UNIT 1

HISTORICAL DEVELOPMENT OF BANKING SYSTEM

Origin of the word Bank:
According to some authorities, the word “Bank” is derived from the word bancus or banque,
which means a bench. Some other authorities opine that the word “Bank” is derived from the
German word “back” which means a joint stock fund.
Early history of Banking:
The Babylonians had developed a banking system as early as 2000 B.C. The Roman’s minute
regulations as to the conduct of private banking were calculated to create the utmost confidence
in it. In the middle of 12th century banks were established at Venice and Genoa. The modern
banking may be traced to the money dealers in Florence.
In England:
In England, during the reign of Edward III money changing was taken up by a Royal Exchanger
for the benefit of the Crown. Later, merchants decided to keep their cash with goldsmiths. In
1672 English Banking received a rude setback. The Bank of England was established in 1694.
With the enactment of Tonnage Act small private banking firms were extremely affected by the
new bank. Another important Act gave a monopoly of note issue to the Bank of England. This
was the first of the central banks and is still the banker for the English government. The BOE
was originally privately owned but was nationalised in 1946 and eventually became an
independent organization in 1998. The BOE issues all banknotes for England and Wales and it is
responsible for regulating bank notes issued by Scottish and Northern Irish banks. As the
forerunner to the modern banking system of the UK, the BOE manages monetary policy and has
its headquarters in the City of London. The Bank of England keeps safe all the gold reserves of
the UK and that of some other countries. It is the largest protector of gold reserves in the world.
In India:
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 the East
India Company era, agency houses were involved in banking. Three Presidency Banks were
established in Bengal, Bombay and Madras in the early 19th century. These banks functioned
independently for about a century before they were merged into the newly formed Imperial Bank
of India in 1921. The Imperial Bank was the forerunner of the present State Bank of India. The
latter was established under the State Bank of India Act of 1955 and took over the Imperial Bank.
The Swadeshi movement witnessed the birth of several indigenous banks including the Punjab
National Bank, Bank of Baroda and Canara Bank. In 1935, the Reserve Bank of India was
established under the Reserve Bank of India Act as the central bank of India. In spite of all these
developments, independent India inherited a rather weak banking and financial system marked
by a multitude of small and unstable private banks whose failures frequently robbed their
middle-class depositors of their life’s savings. After independence, the Reserve Bank of India
was nationalized in 1949 and given wide powers in the area of bank supervision through the
Banking Companies Act (later renamed Banking Regulations Act). The nationalization of the
Imperial bank through the formation of the State Bank of India and the subsequent acquisition of
the state-owned banks in eight princely states by the State Bank of India in 1959 made the
government the dominant player in the banking industry.

