BANKING LAW

NABARD: Functions, Roles & Achievements

National Bank for Agriculture and Rural Development (NABARD) was established on July 12, 1982 with the
paid up capital of Rs. 100 cr. by 50: 50 contribution of government of India and Reserve bank of India.        
It is the apex banking institution to provide finance for Agriculture and rural development.   National Bank for
Agriculture and Rural Development (NABARD) was established on July 12, 1982 with the paid up capital of Rs. 100
cr. by 50: 50 contribution of government of India and Reserve bank of India. It is an apex institution in rural credit
structure for providing credit for promotion of agriculture, small scale industries, cottage and village industries,
handicrafts etc.

Functions of NABARD:
NABARD was established as a development bank to perform the following functions:

1. To serve as an apex financing agency for the institutions providing investment and production credit for promoting
various developmental activities in rural areas;

2. To take measures towards institution building for improving absorptive capacity of the credit delivery system,
including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions and training of
personnel;

3. To coordinate the rural financing activities of all institutions engaged in developmental work at the field level and
liaison with the Government of India, the State Governments, the Reserve Bank and other national level institutions
concerned with policy formulation; and

4. To undertake monitoring and evaluation of projects refinanced by it.

5. NABARD gives high priority to projects formed under Integrated Rural Development Programme (IRDP).

6. It arranges refinance for IRDP accounts in order to give highest share for the support for poverty alleviation
programs run by Integrated Rural Development Programme.

7. NABARD also gives guidelines for promotion of group activities under its programs and provides 100% refinance
support for them.

8. It is setting linkages between Self-help Group (SHG) which are organized by voluntary agencies for poor and needy
in rural areas.

9. It refinances to the complete extent for those projects which are operated under the ‘National Watershed
Development Programme‘and the ‘National Mission of Wasteland Development‘.

10. It also has a system of District Oriented Monitoring Studies, under which, study is conducted for a cross section of
schemes that are sanctioned in a district to various banks, to ascertain their performance and to identify the constraints
in their implementation, it also initiates appropriate action to correct them.

11. It also supports “Vikas Vahini” volunteer programs which offer credit and development activities to poor farmers.

12. It also inspects and supervises the cooperative banks and RRBs to periodically ensure the development of the rural
financing and farmers’ welfare.

13. NABARAD also recommends about licensing for RRBs and Cooperative banks to RBI.
14. NABARD gives assistance for the training and development of the staff of various other credit insti¬tutions which
are engaged in credit distributions.

15. It also runs programs for agriculture and rural development in the whole country.

16. It is engaged in regulations of the cooperative banks and the RRB’s, and manages their talent acquisition through
IBPS CWE conducted across the country.

Role of NABARD:
1. It is an apex institution which has power to deal with all matters concerning policy, planning as well as operations
in giving credit for agriculture and other economic activities in the rural areas.

2. It is a refinancing agency for those institutions that provide investment and production credit for promoting the
several developmental programs for rural development.

3. It is improving the absorptive capacity of the credit delivery system in India, including monitoring, formulation of
rehabilitation schemes, restructuring of credit institutions, and training of personnel.

4. It co-ordinates the rural credit financing activities of all sorts of institutions engaged in developmental work at the
field level while maintaining liaison with Government of India, and State Governments, and also RBI and other
national level institutions that are concerned with policy formulation.

5. It prepares rural credit plans, annually, for all districts in the country.

6. It also promotes research in rural banking, and the field of agriculture and rural development.

Some of the milestones in NABARD's activities are:

Business Operations:
1. Production Credit: NABARD sanctioned aggregating of 66,418 crore short term loans to Cooperative Banks and
Regional Rural Banks (RRBs) during 2012-13, against which, the maximum outstanding was 65,176 crore.
2. Investment Credit: Investment Credit for capital formation in agriculture & allied sectors, non-farm sector
activities and services sector to commercial banks, RRBs and co-operative banks reached a level of 17,674.29 crore as
on 31 March 2013 registering an increase of 14.6 per cent, over the previous year.
3. Rural Infrastructure Development Fund (RIDF)
Through the Rural Infrastructure Development Fund (RIDF) 16,292.26 crore was disbursed during 2012-13. A
cumulative amount of 1,62,083 crore has been sanctioned for 5.08 lakh projects as on 31 March 2013 covering
irrigation, rural roads and bridges, health and education, soil conservation, drinking water schemes, flood protection,
forest management etc.

New Business Initiatives:

1. NABARD Infrastructure Development Assistance (NIDA):
NABARD has set up NIDA, a new line of credit support for funding of rural infrastructure projects. The sanctions
under NIDA during the year 2012-13 was 2,818.46 crore and disbursement was 859.70 crore.
2. Direct refinance assistance to CCBs for short term multipurpose credit:
Direct refinance assistance to CCBs was conceived and additional line of finance for CCBs in the light of
recommendations of the “Task Force on Revival of Short Term Rural Cooperative Credit Structutre, which enables
the latter to raise financial resources other than from StCBs. During 2012-13, refinance assistance aggregating 3,385
crore was sanctioned to 42 CCBs and disbursement stood at 2,363.45 crore.
Now it can be conclude that the Agricultural & rural development is totally dependent on the efficiency of the
NABARD, which is doing its job as per the requirements of the economy.

NABARD is an apex Development Bank authorised for providing and regulating credit and other facilities for the
promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other
rural crafts and other allied economic activities in rural areas with a view to promote integrated rural development and
prosperity and for matters connected therewith.
History

Reserve Bank of India (RBI), constituted a committee (Shivaraman committee) to review the arrangements for
institutional credit for agriculture and rural development (CRAFICARD) on 30 March 1979, under the Chairmanship
of Shri B.Sivaraman, former member of Planning Commission, Government of India to review the arrangements for
institutional credit for agriculture and rural development. NABARD was established with an initial capital of 100 cr.,
on 12 July 1982 by a special act of parliament 1981, by transferring the agricultural credit functions of RBI and
refinance functions of the then Agricultural Refinance and Development Corporation (ARDC). NABARD replaced
the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of Reserve Bank of India, and
Agricultural Refinance and Development Corporation (ARDC)
NABARD’s activities are governed by a Board of Directors. The Board of Directors are appointed by the Government
of India in harmony with NABARD Act 1981. It has its headquarters in Mumbai. Government of India holds 99%
stake and RBI holds 1% (initially 72.5%) stake in NABARD.

