Banks in India fall under one of the following categories:

1. Body corporate constituted under a special statute;

2. Company registered under Companies Act, 1956 / foreign company
3. Cooperative Society registered under a central and state enactment on
cooperative societies.
The Reserve Bank was constituted under Section 3 of RBI Act. The Central Govt
holds the whole capital of RBI.
1. Regulating the issue of bank notes
2. Keeping of reserves for ensuring monetary stability
3. Generally to operate the currency and credit system of the country to its
advantage.
For opening new branches or shifting branches outside a city, town or village,
permission of the Reserve Bank is required.
Banking companies have to have minimum capital and reserves as specified in
the Banking Regulation Act. The shareholders of a banking company are entitled
to dividends only after all the capitalised expenses are written off.
The board of directors of a bank has to be constituted with persons having
special knowledge or experience in accountancy, banking, economics, law, etc.,
as stipulated. The directors should not have substantial interest in other
companies or firms. The maximum period of office is limited to eight years
continuously.
Authorized Capital the maximum limits of share capital which a company is
authorised to have under its Memorandum.
A Temporary branch for less than 30 days in a town where a bank has an existing
branch does not require permission from RBI.
Banking companies also have to transfer to the reserve fund twenty per cent of
their annual profits as disclosed in the profit and loss account.
Regulation of credit to different sectors of the economy is known as Selective
Credit Control.
While General Credit Controls operate on the cost and volume of credit,
Selective credit controls aim at regulating the distribution or direction of bank
resources to particulars sectors of the economy.
Cash Reserve : The penalty which is payable by a banking company which is
scheduled bank for failure to maintain cash reserve in any week for the first time
is 3% of over bank rate. For 2nd time 5% over bank rate.

Every banking company has to prepare its balance sheet and profit and loss

account annually as at the end of the calendar year or at the end of twelve
months as on a date notified by the Central Government.
Board for Financial Supervisionis constituted by RBI. The board consists of
Chairman (Governor of RBI), Vice Chairman (one of the Dy. Governor of RBI),
Four directors from the Central Board.
The board meets at least once in a month. Three members of whom one
Chairman / vice-chairman shall form a quorum for the meeting.

The public sector banks, namely, State Bank and its subsidiaries, the
Nationalised banks and the regional rural banks are statutory corporations (or
body corporate) established under special statutes.
RRBs were first set up in 1975 under the RRB Ordinance 1975. The ordinance
was later replaced by RRB Act, 1976. Section 3 of the RRB Act authorised Central
Govt. to establish RRB by notification in the official gazette at the request of
Sponsor Bank.
Issued Capital ratio (50:35:15) (Cental Govt:SponsorBank:state govt.)
The regional rural banks are also commercial banks but operating in limited local
areas to cater to rural industries, trade, farmers, artisans, etc.
A Cooperative Bank is a cooperative society engaged in the business of banking.
A cooperative bank shall not grant any loans and advances as under :
a. Loans and advances against its own shares.
b. Unsecured loans or advances to any of its directors
c. Directors interest
d. Unsecured loans and advances in which the Chairman managing agent etc.
Section 131 of the NI Act grants protection to a collecting banker
1. Non-liability of a banker receiving payment of cheque
2. Conditions for protection
Duties of Collecting Bank
1. Duty to open account with references
2. Duty to follow up the reference where the referee is not known
3. Duty to Ensure Crossing : It is duty of the banker to ensure that the cheque is
crossed specifically to himself and if the cheque is crossed to some other banker
they should refuse to collect it. Similarly where the cheque is crossed to a
specific account then crediting the same to another account without necessary
enquirys would make him liable on the grounds of negligence.
4. Duty to verify the instruments / any apparent defect in the Instruments
5. Duty to take into account the state of customers account
6. Negligence of Collecting Bank in Collecting Cheques Payable to Third parties.
Partnership is governed by Indian Partnership Act 1932.

Minimum number of partners is 2 and maximum can be 10 for banking business and 20 for other
business.

