Important Acts in the Banking Sector: Important Acts for GA Preparation

By BYJU'S Exam Prep

Updated on: September 25th, 2023

Banking sectors Act has a major role to play in the financial upliftment of Indian Economy. In this article, we have come up with the most Important Banking Acts like Reserve Bank of India Act, 1934; Reserve Bank of India Act, 1934; Insurance Regulatory and Development Authority Act, 1999; Foreign Exchange Management Act, 1999; SARFAESI-2002, etc.

Banking sector is considered as the backbone of an economy. With time, it has gone through various reforms and acts. Banking sector Acts are very crucial for the student who is preparing for Banking/ General Awareness. Let’s dig deep inside in order to improve your score in upcoming banking exams:

Important Acts in the Banking Sector

Negotiable Instrument act, 1881

Co-operative Societies Act, 1912

Reserve Bank of India Act, 1934

The Industrial Finance Corporation of India Act–1948

The Banking Companies (Legal Practitioner Clients’ Accounts) Act–1949

The Industrial Disputes (Banking and Insurance Companies) Act–1949

The Banking Regulation(Companies) Rules–1949

The Banking Regulation Act–1949

The State Bank of India Act–1955

The State Bank of India (Subsidiary Banks) Act-1959

The Subsidiary Banks General Regulation–1959

The Deposit Insurance and Credit Guarantee Corporation Act–1961

Banking Companies (Acquisition and Transfer of Undertaking) Act, 1969

The Regional Rural Banks Act–1976

The Banking Companies (Acquisition and Transfer of Undertakings) Act–1980

The National Bank for Agriculture and Rural Development Act–1981

NABARD General Regulations 1982

Banking Companies (Period of Preservation of Records) Rules, 1985

Banking Companies (Regulation)Rules,1985

The National Housing Bank Act–1987

SIDBI General Regulations, 1990

Securities and Exchange Board of India Act, 1992

The Industrial Finance Corporation (Transfer of Undertakings and Repeal) Act–1993

Recovery of Debts due to Banks and Financial Institutions Act,1993

Industrial Reconstruction Bank (Transfer of Undertaking & Appeal) Act–1997

Insurance Regulatory and Development Authority Act, 1999

Foreign Exchange Management Act, 1999

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI-2002)

Prevention of Money Laundering Act, 2002

Fiscal Responsibility and Budget Management Act, 2003

Industrial Development Bank (Transfer of Undertaking & Repeal) Act–2003

Credit Information Companies (Rules & Regulation) Act–2005

Government Securities Act, 2006

Banking Ombudsman Scheme

The above-mentioned Banking Acts are of utmost importance, but below, we have dealt with only those Acts that are frequently asked in the examination and are totally important from the exam’s perspective.

Negotiable Instrument Act, 1881

The Negotiable Instruments Act was introduced by the Imperial Legislative Council of India (British) and was enacted on 9th December 1881 to define laws related to negotiable instruments. This act has been amended a lot many times and the last amendment done was in 2002. As per Section 13 of this Act, A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer. Negotiable Instruments may include Inland Instruments, Foreign Instruments, and Bank Drafts.

Negotiable instruments may be transferred from one person to another, who is known as a holder in due course. Upon transfer, also called negotiation of the instrument, the holder obtains full legal title to the instrument. They may be transferred by delivery or by endorsement and delivery. Examples: promissory notes, bills of exchange, cheques, drafts, certificates of deposit.

Reserve Bank of India Act, 1934

The RBI Act, 1934 is a legislative act under which the Reserve Bank of India was established. Along with the Companies Act, it was amended in 1936 to provide a framework for the supervision of banking firms in India. The act also defines Scheduled Banks.

Here are some of the highlights of this act:

  • Section 17 of the Act defines the manner in which the RBI can conduct business.
  • Section 18 defines emergency loans to banks.
  • Section 21 states that the RBI must conduct the banking affairs for the central government and manage public debt.
  • Section 22 states that only the RBI has the exclusive rights to issue currency notes in India.
  • Section 24 states that the maximum denomination of a note can be ₹10,000.
  • Section 26 describes the legal tender character of the Indian bank notes.
  • Section 28 allows the RBI to form rules regarding the exchange of damaged and imperfect notes.
  • Section 31 states that in India only the RBI or the central government can issue and accept promissory notes that are payable on demand.
  • Section 42(1) states that every scheduled bank must maintain an average daily balance with the RBI.

Banking Regulation Act, 1949

This act regulates all banking firms in India i.e. it provides a framework via which commercial banking in India is supervised and regulated.

Here are some of the highlights of this act:

  • Primary Agricultural Credit Society and Cooperative land mortgage banks are not included under this act.
  • The act gives the RBI the power to issue new bank licences; have regulations over shareholding and the voting rights of shareholders.
  • It also allows RBI to supervise the appointment of the boards and regulate the operations of banks.
  • It also lays down the instructions for audits to be conducted by the RBI, control moratorium, mergers, and liquidation issue directives in the interests of public good and on banking policy.
  • Cooperative Banks were included in this act under the 1965 amendment.

New Updates: Banking Regulation (Amendment) Bill, 2020 was introduced in Lok Sabha that will strengthen cooperative banks by enhancing professionalism, enabling access to capital, improving governance, and ensuring sound banking through RBI. It comes in the backdrop of PMC scam. It seeks to enforce banking regulation guidelines of RBI in cooperative banks, while administrative issues will still be guided by the Registrar of Cooperative Societies. It will also bring cooperative banks on par with banking sector development through better management and proper regulation.

State Bank of India Act, 1955

Under the State Bank of India Act of 1955, the Reserve Bank of India acquired a controlling interest in the Imperial Bank of India. On 1 July 1955, the Imperial Bank of India became the State Bank of India. In 2008, the Government of India acquired the Reserve Bank of India’s stake in the SBI to remove any conflict of interest between the two as the RBI is the country’s topmost banking regulatory authority.

