Banking Law 1 Notes
Banking Law 1 Notes
Banking Law 1 Notes
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Table of Contents
BANKING LAW ................................................................................................................................. 3
UNIT-1 ............................................................................................................................................. 3
ORIGIN AND EVOLUTION OF BANKING ...................................................................................... 3
KINDS OF BANK ........................................................................................................................... 5
FUNCTIONS OF COMMERCIAL BANKS/BANKS......................................................................... 10
ANCILLARY FUNCTIONS/SERVICES OF BANK.......................................................................... 12
THE STATE BANK OF INDIA ...................................................................................................... 13
Non-banking subsidiaries ................................................................................................... 15
SBI Capital Markets Ltd .................................................................................................. 15
SBI Cards & Payments Services Pvt. Ltd. (SBICPSL) ...................................................... 15
SBI Life Insurance Company Limited ............................................................................. 15
In March 2001, SBI (with 74% of the total capital), joined with BNP Paribas (with 26%
of the remaining capital), to form a joint venture life insurance company named SBI Life
Insurance company Ltd. ......................................................................................................... 15
BANKING OMBUDSMAN ............................................................................................................ 15
UNIT-2 ........................................................................................................................................... 18
FUNCTIONS OF RBI .................................................................................................................... 18
POWER OF RBI ........................................................................................................................... 20
SUPERVISORY FUNCTION OF RBI ............................................................................................. 22
VARIOUS CONTROL OF RBI OVER COMMERCIAL BANKS ........................................................ 23
DEPOSIT INSURANCE CORPORATION (DICGC ACT1961) ........................................................ 24
BANKING REGULATION ACT 1949 ............................................................................................ 26
ACTIVITIES PERMITTED BY BANKING REGULATION ACT 1949 TO BANKERS ...................... 27
UNIT – 3 ......................................................................................................................................... 28
RELATIONSHIP OF BANKER AND CUSTOMER.......................................................................... 28
PRECAUTIONS TO BE TAKEN BY THE BANK BEFORE OPENING AN ACCOUNT ...................... 31
BANKER OBLIGATION TO MAINTAIN SECRECY OF ACCOUNT ................................................ 34
BANKER DUTY TO HONOUR CUSTOMER CHEQUES ................................................................. 38
RIGHTS OF BANKER .................................................................................................................. 39
CUSTOMER DUTY TOWARDS BANKER ..................................................................................... 42
UNIT 4 ........................................................................................................................................... 43
ENDORSEMENT ......................................................................................................................... 43
HOLDER IN DUE COURSE .......................................................................................................... 45
CHEQUES .................................................................................................................................... 47
CROSSING OF A CHEQUE ........................................................................................................... 50
DISHONOUR OF CHEQUE........................................................................................................... 51
NOTING AND PROTEST ............................................................................................................. 53
PAYING BANKER ........................................................................................................................ 54
UNIT 5 ........................................................................................................................................... 56
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BANKING LAW
UNIT-1
Definition
S.5(c) Banking Regulation Act, 1949: “Banking Company means a company which transacts the business of
banking in India”.
F. E. Perry: A financial institution that accepts deposits and channels those deposits into lending activities
through capital markets deposits can be withdrawn on demand/ returned after fixed period. It connects
customer with capital deficits to customers with capital surplus.
Introduction
The system of banking had existed in India for many centuries, and catered the credit needs of the economy
of that time.
The famous Kautilya Arthashastra, of 4th century BC, contains references to creditors and lending. For
example, there is a reference to “Interest on commodities loaned need to be accounted as revenue of the state.
Lending activities were not entirely unknown in the medieval India and the concepts such as priority of claims
of creditors and commodity lending’ were established in business practices.
the roots of commercial banking in India can be traced back to the early eighteenth century when the Bank of
Calcutta was established in June 1806 –which was renamed as Bank of Bengal in January 1809 .This was
followed by the establishment of the Bank of Madras in July 1843, as a joint stock company, through the
reorganization and amalgamation of four banks viz., Madras Bank, Carnatic Bank, Bank of Madras and the
Asiatic Bank. This bank brought about major innovations in banking such as use of joint stock system,
conferring of limited liability on shareholders, acceptance of deposits from the general public, etc. The Bank
of Bombay, the last bank to be set up under the British era period.
Origin
The origin of banking in India can be traced back to the Vedic period. The transformation from pure money
lending to proper banking have taken place before the times of Manu. Manu, a great Hindu jurist devoted a
section of his work explaining the deposits and advances and laid down certain rules on rates of interest.
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In Mauryan period and later Desi bankers played some role in the economy of the country.
It was during the Mogul period that indigenous bankers started playing a vital role in lending money and
financing of the foreign trade and commerce.
Post-independence period
The RBI was established as the Central bank of the country in 1935 under Reserve RBI Act. Later Banking
Regulation Act passed in 1949; RBI was brought under government control. Under this act RBI was conferred
with supervision and control of the banks and licensing powers and the authority to conduct inspections was
also given to it.
After independence, the Imperial Bank of India was nationalized and was given the name State Bank of India.
It was established under State Bank of India Act, 1955.
In 1960, RBI was empowered to force the compulsory merger of the weak banks with the strong ones. This
led to reduction in the number of banks from 566 in 1951 to about 89 in 1969.
Nationalisation Period
On July 19, 1969, Government of India nationalized 14 major banks whose national deposits were more than
50 crores.
In1980, another six banks were nationalized, and thus raising the number of nationalized banks to 20.
The Indian Banking system immensely developed after nationalization but the rural and weaker section of
the society was still not covered under the system.
On 2nd October 1975, RRB(regional rural banks) were established with an objective to extend the amount of
credit to the rural section of the society.
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Banking industry in the pre-independence era developed with the Presidency Banks, which were
transformed into the Imperial Bank of India and subsequently into the State Bank of India.
The initial days of the industry saw a majority private ownership and a highly work environment.
Major concentration towards public ownership and accountability were made with Nationalisation in 1969
and 1980 which transformed the face of banking in India.
The industry in recent times has recognised the importance of private and foreign players in a competitive
scenario and has moved towards greater liberalisation.
KINDS OF BANK
2. Commercial Banks
Commercial bank is an institution that offers various services services like accepting deposits and lending
loans and advances to general customers and business man.
They cater to the financial requirements of industries and various sectors like agriculture, rural
development, etc. it is a profit making institution owned by government or private of both.
A. Scheduled banks
Scheduled Banks in are banks which are listed in the Second Schedule of the Reserve Bank of India Act1934.
The scheduled banks enjoy several privileges as compared to non- scheduled banks such as refinance
facilities from the Reserve Bank of India etc. Besides commercial banks, cooperative banks may also
become scheduled banks if they fulfil the criteria stipulated by RBI.
All commercial banks (Indian and foreign), regional rural banks, and state cooperative banks are
scheduled banks.
These banks have to satisfy the RBI that their affairs are carried out in the interest of their depositors.
Cooperative banks may also become scheduled banks if they fulfill the criteria stipulated by RBI.
B. Non-Scheduled Banks
Non- scheduled banks are those which are not included in the second schedule of the RBI Act, 1934.
These banks do not fallow to the norms of the RBI act. According to RBI these banks are not capable of
serving and protecting the interest of depositors.
Presently there are only four non schedule banks in India.
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14 commercial banks were nationalized in 1969, and 100% ownership of these banks were held by the
Government of India. Later six more private banks were nationalized in 1980.
The public sector accounts for 75 percent of total banking business in India.
State Bank of India is the largest commercial bank in terms of volume of all commercial banks.
Later these banks were allowed to raise capital through IPOs and there by the share holding pattern has
changed.
IDBI Bank and Regional Rural Banks are also included in the category of Public Sector banks.
E. Foreign Banks
Foreign banks have their registered offices outside India, and through their branches they operate in
India.
They are allowed to operate through branches or wholly owned subsidiaries.
Foreign banks have to adhere to all local laws as well as guidelines and directives of Indian Regulators
such as RBI, IRDA, and SEBI.
foreign banks are very active in:
Forex, Trade Finance and Corporate Banking activities.
Assist their clients in raising External Commercial Borrowings through their branches outside
India or foreign correspondents.
They are active in loan syndication as well.
CITI bank, HSBC, Standard Chartered etc. are the examples of foreign bank in India.
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E. Payments bank
In July 2014, the RBI released the draft guidelines for payment banks, seeking comments from interested
entities and public at large.
After taking in to account suggestions from respondents in November 2014, RBI released the final
guidelines for payment banks and invited applications for opening such banks from interested parties.
There were 41 applications from various segments including some corporate houses. After a due process
RBI accorded eleven entities to launch payments banks within a period of 18 months.
Within this period of 18 months, these entities were to comply with requirements regarding capital funds
of Rs. 100 crores.
License was valid for 18 months within which the entities must fulfill the requirements and they were
not allowed to engage in banking activities within the period.
The RBI will grant full licenses under Section 22 of the Banking Regulation Act, 1949 after it is satisfied
that the conditions have been fulfilled.
Some of payment banks functioning in India. They are as follows:
1. The Airtel Payment Bank
2. Paytm Payment Bank
3. India Post Payment Bank
4. Fino Payment Bank
5. Aditya Birla Idea Payment Bank
6. Jio Payment Bank
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These banks established with an aim of financial inclusion “to sections of the economy not being served
by other banks. Such as small business units, small and marginal farmers, micro and small industries and
unorganized sector entities.
These banks established for promoting rural and semi urban savings and extending credit for economic
activities in the local areas.
3. Co-operative banks
Cooperative banks play an important role in the Indian Financial System, especially at the village level.
Cooperative banks cater to the needs of agriculture, retail trade, small and medium industry and self-
employed businessmen usually in urban, semi urban and rural areas.
They are organized and managed on the principal of co-operation and mutual help. The main objective of co-
operative bank is to provide rural credit.
The growth of Cooperative Movement commenced with the passing of the Act of 1904.
It registered as a cooperative under any State or Central Act. If it operating in more than one State, the Central
Cooperative Societies Act is applicable. In other cases the State laws are applicable
In co-operative banks, the shareholders should be members of the co-operative banks
The rural credit flow through rural cooperative sector has risen substantially in order to keep pace with the
growing demand for credit in the rural parts of India.
4. Development banks
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The main object of NABARD is Supplementing the resources of the cooperatives banks and RRBs for
meeting the credit needs of its clientele.
Functions of NABARD
(a) Credit Dispensation
It Prepares credit plan for each district annually.
It participates in finalization of Annual Action Plan at block, district and state levels and
monitors implementation of credit plans at above levels.
(b) Developmental & Promotional
Nurturing and strengthening of - the Rural Financial Institution.
Development and promotional initiatives in farm and non-farm sector.
Extending assistance for Research and Development.
(c) A Supervisory Activities
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Primary Functions
1. Acceptance of Deposits:
This function of commercial bank mobilizes savings of the household sector.
Banks generally accept three types of deposits viz.
(a) Current Deposits
Usually opened by businessmen who have a number of regular with transactions with the bank.
There is no restriction on number of amount of deposits and withdrawls,
No interest is paid on current deposits, but banks may charge interest for providing this facility.
These accounts are also known as demand deposits as amount can be withdrawn on demand.
(b) Savings Deposits
Saving Accounts are opened by salaried and other less income people
There is no restriction on number and amount of deposits.
Withdrawals are subject to certain restrictions.
It earns Interest but less than fixed deposits.
Saving deposits are an important source of funds for banks.
