BANKING LAWS PREVAILING IN INDIA

Authors:

Chetana Prakash, SLS Hyderabad

Manasi Pawaskar, GLC Mumbai

Saket Pathak, MNLU


Editor:

Puru Pratap Singh, GNLU

Introduction

Banks in India comprise of scheduled commercial banks, cooperative banks, small finance banks, regional rural banks (RRBs) and payments banks. The Indian banking sector is regulated by the Reserve Bank of India Act, 1934 (RBI Act), Banking Regulations Act, 1949 (BR Act), Foreign Exchange Management Act 1999 (FEMA), Prevention of Money Laundering Act, 2002 (PMLA), Recovery of Debts and Bankruptcy Act, 1993 (RDB Act) and Securitization And Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (SARFAESI Act).

Reserve Bank of India Act, 1934

The key regulator and apex financial institution for the banking system in India is the Reserve Bank of India (RBI) and provide the central bank (RBI) with various powers to act as the Central Bank of India. RBI was setup in 1935 under the Reserve Bank of India Act, 1934. The main objective of the Reserve Bank is to regulate the issue of bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country[1]. This act was meant to provide a framework for the supervision of banking firms and to keep an eye/check on the working of the banks within the rules prescribed in India. Courts are not to interfere with the economic policy which is a function of the experts. The role of RBI is to safeguard the economic and financial stability of the country- Peerless General Finance and Investment Co. Ltd. v. RBI, 1992 2 SCC 343[2]. Section 7 of the BBI Act states that central government can legislate the functioning of the RBI through the RBI board, and the RBI is not an autonomous body.

Section 17 defines the manner in which the Central Bank of India (RBI) can conduct business. RBI can accept deposits from the central and state governments without interest, can purchase and discount bills of exchange from commercial banks and can purchase foreign exchange from banks and sell it to them. It can also provide loans to banks and state financial corporations, provide advances to the central government and state governments, can buy or sell government securities and can also deal in derivative, repo and reverse repo[3]. Section 21 states that RBI should conduct banking affairs for the central government and manage public debts[4]. Section 22 provides that only RBI has the exclusive rights to issue currency notes in India. Section 26 describes the legal tender character of Indian bank notes[5].

RBI has the right to obtain information from the banks under section 27. Section 31 of the act states that in India, only RBI or the central government can issue and accept promissory notes that are payable on demand but the cheques that are payable on demand, can be issued by anyone. Section 35 states that RBI can carry out inspection of any bank in India. Section 42 (1) states that every scheduled bank must have an average daily balance with the RBI[6].

Recently the Finance Bill of 2019 proposed to amend the RBI Act, 1934 to give RBI a bigger role in the management of NBFCs (non-banking financial company) in adverse situations as the sector have come under serious financial pressure. The RBI has newly inserted sections 45-ID, 45-IE, 45 MAA, 45 MBA and 45 NAA to control the management of an NBFC[7]. Section 45-E prohibits Reserve Bank from disclosing any credit information, but according to section 2(f) of the RTI Act, RBI cannot withhold any information[8]- RBI v. Jayantilal N. Mistry. Ravin Ranchchodlal Patel v. RBI.

The Banking Regulation Act of 1949

All banking firms in India come under the regulation of the Banking Regulation Act of 1949. The Banking Regulation Act was originally passed as the Banking Companies Act of 1949. It came into effect from 16th March 1949 and was changed into Banking Regulation Act of 1949 from 1st March, 1966. It was implemented in Jammu and Kashmir from 1956.

Originally, the law was made with the intention to only apply it to banking companies. But in 1965, it was amended to make it applicable even to cooperative banks and to make it flexible so that further changes could be introduced.

Salient Features of the Act

In addition to providing an outline inside which commercial banking in India is overseen and controlled, the Act augments the Companies Act of 1956. Although, Primary Agricultural Credit Society and co-operative land mortgage banks do not come under the Act.

