Authored By: Dev Gupta
Table of Contents
THE LAWS: As the topic suggests, a single book of laws covering all that is to be covered in Banking does not exist. If that were the case, it would have left many essential banking aspects untouched. Instead, the term BANKING LAWS is just an abbreviation of sorts for all the acts named below:
a) The Reserve Bank of India Act, 1934
b) The Banking Regulation Act, 1949
c) The Bankers’ Books Evidence Act, 1891
d) The Recovery of Debts and Bankruptcy Act, 1993
e) The Negotiable Instruments Act, 1881
f) The Securities & Exchange Board of India (Rules & Regulations)
THE LAWS IN BRIEF:
The Reserve Bank of India Act, 1934
The Reserve Bank of India was established in India per the recommendation of the Royal Commission on India Currency & Finance (Milton Young Commission) in 1926. The Act was enacted in 1934 and was fully operative two years later.
Surprisingly, the Act temporarily resolved the country’s currency disorganization and made it advantageous. The Act has stood the test of time and, through several amendments, has kept the workings of the RBI going abreast.
The Act applies to the whole of India, including Jammu and Kashmir. The primary purpose of the Act can be said to be as follows-
- Regulating & issuing banknotes
- To secure monetary stability, to keep reserves
- Dealing with the operation of currency and credit system of the country to make it advantageous.
As a statue, it includes definitions for the terms used in the Act. It deals with various aspects in respect of working of the RBI such as providing for definitions, outlining the management procedures, powers and functions, regulations of various institutions, credit information, penalties and some general provisions. The Act consists of a total of 61 sections and 2 schedules.
The Banking Regulation Act, 1949
Before the passing of the Banking Regulation Act, 1949, there were inadequate provisions which were included in the Indian Companies Act, 1913. Since, the main objective of the company laws was to safeguard the interests of the shareholders, the main objective of banking laws should be to safeguard to the interests of those who deposit in such banking institutions.
To cater to the increasing needs of deposits, especially after the World War 2 which saw a rapid growth of banking institutions throughout the country and the world, the Banking Companies Bill was passed by the Legislative Assembly in 1949, the Banking Companies Act, 1949 came into force on September 16, 1949. The name was subsequently changed to -the Banking Regulation Act, 1949 – from March 1, 1966.
The main purposes, objectives and aim of the Act are as follows:
- A comprehensive definition of ‘banking’ is given, so as to bring within the scope of the Act, all institutions which receives deposits repayable on demand or otherwise, for lending or investments. Thus, not only banks, but all such institutions fall under the ambit of the Act.
- The Act prohibits non-banking companies from accepting deposits repayable on demand.
- The Act prohibits trading with a view to elimination non-banking risks.
- Minimum Capital standards have been prescribed by the Act.
- Payment of capital dividends by a banking company has been eliminated.
- Banks incorporated or registered outside India also fall (to a limited extent) within the purview of the Act.
- A comprehensive system of licensing of banks and their branches has been introduced.
- A special form of balance sheet has been prescribed for banks and the RBI has the power to call for periodic returns.
- The Act authorizes the RBI to inspect the books and accounts of a bank.
- The Central Government has been empowered to take appropriate actions against banks which conduct their affairs in a manner detrimental to the interests of the depositors
- The RBI has been brought into closer touch with banks – with the RBI controlling them from various angles.
- An expeditious procedure has been prescribed for liquidation of banking companies.
- The powers of the RBI have been widened, so as to enable it to come to the aid of banking companies in emergencies.
- Detailed provisions have been made in connection with the management of the banks.
Although the Act extends to the whole of India, Sec. 3 of the provides that it shall not apply to –
a) a primary agricultural credit society
b) a co-operative land mortgage bank; and
c) any other co-operative society, except in the manner
There are a total of 56 Sections and 5 Acts discussing in detail all that was mentioned above.
The Bankers’ Books Evidence Act, 1891
The Bankers’ Books Evidence Act, 1891 was passed to amend the law of evidence with respect to the Bankers’ Books. The Act applies to the whole of India. The Act, although, is a Short Act consisting of only 8 sections, it is one of great importance since it puts down the procedures for using the bankers’ books as evidence in courts of law. The sections are as follows –
- Definitions – Sub. Sec. 2 & 2A
- Power to extend provisions of the Act – Sec 3
- Mode of proof of entries – Sec. 4
- When an officer of a bank cannot be compelled to produce a banker’s book – Sec 5.
- Inspection of a Banker’s book – Sec 6.
- Costs – Sec 7.
The Recovery of Debts and Bankruptcy Act, 1993
Banks, in the past have faced major difficulties with recovering loans given out to the citizens. The result was litigation, which a long, drawn out procedure which goes on for years and years. As a result, crores of rupees were locked due to court cases and the said money then deteriorates as it cannot be used. For this reason, the Narasimhan Committee recommended the setting up of special tribunals which expressly dealt with issues relating to the Recovery of Debts. In 1981, the Tiwari Committee also expressed concern over the working of the banks in terms of legal difficulties and suggested changing existing laws and setting up of special tribunals. On September 30, 1990, more than 15 lakh such cases were pending and an alarming 6,000 crore rupees was locked behind litigation which could have been rightfully put to use for the development of the country.
As a result of this, the Recovery of Debts due to Banks and Financial Institutions Act, 1993 was passed by the parliament with effect on June 25, 1993. In 2016 the name of the Act was changed to the Recovery of Debts and Bankruptcy Act, 1993 and after 2019 the Act applied to the whole of India, including Jammu and Kashmir.
The Act allowed for the establishment for Debt Recovery (and Appellate) Tribunals which was a landmark move towards lessening the pendency in cases related the recovery of debts.
The Act mainly provides for the definitions of terms used in the Act and for the powers and procedures for the Debt Recovery Tribunals. It contains 37 Sections and No schedules governing the same.
The Negotiable Instruments Act, 1881
In India, bills of exchange have been traced back to as much as 14th Century, known as “hundi” in local language. Since the advent of the British Colonial Era in India, the economic activities boomed and just coins and notes as monetary means were deemed to be inadequate to keep up. Instruments such as credit notes took over the function like they were used in England. Litigation relating to Englishmen was guided by the Negotiable instruments law prevalent in England. In the case of Hindus & Muslims, none of the religious texts amply dealt with negotiable instruments.
In 1886, The Negotiable Instruments bill was drafted by the Indian Law Commission but due to numerous objections, the bill had to be drafted three times before being finally passed in 1881 and came into force in 1882.
The Act is mainly based on the English Common Law relating to negotiable instruments- however there are some points of difference due to the difference in economic conditions of England and India. The Act does not affect the working of the Indian Currency Act, 1871. The Act contains 148 Sections and 1 Schedule.
The Securities & Exchange Board of India (Rules and Regulations)
Although not a direct bank, the SEBI oversees the working and exchanging of the shares and securities in the capital market. SEBI provides for the rules and regulations to be followed by companies whenever they are to release stocks in the market and also in the dealings of banks in terms of their securities. Due to the comprehensive and rigid rules and regulations imposed by the SEBI, citizens can freely chose to buy and sell shares as they please.
