Source- Courting The Law
The foundation of Indian banking sector can be traced back to the 18th century, and has vastly developed since then. The initial banks in India comprised of traders’ banks that indulged only in financing activities. Banking industry during the pre-independence timeevolved with the Presidency Banks, which then transformed into the Imperial Bank of India and eventually into the State Bank of India.In the initial years of the industry, there existed a highly volatile work environmentand banks were majorlyowned by private individuals. It was only after the Nationalisation in 1969 and 1980 which transformed the face of banking in India and public sector banks were set up.The importance of private and foreign players has recently been recognised in a competitive scenario which has pushed the industry to move towards greater liberalisation.
Structure of banking sector in India
Reserve bank of India-
RBI is the Central Bank of India. It is owned by the government of our country and is also known as the banker’s bank. It was established under the Reserve Bank of India Act, 1934on 1st April 1935. It holds the top position in the banking structure and is responsible for various developmental and promotional functions.It has wide range of powers to supervise and control the banking structure of India. It plays a pivotal roleto formulate and implement monetary and credit policies in India and has the monopoly power to issue coins and currency notes.
Commercial bank are institutions that accept deposits, lending loans and advances to general public and offer other allied services to its customers.The sole purpose of these institutions is to profit making. They are owned by government or private of both and cater to the financial needs of industries and various sectors like agriculture, rural development, etc.
Commercial bank includes public sector, private sector, foreign banks and regional rural banks:
Public Sector Banks: The public sector contributes to 75 % of total banking business in India. There are 21 Nationalised banks in India, State Bank of India being the largest commercial bank in terms of volume of all commercial banks.
Private Sector Banks: The private-sector banks are institutions where greater partsi.e. 51% of stake or equity are held by the private shareholders and not by government.
Foreign Banks:A foreign bank established on Indian land have their head offices abroad.They are obligatedto follow the regulations of their home country as well astheir host country. Loan limits for these banks are based on the capital of the parent bank, which allows these foreign banks to give more loans than other subsidiary banks.These banks are CITI bank, HSBC, and Standard Chartered etc. India has 36 foreign banks at present.
Regional Rural Bank (RRB):The government of India initiated with theRRBs in October, 1975 to provide credit to the weaker sections of the rural areas, particularly to the small and marginal farmers, agricultural labourers, and small entrepreneurs. There are 82 RRBs in the country NABARD being the apex institution in the agricultural and rural development sector.
Co-operative banks ware set up underCo-operative Act in 1904 with the main objective of providing rural credit to the members of the society. They are organised and managed on the principal of co-operation and mutual help and play a vital role today in rural co-operative financing.The Cooperative Credit Societies Act, 1904 was amended in 1912, with the aim to enable organisation of non-credit societies.
Scheduled and Non-Scheduled Banks
The scheduled banks are those which are mentioned in the second schedule of the RBI Act, 1934. These banks have a paid-up capital and reserves of value of not less than Rs. 5 lakhs, and have to satisfy RBI about their affairs which are carried out in the interest of their depositors.All commercial banks; Indian and foreign, regional rural banks, and state cooperative banks are listed as scheduled banks.
Regulatory Bodies: paradigm in regulation of financial markets
The Indian financial system is regulated by five major regulatory bodies:
RBI - the apex monetary institution:
RBI was Established in April, 1935 in Calcutta, and later shifted to Mumbai in 1937 which after its nationalization in 1949, is owned by the Government of India. It has 19 regional offices and 9 sub-offices. It is the sole official issuer of the Indian coin and currency notes. RBI is responsible to regulatethe banking and financial system of the country by issuing guidelines and instructions to all the commercial banks and financing institutions throughout India.
Role of RBI
Controlling money supply
Monitoring indicators like GDP and inflation
Maintaining people’s confidence in the banking and financial system by providing tools such as ‘Ombudsman’
Formulating monetary policies such as inflation control, bank credit and interest rate control
SEBI- the regulator for the securities market:
Securities Exchange Board of India (SEBI) was established in 1988 and was legally recognised in 1992 as asupervising authority to regulate the functions of securities market to preventany malpractices and protect the interests of the investors. Its Headquarters are situatedat Mumbai, with its regional offices in New Delhi, Kolkata, Chennai and Ahmedabad.
Role of SEBI
Protecting the interests of investors by providing them with adequate education and guidance
Regulating and controlling the business of stock exchanges and other security markets
Preventing capital market frauds
Supervising the performance and auditing the work of stock market
Insurance Regulatory and Development Authority of India (IRDAI)
IRDAI was established in 1999 through an act passed by the Parliament of India. It is an autonomous statutory body set up for regulating and development of the insurance sector in India. It is headquartered in Hyderabad and is responsible for promoting insurance business in India.
Forward Market Commission of India (FMC)
Forward Market Commission of India is a statutory body, established in Mumbai under the Forward Contracts (Regulation) Act, 1952. It is a regulatory authority governed by the Ministry of Finance. The commission allows commodity trading in 22 exchanges in India and is now merged with SEBI.
Pension Fund Regulatory and Development Authority (PFRDA)
PFRDA was established in October 2003 by the Government of India with an aim to provide retirement income to all the citizens. It is responsible for the developmentof the pension sector in India. The National Pension System (NPS) was launched in January 2004 with theobjective to bring pension reforms and instil the habit of saving for retirement amongst the government employees.