Who can become a partner: An individual, partnership firm, limited company.

Who cannot become a partner: Minor, insolvent, insane cannot become partner because they are not
competent to contract.

Though a minor cannot become partner, he can be admitted for sharing the benefits.

As per Supreme Court Judgement, HUF cannot become partner as HUF cannot be liable for action of
others.

Registration of a partnership firm is optional. It is not necessary that the firm be registered. But an
unregistered firm can not file suit against others for recovery of its debt whereas others can file suit
against the firm.

Liability of a partner: Every partner is liable, jointly with all other partners and also personally, for all
acts of the firm while he is a partner. His liability is unlimited.

Limited Companies
A limited company is an artificial person with perpetual succession incorporated under the Companies
Act.

Shareholders are owners of the Company and directors are agents of the company to manage company.

A limited company may be private limited or public limited.

Members in a private limited company: minimum 2; maximum excluding employees can be 50.

Members in a public limited company: minimum 7 and there is no ceiling on maximum number.

Number of Directors: A private limited company should have minimum 2 directors whereas a public
limited company should have minimum 3 directors. No limit on maximum number of directors. In a
public limited company, if directors are more than 12, permission from central govt required.

Public company: When minimum 51% shares with government.

Documents for opening the account: Memorandum of Association, Articles of Association, Certificate
of Corporation, Certificate of Commencement of Business (only for public limited companies) and
Board Resolution. No introduction is required as Certificate of Incorporation is enough introduction.
However, KYC norms to be applied on all persons authorized to operate the account.

Memorandum of Association: It contains name of the Company, its authorised capital, registered office
and liability of shareholders, objects of the company etc.

Hindu Undivided Family (HUF) : HUF is neither a legal person nor a natural
person. It is not created by agreement_ It is not incorporated under any Act. It is
from a common ancestor and membership is by birth or adoption.
The eldest member of family is the Karta and others are co parceners. Daughter can also be Kerta.

Senior most member continues to be Karta even when he/she lives outside India.

Operational authority to operate the account is with Karta

Trusts :
Trusts can be of two types - private trusts where beneficiaries are certain specified individuals or
groups and public trusts where beneficiary is public at large.

Private trusts are governed by Indian Trust Act, 1882, public trusts are governed by Public Trusts Act
of the concerned state.

Clubs and Societies

For opening account of Clubs and Societies bank will require Certificate of Registration, Bye laws of
the Society, and resolution of Managing Committee or Executive Committee.

Operational Authority will be as per resolution of Managing Committee.

Change in Operational authority as per resolution of Managing Committee.

Stop payment and revocation of stop payment as per Operational Authority.

Cheque signed by the secretary or treasurer or president of society and presented after his death can be
paid if otherwise in order.

Fund Based Credit Facilities

Cash Credits / Overdrafts Cash credit /Overdraft is an arrangement by which a banker allows his
customer to borrow money up to a certain limit.

Term Loans

Bill Finance

Non-Fund based Credit Facilities

Bank Guarantee

Letter of Credit Facility

Guarantee is defined in section 126 of Indian Contract Act.

There are three parties to a contract of guarantee namely principal debtor, creditor and surety.

The liability under guarantee is a contingent liability and surety is liable on default by the principal
debtor.

Once there is a default, the liability of the surety is co extensive with the principal debtor. That is he is
equally liable as principal debtor.

Performance Guarantee: These are guarantees issued by banks on behalf of its customers whereby
the bank assures a third party that the customer will perform the contract entered into by the customer
as per the conditions stipulated in the contract, failing which bank will compensate the third party up to
which the amount specified in the guarantee.

Deferred Payment Guarantee: Under this type of the guarantee, the banker guarantees payment of
installments over a period of time. This type of the guarantee is required when the customer on credit
purchases goods/machinery and payment is to be made in installments on specified dates. A deferred
payment guarantee constitutes an undertaking on the part of the bank to make payment of deferred
installments to the seller (beneficiary) on due dates in the event of default by the customer (buyer).

