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Banking Regulation Act — Transcript

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0:04[music]
0:17[music]
0:21>> Welcome. Welcome to banking and finance
0:24law scores.
0:25This is the fourth week. This week we
0:27are discussing about powers and
0:29functions of Reserve Bank of India and
0:32other banks. This is the 20th session.
0:35In this session, we will discuss about
0:38banking regulation act, its provisions,
0:41and the decisions relating to that.
0:43So, as part of powers and functions of
0:46the Reserve Bank of India and other
0:48banks, we have discussed about the
0:50Reserve Bank of India's establishment,
0:53its note issue power, its power to
0:55control the credit, and we have also
0:58discussed about the bank current
1:00customer legal relationship, and the
1:03legal implications of that relationship
1:05in the previous classes.
1:08In this class, we will discuss about
1:11banking regulation act and the powers of
1:14the Reserve Bank of India.
1:16In the banking regulation act, let us
1:18try to first understand what is meant by
1:20banking.
1:22Section 5 subsection B of the banking
1:25regulation act defines banking as
1:28Banking means the accepting for the
1:30purpose of lending or investment of
1:33deposits of money
1:35from the public, repayable on demand or
1:39otherwise, and withdrawable by check,
1:42draft, order, or otherwise.
1:44So, the essence of banking is accepting
1:47deposits for the purpose of lending or
1:50investment. This forms the core of
1:52banking. And if there is any financial
1:55institution which does not accept
1:57deposits for the purpose of lending, it
2:00is not a banking institution.
2:02And this a deposit of money is repayable
2:05to the public on demand or otherwise
2:07withdrawable by check, draft, order, or
2:10otherwise. So, this is the essence of
2:12banking. You must be allowing public to
2:14deposit, allow them to withdraw, and
2:17that money deposited has to be given on
2:20loan or as credit for the purpose of
2:23lending or investment. So, this is the
2:25essence. This is the core banking
2:27function we call it.
2:30And section 6, subsection 1
2:33lists There is a huge big list what all
2:36businesses banks can do and what all
2:39businesses it should be allowed to do is
2:41given. And subsection 6, subsection 2
2:45imposes a prohibition on doing other
2:48businesses other than those specified in
2:52section 6, subsection 1 on banking
2:54companies.
2:55That is commercial banks, private
2:57commercial banks. So, there is a list
3:00which says that this is the business you
3:02should do.
3:03And there is a subsection which tells
3:05you you can't do anything other than
3:07that mentioned there. So, this is how
3:09Banking Regulation Act allows the banks
3:12to do and also prohibits the banks to do
3:15businesses.
3:16Now, section 10, 10A, B, A, BB, 10C,
3:2110D, and 11, these sections prescribe
3:25the eligibility, qualification, and
3:27restriction on banks, who can become
3:30banks' managers, who can be on the board
3:32of directors of the bank, and what are
3:35the administrative responsibilities,
3:38what kind of education they must have,
3:40how many years they should work, what
3:43whom they can give loans to, all these
3:45eligibility, qualification, what they
3:47can't take loans for themselves, their
3:49relatives, all these kind of measures
3:52are given in those sections. And some of
3:55these provisions are amended by virtue
3:57of social control measures where we have
4:00seen that Banking Regulation Act was
4:02amended to bring professional management
4:05in the banks. And there are some
4:07amendments later also. Section 12 to 16
4:11deals with shareholding of directors
4:14etc. of banks and also in the business
4:17by banking administrative personnel. So,
4:20in a way, banks directors, banks they
4:23how much shareholding they can have, how
4:25much they can't have, what kind of
4:28business they are allowed to do, what
4:30kind of business they can't do, what
4:32kind of loans they can give. So, there
4:34are a lot of restrictions on banks
4:37administrative personnel to ensure that
4:40nobody in the banks administration uses
4:43the public money for their own benefit
4:46or for they do some mismanagement. To
4:49prevent all that and to bring expertise
4:52into management of the banking business
4:56and to bring proper guidance to the
4:58banks administrators, all these
5:00provisions are meant to prohibit and
5:03also to regulate the banks in that kind
5:06of in the measures relating to the
5:08administration of the banks.
