Sources of Banking Law in India and Their Order of Authority

A question of banking law is rarely answered by a statute alone. The Banking Regulation Act sets the frame, but the operative rule is usually found in a Reserve Bank direction, the contract between banker and customer, or a line of decisions on the banker's duty of care. Knowing where banking law is found, and how the sources rank when they conflict, is therefore part of the subject itself. This note sets out each source, the force it carries and the place it occupies in the hierarchy.

The sources from which banking law is drawn

Figure 1: The sources from which banking law is drawn

1. The Constitution

Legislative competence: Entry 45 of List I (banking) and the connected entries determine who may legislate, and a statute outside competence is void.
Fundamental rights: regulation must satisfy Article 19(6) as a reasonable restriction and Article 14 as a reasonable classification, and deprivation of property requires authority of law under Article 300A.
Judicial review: the writ jurisdiction under Articles 226 and 32 is available against the Reserve Bank and public sector banks, which are State within Article 12.

2. Statutes

Constituting statutes: the RBI Act, 1934, the State Bank of India Act, 1955, the Acquisition and Transfer Acts of 1970 and 1980 and the Regional Rural Banks Act, 1976 create the institutions.
The regulatory statute: the Banking Regulation Act, 1949 governs licensing, capital, management, business, lending, inspection, amalgamation and winding up.
Transactional statutes: the Negotiable Instruments Act, 1881, the Indian Contract Act, 1872 and the Transfer of Property Act, 1882 govern the instruments and securities banks deal in.
Enforcement statutes: the Recovery of Debts and Bankruptcy Act, 1993, the SARFAESI Act, 2002 and the Insolvency and Bankruptcy Code, 2016.
Compliance statutes: the Prevention of Money-Laundering Act, 2002, FEMA, 1999, the Information Technology Act, 2000 and the Digital Personal Data Protection Act, 2023.

3. Reserve Bank Directions and Guidelines

Section 35A(1), Banking Regulation Act, 1949

(1) Where the Reserve Bank is satisfied that: (a) in the public interest; or (aa) in the interest of banking policy; or (b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or (c) to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.

Four grounds: the public interest, the interest of banking policy, prevention of conduct detrimental to depositors or prejudicial to the bank, and securing proper management. Directions under the RBI Act separately govern the cash reserve ratio, non-banking financial companies and payment systems.
Binding force: a direction under Section 35A is binding, and contravention attracts penalty under Section 46 and Section 47A. It is delegated legislation, not advice.
Master Directions: the Reserve Bank consolidates its instructions on a subject into a Master Direction, updated as changes occur, which is the practical starting point for any current question.
Circulars and master circulars: operating instructions issued through the year, with master circulars compiling them annually on certain subjects.
Prudential norms: classification of assets, provisioning, capital adequacy, exposure limits and the framework for stressed assets are almost entirely the product of Reserve Bank instruments rather than statute.

⚠ Note

Because so much operative law is contained in directions that change frequently, a statement of banking law has two layers. The statutory provision gives the source of power and is stable; the current direction gives the rule and may be superseded. Any answer on capital adequacy, asset classification or know your customer norms should cite both, and should be checked against the Reserve Bank's current Master Direction.

4. Contract and Standard Terms

The account contract: the relationship between banker and customer is founded on contract, and the terms of the account govern matters such as charges, set-off and the mandate to operate.
Security documents: the deed of hypothecation, the letter of pledge, the mortgage deed and the guarantee set out the bank's rights against the borrower and the surety.
Standard form and unfairness: these are contracts of adhesion, and courts scrutinise unreasonable terms, while the Reserve Bank regulates them through the fair practices code and the charter of customer rights.
Uniform rules: documentary credits are governed in practice by the Uniform Customs and Practice for Documentary Credits, issued by the International Chamber of Commerce, which binds the parties because they incorporate it into the credit.

5. Custom and Usage

Origin of banking law: many rules, such as the banker's lien and the practice of crossing cheques, began as mercantile custom and were later recognised by courts and codified.
Hundis: the Negotiable Instruments Act expressly saves local usage relating to instruments in an oriental language, so custom still governs hundis unless the parties agree otherwise.
Banker's lien: recognised as a general lien by Section 171 of the Indian Contract Act, 1872, which gives statutory force to what was originally a usage of bankers.
Limits: a custom must be ancient, certain, reasonable and not contrary to statute. It cannot override an express provision of law or a contract.

6. Case Law

Interpretation of statute: decisions on the meaning of banking, on the scope of Reserve Bank powers and on the recovery statutes.
The common law of banking: the duty of secrecy, the duty of care in paying and collecting cheques, the banker's lien and the right of set-off are largely judge-made, and English decisions remain persuasive in India.
Constitutional decisions: R.C. Cooper v. Union of India, (1970) 1 SCC 248 on nationalisation and Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd., (2020) 9 SCC 215 on cooperative banks shape the framework itself.
Precedent: decisions of the Supreme Court bind all courts under Article 141; decisions of the Debts Recovery Appellate Tribunal and the National Company Law Appellate Tribunal guide the recovery and insolvency forums.

📖 Tournier v. National Provincial and Union Bank of England, [1924] 1 KB 461 (Court of Appeal, England)

Facts: A customer's account was overdrawn. The bank told his employer that he had been paying money to a bookmaker. The employer did not renew his engagement, and the customer sued the bank for breach of its duty of secrecy.

