EVOLUTION

The Indian banking law is based to a very large extent, though not entirely, upon English
banking law. The practice of marking BOE, payable on order and transferring them to
endorsement dates back to beginning of 17th century where 1st banking Act was passed
which brought into existence bank of England.
The word bank is derived from the Italian word banco meaning a bench. It was upon
the bench in the market place tht early bankers- medieval European moneylenders and
moneychangers used to display their coins and transact business.
As early as 2000 BC, the Babylonians developed banking system where most temples
were financial centers/ banks of their cities and practice of depositing personal valuables
as treasuries against a receipt took place.
The concept of banking was first introduced in medieval Florence in 14th century. A
powerful merchant family named Medici established a network of shops that allowed
patrons to place money on account and withdraw the money in another city that had a
Medici representative. Many powerful families and even the Church kept their money in
Medici banks. Banking continued to gain popularity throughout Europe by 1700. Nearly
every country in Europe had some form of established banking. Modern banking has
come a very long way from those humble beginnings in Florence.
Gradually as the personal possession got evaluated in term of money, in form of coins
made of precious metal like gold and silver, these were being deposited in the temple
treasuries. As these coins were commonly accepted form of wealth, lending activity to
those who needed it and were prepared to borrow at an interest began. The person who
conducted this lending activity was known as the Banker because of the bench he
usually set. It is also observed that the term bankrupt got evolved then as the irate
depositors broke the bench and table of the insolvent banker.
With the expansion of trade the concept of banking gained greater ground. The handling
of banking transcended from individual to groups to companies. Issuing currency was
one of the major functions of the banks. The earliest from of money coins, were a
certificate of value stamped on a metal, usually gold, silver, and bronze or any other
metal, by an authority, usually the king. With the increasing belief and faith in such
authority of their valuation and the necessities of wider trade a substitute to metal was
found in paper. The vagaries of monarchial rule led to the issues of currency being vested
with the banks since they enjoyed faith, controlled credit and trading. All forms of money
were a unit of value and promised to pay the bearer of specified value. Due to failure on
account of unwise loans, to rule and organize, a stable banking system arose. The worlds
earliest bank currency notes were issued in Sweden by stock holms Banco in July 1661.
Banking Regulation Act, 1949, Section 5(c), defines bank as "a banking company which
transacts the business of banking in India.' Further, Section 5(b) of the BR Act defines
banking as, 'accepting, for the purpose of lending or investment, of deposits of money

from the public, repayable on demand or otherwise, and withdrawable, by cheque, draft,
and order or otherwise.'
INDIA
Transition from money-lending to banking must have occurred much before Manu which
devotes a special section on deposits and pledge.The Rig Veda speaks only gold, silver
copper and bronze and the later Vedic texts also mention tin, lead, iron and silver.
In ancient India during the Maurya dynasty, an instrument called adesha was in use,
which was an order on a banker desiring him to pay the money of the note to a third
person, which corresponds to the definition of BOE + During the Buddhist period.
The earliest form of Indian Bill of Exchange was called Hundi- to collect
The reminisce of banking in India can be traced back to the 4th century BC in the
'Kautilya Arthashastra' , which contains references to creditors and lenders.
Traditionally, bankers lent money against personal & other securities like ornaments,
goods & immovable property. Usury/high rate of int. was widely prevalent is india.
The payment of taxes in cash, better means of communication & transportation, uniform
currency, unification of country under 1 CG, dvpl of co-operative movement &
establishment of joint-stock banks have taken away good deal of business frm hands of
indian money-lender.
PRE INDEPENDENCE ERAThe English traders that came to India in the 17th century could not make much use of
indigenous bankers, owing to their ignorance of the language & inexperience indigenous
people of the European trade. Therefore, the English Agency Houses(trading firms) in
Calcutta and Bombay began to conduct banking business, besides their commercial
business. They began to serve as bankers to the East India Company which had no capital
of their own and depended on deposits for their funds. They financed movements of
crops, issued paper money and established joint stock banks.
Bank of Hindustan was 1ST bank started under European direction in india & General
bank of india 2ND, both are now defunct.
The oldest bank in existence in India is the State Bank of India, which originated in the
Bank of Calcutta, which almost immediately became the Bank of Bengal. This was one
of the three presidency banks, the other two being the Bank of Bombay and the Bank of
Madras, all three of which were established under charters from the British East India
Company. For many years the Presidency banks acted as quasi-central banks, as did their
successors. Later, The three banks merged together & called Imperial Bank of India,
which, upon India's independence, renamed as State Bank of India.
Indian merchants in Calcutta established the Union Bank, but it failed as a consequence
of the economic crisis of 1848-49. Post crisis of 1862-65(Indias cotton exports affected