5:12And banks essential job is lending, that
5:15is credit. And there are certain
5:17measures for credit control which we
5:19have studied in the two previous
5:21classes, which is one of the very
5:23important measure. And section 2021
5:26specifically empowers them with this.
5:29So, section 20 banks are not allowed to
5:31lend to its own directors and on the
5:34guarantee of its own assets or to its
5:37own businesses. Those kind of things are
5:39prohibited under section 20.
5:42And section 21 allows RBI, Reserve Bank
5:45of India, to control the advances given
5:48by the banks. So, it can order bank, a
5:51particular group of banks, or individual
5:53bank. And these orders can be related to
5:56maximum amount of money that the bank
5:59can give as a loan to one individual
6:01company or a firm, or maximum amount of
6:04guarantee to be given by a bank on
6:07behalf of a company or a firm, bank
6:09guarantee's maximum amount. Similarly,
6:12purpose or purposes for which loans have
6:15to be given, rate of interest that is to
6:17be charged on these loans, and the
6:19margins to be maintained for secured
6:22loan. All these kind of directions RBI
6:25can give in relation to credit control.
6:28And we have studied some aspects of it
6:30in the previous class. Now,
6:34the one section that is included into
6:37the Banking Regulation Act by way of an
6:39amendment is section 21A.
6:42And this section is challenged in the
6:44courts in some cases, which we will see
6:46later. This is relating to rate of
6:49interest. Now, section 21A states that
6:53notwithstanding anything contained in
6:56the Usurious Loans Act, 1918, or any
7:00other law relating to indebtedness in
7:03force in any state, a transaction
7:06between a banking company and its debtor
7:10shall not be reopened by any court on
7:13the ground that rate of interest charged
7:15by the banking company in respect of
7:18such transaction is excessive. So, in a
7:21way, this act prohibits any other law,
7:25including Usurious Loans Act. So,
7:27notwithstanding anything contained in
7:29Usurious Loans Act and are in any other
7:31law relating to indebtedness, so
7:34relating to debt-related legislations in
7:36any state, any transaction between a
7:39banking company and a debtor, that means
7:42any transaction, a loan or anything
7:44which is given by a banker to its
7:46customer cannot be reopened in a in any
7:50court on the ground that rate of
7:52interest charged is very excessive. So,
7:55this is what the sum and substance of
7:57this provision is. Now, this was
7:59challenged in the court
8:02in this case called Hong Kong and
8:04Shanghai Banking Corporation Limited,
8:07most popularly known as HSBC. Now, HSBC
8:11versus Awas. Awas is an NGO
8:15which on behalf of group of customers
8:17have filed a case before the consumer
8:20forums. And the case reached up to
8:23National Consumer Dispute Redressal
8:25Commission. And in this case, the main
8:29rate of interest was on the credit cards
8:31and the amount of interest that is
8:33charged on the credit cards. So, it has
8:36gone up to more than 36% something like
8:39that. More than 30% like that.
8:42Now, the National Consumer Dispute
8:44Redressal Commission, which is a
8:47national level consumer redressal
8:49agency. The in the district level, there
8:52is district consumer forum. At state
8:54level, there is consumer dispute
8:56redressal commission. And at national
8:58level, there is national consumer
9:00dispute redressal commission. So, the
9:02appeals from state consumer redressal
9:05commission will lie to the national
9:07consumer dispute redressal commission.
9:09So, it is the apex dispute settlement
9:12body of the consumer disputes. Now, this
9:15National Consumer Dispute Redressal
9:18Commission stated that the banks cannot
9:21charge more than 30% rate of interest.
9:24So, even 30% is very high rate of
9:26interest, but this is on the credit
9:28cards. So, they have put this as the
9:30cap. More than this, you can't charge.
9:33This was imposed in 2000 This decision
9:36came much before, but in 2024, Supreme
9:40Court had to discuss the validity of
9:42this decision.
9:44Now, the Supreme Court has to look at
9:46whether the bank inter
9:49uh practiced any unfair trade practice.
9:52Unfair trade practice means they will
9:54tell you that rate of interest is 15 or
9:5620% and then charge you with 35% or so.
