Student Id: 18010837

BANKING LAW MIDTERM

A1: The recent outbreak of the “bacterial bloom” has trembled the GDP and the overall
economic prosperity of Kargiri as the principal business activities prevailing in the nation of
Kargiri has been put at a halt due to the famines that have occurred in the sea life. These
predicaments have forced the Kargirian Government to formulate a plan to revive the
economy with the aid of structural reforms in the banking sector.
However, it is noteworthy to mention that the current factual position of Kargiri is analogous
to the instance of Bank Nationalisation that was occurred in India wherein 14 private banks
were nationalized on account of maximizing the social welfare of the depositors and the
efficiency of the credit system. The foremost reason behind the nationalization was to revive
India’s economic stability which was obstructed due to the war the country had faced. In
addition, the problem of indiscrete lending of credit primarily to the large enterprises also
raised a need to tackle the situation of inflation and therefore nationalization was executed to
dispense the central bank with the absolute authority and power to commence with the
monetary functions of the Indian economy. Therefore, the adoption of the proposal made
before the Kargirian legislature is significant to address the current crisis.
In my opinion, the first part of the proposed policy which relates to the replacement of
commercial banks with universally available deposit accounts maintained by the KCB should
be adopted keeping in mind the resources incurred by the government in bailing out the
financial institutions in the garb of financial stability. Moreover, it would aid the government
to provide assistance and aid to the common people and small businesses which is in the
direction towards Kargiri’s legislative goal of preventing inflation. This proposal is supported
by the Supreme Court’s ruling in the case of Joseph Kuruvilla 1 where the court held that KCB
as a statutory body is empowered to take any corrective measure for the betterment of the
overall economy. Nevertheless, the KCB would have to work efficiently for the better
implementation of this policy keeping in mind the population size of Kargiri.
Secondly, the proposal of allowing private payment services providers (PSP’s) for the
regulation and checks and balances under the Payment and Systems Settlement Act, 2007 of
KCB is also agreed upon as it may benefit the user experience. However, it should be
regulated under the supervision of the Board for Regulation and Supervision of Payment and
Settlement Systems Regulations, 2008.

1
Joseph Kuruvilla Vellukunnel vs The Reserve Bank Of India, 1962 AIR 1371.

PRAJWAL 1
Lastly, the policies mentioned in clauses (vi) and (vii) may seem problematic as it mainly
deals with the fiscal policy which is entrusted to the government. The KCB Act (RBI Act)
through its preamble clearly enunciates that KCB has been constituted with a view to secure
monetary stability in Kargiri and therefore the empowerment of fiscal policy on KCB would
lead to a conflict of interest and separation of powers among the government and the KCB.
However, it is pertinent to mention that the Kargirian government should make amendments
to certain sections ( Section 7 & 8 for instance) of the KCB Act which directly empowers the
central government to interfere in the functioning of the central bank. In this way, the
independence of the central bank would be maintained while economic stability is being
attained.
Henceforth, the Kargirian government should partially adopt the above-mentioned proposal
in the larger interest of the people.

PRAJWAL 2
A2: In my opinion, the relationship between the KCB and the Government would be severely
impacted if this proposal is to be accepted.
Firstly, there would be a competing conflict of interests between both entities as fiscal policy
generally comes in the realm of the government. Secondly, if the commercial banks get
eliminated from the banking sector then there is a huge possibility that the central
government would invariably influence the working of the KCB by the virtue of Section 7 of
the KCB Act which would be in direct violation of Section 3 of the KCB Act which
categorically mentions that KCB is constituted for the purposes of taking over the
management of the currency from the central government. Such a similar contention was
raised by the Palai Central Bank in the case of Joseph Kuruvilla where Palai alleged that RBI
can be controlled by the central government and courts become powerless.
Therefore, it may be argued that the nationalization of banks in a way gives all the control to
the government regarding the functioning of these nationalized assets which may enhance the
current problem of indiscriminate printing of money under Section 47 of the RBI Act by the
KCB to fund the expenditure of the government. The adoption of the proposal would lead to
a clash of objectives between the KCB and the government and thus independence of the
central bank would be vitiated and the government would control the central banks for its
political whims and fancies. This would go against the legislative intent which essentially
focused on mutual cooperation between the government and the central bank for the benefit
of the people at large. In light of this, Viral Acharya’s statement “Governments that do not
respect central bank independence will ignite economic fire and come to rue the day” 2 gains
a lot of prominence while determining the relationship between the government and the
central bank.
Nevertheless, the KCB and the Kargirian Government must balance these interests for the
efficient and robust banking system that caters to the needs of larger public interest.

2
Viral V. Acharya, On the importance of Independent Regulatory Institutions- The Case of the Central Bank,
Reserve Bank of India (Oct 26, 2018), https://www.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1066.
PRAJWAL 3