(c) Fixed Deposits
Money under this account is deposited for fixed period of time varying from 15 days to several
years.
Rate of interest is very high. But if money is withdrawn before expiry date, the depositor receives
lower rate of interest.
Deposits can be renewed for further period. Many banks sanction loans against security of fixed
deposits
(d)Recurring Account Deposit
Specified amount is regularly deposited by account holder, usually once in a month.
Main object to form the habit of small savings among the people.
At the end of maturity period, the account holder gets a substantial amount.
Interest on this type of deposit is almost equal to fixed deposits.
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1. Agency services
Banks perform certain functions on behalf of their customers.
While performing these services, banks act as agents to their customers, hence these are called as
agency services.
Important agency functions:
A. Collection
Banks collect cheques, drafts, bills, promissory notes, dividends, subscriptions, rents and
any other receipts which are to be received by the customer. For these services banks
charge a nominal amount
B. payment
Banks makes payments on behalf of their customers like paying insurance premium, rent,
taxes, electricity and telephone bills etc. for such services commission is charged.
C. Sale and Purchase of Financial Assets
Banks undertake sale and purchase of securities, share and any other financial assets.
Nominal charges are charged by a bank.
D.E- banking
A customer can operate his bank account through his internet. He can make payments of
various bills. He can even transfer money from one place to another.
2. Utility services
A. Locker Facilities
Commercial banks provide locker facilities to its customers for safe keeping of jewellery, shares,
debentures, and other valuable items. This minimizes the risk of loss due to theft at homes.
B. Dealing in Foreign Exchange
Commercial banks help in providing foreign exchange to businessmen dealing in exports and
imports.
However, commercial banks need to take the permission of the central bank for dealing in foreign
exchange.
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C. Transfer of funds
Bank cheaply and safely transfer fund from one place to another.
Transfer can be in the form of Demand draft, Travellers cheques. draft, telephonic transfer, and
electronic transfer.
D. Underwriting
This facility is provided to Joint Stock Companies and to government to enable them to raise funds.
Banks guarantee the purchase of certain proportion of shares, if not sold in the market.
Introduction
All the services provided by banks can be broadly divided into two categories.
primary services: which consist of accepting demand deposits and lending money to its customers
as per their requirement.
ancillary services: Apart from their daily primary activities, banks provide many other supporting
services; these are called ancillary services
1.Remittance services
It means a transfer of funds from one branch of a bank to another branch of the same bank or a different
bank.
One can make local remittances through:
Bankers Cheque (BC)
Demand drafts (DD)
Telegraphic Transfer (TT),
Mail Transfer (MT)
National Electronic Fund Transfer (NEFT)
Real Time Gross Settlement (RTGS) at specified service charges.
The customer shall fill in full particulars regarding the remittance such as:
Nature of the remittance i.e. by filling in DD/TT/MT etc.
Name and address of the beneficiary.
Name of the branch to which the remittance is to be made.
Name, address, an account number of the remitter/customer if required.
2.Custodial Services
This facility is popularly known as Safe Deposit Locker.
It enables customer to keep their valuables/important documents in a specially designed locker.
A prescribed rental is charged on them.
Lockers can be hired by individuals (not minors), firms, limited companies, specified associations and
societies.
Lockers can be rented for a minimum period of one year.
There are four different types of lockers i.e. small, medium, large and extra-large with varying rentals.
Nomination facility is available to an individual hirer.
In a case of overdue rents bank can charge a penalty.
3.Forex Services
When a person travels to different countries or wants to buy any foreign merchandises, then they require
foreign currencies.
Bank provide these currencies to its customers.
All transactions are done over the counter and only authorised bank branches can perform these functions.
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When a person earns or receives foreign currencies from abroad, he can also send them to banks.
These foreign exchange transactions are done according to the rules and regulations of the central banks of
respective countries.
In India, all the transactions are subjected to the regulations of Foreign Exchange Management Act (FEMA),
1999.
4.Card Services
card services were introduced for convenience and safety purposes but nowadays it has become the most
popular payment mode among people.
The bank issues customers two basic types of cards those are credit cards and debit cards.
With the help of a credit card, the card holder can obtain either goods or services from merchant
establishment where such arrangement exists.
Then a bill is sent to the cardholder indicating the dues that he/she has to pay within a period of 30-40
days. It carries a fixed interest.
Debit cards are same as credit cards. The only difference is that a number of dues for each transaction is
debited to card holder’s account as each transaction is notified.
6.Insurance services
Banks deliver a wide range of insurance products that covers the risk of almost every aspect of a human
life, such as- Life, Health, Valuable assets like Personal vehicles, Debit and credit cards etc.
It is also known as Bank assurance in which a bank and an insurance company form a partnership.
The insurance company sales its different products to the bank's client base.
This partnership is profitable for both companies.
Banks can earn additional revenue by selling the products and the insurance company can expand its
customer base. Example- ICICI Prudential, Bajaj Allianz etc.
7.Investment services
Some banks also offer Investment services for their corporate customers.
It is also known as Portfolio services.
They guide their clients especially about how to invest adequately or raise financial capital for their
business.
Any individual customer can also avail this kind of services from their respective bank.
Introduction
SBI is an Indian multinational, public sector banking and financial services statutory body. It is a government
corporation statutory body headquartered in Mumbai.
SBI shall:
act as agent of RBI
can acquire banking business of other banks in India,
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can transact all banking activities permitted for commercial banks under s. 5 of Banking Regulations Act,
State Bank shall not own or, acquire any immovable property except for the purpose of providing
buildings or other accommodation in which to carry on the business of the State Bank or for providing
residences for its officers and other employee
Capital structure:
The authorised capital of the State Bank shall be 5000 crores rupees divided into 500 crores of fully
paid-up shares.
The issued capital of state bank on the appointed day, be 5,62,50,000 divided into 5,62,500 shares.
all shares appointed day, stand allotted to the RBI in lieu of the shares of the Imperial Bank
transferred to state bank
The issued capital of the State Bank shall consist of equity shares or equity and preference shares
Evolution of SBI
The origin of the SBI goes back to the first decade of the nineteenth century with the establishment of the Bank
of Calcutta in Calcutta on 2 June 1806.
Three years later the bank was re-designed as the Bank of Bengal. it was the first joint-stock bank of British
India sponsored by the Government of Bengal.
Later Bank of Bombay and the Bank of Madras established followed by the Bank of Bengal. These three banks
remained at the apex of modern banking in India till their amalgamation as the Imperial Bank of India on 27
January 1921.
Till 1951 The commercial banks of the country including the Imperial Bank of India had their operations to the
urban sector and were not equipped to respond to the emergent needs of economic regeneration of the rural
areas.
In 1951, when the First Five Year Plan was launched, the development of rural India was given the highest
priority.
to serve the economy in general and the rural sector. the All India Rural Credit Survey Committee
recommended the creation of a state-partnered and state-sponsored bank by taking over the Imperial Bank of
India, and integrating with it, the former state-owned or state-associate banks.
Act was accordingly passed in Parliament in May 1955 and the State Bank of India was constituted on 1 July
1955. More than a quarter of the resources of the Indian banking system thus passed under the direct control
of the State.
Later, the State Bank of India (Subsidiary Banks) Act was passed in 1959, enabling the State Bank of India to
take over eight former State-associated banks as its subsidiaries (later named Associates).
The SBI was thus born with a new sense of social purpose aided by the 480 offices comprising branches, sub
offices and three Local Head Offices inherited from the Imperial Bank.
The Bank is actively involved since 1973 in non-profit activity called Community Services Banking.
Board of directors
The general direction of the affairs and business of the State Bank shall be entrusted to the Central Board.
Constitution shall be:
One chairman
Four managing directors
Nine directors
At each place where the State Bank has a local head office there shall be a Local Board which shall consist of the
following members:
One chairman
all directors of SBI from area of local board
six members to be nominated by the Central Government.
one ex officio member who shall be the CGM of local head office of SBI
Branches
SBI has 16 regional hubs and 57 zonal offices that are located at important cities throughout India.
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SBI has over 24000 branches in India. The bank had overseas offices spread over 36 countries having the largest
presence in foreign markets among Indian banks.
Non-banking subsidiaries
SBI Capital Markets Ltd
SBI Cards & Payments Services Pvt. Ltd. (SBICPSL)
SBI Life Insurance Company Limited
In March 2001, SBI (with 74% of the total capital), joined with BNP Paribas (with 26% of the remaining
capital), to form a joint venture life insurance company named SBI Life Insurance company Ltd.
BANKING OMBUDSMAN
Introduction
Banking Ombudsman senior official appointed by the Reserve Bank of India to address grievance redressal
system. This service is available for complaints against a bank’s deficiency of service.
Bank’s customer can submit complaint against the deficiency in the service of the bank’s branch and bank as
applicable, and if he does not receive a satisfactory response from the bank, he can approach Banking
Ombudsman for further action.
Banking Ombudsman is appointed by RBI under Banking Ombudsman Scheme, 2006. RBI as per Sec 35 A of
the Banking Regulation Act, 1949 introduced the Banking Ombudsman Scheme with effect from 1995.
All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-operative Banks are
covered under the Scheme.
The Banking Ombudsman has to send to the Governor of RBI a report, as on 30th June every year, containing
a general review of the activities of his Office in preceding financial year.
Appointment of ombudsman
Reserve Bank may appoint one or more of its officers in the rank of Chief General Manager or General Manager
to be known as Banking Ombudsmen.
The appointment of Banking Ombudsman may be made for a period not exceeding three years at a time.
The RBI shall specify the territorial limits to which the authority of each Banking Ombudsman appointed.
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Power to facilitate settlement by agreement through conciliation and mediation between the bank concerned
and the aggrieved parties or by passing an Award in accordance with the Scheme.
Power to superintendence and control over his Office and shall be responsible for the conduct of business
thereat.
Power to draw up an annual budget for itself in consultation with RBI and shall exercise the powers of
expenditure.
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non-adherence to the provisions of the fair practices code for lenders as adopted by the bank or Code of
Bank’s Commitment to Customers, as the case may be
Non-observance of any other direction or instruction of the Reserve Bank as may be specified by the Reserve
Bank for this purpose from time to time.
Case law: India Export Corporation & ors Vs. Chairman-cum-MD, Syndicate Bank & ors,
The complainant withdrew overdraft facility sanctioned to him by the bank only after availing facility to the
extent of Rs.1, 20,000/-. The facility was availed by the complainant for business purpose. It was held that where
Complaint alleging banking service deficiency was found connected with commercial purpose, the consumer
complaint would not be maintainable.
Absence of security
In a case cash was snatched from the hands of the complainant at the gate of the respondent bank. The appellant
alleges that the absence of security on the gate and the non-provision of steps like siren/alarm system etc.
Amounts to deficiency in service on the part of the respondent bank. The State Commission held that the non-
provision of security on the gate of the bank on the date of occurrence viz. snatching of cash in bank premises
cannot be held to be amounting to deficiency in service hired by complainant.
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UNIT-2
FUNCTIONS OF RBI
Introduction
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve
Bank of India Act, 1934.
The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to
Mumbai in 1937. The Central Office is where the Governor sits and policies are formulated.
Originally it was privately owned, since nationalization in 1949 the Reserve Bank is fully owned by the
Government of India.
RBI is the apex financial institution of the country’s financial system. It is entrusted with the task of control,
supervision, promotion, development and planning.
The Reserve Bank of India influences the management of commercial banks through its various policies,
directions and regulations. Its role in bank management is quite unique.