Objectives

More than 50% of the rural credit is disbursed by the Co-operative Banks and Regional Rural Banks. NABARD is
responsible for regulating and supervising the functions of Co-operative banks and RRBs. NABARD works towards
providing a strong and efficient rural credit delivery system, capable of taking care of the expanding and diverse credit
needs of agriculture and rural development.

Functions of NABARD

Credit Functions:

 Framing policy and guidelines for rural financial institutions.

 Providing credit facilities to issuing organizations
 Monitoring the flow of ground level rural credit.
 Preparation of credit plans annually for all districts for identification of credit potential.

Development Functions:

 Help cooperative banks and Regional Rural Banks to prepare development actions plans for themselves.
 Help Regional Rural Banks and the sponsor banks to enter into MoUs with state governments and cooperative
banks to improve the affairs of the Regional Rural Banks.
 Monitor implementation of development action plans of banks.
 Provide financial support for the training institutes of cooperative banks, commercial banks and Regional
Rural Banks.
 Provide financial assistance to cooperative banks for building improved management information system,
computerisation of operations and development of human resources.

Supervisory Functions:

 Undertakes inspection of Regional Rural Banks (RRBs) and Cooperative Banks (other than urban/primary
cooperative banks) under the provisions of Banking Regulation Act, 1949.
 Undertakes inspection of State Cooperative Agriculture and Rural Development Banks (SCARDBs) and apex
non- credit cooperative societies on a voluntary basis.
 Provides recommendations to Reserve Bank of India on issue of licenses to Cooperative Banks, opening of
new branches by State Cooperative Banks and Regional Rural Banks (RRBs).
 Undertakes portfolio inspections besides off-site surveillance of Cooperative Banks and Regional Rural Banks
(RRBs).

Banker-Customer Relationship
The banker-customer relationship is that of a:

Debtor and Creditor,Pledger and Pledgee,Licensor and Licensee,Bailor and Bailee,Hypothecator and Hypothecatee,

Trustee and Beneficiary,and Principal,Advisor and Client, and Other miscellaneous relationships.
Discussed below are important banker-customer relationships.

1. Relationship of Debtor and Creditor

When a customer opens an account with a bank and if the account has a credit balance, then the relationship is that of
debtor (banker / bank) and creditor (customer).

In case of savings / fixed deposit / current account (with credit balance), the banker is the debtor, and the customer is
the creditor. This is because the banker owes money to the customer. The customer has the right to demand back his
money whenever he wants it from the banker, and the banker must repay the balance to the customer.

In case of loan / advance accounts, banker is the creditor, and the customer is the debtor because the customer owes
money to the banker. The banker can demand the repayment of loan / advance on the due date, and the customer has
to repay the debt.

A customer remains a creditor until there is credit balance in his account with the banker. A customer (creditor) does
not get any charge over the assets of the banker (debtor). The customer's status is that of an unsecured creditor of the
banker.

The debtor-creditor relationship of banker and customer differs from other commercial debts in the following ways:

The creditor (the customer) must demand payment. On his own, the debtor (banker) will not repay the debt. However,
in case of fixed deposits, the bank must inform a customer about maturity.The creditor must demand the payment at
the right time and place. The depositor or creditor must demand the payment at the branch of the bank, where he has
opened the account. However, today, some banks allow payment at all their branches and ATM centres. The depositor
must demand the payment at the right time (during the working hours) and on the date of maturity in the case of fixed
deposits. Today, banks also allow pre-mature withdrawals.

The creditor must make the demand for payment in a proper manner. The demand must be in form of cheques;
withdrawal slips, or pay order. Now-a-days, banks allow e-banking, ATM, mobile-banking, etc.

2. Relationship of Pledger and Pledgee

The relationship between customer and banker can be that of Pledger and Pledgee. This happens when customer
pledges (promises) certain assets or security with the bank in order to get a loan. In this case, the customer becomes
the Pledger, and the bank becomes the Pledgee. Under this agreement, the assets or security will remain with the bank
until a customer repays the loan.

3. Relationship of Licensor and Licensee

The relationship between banker and customer can be that of a Licensor and Licensee. This happens when the banker
gives a sale deposit locker to the customer. So, the banker will become the Licensor, and the customer will become the
Licensee.

4. Relationship of Bailor and Bailee

The relationship between banker and customer can be that of Bailor and Bailee.Bailment is a contract for delivering
goods by one party to another to be held in trust for a specific period and returned when the purpose is ended.

Bailor is the party that delivers property to another.Bailee is the party to whom the property is delivered.

So, when a customer gives a sealed box to the bank for safe keeping, the customer became the bailor, and the bank
became the bailee.

5. Relationship of Hypothecator and Hypothecatee

The relationship between customer and banker can be that of Hypothecator and Hypotheatee. This happens when the
customer hypothecates (pledges) certain movable or non-movable property or assets with the banker in order to get a
loan. In this case, the customer became the Hypothecator, and the Banker became the Hypothecatee.

6. Relationship of Trustee and Beneficiary

A trustee holds property for the beneficiary, and the profit earned from this property belongs to the beneficiary. If the
customer deposits securities or valuables with the banker for safe custody, banker becomes a trustee of his customer.
The customer is the beneficiary so the ownership remains with the customer.

7. Relationship of Agent and Principal

The banker acts as an agent of the customer (principal) by providing the following agency services:

Buying and selling securities on his behalf,Collection of cheques, dividends, bills or promissory notes on his behalf,
and Acting as a trustee, attorney, executor, correspondent or representative of a customer.Banker as an agent performs
many other functions such as payment of insurance premium, electricity and gas bills, handling tax problems, etc.

8. Relationship of Advisor and Client

When a customer invests in securities, the banker acts as an advisor. The advice can be given officially or unofficially.
While giving advice the banker has to take maximum care and caution. Here, the banker is an Advisor, and the
customer is a Client.

9. Other Relationships:

Other miscellaneous banker-customer relationships are as follows:Obligation to honour cheques : As long as there is
sufficient balance in the account of the customer, the banker must honour all his cheques. The cheques must be
complete and in proper order. They must be presented within six months from the date of issue. However, the banker
can refuse to honour the cheques only in certain cases.

