70 Policies — Banking Regulation Act, 1949

The following is a chapter from the book 70 Policies that Shaped India: 1947 to 2017, Independence to $2.5 Trillion. Find the book here.

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Enacted by Parliament on 10 March 1949, the Banking Regulation Act ^<1> laid the foundations of banking in India. It gave India’s central bank, the Reserve Bank of India (RBI), powers to license banks, ^<2> regulate shareholding and voting rights, ^<3> supervise board appointments ^<4> and control over managements ^<5>, regulate banking operations ^<6>, lay down instructions for audits ^<7> and liquidation, ^<8> and impose penalties. ^<9> In 1965, the Act was amended to include cooperative banks. ^<10> Stability of banks has been RBI’s sole focus for the past 70 years, an idea the central bank has nurtured since its nationalisation on 23 September 1948, under the RBI (Transfer to Public Ownership) Act ^<11>. However, stability has come at the cost of rural penetration, which began only recently through payments banks. Weighed down by the concerns of financial stability, RBI has ignored consumers. It has overseen financial repression through the lowest possible interest rates on saving deposits to consumers until rates were freed only 54 years after Independence, on 25 October 2011. ^<12> It has given banks a freeway to mis-sell financial products such as insurance, without any restraint or regulatory oversight. It has allowed banks to let interest rates on floating loans rise with increases in policy rates but not cut them on the way down. It is only now that RBI is increasing the pressure on commercial banks to serve consumers. Given its late start, there is much to be done. In a way, the process of consumer-focused modern banking is beginning only now. On the other hand, RBI has not allowed a single commercial bank to fail, nudging public sector banks to take over failing banks. Whether that is good or not is debatable, but in the absence of a law for resolving financial bankruptcies ^<13>, this was perhaps the best RBI could do. A May 2016 amendment ^<14> to the RBI Act, 1933 gave RBI’s monetary policy a statutory focus to target inflation. Finally, the future of banking is increasingly moving towards electronic and mobile money, which is both an opportunity to reach the unbanked and a threat from criminals, and thus an area where RBI needs to keep pace.

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^<1> The Banking 3 Act, 1949, Ministry of Law and Justice, Government of India, 10 March 1949. ^<2> Ibid., Part II, Section 22. ^<3> Ibid., Part II, Section 12. ^<4> Ibid., Part IIAB. ^<5> Ibid., Part IIA. ^<6> Ibid., Part IIIB. ^<7> Ibid., Part II, Section 30. ^<8> Ibid., Part III. ^<9> Ibid., Part IV. ^<10> Ibid., Part V, Section 56. ^<11> The Reserve Bank (Transfer to Public Ownership) Act, 1948, Ministry of Law and Justice, Government of India, 23 September 1948. ^<12> “Deregulation of Savings Bank Deposit Interest Rate: Guidelines,” Reserve Bank of India, 25 October 2011, accessed 29 December 2017. ^<13> The Financial Resolution and Deposit Insurance Bill, 2017, PRS Legislative, 10 August 2017, accessed 29 December 2017. ^<14> The Finance Act, 2016, Part I, Section 221, Central Board of Excise and Customs, 14 May 2016, accessed 29 December 2017.

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