LLM Group 2 Business Law Banking Laws 2019 Question Paper with Solutions

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.)

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.

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.

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.

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.

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.

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.

Why the State intervenes: the definition

Section 5(b) of the Banking Regulation Act, 1949, defines banking as the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. Section 5(c) defines a banking company as any company which transacts the business of banking in India. The definition is functional: an institution is a bank because of what it does.

Each of the four elements is a reason for State intervention. The deposits come from the public, so the risk is spread over people who cannot investigate the institution. They are taken for lending or investment, so the money is put at risk with third parties the depositor never meets. They are repayable, so the institution is permanently exposed to a demand it cannot meet from realisable assets. And they are withdrawable by cheque or order, so the institution is part of the payment system and its failure interrupts payment generally.

Joachimson v. Swiss Bank Corporation, [1921] 3 KB 110, adds that the debt is payable on demand at the branch where the account is kept, during banking hours, so limitation runs from the demand and not from the deposit and a dormant account does not become time barred by inaction.

Deposits are demand deposits, that is current and savings accounts, or time deposits, that is fixed and recurring deposits, and the classification determines the net demand and time liabilities on which the cash reserve ratio under section 42 of the Act of 1934 and the statutory liquidity ratio under section 24 of the Act of 1949 are computed.

Two protections outside the contract should be named. Deposit insurance under the Deposit Insurance and Credit Guarantee Corporation Act, 1961, raised to five lakh rupees per depositor per bank with effect from 4 February 2020, with section 18A inserted in 2021 requiring interim payment within ninety days of all inclusive directions. And nomination under sections 45ZA, 45ZC and 45ZE of the Act of 1949, which since the Banking Laws (Amendment) Act, 2025, permits up to four nominees from 1 November 2025, simultaneously with stated shares or successively, a nominee still receiving as trustee for those entitled under succession law.

What limits interest instead is Central Bank of India v. Ravindra, (2002) 1 SCC 367, decided on 18 October 2001 by a Constitution Bench. A loan carried interest at eleven per cent with quarterly rests on 31 March, 30 June, 30 September and 31 December. The Court held that a contract for interest with rests capitalises the interest, so principal and accrued interest together become the principal sum adjudged under section 34 of the Code of Civil Procedure, 1908, but that interest on interest cannot be capitalised, being contrary to public policy, and that penal interest may be charged only once for one period of default and cannot be capitalised at all.

The first moment: entry, under section 22

Section 22(1) provides that no company shall carry on banking business in India unless it holds a licence issued by the Reserve Bank. The licence is a condition precedent to the business and not an incident of incorporation, so a company with banking objects that has not obtained one cannot lawfully take a deposit.

Why such a discretion is constitutionally acceptable is answered by Joseph Kuruvilla Vellukunnel v. Reserve Bank of India, AIR 1962 SC 1371, decided on 7 March 1962. The Palai Central Bank Ltd., 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. A director challenged sections 38 and 39 of the Banking Companies Act, 1949, under Article 14. The Supreme Court upheld the sections, holding banks a class apart because they trade on deposits taken from the public. If a bank may be dissolved on the regulator's opinion, refusing it entry on the regulator's satisfaction is a lesser thing.

The second moment: continuance, and its withdrawal

Sections 6 to 24 govern what a licensed bank may do, section 6(2) confining it to enumerated businesses, section 8 forbidding trading, section 19 restricting subsidiaries and shareholdings, sections 10A and 10B governing the board and requiring whole time management, and sections 29 to 35A providing accounts, audit, inspection and directions.

The third moment: expropriation, under sections 36AE to 36AJ

The power to acquire the undertaking of a banking company must be kept distinct from amalgamation and reconstruction under sections 44A and 45. Acquisition transfers the undertaking to the Central Government or a company owned by it against compensation; a scheme under section 45 transfers it to another bank.

Section 36AE(1) sets the conditions. Where the Reserve Bank is satisfied that a banking company has failed to comply with directions given under section 21 or section 35A regarding its policy on advances, or is being managed in a manner detrimental to depositors' interests, and that an order of moratorium under section 45 would not be adequate, it may report to the Central Government. The Central Government may then, after consultation with the Bank and after giving the company a reasonable opportunity of showing cause, acquire the undertaking by notified order stating the grounds.

Section 36AF empowers a scheme for the transfer; section 36AG provides compensation on the principles in the Fifth Schedule; section 36AH constitutes a Tribunal presided over by a person who is or has been a judge of a High Court or the Supreme Court to determine disputes about the amount; and section 36AJ excludes the ordinary jurisdiction.

In practice the third moment is now reached under section 45 and not under section 36AE, and Ganesh Bank of Kurundwad Ltd. v. Union of India, (2006) 10 SCC 645, decided on 28 August 2006, shows why. A moratorium on Ganesh Bank was advertised on 7 January 2006, the Federal Bank proposed the next day, and the Reserve Bank prepared a scheme of amalgamation; the challenge was dismissed, the Court holding that once a moratorium is imposed the Bank is under a duty to prepare a scheme and that merging a weak bank into a strong one in the interests of the weak bank's depositors is the section's purpose. Global Trust Bank in 2004, Yes Bank in March 2020, Lakshmi Vilas Bank in November 2020 and the Punjab and Maharashtra Co-operative Bank in January 2022 all went the same way. A scheme costs the exchequer nothing; an acquisition must be paid for.

Conclusion. Read as three moments, the two limbs of this question become one argument. Section 5(b) describes an activity that is dangerous to the public because it takes repayable money from people who cannot protect themselves, lends it to strangers and ties it to the payment system; and Foley v. Hill makes that money a bare debt, so the depositor has nothing but the institution's solvency to rely on.

For full marks, cover: organise round the four things that can go wrong in a recovery, because each has its own law and each has a precaution that answers it: the claim can be dead, the forum can be wrong, the security can be unenforceable, and the priority can be lost; deal with each and then set the precautions against it, which is what makes the second limb an argument rather than a checklist; and give the leading case on each route.

(This question is set on four papers in this folder. The plans used elsewhere are the four routes in ascending order of speed, what the bank owns at each stage, and the creditor's choice of instrument.)

Admissibility can kill a live claim just as effectively. Section 35 of the Indian Stamp Act, 1899, makes an instrument not duly stamped inadmissible in evidence, so an unstamped or insufficiently stamped mortgage or promissory note is a suit lost before it is filed. And under the Bankers' Books Evidence Act, 1891, a computer record is admissible only with the certificate required by section 2A, so a bank that cannot produce a compliant certificate cannot prove its own ledger.

Second thing that can go wrong: the wrong forum

There are four routes and choosing wrongly costs years. The ordinary suit, with the summary procedure under Order XXXVII of the Code of Civil Procedure, 1908, where the claim rests on a written contract or a negotiable instrument, and a mortgage suit for sale under Order XXXIV.

The Debts Recovery Tribunal under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, renamed the Recovery of Debts and Bankruptcy Act, 1993, by the Insolvency and Bankruptcy Code, 2016. It has jurisdiction over applications by banks and financial institutions for debts above the prescribed amount, ten lakh rupees originally and twenty lakh rupees since the notification of September 2018, and the civil courts' jurisdiction is excluded.

Insolvency, under the Code of 2016, where section 7 permits a financial creditor to apply on proof of default. Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, holds that the adjudicating authority is concerned only with whether a default has occurred and whether the application is complete, the Code overriding inconsistent State law under section 238; Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, upheld the Code entire, including the distinction between financial and operational creditors and the disqualification of defaulting promoters under section 29A; and Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531, held that the commercial wisdom of the committee of creditors is not justiciable on merits, so a bank's recovery is decided by its voting share and not by a court.

