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Banking Laws
Previous Year Question Paper with Solution
LLM · Group 2 Business Law
2019 Examination
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LLM Group 2 Business Law Banking Laws 2019 Question Paper with Solutions
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First published on munotes.in on 12 August 2026.
Published by munotes.in, Mumbai.
Model answers written and edited by the munotes.in editorial desk.
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The University does not publish an official answer key for this paper. The answers in this volume are model answers, written to show how a full-mark answer is built. They are a study aid, not an authority on what an examiner marked.
The question paper reproduced here is the paper as set by the University of Mumbai at the 2019 examination.
Three changes date most textbooks on this subject. The Banking Laws (Amendment) Act, 2025, commenced in two stages, on 1 August 2025 for governance and audit and 1 November 2025 for nomination: a depositor may now name up to four nominees, and substantial interest in section 5 of the Banking Regulation Act, 1949, rose from five lakh to two crore rupees, its first revision since 1968. The Banking Regulation (Amendment) Act, 2020, lets the Reserve Bank prepare a scheme of reconstruction under section 45 without first obtaining a moratorium, and brought co-operative banks fully under the Act. And since the 2016 amendment to section 13(8) of the Securitisation Act, 2002, a borrower's right to redeem ends when the auction notice is published and not when the sale is made: Celir LLP v. Bafna Motors, 21 September 2023.
Contents
The questions below are the paper as the University of Mumbai set it at the 2019 examination, in the order it was set.
MarksPage
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2019 examination, reproduced as the University of Mumbai set them, in the order it set them. Nothing has been reworded, added or left out. 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.
SECTION I
Printer's form 68583, footed Page 1 of 1. Attempt any four questions, all questions carry equal marks, cite relevant case laws wherever necessary
any four of six · 100 Marks
Q.1.Briefly discuss the main functions of Reserve Bank of INDIA with regard to the following -[25]
- (a) Regulation of Currency.
- (b) Banker to the Government and Banker's Bank
- (c) Bank rate.
Answer
For full marks, cover: organise the three heads by asking what fails if the Bank does not perform each, because that turns a list of functions into an account of why a central bank exists; if the currency function fails, money is not accepted; if the Government function fails, the deficit is monetised and prices are not controllable; if the bankers' bank function fails, a solvent bank collapses in a run; and the bank rate is the price at which the third is supplied. Give every section, and close on what has replaced the bank rate.
(This question recurs on six of the eleven papers in this folder and each page here answers it on a different plan. The others are the Bank's three statutory monopolies, its three relationships, its four historical capacities, the three things it controls, and a classification into four groups.)
(a) Regulation of currency: what fails without it
Without a monopoly issuer, money is a matter of the issuer's credit, and the nineteenth century Indian experience proves it: the three presidency banks each issued notes within their own presidency, and the Paper Currency Act of 1861 withdrew that right and gave the issue to the Government precisely because a note whose acceptability depends on which bank issued it is not money.
Section 22 of the Reserve Bank of India Act, 1934, now confers the sole right to issue bank notes in India. Section 23 requires the issue to be conducted through a separate Issue Department whose assets are segregated from the Banking Department, so that the note liability always has identifiable cover against it and cannot be absorbed into the Bank's general business. Section 24 fixes the denominations, up to a ceiling of ten thousand rupees, and section 25 requires the design, form and material to be approved by the Central Government on the recommendation of the Central Board.
One rupee notes and all coins fall outside the monopoly, being issued by the Central Government under the Coinage Act, 2011, and put into circulation only through the Bank under section 38. The monopoly in section 22 is therefore of bank notes and not of legal tender.
Section 33 fixes the cover under the minimum reserve system introduced by the amending Act of 1957: the assets of the Issue Department must include gold coin, gold bullion and foreign securities of an aggregate value of not less than two hundred crore rupees, of which gold not less than one hundred and fifteen crore rupees. The proportional reserve system it replaced required forty per cent cover in gold and sterling, so the size of the note issue ceased to be governed by a metallic ratio and became a question of monetary policy.
