Module -1

Introduction to
Banking Laws
 Why regulate Banks?
Institutions of Public Interest

Guardians of Public Money

Trustees of Depositors interest

Facilitators of Economic Growth

Providers of Corporate Finance

Holders of Financial Stability

 TWO MAIN OBJECTIVES
To Preserve Systemic Stability

Protection of Depositors
 Laws applicable for Banking Companies

The Banking Regulation Act,1949

The RBI Act, 1934
The Negotiable Instruments Act, 1881
The Bankers Books Evidence Act 1891
The SARFAESI Act
The Banking Companies Acquisition and Transfer of Undertakings
Act, 1969& 1970
State Bank of India Act, 1955 and its rules
 Banking - S.5(b) of Banking Regulation Act,1949

“Banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawable by cheque, draft, and order or otherwise.
 United Dominions Trust Ltd v. Kirkwood [1966 ] 2QB431(
CA)
(i) Acceptance of money
ii) Honour cheques
Stability, Soundness
(iii) keep current accounts and Probibity is also
required to
constitute a banker
Issue: Whether UDT Ltd did engage
in the business of ‘banking’ for the
purpose of availing protection as a
banker ?

Three Judges , three

UDT Had reputation, but it did not judgements – Lord Diplock,
maintain current account , hence not a Lord Denning and Lord
bank. Harman
Lord Denning MR
 Bank of Chettinad Ltd of Colombo v. IT Commrs of
Colombo[1966] 2QB431

“ Banker is one who carries on as his principal business

the accepting of deposits of money on current account or
otherwise , subject to withdrawal by cheque, draft or
Order.
 •

•Multiple institutions/
entities are engaged in
financial activities. Are
they all banks?
Banking Company – Engaged in the business of
Banking (Section5(C)
 What are the business of Banking Companies?

Only those permitted under section 6 of the Banking Regulation Act,1949

 Answer the following questions
1. State the differences between a banking company and a
non-banking company?
2. Whether Co-operative banks are regulated under Banking
Regulation Act?
3. Explain ‘Systemic Risk’
4. What are the businesses in which a bank may engage in?

Keep your answers ready !

Session- 2
Law of Banking
 Can you state three features of Banking
Companies?
Whether the definition of 'banking company'
contained in Section 5(c) of the Banking Regulation
Act, 1949 covers cooperative banks registered
under the State law and also multi-State
co-operative societies under the Multi-State
Co-operative Societies Act, 2002 ?

Ref : Pandurang Ganpati Chaugule vs. Vishwasrao

Patil Murgud Sahakari Bank Limited
MANU/SC/0429/2020
Whether Chit Fund Business is covered under Section
6 of the Banking Regulation Act, 1949?

[ Union of India (UOI) and Ors. vs. Margadarshi Chit

Funds (P) Ltd. and Ors.MANU/SC/0798/2017-
 Whether following activities regulated by
RBI?

Investment Bankers

Merchant Bankers
 An investment bank is a financial services company or
corporate division that engages in advisory-based
financial transactions on behalf of individuals,
corporations, and governments. ... Unlike
commercial banks and retail banks, investment
banks do not take deposits.
Eg.,
Goldman Sachs
Morgan Stanley.
JP Morgan Chase
A merchant bank is a company
that conducts underwriting, loan
services, financial advising, and
fundraising services for large
corporations and high net worth
individuals.
 Is it necessary to use the word banking in the
name of Banking Company?

Ref. Sec.7 of B.R.Act,1949

Whether subsidiary of a bank can use the

word baking/bank/banking company in
its name?
Constitutional validity of banking companies?

Bank is a Subject under Entry 45, VII Schedule,

List -1 (Union List)
Co-operative societies engaged in banking
business are governed by respective co-operative
societies legislations and is in the state list, Entry
32 , VII schedule.[ Art.43 –B and Part IX- B of
Indian Constitution ]
 Answer the Problem:

Canara Bank has established a Business School to train Bank

Managers and the said bank is responsible for the supervision,
administration and management of the Business School.