The Code also reaches personal guarantors, Lalit Kumar Jain v. Union of India, decided on 21 May 2021, holding that approval of a resolution plan does not discharge the guarantor, and Dilip B. Jiwrajka v. Union of India, decided on 9 November 2023, upholding sections 95 to 100.

The Act was upheld with one provision struck down in Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311. The Supreme Court accepted that the burden of non performing assets justified a special enforcement mechanism but struck down section 17(2) as it then stood, which required the borrower to deposit seventy five per cent of the claimed amount before his appeal could be entertained, as onerous, oppressive and illusory as a remedy. It also held that the borrower must be permitted to make a representation and the creditor must give reasons, and Parliament then enacted that direction as section 13(3A), which is a rare instance of a judicial gloss becoming statutory text.

Three further decisions define the working of the Act. Transcore v. Union of India, (2008) 1 SCC 125: a bank need not withdraw proceedings pending before the Tribunal in order to invoke the Act of 2002. United Bank of India v. Satyawati Tondon, (2010) 8 SCC 110: a High Court should not entertain a writ petition against a measure under section 13(4) where the statutory remedy under section 17 exists, repeated in Authorized Officer, State Bank of Travancore v. Mathew K.C., (2018) 3 SCC 85. And Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd., (2020) 9 SCC 215: co-operative banks carrying on banking business are banks for the purposes of the Act.

Fourth thing that can go wrong: the priority is lost

This is the most recently changed part of the law and the most easily overlooked. A charge created by a company must be registered under section 77 of the Companies Act, 2013, within thirty days, failing which it is void against the liquidator and other creditors. A security interest must be registered with the Central Registry established under section 20 of the Act of 2002, and sections 26D and 26E, inserted by the amendment of 2016, provide that a secured creditor who has not registered may not enforce under the Act, and that a registered secured creditor has priority over all other debts, including revenues, taxes and cesses payable to the Central or a State Government.

Registration has therefore ceased to be a formality and has become the source of priority. The older law on priority is illustrated by Central Bank of India v. Siriguppa Sugars and Chemicals Ltd., (2007) 8 SCC 353, where sugar stocks pledged to a bank were claimed by the State for cane dues and by the cane growers, and the pledgee bank's rights prevailed because the competing claims were unsecured; sections 26D and 26E now give a registered creditor that result by statute rather than by the accident of possession.

On the security. Title search, valuation, exclusion of agricultural land, registration under section 77 of the Companies Act and with the Central Registry.

On compliance. Section 20 of the Act of 1949 forbids advances against the bank's own shares and to directors and their concerns; the large exposures framework caps concentration; and a sanction in breach exposes the bank to penalty under section 47A and its officers to removal under section 36AA.

On monitoring after sanction. End use verification, inspection of stocks, periodic review, and prompt classification under the norms, since every enforcement power depends on it. Where fraud is alleged, classification is governed by the Master Direction on frauds subject to State Bank of India v. Rajesh Agarwal, decided on 27 March 2023, which requires notice, disclosure of the material, an opportunity to represent and a reasoned order.

The single point to end on is that the law of recovery has moved steadily out of the courts, from a suit in 1908, to a tribunal in 1993, to enforcement by the creditor itself in 2002, to a creditors' committee whose commercial judgment Essar Steel placed beyond review. The consequence is that the quality of what a bank did before it lent now determines almost everything, because there is very little adjudication left in which to repair it.

Who is a customer, and why the answer decides the case

A person becomes a customer when an account is opened, and no course of dealing is needed. Ladbroke v. Todd, (1914) 30 TLR 433, held a thief who opened an account with a stolen cheque to be a customer from that moment, so the bank could claim the protection; Commissioner of Taxation v. English, Scottish and Australian Bank Ltd., [1920] AC 683, held that duration of dealing is not of the essence.

Great Western Railway Co. v. London and County Banking Co., [1901] AC 414, is the case that shows why this limb matters most to a collecting banker. A man had for years presented cheques at a bank and taken cash across the counter but never had an account. The House of Lords held that he was not a customer, and the consequence was that the bank, having collected for a non customer, lost the statutory protection and was liable to the true owner in conversion. The definition of "customer" is therefore not academic: it is the first of the four conditions of section 131.

The locker relationship, which the Supreme Court in Amitabha Dasgupta v. United Bank of India, decided on 19 February 2021, refused to treat as a bare licence: a customer's locker had been broken open for alleged non payment of rent and its contents lost, and the Court held that a bank cannot wash its hands of responsibility because the customer is entirely at the mercy of the bank, the locker being inoperable without the bank's own key, and directed the Reserve Bank to frame rules, which followed in August 2021 with a liability of one hundred times the annual rent for loss caused by the bank's negligence, fire, theft or employee fraud. Trust, where money is paid in for a purpose that fails. And pledgee or mortgagee, where security has been taken.

The protection of the collecting banker: section 131

Section 131 provides that a banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment. Section 131A applies the same protection to drafts.

Four conditions must be satisfied and each should be taken separately.

Three, a crossing already on the instrument. The cheque must be crossed generally, or specially to that banker, before it reaches him; an uncrossed cheque attracts no protection under this section, and a banker cannot manufacture the protection by crossing the cheque himself after receipt.

Four, receipt as agent and not as holder for value. Where the bank has given value, by allowing the customer to draw against an uncleared cheque, it may be a holder for value in its own right, and its position is then governed by the law of holders rather than by section 131. The two capacities are alternatives and are habitually pleaded in the alternative.

Explanation II, inserted by the amending Act of 2002 with effect from 6 February 2003, adapts the section to cheque truncation. It imposes on a banker who receives payment on an electronic image of a truncated cheque a duty to verify the prima facie genuineness of the cheque and any fraud, forgery or tampering apparent on the face of the instrument that can be verified visually. That is as far as any duty can go once the paper no longer reaches the collecting bank, and it is a good illustration of a nineteenth century protection being kept alive by amendment rather than replaced.

The duties and rights, in outline

The bank's duties are to honour the mandate under section 31 of the Act of 1881, with liability in substantial damages for the wrongful dishonour of a trader's cheque on Marzetti v. Williams, (1830) 1 B & Ad 415, and Rolin v. Steward, (1854) 14 CB 595; to keep the customer's affairs secret on Tournier v. National Provincial and Union Bank of England, [1924] 1 KB 461, subject to its four exceptions of compulsion of law, duty to the public, the interests of the bank and consent; to render accounts; and to give reasonable notice before closing an account in credit.

Its rights are the general lien under section 171 of the Contract Act, described as an implied pledge in Syndicate Bank v. Vijay Kumar, (1992) 2 SCC 330; set off between accounts held in the same right; and appropriation under sections 59 to 61 and Clayton's case, Devaynes v. Noble, (1816) 35 ER 781.

By operation of law. Death determines the bank's authority to pay, an agency being ended by the death of the principal under section 201 of the Contract Act, and the balance passes to the legal representatives subject to any nomination under section 45ZA of the Banking Regulation Act, 1949, which since the Banking Laws (Amendment) Act, 2025, permits up to four nominees. Insanity on notice and insolvency have the same effect, as does the winding up of a corporate customer. A change in the constitution of a firm closes the account as constituted and Clayton's case then runs from that date, which is why a bank rules off when a partner dies or a surety withdraws.