TYPES OF BANKS - FUNCTIONS

The bank takes deposits at a much lower rate from the public called the deposit rate and lends
money at a much higher rate called the lending rate.
Banks can be classified into various types. Given below are the bank types in India:-
 Central Bank
 Cooperative Banks
 Commercial Banks
 Regional Rural Banks (RRB)
 Local Area Banks (LAB)
 Specialized Banks
 Small Finance Banks
 Payments Banks
FUNCTIONS OF BANKS
The major functions of banks are almost the same but the set of people each sector or type deals
with may differ. Given below the functions of the banks in India:
1. Acceptance of deposits from the public
2. Provide demand withdrawal facility
3. Lending facility
4. Transfer of funds
5. Issue of drafts
6. Provide customers with locker facilities
7. Dealing with foreign exchange
Apart from the above-mentioned list, various utility functions also need to be performed by the
various banks.
1. Central Bank
The Reserve Bank of India is the central bank of our country. Each country has a central bank
that regulates all the other banks in that particular country.
The main function of the central bank is to act as the Government’s Bank and guide and regulate
the other banking institutions in the country. Given below are the functions of the central bank of
a country:
 Guiding other banks
 Issuing currency
 Implementing the monetary policies
 Supervisor of the financial system
In other words, the central bank of the country may also be known as the banker’s bank as it
provides assistance to the other banks of the country and manages the financial system of the
country, under the supervision of the Government.
2. Cooperative Banks
These banks are organised under the state government’s act. They give short-term loans to the
agriculture sector and other allied activities.
The main goal of Cooperative Banks is to promote social welfare by providing concessional
loans
They are organised in the 3-tier structure
 Tier 1 (State Level) – State Cooperative Banks (regulated by RBI, State Govt, NABARD)
 Funded by RBI, the government and NABARD. Money is then distributed to the
public
 Concessional CRR and SLR apply to these banks. (CRR- 3%, SLR- 25%)
 Owned by the state government and top management is elected by members
 Tier 2 (District Level) – Central/District Cooperative Banks
 Tier 3 (Village Level) – Primary Agriculture Cooperative Banks
3. Commercial Banks
 Organised under the Banking Companies Act, 1956
 They operate on a commercial basis and its main objective is profit.
  They have a unified structure and are owned by the government, state, or any private
entity.
 They tend to all sectors ranging from rural to urban
 These banks do not charge concessional interest rates unless instructed by the RBI
 Public deposits are the main source of funds for these banks
The commercial banks can be further divided into three categories:
1. Public sector Banks – A bank where the majority stakes are owned by the Government
or the central bank of the country.
2. Private sector Banks – A bank where the majority stakes are owned by a private
organization or an individual or a group of people
3. Foreign Banks – The banks with their headquarters in foreign countries and branches in
our country, fall under this type of bank
Given below is the list of commercial banks in our country:

Commercial Banks in India

Public Sector Banks Private Sector Banks Foreign Banks

State Bank of India Catholic Syrian Bank Australia and New Zealand Banking
Group Ltd.
Allahabad Bank City Union Bank
National Australia Bank
Andhra Bank Dhanlaxmi Bank
Westpac Banking Corporation
Bank of Baroda Federal Bank
Bank of Bahrain & Kuwait BSC
Bank of India Jammu and Kashmir Bank
AB Bank Ltd.
Bank of Maharashtra Karnataka Bank
HSBC
Canara Bank Karur Vysya Bank
CITI Bank
Central Bank of India Lakshmi Vilas Bank
Deutsche Bank
Corporation Bank Nainital Bank
DBS Bank Ltd.
Dena Bank Ratnakar Bank
United Overseas Bank Ltd
Indian Bank South Indian Bank
J.P. Morgan Chase Bank
Indian Overseas Bank Tamilnad Mercantile Bank
 Oriental Bank of Axis Bank Standard Chartered Bank
Commerce
Development Credit Bank (DCB There are over 40 Foreign Banks in
Punjab National Bank Bank Ltd) India
Punjab & Sind Bank HDFC Bank
Syndicate Bank ICICI Bank
Union Bank of India IndusInd Bank
United Bank of India Kotak Mahindra Bank
UCO Bank Yes Bank
Vijaya Bank IDFC
IDBI Bank Ltd. Bandhan Bank of Bandhan
Financial Services.

