Course: CBIL-01 Banking Laws In India Vardhaman Mahaveer Open University, Kota 1 Course: CBIL-01 Banking Laws In India Vardhaman Mahaveer Open University, Kota 2 Course Development Committee CBIL-01 Chairman Prof. L. R. Gurjar Director (Academic) Vardhaman Mahaveer Open University, Kota Convener and Members Convener Dr. Yogesh Sharma, Asso. Professor Prof. H.B. Nanadwana Department of Law Director, SOCE Vardhaman Mahaveer Open University, Kota Vardhaman Mahaveer Open University, Kota External Members: 1. Prof. Satish C. Shastri 2. Prof. V.K. Sharma Dean, Faculty of law, MITS, Laxmangarh Deptt.of Law Sikar, and Ex. Dean, J.N.Vyas University, Jodhpur University of Rajasthan, Jaipur (Raj.) 3. Dr. M.L. Pitaliya 4. Prof. (Dr.) Shefali Yadav Ex. Dean, MDS University, Ajmer Professor & Dean - Law Principal, Govt. P.G.College, Chittorgarh (Raj.) Dr. Shakuntala Misra National Rehabilitation University, Lucknow 5. Dr Yogendra Srivastava, Asso. Prof. School of Law, Jagran Lakecity University, Bhopal Editing and Course Writing Editor: Course Writer: Dr. Yogesh Sharma Dr Visvas Chauhan Convener, Department of Law State P. G. Law College, Bhopal Vardhaman Mahaveer Open niversity, Kota Academic and Administrative Management Prof. Vinay Kumar Pathak Prof. L.R. Gurjar Vice-Chancellor Director (Academic) Vardhaman Mahaveer Open University, Kota Vardhaman Mahaveer Open University, Kota Prof. Karan Singh Dr. Anil Kumar Jain Director (MP&D) Additional Director (MP&D) Vardhaman Mahaveer Open University, Kota Vardhaman Mahaveer Open University, Kota Course Material Production Prof. Karan Singh Director (MP&D) Vardhaman Mahaveer Open University, Kota Production 2015 ISBN- All right reserved no part of this book may be reproduced in any form by mimeograph or any other means, without permission in writing from the V.M. Open University, Kota. Printed and published on behalf of V.M. Open University, Kota by Director (Academic) Printed by……… 3 Vardhaman Mahaveer Open University, Kota Banking Laws in India Unit No. Unit Name Page No. Unit – 1 History of Banking Law 7 Unit – 2 The RBI Act, 1934-I 35 Unit – 3 The RBI Act, 1934-II 62 Unit – 4 The Indian Banking System 98 Unit – 5 The Banking Regulation Act-I 121 Unit – 6 The Banking Regulation Act-II 146 Unit – 7 Negotiable Instrument Act, 1881-I 172 Unit – 8 Negotiable Instrument Act, 1881-II 205 Unit – 9 Banking Ombudsman 226 Unit – 10 Bank Frauds 253 Unit – 11 Development Banks 281 Unit – 12 Debt Recovery Tribunal 311 Unit – 13 The SARFAESI Act, 2002 334-357 4 CBI-1 Introduction This Course is conceived and produced for the students of Certificate Program in Banking and Insurance Laws who need to study the different basic aspects of Banking Laws. It will provide understanding, skill and elementary knowledge of Banking Laws. It will train learner for career as Banking Officer, Agents or professionals. Course will also inculcate the understanding of Banking Laws at state and national level and it will provide some other regulatory dimensions in Banking Laws field. This Block contains Thirteen Units. First Unit will introduce students with the meaning of Bank and Banking, its historical development and laws in India before independence and after independence along with the nature of banking also. This Second unit deals with the Reserve Bank of India Act, 1934. It informs about the Establishment and incorporation of Reserve Bank in India along with the business which the Bank may transact and the business which the Bank may not transact. The Third Unit again deals with the Reserve Bank of India Act, 1934 which informs about the functions of Central Bank. It also informs students about the Provisions Relating to Non-Banking Institutions receiving deposit and Financial Institutions and the Power of Bank to determine policy and issue directions to other banks in India. Unit Four will introduce students with the Indian Banking System and the Nationalization of the various Banks. It apprises students with History of Banking Regulation Act, 1949 along with Present Banking Structure and its related issues. Unit Five also helps in knowing the provisions of Banking Regulation Act, 1949 which informs about the Forms of business in which banking companies may engage and Power of Reserve Bank to control advances by banking companies. Unit Six will explain students about the other provisions of Banking Regulation Act, 1949. It apprises about Production of documents of confidential nature and Power of the Reserve Bank to give Directions. It also informs about Suspension of Business and winding up of the Banking Companies along with Court Liquidator and Reserve Bank to be Liquidator and the Powers of High Court in winding up etc. Unit seventh will introduce students with The Negotiable Instruments Act, 1881. It informs about the Negotiable Instruments, Promissory Note and Hundies etc. How the Payments of these are made? Unit Eight explains who is Holder and what are his Rights and Duties? It also explains about the Stop Payment and Payment of Post Dated Cheques along with the liabilities of Drawer and Drawee. 