Financial Crime World

Regulating the Indian Banking Sector: A Look at Key Policies and Challenges

The Indian banking sector is governed by a robust regulatory framework consisting of various policies and legislation. Here’s an overview of the key definitions, policies, regulators, challenges, and focus areas within this setting.

Defining the Scope of Banking Laws and Institutions:

Key policies:

  • Reserve Bank of India (RBI) Act of 1934: Defines regulatory framework for the banking sector.
  • Banking Regulation Act (BR Act), 1949: Governs the conduct of banking business in India.
  • Foreign Exchange Management Act (FEMA), 1999: Regulates foreign exchange transactions.

Supplementary legislation:

  • Recovery of Debts Due to Banks and Financial Institutions Act (RDDB Act), 1993: Regulates the recovery of debts owed to banks and financial institutions.
  • Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), 2002: Provides for the establishment of a debt recovery tribunal and security interest registration Authority.
  • Insolvency and Bankruptcy Code, 2016 (IBC): A legal framework for insolvency resolution and bankruptcy proceedings in India.
  • Payment and Settlement Systems Act, 2007 (PSS Act): Regulates payment systems in India.

Regulated Institutions:

Banks operate under the auspices of the RBI, defined as entities accepting deposits and providing loans. However, non-bank fintech entities like:

  • Payment aggregators
  • Payment gateways
  • Prepaid payment instrument issuers
  • Peer-to-peer (P2P) lending platforms

…are regulated differently based on their specific business activities.

The Nature of Regulation:

Regulations vary depending on the size, complexity, and structure of banking institutions. They are categorized into:

  • Commercial banks (RRBs and scheduled commercial banks)
  • Cooperative banks (Urban and rural cooperative banks)
  • Payments banks (Introduced in 2015)

Comprehensive Regulatory Framework:

The Indian banking sector is subject to primary legislation, such as the:

  • RBI Act
  • BR Act
  • FEMA
  • RDDB Act
  • BBE Act
  • PSS Act

The RBI also issues:

  • Directions
  • Regulatory frameworks
  • Guidelines for effective regulation in the banking sector

Regulators:

  • Reserve Bank of India (RBI): Primary regulatory authority, responsible for overseeing banking sector operations and management.
  • Deposit Insurance and Credit Guarantee Corporation (DICGC): Established under the Deposit Insurance and Credit Guarantee Corporation Act of 1961, insures deposits (principal and interest) up to INR 500,000 in commercial banks, including branches of foreign banks, local area banks, and RRBs.

Challenges and Regulatory Focus:

Principal challenges:

  • Addressing the slow resolution of stressed assets
  • Fraud prevention
  • Cybersecurity

Regulatory focus areas:

  • Consumer protection: Bank services are covered under the Consumer Protection Act of 2019.
  • RBI guidelines on customer service in banks.

Conclusion:

The Indian banking sector operates under a comprehensive regulatory framework comprising primary legislation, RBI directions, and guidelines. This evolving regulatory landscape prioritizes effective consumer protection, maintaining the integrity of financial institutions, and addressing emerging challenges like cybersecurity and technology-driven innovations.