Banking Law and Practice

Over the last two centuries, the Indian banking system has seen various modifications. Businessmen known as Sharoffs, Seths, Sahukars, Mahajans, Chettis, and others have run an indigenous banking system from ancient times. They performed the standard functions of lending money to merchants and craftsmen, as well as putting money in the hands of monarchs to fund wars. However, local bankers were unable to develop a system for collecting public deposits, which is now a key function of a bank, to any major extent. Modern banking in India originated in the latter half of the 18th century.

The General Bank of India and the Bank of Hindustan, both formed in 1786, were the first banks. Following that, the Bank of Bengal (formed in 1806 as the Bank of Calcutta and renamed the Bank of Bengal in 1809), the Bank of Bombay, and the Bank of Madras were established as presidential banks. For many years, the Presidency banks acted as quasi-central banks. In 1925, the three banks merged to establish the Imperial Bank of India.

The Union Bank was established in Calcutta in 1839 by Indian traders, but it failed in 1848 due to the 1848-49 economic crisis. The Bank of Upper India was established in 1863 but declared insolvent in 1913. The Allahabad Bank is India’s oldest surviving joint stock bank, having been established in 1865. The Oudh Commercial Bank in Faizabad, which was formed in 1881, fell bankrupt in 1958. Following that was the Punjab National Bank, which was created in Lahore in 1895 and is now one of India’s largest banks.

Reserve Bank of India Act, 1934 

The Reserve Bank of India Act, 1934 was adopted with the goal of establishing the Reserve Bank of India. 

(a) The issue of bank notes is regulated.

(b) to preserve reserves in order to keep the monetary system stable

(c) to keep the country’s currency and credit system running smoothly

The RBI Act covers: 

(i) the constitution 

(ii) powers 

(iii) functions of the Reserve Bank of India. 

The act does not directly deal with banking system regulation, with the exception of a few sections dealing with bank CRR maintenance and direct discount of bills of exchange and promissory notes as part of rediscounting facilities to manage credit to the banking system.

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Banking Regulation Act, 1949 

The Banking Regulation Act, 1949 is one of the important legal frameworks. Initially the Act was passed as Banking Companies Act,1949 and it was changed to Banking Regulation Act 1949. Along with the Reserve Bank of India Act 1935, the Banking Regulation Act 1949 gives banks a slew of rules in a variety of sectors. Some of the important provisions of the Banking Regulation Act 1949 are listed below. 

• According to Sec 5(i) (b), banking is defined as the acceptance of money deposits from the general public for the purpose of lending and/or investment. Such deposits can be repaid on demand or in other ways, and they can be withdrawn by check, draught, order, or other means.
• A banking firm is defined in Section 5(i)(c) as any company that conducts banking activity.
• Any company that does banking business is defined as a banking company under Section 5(i)(c).
• Secured loans or advances are defined under Section 5(i)(h). A secured loan or advance secured by the security of an asset whose market worth is not less than the amount of the loan or advances at any time. Unsecured loans, on the other hand, are defined as a loan or advance that is not secured.
• The definition of banking business is dealt with in Section 6(1).
• Sec 7 mandates that banking businesses conducting business in India use at least one of the words bank, banking, or banking company in their name.
• The Banking Regulation Act restricts or prohibits certain bank activity through a number of clauses.

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LIMITATION ACT, 1963 Limitation Act – Important Aspects

 The Limitation Act of 1963 establishes a time limit within which any suit appeal or application must be filed. The ‘prescribed period’ refers to the period of limitation determined in accordance with the Limitation Act’s provisions. Only when the documents are inside the statute of limitations is a banker entitled to pursue legal action by filing a suit, preferring an appeal, and applying for recovery. If, on the other hand, the documents have expired or have become time barred, the banker will be unable to pursue legal action to recover the debt.

As a result, banks must ensure that all legal loan documentation in their possession are current and legitimate. To put it another way, lenders are responsible for ensuring that all loan documents are correctly executed and that they are all within the required limitation period as set forth in the limitation act. This is one of the most important aspects of bank credit management.

BANKERS’ BOOK EVIDENCE ACT, 1891

 (a) Except for the state of Jammu and Kashmir, the Act covers all of India.

(b) ‘Bank’ and ‘banker’ means

 (i) any organisation or entity that engages in banking

(ii) any partnership or individual whose books are subject to the provisions of this Act

(iii) any money order or savings bank in a post office

(c) All books used in the ordinary work of a bank, such as ledgers, day books, cash books, and other records, are referred to as “bankers’ books.” The records can be kept in any format, including manual records, printed computer printouts, written records, microfilm, magnetic tape, or any other mechanical or electronic data. Such records can be kept on-site or off-site, including at a backup or disaster recovery facility.

(d) The term ‘court’ refers to the person or persons in front of whom a judicial proceeding is held, and the term ‘judge’ refers to a High Court judge.

(e) Different sorts of inquiry proceedings and investigations are referred to as legal proceedings. The term “legal procedures” refers to the process of

(i) any investigation or action in which evidence is or may be given

(ii) an arbitration 

(iii) any investigation or inquiry undertaken by a police officer under the Code of Criminal Procedure, 1973, or any other applicable statute for the acquisition of evidence

(f) an accurate and certified copy of the bank records

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RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993 (DRT ACT) 

Due to a large backlog of cases and the time involved, recovering loan dues from borrowers through the courts has been a big challenge for banks and financial institutions. The Act went into effect on June 24, 1993.

Important highlights of DRT Act 1993: 

1. This Act established special “Debt Recovery Tribunals” to accelerate debt recovery.
2. This Act governs the collection of debts owed to any bank or financial institution, or a group of them, in excess of ten lakhs rupees.
3. Except for the state of Jammu and Kashmir, this Act applies to the entire country of India.
4. The term “debt” refers to the following sorts of bank and financial institution debts:

(a) any liability, whether secured or unsecured, that includes interest

(b) any liability incurred as a result of a decree or order of a Civil Court, or as a result of an arbitration award, or otherwise

(c) any obligation owed under a mortgage that is owed on the date of application and is legally recoverable.

Conclusion

The Legislation of Limitation is an important banking law that requires the lending banker to be careful in initiating legal action against the borrower if the loan defaults. According to the requirements of the Bankers’ Book Evidence Act,1891, banks can present a certified copy of the extracts of original documents, records of the bank as evidence when a claim of the bank is necessary to be proven in a court of law. As a business unit (entity), the bank must adhere to a variety of tax laws. Banks must pay corporate tax at the same rates as other businesses. Apart from that, if banks use the services of professionals, contractors, or other third parties, they must deduct and pay relevant tax at source (TDS) and other special taxes as required by the Income Tax Act of 1961.