Secrecy of customer's account : When a customer opens an account in a bank, the banker must not give information
about the customer's account to others.

Banker's right to claim incidental charges : A banker has a right to charge a commission, interest or other charges for
the various services given by him to the customer. For e.g. an overdraft facility.

Law of limitation on bank deposits : Under the law of limitation, generally, a customer gives up the right to recover
the amount due at a banker if he has not operated his account since last 10 years.

So, these were some important banker-customer relationships.

The relationship between a banker and a customer depends on the type of transaction.
In this banker and customer relationships; both parties have some obligations and rights.
The relationship between banker and customer is not only that of a debtor and creditor.
However, they also share other relationships.
Banker
The term banking may define as accepting of deposit of money from the public for the purpose of lending or investing
investment of that money which are repayable on demand or otherwise and with a draw by cheque, draft or order.
Features of Banking

1. The definition of banking describes the following features of banking.

 A banking company must perform both of the essential functions.
 Accepting of deposit.
2. Lending or investing the same: The phrase deposit of money from the public is significant. The bankers accept
a deposit of money and not of anything else. The world public implies that a banker accepts deposit from anyone
who offers his/her money from such purpose.
3. The definition also implies the time and made to withdrawing of the deposit. The deposit money should be
repayable to the depositor on demand made by the letter or according to the agreement reached between the two
parties.

Related: Bank is an Agent, Trustee, Executor, Administrator for Customers

Customer
A person who has a bank account in his name and for whom the banker undertakes to provide the facilities as a banker
is considered to be a customer.
To constitute a customer the following requirements must be fulfilled;

1. The bank account may be savings, current or fixed deposit must be operated in his name by making a
necessary deposit of money.
2. The dealing between the banker and customer must be of the nature of banking business. The general
relationship between banker and customer:

Types of the Relationship between Banker and Customer

The relationship between banker and Customer are categorized into three;

1. Relationship as debtor and creditor.

2. Banker as a trustee.
3. Banker as an agent.
4. Other special relationship with the customer, obligations of a banker

Relationship as Debtor and Creditor

On the opening of an account, the banker assumes the position of a debtor. A depositor remains a creditor of his
banker so long as his account carries a credit balance.
Relationship with the customer is reserved as soon as the customer account is overdrawn. Banker becomes a creditor
of the customer who has taken a loan from the banker and continues in that capacity fills the loan is repaid.
Banker as a Trustee
Ordinally a banker is a debtor of his customer in the report of the deposit made by the letter but in certain
circumstances, he acts as trustee also.
A trustee hold holds money or asset and performs certain functions for the benefit of some other person called the
beneficiary.
For example;
If the customer deposits securities or other values with the banker for the safe custody, the letter acts as a trustee of his
customer.
Banker as an Agent
A banker acts as an agent of his customer and performs a number of agency functions for the conveniences of his
customer. For example, he buys or sells securities on behalf of his customer, collects cheques on his behalf and makes
payment of various dues of his customer.
Special relationship with customer/obligation of a banker:
Through the primary relationship between a banker and his customer is that of a debtor and a creditor or vice versa,
the special features of this relationship as a note above impose the following additional obligations on the banker.
The obligation to honor the cheques
The deposit accepted by a banker is his liabilities repayable on demand or otherwise. The banker is therefore under a
statutory obligation to honor his customer’s cheque in the usual course.
According to section 31 of the negotiable instruments. Act 1881 the banker is bound to honor his customer’s cheque
provided by following conditions are fulfilled:

 Availability of sufficient fund of the customer.

 The correctness of the cheque.
 Proper presentation of the cheque.
 A reasonable time for collection.
 Proper drawing of the cheque.

The obligation to maintain the secrecy of the customer accounts

The banker is an obligation to take utmost care in keeping secrecy about the account of his customer.
By keeping secrecy is that the account books of the bank will not be thrown open to the public or government,
officials if the following reasonable situation does not occur,

1. Discloser of information required by law.

2. Discloser permitted by bankers practice and wages. The practice and wages customary amongst banker permit
disclosure of certain information and the following circumstances.
 With express or implied consent of the customer.
 Banker reference.
 Duty to the public to disclose.

Bank is an Agent, Trustee, Executor, Administrator for Customers

Modern commercial bank beside performing the main functions that are accepting deposit and lending money covers a
wild range of financial and non-financial services to the customers and the general public.
The services are as follows:

1. Agency service,
2. Banker as a trustee,
3. Banker as an executor,
4. Banker as administrator.

Banker as an Agent
The banker act as the agent of his customer in performing the following functions:

1.
1. Payment and collection of subscription, dividends, salaries, pensions etc.Bankers make payments
and receive money on behalf of their customer in the following ways:
 Payment of insurance premium.
 Payment of membership subscription to club, library, and professional association
 Payment of rents and salaries.
 Collections of dividends on behalf of customers.
 A collection of pension, rents etc.
 Transfers of tunas from one account to another.
The banker charges a nominal amount for this service. For doing this service the banker should get clear
instructions in writing from customers.The instructions of the customer should be clear and not be end
uncertain loans which give rise to controversial meaning. The banker may not accept the instructions
which are difficult to comply with but once accepted it is the duty of the banker to carry out the
instructions.
2. Purchases and sales of securities: Banker undertakes to purchase and sell shares and debentures of
joint stock Company on behalf of his customer only.Whenever the customer delegates the work to the bank
the banker should get clear and precise instructions in special forms used for this purpose. The form should
contain the following things:
 The particulars of securities to be sold or purchased.
 The minimum and maximum price at which the securities are to be sold or purchased.
 The period within which they are to be sold or purchased.
 The names, addresses of the persons in whose name they are to be registered.
 In executing this services the banker act as an agent of his customer. Only members of the
stock exchange can sell or purchase of securities.As the bank is not the members of the stock exchange
they appoint brokers who act as sub-agents of the bank to carry out the instructions.
3. Acting as an attorney:Power of attorney may be given by a customer to the Tanker. By granting
power of attorney, the customer authorized the banker to receive dividends and interest on securities belonging
to him and give a valid discharge, therefore.