Section 26(1) makes every bank note legal tender guaranteed by the Central Government, and section 26(2) is the withdrawal power, permitting the Central Government, on the recommendation of the Central Board, to declare that any series of notes of any denomination shall cease to be legal tender.
That power was tested at its limit and upheld in Vivek Narayan Sharma v. Union of India, decided by a Constitution Bench on 2 January 2023. The withdrawal of the five hundred and one thousand rupee notes on 8 November 2016 was challenged on the ground that "any series" cannot mean the whole of a denomination, that the demonetisations of 1946 and 1978 had each been done by plenary legislation, and that the proposal had originated with the Central Government rather than with the Central Board as the section requires. The majority upheld it by four to one, holding that the power extends to all series of a denomination, that the six month consultation satisfied the requirement of a recommendation, and that hardship to some citizens does not invalidate a policy measure.
Nagarathna J. dissented, and the dissent is the more useful half for an examination answer. She held that "any series" cannot be read to include the entire denomination, that a proposal originating with the Government cannot be dressed up as a recommendation of the Central Board, and that a measure withdrawing the greater part of the currency in circulation could be taken only by legislation, since Parliament is the forum in which such a measure must be debated. She declined relief because the notes had long been exchanged, so the dissent is declaratory, but it identifies the constitutional limit on an executive currency power.
The function now has a digital limb. The Finance Act, 2022, amended the definition of "bank note" to include a note issued in digital form, which read with section 22 authorises central bank digital currency; the wholesale pilot began on 1 November 2022 and the retail pilot on 1 December 2022. The technique is worth noting: Parliament widened the definition of the existing instrument rather than creating a new one, so the digital rupee is legal tender on precisely the same footing as a printed note.
(b) Banker to the Government and bankers' bank: what fails without them
Without the Government relationship the deficit is monetised, and no interest rate policy can survive that. Section 20 obliges the Bank to accept money for the Central Government's account, to make payments up to the credit balance, and to conduct its exchange, remittance and other banking operations, including the management of the public debt. Section 21 confers the corresponding right, requiring the Government to entrust the Bank with all its money, remittance, exchange and banking transactions in India and to deposit its cash balances with it free of interest. Section 21A extends the arrangement to State Governments by agreement.
Three consequences follow. The Bank manages the public debt, conducting the auctions of dated securities and treasury bills and maintaining the ownership records. It provides Ways and Means Advances, temporary accommodation repayable within three months to bridge mismatches between receipts and payments, limited in amount by agreement. And since the Fiscal Responsibility and Budget Management Act, 2003, it may not subscribe to primary issues of Central Government securities, which ended the automatic monetisation of the deficit. That prohibition is the single most important reform in this relationship, because before it the Bank could be required to create money to fund the Government, and a central bank in that position cannot control prices.
Without the bankers' bank function a solvent bank collapses in a run, because a bank borrows short and lends long and cannot realise its assets at short notice. Section 42 requires every scheduled bank, that is a bank in the Second Schedule under section 42(6), to maintain with the Reserve Bank a cash reserve of such percentage of its net demand and time liabilities as the Bank notifies. The Reserve Bank of India (Amendment) Act, 2006, removed the earlier floor of three and ceiling of twenty per cent with effect from 22 June 2006 and omitted section 42(1B), so no interest is paid on those balances, which is what makes the ratio an instrument of control rather than a deposit.
The companion requirement is the statutory liquidity ratio in section 24 of the Banking Regulation Act, 1949, subject to a statutory ceiling of forty per cent. The two do different work: the cash reserve ratio drains liquidity to the central bank, while the statutory liquidity ratio compels banks to hold safe assets and so protects depositors as well. At the policy of 5 August 2026 the cash reserve ratio stood at three per cent and the statutory liquidity ratio at eighteen per cent.