Whether the above given activity is covered under Section 6

of the Banking Regulation Act, 1949?
Evolution of Banking
Regulation –Topic-2 module-1
 History of Banking Regulation

Pre-independence stage
Post Independence stage
Nationalization of Banks
Introduction of Financial Sector Reforms
IT revolution in Banks
Indian Banking Law is based on English Banking Law

Banking law in general is part of the law merchant or as it is sometimes known as lexmercatoria

1694
First Banking Act
in England
Act 6 of 1840 represented the earliest
attempt to regulate the law relating to
bill of exchange and promissory
notes.
In 1866 a bill to codify the law
relating to negotiable instrument was
drafted and in the year 1881
Negotiable instrument Act was passed
Answer the following( Ref. Reading material-2)
1) "If anyone became bankrupt, debts owed to the state had priority over
other creditors". Similarly, there is also a reference to "Interest on
commodities loaned" – Which book contained these two statements?
Kautilya Arthashastra

2) The roots of commercial banking in India can be traced back to the early
eighteenth century when the Bank …………..was established in June 1806 –
which was renamed as Bank of Bengal in January 1809.

3) Bank of Bengal was established for ………………

4) This was followed by the establishment of the Bank of Madras in July 1843, as a joint stock
company, through the reorganization and amalgamation of four banks………..name all four
banks?

5) The three Presidency Banks, as these were then known, were amalgamated in January 1921 to
form the …………………………..

6) What were the three fold Roles of Imperial bank of India ?

7) With the formation of the Reserve Bank of India in 1935, some of the
central banking functions of the …….. were taken over by the RBI

8) and subsequently, the ……………………, set up in July 1955, assumed the other functions of
the Imperial Bank and became the successor to the Imperial Bank of India.

9) The ……were regulated and governed by their Royal

Charter, the East India Company and the Government of
India of that time.
10) Company law was introduced in India way back in ……, it did
not apply to the banking companies.

11) Prior to 1949, the banking companies, in common with other

companies, were governed by the …………which itself was a
comprehensive re -enactment of the earlier company law of 1850.
12) The
banking crisis of 1913, however, had revealed several
weaknesses in the Indian banking system,
……………………………resulting in large-scale bank failures,
What were the weaknesses?
Ans: The low proportion of liquid assets of the banks and connected lending
practices, resulting in large-scale bank failures
13) The Act vested in the Reserve Bank the responsibility relating
to licensing of banks, branch expansion, liquidity of their assets,
management and methods of working, amalgamation,
reconstruction and liquidation. Important changes in several
provisions of the Act were made from time to time, designed to
enlarge or amplify the responsibilities of the RBI or to impart
flexibility to the relative provisions, commensurate with the
imperatives of the banking sector developments. Name the Act?
14) Till March 1966, the Reserve Bank had practically no role in relation to the functioning of the
…………………….

15) The basic rationale for exercising fairly close regulation and supervision of banking institutions, all
over the world, is premised on the fact that the banks are …………….. for several reasons.

16) State the reasons for banks being special?

The banks accept uncollateralized public deposits, are part of the payment and settlement system, enjoy the safety net of deposit
insurance funded by the public money, and are an important channel for monetary policy transmission. Thus, the banks become a
keystone in the edifice of financial stability of the system – which is a “public good” that the public authorities are committed to
provide. Preventing the spread of contagion through the banking system, therefore, becomes an obvious corollary of
regulating the banks to pre-empt any systemic crisis, which can entail enormous costs for the economy as a whole. This is
particularly so on account of the inevitable linkages that the banks have by virtue of the nature of their role in the financial system

17 ) The ……become a keystone in the edifice of financial stability of the system

18) Ensuring ………………….and ……………………the
banking system, therefore, becomes a predominant
objective of the financial regulators.
 1969 –Two major steps in Banking
Regulation Reasons for Social Control

The objective of social control was about

•Social Control on making banking sector accessible in areas
where these services were not accessible.
Banking Companies To regulate and direct the banks to ensure
•Nationalization of 14 fair governance so as to avoid bank
collapse.
Major Banks To supervise management of banks and
Credit policy of commercial banks
Re constitute the board of directors
To impose restrictions on loans to related
parties.
 1. Setting up of a National Credit Council - (1967)
National Credit Council set up to provide a forum to discuss and assess credit
Social priorities on an all India basis. Council was to assist RBI and government to
allocate credit.(NCC is dissolved since nationalization of Commercial banks).

Control on What were the functions of NCC?

