BANKING LAW PSDA

QUES1. A] EVOLUTION OF BANKING IN INDIA FROM PRE -INDEPENDENCE TO

POST INDEPENDENCE .
The evolution of banking in India from the pre-independence era to the post-independence period

is marked by significant phases of transformation. Here’s a breakdown of the journey of banking

in India:

1. Pr e-Independence Er a (Befor e 1947)

Ear ly Banking Activities (18th - Ear ly 19th Centur y)

 The first formal banks in India were Bank of Hindustan (1770) and Gener al Bank of

India (1786), established under British rule in Kolkata. These banks set the foundation for

a structured banking system, although they soon ceased operations.

 Pr esidency Banks emerged next, beginning with the Bank of Bengal (1806), followed by

the Bank of Bombay (1840) and the Bank of Madr as (1843). These banks were

established in the three Presidency towns and primarily served British interests.

For mation of J oint-Stock Banks and Indigenous Banks

 From the mid-19th century onward, Indian businessmen set up joint-stock banks,

including Allahabad Bank (1865), Punjab National Bank (1894), and Bank of India

(1906). These were among the first Indian-owned banks that also served Indian clientele.

 Indigenous banks also operated outside the formal sector, run by moneylenders and traders,

who provided credit informally and were integral to rural finance.

Establishment of the Reser ve Bank of India (1935)

 The Reser ve Bank of India (RBI) was established in 1935 as the country’s central bank,

responsible for issuing currency and regulating the banking system. The RBI’s

establishment was a crucial step toward creating a unified banking system.

2. Post-Independence Er a (1947 - Pr esent)

Ear ly Post-Independence Per iod (1947-1969)

 Post-independence, India inherited a banking system catering primarily to urban areas,

with a limited role in rural finance.

 Banks operated on a commercial basis, focusing more on profits and often ignoring the

needs of agriculture and small industries.

 In 1949, the Banking Regulation Act was passed, giving the RBI authority to regulate

and supervise banks in India.

Nationalization of Banks (1969 and 1980)

 In 1969, 14 major commer cial banks were nationalized by the Indian government. This

move was motivated by the need to ensure that banks served the public interest, especially

in rural and agricultural sectors.

 Nationalization led to significant changes, with an increased focus on social objectives,

such as rural credit, priority sector lending, and poverty alleviation.

 In 1980, another 6 banks wer e nationalized, bringing the total number of public sector

banks to 20. This phase saw the expansion of branch networks into rural and semi-urban

areas.

Liber alization and Banking Sector Refor ms (1991 Onwar ds)

 The 1991 Economic Refor ms marked a turning point in Indian banking. With the onset of

liberalization, the Narasimham Committee recommended major reforms, aiming to

improve efficiency, competition, and stability in the sector.

 These reforms led to the entr y of pr ivate sector banks, such as HDFC Bank and ICICI

Bank, and allowed foreign banks to operate in India, enhancing competition.

  Other key changes included the introduction of pr udential nor ms, improved capital

adequacy requirements, and increased autonomy for the RBI in monetary policy.

Technological Advancements (Late 1990s - 2000s)

 The late 1990s saw rapid technological advancements, with banks adopting cor e banking

solutions (CBS), automated teller machines (ATMs), inter net banking, and mobile

banking.

 The rise of digital payments transformed the banking landscape, making financial

services more accessible and convenient for the public.

Rise of Financial Inclusion (2000s - Pr esent)

 In the 2000s, India undertook significant initiatives to promote financial inclusion,

including the Pr adhan Mantr i J an Dhan Yojana (PMJ DY), which aimed to provide

banking services to unbanked populations.

 The RBI issued licenses to small finance banks and payment banks to address the needs

of underserved populations and sectors, expanding financial access across India.

Recent Developments: Digitalization and Fintech (2010s - Pr esent)

 Digital banking and fintech have brought a new wave of transformation. Technologies

such as the Unified Payments Inter face (UPI) and Aadhaar -based identification have

made banking services more inclusive and convenient.

 The RBI continues to focus on cybersecurity, data protection, and digital innovation to

keep pace with changing financial landscapes, while regulatory sandboxes allow fintech

companies to innovate under the RBI’s oversight.

 Key Milestones and Impact on the Indian Banking Sector

  Nationalization: Nationalization ensured that banks served rural, agriculture, and priority

sectors, leading to greater credit access and financial inclusion.

 Liber alization: The 1991 reforms made Indian banks competitive, improved service

quality, and introduced private sector and foreign banks.

 Technological Tr ansfor mation: Digitalization in the banking sector provided customers

with faster, more secure, and more convenient services, transforming banking from

traditional to online and mobile.

 Financial Inclusion Initiatives: Initiatives like PMJDY and small finance banks helped

bring millions of Indians into the formal banking system.

