Banking Law in India

The banking industry is regarded as the foundation of any economy. It has undergone numerous modifications and acts over time. Businessmen like the Sharoffs, Mahajans, Seths, Sahukars, etc, mostly handled banking in ancient times. With the foundation of the General Bank of India and Hindustan Bank in latter half of the 18th century, modern banking got its start. Then, the Bank of Madras, Bombay, and Calcutta were established as the three presidential banks. For a long time the presidency banks served as a sort of central bank. In 1925, they combined to form the Imperial Bank of India.

The decision to establish the Reserve Bank of India in 1934 was a significant turning point in the evolution of banking. It first operated in 1935. Since that time, both the country’s central bank and the banking industry have been governed by RBI. The RBI Act of 1934 is where it gets its authority.

There functioning of the nation’s banks is mostly or partially governed by a number of banking laws and regulations. In this article, we will discuss various acts of Banking.

RBI as the Central Bank of the Country

Being a bank owned by private stockholders, RBI first began operations. It took over the role of the Imperial Bank of India, began printing banknotes, and served as the government’s banker. RBI covers the entire country of India. In order to create policies that complemented the goals of the government and the RBI. Soon after the nation gained independence, the authorities swiftly nationalized RBI. The RBI began operating as a state-owned and regulated central bank on January 1, 1949. The Banking Regulation Act was likewise passed in India, in 1949 with the goal of streamlining the operations of commercial banks. RBI serves three purposes;

• It is the regulator of banks.
• Banker to the government.
• Banker’s Bank.

Important Acts of the Banking Sector;

A significant part of the banking sector Acts contribution to the Indian Economy’s financial development. The Reserve Bank of India Act, of 1934, the Insurance Regulatory and Development Authority Act, of 1999, the Foreign Exchange Management Act, of 1999, the SARFAESI-2002, and other significant banking laws are listed in this article.

1. Negotiable Instrument Act, 1881

A piece of paper that guarantees the payment of a specific amount of money, either instantly upon demand or at any set period, whose payer is normally recognized, is referred to as a negotiable instrument. It is a piece of writing that is intended to represent or is composed of a contract that ensures the unconditional payment of money, which may be made now or at a later date. The first of March 1881 saw the implementation of the negotiable instruments Act of 1881, which covers the whole of India.

Depending on the country and context in which it is used, as well as how it is utilized to enforce different laws, the phrase can have a variety of meanings. The three categories of instruments covered but the Negotiable Instruments Act of 1881 are promissory notes, bills of exchange, and checks. The restrictions of this Act do not apply to terminology for financial instruments used in oriental languages, such as undies.

Two new payment systems, NEFT (National Electronic Fund Transfer) and RTGS were made popular by technology (Real Time Gross Settlement). The law governing these electronic transfer techniques are contained in the Payment and Settlement Systems Act of 2007.

2. Reserve Bank of India Act, 1934

The Reserve Bank of India was founded in accordance with the RBI Act of 1934, a piece of legislation. It was revised in 1936, along with the Companies Act, to offer a framework for the oversight of banking institutions in India. Scheduled Banks are also described in the act.

Some of the highlights of this act are mentioned below;

• Section 17 of the Act describes the parameters by which the RBI may operate a business.
• Section 18 describes emergency loans to banks.
• Section 21 defines that RBI is responsible for managing public debt and managing the central government’s banking operations.
• Section 22 states that the RBI alone has the authority to exclusively issue currency notes in India.
• Section 24 specifies that the maximum denomination of a note can be ₹10,000.
• Section 26 defines the legal tender status of the Indian banknotes.
• Section 28 states that the RBI may establish regulations for the exchange of defective and damaged notes.
• Section 31 mentions that only the RBI or the central government may issue and accept promissory notes that are payable on demand in India.
• Section 42(1) describes that every scheduled bank must maintain an average daily balance with the RBI.

3. The Banking Regulation Act–1949 This act governs all Indian Banking Institutions, i.e., it offers a framework for the supervision and regulation of Indian commercial banking.

Some of the highlights of this act are written below;

1. Under this act, the Primary Agricultural Credit Society and Cooperative land mortgage banks are not included.
2. The act grants the RBI the authority to provide new bank licenses and to impose restrictions on shareholding and the voting rights of shareholders
3. Additionally, it enables RBI to supervise the appointment of the boards and regulates the operations of banks.
4. It also specifies how the RBI should perform audits, control moratoria, issue mergers, and liquidation orders, and make decisions about banking policy and the interests of the general public.
5. By the 1965 amendment, cooperative banks were covered in this act.

New Updates: The Banking Regulation (Amendment) Bill, 2020 was presented in Lok Sabha, and it aims to enhance cooperative banks through improved governance, increased access to capital, more professionalism, and sound banking through the RBI. A PMC fraud is the backdrop to it. It aims to apply the RBI’s banking regulation requirements in cooperative banks while leaving administrative decisions in the control of the Registrar of Cooperative Societies. With improved management and appropriate regulation, it will also bring cooperative banks up to pace with banking sector development.

