Banking LAW UNIT 1 - Easy way of understanding the concept PDF

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UNIT 1 BANKING LAWMeaning and Origin of Bank:The word „Bank‟ is widely and extensively used and circulated. The „Bank‟ in English carries the same meaning in Bengali. The origin of English word „Bank‟ came into being (when, where and how) which could not be specifically identified. The history regar...

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UNIT 1 BANKING LAW Meaning and Origin of Bank: The word „Bank‟ is widely and extensively used and circulated. The „Bank ‟ in English carries the same meaning in Bengali. The origin of English word „Bank‟ came into being (when, where and how) which could not be specifically identified. The history regarding the origin of „Bank‟ , even after the twelfth century, is not also clear which has been based on guesses. According to some writer the word „Bank‟ was derived from „Banco‟ , „Bancus‟ , „Banque‟ or „Banc‟ all of which mean a bench upon which the mediaeval European Money-lenders and Money –Changers used to display their coins. Anyhow this word has been in use from the middle ages in connection of a bank. In the words of German writer W. Frankace, a long stool or bench was said to be replaced by Bank, Bangke etc. in the Scandinavian and Mid- 2 European countries. Again, Dutch and French words „Banque‟ , „Bangko‟ were used to mean stool or bench and in course of time the word „Bank‟ came into effect. In the Mediaeval age Italian states were sound and solvent economically and commercially. At that time a group of people used to conduct business of transaction of money sitting on a stool or bench which was replaced by „Banco,‟ „Banko‟ „Banca‟ , „Bangk‟ , „Bancus‟ , „Banc‟ etc.It is assumed that the word „Bank‟ was originated from these words. In the later age, an English writer Maclead challenged the above concepts. His contention was that the money-lenders and money-changers used to display their coins which were not termed as „Banco‟ , „Banque‟ , „Banke‟, „Banca‟. However, Banco in Italy and Banke in German and Australia were understood as public debt or issue of paper money. In his opinion, these words were used for the purpose of economic activities of different countries of Europe. Another British writer Chamber ,in his Twentieth Century Dictionary, very clearly stated that the word „Bank‟ is derived from Banca and Banque. The French still uses „Banque‟ in place of the word „Bank‟ . In the mid of twelfth century Italian states were under political turmoil and in 1150 Venice was afflicted with enemies. As a result, the Government introduced public debt/ collective credit/ forced subscribed loan @ 5% compulsorily on the public for meeting economic crisis. During that time this loan was called Banke, Banco, Compara,Monte etc. So many thinkers think that the German word‟ Banke‟ and the Italian word „Banco‟ have been transformed into English word‟ Bank‟.

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EVOLUTION OF BANKING INSTITUTIONS Evolution of Bank in England The Bank of England was originally established as a corporation with private shareholders under the Bank of England Act 1694 , to raise money for war with Louis XIV, King of France. After the South Sea Company collapsed in a speculative bubble in 1720, the Bank of England became the dominant financial institution, and acted as a banker to the UK government and other private banks. The Bank of England could, simply by being the biggest financial institution, influence interest rates that other banks charged to businesses and consumers by altering its interest rate for the banks' bank accounts. The Bank of England Act 1716 widened its borrowing power. The Bank Restriction Act 1797 removed a requirement to convert notes to gold on demand. The Bank Charter Act 1844 gave the bank sole rights to issue notes and coins. It also acted as a lender through the 19th century in emergencies to finance banks facing collapse. Because of its power, many believed the Bank of England should have more public duties and supervision. The Bank of England Act 1946 nationalised it. Its current constitution, and guarantees of a degree of operational independence from government, is found in the Bank of England Act 1998. Evolution of Bank in India Banking in India has a very long history starting from the late 18 th century. The origin of modern banking started from 1770 in the name of “Bank of Hindustan” by English agency ‘House of Alexander & Co’ in Kolkatta however it was closed in 1832. Further in 1786 “General Bank of India” was started and it failed in 1791. The Banking system of the country is the base of the economy and economic development of the country. It is the most leading part of the financial sector of the country as it is responsible for more than 70 % of the funds flowing through the financial sector in the country. The banking system in the country has three primary functions: 

Operations of Payment system



Depositor and protector of people’s savings



Issue loans to individual and Companies 2

The Banking system in India can be categorised in two phases 

Pre-Independence Phase (1786-1947)



Post- Independence Phase (1947 to till date)

The post-Independence period may further be divided into three phases

Pre-nationalisation Period (1947 to 1969)



Post nationalisation Period (1969 to 1991)



Liberalisation Period (1991 to till date)

Pre-Independence Phase (1786-1947) The origin of the Banking system in India can be traced with the foundation of Bank of Calcutta in 1786. The Banking in India originates in the last decade in the 18 th century with the foundation of the English Agency houses in Bombay and Calcutta (now Kolkata). 