By act of a third party. A garnishee order under Order XXI Rule 46 of the Code of Civil Procedure, 1908, a notice under section 226(3) of the Income Tax Act, 1961, or an attachment under the Prevention of Money Laundering Act, 2002, freezes the balance to the extent attached; a notice of assignment obliges the bank to pay the assignee; and notice of a trust or an adverse claim puts the bank on inquiry and may justify interpleading.

And termination matters because it is the point at which all of this stops. The relationship ends by notice, by operation of law on death, insanity, insolvency or winding up, or by the act of a third party through a garnishee order or attachment; but the debt outlives it, which is why sections 26 and 26A had to provide for unclaimed balances and why the nomination provisions exist at all.

The hinge: what a moratorium is

A moratorium is an order staying all actions and proceedings against a banking company, and during it the bank stops paying. Section 45(3) says so in terms: except as the Central Government's order directs, the company shall not during the period of moratorium make any payment to any depositor or discharge any liability or obligation to any other creditor, and, since the Banking Regulation (Amendment) Act, 2020, shall not grant any loans or advances or make investments in credit instruments.

So a moratorium protects the bank and freezes the depositor. That is the fact from which everything else follows, and it explains why the law has moved to make the moratorium shorter, and finally to make it unnecessary.

Section 45(1) and (2) is the route the regulator takes. Where it appears to the Reserve Bank that there is good reason to do so, it may apply to the Central Government for an order of moratorium, and the Central Government may make one, again for a total period not exceeding six months.

The first route out: a scheme under section 45(4)

Sub-section (4) is the operative power of modern Indian bank resolution. If the Reserve Bank is satisfied that it is necessary in the public interest, or in the interests of the depositors, or in order to secure the proper management of the banking company, or in the interests of the banking system of the country as a whole, it may prepare a scheme for the reconstruction of the company or for its amalgamation with any other banking institution.

Sub-section (5) lists what the scheme may provide for, including the constitution, name and capital of the transferee, the transfer of assets and liabilities, the rights and interests of members and creditors, the continuance of employees, and the reduction of the interest or rights of members and depositors to the extent necessary. Sub-section (7) requires the scheme to be sanctioned by the Central Government, and the sanctioned scheme is binding on everyone.

The Supreme Court dismissed the challenge and upheld the amalgamation, holding that once a moratorium is imposed the Reserve Bank is under a duty to prepare a scheme of reconstruction or amalgamation under section 45(4), and that such a scheme may properly merge a weak bank into a strong one in the interests of the depositors of the weak one. The speed that looked like unfairness to the shareholders was protection to the depositors, who could not get their money while the moratorium ran.

The record confirms the pattern. Global Trust Bank was amalgamated with Oriental Bank of Commerce in 2004; Yes Bank was placed under moratorium on 5 March 2020 and reconstructed by a scheme notified on 13 March 2020, State Bank of India taking a controlling stake and the moratorium being lifted in thirteen days; Lakshmi Vilas Bank was amalgamated with DBS Bank India Limited in November 2020, the first significant use of the amended power; and the Punjab and Maharashtra Co-operative Bank, under all inclusive directions from September 2019, was amalgamated into Unity Small Finance Bank in January 2022. In every case depositors were carried across and shareholders were extinguished.

Inability to pay is defined for banking purposes and it is not the ordinary company law test. A banking company is deemed unable to pay its debts if it has refused to meet any lawful demand made at any of its offices or branches within two working days where the demand is made at a place having an office of the Reserve Bank and within five working days in any other case, and the Reserve Bank certifies in writing that the company is unable to pay its debts; or if the Reserve Bank so certifies of its own motion. The certificate is the operative document.

The constitutional foundation is 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 them. A director challenged sections 38 and 39 of the Banking Companies Act, 1949, under Article 14, arguing that banking companies were denied the procedural protections other companies enjoy and that the Bank had an unchecked power. The Supreme Court upheld both sections, holding banks a class apart because they trade on deposits taken from the public. That decision is the licence for every feature of this Part that looks severe.

The figure was fixed by the Banking Companies (Second Amendment) Act, 1960, and has never been revised, and the right inference is that depositor protection was deliberately moved out of the Act and into insurance: cover under the Deposit Insurance and Credit Guarantee Corporation Act, 1961, was raised to five lakh rupees per depositor per bank with effect from 4 February 2020, and section 18A, inserted by the amending Act of 2021 in force from 1 September 2021, requires interim payment within ninety days where a bank is placed under all inclusive directions.

Sections 44 and 44A complete the Part. Section 44 permits a voluntary winding up only if the Reserve Bank certifies that the company is able to pay its debts in full; section 44A prescribes the procedure for a voluntary amalgamation, requiring approval by a majority in number representing two thirds in value of the shareholders of each company and sanction by the Reserve Bank, dissentients being entitled to the value of their shares.

And banks are outside the general insolvency law: the Insolvency and Bankruptcy Code, 2016, excludes financial service providers, section 227 has been used for non banking financial companies and never for banks, and the Financial Resolution and Deposit Insurance Bill, 2017, was withdrawn in August 2018.

Information. Accounts, audit and publication under sections 29 to 31; inspection under section 35; and the income recognition, asset classification and provisioning norms issued under section 35A, which fix when a loan must be recognised as bad. A bank that can defer recognition can hide a loss until it is fatal, which is why the asset quality review of 2015 and 2016 mattered more than any amendment of that period.

Early intervention, which is where the hinge is actually avoided. Section 36AA allows the removal of managerial and other persons, section 36AB the appointment of additional directors, section 36ACA the supersession of the board, and section 35A the all inclusive directions used at the Punjab and Maharashtra Co-operative Bank. Above them sits the Prompt Corrective Action framework, revised with effect from 1 January 2022, which sets thresholds on capital adequacy, net non performing assets and the leverage ratio and imposes escalating restrictions on dividend, expansion, remuneration and lending as each is breached. Its whole purpose is to constrain a bank while it is still solvent.

The decisive modern development is that the hinge has been removed. Since the amendment of 2020 the Reserve Bank may prepare a scheme "at any other time", so it need not freeze depositors before rescuing them, and every significant failure since has been resolved that way. The systematic measures for prevention are therefore best understood as everything that keeps a bank away from the moratorium in the first place: entry control, governance rules aimed at the insider, prudential floors, honest recognition under section 35A, early intervention through the Prompt Corrective Action framework, and a working recovery apparatus. Behind all of them stands deposit insurance, because section 43A still promises the depositor the two hundred and fifty rupees fixed in 1960.

(a) Privileges of a holder in due course

Section 9 defines him as a person who, for consideration, became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorsee thereof if payable to order, before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. Four conditions: consideration, possession or the character of payee or indorsee, acquisition before maturity, and absence of sufficient cause to believe in a defect, which is not mere honesty since a person who shuts his eyes to an obvious defect has sufficient cause.

How far that presumption now reaches was settled in Rangappa v. Sri Mohan, (2010) 11 SCC 441, decided on 7 May 2010 by three judges. The accused admitted his signature on a dishonoured cheque but denied any legally enforceable debt. The Court held that the presumption under section 139 includes the existence of a legally enforceable debt or liability, described section 139 as a reverse onus clause enacted to improve the credibility of negotiable instruments, and held it rebuttable on the preponderance of probabilities from the complainant's own material if necessary.

The policy closes the note. A negotiable instrument is meant to circulate as money does, and it can do so only if a taker need not investigate his transferor's title, so the law gives the innocent purchaser for value a better title than his transferor had, a deliberate exception to nemo dat quod non habet, and the price of the exception is the strictness of section 9. The everyday application is a bank: a bank that discounts a bill or buys a cheque for value before maturity is a holder in due course and takes free of disputes between drawer and payee, whereas one that merely collects as agent takes nothing and needs section 131.