Banks led 2. Introducing of legislative controls by amending the banking regulation

Licensing

to Nature of permissible business by banks

Market Capitalisation
Branch expansion
Appointment of Board of Directors
Amalgamation and Winding up – Supervision of RBI
Nationalization of Banks?
“The reason for nationalizing banks was to sync
the banking sector with the goals of socialism
adopted by the Indian government after
independence. RBI’s history points that the idea
to nationalize banks and insurance companies
germinated as early as 1948, in an All India
Congress Committee report. The insurance
sector was nationalized in 1956 with the
formation of Life Insurance Corporation of India”

Read more
at: https://www.bloombergquint.com/opinion/w
hy-indira-gandhi-nationalised-indias-banks
 Bank Nationalization

1970 &1980
14 6

Find out the list of banks nationalized

during 1970& 1980
Nationalisation of Banks
 Reasons for Nationalisation of Banks
1. Prevent Concentration of Wealth and All India Bank Officers Confederation v.
Union of India-AIR 1989SC2045
Economic Powers
R.C. COOPER V. Union of India AIR
2. Branch Expansions even to rural areas 1970 SC 564

3. Neglect of agriculture, small industries, and

other deserving sectors
4. Various malpractices
5. Change in business management of banks
 R.C Cooper v. Union of India
AIR 1970 SC 564
Arguments for Nationalization of Banks Arguments Against Nationalization
Government to obtain control over the banks Compensation to the shareholders by state
Protection of depositors interest and promote public confidence Loans to agriculture is risky and is less
in Banking institutions remunerative
Prevention of concentration of wealth among few. State capitalism is not socialism
Ensure financial stability Nationalization may not curb monopoly and abuse
of power
Banks to lend priority sectors
Banking in rural areas
Standardization of Banking Services
Land mark case in the History of Supreme
Court
Rustom Cavasjee Cooper and Ors v. Union of India (UOI)
Hon'ble Judges/Coram:
A.N. Grover, A.N. Ray, C.A. Vaidialingam, G.K. Mitter, I.D. Dua, J.C. Shah, J.M. Shelat,
K.S. Hegde, P. Jaganmohan Reddy, S.M. Sikri and Vashishtha Bhargava, JJ.
Counsels:
For Appellant/Petitioner/Plaintiff: N.A. Palkhivala, M.C. Chagla, A.J. Raja, N.N.
Palkhivala and R.N. Bannerjee, Advs

For Respondents/Defendant: Niren De,, Attorney-General, Jagadish Swarup,,

Solicitor-General, M.C. Setalvad, C.K. Daphtary, and R.H. Dhebar, Advs.
Statutes enabled acquisition of the undertaking
of banking companies
The Banking Companies( Acquisition and Transfer of Undertakings)Act,1970 &
1980
Why Bank Nationalisation was challenged?

Rustom Cavasjee Cooper—held shares in the Central Bank of India Ltd., the Bank of
Baroda Ltd., the Union Bank of India Ltd., and the Bank of India Ltd., and had
accounts--current and fixed deposit --with those Banks : he was also a director of the
Central Bank of India Ltd. By petitions he claimed a declaration that the Banking
Companies (Acquisition and Transfer of Undertakings) Ordinance 8 of 1969 promulgated
on July 19, 1969, and the Banking Companies (Acquisition and Transfer of Undertakings)
Act 22 of 1969 which replaced the Ordinance with certain modifications impair his rights
guaranteed under Articles 14, 19 and 31 of the Constitution, and are on that account
invalid.
Answer the following

Why was nationalization of Banks

preferred over Social Control of Banks?
Mega Merger (2020)Among Nationalised banks
Overview of Categories of Banks in India
 Scheduled banks?

A scheduled bank, in India, refers to a bank which

is listed in the 2nd Schedule of the Reserve Bank
of India Act, 1934. Banks not listed under
this Schedule are called non-scheduled banks.
Scheduled banks are usually private, foreign and
nationalized banks operating in India
Ref : section 42 of RBI Act,1934
 3 Topics

1. RBI and Its Role

2. Functions of RBI
3. RBI and Commercial Banks
 Role of RBI

Regulates
The Banking Regulation Act, 1949

Commercial Banks
Supervises The Reserve Bank of India Act , 1935
Controls
 Role of RBI as a Regulator of Commercial
Banks -
RBI Exercises the following regulatory powers under the Banking Regulation Act, 1949
1. Maintenance of Reserve Fund (Sec.17) :
2. Maintain Cash Reserve ( Sec 18)
3. Restrictions on loans and advances by Commercial banks ( Sec.20)
4. Licensing of Banking Companies ( Sec. 22)
5. Opening of new branches by banks( Sec. 23)
6. Maintenance of Percentage of Assets Sec 24, 25)
7. Submission of Monthly returns to RBI( Sec. 27)
8. Approval of Auditors of banking company by RBI
9. Inspection of commercial banks by RBI( Sec. 35)
10 ) Power of Reserve Bank to give Directions (Sec.35A)
11)Powers and Functions of RBI(Section 36 of Banking Regulation Act, 1949)
12)Power of RBI to Control over management
13 )Supersession of Board of Directors of banking company
14)Power to order amalgamation of banks (Sec. 44 A, 45 )
Why regulate banking companies?
 RBI Control over Banks in India

