Finance and banking sector is the lifeblood of trade, commerce, and industry. Banking sector acts as the backbone in the modern business. The development of any country primarily depends upon the banking system of that country. A bank is a financial institution which deals with deposits and advances and other services related to it. Banks receive the money from those who want to save in the form of deposits and it lends money to those who are in need for it. Banking and Finance is one of the most essential and important parts of human life.

Law is a set of rules and regulation enforced by the set of institutions. Law is the enactment or statute enacted by the legislature. The principles and regulation which are formed to implement this enactment in the banking and finance sector are broadly known as Banking and Finance Laws. The banking and financial industry are regulated by state and federal laws. These laws impose reporting requirements for banks and other financial institutions, govern securities and other transactions and regulate taxes. In addition to affecting banks, banking, and finance law often plays a large role in mergers and acquisitions or corporations, stock purchases and investments by both individuals and companies, and tax audits of bank accounts.

All the laws relating to banking and finance in India are administered by the Finance Ministry’s Department of Financial Services. The mandate of the Departure of Financial Services covers the functioning of Banks, Financial Institutions, Insurance Companies, and the National Pension System.

Finance and banking sector is the lifeblood of trade, commerce, and industry. Banking sector acts as the backbone in the modern business. The development of any country primarily depends upon the banking system of that country. A bank is a financial institution which deals with deposits and advances and other services related to it. Banks receive the money from those who want to save in the form of deposits and it lends money to those who are in need for it. Banking and Finance is one of the most essential and important parts of human life.

WHY BANKING AND FINANCE LAWS?

Banking and Finance laws impose the reporting requirements for banks and other financial institutions, govern securities and other transactions and regulate taxes. In addition to affecting banks, banking, and finance law often plays a large role in mergers and acquisitions of corporations, stock purchase and investment by both individuals and companies, and tax audits of bank accounts.

To overcome the problems faced by the people who need legal help with banking and finance law when forming a new business, it is necessary to have a set of rules which provides guidance. Therefore, there are many laws, contracts, and regulations that may dictate how new business spend and account for investment funds. And so, we need Banking and Finance laws.

WHAT IS THE LEGAL FRAMEWORK FOR BANKING REGULATIONS?

Banking business and related financial services are governed primarily by the Banking Regulation Act, 1949 (Banking Regulation Act).
The Reserve Bank of India Act, 1934 (RBI Act) empowers the Reserve Bank of India (RBI) to issue rules, regulations, directions, and guidelines on a wide range of issues relating to banking and the financial sector. The RBI is the central bank of India and the primary regulatory authority for banking.

Cross-border transactions and related activities are governed by the Foreign Exchange Management Act, 1999. This provides for, among other things, certain banking and other institutions to be licensed as authorized dealers in foreign exchange.

MAJOR LAWS ADMINISTERED BY DEPARTMENT OF FINANCIAL SERVICES IN INDIA:

THE NEGOTIABLE INSTRUMENTS ACT, 1881

The NI act was enacted in the year 1881 with the objective to legalize the system by which instruments contemplated and it could pass from hand to hand by negotiation like any other ground.

The enactment was for the purpose to present an orderly and authoritative statement of leading rules of law relating to the negotiable instruments and to confer certain privileges to the mercantile instruments contemplated under it and provide the special procedure in case the obligation under the instrument was not discharged.

RESERVE BANK OF INDIA, 1934

The RESERVE BANK OF INDIA, 1934 defines the manner in which the Apex bank can conduct its business. The RBI is empowered to accept deposits from the central and the state governments without interest. As per the act, the RBI performs 3 types of functions as a central bank:

  • 1. Banking functions;
  • 2. Supervisory functions;
  • 3. Promotional functions.

The bank is empowered to purchase and discount bills of exchange from commercial banks. It can also purchase foreign exchange from banks and sell it to them. The RBI is allowed to provide loans to banks and state financial corporations. It is entitled provide advances to the central government and state governments.

RBI can buy or sell government securities. It can deal in a derivative, repo and reverse repo. It also deals with emergency loans to banks. The RBI must conduct the banking affairs for the central government and manage public debt.

In India, it is only the RBI or the central government to issue and accept promissory notes that are payable on demand. However, a cheque that is payable on demand, can be issued by anyone.

THE BANKING REGULATION ACT, 1934

In India, all the banking firms are regulated by the Banking Regulation Act, 1949. Initially, this law was applicable only to banking companies. But in the year 1965 the act was amended to make it applicable to cooperative banks and to introduce other changes.

The Act provides a framework using which commercial banking in India is supervised and regulated. The Act supplements the Companies Act 1956. Primary Agricultural Credit Society and cooperative land mortgage banks are excluded from the Act. The Act gives the Reserve Bank of India (RBI) to power to license banks, have regulation over shareholding and voting rights of shareholders; supervise the appointment of the boards and management; regulate the operations of banks; lay down instructions for audits; control moratorium, mergers and liquidation; issue directives in the interests of public good and on banking policy, and impose penalties.

The amendment in 1965 introduced cooperative banks under its purview by adding Section 56 in the Act. Cooperative banks, which operate only in one state, are formed and run by the state government. The RBI controls the licensing and regulates the business operations. The Banking Act was a supplement to the previous acts related to banking.

SICK INDUSTRIAL COMPANIES ACT (SICA), 1985

The Sick Industrial Companies Act (SICA) was a key piece of legislation dealing with the issue of rampant industrial sickness in India. The Sick Industrial Companies (Special Provisions) Act (SICA) was enacted in the year 1985 in India to determine the extent of sickness in industrial units, expedite the revival of potentially viable companies and close unviable units to release investment locked up in them for productive use elsewhere.

According to SICA, a sick industrial unit is one that had existed for at least five years and had incurred accumulated losses equal to or exceeding its entire net worth at the end of any financial year. The basic rationale of enacting SICA was to determine sickness in the industrial units. It also aimed at expediting the revival of potentially viable units so as to make the investments in such units profitable. At the same time, to ensure the closure of unviable units so as to release the investments locked up in such units for productive use elsewhere.

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