Report on Laws Regulating Banking Sector in India

Report on Laws Regulating Banking Sector in India

Reserve Bank of India Act, 1934
The functions and establishment of RBI are laid down in 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
CA, 2013 mainly regulates the Related Party Transactions (transactions with affiliates). Compliance with the SEBI (LODR) is also necessary for banks which are listed companies. Related parties include:
(i) Directors (or their relatives);
(ii) Key managerial personnel (or their relatives);
(iii) Subsidiaries;
(iv) Holding companies; and
(v) Associate companies.
There are separate thresholds and approval requirements (by the Board of Directors and/or shareholders) for entering into an RTP. Further, disclosure of these RTPS in the annual accounts is a must 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 on an arms-length basis.

Consumer Protection Act, 2019 (CPA. 2019)
The relationship between a bank and its customer is considered to be of a consumer and service provider, and thus CPA becomes applicable. This is an alternative and speedy remedy to approaching courts. A three-tier mechanism has been established to deal with complaints:
(i) District Forum: Operating at the district level with complaint value up to Rs. 2 million.
(ii) State Commission: Operating at the state level with complaint value between Rs. 2 million and 10 million. It is also an appellate authority for orders passed by the District Forum.
(iii) National Commission: Operating at the national level with complaint value more than Rs. 10 million. 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 Supreme Court of India.

Banking Regulation Act, 1949 (BRA, 1949)
The framework for supervision and regulation of all banks is provided by the Banking Regulation Act, 1949. This legislation further confers the power to RBI to regulate the business operations of banks and also grant them licenses.
In addition, banks are prohibited from entering into certain RPTs under the BR Act. For example, a bank cannot give loans or advances to, or on behalf of, or remit any amounts due to it by:
(i) Any of its directors (or spouse or minor children of such a director);
(ii) Any partnership firm in which any of its directors is interested as a partner, manager, employee or guarantor;
(iii) 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 500,000 rupees or 10 percent of the paid-up capital of the company, whichever is lower; and
(iv) Any individual with respect to whom a director is a partner or a guarantor.
(v) 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  (FEMA, 1999)
FEMA and its rules were made with the purpose of regulating and monitoring cross-border activities of banks that are administered by RBI. The primary legislation for the control of exchange is FEMA.

Bankers Books Evidence Act, 1891 (BBE, 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 (NI 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 by the NI Act.  Legal protection under 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 (RDDBFI, 1993)
The banks (and other financial institutions) which are registered with 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  (PSS Act, 2007)
All the modes of payment systems used in India are governed and regulated by the PSS Act, 2007.  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 (SARFAESI, 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 helps in determining the limitation period as well as enables the banks to enforce their rights under the SARFAESI Act, 2002, and also initiate recovery proceedings in Debt recovery Tribunals.

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

Insolvency and Bankruptcy Code, 2016 (IBC, 2016)
RBI has the power to issue directions to any banks in the matter to commence the insolvency resolution process under IBC, 2016 with relations to any default in loan. 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 resolution Process in order to revive the entity or take further actions of 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 related to 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.

S. No. Basis of Difference RDDBFI SARFAESI IBC
Trigger Amount
The default of 
Rs. 10 Lakh 
or more
Amount of default as
owed to a
secured creditor
Minimum default of 
amount of Rs. 1 Lakh 
to file an application
More than 2 Years
1-2 Years
180-330 Days
Types of
Creditors Covered
Secured & Unsecured
Operational and Financial Creditor 
which include secured and unsecured creditor