Every argument about an Indian bank in trouble is really an argument about one statute. When depositors queue outside a branch, when a board is swept away overnight, when withdrawals are capped at a figure that will not cover a month of household expenses, the legal instrument being operated is almost never the law the public names. It is not the insolvency code, which does not touch banks. It is not company law, which governs banks only at the margins. It is the Banking Regulation Act 1949, a statute most readers meet for the first time on the worst day of their relationship with their bank, and meet in the form of a one-page notice pasted on a shuttered branch door.

The statute wears a misleading face. Read quickly, it looks like a licensing law: it defines banking, says who may carry it on, prescribes the business a bank may and may not do, and sets the balance-sheet disciplines a bank must observe. That reading is accurate and incomplete. The provisions that decide what actually happens in a banking crisis sit in a small minority of its text, concentrated in the part of the Act that hands the Reserve Bank of India a set of intervention powers of escalating severity, ending in a moratorium and a scheme of reconstruction or amalgamation prepared by the regulator itself and sanctioned by the Central Government. The series thesis for this pillar can be stated in one sentence: the Act reads as a licensing law and operates as a resolution law. Everything in the pages that follow is organised around that gap between the text’s centre of gravity and the record’s.

The depositor’s question deserves to be put at the front, because it is the question that brings most readers here. If a bank fails, what happens to the money in an ordinary savings account? The short answer has three layers. The first is that an Indian bank is almost never allowed to fail in the way an ordinary company fails, by a disorderly collapse into liquidation, because the statute gives the regulator the tools to intervene long before the doors close. The second is that where intervention comes too late to save the institution, the Act’s own machinery, a short moratorium followed by a scheme, is designed to transfer the deposits to a sound bank or to rebuild the failing one within weeks. The third layer sits outside this statute altogether: a separate law insures deposits up to a fixed ceiling per depositor, and that ceiling, not the moratorium withdrawal limit that dominates the headlines, is the figure that decides the worst case for a small depositor. Each layer is examined in its place below. A reader who keeps the three separate will understand Indian bank failure better than most commentary explains it, because most commentary collapses them into one.

What existed before 1949, and why it failed

Banking in India was regulated in fragments before 1949, and the fragments were not enough. The Indian Companies Act carried a set of provisions on banking companies from 1936 onwards, and the Reserve Bank of India Act 1934 gave the central bank some inspection and licensing-adjacent powers, but there was no comprehensive code that defined banking, controlled entry into it, prescribed the business a bank could do, and armed a supervisor to act against a bank whose affairs were being conducted against the interests of its depositors. The cost of that absence was measured in failures. The collapse of the Travancore National and Quilon Bank in 1938, then among the largest banking failures in the country, exposed how little stood between a badly run bank and its depositors. Through the war years and the disturbed conditions that followed Partition, banks continued to fail in numbers that made the gap in the law impossible to defend, and small depositors, who had no means of judging a bank’s soundness and no insurance if they judged wrong, bore the loss each time.

The fragments deserve a closer look, because the 1949 Act was assembled from them and their limits explain its shape. The Indian Companies Act had carried banking provisions since the early twentieth century, tightened in 1936 when a part devoted to banking companies introduced requirements on cash reserves, liquid assets and the restriction of business, the ancestors of several provisions examined below. What the company law vehicle could not supply was a supervisor with continuing jurisdiction over the banking function as such: the Registrar of Companies policed incorporation and filing, not solvency, and the Reserve Bank’s own early powers, to call for information and to inspect in defined circumstances, were enlarged by an ordinance of 1946 that armed it to inspect banking companies, a rehearsal for the general inspection power the Act would confer. The lesson the drafters drew from the decade of failures was that bank regulation fails when it is split between a companies registry concerned with form and a central bank without statutory command over the regulated entity’s business, capital and management; the Act’s unity, one statute addressing the banking company across its whole life and one supervisor addressed throughout, is the direct product of that diagnosis.

The legislative response took a decade to mature. The Reserve Bank pressed for a dedicated banking law from the late 1930s, a banking companies bill was introduced in 1946 and examined in committee, and the measure that finally emerged was enacted as the Banking Companies Act, 1949, Act 10 of 1949, brought into force on 16 March 1949. The choice of vehicle matters for reading the statute. Parliament did not write a central banking law; the Reserve Bank already had one, and the companion pillar on the Reserve Bank of India Act 1934 and the charter it gives the regulator covers that side of the design. The 1949 Act is the regulated-entity statute. It takes the banking company as its subject and follows it through its whole life: what it is, what it may do, how it is watched, how it is corrected, and how it is ended or absorbed when correction is no longer possible. The division of labour between the two statutes is the first thing to fix in mind, because provisions that readers instinctively look for in this Act, the cash reserve ratio among them, live in the other one, and provisions that look like central banking, the direction power above all, live here.

The Act was renamed a generation later. The Banking Laws (Application to Co-operative Societies) Act, 1965 extended the statute to co-operative banks and, with effect from 1 March 1966, changed its name from the Banking Companies Act to the Banking Regulation Act, a title that better described a text which by then reached well beyond companies. That 1965 extension is the seed of the co-operative bank story that runs through this article and ends, more than half a century later, in the amendment of 2020. The renaming also explains a small puzzle for anyone who reads older judgments and reports: references to the Banking Companies Act and to the Banking Regulation Act are references to the same statute at different points in its life, and section numbers carried across the change.

The architecture of the Banking Regulation Act 1949

The Act is best read as five concentric rings of control, each ring tighter than the one outside it. The outer ring is the definition: the statute decides what banking is and who counts as a banking company, and everything else follows from that boundary. The second ring is permission: a company inside the definition may not carry on banking without a licence, may not open branches at will, and may use the word bank in its name only within the statute’s limits. The third ring is conduct: the permitted and prohibited business, the capital and reserve disciplines, the liquidity holdings, and the controls on lending that a licensed bank must observe every day it operates. The fourth ring is supervision: the returns the bank must file, the inspections it must submit to, and the directions the Reserve Bank may issue when supervision finds something wrong. The fifth and innermost ring is intervention and exit: the removal of directors, the supersession of boards, the winding-up jurisdiction, and the moratorium and scheme machinery of Section 45 by which a failing bank is resolved.

Most of the Act’s sections serve the outer three rings, and a reader working through the text in order spends most of the journey on definitions, forms of business, capital, reserves, accounts, audit and returns. That distribution is exactly why the statute is misread as a licensing law. The inner rings are short. The direction power is a single section. The supersession powers occupy a handful of sections inserted over the years. Section 45 does its enormous work in one long provision. Yet measured by consequence rather than by page count, the inner rings dominate: they are the provisions invoked in every modern bank rescue, the provisions litigated when a rescue is challenged, and the provisions a depositor’s rights actually depend on. A pillar article has to give the outer rings their due, because the definition and the licence genuinely decide who is inside the protective perimeter and who is outside it, as depositors in unlicensed entities have repeatedly discovered. But it should not pretend the weight is evenly spread.

Two structural features deserve notice before the detail. The first is that the Act is written around a single relationship, between the banking company and the Reserve Bank. The Central Government appears at defined points, most importantly as the authority that sanctions a scheme and orders a moratorium on the Reserve Bank’s application, but the initiative, the inspection, the direction and the drafting hand are the Reserve Bank’s throughout. The second is that the Act’s severities are graduated. It does not move from health to moratorium in one step. Between the two lie returns that expose trouble, inspections that confirm it, directions that command correction, restrictions on business, the removal of individuals, the appointment of additional directors, and the supersession of the whole board. The failure sequence table later in this article sets the ladder out in order; the prose first, rung by rung.

The definition that decides who needs a licence

Section 5 carries the definitions on which the whole statute turns, and two of them do the decisive work. Section 5(b) defines banking as the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. Every element of that sentence is load-bearing. The money must come from the public, which is why a company that borrows only from its own directors or from a single lender is not banking. The money must be accepted for the purpose of lending or investment, which is why a trader who holds customer advances is not banking. And the deposit must be repayable on demand or otherwise and withdrawable by cheque, draft or order, which is the feature that turns a mere deposit-taking business into banking in the statutory sense, because the depositor holds something functionally equivalent to money in an account.

Section 5(c) then defines a banking company as any company which transacts the business of banking in India, and the definition is deliberately circular in form and functional in effect: an entity that does the thing defined in Section 5(b) is a banking company, whatever it calls itself and whatever its memorandum says. The Reserve Bank’s licensing jurisdiction follows the function, not the label. The surrounding definitions fill out the perimeter. Section 5(d) incorporates the Companies Act meaning of a company. The definitions of demand and time liabilities supply the base against which the liquidity and reserve obligations are measured. Section 49A completes the boundary from the other side by providing that no person other than a banking company, the Reserve Bank, the State Bank of India and institutions the Central Government notifies may accept deposits withdrawable by cheque, so the defining privilege of banking, the chequeable deposit, is fenced off for the licensed.

The practical consequence of a functional definition is that the licensing question is answered by examining what an entity does, not what it is called. Entities that drift into deposit-taking from the public for onward lending, whether they style themselves finance companies, nidhi-style ventures or co-operative societies, find that the statute’s perimeter is drawn around their activity. The painful illustrations come from the co-operative sector and from unregistered deposit schemes, where the discovery that an entity stood outside the Reserve Bank’s supervision is usually made after the money is gone. Section 7 adds the naming rule: no company other than a banking company may use the words bank, banker or banking as part of its name, and no firm or individual may carry on business under a name that includes them. The rule sounds cosmetic. It is a perimeter defence, because the word bank is itself a representation of supervised safety, and the statute reserves it for entities that have passed through the gate described next but one.

How much of a bank’s assets must be kept within India?

Section 25 requires every banking company to hold, at the close of business on the last Friday of each quarter, assets in India whose value is not less than seventy-five per cent of its demand and time liabilities in India, so that the assets backing Indian deposits stay within Indian reach.

The rule anchors the balance sheet to the jurisdiction whose depositors the Act protects, so that a bank taking Indian deposits cannot quietly move the substance of its assets beyond the reach of Indian supervision and Indian courts. It is one of several provisions, with the liquidity rules and the returns regime, that treat geography as a supervisory fact and not merely a commercial choice.

Permitted business, prohibited business, and the discipline of the balance sheet

A statute that defines banking must also police its edges, because a bank’s freedom to wander into other business is one of the oldest routes to failure. Section 6 sets out the forms of business in which a banking company may engage: the borrowing and lending of money, dealing in bills of exchange and other negotiable instruments, dealing in stock, funds and shares, issuing letters of credit and travellers’ cheques, dealing in foreign exchange, safe custody, collecting and transmitting money and securities, acting as agent for governments and local authorities, contracting for public and private loans, guaranteeing and indemnifying, managing and underwriting share issues, and a residual class of business the Central Government may notify as lawful forms for a banking company. The list is generous but it is a list, and its function is boundary-setting: a banking company that steps outside the enumerated forms acts beyond the statute’s permission.

Section 8 then states the prohibition in terms that surprise readers who assume a bank is a company like any other. Notwithstanding anything in the Companies Act, a banking company shall not directly or indirectly deal in the buying or selling or bartering of goods, except in connection with the realisation of security given to or held by it, and shall not engage in any trade or buy, sell or barter goods for others otherwise than in connection with bills of exchange received for collection or negotiation. The reasoning is the reasoning of the whole Act in miniature. A trading bank is exposed to commercial risks its depositors never agreed to underwrite, its trading stock cannot be realised at the speed a deposit run demands, and its officers’ judgement is pulled between the prudence of lending and the appetite of commerce. The nineteenth and early twentieth century failures that taught this lesson are the statute’s unspoken preamble. Section 9 applies the same logic to property: a banking company may not hold immovable property, however acquired, except such as is required for its own use, for a period longer than seven years from acquisition, and it must dispose of such property within that period, though the Reserve Bank may extend the time by up to five further years where satisfied that the extension serves the interests of depositors. Property taken as security and foreclosed is therefore on a statutory clock, a rule whose pressure is felt in every stressed-asset negotiation in which a bank holds real estate it never wanted.

The capital and reserve provisions build the loss-absorbing core. Section 11 prescribes minimum paid-up capital and reserves, with figures that belong to the monetary world of 1949 and that were overtaken in practice by the Reserve Bank’s licensing policy, under which entry capital for a new bank is fixed by guidelines of an entirely different magnitude. The durable point of Section 11 is structural rather than numerical: the statute makes a minimum of owned funds a condition of carrying on banking and empowers the Reserve Bank to test compliance, and the modern content of the requirement is supplied by the licensing gate rather than by the figures in the section. Section 12 adds the proportions between authorised, subscribed and paid-up capital and restricts the composition of capital, and Section 13 caps the commission and discount a banking company may pay on its share issues.