Reserve Bank of India is authorised with the power to control shareholding and voting rights to shareholders, license banks, control the operation of banks, put down instructions for audits, overlook the appointment of board members and management, regulate moratorium, mergers and liquidation, issue directives in the interests of public good and banking policies, in addition to imposing penalties, by this Act.

In the year 1965, the Act was amended for the inclusion of co-operative banks under its scope. This was done by adding section 56 to the Act. Co-operative banks with operations in just one state, come under the purview of the state government. That being said, the licensing and regulation of business operations come under the purview of the RBI, nevertheless.

In 2017, the Act was again amended to include provisions for handling of cases in relation to stressed assets.[9]

To summarise, the Banking Act was an enhancement to all the previous acts which are related to banking.

Prevention of Money Laundering Act, 2002

Money laundering means to hide the origin of illicitly gained money, usually involving money transfers from legitimate businesses. The NDA government enacted the Prevention of Money Laundering Act, 2002 to combat the evil of money laundering and to provide procedures involving confiscation of property obtained by money laundering. The Act and the rules obligate companies to check the client's identity, furnish information and maintain records in the prescribed forms. The act was amended in the years 2005, 2009, and 2012.

Some Salient Features

● The punishment for money laundering is 3-7 years.

● The Adjudicating authority will be the authority chosen by the government to exercise powers and jurisdiction given under the PMLA. It undertakes the decisions if any seized property was involved in money laundering.

● Burden of proof is on the person accused of committing money laundering.

PMLA Amendment 2019

To tighten the gaps in the existing PMLA, 2002, the Finance Act, 2019 was enacted. After a visible increase in the cases of financial crimes (many amongst them quite high profile), the need to make stricter laws was observed. In the PMLA, there existed an ambiguity as to what comes under 'proceeds of crime', which has had an adverse effect on chasing the money trail. So through this amendment, the scope of 'proceeds of crime' is increased as it now includes property, assets obtained through criminal activities, even if it does not come under PMLA.

It also provides clarification on the Section 3 of the PMLA. The 2019 Act clarifies that it would be incorrect to interpret money laundering as a one-time, instantaneous offence that ceases with the concealment or possession or acquisition or use or projection of the proceeds of crime as untainted property or claiming it as untainted.[10]

Debt Recovery due to Banks and Financial Institutions Act, 1993

Before the enactment of the Act in the year 1993, the banks and the other financial institutions had been facing hindrances in the recovery of loans advanced. As an effect of this the banks and the other financial institutions of the country were reluctant in advancing loans. Hence in order to put an end to the plight of the banks and other financial institutions the Debt Recovery due to Banks and Financial Institutions Act was enacted in the year 1993 based on the recommendations of the Narasimham Committee in the year 1991. Currently, there are “33 Debt Recovery Tribunals in 22 locations”.[11]

In Section 3 of the Act, it has been stated that Debt Recovery Tribunals are to be setup for the speedy trial of cases with regards to default in debt which is the primary objective of the Act.

What’s important to note here is that the term ‘debt’ has been given a wide interpretation under the Act and is inclusive of the following types:-

i.Any liability inclusive of interest, it may be secured or unsecured;

ii. Any liability which is to be paid under a decree, order of any civil court or any arbitration award or otherwise; and

iii. Any liability payable under a mortgage and subsisting on and legally recoverable on the date of application”.[12]