Conclusion

From a fragmented system serving colonial and commercial interests in the pre-independence era,

Indian banking has evolved into a vibrant, technology-driven sector focused on inclusion,

efficiency, and innovation. The journey reflects India’s economic shifts, from centralized control

and social welfare objectives to liberalization, digitalization, and a robust regulatory framework

that supports growth, transparency, and financial stability.

ANS b) Role of the Reserve Bank of India (RBI) in the development of the Indian banking

system since its inception in 1935.

The Reserve Bank of India (RBI) has played a foundational role in India's banking system since

its inception in 1935. Established under the Reserve Bank of India Act, 1934, the RBI was

initially set up to address currency issues, manage the nation’s monetary policy, and regulate the

banking sector. Over time, its mandate has expanded significantly to include financial stability,

regulatory oversight, and developmental functions to support economic growth. Here’s a detailed

look at its roles:

1. Monetar y Author ity

 Monetar y Policy For mulation: The RBI is responsible for formulating India’s monetary

policy, which includes adjusting the interest rates (such as the repo rate) to control

inflation and ensure price stability.

 Inflation Tar geting: Since the establishment of the Monetary Policy Committee (MPC)

in 2016, the RBI’s monetary policy is geared towards achieving a targeted inflation rate,

balancing growth and inflation.

 Liquidity Management: By regulating the money supply, the RBI ensures that there is

adequate liquidity in the banking system, which is essential for economic stability.

2. Issuer of Cur r ency

 Cur r ency Management: The RBI has the sole authority to issue currency notes in India,

except for the one-rupee note and coins, which the Government of India issues. The RBI

manages the printing, distribution, and security of the currency in circulation.

  Contr olling Counter feit Cur r ency: The RBI has developed mechanisms to ensure the

authenticity of currency notes, including high-security features to counter counterfeit

currency.

3. Regulator and Super visor of the Financial System

 Banking Regulation Act, 1949: The RBI is empowered to regulate and supervise banks

under the Banking Regulation Act. This includes issuing licenses to banks, setting

prudential norms, and monitoring bank performance.

 Risk Management: The RBI sets standards and guidelines to ensure that banks follow

robust risk management practices. These include capital adequacy norms, asset

classification, and provisioning requirements.

 Banking Super vision: Through its supervisory function, the RBI conducts regular

inspections and audits of banks to ensure they follow regulations and maintain financial

stability.

 Resolution of Bank Failur es: The RBI has played a crucial role in managing stressed

assets and facilitating bank mergers to prevent systemic failures, such as the merger of

struggling public sector banks.

4. Developmental Role

 Financial Inclusion: The RBI has been instrumental in promoting financial inclusion in

India, encouraging banks to open branches in rural areas, establishing policies for

small-value transactions, and implementing initiatives like the Priority Sector Lending

(PSL) norms.

 Development of Payment and Settlement Systems: The RBI has promoted digital

payment systems, including the Unified Payments Interface (UPI) and Real-Time Gross

Settlement (RTGS), aiming to modernize India’s financial infrastructure.

  Agr icultur al and Rur al Cr edit: The RBI has created policies to increase credit access to

agriculture and rural areas, including the establishment of regional rural banks (RRBs) and

NABARD (National Bank for Agriculture and Rural Development).

5. For eign Exchange Management

 Management of For ex Reser ves: The RBI is responsible for managing India’s foreign

exchange reserves, which is crucial for maintaining currency stability and handling

external shocks.

 Exchange Rate Policy: The RBI maintains a managed float policy for the rupee,

intervening in the foreign exchange market as needed to prevent extreme volatility.

 Regulation of For eign Exchange: Under the Foreign Exchange Management Act

(FEMA), the RBI regulates transactions involving foreign exchange, including remittances,

foreign direct investment, and external commercial borrowings.

6. Regulator of Non-Banking Financial Companies (NBFCs)

 Over sight of NBFCs: Since the 1990s, the RBI has had regulatory authority over NBFCs,

ensuring that they follow guidelines for capital adequacy, asset classification, and

governance.

 Systemically Impor tant NBFCs: For larger NBFCs deemed systemically important, the

RBI has stricter supervision and requirements, ensuring these institutions don’t pose risks

to the broader financial system.

7. Consumer Pr otection and Public Awar eness

 Banking Ombudsman Scheme: The RBI established the Banking Ombudsman Scheme

to address grievances of banking customers, ensuring fair practices in the banking sector.

 Pr omotion of Financial Liter acy: The RBI conducts programs to educate the public on

financial matters, aiming to improve financial literacy and protect consumers.

8. Cr isis Management and Financial Stability

 Financial Stability: The RBI plays a proactive role in maintaining the stability of the

Indian financial system, assessing and mitigating systemic risks through regular

monitoring.

 Role in Financial Cr isis: During financial crises, the RBI steps in to stabilize the market.