10:01No, but the banks have clearly said in
10:03the credit card, up to 40 days we will
10:05give you free credit and after that we
10:07will charge you. Or up to 30 days we
10:10will give you free credit and after that
10:12we charge. Rate of interest is very
10:14high. It is because to ensure that the
10:16credit cards are honored very promptly.
10:19This is the reason for that. But in this
10:21case, there is no unfair trade practice.
10:24Though the rate of interest is very
10:25high, there is no unfair trade practice.
10:28And whether RBI directives are there in
10:31relation to this. RBI directives only
10:34stated maximum home rate of interest as
10:3636%.
10:37So, why should it be capped and the Hong
10:39Kong HSBC did not charge more than RBI
10:42directive? So, it was well within the
10:45RBI directive and there was no
10:48deficiency in service. That means the
10:50bank did not do any harm to any
10:52individual or any loss happened to that
10:55individual. No. The credit cards were
10:57given to all eligible people and the
10:59same service was provided to all and
11:01there was no
11:02deficiency in the service in which they
11:05were doing. So, given all of this, on
11:08what basis can a court cap the rate of
11:11interest? Because RBI if there is a
11:13violation of RBI directive, then yes,
11:16the bank the court can stop. And as it
11:19is, section 21A says that between
11:22banking and the customer, between the
11:25banker and customer, any transaction
11:28between them cannot be reopened in the
11:30court. So, basing on that, Supreme Court
11:33upholding Section 21A overruled the
11:36decision of the National Consumer
11:39Dispute Redressal Commission, which
11:41capped the interest rate at 30%. The
11:43Supreme Court said this decision is not
11:46correct because there was no unfair
11:48trade practice on behalf of HSBC. There
11:51is no violation of RBI directive. There
11:54is no deficiency of service. So, the
11:56bank cannot be penalized like that.
12:01Now, there is this another case from
12:03Sardar Associates and others versus
12:06Punjab and Sind Bank. This is a 2009
12:09Supreme Court decision. Now, in this
12:11case, the loan amount was 3.5 crore,
12:15which was obtained by these Sardar
12:17Associates for doing a business
12:21doing a business, and they this loan was
12:24obtained by that business enterprise
12:26called Sardar Associates and others. And
12:28they mortgaged their property as
12:31security for that loan.
12:33And the bank initiated proceedings
12:35against the borrower for recovery of
12:37this loan from the properties mortgaged
12:39to it. That is, the bank want to sell
12:41the properties and recover the amount.
12:44But what these people's argument is, in
12:462005,
12:48Reserve Bank of India issued a circular
12:50for one implementation of one-time
12:52settlement scheme for non-performing
12:55assets below 10 crore rupees. That means
12:58if any borrower who has defaulted his
13:01loan repayment, and if the loan amount
13:03is less than 10 crore rupees,
13:06and if they want to pay a lump sum as
13:08one-time settlement, it must be allowed.
13:11Then the borrower contends that this
13:13circular has to be implemented, and they
13:15should be allowed for a one-time
13:17settlement instead of selling away their
13:19mortgaged properties.
13:22The court held that Section 21, 36, and
13:2635A of Banking Regulation Act empower
13:29the Reserve Bank of India to give such
13:32orders to the banks and banks are bound
13:34to comply with them. So, the court also
13:37held that RBI directive, they have a
13:39statutory flavor and any contravention
13:42thereof in any default of complaints is
13:45punishable under subsection 4 of section
13:4846 of Banking Regulation Act. So, when
13:51the RBI issued a circular to implement
13:54one-time settlement and it is for the
13:56assets below 10 crores rupees and if the
13:59borrower becomes eligible for that
14:01settlement, he must be provided with
14:04that settlement. So, this is what the
14:06court has held in favor of the
14:08associates because the RBI circular was
14:12in favor of that particular party. In In
14:15the next case, that is Jayant Verma and
14:18others versus Union of India and others,
14:21this is a 2018 Supreme Court decision.
14:25Now, this is a case relating to the
14:28validity of these section 21A. They
14:31challenged the constitutional validity
14:33of this section which says that you
14:36can't open the rate of interest in the
14:38court of law. Now, the petitioners
14:40contended that agriculture debt is
14:42governed by state debt relief act in
14:44some states
14:46and states have the power to enact
14:48statutes in relation to money lending
14:50and relief of agriculture indebtedness
14:53as per list two of the Constitution of
14:56India which we call it a state list
14:58entry 13. Now, they challenged the
15:01constitutional validity of section 21A
15:04because money lending comes under the
15:06purview of state and in the state, there
15:09were many farmers who committed suicide
15:11also due to agriculture indebtedness.
