ASSIGNMENT :- BANKING LAW.

GIVEN BY :- PROF. SUMAN MANGAR.

NAME :- SAGNIK DAS.

ID :- 16/KLC-BA-LLB/8.

SEMESTER :- 7TH SEMESTER.

Q.1 Give a brief India on introduction of Banking System in India?

Ans. In India the banks and banking have been divided in different groups. Each
group has their own benefits and limitations in their operations. They have their
own dedicated target market. Some are concentrated their work in rural sector
while others in both rural as well as urban. Most of them are only catering in cities
and major towns. Modern banking in India originated in the last decade of the 18th
century. Among the first banks were the Bank of Hindustan, which was established
in 1770 and liquidated in 1829–32; and the General Bank of India, established in
1786 but failed in 1791. The Indian banking system consists of 20 public sector
banks, 22 private sector banks, 44 foreign banks, 44 regional rural banks, 1,542
urban cooperative banks and 94,384 rural cooperative banks.

Organisational Structure

1. Reserve Bank of India:

Reserve Bank of India is the Central Bank of our country. It was established on
1st April 1935 accordance with the provisions of the Reserve Bank of India Act,
1934. It holds the apex position in the banking structure. RBI performs various
developmental and promotional functions. It has given wide powers to supervise
and control the banking structure. It occupies the pivotal position in the monetary
and banking structure of the country. In many countries central bank is known by
different names. For example, Federal Reserve Bank of U.S.A, Bank of England in
U.K. and Reserve Bank of India in India. Central bank is known as a banker‟s
bank. They have the authority to formulate and implement monetary and credit
policies. It is owned by the government of a country and has the monopoly power
of issuing notes.
2. Commercial Banks:
Commercial bank is an institution that accepts deposit, makes business loans and
offer related services to various like accepting deposits and lending loans and
advances to general customers and business man. These institutions run to make
profit. They cater to the financial requirements of industries and various sectors
like agriculture, rural development, etc. it is a profit making institution owned by
government or private of both.

Commercial bank includes public sector, private sector, foreign banks and
regional rural banks:

3. Public Sector Banks:

Currently there are 21 Nationalised banks in India. The public sector accounts for
75 percent of total banking business in India and State Bank of India is the largest
commercial bank in terms of volume of all commercial banks. Now from April 1,
2017 all the 5 associate banks of SBI and Bhartiya Mahila Bank are merged with
State Bank of India. After this merger now SBI is counted among the top 50 largest
banks of the world.

Nationalised Banks in India are

1. Allahabad Bank
2. Andhra Bank
3. Bank of India
4. Bank of Baroda
5. Bank of Maharashtra
6. Canara Bank
7. Central Bank of India
8. Corporation Bank
9. Dena Bank
10. Indian Bank
11. Indian Overseas Bank
12. Oriental Bank of Commerce
13. Punjab & Sindh Bank
14. Punjab National Bank
15. State Bank of India
16. Syndicate Bank
17. UCO Bank
18. Union Bank of India
19. United Bank of India
20. Vijaya Bank

4. Private Sector Banks:

The private-sector banks in India represent part of the Indian banking sector that is
made up of both private and public sector banks. The "private-sector banks"
are banks where greater parts of stake or equity are held by
the private shareholders and not by government.

List of Private Sector Banks is:

5. Foreign Banks:
A foreign bank with the obligation of following the regulations of both its home
and its host countries. Loan limits for these banks are based on the capital of the
parent bank, thus allowing foreign banks to provide more loans than other
subsidiary banks. Foreign banks are those banks, which have their head offices
abroad. CITI bank, HSBC, Standard Chartered etc. are the examples of foreign
bank in India. Currently India has 36 foreign banks.

6. Regional Rural Bank (RRB):

The government of India set up Regional Rural Banks (RRBs) on October 2, 1975.
The banks provide credit to the weaker sections of the rural areas, particularly the
small and marginal farmers, agricultural labourers, and small entrepreneurs. There
are 82 RRBs in the country. NABARD holds the apex position in the agricultural
and rural development. List of some RRBs is given below:

7. Co-operative Bank:
Co-operative bank was set up by passing a co-operative act in 1904. They are
organised and managed on the principal of co-operation and mutual help. The main
objective of co-operative bank is to provide rural credit.

