This article on ‘Emerging Trends in Banking Laws‘ was written by Swaroopa Royadu, an intern at Legal Upanishad.
With the changing economic, social, and technological needs, the role of banks has also changed from merely receiving deposits and rendering money to online banking activities. As and when the need arises to improve or add new ideas in the banking sector, there arises the need to make new laws, rules, and regulations to implement the new changes. This article covers the evaluation of banks, laws governing banks in India, emerging trends in banking laws, reformation and liberalization of banks, and analysis of emerging trends in banking laws.
MEANING OF BANK:
A bank is a financial institution that holds a license to accept deposits and give loans to people. Along with providing deposit facilities (saving deposit, current account deposit, fixed deposit, etc.) and loan facilities (short-term loan, long-term loan, etc.) banks also provide services like granting credit cards, mortgage facilities, locker facilities, money orders, currency exchange, etc.
EVALUATION OF BANKS:
The basic function of banks, that is lending and receiving money can be traced back to the Vedic period. The modern bank as it exists today was first established in the year 1770 with the name “The Bank of Hindostan”, followed by “The General Bank of India” established in 1786. However, both these banks were closed due to their inefficiency. Later during the 18th century, economic activities gained significant heights which led to the establishment of the Bank of Calcutta, Bank of Madras, and Bank of Bombay. In the year 1894 Punjab National Bank was established, it had 100% stakeholders from India. Many banks were established in the 19th century after getting inspiration from the swadeshi Movement.
There were no Acts to regulate banks till the Reserve Bank of India Act was regulated in 1934. The Reserve Bank of India was established in 1935. Post-Independence many banks were nationalized. In the year 1949, the Reserve Bank of India was nationalized followed by the nationalization of 14 other banks in the year 1969 and 6 other banks in 1980. [ Nationalized banks are the banks that are owned and managed by the government].
In the year 1991, as a result of LPG [Liberalisation, Privatisation, and Globalisation] tremendous changes and improvements were seen in the banking sector. The concept of privatizing Indian banks, the concept of e-banking, the development of payment banks, etc. were all the result of LPG.
LEGISLATION GOVERNING BANKS IN INDIA:
There are more than 40 Acts regulating Banks in India. Some are directly related to banking activities while some are supportive or are relevant to only specific departments of the bank. Example: The Industrial Disputes (Banking and Insurance Companies) Act, 1949 can be referred to in case of bank disputes and not for regulating bank functions. Some of the important Acts regulating banks in India are:
- Reserve Bank of India Act, 1934
- The Banking Regulation Act, of 1949
- Negotiable Instrument Act, 1881, 2015
- Banker Book Evidence Act, 1891
- Banking Regulation (Amendment) Act, 2020
- Amalgamation of Public Sector Banks scheme, 2020
- Banking Law Amendment Act, 2012, 2013
- The State Bank of India Act, 1955
- Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003
- The Export-Import Bank of India Act,1981
- Limitation Act, 1963, etc.
EMERGING TRENDS IN BANKING LAWS FROM 1991:
Most of the banks that were in existence before 1991 were public sector banks. The performance of these banks was very poor. During economic crises, these banks received fewer deposits and the demand for loans was very high, this resulted in poor performance by public sector banks. The SLR (Statutory Liquidity Ratio) and CRR (cash reserve ratio) were very high.
The banking system was not stable, hence the need for banking Reformation arose and this was considered an integral part of the liberalization. The reformation was made in 1991, following the Narasimham committee report which aimed at increasing the role of private sector banks, reducing the SLR and CRR rates, deregulating interest rates, setting up of hierarchy bank system, arranging for Asset Reconstruction funds, etc.
Narasimham committee 2 was formed in 1998 to strengthen the banking sector. This committee recommended raising the capital adequacy ratio of banks, rising start-up capital for foreign banks, suggested the merging of Public sector banks for better international performance, Narrow banking concept was introduced for banks whose non-performing assets were performing poorly. “Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002” came into force as a result of the committee’s recommendation.