4. Regional Rural Banks (RRB)

 These are special types of commercial Banks that provide concessional credit to
agriculture and rural sectors.
 RRBs were established in 1975 and are registered under the Regional Rural Bank Act,
1976.
 RRBs are joint ventures between the Central government (50%), State government
(15%), and a Commercial Bank (35%).
 196 RRBs have been established from 1987 to 2005.
 From 2005 onwards government started the merger of RRBs thus reducing the number of
RRBs to 82
 One RRB cannot open its branches in more than 3 geographically connected districts.
Aspirants can check the list of Regional Rural banks in India in the linked article.
5. Local Area Banks (LAB)
 Introduced in India in the year 1996
 These are organized by the private sector
 Earning profit is the main objective of Local Area Banks
 Local Area Banks are registered under Companies Act, 1956
  At present, there are only 4 Local Area Banks all of which are located in South India
6. Specialized Banks
Certain banks are introduced for specific purposes only. Such banks are called specialized banks.
These include:
 Small Industries Development Bank of India (SIDBI) – Loans for a small-scale industry
or business can be taken from SIDBI. Financing small industries with modern technology
and equipment is done with the help of this bank
 EXIM Bank – EXIM Bank stands for Export and Import Bank. To get loans or other
financial assistance with exporting or importing goods by foreign countries can be done
through this type of bank
 National Bank for Agricultural & Rural Development (NABARD) – To get any kind of
financial assistance for rural, handicraft, village, and agricultural development, people
can turn to NABARD.
There are various other specialized banks and each possesses a different role in helping develop
the country financially.
Small Finance Banks
As the name suggests, this type of bank looks after the micro industries, small farmers, and the
unorganized sector of society by providing them with loans and financial assistance. These banks
are governed by the central bank of the country.
Given below is the list of the Small Finance Banks in our country:

AU Small Finance Equitas Small Finance Jana Small Finance Northeast Small Finance
Bank Bank Bank Bank

Capital Small Finance Fincare Small Finance Suryoday Small Ujjivan Small Finance
Bank Bank Finance Bank Bank

Esaf Small Finance Utkarsh Small

Bank Finance Bank

Payments Banks
A newly introduced form of banking, the payments bank has been conceptualized by the Reserve
Bank of India. People with an account in the payments bank can only deposit an amount of up to
Rs.1,00,000/- and cannot apply for loans or credit cards under this account.
Options for online banking, mobile banking, the issue of ATMs, and debit cards can be done
through payments banks. Given below is a list of the few payments banks in our country:
 Airtel Payments Bank
 India Post Payments Bank
 Fino Payments Bank
 Jio Payments Bank
 Paytm Payments Bank
 NSDL Payments Bank