Three presidency banks Bank of Bengal, Bank of Bombay and Bank of Madras established in the 19th Century under the charter of the British East India Company.These banks were funded by the presidency government at that time.



The 3 presidency banks were Bank of Bengal- Established in 1806, Bank of Bombay - Established in 1840, Bank of Madras - Established in 1843



In 1935, the presidency banks merge together and formed a new bank named Imperial Bank of India.



The Imperial Bank of India subsequently named the State Bank of India.



The first Indian-owned Allahabad Bank was set up in 1865 in Allahabad.



In 1895, the Punjab National Bank was established in 1895.



The Bank of India founded in 1906 in Mumbai.



Many more commercial banks such as Canara Bank, Indian Bank, Central Bank of India, Bank of Baroda and Bank of Mysore were established between 1906 and 1913 under Indian ownership.

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

The central Bank of India, RBI establish in 1935 on the recommendation of HiltonYoung Commission.

At that time, the Banking system was only covered the urban population and need of rural and agriculture sector was totally neglected. Post- Independence Phase (1947 to till) 

At the time independence, the entire Banking sector was under private ownership. The rural population of the country had to dependent on small money lenders for their requirements. To solve these issues and better development of the economy the Government t of India nationalised the Reserve Bank of India in 1949.



In 1955 the Imperial Bank of India was nationalised and named the State Bank of India.



The Banking Regulation Act enacted in 1949.

Nationalisation Period (1969 to 1991) 

In 1969, Government of India nationalised 14 major banks whose national deposits were more than 50 crores.

1. Allahabad Bank 2. Bank of India 3. Punjab National Bank 4. Bank of Baroda 5. Bank of Maharashtra 6. Central Bank of India 7. Canara Bank 8. Dena Bank 9. Indian Overseas Bank 10. Indian Bank 4

11. United Bank 12. Syndicate Bank 13. Union Bank of India 14. UCO Bank The Indian Banking system immensely developed after nationalisation but the rural and weaker section of the society was still not covered under the system. To solve these issues, the Narasimham Committee in 1974 recommended the establishment of Regional Rural Banks (RRB) . On 2nd October 1975, RRBs were established with an objective to extend the amount of credit to the rural section of the society. 

Six more banks further nationalised in the year 1980. With the second wave of nationalisation, the target of priority sector lending was also raised to 40%.

1. Andhra Bank 2. Corporation Bank 3. New Bank of India 4. Oriental Bank of Commerce 5. Punjab & Sindh Bank 6.

Vijaya Bank

Liberalisation Phase (1990 to till) In order to improve financial stability and profitability of Public Sector Banks, the Government of India set up a committee under the chairmanship of Shri. M. Narasimham. The committee recommended several measures to reform banking system in the country. 

The major thrust of the recommendations was to make banks competitive and strong and conducive to the stability of the financial system.



The committee suggested for no more nationalisation of banks.

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

Foreign banks would be allowed to open offices in India either as branches or as subsidiaries.



In order to make banks more competitive, the committee suggested that public sector banks and private sector banks should be treated equally by the Government and RBI.



It was emphasised that banks should be encouraged to abandon the conservative and traditional system of banking and adopt progressive function such as merchant banking and underwriting, retail banking, etc.



Now, foreign banks and Indian banks permitted to set up joint ventures in these and other newer forms of financial services.



10 Privates players got a license from the RBI to entry in the Banking sector. These were

Global

Trust

Bank, ICICI Bank, HDFC Bank,

Axis

Bank,

Bank

of

Punjab, IndusInd Bank, Centurion Bank, IDBI Bank, Times Bank and Development Credit Bank. The Government of India accepted all the major recommendation of the committee. Recent Development in Indian Banking Sector: 

Kotak Mahindra Bank and Yes Bank got a license from RBI to entry in the system in the year 2003 and 2004.



