The Reserve Bank of India(RBI) setup in April 1935 under the aegis of the RBI act 1934.In the addition to the RBI Act the primary legislature governing bank in India is the Banking Regulation Act 1949. Additionally, RBI periodically issues various circular, Directions and Guidelines to be followed by banks.
The Regulatory regime applicable to Bank
- Banking business and licensing requirement – ‘Banking business’ as per section 6 of the BR Act, refers to acceptance of public deposits for the purpose of leading or investment ,which would be repayable and capable of withdrawal and include guarantee and indemnity business discounting dealing in negotiable instrument underwriting participating or managing of any issue and other incidental activity. Hence, Banks in India required to obtain a licence.
- Legal structures for banking entities – Banks in India are mostly set up as companies (including foreign companies). As such, domestic banks are also subject to the purview of the Indian Companies Act 2013 (CA) to the extent applicable, and if such banks are listed on a stock exchange in India, additional trading or listing rules apply. At present, foreign banks, if eligible, are allowed by the RBI to set up business in India through a single mode of presence (i.e., either through a branch model or a wholly owned subsidiary (WOS) model).
- Relationship with the prudential regulator – As a ‘banker to banks’ and as ‘lender of last resort’, RBI directly controls the prudential regulation of banks, introducing norms for income recognition, asset classification and provisioning for the advance portfolios of banks, and ensuring consistency and transparency in published accounts. The BR Act specifically requires banks to maintain books and records in a particular manner and file the same with the regulatory authority on a periodic basis. The RBI’s directives on know your customer (KYC) and anti-money laundering provide for transactional and identification records to be maintained for a minimum period of 10 years from the date of transaction and 10 years from the cessation of relationship with the client, respectively. The provisions for production of documents and availability of records for inspection by shareholders as stipulated under the CA and the rules thereunder also apply to banks.
- Management of banks – The appointment, reappointment or termination of the appointment of a chairperson, managing director, full-time director or chief executive officer of a bank shall have effect only if made with the prior approval of the RBI. The RBI is also empowered to remove a chairperson, managing director or full-time director from office on the grounds of public interest or the interests of depositors or in securing proper management of the bank.
- Conduct of business – In recent years, the responsibility on banks to protect customer data has increased, whether as a result of the enhanced degree of care required under the Information Technology Act 2000, read with the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules 2011, or as a result of the global harmonization required under the European Union’s General Data Protection Regulation. RBI issued a circular dated 6 April 2018 directing banks to ensure that all data relating to payment systems operated by them are stored only in India. Further, the Personal Data Protection Bill 2019 (the PDP Bill) was tabled before Parliament for consultation, and was then referred to the joint parliamentary committee (JPC) for further consideration. On 16 December 2021, the JPC published its report on the PDP Bill along with the revised draft of the bill (renamed as the Data Protection Bill). The revised draft of the bill now encompasses protection of both personal and non-personal data within its ambit. In addition, the Ministry of Electronics and Information Technology has devised a framework for governing non-personal data. If data relates to customers’ identification, additional guidelines stipulated by the Unique Identification Authority of India, the NPCI and directives periodically issued by the RBI also apply. Exceptions to such confidentiality arise with respect to disclosures and periodic reporting to be made to RBI by the banks, including with respect to any borrowers and promoters that are willful defaulters, and reporting of any NPAs, fraud, suspicious transactions and cyber security failures.
In recent years, the banking policy focus areas for the RBI have been in strengthening stressed asset resolution, modernizing payment and settlement systems, and calibrating macro-prudential regulations to the best international norms. The RBI’s recent National Strategy for Financial Inclusion (2019–2024) has also set forth the vision, key objectives and methodologies for increasing access to broad-based, formal and affordable financial services and promoting financial literacy and consumer protection. Further, following the global financial crisis, financial stability has also emerged as a key priority for the RBI. It has taken several policy actions in recent months, encompassing monetary and liquidity measures as well as macro prudential measures to reinvigorate domestic demand and accelerate the pace of economic growth.
Written by Aditya Chaudhary,
Student of JEMTEC School of Law
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