The cooperative banks in India play an important role even today in rural co-
operative financing. The enactment of Co-operative Credit Societies Act, 1904,
however, gave the real impetus to the movement. The Cooperative Credit Societies
Act, 1904 was amended in 1912, with a view to broad basing it to enable
organisation of non-credit societies.

Name of some co-operative banks India are:

1. Andhra Pradesh State Co-operative Bank Ltd
2. The Bihar State Co- operative Bank Ltd.
3. Chhatisgarh Rajya Sahakari Bank Maryadit
4. The Gujarat State Co-operative Bank Ltd.
5. Haryana Rajya Sahakari Bank Ltd.
Three tier structures exist in the cooperative banking:
i. State cooperative bank at the apex level.
ii. Central cooperative banks at the district level.
iii. Primary cooperative banks and the base or local level.

Scheduled and Non-Scheduled Banks:

The scheduled banks are those which are enshrined in the second schedule of the
RBI Act, 1934. These banks have a paid-up capital and reserves of an aggregate
value of not less than Rs. 5 lakhs, they have to satisfy the RBI that their affairs are
carried out in the interest of their depositors. All commercial banks (Indian and
foreign), regional rural banks, and state cooperative banks are scheduled banks.
Non- scheduled banks are those which are not included in the second schedule of
the RBI Act, 1934. At present these are only three such banks in the country.

Q.2 Explain the Functions of Reserve Bank of India?

Ans. The regulators of the Indian financial sector are the Reserve Bank of India,
the Ministry of Finance (Income Tax Department), Foreign Exchange Dealers
Association of India, Deposit Insurance and Credit Guarantee Corporation, Fixed
Income Money Market and Derivatives Association of India and the Clearing
Corporation of India Ltd. This paper shall deal with the most important of these
regulators, the Reserve Bank of India.

The Reserve Bank of India (RBI) is the central bank of our country. It was
established on April 1, 1935 in accordance with the provisions of the Reserve Bank
of India Act, 1934, based on the recommendations of the Royal Commission on
Indian Currency and Finance (Hilton Young Commission) in 1926. The Central
Office of the RBI, which was then located in Calcutta, was permanently moved to
Mumbai in 1937. Today the RBI has 22 regional offices, mostly in State capitals.
During its inception, the RBI was privately owned with a paid up capital of five
crores. On establishment, the RBI was handed over the function of issuing
currency by the Government of India and the power of credit control by the then
Imperial Bank of India. However, the RBI is now fully owned by the Government
of India post-nationalisation in 1949. The reasons behind the nationalisation of the
RBI were twofold: first, to control inflation in India which existed since 1939 and
second, in order to utilise it as a tool for economic change in India at a point of
time when India was prepared to set out on its journey of economic growth and
development.

This paper shall discuss how exactly the RBI carries out its intended functions. In
section II, this paper shall discuss the basic functions of the RBI. In section III, the
author shall elaborate upon the organisational structure of the RBI and in section
IV the author shall elaborate upon the specific role of the RBI as a regulator.

Basic Functions Of The RBI

The preamble of the Reserve Bank of India Act, 1934 states that the objectives of
the RBI are “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
and credit system of the country to its advantage.” Thus, the basic functions of the
RBI as stipulated in the Preamble of the RBI Act are threefold: First, the RBI
performs the function of regulating the issue of bank notes (the RBI also exchanges
or destroys currency and coins not fit for circulation). In fact, by virtue of being the
sole authority for the issue of currency in the country, the RBI is empowered to
control money supply in the country; Second, the RBI keeps reserves in order to
maintain monetary stability in India; Third, the RBI must operate the currency and
credit system of India to its advantage. In pursuance of this function, the RBI also
has the responsibility to maintain the internal and external value of the Indian
Rupee.

One of the functions the RBI performs is that it has a monopoly with respect to the
issue of currency (excluding one rupee coins and notes which are issued by the
Government of India) according to section 22 of the RBI Act. The notes are the
liability of the Issue Department of the RBI only and hence the assets of the Issue
Department are also kept separate from that of the Banking Department of the RBI.
Such assets, according to section 33 of the RBI Act, must consist of gold coins and
bullion, foreign securities, rupee coin, Government of India securities and Bills of
Exchange and Promissory Notes payable in India and as are eligible for purchase
by the RBI. As per amendments to the RBI Act, it is mandated that the Issue
Department of the RBI must at all times have an aggregate value of gold bullion
and foreign securities worth not less than rupees two hundred crores of which gold
coins and gold bullion should comprise no less that rupees hundred and fifteen
crores. Provided such minimum was maintained by the RBI the volume of
currency that can be issued by the RBI is not curtailed.

