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Banking regulation laws under the RBI act, 1934

Authored By- Hemangee Sharma


Reserve Bank of India Act 1934, Foreign Exchange Management Act 1999 (FEMA), Banking Regulation Act 1949 (BR Act), Securitisation and Reconstruction of Financial Assets, and Enforcement of Security Interest Act 2002.


The Indian banking sector is regulated by the Reserve bank of India Act 1934 (RBI Act) and therefore, the Banking Regulation Act 1949 (BR Act). RBI, is India’s financial organization, it issues notifications, and policies from time to time to control the banking sector. Besides, the exchange Management Act 1999 (FEMA) regulates cross-border exchange transactions by Indian entities, as well as banks. The article here discusses intimately regarding banking regulation laws under the RBI Act, 1934.


India has each non-public sector bank (which embody branches and subsidiaries of foreign banks) and public-sector banks (i.e., banks within which the govt. directly or indirectly holds possession interest). Banks in India are primarily classified as:

1) Scheduled industrial banks (i.e., industrial banks, performing all banking functions);

2) Cooperative banks (set up by cooperative societies for providing finance to little borrowers); and

3) Regional rural banks (RRBs) (for providing credit to rural and agricultural areas).

Recently, the RBI has additionally introduced specialized banks like payments banks and the little finance banks that perform some banking functions.

The key statutes and rules that govern the banking system in the Asian country and significantly regular industrial banks area unit as follows:


The RBI Act[i] was enacted to ascertain and launch functions of the RBI. It grants the RBI powers to control the financial policy of the Asian countries and lays down the constitution, incorporation, capital, management, business, and functions of the RBI[ii].

BR Act

The BR Act[iii] provides a framework for the oversight and regulation of all banks. It additionally offers the RBI the facility to grant licenses to banks and regulate their business operation.


FEMA[iv] is the primary exchange management legislation in India. Federal Emergency Management Agency and, therefore, the rules created under that regulate cross-border activities of banks.

The other key statutes include:

1) The Negotiable Instruments Act 1881;[v]

2) The Recovery of Debts Due to Banks and Financial Institutions Act 1993;

3) The Bankers Books Evidence Act 1891;

4) The Payment and Settlement Systems Act 2007;

5) The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002; and

6) The Banking Ombudsman Scheme 2006.

Public sector banks area unit regulated by the BR Act and therefore the statute consistent with that they need to be nationalised and entrenched. These include:

1) banks constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 of the Banking Companies (Acquisition and Transfer of Undertaking Act) 1980; and

2) The Reserve bank of India and subsidiaries and affiliates of the reserve bank of India entrenched and controlled by the banking company of India Act 1955 and therefore the banking company of India (Subsidiary Banks) Act, 1959 severally.

3) Regulatory authorities

The RBI supervisors are answerable for managing the operation of the Indian national economy, to supplying rules and pointers for banking operations. It has wide discretionary powers and is authorized to examine and investigate the affairs of banks and to impose penalties within the event of non-compliance.

The key restrictive challenges area unit is as follows.

Base III implementation

Indian bank area unit needed to suit the metropolis III Capital rules (Basel Regulations) by 31st March 2019. Most of the public-sector banks could want further capital infusion to fulfill the upper capital needs, which can consequently scale back the come back on equity. As a result, government support is needed, which can exert vital pressure on the government’s business enterprise position.

Specialised banking

The RBI has presently granted roughly ten little finance bank licenses and roughly seven payments of bank licenses.

Priority sector disposition and NPAs

The RBI needs banks to produce obligatory credit to sure weaker sections of society and set out targets for the same. Within the past, banks have struggled to fulfil these targets. These sectors typically yield low profits, and that they adversely impact banks’ profit.

Consumer Protection

Banks in India’s area unit are subject to client protection laws that act as an alternate and speedy remedy to approaching courts, a method that may be dearly-won and long. The Consumer Protection Act,[vi] 1986, is the primary legislation governing disputes between shoppers and repair suppliers. The link between a bank and its client is considered that of a client and repair supplier, thus conveyance them below the reach of the buyer Protection Act. A three-tier mechanism has been established to influence complaints:

1. District forum: this operates at the district level and deals with client complaints of a price not extraordinary a pair of million rupees;

2. State commission: this operates at the state level and deals with client complaints of a price between a pair of million rupees and ten million rupees. It additionally hears appeals against the orders elapsed the district forum, and

3. National commission: this operates at the national level and deals with client complaints of a price extraordinary ten million rupees. It additionally hears appeals against the orders by the state commission. Attractiveness from the order of the national commission is often directed to the Supreme Court of India.


The RBI will conduct required amalgamations: 1) in the public interest; 2) in the interests of depositors of a bank; 3) to secure the correct management of a bank; or, 4) in the larger interests of the banking industry. For this purpose, the RBI, once declaring a moratorium in relevancy the distressed bank, prepares a draft theme of consolidation that is distributed to the depositors, shareholders, and creditors of the bank for comments. This theme, among others, could offer an amendment within the management of the bank and a discount of rights of members, depositors, and creditors.

References: [i] [ii]Shri Mahavir Co-Operative Bank ... vs Income-Tax Officer on 18 January, 1991 [iii] [iv] [v] [vi]