Section 15 disciplines distributions by forbidding the payment of dividend until all capitalised expenses, including preliminary expenses, organisation expenses, share-selling commission and losses, have been completely written off, subject to defined exceptions for depreciation and bad debts that have been adequately provided for. Section 17 then builds the reserve fund: every banking company incorporated in India must create a reserve fund and, out of the balance of profit of each year and before any dividend is declared, transfer to it a sum equivalent to not less than twenty per cent of that profit. The Central Government may, on the Reserve Bank’s recommendation and having regard to the adequacy of a bank’s capital and reserves against its deposit liabilities, exempt a bank from the transfer for a specified period, and only where the reserve fund together with the share premium account is not less than the paid-up capital. The twenty per cent rule is easy to overlook and worth dwelling on, because it converts a fifth of every profitable year into permanent cushion automatically, without a board decision and without regard to shareholder pressure for distribution. Across decades it is one of the quiet mechanisms by which Indian banks built the reserves that later absorbed their losses.

Liquidity is policed separately from capital, because a solvent bank can still die of a run. Section 18 requires a banking company that is not a scheduled bank to maintain a cash reserve of at least three per cent of its demand and time liabilities in India, held with itself, with the Reserve Bank, or in current accounts. Scheduled banks carry the corresponding obligation under the Reserve Bank Act, which is where the cash reserve ratio properly lives. Section 24 carries the statutory liquidity requirement: every banking company must maintain in India, in cash, gold or unencumbered approved securities, assets whose value at the close of business on any day is not less than the percentage of its demand and time liabilities that the statute and the Reserve Bank’s specification together fix. As enacted and for most of its life the section prescribed a floor of twenty-five per cent with a ceiling of forty per cent; the Banking Regulation (Amendment) Act, 2007 removed the statutory floor so that the Reserve Bank may specify the ratio without a minimum written into the Act, keeping the forty per cent ceiling. The 2007 change is a small amendment with a large meaning: Parliament moved the operative number out of the statute and into the regulator’s hands, conceding that a ratio used as an instrument of monetary and liquidity policy cannot be frozen in primary legislation. A reader who meets an examination answer or a commentary still stating a statutory twenty-five per cent floor is reading the Act as it stood before 2007.

The holding restrictions in Section 19 limit a banking company’s subsidiary ventures and cap its holding of shares in other companies, whether as pledgee, mortgagee or absolute owner, by reference to a proportion of the investee’s paid-up capital and of the bank’s own paid-up capital and reserves. Section 10 governs who may be employed and in what form, striking at the managing agency model the drafters distrusted; Section 10A requires that the board include directors with professional or practical experience in fields the statute lists, making up not less than fifty-one per cent of the total number of directors; and Section 10B requires every banking company to have a whole-time chairman. These governance provisions read as housekeeping. In a crisis they become operative, because the intervention powers discussed later work by displacing exactly the offices these sections constitute.

The licensing gate: entry, branches, and the continuing conditions

Section 22 is the gate through which every banking company must pass. A company may not carry on banking business in India unless it holds a licence issued by the Reserve Bank under the section, and the Reserve Bank may impose conditions when it grants one. Before granting a licence to a company incorporated in India, the Reserve Bank must be satisfied, by inspection of the company’s books or otherwise, of a set of conditions that amount to a statutory definition of a fit entrant: that the company is or will be in a position to pay its present and probable future depositors in full as their claims accrue; that its affairs are not being or are not likely to be conducted in a manner detrimental to the interests of its present or probable future depositors; that its management is not prejudicial to the public interest or the interests of depositors; that it has an adequate capital structure and earning prospects; that the public interest will be served by the grant; and that the grant will not be prejudicial to the operation and consolidation of the banking system and to monetary and financial stability. A further set of conditions applies to foreign banking companies, and the Reserve Bank may cancel a licence where a company ceases to carry on banking business, fails to comply with conditions imposed on it, or ceases to fulfil the licensing conditions, with an appeal lying to the Central Government against cancellation.

Three features of the gate repay attention. The first is that the test is forward-looking and depositor-centred: the statute asks not whether the promoters are respectable but whether probable future depositors will be paid in full, a standard that lets the Reserve Bank refuse entry to an entity whose business plan is unsound even if its papers are in order. The second is that licensing is not an event but a continuing state; the conditions that justify the grant must continue to be fulfilled, and their failure is a ground of cancellation, which is why the supervisory provisions that follow are not an intrusion on a completed permission but the machinery by which a continuing permission is policed. The third is the appeal asymmetry: the Reserve Bank decides, and the disappointed applicant’s or cancelled bank’s recourse is to the Central Government within the statute and to the courts on ordinary public law grounds outside it, a distribution of power that recurs throughout the Act and that courts have generally respected while insisting that it be exercised on relevant material and after a fair process.

Section 23 extends the gate to geography. A banking company in existence at the Act’s commencement, and a new banking company after it, may not open a new place of business in India, or change the location of an existing place of business, without the Reserve Bank’s prior permission, and permission is tested against the bank’s financial position and history, the character of its management, the adequacy of its capital and earning prospects, and the public interest served by the opening. The provision belongs to a world of branch banking in which physical presence was the service; its discipline survives in altered form, because the question it asks, whether this institution should be allowed to expand its deposit-gathering footprint, is the licensing question asked repeatedly across a bank’s life rather than once at its birth.

The licensing power is also the instrument through which the structure of Indian banking has been deliberately reshaped in the liberalised period, and a pillar should record the fact because it explains the population of banks the Act governs. After 1991 the Reserve Bank used Section 22 to admit a generation of new private banks under guidelines issued in 1993 and revised in 2001, ending the long closure of entry that had followed nationalisation. A further round under the 2013 guidelines produced the universal bank licences of Bandhan and IDFC in 2014. In 2015 the power was used differentially: small finance banks were licensed to take the deposit and lending franchise to underserved segments under a distinct set of conditions, and payments banks were licensed to take deposits and make payments while being forbidden to lend, a licence class drafted around the prohibition by limiting the permitted business rather than by relaxing supervision. Each experiment was conducted inside the same statutory gate, with the conditions of the licence doing the tailoring, which illustrates the flexibility Parliament bought by writing the gate as a discretion tested against depositors’ interests rather than as a fixed specification of what a bank must look like.

The perimeter beyond the banking companies

The Act’s edges are as instructive as its centre, because the Indian financial system’s recurring disasters have disproportionately occurred just outside them. Section 3 excludes from the Act the institutions it names, confined by the amendment of 2020 to primary agricultural credit societies and to co-operative societies whose primary object and principal business is long-term finance for agricultural development, provided they neither use the words bank, banker or banking nor act as drawee of cheques. Primary credit societies, the village-level base of the co-operative credit structure, accordingly stand outside banking regulation altogether, supervised, to the extent they are supervised, within the co-operative regime; their members’ deposits carry neither the Act’s discipline nor deposit insurance, a boundary drawn for reasons of administrative scale that the depositor at the boundary rarely knows exists. Non-banking financial companies, which may lend and invest and, in restricted categories, accept deposits, are regulated not under this Act but under Chapter IIIB of the Reserve Bank of India Act, with their deposit-taking fenced by directions and by Section 45S of that Act’s prohibition on unincorporated bodies, and their failure, as the Dewan Housing case showed, runs through the insolvency code by notification rather than through Section 45. Nidhi companies occupy a third compartment, declared by the Central Government under the Companies Act and exempted in defined respects from the non-banking regime. Chit funds answer to state legislation under a central framework Act of 1982. The map matters to the argument of this article: the 1949 Act is the statute of the licensed deposit-taker, and the series of Indian savings disasters that occurred outside it, in unregistered schemes, in deposit-taking by companies under the older company law regime and in societies misusing the word bank, are the negative space that shows what the licence, the returns regime and the inspection power are for. The Reserve Bank’s recurring public cautions against entities collecting deposits without authorisation are the perimeter being patrolled in public, because the statute’s own sanctions reach those entities only after the collection has happened.

What must a bank satisfy before it opens a new branch?

Before granting permission under Section 23, the Reserve Bank considers the bank’s financial position and its history, the general character of its management, the adequacy of its capital structure and its earning prospects, and whether the public interest will be served by the new place of business.

The same cluster of considerations governs the original licence under Section 22, which is the point: the Act treats expansion as a fresh occasion to ask whether an institution that gathers the public’s deposits should be permitted to gather more of them, in a new place, on the strength of the record it has built.

Control over lending: the bank’s own book as a supervisory object

A bank fails through its loan book, and the Act reaches into that book at three points. Section 20 attacks the oldest conflict of all: a banking company may not make loans or advances on the security of its own shares, and may not enter into a commitment to advance money to any of its directors or to a firm or company in which a director is interested as partner, managing agent, guarantor or otherwise, within the limits the section draws. The provision is the statutory form of a lesson written across the pre-1949 failures, in which banks lent to their own directors’ ventures until the bank and the venture fell together. The co-operative bank catastrophe examined later in this article is the same lesson unlearned in a different corporate form, a concentration of lending to one borrower group concealed from the supervisor.

Section 21 gives the Reserve Bank power to control advances by banking companies generally. Where satisfied that it is necessary or expedient in the public interest or in the interests of depositors or banking policy to do so, the Reserve Bank may determine policy in relation to advances and give directions to banking companies generally or to any banking company in particular, on the purposes for which advances may or may not be made, the margins to be maintained against secured advances, the maximum amount of advances and guarantees to any one company, firm or individual, and the rate of interest and other terms on which advances may be made. Banks are bound to comply. Section 21A adds that a transaction between a banking company and its debtor shall not be reopened by any court on the ground that the rate of interest charged is excessive, notwithstanding the Usurious Loans Act and state laws on moneylending; the courts have read the provision as barring the reopening of the interest bargain itself while leaving their other powers over banking transactions intact.

The significance of Section 21 for the architecture of the Act is that it marks the outer edge of routine supervision turning into direction of business judgement. The Reserve Bank does not lend, but under this section it can determine the terms on which a whole class of lending happens, and under the priority-sector and exposure frameworks built in its shadow it does so continuously. The line the statute draws is instructive: Parliament was willing to let the regulator control the conditions of lending, including margins against the shares and commodities whose speculative inflation had ruined banks before, while leaving individual credit decisions to the bank. When that line later had to be crossed, in 2017, it took a further amendment to cross it, and the reasons are examined in their place below.

The liquidity provisions as instruments of policy

Sections 18 and 24 deserve a joint reading, because together they make the Act an instrument of monetary and credit policy as well as a charter of supervision, and the seam between the two statutes of this cluster runs through them. The cash reserve in Section 18 and the liquid assets ratio in Section 24 both conscript a fraction of every bank’s balance sheet into prescribed forms: cash and balances at one end, cash, gold and approved securities at the other. The proportions are not prudential decoration. A system in which every bank must hold a stated slice of its liabilities in government securities creates a captive demand for public debt and a transmission channel through which the central bank’s operations reach the whole credit system, and the history of the Indian ratios is a history of that channel being used hard: the statutory liquidity ratio was raised in stages to a peak of 38.5% of liabilities in the early 1990s, when directed holding of government paper at administered rates was a pillar of fiscal financing, and then lowered in steps across the reform decades as the fiscal rationale receded and the prudential one came forward, which is the setting in which the 2007 amendment removed the statutory floor and left the Reserve Bank to set the ratio within the ceiling the Act retains. The student should hold the two ratios apart in the manner the cluster’s division of labour requires. The cash reserve ratio proper, the reserve against liabilities that banks maintain with the Reserve Bank itself, is a creature of the Reserve Bank of India Act for scheduled banks, and the companion article on that statute owns it. Section 18 of this Act is the parallel obligation the Banking Regulation Act lays on banks outside that fold, and Section 24 is this Act’s own instrument throughout. The overlap is deliberate drafting, not accident: Parliament built the perimeter so that no deposit-taker stands outside the reserve discipline merely because it stands outside a schedule of the other Act, and the reader who grasps that redundancy grasps something essential about the 1949 settlement, which trusted no classification enough to leave a gap behind it.

