Laws of Banking in India

Laws of Banking in India


1. Evaluation of Banking Law in India

Banking as a business has its own distinctive features when compared with all other trade and business. A Banking company deals mainly with the money of large number of depositors who do not have any control over the affairs of the bank.Hence, there is a need for proper control over the banks.It is the responsibility of the Government to safeguard the interests of the large number of depositors. banking Regulation Act, 1949 is the most important Act enacted by the Government to protect the interests of the people.The provision of this act are in addition to those of companies Act, 1956 and any other law like the contract Act, the negotiable Instruments Act, the codes of Civil Criminal Procedures,etc.The commercial banks in India are also regulated by the Reserve Bank of India Act,1934.

Banking law in India, as we found today, is the outcome of the gradual process of evolution. The Indian Companies Act, 1913 was not adequate and therefore a separate legislation was passed in 1949 under the name of Banking companies Act, 1949. This act was based to a large extent upon the English banking law. Later in 1966, this Act was renamed as Banking Regulation Act. Since its enforcement in 1949, the Act has been amended several times to cater to the needs of the society and also to remove the loopholes.An important amendment was made in 1968 for the purpose of introducing “Social control” on the banks. To takes over the 14 major commercial banks in India with effect from July 19, 19 1969, the Banking companies (Acquisition and Transfer of Undertakings) Act was passed in 1970. To meet the changing requirements of the many enactments such as The Public Financial Institutions laws(Amendment) Act, 1975, The regional Rural Banks At, 1976, the banking Companies (Acquisition and tRANSFER OF uNDERTAKINGS) aCT,1980, ETC, have been passed.

 2. Reserve Bank of India Act, 1934

 The Reserve Bank of  India Act was passed in 1934 to establish the Reserve Bank of India which is the guardian of the banking system in India. As the Central Bank of the country, the Reserve Bank of India Act contains provisions concerning the commercial banks. The Act provides for the classification of banks into scheduled banks and non-scheduled banks. Accordingly, a scheduled bank is one which is included in the second schedule to the Reserve Bank of India Act, 1934.

As per the conditions, laid down in the Reserve Bank of India Act, 1934, a bank satisfying the following conditions can be included in the second schedule:

(j) It must have a paid up capital and reserves of not less than Rupees 5 lakhs.
(ii) It does not conduct its affairs in the manner detrimental to the interest of the depositors, and
(iii) It must be a state co-operative bank or a company defined in the Companies Act, 1956 or an institution notified by the Central Government in this behalf or a corporation or a company incorporated by or under any law in force outside India.

A Scheduled Commercial Bank enjoys certain advantages such as getting financial accommodation from the RBI, cheap remittance facilities from the RBI, clearing facilities, etc. In order to enjoy these facilities, a scheduled commercial bank has to fulfill the obligation of maintaining statutory reserves with the Reserve Bank. It is not obligatory on the part of non-scheduled banks to maintain statutory cash reserves with the Reserve Bank.

Being the central bank of our country, the Reserve Bank of India performs all Central Banking functions. Many powers are given to the Reserve Bank of India to control the commercial banks by the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. The powers are as follows:

  1. As supervisory and controlling authority over banks.
  2. As controller of credit.
  3. As banker to the banks i.e., as the lender of the last resort.
Sec.2(e) Definition of Scheduled Bank : Name in 2nd schedule with minimum paid up Capital & Reservesof Rs. 5 lac.
Sec 17: RBI can transact business like i)Accepting deposits of Central/ State Govt. free of intt.ii)Purchase / rediscount of Bills of Exchange from banks iii)Purchase/ sale of Foreign Exchange to/ from banks iv)To give loans to banks, SFCs etc.v)To provide advances to Central/ State purchase/ sale Govt. securities etc.
Sec.18 Emergency loan to banks 
Sec.21 Central Govt is obliged to give its banking business to RBI and to entrust management of Public debt to RBI
Sec.22 Exclusive right to issue bannotes 
Sec.24 Maximum denomination of bank note can be Rs. 10000/-
Sec 28 RBI can frame rules for refunding value of mutilated, soiled or imperfect notes as a matter of grace.
Sec 31 No body other than RBI or Central Govt. is authorised to make promissory note payable to bearer : Demand Similarly except RBI and Central Govt. , nobody is authorised to draw/ accept bills of Exchange payable to bearer on demand ( Exception : Cheques payable to bearer on demand can be drawn by any body).
Sec.42 (1)Maintenance of CRR by scheduled banks
Sec 45 A–F
Power to call for credit information from banks
Sec 49 Publication of bank rate – presently 6.0% (since 29.04.2003)
Sec.58 RBI’s Central Board is empowered to make regulations consistent with the Act.
Presently, 5% (since 02.10.2004).As per sec-42 of RBI Act 1934, all schedule banks are required to maintain cash reserve. Aschedule bank maintains cash reserve by keeping a specified percentage of its Net Demand and Time Liabilities (NDTL) as current account balance with RBI. Sec 5 (f) of Banking Regulation Act defines Demand Liabilities as liabilities, which must be met on demand and term liabilities as liabilities payable after a specified time.RBI is authorised by the act to vary the cash reserve requirement from minimum 3% to maximum 20% of NTDL (amended in 1990). For any statutory reserve above 3%, RBI pays interest @ 3.5%(presently).
3. Banking Regulation Act,1949
The law governing the working and functions of banks in India was .passed in 1949 and named as the Banking Regulation Act, 1949. Before passing this Act, the banking companies were governed by the Indian Companies Act, 1913. Since banking as a business has its own distinctive features, it was felt necessary to have a separate Act concerning only the banking companies. Hence an Act was passed in 1949, regulating the banking companies. In order to cover the cooperative banks also, the name of the Act was changed as the “Banking Regulation Act, 1949”.