Related: How a Banker’s Lien is an Implied Pledge

Banker as a Trustee
A person may desire that after his death, a part or whole of his property be held in a trust for the benefit of various
beneficiaries named in the will.
In such a case he may create a trust under his will directing a certain person to hold the property to such persons after
a specified time. When the bankers take the liability to administrate of this type of property he will be called trustee.
Related: Difference between Pay Order and Demand Draft
Banker as an Executor
A person may make will expressing his intention regarding the disposal of his property after his death. A will has to be
in writing, signed by the person making the will which called trusted and attested by two witnesses.
A will becomes effective only after it is approved by the court as a private. A private is a copy of the will duly certify
under the seal of the court together with a grant administrator.
The person appointed as an administrator of the deceased is known as executor. The bank may appoint as an executor
for such service.
Banker as an Administrator
In case a person dies without making a valid will, the property of the deceased may be administered according to law.
The bank may be appointed for the administration of this property and then the banker will be called the administrator.

WINDING UP

Procedure of winding up

For the process of winding up in banking company, Companies Act is not to be followed and power for the same is
with the high court only.

2.1 Winding up by High Court

For the process of winding up S. 391, S.392, S.433 and S.583 is not applicable for banking company. As per S. 37 (1)
of the Banking Regulation Act the High court can order for winding up of a banking company on basis of following
conditions

1. If the banking company is unable to pay its debts; or

2. If an application for its winding up has been made by the Reserve Bank under section 37 or this section.

The Reserve Bank can also make an application under section 38 for the winding up of a banking company if it is
directed so to do by an order under clause(b) of sub-section (4) of section 35.

The Reserve Bank may make an application under this section for the winding up of a banking company-

If the banking company has failed to comply with the requirements specified in section 11; or has by reason of the
provisions of section 22become disentitled to carry on banking business in India; or has been prohibited from
receiving fresh deposits by an order under clause (a) of sub-section (4) of section 35 or under clause (b) of sub-section
(3A) or section 42 of the Reserve Bank of India, Act, 1934.

If the company has failed to comply with any requirement of the Act other than the requirements laid down in section
11, has continued such failure, after notice in writing of such failure or contravention has been conveyed to the
banking company.

When high court order for winding up a liquidator is appointed by the court under S.38A which is as follow

(1) There shall be attached to every High Court a court liquidator to be appointed by the Central Government for the
purpose of conducting all proceedings for the winding up of banking companies and performing such other duties in
reference thereto as the High Court may impose.

(2) Where having regard to the number of banking companies wound up and other circumstances of the case, the
Central Government is of opinion that it is not necessary or expedient to attach for the time being a court liquidator to
a High Court, it may, from time to time, by notification in the Official Gazette, direct that this section shall not have
effect in relation to that High Court.]

39. Reserve Bank to be official liquidator

(1) Notwithstanding anything contained in section 38A of this Act or in section 448 or section 449 of the Companies
Act, 1956 (1 of 1956), where in any proceeding for the winding up by the High Court of a banking company, an
application is made by the Reserve Bank in this behalf, the Reserve Bank, the State Bank of India or any other bank
notified by the Central Government in this behalf or any individual as stated in such application shall be appointed as
the official liquidator of the banking company in such proceeding and the liquidator, if any, functioning in such
proceeding shall vacate office upon such appointment.

(2) Subject to such directions as may be made by the High Court, the remuneration of the official liquidator appointed
under this section, the cost and expenses of his establishment and the cost and expenses of the winding up shall be met
out of the assets of the banking company which is being wound up, and notwithstanding anything to the contrary
contained in any other law for the time being in force, no fees shall be payable to the Central Government, out of the
assets of the banking company.]

When high court appoint a court liquidator, the Companies Act is application to liquidators who is appointed under
Section 38A and 39. The liquidator appointed in such condition will have the same power position that of the official
liquidator for the purpose of winding up process of a banking company.

Voluntary and speedy winding up

3.1 High Court has some power in process of voluntary winding up

For the purpose of voluntary winding up the banking company has to get a letter / certificate from the reserve bank,
that the company is able to pay all their debts to its creditors and court can also keep supervision on such banking
company if it think fit.

3.2 Speedy disposal of winding up for banking company

From S. 44A to 44X deal with this aspect

In case of Baidyanath Bayar v. Berhampore bank Ltd. it was held that High court has exclusive jurisdiction for the
winding up of banking company. The main object of this jurisdiction is speedy realization of claims of the bank

In such condition of winding up the Summary proceedings take place and not the general proceeding. [S. 45B - The
High Court shall, save as otherwise expressly provided in section 45C, have exclusive jurisdiction to entertain and
decide any claim made by or against a banking company which is being wound up (including claims by or against any
of its branches in India) or any application made under 236[section 391 of the Companies Act, 1956 (1 of 1956)] by or
in respect of a banking company or any question of priorities or any other question whatsoever, whether of law or fact,
which may relate to or arise in the course of the winding up of a banking company, whether such claim or question
has arisen or arises or such application has been made or is made before or after the date of the order for the winding
up of the banking company or before or after the commencement of the Banking Companies (Amendment) Act, 1953
(52 of 1953)]

In some condition court can also order for sale of debtor’s property, under Section 45D(7) – [At the time of settling
the list of debtors or at any other time prior or subsequent thereto, the High Court shall have power to pass any order
in respect of a debtor on the application of the official liquidator for the realization, management, protection,
preservation or sale of any property given as security to the banking company and to give such powers to the official
liquidator to carry out the aforesaid directions as the High Court thinks fit.] This was held in the case of Hanuman
Bank Ltd v. P.T.Munia Servai. This is only done when debtor is not paying debt during the process and this done after
serving him a valid notice.

Types of Banks:

1. Commercial Banks:

These banks play the most important role in modern economic organisation. Their business mainly consists of
receiving deposits, giving loans and financing the trade of a country. They provide short-term credit, i.e., lend money
for short periods. This is their special feature.

2. Exchange Banks:
Exchange banks finance mostly the foreign trade of a country. Their main function is to discount, accept and collect
foreign bills of exchange. They also buy and sell foreign currencies and help businessmen to convert their money into
any foreign money they need. Their share in the internal trade of a country is usually small. In addition, they carry on
ordinary banking business too.