Key Banking Regulations
The principal governmental and regulatory policies that govern the banking sector areregulated by the Reserve Bank of India Act 1934 (RBI Act) and the Banking Regulation Act 1949 (BR Act). The Reserve Bank of India (RBI), India’s Apex banking institution, issues various guidelines, notifications and policies regularly to regulate the banking and finance industry. In addition to this, the Foreign Exchange Management Act 1999 (FEMA) regulates inter-country exchange transactions by Indian entities, including banks.
The key statutes and regulations that rule the banking sector and scheduled commercial banks in India are as follows:
Reserve Bank of India Act, 1934
The RBI Act was enacted to carry out functions of the RBI. It vests in the RBI, powers to regulate the monetary policy of India and asserts the constitution, incorporation, capital, management, business and functions of the RBI.
Banking Regulation Act, 1949
The Banking Regulations Act provides a framework to oversee and regulate all banks. It also gives the RBI the power to permit licences to banks and regulate their business operation.
Foreign Exchange Management Act, 1999
FEMA is the primary cross-border exchange regulating legislation in India. FEMA and the rules made thereunder controlinter-country activities of banks. These are managed by the RBI.
The other key statutes include-
the Negotiable Instruments Act 1881;
the Recovery of Debts Due to Banks and Financial Institutions Act 1993;
the Bankers Books Evidence Act 1891;
the Payment and Settlement Systems Act 2007;
the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002; and
The Banking Ombudsman Scheme 2006.
Public sector banks are controlled by the Banking Regulation Act and the statute in light of which they have been nationalised and constituted. These include:
banks established under the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 or the Banking Companies (Acquisition and Transfer of Undertaking Act) 1980; and
The State Bank of India and subsidiaries and affiliates of the State Bank of India constituted and regulated by the State Bank of India Act 1955 and the State Bank of India (Subsidiary Banks) Act, 1959 respectively.
The RBI Act, the BR Act and FEMA together have wide discretionary powers and are authorised to supervise, inspect and investigate the affairs of banks and to inflict penalties in the cases of its non-compliance.
Consumer protection Act, 1986-
The Banks in India are also subject to consumer protection laws that act as an alternative and speedy remedy to litigation in courts, in order to protect the interest of its customers.The relationship between a bank and its customer is regarded as that of a consumer and service provider and therefore The Consumer Protection Act 1986 provides an adequate mechanism to solve such disputes. Three-tier machinery has been set up to deal with complaints:
district forum which operates at the district level and deals with consumer complaints of a value not exceeding 20 lakh rupees;
state commission which runs at the state level and deals with consumer complaints of a value between 2 lakh rupees but not exceeding 1 crore rupees. It also entertains appeals against the orders passed by the district forum; and
National commission that works at the national level and deals with consumer complaints of a value exceeding 10 crore rupees. It also entertains appeals against the orders of the state commission.
Internal Controls and Banking Governance
Every bank in India is to be constituted in the form of a company, save and except for foreign banks, which are allowed to conduct their operations in India through branches. The Banking Regulation Act lays down the key provisions to be duly followed by each banking company in relation to the constitution of its board, the basis for appointment of its directors, and the role and responsibility of the board. Like.
Guidelines for the Directors
Directors must have professional or other experience-At least 51% of the board must have specialised practical know-how in the identified fields like accountancy, banking and economics of which, at least twodirectors must have an expertise inagriculture and rural economy, co-operation or small-scale industry.
A bank director must not have a personal interest in, or connected with anycompany or firm carrying on business, commerce or industry which is not a small-scale industrial concern. They are not permitted to own a trade, commercial or industrial unit andalsocannot hold office continuously for a period exceeding eight years, other than the chairman or a full-time director.
A bank cannot have more than three directors who are directors of companies which are together entitled to exercise voting rightsexceeding 20% of the total voting rights of the bank's shareholders.
Each bank must designate one director as chairman of the board. A full-time chairman who manages the bank's working, subject to the supervision, command and orders of the board.
Corporate Governance Standards
Apart from the provisions of the Banking Regulation Act, the Companies Act, 2013 also lays down certain corporate governance standards which should be complied with.Moreover, since most banks which are incorporated in India are listed institutions, there are various corporate governance standards that these banks are obligated to follow under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. According to these regulations, listed organisations are required to establish the following committees for smooth functioning and ensuring proper compliance with various corporate governance policies (a) audit committee to review compliance-related matters, including related party transactions; (b) nomination and remuneration committee to review the remuneration policies in relation to the management from time to time, (c) stakeholders relationship committee to specifically look into various aspects of interest of shareholders, debenture holders and other security holders, and (d) risk-management committee to set up risk-management controls and devise risk-management policies,
Additionally, there are a number of other guidelines furnished by the RBI which govern the working of a bank and its management, including provisions relating to conflict of interest, an adequate compliance team and appropriate speedy customer redressal machinery.
https://www.lexology.com/library/detail.aspx?g=a1976e5b-288e-4dce-be91-ecd57fc575c9 accessed on 6th December, 2020 at 11:30 pm
https://www.globallegalinsights.com/practice-areas/banking-and-finance-laws-and-regulations/indiaaccessed on 7th December, 2020 at 12:45 am
https://www.jagranjosh.com/general-knowledge/structure-of-banking-sector-in-india-1448530019-1accessed on 7th December, 2020 at 2:35 pm