Important Banking Sector Reforms and Acts in India

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The Banking Sector is an important part of the economy. It monitors and regulates the smooth functioning of the Indian economy. The banking sector reforms ans acts are to promote the efficiency and productivity of the banking system in India. They aim to increase growth and development. They also maintain stability and adequacy in the financial market. Let us learn more about Important Banking Sector Reforms and Acts.

Bnaking sector reforms and acts

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History and Development of Banking Sector in India

The modern banking of India came into place in the late 18th century. The Bank of Bombay, Bank of Bengal, and Bank of Madras are the first three banks to function well in India. They later merged and became the Imperial Bank of India. Post-independence it became the State Bank of India in 1955. The Reserve Bank of India entered the system in 1935 and became the monitor and regulator of the Banking System of India in 1949. The Banking Regulation Act of 1949 changed the functioning of the commercial banking sector.

Though RBI was regulating the banking economy, most of the banks except SBI were private banks. By the 1960s, the banking sector was contributing a good share to the Indian economy. It became important to regulate and control to maintain the balance in the economy. This led to the introduction of the Nationalization of Banks Act 1964. This act led to the nationalization of 14 major commercial banks in India. Though this process took place in 1969 with the president’s approval.

In 1991, Rajiv Gandhi introduced Liberalisation, Privatisation, and Globalisation Policy. This led to the addition of Global banks in the country. The foreign direct investment opened up too. This also led to a relaxation in many previous policies of the government. The licensing, taxation, formation process, etc became more flexible for banking companies.

In the 1990s, the Government of India formed a high-level committee to improve the functioning of financial institutions in India. They introduced different acts and reforms to strengthen the banking system. India has seen many such committees. The Banking System of India has important acts and reforms from two phases. The first phase revolves around basic policy and institutional frameworks. And the second phase revolves around structuring and developing the industry with advancements.

The two committees that shaped the banking system of India are –

1. The Narasimham Committee 1991 – First Phase

It was the first committee of India to suggest acts and reforms for an improved banking system. M. Narasimham was the chairman of this committee, thus justifying the name. This committee was formed right after the economic crisis. It suggested – Autonomy in Banking, Reforms in the role of RBI, Change in CRR and SLR, Recovery of Debts, Freedom of Operation, Local Area Banks, Prudential Norms, and Entry of Foreign Banks.

2. The second Narasimham Committee 1998 – Second Phase

This again was headed by M Narasimhan, the 13th governor of RBI. This committee is an extension of the first one. The idea was to overview the reforms introduced after the first committee. It suggested – Development Finance Institution, Stronger banking system, the idea of Non-performing assets, Capital adequacy and tightening of provisioning norms, and, Rural and Small Industrial Credits.

Many other committees followed – The Verma Committee, The Khan Committee, AK Bhuchar Committee, The Urjit Patel Committee, The Vaghul Committee, etc.

Importance of Banking Sector Reforms and Acts

  • These banking reforms aim to remove the external restriction on banks like high-interest rates, reserve requirements (CRR and SLR), and frequent change in interest rates. They want to make the banking system more adaptive and flexible.
  • They are to smoothen the process of bank formation in India. It is to promote healthy competition for better productivity. Foreign direct investment is another area they focus on to improve the economy.
  • The merging of banks across India is their focus again. It is done to improve efficiency and productivity. These reforms have improved the overall functioning of the banking system in the country.