The last resort function is in sections 17(4) and 18. Section 17(4) permits advances to scheduled banks against eligible security; section 18 confers an emergency power to lend to any bank or person against security the Bank would not ordinarily accept, where it considers it necessary in the interest of trade, commerce, industry or agriculture. Section 18 is the true last resort power precisely because it operates outside the ordinary collateral rules, and its existence is what makes a run on a solvent bank a manageable event rather than a fatal one. To it must be added the settlement function under the Payment and Settlement Systems Act, 2007, the section 42 accounts being those across which interbank obligations are settled.
How far this supervisory relationship goes was settled in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India, AIR 1962 SC 1371, decided on 7 March 1962. The Palai Central Bank Ltd., incorporated in 1927 and grown into the largest bank in Kerala with twenty five branches, was wound up on the Reserve Bank's opinion that it could not pay its depositors in full and that its continuance was prejudicial to their interests. A director challenged sections 38 and 39 of the Banking Companies Act, 1949, under Article 14, on the footing that banking companies were denied protections other companies enjoy. The Supreme Court upheld both sections, holding that banks are a class apart because they trade on deposits taken from the public, so a stricter and separate procedure is a permissible classification.
(c) Bank rate: the price at which the third function is supplied
Section 49 defines the bank rate as the standard rate at which the Bank is prepared to buy or rediscount bills of exchange or other commercial paper eligible for purchase under the Act, and requires the rate to be made public. It is, in other words, the price of the bankers' bank function: what the banking system pays for central bank money.
In the classical model that price was the instrument. Raising it made refinance dearer, which was passed on in banks' lending rates and contracted credit; lowering it did the reverse.
It is no longer the operative rate, and an answer that presents it as such is decades out of date. The working rate is the repo rate under the liquidity adjustment facility, and since the realignment of February 2012 the bank rate has been kept equal to the marginal standing facility rate, itself set at a margin above the repo rate, so it moves automatically and signals nothing.
Its survival is legal rather than economic. Because a large number of statutes and contracts fix rates by reference to it, the bank rate continues to serve as a benchmark, including for the penalty on a shortfall in the cash reserve ratio under section 42. It has moved from being an instrument of policy to being a legal reference rate, and it remains in the Act for that reason alone.
What replaced it is Chapter III F, inserted by the Finance Act, 2016. Section 45ZA requires the Central Government, in consultation with the Bank, to determine the inflation target in terms of the consumer price index once every five years; it is four per cent with a band of two per cent either way. Section 45ZB constitutes the six member Monetary Policy Committee, the Governor as ex officio chairperson with a casting vote, the Deputy Governor in charge of monetary policy, an officer of the Bank nominated by the Central Board, and three members appointed by the Central Government, meeting at least four times a year.
Section 45ZN obliges the Bank to report to the Central Government, with reasons and remedial action, if the target is missed for three consecutive quarters. The corridor is completed by the standing deposit facility, introduced in April 2022 as the floor, which absorbs liquidity without the Bank giving collateral, and the marginal standing facility as the ceiling.
Conclusion. Asked what fails without each function, the three heads stop being a list and become an account of why the institution exists. Without a monopoly issuer whose notes carry a statutory cover under section 33 and a Government guarantee under section 26(1), money is only as good as its issuer's credit, which is the problem the Act of 1861 and then section 22 were written to solve; and section 26(2) marks the outer limit of that power, tested in Vivek Narayan Sharma and defended in Nagarathna J.'s dissent.
Without sections 20 and 21 the Government would bank where it liked and, far more seriously, could require the Bank to fund it; the prohibition in the Act of 2003 on subscribing to primary issues is what removed that danger and made monetary policy possible at all. Without section 42 the banking system would hold no common reserve and without section 18 there would be nobody to lend to a solvent bank in a panic; and Vellukunnel is the decision that lets the Bank act on its own opinion in that relationship without a court second guessing it.
The bank rate is the odd one out, and saying why is the best way to end. It is the price of the third function, and it has been overtaken: the repo rate now does its work, section 49 survives as a benchmark for penalties, and the setting of the price of money has passed to a statutory committee measured against a target the Government fixes. The Act of 1934 still names the instrument; Chapter III F of 2016 contains the policy.
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