KSLU Solved Question Papers
Banking Law
Previous Year Question Paper with Solution
B.A. LL.B. (Five Years) · Sem 8
2021 Mar Examination
munotes.in
Mumbai
B.A. LL.B. (Five Years) Sem 8 Banking Law 2021 Mar Question Paper with Solutions
First published on munotes.in on 21 October 2026.
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Contents
The questions below are the paper as Karnataka State Law University set it at the 2021 Mar examination, in the order it was set.
MarksPage
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2021 Mar 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 · 13 questions answered
How to use this volume
Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.
Q1Explain the functions of Commercial Banks. Examine the recent trends in the functioning of Commercial Banks in India.[16]
Answer
For full marks, cover: Part A, the functions of commercial banks in brief, with their legal base (sections 5(b) and 6(1) of the Banking Regulation Act, 1949): deposits, loans and advances, credit creation, agency services, general utility services, social functions; Part B, the recent trends in their functioning in India, each with its date or source: consolidation of public sector banks (12 since 1 April 2020); the clean-up of bad loans and the Insolvency and Bankruptcy Code, 2016 (Swiss Ribbons, Essar Steel); the market in stressed loans (ICICI Bank v. Official Liquidator of APS Star Industries); new kinds of banks (2015) and on-tap licensing; financial inclusion (Jan Dhan, 2014); digital banking and UPI; digital lending rules; co-lending with NBFCs; stronger prudential rules (Basel III, expected credit loss from 1 April 2027); green deposits; stronger customer protection (2026); an assessment.
Part A: the functions
A commercial bank accepts deposits from the public and lends or invests them for profit (section 5(b) of the Banking Regulation Act). Its permitted business is listed in section 6(1), and nothing else is allowed (section 6(2)).
1. Deposits. Savings, current, fixed and recurring deposits gather the public's savings. Each is a debt the bank owes, repayable on demand or at maturity.
2. Loans and advances. Term loans, cash credit, overdrafts and bill discounting supply credit to industry, trade, agriculture and households.
3. Credit creation. When a bank lends by crediting a borrower's account, it creates a deposit that can be lent again. The cash reserve ratio (now 3 per cent) and the statutory liquidity ratio (now 18 per cent) limit how far this goes.
4. Agency services. Collecting cheques and bills, paying bills on standing instructions, buying and selling securities, and acting as trustee or executor (section 6(1)(b), (h), (i)).
5. General utility services. Lockers, letters of credit, guarantees, foreign exchange, underwriting, cards and digital payments.
6. Social functions. Lending to priority sectors (40 per cent of adjusted net bank credit for domestic banks), opening branches in rural areas and paying Government benefits.
Part B: the recent trends
1. Consolidation of public sector banks. The Government merged public sector banks in stages. The State Bank's associate banks joined it in 2017. Bank of Baroda absorbed Vijaya Bank and Dena Bank in 2019. Ten banks became four on 1 April 2020. Twenty-seven public sector banks in 2017 became twelve. The aim was fewer, stronger banks with more capital and lower costs.
2. Cleaning up bad loans. From 2015 the Reserve Bank's asset quality review made banks recognise hidden bad loans. Non-performing assets rose sharply, then fell as loans were resolved, written off or sold. The Government recapitalised public sector banks to absorb the losses.
3. The Insolvency and Bankruptcy Code, 2016. Banks gained a creditor-led route to resolve large defaults. In Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, the Code was challenged as a whole. The Supreme Court upheld it, including the different treatment of financial and operational creditors and the bar on defaulting promoters. Its object, the Court said, is to revive the debtor as a going concern and maximise value.
In Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531, a resolution plan for Essar Steel was attacked for treating creditors unequally. The Court held that the commercial wisdom of the committee of creditors is not open to review on merits. Banks, as the main financial creditors, now decide such resolutions.
