“Assume you are a lawyer who specialises in banking-related matters.

An intern has
joined you to help you with your winter work. Brief the intern on the workings of a
bank and how it may influence the legal and regulatory framework surrounding it. In
your explanation, highlight why a particular/ special statute relating to banking
companies may have been enacted. You must use theories, examples and illustrations."
The two legislative frameworks that control the banking sector in India are the Reserve Bank
of India Act, 19341 (referred to as the RBI Act) and the Banking Regulation Act, 1949
(known as the BR Act).
The Reserve Bank of India (RBI) was established by the RBI Act, serving as the central bank
of India and the principal regulatory body for the banking industry. The RBI Act and the BR
Act grant the RBI the authority to establish and enforce regulatory policies in India. These
policies encompass a broad spectrum of matters pertaining to the banking and financial
industry, including the issuance of rules, regulations, instructions, and guidelines.
The Reserve Bank of India (RBI) exercises regulatory authority over transactions pertaining
to foreign exchange, current account, and capital account transactions through the authorities
conferred upon it under the Foreign Exchange Management Act of 19992 (FEMA).
In addition, there exist extra legislative measures that govern the banking sector, including:
The legislative measures referred to as the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 3(RDDB Act), the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 4 (SARFAESI Act), the Insolvency and
Bankruptcy Code, 20165 (2016 Code), and the Payment and Settlement Systems Act, 2007
(PSS Act) are of significant importance in the field of financial governance.
The process of official administration often consists of two distinct stages: diagnoses and
restructuring/liquidation. During the diagnostic phase, the official administrator performs
thorough research and evaluates the likelihood of reviving the bank's operations as a viable
entity. During the restructuring phase, many financial and operational measures may be
implemented in an effort to save the banking firm. Liquidation proceedings may be initiated
for any non-viable aspects of the bank's business.
Illustration: -
A unique statute pertaining to banking organisations is the Banking Regulation Act. Adopted
in several nations, India among them, this legislation offers a thorough framework for bank
regulation and oversight. It defines prudential standards, lists bank licencing requirements,
and gives regulatory bodies the authority to monitor banking operations.

Why was then the Banking Regulation Act passed? Stability of the banking system and
protection of depositor interests are two reasons. The act attempts to reduce risks to depositor

1
Reserve Bank of India Act, 1934.
2
Foreign Exchange Management Act of 1999.
3
Recovery of Debts Due to Banks and Financial Institutions Act, 1993/
4
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
5
Insolvency and Bankruptcy Code, 2016.
funds and stop bank collapses by enforcing prudential principles and minimum capital
requirements.

The act also contributes to the preservation of financial stability by enabling regulatory
bodies to step in and take remedial action in financially distressed banks when needed. This
preventive strategy might stop systemic crises and financial contagion from spreading.

To put it briefly, the integrity and stability of the financial system depend on the legal and
regulatory environment surrounding banks. To govern banks, safeguard depositors, and
advance financial stability, special laws such as the Banking Regulation Act are passed. To
properly counsel clients and negotiate the intricacies of the banking sector, a lawyer
concentrating in banking-related issues must have a comprehensive grasp of these rules and
regulations.
Why a company has been enacted in banking sector: -
The primary objective of the Negotiable Instruments Act of 1881 6 is to establish and modify
the legal framework pertaining to promissory notes, bills of exchange, and cheques. The
scope of this phenomenon encompasses the entirety of India, yet having no impact on the
local practices pertaining to musical instruments in Indian languages.
The Banker's Book Evidence Act, 1891 is a significant statute specifically designed for
Bankers in this country. This Act grants banks specific advantages on the method of recording
entries in their books and presenting them in court.
The Preamble of the Reserve Bank of India Act, 1934 7 states that it is necessary to establish a
Reserve Bank of India to oversee the issuance of bank notes and the maintenance of reserves
in order to ensure monetary stability in India and effectively manage the country's currency
and credit system.
According to the Industrial Re-Construction Bank of India Act of 1984, the IRBI is a
financial institution that operates throughout India. Its primary objective is to offer financial
support to both ill and non-sick sectors that require modernization, diversification, and
technical advancements. The organisation was founded in April 1971 amidst the escalating
issue of occupational illness.
The Regional Rural Banks (RRB) were established based on the advice of a working
committee to investigate and address the credit requirements of rural communities. Reserve
Bank of India (RRBs) were founded on October 2, 1975, with an authorised capital of Rs. 5
crores. This capital was divided into 5 lakhs of fully paid-up shares of Rs. 100 each, with
50% subscribed by the Central Government, 15% by the respective State Government, and
35% by the sponsor banks. The Security and Exchange Board of India (SEBI) was
established by the Government of India in 1988. SEBI was granted statutory powers under
the SEBI Act of 1992, with the primary objectives of safeguarding investor interests,
fostering the growth of the security market, and regulating the security market.
6
Negotiable Instruments Act of 1881.
7
Reserve Bank of India Act, 1934.
The basic goal is to guarantee the stability of the financial system. Banks play a crucial role
in the operation of the economy, and any disruption within the banking industry can have far-
reaching consequences, impacting many entities such as enterprises, individuals, and the
broader economy. Governments seek to mitigate systemic risks, bank failures, and financial
crises by implementing regulatory measures through the enactment of particular acts.
Depositor Protection: Special statutes frequently give priority to safeguarding the funds of
depositors. Financial institutions possess a substantial quantity of public deposits, and
safeguarding these monies is vital for upholding public trust and confidence in the financial
system. In order to protect the interests of depositors, statutes may implement various
measures, such as deposit insurance programmes or regulatory mandates for capital
adequacy.
Banking legislation play a crucial role in upholding the integrity and effectiveness of
financial markets. Their role involves establishing regulations and criteria for banking
activities, encompassing lending procedures, risk mitigation, transparency obligations, and
corporate governance. These legislations serve to mitigate market manipulation, fraud, and
misconduct by fostering transparency, accountability, and ethical conduct within the banking
sector.
The implementation of specific legislation facilitates the prudential regulation of banking
operations. These regulations establish criteria and principles for responsible banking
operations, including the management of risk, management of liquidity, and assessment of
asset quality. Statutes seek to strengthen the ability of banks to withstand economic shocks
and reduce threats to financial stability by implementing prudential requirements.
Regulatory Oversight: Regulatory authorities are granted the requisite instruments and
jurisdiction through special statutes to properly oversee and supervise banking activity.
Regulatory agencies have the responsibility of overseeing adherence to legal obligations,
performing inspections and audits, and implementing enforcement measures as needed.
Statutes play a crucial role in ensuring that banks adhere to legal and regulatory norms by
means of regulatory scrutiny.