Without lawyers, companies can’t go to battle. Or you might say it’s like a healthy snack in your bag; you may not need it now, but it’s better to have it. Here’s everything about banking lawyers.
Like any other industry, lawyers enter the banking industry to anticipate and resolve risks in transactions and future disputes. These advocates manage transactional paperwork, standardise documentation, design and execute rules, answer questions, stay up to date on regulations, ensure compliance, and resolve disputes.
Most notably, banking lawyers in Mumbai are required when dealing with the complicated and broad regulations governing money. Who else can keep up with ever-changing laws and RBI regulations? So these heroes in shining armour come to the rescue, devising a strategy for the sales, retail, and business teams! They not only develop the action plan but also guarantee that the other teams understand it well enough to carry it out.
Let’s get in-depth and understand how banking lawyers in Mumbai can help you and their roles and responsibilities.
What is banking law in India?
Banking dates back to the Vedic period when practices such as usury and loan documents were standard. Banking activity was also observed during the Vedic and Maurya eras. The Bank of Hindustan was the first bank established in India in 1770 in Calcutta, and it was closed down in 1830-32.
By 1843, the British East India Company had three major banks:
- The Bank of Calcutta
- The Bank of Bombay, and
- The Bank of Madras.
The three banks united to become the Imperial Bank of India in 1921. The Imperial Bank of India was nationalised and renamed the State Bank of India in 1955, making it no longer a private entity. The State Bank of India is the country’s oldest bank.
Banking law evolution
The Indian banking system has developed from a caterpillar to a butterfly in the past two centuries. Traditionally businesspeople such as the Sharoffs, Mahajans, Seths, and Sahukars handled the banking. They performed the typical duty of lending money to traders and artisans and occasionally placed their funds at the disposal of the kings’ war chest.
Modern banking began in the late 18th century with the establishment of the General Bank of India and the Hindustan Bank. Then three presidency banks were established:
- The Bank of Madras,
- The Bank of Bombay, and
- The Bank of Calcutta.
For a long time, the presidency banks served as quasi-central banks. In 1925, they united to form the Imperial Bank of India. From 1906 through 1911, the Swadeshi movement spurred the Indian business community to establish their banks. Several banks created during the time have survived to the present day, including Canara Bank, Indian Bank, Bank of Baroda, and the Central Bank of India, among others.
A watershed moment in banking history occurred in 1934 when the decision was made to establish the Reserve Bank of India. It began operations in 1935. Since then, the RBI has served as the country’s central bank and the banking sector’s regulator. The RBI Act of 1934 gives it authority.
The nationalisation of 14 of the largest commercial banks in 1969, under the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, was the second important event in the modern banking era. Later, another four banks were consolidated, bringing the total to twenty. Currently, the Government of India controls more than 90% of all banking activities in India.
Following the government’s liberalisation efforts, a slew of private firms entered the Indian banking market, where the RBI ensured that they were tightly monitored and strictly controlled. Furthermore, there were frequent inspections on compliance with numerous rules, and any abnormalities would have resulted in their licenses revoking.
The RBI serves as the country’s central bank.
The RBI began operations as a private shareholders bank. It took over the Imperial Bank of India and began printing currency notes and functioning as the government’s banker. The RBI encompassed the entire country of India.
Immediately following the country’s independence, the government nationalised the RBI. The RBI began operations as a state-owned and regulated central bank on January 1, 1949. To streamline the operation of commercial banks, India adopted the Banking Regulation Act in 1949. The RBI primarily serves three purposes:
- It is the bank regulator.
- The government’s banker.
- Bank for Bankers.
Laws related to finance and banking
The RBI regulates India’s banking system under the 1949 Banking Regulation Act. It is good to get in touch with banking lawyers in Mumbai to understand the laws. However, below are some essential components of India’s banking legislation and RBI circulars.
A single borrower may receive up to 20% of the bank’s capital funds (tier 1 and tier 2) for infrastructure projects. Group borrowers can borrow up to 30% of the bank’s capital for infrastructure projects. With board permission, loan limits can get increased by 5%. Lending is fund-based and non-fund-based.
Banks in India must retain 4% of their net demand and time liabilities (NDTL) in cash with the RBI. These are interest-free.
CRR must get maintained every two weeks, and daily maintenance must be 95% of the required reserves. In the case of daily maintenance default, the penalty is 3% over the bank rate multiplied by the amount short of the authorised level.