NATIONALIZATION VIS-A-VIS PRIVATIZATION: EVALUATION

Nationalization refers to the transfer of ownership and control of banks from private individuals
or entities to the government. This typically involves the government acquiring a majority stake
in the bank and exercising significant control over its operations. Nationalization is often driven
by the objective of promoting financial stability, ensuring equitable access to banking services,
and directing credit towards priority sectors of the economy.
Privatization, on the other hand, involves the transfer of ownership and control of banks from
the government to private individuals or entities. This is done through the sale of shares or assets
of state-owned banks to private investors. Privatization is often pursued with the aim of
improving efficiency, promoting competition, and reducing the burden on the government in
terms of financial resources and management responsibilities.
The evaluation of nationalization and privatization in banking law in India involves considering
their respective advantages and disadvantages.
Advantages of nationalization include:
 Enhanced government control over the banking sector, allowing for the implementation
of policies that align with national priorities.
 Increased access to banking services, particularly in rural and underserved areas.
 Directing credit towards priority sectors, such as agriculture, small-scale industries, and
marginalized sections of society.
 Promoting financial stability and preventing systemic risks.
Disadvantages of nationalization include:
 Potential inefficiencies and bureaucratic hurdles associated with government control.
 Limited autonomy for banks in decision-making and operational matters.
 Risk of political interference in the functioning of banks.
  Lack of competition and innovation due to the dominance of state-owned banks.
Advantages of privatization include:
 Improved efficiency and competitiveness through private sector management practices.
 Access to private capital and expertise, which can help banks expand their operations and
improve their financial performance.
 Enhanced innovation and customer-centric approaches.
 Reduction in the burden on the government in terms of financial resources and
management responsibilities.
Disadvantages of privatization include:
 Potential concentration of economic power in the hands of a few private entities.
 Risk of neglecting the interests of marginalized sections of society and underserved areas.
 Possibility of excessive risk-taking and focus on short-term profitability.
 Potential job losses and labor-related issues during the transition.
The evaluation of nationalization and privatization in banking law in India is a complex and
ongoing process. It requires considering the specific context, objectives, and challenges faced by
the banking sector in India. The approach chosen should aim to strike a balance between
promoting financial stability, ensuring equitable access to banking services, and fostering
efficiency and innovation.
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Nationalization is a process wherein the government of a country brings the working entities or
the organisations under the control or the power of the government. During this process the
government takes control over the privately owned organisations, converting them into state
owned entities and in this case, it includes or consists of privately owned banks. This is typically
done to gain social, political or economic gains.
The major or crucial reason or evolution for the current banking systems in India is the
Nationalization of Banks in the year 1969. In that year Government of India nationalised 14
major banks whose national deposits were above 50 crores. This was done under the Indira
Gandhi government. The list of banks that were nationalized or brought under the control of the
government and as a public sector entity are as follows:
• Allahabad Bank
• Bank of Baroda
• Bank of India
• Canara Bank
• Central Bank of India
• Dena Bank
• Indian Bank
• Indian Overseas Bank
• Punjab National Bank
• Syndicate Bank
• Union Bank of India
• United Bank of India
• UCO Bank
• Vijaya BankTop of Form
Eventually in 1980 six more private banks were nationalised to the earlier 14 major banks. The
names of these six banks are as follows:
 Andhra Bank
 Corporation Bank
 New Bank of India
 Oriental Bank of Commerce
 Punjab and Sind Bank
 Vijaya Bank
An overview of the benefits of this step is that the banks were spreading their branch networks
throughout the country, nation-wide deployment of credit and increased mobilization of
resources. The reason behind the immense development of the Indian banking system was this
process of nationalization that was implemented in our country. This happened soon after
independence wherein people were in dire need of access to various facilities but at the same
time had no idea or knowledge about the same. Thus, nationalization solved this issue as it
brought the procedure or access of banks easy and equal to all citizens.
Banks had been taken under the government control in many nations. When we specifically talk
about the case of India the nationalization process took place in majorly two phases, the first one
on July 19, 1969 and the second one on April 15, 1980. During the first phase such a step was
taken in order to promote social welfare, increase credit availability in rural areas, and reduce
concentration of economic power. The nationalized banks had to mandatorily shift a certain
amount or percentage of their lending towards sectors like agriculture, small scale industries and
exports.
When banks were nationalized, it came directly under the control of the Banking Regulation Act,
1949. RBI later became the regulatory authority for banking in India.
Situation of Banks Before Nationalization[2]
Before nationalisation took place in 1969, only State Bank of India was a public sector
undertaking. It was also the first nationalized bank of India which was earlier known as the
Imperial Bank of India. In the year 1951, there were more than 400 commercial banks who
worked under the private sector. More than 360 banks had failed or collapsed between 1947 and
1955. The rate at which the banks were collapsing was around 40 banks within a duration of one
year. This in turn resulted to a huge loss for the people who had invested their money in those
particular banks and also affected the economy of our country on a large scale. This trend of
collapsing of banks continued throughout the 1950s till the first half of 1960s.
This situation had forced the then finance minister Mr. Morarji Desai, under the leadership of
Jawaharlal Nehru as the Prime Minister,to launch a massive bank consolidation drive. It brought
down the number of banks from 328 in 1960 to 68 in 1965.
WHAT IS NATIONALIZATION
The concept of nationalization is not just limited to banks but also various other sectors or
working organisations that exist in the country. Mainly those which are privately owned by
individuals or other entities. It also brings these entities under the public ownership of a national
government or state. This would widen the parameters of control that the government has over
the state as well as the citizens of the nation. As per the International Monetary Fund (IMF)
Nationalisation is a process by which the government takes over private assets and brings them
under public ownership.
There is a fine line of difference between nationalization and privatisation and with
demutualization. Privatization is a concept in contrast wherein the ownership and management
are transferred from public to private sector. On the other hand, demutualization is basically a
process in which a customer owned mutual organization or co-operative changes legal form to a
joint stock company.
BENEFITS OF NATIONALIZATION
An overview of the benefits of this step is that the banks were spreading their branch networks
throughout the country, nation-wide deployment of credit and increased mobilization of
resources. The reason behind the immense development of the Indian banking system was this
process of nationalization that was implemented in our country. This happened soon after
independence wherein people were in dire need of access to various facilities but at the same
time had no idea or knowledge about the same. Thus, nationalization solved this issue as it
brought the procedure or access of banks easy and equal to all citizens.
Economic Rationale Behind Nationalization[3]
 The banks were only available to a certain geographical and social sector. There were a
lot of issues related to the reach and flow of important sectors[4]. Farmers for instance
 play a vital role in boosting up the economy of our country and banks provide them with
loans and other facilities to carry out farming in a profitable way.
 Banks did not give enough credit to the industrial and agricultural sector. Nationalisation
played an important role in solving this issue. It was very necessary because around 75%
of our country at the time of independence constituted of the agriculture sector.
 The collapse of the banks before nationalisation was causing distress among the people
who had invested their money and was also a reason for the regional imbalance in the
banking sector.
 Nationalisation developed the financial inclusion of people in the banking arena. During
the earlier times people preferred to keep their money either with themselves or usually
gave it to the money lenders who charged exorbitant interest rates. This was all the more
a reason for the nationalisation of banks.