3. Industrial Banks:

There are a few industrial banks in India. But in some other countries, notably Germany and Japan, these banks
perform the function of advancing loans to industrial undertakings. Industries require capital for a long period for
buying machinery and equipment. Industrial banks provide this type of Mock capital. Industrial banks have a large
capital of their own. They also receive deposits for longer periods. They are thus in a position to advance long-term
loans.

In India, the Central Government set up an Industrial Finance Corporation of India (IFC1) in 1948. Its activities have
since then been greatly enlarged. Further the States have also set up State Financial Corporations. The Central
Government has also established the Industrial Credit and Investment Corporation of India (ICICI) and the National
Industrial Development Corporation for the financing and promotion of industrial enterprises. In 1964 the Industrial
Development Bank of India (1DBI) was established as the apex or top term-lending institution. These new institutions
fill important gaps in our system of industrial finance.

4. Agricultural or Co-operative Banks:

The main business of agricultural banks is to provide funds to farmers. They are worked on the co-operative principle.
Long-term capital is provided by land mortgage banks, nowadays called land-development banks, while short-term
loans are given by co-operative societies and co-operative banks. Long-term loans are needed by the farmers for
purchasing land or for permanent improvements on land, while short-period loans help them in purchasing
implements, fertilizers and seeds. Such banks and societies are doing useful work in India.

5. Savings Banks:

These banks (perform the useful service of collecting small savings. Commercial banks too run “savings departments”
to mobilise the savings of men of small means. The idea is to encourage thrift and discourage hoarding. Post Office
Saving Banks in India are doing this useful work.

6. Central Banks:

Over and above the various types of banks mentioned above, there exists in almost all countries today a Central Bank.
It is usually controlled and quite often owned by the government of the country.

7. Utility of Banks

An efficient banking system is absolutely necessary for a country, if it is to progress economically. The services that
an efficient banking system can render a country are indeed very valuable. Undeveloped banking system is not only an
index of economic backwardness of a country, it is also an important cause of it. The banking system can be useful in
the following ways, in addition to what has been mentioned in the functions of banks.

(i) The banks create instruments of credit which are very convenient substitutes for money. This means a great saving
Actual movement of money is avoided and expenses saved.

(ii) The banks increase the mobility of capital. They bring the borrowers and the lenders together. They collect money
from those who cannot use it, and give it to those who can. Thus, they help the movement of funds from place to
place, and from person to person, in a very convenient and inexpensive manner.

(iii) They encourage the habit of habit by providing safe channels of investment. In the absence of banking facilities,
people would just squander their funds.
(iv) By encouraging savings, the banks bring about accumulation of large amount of capital in the country from small
individual savings. In this way, they make the resources of the country more productive, and thus contribute to the
general prosperity and welfare, of the country.

Role of Banks in the Economic Development of a Country

The banking system plays an important role in the modern economic world. Banks collect the savings of the
individuals and lend them out to business- people and manufacturers. Bank loans facilitate commerce.

Manufacturers borrow from banks the money needed for the purchase of raw materials and to meet other requirements
such as working capital. It is safe to keep money in banks. Interest is also earned thereby. Thus, the desire to save is
stimulated and the volume of savings increases. The savings can be utilised to produce new capital assets.

Thus, the banks play an important role in the creation of new capital (or capital formation) in a country and thus help
the growth process.

Banks arrange for the sale of shares and debentures. Thus, business houses and manufacturers can get fixed capital
with the aid of banks. There are banks known as industrial banks, which assist the formation of new companies and
new industrial enterprises and give long-term loans to manufacturers.

The banking system can create money. When business expands, more money is needed for exchange transactions. The
legal tender money of a country cannot usually be expanded quickly. Bank money can be increased quickly and used
when there is need of more money. In a developing economy (like that of India) banks play an important part as
supplier of money.

The banking system facilitates internal and international trade. A large part of trade is done on credit. Banks provide
references and guarantees, on behalf of their customers, on the basis of which sellers can supply goods on credit. This
is particularly important in international trade when the parties reside in different countries and are very often
unknown to one another. Trade is also assisted by the grant of loans by discounting bills of exchange and in other
ways. Foreign exchange transactions (the exchange of one currency for another) are also done through banks.

Finally, banks act as advisers, counsellors and agents of business and industrial organisations. They help the
development of trade and industry.

Conclusion:There are special types of banks which provide facilities to different kinds of economic activities. Now-a-
days in every country there is a central bank which controls the activities of all other banks, endeavours to keep the
price level steady, and controls the rates of foreign exchange. The role of banks in economic development is to
remove the deficiency of capital by stimulating savings and investment.

A sound banking system mobilizes the small and scattered savings of the community, and makes them available for
investment in productive enterprises.

In any plan of economic development, capital occupies a position of strategic importance. No economic development
of sizable magnitude is possible unless there is an adequate degree of capital formation. A very important
characteristic of an under-developed economy is deficiency of capital which is the result of insufficient savings made
by the community. Backward economies hardly save 5% of the national income, whereas they should save and invest
at least 15%. The role of banks in economic development is to remove the deficiency of capital by stimulating savings
and investment. A sound banking system mobilizes the small and scattered savings of the community, and makes
them available for investment in productive enterprises. In this connection, the banks perform two important
functions:
(a) They mobilize deposits by offering attractive rates of interest, thus converting savings,, which otherwise would
have remained inert, into active capital.
(b) They distribute these savings through loans among enterprises which are connected with economic development.
In this way, they promote the development of agriculture, trade and industry.

It is difficult to see how, in the absence of banks, could small savings be stimulated or even made possible. It is also
difficult to see who would distribute these savings among entrepreneurs. It is through the agency of the banks that the
community’s savings automatically flow into channels which are productive. The banks exercise a degree of
discrimination which not only ensures their own safety but which makes for optimum utilization of the financial
resources of the community. We see that in India the period of economic development has coincided with a
phenomenal increase in bank deposits—and bank offices.

Thus, the banks have come to play a dominant and useful role in promoting economic development by- mobilising the
financial resources of the community and by making them flow into the desired channels. The Indian banks are now
playing a very active role in fostering economic development of the country.