due to civil war in US whr bank of Bombay went in liquidation), The Allahabad Bank
was established and still functioning today, is the oldest Joint Stock bank in India.
The year of 1860 marked a new era in history of public banks in india as this was the year
where principle of limited liability was 1st applied to joint-stock banks.
Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire
d'Escompte de Paris opened a branch in Calcutta and another in Bombay. HSBC
established itself in Bengal in 1869. Calcutta was the most active trading port in India,
mainly due to the trade of the British Empire, and so became a banking centre.
With the crisis, there was fall in gold price in relation to silver standard + slow growth of
join-stock. Thereafter, Punjab National Bank, established in Lahore in 1895, which has
survived to the present and is now one of the largest banks in India.
The period between 1906-1913, saw the establishment of banks inspired by the Swadeshi
movement. The Swadeshi movement inspired local businessmen and political leaders to
start many new institutions.
Establishment of pvt banks-Bank of India, Corporation Bank, Indian Bank, Bank of
Baroda, Canara Bank and Central Bank of India were started. Crash 1913-17.
Then 1st world war & 2nd. 94 banks collapsed/failed btw 1913 & 1918
Earlier agency agreement btw former imperial bank of india and RBI was replaced by
agree btw SBI and RBI for performance of agency functions. SBI Act simplified the
procedure abt taking over of business of any banking institutions which state bank may
acquire through negotiations.
RBI was established in1934 as an apex Bank, however without major government
ownership. Immediately after the independence, the Government of India came up with
the Banking Companies Act 1949. This act was later changed to Banking Regulation
(Amendment) Act 1949. Further, the Banking Regulation (Amendment) Act of 1965 gave
extensive powers to the Reserve Bank of India and via this act, the Reserve Bank of India
was made the Central Banking Authority.
POST INDEPENDENCE ERA
Partition 1947 adversely impact economies of Punjab & west Bengal
End of laiseez faire for indian banking
Economic life of notion bad
The Government india enact Industrial Policy Resolution
Government took major steps in this Indian Banking Sector Reform after independence.
First major step in this direction was nationalization of Reserve Bank in 1949.
Enactment of Banking Regulation Act in 1949
Reserve Bank of India Scheduled Banks' Regulations, 1951.

Nationalization of Imperial Bank of India in 1955, with extensive banking facilities on a

large scale especially in rural and semi-urban areas.
Nationalization of SBI subsidiaries in 1959.
5 yr plan of govt
NATIONALIZATION PROCESS
Despite the provisions, control and regulations of Reserve Bank of India, banks in India
except SBI, continued to be owned and operated by private persons.
Tht time -430 commercial banks
On 19 July 1969, the Government nationalized 14 banks whose national wise deposits
were greater than Rs. 50 crore.
Within two weeks of the issue of the ordinance, the Parliament passed the Banking
Companies (Acquisition and Transfer of Undertaking) Bill, and it received the
presidential approval on 9 August 1969 as private commercial banks were lacking in
fulfilling the social & developmental goals of banking
Nationalization of 6 more commercial banks followed in 1980, reason was to give the
government more control of credit delivery, purpose -rapid branch expansion and
channeling of credit according to the plan priorities of 5 yr plan.
With the second dose of nationalization, the Government of India controlled around 91%
of the banking business of India.
Later on, in the year 1993, the government merged New Bank of India with Punjab
National Bank. It was the only merger between nationalized banks and resulted in the
reduction of the number of nationalized banks from 20 to 19. Currently there are 27
nationalized commercial banks.
ECONOMIC LIBERALIZATION
In the early 1990s, the then Narasimha Rao committee headed by M Narsimhan and then
PM Manmohan Singh embarked on a policy of liberalization, licensing a small number of
private banks. These came to be known as New Generation tech-savvy banks, and
included Global Trust Bank (the first of such new generation banks to be set up), which
later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI
Bank),ICICI Bank and HDFC Bank. This move, along with the rapid growth in the
economy of India, revitalized the banking sector in India, which has seen rapid growth
with strong contribution from all the 3 sectors of banks, namely, government banks,
private banks and foreign banks.