SOCIAL CONTROL MEASURES

The major positive side of this process is the broad social control over banks which aims at
ensuring that the banks operate in a manner that aligns or goes in par with the social and
economic objectives of the society. In India during the British control, people suffered a great
number of losses as the landlords and the moneylenders, who performed or functioned as a bank
used to lend money at exorbitant interest rates which was clearly not functioning for the welfare
of the society.
The various countries that opted for nationalization of banks are as follows:
1. United Kingdom (1946 & 2007): Soon after the world war the Labour Government lead
by Clement Atlee nationalized the Bank of England.
2. India (1969 &1080): As mentioned earlier the nationalization of banks in India happened
in two different phases. During the first one 14 banks were nationalised followed by the
second phase wherein 6 more banks were added to the list.
3. Argentina (1946 &2008): The Central bank and the other financial institutions of
Argentina were nationalized by the then President of Argentina, President Juan Perón.
This was done as a part of the broader economic policies of the nation.
4. Egypt (1961 and 1963): In order to increase state control and lessen foreign influence,
President Gamal Abdel Nasser of Egypt nationalized banks and insurance businesses.
5. Iran (1979): To create Islamic economic principles and lessen foreign influence, the new
government, led by Ayatollah Khomeini, nationalized banks and other significant
industries after the Iranian Revolution.
6. Chile (1971): During his brief presidency, President Salvador Allende’s administration
nationalized the country’s banking industry to expand state control over the economy.
 7. Bolivia (2007): In order to strengthen state control over vital industries and natural
resources, President Evo Morales nationalized some banks and the country’s mining and
hydrocarbon industries.
R.C. COOPER v UNION OF INDIA
Popularly known as the Bank Nationalisation case of 1970 was a major landmark judgement as it
guided the parliament and dealt with the constitutional jurisprudence of the nation. Another
reason why this case is so important is the fact that it overruled or rejected the mutual exclusivity
theory provided or given in the case of A.K. Gopalan v State of Madras. This case was filed as a
result of the nationalisation of the 14 banks within the duration of the Congress party under the
leadership of Indira Gandhi in the year 1969. These banks were nationalised due to the reason
that Rustom Cavasjee had filed this suit because he was a major shareholder of the Bank of
Baroda and Central Bank of India, both of which were nationalised. Through this petition, he
claimed that his fundamental rights under Article 13, Article 14, Article 19 and Article 31 were
violated. It was held that the government had violated the Article 31 and Article 14. It was also
held that any shareholder or director cannot file a petition on the grounds that the company’s
fundamental rights have been violated. However, they can file a petition if that particular
individual’s fundamental rights have been violated. This landmark judgement was given by the
Supreme Court of India on the 2nd of February, 1970 by a majority of 10:1.

