The ICFAI University, Dehradun

ICFAI Law School

Assignment for Banking and Insurance Law

(LL-442)

History of Banking
&
Principles of Insurance

Submitted To
Dr. Susanta K. Shadangi
Associate Professor
ICFAI Law School

Submitted By
Rudresh Kumar Srivastava
B.A.LL.B. (Hons.)
16FLICDDN02047
Introduction

Our banking system is divided into commercial banks (public and private banks), Regional Rural
Banks, Cooperative Banks, etc.

One of the key events that marked the evolution of the Indian banking sector is the
nationalization of banks. The event made way for the Indian economy to get a global position
among the top ten economies in the world.

In this assignment, we seek to discuss the history of banking in India.

The advancement in the Indian banking system can be classified into three different phases.

1. The pre-independence phase, i.e., before 1947

2. After independence phase, i.e. from 1947 to 1991

3. The LPG (1991) era and beyond, i.e. 1991 and beyond

The Pre-Independence Phase 

This phase is categorized by the presence of a considerable number of banks in India. Nearly 600
banks were present in India.

The banking system started with the foundation of Bank of Hindustan in the then capital,
Calcutta (present-day Kolkata) in 1770. The bank ceased its operations in 1832.

Post Bank of Hindustan, many other banks evolved such as the General Bank of India (1786-
1791) and Oudh Commercial Bank (1881-1958), but they did not continue their operations for
long.

Oudh Commercial Bank was the first commercial bank of India.

Some banks of the 19th century continue to operate even now establishing themselves as an
institution of excellence. For example, Allahabad Bank was established in 1865, and Punjab
National Bank was established in 1894. 
Also, some banks such as Bank of Bengal (est. 1806), Bank of Bombay (est. 1840), Bank of
Madras (est. 1843) were merged into one entity.

The new body was called Imperial Bank of India which was later renamed as the State Bank of
India.
In the year 1935, the Reserve Bank of India was commissioned upon the recommendation of the
Hilton Young Commission.

During this phase, due to the failure of the majority of small-sized banks, the confidence of the
public was low, and people continued to engage with money lenders and unorganized players.

After Independence Phase – 1947 to 1991

One of the main features of the period was the nationalization of the bank.
Why was Nationalization Needed? 

 The banks primarily catered to large businesses

 Critical sectors such as agriculture, small-scale industries and exports were lagging

 The moneylenders exploited masses

Thus, in the year 1949, the Reserve Bank of India was nationalized. In two decades, fourteen
commercial banks were nationalized in July 1969 during the reign of Smt. Indira Gandhi.

In 1975, based on the recommendation of the Narasimham committee, Regional Rural Banks
(RRBs) were constituted with an objective of serving the unserved. The primary goal was to
reach masses and promote financial inclusion.

Some other specialized banks were also set up to promote the activities that were required for the
economy.

For example, NABARD was established in 1982 to support agriculture-related work. Similarly,
EXIM bank was built in 1982 for export and import.

National Housing Bank was set up in 1988 for the Housing sector, and SIDBI was established in
1990 for small-scale industries.
Was Nationalization Successful? 

Nationalization was a significant step in the banking sector, and it helped improve people’s
confidence in the system.

Small and critical industries started getting access to capital that helped boost economic growth.
Additionally, the move added to the country’s growth across the global banking sector.

Third phase – The LPG (1991) Era and Beyond

1991 saw a remarkable change in the Indian economy.

The government opened up the economy and invited foreign and private investors to invest in
India. This move marked the entry of private players in the banking sector.

The RBI provided banking license to ten private entities of which some of the notable ones
survived such as ICICI, HDFC, Axis Bank, IndusInd Bank, and DCB.

In 1998, the Narsimham committee again recommended the entry of more private players. Thus,
the RBI provided a license to Kotak Mahindra Bank in 2001 and Yes Bank in 2004.

Nearly after a decade, the third round of licensing took place. The RBI in 2013-14, allowed a
license for IDFC bank and Bandhan Bank.

The story didn’t end here, with an aim to make sure that every Indian gets access to finance, the
RBI introduced two new set of banks – Payments bank and small banks, and this marked the
fourth phase in the banking industry.

1. Payments Bank 

 These banks are allowed to accept a nominal deposit (Rs. 1 lakh per currently).

 These banks are not allowed to provide credit (both loans and credit cards), but can
operate both current account and savings accounts.

 Other services include ATM/debit cards, net-banking, and mobile banking. Bharti Airtel
started first payments’ bank in India.
Following the six most active payments bank currently –

 Aditya Birla Payments Bank

 Airtel Payments Bank

 India Post Payments Bank

 Fino Payments Bank

 Jio Payments Bank

 Paytm Payments Bank

2. Small Finance Bank 

These banks are niche banks, with basic banking service, which include acceptance of deposits
and lending.

The primary objective is to serve the unserved, such as small business units, small and marginal
farmers, micro and small industries, and unorganized sectors.

Following are the small finance bank currently operational in India –

 Ujjivan Small Finance Bank

 Jana Small Finance Bank

 Equitas Small Finance Bank

 AU Small Finance Bank

 Capital Small Finance Bank

 Fincare Small Finance Bank

 ESAF Small Finance Bank

 North East Small Finance Bank

  Suryoday Small Finance Bank

 Utkarsh Small Finance Bank

We believe rapid digitization in banks coupled with the new model of banking will continue to
remain the key theme for the fourth and ongoing phase of the banking industry.

Conclusion 

There has been a big revolution in the banking sector over the years and it is bound to evolve
further. With various steps and new features that the banking industry is introducing, this sector
will grow further.
 Principles of Insurance

The Principle of Utmost Good Faith

 Both parties involved in an insurance contract—the insured (policy holder) and the
insurer (the company)—should act in good faith towards each other.

