BANK LEGISLATION

Define Bank
• “An establishment for the custody of money
which it pays out on a customer’s order”.
Evolution

• The origin of the word ‘bank’ in the modern

sense, to the German word “Banck” which means,
heap or mound or joint stock fund. From this, the
Italian word “Banco” meaning heap of money was
coined.
Thus, the origin of the word bank can be traced as follows :

• Banck - German (Joint stock fund)

• Banco – Italian (Heap of money)

• Bancus/Banque – French (Bench, a place where valuables are kept)

• Bank – English (common meaning prevalent today, i.e. as an institution

accepting money as deposit for lending)
Banking Regulation Act, 1949
• InIndia, the Banking Regulation Act, 1949,
under which banks are regulated by the
Reserve Bank of India, defines ‘banking as an
activity of accepting of deposit, which shall be
repayable on demand from the depositor’.
The origin of modern banks is traced to
three important sources. They are :

1. the goldsmith
2. the money lenders, and
3. the merchant bankers
Development of Banking in India
East India Company laid the foundations for modern banking in the first half of the
19th century with the establishment of the following three banks:
i) Bank of Bengal in 1809
ii) Bank of Bombay in 1840
iii) Bank of Madras in 1843

These banks are also known as “Presidency Banks” and they functioned well as
independent units.
During the last part of 19th century and early phase of 20th century, the Swadesh
movement induced the establishment of a number of banks with Indian Management.
For ex.
1. Punjab National Bank Ltd in 1895
2. The Bank of India Ltd in 1906
3. The Canara Bank Ltd in 1907
4. The Bank of Baroda Ltd in 1908
5. The central Bank of India in 1911

And many more, but most of the weak banks went bankrupt due to wrong policy
decisions taken by the management and due to the severe banking crisis during 1913-
1918, the period of World War I.
• In 1920, the “imperial bank of India Act”, was passed for amalgamating the three
Presidency Banks. As such, the imperial Bank of India’, was established in 1921.
• It was given power to hold Government funds and manage the public debt.

On the basis of recommendation of ‘Banking Enquiry Committee, The Reserve Bank

of India Act as passed in 1934. Accordingly,
The “Reserve Bank of India” was constituted in 1935 to regulate the issue of Bank
notes, securing monetary stability in India and to operate the currency and credit
system of the country to its economic development.
• In 1955, the ‘state Bank of India Act’ was passed. Accordingly the ‘Imperial Bank’ was nationalized
and the ‘State Bank of India’ emerged with the objective of extension of banking facilities on a large
scale, specifically in the rural semi-urban areas and for various other public purposes.

• In 1959, the state bank of India Act was passed. The following banks were made the subsidiaries of
state bank of India.
• The State Bank of Bikanur,
• The State Bank of Jaipur,
• The State Bank of Indore,
• The State Bank of Mysore,
• The State Bank of Patiala,
• The State Bank of Hyderabad,
• The State Bank of Saurashtra,
• The State Bank of Travancore.
In 1969, fourteen major Indian commercial
banks were nationalized
1. Allahabad Bank 8. Indian Overseas Bank
2. Bank of Baroda 9. Punjab National Bank
3. Bank of India 10. Syndicate Bank
4. Canara Bank 11. Union bank of India
5. Central Bank of India 12. United Bank of India
6. Dena Bank 13. United commercial Bank
7. Indian Bank 14. Bank of Maharashtra
Meaning and definition of Banking
• A bank is an institution, which deals with money and credit. Thus
bank is an intermediary, which handles other people’s money both
for their advantage and to its own profit. In other words, a bank is a
factory of credit.

• According to sec 5(1)(b), “Banking means accepting for the purpose

of lending or investment, of deposits of money from the public,
repayable on demand or otherwise and withdrawable by cheques,
order or otherwise.”
Features of Banking
• Dealing in money
• Deposits must be withdrawable
• Dealing with credit
• Commercial in nature
• Nature of Agent
Evolution of Banking Law in
India
• A banking company deals mainly with the money of
large number of depositors who do not have any
control over the affairs of the bank. Hence, there is
a need for proper control over the banks. It is the
responsibility of the Government to safeguard the
interests of the large number of depositors.
The Banking Regulation Act, 1949
• It is the most important Act enacted by the Government to protect the interests of
the people.
• The provision of this Act are in addition to those of Companies Act, 1956 and any
other law like the Contract Act, the Negotiable Instruments Act, the Codes of Civil
and Criminal Procedures , etc.