CONTROL BY GOVERNMENT AND ITS AGENCIES

In India, banking companies are regulated by Banking Regulation Act, 1949 and Reserve Bank
of India Act, 1934.
Regulatory Regime Exercises Its Control On Banks In Followings Ways:
 RBI (Reserve Bank of India) decides the rate of interest charged on loans.
 RBI (Reserve Bank of India) decides the rate of interest given on FDRs which usually is
higher for senior citizens.
 RBI (Reserve Bank of India) decides the Statutory Liquidity Ratio (SLR) which a
commercial bank has to maintain in order to control the expansion of credit.
 RBI (Reserve Bank of India) decides the Cash Reserve Ratio (CRR) it is the ratio of cash
which the bank has to deposit to RBI without and interest.
 RBI (Reserve Bank of India) decides the withdrawal limit from ATM.

All the above-mentioned points are needed to be checked to ensure smooth running of the
economy.

Central Government implements its financial policy through the regulatory regime:
Recently our Central Government has undergone the policy of demonetization of Rs. 500 and
Rs.1000 notes which mean that the currency notes ceases to have the legal tender.
Demonetization was a step against black money government has carried its policy through RBI.
RBI had restricted the withdrawal limit of cash from banks and had also converted the old
currency notes.
Demonetisation process was carried out in a very effective manner by banks throughout the India
which could not have been possible without the regulatory regime over banking companies.
Regulatory Regime Prohibits The Banking Company To Indulge In Trading
U/S 8 of BR Act, 1949 banks are not allowed to indulge in the practices of trading of goods.
Bank Regulation Act, 1949 permits a bank to do trade of securities, bills of exchange and other
negotiable instruments but not of any goods directly or indirectly through barter system.
Reserve Bank of India Controls Inflation and Deflation in the Economy
Inflation is a situation in an economy where the demand increases and supply decreases, this
leads to rise in value of goods which reduces the purchasing power of the people. To control such
situation the RBI sells the securities held with it by the commercial banks. This step by RBI
reduces the cash lending power of banks which leads to increase in rate of interest on lending
money by bank. This causes the decrease in demand as the people will opt to savings. In this way
inflation is controlled by the RBI.
On the other hand in situation of deflation, demand decreases which increases the supply. This
reduces the value of goods causing an increase in purchasing power of people. To control the
situation the RBI buys the securities from commercial banks which increases their cash lending
capacity which further results in fall in interest rate on lending money by bank. This causes
people to spend money rather than saving it, which helps to increase the demand and making the
market stable. Controlling of Inflation and Deflation is one of the most important regulatory
measure performed by RBI.
Supervision and Control
Reserve Bank of India for better supervision and control over banking companies has constituted
a separate board viz. “The Board for Financial Supervision”. This board meets on monthly basis
it has power to constitute sub-committees.
RBI regulates the licensing of banking companies
U/S 22 of BR Act, 1949 a company to function as a banking company must hold a license of
banking issued by Reserve Bank of India.
Board of Directors and Chairman
As per Section 10A of BR Act, 1949, every banking company shall have the board of directors
who shall have special knowledge and practice experience in banking field and a Chairman.If
RBI is of opinion that composition of the board of directors of any banking company does not
fulfil the requirement of the provisions of BR Act, 1949 it can after giving such banking
company an opportunity of being heard, directs the banking company to re-constitute the board
of directors.
RBI as lender of last resort
Usually, banks perform the function of lending money to people, but in a situation where bank
runs out of cash and does not have left cash for its operation, then RBI comes to rescue the bank
from such crisis. RBI lends loans to the bank so that bank could operate.
Amalgamation of Banks
BR Act, 1949 regulates the process of amalgamation of banking companies. The banking
companies planning to amalgamate shall have to create a draft copy of scheme of amalgamation
covering terms and conditions, such draft should be approved by the resolution passed by
members of banking companies. RBI holds the power of sanctioning the draft, once the draft is
sanctioned by RBI then the assets and liabilities of banking companies are amalgamated.
Submission of returns by banks
Every bank in India as a measure of regulation has to prepare and submit returns of liquid assets,
unclaimed deposits, balance sheets, liabilities, etc., to the Reserve Bank of India under provisions
of BR Act, 1949 and RBI Act, 1934.The returns sent by the banks are analyzed by Reserve Bank
of India this is kind of a measure through which RBI gets to know about the performance of the
bank in the economy.
ON MANAGEMENT- ACCOUNTS AND AUDITS:
Prohibition of Managing Agents and Employment Restrictions
Empowerment of Banking Companies:
- No banking company shall utilize Managing Agents for management.
- Employment restrictions on individuals adjudicated insolvent, convicted of moral turpitude, or
whose remuneration includes commission based profit-sharing.
Key Exceptions:
- Exceptions to commission payments:
- Bonuses in accordance with industrial dispute settlements or customary practices.
- Commissions to brokers and other contractors, not regular staff.
- The Reserve Bank of India (RBI) retains the authority to determine if a person's remuneration
is excessive.
 Management Restrictions:
- Prohibition against managing persons who are directors in non-subsidiary companies and
other businesses.
- Term limits for Managing Directors (not exceeding five years) with provisions for renewal.