Examples include the Global Financial Crisis (2008) and, more recently, the COVID-19

pandemic, during which the RBI implemented relief measures and liquidity support to

maintain economic stability.

 Conclusion

The RBI’s role in the Indian banking system is multifaceted, encompassing regulatory,

supervisory, developmental, and consumer-focused functions. Its responsibilities have evolved

significantly to respond to new economic challenges and support sustainable economic growth.

As the banking sector grows, the RBI continues to be the backbone of India’s financial system,

ensuring stability, promoting inclusivity, and adapting to changes in the global economic

landscape.
QUES 2Write any two of the following case laws related to bank frauds in India

Case Law 1: Sahar a India Financial Cor por ation Ltd. vs. SEBI (2012)

Br ief Facts of the Case

Sahara India Financial Corporation, a major non-banking financial institution (NBFC), raised over

₹24,000 crore from the public through debentures and other instruments. SEBI, the capital

markets regulator, found that Sahara’s method of raising funds violated the regulations, as they

were not adequately registered with SEBI and had not filed the necessary disclosures. SEBI

argued that the funds were collected in violation of securities laws and ordered Sahara to return

the money to investors with interest.

Key Issues Befor e the Cour t

1. Compliance with Regulator y Requir ements: Whether Sahara complied with SEBI’s

regulatory requirements for raising funds from the public.

2. Investor Pr otection: The legal obligations of financial institutions to protect investor

interests and transparency in fund-raising activities.

3. SEBI’s J ur isdiction: Whether SEBI had jurisdiction over Sahara’s fund-raising activities

and the authority to regulate non-banking financial institutions raising funds from the

public.

J udgment and Legal Pr inciples Established

The Supreme Court ruled in favor of SEBI, ordering Sahara to return the entire amount it raised to

investors with interest. The judgment emphasized the necessity of regulatory compliance,

transparency, and accountability in fundraising. It clarified SEBI’s jurisdiction over entities

raising funds from the public, even if they were structured as NBFCs, and stressed the need for

registration and disclosure requirements to safeguard investors.

Impact on Banking and Financial Pr actices in India

The case had a major impact on India’s banking and financial sector, particularly in the NBFC

and cooperative banking sectors. It reinforced the importance of regulatory oversight by SEBI,

even over non-banking entities, and led to increased scrutiny of fund-raising activities by financial

institutions. The case also paved the way for stricter compliance norms and disclosure

requirements, ensuring transparency in fund-raising and protecting public interest in banking and

financial transactions.

Case Law 2: ICICI Bank-Video con Loan Fr aud Case (2018)

Br ief Facts of the Case

In 2018, Chanda Kochhar, the then CEO of ICICI Bank, was accused of improperly sanctioning

loans to the Videocon Group, which amounted to ₹3,250 crore. Allegations surfaced that Kochhar

had conflicts of interest, as her husband, Deepak Kochhar, had financial ties with the Videocon

promoter, Venugopal Dhoot, who allegedly invested in Deepak Kochhar’s company, NuPower

Renewables, after securing loans. The case involved accusations of quid-pro-quo transactions, and

the CBI charged Kochhar, Dhoot, and other associates with criminal conspiracy, corruption, and

misappropriation.

Key Issues Befor e the Cour t

1. Conflict of Inter est and Cor r uption: Examining if Chanda Kochab misused her position

to benefit her husband’s business interests and compromised the bank’s decision-making

process.

2. Banking Ethics and Gover nance: Determining if ICICI Bank’s internal governance

standards and ethical policies were breached in the loan approval process.
 3. Liability of Bank Officials in Loan Sanctioning: Addressing the accountability of senior

bank officials in cases of alleged favoritism and misrepresentation.

J udgment and Legal Pr inciples Established

While investigations are ongoing, preliminary findings by the court and enforcement agencies led

to charges under the Prevention of Corruption Act and other criminal statutes. Chanda Kochhar

was terminated from ICICI Bank, and the court allowed the CBI to proceed with their

investigation. The case established the principle that even senior bank executives could be held

personally liable for breaches of fiduciary duty and conflict of interest, a precedent for governance

in banking.

Impact on Banking Pr actices in India

The ICICLE-Videocon case had a profound impact on banking governance and ethics in India. It

highlighted the importance of transparency and strict compliance in loan sanctioning processes,

especially in private banks. Following this case, the RBI strengthened corporate governance

norms, mandating stricter conflict-of-interest policies, enhancing the role of risk and audit

committees, and encouraging banks to implement robust checks to prevent the influence of

personal interests on financial decisions. The case also led to heightened awareness about ethical

compliance in banking.

 Conclusion

Both cases underscore the importance of regulatory compliance, timely reporting, and

transparency in India’s banking and financial landscape, setting standards that continue to shape

practices across the industry.