4. The State Bank of India Act–1955

Under the State Bank of India Act of 1955, the Reserve Bank of India gained a controlling interest in the Imperial Bank of India. The Imperial Bank of India changed its name to the State Bank of India on 1 July 1955. While the RBI is the nation’s primary banking regulatory body, the Government of India purchased the Reserve Bank of India’s holding in SBI in 2008 to resolve any potential conflicts of interest between the two.

5. The Deposit Insurance and Credit Guarantee Corporation Act–1961

The Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI was established on 15th July 1978 in accordance with this Act, to offer deposit insurance and credit facility guarantees. Saving, fixed, current, and recurring deposits are all insured by the DICGC up to a maximum of Rs. 100,000. This statute mandates that all new commercial banks register as soon as the Reserve Bank of India grants them a license.

6. The Regional Rural Banks Act–1976

In order to provide an alternate channel to the cooperative credit structure and to guarantee adequate institutional financing for the rural and agricultural sectors, Regional Rural Banks were founded under this act. M. Narasimham recommended this action be taken as soon as possible. With the issued capital divided in the proportions of 50%, 15%, and 35% respectively, they are jointly held by the Government of India, the relevant State Government, and Sponsor Banks.

7. Securities and Exchange Board of India Act, 1992

the Securities and Exchange Board of India (SEBI) received statutory powers under this law, on January 30, 1992. The Act was passed in order to control and promote India’s securities industry. It was modified in 1995, 1999, and 2002 to address the constantly changing requirements of the securities market.

8. Foreign Exchange Management Act, 1999

The Foreign Exchange Management Act, of 1999, otherwise known as FEMA for short, is the law that governs all foreign exchange transactions in the nation. In other words, it is a set of principles that gives the Reserve Bank of India authority to adopt laws and permits the Indian government to enact regulations governing foreign exchange that are consistent with India’s international trade strategy.

• In order to facilitate external trade and to promote orderly development and maintenance of the foreign exchange market in India. This act was enacted to consolidate and reform the law relating to foreign exchange.
• It took the place of the Foreign Exchange Regulation Act (FERA), which was no longer compatible with the government of India’s pro-liberalization policy.
• The law set the door for a new system of managing foreign exchange that was in line with the WTO’s developing framework.

9. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI-2002) Financial institutions are helped in a number of ways to ensure asset quality by a statute from 2002 called the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. Three methods of NPA recovery are supported by the Act. The following are some of them:

• Securitization.
• Reconstruction of Asset, and
• Enforcement of Security without the Court’s intervention.

The SARFAESI Act, 2002 does not apply to unsecured loans, loans under ₹100,000, or loans with outstanding debt that is less than 20% of the original principal amount.

10. Prevention of Money Laundering Act, 2002. The act was passed to stop money laundering and to establish guidelines for the seizure of assets earned through money laundering. A change was made to this law in 2005, 2009, and 2012. It includes the following:

• Punishment for Money laundering
• Powers of attachment of tainted property
• Adjudicating authority
• The presumption in interconnected transactions
• Special court and FIU - Ind (Financial Intelligence Unit – India)

11. Fiscal Responsibility and Budget Management Act, 2003 The FRBM Act set goals for the Indian government, including establishing financial disciplines, bettering public money management, enhancing fiscal prudence, and lowering fiscal deficits. Also, it was meant to give the RBI more control over how India’s inflation is managed. It was initially introduced with the following goal:

• Introduction of a countrywide transparent financial management system.
• Ensuring fair allocation of the debt over time.
• Ensuring long-term fiscal stability.

12. Government Securities Act, 2006

The Government Securities Act, of 2006 is a piece of legislation passed by the Indian Parliament to make changes to the government securities market and the Reserve Bank of India’s handling of such securities (RBI). The Public Debt Act, of 1944 was replaced by it.

13. Banking Ombudsman Scheme

The Banking Ombudsman Scheme offers bank customers a low-cost forum for the settlement of grievances regarding certain services provided by banks. The RBI put it in place to address customer concerns about particular financial services offered by banks and make resolving those complaints easier. The RBI introduced it in accordance with the Banking Regulation Act of 1949.

Institutions covered under the Banking Ombudsman Scheme

• All Scheduled Commercial Banks,
• Regional Rural Banks (RRBs) and
• Scheduled Primary Co-operative Banks (UCBs)
• Some NBFCs

Note: The Banking Ombudsman never charges any fee for filing and resolving customers’ complaints

About the Integrated Ombudsman scheme.

