A bank is a financial institution which accepts deposit for the purpose of lending. In other words, bank is a banking company which trades in money. The word “banking” means the accepting for the purpose of lending or investment of deposit of money from the public repayable on demand. Before Looking into the Indian Banking Law, let us first look into the historical background of Indian Banking system
Indian Banking History
In India, the advancement of the financial framework can be followed back to 1770 when the principal joint-stock bank of Hindustan was set up. In 1806, the Bank of Calcutta was built up where as New Bank of Bombay and Bank of Madras built up in 1840 and 1843 respectively. These three banks (Bengal, Bombay, and Madras banks) amalgamated in 1921 and turn into the Imperial Bank of India.
In the year 1934, The Reserve Bank of India Act was passed which proposed the Reserve Bank of India (RBI) establishment, which is currently known as the Central Bank. RBI had the ability to give notes, and go about as the legislature to the banks. In 1949, the Banking Regulations Act was passed, carrying guideline to the exercises of business banks through RBI.
Banks were nationalized in 1969 and 1980 respectively. This saw the necessary merger of the smaller banks with the bigger ones. There was also the nationwide extension of banks’ branch network; credit deployment reached the rural areas, which in turn led to an increase in resource mobilization.
The most seasoned bank of India, Bank of Calcutta, is still in presence to date as the State Bank of India. It is the most secure and biggest bank in India. As of now, India has a consolidated business, private, and remote banks system of 53,00 branches across the nation, with 17,000 ATMs.
Types and Functions of banks in India
1.Central Bank: Also known as the Reserve Bank of India(RBI).
- Regulate the issue of bank and the keeping of reserve with a view to secure monetary stability in India
- Issues and regulates the issue of currency in India
- Act as a banker to Government and to commercial banks
- Exercises control over the volume of credit created by commercial banks
2. Commercial Banks
- Receiving cash deposit and Issuing loans and advances
- Online bills payments
- Safety lockers and vaults service
- Fund transfer and issuance of banks’ guarantee
3. Special Banks
These particular financial foundations address explicit financial administrations.
- Industrial Banks supply both working and long term capital to industries
- Development Banks offer budgetary help to those engaged with development activities
- Co-Operatives serve independently employed people and smaller ventures.
4. Specific Banks
These banks offer non-banking administrations
- Mutual Funds-Accept stores from individuals, at that point put them in essential and capital markets.
- Insurance &Merchant organizations- These are represented by the Merchant Bankers rules of 1992.
THE INDIAN BANKING LAW
The Banking Regulatory Act of 1949 of India, offers a framework under which Commercial and Cooperative banks in India are administered, managed, and controlled. The Act likewise offers power to Reserve Bank of India (RBI), which works equivalent to national banks the world over, control over banks to:
- Issue and regulate the issuance of currency in India
- Act as a banker to Government and banker’s bank
- Controller of credits. Fix interest rates and also exercise selective credit controls in order to control inflation
- Make compliance of statutory reserves. A scheduled bank is under obligation to keep cash reserve ratio with the Reserve Bank of India
- Collect credit information from banking companies
- Act as a custodian of Foreign exchange
What different capacities does the RBI (national bank of India) have?
The Banking Regulatory Act permits RBI power to:
- Exclusively issue currency notes
- Exclusively issue promissory notes
- RBI accepts deposits from both the central and state governments at no interest.
- Purchasing and discounting of bills of exchange from commercial banks
- Purchase and sell foreign currency from commercial banks
- Provide loans to the state’s financial operations and banks. Extend advances to the central and state governments.
- Buy and sell government securities
- Carry out banking affairs on behalf of the central government and manage the public debt.
The Act and governing Indian Banking Systems are:
1.Reserve Bank of India Act of 1934: The RBI Act was developed to provide power to RBI in case of issuance of currency notes and monitoring of all commercial banks.
2. Bank Regulation Act of 1949: The BR Act gives RBI ability to control and issue licenses to banks; Stipulates the business that the bank of India should take an interest in; gives a framework for the rule and supervision taking everything into account.
3. Foreign Exchange Management Act of 1999-FEMA Act and its rules are constrained by RBI, coordinating cross-periphery trades and activities.
The legalization and the performance of the commercial banking sector in India have improved considerably after enactment of certain Acts discuss further. However, the public sector is hard-pressed by the Non-Performing Assets (NPAs) due to high bad debts levels. The banks can use the courts’ way, which happens to be lengthy, or Lok Adalat (out of court mechanisms).
A NPA occurs when borrower fails to pay its dues for the period of 90 days or Cash credit or overdarft account remains out of order for 90 days or principal and interest is due for half a year or two consecutive harvesting season in case of agriculture loan
Cause of NPAs in India are Poor management policy in sanctioning of loans and credit appraisal,Corruption, Political impedance, Poor enforcement of the law, Lack of mechanisms of sharing credit data,Archaic legal frameworks, guidelines, and methodology
Bank regulators have introduced different recovery mechanism against NPA borrowers, and permit banks and other lending institutions to sell off both business and private properties to recuperate the unpaid credit dues. This is made possible through SARFASI Act, 2002 which provides the authority to sell to secured creditors.
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, established in 2002, gives a road to banks and other lending institutions, recuperate from borrowers any past overdue amount quickly, without going the courts’ way. The Supreme Court of India pronounced the SARFASEI Act constitutional, permitting banks and lending institutions to lodge complaint before DRT simultaneously for recovery of dues.
