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Regulating ‘banks’ [Module II & III]

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Dr. O V Nandimath,
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Professor in Law,
National Law School of India University, Nagarbhavi,
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Bangalore-560072
ovnandimath@nls.ac.in
Topics covered …

• The ‘birds-eye-view’ of the Banking Law

paper

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• Introduction to Indian Banking scenario
• Structure & functions of commercial bankers
& financial institutions (in India)

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• The role of law in regulating these
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institutions
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The present module to be covered

• Module II – Reserve Bank of India

• Module III – Law and Banking Regulation

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Why regulate banks?

• Banks may fail and destabilize the economy

• History is evident of that fact

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– Crash of world economy during 1929-33 (i.e.,
the interim period of World Wars)
– Banking crises of 1973-76 in Europe (specifically

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in England, where ‘life boat’ operations were
held)
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– The recent ‘melt-down’
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Objectives of banking sector regulation

• Public confidence in banks

• Stability of individual banks (Avoidance of

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systemic risk)
– By restricting entry norms
– Regulating their working etc.,

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• Prevention of fraud
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• Money laundering and terrorism
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• Consumer protection
Bank regulation in India

• 1968 – social control over banks

• 1969 & 1980 – bank nationalization

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• 1991 – era of liberalization
– Narisimham Committee Report; and

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– Entry of Foreign Banks
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Nationalization

“the nationalization of the commercial banks

was a ‘revolution’ in the Indian Banking

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system. This revolution did not merely signify
a change in the ownership of these Banks but
it was the beginning of a coordinated

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endeavor to use an important part of the
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financial mechanism for the country’s
economic development”
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- M L Tannan, Banking Law & Practice
Entry of foreign banks

• Narsihman Committee
– No more nationalization

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– Recommendation for public issue of shares (up
to 49%),
– The discrimination between public and private

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sector banks to be eliminated
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Bank categorization in India

1. Body corporates under special statutes

1. State Bank of India Act, 1955

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2. State Bank (subsidiary Banks) Act, 1959
3. Regional Rural Banks Act, 1976
4. Banking Companies (Acquisition & Transfer of

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Undertakings) Act, 1970
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5. Banking Companies (Acquisition & Transfer of
Undertakings) Act, 1980
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2. Banking Companies Registered under the
Companies Act

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3. Foreign Banks (those incorporated abroad
& having business in India)
4. Cooperative banks

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The regulatory environment

• Instruments
– The Reserve Bank of India Act, 1934

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– The Banking Regulation Act, 1949
• Institutions
– The Central Bank (RBI)

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– The Central Government; and
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– Courts
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