The banking industry has undergone drastic changes in the recent years. From mobile banking to managing your securities, financial management banks are no longer about small deposits and withdrawals. Today, you can even file your taxes through your bank account. You want to go shopping, out comes the debit or credit card. You need to send some money to someone’s bank account; you can instantly transfer through Unified Payments Interface (UPI). So banks are practically in every aspect of your finances.
Inspite of the constant annoying calls for getting ‘free’ lifetime credit cards, they are a part of our daily lives! Not only are they incessant but persistent too. Even the DND does not seem to help us with such calls!
This morning alone, three banks called me offering a lifetime free credit card and personal loan. How is it free if I have to pay for it at any point? How do they know so much about my finances even if I am not banking with them? That got me thinking. How big is the banking industry in India to make these calls on such a massive scale, day in and out?
I looked it up.
According to a Report of India Equity Brand Foundation, 2017, the Indian banking system consists of 27 public sector banks, 22 private sector banks, 44 foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks, in addition to cooperative credit institutions. Bank credit grew at 12.64 per cent year-on-year to Rs. 85.511 lakh crore (US$ 1,326.78 billion) on May 11, 2018, from Rs 75.91 lakh crore (US$ 1,131.47) on May 12, 2017! That is a lot of money!
So the next thing I do is I call up my friend from law school, now working with a prominent bank, and ask her about a lawyer’s role in the banking industry. I mean everyone needs lawyers, but what does a banking lawyer do differently. What kind of challenges do they face? What does someone need to do if they want to step into the banking industry? What do they need to know to ensure a successful transition into the banking sector?
What is the need for lawyers in the banking sector?
Lawyers are like the general without whom companies don’t go into war. Or you could say it’s like a healthy snack in your bag, you may not need one now, but it is always better to have it just in case.
Like any other sector, lawyers come into the picture to foresee the vulnerabilities in transactions and potential disputes and sort them out. Too vague? These lawyers handle the transactional paperwork, standardise documents, answer the queries, keep up with the regulations and handle the disputes.
Most importantly, you need banking lawyers when dealing with finances. Who else will keep up with ever-changing laws and RBI regulations? The banking industry needs to comply with the RBI regulation immediately as it is applied. So these knights in shining armour come to the rescue, and devise an action plan for the sales, retail and business teams! They not only need to create the action plan, but they also need to ensure that the other teams have understood them well enough to implement them.
Essential Skill Sets for a Banking Lawyer
While the skill sets for any lawyer includes contract drafting, advising, industry knowledge, astute legal acumen, it differs slightly based on the industry. There are various divisions in full-service bank like litigation which handles consumer complaints, debt recovery etc.; documentation team, retail teams which sell credit and debit cards, insurance; corporate which handles the term loans, etc. for corporate houses; investment advisory team which looks into funding based on underlying assets, etc.
With different departments, a lawyer’s work changes based on the nature of transaction he/she is handling. They need to know how to structure the loan or advise on the investment accordingly.
But there are some essential underlying skill-sets which are crucial for working as a banking lawyer. Such as:
Contract Drafting and Negotiation
I have been writing for a while about law and skill sets in different sectors. But it never ceases to amaze me that contract drafting is common to almost all of them! This is a skill that can be acquired through online courses that give you real-life situations as drafting exercises to work on or hands-on experience alone. It is one of the most enviable skill sets for a lawyer and an indispensable one.
Contract drafting is essential for a banking lawyer. He/she may need to draft a standard contract for a loan with an individual which is non-negotiable. He/she may have to draft a term loan agreement or draft a service provider agreement for the corporate clients, where the commercials are vehemently negotiated. So a lawyer needs to be adept at both contract drafting and negotiation. There has to be an extended due diligence and compliances done before extending such term loans, to avoid repeats of default like in the cases of Vijay Mallya or Nirav Modi.
Banks have to be clear and define the terms in the contract. They can’t modify them afterwards without your consent. A bank also cannot place conditions in the agreement where the balance of favour is with the bank or limits their liabilities to the detriment of the customer. They need to find the right balance because they are handling everyone’s money at the end of the day. There has to be sufficient transparency and accountability.
Remember this the next time you go to a bank and apply for a car loan, or house loan, or an education loan. It is a standardised document. Each clause there serves a purpose. Read it carefully. These contracts will have specific terms and conditions set out within them that will apply to all customers, and you’re one of them. Think of terms like ‘bank charges’ and how when your statement comes, and there is a deduction for that. The bank is providing you with a multitude of services, and when you agree to sign for those terms and condition (with a cursory glance), you’re legally bound by them! So no backing out once you have signed the contract. Trust me, I took an education loan 8 years ago and it is still haunting me!
