Recently, I was living in a remote village in Goa. For someone like me, who was born and raised in metropolitan cities, it was a huge adjustment. Thanks to the online banking, money was the least of my worries. But, things like electricity, food, lodging, commute were the regular challenges that I faced. I had to file my tax return and thanks to internet banking, I was able to not only file my returns but also do an electronic verification through net banking. Needless to say, I’ve developed a whole new appreciation for electricity and internet, and all the facilities it brings together. Also, I have a newfound appreciation for the miracles offered by the banking industry, as well as NBFCs in India. India has a truly massive banking infrastructure, and it is still growing faster than anywhere else in the world.
We have a lot to catch up to, but still the Indian banking sector is a giant, beautiful, massively growing organism. It’s mind boggling if you begin thinking about how many people it connect and how many people are directly and indirectly affected by it.
It’s probably the most critical industry. Wherever there is money, there are banks involved.
According to a Report of India Equity Brand Foundation, 2018, the Indian banking system consists of 27 public sector banks, 21 private sector banks, 49 foreign banks, 56 regional rural banks, 1,562 urban cooperative banks and 94,384 rural cooperative banks, in addition to cooperative credit institutions. India’s retail credit market is the fourth largest in the emerging countries. It increased to US$ 281 billion on December 2017 from US$ 181 billion on December 2014! That is a lot of money!
So the next thing which crops in my mind is about the role of a lawyer’s in the banking industry. I mean everyone needs lawyers, but what does a banking lawyer do differently? What kind of challenges do they handle? 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?
Banking industry hires a lot of lawyers, and legal work is crucial to its success. So banking lawyers are very well paid. Let’s do a deep dive into the world of banking lawyers.
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, create and implement policies, answer the queries, keep up with the regulations, ensure compliance and handle the disputes.
Most importantly, you need banking lawyers when dealing with the complex and vast laws relating to finance. Who else will keep up with ever-changing laws and RBI regulations? 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. They might be able working on recovering bad loans and enforcing security interests. Litigators do not do transactions and vice versa.
But there are some essential underlying skill-sets which are crucial for working as a banking lawyer. Following are essential skill sets for a banking lawyer-
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 quickly acquired through online courses that give you real-life situations as drafting exercises to work on, hands-on experience as well as feedback.
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 syndicated 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!
And there are smart and we’ll paid lawyers who are drafting these and even tweaking them from time to time. In case of big loans, they are negotiating too!
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 without waiting for a court order! This is a step that lawyers enforce.
Under the controversial IBC, a lot of changes have been made and it is being amended from time to time. So a company under insolvency 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 evaluate and 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 forego the rest in case of a forced asset sale through IBC. So the banking lawyer needs to find the best way to mitigate their losses.
Lawyers also do a lot of work with respect the structuring and management of banks themselves. How are banks funded? How do they manage their corporate governance? There is a huge amount of work that goes into this aspect as well.
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 the basic understanding of what the business is all about is critical. 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 understand what makes the markets tick. They need to grasp how the banking industry makes money and how to protect its most critical interests.
They also need to quickly grasp the business of the entity taking a loan. They need to know the business model, associated risks and what the future may bring.
A banking lawyer has to advise on various transactions from a standard loan to a term loan of thousands of 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 finance that banks and NBFCs offer like project finance, term loan, housing finance companies (like Bajaj offer consumer durables), or real estate finance. Every transactions inherently unique nature impacts the applicable laws, contractual clauses, moratorium period, amount of loan, representations required etc. A banking lawyer is expected to understand not only the legal aspects of the said transactions but also the commercials involved.
Challenges faced by a banking lawyer
The banking lawyers handle hundreds and thousands of crores worth transactions going through banks and NBFCs on a daily basis. They deal with massive pressure. Do not think that the job of a banking lawyer is a walk in the park followed by lots of money and glamour. It’s one of the toughest legal jobs with a massive amount of money at stake. Most importantly, after the alleged financial frauds committed by Vijay Mallya, Nirav Modi and the likes, there has been a huge spotlight on the inner workings of the banking industry.
Keeping up with the evolving laws and regulations
In the day to day business, a banking lawyer faces many challenges like keeping up with the ever changing 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 or lender, strict adherence to FEMA laws have to be maintained.
For listed companies, they also need to stay abreast with SEBI regulations.
Laws like Companies Act and IBC are evolving on a regular basis. The lawyers need to keep themselves updated at all times, including recent judgments. 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. You can check out the IBC course here.
The frequent changes in law lead to confusion and queries from management and clients alike. It also impacts ongoing litigations 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 always going on with large borrowers for the various kind of loans and project finance deals.
All in all, the job of a banking lawyer requires a lot of attention to detail. They’re expected to learn and adapt on the fly and keep afloat. These lawyers need to be specialists but still be able to advise on a wide 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, suck up the industry knowledge and grow an interest in 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!