Presentment for payment is governed by sections 64 onwards. Section 64 requires presentment to the maker, acceptor or drawee by or on behalf of the holder, in default of which the other parties are not liable. Section 65 requires it during the usual hours of business and, for a banker, within banking hours. Section 66 fixes maturity as the time of presentment for instruments payable after date or after sight. Section 68 requires presentment at the proper place where one is specified. Section 74 requires an instrument payable on demand to be presented within a reasonable time of its receipt.

Sections 72 and 73 divide the cheque rules and the distinction is regularly examined. Under section 72 a cheque must be presented at the bank on which it is drawn before the relation between the drawer and his banker has been altered to the drawer's prejudice, if the drawer is to be charged. Under section 73 it must be presented within a reasonable time of delivery if any other person, that is an indorser, is to be charged. The difference reflects their positions: the drawer is prejudiced only if delay costs him his funds, whereas an indorser is entitled to prompt presentment as such.

The Information Technology Act, 2000, supplies form. Section 4 provides that where any law requires information to be in writing, that requirement is satisfied by an electronic record accessible for subsequent reference; section 5 gives legal recognition to electronic signatures. Sections 43, 43A, 66 and 72A supply liability and offences, section 43A obliging a body corporate handling sensitive personal data to compensate where negligence in maintaining reasonable security practices causes wrongful loss.

The Negotiable Instruments Act, 1881, as amended in 2002 with effect from 6 February 2003, supplies the instrument. Section 6 now defines a cheque to include the electronic image of a truncated cheque and a cheque in the electronic form, both defined in the section, and Explanation II to section 131 imposes on the collecting banker a duty to verify the prima facie genuineness of a truncated cheque and any fraud, forgery or tampering apparent on its face that can be verified visually. Truncation is what made same day national clearing possible.

The Payment and Settlement Systems Act, 2007, supplies the system. It requires the authorisation of every payment system, empowers the Reserve Bank to determine standards and call for information, and provides for the finality of settlement, which prevents a completed settlement being unwound in the insolvency of a participant.

(d) Automated teller machines and the use of the internet

A machine creates no new legal relationship. A withdrawal is a demand under the Joachimson mandate made through an electronic channel and authenticated by a personal identification number, and the card is not a negotiable instrument, containing no unconditional order for a sum certain and being non transferable.

The governing principle on loss is the one Canara Bank v. Canara Sales Corporation, (1987) 2 SCC 666, laid down for paper. An accountant forged the managing director's signature on many cheques and the bank debited the account; the Supreme Court held the bank bound to recredit, because a forged signature is wholly inoperative, the payment was made without a mandate, and the customer owes the bank no duty to examine his pass book. The bank's own contract had put the electronic equivalent of that loss on the customer whenever the correct number had been used, and it took a regulatory direction to reverse it.

The forum is now single. The Reserve Bank Integrated Ombudsman Scheme, 2021, in force from 12 November 2021, merged the Banking Ombudsman Scheme, 2006, the Ombudsman Scheme for Non Banking Financial Companies, 2018, and the Ombudsman Scheme for Digital Transactions, 2019, into one jurisdiction neutral scheme on a "one nation one ombudsman" basis, with a Centralised Receipt and Processing Centre at Chandigarh.

(e) The banker's right to claim over securities and set off

The general lien. Section 171 of the Indian Contract Act, 1872, names bankers among those who may, in the absence of a contract to the contrary, retain as security for a general balance of account any goods bailed to them. It is general rather than particular, so it secures the whole balance and not merely the advance on which the goods came in, and it arises by operation of law. Its limits: it does not reach goods bailed for a specific purpose inconsistent with retention, articles in safe custody, or securities lodged for a particular transaction, and it may be excluded by agreement.

Set off is a different right and is not a right over property at all: it is the right to combine two or more accounts of the same customer, held in the same right, and strike a single balance. It requires mutuality and debts that are due and certain, so it does not operate between a personal account and one held as trustee or executor, does not reach a contingent liability, and does not ordinarily reach a fixed deposit before maturity unless it was taken as security. Notice is generally required before a bank combines accounts and dishonours cheques on the strength of the combination.

Appropriation is governed by sections 59 to 61 of the Contract Act, which give the choice first to the debtor at the time of payment, then to the creditor, and in default apply payments in order of time; and in a running account by the rule in Devaynes v. Noble, (1816) 35 ER 781, Clayton's case, under which the first item on the debit side is discharged by the first on the credit side. Its greatest practical importance is in guarantees, where a bank that fails to rule off an account on the death or retirement of a surety may find the guaranteed debt discharged by later credits.

Automation, the automated teller machine and the banker's self help rights are the law of the modern bank, and in all three the operative rule now comes from somewhere other than an Act of Parliament. Automation was made lawful by four statutes each contributing one element, form, instrument, system and proof, but who bears the loss on a cloned card is decided by directions of 6 July 2017; compensation for a failed withdrawal comes from directions of September 2019; and the banker's ancient general lien has been supplemented by a statutory power to sell without a court and by a priority that now depends on registration rather than on possession. In each case the direction of travel is the same, which is away from the court and towards the regulator and the register.

For full marks, cover: this is the only question in the folder that asks for organisational structure, so give it properly and first, with sections: incorporation under section 3, the Central Board under section 8, Local Boards under section 9, the Governor and Deputy Governors, the Monetary Policy Committee under section 45ZB, and the power of the Central Government to direct under section 7; then role, meaning the capacities the Bank occupies; then functions, classified rather than listed. The marks that others lose are in the first part.

Organisational structure

The Bank is a body corporate. Section 3 of the Reserve Bank of India Act, 1934, constitutes it as a body corporate with perpetual succession and a common seal, capable of suing and being sued in its own name. It began operations on 1 April 1935 on the recommendation of the Royal Commission on Indian Currency and Finance of 1926, the Hilton Young Commission, as a shareholders' bank, and was taken into public ownership by the Reserve Bank (Transfer to Public Ownership) Act, 1948, with effect from 1 January 1949, so its entire share capital of five crore rupees is now held by the Central Government.

Section 7 is the provision that fixes the Bank's constitutional position and it must not be omitted. It provides that the Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest; and that subject to any such directions the general superintendence and direction of the affairs and business of the Bank shall be entrusted to the Central Board, which may exercise all powers and do all acts which may be exercised or done by the Bank. Section 7 has never been formally invoked, but it was publicly discussed during the disagreement between the Government and the Bank in 2018, and its existence means that the Bank's autonomy is statutory and defeasible, not constitutional.

The Monetary Policy Committee is a distinct statutory organ and belongs in any account of the structure. Section 45ZB, inserted by the Finance Act, 2016, constitutes it with six members: the Governor as ex officio chairperson, the Deputy Governor in charge of monetary policy, one officer of the Bank nominated by the Central Board, and three members appointed by the Central Government. Decisions are by majority and the Governor has a casting vote in the event of a tie. It must meet at least four times a year, and each member's vote and statement are published.

Role

The Bank occupies four capacities and they were acquired in layers, which is the most useful thing to say about its role.

As issuer, under section 22, which confers the sole right to issue bank notes, with the cover fixed by section 33 under the minimum reserve system of 1957 and the withdrawal power in section 26(2), upheld four to one in Vivek Narayan Sharma v. Union of India, decided on 2 January 2023, Nagarathna J. dissenting on the ground that an entire denomination could be withdrawn only by legislation and that a Government proposal is not a recommendation of the Central Board.