Statutory Guarantee: These are guarantees issued by banks favoring Courts and other statutory
authorities guaranteeing that the customer will honor his commitments imposed on under law, failing
which bank will compensate to the extent of the amount guaranteed.

Difference between Indemnity and Guarantee

Contract of Indemnity
There are 2 parties
(Indemnifier and Indemnified)
Risk is contingent
The Indemnifier is required to make good
the loss as soon as it occurs
There are only two parties to a contract of
indemnity
An indemnity is for the reimbursement of a
loss

Contract of Guarantee
There are 3 parties
(Debtor, Creditor/Beneficiary, Surety)
Liability is subsisting
The Suretys liability is secondary and the
principal debtor is primarily liable
There are at least three parties in the contra
of Guarantee
Guarantee is only security to the creditor

Letter Of Credit
A Letter of credit is a form of guarantee given by banks on behalf of its
customer.
Parties to a Letter Of Credit
Applicant-Buyer-Importer-Opener : He is the person who applies to bank for Letter of Credit

Issuing Bank : The bank which opens the Letter Of Credit on the request of applicant/Buyer.

Beneficiary-Exporter-Seller : The person who is entitled to receive the benefit under Letter of Credit.

Advising Bank / Notifying Bank : The bank in the Beneficiary/Exporters Country through which the
letter of credit is advised to the beneficiary.

Negotiating Bank : The bank in the Beneficiary/Exporters Country which negotiate the bills (i.e. make
payments on the bills drawn by the seller and accepts the documents.) If the LC specifies a bank then
that bank is the Negotiating Bank and is also called theNominated Bank / Paying Bank. If the LC
however does not specify the bank, than any bank can be negotiating bank.

Confirming Bank : The advising bank is only required to advise the credit to the beneficiary. If
however in addition to advising the credit the advising bank were to confirm it, then the advising bank
will also become confirming Bank.

Reimbursing Bank : It is the bank which is appointed by the Issuing Bank to make reimbursement to
the Negotiating, Paying or confirming Bank.

Revocable Credit
Where the credit terms can be unilaterally altered or cancelled by the issuing
bank.
Revolving Credit
Where the amount is fixed but can be utilised again and again as and when the
earlier bills drawn are paid.
Transferable Credit
Where rights under an LC can be transferred to third parties.
Red Clause Credit
Where the beneficiary is entitled to advance payment before production of
documents
Green Clause Credit
Credits where in addition to advance payment, the beneficiary is entitled to
payment of storage / warehousing charges.
Deferred Payment Guarantee
Deferred Payment Guarantee: A is an unconditional and irrevocable guarantee
issued by the bank assuring payment in installments and interest on due dates.

DPGs are usually insisted upon when capital goods are imported and
seller/exporter requires an additional assurance that the instalment payment
allowed by him to the buyer/importer is met.

Classification of Bills
Inland Bills : Bills drawn or made in India and made payable in, or drawn upon any person resident in
India. It may be made payable in a foreign country.

Foreign Bills: Bills drawn outside India and made payable in or drawn upon any person resident in any
country outside India / resident in India

Demand Bills: Section 19 : It is an instrument payable on demand and no time for payment is specified
therein. Demand Bill is otherwise called sight bill.

Usance Bills: Bill Payable after sight : a bill payable otherwise than on demand. It specifies normally a
time for payment of the value it represents.

Clean Bills: is a bill of exchange drawn as per requirements of NI Act and is not supported by
documents of title of goods.

Documentary Bills: A bill of exchange accompanying documents of title of goods. These bills are
drawn to claim price of goods supplied.

Mortgage
A mortgage is the transfer of interest in specific immoveable property, for the
purpose of securing the payment of money advanced or to be advanced by way
of loan, on existing of future debt or the performance of an engagement which
may give rise to a pecuniary liability
1. Simple Mortgage: Section 58(B)
The mortgagee has no power to sale without Court Intervention

No right to get any payments out of the rents

Not in possession of the property

Registration is mandatory.