RBI controls the activities of commercial banks by virtue of the powers vested in it under the Banking Regulation
Act,1949 and the Reserve Bank of India.
1. Licensing of commercial banks- Section 22 of the Banking Regulation Act,1949 – Refer the criteria for issuing
license by RBI
2. Power to Inspect Commercial Banks – Section 35 of the Banking Regulation Act,1949
3. Management Control by RBI – Section 35B of the BR Act,1949 – approval of RBI is necessary for the
appointment or re-appointment or termination of an appointment of a chairman, managing or whole- time
director.
4. Power to supersede the board of directors of banking company – RBI may takeover the management of a
banking company , if the business is carried out in a manner prejudicial to the interest of bank or depositors(
As per banking laws Amendment Act,2012)
5. Power to control volume of Credit : RBI is empowered to control the volume of credit
through the use of bank rate, open market operations, variable reserve requirements, apart
from impounding of deposits beyond a certain level.
6. Power of Selective Credit Control? : Under section 21 of the Banking Regulation
Act,1949, RBI has been given a power to control advances granted by commercial
banks. This power is known as the power of Selective Credit Control
As on Today
Is there is a need for separate banking regulation?
Joseph Kuruvilla Vellikunnel v. RBI 1962 AIR 1371

“ For the present we only wish to emphasize that banking companies cannot be compared
with other companies. The ordinary companies deal with the money of the
stockholders, who own a share in the assets, who appoint their own Directors, for
better or for worse, and whose liability is also limited.
The banking companies are in an entirely different class, as they deal with the money
of the depositors who have no security except the solvency of the banking company
and its sound dealings with their money. Ex facie, the banking companies must be
regulated somewhat differently, and the interests of the depositors must be
paramount and the winding up of such companies depends upon other considerations,
chief among which is the desire to pay off the creditors as far as possible in full or at
least equitably” .
 Reserve Bank of India Act
Total Number of Sections- [58G]
Schedule- 2
Preamble to the Act read as follows:
An Act to constitute Reserve Bank of India
Whereas it is expedient to constitute a Reserve Bank for India to regulate the issue of Bank notes and the keeping of
reserves with a view to securing monetary stability in [India] and generally to operate the currency any credit
system of the country to its advantage; And whereas in the present disorganization of the monetary system, it is not
possible to determine what will be suitable as a permanent basis for the Indian monetary systems of the world;
But whereas it is expedient to make temporary provision on the basis of the existing monetary system, and to
leave the question of the monetary standard best suited to India to be considered when the international monetary
position has become sufficiently clear and stable to make it possible to frame permanent measures;
Scheme of the RBI Act

The Act is divided into four chapters;

the first chapter dealing with definitions, characteristic of most if not all Indian Acts;
the second with the incorporation, share capital, management and business of the Bank;
the third with central banking functions, and
the fourth with general provisions relating to the Reserve fund, auditing, returns and
kindred questions
And Two Schedules
The Reserve Bank is a shareholders' bank free from any political influence.
 RBI-A large Public Trust
A Reserve Bank is not a Department of State but rather a large public trust, and the greatest possible care
must be taken not to allow sectional interests, even banks themselves, to be represented on the Central
Board of Directors.
For this reason the share holders cannot be allowed entirely to elect from shareholders the Board. The
limitation- of voting power to ten votes prevents undue influence on the Board by those holding large
blocks of share
Profits distribution is also limited

The profits, too, of the shareholders have to be limited, as the Bank must not be
conducted primarily from the view point of dividends, and this limitation prevents the
Directors from being unduly influenced by this-the return to be paid on the capital of the
Bank
Free from Government Influence

A careful balance has been kept between the various influences likely to bear on the
management of the Bank-Government and private.
If Government had a controlling influence over the Bank there are ways by which powerful
interests in India to-day may try to enforce their wishes
Status of RBI ?