What are the principal governmental and regulatory policies that govern the banking sector?
The Indian banking sector is regulated by the Reserve Bank of India Act 1934 (RBI Act) and the Banking Regulation
Act 1949 (BR Act). The Reserve Bank of India (RBI), India’s central bank, issues various guidelines, notifications
and policies from time to time to regulate the banking sector. In addition, the Foreign Exchange Management Act
1999 (FEMA) regulates cross-border exchange transactions by Indian entities, including banks.
Summarise the primary statutes and regulations that govern the banking industry.
India has both private sector banks (which include branches and subsidiaries of foreign banks) and public-sector banks
(ie, banks in which the government directly or indirectly holds ownership interest). Banks in India can primarily be
classified as:

 scheduled commercial banks (ie, commercial banks performing all banking functions);
 cooperative banks (set up by cooperative societies for providing financing to small borrowers); and
 regional rural banks (RRBs) (for providing credit to rural and agricultural areas).
Recently, the RBI has also introduced specialised banks such as payments banks and small finance banks that perform
only some banking functions.
The key statutes and regulations that govern the banking industry in India and particularly scheduled commercial
banks are as follows:
RBI Act
The RBI Act was enacted to establish and set out functions of the RBI. It grants the RBI powers to regulate the
monetary policy of India and lays down the constitution, incorporation, capital, management, business and functions
of the RBI.
BR Act
The BR Act provides a framework for supervision and regulation of all banks. It also gives the RBI the power to grant
licences to banks and regulate their business operation.
FEMA
FEMA is the primary exchange control legislation in India. FEMA and the rules made thereunder regulate cross-
border activities of banks. These are administered by the RBI.
Other key statutes
The other key statutes include:

 the Negotiable Instruments Act 1881;

  the Recovery of Debts Due to Banks and Financial Institutions Act 1993;
 the Bankers Books Evidence Act 1891;
 the Payment and Settlement Systems Act 2007;
 the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002; and
 the Banking Ombudsman Scheme 2006.
Public sector banks are regulated by the BR Act and the statute pursuant to which they have been nationalised and
constituted. These include:

 banks constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 or the
Banking Companies (Acquisition and Transfer of Undertaking Act) 1980; and
 the State Bank of India and subsidiaries and affiliates of the State Bank of India constituted and regulated by
the State Bank of India Act 1955 and the State Bank of India (Subsidiary Banks) Act, 1959 respectively.
Unless otherwise specified, this chapter focuses on the regulatory regime governing private sector banks.
Regulatory authorities
Which regulatory authorities are primarily responsible for overseeing banks?
The RBI supervises and is responsible for managing the operation of the Indian financial system. In addition to issuing
regulations and guidelines for banking operations, it also administers the provisions of the RBI Act, the BR Act and
FEMA. It has wide discretionary powers and is authorised to inspect and investigate the affairs of banks and to impose
penalties in the event of non-compliance.
What are the principal regulatory challenges facing the banking industry?
The key regulatory challenges are as follows.
Basel III implementation
Indian banks are required to fully comply with the Basel III Capital Regulations (Basel Regulations) by 31 March
2019. Most of the public-sector banks will need additional capital infusion to meet the higher capital requirements,
which will consequently reduce the return on equity. As a result, government support will be required, which may
exert significant pressure on the government’s fiscal position.
Specialised banking
The RBI has currently granted approximately 10 small finance bank licenses and approximately seven payments of
bank licences. While the RBI has set up the mechanism for the use of these licences, the current provision of these
services seems to be falling short of catering to the unbanked sectors that include rural areas and other underdeveloped
and unorganised sectors. Further reorientation of regulatory and supervisory resources is likely needed to widen access
to these systems, in light of the wider objective of financial inclusion.
Asset quality
The quantity of net non-performing assets (NPAs) of Indian banks has been increasing significantly. The RBI has,
over the years, taken significant measures, both regulatory and structural, in order to tackle this issue. However, the
rise in NPAs continues to be one of the most fundamental threats to the banking sector (see question 24 for a brief on
the measures being taken).
Priority sector lending and NPAs
The RBI requires banks to provide mandatory credit to certain weaker sections of society and sets out targets for the
same. In the past, banks have struggled to meet these targets. These sectors often yield low profits, and they adversely
impact banks’ profitability.
Separately, the agricultural sector (one of the main sectors for priority lending) has a high level of NPAs. The new
measures introduced by the RBI to reduce stressed assets, as mentioned above, do not take into account agricultural
NPAs.
Challenges from the cashless economy
The shift to a cashless economy has brought with it a specific set of issues, which primarily revolve around access.
The RBI has taken concerted measures such as setting up an e-wallet linked to the unique identification number
system (AADHAAR) set up (akin to the social security number structure in the United States) and encouraging
retailers, as well as other local businesses, to provide discounts and cash-back schemes for using electronic means of
payment. There is a severe lack of infrastructure in most parts of the country for such payment systems to be used
regularly, ranging from a functional internet connection to the sophistication of its users. Recently, privacy concerns,
and legal challenges on this basis, have been raised. While these issues are currently being grappled with, there is a
long way to go before India becomes a cashless economy.
Enforcement of the new insolvency regime
The IBC, which was brought into effect in December 2016, has been in operation for a year and a notable shift has
been seen in the approach of the RBI, as well as creditors, in bringing action against defaulters. The National
Company Law Tribunal and the National Company Law Appellate Tribunal have provided judgments that have
helped clarify some points that were unclear in the IBC itself. While the jurisprudence is gradually developing, the
Ministry of Finance has been quick to identify the challenges and update the IBC with regulations aimed to make the
process more efficient. It remains to be seen if the IBC process actually keeps pace with increasing NPAs, therefore
improving the status of banks as creditors within the Indian financial system.
Consumer protection
Are banks subject to consumer protection rules?
Banks in India are subject to consumer protection laws that act as an alternative and speedy remedy to approaching
courts, a process that can be expensive and time-consuming.
The Consumer Protection Act 1986 (the Consumer Protection Act) is the primary legislation governing disputes
between consumers and service providers. The relationship between a bank and its customer is regarded as that of a
consumer and service provider, therefore bringing them under the ambit of the Consumer Protection Act. A three-tier
mechanism has been established to deal with complaints:

