals with:
A. Preliminary definitions
B. Penalties
C. Incorporation and capital
D. NBFC regulation
E. Central Banking Functions
Answer: B. Chapter V covers Penalties.
📜 Schedules to the RBI Act
6 A bank acquires "Scheduled Bank" status by being included in the:
A. First Schedule to the RBI Act
B. Second Schedule to the RBI Act
C. Banking Regulation Act's Section 56
D. Companies Act's Schedule III
E. SEBI's listing regulations
Answer: B. Scheduled status comes from inclusion in the Second Schedule to the RBI Act.
7 The First Schedule to the RBI Act lists:
A. Scheduled banks
B. The four Local Areas for Local Boards
C. Penalties for violations
D. NBFC classifications
E. Cooperative bank rules
Answer: B. The First Schedule lists the four Local Areas.
8 A key benefit of Scheduled Bank status is that the bank can:
A. Avoid all RBI supervision
B. Borrow from RBI at the Bank Rate and access other RBI facilities
C. Set its own SLR requirement
D. Issue its own currency
E. Bypass licensing requirements
Answer: B. Scheduled banks can access RBI's refinance/Bank Rate facilities.
📋 Banking Regulation Act — Background
9 The Banking Regulation Act, 1949 was originally enacted under the title:
A. Banking Companies Act, 1949
B. RBI Regulation Act, 1949
C. Indian Banking Act, 1949
D. Companies (Banking) Act, 1949
E. Banking Business Act, 1949
Answer: A. It was originally the "Banking Companies Act, 1949."
10 The Act was renamed the "Banking Regulation Act, 1949" in:
A. 1949
B. 1956
C. 1966
D. 1991
E. 2020
Answer: C. It was renamed in 1966, on being extended to cooperative banks.
11 The Banking Regulation Act, 1949 contains how many sections?
A. 24
B. 45
C. 56
D. 75
E. 100
Answer: C. The Act runs to 56 sections.
12 The Banking Regulation (Amendment) Act, 2020, which strengthened RBI's powers over Co-operative Banks, followed which real-world episode?
A. The Harshad Mehta scam
B. The PMC Bank crisis
C. The 2008 Global Financial Crisis
D. Demonetisation
E. The Satyam scandal
Answer: B. The 2020 amendment followed the PMC Bank crisis.
📖 Key Sections — Definitions & Capital
13 The definition of "Banking" is provided under which section of the Banking Regulation Act?
A. Section 5(b)
B. Section 6
C. Section 22
D. Section 45
E. Section 56
Answer: A. Section 5(b) defines "banking."
14 Section 8 of the Banking Regulation Act prohibits a banking company from:
A. Accepting deposits
B. Directly engaging in trading activities
C. Opening branches
D. Issuing cheques
E. Lending money
Answer: B. Section 8 prohibits direct trading by a banking company.
15 Section 17 of the Banking Regulation Act requires a bank to transfer at least what percentage of profits to a Reserve Fund each year (until the fund equals paid-up capital)?
A. 5%
B. 10%
C. 20%
D. 40%
E. 100%
Answer: C. At least 20% of profits must go to the Reserve Fund under Section 17.
16 Sections 11 and 12 of the Banking Regulation Act deal with:
A. Branch licensing
B. Minimum paid-up capital/reserves and regulation of shareholder voting rights
C. Moratorium and reconstruction
D. Cooperative bank application
E. Nomination facility
Answer: B. Sections 11/12 cover capital requirements and voting-right caps.
17 Section 20 of the Banking Regulation Act restricts:
A. Loans and advances to the bank's own directors
B. Branch expansion
C. The Reserve Fund transfer
D. Deposit interest rates
E. Import/export financing
Answer: A. Section 20 restricts loans/advances to a bank's own directors.
18 The Statutory Liquidity Ratio (SLR) is governed by which section of the Banking Regulation Act?
A. Section 17
B. Section 22
C. Section 24
D. Section 42
E. Section 56
Answer: C. SLR is governed by Section 24 of the Banking Regulation Act.
19 Unclaimed deposits inactive for a specified period must be transferred by banks under Section 26 to RBI's:
A. DEA Fund (Depositor Education and Awareness Fund)
B. Reserve Fund
C. Consolidated Fund of India
D. Contingency Fund
E. Priority Sector Fund
Answer: A. Unclaimed deposits are transferred to RBI's DEA Fund.
