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B.A. LL.B. (Five Years) Sem 8 Banking Law 2013 Dec Question Paper with Solutions - KSLU

KSLU Solved Question Papers

Banking Law

Previous Year Question Paper with Solution

B.A. LL.B. (Five Years) · Sem 8

2013 Dec Examination

munotes.in

Mumbai

First published on munotes.in on 21 October 2026.

Published by munotes.in, Mumbai.

Model answers written and edited by the munotes.in editorial desk.

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The question paper reproduced here is the paper as set by Karnataka State Law University at the 2013 Dec examination.

The Paper as Set

The questions in this volume are the questions asked at the 2013 Dec examination, reproduced as Karnataka State Law University set them, in the order it set them. Long reading passages are shortened to their first and last lines and our summary; the original paper prints them in full. Only the answers are ours. See the original question paper.

Duration 3 hours · Total marks 100 · 20 questions answered

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Read the original question paper

Q1

Unit I

(a)Critically examine the contributions of Regional Rural Banks in promoting rural economy.[15]

Answer

For full marks, cover: why regional rural banks were created (the gap left by commercial and co-operative banks after nationalisation, Rustom Cavasjee Cooper v. Union of India; the Narasimham Working Group of 1975; the Ordinance of 26 September 1975; the first RRB on 2 October 1975; the Regional Rural Banks Act, 1976); their legal design (sections 3, 6 and 18; the 75 per cent priority sector target); their contributions to the rural economy (branches, credit to small farmers and the rural poor, crop loans, self-help groups, financial inclusion, welfare payments, local employment); the problems (small loans and high costs, losses, the pay parity dispute, All India Regional Rural Bank Officers Federation v. Government of India, bad loans, dependence on sponsors); the reforms (amalgamation from 196 RRBs in 2005 to 28 from 1 May 2025, recapitalisation, the 2015 amendment); present performance; a critical assessment.

Why regional rural banks were created

After the nationalisation of 1969, commercial banks opened rural branches, but they remained urban in cost and outlook. In Rustom Cavasjee Cooper v. Union of India, (1970) 1 SCC 248, the Supreme Court struck down the first nationalisation Act, and Parliament re-enacted it in 1970. Public ownership alone did not take credit to the poorest villagers, however. Co-operative credit societies, meant for the village, were often weak or controlled by richer farmers.

The Narasimham Working Group of 1975 proposed a new kind of bank. It would combine the local feel and low cost of a co-operative with the professional management of a commercial bank. The Regional Rural Banks Ordinance followed on 26 September 1975. The first RRB, Prathama Bank, sponsored by Syndicate Bank, opened at Moradabad on 2 October 1975. Parliament then passed the Regional Rural Banks Act, 1976.

The Act is deemed in force from 26 September 1975. Its purpose, in its long title, is "developing the rural economy" by providing credit and other facilities "particularly to the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs".

The legal design

Creation. The Central Government establishes an RRB by notification, at the request of a sponsor bank, with a defined local area (section 3(1)).
The sponsor's duty. The sponsor bank subscribes to its capital, trains its staff and gives managerial and financial help (section 3(3)).
Ownership. Its issued capital is held in fixed shares (section 6(2)). The Central Government holds 50 per cent, the State Government 15 per cent and the sponsor bank 35 per cent.
Business. It carries on banking, and lends "particularly to small and marginal farmers and agricultural labourers", and to artisans and small entrepreneurs in its area (section 18).
Directed lending. The Priority Sector Lending Directions, 2025 require RRBs to lend 75 per cent of their adjusted net bank credit to priority sectors. The figure for domestic commercial banks is 40 per cent.
Supervision. NABARD supervises them and refinances their farm lending.

