The legal framework in India is predicated on two acts, the 1949 Banking Regulation Act and the 1934 Reserve Bank of India Act. BR act helps to manage and supervise banking activities, acts as a banking guideline, whereas the RBI act authorizes RBI to issue currency notes, regulate all banks, and take care of the economic and financial situation of the country.
To get in-depth knowledge and understanding of the legal framework in India for credit and lending, you ought to choose a credit analysis course or a PGDM in banking and finance.
Under the given framework, banks are allowed to perform the below activities:
- Borrow or grant loans: Loan terms are set by negotiation and could be without any security too.
- Issue credit letter: This letter ensures the customer would pay money to the vendor and just in case of the buyer's default, the bank pays the amount. It’s crucial for international trade.
- Issue promissory note: It's a legal document, in which one party promises in writing to pay a determinate sum of cash to the other, either in a determinable future time or on demand of the payee, under specific terms.
- Issue bill of exchange: A bill of exchange may be a written order that is in international (export/import) trade binding one party to pay an amount of cash to a different party at a scheduled date or on demand of the same.
- Apart from that, banks are allowed to deal in stocks, shares, provide vaults, perform guarantees, fund charitable causes, promote their business and merchandise.
Features Of Banks Under Legal Frameworks
Let’s explore a few more features and aspects of banks under the legal frameworks:
- Cash reserve: Every depository financial institution needs to take care of a sum like a percent of the demand in total and time liabilities with itself (referred to as Statutory Liquidity Ratio) and with the Federal Reserve Bank (referred to as CRR, or Cash Reserve Ratio) to regulate the credit growth and liquidity within the economy.
- Private banks, co-operative society, small finance banks, and payment banks:
- To operate in India, for private banks, the initial minimum paid-up capital is 200 crores, of which the promoter must pay 40% with 5 years locking, and the initial 200 crores need to raise to 300 crores in 3 years.
- Co-operative societies also come under the BR act.
- Small finance banks and payment banks are licensed under the BR act. To boost financial inclusion by providing aid to unorganized sectors, micro industries were introduced. Payment banks aren't allowed to supply loans.
- Regional Rural Banks: Regional Rural Banks with the target of providing sufficient funds to rural sectors and agriculture, was established and controlled under the RRB act 1976. National Bank for Agriculture and Rural Development regulates these banks.
RBI Lending Policies
More about RBI lending policies:
- Recently, RBI relaxed lending norms to NBFC and also provided relaxation in bank’s exposure to limits, in order to assist under-stress sectors.
- RBI allowed banks to prioritize agriculture, micro-small-medium industries, and affordable housing while granting loans.
- Banks now can grant loans to agriculture with the capping of up to Rs 10 lakhs and to micro and little enterprises up to Rs 20 lakhs and to housing sector up to Rs 20 lakhs per borrower, and it is assessed as priority sector lending.
- The RBI increased the loan exposure limit of banks to a single NBFC from 15% to 20% of its capital base, to aid increased credit supply to the crisis-ridden shadow banking sector.
The legal framework in India for credit and lending is vast and needs extensive study to become fully accustomed to it. And also, based on the economic situation, norms tend to update or new regulations come into the picture. To understand this, you should either go for a PGDM in banking and finance or at least take a credit analysis course, to begin with.