Banking Law - Origin of banking , Definition of banks , Function of bank and classification of banks

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BANKING LAW



Introduction (Banking)
  • Banking is an integral part of the modern economy. But the nature and functions of modern banks have evolved over a long period of time.
  • The idea of banking evolved with the idea of money. Banking business is mainly linked to lending. Moneylender is to be found in every society-ancient or modern; advanced or backward
  • The ten commandments of Moses, Quoran, Manusmrity, Kautilya's Arthashastra all have references to moneylenders and rate of interest.
  • Modern banks also undertake foreign exchange transactions.
  • The priests in temples took advantage of the sanctity of the temples, collected people's savings and did lending business. In the middle ages, banking business was carried on by the individuals.
  • Then came partnership and today in all countries banking is carried out by
  • joint stock companies and is regulated by the government.

Origin of Banking

  • It is seen that banking transactions have been taking place since last number of years. Even it is evidenced that the banking system was prevailing at the time of Babylonian culture. The banks were in existence in Rome also.
  • It was said that in the year 1171, the authorities of Venice had taken loan from the people for meeting the expenses of war and the arrangements for repayment were also made by them.
  • Such loan was called as ‗Mot‘ in Italian language. The meaning of mot in German language is ‗bank‘. In those days,
  • There was German rule in many parts of Italy. Afterwards, in Italian language it was called as banco. The German word bank means a joint stock fund.
  • It is seen that since 1646 the word ‗bank‘ has been used in the articles .Later on there were many banks who started using the word bank in their names.

INDIAN BANKING SYSTEM

Indian banking system is classified into 3 distinct phases:
1. The pre-independence phase i.e. before 1947
2. Second phase from 1947 to 1991
3. Third phase 1991 and beyond

Phase I :- The pre-independence phase i.e. before 1947

  • This phase is characterized by the presence of a large number of banks (more than 600).
  • Banking system commenced in India with the foundation of Bank of Hindustan in Calcutta (now Kolkata) in 1770 which ceased to operate in 1832.
  • After that many banks came but some were not successful like – General Bank of India (1786-1791)
  • Oudh Commercial Bank (1881-1958) – the first commercial bank of India .Whereas some are successful and continue to lead even now like –Allahabad Bank (est. 1865)
  • Punjab National Bank (est. 1894, with HQ in Lahore (that time))
  •   Bank of India (est.1906)
  • Bank of Baroda (est. 1908)
  • Central Bank of India (est. 1911)
  • While some others like Bank of Bengal (est. 1806), Bank of Bombay (est. 1840)
  • Bank of Madras (est. 1843) merged into a single entity in 1921 which came to be known as Imperial Bank of India.
  • Imperial Bank of India was later renamed in 1955 as the State Bank of India.
  • In April 1935, Reserve Bank of India was formed based on the recommendation of Hilton Young Commission (setup in 1926).

In this time period, (The pre-independence phase i.e. before 1947) most of the banks were small in size and suffered from high rate of failures. As a result public confidence is low in these banks and deposit mobilization was also very slow. People continued to rely on unorganized sector (moneylenders and indigenous bankers).

Phase II :- Second phase from 1947 to 1991

Broadly the main characteristic feature of this phase is the nationalization of banks. With the view of economic planning, nationalization emerged as the effective measure.

  • In the year 1949, on 1st January the Reserve Bank of India was nationalized.
  • 14 commercial banks were nationalized in 19th July, 1969. Smt. Indira Gandhi was the Prime Minister of India, during in 1969
        These were

  1. Central Bank of India,
  2.   Bank of India
  3. Punjab National Bank,
  4. Bank of Baroda
  5. United Commercial Bank,
  6. Canara Bank
  7. Syndicate Bank
  8. Allahabad Bank
  9. Indian Bank,
  10. Union Bank of India,
  11. Bank of Maharashtra
  12. Indian Overseas Bank
  13. Dena Bank
  14. UCO Bank
  • 6 more commercial banks were nationalized in April 1980.
    These were:
  1. Andhra Bank,
  2. Corporation Bank,
  3. New Bank of India,
  4. Oriental Bank of Commerce
  5. Punjab & Sind Bank,
  6. To install Vijaya Bank.
  • Meanwhile on the recommendation of M.Narsimhan committee, RRBs (Regional Rural Banks) were formed on Oct 2, 1975. The objective behind the formation of RRBs was to serve large un served population of rural areas and promoting financial inclusion. With a view to meet the specific requirement from the different sector (i.e. agriculture, housing, foreign trade, industry)
  • some apex level banking institutions were also setup like
    NABARD (est. 1982) National Bank for Agriculture and Rural Development
    EXIM (est. 1982) Export-Import Bank of India
    NHB (est. 1988) National Housing Bank
    SIDBI (est. 1990) Small Industries Development Bank of India

    Impact of Nationalization
  • Improved efficiency in the banking system
  • Sectors such as agriculture, small and medium industries started getting funds
  • Increased penetration of Bank branches in the rural areas.
Phase III :- Third phase 1991 and beyond

  • This period saw a remarkable growth in the process of development of banks with the liberalization of economic policies.
  • Considering this, in 1991, the Narsimhan committee gave its recommendation i.e. to allow the entry of private sector players into the banking system.
  • Following this RBI gave license to 10 private entities, out of which 6 are survived which are-
ICICI, (Industrial Credit and Investment Corporation of India)
  • HDFC, (Housing Development Finance Corporation Limited)
  •   Axis Bank, ( No Full Name , formerly known as UTI Bank (1993–2007),
  • IDBI, (Industrial Development Bank of India Limited)
  • Indus,
  • Dbc. (Development Credit Bank Ltd.

  • In 1998, the Narsimhan committee again recommended entry of more private players. As a result RBI gave license to
    • Kotak Mahindra Bank (2003)
    • Yes Bank (2004)
  • In 2013-14, 3rd round of bank licensing took place. And in 2014 IDFC bank and Bandhan bank emerged. In order to further financial inclusion, RBI also proposed to set up 2 kind of banks i.e. Payment Banks and Small Banks.


Some Important Facts

  • Allahabad Bank, established in 1865 – Allahabad Bank is the oldest Public Sector Bank in India having branches all over India and serving the customers for the last 145 years.

  •   Imperial Bank of India was later renamed in 1955 as the State Bank of India.

  • The first Bank of India with Limited Liability to be managed by Indian Board was Oudh Commercial Bank. It was established in 1881 at Faizabad.

  • Punjab National Bank is the first bank managed purely by Indians, which was established in Lahore in 1895.

  • First Truly Swadeshi bank – Central Bank of India is called India's First Truly Swadeshi bank, which was established in 1911 and wholly owned and managed by Indians. 

  • Union Bank of India was inaugurated by Mahatma Gandhi in 1919.
  •  Osborne Smith was the first governor of the Reserve Bank.
  •  CD Desmukh was the first Indian to be the governor of Reserve Bank.
  •  Savings account system in India was started by Presidency Bank, 1833.
  •  The first Indian bank to open overseas branch is Bank of India. It established a branch  in London in 1946.
  • ICICI Bank was the first Indian bank to provide internet banking facility.
  • Central Bank of India was the first public bank to introduce Credit card.
  • ICICI bank is the first bank to provide mobile ATM.
  • Bank of Baroda has the maximum number of overseas branches.

Definition of bank

“Bank” means a legal entity engaged in the business of accepting deposits and using such funds either in whole or in part to make extensions of credit or investments for the account of the bank

“banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise;
                                 Section 5 in the Banking Regulation Act, 1949

Oxford Dictionary defines a bank as "an establishment for custody of money, which it pays out on 

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