15:14Now, the Supreme Court held that section
15:1621A is valid because
15:19Parliament is like competent to
15:21legislate on matters in list one.
15:25Entry 45 of list one is banking. So,
15:28list one is central list we call it
15:30where central government will enact. So,
15:33banking comes within the purview of
15:35central government. So, section 21A of
15:38Banking Regulation Act which is related
15:41to banks lending will come within the
15:43purview of central government
15:46legislative power. So, they are eligible
15:48to make laws. So, section 21A is valid.
15:52But, now there are states where are
15:54there are states which have state debt
15:57relief act. So, what the Supreme Court
15:59said is where there are states in which
16:02there is a debt relief act in those
16:04states
16:05this will not apply. It does not apply
16:08to banks. This section is valid and
16:11applicable to all banks in those states.
16:14So, where
16:16the as far as states where debt relief
16:18act does not apply
16:20to banks, this section is valid. So,
16:23that means in states where debt relief
16:25act is applicable to certain banks in
16:28this section is not applicable to those
16:31banks and it is applicable to other
16:32banks. Suppose if there is a state where
16:35they said debt relief act is applicable
16:37to their state cooperative banks.
16:39Then
16:41section 21A and Banking Regulation Act
16:44provisions of money lending will be
16:45applicable to
16:47private commercial banks and state debt
16:49relief act will be applicable to
16:51cooperative banks. Suppose if there is a
16:54state which enacted debt relief act and
16:56said that their debt relief is governed
16:58by this legislation in for these banks,
17:01then in those states only that state law
17:04will prevent. So, this is how the
17:06Supreme Court has interpreted when there
17:09is a inconsistency between the two
17:12legislations.
17:13Uh the situation of where the two laws
17:16are very in constitution but up held the
17:18validity of section 21A of the
17:23banking regulation act.
17:25Then there is this case where Central
17:27Bank of India versus Ravindra and
17:29others.
17:31The court held that when remain interest
17:33remains unpaid, the bank can adjust it
17:36periodically to the principal. This is
17:39also called compounding the interest.
17:42This has to be done in accordance with
17:44the terms of the contract or as per the
17:46established practice of the bankers in
17:49that region. The court also held that
17:52interest on interest cannot be claimed.
17:54This is called compounding the interest.
17:57The court also held that banks are bound
17:59by RBI directives regarding rate of
18:03interest, procedure for compounding the
18:06interest, and the mode of calculating
18:08periodic rest. That means this
18:10periodically accumulated amount when the
18:13interest goes and joins with the
18:15original principal amount, how to
18:17calculate interest on what amount
18:19principal should interest should be
18:21calculated. After all of this, banks are
18:24bound to follow the RBI directives in
18:27this regard. The court also held that
18:29for expeditious disposal of core cases,
18:33courts can act on assumption that
18:35accounts maintained by banks are in
18:37conformity with RBI directives. So,
18:40generally the courts can believe that
18:42banks do follow RBI directives when it
18:45comes to calculating the interest and
18:48the principal. And if there is anything
18:51that is brought forth before the court's
18:53knowledge that a particular bank is not
18:55following RBI directive in relation to
18:58calculating the rate of interest or
19:00calculating the compound interest or
19:03compounding the interest to the
19:04principal, then that if it is violated
19:07of RBI, then the courts can reopen that.
19:10So, this is a 2001 Supreme Court
19:13decision.
19:15Now, if we have to understand how does
19:18this Banking Regulation Act operate to
19:20different kinds of banks? Now, it tries
19:23to govern different banks with different
19:25provisions. For example, Section 56 of
19:28the Act is applicable to cooperative
19:30banks only. And 56 rewrites most of the
19:34provisions of the Banking Regulation Act
19:36to suit cooperative banks. So it is a
19:39very very lengthy
19:40provision which rewrites many provisions
19:43of the Banking Regulation Act as
19:45applicable to cooperative banks.
