• Module-2

Early Legislations
• The Negotiable Instruments Act 1881
• The Banker’s Books Evidence Act,1891
• The Usurious Loans Act, 1918
• Co-operative Society’s Act, 1912
• The Indian Companies Act, 1913
• The Reserve Bank of India Act,1934
• State Money lender’s Acts, 1940
The Need for Banking Regulation Act
• The provision of the Indian Companies Act 1913 was found inadequate and
unsatisfactory to regulate banking companies in India.
• Due to inadequacy of capital many banks failed and hence prescribing a minimum
capital requirement was felt necessary. The banking regulation act brought in certain
minimum capital requirements for banks.
• To avoid cut throat competition among banking companies. The Act has regulated the
opening of branches and changing location of existing branches.
• Assign power to RBI to appoint, reappoint and removal of chairman, director and
officers of the banks. This could ensure the smooth and efficient functioning of banks
in India.
• To protect the interest of depositors and public at large by incorporating certain
provisions, viz. prescribing cash reserve and liquidity reserve ratios. This enable bank
to meet demand deposits.
• Provide compulsory amalgamation of weaker banks with senior banks, and
thereby strengthens the banking system in India.
• Provide quick and easy liquidation of banks when they are unable to continue
further or amalgamate with other banks.
Banking Regulation Act 1949.
• Deals with Banking companies & corporations & does not codify the law of banking.
• Mainly a Regulatory Act- to regulate the functioning of banking companies &
corporations.
• Provisions- initially in Part XA of the Indian Companies Act 1913 in 1936.
• Long & detailed consideration by expert committees, the RBI, the govt & the
legislature-Banking Companies Bill 1949 was passed as the Banking Companies Act
1949.
• With effect from 1966, its name changed to the Banking Regulation Act 1949
• Amending Act 23 of 1965 made the Act applicable to co-operative banks.(S 56)
• Objectives-protection of the interests of the depositor.
Main Provisions-
• Part 1- Preliminary
• Part II- Business of Banking Companies ( S 6- 36-A)
• Part II A- Control Over Management ( S 36AA -36 AB)
• Part II B-Prohibition of certain activities in relation to Banking companies ( S36-AD)
• Part II C- Acquisition of the undertaking of Banking companies in certain cases (S
35AE to 36AJ)
• Part III-Suspension of Business & winding up of Banking Companies (S 36 B to 45)
• Part III A- Special provisions for Speedy Disposal of winding up
• Part III B- Provisions relating to certain operations of Banking Companies (S 45 Y –
45 ZF)
• Part IV-Miscellaneous (S 46 -55A)
• Part V-Provisions applicable to Co-operative Banks ( S 56)
Common Law Definition of Banking
• United Dominions Trust Ltd v. Kirkwood- UDT did not maintain current accounts, so
was not carrying on a banking business.
• Lord Denning held-the usual characteristics of banking are the conduct of current
accounts, the payment of cheques, the collection of cheques for customers.
• Harman J noted that its difficult to define the business of banking & that no statute
has defined it.
• Banker is the one who carries on as his principal business; the accepting of deposits of
money on current account or otherwise subject to withdrawal by cheque, draft or
order.
• Diplock LJ held that a banker should accept money from his customers upon a
running account into which sums of money are from time to time paid by the
customer & from time to time withdrawn by him.
Statutory Definition of Banking- India
• The term BANK has not been defined.
• According to section 5(b) of the Banking Regulation Act, 1949,
• “banking” means the accepting, for the purpose of lending or investment, of deposits
of money from the public, repayable on demand or otherwise and withdrawable by
cheque, draft, and order or otherwise.
• The essential characteristics of the ‘banking business’ as defined in section 5(b) of the
Banking Regulation Act are:
• Acceptance of deposits from the public, for the purpose of lending or investment
• Withdrawable by means of any instrument whether a cheque or otherwise.
Banking Company?
• S.5(c)-’Banking company’ means any company which transacts the business of
banking in India. Explanation to S 5(C)provides:
• 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 for the purpose of
financing its business as such manufacturer or trader shall not be deemed to transact
the business of banking within the meaning of this clause.
• S 7-use of words bank, banker, banking or banking company
No company other than a ‘banking company’ shall use as part of its name any or
the words bank, banker or banking & no company shall carry on the business of
banking in India unless it uses as a part of its name at least one of such words
• Mahalakshmi Bank Ltd v. Registrar of Co, West Bengal-
• The essential characteristics being its ability to receive money as deposits from
customers and its ability to honor their cheques and without this, mere power to grant
loans, would not render an institution a banking company.
• S 6-forms of business in which banking companies may engage.
• S 8-Prohibition of trading-no banking co shall directly or indirectly deal in buying
,selling or bartering of goods, except in connection with realization of security given
to it or held by it.
• Money lenders are not bankers-Vimal Chandra Grover v. Bank of India
• Though they accept deposits from public & invest or lend to needy people, they
neither do banking business nor provide cheque facility.

