Banking Regulation in India

INTRODUCTION TO THE ACT REGULATING & CONTROLLING BANKING SERVICES IN INDIA

The Banking Regulation Act, 1949 controls the banking institutions from their birth to death. If any bank has to start business, it cannot do so unless it has obtained a licence under the provisions of Banking Regulation Act,1949 and if it has to close down business, the winding of operations will be as per the provisions of the Banking Regulations Act,1949. Even for the day today banking business, the Banking Regulation Act, 1949 lays down defined areas including provisions for penalties in case of violation by the concerned banks.

The Banking Regulation Act came into effect on 16 March 1949 and it applies to the whole of India. The act was amended by Banking Laws Amendment Act, 1983, The Banking Public Finance Institutions And Negotiable Instrument Laws Amendment Act, 1988 And The Banking Regulation Amendment Act, 1994.

The purpose of enacting the Banking Regulation Act, 1949 was two fold:
1. To consolidate and amend the law related to banking companies.
2. To check the abuse of powers by managers of banks and also to safeguard the interest of depositors and the interest of the country in general.

Regulatory Architecture: Overview of Banking Regulators & Key Regulations

Banking in India is mainly governed by:
1. The Reserve bank of India Act, 1934
2. The Banking Regulation Act, 1949 and
3. The Foreign Exchange Management Act, 1999.

The Reserve Bank of India and the Government of India exercise control over banks from the opening of banks to their winding up by the virtue of powers conferred under the statutes. All the regulatory provisions are not uniformly applicable to all the banks. The applicability of the provisions of the three acts to a bank depends upon its constitution, that is whether it is a statutory corporation, a banking company or a cooperative society. To understand this further, let us first explore the types of banks in India.

TYPES OF BANKS IN INDIA

1. Central Bank (Known as Banker’s Bank)

The national bank of India is known as RBI. It is a bank whose responsibility it is to direct and control the nation's banking system. Being a government bank, it rarely does business with the ordinary population. Every time one of the other banks has a problem, it offers advice. It prints banknotes and provides the government with recommendations on different monetary and credit policies.

Reserve Bank of India (RBI) is the key regulator of the banking system in India. The RBI is the central bank of India and the primary regulatory authority for banking. An entity intending to carry out banking business in India must obtain a licence from the RBI. The RBI has wide-ranging powers to regulate the financial sector, including prescribing norms for setting up and licensing banks.

 Commercial Bank

They accept deposits and offer short-term loans to its clients as well as long- and medium-term loans to businesses. Long-term housing loans are another service they offer to private citizens. There are three types of commercial banks namely:

a) Public Sector Banks, such as State Bank of India, Bank of Baroda, and Dena Bank, which are majority owned by the Indian Government or Reserve Bank.
b) Private Sector Banks like Bank of Rajasthan, Vyasa Bank, Bharat Overseas Bank Ltd., etc. where private persons hold the bulk of the stock.
c) Foreign Banks which are registered abroad and have their headquarters abroad but have branches in India such as Grindlay's Bank, Hong Kong and Shanghai Bank Corporation (HSBC), Citibank etc.

3. Cooperative Banks (set up by cooperative societies to provide financing to small borrowers)

Cooperative societies are formed by people who come together and form a society jointly so as to serve their common interest. These societies are formed under the Cooperative Societies Act. When a Cooperative Society engages in banking business it is called a ‘Cooperative Bank’. They have to obtain a licence from the Reserve Bank of India.

4. Institutionalised Banks

Some of the examples of institutionalised banks are:
a) Life Insurance Corporation Of India (LIC)
b) General Insurance Corp Of India (GIC)
c) Unit Trust Of India (UTI)

5. Specialised Banks

These banks provide support for setting up business in specific areas of activity only. Some of the specialised banks are:
a) Export Import Bank of India (EXIM)
b) National Bank for Agriculture & Rural Development (NBARD)

. Development Banks

It raises the bulk of its fund from:
a) Market borrowings by the way of bonds
b) The borrowing out of National Industrial Credit Fund of RBI
They provide medium and long-term capital for purchase of machinery and equipment for using latest technology or for expansion and modernisation.  Development banks can be classified into two categories
a) All India Development Bank
b) State-Level Development Bank

Some of the examples of development banks or IDBI, IFCI, ICCI, SFCs, SIDCs.

The key RBI regulations which are important in connection with the regulation of banks are as follows:

1. RBI circulars dealing with capital adequacy and provisioning requirements, being the Master Circular – Prudential Guidelines on Capital Adequacy and Market Discipline-New Capital Adequacy Framework (NCAF) dated July 1, 2015, as amended from time to time; the Master Circular – Prudential Norms on Capital Adequacy – Basel I Framework dated July 1, 2015, as amended from time to time; and the Master Circular on Basel III Capital Regulations dated July 1, 2015, as amended from time to time.
2. RBI directions dealing with ownership of banks being Master Direction – Ownership in Private Sector Banks, Directions, 2016 dated May 12, 2016, as amended from time to time.
3. RBI circular dealing with setting up of branches and subsidiaries by foreign banks, being the Scheme for Setting up of WOS by foreign banks in India issued on November 06, 2013, as amended from time to time.
4. RBI circular dealing with setting up of new banks, being the Guidelines for ‘on tap’ Licensing of Universal Banks in the Private Sector dated August 1, 2016.
5. RBI circular dealing with setting up of small finance banks, being the Guidelines for Licensing of ‘Small Finance Banks’ in the Private Sector dated November 27, 2014.
6. RBI circular dealing with setting up of payment banks, being the Guidelines for Licensing of ‘Payments Banks’ dated November 27, 2014.
7. RBI circular on external commercial borrowings, being the Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers dated January 01, 2016, as amended from time to time (ECB Regulations).
8. In relation to banking operations, there are certain restrictions applicable to end use of the loans and advances provided by banks, including in relation to funding real estate and capital market transactions and speculative transactions, as well as for on-lending to other financial institutions, which use the funds for any of these purposes.

Further, one key requirement for the licensing of banks in India is that each bank has to have adequate exposures to the ‘priority sector’.  The term ‘priority sector’ comprises activities which have national importance and have been assigned priority over other sectors for the development of India and includes categories like agriculture, micro, small and medium enterprises, education and housing.  By ensuring that one of the most important pillars of the economy, being the banking system, is engaged with the priority sector, the government hopes that the economy itself is moulded in a direction which serves all sections of society.

The economic policies in India, including regulation of the banking system, are also influenced due to its membership of international economic organisations such as BRICS, the G20 summit and treaties and agreements entered into on account of India is a member of the General Agreement on Trade in Services (GATS) under the World Trade Organisation (WTO).

Regulatory Development in Recent Times

To reinforce the ability of the lender to deal with distressed assets, the Reserve Bank of India has issued guidelines and norms on distressed asset resolution by lenders. The RBI has issued a notification on “Guidelines on Sale of Stressed Assets by Banks” as a part of the already existing “Framework for Revitalising Distressed Assets in the Economy”. The framework and guideline have been created as a part of the enforcement of and regulations under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The Insolvency and Bankruptcy Code, 2016 (IBC) seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The bankruptcy code is a one-stop solution for resolving insolvencies which at present is a long drawn process and fails to offer an economically.