19:48Similarly, certain provisions are
19:49applicable to banking companies only.
19:52That is private commercial banks. Like
19:54say Section 6 subsection 2, Section 49
19:58etc. There are many provisions. So many
20:00provisions are applicable only to
20:02private commercial banks. That means
20:04these nationalized banks are what we
20:07call them as public sector banks. For
20:09them, some provisions are not
20:11applicable. Some are applicable to them.
20:13So Banking Regulation Act governs
20:16different banks with different set of
20:18provisions and different regulations. So
20:21there are and this Act generally governs
20:24to how to establish a bank, you have to
20:26go to Banking Regulation Act. Then how
20:29to manage, who should be the director,
20:31who should be the manager, who should be
20:33the chairman, what should be the
20:35shareholding of the directors. For all
20:36of that, you have to go to Banking
20:38Regulation Act. These provisions only
20:40govern them.
20:42What business banks can do, what are
20:44banking operations, what business they
20:47cannot do, we have to look at Banking
20:49Regulation Act provisions only. If a
20:51bank has to wound up, how to do the
20:54accounting, how to do winding up, how to
20:57take approval from Reserve Bank of India
20:59to wind up, what will happen to the
21:00customer's deposit. For all of these
21:03provisions, again Banking Regulation Act
21:05only guides. So in a way, from banking
21:08establishment to its winding up, Banking
21:10Regulation Act governs the entire bank's
21:13establishment, management, operations,
21:16and winding up. And with superadded
21:18power from RBI through the RBI Act also,
21:22RBI has enormous powers to regulate the
21:25banks not only by virtue of the
21:27provisions of Banking Regulation Act,
21:29but also by virtue of the Reserve Bank
21:31of India Act. So, this is how they have
21:34the power and regulating the banks. And
21:37some powers are there to the government
21:39as well. Some majority of the powers,
21:42generally it is the RBI which regulates
21:44the banks. And Central Government also,
21:47most of the time, delegates its power to
21:49the Reserve Bank of India to regulate
21:51the banks in India.
21:53>> [snorts]
21:53>> And this Act also provides for penal
21:56consequences for non-compliance of its
21:58provisions. So, if some banks are not
22:00obeying, or if any bank has violated a
22:03provision of the Banking Regulation Act,
22:05then there are penal consequences. They
22:08can be
22:09penalized in accordance with the
22:11punishment prescribed in the Banking
22:13Regulation Act. So, in a way, this is a
22:15kind of legislation which completely
22:17governs from establishment to winding up
22:20and all the operations of the banks in
22:23India.
22:24>> [snorts]
22:24>> And now to conclude, Banking Regulation
22:27Act and Reserve Bank of India
22:28collectively provide the requisite
22:31statutory mandate to the RBI to govern
22:34banks in India. So, RBI's power flows
22:37not from RBI Act, but also from Banking
22:40Regulation Act. And these two acts
22:42cumulatively give power to RBI to
22:44regulate banks in India. And banks'
22:47powers also are coming from Banking
22:49Regulation Act. Their power to charge
22:52interest, their power to collect
22:53interest, all this also is coming from
22:55Banking Regulation Act. And there are
22:58also powers to the banks to that extent
23:00that courts cannot ask them why they are
23:02doing like this. It is only if they are
23:04following RBI directive then it is good.
23:07So, courts can intervene if they are not
23:09following RBI directives because RBI is
23:12the regulator of the bank. And if it is
23:15very excessive and abnormal interest
23:18that is charged in violation of RBI
23:20directive then of course courts will ask
23:23the bank that they what they have done
23:25is wrong and it will penalize them. So,
23:27violation of a provision of a banking
23:29regulation act or the Reserve Bank of
23:31India Act or any of the directive of the
23:34Reserve Bank of India also will not be
23:37you know, will test will be tested in
23:40the court of law and can be decided in
23:43accordance with the legal provisions
23:45applicable to that bank at that point of
23:47time.
23:48So, [snorts] with this we will conclude
23:50our discussion on the powers and
23:52functions of the Reserve Bank of India
23:55and other banks and we will discuss
23:57about debt recovery tribunals and the
24:00laws governing recovery of debts next
24:02week.
24:03With this we will conclude our
24:05discussion of this week and thank you.

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