Supervision in operation: returns, inspection, and the direction power

Supervision begins with information, and the Act builds the information system before it builds the sanctions. Section 25’s asset rule has been noted. Section 26 requires a return of accounts that have been inoperative for ten years. Section 27 requires monthly returns of assets and liabilities. Section 29 prescribes the form of the balance sheet and profit and loss account, which must follow the Third Schedule, and Section 30 requires audit by qualified auditors, with the prior approval of the Reserve Bank needed for the appointment of auditors of a banking company, a requirement that converts the statutory audit into a supervised office. Section 31 requires the accounts and balance sheet, together with the auditor’s report, to be submitted to the Reserve Bank, and Section 32 requires copies to go to the Registrar of Companies. The point of the machinery is that the supervisor’s picture of a bank is not assembled in a crisis; it is delivered by law, in standard form, at fixed intervals, and the offence of filing late or falsely is the first step on the enforcement ladder.

The Third Schedule forms deserve a word of their own, because they standardise the language in which Indian banks confess their condition. Balance sheets under the Act must disclose, in the schedule’s vertical form, capital, reserves and surplus, deposits broken into demand, savings and term, borrowings, and on the asset side cash and balances, investments, advances broken into bills, cash credits and term loans, fixed assets and other assets, with schedules for contingent liabilities and bills for collection. The standardisation is the supervision: a supervisor reading a hundred balance sheets in one format can compare liquidity and asset quality across the system, and a bank’s departures from the format are themselves a signal. The auditor’s position completes the ring. The auditor must report whether the balance sheet gives a true and fair view and must state, in the long-form reporting the Reserve Bank requires alongside the statutory report, matters bearing on advances, liabilities and the conduct of branches; and because the appointment itself needs the Reserve Bank’s prior approval, an auditor who signs what management wishes rather than what the ledgers show risks the office on which the practice depends. The PMC Bank concealment, effected by keeping the true exposure outside the returns the auditors and inspectors were shown, is the standing demonstration that the information ring is only as strong as the integrity of the records fed into it, which is why the Act treats falsification of returns not as a filing lapse but among its gravest offences.

Section 35 arms the Reserve Bank to inspect. It may at any time cause an inspection to be made of any banking company and its books and accounts, by its officers or by any other person the Reserve Bank directs, and it must cause an inspection where the Central Government directs. The banking company and its officers must produce books and documents and furnish statements and information. Section 35 also carries a provision of real consequence for public sector banks: the Reserve Bank may order a scrutiny in defined circumstances, a mechanism whose limits in relation to government-owned banks have been debated whenever a public sector bank has failed to be caught in time. Inspection reports are confidential, communicated to the bank with portions the Reserve Bank thinks fit to share, and the bank’s board is required to take the findings into its deliberations. The inspection is the supervisor’s eyes; everything in the following sections is what the supervisor may do with what the eyes report.

What does a Reserve Bank inspection of a bank actually examine?

An inspection under Section 35 examines the bank’s books and accounts and, through them, the reality behind the returns: whether advances are genuinely recoverable or merely rolled over, whether income recognised on bad assets has flattered the accounts, and whether exposure limits and lending controls have been observed.

The inspection also tests whether the management information the board receives matches the ledgers, and whether the bank’s affairs are being conducted in a manner detrimental to the interests of its depositors. The bank and every officer must produce documents and information the inspecting team requires, and the findings feed directly into the direction and intervention powers.

Section 35A is the workhorse, and if a reader remembers one provision from this article it should be this one. Where the Reserve Bank is satisfied that in the public interest, or in the interests of banking policy, or 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 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 issue such directions, and the banking companies are bound to comply. The drafting is deliberately capacious: five alternative grounds, directions of general or particular application, and a duty of compliance stated without qualification. Under Section 35A the Reserve Bank caps withdrawals at a stricken co-operative bank, restricts a bank’s lending or branch expansion, directs the replacement of management processes, imposes the business restrictions that accompany its prompt corrective action framework, and issues the thousands of routine directions through which Indian banking is actually steered. Section 35B adds that amendments of a banking company’s articles, and appointments, reappointments and terminations of chairmen, directors and senior managers in the cases it specifies, require the Reserve Bank’s prior approval, so the direction power is reinforced by a personnel gate. Section 35A directions are administrative action and are amenable to judicial review on ordinary grounds, but courts approached to undo them mid-crisis have been conscious that the direction is usually the alternative to the moratorium, and that quashing the restraint can precipitate the run it was imposed to prevent.

Depositors meet Section 35A before they meet any other part of the Act. When the Reserve Bank placed the Punjab and Maharashtra Co-operative Bank under directions on 23 September 2019, restricting withdrawals initially to one thousand rupees per depositor, the instrument was Section 35A, not the moratorium power, and the distinction matters for understanding the sequence of a modern bank failure: the direction power is the tourniquet applied on first suspicion, while the supervisor works out what the institution’s balance sheet actually contains and whether a resolution under Section 45 is needed. The withdrawal ceiling in that case was raised in steps over the following months to one lakh rupees, where it remained while the resolution was constructed, which is why the failure table below treats directions and moratorium as separate rungs with separate legal consequences.

The ladder in practice: prompt corrective action

Between the routine direction and the crisis instruments the Reserve Bank operates a published framework that converts the Act’s discretions into a graded response, and no account of the statute in operation is complete without it. The prompt corrective action framework, first issued in 1999 as a scheme of structured early intervention and revised in 2017 and again in 2021, sorts banks by trigger thresholds on the indicators the returns disclose: capital adequacy, net non-performing assets and return on assets, with leverage added in the revised design. A bank breaching the first risk threshold faces mandatory restrictions, on dividend distribution, branch expansion and capital expenditure among them, and discretionary action on its business plan; deeper breaches add restrictions on lending, on managerial compensation and on the acceptance of deposits, and place the bank under the shadow of the terminal options, amalgamation, reconstruction or winding up, which the framework names expressly as the resolution of last resort. The framework is not in the Act; it is an exercise, systematised in advance, of the direction and approval powers the Act confers, principally Sections 35A and 35B and the licensing conditions. Its legal interest is the transformation it works on discretion: a bank can read, from published thresholds, the supervisory consequences of its own numbers, which disciplines the bank’s board between inspections and confines the supervisor’s forbearance within declared limits. Its practical interest is that the population of banks under prompt corrective action, eleven public sector banks at the framework’s widest reach in 2018, became the public register of the bad-loan crisis, and the conditions imposed under it, on lending and expansion, were the means by which the system was made to deleverage without a single moratorium. The framework’s limits are the limits of its inputs: it moves on reported capital and reported bad assets, and a bank concealing its position, as the co-operative cases showed concealment to be possible, presents the framework with numbers that trigger nothing.

The 2017 turn: the direction power reaches into the insolvency process

For most of the Act’s life the Reserve Bank’s powers stopped at the bank’s own balance sheet. The crisis of bad loans that built up in the Indian banking system in the decade after the financial crisis exposed a precise gap: a bank’s corporate borrowers could default on an enormous scale while the bank, fearing the provisioning consequences of admitting the default and divided against fellow lenders in a consortium, declined to pull the trigger of the new insolvency process Parliament had created in 2016. The legislative answer came by ordinance on 4 May 2017 and then as the Banking Regulation (Amendment) Act, 2017, Act 30 of 2017, deemed to have come into force on the day of the ordinance. It inserted two sections after Section 35A.

Section 35AA provides that the Central Government may, by order, authorise the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default under the Insolvency and Bankruptcy Code, 2016. The Central Government issued that authorisation the day after the ordinance. Section 35AB provides that the Reserve Bank may, from time to time, issue directions to any banking company or banking companies for resolution of stressed assets, and may specify authorities or committees, whose members it appoints or approves, to advise banking companies on such resolution. Acting under these provisions, the Reserve Bank in June 2017 directed the banks concerned to begin insolvency proceedings against the twelve largest defaulting accounts on its internal list, a single administrative act that moved a substantial share of the system’s recognised bad debt into the tribunal process at once.

Two features of the 2017 design repay attention. The first is the authorisation chain: Parliament did not let the Reserve Bank seize the insolvency trigger on its own motion; it interposed an order of the Central Government, so the most consequential exercise of the power rests on a recorded political authorisation, and the Reserve Bank’s role is directive rather than proprietary. The second is the direction of travel. Every earlier provision in this cluster empowers the regulator against the bank; the 2017 sections empower the regulator, through the bank, against the bank’s borrowers. The insolvency code is thus made to work on the banking system by a provision of the banking statute, a junction examined again where this article considers why the code itself does not reach banks. The arrangement was challenged, in the course of the litigation over the Reserve Bank’s circular of 12 February 2018 on stressed assets, and although the Supreme Court struck down that circular in the Dharani Sugars case in 2019 for exceeding the statutory authorisation, because the authorisation under Section 35AA spoke to specific defaults and not to a general class, the sections themselves were not invalidated, and the distinction the Court drew, between a direction authorised for identified defaults and a blanket direction to all debtors above a threshold, is the controlling reading of the power.

Intervention in the boardroom: removal, additional directors, supersession

Between direction and resolution the Act holds a row of personnel powers, each stronger than the last, and together they explain how a bank can change hands in management terms without any shareholder meeting, court order or vote. Section 36AA empowers the Reserve Bank, where satisfied that in the public interest or in the interests of banking policy or to prevent the affairs of a banking company being conducted in a manner detrimental to the interests of its depositors it is necessary, to remove a chairman, director, chief executive or other officer or employee of a banking company from office by order in writing, after giving a reasonable opportunity of being heard in the cases the section protects, with an appeal to the Central Government. The person removed is barred for the period the order specifies from acting in the management of a banking company. Section 36AB empowers the Reserve Bank to appoint additional directors to the board of a banking company where it considers it necessary in the interest of banking policy, the public interest, the interests of the banking company or its depositors; the appointees hold office on the Reserve Bank’s pleasure and are not counted against the articles’ limits on board size in the manner an ordinary appointment would be.

Section 36ACA completes the ladder for banking companies generally: the Reserve Bank may, in consultation with the Central Government in the cases the section specifies, supersede the board of directors of a banking company for a period not exceeding six months at a time, on the grounds the section states, including that the affairs of the bank are being conducted in a manner detrimental to the interests of depositors, and appoint an administrator; the administrator discharges the board’s functions for the period of supersession, and a fresh board is constituted when the period ends. For multi-state co-operative banks a parallel provision, Section 36AAA, governs supersession, and the amendment of 2020 recast the co-operative position, as the co-operative discussion below explains. The supersession of the boards of Yes Bank in March 2020 and of Lakshmi Vilas Bank in November 2020 were exercises of this cluster of powers, in each case paired with the moratorium and scheme machinery of Section 45, and in each case effected by administrative order on a single day, which is the speed the statute is built to deliver.

The constitutional and administrative law questions these powers raise are real and should not be waved away. A board elected by shareholders is displaced by an executive agency; the displaced directors’ remedy is representation and appeal after the event, not a hearing that can stop the displacement while depositors wait; and the administrator who replaces the board answers to the regulator rather than to the shareholders whose property the bank, in one view, is. The courts have nonetheless sustained the design, for a reason grounded in the nature of the asset in question: a bank’s board controls other people’s money held on demand, and the interval between a board’s failure becoming visible and a run becoming irreversible is measured in days. The statute’s answer is not that property rights do not matter but that their vindication must follow the rescue rather than precede it. Whether that ordering should extend to permanently extinguishing investors’ instruments, rather than temporarily displacing their managers, is the harder question, and it is the question the Yes Bank litigation eventually forced the courts to answer.

Winding up, and why it is the road not taken

The Act does provide for a bank’s death by liquidation. Part III contains the winding-up provisions, including Section 38, under which the High Court shall order the winding up of a banking company in defined circumstances: if the company is unable to pay its debts, or if the Reserve Bank applies for winding up on grounds that include the company’s affairs being conducted in a manner detrimental to the interests of depositors, the continuance of the company being prejudicial to the public interest or the interests of depositors, or the company having failed to maintain the capital requirements of Section 11. The Reserve Bank’s own opinion on inability to pay debts is given statutory weight. The winding-up provisions are detailed, and the official liquidator’s handling of depositor claims under them was the lived experience of bank failure in the Act’s early decades, when depositors in failed banks waited years for partial dividends from asset realisations. The liquidation, where it comes, runs on machinery built for speed inside the Act itself. Part IIIA, the special provisions for the speedy disposal of winding up proceedings, equips the High Court to decide the claims in respect of the failed company in one forum, settles the list of debtors by a summary process, provides for public examination of directors and auditors and for assessing damages against delinquent directors, managers and officers, fixes a special period of limitation, and casts the Reserve Bank in the role of adviser to the court in the proceedings, with power to inspect and to call for returns even in liquidation. The design premise is the one the Palai collapse taught: a bank liquidation that proceeds at the pace of ordinary civil litigation destroys the value it exists to distribute, because the assets are largely other people’s promises to pay, and their value decays while files move.