 The insurer and the insured must provide clear and concise information regarding the
terms and conditions of the contract

This is a very basic and primary principle of insurance contracts because the nature of the service
is for the insurance company to provide a certain level of security and solidarity to the insured
person’s life. However, the insurance company must also watch out for anyone looking for a way
to scam them into free money. So each party is expected to act in good faith towards each other.

If the insurance company provides you with falsified or misrepresented information, then they
are liable in situations where this misrepresentation or falsification has caused you loss. If you
have misrepresented information regarding subject matter or your own personal history, then the
insurance company’s liability becomes void (revoked).

The Principle of Insurable Interest

Insurable interest just means that the subject matter of the contract must provide some financial
gain by existing for the insured (or policyholder) and would lead to a financial loss if damaged,
destroyed, stolen, or lost.

 The insured must have an insurable interest in the subject matter of the insurance
contract.

 The owner of the subject is said to have an insurable interest until s/he is no longer the
owner.

In auto insurance, this will most times be a no brainer, but it does lead to issues when the person
driving a vehicle doesn’t own it. For instance, if you are hit by a person who isn’t on the
insurance policy of the vehicle, do you file a claim with the owner’s insurance company or the
driver’s insurance company? This is a simple but crucial element for an insurance contract to
exist.

The Principle of Indemnity

 Indemnity is a guarantee to restore the insured to the position he or she was in before
the uncertain incident that caused a loss for the insured. The insurer (provider)
compensates the insured (policyholder).

 The insurance company promises to compensate the policyholder for the amount of the
loss up to the amount agreed upon in the contract.

Essentially, this is the part of the contract that matters the most for the insurance policyholder
because this is the part of the contract that says she or he has the right to be compensated or, in
other words, indemnified for his or her loss.

The amount of compensation is in direct proportion with the incurred loss. The insurance
company will pay up to the amount of the incurred loss or the insured amount agreed on in the
contract, whichever is less. For instance, if your car is inured for $10,000 but damages are only
$3,000. You get $3,000 not the full amount.

Compensation is not paid when the incident that caused the loss doesn’t happen during the time
allotted in the contract or from the specific agreed upon causes of loss (as you will see in The
Principle of Proximate Cause). Insurance contracts are created solely as a means to provide
protection from unexpected events, not as a means to make a profit from a loss. Therefore,
the insured is protected from losses by the principle of indemnity, but through stipulations that
keep him or her from being able to scam and make a profit.

The Principle of Contribution

 Contribution establishes a corollary among all the insurance contracts involved in an

incident or with the same subject.

 Contribution allows for the insured to claim indemnity to the extent of actual loss from
all the insurance contracts involved in his or her claim.
For instance, imagine that you have taken out two insurance contracts on your used Lamborghini
so that you are covered fully in any situation. Let’s say you have a policy with Allstate that
covers $30,000 in property damage and a policy with State Farm that cover $50,000 in property
damage. If you end up in a wreck that causes $50,000 worth of damage to your vehicle. Then
about $19,000 will be covered by Allstate and $31,000 by State Farm.

This is the principle of contribution. Each policy you have on the same subject matter pays their
proportion of the loss incurred by the policyholder. It’s an extension of the principle of
indemnity that allows proportional responsibility for all insurance coverage on the same subject
matter.

The Principle of Subrogation

This principle can be a little confusing, but the example should help make it clear. Subrogation is
substituting one creditor (the insurance company) for another (another insurance company
representing the person responsible for the loss).

 After the insured (policyholder) has been compensated for the incurred loss on a piece of
property that was insured, the rights of ownership of this property go to the insurer.

So lets say you are in a car wreck caused by a third party and your file a claim with your
insurance company to pay for the damages on your car and your medical expenses. Your
insurance company will assume ownership of your car and medical expenses in order to step in
and file a claim or lawsuit with the person who is actually responsible for the accident (i.e. the
person who should have paid for your losses).

The insurance company can only benefit from subrogation by winning back the money it paid to
it’s policyholder and the costs of acquiring this money. Anything paid extra from the third party,
is given to the policyholder. So lets say your insurance company filed a lawsuit with the
negligent third party after the insurance company had already compensated you for the full
amount of your damages. If their lawsuit ends up winning more money from the negligent third
party than they paid you, they’ll use that to cover court costs and the remaining balance will go
to you.
The Principle of Proximate Cause

 The loss of insured property can be caused by more than one incident even in succession
to each other.

 Property may be insured against some but not all causes of loss.

 When a property is not insured against all causes, the nearest cause is to be found out.

 If the proximate cause is one in which the property is insured against, then the insurer
must pay compensation. If it is not a cause the property is insured against, then the
insurer doesn’t have to pay.

When buying your insurance policies, you will most likely go through a process where you select
which instances you and your property will be covered for and which ones they will not. This is
where you are selecting which proximate causes are covered. If you end up in an incident, then
the proximate cause will have to be investigated so that the insurance company validates that you
are covered for the incident.

This can lead to disputes when you have suffered an incident you thought was covered but your
insurance provider says it’s not. Insurance companies want to make sure they are protecting
themselves but sometimes they can use this to get out of being liable for a situation. This might
be a dispute where you’ll need a lawyer to help argue for you.

The Principle of Loss Minimization

This is our final principle that creates an insurance contract and the most simple one probably.

 In an uncertain event, it is the insured’s responsibility to take all precautions to minimize

the loss on the insured property.

Insurance contracts shouldn’t be about getting free stuff every time something bad happens.
Therefore, a little responsibility is bestowed upon the insured to take all measures possible to
minimize the loss on the property. This principle can be debatable, so call a lawyer if you think
you are being unfairly judged under this principle.