It performs the four basic functions such as planning, organizing, directing and controlling in laying a strong
foundation for the functioning of commercial banks.
Functions
The functions of RBI derived from its objectives, such as promoting or facilitating a high growth rate, full
employment, price stability and a viable external payment positing.
These objectives help to control the country’s currency and credit by the Central Bank as also the control it
over the country’s transactions with other countries.
I. Banking Function
A. Regulator of Currency
The RBI is the note issuing authority of the country. Different note issue systems are adopted by the RBI.
The Reserve Bank has the sole right to issue and management of currency in India under Section 22 of the
RBI Act.
The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes.
RBI handles the currency management function through two departments’ viz., the Issue Department and the
Banking Department which located in Mumbai.
The issue department should ensure that the aggregate value of the currency notes and bank notes in
circulation from time to time should be equivalent to the eligible assets (gold coins, bullion and foreign
securities).
RBI may issue notes of different denominations as decided by the Central Government, based on the
recommendations made by the Central Board of the bank from time to time. Such notes should be legal tender
at any place in India.
B. Banker to Government
The Reserve Bank is agent of both Central and state Government, and it act as Government banker, agent and
adviser.
It accepts money on account of the Central/state Government and also makes payment to the credit of its
account and under sections 20, and 21(a) of the Act.
It makes advances and advises the government regarding the policies and measures concerning loans and
agricultural and industrial finance to co-operative organizations.
The Reserve Bank of India helps the Government—both the Union and the States to float new loans and to
manage public debt.
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RBI has entrusted the work of payment and receipts on behalf of Government to its agents like State Bank of
India and its Associate Banks.
Some other commercial banks are also doing some Government transactions as agents of RBI.
C. Bankers Bank
RBI renders services to the commercial and state co-operative banks of the country.
All the scheduled commercial banks keep their accounts with the RBI for the purpose of maintaining cash
reserves.
Every scheduled bank was required to maintain with the Reserve Bank cash balance equivalent to 3 percent
of their aggregate deposit liabilities.
The minimum cash requirements can be changed by the Reserve Bank of India.
It also supervises and controls the banking services and banking system. Even It can inspect all the books of
the banks
RBI controls statutory cash reserves and licensing of banks and also cancel the license granted to any of the
banks in India
E. Controller of Credit
The RBI is the controller of credit; it has the power to influence the volume of credit created by banks in India.
It can control credit through changing the Bank rate or through open market operations.
RBI can ask any particular bank or the whole banking system not to lend to particular groups or persons on
the basis of certain types of securities.
Each scheduled bank must send a weekly return to the Reserve Bank showing in detail, of its assets and
liabilities.
RBI measure of credit control may be classified in to the 2 categories:
A. Quantitative Methods: Bank rate policy. Open market operations, statutory liquidity requirements.
B. Qualitative Methods: Selective credit control, credit authorization monitoring and moral suasion.
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It publishes a weekly statement showing the working of its issuing and banking department.
A monthly bulletin showing the banking and monetary trends and an annual report analysing the banking
and monetary affairs of the national and international plans is prepared.
Supervisory Functions
The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of
supervision and control over commercial and co-operative banks, relating to:
Licensing and establishments,
branch expansion,
liquidity of their assets,
management and methods of working,
Amalgamation, reconstruction and liquidation.
The RBI is authorized to carry out periodical inspection of the banks and to call for returns and necessary
information from them.
POWER OF RBI
E. power to ask Monthly returns call or other returns and information (Section 27)
At any time, the RBI may direct a banking company to furnish it with statements and information relating to
the business or affairs.
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RBI can obtain information for the purposes of this Act, from the banking company (including any business
or affairs with which such banking company is concerned.
RBI can call for information every half-year regarding the investments of a banking company and the
classification of its advances in respect of industry, commerce and agriculture.
The following Sections have been inserted with effect from May 2017 Section
B. Section 35AB
1) Power to RBI:, To issue directions to any banking company or banking companies for resolution of stressed
assets.
(2) Power to RBI to specify one or more authorities or committees with such members as the Reserve Bank may
appoint or approve for appointment to advise any banking company or banking companies on resolution of
stressed assets.
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Narasimham committee suggested for setting up autonomous banking supervisory board under
Banking Regulation Act, 1949
There are mainly Department of supervision from 1993
Department of Banking Supervision,
Department of Non-Banking Supervision
Department of Co-operative Bank Supervision.
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Introduction
Most important functions of RBI are to fill in as regulator and supervisor of financial system.
The financial system in India incorporates Commercial Banks, Regional Rural Banks, Local Area Banks,
Cooperative Banks, Financial Institutions including Development Financial Institutions (DFIs) and Non-
Banking Financial Companies.
RBI infers its controlling forces for Indian Banking System from the arrangements of the Banking
Regulation Act 1949.
Goals of this to keep up the wellbeing and soundness of the banking and Financial System of the nation.
After the progression of the Indian
Forms of controls
1.licensing requirements
To complete a business of commercial banking in India,or Foreign, a permit from RBI is required.
Opening of Branches is dealt with by the Branch Authorization Policy. At present
Indian banks never again require a permit from the Reserve Bank for opening a branch at a place with
populace of beneath 50,000.
3.Statutory Pre-emptions
Every commercial bank is required to keep up certain segment of their Net Demand and Time Liabilities
(NDTL) as cash with the Reserve Bank, called Cash Reserve Ratio (CRR)
4.Interest Rates
The interest rates on the majority of the classes of deposits and lending transactions have been deregulated
and are to a great extent dictated by RBI.
Reserve Bank manages the interest rates on investment funds ledgers and deposits of non-resident Indians
5.Prudential Norms
Prudential Norms up by the banks.
RBI issues "Prudential Norms" to be trailed by the commercial banks to reinforce the balance sheets of
banks.
6.Disclosure Norms
One of the important apparatuses for marketing discipline is to keep up open disclosure of pertinent data.
RBI's mandates, the banks are required to make disclosures of their yearly reports and some different
records about their capital ampleness, asset quality, liquidity, etc.
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10.OSMOS
OSMOS means Off Site Surveillance and Monitoring System.
The RBI expects banks to submit itemized and organized information periodically under OSMOS.
Based on OSMOS, RBI breaks down the strength of the banks.
Introduction
This Act came into force from 1-1-1962 for the purpose of insurance deposits and guaranteeing of credit
facilities and for other matters related there.
This Act in the first place, aims at giving a certain measure of protection to the depositors.
The interests of small depositors needed protection against the risk of a bank’s failure to pay back the
deposits, for over a hundred years of the evolution of modern banking in India.
The rate of bank failures was very high.
During the first half of the twentieth century two world wars and a great depression had caused a sense of
uncertainty in the minds of people.
besides the traditional India banking was more familiar and more trustworthily in the eyes of the people.
But to speeding up of the pace of economic development for which capital formation was a crucial factors for
this purposes deposit mobilization was necessary.
therefore, set in line a chain of objectives which called for the establishment of the deposit insurance and
credit guarantee corporation i.e. DICGC.
This Act extends to whole of India. The Central Govt shall establish a corporation with its head office at
Mumbai.
Management of DICGC
The general superintendence, direction and the management of affairs and business of the corporation are under
section 5 vested in a board of directors.
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d) two Director nominated by the central Government in consolation with the RBI, who shall have special
knowledge of Industry.
e) The board of directors can constitute an executive committee and such other committee the
f) corporation thinks fit and the board can delegate some of the powers and functions to them.
g) A person cannot be nominated as director if
has been removed or dismissed from a government job, (
he is / was adjudged insolvent,
he is of an unsound mind,
he has been convicted of any offence involving moral turpitude.
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Introduction
The provision of the Indian Companies Act 1913 was found inadequate to regulate banks in India.
Therefore, a need was felt to introduce a specific legislation having comprehensive coverage on issues
relating to the banking business in India.
Due to inadequacy of capital, many banks failed and therefore prescribing a minimum capital requirement
was felt necessary.
To ensure sound banking through regulations covering the opening of branches and the maintenance of liquid
assets.
The act provides a framework that regulates and supervises commercial banks in India. all banking firms will
be regulated under this act.
The act came into force on March 16 1949.
There are a total of 55 Sections under the banking regulating act.
Initially the law was only applicable to banks, but after 1965, it was amended to make it applicable to co-
operative banks and also to introduce other changes.
This act gives power to the RBI to exercise control and regulate banks under supervision.
The Banking Regulation Act, 1949 is one of the important legal frame works.
Initially the Act was passed as Banking Companies Act,1949 and it was changed to Banking Regulation Act
1949.
Along with the Reserve Bank of India Act 1935, Banking Regulation Act 1949 provides a lot of guidelines to
banks covering wide range of areas.
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3.Other services
Contracting for public and private loans and negotiating and issuing the same
insuring, guaranteeing, underwriting, carrying out of any issue, public or private, of State.
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UNIT – 3
Introduction
The relationship between a banker and his customer depends upon the nature of service provided by a
banker.
Accepting deposits and lending and/or investing are the core banking businesses of a bank.
The relationship between a banker and customer is the transactional relationship.
Bank’s business depends much on the strong bondage with the customer.
“Trust” plays an important role in building healthy relationship between a banker and customer.
In addition to its primary functions, it deals with various customers by providing other services like:
safe custody services,
safe deposit lockers,
assisting the clients by collecting their cheques and other instruments as an agent and trustees for
them.
So, based on the above a banker customer relationship can be classified.
Meaning of Banker
Banker is one who in the ordinary course of his business, honors cheques drawn upon him by persons from
and for whom he receives money on current accounts.
Banker includes any person acting as a banker.
banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise;
5 (c) "banking company" means any company which transacts the business of banking in India.
Meaning of Customer
The term customer of a bank is not defined by law.
Ordinarily, a person who has an account in a bank is considered its customer.
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Banking experts and legal judgment in the past, used to qualify this statement by laying emphasis on the
period for which such account had actually been maintained with the bank.
customer of a bank lays emphasis on the duration of the dealing between the banker and the customer and
is, therefore, called the duration theory.
a person does not become a customer of the banker on the opening of an account; he must have been
accustomed to deal with the banker before he is designated as a customer.
The “Duration Theory” was exploded by Mr. Justice Bailhache in Ladbroke v. Todd
Who observed that the relation of banker and customer begins as soon as the first cheque is paid in
and accepted for collection and not merely when it is paid.
the Kerala High Court observed in the case of Central Bank of India Ltd. Bombay vs. V. Gopinathan Nair
and others “Broadly speaking, a customer is a person who has the habit of resorting to the same place or
person
to do business. So far as banking transactions are concerned he is a person whose money has been accepted
on the footing that banker will honour up to the amount standing to his credit, irrespective of his connection
being on short or long standing.”
bank customers can be categorized in to four broad categories as under:
Existing customers: Those who maintain account relationship with banks i.e.
Former Customers: Those who had account relationship with bank i.e. Those who do not maintain
any account relationship with the bank but frequently visit branch of a bank for availing banking
facilities such as for purchasing a draft, encashing a cheque, etc. Technically they are not customers,
as they do not maintain any account with the bank branch.
Prospective/ Potential customers: Those who intend to have account relationship with the bank. A
person will be deemed to be a 'customer' even if he had only.
Classification of relationship
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The debtor has to follow the terms and conditions of bank said to have been mentioned in the account opening
form.
Though the terms and conditions are not mentioned in the account opening form, but the account opening
form contains a declaration that the terms and conditions.