The honest summary of the modern position is that the winding-up provisions survive as a backstop and a threat, while the operative resolution route is Section 45. The reasons are practical. A liquidation converts a liquidity problem into a certainty of loss, destroys the franchise value that an acquirer will pay for, and pays depositors slowly out of assets sold into a distressed market. A scheme, by contrast, transfers the deposit book intact to a going concern, and depositors wake to find their bank renamed rather than ruined. The comparison is not costless, and the costs fall where the scheme places them, on shareholders and on the holders of instruments the scheme treats as loss-absorbing, which is why the litigation examined below is a litigation about schemes and not about liquidations. For completeness, the depositor ranking in a winding up and the deposit insurance payout that follows a cancellation of licence belong to the same backstop world; both matter when no scheme can be built, as the co-operative cases show, but they are the exception in the modern record rather than the rule.

The preference that stopped at two hundred and fifty rupees

One provision in the failure architecture repays isolation, because it decides the texture of the cases where the scheme machinery cannot be used, and because its history is the history of Indian depositor protection in miniature. Section 43A, inserted by the Banking Companies (Second Amendment) Act of 1960 after the Palai failure, is headed preferential payments to depositors, and it does give the depositor a statutory preference in a winding up. After the preferential payments of the companies legislation have been made or provided for, the official liquidator must, within three months of the winding up order, pay first every savings bank depositor a sum of two hundred and fifty rupees or the balance at credit, whichever is less, and then every other depositor the same, in priority to all other debts from the assets available for general creditors, with a combined ceiling of two hundred and fifty rupees for a person holding both kinds of account. In 1960, when deposits were small and failure meant the queue at a locked branch, a fast two hundred and fifty rupees in three months was real money and a real reform, and the three-month discipline the section imposes on the liquidator shows the same urgency that produced the moratorium power in the same amendment. The defect is not in the design but in the figure, which has never been revised. Two hundred and fifty rupees, set against a deposit insurance ceiling of five lakh rupees, is a fossil: the preference survives in the text and performs almost nothing, because the insurance payment reaches the depositor first and at two thousand times the scale, and because beyond insurance and the two hundred and fifty rupees, the balance of a large deposit ranks as an ordinary unsecured claim alongside the bank’s other general creditors, waiting for dividends that in the co-operative liquidations of record have arrived slowly and partially. Reform proposals have repeatedly targeted the gap the fossil leaves. The Financial Sector Legislative Reforms Commission recommended a considered depositor preference in resolution and liquidation, placing deposits ahead of other unsecured claims, and the withdrawn Financial Resolution and Deposit Insurance Bill carried a creditor hierarchy in that direction, on the reasoning that the depositor is the one creditor of a bank who neither chose the bank’s risks as an investment nor can monitor them, and that a system which asks the public to treat deposits as the safest of assets should rank them accordingly when the assets are divided. No such revision has been enacted, and a durable account of the Act should record the position as it stands: protection for the Indian depositor is achieved operationally, by preventing failure and by the scheme that transfers deposits whole, financially, by the insurance ceiling, and symbolically, by a preference figure that records what protection was worth in 1960. The reader weighing where to hold a large balance is owed that summary in plain terms, because it, and not the headline ceiling on a moratorium that will probably end in rescue, is the true boundary of the state’s commitment.

Section 45: the moratorium is the resolution

Section 45 is the provision on which the modern history of Indian banking quietly rests. It opens with the Reserve Bank’s power, where satisfied that in the public interest or in the interests of depositors it is necessary, to apply to the Central Government for an order of moratorium in respect of a banking company. The Central Government, after considering the application, may make an order staying the commencement or continuance of all actions and proceedings against the banking company for a fixed period on such terms as it thinks fit, and the total period of the moratorium, including extensions, may not exceed six months. During the moratorium the banking company shall not, except as the order directs, make any payment to a depositor or discharge any liabilities, and the order may authorise a scheme of partial payment in the cases it contemplates. The moratorium’s function is double and both halves matter: it stops the run by law rather than by persuasion, and it buys the one thing a resolution needs and a panic destroys, which is time in which the regulator can see the balance sheet whole.

The time is used for the scheme. The section empowers the Reserve Bank, where it prepares a scheme for the reconstruction of the banking company or for its amalgamation with another banking institution, to place the draft scheme before the public: the draft is published, sent to the banking company and to the transferee institution, and suggestions and objections are invited from members, depositors and creditors within the period the Reserve Bank specifies. The Reserve Bank considers the objections and may modify the draft. The scheme as finally settled is then sanctioned by the Central Government by order notified in the Official Gazette, and on the appointed date its provisions come into force and bind the banking company, the transferee, and all members, depositors, creditors, employees and other persons having rights or liabilities in relation to the bank. The scheme may provide for the continuation of services of employees, for the reduction of the interest or rights of members and creditors to the extent the scheme specifies, for the allotment of shares in the transferee institution, for the settlement of the claims of dissenting members within the scheme’s terms, and for the transfer of the whole or part of the bank’s assets and liabilities. The permissible contents repay a slow reading, because they define how far a scheme may go without further authority. A scheme may rewrite the bank’s capital structure, convert or extinguish classes of claims, transfer the undertaking in parts to more than one transferee, preserve or terminate contracts and continue the employment of staff on the transferee’s rolls, and it may do these things with effect from an appointed date that the sanctioning order fixes, which is what permits a bank to close on a Friday under one name and open on the following Monday under another with its deposit ledger intact. What a scheme may not do is equally instructive by omission: it operates on the banking company and those holding rights and liabilities in relation to it, and it is not a general power to remake the rights of strangers to the bank, which is why the litigation about schemes has concentrated on the treatment of the bank’s own members, depositors, creditors and instrument holders, and on whether each burden placed on them is traceable to a term the sanctioned document contains. The discipline the Supreme Court enforced in the bonds litigation is, in this light, not an external imposition on Section 45 but the working out of the section’s own logic: a power to bind everyone affected must be exercised through the instrument that everyone affected was invited to object to. The Central Government may also modify a sanctioned scheme to correct difficulties in its working.

The Global Trust Bank episode of 2004 shows the machinery in its earlier modern form and is worth a paragraph because it predates the social memory of 2020. The bank, a first-generation private bank of the liberalisation era, had accumulated concealed bad assets; in July 2004 the Reserve Bank procured a moratorium of three months, and within weeks a scheme amalgamated the bank into the Oriental Bank of Commerce, a public sector bank, with depositors protected in full and the amalgamation effective in August 2004. The pattern set then, moratorium measured in days before a scheme rather than in months of drift, an acquirer drawn from the sound end of the system, shareholders bearing the loss of a franchise whose net worth was doubtful, is the pattern of 2020 with different names, and its repetition across sixteen years and across governments of both coalitions is evidence that the machinery, and not the improvisation of any single crisis team, is what produces the speed.

The design choices inside Section 45 explain both the speed of Indian resolutions and the grievances they generate. There is no vote of shareholders and no vote of creditors; objection replaces consent as the participatory mechanism, and the objection window is short because the moratorium clock is short. The scheme binds dissentients, which company law ordinarily permits only through court-sanctioned arrangements with class meetings and majority thresholds; here the sanctioning authority is the government acting on the regulator’s draft. Capital absorbs loss in the order the scheme decrees: the scheme may reduce the interest of members to nothing, as it did for the shareholders of Lakshmi Vilas Bank, and the treatment of subordinated and loss-absorbing instruments within the scheme is a term of the scheme, which is precisely the proposition that was fought over in the Yes Bank case discussed below. Section 45’s scheme machinery is also the route by which the Reserve Bank prepares amalgamations of weaker banks in ordinary times, away from moratorium, and the section’s long history of use, from the amalgamation of the Global Trust Bank into the Oriental Bank of Commerce in 2004 onwards, is the working record of Indian bank resolution.

The amendment of 2020 made one deliberate change to this machinery whose significance is easy to miss: it enabled the Reserve Bank to prepare a scheme of reconstruction or amalgamation for a banking company, in the public interest, in the interest of the banking system or of depositors, or to secure the proper management of the bank, without first obtaining an order of moratorium. The moratorium is a confession of distress that can itself trigger the wider panic the scheme exists to prevent, and the amendment’s purpose, stated in the bill’s objects, was to let a resolution be constructed quietly where that was possible, reserving the public freeze for cases that genuinely need it. The step ladder in the table that follows therefore shows the scheme step as capable of standing alone in the amended design, even though every celebrated use of the machinery so far has travelled the full road from directions to moratorium to scheme.

Step	Provision	Who decides	Typical time	What the depositor can and cannot do
Supervisory concern: returns, inspection and findings	Sections 27, 29 to 35	Reserve Bank	Continuous; inspection cycles run across months	Nothing changes for the depositor; the process is confidential and the account operates normally
Business restricted; withdrawals may be capped	Section 35A directions	Reserve Bank	Immediate on issue; directions run for a stated period and are renewed	The depositor may withdraw only up to any ceiling the direction sets; the account is not frozen in law, and the bank continues to exist
Individuals removed; additional directors appointed	Sections 36AA and 36AB	Reserve Bank	Days	No direct effect on the depositor; management changes above the counter, not at it
Board superseded; administrator takes charge	Sections 36ACA and 36AAA	Reserve Bank, with the Central Government in the specified cases	Immediate on order; supersession runs for a limited period	Banking continues under the administrator; the depositor deals with the same branches and accounts
Moratorium ordered; actions and payments stayed	Section 45(1) and (2)	Central Government on the Reserve Bank’s application	Never more than six months in total; modern cases have run for days to a month	Withdrawals only as the moratorium order permits, up to the limit it states; the depositor cannot sue the bank or enforce a claim during the stay
Draft scheme published; objections invited	Section 45(4) to (6)	Reserve Bank prepares; the Central Government sanctions	The objection window is the period the Reserve Bank specifies, usually days to a few weeks	The depositor may file suggestions and objections to the draft; there is no vote and no veto
Scheme sanctioned and effective; bank reconstructed or amalgamated	Section 45(7) onwards	Central Government by gazette order	Effective on the appointed date; Yes Bank took eight days from moratorium to scheme, Lakshmi Vilas Bank ten days	Deposits transfer to the reconstructed or acquiring bank on the scheme’s terms; the depositor’s account continues, and restrictions lift as the scheme provides
If no scheme is possible: licence cancelled and insurance pays out	Section 22 and the Deposit Insurance and Credit Guarantee Corporation Act, 1961	Reserve Bank; the Corporation pays	Insurance payment follows the statutory process after cancellation or scheme	The depositor is paid the insured sum per depositor per bank, up to the ceiling; any balance ranks as a claim in the winding up

How quickly did the Lakshmi Vilas Bank rescue move from moratorium to amalgamation?

Ten days. The moratorium was ordered on 17 November 2020, with withdrawals capped at twenty-five thousand rupees and the board superseded and an administrator appointed; the amalgamation scheme took effect on 27 November 2020, whereupon the moratorium and the withdrawal cap ended, and depositors lost no money.

The scheme, amalgamating the bank into DBS Bank India, had been approved by the Union Cabinet. Depositors gained a sound bank; shareholders lost everything; and the bank’s Tier 2 bonds, about three hundred and eighteen crore rupees, were written off under their own terms.

The two rescues of 2020 and what each one teaches

The Yes Bank episode is the fullest worked example of the machinery. The bank, then among the largest private sector lenders, had concealed the scale of its bad loans through a period of rapid growth, and by early 2020 its capital position and its deposit base were deteriorating together. On 5 March 2020 the Reserve Bank superseded the board and appointed an administrator, and the Central Government, on the Reserve Bank’s application, ordered a moratorium capping withdrawals at fifty thousand rupees, with exceptions for defined hardships. The Reserve Bank published a draft reconstruction scheme the following day; the final scheme, sanctioned by the Central Government and effective on 13 March 2020, brought in the State Bank of India, investing about seven thousand two hundred and fifty crore rupees for a stake of up to forty-nine per cent, at the head of a consortium in which ICICI Bank, the Housing Development Finance Corporation, Axis Bank, Kotak Mahindra Bank, Bandhan Bank and Federal Bank also took stakes, reconstituted the board, imposed a three-year lock-in on seventy-five per cent of the holdings of existing shareholders above a hundred shares, and lifted the moratorium on 18 March 2020. From first intervention to restored withdrawals took thirteen days, and no depositor lost a rupee.