Held: The banker owes the customer a contractual duty of secrecy, which is implied in the banking contract. The duty is not absolute. It yields in four classes of case: where disclosure is under compulsion of law, where there is a public duty to disclose, where the interests of the bank require disclosure, and where the customer gives his express or implied consent.

Ratio: The four Tournier exceptions are the foundation of the law of banking secrecy in India as well, and are now reflected in statutory disclosure obligations, in Section 13 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, which requires every nationalised bank to observe the practices and usages customary among bankers and not to divulge information about its constituents, and in the credit information and data protection statutes.

Devaynes v. Noble (Clayton's case), (1816) 1 Mer 572 supplies the other great common law rule: in a running account, payments in are appropriated to the earliest debit, so the first item in is the first item out. The rule governs the appropriation of credits in cash credit and overdraft accounts unless the parties agree otherwise.

7. Soft Law and International Standards

Basel framework: the capital adequacy, liquidity and risk standards of the Basel Committee on Banking Supervision are not law in India by their own force. They bind banks only when the Reserve Bank adopts them through directions, which it has done in successive phases.
Financial Action Task Force: its recommendations on money laundering and terrorist financing are implemented through the PMLA and Reserve Bank know your customer directions.
Codes: the fair practices code, the code of commitment to customers and the model customer rights policy operate through regulatory supervision and the ombudsman rather than by suit.

8. Hierarchy and Conflict

How the sources rank when they conflict

Figure 2: How the sources rank when they conflict

The Constitution prevails over all.
A statute prevails over delegated legislation, custom and contract.
A direction made within the statutory power prevails over inconsistent contract and custom, but a direction beyond the power is invalid.
Custom gives way to statute and to the express terms of the contract.
Soft law has no independent force and operates only through the instrument that adopts it.

Where two statutes conflict, the ordinary principles apply, so that a special provision prevails over a general one and a later statute over an earlier one, and a non obstante clause, such as that in Section 35 of the SARFAESI Act, gives overriding effect within its field.

⚠ Key point

Banking law is drawn from the Constitution (Entry 45, List I, Articles 14, 19(6), 300A, 226), statutes (the RBI Act, 1934 and the Banking Regulation Act, 1949, with constituting, transactional, enforcement and compliance statutes), Reserve Bank directions under Section 35A and the RBI Act, consolidated as Master Directions and binding on pain of penalty under Sections 46 and 47A, the contract between banker and customer, custom such as the banker's lien now in Section 171 of the Contract Act, and case law, including Tournier (1924), Clayton's case (1816), R.C. Cooper (1970) and Pandurang Ganpati Chaugule (2020). Basel and FATF standards apply only as adopted. The hierarchy runs Constitution, statute, valid direction, contract, custom.

9. Quick Revision

✦ Points worth fixing

Section 35A is the direction power, Sections 46 and 47A are the penalties. Power and sanction always travel together.

Four grounds in Section 35A: public interest, banking policy, detriment to depositors or prejudice to the bank, and proper management.

Four exceptions in Tournier: compulsion of law, public duty, interest of the bank, consent of the customer.

First in, first out is Clayton's case, on appropriation in a running account.

Section 171 of the Contract Act is the banker's general lien, a custom that became statute.

Basel is not law until the Reserve Bank adopts it. The same is true of FATF recommendations.

The hierarchy in five words: Constitution, statute, direction, contract, custom.

10. Frequently Asked Questions

What are the sources of banking law in India?

The Constitution, statutes such as the RBI Act, 1934 and the Banking Regulation Act, 1949, Reserve Bank directions issued under Section 35A and the RBI Act, the contract between banker and customer, mercantile custom, case law, and international standards such as the Basel norms, which apply only when adopted by the Reserve Bank.

Are Reserve Bank directions law?

Yes, within the power that authorises them. A direction under Section 35A is delegated legislation. Banks are bound to comply, and breach attracts penalty under Sections 46 and 47A. A direction issued beyond the statutory power may be struck down.

What is the significance of Tournier's case?

It established that the banker's duty of secrecy is an implied term of the banking contract, and defined the four exceptions: compulsion of law, public duty, the bank's own interest, and the customer's consent. Indian courts follow the same classification.

Can custom override a statute in banking law?

No. A custom must be ancient, certain, reasonable and not contrary to law. It yields to statute and to the express terms of the contract. Custom operates where the law is silent, as with hundi usage saved by the Negotiable Instruments Act.

Do the Basel norms apply directly to Indian banks?

No. The Basel Committee has no legislative power. Its standards bind Indian banks only to the extent that the Reserve Bank adopts them through directions and guidelines on capital adequacy, liquidity and risk management, which it has done in phases.

Where does one look first when answering a current banking law question?

At the Master Direction on the subject, and then at the statutory provision that authorises it. The direction supplies the operative rule and is current; the statute supplies the source of power and tells you whether the rule is validly made. An answer resting on the statute alone will usually be incomplete, and one resting on a circular alone may be out of date.

What happens when a Reserve Bank direction conflicts with the account contract?

The direction prevails, provided it was issued within the statutory power. A direction under Section 35A is delegated legislation, and a contractual term inconsistent with it cannot be enforced to that extent. If the direction itself is beyond the power conferred, it may be challenged, and until then the contract governs.

11. Related Topics and Provisions

Constitutional and legislative framework of banking
Meaning of banking, banker and bank
Inspection and the power to issue directions (Sections 35 and 35A)
Banker's lien and the right of set-off
The banker's duty of secrecy and its exceptions
Basel norms and capital adequacy