Board of Directors Requirements

Composition of Board:
- Minimum of 51% of Board members must have expertise in relevant fields such as
accountancy, agriculture, law, finance, etc.
- At least two directors must have expertise in agriculture and rural economy or small-scale
industry.
Further Restrictions:
- Directors cannot have substantial interests in outside companies or firms that do not qualify as
small-scale industries.
- Continuity limits for Directors must follow specified timeframes with conditions for re-
election.
Reconstitution of Board:
- Should composition requirements not be met, the Board must reconstitute itself.
- The RBI can direct changes if composition is inadequate or fails to meet statutory
requirements.

Appointment of Directors and Chairpersons

Chairman Requirements:
- Each banking company must have a whole-time Chairman or a part-time Chairman with RBI
approval.
- Chairman's powers are subject to the Board's control and direction.
- Special provisions allow the RBI to appoint a Chairman or Managing Director if the position
is vacant, ensuring stability in management.
 Financial Oversight Powers of RBI:
- RBI can mandate audits or evaluations and has the final say on the suitability of the board
members.
- Any decisions or appointments made by the RBI regarding the board are final and not subject
to judicial review.
Additional Provisions
Qualifications and Disqualifications:
- Specific qualifications are required for positions of Chairman and Managing Director,
centered around banking and financial expertise.
- Strictures on concurrent directorships are imposed to prevent conflicts of interest.

Miscellaneous Provisions:
- Provisions for confidentiality regarding banking documents in legal disputes.
- Requirements for annual financial statements and audits, with special auditing measures
available under RBI’s purview.
- Prohibition on dividend payments until all capitalized expenses have been written off.

DISINVESTMENT, PRIORITY LENDING AND PROMOTION OF UNDER PRIVILEGED CLASSES

Priority lending refers to the practice of banks giving a certain percentage of their loans to
priority sectors identified by the Reserve Bank of India (RBI). These sectors include agriculture,
micro, small, and medium enterprises (MSMEs), education, housing, and others. The purpose of
priority lending is to support the development of these sectors and promote inclusive growth.
Banks are required to allocate a specific percentage of their total lending to these priority sectors.
The exact percentage is determined by the RBI and may vary from time to time. Failure to meet
these targets can result in penalties for the banks.
In addition to priority lending, there are also provisions for the promotion of underprivileged
classes in banking law. These provisions aim to ensure that individuals from marginalized
communities, such as Scheduled Castes (SCs) and Scheduled Tribes (STs), have access to credit
and financial services on an equal basis.
Banks are required to set aside a certain percentage of their lending for these underprivileged
classes. This is known as the priority sector sub-target for lending to SCs and STs. The RBI sets
specific targets for banks to meet in this regard.
The objective of these provisions is to address the historical disadvantages faced by these
communities and promote their socio-economic development. By providing them with access to
credit and financial services, it is hoped that they will be able to improve their livelihoods and
participate more fully in the economy.
Overall, priority lending and the promotion of underprivileged classes in banking law in India
are important measures to promote inclusive growth and reduce economic disparities in the
country.