 The Banking Regulation Act, 1949 was passed in February 1949 with the following objectives in view:

  1. Comprehensive Legislation: The Indian Companies Act, 1913 was inadequate and unsatisfactory to regulate and control the business of banking in India and therefore, there was a need to have specific legislation containing comprehensive provisions, particularly to the business of banking in India.
  2. To Prevent Bank Failures: The bank failures were common in those days due to inadequacy of capital and hence prescribing minimum capital requirements was necessary. The banking Regulation Act, 1949 was enacted to prevent such bank failures by certain minimum capital requirements.
  3. To Avoid Cut Throat Competition: The Act passed aims for avoiding cut throat and wasteful competition among the banking companies. The Act also regulates the opening of branches and changing the location of the existing branches.
  4. Ensuring Balanced Development of Banks: In order to avoid indiscriminate opening of new branches and thereby ensuring balanced development of banking companies, the system of licensing is provided in this Act.
  5. Regulation of Bank Credit and Working of Banks: The RBI has been given powers to approve the appointment, reappointment and removal of the chairman, directors and officers of the banks. This will ensure efficient and smooth working of banks in India.
  6. Safeguarding the Interests of Depositors: The Act protects the interest of the depositors at the public at large by incorporating certain provisions such as prescribing cash reserves and liquidity ratios. This would enable the banks to meet the demand of the depositors.
  7. Strengthening the Banking System: This Act provides for compulsory amalgamation of weaker banks with stronger ones to facilitate strengthening the banking system of our country.
  8. Controlling Foreign Banks: The Act contains certain provisions which restrict the foreign banks to invest funds of the Indian depositors outside India.
  9. Providing Quick and Easy Liquidation: The Banking Regulation Act also provides for quick and easy liquidation of the banks if they are not able to continue further or amalgamate with other banks.

The Banking Regulation Act, 1949 as amended up-to-date is divided into five parts and contains five schedules. This Act is applicable to all banking companies including co-operative banks. The provisions of this Act provide for achieving the above mentioned objectives for which the Act was enacted.


The Banking Companies (Acquisition and Transfer of undertakings) Act,: 1970 is yet another legislation passed in India to nationalise the 14 major commercial banks in India having deposits of more than Rs. 50 crores each in 1969. As per the provisions of this Act the ownership of the 14 top commercial banks has been transferred to the Government of India. However the independent entity of these banks have been protected and they are allowed to have their business in their old names. Though the Act empowers the Government to reconstitute any of the acquired banks into two or more banks or merge one with another, nothing in this regard has happened so far.

The Act provides that the entire capital of the new banks stands transferred to the Central Government. According to this Act, the general administration and management of the affairs of each nationalised bank is vested in a. Board of Directors consisting of not more than fifteen members. Further,the Act provides that the net profits earned by the nationalised banks are required to be transferred to the Government of


The Regional Rural Banks Act, 1976 was enacted on 9th February, 1976 wIth a view to developing the rural economy of India. The Act was iñtended for the development of agriculture, trade, commerce, industry and other productive activities in the rural areas. The Regional Rural Banks provide finance mainly to small and marginal farmers, agricultural labourers, artisans and small entrepreneurs. The idea of starting Regional
Rural Banks was conceived by combinìng the strong points of both commercial banks and co-operative banks.

The Regional Rural Banks Act, 1976 provides for the establishment of a Regional Rural Bank by a sponsor bank with the assistance of the Central Government. As per the provisions of thiš Ad, The sponsor bank has to assist añd help the Regional Rural Bank by subscribing to the share capital of such Regional Rural Bank. Further, the sponsor bank has to assist in providing the required managerial and financial assistance.’The general administration and Management of the affairs and business of a Regional Rural Bank shall vest in a
Board of Directors consisting of not exceeding 15 members.


The Banking Companies (Acquisition and Transfer Undertakings) Act, 1980 was enacted to replace an ordinance promulgated on 15th April; 1980 nationalising six more banks. The banks taken over were commercial banks whose demand and time liabilities exceed Rs. Two hundred crores. The main
provisions of this Act relate to the establishment of new banks, business, share capital and management of these six banks.


The Negotiable Instruments Act 1881 contains important provisions relating to the negotiable instruments  in which the banks normally deal. The negotiable instruments mainly concerned are Promissory Notes, Bills of Exchange and Cheques. It came into effect prom 1st March 1882 and the Act is divided into 17 chapters and contains 137 sections.


The Central Government and the Reserve Bank of India are the two main authorities in India which are responsible for administering the different provisions of the various legislations passed in respect of Banking Companies. These two authorities have separate departments of Banking to look after all matters
concerning the banking industry in India.

Article Source:  Banking Law and Practice By K.P. Kandasami, Page No.1-6

Certificate of Deposit(CD)

Certificate of Deposit (CD)

Certificate of Deposit (CD) Certificate of Deposit (CD) implies an unsecured, securities industry instrument, issued by the financial organisation| or financial institution, either in demat type or as a usance …


BANK OF INDIA ACT, 1934  The Reserve Bank of  India Act was passed in 1934 to establish the Reserve Bank of India which is the guardian of the banking system …

Laws of Banking in India

Laws of Banking in India

Laws of Banking in India

Laws of Banking in India

Laws of Banking in India

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