Improved quality of internet service has bought new trends in the banking sector. The Internet has almost replaced the manual and traditional work environment with an online work environment and this work environment is widely accepted in the country today. E-payment, E-service, e-money, digital wallet, Magnet ink character recognition, KYC norms, Debit card, credit card, electronic clearance services, Internet banking, Electronic Fund Transfer, payment banks, mobile banking, etc. are a few examples of trending banking services.
Internet Banking is not a separate sector but a modified version of the banking sector where all the similar functions of banks are followed but through computers and new technology. The enactments controlling Internet Banking in India are Information Technology Act, 2000 (IT Act), the Indian Penal Code, Banking Regulatory Act, RBI Act, the Consumer Protection Act, Negotiable Instrument Act.
- The Information Technology Act deals with electronic commerce and cybercrime. Internet Banking operates in conformity with the provisions of the IT Act. The legal recognition for all electronic documents, transactions, and authentication is provided by IT Act. Digital signatures are accepted under the provisions of this Act for internet banking purposes. Section 66 of the IT Act deals with penalizing the acts of hacking, spreading the virus through computers, etc. which is applicable in the bank sector too.
- Provisions of the Indian Penal Code protect internet banking from fraud, theft of data, and other Internet-related problems.
- Under the Negotiable Instrument Act, e-cheques were added that are in electronic format, forming a part of internet banking.
- Consumer Protection Act has a provision to protect consumer’s personal data, safe and secured under internet banking.
CRITICAL ANALYSIS OF EMERGING TRENDS IN THE BANKING SECTOR:
No doubt the emerging trend in the banking sector has contributed to economic growth and has played a crucial role in improving India’s international business and overall development of our country. With the help of the Internet, individuals are benefited from availing of banking services from every corner of the world. With the necessary enactments and legal support, the transactions carried out under internet banking are safe and secured. Internet Banking is available 24/7, so the question of Sundays or other holidays does not arise. Transactions done through internet banking saves valuable time for both customers and bankers.
Through consistent efforts are made to improve internet banking, the sector still faces some issues such as:
- phishing, hacking, data theft, loss of data, etc. are still the major concerns in internet banking.
- Illiterates, people from small villages, old aged people, etc cannot easily understand the procedures or use internet banking. So, still, the entire population cannot avail of the facility.
- Jurisdiction problems may arise especially concerning an international transaction unless the jurisdiction is clearly mentioned in the agreement.
- In villages or towns where there is an issue with internet speed, availing of the benefit of internet banking becomes difficult.
- Internet banking involves transactional risk. Problems of inaccuracy in processing, problems with software or computer, failure to transfer money or double/multiple time transfer of amount for the same transaction, etc. are still prominent issues.
Banks have to adopt measures to secure the personal data, financial data of their customers. Banks have to adopt a new and developed version of software to avoid transactional risks and every banker must be technically well-trained and skilled to operate the computer and solve the problems associated with it. Workshops can be conducted to train bankers to guide customers to use internet banking. Free Workshops for customers especially in rural area is also essential to make people aware of the availability of internet banking.
Digital India is a program launched by our central government in the year 2015 with the aim to transform India into a digitally empowered society. The banking sector of our country has almost achieved the aim of the Digital India Program. A strong Banking system, with the ability to adapt to emerging trends in society, is likely to achieve economic progress rapidly.
- (24/September/2021), “What is Bank?” available at https://www.nerdwallet.com/article/banking/what-is-a-bank
- “Banking Acts/Ministry of Finance/ Government of India” available at https://financialservices.gov.in/act-rule/Banking/Banking-Acts
- “Narasimhan Recommendation on Banking Sector” available at https://www.insightsonindia.com/indian-economy-3/indian-financial-system-commercial-banking-system/narasimhan-committee-recommendation-on-banking-sector/
- Sujay Ilnu, “Liberalisation of Indian Banking and Regulation” available at http://www.legalservicesindia.com/article/1023/Liberalisation-of-Indian-Banking-&-Regulation.html
- Rohit Jain, “Legal framework of internet banking in India”, IV(1) IJLMH (2021) available at https://www.ijlmh.com/wp-content/uploads/Legal-Framework-of-Internet-Banking-in-India.pdf
- “Banking History Introduction to Banking” available at https://www.youtube.com/watch?v=ImYAOv-DREU