Section 20. Restrictions on loans and advances:

(1) Notwithstanding anything to the contrary contained in section 77 of the Companies Act, 1956
(1 of 1956), no banking company shall,-
(a) grant any loans or advances on the security of its own shares, or-
(b) enter into any commitment for granting any loan or advance to or on behalf of-
(i) any of its Directors,
(ii) any firm in which any of its Directors is interested as partner, manager,
employee or guarantor, or
(iii) any company [not being a subsidiary of the banking company or a company
registered under section 25 of the Companies Act, 1956 (1 of 1956), or a
Government company] of which 2[or the subsidiary or the holding company of
which] any of the Directors of the banking company is a Director, Managing
agent, manager, employee or guarantor or in which he holds substantial interest,
or
(iv) any individual in respect of whom any of its Directors is a partner or
guarantor.
(2) Where any loan or advance granted by a banking company is such that a commitment for
granting it could not have been made if clause (b) of sub-section (1) had been in force on the date
on which the loan or advance was made, or is granted by a banking company after the
commencement of section 5 of the Banking Laws (Amendment) Act, 1968(58 of 1968), but in
pursuance of a commitment entered into before suchcommencement, steps shall be taken to
recover the amounts due to the bankingcompany on account of the loan, or advance together with
interest, if any, due thereon within the period stipulated at the time of the grant of the loan or
advance, or where no such period has been stipulated, before the expiry of one year from the
commencement of the said section 5:
PROVIDED that the Reserve Bank may, in any case, on an application in writing made to it by
the banking company in this behalf, extend the period for the recovery of the loan or advance
until such date, not being a date beyond the period of three years from the commencement of the
said section 5, and subject to such terms and conditions, as the Reserve Bank may deem fit:
PROVIDED FURTHER that this sub-section shall not apply if and when the Director concerned
vacates the office of the Director of the banking company, whether by death, retirement,
resignation or otherwise.
(3) No loan or advance, referred to in sub-section (2), or any part thereof shall be remitted
without the previous approval of the Reserve Bank, and any remission without such approval
shall be void and of no effect.
(4) Where any loan or advance referred to in sub-section (2), payable by any person, has not been
repaid to the banking company within the period specified in that subsection, then, such person
shall, if he is a Director of such banking company on the date of the expiry of the said period, be
deemed to have vacated his office as such on the said date.
Explanation.--In this section-
(a) "loans or advance" shall not include any transaction which the Reserve Bank may,
having regard to the nature of the transaction, the period within which, and the manner
and circumstances in which, any amount due on account of the transaction is likely to be
realised, the interest of the depositors and other relevant considerations, specify by
general or special order as not being a loan or advance for the purpose of this section;
(b) "Director" include a member of any board or committee in India constituted by a
banking company for the purpose of Managing, or for the purpose of advising it in regard
to the management of, all or any of its affairs.
(5) If any question arises whether any transaction is a loan or advance for the purposes of
this section, it shall be referred to the Reserve Bank, whose decision thereon shall be
final.]

Section 20A. Restrictions on power to remit debts

(1) Notwithstanding anything to the contrary contained in section 293 of the Companies Act,
1956 (1 of 1956), a banking company shall not, except with the prior approval of the Reserve
Bank, remit in whole or in part any debt due to it by-
(a) any of its Directors, or
(b) any firm or company in which any of its Directors is interested as Director, partner,
Managing agent or guarantor, or
(c) any individual if any of its Directors is his partner or guarantor.
(2) Any remission made in contravention of the provisions of sub-section (1) shall be void and of
no effect.]