They submitted recommendations in the 1990s in reports widely known as the

Narasimham Committee-I (1991) report and the Narasimham Committee-II (1998)
Report. The year 1991 which is also called as the year of 'Banking Sector Reforms'
opened the gates to the private sector & to foreign banks which in turn significantly
increased the level of competition .
Seven new private banks entered the market between 1994 and 2000.
In addition, over 20 foreign banks started operations in India since 1994.
By March 2004, the new private sector banks and the foreign banks had a combined share
of almost 20% of total assets.

The major factors that contributed to deteriorating bank performance included :

(a) Too stringent regulatory requirements (i.e., a cash reserve requirement [CRR] and
statutory liquidity requirement [SLR])
(b) Low interest rates charged on government bonds (as compared with those on
commercial advances)
(c) Directed and concessional lending
(d) Administered interest rates
(e) Lack of competition.
CRR
mandatory reserves to be maintained with RBI.
Sec 42 RBI Act
Every scheduled Bank is required to keep certain % of their demand and time liabilities,
as cash balances with the RBI from time to time
No maximum ceiling/ floor rate in respect of CRR.
Sec 18 BRA-Non-scheduled banks are required to maintain the cash reserve
Computation of DTL:
Liabilities of a bank may be in the form of demand/time deposits/borrowings /other
miscellaneous items of liabilities.
Demand Liabilities:
of a bank are liabilities which are payable on demand/demanded by customer
Eg: current deposit/recurring deposits/savings a/c/unclaimed deposits/DD/ mail
trf/outstanding telegraphic trf

(i)
(ii)
(iii)

Time Liabilities:
of a bank are those which are payable otherwise than on demand/after certain period of
time. These include:
fixed deposits (eg:1 yr)
cash certificates
cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff
security deposits, margin held against letters of credit, if not payable on demand, deposits
held as securities for advances which are not payable on demand and Gold deposits.
Other Demand and Time Liabilities (ODTL) :include
interest accrued on deposits, bills payable, unpaid dividends, suspense account balances
representing amounts due to other banks or public, net credit balances in branch
adjustment account, any amounts due to the banking system which are not in the nature
of deposits or borrowing.
Penalties:
Penal interest will be charged as under in cases of default in maintenance of CRR by
SCBs as per the directives of the Reserve Bank of India.
Liabilities not to be included for DTL/NDTL computation:

The following items will not form part of liabilities for the purpose of CRR and SLR:
(a) Paid up capital, reserves, any credit balance in the Profit & Loss Account of the bank,
amount of any loan taken from the RBI and the amount of refinance taken from Exim
Bank, NHB, NABARD, SIDBI
(b) Net income tax provision
(c) Amount received from DICGC towards claims and held by banks pending
adjustments thereof
(d) Amount received from ECGC by invoking the guarantee
(e) Amount received from insurance company on ad-hoc settlement of claims pending
judgment of the Court
(f) Other items as approved by RBI
Example You deposit say Rs 1000 in your bank. Then Bank receives Rs 1000 and has to
put some percentage of it with RBI. If the prevailing CRR is 6% then they will have to
deposit Rs 60 with RBI and they are left with Rs 940. Your bank can not use this Rs 60 for
its commercial activities like lending or investment purpose. This Rs60 is deposited in
current account with RBI
Statutory Liquidity Ratio (SLR)
also the mandatory reserves to be maintained by banks held in the form of prescribed
securities.
This is also based on certain percentage of their demand and time liabilities of a bank.
Sec 24 BRA
Every banking company in India is required to maintain in India, in cash, gold or other
approved securities an amount which should not at close of business on any day be less
than the percentage prescribed by RBI of the total of its demand and time liabilities in
India
Banking Regulation (Amendment) Act, 2007
RBI can prescribe the SLR for SCBs in specified assets.
The value of such assets of a SCB should not be less than such percentage not exceeding
40 % of its total DTL in India as on the last Friday of the second preceding fortnight as
the RBI may, by notification in the Official Gazette, specify from time to time.
Procedure for Computation of SLR:
The procedure to compute total NDTL for the purpose of SLR under Section 24 (2) (B)
of B.R. Act 1949 is broadly similar to the procedure followed for CRR. . SCBs are
required to include inter-bank term deposits/term borrowing liabilities of all maturities in
Liabilities to the Banking System. Similarly, banks should include their inter-bank
assets of term deposits and term lending of all maturities in Assets with the Banking
System for computation of NDTL for SLR purpose
Penalties:
If a banking company fails to maintain the required amount of SLR, it should be liable to
pay to RBI in respect of that default, as per the directives of the Reserve Bank of India
from time to time.