The Lakshmi Vilas Bank episode later the same year ran the machinery in its amalgamation form, with the timeline set out in the answer block above: a ninety-four year old private bank with three years of losses, a quarter of its advances bad by the middle of 2020 and a failed search for an investor was placed under a thirty-day moratorium, its board superseded, its entire equity written off by the scheme, its Basel III Tier 2 bonds of about three hundred and eighteen crore rupees written down under their contractual point-of-non-viability terms, and its deposits, branches and staff transferred to DBS Bank India, which infused twenty-five hundred crore rupees of fresh capital. Both rescues vindicate the brief’s counter-reading on speed: a court-driven process, with class meetings, valuation disputes and appeals, would have measured these rescues in years, and depositors in both banks would have faced the value destruction that delay in a banking panic guarantees. Both also display the price. Shareholders in Lakshmi Vilas Bank received nothing and had no vote; their legal challenge faces the answer that the alternative to a scheme that wipes out equity in a bank whose net worth is negative is not the preservation of value but its slower destruction in liquidation, where they would rank behind every depositor. Equity in a bank is a claim on a franchise the regulator licenses, and the scheme jurisprudence treats it accordingly.

The bondholders’ position is harder, and it produced the leading modern litigation on the Act. As part of the Yes Bank reconstruction, the administrator wrote down the bank’s Additional Tier 1 bonds, perpetual instruments carrying about eight thousand four hundred and fifteen crore rupees, to zero. The bonds were, by their terms and by the Reserve Bank’s Basel III framework, loss-absorbing instruments, written down or converted when a bank’s capital fell through defined triggers or at the point of non-viability. The holders, led by the debenture trustee, Axis Trustee Services, challenged the write-down in the Bombay High Court. Their case turned on the scheme rather than on the instruments: the draft reconstruction scheme published by the Reserve Bank had contained a clause writing down the bonds, but the final scheme sanctioned by the Central Government and gazetted did not, and the administrator’s write-down decision, communicated on 14 March 2020, a day after the scheme took effect and the bank stood reconstructed, could not rest on a scheme that had chosen not to include it. The Bombay High Court accepted the argument and quashed the write-down on 20 January 2023, holding that the administrator had exceeded the authority the final scheme conferred and that the decision also failed the requirements of the Reserve Bank’s own framework documents. The Supreme Court, in the appeal by the bank, the Reserve Bank and the Central Government, dismissed the appeals and upheld the High Court, answering the two questions before it, whether the administrator could write down the bonds without a specific provision in the scheme and whether the write-down complied with the Reserve Bank’s master circular and the bonds’ own information memoranda, against the write-down on both counts.

The holding must be stated at its proper width, because both camps in the continuing argument overstate it. The courts did not hold that Additional Tier 1 bonds cannot absorb losses in an Indian bank reconstruction; the instruments are designed to do exactly that, and the Lakshmi Vilas Tier 2 write-down under an express scheme and contractual trigger stands in contrast rather than in conflict. What the courts held is that the extinguishment of a class of instruments is an exercise of power that must be found in the scheme the government sanctions, executed while the administrator’s authority under that scheme subsists, and carried out in conformity with the regulator’s own published framework; a term dropped between draft and final scheme cannot be revived by administrative decision the day after the scheme closes. For the design debate, the case is therefore best read as the judiciary policing the scheme from inside its own logic: the scheme’s speed and finality are accepted, its binding force on dissentients is accepted, and what is insisted on is that the document that does this extraordinary work must actually say what is done in its name. That is a narrower and more interesting discipline than either the claim that the courts have hamstrung resolution or the claim that they have vindicated investors against it.

The depositor’s real safety net sits in a different statute

Everything said so far concerns how a bank is prevented from failing and how it is rescued when prevention fails. The depositor’s ultimate protection, the payment that arrives if rescue is impossible, belongs to the Deposit Insurance and Credit Guarantee Corporation Act, 1961, which created the corporation of that name as a wholly owned subsidiary of the Reserve Bank and insures bank deposits in India. The cover attaches per depositor per bank, across all accounts of the same depositor in the same right and capacity, and its ceiling has moved with the decades: one lakh rupees for a long period from 1993, and five lakh rupees with effect from 4 February 2020. Where a bank’s licence is cancelled, or a scheme of amalgamation or reconstruction operates, the Corporation pays the insured sum; an amendment of 2021 added an interim payment mechanism under which depositors of a bank placed under directions that restrict withdrawals are to be paid the insured amount within a defined period of ninety days, a reform written directly out of the experience of depositors who had waited under withdrawal caps with insurance they could not reach.

Two confusions dominate public discussion whenever a bank is in trouble, and the article should separate them cleanly because the brief’s search record shows both errors flourishing. The first confuses the moratorium withdrawal limit with the insurance limit. They are different instruments doing different work: the withdrawal limit in a moratorium or a Section 35A direction is a temporary rationing of access to deposits that continue to exist in full, designed to stop a run while a scheme is built; the insurance limit is the ceiling on compensation if the bank’s licence is cancelled and deposits are extinguished in a winding up. A depositor capped at fifty thousand rupees during the Yes Bank moratorium did not lose everything above fifty thousand rupees; the full balance returned when the scheme lifted the cap thirteen days in. The second confusion concerns co-operative societies that are not banks at all: the Reserve Bank has had repeatedly to caution the public that co-operative societies which use the word bank without a licence are neither licensed nor supervised, and their deposits carry no insurance cover, a warning whose necessity measures how many depositors discover the perimeter of the system only from outside it. The general position described in this article is information about the statute and its machinery, and it is no substitute for advice on the position of a particular depositor in a particular bank, where the scheme document and the Corporation’s payment record are the materials that decide.

Co-operative banks: the perimeter’s weak wall and the amendment of 2020

The co-operative bank is the point where the Act’s design carried a flaw for half a century, and the flaw has a name in the literature: dual control. A co-operative bank is incorporated under a co-operative societies law, state or multi-state, and its incorporation, management elections, audit and liquidation as a society belong to the Registrar of Co-operative Societies. Its banking business, however, needed a licence and attracted the Reserve Bank’s powers when the 1949 Act was extended to co-operative societies in 1966 through Part V and Section 56, which applies the Act to co-operative banks with modifications. The result was a divided supervisor: the Reserve Bank could inspect the banking business and issue directions, but the board that ran the bank owed its position to the societies regime, and the Reserve Bank’s strongest personnel powers, supersession among them, were framed for multi-state co-operative banks and sat awkwardly, or not at all, over the far larger population of state-registered urban co-operative banks. Add audit arrangements weaker than those for commercial banks and boards drawn from local political networks, and the sector accumulated the precise vulnerability the 1949 Act had been written against: lending concentrated on connected borrowers, concealed from effective supervision.

The Punjab and Maharashtra Co-operative Bank supplied the catastrophe that made the flaw undeniable. When the Reserve Bank placed it under directions in September 2019, the examination that followed disclosed that the bank had concealed an exposure of about six thousand five hundred crore rupees to a single real estate group, Housing Development and Infrastructure Limited, amounting to roughly seventy-three per cent of its advances, hidden behind a mass of fictitious accounts, more than twenty-one thousand of them on the account that emerged. The withdrawal ceiling began at one thousand rupees per depositor and rose in steps to one lakh, where it stayed for over two years while a resolution was assembled; depositors, many of them elderly account holders whose life savings were in the bank, waited through that period with neither a scheme nor an insurance payout, because the bank’s licence had not been cancelled and the interim payment mechanism did not yet exist. The resolution, when it came in January 2022, amalgamated the bank into a newly licensed small finance bank, Unity Small Finance Bank, under a scheme that paid depositors up to five lakh rupees with the Corporation’s support and spread the repayment of larger balances across a period of up to ten years. The counterexample within the sector is the Madhavpura Mercantile Co-operative Bank, a casualty of the securities scam of 2001, which lived under directions for over a decade before its licence was finally cancelled in 2012; its depositors received the insured sum, then capped at one lakh rupees, and the balance of their claims was remitted to a liquidation whose realisations have been measured in years and in fractions. Madhavpura is what the pre-2020 sector produced when neither a scheme nor a buyer could be assembled, and it is the case the 2020 amendment’s promise has to be judged against: the powers are ample, and the open question is the supervisory capacity to use them before concealment has eaten the balance sheet. Every element of that sentence is an indictment of the pre-2020 design: the fraud’s scale relative to the loan book, the duration of the freeze, and a resolution that could return large depositors their money only across a decade.

The depositors’ own litigation during the long freeze is part of the record and tests the judiciary’s role at the perimeter. Petitions by PMC Bank depositors in the Bombay High Court sought the lifting of the withdrawal ceiling and the acceleration of resolution; the courts, declining to substitute their judgement for the supervisor’s on the ceiling, directed the Reserve Bank to expedite a resolution and to consider hardship relaxations, and the ceiling was in fact raised in steps within the directions framework rather than struck down. The pattern is consistent with the courts’ treatment of Section 35A throughout: the direction is reviewed for legality and fairness of process, not re-made on its merits, and the remedy granted is expedition rather than release. For the depositor the practical consequence is that the courtroom is a lever on the timetable of a resolution, not an alternative to the resolution itself, which remains with the Reserve Bank and the Central Government under the provisions this article has traced.

The Banking Regulation (Amendment) Act, 2020, Act 39 of 2020, which received assent on 29 September 2020 and replaced an ordinance promulgated on 26 June 2020, is the statutory answer, and its main moves should be stated exactly. It substituted Section 3 so that the Act’s exclusion is confined to primary agricultural credit societies and to co-operative societies whose primary object is long-term agricultural finance and which neither use the words bank, banker or banking nor act as drawee of cheques. It applied the governance provisions of the Act, including Sections 10, 10A and 10B on employment, board composition and whole-time chairmen, and Section 35B approvals, to co-operative banks. It empowered co-operative banks, with the Reserve Bank’s approval, to raise capital by issuing shares and debentures on terms the amendment specifies, and barred a member from demanding payment for surrender of shares, attacking the withdrawal-of-capital rule that had made co-operative capital unstable. It extended the board-supersession and additional-director powers into the co-operative sector, with consultation with the state government built into the exercise for state-registered banks. And, in the change to Section 45 described earlier, it freed the scheme power from a prior moratorium. A bill to the same end had been introduced in the Lok Sabha on 3 March 2020 and could not be passed before the pandemic session ended, which is why the reform arrived by ordinance, as banking reforms in India repeatedly have at the moments of greatest urgency.

The federal objection to the 2020 amendment deserves its strongest statement, because it was made in Parliament by the opposition parties and it is not frivolous: co-operative societies are a state subject, Entry 32 of the State List covers incorporation and winding up of co-operative societies, and a central amendment that subjects state-registered societies’ boards to displacement by a central regulator presses on that boundary. The answer, also at its strongest, is that the amendment proceeds under the Union’s banking power, Entry 45 of the Union List, and regulates the co-operative bank only in its character as a bank: the society remains the state’s creature for incorporation and membership, while the business of banking, which is what imperils depositors who are also the state’s own citizens, is regulated by the authority that regulates banking everywhere else in the Republic. The Supreme Court’s jurisprudence on co-operative banks and the banking power, in the line running through the Greater Bombay Co-operative Bank litigation and the later rulings on the ninety-seventh amendment’s co-operative provisions, supports the distinction between the society and its banking business. The design question that survives the legal one is administrative rather than constitutional: whether the Reserve Bank’s supervisory capacity, built for a few hundred commercial banking entities, can in fact examine over a thousand urban co-operative banks to the standard the amendment assumes. The amendment gives the powers; the record of their use will decide the verdict, and a durable article should say so rather than prophecy.

