Law and Economics of Evolution of Banking Regulation in India

Abstract

AbstractThis work seeks to inquire, with the principles of rationality and equity in view, into the economic circumstances against the backdrop of which regulation of India’s banking industry has been evolving in terms of enactment of banking laws and rules broadly through the following five stages: (a) pre-independence era, (b) post-independence period till 1949, (c) From 1949 to 1970, (d) from 1970-1990, (e) 1990 onward: (a) pre-independence era—India was a British colony till 1947. Under the then ruler’s patronage a few private sector banks were created. However, there was absolutely no regulation of banks as such till 1935. This period is characterized by bank failure. (b) post-independence period till 1949—The Reserve Bank of India (‘RBI’ henceforth) born during 1934-35 started controlling only the credit operations and volumes of the banks till 1949. (c) From 1949 to 1970—With the passage of the Banking Regulation Act in 1949, the RBI got the full effective power to regulate the banks. (d) From 1970-1990—The banking industry in India financed the development goals of the country. Competitive performance in profit making was not in focus. The entry of any new private sector bank was not allowed. (e) From 1990 onward—India opened herself for liberalization, privatization and globalization. Entry of new private sector banks was allowed. Risk based regulation started in India in line with the guidelines of the Basel Committee on Banking Supervision. Increasing loss of confidence on fiat money poses a threat as an alternative monetary system before the regulator in the form of crypto currency.