License from RBI

• S 22-(1) No Company shall carry on banking business in India unless it holds a
license issued on that behalf by the RBI, subject to conditions as RBI thinks fit to
impose.
• Necessity of license
• (2)-Procedure of obtaining license-shall apply in writing to the RBI
• (3)-Conditions for the issue
• (4)-Cancellation of license
• (5) & (6)Appeal of remedy against cancellation.
Conditions for the issue of License
• Company is or will be in a position to pay its present or future depositors in full as
their claims accrue.
• Affairs of the company are not being or likely to be conducted in a manner
detrimental to the interests of the present or future depositors.
• General character of the proposed management of the company will not be
prejudicial to public interest or the interest of depositors.
• Co. has adequate capital structure & earning prospects
• Public interest will be served by the grant of license to company.
• Grant of license will not be prejudicial to the operation and consolidation of
banking system consistent with monetary stability and economic growth.
• Any other condition which is necessary protecting public interest/depositors.

3(A) Amendment of 1984

• 3(A) –Company incorporated outside India-RBI need to satisfied by an inspection of
the books of the company or that the conditions specified in sub section (3) are
fulfilled & may inquire as to :
• -Such company fulfills conditions of sub section (3)
• -To carry on business by it will be in public interest
• -Govt or law of the country in which it is incorporated does not discriminate in any
way against banking companies registered in India
• -Company complies with all the provisions of the BR Act applicable to banking
companies incorporated outside India ( S 22(3-A)
Case Laws-License

• Shivabhai Zoverbhai Patel v. RBI- RBI has full right to refuse or grant the license.
The High court is not entitled to look into the matter, if it is refused on the basis of
relevant reasons.
• Sajjan Bank (Pvt)Ltd v. RBI -refusal of license does not mean stoppage of business,
it can continue money lender’s business.
• Pramod Malhotra v. Union of India- Challenged a Scheme of Amalgamation (SBL
amalgamation with Union Bank of India) framed by RBI & issue a Mandamus to
direct respondents to pay petitioners and other fixed deposit holders of the SBL.

Need for Nationalisation

• To avoid concentration of wealth & economic power.

• To bring branch expansion in unbanked areas.
• To prevent the neglect of agriculture, small scale industries & other deserving sectors.
• To prevent various mal practices happening in the banking sector.
• To bring better government control over nationalized banks.
• 1970-14 major commercial banks were nationalized-Banking Companies(Acquisition
and Transfer of undertakings Act, 1970)
• 1980- 6 more banks were nationalized Banking companies (Acquisition and transfer
of undertakings Act,1980).
• 2018-SBI absorbed 5 banks.
•
Nationalisation of Banks -Advantages & Disadvantages

Advantages

• New source of profit for govt, better control

• Improve the confidence of public
• Avoids concentration of power
• Stabilizing price levels
• Focus on priority sectors
• Checks favoritism
• More branches in rural areas
• Profit replaced by service motive
Disadvantages

• Compensation to shareholders
• Loans to agriculture and small scale industries are risky & less remunerative
• Reduced efficiency of banks
• Weak performance and heavy loss
• Rise of NPA’s.

