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EVOLUTION OF BANKING LAW IN INDIA

Author: Vaishali Yadav, IV year of B.A.,LL.B. from Shambhunath Institute of Law, Prayagraj

Co-author: Madhu Singh, IV year of B.A.,LL.B. from Shambhunath Institute of Law, Prayagraj

Co-author: Priyanshu Mishra, IV year of B.A.,LL.B. from Shambhunath Institute of Law, Prayagraj


The Banking Regulation Act, 1949 is the central law that governs all banking firms based in India. Passed as the Banking Companies Act, it is one of the most important laws for banks. It was first implemented on 16 March 1949 which was later changed to the Banking Regulation Act in 1966. Banks in India form the base for the economic development of the country. The history of banking in India dates back to before India got independence in 1947.


Development and history

The banking sector development can be divided into three phases-

Phase 1- the earlier face which was lasted from 1770 to1969

Phase 2 - the nationalisation phase which listed from 1969 to 1991

Phase 3 - the liberalisation for the banking sector reform phase which begins in 1991 and continues to flourish to date.


Pre-Independent period 1786 to 1947

The first bank of India was ‘Bank of Hindustan’ established in 1770 and located in Kolkata; however, this bank failed to work and ceased operation in 1832.

During this period over 600 banks had been registered in the country but only a few managed to survive following the path of Bank of Hindustan various other banks were established in India:-

  1. The general Bank of India (1786-1791)

  2. Oudh Commercial Bank (1881-1958)

  3. Bank of Bengal (1809)

  4. Bank of Bombay (1840)

  5. Bank of Madras (1843)

The East India Company has established three banks

  • Bank of Bengal

  • Bank of Bombay

  • Bank of Madras

These banks were called the Precedential Banks. Thus, three banks were later managed into one single Bank in 1921 which was called ‘Imperial Bank of India’. The Imperial Bank was later nationalised in 1955 and was named the ‘State Bank of India’ which is the largest public sector bank.


Pre independent banks in India

  • Allahabad Bank, 1865

  • Punjab National Bank, 1894

  • Bank of India, 1906

  • Central Bank of India, 1911

  • Canara Bank, 1906

  • Bank of Baroda, 1908

Why did many banks fail to survive during the pre-independence period?

  • Indian account holders had become fraud-prone.

  • Lack of machine and technology

  • Human errors and time consuming

  • Fewer facilities

  • Lack of proper management skills

Post-Independent Period (1947-1991)

At the time, when India got independent all the major banks of the country were led privately which was a cause of concern as the people belonging to the rural area where is still dependent on moneylenders for financial assistance intending to solve this problem then government decided to nationalise the banks. These banks were nationalised under the “Banking Regulation Act, 1949”.


Reserve Bank of India was nationalised in 1949 following the formation of the State Bank of India in 1955 and the other 14 banks were nationalized between the time duration of 1969 to 1991. There were banks whose national deposits were more than 50 crores.

  • Allahabad Bank

  • Bank of Baroda

  • Bank of India

  • Bank of Maharashtra

  • Central Bank of India

  • Canara Bank

  • Dena Bank

  • Indian Bank

  • Indian Overseas Bank

  • Punjab National Bank

  • Syndicate Bank

  • UCO Bank

  • Union Bank

  • United Bank


In 1980, six banks to be nationalised were

  • Punjab and Sind Bank

  • Vijaya Bank

  • Oriental Bank of India

  • Corporate Bank

  • Andhra Bank

  • New Bank of India


Impact of nationalisation

  1. This leads to an increase in funds and increases the economic condition of the country.

  2. Increased efficiency.

  3. Help in boosting the ruler and agriculture sector for the country.

  4. It opened up a major employment opportunity for the people.

  5. The government used profit gained by banks for the betterment of people.

  6. The competition decreased which resulted in increased work efficiency.

Liberalisation period (1991-till date)

The last phase of the ongoing face of the banking sector development plays a hugely significant role. To provide stability and probability to the nationalised public sector banks the government decided to set up a community under the leadership of Shri M Narsimham to manage the various reforms in the Indian banking industry. The biggest development was the introduction of private sector banks in India. Reserve Bank of India gave licences to 10 private sector banks to establish them in the country.

