Constitutional and Legislative Framework of Banking Law in India

Banking is a Union subject, but the entities that carry it on may be companies, cooperative societies or statutory corporations, and the contracts banks make are governed by the general civil law. The result is a layered framework in which Parliament's power over banking meets the States' power over cooperative societies and money lending. This note sets out the constitutional basis of banking law, the division of legislative power, the statutes that make up the subject, and the directions that carry most of its operative detail.

1. The Constitutional Entries

Legislative power over banking in the Seventh Schedule

Figure 1: Legislative power over banking in the Seventh Schedule

Entry 45, List I: Banking. This is the direct source of Parliament's power to enact the Banking Regulation Act, 1949.
Entry 38, List I: Reserve Bank of India, the basis of the RBI Act, 1934.
Entry 36, List I: Currency, coinage and legal tender; foreign exchange, which supports the note issue provisions and FEMA, 1999.
Entry 43, List I: incorporation, regulation and winding up of trading corporations, including banking, insurance and financial corporations, but not including cooperative societies.
Entry 46, List I: bills of exchange, cheques, promissory notes and other like instruments, the basis of the Negotiable Instruments Act, 1881.
Entry 32, List II: cooperative societies, among other corporations not specified in List I.
Entry 30, List II: money lending and moneylenders; relief of agricultural indebtedness, under which the States have enacted moneylenders Acts and debt relief laws.

2. The Cooperative Bank Question

A cooperative bank is both a bank, which is a Union subject under Entry 45 of List I, and a cooperative society, which is a State subject under Entry 32 of List II. The division was settled by a Constitution Bench.

📖 Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd., (2020) 9 SCC 215

Facts: Cooperative banks sought to recover secured debts by taking action under the SARFAESI Act, 2002. Borrowers contended that cooperative banks were creatures of State law under Entry 32 of List II, so Parliament could not bring them within a Union recovery statute.

Held: A five judge bench held that the banking activity of a cooperative society falls within Entry 45 of List I, while its incorporation, regulation and winding up as a society fall within Entry 32 of List II. Cooperative banks are covered by the Banking Regulation Act and are banks for the purposes of SARFAESI. Recovery of dues is an essential function of banking, so Parliament was competent to extend Section 13 of SARFAESI to them.

Ratio: Legislative power over cooperative banks is divided by activity, not by entity: banking is Union, the society itself is State.

⚠ Note

The distinction is between the entity and the activity. A State legislature may say how a cooperative society is formed, managed and wound up. Parliament may say how it conducts banking, including licensing, prudential norms and recovery. The Banking Regulation (Amendment) Act, 2020 strengthened Reserve Bank supervision of cooperative banks on exactly this basis.

3. Fundamental Rights and Banking

Article 19(1)(g): the right to carry on business. Regulation of banking, including licensing, is a reasonable restriction under Article 19(6), and the State may create a monopoly in its own favour, as the nationalisation cases recognised.
Article 14: classification among banks or borrowers must be reasonable and bear a rational nexus with the object. Discriminatory treatment of similarly placed banks was one ground of challenge in R.C. Cooper v. Union of India (1970).
Article 300A: no person may be deprived of property save by authority of law. Deposits and securities are property, and acquisition of a banking undertaking requires valid legislation.
Article 301: freedom of trade and commerce throughout India supports the nationwide operation of banks and payment systems.
Articles 12 and 226: public sector banks are State within Article 12, so writs lie against them, and a writ may lie against a private bank discharging a public function such as action under SARFAESI.

4. The Statutory Framework

The statutes that make up banking law

Figure 2: The statutes that make up banking law

Constituting statutes: create the institutions, from the Reserve Bank to the regional rural banks.
Regulatory statutes: govern how banking is carried on, with the Banking Regulation Act, 1949 at the centre.
Enforcement statutes: provide the special machinery for recovery and insolvency, displacing ordinary civil suits for secured debts.
Compliance statutes: impose obligations on banks that arise from other policy fields, such as money laundering, foreign exchange and data protection.