Deposit Insurance and Credit Guarantee Corporation Act, 1961

Under this Act, Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI was set up on 15th July 1978 to provide insurance of deposits and guaranteeing of credit facilities. DICGC insures saving deposits, fixed deposits, current deposits, and recurring deposits up to a limit of Rs. 100,000. As per this act, all new commercial banks are required to be registered as soon as they are granted a license by the Reserve Bank of India.

Regional Rural Banks Act, 1976

Under this act, Regional Rural Banks were established to create an alternative channel to the cooperative credit structure and to ensure sufficient institutional credit for the rural and agriculture sector. This act was recommended by  M. Narasimham. They are jointly owned by the Government of India, the concerned State Government and Sponsor Banks with the issued capital shared in the proportion of 50 percent, 15 percent, and 35 percent respectively.

Securities and Exchange Board of India Act, 1992

Under this act, the Securities and Exchange Board of India (SEBI) was given Statutory powers on 30th January 1992. The Act was enacted for the regulation and development of the securities market in India. It was amended in the years 1995, 1999 and 2002 to meet the ever-evolving needs of the securities market. 

Foreign Exchange Management Act, 1999

Foreign Exchange Management Act, 1999 popularly known as FEMA is the Bible of all Forex transactions that happen in the country. In other words, it is a set of regulations that empowers the Reserve Bank of India to pass regulations and enables the Government of India to pass rules relating to foreign exchange in tune with the foreign trade policy of India.

  • It was enacted to consolidate and amend the law relating to foreign exchange in order to facilitate external trade and to promote orderly development and maintenance of the foreign exchange market in India.
  • It replaced the Foreign Exchange Regulation Act (FERA), which had become incompatible with the pro-liberalization policies of the Government of India.
  • The act paved the way for a new foreign exchange management regime that was consistent with the emerging framework of the World Trade Organisation (WTO).


Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 is a law that helps financial institutions to ensure asset quality in number of ways. The Act upholds three methods for recovery of NPAs. They are as follows:

  1. Securitization;
  2. Asset Reconstruction; and
  3. Enforcement of Security without the intervention of the Court.

SARFAESI Act, 2002 does not apply to unsecured loans, loans below ₹100,000 or loans where remaining debt is below 20% of the original principal amount

Prevention of Money Laundering Act, 2002

The act was enacted in order to prevent Money Laundering as well as to provide provisions for the confiscation of properties obtained from money laundering. This act was amended in 2005, 2009 and 2012. It involves the following:

  • Punishment for Money laundering
  • powers of attachment of tainted property
  • adjudicating authority
  • the presumption in interconnected transactions
  • Special court and FIU – Ind (Financial Intelligence Unit – India

Fiscal Responsibility and Budget Management (FRBM) Act, 2003

FRBM act set targets for the Government of India to establish financial discipline, improve the management of public funds, strengthen fiscal prudence and reduce its fiscal deficits. It also intended to give flexibility to RBI for managing inflation in India. It was introduced with the following objective:

  • Introduction of a transparent system of fiscal management within the country
  • Ensuring equitable distribution of debt over the years
  • Ensuring fiscal stability in the long run

Government Securities Act, 2006

Government Securities Act, 2006 is legislation of the Parliament of India to introduce various improvements in the government securities market and the management of government securities by the Reserve Bank of India (RBI). It replaced Public Debt Act, 1944. 

Banking Ombudsman Scheme

Banking Ombudsman Scheme is an inexpensive forum for bank customers for resolution of complaints relating to certain services rendered by banks. It was implemented by the RBI to redress the complaints of customers on certain types of banking services provided by banks and to facilitate the settlement of those complaints. It was introduced under the Banking Regulation Act of 1949 by RBI.

Institutions covered under the Banking Ombudsman Scheme

  • All Scheduled Commercial Banks,
  • Regional Rural Banks (RRBs) and
  • Scheduled Primary Co-operative Banks (UCBs) 
  • Some NBFCs

Fees: The Banking Ombudsman does not charge any fee for filing and resolving customers’ complaints

RBI has 22 Ombudsman Offices in India. 

Integrated Ombudsman scheme

About Integrated Ombudsman scheme

  • The scheme aims to simplify the process of redress of grievances mechanism easier for resolving customer complaints against entities regulated by RBI.
  • Central theme of Integrated Ombudsman scheme is based on ‘One Nation-One Ombudsman’ for customers to file their complaints, submit the documents, track status, and provide feedback.
  • A multi-lingual toll-free number has also been launched to provide all relevant information on grievance redress and assistance for filing complaints.

One Nation One Ombudsman

  • RBI integrated three Ombudsman schemes and adopted ‘One Nation One Ombudsman’ approach for grievance redressal to make the alternate dispute redress mechanism simpler and more responsive to the customers of regulated entities
  • Earlier, there were 3 Ombudsman schemes in India:
    • Banking Ombudsman Scheme
    • Ombudsman Scheme for Non-Banking Financial Companies
    • Ombudsman Scheme for Digital Transactions.
  • Over 20 ombudsman offices of Reserve Bank of India (RBI) work on consumers grievance redressal process across the country.

What are the advantages of Integrated Ombudsman scheme?

  • It will act as faster resolving any grievances of customers.
  • Multi-lingual toll-free helpline number will, in addition to building trust and confidence, also reduce expenditure on both financial and human resources.
  • It will help in providing all the relevant information on grievance redress and assistance for filing complaints.
  • Under this new initiative, there will be a single point of reference for the customers to file their complaints, submit documents, track the status of their complaints.
  • It will also aid with filing complaints.

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