Example You deposit say Rs 1000 in your bank. Then Bank receives Rs 1000 and has to
put some percentage of it with RBI as SLR. If the prevailing SLR is 20% then they will
have to invest Rs 200 in Government securities
CRR 4%
SLR 20.75
REPO RATE 6.25
REVERSE REPO RATE 5.75
Repo
Similarly, when banks need money they approach RBI. The rate at which banks borrow
money from the RBI by selling their surplus government securities to the central
bank (RBI) is known as Repo Rate. Repo rate is short form of Repurchase Rate.
Generally, these loans are for short durations (up to 2 weeks).

Example If repo rate is 5% , and bank takes loan of Rs 1000 from RBI , they will pay
interest of Rs 50 to RBI.
Banks enter into an agreement with the RBI to repurchase the same pledged government
securities at a future date at a pre-determined price. RBI manages this repo rate which is
the cost of credit for the bank.
higher the repo rate higher the cost of short-term money and vice verse. Higher repo rate
may slowdown the growth of the economy. If the repo rate is low then banks can charge
lower interest rates on the loans taken by us
Reverse Repo
rate of interest offered by RBI, when banks deposit their surplus funds with the RBI for
short periods. When banks have surplus funds but have no lending (or) investment
options, they deposit such funds with RBI. Banks earn interest on such funds
The RBI uses this tool when it feels there is too much money floating in the banking
system.
An increase in the reverse repo rate means that the RBI will borrow money from the
banks at a higher rate of interest. As a result, banks would prefer to keep their money
with the RBI

RIGHT OF RBI TO ISSUE BANK NOTES & FUNCTION OF ISSUE DEPT

RBI Act 1934, Section 22,has the sole right to issue bank notes of all denominations. is responsible for the design,
production andmanagement of the currency of India, with the goal of ensuring
an adequate supply of clean and genuine notes.
Section 22. Right to issue bank notes
(1) The bank shall have the sole right to issue bank notes in India, and may, for a period
which shall be fixed by the Central Government on the recommendation of the Central
Board, issue currency notes of the Government of India supplied to it by the Central
Government, and the provisions of this Act applicable to bank notes shall, unless a
contrary intention appears, apply to all currency notes of the Government of India issued
either by the Central Government or by the Bank in like manner as if such currency notes
were bank notes, and references in this Act to bank notes shall be construed accordingly.
(2) On and from the date on which this chapter comes into force the Central Government
shall not issue any currency notes.
S38 RBIACT- govt puts into circulation 1 rupee coins & notes through RBI only
The responsibility for coinage vests with the Government of India on the basis of The
Coinage Act, 2011. RBI acts as an agent of government which
merely distributes the coins in the market.
Denominations
Currently, RBI has issued currency notes in the denomination of Rs. 10, 20, 50, 100,
500 and 1000. However, it can issue notes with denomination up to Rs. 10,000, as per the
provision of RBI Act, 1934.
Coins are presently being issued by the government in the denomination of 50 paise, Re.
1, Rs. 2, 5, and 10. Coins up to 50 paise are called 'Small coins' and Rupee
1 and above are called 'Rupee coins'. Coins can be issued up to the denomination ofRs.
1000 in terms of The Coinage Act, 2011.

Liabilities
Small and Rupee Coins - Government of India
Rupee One banknote - Government of India (signed by Finance Secretary)- legal
tender
Banknotes above Rupee One - Reserve Bank of India (signed by RBI Governor)
Minimum Reserve System to issue currency
India adopted Minimum Reserve System in the tenure of RBI governor Sir Benegal
Rama Rau in 1957. In this system, RBI is required to maintain a minimum reserve of Rs.