Case Laws-Nationalisation

• R.C Cooper v. UOI -word undertaking includes entire organization -Constitutional

validity of Banking Co (Acquisition and transfer of undertakings )Act of 1969
was challenged.
• All India Bank Officer’s Confederation v. UOI-objective of the 1980Act is to
nationalize the banks to render the largest good to the largest number of people.
Tara Chand Vyas v. Chairman Disciplinary Authority -economic empowerment is
a fundamental right of the weaker sections of the people
• N. Santhosh v. Indian Overseas Bank-A nationalized bank could be safely treated
as a State within the meaning of Article 12 of the constitution and where a dispute is
related to statutory obligation a writ petition is maintainable.
• Nationalized bank is a public institution, which falls within the meaning of state for
the purpose of enforcement of fundamental rights.
• Federal Bank Ltd. v. Sagar Thomas
• The SC held that a private banking company carrying business in conformity with
the RBI rules and regulations does not perform any govt functions. Hence it is not
equivalent to state or an instrumentality of the state.

Powers of RBI over Banking Companies-Banking Regulation Act

• S 19- Restriction on the nature of subsidiary companies

• S 21- Control advances by banking Co.
• S 22-Granting License
• S.23-Restrictions on opening of new, and transfer of existing places of business
• S35-Inspection of books & accounts
• S 35 A-Power of Reserve Bank to give directions
• S35AA – Power of Central Government to authorize Reserve Bank for issuing
directions to banking companies to initiate insolvency resolution process
• S 35B-Amendment of provisions relating to appointment of managing directors
subject to the approval of RBI.
Part 11A-Control over Management

• S 36 AA-Power of RBI to remove managerial & other persons from Office.

• -in public interest, to prevent business being conducted in a manner detrimental to the
interests of depositors, securing proper management of banking Co.(after giving a
reasonable opportunity)
• S 36 AB-Power of RBI to appoint additional directors.

Part II C-Acquisition of the undertakings of banking Co in certain cases.

• S 36 AE-Power of central govt to acquire undertakings of banking co.(after giving a

reasonable opportunity) in case of breach of directions, business detrimental to the
interest of depositors.
• S 36 AF-Power of Central government to make a scheme.
• S36 AG-Compensation to be given to shareholders of the acquired bank
• S36 AH-constitution of a Tribunal
• Schedule V- fixing compensation

Part III-Suspension of business & winding up of Banking Companies

• S 37-Suspension of Business
• S 38-Winding up by the High Court
• S 38 A- Court Liquidator
• S 39-RBI to be the official liquidator
• S 39 A-Application of Companies Act to liquidators.
• A banking Co can be wound up only with the approval of the RBI.
-Joseph Kuruvilla Vellukunnel v. RBI
• S 41 A- Notice to preferential claimants, secured & unsecured creditors.
• S 43 A-preferential payment to depositors.
• S 44-Powers of High Court in voluntary winding up.
• S 44 A- Procedure for amalgamation of banking companies
• S 44B-restriction on compromise or arrangement between banking co & creditors
(unless approved by the RBI)
• S 45 –Power of RBI to apply to central bank for suspension of business by a banking
company & to prepare a scheme of reconstruction or amalgamation.
• Part IIIA
• Special provisions for speedy disposal of winding up proceedings.

Joseph Kuruvilla v. RBI (AIR 1962 SC1371)

• RBI under sec 38 of the Banking Companies Act applied for winding up of the
plaintiff’s banking business.
• Issues:
-Sec 38 read with Sec 3 (b)(iii) was violative of Art. 14 and 19 (f) and (g) of the
Constitution
-discrimination between banking company and other companies
-Unreasonable restriction on right to carry banking
-Procedure of winding up is arbitrary

Peerless General Finance and Investment Co. Ltd v. RBI

• Notification of RBI regulating Residuary Non-Banking company as per Sec 45 I to L

of RBI Act was challenged
 • The notification required these companies to invest in zero risk securities or deposit
with a public sector bank, amount equivalent to aggregate deposits received under a
scheme.
• Issues
• RBI notification violative of
-Art. 14 for being discriminatory,
-Art. 19(1)(g) for being a restriction on trade
-Violative of sec 45 J and 45K of the RBI Act
• Peerless General Finance and Investment Co. Ltd v. RBI -NBFC directions
issued by RBI was ultra vires of its powers -S 45 J & 45 K of the RBI Act .

