Banking Law and Practice

BANKING LAW AND PRACTICE
CHAPTER-1 BANKER AND CUSTOMER

Introduction:
‘Bank’ has been derived from the Latin word ‘bancus’ or ‘banque’. The meaning of it in English is a bench.
The early bankers transacted their business at benches in a marketplace. A bank is a financial institution that
deals with deposits, advances, and other related services. It receives money from those who want to save in
the form of deposits and it lends money to those who need it in the form of a loan.
Definition:
According to The Indian Banking Companies Act, 1949: “Banking means the acceptance for lending or
investment, of deposits of money from the public repayable on demand or otherwise, and withdrawal by
cheque, draft, order or otherwise”.
According to Sir John Pagette, “A bank is a financial institution that collects money in current, savings,
or fixed deposit accounts, collects checks as deposits, and pays money from the depositors' accounts
through checks”.
According to Prof. Kinley “A bank is an establishment that makes advances of money or other means of
payment to individuals, and to which individuals entrust money or means of payment when not required
by them for use”.
FEATURES OF BANK
Banks play a critical role in the financial system and the economy by offering a range of services that
revolve around handling money, serving individuals and businesses, and acting as financial intermediaries.
1. Dealing with Money: Banks primarily deal with money—accepting deposits, providing loans, facilitating
transactions, and offering various financial services. They help in the circulation of money within the
economy by providing a safe place for individuals and businesses to store their funds and access credit.
2. Individual and Business Services: Banks cater to both individual customers (retail banking) and
businesses (corporate banking). Services include personal loans, mortgages, credit cards for individuals, and
working capital loans, trade finance, and treasury services for businesses.
3. Acceptance of Deposits: Banks accept deposits from the public in the form of savings accounts, fixed
deposits, and recurring deposits. These deposits are a key source of funds for the bank, which they then use
to provide loans and advances.
4. Giving Advances and Loans: Banks provide loans and advances to individuals and businesses. This
includes personal loans, home loans, business loans, and lines of credit. The interest earned on these loans is
a primary source of income for banks.
5. Agency Services: Banks perform various agency services on behalf of their customers, such as managing
investments, collecting cheques, paying bills, handling dividends, and facilitating the purchase and sale of
securities.
6. Utility Services: Banks offer utility services like locker facilities, ATM services, internet banking, mobile
banking, and the issuance of credit and debit cards. These services add convenience and security for
customers.
7. Payment and Withdrawal: Banks facilitate payments and withdrawals through various channels,
including cash transactions, cheques, digital transfers (e.g., NEFT, RTGS), and card payments. This function
supports the seamless movement of money in the economy.
8. Profit and Service Orientation: Banks are profit-oriented institutions, seeking to earn income through
interest on loans, fees for services, and investments. However, they also have a service orientation, aiming to
meet the financial needs of their customers through various products and services.
9. Ever-Increasing Functions: The role of banks is continuously evolving, with new functions and services
being added over time. For instance, banks now engage in financial advisory services, insurance, wealth
management, and providing digital payment solutions.
10. Connecting Links: Banks act as intermediaries between depositors and borrowers, linking those who
have excess funds with those who need funds. This intermediation helps in the efficient allocation of
resources in the economy.
11. Banking Business Name and Identity: The identity of a bank is crucial for its business. A strong,
trustworthy brand attracts customers and retains their loyalty. The bank's name and identity are associated
with its reputation, customer service, and the quality of its financial products.
These features highlight the multifaceted role of banks in the economy, serving as financial intermediaries,
service providers, and custodians of public trust.
FUNCTIONS OF BANK
Banks perform a variety of functions that are essential for the smooth functioning of the economy. These
functions can be broadly categorized into primary functions and secondary functions.
Primary Functions of Banks

Accepting Deposits:
One of the fundamental functions of banks is to accept deposits from the public, which provides a safe place
for individuals and businesses to store their money. Deposits are the primary source of funds that banks use
to provide loans and earn interest.
Types of Deposits:
1. Savings Deposits: Savings accounts are designed for individuals to save money while earning a
moderate interest rate. These accounts are highly liquid, allowing depositors to withdraw money
whenever needed. There is usually a limit on the number of withdrawals per month.
2. Current Deposits: Current accounts are mainly used by businesses and firms that need to perform
numerous transactions daily. These accounts are highly liquid, offering no interest on deposits but
allowing unlimited withdrawals and deposits.
3. Fixed Deposits (Term Deposits): Fixed deposits are meant for people who want to earn a higher rate
of interest on their savings by locking in their funds for a specified period. Depositors cannot
withdraw money before the maturity date without incurring a penalty. Interest rates are higher than
savings accounts.
4. Recurring Deposits: These accounts are designed for individuals who want to save a fixed amount
of money regularly over a specified period. Depositors receive interest at the rate applicable to fixed
deposits, and the total amount is paid at the end of the term.
2. Providing Loans and Advances
Banks use the deposits they gather to provide loans and advances to individuals, businesses, and other
entities. This function is crucial for supporting economic activities by providing the necessary capital for
consumption and investment.
Types of Loans and Advances:
1. Overdraft (O/D): Overdraft facilities allow current account holders to withdraw more money than
they have in their account up to a pre-agreed limit. Interest is charged only on the amount overdrawn
and for the period it is overdrawn. It is a flexible form of borrowing.
2. Cash Credit: Cash credit is a short-term borrowing option for businesses to meet their working
capital needs. A cash credit limit is sanctioned against the security of inventory, receivables, or other
assets. Interest is charged on the amount utilized.
3. Loans: Banks provide various types of loans for different purposes, such as personal loans, home
loans, education loans, and business loans. Loans are usually long-term and are repaid in installments
over a period. The borrower is required to pay interest on the outstanding amount.
4. Discounting of Bills of Exchange: This is a form of short-term finance where the bank purchases a
bill of exchange (a promissory note) before its maturity at a discount. The bank pays the holder of
the bill an amount less than its face value and collects the full amount on the maturity date from the
drawee. This provides immediate liquidity to the seller.

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BANKING LAW AND PRACTICE

CHAPTER-1 BANKER AND CUSTOMER

Primary Functions of Banks

2. Providing Loans and Advances

Types of Loans and Advances:

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