🔍 RBI's Supervisory Powers
20 RBI's power to conduct inspections of banks is provided under:
A. Section 22
B. Section 35
C. Section 45
D. Section 51
E. Section 6
Answer: B. Section 35 provides RBI's inspection power.
21 RBI's power to issue binding directions to banks in the public interest arises under:
A. Section 17
B. Section 22
C. Section 35A
D. Section 56
E. Section 9
Answer: C. Section 35A empowers RBI to issue directions.
22 RBI's power to appoint additional directors to a bank's board is found under:
A. Section 36AB
B. Section 20
C. Section 8
D. Section 24
E. Section 29
Answer: A. Section 36AB allows RBI to appoint additional directors.
🪪 Sections 22 & 23 — Licensing
23 Which section requires a company to obtain an RBI licence before carrying on banking business in India?
A. Section 9
B. Section 22
C. Section 26
D. Section 45
E. Section 51
Answer: B. Section 22 requires a licence to carry on banking business.
24 Which section governs a bank's need for RBI's prior permission to open a new branch?
A. Section 21
B. Section 22
C. Section 23
D. Section 24
E. Section 29
Answer: C. Section 23 governs branch licensing.
25 RBI may cancel a bank's licence granted under Section 22 for reasons including:
A. Violation of licensing conditions or unsound financial position
B. The bank opening too many ATMs
C. A change in the bank's logo
D. The bank's profits being too high
E. None; licences can never be cancelled
Answer: A. RBI can cancel a licence for violations/unsoundness.
⚖️ Sections 45 & 56
26 A moratorium on a failing bank, temporarily limiting withdrawals while RBI prepares a rescue scheme, is provided under:
A. Section 22
B. Section 35A
C. Section 45
D. Section 51
E. Section 17
Answer: C. Section 45 provides for moratorium and reconstruction/amalgamation.
27 Under Section 45, a moratorium order can be granted for a maximum period of:
A. 1 month
B. 6 months
C. 1 year
D. 5 years
E. Indefinitely
Answer: B. A Section 45 moratorium can run up to 6 months.
28 The section that extends the Banking Regulation Act (with modifications) to Co-operative Banks is:
A. Section 22
B. Section 45
C. Section 51
D. Section 56
E. Section 9
Answer: D. Section 56 extends the Act to Co-operative Banks with modifications.
29 Under Section 56, Co-operative Banks' incorporation and general management remain primarily under the purview of:
A. SEBI
B. IRDAI
C. The Registrar of Co-operative Societies / State Government
D. The Ministry of Corporate Affairs exclusively
E. NABARD exclusively
Answer: C. Incorporation/management of co-op banks stays with the Registrar/State Government, even as RBI regulates banking functions.
30 Section 51 of the Banking Regulation Act specifically applies certain provisions of the Act to:
A. Only foreign banks
B. SBI, nationalised banks and RRBs
C. Only NBFCs
D. Only payment banks
E. Only cooperative banks
Answer: B. Section 51 extends specified provisions to SBI, nationalised banks and RRBs.
🧩 Mixed / Comprehensive
31 Which Act creates and empowers the regulator (RBI) itself?
A. Banking Regulation Act, 1949
B. RBI Act, 1934
C. Companies Act, 2013
D. SEBI Act, 1992
E. FEMA, 1999
Answer: B. RBI Act, 1934 creates and empowers RBI.
32 Which Act regulates the licensing, capital and functioning of banking companies themselves?
A. RBI Act, 1934
B. Banking Regulation Act, 1949
C. FEMA, 1999
D. SARFAESI Act, 2002
E. Insolvency and Bankruptcy Code, 2016
Answer: B. The Banking Regulation Act regulates banking companies.
33 Before 1949, banking companies in India were primarily regulated under the:
A. RBI Act, 1934, in full detail
B. General Companies Act, with limited specialised banking regulation
C. SEBI Act
D. FEMA
E. There was no regulation at all
Answer: B. Pre-1949, banks were regulated mainly under general company law, with limited banking-specific rules.
34 Section 9 of the Banking Regulation Act restricts a bank from:
A. Accepting deposits
B. Holding immovable property beyond a specified period, except for its own use
C. Opening savings accounts
D. Issuing demand drafts
E. Hiring staff
Answer: B. Section 9 restricts holding non-own-use immovable property beyond a limited period.
35 The nomination facility for bank deposit accounts and safe custody articles is governed by which set of sections?
A. Sections 5(b)–5(c)
B. Sections 45ZA–45ZF
C. Sections 11–12
D. Sections 22–23
E. Section 8 only
Answer: B. Sections 45ZA-45ZF govern the nomination facility.