List of Important Banking Sector Reforms and Acts of India

S. No.  Banking Acts and Reforms Year Description
1 Societies Registration Act 1860 This act allows seven or more people related to any literary, scientific, or charitable purpose to form a society or an association. It is to promote a formal organization in the country. 
2 Negotiable Instrument Act 1881 This act defines and amends the law relating to negotiable instruments like – the promissory note, bill of exchange, and cheques. 
3 Indian Trusts Act 1882 This act helps to recognize what is a trust and who is legally a trustee by law and gives a  proper definition for them. 
4 The Bankers’ Books Evidence Act 1891 This act allows bankers to use their ledgers and books as evidence to show their clear records. 
5 Indian Stamp Act 1899 This act is related to introducing and amending laws related to stamp duty and transaction. 
6 Co-operative Societies Act 1912 This act consolidates and amends the law relating to the democratic and smooth functioning of registered co-operative societies.
7 Provident Funds Act 1925 This act makes it mandatory to provide pension or provident funds to employees of different organizations. 
8 Indian Partnership Act 1934 This act clarifies the definition of a partnership between two or more persons who share the profits of a business run by all or by one person only.
9 The Reserve Bank of India Act 1934 This act led to the formation of the Reserve Bank of India in 1935. 
10 Insurance Act 1938 This act regulates the insurance sector and provides a legal framework to monitor industry framework.
11 Central Excise Act 1944 This act forms and regulates law-related to excise duty on goods and services.  
12 Public Debt Act 1944 This act forms and provides a legal framework for the maintenance of government securities. 
13 International Monetary Fund and Bank Act 1945 This act led to the formation of the International Monetary Fund.
14 Employees’ State Insurance Act 1948 This act allows employees to enjoy certain benefits in case of sickness, maternity, and employment injury.
15 The Industrial Finance Corporation of India Act 1948 This act led to the establishment of the Industrial Finance Corporation of India to provide long term loans and finances to the industrial sector. 
16 The Banking Companies (Legal Practitioner Clients’ Accounts) Act 1949 This act monitors and restricts banking company’s transactions by legal practitioners. 
17 The Industrial Disputes Act 1949 This act is to solve industrial disputes related to certain banking and insurance companies.
18 The Banking Regulation Act 1949 This act is responsible for regulating all banking companies in India.
19 Chartered Accountants Act 1949 This is responsible for regulating the profession of Chartered Accountants in India.
20 Contingency Fund of India Act 1950 This act led to the establishment of the Contingency Fund of India.
21 The State Financial Corporations Act 1951 This act led to the establishment of State Financial Corporations.
22 Employees Provident Fund and Miscellaneous Provisions Act 1952  This act makes it mandatory to provide pension funds and deposit-linked insurance funds for employees working in factories and other institutions.
23 The Reserve Bank of India (Amendment and Misc. Provisions) Act 1953 This act provides provisions for certain high denomination banknotes.
24 The Industrial Disputes (Banking Companies) Decision Act 1955 This act is to provide modification to the decision of the Labour Appellate Tribunal.
25 The State Bank of India Act 1955 This act led to the Reserve Bank of India acquiring a controlling interest in the Imperial Bank of India.
26 Life Insurance Corporation Act 1956 This act led to the establishment of the Life Insurance Corporation of India.
27 Companies Act 1956 This act led to the enabling of company formation by registration and sets out the basic duties of companies.
28 Central Sales Tax Act 1956 This act provides provisions for important goods in interstate commerce and lays down tax restrictions on them.
29 The State Bank of India (Subsidiary Banks) Act 1959 This act led to the transfer of eight banks that belonged to princely states into SBI subsidiaries.
30 The Subsidiary Banks General Regulation 1959 This act provides the constitution, management, and control of the subsidiary banks formed in India.
31 The Deposit Insurance and Credit Guarantee Corporation Act 1961 This led to the establishment of a Corporation for providing insurance of deposits and guaranteeing of credit facilities.
32 Customs Act 1962 This act is for the formation and amending the laws related to customs. 
33 Unit Trust of India Act 1963 This act led to the formation of the Unit Trust of India as a public sector investment institution.
34 Limitation Act 1963 This act provides a time limit for different lawsuits within, which an individual can approach the court for justice.
35 Nationalization of Banks Act 1964 This act led to the nationalization of 14 major commercial banks in India. Though this process took place in 1969.
36 Banking Laws (Application to Co-operative Societies) Act 1965 This amendment made the Banking Regulation Act, 1949 applicable to cooperative banks as well.
37 Banking Companies (Acquisition and Transfer of Undertaking) Act 1969 This act allows the acquisition and transfer of certain banking companies for national development.
38 The Nationalized Banks Scheme 1970 This amendment provides management and miscellaneous provisions for the functioning of Nationalized Banks. 