The constitutional ground beneath the co-operative settlement shifted once more while the dust of the PMC case was settling, and the shift should be recorded because it defines the space in which the 2020 amendment operates. The Constitution (Ninety-seventh Amendment) Act, 2011 had inserted Part IXB into the Constitution, prescribing democratic and professional norms for co-operative societies, and in Union of India v Rajendra N Shah, decided in 2021, the Supreme Court struck down Part IXB in its application to co-operative societies registered under state law, for want of the ratification by the states that the amendment procedure requires for provisions trenching on the State List, while sustaining it for multi-state co-operative societies. The judgment does not touch the 2020 amendment to the banking statute, which proceeds, as argued above, under the Union’s banking entry rather than under a constitutional code for societies; but it marks the federal boundary within which that argument must be made, and it leaves the governance of the state co-operative society, as distinct from its banking business, more firmly with the states than the reformers of 2011 intended. The working result is the division the statute embodies: the society’s existence and internal democracy are state territory, the depositors’ protection is the banking regulator’s, and the friction between the two jurisdictions is managed, where the Act requires consultation before supersession, by procedure rather than by a clean allocation of power.

Why banks sit outside the insolvency code

A reader who has followed the resolution story will ask the obvious question: why does India have a modern insolvency code and not use it for banks? The answer is structural and is written into the code itself. The Insolvency and Bankruptcy Code, 2016 applies to corporate debtors, and financial service providers are excluded from its definition of corporate person unless the Central Government notifies a category of them for the code’s application, as it did in November 2019 for large non-banking financial companies, which is how the Dewan Housing Finance Corporation proceedings came to run under the code with the Reserve Bank as applicant. The comparison of timetables is the cleanest evidence for the exclusion: the Dewan Housing proceedings, begun at the end of 2019 under a supervisor-driven application in a company whose liabilities were largely market borrowings rather than demand deposits, produced an approved resolution plan in the middle of 2021, a respectable pace for the code and an impossible one for a deposit-taker, whose depositors would have withdrawn the institution’s funding in the first fortnight. Banks have never been notified, and the exclusion is deliberate, for the reason the brief’s namable claim identifies: a bank run cannot survive the timetable of a resolution process. The code’s machinery, admission, moratorium, committee of creditors, invitation and approval of plans, is measured in months and is conducted in public before a tribunal; a bank whose depositors believe it is in resolution proceedings loses its deposits in days, because a deposit is a claim payable on demand and the rational depositor does not wait to learn whether the committee of creditors will approve a plan. The discussion in the complete guide to the Insolvency and Bankruptcy Code 2016 sets out that machinery on its own terms; the banking statute’s answer is the Section 45 sequence, administrative, confidential in its early stages, and concluded before the public fully understands that a resolution has occurred.

The recovery side of banking law should not be confused with either. Where a bank seeks to enforce its own security against a defaulting borrower, the governing statute is the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, whose machinery is mapped in the guide to the SARFAESI Act and bank recovery; that statute arms the lender as creditor, while the 1949 Act, in the provisions this article has examined, governs the lender as a supervised institution and, at the limit, as a failing one. The parallel with the other regulated sectors is instructive and is drawn out in the guide to the IRDAI Act and insurance regulation: insurance has its own regulator and its own statutory scheme for the transfer and winding up of insurers, and the design choice recurs across Indian financial law, that a firm holding the public’s money under a promise of repayment on demand or on contingency is resolved inside its sector statute by its sector regulator, and not in the general insolvency court. The recurring claim that public sector banks cannot fail belongs to the same discussion and should be answered precisely: nothing in the 1949 Act exempts a nationalised bank from its provisions, and the ownership history traced in the account of the bank nationalisation Acts and public ownership explains why the market treats the sovereign as standing behind them. The protection depositors in a public sector bank actually enjoy is the political and fiscal reality of state ownership, an implicit guarantee rather than a legal one, and conflating the two misstates both the law and the risk.

The penalty and enforcement architecture

A regulatory statute is measured at the point of disobedience, and the Act’s sanctions are arranged, like its interventions, in ascending order. At the base sits Section 47A, which empowers the Reserve Bank to impose monetary penalties on a banking company for contraventions of the Act and for failure to comply with directions, after giving the bank a reasonable opportunity of being heard and by a reasoned order, with the amounts scaled by amendment over the years to keep pace with the size of banking balance sheets. A penalty under the section is a civil exaction, recoverable through the machinery the section provides, and it is the sanction of first resort for the run of compliance failures: late or defective returns, breaches of exposure and liquidity requirements, and disobedience of directions that does not rise to the level at which the business itself must be stopped.

Above the monetary penalty sits the business restriction, imposed through directions under Section 35A and its companions: a bank may be forbidden to accept fresh deposits, to expand lending, to open branches or to declare dividend, each a partial suspension of the franchise that hurts without killing. Above that sit the personnel powers already examined, which change who runs the bank, and the cancellation of the licence under Section 22, which ends the bank’s authority to be a bank and is therefore reserved for cases in which no scheme can preserve the deposit book. Section 46 carries the criminal offences: wilfully false statements in returns and balance sheets, obstruction of inspection and of the Reserve Bank’s officers in the discharge of their functions, contravention of the deposit-taking prohibitions, and the residual offence of contravening the Act where no other penalty is provided, punishable with fines and, in the graver cases, imprisonment. Section 36AD gathers the obstruction offences, penalising whoever obstructs a person authorised to inspect, wilfully fails to produce books and documents, or refuses to answer questions lawfully put. The criminal provisions are used sparingly against licensed banks and heavily at the perimeter, against the unlicensed deposit-takers whose prosecution is the only instrument the statute holds over them.

Two features of this architecture deserve analytic notice. The first is that the Act separates the fate of the institution from the fate of the individuals in a way company law does not: the supervisor can fine the bank, remove its managers, replace its board and extinguish its shareholders’ interest through a scheme, each by a different instrument with a different procedure, and the choice among them is a supervisory judgement about which consequence will protect depositors at the least systemic cost. The second is the appeal pattern. Penalties under Section 47A carry an appeal to an appellate authority constituted under the Act’s provisions; removal orders under Section 36AA carry an appeal to the Central Government; licence cancellation carries an appeal to the Central Government; and schemes, once sanctioned, are challenged in the constitutional courts. The consistent thread is that no remedy in the Act suspends the supervisory action while it is pursued. The design decision, repeated at every level, is that the bank is dealt with first and argued about afterwards, because the deposit base that the argument is about may not survive the argument.

The government-owned banks and the limits of the Act’s grip

Most Indian deposits sit in banks the Union Government owns, and the Act’s relationship with those banks is the least understood part of its working. Section 51 applies the Act’s provisions to the State Bank of India, to the nationalised banks constituted under the nationalisation Acts of 1970 and 1980, to regional rural banks and to other institutions the section specifies, so far as the provisions are not inconsistent with the statutes that constitute those banks. The qualification does real work. The boards of the nationalised banks are constituted under their own Acts, with directors appointed by the Central Government in consultation with the Reserve Bank; the chairman and managing director hold office under the owner’s pleasure in a way no private bank’s board does; and several of the 1949 Act’s sharpest instruments, the removal of directors, the supersession of the board, the winding-up jurisdiction and compulsory amalgamation, were not framed to run against a bank whose owner is the sovereign itself and whose constitution is a separate parliamentary settlement. The Reserve Bank regulates the government banks’ banking business, inspects them, directs their lending and liquidity, and applies its prudential norms to them; it does not hold over them the full personnel and exit powers it holds over a private banking company.

The asymmetry has been named from inside the system. The Committee to Review Governance of Boards of Banks in India, chaired by P. J. Nayak and reporting in 2014, recommended moving the government’s holdings in public sector banks into a Bank Investment Company and making regulation ownership-neutral, on the ground that the dual position of the state as owner and the Reserve Bank as regulator had produced boards that were neither commercially accountable nor properly supervised. In March 2018 the then Governor of the Reserve Bank, Urjit Patel, set out the asymmetry in a public address in terms that remain the clearest official statement of it: the Reserve Bank’s regulatory powers, he said, should be ownership neutral, and over public sector banks they are not, since the Reserve Bank cannot remove the directors of a nationalised bank, cannot supersede its board, cannot force its merger and cannot take it into liquidation, powers it holds in varying degrees over private banks; the result, in his phrase, was regulation that was neither fully empowered nor fully accountable for the institutions holding the majority of the system’s deposits. The Punjab National Bank fraud of 2018, running to sums of the order of fourteen thousand crore rupees through unauthorised guarantees concealed from the core banking system, was the immediate occasion of the speech, and it demonstrated the PMC pattern inside a government bank: the information ring failed, and the intervention ring could not be reached for because the institution’s governance sat with its owner.

For the depositor the asymmetry cuts in an unexpected direction. The legal weakness of the supervisor over government banks coexists with the strongest informal protection in the system, the market’s settled belief that the sovereign will not let its own bank fail, which the nationalisation history explains and which no resolution has ever contradicted. The 1949 Act’s scheme machinery has never been pointed at a nationalised bank, and no depositor in one has faced a moratorium. A precise account therefore holds two facts together: the Act’s grip on the institutions holding most Indian deposits is formally incomplete, as the regulator itself has said on the record; and the practical protection of those deposits rests on the fiscal credibility of the owner rather than on the resolution machinery this article has described. Both facts belong in any honest map of where the statute’s power ends.

The amendment arc: how the Act reached its modern shape

The Act of 1949 was not yet the resolution statute this article describes; it became one through a series of amendments, each written out of a failure. The first great test came in 1960, when the Palai Central Bank, one of the largest banks in the south, collapsed and its depositors faced the liquidation machinery. The Banking Companies (Amendment) Act, 1960 strengthened the Reserve Bank’s hand, arming it to prepare schemes of amalgamation and to seek the compulsory winding up of banks whose continuance threatened depositors, and the strengthened provisions survived constitutional challenge in the litigation that followed the failure, in which the Supreme Court, in Joseph Kuruvilla Vellukunnel v Reserve Bank of India in 1962, upheld the legislature’s power to subject banking companies to this special and summary regime against arguments founded on the rights to carry on business and to hold property. The deposit insurance corporation arrived the following year, by its own Act of 1961, completing the architecture of failure that the first decade had sketched: scheme where possible, insurance where not. The extension to co-operative banks and the change of name followed in 1966, as described earlier, and with them the dual-control problem that the sector carried for the next fifty years.

The amendment of 1968, the Banking Laws (Amendment) Act of that year taking effect on 1 February 1969, was the era of social control in statutory form: it reconstituted the governance provisions, requiring boards with a majority of directors drawn from the professional and economic fields the statute lists, insisting on whole-time chairmen, tightening the restrictions on lending to directors and their concerns and on the employment of managing agents, and generally converting the board from a proprietors’ committee into a regulated organ. The provisions examined in this article as Sections 10A and 10B descend from that settlement, and their survival, largely unaltered in structure through every subsequent change of economic philosophy, is one of the continuities of Indian banking law: governments that disagreed about who should own banks agreed about how bank boards should be composed. The nationalisations of 1969 and 1980 then overlaid the ownership settlement whose regulatory consequences the previous section examined, though the 1949 Act itself remained the common regulator of the nationalised banks’ banking business.

The later amendments are instruments of a liberalised system. The removal of the statutory liquidity floor in 2007 has been described. The Banking Laws (Amendment) Act, 2012 raised the ceiling on voting rights in private banking companies from ten per cent to twenty-six per cent, a change directed at making bank equity investible by serious promoters, and inserted Section 26A, which establishes the Depositor Education and Awareness Fund, into which the credit balances in accounts inoperative for ten years are transferred, with the depositor’s right to reclaim preserved against the fund. The stressed-assets sections of 2017 and the co-operative and scheme amendments of 2020 complete the arc. Read as a sequence, the amendments show the statute’s centre of gravity migrating: from entry control in 1949, through ownership and governance in the social-control decades, to liquidity flexibility, investor entry and depositor-fund mechanics in the liberalised period, and finally, in 2017 and 2020, to the two problems of the modern system, the bad-loan overhang inside the banks and the supervisory gap around the co-operative sector. The text a reader opens is the sediment of all of these settlements at once, which is why its provisions cannot be dated by its title year. The arc did not close in 2020. The Banking Laws (Amendment) Act of 2025 returned to the depositor-facing provisions of the statute, most visibly in the nomination machinery examined in the next section, which it widened to permit as many as four nominees, successively or simultaneously, in place of the single nominee the 1985 settlement had allowed, a change aimed at the succession disputes that single nomination had generated in joint and family accounts. The pattern of that amendment is the pattern of the whole later arc: Parliament no longer reaches for this Act to restructure the banking system, as it did in 1965, 1968 and 2020, but to service the system’s settled structure, adjusting the points at which the statute touches the ordinary customer’s life. The grand interventions have migrated elsewhere, to the insolvency code, to the Reserve Bank’s frameworks and to episodic ordinances when a crisis demands speed; what remains with the 1949 Act is the constitution in the older sense, the standing arrangement of powers within which those interventions must find their authority or, as the bonds litigation showed, fail for want of it.

