The key regulator of banking in India is Reserve Bank of India (RBI) also known as apex bank of India. It was established under RBI Act 1934 an it came into functioning in 1935. RBI started operating as a private shareholder’s bank, soon it replaced the Imperial Bank of India and started issuing currency notes and acting as a banker to the government. RBI was nationalised soon after Independence of India. On January 1949, RBI started acting as a central bank owned by state. Establishment of RBI was a landmark event in the evolution of banking. RBI is the central bank of India and provides all the regulations for banking in India under the framework of RBI act.
Major events in the modern banking era is the nationalisation of 14 largest commercial banks in 1969, through the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969. Few years later 4 more commercial banks were merged. At that time almost 90% of banks in India were controlled by the Government of India, But with the liberalisation of government policies few private players entered into banking market and RBI made sure they were closely watched and strictly regulated.
Banks in India comprise of:
- Scheduled Commercial Banks:
Commercial banks perform all banking functions, it includes both government owned and private banks and branches and subsidiaries of foreign banks.
- Co-operative Banks:
Co-operative banks are set up by co-operative societies to provide financial support to small borrowers.
- Regional Rural Banks (RRBs):
RRBs are government banks set up to provide financial support in local and rural agricultural areas.
- Small Finance Banks:
Small Finance Banks are setup to undertake regular banking activities for the benefit of small businesses to provide them with aids that are not provided services by other banks.
- Payment Banks
Payment Banks provides small loans and accepts small deposits as well as undertake other small banking activities.
Legislative Framework of Banking sector in India
The Indian banking sector is regulated 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 central bank, issues various guidelines, notifications and policies from time to time to regulate the banking sector. In addition, the Foreign Exchange Management Act 1999 (FEMA) regulates cross-border exchange transactions by Indian entities, including banks.
- Reserve Bank of India Act, 1934 (RBI Act)
RBI act was established in 1934 for the enactment to set out the functions of RBI. RBI Act is responsible for almost all of the supervision for managing the operations of Indian Banking Sector. It empowers RBI to issue guidelines, regulations, directions related to functioning of banking and financial sector in India. RBI act was enacted with an objective to regulate flow of issue of bank notes along with it RBI Act also deals with Incorporation, Capital, Management and Business of the RBI, Various functions of the RBI which include: the issue of bank notes, monetary control, banker to the Central and State Governments and banks, lender of last resort etc, Provisions talking about reserve funds, credit funds, audits and accounts, Issuing directives and imposing penalties for violation of provisions of the Act.
- Banking Regulations Act, 1949
Banking Regulations Act mostly mentioned as BR act was established in 1949. It was initially passed as Banking Companies Act in 1949 but later changed to Banking Regulations Act. It is one of the most important legal frameworks for banks in India. BR act states that all banking firms be regulated under this act. It is BR act that states the definition of Banking in its Section 5 (i)(b) as acceptance of deposits of money from the public for the purpose of lending and/or investment. Such deposits can be repayable on demand or otherwise withdraw able by means of cheque, drafts, order or otherwise. BR act also defines other aspects of banking such as banking companies, secured loans or advances, etc.
It provides RBI with the power to grant licences to the banks and regulate its operations. It also provides us with details that banking sector in India is permitted to engage in along with it, BR act states what all activities are prohibited and restricted for the banking sector. It contains total of 55 sections and it regulates all the commercial as well as co-operative banks in India.
- Foreign Exchange Management Act (FEMA), 1999
FEMA is an Act of the Parliament of India “to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India”. This act deals with offences related to foreign exchange and makes it a civil offence. It promotes management of foreign exchanges in Indian market. This act is applicable to whole of India. FEMA regulates cross border transactions and other related activities. FEMA and other rules made are administered under RBI.
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