39 The Regional Rural Banks Act 1976 This act led to the establishment of Regional Rural Banks of India. 
40 Foreign Contribution Act 1976 This act regulates and monitors the acceptability and utility of foreign contributions by individuals or associations.
41 The Export-Import Bank of India Act 1981 This act led to the establishment of the Export-Import Bank of India to provide financial benefits and security to the importer and exporters of the country. 
42 The National Bank for Agriculture and Rural Development Act 1981 This act led to the establishment of the National Bank for Agriculture and Rural Development to provide and regulate credit facilities for small businesses like agriculture, handicraft, etc.
43 Chit Fund Act 1982 This act is responsible for providing laws and regulations related to chit funds and matters around it. 
44 Sick Industrial Companies (Special Provisions)Act 1985 This act allows the detection of nonperforming or potentially sick companies. It helps them to revive, if possible, or their closure.
45 Shipping Development Fund Committee Act 1985 This act led to the abolition of the Shipping Development Fund Committee.
46 Banking Companies Rules 1985 This amendment led to the addition of certain regulations related to Nomination.
47 The National Housing Bank Act 1987 This act led to the establishment of the National Housing Bank to monitor and promote housing finance institutions in India.
48 SIDBI Act 1989 This act led to the establishment of the Small Industries Development Bank of India. The idea is to co-ordinate and support the functioning of this industry.
49 SIDBI General Regulations 1990 This act laid down regulations for the smooth functioning of the Small Industries Development Bank of India.
50 Securities and Exchange Board of India Act 1992 This act is to monitor and regulate the securities market of India. 
51 The Special Court Act 1992 This act led to the establishment of a Special Court for transaction-related offenses in securities and matters related to it.
52 The Industrial Finance Corporation Act 1993 This act led to the repealing of The Industrial Finance Corporation as a  Statutory Corporation. It made it a public limited company under the Companies Act.
53 Recovery of Debts due to Banks and Financial Institutions Act 1993 This act led to the formation of laws for the ruling and recovery of debts due to banks and financial institutions.
54 Debts Recovery Appellate Tribunal Rules 1994 This led to the introduction of certain provisions for debt recovery called Debts Recovery Tribunals.
55 Industrial Reconstruction Bank Act 1997 This act allows the transfer of the undertakings of particular banking companies to control the economy and its development.
56 Foreign Exchange Management Act 1999 This act provides provisions and amends for foreign exchange management.
57 Insurance Regulatory and Development Authority Act 1999 This act led to the establishment of the Insurance Regulatory and Development Authority of India.
58 Prevention of Money Laundering Act 2002 This act provides provisions to prevent money laundering cases and the consequences of such cases. 
59 Fiscal Responsibility and Budget Management Act 2002 This act provides provisions for financial discipline. It aims to reduce the fiscal deficit and improve macroeconomic and fund management by achieving a balanced budget.
60 The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 This act allows the auction of properties to recover loans by the banks. 
61 Industrial Development Bank Act 2003 This act made the Industrial development Bank a company registered under the  Companies Act, 1956, and continued its banking business. 
62 Credit Information Companies Act 2005 This act provides provisions for the regulation of credit information companies and ensures efficient distribution of credit. 
63 Government Securities Act 2006 This act provides provisions for improving the government securities market and its management. 
64 The Banking Ombudsman Scheme 2006 This act allows customers to complain if they are not happy with banking services. 
64 Factoring Act Rules 2011 This act provides a formal definition to the Factoring Business in India.
66 SARFAESI (Central Registry) Rules 2011 This act made the central registry a part of the SARFAESI Act 2002 to prevent money laundering and other financial frauds.
67 Securities Law (Amendment) Act 2014 This amendment allows the Security and Exchange Board of India to go after fraudulent investment schemes, especially Ponzi schemes.
68 The Regional Rural Banks (Amendment) Act 2014 This amendment allowed the government to authorize and issue the capital of Regional Rural Banks. 
69 The Insurance Laws (Amendment) Act 2015 This amendment provides IRDAI with more flexibility in its functioning to work more efficiently.
70 The Companies Act (Amended) 2015 This amendment allows the formation of companies without a minimum paid-up capital. 

Conclusion

This article will help you study Acts and Reforms in the Banking Sector of India. They are usually asked in the general awareness section of competitive exams. Exams like UPSC, SSC, RRB, and Banking focus on this topic to test the financial knowledge of the individual.
The general knowledge section is comparatively easy and high scoring in nature. Aspirants can use this article to learn basic information related to important banking acts in India. Serious reading and revision can help students score well in the exams.

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