Banking Legislation and Money Laundering in India

BANKING LAWS

The Banking system in India is very well regulated when compared to the world at large. With the Reserve Bank of India at the apex level to govern the rules and regulations for banks and transactions with other countries and domestically otherwise, the banking sector has come a long way. The history of banking law can be traced from the ancient times when a few rich people loaned money to the ones in need with an amount of interest.

This soon led to the establishment of institutions which dealt with the same activity and in no time, all this lead to the nationalisation of the Reserve Bank of India in the year 1934. The RBI Act 1935 was formed and this act gave the RBI the powers to regulate the banking sector. Banking laws is not limited to just one act that governs it, but a number of acts and we provide services under each banking law that we deem to assist you with.

What areas does the banking law regulate?

A bank provides transparency to the consumers; reduces misuse of banks in case of money laundering, fraud, misrepresentation etc. Banking systems regulate and mandate the confidentiality aspect whereby the consumers can rely on it, provide loans to those who need, and they create fair debt collection practices, etc. None of these would’ve been possible had there not been a law that regulated banks.

What are the different kinds of acts under the banking law in India?

· The Limitation Act, 1963

The bank under this act has the power to take a legal action against the person who has failed to repay the loans that the bank had loaned.

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The limitation act specifies a period within which a suit can be filed in the court of law. Under this act, if the documents are within the period of limitation, it is only then that the banks can approach the court of law for a suit against him, if the loaned is not paid off. However, when the limitation period is over, the banks have to arrange a fresh set of documents from the borrower, but this is the last resort since this instance is discouraged by the act.

· Banking Regulation Act, 1949 (BR Act)

This act provides guidelines to the banks along with the RBI. They cater to a lot of areas inclusive of regulation of trading activities of goods, extending loans, accepting money from the public etc. This act prohibits the ability of banks to charge upon unpaid capital of the company and cannot promote creation of a floating charge on any property of the company unless approved by the RBI. The BR act is alongside of the RBI Act and together these acts aim to bring upon a regulated banking system. Emphasis is put by this act on the mandatory maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) by the banks with itself and the RBI as securities. The BR Act has a few compliance requirements which have to be fulfilled like the publishing of the balance sheet on 31st March every year, audit by the auditors. Not adhering to the provisions under this act may lead to serious consequences.

· Recovery of Debts due to banks and Financial Institutions Act, 1993

This act institutes a Debt Recovery Tribunal for recovering loans quickly. A debt is any liability that a person has towards an institution (mainly bank, in this context) that hasn’t been paid off but needs to be paid off at the earliest. For the purpose of recovery of debts, the banks require filing of application by taking the jurisdiction and cause of action into consideration. Since the Limitation Act is also extended to the DRT Act, it is the responsibility of the banks to make sure that the application is timely processed. After scrutinising the application, the tribunal may issue a recovery certificate to the applicant where recovery officers then carefully evaluate the immovable or movable property. The establishment of this act has lessened the burden on courts to solve debt related matters.

· Prevention of Money Laundering Act, 2002 (PMLA)

Money Laundering is defined as obtaining the money through illegal means (criminal activities) but showcasing the obtainment of money through a legitimate source, which is not true. Criminal activities like indulging in scams involving a huge amount by deceiving the authorities, or simply by drug trafficking or being a part of a terrorist act that leads to procurement of money can be termed as Laundering of money. The PMLA aims to prevent this concealment of illegal acquisition of money by establishing rules that govern the same. According to this act, there are three stages in which the laundering of money takes place. The first stage is ‘placement’ which means depositing of cash in a bank or buying of valuable goods through this money. The second stage is that of ‘layering’ where after the cash has entered the financial system, there is transfer of funds to different accounts. The amount is broken into small units making it look like a daily usual transaction that one might make. The third and the final stage is that of ‘integration’ where the offender tries to show the money as a legitimate like making use of the tax havens and using the funds as a source of security for the company. Therefore, to curb money laundering, PMLA has been made with the purpose to investigate crimes like these and try to curb the menace to the minimal. The acts under this legislation may lead the offender to rigorous punishment up to 7 years or maybe levied a fine or both. One rule that every bank has to follow under this act is that of verifying a person’s identity by KYC and keeping photographs, address proofs etc as documentary evidences in their records.

· The Securitization Act, 2002

The objective of this act is to reconstruct financial assets and enforce security interest. The banks have the power to recover their dues in Non-Performing Assets (NPAs) without court intervention. This can be done by issuing a notice for recovery from the borrowers requesting them to discharge the dues within 60 days. If the borrower fails to comply with the notice, the banks then have the rights to take possession of the secured assets of the borrower where court intervention is not a mandate.

· Lenders Liability Act

This act consists of a set of code of conduct known as ‘Fair Practice Code for Lenders’ which was later implemented from the 1st November 2013. A few codes of conduct include – provision of receipts for acknowledgement of loans, follow due diligence while assessing the worthiness of applicants for loans, timely disbursement of loans sanctioned in conformity with authorities etc. These codes are voluntary in nature and banks can decide to follow these codes of conduct if they wish to.

· Tax laws in the banking sector

It is a mandate for the banks to comply with the tax laws prevailing in the country. Taxes are expected to be paid even by banks, even on the interest payable to the customers as per the directions of the authorities.

What if there is a cheque bounce? Under which of the above acts do I approach the court of law?

Although these above acts hold importance in the banking sector, there is yet another major act that is the act of Negotiable Instruments Act, 1881. This act has been prevailing since the British era and remains unchanged and is largely followed. A negotiable instrument under Section 13 of the said act is a promissory note, a bill of exchange or cheque which is payable to the bearer. Bouncing of cheques is now a common phenomenon where the person paid is unable to encash the cheque. Section 138 of the act defines cheque bounce and it is under this section that penalties apply to a drawer when a cheque bounces. Penalties include imprisonment up to 2 years and double the amount as fine.

When the cheque issued cannot be encashed, a complaint can be filed and registered in the Magistrate Court. An appeal can be filed in the Sessions Court. The complaint must be in compliance with Section 142 of the Act which provides the procedure. A complaint must be in writing by the payee and must be made within one month of serving notice and fifteen days of non-payment. The complaint can be filed under section 142 along with a criminal complaint u/s 420 of the Indian Penal Code which talks about a person intentionally by fraudulently inducing a delivery of a security, or cheating. The offender charged under this provision shall face imprisonment up to 7 years and fine.

The above stated information is solely with a purpose to impart knowledge about how Raizada Law Associates endeavour to assist in any matter that may come up with regard to the banking sector. With our very efficient team, we hope to create a place where there are minimal of bank frauds in the future.