• S45K of the RBI Act-. Power of RBI to collect information from non-banking
institutions as to deposits and to give directions.
• 45J- RBI can regulate or prohibit issue of prospectus or advertisement soliciting
deposits of money. The Bank may, if it considers necessary in the public interest so to
do, by general or special order,–
• (a) regulate or prohibit the issue by any non-banking institution of any prospectus or
advertisement soliciting deposits of money from the public; and
• (b) specify the conditions subject to which any such prospectus or advertisement, if
not prohibited, may be issued.
• Judgement-A very wide power is given to the RBI (under Sec 45 J, K and L) to issue
directions in respect of any matters relating to or connected with the receipt of
deposits. It cannot be considered as a power restricted or limited to receipt of
deposits only. Such an interpretation would be violating the language of section
45K (3) which furnishes a wide power to the Reserve Bank to give any directions in
respect of any matters relating to or connected with the receipt of deposits. The
Reserve Bank under this provision is entitled to give directions with regard to the
manner of investing the deposits received.

RBI Act 1934

• Established on 1935 under RBI Act 1934
• Based on the recommendation of Hilton Young Commission.
• RBI was nationalized in 1949 on the basis of the RBI(Transfer to Public Ownership)
Act 1948.All shares were transferred to the Central Govt on paying suitable
compensation.
Board of RBI-Governor and max 4 Dy. Governor appointed by Central govt. Sec.8 (1) (a)
1. 4 directors nominated by Central Govt- Sec 8 (1) (b)
2. 10 Executive Directors- Sec 8 (1) (c)
3. 2 Government officials nominated by CG under Sec 8 (1) (d)
• Local Boards- Sec 9(1) of RBI – Mumbai, Calcutta, Madras and New Delhi
• Management - Sec 7 of RBI Act, 1934
Functions of RBI
• Issuer of currency in India
• Banker to the government
• Banker to Commercial Banks
• Organizer of commercial Banking System
• Regulator & Supervisor of Financial system
• Monetary authority
• Control over money & credit policies
• Controls the volume of credit
• Authority to regulate & supervise payment systems
• Manager of foreign exchange
• Maintains the value of currency
• Development of rural banking
• Money & capital market
• Promotion of financial institutions, regulator for them.
RBI-Banker to the Government
• Sec 17 (1), (5)- accepting deposits, collecting money, advancing loans
• Sec 20- transacting government business
• Sec 21- right to transact government business in India
• Sec 21 A- Banker for State Government
• Sec 45- agents for the bank
• Banker to other banks-Sec 17 (1)- accepting deposits and collection of money
• Sec 18- Power of discount – regulation of credit in the interest of trade, commerce,
industry and agriculture
• Sec 42 (1) - Cash reserves of scheduled banks to be kept with the bank
• Scheduled banks: Sec 2 (e) , Sec 42 (6) (a)
RBI Act -provisions related to currency issue
• Sec 22- Right to issue bank notes
• Sec 24- Denominations of notes
• Sec 27- Re-issue of notes
• Sec 28- Recovery of notes lost, stolen, mutilated or imperfect
• Sec 28 A- Issue of special bank notes and special one rupee notes in certain cases
• Sec 29- no stamp duty on bank notes
• Sec 31- issue of demand bills and notes
• Sec 38- obligation of govt. and bank in respect of rupee notes
• Other powers-Sec 40- custodian of exchange reserves
• Chapter IIIA, Sec45C and D- collection of data and publications
Monetary & Credit Control Policy
• Qualitative Methods- Selective Credit control Sec 21 of Banking Regulations Act,
• Quantitative Methods-
• Repo rate and reverse Repo rate- Sec 17 (12AB) and Sec 45 (U)
• Bank rate- Published under Sec 49 of RBI
• CRR and SLR-variable reserve ratio
• Open Market Operations
• Market Stabilisation Scheme