As banker, to the Government under sections 20, 21 and 21A, and to the banks under section 42, with lender of last resort powers in sections 17(4) and 18. The most important reform in this capacity was a restriction: the Fiscal Responsibility and Budget Management Act, 2003, prohibited the Bank from subscribing to primary issues of Central Government securities, ending automatic monetisation of the deficit.

Functions

Traditional central banking: note issue under sections 22 to 25 and 33; banker and debt manager to the Government under sections 20 to 21A; bankers' bank and custodian of the banking system's reserves under section 42, freed of its statutory band by the amending Act of 2006 and paying no interest; lender of last resort under sections 17(4) and 18; custodian of foreign exchange reserves; and settlement agent under the Payment and Settlement Systems Act, 2007.

Monetary policy: the repo rate as the policy rate, the standing deposit facility introduced in April 2022 as the floor of the corridor, the marginal standing facility as the ceiling, open market operations, and the two reserve ratios. The bank rate under section 49 survives as a legal benchmark rather than an instrument, having tracked the marginal standing facility rate since February 2012. At the policy of 5 August 2026 the repo rate stood at 5.25 per cent, the cash reserve ratio at three per cent and the statutory liquidity ratio at eighteen per cent.

Its reach beyond banks was upheld in Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd., (1987) 1 SCC 424, where directions under Chapter III B regulating a residuary non banking company's forfeiting savings scheme were held within a wide power directed to depositor protection.

Its outer edge was fixed in Internet and Mobile Association of India v. Reserve Bank of India, decided on 4 March 2020, where a circular denying banking services to virtual currency businesses was set aside for want of proportionality although the power to issue it existed; and in State Bank of India v. Rajesh Agarwal, decided on 27 March 2023, where audi alteram partem was read into the Bank's Master Directions on frauds.

Conclusion. The structure explains the institution. It is a body corporate under section 3, wholly owned by the Central Government since 1949, governed by a Central Board under section 8 in which the Government nominates the great majority of members, advised by four Local Boards under section 9, and directed in its monetary function by a six member Committee under section 45ZB in which the Bank holds three votes and the casting vote. Above all of it stands section 7, under which the Government may direct the Bank in the public interest after consulting the Governor.

For full marks, cover: the question asks for impact, not history, so the answer must measure rather than narrate; take nationalisation first and assess it against the objects the Act itself declared, giving both the gains and the costs; then take privatisation and make the central point, which is that it has largely not happened, and explain why in legal terms; then the constitutional impact, which is Rustom Cavasjee Cooper and outlives both policies; and close on consolidation as the substitute that was actually adopted.

Nationalisation: what was done

Three stages. The Imperial Bank of India became the State Bank of India under the State Bank of India Act, 1955, with effect from 1 July 1955, its associates brought in by the Act of 1959. Fourteen major commercial banks were taken over on 19 July 1969, by ordinance and then by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969. Six more followed in 1980.

On governance and asset quality the impact was negative, and an answer that omits this is not an assessment. Lending decisions became susceptible to direction that was not commercial; credit appraisal weakened where targets were expressed as proportions of credit rather than as tests of proposals; and the accumulation of unrecognised bad assets was the result. Capital adequacy fell behind because the owner was also the only source of capital, and recapitalisation competed with every other demand on the exchequer.

On competition and efficiency the impact was mixed and the counterfactual is genuinely arguable. Interest rates were administered, product innovation was slow and service quality was poor for decades; but the counter argument is that a privately owned system would have served the same customers only much later, if at all.

The costs are what produced the next policy, and that is the honest way to make the transition: the Narasimham Committee reports of 1991 and 1998 recommended prudential norms on Basel lines, income recognition and provisioning rules, reduction of the statutory pre-emption of bank funds through the two ratios, autonomy for public sector bank boards and entry for new private banks. The instrument of control moved from ownership to prudential rule.

The one genuine attempt is IDBI Bank. Strategic disinvestment was approved in 2021, the Government and the Life Insurance Corporation of India together offering 60.72 per cent, and the transaction remained incomplete at this sitting. A Banking Laws (Amendment) Bill introduced in 2021 to reduce the statutory shareholding floor was not passed. The Banking Laws (Amendment) Act, 2025, which did pass and which amended both Acquisition Acts, made governance changes and not ownership ones: public sector bank boards may now fix the remuneration of their statutory auditors, and unclaimed shares, interest and bond redemption money must be transferred to the Investor Education and Protection Fund.

The impact of new private banks, as distinct from privatisation, has been substantial and should be credited to the right cause. The licensing rounds of 1993 and 2001, on tap licensing from 2016, and differentiated licences for payments banks and small finance banks from 2015, introduced competition, technology and service standards without transferring a single nationalised bank. The competitive impact usually attributed to privatisation in India was in fact produced by new entry under section 22 of the Act of 1949.

And thirdly, the "effect test", which is the case's lasting contribution to Indian constitutional law. The Court held that State action is to be judged by its direct operation on fundamental rights and not by the object the legislature declared, so a law in form a law of acquisition may still be tested against Article 19. That displaced the compartmentalised reading of the freedoms accepted in A.K. Gopalan v. State of Madras, AIR 1950 SC 27.

The legislative response was swift and is itself part of the impact. The nationalisation was re-enacted by the Act of 1970 in a form that cured both defects; the Twenty Fifth Amendment of 1971 substituted "amount" for "compensation" in Article 31(2), removing adequacy from judicial scrutiny; Article 31 was omitted by the Forty Fourth Amendment in 1978; and the right to property became a constitutional right under Article 300A. Nationalisation therefore changed the Constitution as well as the banking system.

Conclusion. Measured against its own declared objects, nationalisation succeeded on reach and on the direction of credit and failed on governance and asset quality, and it is the second half of that verdict that produced the reforms of 1991. Privatisation, by contrast, has largely not happened, and the reason is that the banks were created by statute with a floor on Government shareholding, so selling one requires an Act, a buyer the Reserve Bank will approve as fit and proper, and a price the Government is willing to defend; the Bill of 2021 that would have lowered the floor was not passed, and IDBI Bank remains unsold.

The competitive impact usually credited to privatisation came instead from new entry, under the licensing rounds of 1993 and 2001, on tap licensing from 2016 and the differentiated licences of 2015, none of which required the transfer of a nationalised bank. And consolidation was the substitute actually adopted, in 2017 and 2020.

For full marks, cover: organise this one by asking who bears the loss at each stage, because that is the question a winding up actually decides and it makes the second limb follow naturally; the order in which loss falls is shareholder, then holder of subordinated capital, then general creditor, then depositor, with the insurer and the transferee bank absorbing what is left; give the provisions along that order; and treat prevention as the law's attempt to make sure the loss stops at the shareholder.

(This question is set in nearly identical terms on eight of the eleven papers in this folder. The other plans used here are the machinery in sequence, the three resolution tools, the depositor's journey, the comparison with the general insolvency law, the four actors, the causes of failure, and the moratorium as the hinge.)

At this stage no loss has crystallised but the depositor already cannot get his money, which is the point that shapes everything below.

Loss falls first on the shareholder

Capital exists to be lost first, and several provisions say so. Sections 11 and 12 fix minimum paid up capital and reserves and regulate the capital structure; section 17 requires a transfer to the reserve fund out of profit before any dividend is declared; section 15 restricts payment of dividend until capitalised expenses are written off. On top of the statute sit the Basel III capital requirements, whose whole logic is that the residual owner absorbs loss before any creditor does.