2. Mortgage by conditional sale : 58 (c)

The sale is ostensible and not real

If the money is not paid on the agreed date, the ostensible sale will become absolute upon the
mortgagor applying to the court and getting a decree in his favour.

The mortgagee can sue for foreclosure, but not for sale of the property.

There is no personal covenant for repayment of the debt and therefore bankers do not prefer this type of
the mortgage.

3. Usufructuary Mortgage: 58(d)

The mortgagee is put in possession of the mortgaged property. Here by possession means legal
possession not a physical possession.

The mortgagee has the right to received rents and profits accruing from the property.

He mortgagee cannot sue the mortgagor for repayment of the debt., sale or foreclosure of the
mortgaged property.

If the mortgagor fails to bring a suit for redemption within 30 years, the mortgagee becomes absolute
owner of the property.

Banker do not prefer this form of mortgage for the following reasons

There is no personal covenant to repay the debt.

It will take very long time to recovery money through this process

4. English Mortgage : 58(e)

It provides personal covenant

There is an absolute transfer of the property in favour of the mortgagee. Property shall be reconveyed
to the mortgagor in the event of repayment of mortgage money.

The mortgagee can sue the mortgagor for the recovery of the money.

5. Mortgage by deposit of title deeds / Equitable Mortgage 58(f)

Where a person in any of the towns notified by the govt. concerned may, delivers to a creditor or his
agent documents of title to immoveable property, with intent to create a security thereon, the
transaction is called a mortgage by deposit of title deeds.
6. Anomalous Mortgage 58(g)
It is combination of two mortgages:
Simple and usufructuary mortgage

usufructuary mortgage accompanied by conditional sale

Pledge
Pledge required only a limited
interest in the
property and ownership remains
with the right of pledger.
The Pawnee has special property
in the
goods decree of pledged
Pawnee has no right to foreclosure

Mortgage
Here the legal ownership passes to
mortgagee.
Of course subject to the mortgagor to
redeem
the property
The mortgage as a rule, takes decree of
a Court of Law before having recourse
against the property mortgaged.
In certain cases, the mortgagee can
foreclose the property.

Pledge means bailment of goods for the purpose of securing a payment of debt or an obligation.

A valid pledge can be created by owner of goods or a mercantile agent

A constructive pledge involves only delivery of keys of the warehouse.

Under the Contract of pledge the Pawnee can sell the goods pledged after notice or retain the goods and
file a suit for recovery of debt.

Hypothecation
The mortgage of moveable property is
called Hypothecation
There is only obligation to repay the
money
and no transfer of interest

Mortgage
Mortgage relates to immoveable
property
There is transfer of interest.

Types of Charges
i. Fixed Charge is also called Specific Charge. It extends over a specific
property.
ii. Floating Charge means a charge
that floats over the present and future property of the company

that does not restrict the company from assigning the property subject to third persons, whether by way
of sale or security.

that on happening of an event or contingency crystallises as a fixed charge.

SARFAESI Act, 2002

The Act is a major step in financial sector reforms. It has brought a legal
framework for the
following important activities in the credit market:
(a) Securitisation of financial assets.
(b) Reconstruction of financial assets.
(c) Recognition of any 'interest' created in the security for due repayment of a
loan as a 'security interest', irrespective of its form and nature but when it is not
in the possession of the creditor.
Financial Asset - a claim to any debt or receivables and includes :
A claim to any debt or receivables or part thereof whether secured or unsecured, or

Any debt or receivable secured by mortgage of or charge on immovable property or

A mortgage, charge, hypothecation or pledge of moveable property, or

Any right of interest in the security, whether full or part, securing debt, or

Securitisation Company : The minimum capital requirement is Rs.200 Crore at

the time of registration, and these companies are required to maintain minimum
capital adequacy ratio of 15% of total asset acquired or Rs.100 crore whichever
is less. It is company registered under companies act 1956 for the purpose of
securitisation. The company also needs registration with
RBI.
Acquisition of financial asset from the originator is the main function of
securitisation company.