The commercial banks in India are also regulated by the Reserve

Bank of India Act, 1934
 • Was not adequate and therefore a
The Indian Company
Act 1913 separate legislation was passed in 1949
under the name
• As it was based largely on English banking law. This
Banking
Companies Act was again renamed as Banking Regulation Act 1966
• Several times amended to cater the needs of the society
Banking Regulation and to remove the loopholes. Another amendment to
Act 1966/1968 introduce ‘social control’ on the banks

Acquisition and Transfer To take over the 14 major commercial banks in India with
of undertaking Act 1970 effect from July 19, 1969, Act was passed in1970
Contd..
To meet the changing requirements of the many enactments such as
• The Public Financial Institution Laws (Amendment) Act, 1975,
• The Regional Rural Banks Act, 1976,
• The Banking Companies (Acquisition and Transfer of Undertakings)Act,
1980 etc. have been passed.
RESERVE BANK OF INDIA ACT, 1934
• This act was passed to establish the Reserve Bank of India, which is the
guardian of the banking system in India. As the Central Bank of the
country, the Reserve Bank of India Act contains provisions concerning the
commercial banks. The Act provides for the classification of banks into
scheduled banks and non-scheduled banks.
• Accordingly, a scheduled bank is one which is included in the second
schedule to the Reserve Bank of India Act, 1934.
As per the conditions laid down in the RBI Act, 1934, a bank
satisfying the following conditions can be included in the
second schedule.

• It must have a paid up capital and reserves of not less than Rupee 5 Lakhs.
• It does not conduct its affairs in the manner detrimental to the interest of
the depositors and
• It must be a state co-operative bank or a company defined in the
companies Act, 1956, or an institution notified by the Central Government
in this behalf or a corporation or a company incorporated by or under any
law in force outside India.
Every Scheduled Banks enjoys following facilities;

1. Scheduled Banks are eligible for obtaining debts/loans on bank rate from

the RBI.
2. Scheduled Banks automatically acquires the membership of the clearing
house.
3. Scheduled Banks get the facility of the rediscount of first class exchange
bills from RBI.
In order to enjoy these facilities, a scheduled banks has to fulfil the obligation
of maintaining statutory reserves with the Reserve Bank. It is not obligatory
on the part of non-scheduled banks to maintain statutory cash reserves with
RBI.
Examples of Scheduled Banks are: 
• Scheduled Commercial Banks in India are categorised in 5 different
groups according to their ownership / nature of operation.
• These bank groups are: 
• (i) State Bank of India
• (ii) Nationalised Banks,
• (iii) Regional Rural Banks,
• (iv) Foreign Banks
• (v) Other Indian Scheduled Commercial Banks (in the private sector).
Example: All local area banks are called the Non-scheduled banks.
Functions of RBI
• Issue currency as well as regulates the issue of currency in India. This power empowers
the RBI to regulate and control money supply in the country.
• The RBI acts as a banker to both the Central Govt and also to the State Govt. The RBI not
only looks after the financial transactions of the Government but also manages the
public debt of the Govt.
• Act as a banker to the commercial banks by keeping and maintaining their accounts just
like the individuals keep their accounts
• In order to maintain price stability, the RBI exercises its control over the volume of credit
created by the commercial banks
• It is also concerned with the development of rural banking, promotion of financial
institutions and development of capital and money markets in India.
Powers of RBI
• As supervisory and controlling authority over banks
• As controller of credit
• As banker to the banks
Banking Regulation Act, 1949
• Comprehensive legislation
• To prevent bank features
• To avoid cut throat competition
• Ensuring balanced development of banks
• Regulation of bank credit and working of banks
• Safeguarding the interests of depositors
• Strengthening the banking system
• Controlling foreign banks
• Providing quick and easy liquidation
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970

• The banking companies (Acquisition and Transfer of Undertakings)Act, 1970, is yet