Since the introduction of deposit insurance in India in 1962, the element of risk to the depositor is minimized
as the DICGC undertakes to insure the deposits up to a specified amount.
2.Creditor–Debtor
Banker’s relationship with the customer is reversed as soon as the customer’s account is overdrawn. Banker
Lending money is the most important activities of a bank.
The resources mobilized by banks are utilized for lending operations.
Customer becomes creditor of the customer who has taken a loan from the banker and continues in that
capacity till the loan is repaid.
As the loans and advances granted by a banker are usually secured by the tangible assets of the borrower, the
banker becomes a secured creditor of his customer.
3.Banker as Trustee
In certain circumstances banker acts as a trustee also.
A trustee holds money or assets and performs certain functions for the benefit of some other called the
beneficiary.
The position of a banker as a trustee or as a debtor is determined according to the circumstances of each case.
If he does in ordinary course of his business, without any specific direction from the customer, he acts as a
debtor/ creditors.
In case of money or bills etc., deposited with the bank for specific purpose,the bankers position will be
determined by ascertaining whether the amount was actually debited or credited to the customer‘s account
or not.
On the other hand, if a customer instructs his bank to purchase certain securities out of his deposit ,but the
bank fails before making such purchase, the bank will continue to be a debtor of his customer (and not a
trustee) .
The relationship between the banker and his customer as a trustee and beneficiary depends upon the specific
instruction by customer.
4.Banker as an Agent
A banker acts as an agent of his customer and performs a number of agency functions for the convenience of
his customers.
Banks also abides by the standing instructions given by its customers. and charges for theses services.
For example, he buys or sells securities on behalf of his customer, collect cheques on his behalf and makes
payment of various dues of his due customers, e.g. insurance premium, etc.
The range of such agency functions has become much wider and the banks are now rendering large number
of agency service of diverse nature.
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While taking physical possession of securities the bank becomes bailee and the customer bailor.
Banks also keeps articles, valuables, securities etc., of its customers in Safe Custody and acts as a Bailee.
As a bailee the bank is required to take care of the goods bailed.
7.Banker as Custodian
A custodian is a person who acts as a caretaker of something.
Banks take legal responsibility for a customer’s securities. While opening a demat account bank becomes
a custodian.
Introduction
Opening of an account binds the banker and customer into a contractual relationship.
Every person who is competent to contract can open an account with a bank.
The capacity of certain classes of person, to make valid agreement is subject to certain legal restrictions, as is
the case with minors, lunatics, drunkards, married women, undischarged insolvents, trustees, executors.
Extra care is also needed for the banker while he deals with customers like public authorities, societies,
joint stock companies, partnership firms etc.
Precautions
Proper introduction of the customer is essential.
The manager should ‘verify whether the new customer is a person with integrity and reputation to be ‘a
"desirable customer", to open the Account. This is to prevent any fraud,
The bank manager may make enquiries from references given by the customer or banks about the status of
the customer.
He should make 'reasonable enquiry' as is necessary in the circumstances, to convince himself that the person
is bonafide customer.
He need not act like a master detective and put the new customer to serious cross examination.
The manager should not act negligently in making enquiries; if proper enquiries are made, he gets protection
under Sn.131 of the Negotiable Instruments Act.
1.Minor:
As a minor has legal incapacity (incapax) to enter into contracts, generally he cannot open a Bank account.
Above rule is made only to give protection and to safeguard the interests of the minor.
there should be a guardian according to law to deal with minor's property. The father is the natural
guardian, and after his demise, the mother.
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The court in suitable cases may appoint a court guardian, Hence, the general rule is. that the Guardian
may open and operate the Bank Account on behalf of the minor.
He ceases to act, on the minor attaining majority.
In practice, the banks allow a minor above 12 years, to open an account in his own name and to issue
cheques as per Sn.26(a) of the Negotiable Instruments Act.
This is valid and the minor may continue his account on attaining majority at 18 (or if under Court of
Wards, age 21).
No overdraft can be given to a minor, as overdraft involves a contract which would be void ab initio
2.Lunatics
A person of unsound mind cannot make a valid contract. So, the bankers should not open an account in
the name of a person of unsound mind.
But a customer may become lunatic after opening an account with the bank.
3. Illiterate persons
An illiterate person means a person who can’t sign his name.
While opening of an account of such a person is unavoidable.
the banker should obtain Left thumb impression on the account opening form and specimen signature
card in the presence of an authorized bank official.
Details of identification marks should be noted on the account opening form and specimen signature card
At least two copies of photograph duly attested by any account holder/authorized bank official.
4.Married Woman
A married woman (Hindu) has the contractual capacity (if about 18 years of age) and has the right to
acquire or dispose of her personal property called "Stridhana" in Hindu Law.
The manager should make the usual essential enquiries in opening the account of a married woman.
In the application (account opening form), she should fill up in addition to her name, address etc., the
name of her husband,, his address (and the address of the employer of the husband).
Proper introduction is necessary.
As a competent person, she can draw and endorse cheques and other documents and these can be debited
to her account.
As long as credit balance is there in her account, there will be no risks.
if loan or overdraft is to be given the Bank should ascertain her credit worthiness, her personal properties
(Stridhana) the nature of the properties held by her etc.
The Husband is not liable for her debts, except for those loans incurred for "necessaries of life" for her
and her family.
Precautions in granting loans or overdraft are necessary as
she may have no property as stridhana.
Her Husband's property is not liable except for necessaries.
she may plead undue influence or ignorance of the nature of loan transaction.
she cannot be committed to civil prison.
6.Purdanashin Woman
She is one who wears a veil (Purdah), as per her customs, and is secluded except the members of her
family.
Some Muslim women observe this as custom in their community.
The Manager should of course follow the preliminary enquiries as usual and may allow such a woman to
open an account.
Her identity and that she is opening the account out of her freewill are essential.
To be on the safer side the manager may require a responsible person known to the bank attest her
signature.
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7. Joint Account
While opening the joint account, all the concerned persons should sign the application form.
The necessary forms are filled up and signed to specify how the account is to be operated and also who is
authorized on all matters including cheques, bills, securities, advances etc.
Operation of the account may be by one or more persons but clear instructions are essential to draw
cheques etc.
Instructions regarding survivorship are also a part of the process of opening of accounts.
The joint holders may nominate a person, if they so desire.
Example of Joint Account is Husband and Wife. In a case of an account with instructions payable to either
or survivor it is held that on the demise of the husband, the wife would be entitled to the amount if the
husband had such an intention to benefit her, but, if there is no intention, it becomes part of the estate of
the husband and hence heirs will be entitled as per law.
Death of the husband, will not constitute a gift to the wife. The burden of proving the intention is on the
wife (Marshall V. Crulwell; Foley V. Foley; Panikar V. TWQ Bank Ltd.)
8. Partnership firm
Partnership Account A banker may open a Current Account in the name of the Partnership Firm.
application made and duly signed by all the Partners along with the partnership deed (original or certified
copy).
The banker should make enquiries as usual and also about the nature of the business, names' and
addresses, of partners etc.
He should get an authority letter signed by all partners authorizing a partner or two or more partners to
draw cheques and other documents, to endorse bills or to accept bills etc., to mortgage, and sell property
of the firm.
The partnership deed is an important document to know the nature of the authority of the partners.
From the provisions of the Partnership Act
A partner's act will bind the firm if such an act is done in usual business of the firm or on behalf of the
firm, with an intention to bind the firm. This authority is implied.
Registration under Sn.69 of the Partnership Act is optional. However, if the firm is not registered, it
gets no locus standi to sue an outsider.
Partner cannot sue the firm or other partners. But, third parties may sue the firm.
To maintain a suit, (a) the firm should be registered; (b) names of Partners are to be on records of
Register of Firm. - . (iii) Implied Authority does not enable a partner to open an account on behalf of
the firm in his own name.
the manager should ensure that the acts of the partner bind the firm, and that a partner does not act
on his own behalf.
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Introduction
The account of the customer in the books of the banker records all of his financial dealings and true state of
his financial position.
If any of these facts is made known to others, the customer’s reputation may suffer and he may incur losses
also.
The banker is, therefore, under an obligation to take utmost care in keeping secrecy about the accounts of his
customers.
By keeping secrecy is meant that the account books of the bank will not be thrown open to the public or
Government officials.
Banker need take all necessary precautions to ensure that the state of affairs of a customer’s account is not
made known to others by any means.
The banker is thus under an obligation not to disclose—deliberately or intentionally—any information
regarding his customer’s accounts to a third party.
The nationalized banks in India are also required to fulfill this obligation.
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3.By order of the Court under the Banker’s Books Evidence Act, 1891.
When the court orders the banker to disclose information relating to a customer’s account, the banker is
bound to do so.
In order to avoid the inconvenience likely to be caused to the bankers from attending the Courts and
producing their account books as evidence, the Banker’s Books Evidence Act, 1891, provides that certified
copies of the entries in the banker’s book are to be treated as sufficient evidence and production of the books
in the Courts cannot be forced upon the bankers.
a certified copy of any entry in a banker’s book shall in all legal proceedings be received as prima facie
evidence of the matters.
Thus if a banker is not a party to a suit, certified copy of the entries in his book will be sufficient evidence.
The Court is also empowered to allow any party to legal proceedings to inspect or copy from the books of the
banker for the purpose of such proceedings.
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7.Disclosure to Police.
Under Section 94 (3) of the Criminal Procedure Code, the banker is not exempted from producing the account
books before the police.
The police officers conducting an investigation may also inspect the banker’s books for the purpose of such
investigations.
A. Express consent
Express in case the customer directs the banker in writing to intimate the balance in his account or any
other information to his agent, employee or consultant.
The banker would be justified in furnishing to such person only the required information and no more.
It is to be noted that the banker must be very careful in disclosing the required information to the customer
or his authorized representative.
if an oral enquiry is made at the counter, the bank employee should not speak in louder voice so as to
be heard by other customers.
Similarly, the pass-book must be sent to the customer through the messenger in a closed cover.
A banker generally does not disclose such information to the customer over the telephone unless he
can recognize the voice of his customer; otherwise he bears the risk inherent in such disclosure.
B. Implied consent
Implied of the customer permits the banker to disclose necessary information.
For example, if the banker sanctions a loan to a customer on the guarantee of a third person and
the latter asks the banker certain questions relating to the customer’s account. The banker is
authorized to do so because by furnishing the name of the guarantor, the customer is presumed
to have given his implied consent for such disclosure.
The banker should give the relevant information correctly and in good faith.
Implied consent should not be taken for granted in all cases even where the customer and the enquirer
happen to be very closely related.
For example, the banker should not disclose the state of a lady’s account to her husband without
the express consent of the customer.
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The banker may disclose the state of his customer’s account in order to legally protect his own interest.
For example, if the banker has to recover the dues from the customer or the guarantor, disclosure of
necessary facts to the guarantor or the solicitor becomes necessary and is quite justified.
3.Banker’s Reference
Banker follows the practice of making necessary enquires about the customers, their sureties or the
acceptors of the bills from other bankers.
This is an established practice amongst the bankers and is justified on the ground that an implied consent
of the customer is presumed to exist.
By custom and practice necessary information or opinion about the customer is furnished by the banker
confidentially.
the banker should be very careful in replying to such enquiries.
Liabilities to customer
The customer may sue the banker for the damages suffered by him as a result of such disclosure.
Substantial amount may be claimed if the customer has suffered material damages.
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Such damages may be suffered as a result of unjustifiable disclosure of any information or extremely
unfavorable opinion about the customer being expressed by the banker.
