Banking Law: Meaning & Applicability

The word "banking law" refers broadly to the laws that control how banks and other financial organizations operate. A bank is a type of financial entity that offers its clients banking and other kinds of financial services. A bank is typically thought of as a business that offers basic banking services like receiving deposits and disbursing loans. A portion of the financial services sector includes banks.

Bank is the term derived from the German word "banck," which means "heap, mound, or joint sock fund." With this, the Italian word "banca," which means "heap of money," was coined.

What is the meaning of Banking Law?

Banking law in India is regulated by the Banking Regulation Act, 1949, which regulates all banking firms in India. The act was enacted to safeguard the interests of the depositors, to control the abuse of powers by controlling the banks by any means necessary, and to further the interests of the Indian economy in general.

"Banking" can be defined as "the business of banking," a vibrant business that continually evolves to meet the latest financial needs and economic conditions. In order to understand how banking evolves, it is important to gain a broad understanding of financial concepts, fundamental banking functions, and the banking business in a technology-driven world.

History of Banking in India

Banking in India has a very special origin; it started with the giving of loans to others. Banking was synonymous with money lending. Manusmirithi speaks of deposits, pledges, loans, and interest rates. Interest could be legally charged between 2% - 5% per month, according to the transaction. The state regulated these transactions to prevent overcharging of interest by the lenders, and collection of usury was not allowed during those periods. The debtor or his family member had a pious obligation to repay the debt to the heir of the deceased person. With the development of trade and commerce, the traders evolved a system of money transfer. The main instrument used in that period was the bill of exchange, or hundi. The Indian bankers acted as treasurers. The Indian bankers acted as treasurers and insurer money changer.

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Year	Evolution and Banking Reforms
Second half of 19th Century	Some exchange banks and Indian joint stock banks were set up.
1900	Nine joint-stock companies, eight exchange banks, and three presidency banks existed.
1921	Imperial Bank of India (IBP) three presidency banks were amalgamated and IBI formed under Companies Act, 1913.
1900-1930	Due to world war and other financial crisis, to maintain stability in financial system the central banks were emerged all around the world.
1934	The Reserve Bank of India was created as the Central bank for India.
1949	The Banking Regulation was enacted to regulation and restructure banks in India.
1950	The Banking Regulation was enacted to regulation and restructure banks in India. Incorporation, regulation and winding up of trading corporations, including banking, insurance and financial corporations, but not including co-operative societies.
1955	The SBI Act was passed in order to convert the Imperial Bank of India into the SBI.
1959	Nationalization of SBI and Associate Banks
1961	Insurance coverage was extended to deposits.
1969 & 1980	Nationalization of Banks, 14 and 6 banks were nationalized.
1971	Creation of credit guarantee corporation, to protect the depositors.
1975	Creation of Regional Rural Banks.
1993	The Recovery of Debts Due to Banks and Financial Institutions Act, 1993.
1993, 2001, 2013	License was given to private bank, foreign bank to start universal banking in India.
2002	The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 This Act makes it possible to recover loans from commercial and personal loans through a public auction.
2013	The Financial Sector Legislative Reforms Commission was constituted under the chairmanship of former Supreme Court Justice B.N. Srikrishna, based on his report on the India Finance Code Bill.
2016	The Insolvency and Bankruptcy Code of 2016 was enacted to prevent multiple contradictory elements in the legal arrangements. The Act has chosen the strategy of repealing many existing laws on bankruptcy and insolvency and writing a clean, modern law that is a simple, coherent, and effective answer to the problems under Indian conditions.
2016	The Banks Board Bureau (BBB) will be a body of eminent professionals and officials, which will replace the appointments board for the appointment of whole-time directors as well as the non-executive chairman of PSBs.
2016	The Monetary Policy Committee was created to take policy decisions.

Significance of Banking Law in India

The significance of banking law is −

• The entire financial industry would not exist without banking. By supplying investment, financing, and infrastructure, it has an impact on the national economy.

• Any nation's economic growth and development depend heavily on the banking industry.

• Computers and microprocessors have made it possible for the majority of banks to operate automatically. It is now simpler and faster to transact with money. Entrepreneurs can easily access extra money for their enterprises because of the easy availability of funds.

• By offering them credit options, the banking sector has also assisted struggling farmers in developing nations.

• Inadequate access to capital, a lack of transparency, the banking industry's size, and its participation in the world economy have all been pointed out as problems with the industry.

Legislation Relating to Banking Laws in India

It is controlled by the government and its agencies in India; banking companies are regulated by the Reserve Bank of India Act, 1934, and the Banking Regulation Act, 1949.

Reserve Bank of India

The Reserve Bank began its activities as a private shareholder's bank before becoming the nation's central bank. The RBI took over from the Imperial Bank of India and began printing currency notes and serving as the government's banker. It was permitted for the Imperial Bank of India to represent the RBI. The RBI encompassed the entirety of independent India. It was planned to nationalize the Reserve Bank as soon as the country gained independence in order to establish a close convergence between Reserve Bank policies and those of the government. The Reserve Bank started operating as a state-owned and state-controlled Central Bank on January 1, 1949. The Government of India passed the Banking Companies Act, 1949, later renamed the Banking Regulation Act, in order to simplify the operation of commercial banks. The RBI serves as a banker to the government, a banker's bank, and a regulator of banks. It utilizes a number of strategies to regulate the nation's financial sector.

Banking Regulation Act, 1949

One of the key legal frameworks is the Banking Regulation Act of 1949. The act was first passed as the Banking Companies Act, 1949, however it was later renamed the Banking Regulation Act, 1949. In addition to the Reserve Bank of India Act of 1935, the Banking Regulation Act of 1949 gives banks a number of regulations covering a wide variety of topics.

Conclusion

The RBI's primary areas of concentration for banking policy have been improving stressed asset resolution, modernizing payment and settlement systems, and adjusting macroprudential laws to the highest standards worldwide. The vision, major goals, and methodology for expanding access to formal, inexpensive financial services, fostering financial literacy, and promoting consumer protection have all been outlined in the RBI's most current National Strategy for Financial Inclusion (2019-2024). In the upcoming years, it is also anticipated that the RBI will keep enacting structural changes to contain inflation by preserving price stability, bringing down capital costs, boosting regulatory coherence across banks and non-banking financial institutions, and cutting capital costs.

Frequently Asked Questions

Q1. What are the important functions of a bank?

Ans: There are two types of functions for banks −

• Primary functions: All banks have to perform two major primary functions, namely, accepting deposits and granting loans and advances.

• Secondary Functions: The secondary functions of a bank are agency functions and utility functions.

Q2. Which was the first bank to be established in India?

Ans: The first bank of India was ‘the Madras Bank,’ which was founded in 1683, followed by Bank of Bombay (1720), Bank of Hindustan (1770), etc. However, the first bank of India, the Madras Bank, later merged into state bank of India.

Q3. What are the main objectives of banking law?

Ans: The objective of banking legislation is to create provisions that can control the banking industry.

Q4. When did the RBI Act enacted?

Ans: The Reserve Bank of India Act commenced on April 1, 1935, for the purpose of operating the credit and currency systems of the country to the fullest.