Study Notes on Important Acts of Banking Sector for UGC NET Commerce

Important Acts of 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

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.

A. Negotiable Instrument act, 1881

The Negotiable Instruments Act was introduced by the Imperial Legislative Council of India 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.

B. 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 banknotes.
• 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.

C. 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.

D. 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.

E. 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.

F. 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 per cent, 15 per cent, and 35 per cent respectively.

G. 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. 

H. Foreign Exchange Management Act, 1999

This act 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 foreign exchange market in India. This Act 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).

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

SARFAESI Act, 2002 enables banks and other financial institutions to auction residential or commercial properties to recover loans. ARCIL, the first Asset Reconstruction Company (ARC) of India was set up under this act. The law does not apply to loans below ₹100,000 or where the remaining debt is below 20% of the original principal amount.

J. 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)

K. Fiscal Responsibility and Budget Management Act, 2003

FRBMA Act was introduced to eliminate the revenue deficit of the country. It also aims to reduce India's fiscal deficit, improve economic management and the overall management of public funds by moving towards a balanced budget.

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