Liabilities to third parties.
The banker is responsible to the third parties also to whom such information is the banker furnishes
such information with the knowledge that it is false.
Such party relies on the information and suffers losses.
Such third party may request the banker to compensate him for the losses suffered by him for relying
on such information.
But the banker shall be liable only if it is proved that it furnished the wrong or exaggerated
information deliberately and intentionally. Thus he will be liable to the third party on the charge of
fraud but not for innocent misrepresentation.
Introduction
When account is opened by a banker in the name if a customer, there is an obligation on the banker to honour
the customer’s cheques.
as long as there are sufficient funds available in the customer’s account the banker need to honour cheques.
whenever the customer demands the repayment of his deposits by issuing cheques there is a contractual
obligation on the banker to honour his customers’ cheques and repay his deposits.
This obligation is provided by stature in section 31 of the Indian Negotiable Instruments Act of 1881.
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RIGHTS OF BANKER
1.Right of Appropriation
In case of his usual business, a banker receives payments from his customer.
If the customer has more than one account or has taken more than one loan from the banker, the question of
the appropriation naturally arises.
right of appropriation is vested in the debtor, who makes a payment to his creditor to whom he owes several
debts.
He can appropriate the payment by
an express intimation.
under circumstances implying that the payment is to be applied to the discharge of some particular
debt. If the creditor accepts such payment, it must be applied accordingly
Example: A owes B several debts, including ` 1,000 upon a promissory note which falls due on 1st
December, 1986. He owes B no other debt of that amount. On 1-12-1986 A pays B ` 1,000. The
payment is to be applied to the discharge of the promissory note.
If the debtor does not intimate or there is no other circumstances indicating to which debt the payment is to
be applied, the right of appropriation is vested in the creditor.
Introduction
Lien means the right of the creditor to retain the goods and securities owned by the debtor until the debt due
from him is repaid.
creditor has the right to retain the security of the debtor and not the right to sell it .
There is no express or implied contract, to the banker’s lien.
It is a legal claim by one person on the property of another as security for payment of a debt.
Types of lien
1. General lien
general lien applicable for the general balance due.
One of the important rights enjoyed by a banker is the right of general lien.
the creditor can retain the goods and securities of the debtor.
Banks in India enjoy not only right of general lien, they can even sell the goods and securities of the debtor in
case of need to recover debts.
Banker’s lien is therefore called as an Implied Pledge. Since Limitation Act is not applicable to right of lien,
banks can recover time barred debts also.
2. Particular lien
particular lien applicable only those goods and securities in respect of which debts are incurred, can be
retained by the creditor.
A particular lien can be exercised by a person who has spent his time, labour and money on the goods
retained. In such cases goods are retained for a particular debt only.
Example 1: if a wrist-watch is given to watch repairer for repairing, till the repairing charges are paid, the
watch repairer has right to retain the wrist watch in his possession. He cannot sell the watch for the recovery
of service charges or also cannot retain any other security of the debtor for these repairing charges.
Example 2: a tailor has the right to retain the clothes made by him for his customer until his tailoring charges
area paid by the customer.:
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1.The banker possesses the right of general lien on all goods and securities
The banker possesses the right of general lien on all goods and securities entrusted to him in his capacity.
Thus, he cannot exercise his right of general lien if –
the goods and securities have been entrusted to the banker as a trustee or an agent of the customer.
a contract – express or implied – exists between the customer and the banker which is inconsistent
with the banker’s right of general lien.
if the goods or securities are entrusted for some specific purpose, the banker cannot have a lien over
them.
3.The right of lien is conferred upon the banker by the Indian Contract Act
No separate agreement or contract is, therefore, necessary for this purpose.
To be on the safe side, the banker takes a letter of lien from the customer mentioning that the goods are
entrusted to the banker as security for a loan.
The banker is also authorized to sell the goods in case of default on the part of the customer.
4.The right of lien can be exercised only if goods in the name of the borrower.
The right of lien can be exercised on goods/securities in name of the borrower
Lien cannot be exercised if goods and securities not jointly with others.
For example, in case the securities are held in the joint names of two or more persons the banker cannot
exercise his right of general lien in respect of a debt due from a single person.
5.Right of lien can exercise by banker on the securities remaining in his possession after the loan,
Bank can exercise lien on securities for which they are lodged, is repaid by the customer.
If no contract to contrary exists, it is an implied presumption that the customer has re-offered the same
securities as a cover for any other advance outstanding on that date or taken subsequently.
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When a customer deposits his valuables, securities, ornaments, documents, with the banker for safe custody,
he entrusts them to the banker s a Bailee or trustee with the purpose to ensure their safety from theft, fire,
etc.
Example: if a customer hands over to the banker some shares with the instruction to sell them at or above a
certain price and the same are lying unsold with the banker, the latter cannot exercise his right of lien on the
same, because the shares have been entrusted for a specific purpose and hence a contract inconsistent with
the right of lien comes into existence.
But if no specific purpose is mentioned by the customer, the banker can have lien on bills or cheques etc.
3.The banker cannot exercise his right of lien over the securities lodged with him for securing a loan,
before such loan is actually granted to him.
Conditions
1.The accounts must be in the same name and in the same right
The first condition for the application of the right of set-off is that the accounts with the banker must not only
be in the same name but also in the same right.
The same right’ meant that the capacity of the accountholder in both the accounts must be the same.
principle involved in this rule is that funds belonging to someone else, but standing in the same name of the
account – holder, should not be made available to satisfy his personal debts.
Examples:1. In case of a sole trader the account in his personal name and that in the firm’s name are deemed
to be in the same right and hence the right of set-off can be exercised in case either of the two accounts is
having debit balance.
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Example 2; In case the partners of a firm have their individual accounts as well as the account of the firm
with the same bank, the latter cannot set-off the debt due from the firm against the personal accounts of the
partners. But if the partners have specially undertaken to be jointly liable for the firm’s debt due to the banker,
the latter can set-off such amount of debt against in the personal accounts of the partners.
2.The right can be exercised in respect of debts due and not in respect of future debts
a banker can set-off a credit balance in the account of customer towards the payment of a bill which is already
due but not in respect of a bill which will mature in future.
If a loan given to a customer is repayable on demand or at a future date, the debt becomes due only when the
banker makes a demand or on the specified date and not earlier.
6.The banker has right to exercise this right before the garnishee order is made effective
In case a banker receives a garnishee order in respect of the funds belonging to his customer, he has the right
first to exercise his right of set-off and thereafter to surrender only the remainder amount to the judgement
creditor.
comply with the KYC norms that have become universal now.
co-operate with the bank in following all the standard rules and procedures, without asking for any
exemption/waiver.
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UNIT 4
ENDORSEMENT
Introduction:
Endorsement is the act of signing a cheque for the purpose of transferring it to somebody else.
Under Negotiable Instruments Act it means the writing of ones name on the back of the instrument or any
paper attached to it with the intention of transferring the rights.
A bearer cheque can be transferred by mere delivery but an order cheque is transferred by endorsement and
delivery.
Endorsements are usually made on the back of the cheque, though they can be made on its face as well. If,
however, no space is left on the instrument, it may be made on a separate paper attached to it.
Endorsement on the cheque must be made in proper fashion, otherwise the bank will not pay it.
The endorser must sign his name exactly as it has been written on the cheque.
He must sign his name with the same spellings as already appear on the cheque.
Unless the transferor signs his indorsement on the instrument and delivers it, the transferee does not become
a holder.
it is essential that the intention of signing the instrument must be negotiation, otherwise it will not constitute
an endorsement.
The person who signs the instrument for the purpose of negotiation is called the ‘endorser’ and the person in
whose favour instrument is transferred is called the ‘endorsee’.
Where a cheque is endorsed on behalf of a company, a firm or some other institution, the person signing. the
endorsement must so sign as to make it clear that he is so doing on behalf of the company or the firm and not
in his personal capacity.
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2. Spelling
The endorser should spell his name in the same way as his name appears on the cheque or bill as its payee or
endorsee.
If his name is mis-spelt or his designation has been given incorrectly, he should sign the instrument in the
same manner as given in the instrument.
Thereafter, he may also put his proper signature in the same handwriting, if he likes to do so. For
Kinds of endorsements
3. Partial Endorsement
partial endorsement which transfers the rights to receive only a part payment of the amount due on the
instrument is invalid.
Such an endorsement has been declared invalid because it would cause inconvenience to them.
Example; Thus, where A holds a bill for Rs 2,000 and endorses it in favour of B for Rs 1,000 and in favour of
C for the remaining Rs 1,000, the endorsement is partial and invalid.
4. Restrictive endorsement
An endorsement which, by express words, prohibits the endorsee from further negotiating the instrument
The endorsee under a restrictive endorsement gets all the rights of an endorser except the right of further
negotiation.
It entitles the endorsee to receive the payment on due date and sue the parties for it but he cannot further
negotiate the instrument.
Illustrations: B, the holder of the bill, makes an endorsement on the bill saying “Pay C only.” It is a restrictive
endorsement as C cannot negotiate the bill further.
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This prevents the risk of unauthorized person obtaining payment through fraud or forgery and the drawer
losing his money.
5. Conditional endorsement
If the endorser of a negotiable instrument, by express words in the endorsement, makes his liability,
dependent on the happening of a specified event, although such event may never happen, such endorsement
is called a ‘conditional’ endorsement.
The law permits a conditional endorsement and therefore it does not in any way affect the negotiability of
the instrument.
Example; Pay B or order on his marriage; “Pay B on the arrival of Peerless ship at Bombay.”
In the case of a conditional endorsement the liability of the endorser would arise only upon the happening of
the event specified.
7. Facultative endorsement:
When the endorser expressly gives up some of his rights under the negotiable instrument, the endorsement
is called a ‘facultative’ endorsement.
Thus, “Pay X or order, notice of dishonour waived” is a facultative endorsement.
As a result of such an endorsement the endorsee is relieved of his duty to give notice of dishonour to the
endorser and the latter remains liable to the endorsee for the non-payment of the instrument
Meaning of holder
holder of a negotiable instruments means any person who is entitled in his own name and right to the
possession of the instrument and to receive and recover the amount due on the instrument.
A person who has obtained possession of the instrument by illegal means, e.g. by theft, or under a forged
indorsement, is not a holder.
A person can become the holder of a negotiable instrument only if the following conditions were satisfied:
He must be entitled to the possession of the instrument in his own name and under a legal title.
He must be entitled to receive or recover the amount from the parties concerned in his own name.
Kinds of Holders
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Holder in due course means any person who for consideration become the possessor of a promissory note,
bill of exchange, cheque etc and payable to bearer, before its maturity, (i.e. before the amount mentioned in
it becomes payable),
Holder in due course had no cause to believe that any defect existed in the title of the person from whom he
derived title.
Conditions
The holder must have taken the instrument for value.
He must have obtained the instrument before its maturity.
The instrument must be complete and regular on its ace.
He must have taken the instrument in good faith and without notice of any defect either in the instrument or
in the title of the person negotiating it to him.
He should not have obtained the instrument:
By gift
By unlawful consideration.
After its maturity.
Illegal method
In Braja Kishore Dixit v. Purna Chandra Panda (AIR 1957 SC 153), the court held that three conditions are
necessary to be holder in due course. Firstly, he must be a holder for consideration, second, the instrument
must have been transferred to him before it becomes overdue, and third, he must be a transferee in good faith
and that he should not have any reason to believe that there was any defect in the title of the transferor.
1.Good title
Holder gets a good title to the instrument even though the title of the transferor is defective.
