Banking Law: Primer

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Banking in India


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India had centuries old tradition ofindigenous Banking.

There existed many evidences showing thatthe concept of Banking was not new toIndia.

As Chanakya’s Arthashashtra about !!!B.C. showed facts that Banking was alreadythere in powerful existence in India.

Phase I –Pre-independencePhase (up to 1947)


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The Bank of "industan was established in#$$! and due to the %nancial crisis& it wasclosed in #'(.

)mergence of three *residency Banks+ Bankof Bengal ,#'!-& Bank of Bombay ,#'/!with a capital of 0s.1( lakhs& and Bank of

2adras ,#'/

Bank of Hindustan to PresidencyBanks


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The Bank of Cacutta was founded on ( 4une #'!5& mainly to fund 6eneral7ellesley8s wars against Tipu 9ultan andthe 2arathas.

It was the %rst bank of India and wasrenamed Bank of Bengal on ( 4anuary #'!-.

Bank of Cacutta


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The Bank of 2adras

was one of India8s three

*residency Banks.

The Bank of 2adras was formed in #'/ asa :oint stock company with a capital of million.

Bank of 2adras


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Bank of Bombay was the second of thethree presidency banks of the 0a: period.

It was established& pursuant to a charter ofthe British )ast India Company& on #1thApril& #'/!.

The bank was head;uartered in Bombay&now called 2umbai.

Bank of Bo!"ay


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I!peria Bank of India

All three *residency banks wereincorporated as :oint stock companies andwere the result of royal charters.

These three banks received the exclusiveright to issue paper currency till #'5# when&with the *aper Currency Act& the right wastaken over by the 6overnment of India.

The *residency banks amalgamated on ($ 4anuary #-(#& and the re


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*ursuant to the provisions of the 9tate Bankof India Act of #-11& the 0eserve Bank ofIndia& which is India8s central bank& ac;uireda controlling interest in the Imperial Bank ofIndia.

=n # 4uly #-11& the Imperial Bank of Indiabecame the 9tate Bank of India.

In (!!'& the government of India ac;uiredthe 0eserve Bank of India8s stake in 9BI so asto remove any con>ict of interest becausethe 0BI is the country8s banking regulatory

authority.

#tate Bank of India


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In #-1-& the government passed the 9tateBank of India ,9ubsidiary Banks Act& whichmade eight state banks associates of 9BI. Aprocess of consolidation began on #9eptember (!!'& when the 9tate Bank of9aurashtra merged with 9BI.

$ssociate Banks


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The 0eserve Bank of India was founded on # April #-1to respond to economic troubles after the ?irst 7orld7ar.

0BI was conceptuali@ed as per the guidelines& workingstyle and outlook presented by r B. 0. Ambedkar aswritten in his book The *roblem of the 0upee Itsorigin and its solution.D in front of the "ilton EoungCommission.

The bank was set up based on the recommendations ofthe #-(5 0oyal Commission on Indian Currency and?inance& also known as the "iltonEoung Commission.

%BI


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The original choice for the seal of 0BI was The )astIndia Company ouble 2ohur& with the sketch of theFion and *alm Tree.

"owever it was decided to replace the lion with the

tiger& the national animal of India. The *reamble of the 0BI describes its basic functions

◦ to regulate the issue of bank notes&

◦ keep reserves to secure monetary stability in India& and

◦ generally to operate the currency and credit system in the

best interests of the country. The Central =Gce of the 0BI was established in

Calcutta ,now Holkata& but was moved to Bombay,now 2umbai in #-$.

%BI


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The 0BI also acted as Burma8s central bank&except during the years of the 4apaneseoccupation of Burma ,#-/(/1& until April #-/$&even though Burma seceded from the Indian nion

in #-$. After the *artition of India in #-/$& the bank

served as the central bank for *akistan until 4une#-/' when the 9tate Bank of *akistan commencedoperations.

Though set up as a shareholders’ bank& the 0BIhas been fully owned by the 6overnment ofIndia since its nationali@ation in #-/-.

%BI


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The 0eserve Bank does not deal directly with the members of publicbut acts as bankers’ bank maintaining deposit accounts of all otherbanks and advances money to banks whenever needed.

It regulates the volume of currency and credit& and has powers ofcontrol and supervision over all banking institutions.

The 0eserve Bank also acts as goverment banker and maintains therecord of goverment receipts& payments and borrowings under variousheads.

It advises the government on monetary and credit policy& besidesdeciding on the rate of interest on bank deposits and bank loans.

It is the custodian of currency reserves consisting of foreign exchange&gold and other securities.

%BI


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At the time of independence& there were 5/'Banks in the Indian nion with a total of /'(!Branch =Gces.

In 4anuary #-/-& the 0eserve Bank of India wasnationali@ed.

0eserve Bank of India assumed extensiveregulatory and supervisory powers under theBanking Companies Act #-/-& later renamed asBanking 0egulation Act.

Phase II-Pre-nationai&ationPhase (1947-19'9)


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The 6overnment of India& under Indira 6andhi issued an ordinance ,8BankingCompanies ,Ac;uisition and Transfer of ndertakings =rdinance& #-5-8 andnationali@ed the #/ largest commercial banks with eJect from the midnight of#- 4uly #-5-.

These banks contained '1 percent of bank deposits in the country.

7ithin two weeks of the issue of the ordinance& the *arliament passed theBanking Companies ,Ac;uisition and Transfer of ndertaking Bill& and itreceived the presidential approval on - August #-5-.

A second dose of nationalisation of 5 more commercial banks followed in#-'!.

The stated reason for the nationalisation was to give the government morecontrol of credit delivery. 7ith the second dose of nationalisation& the6overnment of India controlled around -#K of the banking business of India.

ationai&ation Phase


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Lationalisation of banks was a purelypolitical and populist act in the midst ofpower struggle within the Congress party.

It was Indira 6andhi’s masterly counter<stroke on the 9yndicate of Congress partybosses and 2orar:i esai who had suddenly

combined in an eJort to oust her from theoGce of *rime 2inister.

Poitics "ehindationaisation


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Bank is an institution which deals in moneyand credit.

It accepts deposits from the public andgrants loans and advances to those who arein need of funds for various purposes.

ega $spects*


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Banking is an activity which involvesacceptance of deposits for the purpose oflending or investing.

In addition to accepting deposits and lendingfunds& banking also involves providing variousother services alongwith its main bankingactivity.

These are mainly agency services& but includeseveral general services as well.

Banking


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The Banking 0egulation Act& #-/- de%nesbanking as an activity of accepting fundsfrom the public for the purpose of lending orinvestment.

Banking as de+ned under B%$ct, 1949


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The essential features of banking activities are as follows+<

i accepting deposits from publicM

ii lending or investment of such depositsM

iii incidental to the activities of accepting deposits for lending or

investing& banks undertake activities like N◦ a *romoting and mobili@ing savings of the publicM

◦ b *roviding funds to trade and industry by way of discounting bills& overdraft&cash credit facility& and transfer of funds from one place to anotherM

◦

c *roviding agency services to customers& such as collection of bills,

payment of insurance premium,

purchase and sale of securities, etc.,

issue of travellers’ cheques,

credit cards,

locker facility, etc;

Pri!ary and #u"sidiaryunctions


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Commercial banks

Industrial Banks

?oreign )xchange Banks evelopment Banks ,IBI& I?CI& 9?C

0egional 0ural Banks

Co

Banking Law: Primer

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