200 crore in gold and forex, of which rs 115 crore be in gold form (earlier India
followed Proportional Reserve System) to issue currency in India.
Rbi power to issue/withdraw/exch these currency notes for other denominations- security
of gold bullion/foreign securities/rupee coins/ exch bills/promissory notes
Determination of volume and value of banknotes to be printed
RBI based on the demand requirement indicates the volume and value ofbanknotes to be
printed each year to the government which get finalized aftermutual consultation.

The quantum of banknotes to be printed depends on the followings Requirement for meeting the demand of banknotes
GDP growth
Inflation rate
Replacement of Soiled and Mutilated notes
Reserve Stock requirements, etc.
Notes and Coins production
Notes are printed at 4 Printing Presses, located at - Nashik, Dewas,
Mysore and Salboni
Coins are minted at 4 Mints, located at - Mumbai, Noida, Kolkata andHyderabad
Currency circulation
RBIAct issue of notes & general banking business of bank r undertaken by 2 separate
dept of banks:
Issue department
Responsible for issue of new notes
It keeps its assets which form the backing for the note issued separate frm assets of
banking dept
Assets of issue dept against which bank notes r issued:
security of gold bullion/foreign securities/rupee coins/ exch bills/promissory notes
payable in india & eligible for purchase by bank
empowered to reduce its holding of foreign securities in issue dept to any lesser amt with
previous sanction of CG
The bank has established 14 offices of the Issues Department for the discharge of its
currency functions. At all the other centres of the country, the currency requirements are
met by the bank through currency chests.
FUNCTION OF ISSUE DEPT
S23(1) The issue of bank notes shall be conducted by the Bank in an issue department which
shall be separated and kept wholly distinct from the banking department, and the assets of

the issue department shall not be subject to any liability other than the liabilities of the
issue department as hereinafter defined in section 34.
(2) The issue department shall not issue bank notes to the banking department or to any
other person except in exchange for other bank notes or for such coin, bullion or
securities as are permitted by this Act to form part of the Reserve.
Banking department
Business of banking taken by this dept
Hold stock of currency with itself
Whenever necessary it replineshes stock of currency frm issue dept against trf of
equivalent eligible assets. & if stock of currency with banking dept is surplus- excess is
returned to issue dept in exch of equivalent assets
Currency Chest
is a pocket edition of the Issue Department.
RBI has authorized select commercial bank branches to establish currency chests, which
would act as storehouses for banknotes and rupee coins on behalf of RBI.
These chest branches distribute banknotes and rupee coins to other bank branches in
their area of operation.
are maintained by the bank with the branches of the SBI group, Government Treasuries
and Sub-Treasuries, and public sector banks.
The stock of notes and coins kept in the currency chests varies as per the needs of the
respective areas served by the Treasury or an agency of the bank.
AdvThe currency chests provide remittance facilities to banks and the public.
2. They facilitate Treasuries and bank branches to function by keeping relatively small
cash balances.
3. They facilitate the exchange of rupee coins for notes, as well as the issue of new for
old/soiled notes.

Assets of issue deptConsist gold coins,gold bullion, foreign securities,rupee coins & rupee securities of such
aggregate amt as is not less than total of its liab of issue dept.
The aggregate value of gold coins,gold bullion & foreign securities held as assets shall
not at any time b less than 200 crore.

Aggregate of gold coins & gold bullions shld b 115 crore & shld b valued @ price not
exceeding their int market price. Not less than 85% shld b held in india in custody of
RBI/its agencies
Any gold belonging to rbi which is in any other bank/any mint/treasury/in transit is to b
reckoned as part of such assets

Liab of issue deptWill b amt = total of amt of currency notes of govt of india & banknotes in circulation for
timebeing

Important provisions for issue(i) The Issue Department of the Bank alone can issue notes of Rs. 2 and those of higher
denominations.
(ii) The assets of the Issue Department should be completely segregated from those of the
Banking Department of the Reserve Bank.
(iii) All the notes issued by the Reserve Bank of India are legal tender and are guaranteed
by the Central Government.
(iv) The design, form and material of the notes issued by the RBI should have the
approval of the Central Government.
(v) The Central Government is empowered to demonetise any series of the notes issued
by the RBI.
(vi) No stamp duty is payable by the RBI in respect of notes issued by it.
(vii) The Central Government has to circulate rupee coins through the RBI only.
(viii) The RBI is obliged to supply rupees coins in exchange for bank and currency notes
or bank and currency notes in exchange for coins.