4

BANKING LAW AND PRACTICE

Foreign commercial banks are the branches in India of the joint stock banks
incorporated abroad. These banks, besides financing the foreign trade of the
country, undertake banking business within the country as well.
Public sector in Indian banking reached its present position in three
stages first, the conversion of the then existing Imperial Bank of India into the
State Bank of India in 1955 followed by the establishment of its seven
subsidiary banks ; second, the nationalisation of 14 major commercial banks in
July 1969 and last, the nationalisation of 6 more commercial banks on April 15,
1980.
Differences between State Bank and Nationalised Banks
(1) Though all the 28 public sector banks are corporate bodies, but the
statutes under which they were established are different. The State Bank of Indi
a
was established under the State Bank of India Act, 1955, the subsidiary banks
under the State Bank of India (Subsidiary Banks) Act, 1959, and the nationalised
banks under the Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1970. These banks are, therefore, governed by their respective statutes.
(2) The cent per cent ownership of the 20 nationalished banks vests in the
Government of India, whereas the State Bank of India is owned, to a larger
extent, by the Reserve Bank of India there is still some private ownership in
the share capital of the Slate Bank. The subsidiary banks are owned by the State
Bank of India.
(3) The State Bank of India acts as an agent of the Reserve Bank of India.
According to Section 45 of the Reserve Bank of India Act, 1934 "the Reserve
Bank shall appoint the State Bank as its sole agent at all places in India where
it
does not have an office or branch of its Banking Department and there is a
branch of the State Bank or branch of a subsidiary bank." The nationalised
banks have not been conferred with this privilege of acting as agent of the
Reserve Bank. Since the enforcement of the Banking Laws (Amendment) Act,
1983, the Reserve Bank has been empowerd to appoint any nationalised bank to
act as its agent at all places in India where it has a branch for the following
purposes:
.(i) paying, receiving, collecting and remitting money, bullion and
securities on behalf of any government in India; and
(ii) undertaking and transacting any other business entrusted by the Reserve
Bank from time to time.
THE CO-OPERATIVE BANKS
The co-operative banks also perform the basic functions of banking but
differ from the commercial banks in many aspects as follows:
(1) The commercial banks have been organised either as joint stock
companies under the Companies Act, 1956, or as public corporations under
separate Acts of Parliament. The co-operative-banks have been established under
the Co-operative Societies Acts of different States.
(2) The co-operative banks have a three-tier set-up. The State Co-operative
Bank is the apex institution in a State, while Central/District co-operative ban
ks
BANKING SYSTEM IN INDIA
5
function at the district level and Primary Credit Societies work at the village
level. The commercial banks are organised on a unitary basis.
(3) Only the State Co-operative Banks have access to the Reserve Bank of
India, whereas every commercial bank which is a scheduled bank is entitled to
avail of the refinance facilities from the Reserve Bank.
(4) Co-operative banks function within a given area. Their operations are
restricted to a particular State in case of a State/Apex Bank, a particular dist
rict
in case of a district co-operative bank and to a local area in case of a society
.
The commercial banks, on the other hand, function over a wide area which is not
limited by the boundaries of a particular State or district. Most of them have
branches over a number of States and many of them all over the country.
(5) Till 1969 the commercial banks were urban-oriented and financed
organised trade and industry. The co-operaitve banks have been basically rural-
oriented and have been financing agricultural and allied activities.
(6) The commercial banks are governed by all the sections of the Banking
Regulation Act, 1949, but only some of the sections of this Act are applicable
to co-operative banks. Thus the control of the Reserve Bank is partial over the
co-operative banks.
(7) Co-operauve banks proceed on the principles of co-operation, whereas
commercial banks function on sound business principles. The former arc
therefore, granted accommodation at concessional rates by the Reserve Bark.
THE REGIONAL RURAL BANKS
The Regional Rural Banks are relatively new banking institutions
which were added to the Indian banking scene since October, 1975.
There are 196 Regional Rural Banks with a network of branches
in the States of the Indian Union. These banks have been established by the
Government of India in terms of the provisions of the Regional Rural Banks
Act, 1976. The distinctive feature of a rural bank is that though it is a separa
te
body corporate with perpetual succession and common seal, it is very closely
linked with the commercial bank which has sponsored the proposal to establish
it. The Central Government while establishing a rural bank at the request of the
commercial bank specifies the local limits within which it shall operate. The
rural bank may establish its branches or agencies at any place within the notifi
ed
area
The necessity of rural banks was felt because the then existing credit agencies
the co-operative banks and the commercial banks lacked in certain respects in
meeting the needsof the rural areas. The weaknesses of these institutions in
this regard may be summed up as follows :
(i) The co-operative credit structure is weak so far as the managerial talent
and post-credit supervision and loan recovery arc concerned. These institutions
have not been able to mobilise adequate resources and therefore depend upon the
Reserve Bank for re-finance to a large extent
(ii) The commercial banks are basically urban-oriented. If they have to
play a significant role in rural banking, their methods, procedures, training an
d
orientation shall have to be adapted to the rural environment. This is not likel
y
to be achieved easily and quickly. Moreover, the cost of their operations is qui
te