5 Unit Nine will explain students about the meaning, need and importance of Banking Ombudsman. It will help you in recognizing the role of Banking Ombudsman in protection and promoting of Banking. Unit Ten deals with Bank Frauds its kinds and how they shall be reported and How Police and CBI shall deal with them. Unit Eleven will explain students about the meaning, need and importance of Development Banking in India. It gives account various development Banks of India. Provisions of the National Housing Bank established under the National Housing Act, 1987 has been explained separately. Unit Twelve deals with importance and concept of debt recovery tribunal established under Debt Recovery Tribunal Act, 1993. It explains the Modes of Recovery of Debts. It also explains the Powers and functions of the Registrar for that. Unit Thirteen deals with The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 with Registration of securitization companies or reconstruction companies along with Power of Reserve Bank to determine policy and issue directions in this regards. 6 Unit-1 History of Banking Laws Objectives: After going through this unit you should be able to understand: the development of the banking system the development of banking laws the present banking system Structure: 1.1. Introduction 1.2. Origin of ‘banking’ 1.3. Evolution of Legislative Regulation of Banking in India 1.4. Banking Structure and relevant Theories 1.5 Small Financial Institutions 1.6. Indian Experience with Small Banks- A Journey Banking Models 1.7. Structure of Universal Banking Model 1.8. Global Development on structural reform 1.9. Competition and Licensing of Banks in India 1.10. Legal Framework for Banking 1.11. Summary 1.12. Some Useful Books 1.13. Check Your Progress 1.14. Answer to Check Your Progress 1.15. Terminal Questions 1.1. Introduction: Institutional Evolution of the Indian Banking: The indigenous system of banking had existed in India for many centuries, and catered to the credit needs of the economy of that time. The famous Kautilya Arthashastra, which is ascribed to be 7 dating back to the 4th century BC, contains references to creditors and lending. For instance, it says “If anyone became bankrupt, debts owed to the state had priority over other creditors”. Similarly, there is also a reference to “Interest on commodities loaned” (PRAYOG PRATYADANAM) to be accounted as revenue of the state. Thus, it appears that lending activities were not entirely unknown in the medieval India and the concepts such as ‘priority of claims of creditors’ and ‘commodity lending’ were established business practices. During the period of modern history, however, the roots of commercial banking in India can be traced back to the early eighteenth century when the Bank of Calcutta was established in June 1806 –which was renamed as Bank of Bengal in January 1809 – mainly to fund General Wellesley’s wars. This was followed by the establishment of the Bank of Madras in July 1843, as a joint stock company, through the reorganization and amalgamation of four banks viz., Madras Bank, Carnatic Bank, Bank of Madras and the Asiatic Bank. This bank brought about major innovations in banking such as use of joint stock system, conferring of limited liability on shareholders, acceptance of deposits from the general public, etc. The Bank of Bombay, the last bank to be set up under the British Raj pursuant to the Charter of the then British East India Company, was established in 1868, about a decade after the India’s first war of independence. The three Presidency Banks, as these were then known, were amalgamated in January 1921 to form the Imperial Bank of India, which acquired the three-fold role: of a commercial bank, of a banker’s bank and of a banker to the government. It is interesting to note here that merger of banks and consolidation in the banking system in India, is not as recent a phenomenon as is often thought to be, and dates back to at least 1843 – and the process, of course, still continues. With the formation of the Reserve Bank of India in 1935, some of the central banking functions of the Imperial Bank were taken over by the RBI and subsequently the State Bank of India, set up in July 1955, assumed the other functions of the Imperial Bank and became the successor to the Imperial Bank of India.1 1 The Special Address delivered by Shri V Leeladhar, Deputy Governor, Reserve Bank of India at the Bankers’ Conference (BANCON) 2007 on November 26, 2007 at Hotel Taj Lands End, Mumbai. 8 1.2. Origin of the ‘Banking’: Origin of ‘Banking’ the first bank was probably the religious temples of the ancient world wherein gold was stored in the form of easy-to-carry compressed plates.