The RBI is also the regulator and supervisor of the financial system in India.
Firstly, it acts as a banker to both the Government of India and the State
Governments and therefore handles their current financial transactions and also
manages public debt. The RBI accepts money on behalf of the government and
also makes payments for the Government. Moreover, it acts as a manger of foreign
exchange under the Foreign Exchange Management Act, 1999 and facilitates
external trade and payment. Secondly, it acts as a supervisor and regulator of the
financial sector in India which consists of commercial banks, financial institutions
and non-banking finance companies under the guidance of the Board for Financial
Supervision which was established in 1994. It lays down broad guidelines for
banking operations within the country and acts as a banker to the scheduled banks.
Commercial banks are expected to keep deposits with the RBI and when necessary
they borrow from the RBI (the RBI functions as a lender of last resort to the
commercial banks). The RBI also ensures price stability within India by
controlling the volume of credit created by the commercial banks.

Lastly, the RBI also has a developmental role in that it performs a variety of
promotional functions directed at supporting national objectives. In pursuance of
this function, the RBI has taken several promotional measures such as the
establishment of financial corporations to ensure credit availability for the
agricultural and industrial sector, the promotion of the establishment of Regional
Rural Banks so that banking facilities may be available in the rural areas as well,
the establishment of the Export-Import bank in India to finance exports and so on.

1. Monetary Authority: The main function of RBI is formulating

implementing the monetary policies of India. Creating and balance between
“Price stability” and “future economic growth” is the main challenge of RBI
as a monetary authority.
2. Regulator and supervisor of the financial system: RBI sets the rules and
regulations under which Indian banks and financial system must operate. The
idea is to run the banks and financial system so efficiently that public trust on
the system is maintained. When people feel confident about the financial
system, it‟s a win for RBI. How RBI ensures public confidence? By ensuring
that the depositors money is safe with the banks, and all banking & financial
functions are operating seamlessly as per rules.
3. Manager of Foreign Exchange: In India, all foreign currency flow must be
done as per FEMA (Foreign Exchange Management Act). It is the RBI who
ensures that transactions happens as per FEMA. The bigger role of RBI is in
ensuring that external trade happens in a seamless manner. Whether, the
trader is a resident Indian or a foreign national, they must be able to deal in
foreign exchange in an easy and transparent manner.

4. Issuer of Currency: It is in the responsibility of the RBI to print and issue

new currency notes in India. It is also the RBI‟s responsibility to exchange
old or damaged notes for new ones. This way RBI can manage the
availability of enough “good quality cash” needed in the market at a given
point in time. Here, “cash” means both notes and coins.
5. Regulator and Supervisor of Payment and Settlement Systems:In India,
all payments must be settles as per PSS Act, 2007 (Payment and Settlement
Systems Act). It is the RBI who ensures that transactions happens as per PSS.
In India there are several payments systems like ECS, Credit Card, Debit
Card, RTGS, NEFT, IMPS and UPI. All these payments system are covered
by PSS Act, 2007. The overall objective of RBI is to provide fast, safe and
efficient payment system for the public. Efficient payment flows is one of the
main confidence booster of the public in the Indian financial system.

6. Banker to Government: Like retail and commercial banks gives service to

common public, RBI is the retail bank for the Government of India (GOI).
RBI also acts as a merchant banker for the GOI.

7. Banker to Banks: All Banks in India maintains an account with the RBI.
They keep their statutory reserves and other deposits in this account. Hence,
 this way RBI also functions as banker to the banks. It is RBI‟s responsibility
to ensure inter-bank transactions. RBI can also lend money to banks as a
special case.

Q.3. What do you understand by Nationalization of Bank?