RBI is a statutory body set up by the RBI Act as India's Central Bank. It is a statutory
regulatory authority to oversee the functioning of the banks and the country's banking
sector. Under Section 35A of the Banking Regulation Act, RBI has been given powers to
issue any direction to the banks in public interest, in the interest of banking policy and to
secure proper management of a banking company. It has several other far-reaching
statutory powers.
[Reserve Bank of India and Ors. vs. Jayantilal N. Mistry and Ors. MANU/SC/1463/2015]
RBI –Not a fiduciary

RBI is supposed to uphold public interest and not the interest of individual banks. RBI is
clearly not in any fiduciary relationship with any bank. RBI has no legal duty to maximize
the benefit of any public sector or private sector bank, and thus there is no relationship of
'trust' between them. RBI has a statutory duty to uphold the interest of the public at large,
the depositors, the country's economy and the banking sector. Thus, RBI ought to act with
transparency and not hide information that might embarrass individual banks. It is duty
bound to comply with the provisions of the RTI Act and disclose the information sought by
the Respondents herein
[Reserve Bank of India and Ors. vs. Jayantilal N. Mistry and Ors. (16.12.2015 - SC) :
MANU/SC/1463/2015]
Though originally privately owned, since nationalization in 1949, the Reserve Bank is
fully owned by the Government of India.
Acts administered by Reserve Bank of India

Reserve Bank of India Act, 1934

Public Debt Act, 1944/Government Securities Act, 2006
Government Securities Regulations, 2007
Banking Regulation Act, 1949
Foreign Exchange Management Act, 1999
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
(Chapter II)
Credit Information Companies(Regulation) Act, 2005
Payment and Settlement Systems Act, 2007
Payment and Settlement Systems Regulations, 2008 and Amended up to 2011 and BPSS Regulations, 2008
The Payment and Settlement Systems (Amendment) Act, 2015 - No. 18 of 2015
Factoring Regulation Act, 2011
II. Other relevant Acts
Negotiable Instruments Act, 1881
Bankers' Books Evidence Act, 1891
State Bank of India Act, 1955
Companies Act, 1956/ Companies Act, 2013
Securities Contract (Regulation) Act, 1956
State Bank of India Subsidiary Banks) Act, 1959
Deposit Insurance and Credit Guarantee Corporation Act, 1961
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
Regional Rural Banks Act, 1976
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980
National Bank for Agriculture and Rural Development Act, 1981
National Housing Bank Act, 1987
Recovery of Debts Due to Banks and Financial Institutions Act, 1993
Competition Act, 2002
Indian Coinage Act, 2011 : Governs currency and coins
Banking Secrecy Act
The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003
The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993
Main Functions

1. Monetary Authority:
Formulates, implements and monitors the monetary policy
Objective: maintaining price stability while keeping in mind the objective of growth.
2. Regulator and supervisor of the financial system:
Prescribes broad parameters of banking operations within which the country's banking and
financial system functions.
Objective: maintain public confidence in the system, protect depositors' interest and
provide cost-effective banking services to the public.
3. Manager of Foreign Exchange
Manages the Foreign Exchange Management Act, 1999.
Objective: to facilitate external trade and payment and promote orderly development and
maintenance of foreign exchange market in India.
4. Issuer of currency:
Issues and exchanges or destroys currency and coins not fit for circulation.
Objective: to give the public adequate quantity of supplies of currency notes and coins and
in good quality.
5. Developmental role
Performs a wide range of promotional functions to support national objectives.
Regulator and Supervisor of Payment and Settlement Systems:
Introduces and upgrades safe and efficient modes of payment systems in the country to
meet the requirements of the public at large.
Objective: maintain public confidence in payment and settlement system
Related Functions
Banker to the Government: performs merchant banking function for the central and the
state governments; also acts as their banker.
Banker to banks: maintains banking accounts of all scheduled banks.
6. Subsidiaries
Fully owned: Deposit Insurance and Credit Guarantee Corporation of India
(DICGC), Bharatiya Reserve Bank Note Mudran Private Limited
(BRBNMPL), Reserve Bank Information Technology Private Limited (ReBIT)
Role and Functions of RBI
Visit RBI website and read
https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RWF15012018_FCD40172EE58946BA
A647A765DC942BD5.PDF
https://www.youtube.com/watch?v=J89wllbbMEE
Over view of Functions and Services of Commercial
Banking Companies
Functions of Commercial banks
1. Receiving of money on deposit
2. Lending of money
3. Issuing of various credits[ Letter of Credit, Bank Guarantee etc]
4. Agency services[ Collection and Payments of Bills etc]
5. Miscellaneous General Utility Services [ Collection of Interest on securities, Credit cards etc]