36 A banking company's annual Accounts and Balance Sheet requirements are prescribed under:
A. Section 17
B. Section 29
C. Section 35
D. Section 45
E. Section 56
Answer: B. Section 29 prescribes Accounts and Balance Sheet requirements.
37 "Cash Reserve" requirement specifically for non-scheduled banks is prescribed under:
A. Section 18
B. Section 24
C. Section 42 of the RBI Act
D. Section 45
E. Section 9
Answer: A. Section 18 covers the cash reserve for non-scheduled banks (distinct from CRR under RBI Act Section 42 for scheduled banks).
38 RBI's power to control advances made by banking companies is found under:
A. Section 18
B. Section 21
C. Section 26
D. Section 29
E. Section 51
Answer: B. Section 21 gives RBI power to control advances.
39 Section 6 of the Banking Regulation Act deals with:
A. Forms of business a banking company may engage in
B. Bank licensing
C. Moratorium
D. Cooperative banks
E. Nomination facility
Answer: A. Section 6 lists permissible forms of business.
40 Which real-world 2020 bank rescue is a commonly cited example of Section 45 (moratorium + reconstruction scheme) in action?
A. YES Bank's reconstruction
B. SBI's merger with its associate banks
C. HDFC Bank-HDFC Ltd merger
D. Bank of Baroda-Dena Bank-Vijaya Bank merger
E. ICICI Bank's IPO
Answer: A. YES Bank's 2020 reconstruction used the Section 45 moratorium/scheme mechanism.
41 "Voting rights of any shareholder in a banking company" are capped under which section, to prevent excessive concentration of control?
A. Section 9
B. Section 12
C. Section 24
D. Section 45
E. Section 56
Answer: B. Section 12 caps individual shareholder voting rights.
42 Restrictions on the type of subsidiary companies a bank can float are governed by:
A. Section 17
B. Section 19
C. Section 26
D. Section 35
E. Section 45
Answer: B. Section 19 restricts the nature of subsidiary companies.
43 Which is the correct pairing of an Act with its enactment year?
A. RBI Act — 1949; BR Act — 1934
B. RBI Act — 1934; BR Act — 1949
C. Both Acts enacted in 1935
D. Both Acts enacted in 1966
E. RBI Act — 1935; BR Act — 1966
Answer: B. RBI Act was 1934; Banking Regulation Act was 1949.
44 Which section defines "banking company" as distinct from the general definition of "banking"?
A. Section 5(b)
B. Section 5(c)
C. Section 6
D. Section 8
E. Section 9
Answer: B. Section 5(c) defines "banking company," while 5(b) defines "banking."
45 A regional/local co-operative bank found to be undercapitalised and mismanaged would most likely first attract RBI action under:
A. Section 6
B. Sections 35/35A (inspection and directions)
C. Section 5(b)
D. Section 9 alone
E. Section 29 alone
Answer: B. RBI would typically use its inspection (35) and directions (35A) powers first.
46 Which of the following statutes governs the requirement for a bank to maintain SLR, distinct from CRR under the RBI Act?
A. RBI Act, Section 42
B. Banking Regulation Act, Section 24
C. FEMA, 1999
D. SEBI Act, 1992
E. Companies Act, 2013
Answer: B. SLR is under BR Act Section 24; CRR is under RBI Act Section 42.
47 Which body's dissolution led to the 1965 extension of the Banking Regulation Act to co-operative societies being followed decades later by the 2020 Amendment Act?
A. Not applicable — these are two independent, unrelated reforms strengthening RBI's oversight of co-operative banking over time
B. The Planning Commission
C. SEBI
D. IRDAI
E. The Finance Commission
Answer: A. The 1965 extension and the 2020 Amendment are two separate steps, decades apart, both strengthening co-operative bank oversight — unrelated to the Planning Commission.
48 A banking company wishing to shift an existing branch to a new location within the same city would require permission under:
A. Section 22
B. Section 23
C. Section 24
D. Section 45
E. No permission is ever required
Answer: B. Section 23 covers both opening new branches and shifting existing ones.
49 The correct chronological order of the following events is:
Disclaimer: This article is prepared for educational and exam-preparation purposes only and summarises the structure and key sections of the RBI Act, 1934 and the Banking Regulation Act, 1949 in simplified form. It is not a substitute for the bare Act. Candidates should cross-check the latest official IIBF syllabus and the current text of both Acts before the exam.