Thu, he may get a better title than that of the transferor; e.g. if A steals a bill from B and endorses to C,a holder
due course, C can recover the amount from B, although A cannot recover from B.
3.sueing opportunity
A holder in due course can sue all the parties liable to pay in his own name.
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CHEQUES
Definition (Section 6)
A cheque is a bill of exchange drawn on a specified banker and it is Payable on demand.
Electronic image of a truncated cheque is recognized under law.
The Information Technology Act, 2002recognizes (a) digital signatures and (b) electronic transfer as well
It must be in writing and signed by the drawer.
The cheque is always accepted into the account of the payee.
sometimes cheque cannot be processed due to the insufficiency of funds in the account holder. Banks will
always return such cheques as (cheque bounce).
Parties to a Cheque:
1.Drawer
This is the person who draws the cheque.
He is the maker of the cheque.
He is the account holder who draws the cheque for drawing money from his bank account.
He is the person who issues cheque directing the bank to pay a certain sum of money to a certain person or
to the bearer.
Thus, the person who signs the cheque is known as drawer.
2.Drawee.
Drawee is the bank.
It is the party to whom the drawer gives order to pay the amount to the person named on the cheque or his
order to the bearer.
When the bank follows the order and pays the amount of the cheque then the cheque is
said to be honoured.
In case of refusal of the order, the cheque is said to be dishonoured
3. Payee.
This is the person to whom the amount mentioned in the cheque is made payable.
Payee is the party who presents the cheque for payment.
He is the person who receives money from bank.
He is the party in favour of whom cheque is issued.
The payee is the person whose name is mentioned on the cheque.
If the cheque is made payable to self, the drawer himself becomes the payee
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5. Payees name
cheque may be a valid one, it must be made payable to the order of a certain specified person or to his agent
or the bearer thereof.
A normal cheque is one in which there is a drawer, a drawee whom the amount the cheque is payable.
The payee must, therefore, be a certain person.
He may be a human being or an artificial person i.e., a body corporate, e.g., a company, an authority, a trade
union etc.
7. Payable on Demand
A cheque is always payable only on demand.
It is not necessary to use the word on demand as in the case of a demand bill.
As per Sec.19 of the Negotiable Instruments Act, unless a time factor is specified by the drawer, the cheque
is always payable on demand.
1.Bearer Cheque
When the words "or bearer" appearing on the face of the cheque are not cancelled, then the cheque is called
a bearer cheque.
The bearer cheque is payable to the person specified therein or to any other else who presents it to the bank
for payment.
However, such cheques are risky, this is because if such cheques are lost, the finder of the cheque can collect
payment from the bank.
2.Order Cheque
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An order cheque is a cheque which is payable to a particular person or to to anyone else to whom it is
endorsed (transferred).
In case of order cheque, the word ‘bearer’ might have been cancelled and the word ‘order’ is written.
written on the face of the cheque.
4.Crossed Cheque
Crossing of cheque means drawing two parallel lines on the face of the cheque with or without additional
words like "& CO." or "Account Payee" or "Not Negotiable".
A crossed cheque cannot be encashed at the cash counter of a bank but it can only be credited to the payee's
account.
5. Anti-Dated Cheque
If a cheque bears a date earlier than the date on which it is presented to the bank, it is called as "anti-dated
cheque".
Such a cheque is valid up to three months from the date of the cheque.
6. Post-Dated Cheque
If a cheque bears a date which is yet to come (future date) then it is known as post-dated cheque.
A post-dated cheque cannot be honoured earlier than the date on the cheque.
7. Stale Cheque
If a cheque is presented for payment after three months from the date of the cheque it is called stale cheque.
A stale cheque is not honoured by the bank.
Crossing Yes No
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Crossing Yes No
CROSSING OF A CHEQUE
Introduction
Crossing is an ‘instruction’ given to the paying banker to pay the amount of the cheque through a banker
only.
It not allows bank to pay amount directly to the person presenting it at the counter.
A cheque bearing above instruction is called a ‘crossed cheque.
others without such crossing are ‘open cheques’ which may be encashed at the counter of the paying banker
as well.
The crossing on a cheque is intended to ensure that its payment is made to the right payee.
Section 123 to 131 of the Negotiable Instruments Act contain provisions relating to crossing.
Thus not only cheques but bank drafts also may be crossed.
Types of Crossing
A. General crossing.
cheque bears across its face (generally, on the left hand top corner) two parallel transverse lines without
any words, or with such words as ‘and company or & Co.’ ‘not negotiable’ written in between the parallel
lines, it is called general crossing
The holder may deposit his cheque with any bank of his choice and collect his money through that bank.
it gives a direction to the paying banker that, he should not pay the cheque at the counter
payment is made through an account and not at the counter.
The main intention of crossing a cheque is to give protection for banker and customer.
When a cheque is crossed generally, a person who is not entitled to receive its payment is prevented from
getting that cheque cashed at the counter of the paying banker
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B. Special crossing
cheque bears across its face the name of a banker, that additional name of a bank itself (without any parallel
lines) Or, the name of the banker may be put within the parallel lines.
The special thing in this is the mention of name of a special bank which alone could be the collecting banker
for this cheque.
paying banker has to pay on the cheque only when it is presented through the banker specially mentioned
in the crossing.
the collecting banker can always act through an agent bank.
Sometimes, a cheque may be specially crossed to more than one bank. Sec.127 does not allow this. It
requires that if the second bank has to be mentioned, it must be as the agent of the first bank.
A special crossing gives more protection to the cheque than a general crossing
Account Payee
It’s an additional protection to the payee of a cheque is the practice of restrictive crossing.
This is commonly known as “Account Payee Only” crossing.
Such crossing can be made in the case of both the ‘general’ as well as ‘special’ crossing by putting in
between the parallel lines some restrictive words.
Examples: ‘Account payee (A/c Payee)’, ‘Account Payee only (A/c Payee only)’ or ‘Ram Nath’s account only.’
Double Crossing
When a cheque bears two separate special crossing, it is said to have been doubly crossed.
cheque is crossed specially, the banker to whom it is crossed may be again cross it especially to
another banker, his agent for collection.
It cannot, therefore, be crossed specially again to another banker.
cheque cannot have two special crossings, as the very purpose of the first special crossing is
frustrated by the second one.
DISHONOUR OF CHEQUE
Introduction
dishonored of the cheque means the refusal by the bank to pay the amount of cheque to the payee.
The bank should pay the amount mentioned on the cheque as soon as it is presented.
If the amount of cheque is paid by the bank to the payee, the cheque is said to be honored.
If the bank refuses to pay the amount of cheque, then the cheque is said to be dishonored.
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amount mentioned on the cheque is more than the amount that the drawer has in his bank account.
cheque is overwritten.
cheque is not found in proper condition or it is found wet, torn or spotted.
drawer has given order to the bank to stop payment of the cheque.
bank has got the information regarding the death or insolvency or lunacy of the drawer of depositor.
court of law orders the bank to stop payment of the cheque.
bank balance remains shortage on account of not collecting the cheque deposited.
If the drawer has closed his/her account before presenting the cheque.
1. Countermanding of payment:
customer after having issued the cheque to third party.
Later instructs the banker to stop payment on the cheque before the instrument is presented,
It is the responsibility of the customer to inform the banker before the payment is affected.
2. Death of customer:
Notice of death of customer has to be given by the close relative of the deceased.
On receipt of the notice, banker will close the account and any cheque received thereafter, payment will be
refused.
5. Garnishee order:
court gives order to the bank to close the account of the customer partially or completely and according to
that order cheques will be refused payment.
8. Other grounds
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When a cheque is
Conditional one
Drawn on ordinary piece of paper
Mutilated
Post dated
In sufficient funds
Irregular endorsement etc.
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protest is not compulsory, in the case of an inland bill or note, but a foreign bill must be protested, if so
required by the law of the place where it is drawn.
Protest for Better Security
the acceptor of a bill of exchange has become insolvent, or his credit has been publicly impeached,
before the maturity of the bill, the holder may within a reasonable time, employ a notary public to
demand better security of the acceptor and on its request, may cause facts to be noted and certified
within a reasonable time. Such certificate is called a “Protest for better security”.
The Protest must contain following
The transcript of the instrument or instrument itself.
The names of persons against whom the instrument has been protested.
A statement of (payment, acceptance, better security) that has been demanded of such person by
the notary public.
The place and time of dishonour and place and time of refusal when better security is demanded.
Signature of the Notary.
The subscription of notary public
PAYING BANKER
Introduction
The paying banker is the bank whose name is printed on a given cheque.
bank pays the specified amount by the cheque to the collecting banker and withdraws that amount from the
customer account.
This is only done if the customer has sufficient funds within their account in order to enable the transaction.
It is the duty of the paying banker to examine the cheque and ensure that it has been properly signed, the
endorsements are correct and that the cheque is generally in order.
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Here it must be in printed form, unconditional order of payment, date , amount, material alteration etc
3. Sufficiency of Funds
The banker should see whether the credit balance in the customer’s account is sufficient to pay the cheque
or not.
If there is an over draft agreement, then should see that the limit is not exceeded.
The banker should not make part payment of the cheque. The banker should pay either full amount or
refuse payment.
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If such cheque is a stolen one and the banker makes its payment without the knowledge of such theft, he
will be discharged of his obligation and will be protected under Section -85(2).
UNIT 5
Introduction
It is a fundamental principle of banking that advances are made to customers in reliance on his promise to
repay, rather than the security held by the banker.
All lending involves some degree of risks.
it is necessary for any bank to develop sound and safe lending policies and new lending techniques in order
to keep the risk to a minimum.
the banks are required to follow certain principles of sound lending.
1.Safety
When a loan or investment is made, the banker will have to ensure that the money advanced is
returned by the borrower along with interest within the stipulated period.
This is possible only when the borrower does not face any risk and strictly adheres to the terms
and conditions of the loan.
It’s a duty of the banker to type of borrowers who are prompt in repayment of the principal and
interest amount.
2.Liquidity
An asset is said to be liquid when it converted into cash within a short notice, without loss.
bank has to take more precaution while doing lending.
The depositor may demand his/her moneyat any time and the bank must be in a position to repay the same.
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It necessary that it money must come back on demand or in accordance with agreed terms of repayment.
The borrower must be in a position to repay within a reasonable time after a demand for repayment is made.
This can be possible only if the money is employed by the borrower for short-term requirements.
The source of repayment must also be definite.
‘Liquidity’ has as much importance as ‘safety’ of funds. Because bulk of bank deposit is repayable on demand
or at a very short notice.
Banker must ensure that money is locked up for a long time.
If loan becomes illiquid, it may not be possible for bankers to meet their obligations vis a vis depositors.
liquid assets held by bank, depends upon the following factors
Statutory Requirements
Nature of Money Market
Banking Habits
Structure of Banks
Business Conditions
Monetary Transactions
Number and Size of Deposits
Nature of Deposits
Clearing House Facility
3.Profitability
Banks accept deposits from public and lend it to make profit.
Banks also incur expense to maintain deposits such as rent, stationary, premises rent, provision for
depreciation of their fixed assets, bad loans.
After incurring such expenditures, a bank must earn some profit like other financial institutions.
The bank has profit as its main business motive.
the bank must earn higher interest or higher return.
Factors Affecting Profitability of Banks
Cost of Funds
Yield On Funds
Non-Interest Income
Amount of Working Capital
Non-performing Asset
Competition
Operating cost
Risk Cost
Burden
4. Purpose of loan
A banker would not throw away money for any purpose for which the borrower wants.