The depositors’ small print: nomination, unclaimed money and dormant accounts

Three provisions at the quieter end of the Act shape what a depositor’s family actually receives, and a pillar article should record them because the search traffic on them after any bank failure is heavy and the published explanations are thin. Sections 45ZA to 45ZT, inserted with effect from 29 March 1985, create the nomination machinery for bank deposits, safe custody articles and lockers: a depositor could originally nominate one person to receive the deposit on the depositor’s death, a single-nominee design the amendment of 2025 widened to as many as four nominees, successively or simultaneously, so that the family’s shares can be stated on the record rather than fought over after the event, the bank’s payment to the nominee discharges it, and the nominee holds the money as trustee for the legal heirs, a distinction the courts have had to restate whenever a nominee and an heir dispute the proceeds. The provisions matter to the failure discussion for a practical reason: in a scheme or an insurance payout, the identification of who is entitled to a dead depositor’s balance runs through the nomination record, and accounts without nominations are a standing source of the delays that distress families attribute to the resolution process.

Section 26 requires every banking company to report accounts that have not been operated upon for ten years, and Section 26A, inserted in 2012, moves the credit balances in such accounts to the Depositor Education and Awareness Fund maintained by the Reserve Bank, which applies the money to depositor education and protection purposes; the transfer does not extinguish the claim, and the depositor or heir may reclaim the amount from the bank, which is reimbursed from the fund, on proof of entitlement. The fund is therefore a custodial sweep of dormant money rather than a confiscation, and its steadily growing corpus of unclaimed balances is itself a supervisory datum, recording how much of the deposit base belongs to accounts their owners have lost track of, but the reclaim runs through the bank’s records, which is one more reason the documents a depositor keeps, account statements, deposit receipts and the scheme notices a bank issues in a resolution, carry practical legal weight, and are worth keeping in an ordered private file rather than in a drawer of unfiled paper, as any reader who has reconstructed a deceased parent’s accounts will confirm.

Reading a live resolution: the documents that decide

For the advocate and the affected depositor alike, a resolution under this Act is a short sequence of documents, and knowing which document carries legal force at each moment is the practical mastery of the statute. The sequence opens with the Reserve Bank’s direction or the moratorium order: the moratorium order is the Central Government’s, published in the Gazette, and its operative terms, the period, the payment ceiling and the hardship exceptions, are the law for the depositor until it lapses or is overtaken. The draft scheme follows, prepared by the Reserve Bank and published for objections; it is a proposal, and everything in it, including any clause writing down instruments or reducing members’ interests, is open to representation within the window the Reserve Bank fixes, which is the single participatory moment the design allows and therefore the moment at which an affected class must organise its objection, on the record and addressed to the terms, rather than after sanction. The final scheme, sanctioned by the Central Government and notified in the Gazette, is the operative instrument: it is the document whose text the Bombay High Court treated as the charter and the limit of the administrator’s power in the Yes Bank bonds case, and a party assessing its position reads the gazetted scheme first and the press coverage of the draft not at all. Around these three sit the administrator’s public notices, which communicate decisions but cannot enlarge the scheme, and the transferee bank’s account communications, which execute it. Challenges lie to the High Court under its constitutional jurisdiction, and the grounds that have gained purchase are the ones the bonds case establishes: that the act complained of is not authorised by the sanctioned scheme, that it departs from the regulator’s own governing framework, or that it was taken after the authority under which it purports to act had spent itself. Challenges framed as disagreement with the scheme’s commercial wisdom, by contrast, meet the wall of deference that every court to consider a live bank resolution has maintained, for the reasons of systemic urgency the statute embodies.

The depositor’s own documents run in parallel and are humbler: the account statement and deposit receipts that evidence the balance, the nomination record that identifies who takes on death, and, where insurance is engaged, the Corporation’s payment communication. Where the interim payment mechanism applies, the entitlement is computed from the bank’s records as the directions froze them, and discrepancies between a depositor’s papers and the bank’s books are resolved in the verification the mechanism prescribes; the reader who keeps statements and receipts in order, and whose nominations are recorded, is repaid in weeks saved at exactly the moment when weeks matter most. Keeping such papers securely, with access limited to those entitled to them, is a discipline other professions have had to formalise for their own sensitive records, as the experience of journalists using VaultBook to protect their sources illustrates; a depositor’s file deserves the same seriousness, because in a resolution it is evidence, not memorabilia.

The design debate: who should resolve a bank?

The machinery this article has described is not the only design on the table, and the stance charter requires the alternative to be stated at full strength. The Financial Sector Legislative Reforms Commission, chaired by Justice B. N. Srikrishna and reporting in 2013, proposed a unified financial code under which a statutory Resolution Corporation would take over the resolution of all financial firms, banks included, armed with early-intervention powers, a bridge institution and a funded deposit insurance scheme, taking the function away from the sector regulators on the ground that a supervisor which has failed to prevent a collapse has an institutional interest in concealing or postponing it, and that resolution is a distinct craft deserving a distinct authority. The Financial Resolution and Deposit Insurance Bill, 2017 carried a version of that design into Parliament: a Resolution Corporation, a risk-based early intervention ladder, and, in its Clause 52, a bail-in power under which a failing firm’s liabilities, including deposits above the insured ceiling, could be written down or converted as part of a resolution. The bail-in clause detonated politically. Depositors read it, not unreasonably, as a power to reach into their accounts; the government spent months insisting that deposits were protected and that the clause tracked international practice; and in August 2018 the bill was withdrawn, leaving the 1949 Act’s machinery as the law of bank resolution by default.

The defenders of the existing design answer the Commission on the record rather than on theory. The Section 45 sequence, they point out, has resolved every significant Indian bank failure of the modern period without depositor loss and without the cross-border and inter-regulatory coordination problems that a separate corporation would introduce at the worst moment; the supervisor’s informational advantage, holding the inspection record and the returns, is not a conflict of interest but the essential asset in a process measured in days; and the bail-in controversy itself demonstrates that the Indian depositor’s trust rests on the belief that deposits are sacrosanct in a resolution, a belief the administrative scheme honours by transferring deposits whole and placing losses on capital, and which a statutory bail-in power would corrode whether or not it was ever used. The critics answer that the record is shorter than it looks: the two great rescues of 2020 involved a private bank rescued by the state-owned State Bank of India and a foreign acquirer found by the regulator, outcomes that depended on improvisation and on a buyer existing, and the PMC Bank depositors’ two-year wait shows what the machinery delivers when no buyer steps forward and the supervisor’s information has failed; an arrangement that works when the regulator performs and a rescuer appears, they argue, is a practice rather than a system, and the case for a standing resolution authority with pre-funded resources survives the withdrawal of the bill that carried it. The judiciary’s contribution to the debate, in the Yes Bank bonds case, cuts across both camps: it left the administrative design intact and its speed unquestioned, while insisting that the scheme document, the single instrument through which all this power flows, must contain the authority for each extinguishment it works, which is a rule-of-law discipline imposed from inside the design rather than a transfer of the design to the courts. A third consideration runs beneath the institutional argument and is too often left out of it: the money. A resolution regime is only as credible as the fund that stands behind its promises, and the Indian arrangement finances depositor protection through the deposit insurance fund built from premiums on insured deposits, administered by the Corporation under its own Act, rather than through a pre-funded resolution fund of the kind the Commission proposed. The premium-financed insurance fund has sufficed for the failures it has been called on, which have been overwhelmingly co-operative liquidations of modest individual size, and the 2021 interim payment mechanism stretched the same fund to answer the harder problem of depositors frozen in a bank under directions. Whether the fund’s scale matches a large private bank failure is a question the system’s architects have been content to leave untested, because the Section 45 answer to a large failure is a transfer that leaves the fund untouched: the scheme protects depositors by continuity, and the insurance is the backstop for the cases continuity cannot reach. The student should see the coherence in that ordering, and its risk. A system that resolves big banks by rescue and small banks by insurance has concentrated its financial exposure precisely where its legal tools are weakest, in the long tail of small institutions whose failures are individually minor and collectively constant, which is another way of stating why the co-operative bank settlement of 2020, dull as a unified regulator and a capital-raising power may sound beside the drama of a moratorium, may prove the most consequential amendment in this article.

Assessment: a licensing text that does resolution work

The honest assessment of the Banking Regulation Act begins by giving the speed its due. In 2020 the statute resolved two failing banks, one of them a significant private lender, inside a fortnight each, with no depositor loss, no interruption to the payment system, and no contagion to sound banks; set against the years-long liquidations of the pre-scheme era, or against the multi-year resolution processes that comparable jurisdictions endured after 2008, that is a genuine achievement of statutory design, and it flows from identifiable choices: a supervisor with graduated powers, a scheme that binds dissentients, a government sanction that is administrative rather than judicial, and a moratorium capped at six months that forces the timetable. The co-operative reforms of 2020 closed the perimeter’s worst gap, and the 2017 amendments connected the banking statute to the insolvency machinery it deliberately stands apart from.

The costs are structural and they are the mirror image of the virtues. The same design that delivers speed delivers it by administrative discretion exercised in confidence, and the people whose rights are extinguished, shareholders wiped out without a vote, instrument holders written down by a scheme’s terms, discover their remedy afterwards, in a challenge to a transaction that has already closed and on which third parties and a rescued deposit base rely. The Yes Bank bond litigation shows the courts finding the balance inside that design rather than against it, protecting not the investors’ money but the integrity of the scheme document as the sole charter of the power exercised. A second cost is the supervisory dependency the whole structure creates: because resolution is administrative, everything depends on the supervisor seeing the problem in time, and the PMC Bank fraud, concealed through fictitious accounts across years of returns and audit, is the standing counterexample of what happens when the information ring of the statute fails. A third is the unfinished perimeter: deposit-taking entities outside the licence, from unregistered schemes to societies misusing the word bank, continue to collect the savings of exactly the depositors least able to bear loss, and the statute’s answer to them is prosecution after collapse rather than the prevention the licensing gate achieves inside the perimeter.

The verdict of this pillar follows from its thesis. The Banking Regulation Act 1949 is misdescribed when it is catalogued among licensing statutes, because the provisions by which it will be judged in any crisis are the intervention provisions: Section 35A’s directions, the boardroom powers of Sections 36AA to 36ACA, and the moratorium and scheme machinery of Section 45, read with the 2017 sections that turned the regulator’s authority outward onto banks’ borrowers and the 2020 amendment that carried the whole apparatus into the co-operative sector. A licensing law that resolves banks in weeks is a resolution law wearing licensing dress, and the reader who understands which sections carry that work, and what each rung of the ladder does to depositors, shareholders and instrument holders in turn, understands the statute as it actually operates on the Indian financial system.

Frequently Asked Questions

Q: What does the Banking Regulation Act 1949 control?

The Act controls the business of banking companies in India end to end. It defines what banking is, requires a Reserve Bank licence before a company may carry it on, prescribes the business a bank may and may not do, fixes capital, reserve and liquidity disciplines, governs management and board composition, compels accounts, audit and returns, and arms the Reserve Bank with powers of inspection, direction, removal of managers, supersession of boards and, at the limit, the moratorium and amalgamation machinery by which a failing bank is resolved. It is the regulated-entity statute of Indian banking: the Reserve Bank’s own charter sits in the Reserve Bank of India Act 1934, and the obligations of banks as institutions sit here.

Q: What makes a company a banking company under the Banking Regulation Act?

Section 5(c) defines a banking company functionally, as any company which transacts the business of banking in India, and Section 5(b) defines banking as accepting deposits of money from the public, for the purpose of lending or investment, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise. An entity that does that thing is a banking company whatever it calls itself, and an entity that does not is outside the definition even if its name suggests otherwise. The test examines the activity: public deposit-taking, for onward lending or investment, in a form the depositor can draw on by cheque or similar instrument. That functional definition is what brings the entity within the licensing requirement of Section 22 and within the Reserve Bank’s supervision.

Q: What powers does the Reserve Bank have to give directions to a bank?