Debt Recovery Tribunals- SARFAESI
Debt Recovery Tribunals (DRTs) are constituted in many states to help banks and financial institutions recover due debts without having to go through the civil courts, which would be a lengthy process. Lenders can make claim applications to the tribunal against a defaulter. All evidence presented before the DRT is in the form of affidavits.
DRTs, which are governed by the Recovery of Debt Due to Banks and Financial Institutions Act (RDDBFI Act,1993) /RDB Act, create an interactive forum where the borrower and the bank meet for a mutual settlement. Whatever settlement the bank and defaulter agree on and append signatures to, is presented to the court, which then issues orders as per the settlement terms therein. A presiding officer heads the DRT.
SARFAESI law, however, does not apply to unsecured loans, where the debt is below Rs. 1,00,000 or under 20% of the total outstanding and interest. NPAs have adversely affected the Indian banks and the Indian economy in general. Expansion of the SARFASEI scope, which has been seen to perform well in dealing with NPAs, could make the recovery process faster. Unsecured non-performing loan are pursued through the courts.
Insolvency and Bankruptcy Code (IBC)
IBC Act of 2016, was presented and passed by Lok Sabha and implemented by an Act of parliament. IBC came to fruition from the heap up of non-performing bank credits and deferred obligation goals. Insolvency resolution process occurs when a debtor defaults and the creditor gains control over the assets of the debtor
IBC aims to protect the interests of the small investor as a one-stop insolvency solution to a previously tedious process, making business processes less cumbersome. The insolvency process can be initiated by the creditor or debtor, and apply to individuals, partnerships, and companies
The Inolvency process under the Act is for organizations, associations, and for individuals. The Insolvency and Bankruptcy Board of India (IBBI) supervises the proceedings, consists of 10 members from the Ministry of Finance, Ministry of Law, and those from the RBI.
Within 180 days of the start of resolution process, an insolvency professional deals with debtor’s assets and provide all financial information to secured creditors. All the legal action against this debtor will be on hold.
The selected Insolvency Professional forms a committee of all financial creditors, who choose whether to revive the debt and change the payment schedule, or just sell the assets altogether and recover their dues. Failure to decide in 180 days sees the assets liquidated.
RBI advised banks to step up to the plate with respect to insolvency procedures over their borrowers for stressed asset resolution, to assist them with understanding the best qualities for them. RBI suggests that banks can clean their books utilizing IBC.
Customer Protection Law
The 1986 Consumer Protection Act (CPA) is the most huge and far reaching consumer protection enactment in India. The RBI, the Indian financial segment guardian, has compelling authority over every single Indian bank. It can adequately facilitate with the banks through customer support, customer protection, customer education, and banking ombudsman offices; to give a financial framework to its Indian residents that are transparent.
Bank provide a transparent banking system by protecting its customer. The Consumer Education and Protection Department (CEPD) of RBI is setup to redress public grievances against the bank.
The bank has a role to play in consumer protection:
- Make sufficient disclosure on their operations and functions
- Educating customers on the services they offer, technique, and risks involved, as well as the redress options available to the customers.
- Pricing, penalties, fees, and services charge transparency
- Ethical behavior by the providers of financial services as per the RBI purview
- Improve grievances redress mechanisms, for a timely and effective response, and systemic improvement of the cause of the complaints,
- Consumer education, even in rural areas.
- Sensitizing their staff in the frontline of serving customers, on how important customer service is.
- Build a secure electronic banking environment
Banking Ombudsman Scheme,2006
Banking Ombudsman works on the principle of alternative dispute resolution mechanism, propelled in 1995. Reserve bank of India regulates Banking Ombudsman. There are about 20 offices in India where individuals can lodge complaints about the adoption of unfair means by the bankers.
There exists a fiduciary relation between a banker and a customer. However sometimes due to unfair practices, customer looses trust upon the banker. The bank customers reserve a privilege to have honest and reasonable dealings, have proper and indiscriminative treatment and to have redressal of their grievances on time.
However, the quality of service that the banks provide is still wanting, judging from the many complaints that BO scheme receives.
It is notable that with the increase in cybersecurity breaches and data misuse and malware attacks, BO’s role is a challenging one, which has seen a rise in complex complaints in the dynamic banking environment.
Right to Information Act,2005
In India, the RTI Act of 2005 covers all the nationalized, public sector banks, yet not the private banks. Reserve Bank of India is also a public authority and in this way obliged under the RTI to provide information to society.
The objective of RTI Act is to promote transparency and to enable citizens to avail quicker services from government agencies.
Banks had moved to court seeking that RBI doesn’t release banks’ financial, inspection and risk assessment reports under the RTI act. RBI was opposed to the release of this information, citing fiduciary capacity. The court rules that the RBI can revealed information to all RTI applicants, except that which the law excluded. Indian banks have filed for review and recall of this 2015 ruling, and its adjudication is pending
Loopholes in the Indian Banking law
- Branches control- The internal audits and inspections are inefficient in having the Head offices effectively control the branches.
- Investment Banks- These banks, most of them are the principal brokers in the big, corruption deals. This is one of the bank areas needing probing.
- Private and foreign banks that operate in secret, with systems that help their clients mask their account transactions and aiding money laundering.
- There is no mechanism implemented that ensures that the DRTs are accountable and handle cases with speed, and within a given time frame of 6months as the SARFAESI Act dictates.
The Indian banking sector has grown tremendously, and so has competition. Now, customers have a wide choice of banks to pick from.
However, there is still more that needs reviewing in terms of customer protection and the right to information. Those banks that are willing to adapt to what the market dictates; adopt modern technology; be more responsive to the needs of its customers; are transparent and honest in their dealings with the public, will most likely carry the day.