The purpose should be productive so that the money not only remains safe but also provides a definite
source repayment.
The purpose of loan helps in determining level of risk and also impact interest rate on loan.
5. Shift ability
Sometimes bank is giving loan against the security.
in case of bad debts, the bank must be able to sell the security and realize the loan amount.
In some cases, the bank will not sell the security, but will shift the same to the Central bank which will grant
the commercial bank additional fund against the security.
6. National Interest
The bank must keep in mind national interest while lending or investing depositor’s money.
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When a country is facing unemployment, the bank must give more loans to employment oriented
industries, so that the problem of unemployment can be reduced.
Similarly, when a country is faced with food problem, more loans should be given for agriculture so that,
food production can be increased.
7. Safety Margin
While granting loan against security, the bank will have to keep sufficient safety margin.
bank will lend only unto 50 or 60% of the value of security as loan by keeping a safety margin of 4 or 50%.
For example: when loan is given against a jewel whose market value is Rest. 10,000/-. the loan amount will
be Rest. 6,000/- and the safety margin Rest. 4,000/- now even if the market value of the jewel fluctuates to
Rest. 9,000/- or Rs. 8,000/- still the banker will be able to realize the loan amount in case the borrower
defaults.
8. Diversification of risk
banker cannot invest all his resources in a single industry or with a single borrower.
The banker should not keep all the eggs in the same basket.
By choosing a single industry such as iron and steel or sugar, the banker is inviting more risks.
It is likely that these industries may face depression and the banker will find it difficult to recover the loan
or realize his investment.
PRECAUTIONS OF LENDING
INTRODUCTION
Nearly 90% of total loans and advances given by banks are secured against varied types of assets.
Secured lending provide sense of protection to the banker
In case of non- payment, the banker is entitled to dispose them and realise his debt.
Though the banker’s position is safe he is likely to suffer losses through his own negligence or mistakes.
Therefore, he should take some precautions before lending against assets.
1. Against goods
For various reasons the commercial banks in the past never considered the goods as a perfect security for a
loan.
Goods have difficulties like storage, transport, supervision, valuation, risk of deterioration etc. but now
about 60% of bank loans are given against the security of goods.
Advantages
Easy marketability
goods are tangible securities and are better than guarantee and bill of exchange.
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If the borrower defaults, then bank can realise the loan amount by selling the goods
Ready market
Most of the goods have ready market. They can easily be sold.
Advances for short period
normally loans on goods are given for short period as few goods have seasonal character.
Easy to evaluate the prices of the goods in the market.
Free from fluctuations
generally, banks accept all goods which necessaries of life like wheat, rice, sugar etc
so there is less fluctuation of their market demand and prices.
Disadvantages
Risk of deterioration
some goods of perishable nature and some goods attain depreciation in their values
Risk of fraud
there is no proper standardization and branding.
there is scope for the unscrupulous people to adulterate the goods.
Storage and verification
the banker has to find godowns to keep the goods pledged and secure the service of honest
godowns keepers for ensuring proper supervision on the goods
Fall in the value of security
the value of security is subject to wide fluctuation in case of luxury goods.
Unexpected change in demand may cause their price fall
High transport cost
Precautions
Integrity of the borrower
Banker should ascertain that the borrower is a trustworthy person, honest.
It is needed to avoid fraud.
Proper storage
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RBI directives
RBI directives are issued from time to time regarding lending against goods.
it may require some special conditions for such loans or restrict lending against certain listed
commodities. These must be followed.
Introduction
Land is immovable property.
S. 3 (6) of general clauses act 1897 – immovable property shall include land ,benefits arise out of land and
things attached to earth or permanently fastened or anything attached to earth except standing timber,
growing crops and grass
A loan that you can avail by mortgaging property.
Banks and financial institutions provide LAP (loan against property) on residential, commercial property
and on land property.
It is a Secured loan and so in case of default bank can take over the property and auction it to recover loan
dues.
Ownership stays with the borrower and he can use or rent out the property
Purpose
May be for Business
May be for Personal purposes like –wedding, education, home loans or home improvements etc.
Loan size – rs 5lakh to 10 crore
Tenure –upto 15-20 years
Precautions
financial soundness of the borrower
The banker should ascertain the financial soundness of the borrower.
His annual income and other source of income must be inquired
Banker should ask for latest tax payment receipts
And that owner has nor arrears of land revenue
There should not be any prior mortgage
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Introduction
it was emphasised that commercial banks should increase their involvement in the financing to priority
sectors.
Reserve Bank prescribed a modified return for reporting priority sector advances and certain guidelines
were issued in this connection.
Priority sector refers to sectors of the economy which may not get timely and adequate credit in the
absence of this special dispensation.
Typically, these are small value loans to farmers for agriculture and allied activities, micro and small
enterprises, poor people for housing, students for education and other low income groups and weaker
sections.
3.Micro Credit
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Provision of credit and other financial services and products of very small amounts not exceeding Rs.
50,000 per borrower.
It is mainly to the poor in rural, semi-urban and urban areas, either directly or through a group mechanism,
It main intention to enable them to improve their living standards, will constitute micro credit.
4.Education loans
Education loans include loans and advances granted to only individuals for educational purposes up to Rs.
10 lakhs for studies in India and Rs. 20 lakhs for studies abroad, and do not include those granted to
institutions
5.Housing loans
Loans up to Rs. 15 lakh for construction of houses by individuals, (excluding loans granted by banks to their
own employees) and loans given for repairs to the damaged houses of individuals up to Rs.1 lakh in rural
6. Others
Small road and water transport operators (owning up 10 vehicles)
Small business (Original cost of equipment used for business not exceed Rs. 20 lacs)
Retail trade (advances to private retail traders up to 10 lacs
Professional and self-employed persons
State sponsored organisations for SC / ST
Housing
Consumption loans (under the consumption credit scheme for weaker
sections)
Micro-credit provided by banks either directly or through any
intermediatory; loans to self help groups (SHGs) / Non Governmental
Organisations (NGOs) for onlending to SHGs
Loans to the software industry (having credit limit not exceeding Rs. 1
crore from the banking system)
Loans to specified industries in the food and agro-processing sector
having investment in plant and machinery up to Rs. 5 Crore
(vii) weaker sectors withtin priority sectors
Small and marginal farmers with land holding of 5 acres and less ad
landless labourers, tenant farmers and share croppers.
Artisans, village and cottage industries where individual credit limits do
no exceed rs. 50,000.
Beneficiaries of Swarnjayanti Gram Swarojgar Yojana (SGSY)
SC / ST
Beneficiaries of Differential Rate of Interest (DRI) scheme
Beneficiaries under Swarna Jayanti Shahari Rojgar Yojana (SJSRY)
Beneficiaries under the Scheme for Liberation and Rehabilitation of
Scavangers (SLRS)
Self Help Groups (SHGs)
Introduction
Financial indiscipline is the hallmark of Indian industry.
The growing Non-Performing Assets ('NPA'), forced the government to bring more reform in financial
industry. whereby a special Debt Recovery Tribunal ('DRT') was set up for the recovery of NPA.
However, DRT could not speed up the recovery
Further, the balance sheets of the banks and financial institutions were turning red due to heavy mandatory
provisions for NPAs.
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Realizing that every fifth borrower is a defaulter, the Government brought Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, (SARFAESI 2002).
This Act empowers the banks and financial institutions to recover their dues in Non- Performing Asset (NPA)
accounts, without the intervention of a court.
This Act also empowers the banks and financial institutions to issue notice for recovery from the defaulting
borrowers and guarantors, calling upon them to discharge the dues in full within 60 days.
Features:
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4.Funding of Securitisation.
The SCO/RCO may raise the necessary funds, for the acquisition of financial assets, from the investors by
issuing a security receipt.
Security receipts issued by any SCO or RCO shall be "securities" within the meaning of Section 2(h)(ic) of the
Securities Contracts (Regulation) Act, 1956.
A Scheme of acquisition has to be formulated for every acquisition detailing the description of financial assets,
value of investment, rate of return assured etc.
separate and distinct accounts have to be maintained in respect of each scheme of acquisition.
5.Assets Reconstruction
A SCO or RCO may, according to the guidelines prescribed by RBI, carry out asset reconstruction in any one
of the following manners:
Taking over the management of the business of the borrower.
Changing the management of the business of the borrower.
Selling or leasing of a part or whole of the business of the borrower.
Rescheduling of the payment schedule of the debt.
Entering into settlement with the borrower for the payment of debt.
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If the borrower pays all the dues together with all costs, charges and expenses incurred by the lender before
the date fixed for the sale of the secured assets, the lender shall not transfer or sell the secured assets.
If the sale proceeds of the secured assets are not fully satisfying the debt due, the lendermay file a claim before
the DRT or before a competent court for the recovery of the shortfall.
The lender also has an option to proceed against any of the guarantors or sell the pledged assets without
taking any measures against the borrower.
The lender can take the assistance of the Chief Metropolitan Magistrate or District Magistrate, as the case may
be, in taking possession of the secured assets from the borrower.
9.Exempted transactions
The following transactions are exempted from the provisions of the Securitisation Act:
Lien on any goods, money or securities given under the Contract Act,1872.
Pledge of movables under the Contract Act,1872.
Creation of security on aircraft.
Creation of security interest on vessel.
Conditional sale, hire-purchase or lease in which no security interest is created.
Rights of unpaid seller under the Sale of Goods Act,1930.
Non attachable properties under the civil Procedure Code.
Security interest on an amount less than or equal to Rs.1 lakh.
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8. Salary disbursement
In a huge factory, employing thousands of persons, salar disbursement can be done through bank branches.
The salary of the employee will be credited to his individual account every month and he can either make
cheque payment or even withdraw cash.
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Introduction
Electronic banking has many names like e banking, virtual banking, online banking, or internet banking.
It is simply the use of electronic and telecommunications network for delivering various banking products
and services.
In India ICICI Bank first offered internet banking services,
Through e-banking, a customer can access his account and conduct many transactions using his computer
or mobile phone.
it is the most popular method of doing banking operation.
E banking enable customers to perform all routine transactions, such as account transfers, balance
inquiries, bill payments, and stop-payment requests, and some even offer online loan and credit card
applications.
Account information can be accessed anytime, day or night, and can be done from anywhere.
Types of e banking
2.Online Banking
Online Banking refers to the use of today’s computer technology to avoid the time consuming, paper based
aspects of traditional banking.
It helps to order and manage our finances more quickly and efficiently.
3. Core Banking
Core banking is nothing but centralised banking.
All the information such as account of other branches are channalised through computer to the head office
or corporate office.
all the branch maintains records at branch level.
The information about the branch working is sent by the branch to the head office periodically.
Because of core banking system all the information of branch will be recorded at corporate office (head office)
through Electronic media by computer.
With the help of electronic media core banking and internet the head office can observe the performance of
the branch manager at any time he needs it.
4. Tele Banking
Telephone banking is a service provided by a bank or other financial institution, that enables customers to
perform a range of financial transactions over the telephone, without the need to visit a bank branch or
automated teller machine.
Telephone banking times are usually longer than branch opening times, and some financial institutions offer
the service on a 24-hour basis.
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telephone banking minimises the cost of handling transactions by reducing the need for customers to visit a
bank branch for non-cash withdrawal and deposit transactions.
To use telephone banking facility, a customer must first register with the institution for the service, and set
up some password (under various names) for customer verification.