 district forum: this operates at the district level and deals with consumer complaints of a value not exceeding 2
million rupees;
 state commission: this operates at the state level and deals with consumer complaints of a value between 2
million rupees and 10 million rupees. It also hears appeals against the orders passed by the district forum; and
 national commission: this operates at the national level and deals with consumer complaints of a value
exceeding 10 million rupees. It also hears appeals against the orders passed by the state commission. An
appeal from the order of the national commission can be directed to the Supreme Court of India.
In addition, banks are also subject to the Banking Ombudsman Scheme for the purpose of adjudication of disputes
between a bank and its customers. The scheme provides for a grievance redressal mechanism enabling speedy
resolution of customer complaints in relation to services rendered by banks. The banking ombudsman is a quasi-
judicial authority appointed by the RBI to deal with banking customer complaints relating to deficiency of services by
a bank and facilitate resolution through mediation or passing an award. A complaint under the scheme has to be filed
within one year of the cause of action having arisen.
Future changes
In what ways do you anticipate the legal and regulatory policy changing over the next few years?
The Financial Resolution and Deposit Insurance Bill 2017 (the Bill) proposes to set up a comprehensive recovery and
resolution regime for the financial sector companies and to substitute the present regime for deposit insurance,
systematically important banks etc. The Bill, if passed and implemented, would amount to a comprehensive reform of
the bank recovery and resolution regulations in India and create a wholly new regime covering the sector. The Bill
contains detailed provisions on monitoring and assessment of banks’ health and proactive planning for distress
scenarios, including insolvency events. The new law will mean a more active monitoring of banks with certain key
powers being transferred from the RBI to the resolution corporation. The Basel III capital norms would also be fully
implemented by 2019, which would mark an end to a long and significant transition phase for the banking sector.
Specialised banks such as payments banks and small finance banks are being set up to promote financial inclusion.
We may see further policy changes to encourage the spread of the banking sector in currently underbanked areas.
With an aim to provide for a consolidated time-bound framework for reorganisation and insolvency resolution of
companies, partnership firms and individuals, the code is being brought into force in a phased manner (see question
6). It is envisaged that the code will be fully implemented by 2017. As an additional measure to protect the interests of
the consumer, the RBI proposes to adopt a comprehensive consumer protection framework in relation to the activities
conducted by all financial institutions (and not just banks). This proposal is currently in the planning stage and there is
no visibility regarding its implementation.
A shift towards a cashless economy has been observed following the demonetisation in November 2016, and the
2017-18 Budget proposes certain additional changes towards this end. By way of example, cash transactions over a
limit of 300,000 rupees have been prohibited subject to certain conditions, there is a strong impetus towards increasing
digital transactions and promoting use of internet-based payment gateways by providing discounts and concessions
specifically to transactions undertaken digitally.
Over recent years, the government has taken several measures to liberalise FDI into India, with a view to promote the
ease of doing business. As stated in question 4, there is a move to permit 100 per cent FDI in private banks. It is
uncertain what regulatory changes will need to be made in case there is a change in the ratio of public and private
sector banks in India with the added value of increased foreign investment.
Supervision
Extent of oversight
How are banks supervised by their regulatory authorities? How often do these examinations occur and how
extensive are they?
The RBI conducts periodic audits and also acts as a consumer disputes ombudsman for retail banking. Based on its
findings, and sometimes suo moto, the RBI also supervises the Indian banking system through various methods such
as on-site inspection, surveillance and reviewing regulatory filings made by the banks.
Each year, the RBI conducts an on-site financial inspection of a bank’s books of accounts, loans and advances,
balance sheet and investments. Following this, the RBI issues supervisory directions to banks highlighting the major
areas of concern. Banks are then required to draw up an action plan and implement corrective measures to comply
with the inspection findings.
The RBI also monitors compliance on an ongoing basis by requiring banks to submit detailed information periodically
under an off-site surveillance and monitoring system. Based on this, the RBI analyses the financial health of banks
between two on-site inspections and identifies banks that show financial deterioration that thereby require closer
supervision.
Additionally, the RBI conducts:

 quarterly discussions with the banks’ executives on issues emanating from analysis of off-site surveillance,
status of compliance with annual inspection findings and new products introduced by banks; and
 bi-annual meetings with the chief executive officers of the banking groups identified as financial
conglomerates.
The RBI has taken special initiatives to supervise weaker banks such as quarterly monitoring visits to banks
displaying financial and systemic weaknesses, appointment of monitoring officers and direct monitoring of problem
areas in housekeeping.
Enforcement
How do the regulatory authorities enforce banking laws and regulations?
The RBI issues directions from time to time to ensure compliance with the banking statutes and rectify non-
compliance, if any. In the case of non-compliance with regulatory requirements, the RBI may impose a variety of
sanctions, including fines, orders for the suspension of a bank’s business and cancellation of the bank’s banking
licence.
What are the most common enforcement issues and how have they been addressed by the regulators and the
banks?
The most common enforcement issues are discussed below:

