NATURE AND DEVELOPMENT OF BANKING

✅ 1. Definition & Nature of Banking:

Banking is the business of accepting deposits, lending money, and providing other financial
services.

Banks act as financial intermediaries, channeling funds from savers to borrowers.

Essential for economic development, monetary regulation, and public financial trust.

✅ 2. History of Banking:

a. Global History:

Originated in ancient civilizations: Babylon, Rome, Greece.

Modern banking began in Renaissance Italy (e.g., Medici Bank).

Bank of England (1694) and European merchant banks played key roles.

b. Indian Context:

Bank of Hindustan (1770) – first modern bank in India.

Presidency Banks: Bank of Bengal (1806), Bombay (1840), Madras (1843).

Imperial Bank of India (1921), later became State Bank of India (1955).

RBI established in 1935 for regulation.

Nationalization in 1969 and 1980 brought large banks under state control.

Post-1991 reforms led to growth of private and foreign banks.

✅ 3. Indigenous Banking in India:

Existed before colonial rule: moneylenders, shroffs, seths, etc.

Provided credit on trust and customary laws, especially in rural and trading sectors.

Played a major role in economic activities but lacked regulation.

✅ 4. Evolution of Banking in India:

Transition from indigenous to institutional banking.

Rise of commercial banking, RBI control, and financial inclusion.

Emergence of public, private, cooperative, and foreign banks.

✅ 5. Different Types of Banks and Their Functions:

Type of Bank Functions

Central Bank (RBI) / Controls currency, monetary policy, and regulates all banks.

Co-operative Banks / Credit to farmers, small businesses, local groups.

Regional Rural Banks / Serve rural areas and promote agricultural development.

Development Banks / Provide long-term industrial and infrastructure finance (e.g., NABARD,
SIDBI).

Foreign Banks / International banks operating in India (e.g., HSBC, Citibank).

Multi-functional Banks / Offer universal services: banking, insurance, investments, etc.

✅ 6. Multi-functional (Universal) Banks:

Provide combined services like:

Retail and corporate banking

Insurance

Investment banking

Asset management

Example: ICICI Bank, HDFC Bank

✅ 7. Growth and Legal Issues:

Digital transformation: UPI, mobile banking, fintech.

Financial inclusion: PMJDY, rural banking.

Legal challenges:

NPAs and loan defaults

Cybersecurity threats

Customer data protection

Governed by Banking Regulation Act, 1949, RBI Act, 1934, IBA guidelines.

⚖️LAW RELATING TO BANKING COMPANIES IN INDIA

Main law: Banking Regulation Act, 1949

Central bank: RBI

Supervisory authority: Ministry of Finance, SEBI (for listed banks)

✅ 2. Control by Government and RBI:

a. Management Control:

RBI approves appointment/removal of directors and top executives (Sec. 10B).

Can supersede bank boards in cases of mismanagement or failure.

b. Accounts and Audit:

Statutory audit of banks is mandatory (Sec. 30).

RBI may appoint additional auditors or special audits.

Ensures accuracy and prevents fraud.

c. Lending Control:

Banks must follow priority sector lending norms.

Limits set for loan exposure, sectoral allocation, etc.

RBI monitors risk and capital adequacy (Basel norms).

d. Credit Policy Control:

RBI frames monetary policy affecting interest rates and credit flow.

Tools: CRR, SLR, repo rate, bank rate.

Ensures liquidity and inflation control.

✅ 3. Reconstruction and Reorganization:

Under Section 45 of the BR Act, RBI can:

Merge weak banks with stronger ones.

Approve schemes for revival and amalgamation.

Example: Yes Bank restructuring (2020).

✅ 4. Suspension and Winding Up:

RBI can recommend suspension of business if a bank is insolvent or non-compliant.

Court-driven winding up under Sections 38–44 of the BR Act.

✅ 5. Recent Legal Developments:

IBC, 2016 for resolution of bad loans.

RBI’s Prompt Corrective Action (PCA) framework.

Strengthening banking governance and customer protection laws.

🔹 2. Law Relating to Banking Companies in India (10 Marks Answer)

Introduction:

The functioning of banks in India is governed by several laws, the most important being the
Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934. These laws empower
the RBI and the Government of India to regulate and supervise the banking sector.

Control by Government and RBI:

a. Management Control:

RBI approves the appointment, reappointment, and removal of CEOs and board members of
banks.

Ensures that qualified and ethical individuals hold key positions.

Can take over management in case of misgovernance or public interest.

b. Accounts and Audit:

Every banking company must maintain accurate books of accounts (Sec. 29 of BR Act).

Annual audits are mandatory under Section 30.

RBI has powers to order special audits if malpractice is suspected.

c. Lending Control:
RBI monitors how banks lend, especially to ensure priority sector lending (e.g., agriculture,
MSMEs).

Places limits on exposure to single borrowers and sectors.

Introduces norms like Provisioning for NPAs, and Basel capital adequacy requirements.

d. Credit Policy:

RBI uses monetary tools like:

CRR (Cash Reserve Ratio)

SLR (Statutory Liquidity Ratio)

Repo/Reverse Repo Rates

These help regulate liquidity, control inflation, and ensure monetary stability.

Reconstruction and Reorganization:

RBI can initiate bank reconstruction under Section 45 of the BR Act.

Aimed at reviving weak banks or merging them with stronger ones.

Example: Yes Bank crisis (2020) – restructured with SBI and others.

Suspension and Winding Up:

RBI can apply to the High Court to suspend operations or wind up a bank (Sections 38–44).
Suspension occurs in case of insolvency or failure to meet obligations.

DICGC (Deposit Insurance and Credit Guarantee Corporation) insures deposits up to ₹5 lakhs
per account holder.

Recent Legal Developments:

Insolvency and Bankruptcy Code (IBC), 2016: Allows faster resolution of bad loans.

Prompt Corrective Action (PCA): Framework for early intervention when banks show signs of
financial distress.

Focus on corporate governance, cybersecurity compliance, and customer protection.

Conclusion:

The regulatory framework for banks ensures not only financial stability but also depositor
protection and ethical banking. The combined role of the RBI, government agencies, and
legal reforms ensures that Indian banking adapts to global standards and economic needs.