5. General Law Applied to Banking

Indian Contract Act, 1872: the banker and customer relationship is contractual, and the provisions on bailment, pledge, agency, guarantee and indemnity govern much of bank lending. Section 171 gives the banker a general lien.
Transfer of Property Act, 1882: mortgages, including the equitable mortgage by deposit of title deeds under Section 58(f), and the rules on actionable claims for assignment of book debts.
Companies Act, 2013: incorporation and governance of banking companies and the registration of charges, subject to the special provisions of the Banking Regulation Act.
Limitation Act, 1963: periods for suits on loans and for recovery proceedings.
Consumer Protection Act, 2019: deficiency in banking service.
Sale of Goods Act, 1930: documents of title to goods, relevant to advances against goods and to documentary credits.

6. Delegated Legislation and Soft Law

Reserve Bank directions: issued under Section 35A of the Banking Regulation Act and under the RBI Act, these are binding, and breach attracts penalty under Sections 46 and 47A. Master Directions consolidate them by subject.
Circulars and master circulars: the working tools of banking regulation, revised frequently.
Codes and charters: the fair practices code and the charter of customer rights are enforced through the regulator and the ombudsman rather than by suit.
Effect: a very large part of operative banking law is found not in the statutes but in Reserve Bank instruments, which is why a banking law answer must usually cite both the section and the current direction.

7. Questions Arising

Can a State legislature make a law on banking?

Not on banking as such, which is Entry 45 of List I. A State may legislate on money lending under Entry 30 of List II and on cooperative societies under Entry 32, but a State moneylenders Act cannot be applied to a bank's lending, because that would trench on the Union field.

Does the Banking Regulation Act apply to every bank in the same way?

No. It applies in full to banking companies. Section 51 applies only specified provisions to the State Bank, the nationalised banks and certain other institutions, and Section 56 applies the Act to cooperative banks with extensive modifications. The first step in any problem is to identify which version of the Act governs the entity.

⚠ Key point

Banking rests on Entry 45, List I, supported by Entry 38 (Reserve Bank), Entry 36 (currency and foreign exchange), Entry 43 (banking corporations) and Entry 46 (negotiable instruments), while Entry 32, List II covers cooperative societies and Entry 30 money lending. In Pandurang Ganpati Chaugule (2020) a Constitution Bench held that the banking activity of cooperative banks falls under Entry 45, List I, so SARFAESI applies to them. Articles 19(1)(g), 14, 300A, 301, 12 and 226 shape permissible regulation. The framework is built on the RBI Act, 1934 and the Banking Regulation Act, 1949, with constituting, enforcement and compliance statutes, the general civil law, and a large body of Reserve Bank directions issued under Section 35A.

8. Quick Revision

✦ Points worth fixing

Entry 45 is the one word entry: 'Banking'. Everything else in the Union List supports it.

Entry 43 expressly excludes cooperative societies, which is why the cooperative bank question had to be answered through Entry 45.

Activity versus entity is the formula from Pandurang Ganpati Chaugule: banking is Union, the society is State.

Two State entries matter: 32 for cooperative societies and 30 for money lending.

Section 35A is the direction-making power. Penalty for breach comes from Sections 46 and 47A.

Three versions of the Act: full for banking companies, Section 51 for public sector banks, Section 56 for cooperative banks.

9. Frequently Asked Questions

Under which entry of the Constitution is banking regulated?

Entry 45 of List I, the Union List, of the Seventh Schedule. It is supported by Entry 38 for the Reserve Bank, Entry 36 for currency and foreign exchange, Entry 43 for banking corporations and Entry 46 for negotiable instruments.

Are cooperative banks governed by the Banking Regulation Act?

Yes, through Section 56, which applies the Act to cooperative banks with modifications, strengthened by the Banking Regulation (Amendment) Act, 2020. Their registration and winding up as societies remain under State law or the Multi-State Cooperative Societies Act, 2002.

Can a writ petition be filed against a bank?

Against a public sector bank, yes, because it is State within Article 12. Against a private bank, a writ may still lie where it discharges a public function, such as taking measures under the SARFAESI Act, though not for an ordinary contractual dispute.

Are Reserve Bank directions law?

Yes. Directions issued under Section 35A of the Banking Regulation Act are delegated legislation, binding on banking companies, and their breach attracts penalty under Sections 46 and 47A. They are not advisory.

10. Related Topics and Provisions

Evolution of banking in India
Meaning of banking, banker and bank
Sources of banking law
Cooperative banks and the 2020 amendment
Inspection and the power to issue directions (Sections 35 and 35A)