In a scheme under section 45(4) the shareholder is extinguished, and the record proves it. Global Trust Bank's shareholders lost everything on the amalgamation with Oriental Bank of Commerce in 2004; Lakshmi Vilas Bank's shareholding was written off on the amalgamation with DBS Bank India Limited in November 2020; and Yes Bank's existing capital was written down in the reconstruction notified on 13 March 2020, State Bank of India and others subscribing fresh capital.

Loss falls next on subordinated capital

Section 45(5) permits a scheme to provide for the reduction of the interest or rights of members and creditors to the extent necessary, and that power reaches instruments issued as loss absorbing capital. The Yes Bank scheme wrote down additional tier 1 bonds, which produced litigation about whether such a write down could be effected by a scheme rather than by the terms of the instruments. The point for an answer is that section 45(5) is drafted very widely and its outer limits are still being worked out; the width is deliberate, because a rescue that cannot touch subordinated capital would have to touch depositors instead.

The severity of that section was upheld 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 them. A director challenged sections 38 and 39 under Article 14, arguing 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 separate procedure protecting depositors and financial stability is a permissible classification.

Section 39 makes the Reserve Bank, the State Bank of India or another notified bank the official liquidator. Sections 41 and 41A require a preliminary report within two months and a notice calling on preferential, secured and unsecured claimants to send statements of claim. Section 42 empowers the High Court to decide all claims, and section 45B gives it exclusive jurisdiction in matters relating to a banking company under winding up.

Loss beyond that falls on the insurer and on the banking system

Deposit insurance under the Deposit Insurance and Credit Guarantee Corporation Act, 1961, is where the small depositor is actually protected. Cover was raised from one lakh to five lakh rupees per depositor per bank with effect from 4 February 2020, and section 18A, inserted by the amending Act of 2021 in force from 1 September 2021, requires the Corporation to make interim payment up to the insured amount within ninety days where a bank is placed under all inclusive directions. That reform is directly traceable to the Punjab and Maharashtra Co-operative Bank, whose depositors were frozen for more than two years precisely because the bank was never wound up and the insurance was therefore never triggered under the old law.

And where a scheme is used, the residual loss falls on the transferee bank and hence on the banking system. That is why section 45 is attractive to the State: unlike acquisition under sections 36AE to 36AJ, which requires the exchequer to pay compensation on the principles in the Fifth Schedule with a Tribunal under section 36AH to determine the amount, a scheme costs the Government nothing.

Measures to prevent it: keeping the loss at the shareholder

Entry and governance. Licensing under section 22, whose conditions are all expressed as a satisfaction about the ability to pay depositors; section 10A on board composition and section 10B on whole time management; and above all section 20, which prohibits advances on the security of the bank's own shares and to directors and to concerns in which they are interested. Connected lending has been the proximate cause of most Indian bank failures, and the Banking Laws (Amendment) Act, 2025, raised the "substantial interest" threshold in section 5 from five lakh rupees to two crore rupees, its first revision since 1968.

Prudential floors, so that the shareholder's money is exhausted first: sections 11, 12, 15 and 17, the statutory liquidity ratio under section 24, the cash reserve ratio under section 42 of the Reserve Bank of India Act, 1934, and the Basel III capital, leverage and liquidity requirements.

And a resolution power that can be used in time. The Banking Regulation (Amendment) Act, 2020, inserted the words "or at any other time" in section 45(4), so the Reserve Bank may now prepare a scheme without first obtaining a moratorium. That is itself a preventive measure, because the earlier sequence obliged the regulator to freeze depositors before it could rescue them and therefore delayed intervention.

Conclusion. A winding up is, in substance, a decision about who bears a loss, and the Banking Regulation Act arranges that decision very deliberately. Capital under sections 11, 12, 15 and 17 exists so that the shareholder loses first, and in every Indian resolution the shareholder has lost everything, Ganesh Bank of Kurundwad having upheld exactly that outcome against a challenge to the speed with which it was reached. Subordinated capital comes next, section 45(5) permitting the rights of members and creditors to be reduced so far as necessary, a power whose limits the Yes Bank write down showed to be still unsettled.

For full marks, cover: the paper prints "leading" and means lending, and its own Marathi translation says so, so open by noting that and move on; then organise the answer as the four questions a credit committee must answer before it sanctions, which are whether the borrower can repay, whether the bank can afford the exposure, whether the bank will be able to enforce, and whether the law permits the advance at all; that plan turns a list of canons into a working framework and it puts the statutory provisions where they belong.

(The paper prints "the principles of sound leading Policies". Its Marathi on page 3 reads "साउंड लेंडिंग पॉलिसीचे", so the word intended is lending. The answer is written on lending.)

Two statutory props make appraisal possible. The Credit Information Companies (Regulation) Act, 2005, obliges banks to furnish and permits them to obtain credit information, so a borrower's record with other lenders is available; and the know your customer directions issued under section 35A of the Banking Regulation Act, 1949, and under the Prevention of Money Laundering Act, 2002, require identification and verification of the customer and of the beneficial owner. After Justice K.S. Puttaswamy (Retd.) v. Union of India, (2019) 1 SCC 1, struck down section 57 of the Aadhaar Act, a private bank cannot compel Aadhaar authentication.

Question two: can the bank afford the exposure?

This is where liquidity, profitability and diversification belong, and they are properly questions about the bank rather than about the borrower.

Liquidity. The maturity pattern of the advances must let the bank meet demand deposits, because a bank borrows short and lends long. A perfectly safe but wholly illiquid book still fails, which is why the statutory liquidity ratio under section 24 of the Act of 1949 and the cash reserve ratio under section 42 of the Reserve Bank of India Act, 1934, are imposed by law rather than left to judgment, and why Basel III adds the liquidity coverage and net stable funding ratios.

Diversification. Exposure must be spread across borrowers, sectors and regions, and here the law again does not leave it to judgment: section 21 empowers the Reserve Bank to give directions on the maximum amount of advances to any one borrower, and the large exposures framework issued under it caps exposure to a single counterparty and to a group of connected counterparties as a proportion of eligible capital. Section 19 applies the same principle to the investment book by limiting shareholdings and subsidiaries.

Question three: will the bank be able to enforce?

This is the part of sound lending that is pure law, and it is where most answers stop short. Enforcement depends on four things done at sanction.

Documents that are admissible. Section 35 of the Indian Stamp Act, 1899, makes an instrument not duly stamped inadmissible in evidence, so an unstamped mortgage or promissory note is a suit lost before it is filed. Under the Bankers' Books Evidence Act, 1891, a computer record is admissible only with the certificate required by section 2A.

Priority that will hold. A charge created by a company must be registered under section 77 of the Companies Act, 2013, within thirty days, failing which it is void against the liquidator and other creditors; and a security interest must be registered with the Central Registry, since sections 26D and 26E of the Act of 2002, inserted in 2016, make registration both a condition of enforcement and the source of priority over all other debts, including revenues and taxes payable to the Government. Registration has ceased to be a formality and has become the source of priority.

Guarantees must also be kept alive. Section 133 of the Indian Contract Act, 1872, discharges a surety where the terms of the principal contract are varied without his consent; and the rule in Devaynes v. Noble, (1816) 35 ER 781, Clayton's case, applies later credits in a running account to the earliest debits, so a bank that fails to rule off on the death or retirement of a surety may find the guaranteed debt discharged.

A sanction in breach of section 20 is not merely irregular: it exposes the bank to penalty under section 47A and its officers to removal under section 36AA, and it is the conduct that has actually destroyed Indian banks, which is why the Banking Laws (Amendment) Act, 2025, revised the "substantial interest" threshold in section 5 from five lakh rupees to two crore rupees, its first change since 1968.