These banks included-

  • Global Trust Bank

  • ICICI Bank

  • HDFC Bank

  • Axis bank

  • Bank of Punjab

  • Indusind Bank

  • IDBI Bank

  • Times bank

  • Development Credit Bank


Other measures

  • Sitting up branches of various foreign banks in India.

  • No more nationalisation of banks could be done.

  • Any foreign bank could start joint ventures with Indian Banks.

  • Small finance banks were allowed to set up their branches across India.

  • A major part of Indian banking moved online with interest banking and apps available for fund transfer.

The salient feature of the Banking Regulation Act, 1949 Act

  • Prohibition of trade to eliminate non-banking risks.

  • Prescription of minimum capital standards.

  • Prohibition of non-banking companies from accepting deposits repayable on demand.

  • Introduction of a comprehensive system of licensing of banks and their branches.

  • Inspection of banks and accounts of a bank by the Reserve Bank of India.

  • Provision for bringing the Reserve Bank of India into closer touch with banking companies.

  • Provisions of an expedition’s procedure for liquidation.

  • Widening the powers of the Reserve Bank of India to enable it to come to the aid of banking companies.

  • Empowering the central government to take action against banks conducting their affairs.

  • Limiting the payment of dividends.

The main provisions or contents or characteristics of the Act are

Title extent and commencement- This Act is called ‘Banking Regulation Act, 1949’, extended to the whole of India and came into force on 16 March 1949.

Definition of Banking (Section 5 b)- ‘Banking’ means accepting the deposit of money from the public for a purpose of lending or investment, repayable on demand or otherwise and withdrawals by cheque, draft, order or otherwise. Banking does not include other commercial activities carried on by a banking company.

Section 5(c) - ‘Banking Company’ means any company which transacts the business of banking in India. According to the explanation to Section 5, any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely to finance its business, shall not be deemed to transact the business of banking, and therefore shall not be called a “banking company”.

Section 6 – It provides a list of various forms of business that a banking company may do in addition to the business of banking.

The prohibited function of the bank

According to Section 8 &9, Bank cannot engage themselves in carrying and following activities

  • No banking company shall directly or indirectly deal in the buying or selling or bartering of goods, or engage in any trade.

  • No banking company shall buy or sell, or barter goods for others.

  • No banking company shall hold any immovable property however acquired for more than 7 years from the acquisition.

  • Management of a Bank (Section 10) - A banking company cannot employ or be managed by a managing agent. It cannot employ ‘any person’ who has been adjudicated insolvent or has been convicted by a criminal court or who is engaged in any vocation or business.

Capital and Reserve

According to Section 11, the aggregate value of banking companies' paid-up capital and reserve shall not be less than Rs. 5 lakhs, if the bank has been established after 16th September 1962.

Section 12 states that the subscribe capital for a banking company cannot be less than 50% of authorised capital and the paid-up capital cannot be less than 50% off subscribe capital.

According to Section 17, every Bank creates are reserve fund (statutory reserve fund) when the amount in the reserve fund together with the amount of share premium account equals the paid-up capital then Central Government on the recommendation of RBI can be allowed the bank company not to transfer the stipulated 20% of profit to the reserve fund.

According to Section 24, every bank shall maintain a liquid reserve in cash, gold or unencumbered approved securities at least 25% of the total of its demand and time liabilities in India.

Restrictions concerning payment of dividend

According to Section 15, no bank shall pay any dividend on its shares until all its capitalized expenses (including preliminary expenses, organization expenses, share-selling commission, brokerage, amount of losses incurred or any other item of expenditure on intangible assets) have been completely written off.

Restriction on nature of Subsidiary Company

According to Section 19, a Banking Company cannot form any subsidiary company however it may form a subsidiary company in the following cases

  • To undertake any one or more forms of business permissible for a banking company under Section 6; or

  • To carry on the business of banking exclusively outside India.

  • To undertake such other business which the Reserve Bank may, with prior approval of the Central Government, consider to be conducive to the spread of banking in India.