If the borrower does not pay within 60 days after notice by the secured creditor
the creditor can take possession of the security.
Enforcement of SARFAESI Act only if security is not in possession of the bank and
financial institution.
Registration of Securitisation Company Or Reconstruction Company
- can commence or carry business if
1. Obtain certification of registration from RBI
2. It has the owned funds not less than 2 Crores
Asset Reconstruction means acquisition of any right or interest of any bank of
financial institution in any financial asset for the purpose of realisation.
Securitisation Company needs registration from RBI for commencement of
business.
The four documents involved in the Securitisation Transaction
Offer Document
Debenture
Agreement
Security Receipt

nforcement of Security Interest

The SARFAESI Act empowers bank and financial institutions to enforce
securities in the event of default of borrower without intervention of either civil
court or the DRT.
Any person, including borrower, aggrieved by the any of the measures taken by
the SC or his authorised officer for taking possession of the security may apply
to the DRT with prescribed fees within 45 Days.
If application by borrower, he has to deposit 50% of the amount claimed in the
notice under Section 13(2) of the SARFAESI Act.
The DRT has to dispose of the application within 60 Days. If not possible, then
DRT has to record reasons for delay but such delay should not be beyond 4
Months
Exclusions of possessory securities to which act is NOT APPLICABLE
1. A Lien on any goods, money or security given by or under the Indian Contract
Act, 1872.
2. A pledge of moveable within meaning of Section 172 of the Indian Contract
Act, 1872.
3. Any conditional sale, hire-purchase or lease or any other contract in which
security interest has been created.
4. Any rights of unpaid seller.
5. Any security interest for securing repayment of any financial asset not
exceeding Rs. 1 Lakh rupees.
6. Any security interest created on agricultural land.

Central Registry
A record shall be maintained at the central register at the head office of the
central register in which transactions relating to
1. Securitisation of Financial Assets
2. Reconstruction of Financial Assets
3. Creation of security interests shall be maintained.
Under the SARFAESI act filing of details of transactions of securitisation,
reconstruction and creation of security interest is required to be filed with the
Central Register is 30 days after the date after the date of transaction or
creation of security.
Modification also have to be filled within 30 days
Satisfaction of Charge 30 days
If any securitisation or reconstruction company fails to comply with any of the
directions issued by the Reserve Bank of India, then such company is punishable
with a fine not exceeding Rs. 5 lakh for the default. In case of further
continuation of the offence, an additional fine up to Rs. 10,000 per day of the
default can be imposed.

Non-applicability of SARFAESI Act

(i) A lien, on any goods, money or security given by or under the Indian Contract
Act, 1872 or the Sale of Goods Act, 1930 or any other law for the time being in
force.
(ii) A pledge of movable, within the meaning of Section 172 of the Indian
Contract Act, 1872. (iii) Creation of security interest in any vessel as defined
within the meaning of Section 3(55) of the Merchant Shipping Act, 1958.
(iv) Creation of security in any aircraft as defined in Section 2 of Aircraft Act
1934.
(v) Any conditional sale, hire-purchase or lease or any other contract in which no
security Interest has been created.
(vi) Any rights of unpaid seller under Section 47 of the Sale of Goods Act, 1930.
(vii) Any properties not liable for attachment or sale under the first proviso to
Section 60(1) of the Civil Procedure Code, 1908.
(viii) Any security interest for securing repayment of any financial asset not
exceeding one lakh rupees
(ix) Any security interest created in agricultural land

(x) Any case, in which the amount due is less than twenty per cent of the
principal amount and interest thereunder.