Section 35A empowers the Reserve Bank, where satisfied that it is necessary in the public interest, in the interests of banking policy, to prevent a bank’s affairs being conducted in a manner detrimental to depositors or prejudicial to the bank, or to secure the bank’s proper management, to issue directions to banking companies generally or to any banking company in particular, and banks are bound to comply. The power covers business restrictions, lending and exposure limits, management directions and, in a crisis, caps on depositor withdrawals, which is how it was used at the Punjab and Maharashtra Co-operative Bank in 2019. Section 21 adds a specific power to control advances, and Sections 35AA and 35AB add directions for initiating insolvency proceedings against defaulters and for resolving stressed assets.

Q: Can the Reserve Bank supersede a bank board?

Yes. Section 36ACA empowers the Reserve Bank to supersede the board of directors of a banking company for a limited period, on grounds that include the affairs of the bank being conducted in a manner detrimental to the interests of depositors, and to appoint an administrator who discharges the board’s functions until a fresh board is constituted. A parallel provision, Section 36AAA, addresses co-operative banks, and the amendment of 2020 extended the supersession apparatus into that sector, with consultation with the state government built in for state-registered banks. The power was used against Yes Bank in March 2020 and Lakshmi Vilas Bank in November 2020, in each case on the same day as a moratorium under Section 45, and without any shareholder vote, because the statute treats the board of a failing deposit-taker as replaceable by administrative order.

Q: What is a moratorium on a bank and what happens to depositors?

A moratorium under Section 45 is an order of the Central Government, made on the Reserve Bank’s application, staying all actions and proceedings against a banking company for a fixed period that may not exceed six months in total. During it the bank may make payments to depositors only as the order permits, which in practice means a stated withdrawal ceiling, fifty thousand rupees in the Yes Bank case and twenty-five thousand in the Lakshmi Vilas Bank case, with hardship exceptions. Its purpose is to stop a run and buy the Reserve Bank time to prepare a scheme of reconstruction or amalgamation. Deposits are not extinguished by a moratorium; when the scheme takes effect the ceiling lifts and balances become fully available, as Yes Bank depositors found thirteen days after the order.

Q: How did the 2020 amendment change co-operative bank regulation?

The Banking Regulation (Amendment) Act, 2020, Act 39 of 2020, replaced an ordinance of 26 June 2020 and carried the main Act’s discipline into the co-operative sector after the Punjab and Maharashtra Co-operative Bank collapse. It confined the Act’s exclusion to primary agricultural credit societies and long-term agricultural finance societies that do not use the word bank or act as drawee of cheques. It applied the governance provisions on employment, board composition, whole-time chairmen and Reserve Bank approvals to co-operative banks, empowered those banks to raise capital through share and debenture issues with the Reserve Bank’s approval while barring members from demanding their capital back, extended board supersession into the sector, and freed the Reserve Bank to frame a scheme of reconstruction or amalgamation without first obtaining a moratorium.

Q: Can the Reserve Bank direct a bank to start insolvency proceedings?

Yes, within a defined chain of authority. Section 35AA, inserted by the amendment of 2017, empowers the Central Government to authorise the Reserve Bank by order to direct banking companies to initiate insolvency resolution process in respect of a default under the Insolvency and Bankruptcy Code, 2016, and the authorisation was issued in May 2017. Acting on it, the Reserve Bank in June 2017 directed banks to file proceedings against the twelve largest defaulting accounts. The power runs against the bank’s borrowers, not against the bank itself, because banks are outside the code’s resolution machinery. The Supreme Court’s reading in the Dharani Sugars litigation confined the authorisation to identified defaults rather than a blanket class direction, and struck down a general circular that had exceeded it, while leaving the sections intact.

Q: What does the statutory liquidity ratio require a bank to hold?

Section 24 requires every banking company to maintain in India, in cash, gold or unencumbered approved securities, assets worth not less than the specified percentage of its total demand and time liabilities. For most of the Act’s life the statute itself fixed a floor of twenty-five per cent and a ceiling of forty per cent; the amendment of 2007 removed the floor from the section, so the operative ratio is the one the Reserve Bank specifies from time to time, within the forty per cent ceiling. The requirement is a liquidity discipline distinct from the cash reserve: it ensures that a defined slice of the balance sheet sits in assets that can be turned into cash quickly if depositors call, and the ratio doubles as an instrument of monetary policy in the Reserve Bank’s hands.

Q: Does a bank need a licence before it can accept deposits from the public?

Yes. Section 22 provides that no company shall carry on banking business in India unless it holds a licence issued by the Reserve Bank, and the Reserve Bank may attach conditions to the grant. Before licensing a company incorporated in India it must be satisfied that the company will be able to pay its present and probable future depositors in full as their claims accrue, that its affairs will not be conducted to the detriment of depositors, that its management is not prejudicial to the public interest, that its capital structure and earning prospects are adequate, and that the grant serves the public interest and financial stability. Carrying on banking without the licence is an offence, and the licence may be cancelled if the conditions cease to be fulfilled.

Q: How much of a depositor’s money is insured if a bank fails?

Deposits in licensed banks are insured by the Deposit Insurance and Credit Guarantee Corporation under its own statute of 1961, up to five lakh rupees per depositor per bank, counting all accounts held by the same depositor in the same right and capacity, with effect from 4 February 2020; the ceiling stood at one lakh rupees for the long period before that date. The insurance pays where a bank’s licence is cancelled or where a scheme of amalgamation or reconstruction operates, and an amendment of 2021 added an interim payment obligation so that depositors of a bank under withdrawal-restricting directions receive the insured sum within a defined ninety-day period rather than waiting for the resolution to conclude. Balances above the ceiling are not insured and rank as claims against the bank.

Q: What happens to shareholders and bondholders when a bank is reconstructed?

They absorb loss in the order the scheme decrees, and they do not vote on it. A scheme under Section 45 binds all members, depositors and creditors, and it may reduce the interest of shareholders to nothing, as the Lakshmi Vilas Bank scheme did in November 2020 when the entire equity was written off, or restrict their dealings, as the Yes Bank scheme did by locking in seventy-five per cent of existing holdings for three years. Loss-absorbing instruments are treated according to the scheme and their own terms: Lakshmi Vilas Bank’s Tier 2 bonds were written down under their contractual triggers, while the write-down of Yes Bank’s Additional Tier 1 bonds was quashed by the Bombay High Court in 2023, in a decision the Supreme Court upheld, because the final sanctioned scheme contained no provision authorising it.

Q: Why are banks kept outside the Insolvency and Bankruptcy Code?

Because a bank cannot survive the timetable of a public resolution process. The code’s definition of a corporate person excludes financial service providers unless the Central Government notifies a category, as it did for large non-banking financial companies in 2019; banks have never been notified. A bank’s liabilities are deposits repayable on demand, and the announcement of tribunal proceedings, with admission, committee deliberation and plan approval measured in months, would trigger the run the process exists to prevent. Parliament’s design therefore resolves banks inside the banking statute: a confidential supervisory ladder, a moratorium capped at six months, and a scheme prepared by the Reserve Bank and sanctioned by the Central Government, concluded in the modern cases within days or weeks rather than the code’s longer arc.

Q: What is the difference between a moratorium withdrawal limit and the deposit insurance limit?

They answer different questions. A withdrawal limit, whether set by a direction under Section 35A or by a moratorium order under Section 45, is a temporary ceiling on how much of an existing deposit may be taken out while a resolution is prepared; the deposit itself continues in full, and the ceiling lifts when the scheme takes effect. The deposit insurance limit of five lakh rupees is a compensation ceiling: it is the maximum the Deposit Insurance and Credit Guarantee Corporation will pay a depositor if the bank’s licence is cancelled and the deposit is extinguished. Confusing the two leads depositors in a moratorium to believe they have lost everything above the withdrawal cap, when in the modern rescues they have lost nothing and have merely waited days or weeks for full access.

Q: Can the Reserve Bank remove a bank’s chairman or directors from office?

Yes, short of superseding the whole board. Section 36AA empowers the Reserve Bank, where satisfied that it is necessary in the public interest, in the interests of banking policy or to prevent a banking company’s affairs being conducted in a manner detrimental to depositors, to remove a chairman, director, chief executive or other officer or employee from office by written order, after the opportunity of hearing the section provides, with an appeal to the Central Government; the person removed may be barred from banking management for the period specified. Section 36AB separately empowers the Reserve Bank to appoint additional directors of its own choosing to a bank’s board. Together the two sections let the supervisor change a bank’s management person by person before resorting to the whole-board remedy of supersession.

Q: What business is a bank prohibited from carrying on?

Section 8 states the central prohibition: a banking company shall not directly or indirectly deal in the buying, selling or bartering of goods, except in connection with realising security held by it, and shall not engage in any trade or buy, sell or barter goods for others except in connection with bills of exchange received for collection or negotiation. Section 6 confines a bank to an enumerated list of lawful forms of business, and Section 9 adds that a bank may not hold immovable property beyond what its own use requires for longer than seven years, extendable by the Reserve Bank by up to five more, so foreclosed property sits on a statutory clock. The design keeps a deposit-taker out of commercial risk whose losses its depositors never agreed to carry.

Q: How much of its annual profit must a bank transfer to its reserve fund?

Section 17 requires every banking company incorporated in India to maintain a reserve fund and to transfer to it, out of the balance of profit of each year as shown in the profit and loss account and before any dividend is declared, a sum not less than twenty per cent of that profit. The transfer is automatic and precedes distribution, so a fifth of every profitable year is locked into the bank’s cushion before shareholders are considered. The Central Government may exempt a bank from the transfer for a specified period on the Reserve Bank’s recommendation, and only where the reserve fund together with the share premium account is not less than the paid-up capital, so exemption is available solely to a bank whose existing cushion already matches its capital.

Q: Can the Reserve Bank control the loans and advances a bank makes?

Yes, at the level of policy and terms rather than borrower by borrower. Section 21 empowers the Reserve Bank, where satisfied it is necessary in the public interest, in the interests of depositors or in banking policy, to determine the policy in relation to advances and to direct banking companies generally or individually on the purposes for which advances may or may not be made, the margins to be kept on secured advances, the maximum amount that may be advanced to any one company, firm or individual, and the rate of interest and other terms. Banks must comply. Section 20 separately bars loans on the security of the bank’s own shares and restricts commitments to directors and concerns in which directors are interested, and Section 21A prevents courts from reopening a banking transaction on the ground that interest charged is excessive.

Q: What did the 2017 amendment change about stressed assets?

The Banking Regulation (Amendment) Act, 2017, Act 30 of 2017, which replaced an ordinance of 4 May 2017, inserted Sections 35AA and 35AB to close a specific gap: banks paralysed by the provisioning consequences of admitting defaults, and divided in consortium lending, were not using the new insolvency code against their largest defaulters. Section 35AA lets the Central Government authorise the Reserve Bank to direct banks to initiate insolvency resolution in respect of a default, and Section 35AB lets the Reserve Bank direct banks on the resolution of stressed assets and appoint or approve advisory authorities and committees. The Reserve Bank used the powers within weeks to send the twelve largest defaulting accounts into insolvency proceedings, turning the regulator’s authority outward onto bank borrowers for the first time in the Act’s history.

Q: Why did depositors in the PMC Bank case wait years for a resolution?

Because the failure exposed the weakest part of the old design. Punjab and Maharashtra Co-operative Bank had concealed an exposure of about six thousand five hundred crore rupees to one real estate group, roughly seventy-three per cent of its advances, behind thousands of fictitious accounts, and the divided supervision of co-operative banks, between the Reserve Bank for banking business and the Registrar of Co-operative Societies for the society itself, had not caught it. The Reserve Bank’s directions of September 2019 capped withdrawals at one thousand rupees, later raised in steps to one lakh, and there the depositors stayed: the bank’s licence was not cancelled, so deposit insurance was not triggered, and no transferee could be found quickly for a balance sheet whose true state took months to establish. Resolution arrived only in January 2022, through amalgamation with Unity Small Finance Bank, with larger balances repaid across up to ten years.

Q: Can a co-operative society use the word bank in its name without a licence?

No. Section 7 forbids any company other than a banking company from using the words bank, banker or banking as part of its name, and the prohibition extends through the co-operative provisions to societies: a co-operative society may not style itself a bank, and may accept deposits as a bank only if it is a licensed co-operative bank within the Act. The amendment of 2020 restated the boundary by confining the Act’s exclusion to primary agricultural credit societies and long-term agricultural finance societies that neither use the prohibited words nor act as drawee of cheques. The Reserve Bank has repeatedly cautioned the public that societies using the word bank without a licence are unsupervised and that deposits placed with them carry no deposit insurance, a warning that identifies the perimeter’s edge precisely.