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 May 02, 2024

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BANKING SYSTEM IN INDIA

India’s banking system is well-established and has been meeting the country’s credit and banking demands for many years. It has developed over several decades. In addition to meeting the unique and varied financial needs of various clients and borrowers, the banking ecosystem is boosting the nation’s economic growth and development.

TYPES OF BANKS

There are two broad categories of banks in India, Scheduled Banks and Non-Scheduled Banks. Scheduled banks are those which are included in the Second Schedule of the Reserve Bank of India Act, 1934. They are further classified into:

Commercial Banks: Commercial banks are the common type of banks and offer a wide range of financial products and services to individuals and businesses. These include Public banks, Private banks and foreign banks.

Cooperative Banks: Cooperative Banks are owned by individuals or small businesses. They focus on providing financial services to their local communities. These are Urban Cooperative Banks (“UCBs”) and Rural Cooperative Banks (“RCBs”).

Regional Rural Banks (“RRBs”): Regional Rural Banks are set up by the government of India to provide financial services in rural and underbanked areas.

Non-Scheduled banks are those which are not included in the Second Schedule of the RBI Act. They include:

Small Finance Banks (“SFBs”): Small Finance Banks are set up to provide basic banking services to unbanked and underbanked segments.

Payments Banks: Payments Banks are focused on providing basic banking services like deposits, payments, and money transfers.

BANKING LAWS IN INDIA

The cornerstone of this framework is the Banking Regulation Act, 1949. The Reserve Bank of India (“RBI”) is given authority by this Act to oversee banks, provide licenses, and establish general policies for things like capital requirements and bank operations.

Banking Regulations: The RBI has released these comprehensive guidelines and directives in accordance with the authority bestowed by banking legislation. They offer more detailed instructions on how banks must abide with the more comprehensive legal framework. The RBI publishes several regulations that address things like:

  • Liquidity Risk Management: Maintaining a certain level of liquid assets to meet short-term obligations.
  • Loan Disbursement: Restrictions on loan amounts to a single borrower or group (often capped at 15% and 30% respectively) to prevent excessive risk.
  • Know Your Customer (“KYC”) and Anti-Money Laundering (“AML”): To stop financial crimes, transaction monitoring, customer identification, and reporting of suspicious activity are necessary.
  • Cash Reserve Ratio (“CRR”) and Statutory Liquidity Ratio (“SLR”): This is the bare minimum of deposits banks has to keep with the RBI in order to guarantee stability in the financial system.

Additional Banking-Related Laws:

  • The Reserve Bank of India Act, 1934: This act establishes the RBI and its powers.
  • The Negotiable Instruments Act, 1881: This act governs negotiable instruments like cheques and bills of exchange.
  • The Payment and Settlement Systems Act, 2007: This act regulates payment systems like electronic transfers.

The Consumer Protection Act, 1986: This act protects bank customers from unfair practices.

NEW BANK LICENSE NORMS

  • The new guidelines (“Licensing of New Banks in the Private Sector”) states that:

    • Groups applying for a license should have a successful track record of at least 10 years and the bank should be operated through a non-operative financial holding company (”NOFHC”) wholly owned by the promoters.
    • The minimum paid-up voting equity capital has to be five billion rupees, with the NOFHC holding at least 40% of it and gradually bringing it down to 15% over 12 years. The shares have to be listed within three years of the start of the bank’s operations.
    • Foreign shareholding is limited to 49% for the first five years of its operation, after which RBI approval would be needed to increase the stake to a maximum of 74%.
    • The board of the bank should have a majority of independent directors and it must comply with the priority sector lending targets discussed earlier.
    • The NOFHC and the bank are prohibited from holding any securities issued by the promoter group and the bank is prohibited from holding any financial securities held by the NOFHC.
    • The new regulations also stipulate that 25% of the branches should be opened in previously unbanked rural areas.

FUTURE OF BANKS IN INDIA

  • The Indian banking sector is on a path of massive transition, driven by operators. India has seen a tremendous development in digital banking, with mobile wallets and UPI (“Unified Payments Interface”) becoming popular ways to transact for many. Banks are anticipated to use advanced technologies such as AI, blockchain, and big data to customize services, automate procedures, and improve security. The banking market is becoming more competitive as public sector banks are privatized and FinTech (“financial technology”) businesses gain traction. This will likely result in a greater emphasis on client service, new goods, and competitive interest rate. The future of Indian banks is likely to be shaped by continuous innovation, collaboration, and a focus on providing a seamless and secure banking experience to a growing and tech-savvy customer base.

HOW WE CAN HELP?

  • Advocates play a vital role in ensuring banks comply with a complex web of regulations.

    • Our team is well equipped with regulatory landscape that governs banking operations. This includes banking laws, regulations set by central banks and other financial regulatory bodies.
    • Our professionals ensure well drafted loan agreements, account terms, and other legal documents are prepared for it’s proper enforceability.
    • Our experts assist banks in developing risk mitigation plans and remaining compliant with regulations by identifying potential legal hazards linked with new products, services, or transactions.

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