Banking Ombudsman
1. Minimum age of the person 65 years.
2. Appointment may be made for period of 3 years but the same is extendable
for 2 years.
3. May be removed by giving three months notice/by paying three months
emoluments.
4. Banking Ombudsman is appointed by a committee of 3 Dy. Governers of RBI
and the additional secretary, Finance.
5. Banking ombudsman resolve the dispute between banks or between bank and
its customer by arbitration reference if both the parties to the complaint agree
for such reference for arbitration and if value of the claim does not exceed Rs.
10 lakhs.

Grounds of Complaint
A Complaint on any of the following grounds alleging deficiency in banking
service may be filed with the Banking Ombudsman having the jurisdiction:
1. non-payment/inordinate delay in the payment/collection of cheques
2. non-acceptance, without sufficient cause, of small denomination notes
3. non-issue of drafts
4. non-adherence to prescribed working hours
5. failure to honour guarantee/LC commitments by banks.
6. claims in respect of unauthorized/fraudulent withdrawals.
7. complaints from exporters in India.
8. Complaints from NRI having account in India.
Loans and Advances
9. non-observance of RBI directives on interest rates
10. delay in sanction. disbursement of Loan
11. non-acceptance of application for loans without giving valid reasons.

Procedure For Filing Complaint

1. before making complaint to the BO, must be made written representation to
the bank and either the bank rejected the complaint or the complainant had not
received any reply within one month after the bank recd. the complaint.
2. The complaint should be made before one year after the cause of action has
arisen.

Review Authority
Any person aggrieved by the award has the right to prefer an appeal against the
award before the appellate authority within forty-five days form the date of
receipt of the award. The appellate authority is empowered to allow a further
period not exceeding thirty days on his being satisfied that the appellant had
sufficient cause for not preferring the appeal in time. In case the appeal is by the
bank, the filing of appeal should have been with the previous sanction of the
Chairman or in his absence the Managing Director or Executive Director or the
Chief Executive Officer or any other officer of equal rank.

The central government is empowered to establish one or more tribunal to be

known as Debt Recovery Tribunal.
Composition of Tribunal
The tribunal consists of one person called as Presiding Officer and the
appointment is done by the central govt. by issuing notification.
Debt Recovery Tribunal
Appellate Tribunal
Presiding Officer : District Judge
Chairperson : High Court Judge,
Presiding
officer of a DRT for at least 3 years.
Presiding officer holds officer for a
Chairperson holds officer for a term of
term of
5
5 years or until he attains the age of
years or until he attains age of 65
62 years whichever is earlier.
whichever is earlier.
Recovery Officer
The staff so appointed shall work
under the
general superintendence of the
presiding
officer.
Appeal to the Appellate Tribunal
1. Any person aggrieved by the order passed by DRT, may appeal to an
Appellate Tribunal.
2. The appeal is required to be filed within 45 days from the date on which copy
of the order is received. At the time of filing appeal Section 21 of the DRT Act
50% of the amount shown as due in the order required to be deposited by the
appellant.
3. Appellate Tribunal should disposed off the appeal within 6 months.
LOK ADALATS
The Lok Adalts are created under Legal Services Authority Act 1987.
Awards of Lok Adalt: Their awards are in the form of consent decrees. NO appeal
lies against such Awards which is binding on all parties.
Procedure and powers: Civil Procedure Code is applicable which means the Lok
Adalt can send summons, take evidence on oath, initiate exparte proceedings,
and determine court procedures. Where compromise is not reached: The case
shall be returned back to the court from which the reference was received for
continuing with the case, there.

RBI during April 2001 advised banks and financial institutions to follow the
following guidelines for implementation: Amount - Cases involving an amount up
to Rs.20 lakh may be referred to Lok Adalats.
Borrowers : All NPA accounts (other than time barred), both suit filed and nonsuit filed, which are in "doubtful" and "loss" category.
DRT LOKADALATS
Banks can take up matters where outstanding exceed the ceiling of Rs.20 lac,
with Lok Adalats organised by the Debt Recovery Tribunals / Debt Recovery
Appellate Tribunals.
Supreme Court has suggested that personal loan cases up to Rs.10 lac should
preferably settled through Lok Adalats.