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Understanding Indian Banking Sector
& Banking Institution’s Regulation

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Dr. Nandimath Omprakash V.,
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Professor in Law,
National Law School of India University,
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Bangalore-560 072
Email – ovnandimath@nls.ac.in
• Banking Regulation Act, 1949

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N
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What are the functions of a bank?

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N
The functions of bank

• Acceptance of Deposits

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• Advancing loans
• Investment of funds
Promote use of cheques

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•
• Other agency functions
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– Banking related agency functions
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– Other utility agency functions
Acceptance of deposits

• Two types of deposits

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– Demand deposits; and
– Time deposits
• However now there are many hybrid

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deposits are also available
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N
Advancing of loans

• Advances can be broadly classified as

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– Advances with security
– Advances without security

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N
Investment of funds
• Besides loans & advances – banker also
invest a part of its surplus funds in

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government securities
• In India, the banks are mandated to
invest a part of their funds in government

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and other approved securities
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• Though the returns are not high – funds
are ‘near liquid’ but also ‘secure’ for risk
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perspective
Agency functions – banking related
• Transfer of funds

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• Collecting customer’s funds (cheques)
• Purchase & sale of shares and securities (for
its customers)

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• Collecting dividends on the shares of the
customers
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• Payment of premia
• Acting as trustee and executor
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• Income tax consultancy

Agency functions – utility related
• Safe custody of valuable goods

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• Issuing of travelers’ cheque
• Giving information about its customers on
various issues

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• Collection of statistics
• Accepting bills of exchange on behalf of
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customers
• Underwriting of company debentures
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• Giving advice on financial matters

 I.U
Indian banking sector – its evolution &
development

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N
• British brought the modern concept of
banking to India

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• But the concept of ‘banking’– was known to
us

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– Banking was used in synonymous with money lending
– Vedic literature records the details of banking
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transactions
– Manusmrithi speaks about – deposits, pledge, loans
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and interest rates etc.,
– Sons ‘pious obligation’ – to discharge the loan of the
father
The beginning of Indian ‘modern banking’

• Bank of Hindustan in 1770 [when

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Alexander & Co., agency house started]
• The Bank of Calcutta [ established by East
India Company in 1806]

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• The break-through in 1860 – introduction
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of limited liability to banks
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The interim period of 1906 to 1913
• The influence of ‘swadeshi movement’ –
the following banks were started

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– Peoples Bank of India Ltd.,
– The Bank of India Ltd.,

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– The Central Bank of India Ltd.,
– Indian Bank Ltd.,
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– The Bank of Baroda Ltd.,
• The period ended with the crash of 1913-
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17 overtaking these initiatives

Establishment of Imperial Bank

• Three presidency banks of Calcutta,

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Bombay and Madras were merged into
Imperial Bank
• Vide the Imperial Bank of India Act, 1920

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• The same became State Bank of India
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later
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Establishment of Reserve Bank of India
• It was given the right of note issue

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• Was also to act as ‘bankers bank’ – the
function which it took-over from Imperial
Bank

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• However, Imperial Bank was allowed to
operate as the agent of RBI, especially in
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those places where RBI had no branches
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• Initially RBI was a shareholder’s bank – but
was nationalized in 1948
Establishment of State Bank of India

• Vide State Bank of India Act, 1955 [which

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overtook Imperial Bank]
– The bank which commands approximately 25% of
total banking sector business

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– With highest bank network in India
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N
SBI Subsidiaries

• SBI (Subsidiary Banks) Act, 1959

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– The Bank of Bikaner
– The Bank of Indore
– The Bank of Jaipur

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– The Bank of Mysore
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– The Bank of Patiala
– The Bank of Travancore
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– The Bank of Hyderabad
The banking scenario @ 60s
• Overall mismanagement of banks

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• Major chunk of advances to
– Large;
– Medium; and

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– Big industrial houses only
• Uncovered priority sectors like
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– Small scale industries;
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– Agriculture;
– Exports etc.,
The banking scenario @ 60s

• Composition of bank management

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– Industrialist directors
– Conflicting interests with their ventures
– Indiscriminate lending to their ‘own’ industrial

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establishments
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N
The immediate response

• Introduction of ‘social control’

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• Approach
– Establishment of National Credit Council (NCC)
– Legislative Control through amendment to the

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Banking Regulation Act, 1949
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N