Knowledge of law
A lawyer needs to know the laws. However, it is not possible to understand and remember all the laws that exist. So for the freshers in the industry, it is a good practice to develop a sound and specific knowledge of the Contract Act and Companies Act, The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFAESI), Transfer of Property Act (TOPA), Insolvency and Bankruptcy Code (IBC).
The concepts of indemnity, mortgage, hypothecation, secured loan etc. should be clear for the lawyers interested in banking law. For instance, did you know that the SARFAESI Act is effected only in case of secured loan and upon default, the bank does not require the intervention of the courts to take away the mortgaged or hypothecated security? I did not. So if an individual has secured a loan against his house, the bank can seize the house upon default in payment!
Under the controversial IBC, a lot of changes have been made and it is being amended from time to time. So a company under IBC has to be either revived or liquidated within a strict timeline to pay off the lenders. There are case laws, ordinances and amendments which are changing the IBC’s interpretations regularly. This keeps the banking lawyers on their toes, as not only do they have to ascertain the impact of these changes, they also have to make actionable plans to minimise the risks.
They must have sound legal acumen. They need to be able to ascertain the risks to take the best approach. For instance, if the bank has lent to a builder, then under IBC, most likely the bank will get only a portion of their claim and have to forgo the rest. So the banking lawyer needs to find the best way to mitigate their losses.
Knowledge of commercial transactions and business
Apart from the understanding of the law, a lawyer in the banking sector needs to be able to comprehend the commercial aspects of a transaction. They need not be a commerce graduate, but must have the basic understanding of what is the business about. Banking industry requires lawyers who understand what balance sheets, repo rate, cash reserve ratio, (CRR), bank rate, prime interest rate, inflation, etc. are.
They need to know how the business is managing the finances and disbursing them, what services are being offered or retailed. They need the knowledge of the business, its model and the industry parlance. A banking lawyer has to advise on various transactions from a standard loan to a term loan of 100 crores. They need to be able to distinguish what kind of work goes into which agreement and how to structure such deals.
There are different kinds of finances banks offer like project finance, term loan, housing finance companies (like Bajaj offer consumer durables), or a real estate finance. Every transaction’s nature may require a change in the applicable laws, modification of the contract clauses, moratorium period, amount of loan, etc. A banking lawyer is expected to understand not only the legal aspects of the said transactions but also the commercials involved. Therefore, they need to have sound knowledge of commerce and the business.
Challenges faced by a banking lawyer
I was in a media company and I faced day to day challenges. Just imagine, what the banking lawyers handling hundreds and thousands of crores worth transactions are going through on a daily basis. It cannot be a walk in the park for them either.
Keeping up with the evolving laws and regulations
The challenges in any job, especially as a banking lawyer impact the output of their work.
In the day to day business, a banking lawyer faces many challenges like keeping up with the RBI regulations and its strict compliances. They need to peruse through all the background materials to grasp the implications of the regulations. For instance, whenever the project finance involves a foreign company, strict adherence to FEMA laws have to be maintained.
The laws like Companies Act and IBC are evolving on a regular basis. The lawyers need to keep themselves updated by studying about them. Since they’re already out of law school the best way to do that would be through news articles, official notifications on government websites, research articles. If you’re ambitious and want to not only know the law but have real-practical knowledge about the implementation of it, online courses are a very convenient option.
The frequent changes in law lead to confusion and queries from management and clients alike. It also impacts ongoing litigation and its outcome. So the banking lawyers have to keep themselves updated continuously to be able to address the queries and adhere to regulations.
Volume of Work
Like most lawyers, these lawyers are pressed for time on a day to day basis. However, during the quarter end like March, June and December, their work increases manifold. That coupled with the changing laws increase the pressure to keep researching and making actionable plans for the company to adhere to.
The transactions under 100 crores are in multitude, and the sheer volume of paperwork that requires to be done is enormous. If the law changes, even the standardised documents and contracts need to be revised. After that, modification and negotiations are going on with the corporate houses for the various term loans and service provider agreements, etc.
All in all, the job of a banking lawyer requires a lot of attention to detail. It is not a law firm, so the lawyers cannot be trained or supervised as such. They’re expected to learn on the fly and keep afloat. These lawyers need to be generalists and be able to advise on a variety of matter even beyond the comfort zone of their expertise. They need to be sharp and quick on their feet.
So law students or even lawyers looking to become a banking lawyer, build your conceptual knowledge of laws, learn the industry parlance and the banking business, but most importantly learn how to draft a contract! Acquiring these skills is what will set you apart from the rest and pave your way into a successful banking career!