Corporate Social Responsibility in Banks: Section 135 and CSR Rules (Ethics)

Every bank in India that crosses a defined financial threshold owes something back to society, and the law that fixes exactly how much, on what, and under whose watch is Section 135 of the Companies Act 2013. If you are preparing for the Ethics in Banking paper, corporate social responsibility in banks is one of the most fact-heavy, most testable topics in the syllabus, because unlike most ethics themes it is not a matter of judgment call — it is codified law with hard numbers, committees, and filing deadlines. This article walks through the applicability trigger, the 2 percent spend formula, the CSR Committee, Schedule VII, the unspent-amount rules, impact assessment, and the CSR-1/CSR-2 filings you are expected to know cold.

📊 Who Must Comply: Section 135 Applicability Thresholds

Section 135(1) of the Companies Act 2013, read with the Companies (Corporate Social Responsibility Policy) Rules 2014 as amended in 2021, applies to every company — public or private, including banking companies incorporated under the Companies Act — that met any one of three thresholds in the immediately preceding financial year: net worth of Rs 500 crore or more, turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore or more.

Note the word "any" — a bank does not need to breach all three limits together. A small finance bank with a thin net worth but a net profit crossing Rs 5 crore in the previous year is squarely covered. Once a company falls out of these thresholds for three consecutive financial years, it ceases to be governed by Section 135 until it qualifies again. This nuance — applicability is tested every year against the preceding year's numbers — is a favourite trap in MCQs.

For context on how ethical obligations move from individual conduct to institutional commitment, see the related chapter on Building an Ethical Organization, which frames CSR as one pillar of an ethical institution rather than a standalone compliance checkbox.

🧮 Calculating the Mandatory 2% Spend and the Role of the CSR Committee

Once a bank is covered, Section 135(5) requires the Board to ensure the company spends, in every financial year, at least 2% of the average net profit made during the three immediately preceding financial years, calculated as per Section 198 of the Act (which excludes items such as capital profits and profits from the sale of undertakings). For a company that has not completed three financial years since incorporation, the average is taken over the years actually completed.

The Board must constitute a CSR Committee of three or more directors, including at least one independent director (a private company needs only two directors, and one without an independent director requirement can proceed with its own directors). The committee formulates and recommends the CSR policy, recommends the amount to be spent, and monitors implementation. Where the CSR obligation for a financial year does not exceed Rs 50 lakh, the Rules relax this requirement — the functions of the CSR Committee can be discharged directly by the Board, and a separate committee is not mandatory.

💡 Exam Tip: The Rs 50 lakh figure is a CSR Committee relaxation threshold, not an applicability threshold — do not confuse it with the Rs 5 crore net profit trigger under Section 135(1).

If a bank fails to spend the mandated amount, the unspent balance does not simply lapse — it must either be carried forward through a dedicated account or transferred out, which is covered next.

📋 Where the Money Can Go: Schedule VII Activities and Unspent-Amount Rules

CSR spending is not open-ended charity; it must fall within the activities listed in Schedule VII of the Companies Act — eradicating hunger and poverty, promoting education, gender equality, environmental sustainability, protection of national heritage, contributions to the Prime Minister's National Relief Fund and other specified central funds, rural development projects, disaster management, and similar heads. A bank's CSR policy must map its projects to one or more of these clauses.

The unspent-amount rules are where most exam questions concentrate. If the shortfall relates to an ongoing project, the unspent amount must be transferred within 30 days of the end of the financial year to a special account — the "Unspent Corporate Social Responsibility Account" — opened in a scheduled bank, and it must then be spent within three financial years from the date of transfer. If the unspent amount does not relate to any ongoing project, it must instead be transferred to a fund specified in Schedule VII (such as the PM's National Relief Fund) within the prescribed period following the end of the financial year. Money that stays unspent beyond the ongoing-project window is likewise pushed out to a Schedule VII fund rather than being retained indefinitely.

⚠️ Common Mistake: Candidates often assume the 30-day and three-year rules apply to all unspent CSR money. They apply specifically to amounts earmarked for an ongoing project; non-ongoing shortfalls follow a separate Schedule VII transfer route.

This is distinct from environmental-themed CSR spending, which you can explore further in the sibling article on environmental ethics in banking, and from broader institutional commitment discussed in the chapter on Banking Ethics: Changing Dynamics.

🔍 Impact Assessment, CSR-1/CSR-2 Filings, and Consequences of Default

The 2021 amendment to the CSR Rules introduced mandatory impact assessment for larger spenders. A company with an average CSR obligation of Rs 10 crore or more in the three immediately preceding financial years must get an independent agency to assess the impact of CSR projects with an outlay of Rs 1 crore or more that were completed at least one year before the assessment. The expenditure booked toward this exercise is capped at 5% of that year's total CSR spend or Rs 50 lakh, whichever is lower, and the impact assessment report must be placed before the Board and annexed to the annual CSR report.

Entities implementing CSR projects on a company's behalf must register using Form CSR-1 and obtain a CSR registration number before receiving funds. Companies themselves must report their CSR spend annually through Form CSR-2, filed as an addendum to the financial statement. Non-compliance with Section 135 spend and reporting requirements can attract monetary penalty on the company and its officers under Section 135(7), reinforcing that CSR in banks is a statutory duty, not a discretionary gesture.

These filing and penalty mechanics sit alongside broader compliance obligations covered in compliance breach reporting and root cause analysis, which candidates studying business continuity and compliance papers should also review. For a governance-focused organizational lens, revisit Work Ethics and the Workplace.

📌 Remember: CSR under Section 135 is a Companies Act obligation on spend and governance; BRSR/ESG reporting is a SEBI-driven sustainability disclosure. Don't conflate the two on the exam — see the dedicated guide on BRSR sustainability reporting for banks if you need the distinction spelled out further.

For the wider ethics framework that CSR sits within, the chapter on Ethics: A Holistic Approach is worth a companion read, and the official text of Section 135 and the CSR Rules is available on the Ministry of Corporate Affairs portal at mca.gov.in for primary-source verification.

🧠 Practice MCQs: Corporate Social Responsibility in Banks

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❓ Frequently Asked Questions

🎯 Conclusion: Turning CSR Compliance into Exam-Ready Knowledge

Corporate social responsibility in banks is one of the rare ethics topics with clean, testable numbers: the three applicability triggers, the 2% spend formula, the Rs 50 lakh committee relaxation, the 30-day and three-year unspent rules, and the Rs 10 crore impact-assessment threshold. Memorise these figures together with their conditions, not in isolation, since IIBF questions frequently swap one number into another rule's context to test attention to detail.

Revisit the related chapters on corruption, bribery and white-collar crime and the full Ethics in Banking tag hub for connected topics, then lock in these thresholds with a timed mock. Enrol in the CAIIB course or head straight to iibf.store/tests to attempt a full-length practice set on ethics and CSR before exam day.