another legislation passed in India to nationalized the 14 major commercial banks in
India having deposits of more than 50 crores each in 1969.
• As per the provisions of this Act the ownership of the 14 top commercial banks has been
transferred to the govt of India.
• The aggregate deposits of these banks were Rs. 2632 crores and the total number of
branches of these banks were 4130. However the independent entity of these banks has
been protected and they are allowed to have their business in their old names.
• The act provides that the entire capital of the new banks stands transferred to the
Central Govt. According to this act, the general administration and management of the
affairs of each nationalized bank is vested in a Board of Directors consisting of not more
than fifteen members.
• Further, the Act provides that the net profits earned by the nationalized banks are
required to be transferred to the Govt of India.
 The Regional Rural Banks Act, 1976
• The Regional Rural Banks Act, 1976 was enacted on 9th Feb., 1976 with a view to developing
the rural economy of India.
• The act was intended for the development of agricultural, trade, commerce, industry and
other productive activities in rural areas.
• The RRB provide finance mainly to small and marginal farmers, agricultural labourers,
artisans, and small entrepreneurs. The idea of starting RRB was conceived by combining the
strong points of both commercial banks and co-operative banks.
• The RRB act provides for the establishment of the RRB by a sponsor bank with assistance of
the Central govt. As per the provisions of this Act, the sponsor bank has to assist and help
the RRB by subscribing to the share capital of such Regional Rural Bank.
• Further, the sponsor bank has to assist in providing the required managerial and financial
assistance.
The Banking Companies Act, 1980
• The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, was
enacted to replace an ordinance promulgated on 15th April, 1980, nationally six
more banks.
• The banks taken over were commercial banks whose demand and time liabilities
exceed Rs. 200 crores.
• The main provisions of this Act relate to the establishment of new banks, business,
share capital and management of these six banks.
• The banks taken over were : The Andhra Bank Ltd., the Corporation Bank Lts., the
New Bank of India Lts., The Oriental Bank of Commerce Lts., the Punjab and Sind
Bank Ltd., and Vijaya Bank Ltd.
The Negotiable Instruments Act, 1881

• The negotiable Instruments Act, 1881, contains important

provisions relating to the negotiable instruments in which the banks
normally deal. The negotiable instruments mainly concerned are
Promissory Notes, Bills of Exchange and Cheques. It came into
effect from 1st March 1882 and the Act is divided into 17 chapters and
contains 137 sections.
Conclusion
• The Central Government and
• the Reserve Bank of India are the two main authorities in
India, which are responsible for administering the different
provisions of the various legislations passed in respect of
banking companies.

• These two authorities have separate department of banking

to look after all matters concerning the banking industry in
India.
 UNIT –II

Reserve Bank of India Act, 1934 – Role

and Functions of RBI-Credit Control
Reserve Bank of India Act, 1934
RBI Act, 1934, confers upon it the powers to act as:

1. Note issuing authority

2. Banker’s bank
3. Banker to the Government
Reserve Bank as Note-issuing Authority
1. Government of India issues : one rupee notes and coins
2. Reserve Bank issues : Banks Notes

Reserve bank has the sole right to issue bank notes in India. Reserve Bank also
bears the responsibility of exchanging notes and coins into those of other
denominations as required by the public.
Currency Chests :

• The reserve bank has made adequate administrative arrangements for

undertaking the function of distribution of currency notes and coins.
• Currency chests are receptacles (i.e. boxes or containers) in which stocks of new or
reissuable notes are stored along with rupee coins. The currency chests are run by
the Reserve Bank.
• If its payments on a particular day exceed its own balance, it can immediately
withdraw funds from the chest. Likewise, if the funds are in surplus it can deposit
into it any such surplus funds.
Reserve Bank as Banker to Government
• The reserve bank of India acts as banker to the Central and State government.
According to sec 20 it is obligatory for the bank to transact government business
including the management of the public debt of the union.
• The bank also acts as adviser to the Government on important economic and
financial matters.
• The RBI is also authorized to make to the Central and state Govt ways and means
advances which are repayable within 3 months from the date of making the
advances.
Reserve Bank as Bankers Bank
• Reserve Bank is the Banker to the banks----Commercial, co-operative and
Regional rural Banks.
• This relationship is established once the name of the bank is included in the
second schedule to the RBI Act 1934.
As supervisory and controlling Authority
over Bank
• Licensing of banking companies
• Permission for opening Branches
• Power to inspection Banking Companies
• Power to issue Directions
• Control over the Top Management
As controller of Credit
By Changing the statutory requirement regarding maintenance of liquid assets.
SLR (STATUTORY LIQUIDITY RATIO) 25% - 40%
BY issuing directive under section 21
By changing the bank rate and its policy of granting accommodation to the
commercial banks.
As banker to the Bank
• Re-discounting or purchase of eligible bills and
commercial bills, bill for financing agricultural operation,
Bill for financing cottage and small scale industries, bill for trading in govt securities
Foreign bill
• Loans and advances against certain securities
Function of RBI

1. Authority of Issuing Notes

2. Bankers to the Government
• Banker, agent, advisor

3. Banker to the Banks

• Accepts the deposits from the commercial banks
• Supervises them
• Lender to last resort
• Control credit (CRR, SLR, etc.)
• Custodian of foreign exchange reserves