The tension, and how the law resolves it

Compelled lending conflicts with the canon of safety, and the conflict is real. A target expressed as a proportion of credit takes no account of whether good proposals exist in the targeted sector, and the credit risk stays with the bank.

Can the bank afford it covers liquidity, profitability and diversification, and in each the law has replaced judgment with a rule: the two reserve ratios, the large exposures framework under section 21, and section 21A protecting the bank's pricing while Central Bank of India v. Ravindra limits it by holding that interest on interest cannot be capitalised and penal interest may be charged only once.

Will the bank be able to enforce is the half usually omitted and it is decided entirely at sanction: stamping under section 35 of the Act of 1899, acknowledgements under sections 18 and 19 of the Limitation Act, title and the exclusion of agricultural land under section 31, correct classification under section 35A, and registration under section 77 of the Companies Act and sections 26D and 26E of the Act of 2002, which now determine priority even against the tax authorities.

And does the law permit it is the distinctively Indian question, because section 20 forbids the lending that has actually destroyed banks while section 21 compels lending the canons would not choose. Sound lending in India therefore means prudence exercised inside a corridor that Parliament and the Reserve Bank have drawn on both sides.

Two, it preserves customary law rather than replacing it. Section 1 provides that nothing in the Act affects any local usage relating to any instrument in an oriental language, with a proviso permitting the parties to exclude the usage by words in the instrument. A hundi is therefore governed by custom unless the parties contract into the statute, which reverses the usual relation between code and usage and is a striking feature of a colonial codification.

Three, its central idea is that a transferee may take a better title than his transferor had. That is a deliberate exception to nemo dat quod non habet, and it exists so that a commercial instrument can circulate as money does. It is delivered through the status of holder in due course under section 9 and the privileges in sections 20, 36, 42, 43, 53 and 58, with estoppels in sections 120 to 122.

Four, it works through presumptions rather than proof. Section 118 presumes consideration, date, time of acceptance, time of transfer, order of indorsements, stamp, and that the holder is a holder in due course, subject to the proviso to clause (g) returning the burden where the instrument was obtained by an offence or fraud; section 119 presumes dishonour on proof of protest. This is the Act's real engine, because it relieves a holder of proving the history of the paper.

The amendments, analysed

The Act ran for more than a century with little change, and then was amended four times in thirty years, every time in the same direction: to make a cheque enforceable.

One, the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988, which inserted Chapter XVII and with it sections 138 to 142, with effect from 1 April 1989. This is the most consequential amendment the Act has ever received. Before it, a dishonoured cheque gave only a civil claim; section 138 made dishonour for insufficiency of funds, or because the amount exceeded the arrangement, a criminal offence, subject to three conditions in the proviso: presentment within the period of validity, a written demand within a stated period of information of dishonour, and failure to pay within a stated period of the notice. Section 141 extended liability to persons in charge of a company and section 142 governed cognizance.

The reason was commercial confidence. A cheque that could be dishonoured with no consequence beyond a civil suit taking a decade was not a reliable payment instrument, and the amendment converted the drawer's default into an offence in order to make the instrument work.

Three, the Negotiable Instruments (Amendment) Act, 2015, which reversed a judgment. In Dashrath Rupsingh Rathod v. State of Maharashtra, (2014) 9 SCC 129, the Supreme Court had held that jurisdiction under section 138 lay only where the drawee bank, that is the bank on which the cheque was drawn, was situated, so a payee had to sue wherever the drawer happened to bank. That decision transferred a very large number of pending complaints and made the remedy far less useful to payees.

Parliament responded by inserting section 142(2) and section 142A, fixing jurisdiction at the court within whose local jurisdiction the branch of the bank where the payee maintains the account is situated, where the cheque is delivered for collection through an account, and providing for the transfer of pending cases. This is a clean example of a holding undone by statute, and the reason is instructive: the Court had reasoned from the language of the section and Parliament from the purpose of the remedy.

How the amendments and the presumptions work together

The amendments would achieve little without the presumptions, and Rangappa v. Sri Mohan, (2010) 11 SCC 441, decided on 7 May 2010 by three judges, is where the two meet. The accused admitted his signature on a dishonoured cheque but denied that any legally enforceable debt existed. The Court held that the presumption under section 139 includes the existence of a legally enforceable debt or liability, described section 139 as a reverse onus clause enacted to improve the credibility of negotiable instruments, and held it rebuttable on the preponderance of probabilities, the accused being entitled to raise a probable defence from the complainant's own material without entering the witness box.

Read with section 118(a) the effect is that a complainant who proves the signature has effectively proved his case, and the trial becomes an inquiry into whether the accused can make his denial probable.

Conclusion. The salient features of the Act are the architecture of 1881: definition by enumeration, the saving of oriental usage in section 1, negotiability delivered as a better title to a holder in due course, presumptions that relieve him of proof, a chain of liability with principals and sureties, a discipline of presentment and notice on the holder, and special protection for the banker who stands in the middle of every cheque.

The amendments have all been about one instrument and one problem. 1988 made dishonour of a cheque an offence, because a civil remedy was too slow to make the cheque reliable. 2002 modernised the cheque into an electronic image and, having found the offence too slow to enforce, added summary trial, evidence on affidavit and compounding. 2015 reversed Dashrath Rupsingh Rathod to restore jurisdiction to the payee's own bank branch. 2018 added interim compensation under section 143A and an appellate deposit under section 148 to remove the accused's incentive to delay.

For full marks, cover: the question says analyse, so every trend must be paired with the legal instrument that carries it and with the problem it created; organise as the four legal problems technology raised, form, instrument, system and loss, then the trends themselves, then the unresolved issues; and make the central argument, which is that Indian law has absorbed every technological change by widening an old definition rather than by writing a new statute, and that the rules which actually decide disputes are made by the regulator.

Problem two: is an instrument that exists only as an image a cheque? The answer was given inside the Negotiable Instruments Act, 1881, by the amending Act of 2002 in force from 6 February 2003. Section 6 now defines a cheque to include the electronic image of a truncated cheque and a cheque in the electronic form, and the Explanation defines both. Explanation II to section 131 then adapts the collecting banker's protection, imposing a duty to verify the prima facie genuineness of the truncated cheque and any fraud, forgery or tampering apparent on its face that can be verified visually, which is the furthest a duty can go once the paper no longer reaches the collecting bank.

Problem three: who guarantees that a payment, once made, stays made? The answer is the Payment and Settlement Systems Act, 2007, which requires the authorisation of every payment system, empowers the Reserve Bank to determine standards and call for information, and provides for the finality and irrevocability of settlement, preventing a completed settlement from being unwound in the insolvency of a participant. Without settlement finality no real time payment system could operate.

The principle those directions apply is not new: it is Canara Bank v. Canara Sales Corporation, (1987) 2 SCC 666. A company's accountant forged the managing director's signature on many cheques over several years and the bank debited the account throughout; the Supreme Court held the bank bound to recredit the whole amount, because a forged signature is wholly inoperative, so the payment was made without a mandate and with the bank's own money, and the customer owes the bank no duty to examine his pass book. The directions of 2017 carry that reasoning into the electronic world.

Proof is supplied by the Bankers' Books Evidence Act, 1891, whose definition of bankers' books was widened to include data stored on a computer or in electronic form, subject to the certificate required by section 2A, without which a printout is inadmissible. A bank that cannot produce a compliant certificate cannot prove its own ledger.