In addition to the CRR, 22 to 40% of NDTL, known as the SLR, must be held in gold, cash, or approved securities. The RBI’s Marginal Standing Facility (MSF) can be used to borrow surplus SLR overnight, and MSF charges 100 bps more than repo and limits lending to 2% of NDTL.
Priority sectors include micro and small businesses, agriculture, education, housing, and low-income or disadvantaged groups (classified as “weaker sections”).
For domestic, commercial banks and foreign banks with more than 20 branches, the lending target is 40% of adjusted net bank credit (ANBC) (outstanding bank credit minus specific bills and non-SLR bonds) or the equivalent credit amount of off-balance-sheet exposure (sum of current credit exposure + potential future credit exposure calculated using a credit conversion factor). For fobs, the target is 32%.
Agriculture loans should be the credit equivalent of off-balance-sheet exposure or 18 per cent of ANBC, whichever is higher. Of the amount loaned to micro-enterprises and small businesses, 40% should be advanced to those with equipment valued at a maximum of 200,000 rupees and plant and machinery valued at a maximum of half a million rupees.
20% of the total amount lent should be advanced to micro-enterprises with plant and machinery valued from just above 500,000 rupees to a maximum of 1 million rupees and equipment valued at more than 2 million rupees.
Total loans to weaker parts should be 10% of ANBC or the credit equivalent of off-balance sheet exposure, whichever is larger. Weaker divisions include castes and tribes like small farmers. Foreign banks with fewer than 20 branches have no goals.
Private banks in India have been hesitant to lend directly to farmers and the poor. Some estimates say priority sector loans account for 60% of all NPAs. They meet their quota by buying loans and securitised portfolios from other NBFCs and investing in RIDF.
New banking regulations
The new standards require that groups applying for a license have a 10-year track record of performance and that the bank get administered through a promoter-owned non-operative financial holding company (NOFHC).
The NOFHC must hold at least 40% of the paid-up voting equity capital and reduce its share to 15% over 12 years. The shares must be listed within three years of the bank’s launch.
Foreign shareholding is limited to 49% for the first five years of operation; RBI clearance is needed to extend it to 74%. The bank’s board should be majority independent and must meet priority lending targets. The NOFHC and the bank can’t hold promoter-issued securities, and the bank can’t hold NOFHC securities. New restrictions require 25% of branches to be in unbanked rural areas.
Willful default occurs when a loan isn’t repaid even while resources are available, if the money lent is used for another purpose, or if a property secured by a loan is sold without the bank’s knowledge or agreement. If a group company defaults and the other group firms that gave assurances don’t honour them, the group is a wilful defaulter.
Willful defaulters (including directors) may face criminal charges. The RBI has modified the criteria to include non-group entities as intentional defaulters if they fail to honour a pledge.
Roles and responsibilities of banking lawyers in Mumbai
Banking and finance law encompasses several technically complicated and ever-changing sectors. As a result, banking lawyers in Mumbai specialise in the banking area. A banking and finance lawyer will either represent the borrower or the lender, and their primary duty will be to handle the transactional aspects of arranging transactions.
banking lawyers in Mumbai assist with negotiating, creating and managing financial arrangements, and doing due diligence, regardless of the specialised banking and finance domain.
banking lawyers in Mumbai must balance compliance by complying with all applicable laws and regulations (which are frequently cross-jurisdictional) with mediating parties by assisting them in reaching mutually suitable arrangements.
Another aspect of banking lawyers in Mumbai is to be aware of future trends that may affect a transaction. A banking and finance lawyer must be able to explain facts clearly and succinctly after conducting analytical fact-checking and paying close attention to detail.
The Banking Regulation Act of 1949 (“Banking Regulation Act”) governs the banking industry and related financial services.
The Reserve Bank of India Act, 1934 (“RBI Act”) gives the Reserve Bank of India (RBI) the authority to adopt rules, regulations, directions, and guidelines on a wide variety of banking and financial concerns. The RBI is India’s central bank and the principal banking regulatory authority.
The government and regulators have done several initiatives to enhance the Indian banking system.
According to statistics, the banking sector banking lawyers in Mumbai and other regions will become a thriving sector in the Indian economy in the future year. It is a lucrative and appealing career path for all law students. Even when things aren’t going well, it’s said to be a top sector that’s appealing to lawyers.
When banks do well, they require a large number of lawyers. They need more lawyers when things aren’t going smoothly! Firms do well when banks do not do well, assets are reported to be distressed, and clients fail on payments. It is safe to say that the banking industry for lawyers is recession-proof and here to stay.