In spite of the aforementioned objective with which the Act was enacted seems to have some issues in the present times. One of the major setbacks in today’s times with regards to the Act is that the very intention with which the Act was enacted i.e. to reduce the burden on the judiciary and speedy trial of cases seems to have proven ineffective to a great extent. In the case of Standard Chartered Bank v. Dharminder Bhohi & ors.[13] the Hon’ble Supreme Court had held that the powers vested in the DRTs by virtue of Section 17 and 18 of the Act is limited in scope and that the intervention of the Civil Courts cannot be prohibited completely which leads to delay in the delivery of judgement by the DRTs. The DRTs were formed to lower the burden on the judiciary but the burden seems to have been shifted to the DRTs in an uncontrollable manner. Originally the DRTs were supposed to deal with 30 cases per day but according to the Deshpande Report, the number of cases in one of the DRTs in a day was 4000. The intention of the Legislature was to enact a creditor friendly Act but the Court’s stance in cases seems to be different and the courts have been of the opinion that the principles of natural justice simply cannot be given away with which was essentially held by the Supreme Court in the case of Mathew Verghese v. M. Amritha Kumar.[14]

Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002

The SARFAESI Act, 2002 was enacted in furtherance of the DRDBFI Act, 1993 in order to curb the problems faced by the DRTs. The SARFAESI Act, 2002 lets the banks as well as other financial institutions of India auction commercial or residential properties for the purpose of loan recovery.[15] The 3 modes for reclamation in the SARFAESI Act, 2002 are:-

i. Securitisation

ii. Asset reconstruction

iii. Security enforcement

The Act is procedural and retrospective in nature and under this Act the RBI has the power to maintain the Asset Reconstruction Companies and regulate the sale of the non-performing assets of the companies listed under the Asset Reconstruction Companies. The act details the scope of capital requirements, funding and activities. Reserve Bank of India regulates the institutions established under the SARFAESI Act.[16] Although the Act was with a view to solve the problems faced by the DRTs it didn’t really serve the purpose. Upon scrutiny various flaws can be found with the Act which have been a matter of concern. The issues with regards to the Act in present times are as follows:-

a. Sale of assets under the SARFAESI: the provision of the sale of assets under the Act is usually criticized by the borrowers. In some cases, the auction process is hurriedly completed and it would be extremely difficult for the borrowers to get the transaction set-aside though the DRT is empowered to do so under section 17.[17]

b. Thin investor base: the investor base in the Security Receipt sector lacks investment. Hence more financial institutions should be included in the investors list so that the investor base increases.

c. Risk management in securitization: there are various risks associated with the securitization like the credit risk, sovereign risk, collateral deterioration risk, legal risk, payment risk, swap counterparty risk and the financial guarantor risk. All these risks need to be overcome in order for the Act to operate smoothly.

This is all about the most important banking laws in India and the challenges that come with each of the Acts.

[1]https://www.mbaknol.com/financial-management/the-reserve-bank-of-india-rbi-indias-apex-bank/ [2]https://www.casemine.com/judgement/in/5790b3f6e561097e45a4e4fc [3]https://en.wikipedia.org/wiki/Reserve_Bank_of_India_Act,_1934 [4]https://www.gktoday.in/gk/major-provisions-of-reserve-bank-of-india-act-1934/ [5]https://indiankanoon.org/doc/462219/ [6]https://aspirantszone.com/reserve-bank-india-rbi-act-1934-sections/ [7]https://enterslice.com/learning/amendment-in-rbi-act/ [8]https://www.moneylife.in/article/rbi-cannot-withhold-information-under-rti-citing-fiduciary-relations-sc/44542.html [9] The Banking Regulation (Amendment) Bill, 2017. (2020, January 28). Retrieved from https://www.prsindia.org/billtrack/banking-regulation-amendment-bill-2017 [10] PMLA Amendment 2019 – Plugging the Loopholes. (2019, September 19). Retrieved from https://corporate.cyrilamarchandblogs.com/2019/09/finance-act-2019-prevention-money-laundering-act-amendment/ [11] https://blog.ipleaders.in/functioning-debt-recovery-tribunals/ [12] Id. [13] (2013) 15 SCC 341 [14] (2014) 5 SCC 610 [15] https://www.taxmann.com/blogpost/2000000381/what-is-sarfaesi-act.aspx [16] Id. [17] https://taxguru.in/corporate-law/critical-issues-sarfaesi-act-2002.html

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