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      Question

      Section 17 of the Act requires every banking company

      incorporated in India to create a reserve fund. Out of the balance of profit of each year, as disclosed in the profit and loss account and before any dividend is declared, the company must transfer to the reserve fund a sum equivalent to not less than:
      A Ten per cent of such profit Correct Answer Incorrect Answer
      B Twenty-five per cent of such profit Correct Answer Incorrect Answer
      C Twenty per cent of such profit Correct Answer Incorrect Answer
      D Fifteen per cent of such profit Correct Answer Incorrect Answer
      E Five per cent of such profit Correct Answer Incorrect Answer

      Solution

      Section 17(1) mandates that every banking company incorporated in India shall create a reserve fund and, out of the balance of profit of each year as disclosed in the profit and loss account prepared under Section 29 and before any dividend is declared, transfer to the reserve fund a sum equivalent to not less than twenty per cent of such profit. Section 17(1A) allows the Central Government, on the recommendation of the Reserve Bank, to exempt a bank from this requirement where its reserve fund plus share premium is not less than its paid-up capital. The provision strengthens the bank’s loss-absorbing buffer and protects depositors.

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