The trends, each with its instrument

Cheque truncation and same day clearing, resting on section 6 and Explanation II to section 131 as above.

Central bank digital currency. The Finance Act, 2022, amended the definition of "bank note" in the Reserve Bank of India Act, 1934, to include a bank note issued in digital form, which read with section 22 authorises the issue of the digital rupee; the wholesale pilot began on 1 November 2022 and the retail pilot on 1 December 2022. Once again the technique was to widen the definition of the existing instrument, so the digital rupee is legal tender on precisely the same footing as a printed note.

Digital lending. Credit is now originated and disbursed through platforms that are not lenders. The Reserve Bank's digital lending directions require the flow of funds to be direct between the regulated lender and the borrower without pooling by an intermediary, and the scale based regulatory framework for non banking financial companies, in force from 1 October 2022, applies progressively bank like capital and governance requirements as an entity moves into a higher layer.

Remedy. The Reserve Bank Integrated Ombudsman Scheme, 2021, in force from 12 November 2021, merged the Banking Ombudsman Scheme, 2006, the Ombudsman Scheme for Non Banking Financial Companies, 2018, and the Ombudsman Scheme for Digital Transactions, 2019, into one jurisdiction neutral scheme on a "one nation one ombudsman" basis, with a Centralised Receipt and Processing Centre at Chandigarh. A customer no longer has to identify which scheme and which territorial ombudsman covers a digital complaint.

What technology has not solved, and the limit on the regulator

Three issues remain open and naming them is what makes this an analysis.

The definition of banking. Anchoring section 5(b) on the cheque leaves the boundary between a bank and a payment institution to be policed by section 49A, a provision about an instrument that most customers no longer use.

Jurisdiction and enforcement. Customer, server and beneficiary may be in different countries; section 75 of the Act of 2000 asserts extraterritorial application where the contravention involves a computer resource located in India, but recovery from a foreign fraudster is another matter.

The technique is to widen an old definition rather than write a new statute. A cheque became an electronic image in 2002 by amending section 6; a bank note became digital in 2022 by amending a definition in the Act of 1934; bankers' books became computer records by amending the Act of 1891. The only genuinely new statutes were the Information Technology Act, 2000, which supplied form, and the Payment and Settlement Systems Act, 2007, which supplied settlement finality.

The shift is that the rules deciding real disputes are now made by the regulator. Nothing in the Negotiable Instruments Act, the Contract Act or any decision of the Supreme Court gives a customer his protection against an unauthorised electronic debit; it comes from directions of 6 July 2017 issued under section 35A of the Banking Regulation Act, 1949, and the Act of 2007, and compensation for a failed withdrawal comes from directions of September 2019. The principle behind them is old, and it is Canara Bank v. Canara Sales Corporation: a payment outside the mandate is the bank's loss, and the customer is under no duty to police his own account. What is new is that the rule reached him by regulation rather than by litigation, and that Internet and Mobile Association of India is now the main check on how such rules are made.

It wears two hats, and this is the feature worth building the note on.

Under the Act of 1993 it is the bank's forum. It has jurisdiction over applications by banks and financial institutions for the recovery of debts above the prescribed amount, ten lakh rupees originally and twenty lakh rupees since the notification of September 2018, and the jurisdiction of civil courts over such claims is excluded. The application is made under section 19; the Tribunal is not bound by the Code of Civil Procedure, 1908, and is guided by the principles of natural justice; it may make interim orders of attachment or injunction; and a defendant may set up a counter claim, which the Tribunal may try. On adjudication it issues a recovery certificate, executed by a Recovery Officer whose powers are modelled on tax recovery and include attachment and sale of property, arrest and detention, and the appointment of a receiver.

Its constitutionality was upheld in Union of India v. Delhi High Court Bar Association, (2002) 4 SCC 275. The High Court had struck down the Act of 1993 for want of legislative competence and because excluding the civil courts left the borrower without a forum. The Supreme Court reversed, holding Parliament competent under the Union List, the classification of bank claims rational, and the borrower's right to file a counter claim before the Tribunal a sufficient answer, while directing that the qualifications and conditions of service of presiding officers be brought into line with judicial standards.

The honest assessment, which earns the last marks, is that the Tribunal has not delivered. Filings vastly exceeded the capacity created, vacancies have been chronic, and disposal has taken years rather than the six months contemplated. That failure is the direct explanation for what followed: the Act of 2002 took enforcement out of adjudication altogether by letting the secured creditor act on its own notice, and the Code of 2016 moved resolution to a committee of creditors whose commercial judgment is not reviewable on merits, as Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531, held. A specialist tribunal was the first answer to delay, and when it did not work Parliament stopped trying to speed up adjudication and removed the adjudication.

Proof comes from the Bankers' Books Evidence Act, 1891, whose definition of bankers' books extends to data stored on a computer or in electronic form, subject to the certificate required by section 2A; without that certificate a printout is inadmissible and the bank cannot prove its own record.

Authentication is regulated and not left to contract. The Reserve Bank has required additional factor authentication for card not present transactions, which is why an Indian online payment carries a second step that many foreign systems do not, and the payment systems themselves are authorised under the Payment and Settlement Systems Act, 2007, which also provides for the finality of settlement.

Liability is where the law actually is, and it is regulatory. The Reserve Bank's directions of 6 July 2017 provide zero liability where the loss arises from the bank's own contributory fraud, negligence or deficiency, or from a third party breach reported within three working days; limited liability on a sliding scale thereafter; and they place the burden of proving customer liability on the bank. The harmonisation directions of September 2019 require automatic reversal of failed transactions within a fixed turnaround time with compensation for each day of delay, payable without the customer having to complain.

To honour the mandate. Section 31 of the Negotiable Instruments Act, 1881, requires the drawee of a cheque having sufficient funds properly applicable to pay when duly required and to compensate the drawer for any loss or damage caused by default. The duty is owed to the drawer alone, the payee having no privity. Wrongful dishonour sounds in substantial damages for a trader without proof of special damage, on Marzetti v. Williams, (1830) 1 B & Ad 415, and Rolin v. Steward, (1854) 14 CB 595, injury to commercial credit being treated as a fair inference.

Not to debit without a mandate. In Canara Bank v. Canara Sales Corporation, (1987) 2 SCC 666, an accountant forged the managing director's signature on many cheques over years and the bank debited the account throughout; the Supreme Court held the bank bound to recredit the whole amount, because a forged signature is wholly inoperative and the customer owes the bank no duty to examine his statements.

Other duties are to render an account and supply a statement; to act on standing instructions and on a countermand of payment; to exercise reasonable care in collection and in payment; and to give reasonable notice before closing an account in credit, Prosperity Ltd. v. Lloyds Bank Ltd., (1923) 39 TLR 372, holding one month insufficient in the circumstances of that case.

Statutory duties include nomination under sections 45ZA, 45ZC and 45ZE of the Banking Regulation Act, 1949, which since the Banking Laws (Amendment) Act, 2025, permit up to four nominees from 1 November 2025, simultaneously with stated percentage shares or successively; and the annual return of accounts unoperated for ten years under section 26, with transfer of the balance to the Depositor Education and Awareness Fund under section 26A, the depositor's right to claim from the bank being expressly preserved.

The last observation is the sharpest. The customer's own duties are strikingly few: to draw cheques with reasonable care so as not to facilitate alteration, and to inform the bank of a forgery of which he knows. Canara Bank confirms there is no general duty to check the account. The contract is drafted by the bank, and yet the law implies almost nothing against the customer, which is a deliberate allocation of risk to the party better able to prevent and to bear it.