In 2014, RBI grants in-principle approval to IDFC and Bandhan Financial Services to set up banks.

Today, Indian Banking industry is one of the most growing flourishing industries. Banking systems of any country need to be effective, efficient as it plays the active in the economic development of the country. Indian Banks are classified into commercial banks and Co-operative banks. Commercial banks comprise: (1) Schedule Commercial Banks (SCBs) and non-scheduled commercial banks. SCBs are further classified into private, public, foreign banks and Regional Rural Banks (RRBs); and (2) Co-operative banks which include urban and rural Co-operative banks.

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The Indian banking industry has its foundations in the 18th century, and has had a varied evolutionary experience since then. The initial banks in India were primarily traders’ banks engaged only in financing activities. Banking industry in the pre-independence era developed with the Presidency Banks, which were transformed into the Imperial Bank of India and subsequently into the State Bank of India. The initial days of the industry saw a majority private ownership and a highly volatile work environment. Major strides towards public ownership and accountability were made with Nationalisation in 1969 and 1980 which transformed the face of banking in India. The industry in recent times has recognised the importance of private and foreign players in a competitive scenario and has moved towards greater liberalisation. 1. Reserve banks of India. 2. Indian Scheduled Commercial Banks. a. State Bank of India and its associate banks. b. Twenty nationalized banks. c. Regional rural banks. d. Other scheduled commercial banks. 3. Foreign Banks 4. Non-scheduled banks. 5. Co-operative banks. Origin of Banking in India Banking in India is indeed as old as the Himalayas. But, the banking functions became an effective force only after the first decade of 20th century. Banking is an ancient business in India with some of oldest references in the writings of Manu. Bankers played an important role during the Mogul period. During the early part of East India Company era, agency houses were involved in banking. Modern banking (i.e. in the form of joint-stock companies) may be said to have had its beginnings in India as far back as in 1786, with the establishment of the General Bank of India. Structure of Indian Banking System is as Follows: 7

In the evolution of this strategic industry spanning over two centuries, immense developments have been made in terms of the regulations governing it, the ownership structure, products and services offered and the technology deployed. The entire evolution can be classified into four distinct phases. 1. Phase I- Pre-Nationalisation Phase (prior to 1955) 2. Phase II- Era of Nationalisation and Consolidation (1955-1990) 3. Phase III- Introduction of Indian Financial & Banking Sector Reforms and Partial Liberalisation (1990-2004) 4. Phase IV- Period of Increased Liberalisation (2004 onwards) Organisational Structure 1. Reserve Bank of India: Reserve Bank of India is the Central Bank of our country. It was established on 1 st April 1935 accordance with the provisions of the Reserve Bank of India Act, 1934. It holds the apex position in the banking structure. RBI performs various developmental and promotional functions. It has given wide powers to supervise and control the banking structure. It occupies the pivotal position in the monetary and banking structure of the country. In many countries central bank is known by different names. For example, Federal Reserve Bank of U.S.A, Bank of England in U.K. and Reserve Bank of India in India. Central bank is known as a banker’s bank. They have the authority to 8

formulate and implement monetary and credit policies. It is owned by the government of a country and has the monopoly power of issuing notes. 2. Commercial Banks: Commercial bank is an institution that accepts deposit, makes business loans and offer related services to various like accepting deposits and lending loans and advances to general customers and business man. These institutions run to make profit. They cater to the financial requirements of industries and various sectors like agriculture, rural development, etc. it is a profit making institution owned by government or private of both. Commercial bank includes public sector, private sector, foreign banks and regional rural banks: 3. Public Sector Banks: Currently there are 21 Nationalised banks in India. The public sector accounts for 75 percent of total banking business in India and State Bank of India is the largest commercial bank in terms of volume of all commercial banks. Now from April 1, 2017 all the 5 associate banks of SBI and Bhartiya Mahila Bank are merged with State Bank of India. After this merger now SBI is counted among the top 50 largest banks of the world. Nationalised Banks in India are 1. Allahabad Bank 2. Andhra Bank 3. Bank of India 4. Bank of Baroda 5. Bank of Maharashtr 6. Canara Bank 7. Central Bank of India 9