Restrictions on Loans and Advances

According to Section 20, the following restrictions have been laid down on loans and advances of a bank:

  • A bank cannot grant any loans or advances on the security of its shares.

  • It cannot enter into any commitment for granting any loan.

  • A bank cannot remit (mitigate or leave) the whole or any part of a loan.

Licensing of banking companies

According to Section 22, a banking company cannot carry on banking business in India unless it holds a license issued on that behalf by the Reserve bank, before commencing banking business in India, every banking company shall apply in writing to the Reserve bank for a license. The Reserve Bank has to be satisfied that the following

  • The banking company is or will be in a position to pay its present or future depositors in full as their claims accrue.

  • The public interest will be served by the grant of licences.

  • The company has adequate capital structure and earning prospects.

  • Management of the company will not be prejudicial to the public interest or the interest of its depositor.

Opening of new branches and transfer of existing branches

Section 23, provides that without obtaining the prior permission of the Reserve Bank, a banking company cannot open a new branch. It cannot change the location of an existing branch. Similar rules for opening or transferring branches outside India.

Assets, returns, information, accounts and audit

A banking company is required to observe and comply with the following requirements

  • As per Section 25, every banking company shall maintain its assets at least 75% of its demand and time liabilities in India.

  • As per Section 26, every banking company shall submit an annual return of each year to the Reserve Bank with the details of all accounts.

  • As per Section 27, every banking company shall submit a monthly return to the Reserve Bank showing its assets and liabilities in India.

  • As per Section 30, the balance sheet and profit and loss account shall be audited by a person duly qualified to be an auditor of companies.

Inspection

According to Section 35, the Reserve Bank on its own or on being directed by the Central Government can cause an inspection of any banking company And its books and accounts. It may also cause scrutiny of its affairs and books and accounts, and the officers of the company shall have to fully cooperate with it.

Prohibition of certain activities about banking companies

According to Section 36AD, No person should obstruct the business of the banking company; No person shall do anything within his office which is violent or which precludes his normal business and shall not act in any manner calculated to undermine the confidence of the depositors in the banking company.

Acquisition of the undertakings of banking companies in certain cases

Section 36AE states that the Central Government has the power to take over the undertakings of banking company if, on receipt of a report from the Reserve Bank, it is satisfied that the banking company is to comply with the policy of the Reserve Bank in respect of advances or directions given. As per Section 36AG, compensation shall be given to shareholders of the acquired bank.

Suspension of business (moratorium) and winding up of banking companies

According to Section 37, if a banking company is temporarily unable to meet its obligations, it may apply for a moratorium to the High Court. (Moratorium means a legally authorized postponement of the fulfilment of an obligation). As per Section 38, the High Court can order the winding up of a banking company if it is unable to pay its debts, or if an application for its winding up has been made by the Reserve Bank.

Restriction on acceptance of deposits withdrawal by cheque

According to Section 49A, no person other than a bank shall accept deposits of money withdrawal by cheque.

Change of name of banking company

According to Section 49B, a banking company can change its name if the Reserve Bank has no objection to such change and the Central Government give its approval to such change.

Power of Central Government to make rules

According to Section 52, after consultation with the Reserve Bank, the Central Government may make rules to provide for all matters for which provision is necessary and all such rules shall be published in the official gazette.

Power to exempt in certain cases

Section 53 states that on the recommendation of the Reserve Bank, the Central Government may declare by notification in the Official Gazette that any or all of the provisions of the Act shall not apply to any banking company or institution generally or for such period as may be specified.

Act to apply to cooperative societies

According to Section 56, the provisions of this Act shall apply to cooperative societies as they apply to bank companies, but are subject to certain modifications.


Conclusion

The history of banking in India shows that with the times and the needs of the people, major developments have been made to make the banking sector prosperous. Banks are constantly striving to ensure maximum customer satisfaction. With the continuous improvement of banking services, the banking system in India is getting streamlined. Before the passing of the Banking Regulation Act, 1949, several anomalies were prevalent in the banking sector. It was highly disorganized and unsuccessful. With the introduction of this Act, the functioning of banking firms has been regulated. This act has ensured a thriving and balanced development in the banking sector.