Contributions to the rural economy

Banking in villages. RRBs opened branches in villages that had never had a bank. Today the 28 RRBs work through about 22,000 branches in about 700 districts. Some 90 per cent of their business is in rural and semi-urban areas.
Credit to the rural poor. Their loans go mainly to small and marginal farmers, landless labourers, artisans, small traders and rural enterprises. These borrowers were earlier left to moneylenders.
Crop and farm credit. They give crop loans, often through Kisan Credit Cards, and term loans for wells, pumps, livestock and farm machinery.
Self-help groups. They have linked about 1.57 million self-help groups, mostly of women, to bank credit, and financed about 165,000 joint liability groups.
Financial inclusion. They hold over 300 million deposit accounts, many opened under the Pradhan Mantri Jan Dhan Yojana. Subsidies, pensions and wages are paid into these accounts.
Mobilising rural savings. They collect small savings and lend them in the same area, instead of sending them to cities.

Local employment and knowledge. Their staff are largely recruited from the area and know its language and needs.
Modern services. They now run on core banking and offer NEFT, RTGS, RuPay cards and digital payments.

The problems

Small loans, high costs. Many small loans and a narrow lending base made RRBs costly to run. Many made losses in their early decades.
Pay parity. Their staff claimed the same pay as sponsor bank staff. In All India Regional Rural Bank Officers Federation v. Government of India, decided on 7 March 2002, the Supreme Court enforced its earlier ruling. That ruling had held that RRB pay, fixed by the Central Government under section 17(1), must keep parity with nationalised bank employees. It quashed the clauses tying pay and arrears to profits, since an employer's paying capacity is irrelevant to the wage structure. Parity was fair to the staff, but it sharply raised RRBs' costs.
Bad loans. Directed lending, drought, loan waivers and weak recovery produced high non-performing assets.

Dependence and interference. RRBs depended on their sponsors for staff and policy, and on Governments for capital. State influence often decided lending.
Too many, too small. By 2005 there were 196 RRBs, many too small to survive.

The reforms

Amalgamation. From 2005 the Central Government merged RRBs within each State in phases, under section 23A. In the fourth phase, twenty-six RRBs were amalgamated from 1 May 2025, so that 43 became 28, broadly one RRB a State.
Recapitalisation. Following the K.C. Chakrabarty Committee of 2010, the Centre, States and sponsors put in fresh capital to restore capital adequacy.
The 2015 amendment. Authorised capital was raised to Rs 2,000 crore (section 5). RRBs may also raise capital from other sources, as long as the Centre and the sponsor keep at least 51 per cent (section 6(2), proviso).
Technology. Core banking and digital payment systems were introduced across RRBs.

Present performance

The reforms have shown results. In 2023-24 the RRBs earned a combined net profit of Rs 7,571 crore. Their gross non-performing assets stood at 6.15 per cent and net at 2.4 per cent.

A critical assessment

For. RRBs have done what the Act asked. They took banking to villages, lent to the people commercial banks avoided, and became the main channel for self-help group credit and welfare payments. Their high priority sector share makes them the most rural of India's banks.

Against. For much of their history they were loss-making and dependent on public money. Pay parity and political lending raised costs, and their separate identity was blurred as they grew to resemble small commercial banks. The 2025 mergers improve scale and technology, but very large State-wide RRBs risk losing the local touch that was their purpose.

Their record also shows that rural credit needs owners willing to accept lower returns in exchange for reach. It also needs a regulator willing to insist on sound lending.

On balance, RRBs have made a real and lasting contribution to the rural economy. Their future depends on keeping local focus while maintaining financial discipline.

Conclusion. Regional rural banks were set up from 2 October 1975 to develop the rural economy. Their law is the Ordinance of 26 September 1975 and the Act of 1976. They lend to small and marginal farmers, labourers, artisans and small entrepreneurs, owned 50:15:35 by the Centre, the State and a sponsor bank. They have spread branches, crop credit, self-help group finance and financial inclusion across rural India. They have also suffered small size, losses, high costs after pay parity (All India RRB Officers Federation) and bad loans. Amalgamation (196 in 2005 to 28 from 1 May 2025), recapitalisation and the 2015 amendment have restored their strength. They earned a profit of Rs 7,571 crore in 2023-24.

B.A. LL.B. (Five Years) Sem 8 Banking Law 2013 Dec Question Paper with Solutions

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