8. Corporation Bank 9. Dena Bank 10. Indian Bank 11. Indian Overseas Bank 12. IDBI Bank 13. Oriental Bank of Commerce 14. Punjab & Sindh Bank 15. Punjab National Bank 16. State Bank of India 17. Syndicate Bank 18. UCO Bank 19. Union Bank of India 20. United Bank of India 21. Vijaya Bank 4. Private Sector Banks: The private-sector banks in India represent part of the Indian banking sector that is made up of both private and public sector banks. The "private-sector banks " are banks where greater parts of stake or equity are held by the private shareholders and not by government. List of Private Sector Banks is: Banks

Established

1. Axis Bank (earlier UTI Bank)

1993(as UTI Bank)

2. Bank of Punjab (actually an old

generation

private

bank

since it was not founded under 10

post-1993 new bank licensing regime) 3. Centurion Bank Ltd. (Merged in Bank of Punjab in late 2005 to become

Centurion

Bank

of

1994

Punjab, acquired by HDFC Bank Ltd. in 2008) 4. Development

Credit

Bank

(Converted from Co-operative

1995

Bank, now DCB Bank Ltd.) 5. ICICI Bank(previously ICICI and

then

merger

both

merged;total

SCICI+ICICI+ICICI

1996

Bank Ltd) 6. IndusInd Bank

1994

7. Kotak Mahindra Bank

2003

8. Yes Bank

2005

9. Balaji

Corporation

Limited

Bank

2010

10. HDFC bank

1994

11. Bandhan bank

2015

12. IDFC Bank

2015

5. Foreign Banks: A foreign bank with the obligation of following the regulations of both its home and its host countries. Loan limits for these banks are based on the capital of the parent bank, thus allowing foreign banks to provide more loans than other subsidiary banks. Foreign banks are those banks, which have their head offices abroad. CITI bank, HSBC, Standard Chartered etc. are the examples of foreign bank in India. Currently India has 36 foreign banks. 11

6. Regional Rural Bank (RRB): The government of India set up Regional Rural Banks (RRBs) on October 2, 1975. The banks provide credit to the weaker sections of the rural areas, particularly the small and marginal farmers, agricultural labourers, and small entrepreneurs. There are 82 RRBs in the country. NABARD holds the apex position in the agricultural and rural development. List of some RRBs is given below: 7 Co-operative Bank: Co-operative bank was set up by passing a co-operative act in 1904. They are organised and managed on the principal of co-operation and mutual help. The main objective of co-operative bank is to provide rural credit. The cooperative banks in India play an important role even today in rural co-operative financing. The enactment of Co-operative Credit Societies Act, 1904, however, gave the real impetus to the movement. The Cooperative Credit Societies Act, 1904 was amended in 1912, with a view to broad basing it to enable organisation of non-credit societies. Name of some co-operative banks India are: 1. Andhra Pradesh State Co-operative Bank Ltd 2. The Bihar State Co- operative Bank Ltd. 3. Chhatisgarh Rajya Sahakari Bank Maryadit 4. The Gujarat State Co-operative Bank Ltd. 5. Haryana Rajya Sahakari Bank Ltd. Three tier structures exist in the cooperative banking: i. State cooperative bank at the apex level. ii. Central cooperative banks at the district level. iii. Primary cooperative banks and the base or local level. Scheduled and Non-Scheduled Banks:

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The scheduled banks are those which are enshrined in the second schedule of the RBI Act, 1934. These banks have a paid-up capital and reserves of an aggregate value of not less than Rs. 5 lakhs, they have to satisfy the RBI that their affairs are carried out in the interest of their depositors. All commercial banks (Indian and foreign), regional rural banks, and state cooperative banks are scheduled banks. Non- scheduled banks are those which are not included in the second schedule of the RBI Act, 1934. At present these are only three such banks in the country. Banking System types and functions of Banks The structure of banking system differs from country to country depending upon their economic conditions, political structure, and financial system. Banks can be classified on the basis of the volume of operations, business pattern and areas of operations. They are termed as a system of banking. The commonly identified systems are: Un...