Ans. Nationalized basically means it is under the government control. So the banks
are nationalized so that the control vests with the government and they can use
banks resources for the benefit of the masses as perceived by them. The first bank
in India to be nationalized was the Reserve Bank of India which happened in January
1949. Further, 14 other banks were nationalized in July 1969. Bank of India, PNB,
and many others were part of this nationalization. While the next phase of
nationalization saw 6 other commercial banks were nationalized in 1980. These
included Vijaya bank, a new bank of India, Corporation Bank, and others. During
early 1990's, the government of India adopted the policy of liberalization and
licensed a small number of private banks in the country which helped for the rapid
growth of the economy of India.
The following banks were nationalized in 1969:
Allahabad Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Central
Bank of India, Canara Bank, Dena Bank (Now Bank of Baroda), Indian Bank,
Indian Overseas Bank, Punjab National Bank, Syndicate Bank, UCO Bank, Union
Bank, United Bank of India
A second round of nationalizations of six more commercial banks followed in
1980. The stated reason for the nationalization was to give the government more
control of credit delivery. With the second round of nationalizations, the
Government of India controlled around 91% of the banking business of India.
The following banks were nationalized in 1980:
Punjab and Sind Bank, Vijaya Bank (Now Bank of Baroda), Oriental Bank of
India, Corporate Bank, Andhra Bank, New Bank of India

Q.4 Explain the Process of Nationalization of Banks?