4. A market in stressed loans. Banks increasingly sell bad loans to other banks and to asset reconstruction companies. In ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd., (2010) 10 SCC 1, ICICI Bank had assigned debts to Kotak Mahindra Bank. The question was whether such an assignment was lawful banking business. The Supreme Court held that it was, and that section 8 of the Banking Regulation Act did not bar it.
5. New kinds of banks. In 2015 the Reserve Bank licensed payments banks, which take small deposits and offer payments but do not lend. It also licensed small finance banks, which serve small borrowers. Universal bank licences became available "on tap" rather than in occasional rounds. Competition has grown as a result.
6. Financial inclusion. The Pradhan Mantri Jan Dhan Yojana, launched in August 2014, opened basic accounts for hundreds of millions of people. Business correspondents now take banking to villages without branches. Direct benefit transfers pay subsidies straight into these accounts.
7. Digital banking. Payments have moved to mobile phones, and much of banking with them. UPI, launched in 2016, is now India's main means of payment. NEFT and RTGS run round the clock, video KYC allows remote account opening, and account aggregators let customers share data with consent. Branches are becoming advice centres rather than transaction counters.
8. Digital lending. Banks lend through apps and fintech partners. Under the Reserve Bank's digital lending rules, loan money must flow directly between the bank and the borrower. The borrower must also get a key fact statement and a cooling-off period. These rules were made after abuses by unregulated lending apps.
9. Co-lending. Banks now lend jointly with non-banking financial companies. The bank provides most of the funds, and the NBFC brings its reach to small borrowers, especially in priority sectors.
10. Stronger prudential rules. Banks follow Basel III capital, liquidity and leverage rules. Weak banks face the prompt corrective action framework. From 1 April 2027, banks must provide for expected credit losses rather than waiting for loans to go bad.
11. Green finance. The Reserve Bank's framework of 2023 lets banks raise green deposits and requires them to use the money only for green projects. Climate risk is entering bank supervision.
12. Stronger customer protection. Several measures arrived in 2026. Two-factor authentication became compulsory for digital payments from 1 April 2026. The Integrated Ombudsman Scheme, 2026 started on 1 July 2026, with compensation up to Rs 30 lakh. Rules on customer liability for frauds apply from 1 January 2027.
The functions and trends at a glance
| Area | Then | Now |
|---|---|---|
| Ownership | Many small public sector banks | Twelve larger public sector banks; more private and new banks |
| Bad loans | Hidden, slow recovery | Recognised; IBC and SARFAESI; loan sales |
| Customers | Mainly urban, branch-based | Mass inclusion; mobile-first |
| Payments | Cash and cheques | UPI and round-the-clock transfers |
| Lending | Direct, branch-based | Digital and co-lending, under strict rules |
| Prudence | Basic capital rules | Basel III, PCA, expected credit loss |
What the trends mean for a customer
For an ordinary customer the change is visible every day. He can open an account by video, pay a shopkeeper by scanning a code and get a small loan on his phone. His deposit is insured up to Rs 5 lakh, and his complaints go to a free ombudsman. But he must also guard his PIN and one-time passwords, because fraud has moved online too. The bank he deals with may be a merged public sector bank, a small finance bank or a payments bank, each with different powers.
An assessment
The trends have made commercial banks larger, more digital and more inclusive. Their balance sheets are healthier than a decade ago. The new risks are cyber fraud, reliance on technology partners and the misuse of customer data. Concentration of business in a few large banks is another concern, since the failure of one would now be felt across the system. The Reserve Bank's recent rules on authentication, digital lending and customer liability try to keep protection in step with innovation.
Conclusion. Commercial banks accept deposits, lend, create credit, act as agents and provide utility and social services. All of these lie within sections 5(b) and 6(1) of the Banking Regulation Act. Recent trends have reshaped how they work. Consolidation has left twelve public sector banks. Bad loans have been cleaned up through the IBC (Swiss Ribbons, Essar Steel) and loan sales (APS Star Industries). New banks, Jan Dhan accounts, UPI and digital and co-lending have widened reach. Stronger prudential rules, green finance and new customer protection mark the latest stage.
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