 Deterioration of asset quality of the banking system: Deteriorating asset quality is often attributable to poor
underwriting by bank staff while undertaking credit appraisal of the projects. The RBI conducts ad hoc asset
quality reviews of banks’ assets. Based on this review, the RBI issues directions to banks for them to comply
 with capital adequacy norms (see question 18). Additionally, the RBI has directed banks to take other
corrective measures such as conversion of debt into equity and has permitted longer repayment schedules for
long-term projects. In light of the demonetisation measures, there is speculation that the asset quality review
that is generally conducted at the end of the financial year will be postposed to the next financial quarter.
 Deficiencies in compliance with know-your-customer (KYC) anti-money laundering (AML) norms by banks:
In 2013, investigations carried out by the Cobrapost media portal exposed serious violation of KYC and AML
norms leading to imposition of a total fine of 500 million rupees by the RBI on 22 banks. To combat such a
breach, the RBI is also considering imposing operational curbs on banks in addition to the monetary fines.
The RBI has advised banks to undertake employee training programmes on KYC and AML policy as
violations have often been attributable to the staff’s lack of familiarity with, and ability to monitor compliance
with, the KYC and AML policy.
 Mis-selling of financial and structured products: A wide range of complex structured financial products were
being sold by banks to unsophisticated customers (such as retail and individual customers) without providing
sufficient information. In 2011, the RBI imposed a total fine of 19.5 million rupees on 19 banks for mis-
selling derivative products to clients and failing to match the complexity of products to clients with
appropriate risk profiles and determining whether clients have appropriate risk management policies prior to
investing in these products. The RBI has framed a Charter of Customer Rights as overarching principles to
protect customers, pursuant to which banks must formulate board-approved customer rights policies and
conduct periodic reviews.
 Internal fraud: In 2015, investigations revealed a sum of 60,000 million rupees being routed to Hong Kong for
non-existent imports through Bank of Baroda, leading to the arrest of certain bank employees. To combat
fraud, the RBI has issued instructions for banks to take corrective measures, such as investing in data analytics
and intelligence, gathering and maintaining internal vigilance and undertaking employee background checks.
Further, a central fraud registry has been established, which acts as a centralised database to detect such fraud.
Some banks have set up internal investigation teams to probe fraud allegations and implement anti-fraud
controls.
 Financial inclusion: For meeting financial inclusion targets, the RBI observed that banks were incorrectly
classifying their contingent liabilities and off-balance sheet items (such as letters of credit, bank guarantees,
and derivative instruments). The RBI asked banks to immediately declassify such credit facilities with
retrospective effect. Failure to meet the priority sector lending targets results in penalties and can hamper
regulatory approvals in the future.
Undercapitalisation
What happens in the event that a bank becomes undercapitalised?
The RBI has a stringent control mechanism for monitoring the financial health and soundness of Indian banks. To this
effect, the RBI has initiated a prompt corrective action plan as a measure to ensure adequacy of a bank’s internal
control system in terms of three parameters: CRAR, net NPA and return on assets (ROA). The RBI has put in place
certain trigger points to assess, control and take corrective action on banks that are weak and troubled. The trigger
points for CRAR are:

 CRAR less than 9 per cent but equal to or more than 6 per cent;
 CRAR less than 6 per cent but equal to or more than 3 per cent; and
 CRAR less than 3 per cent.
Similar trigger points have also been provided with respect to NPAs and ROAs.
Upon hitting any of the trigger points, the banks are required to immediately report to the RBI and simultaneously
implement internal measures to regularise the relevant trigger point. The RBI also has the powers to initiate certain
structured and discretionary actions, which, among others, include implementation of a capital restoration plan,
prohibition on entering into a new line of business, imposing stringent credit and investment strategy controls and
merger or amalgamation of the bank. The RBI also has the ability to impose a moratorium on the bank in the event the
CRAR does not improve beyond 3 per cent, within one year or such extended period as the RBI deems fit.
Insolvency
What are the legal and regulatory processes in the event that a bank becomes insolvent?
The BR Act deals with the provisions relating to insolvency (referred to as ‘winding-up’) of banking companies
(including branches of foreign banks operating in India).
Winding-up (whereby all the affairs of the banking company are wound up, assets are realised, liabilities are paid and
the balance, if any, is distributed to its shareholders in proportion of their holding in the company) can either be
voluntary (by members or creditors of a solvent banking company) or compulsory (by the High Court under whose
jurisdiction the bank operates).
The RBI has the power of winding-up of a banking company. An order for the winding-up of a banking company can
be passed by a High Court:

 if it is unable to pay its debts;

 if an application has been made by the RBI; or
 on request of the GOI.
For winding-up, every High Court appoints a liquidator (as an officer of the court) to manage the assets and liabilities
of a banking company and supervise the liquidation process. The liquidator is required to submit a preliminary report
to the High Court in relation to the assets and liabilities of a banking company and also make a just estimate of the
liabilities of the bank. For this purpose, creditors or depositors are required to provide evidence of the debt owed to
them. Secured creditors are not required to prove their debt. They may choose to stay out of the winding-up
proceedings and claim the amounts owed to them from the secured assets. The secured creditors also have the option
to relinquish their security and to prove their debt in the same manner as an unsecured creditor.
The law relating to the winding-up of a banking company does not apply to government banks (ie, banks largely
owned by the government and classified as government banks under different statutes). A government bank can only
be placed under liquidation by an order and in the manner provided by the GOI. At present, there is also some
ambiguity around the competent forum for filing and prosecuting any insolvency matters covering financial services
providers, including the private banks. Theoretically, it may not be possible to apply for the liquidation of a bank at
the moment without a special notification from the central government.
However, if the inability to pay its debts is temporary, the banking company may apply to the relevant High Court
(accompanied by a report from the RBI declaring its ability to meet its obligations and pay all debts during such
moratorium period) requesting an order of moratorium for staying the commencement or continuation of all actions
and proceedings against it for a period not exceeding six months.
During the moratorium period, if the RBI is of the opinion that the affairs of the banking company are being
conducted in a manner detrimental to the interests of the depositors or if in the opinion of the High Court, the inability
of the banking company to meet its obligations or to pay its debt is not temporary, the court may call for the winding-
up of the company. Note that the RBI would invariably intervene and declare a moratorium on payments rather than
allow the winding-up of banks.
In addition, if the RBI is concerned about the financial health of a banking company, it may make a recommendation
to the GOI in relation to its reconstruction and amalgamation with another banking company (generally a government
bank) and prepare a scheme for the same. The RBI has wide powers and can provide in such a scheme for the
reduction of the interest or rights that the members, depositors and other creditors have in, or against, the banking
company before its reconstruction to the extent as the RBI considers necessary in the public interest or in the interest
of the members. The RBI can also issue a direction to the banking company preventing it from entering into an
agreement or honouring its obligations under any agreement. On sanction by the GOI, the banking company can be
amalgamated under the provisions of the BR Act. In the past few decades, the RBI has been reconstructing or
amalgamating weaker banks with stronger counterparts to avoid winding-up situations.
The Bill is expected to establish clear processes to respond to a bank failure. Among other things, the Bill would
require banks with potential risks to their viability to have recovery and resolution plans. The resolution plan is
proposed to include details of all assets, liabilities, specifics of operations, and possible strategies, etc. As per the Bill,
the resolution corporation will be the administrator of the insolvent bank who will take all the necessary steps to
ensure an orderly and safe resolution and will enjoy wide powers to achieve such objectives.