Banking Laws

Here are the banking laws of India.

Reserve Bank of India Act, 1934

The functions and establishment of the Reserve Bank of India (RBI) are laid down under the RBI Act which provides the RBI to manage its own constitution, incorporation, capital management, business, and functions. The RBI is also conferred with the power to regulate the monetary policy of India.

Companies Act, 2013

The Companies Act, 2013 mainly regulates the related party transactions (transactions with affiliates). For more details on Companies Act, read our company law page. Compliance with the Securities and Exchange Board of India (SEBI) Listing Obligations and Disclosure Requirement (LODR) is also necessary for banks which are listed companies. Related parties include:

  • Directors (or their relatives);
  • Key managerial personnel (or their relatives);
  • Subsidiaries;
  • Holding companies; and
  • Associate companies.

There are separate thresholds and approval requirements (by the Board of Directors and/ or shareholders) for entering into a related party transaction. Further, disclosure of these related party transactions in the annual accounts is mandatory and must be abiding the Indian generally accepted accounting principles. All transactions between a bank and a subsidiary or mutual fund sponsored by it should be at an arms-length basis.

Consumer Protection Act, 2019

The relationship between a bank and its customer is considered to be of a consumer and service provider, and thus the Consumer Protection Act, 2019 (CPA) becomes applicable. This is an alternative and specialised remedy for people to approach courts. A three-tier mechanism has been established to deal with complaints:

  • District Forum: Operating at the district level.
  • State Commission: Operating at the state level. It is also an appellate authority for orders passed by the District Forum.
  • National Commission: Operating at the national level. It is also an appellate authority for orders passed by State Commission. An appeal from the order of the national commission can be directed to the Hon’ble Supreme Court of India.

Banking Regulation Act, 1949

The framework for supervision and regulation of all banks is provided under the Banking Regulation Act, 1949. This legislation further confers the power to the RBI to regulate the business operations of banks and to also grant them licenses.

In addition, banks are prohibited from entering into certain related party transactions under the Banking Regulation Act, for example, a bank cannot give loans or advances to, or on behalf of, or remit any amounts due to it by:

  • Any of its directors (or spouse or minor children of such a director);
  • Any partnership firm in which any of its directors is interested as a partner, manager, employee or guarantor;
  • Any company or subsidiary or holding company of a company in which any of its directors is interested as a director, managing agent, manager, employee or guarantor, or in which a director (together with its spouse and minor children) holds the interest of more than INR 5,00,000/- (Rupees Five Lakhs Only) or 10 percent of the paid-up capital of the company, whichever is lower; and
  • Any individual with respect to whom a director is a partner or a guarantor.
  • An approval from the board of the bank will be required for any loans given to relatives of any directors of that bank or directors or relatives of directors of any other bank.

Foreign Exchange Management Act, 1999

The Foreign Exchange Management Act, 1999 (FEMA) and its rules were made with the purpose of regulating and monitoring cross-border activities of banks that are administered by the RBI. The primary legislation for the control of exchange is FEMA.

Bankers Books Evidence Act, 1891

The Act is applicable in the event where the judge orders a party to inspect and take copies of the books of the bank. Negotiable Instruments Act 1881

Banks deal with various negotiable instruments in order to provide banking services to their customers. These can include Cheques, Demand Drafts, Bill of Exchange, etc. The duties and responsibilities of a paying bank, as well as collecting such Negotiable Instruments, are governed under the Negotiable Instruments Act, 1881.  Legal protection under the NI Act can only be availed if the banks have adhered to the provisions laid down by the Act.

Recovery of Debts Due to Banks and Financial Institutions Act, 1993

The banks (and other financial institutions) which are registered with the RBI have the duty to provide loans to legal entities and other borrowers (individuals). They also have the power to recover these loans or any unpaid amount, including interest and part of any loan or if the debts become Non-Performing Assets (NPA). This recovery can be made by approaching the appropriate Judicial forum.

Payment and Settlement Systems Act, 2007

All the modes of payment systems used in India are governed and regulated by the Payment and Settlement Systems Act, 2007 (PSS).  The RBI has been conferred with the power to direct and regulate the payment systems as well as its participants in India. The Act also governs and regulates activities which involve payment and settlement of the transaction in substitute of paying or settling a transaction by cash or other means of physical movement of payment instruments to settle a transaction.

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

Documentation enables a bank to determine the borrower, capacity, security, and type of charge created. This documentation also serves as a piece of evidence in recovery proceedings before a court of law. This documentation also help in determining the limitation period as well as enables the banks to enforce their rights under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), and also initiate recovery proceedings before the Debt Recovery Tribunals (DRTs).

Banking Ombudsman Scheme, 2006

If there is any dispute existing between a bank and its customers, then they are adjudicated under the Banking Ombudsman Scheme, 2006. The Banking Ombudsman is an authority appointed by the RBI and is quasi-judicial in nature. It deals with customer complaints against banks in relation to lack of services rendered by them and facilitates resolution through mediation or by passing an award.

Insolvency and Bankruptcy Code, 2016

The RBI has the power to issue directions to any banks in the matter to commence the insolvency resolution process under Insolvency and Bankruptcy Code, 2016 (IBC) with relations to any default in loans. However, this can only be done when the RBI is authorized by the Central Government to issue such directions.

If banks have provided a person with any loan, they fall within the ambit of Financial Creditor and constitute the Committee of Creditors for taking a decision on the resolution plan and the resolution process in order to revive the entity or take further actions pertaining to liquidation or bankruptcy.

Complexities between RDDBFI, SARFAESI, and IBC

IBC, 2016 is a more streamlined procedure of dealing with stressed assets as it unifies all the laws dealing with bankruptcy. The Code focuses on ‘Creditor-in-control’ rather than ‘Debtor-in-possession’. It has been designed in such a way that it unites the provisions of the SARFAESI, the RDDBFI, the Code of the Civil Procedure, etc.