To access telephone banking, the customer would call a special phone number set up by the financial
institution.
The service can be provided using an automated system.
The types of financial transactions which a customer may transact through telephone banking include
obtaining account balances and list of latest transactions.
Transactions involving cash or documents (such as cheques) are not able to be handled using telephone
banking,
5. Net Banking
Internet enables one to connect to other computer systems so that they can look up for an information,
documents data programs and images.
They can be used to search for information on all sorts of services.
One can do a number of activities by just sitting in front of one’s computer screen or smart phone.
Net banking help to Transfer of funds from one account to another in the same bank or different banks, Keep
surplus funds in a fixed deposit account, Online shopping etc.
The only thing he/she needs to do is to access his/her virtual account with the help of the ID and PASSWORD,
provided by the bank. E-Banking Service.
6. Credit card
A card issued by a financial company giving the holder an option to borrow funds.
borrowing limits are pre-set according to
the individual's credit rating.
Credit cards charge interest and are primarily used for short-term financing.
Credit cards have higher interest rates than most consumer loans o lines of credit.
Almost every store allows for payment of goods and services through credit cards.
Because of their wide spread acceptance, credit cards are one of the most popular forms of payment for
consumer goods and services.
7.Debit Card
A payment card that deducts money directly from a consumer’s account to pay for a purchase.
Debit cards eliminate the need to carry cash or physical checks to make purchases.
Unlike credit cards, they do not allow the user to go into debt, except perhaps for small negative balances
debit cards usually have daily purchase limits, meaning it may not be possible to make an especially large
purchase with a debit card.
Advantages of e-banking
1.For Banks
Lesser transaction costs
electronic transactions are the cheapest modes of transaction
A reduced margin for human error
since the information is relayed electronically, there is no room for human error
Lesser paperwork
digital records reduce paperwork and make the process easier to handle. Also, it is environment-friendly.
Reduced fixed costs
A lesser need for branches which translates into a lower fixed cost.
More loyal customers
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since e-banking services are customer-friendly, banks experience higher loyalty from its customers.
2.Customers
Convenience
a customer can access his account and transact from anywhere 24x7x365.
Lower cost per transaction
since the customer does not have to visit the branch for every transaction, it saves him both time and money.
No geographical barriers
In traditional banking systems, geographical distances could hamper certain banking transactions. However,
with e-banking, geographical barriers are reduced.
3.Businesses
Account reviews
Business owners and designated staff members can access the accounts quickly using an online banking
interface. This allows them to review the account activity and also ensure the smooth functioning of the
account.
Better productivity
Electronic banking improves productivity. It allows the automation of regular monthly payments and a host
of other features to enhance the productivity of the business.
Lower costs
Usually, costs in banking relationships are based on the resources utilized. If a certain business requires more
assistance with wire transfers, deposits, etc., then the bank charges it higher fees. With online banking, these
expenses are minimized.
Lesser errors
Electronic banking helps reduce errors in regular banking transactions. Bad handwriting, mistaken
information, etc. can cause errors which can prove costly. Also, easy review of the account activity enhances
the accuracy of financial transactions.
CREDIT CARDS
Introduction
Credit cards are considered a boon for the ready convenience.
you don't have to worry about carrying enough cash when you go shopping or to a restaurant.
Just flash your card, sign and walk out.
Thus the age of plastic money has finally come to India.
A credit card in simple words is a plastic card which can be used as substitute for cash.
It is widely used by people for make payment whether it is a small sum involving buying a movie
ticket or big sum like purchasing some furniture or payment at hospitals.
Banks issue it to their customers to enable them to purchase on credit.
These cards store the information relating to customers account.
Features
1.Alternative to cash
Credit card is a better alternative to cash. It removes the worry of carrying various currency denominations
to pay at the trade counters.
It is quite easy and faster than waiting for completion of cash transactions.
As an alternative, credit card helps a cardholder to travel anywhere in the world without a need to carry an
ample amount of cash.
It also reduces the possible risk of money theft and gives its user a complete peace of mind.
2. Credit limit
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The credit cardholder enjoys the facility of a credit limit set on his card.
This limit of credit is determined by the credit card issuing entity (bank or NBFC) only after analysing the
credit worthiness of the cardholder.
The credit limit is of two types, viz.,
Normal credit limit- Normal credit limit is usual credit given by the bank or NBFC at the time of issuing a
credit card.
Revolving credit limit. - Revolving credit limit varies with the financial exposure of the credit cardholder.
5. Regular charges
Regular charges are basic routine charges charged by the credit card issuing entity on the usage of credit
card by its cardholder.
These charges are nominal in nature.
The regular charges are primarily classified into two types, viz.,
Annual charges- Annual charges are collected on per annum or yearly basis
Additional charges. - Additional charges are collected for other supplementary services provided
by the credit card issuing entity. Such services include, add-on-card (an additional
credit card), issue of a new credit card, etc.
6. Grace period
The grace period is referred to those minimum numbers of additional days.
Within which a credit cardholder has to pay his credit card bill without any incurring interest or financial
charges.
7. Bonus points
The competition among the credit card providers is unbending (adamant).
Offering various incentives is usually a trendy (fashionable) way to improve the sale of the
products in the ordinary course of business.
credit card providers also give bonus points on the financial value of the transactions compiled by
their customers.
8. Gifts and other offers
bonus points are redeemed either by converting them into gifts, cash back offers, or any other
similar compelling offers.
To collect many bonus points, the credit cardholder has to carry out a considerable number of
transactions through his credit card.
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Besides providing credit, the credit card organization extends some additional facilities to attract
customers.
1.Risk Coverage
Depending on the type of card issued, some banks ensure the card holders a fixed percentage on the value
of a particular sum for covering the risk.
2.Travel Privileges
Banks provide travel assistance to their card holders by offering a wide range of services linked to airline
and hotel bookings, discounted holiday packages, car rentals etc.
4.Purchase Protection
This facility protects the purchases against damage or loss caused due to fire and theft at no extra cost.
The card holder can claim the value of the product damaged or lost from the Insurance Company.
This protection is available for a period of 90 days from the date of purchase of the product using the card.
5.Supplementary Cards
These cards are issued to the family members of cardholders.
A cardholder of any bank can obtain supplementary cards at the prevailing card fee for the immediate
family members.
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Advantages.
Credit card reduces need to carry cash or checks.
If you make an unforeseen, large purchase, credit allows you to buy it at once and settle up later. Besides it
gives you the opportunity to spread the cost of a large payment over several months.
credit companies offer consumers flexible rewards schemes in which points earned by purchasing goods
with the card can be redeemed for further goods and services.
you can make purchases abroad without having to worry about local currency. They have now spread
worldwide.
credit cards can help you build a positive credit history. Having a good credit history is also very important,
when the credit card owner is applying for loans, rental or even jobs.
Many credit cards offer some type of insurance if your purchase is stolen. Some credit companies provide
extended warrantees on certain types of purchases.
In general, credit cards enhance our personal responsibility and independence.
Introduction
Mobile Banking can be described as a mechanism which allows customer of a financial institution to carry
out various financial transactions with the help of their mobile
It is a quite popular method of banking that fits in well with a busy, technologically oriented lifestyle.
It might also be referred to as M-banking or SMS banking.
The amount of banking you are able to do on your cell phone varies depending on the banking institution
you use.
Some banks offer only the option of text alerts, such as deposits,
Mobile Banking Service include: -
Account Balance Enquiry
Account Statement Enquiries.
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cost effective
Various banks provide this facility at a lower cost as compared to banking by self.
Banking through cell phone benefits the banks too. It cuts down on the cost of tele- banking and is
more economical.
reduces the risk of fraud
Banking through mobile reduces the risk of fraud.
You will get an SMS whenever there is an activity in your account. This includes deposits, cash
withdrawals, funds transfer etc.
you will get a notice as soon as any amount is deducted or deposited in your account.
Banking relation
Mobile banking through cell phone is very advantageous to the banks .
it serves as a guide in order to help the banks improve their customer care services.
Banks can be in touch with their clients with mobile banking.
Banks can also promote and sell their products and services like credit cards, loans etc. to a specific
group of customers.
This gives the bank ability to cross-sell up-sell their other complex banking products and services
such as vehicle loans, credit cards etc.
Mobile banking offers the next surest way to achieve growth. Service providers are increasingly
using the complexity of their supported mobile banking services to attract new customers and
retain old ones.
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Besides, internet connection on phones may be costly depending on the phone features and
network providers.
Restricted scope
Mobile Banking has not been fully adopted by people as of yet.
according to the data, only 14% of Indian customers are familiar with mobile banking.
mobile phones have a very small screen compared to a laptop or a computer and this proves to be a
disadvantage when doing banking through mobiles.
While, new web designs aim to take care of it, but still it is nowhere near a desktop.
Working in the virtual world proves to be a loss of personal banking experience especially for those
who find mobile banking more complicated.
A two-way communication becomes almost impossible between the customers and the bank.
Non-uniformity of services
It is very important to understand that not all banks provide same services through Mobile Banking.
While few been allowed to provide mobile banking services to customers by Reserve Bank of India,
there are still many in line who are being kept out of the purview.
Theft of mobile
This is one of the major disadvantages of mobile banking.
In case the mobile gets stolen, the person is almost bound to lose money if the bank account
information gets leaked and the criminals gain access to the bank account through mobile web or
mobile apps
Not considered for bulky or large volume of transactions
Mobile banking is not considered an option for a very large transaction or even for a big volume o
transactions due to mobile banking rules.
The total upper limit of the worth of such transactions has been limited.
This can be a hindrance for those who need to transact for more.
Introduction
Automatic teller machines have transformed the concept of banking in India.
It has eliminated the requirement of to stand in long queue and filling of forms for routine banking
transaction.
The first bank to introduce the ATM concept in India was the Hong Kong and Shanghai Banking Corporation
(HSBC) in the year 1987.
Now customers of banks can access their money with the scratch of a ATM E-banking
ATM is an electronic computerised device that allows banks customers to directly use a secured method of
communication to access their bank accounts.
There is no need for a customer to visit branches for their day to day banking transaction like cash deposits,
cash withdrawals, balance enquiry, dropping cheque etc.
This is expected to result in more efficient banking system.
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ATM delivers multiple services 24x7, which is major cause of making it a success in the history of banking
industry.
ATM services became profitable and successful due to various services delivered.
Advantages
24 hours’ service
ATMs provide service round the clock.
The customer can withdraw cash upto a certain a limit during any time of the day or night.
More convince
ATM gives convenience to bank and customers
ATMs are located at convenient places, such as at the air ports, railway stations, etc. and not
necessarily at the Bank premises.
It is to be noted that ATMs are installed off-site. (away from bank premises) as
ATMs reduce the work pressure on bank’s staff and avoid queues in bank premises.
ATMs are of great help to travellers. They need not carry large amount of cash with them. They can
withdraw cash from any city or state, across the country and even from outside the country with the
help of ATM.
ATMs provide privacy in banking transactions of the customer.
Disadvantages
ATMs may be unreliable especially when they are down.
In case of system failure, there is nothing you can do until they are restored.
What happens if you forget your PIN? You will have to engage in hassles with the management before a new
one is issued usually after some days.
In case of serious theft, you may lose the ATM card. The thieves can further hack the ATM card and be able
to withdraw cash from your account.
The ATM machine does not guarantee a 100% availability of cash. In some cases, it may run low of cash and
you will have to wait until it is restored by the management.
The cost of levied to an individual using an ATM could be higher although this vary with the banks.
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