• The program intends to make the method for resolving grievances against entities under RBI regulation simpler and more user-friendly.
• ‘One Nation-One Ombudsman’ is the foundation of the Integrated Ombudsman scheme, which allows customers to make complaints, submit supporting documentation, monitor their progress, and offer feedback.
• In order to provide all pertinent information on grievance redress and support for filing complaints, a multilingual toll-free number has also been launched.

One Nation One Ombudsman

• To make the alternative dispute resolution system easier to use and more sensitive to the needs of the customers of regulated firms, the RBI combined three Ombudsman schemes and adopted the “One Country One Ombudsman” grievance resolution strategy.
• There were 3 Ombudsman schemes in India;
• Banking Ombudsman Scheme
• Ombudsman Scheme for Non-Banking Financial Companies
• Ombudsman Scheme for Digital Transactions.
• The Reserve Bank of India (RBI) has around 20 ombudsman offices that handle consumer grievance redressal processes across the country.

Advantages of the Integrated Ombudsman Scheme.

• That will help resolve customer complaints more quickly.
• Together with increasing trust and confidence, the multilingual toll-free helpline number will also lower the cost of both financial and human resources.
• It will aid with complaint filing and in providing the necessary information on grievance remedies.
• Customers will be able to check the status of their concerns, provide documents, and make complaints through a single point of contact under this new initiative.
• It will also help with complaint filing.

14. Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“DRT Act”)

Some of the important Highlights of the DRT Act are:

1. The act established a Debt Recovery Tribunal, primarily for quick recovery loans.

2. Any bank, financial institution, or grouping of them is subject to the act in order to recover debts totaling more than ten lakhs.

3. Valid throughout the nation, excluding J&K.

4. Debt has many different uses, some of which are listed below:

   • Any debt, interest included, could be secured or unsecured.
   • Any obligations that must be fulfilled in accordance with a court order, arbitration award, or another legal decree; and
   • Any debt due under a mortgage that is owing as the application date is formally payable.

5. Lok Adalats under Legal Services Authority Act

The Legal Services Authorities Act, of 1987 established Lok Adalats. They were created to establish a system of conflict resolution across the nation. By agreement or when the court is persuaded that the matter may be resolved at the Lok Adalat, the Lok Adalat essentially derived jurisdiction. It is controlled by a number of legal principles as well as the concepts of justice, equity, and morality. The award would be enforceable against the disrupting parties in the event of settlement. No court will hear an appeal against the award. Lok Adalats are currently usually held when a case has a value of fewer than 20 lakhs.

16. Lenders Liability Act

The RBI has completed a set of conduct known as “the Fair Practice Code for Lenders” and recommended banks apply the principles based on the recommendations of the working group on lenders’ liability laws established by the Government of India. According to the instructions, all banks went ahead and created their own Fair Practice Codes, which they began putting into use on November 1st 2013.

17. The Consumer Protection Act, 1986

This Act was established to provide for the better protection of the interests of consumers and consumer councils and other authorities for the settlement of consumers’ disputes and for matters connected therewith. The Act covers all goods and services except the ones which can be resold or for commercial purposes and services rendered free of charge and a contract of personal service. This Act extends to the whole of India except J&K

18. Bankers’ Book Evidence Act, 1891

The law governing banker’s books and what constitutes certified copies of bank records is set forth in the Bankers’ Books Evidence Act, of 1891. This act gives banking organizations guidance about legal actions involving banking records. This Act was implemented to modify the Law of Evidence with regard to banking records. Every bank does bookkeeping or the recording of transactions, in books used for regular business operations such as ledger books. Any inconsistency in these banking records will constitute a violation of this Act. Each financial institution or business that performs banking services is subject to the terms of this Act if legal action is taken against them.

Except for J&K, this act applies to all other states of India.

19. Tax Laws applicable to Banking Operations

Just like every other business, banks must also make sure they are in compliance with all applicable tax regulations. They need to be aware of the many provisions and legislation (such as the Finance Acts and Income Tax Act) that apply in order to be able to deduct and pay all applicable taxes, such as Income Tax, Service Tax, Finance Tax, and others. Banks are subject to the relevant tax regulations under which they are governed as both an employer and a recipient of various services. In addition to all the roles that banks play as employers and recipients of various services, banks are also required by law to pay tax on the interest that is due to customers. This tax is deducted at source (“TDS”) on interest that is due on fixed deposits, NRO deposits, income from investments made by the bank, and dealing in securities by banks, among other things.

20. Limitation Act, 1963

The Limitation Act, of 1963, (also known as “LI Act”) establishes a time frame within which a lawsuit, appeal, or other application may be submitted. In essence, it signifies that a deadline has been set in compliance with the LI Act. A banker may only initiate legal action by filing a specific lawsuit, application, or appeal and request any type of recovery if the relevant documents are still within the statute of limitations. If the documents are time-barred or expired, the banker will be forced to pursue all available legal options in order to reclaim any outstanding debts.