Ans. The post war development strategy was in many ways a socialist one and
Indian Government felt that banks in private hands didn‟t lend enough to those
who needed it most. In July 1969, the Government nationalized all 14 banks whose
national wise deposits were greater than Rs. 500 million, resulting in the
nationalization of 54 percent more of branches in India and bringing the total
number of branches under Government control to 84 percent. Prakash Tandon,
former chairman of the Punjab National Bank (nationalized in 1969) describes the
rationale of nationalization as follows.11 67 „Many bank failures and crisis over
the two centuries, and the damage they did under „laissez faire‟ conditions; the
needs of planned growth and equitable distribution of credit, which in privately
owned banks was concentrated mainly on controlling industrial houses and
influential borrowers; the needs of growing small scale industries and farming
regarding finance, equipment‟s and inputs; from all these there emerged and
inexorable demand for banking legislation, some government control and a Central
banking authority, adding up, in the financial analysis, to social control and
nationalization‟. The bank nationalization in July 1969 with its objective to
„Control the commanding heights of the economy and to meet progressively the
needs of development of the economy in conformity with the national policy and
objectives‟ served to intensify the social objective of ensuring that financial
intermediaries fully met the credit demands for the productive purposes. Two
significant purposes of nationalization were rapid branch expansion and channeling
of credit according to the plan priorities. To meet the broad objective, banking
facilities were made available in hitherto uncovered areas, so as to enable them to
not only mop up potential savings and meet the credit gaps in agriculture and small
scale industries, thereby helping to bring large areas of economic activities within
the organized banking system. Towards this end, the Lead banks scheme 68
introduced in December 1969 represented an important step towards the
implementation of the two fold objective of mobilization of deposits on an
extensive scale throughout the country and striving for planned expansion of
banking facilities to bring about greater regional balance. As a consequence, the
perceived need of the borrower gained primacy over commercial conservations in
the banking sector12. The Indian banking system progressed by leaps and bounds
after nationalization. Under the system of branch licensing, bank branches
expanded rapidly both in rural and urban areas. There was a rapid growth in
deposits mobilized by the banks, besides credit expansions, especially in the areas
designated as priority sector. After nationalization, the breadth and scope of Indian
banking sector expanded at a rate perhaps unmatched by any other country. Indian
banking has been remarkably successful at achieving mass participation. Between
the time of the 1969 nationalization and the present, over 58,000 bank branches
were opened in India; these new branches as on March 2005 had mobilized over
ten trillion rupees in deposits, which represent the overwhelming majority of
deposits in Indian banks. This rapid expansion is attributable to a policy which
required banks to open four branches in unbanked locations for every branch they
opened in banked locations. 69 Between 1969 and 1980, the number of private
branches grew more quickly than public banks and on April 1st 1980, they
accounted for approximately 17.5 percent of bank branches in India. In April 1980,
the government undertook a second round of nationalization, placing under
government control the six private banks whose national wide deposits were above
Rs. 2 billion or a further 8 percent of bank branches, living approximately 10
percent of bank branches in private hands. The share of private bank branches
stayed fairly constant between 1980-2000. Following the Nationalization Act of
1969 and the nationalization of 14 largest commercial banks raised the public
sector banks share of deposit from 31% to 86%. As stated earlier, the two main
objectives of the nationalization were rapid branch expansion and channeling of
credit in line with the priorities of the five-year plans. To achieve this goal, the
newly nationalized banks received quantitative targets for the expansion of their
branch network and for the percentage of credit they had to extent to certain
sectors and groups in the economy, the so called priority sectors, which initially
stood at 33.3%. The further nationalization of six more banks in 1980, raised the
public sector banks‟ share of deposits to 92%.. The second wave of
nationalizations occurred because control over the banking system became
increasingly more important as a means to ensure priority sector lending reach the
poor through 70 a widening branch network and to fund rising public deficits. In
addition to the nationalization of banks, the priority sector lending targets raised to
40%. In the period of 1969-1991, the number of banks increased slightly, but
savings were successfully mobilized in part because relatively low inflation kept
negative real interest rates at a mild level and in part because the number of
branches was encouraged to expand rapidly. Nevertheless many banks remain
unprofitable, inefficient and unsound owing to their poor lending strategy and lack
of internal risk management under government ownership. It was reported the
average return on asset in the second half of 1980s was only 0.15% while the
capital and reserves averaged about 1.5% of asset. The major factors that
contributed to deteriorating bank performance included (a) Too stringent
regulatory requirements of CRR and Statutory Liquidity requirement of SLR that
required banks to hold a certain amount in government and eligible securities; (b)
Low interest rates charged on government bonds as compared to commercial
advances; (c) Directed and concessional lending. (d) Administrated interest rates
and (e) Lack of competition. These factors not only reduced incentives to operate
properly, but also undermind regulators incentives to prevent banks from taking
risks. While government involvement in the financial sector can be justified at the
initial stage of economic development, the prolonged presence of excessively 71
large public sector banks often results in inefficient resource allocation and
concentration of power in a few banks13. The policies that were supposed to
promote a more equal distribution of funds, also lead to inefficiencies in the Indian
banking system. To alleviate the negative effects, a first wave of liberalization
started in the second half of 1980s. The main policy changes were the introduction
of treasury bills, the creation of money markets and a partial deregulation of
interest rates. Besides the establishment of priority sector credits and
nationalization of banks, the government took further control over banks funds by
raising the statutory liquidity ratio (SLR) and the cash reserve ratio (CRR). From a
level of 2% for the CRR and 25% for the SLR in 1960, both witnessed a steep
increase until 1991 to 15% and 38.5% respectively. The interest rate deregulation
was another liberalization took place in the second half of 1980s. Prior to this
period, almost all interest rates were administered and influenced by budgetary
concerns and the degree of concessionality of directed loan. To preserve some
profitability, interest rate margins were kept sufficiently large by keeping deposits
rates low and non concessional lending rates high. Based on the 1985 report of
Chakravarthy committee, Coupon rates on government bonds were gradually
increased to reflect demand and supply conditions. 72 India‟s banking system until
1991 was an integral part of the Governments spending policy. Through the
directed credit rules and the statutory pre-emptions, it was a captive source of
funds for the fiscal deficit and the key industries. Through the CRR and the SLR
more than 50% of the savings had either to be deposited with the RBI or used to
buy government security. Of the remaining savings, 40% had to be directed to
priorities sectors that were defined by the government. Besides these restrictions
on the use of funds, the government had also controlled over the prices of the
funds, that is, the interest rates on saving and loans. Like the overall economy, the
Indian banking sector had severe structural problems by the end of 1980s. The
major of those problems were unprofitability, inefficiency and financial
unsoundness. By international standards, the Indian banks were even despite a
rapid growth of deposits, extremely unprofitable. Despite the impressive progress
made by the banks in the two decades following nationalization, the excessive
controls enforced on them by the government fostered certain rigidities and
inefficiencies in the commercial banking system. This not only hindered their
development but also eroded their profitability. These adverse developments
coupled with the balance of payments crisis, which followed in the wake of Gulf
War of 1990 coupled with the erosion of public savings and the inability of public
sector to generate 73 resources for investments rapidly brought forth the
imperatives for financial sector strengthening in India14 . The need to correct the
defects of financial sector was felt during the global trend towards economic
liberalization. Hence, a high level committee was constituted under the
chairmanship of Shri. M. Narasimham to review the progress and working of the
Indian financial sector and to suggest measures to reform it. The committee
identified the following rigidities and weakness in the system. The Narasimham
committee pointed out that the causes for poor profitability of Indian banks were
its priority sector lending, pre-emptions of funds by government in the form of
statutory liquidity requirements, overstaffing, lack of organization and a proper
work culture and excessive controls on opening and closing of branches, including
the policy of fostering unviable bank branches. Therefore the committee
recommended reforms to revamp the banking system so as to make it competitive
and efficient.