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Q. Explain the origin & development of banking in India. Banking was in existence in India during the Vedic times (2000 BC to 1400 BC). Money lending was regarded as an old art and was practiced in the early Aryan days. Rina (debt) is often mentioned in the Rig Veda reflecting a normal condition prevalent in the Vedic Society. The transition from money-lending to banking must have occurred before Manu-he states that a sensible man should deposit his money with a person of good family, good conduct, wellacquainted with law, wealth and honorable. There are references to lending and banking in the two epics namely Ramayana & Mahabharata. During that period banking had become a full fledged business More details pertaining to money lending in the Sutra period (7th century to 2nd century) are available from the Jatakas (Buddhist writings). Jatakas establish the existence of seths (money lenders) and contain several stories of Kings receiving financial help from the guilds. From these accounts it is evident that money lending, banking and trading were interlinked. In the Buddhist period even the Brahmins & Kshatriyas started taking banking as a business. Bills of exchange came into use in this period. The banking business was being carried out even in the Smriti period and the Smritis explained the methods of regulation of interest. The tradition from money-lending to banking appears to have taken place in the 2nd or 3rd century AD. During This period, people were enjoined upon to make deposits with respectable bankers. This period is characterized as one in which the activities of the bankers/money lenders were well controlled and regulated. Rules for safeguarding the interest of borrowers were introduced. Kautilya in his Arthashastra which was written in the Maurya period in the 4th century mentioned the maximum rate of interest which could be charged by the lenders. The bankers during this period was known as Shakuras and Mahajans There is no live account of indigenous banking from the 6th to 16th century but some stray evidence is found. During the Moghul period indigenous banking was in its prime. There was hardly any village without its money-lender or Sharoff who financed trade and commerce. The system of currency and coinage rendered money lending a highly profitable business. The British came to India in the 17th century. The East India company established its Agency houses in Bombay, Calcutta & Madras. These agency houses were the combination of trade & banking in India. Bank of Hindustan- Appendage of Alexander & Co.1st bank under European direction Established in 1771 at Cal. Collapsed due to failure of parent company Bengal bank was established in 1784 General Bank of India was established in 1786. It was the 1st joint stock company with limited liability Presidency banks were established in Calcutta, Bombay & Madras. It amalgamated into the Imperial bank in 1921. In 1865 Allahabad Bank was set up under European management In 1875 Alliance Bank of Shimla was started Oudh Commercial bank was the 1st purely Indian management joint bank. Swadeshi movement stated in 1905 and the period from 1906 to 1913 was a period of boom for Indian Banking. The Bank of Burma was established in 1904.
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Bank of India, Bank of Rangoon & Indian Specie Bank was established in 1906 Some of the important banks which were established later were Bank of India, Central Bank of India, Bank of Baroda, etc. Who is a banker and customer? Explain the general relationship between banker & customer. OR The relation between a banker and a customer is that of a debtor and a creditor. Explain. The relationship between a banker and a customer is of great significance. It depends upon the services rendered by the banker to the customer. Definition of banker According to section 3 of the Negotiable instrument Act, 1881; banker includes any person acting as a banker and any post office savings bank. According to section 5(b) of the Banking Regulation Act, 1949, banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. To sum up a banker is who 1) Take deposit account 2) Take current accounts 3) Issue and pay cheques 4) Collect cheques crossed and uncrossed for his customers. Money lender is not considered as a banker as mere lending does not constitute banking business. Banker is an institution which borrows money by accepting deposits from the public for the purpose of lending to those who are in need of money. Definition of customer The term customer is not defined by law. Ordinarily, a person who has an account in a bank is called a customer. Acc to Dr. Hart, a customer is one who has an account with a banker or for whom a banker habitually undertakes to act as such. Thus to constitute a customer, the following essential requisites must be fulfilled: 1) He must have some sort of an account. 2) Even a single transaction constitutes a customer. 3) The dealing must be of a banking nature. A customer need not be a person. A firm, joint stock company, a society or any separate legal entity may be a customer. Explanation to section 45-Z of the BR Act clarifies that a customer includes a Government department and a corporation incorporated by or under any law. Relationship between a banker and customer Relation of a debtor and a creditor The general relationship between banker and a customer is that of a debtor and a creditor i.e. borrower and lender. In Foley v. Hill, Sir John Paget remarks, the relation of a banker and a customer is primarily that of debtor and creditor, the respective positions being determined by
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the existing state of account. Instead of the money being set apart in a safe room, it is replaced by the debt due from the banker. The money deposited with him becomes his property, and is absolutely, at his disposal, and, save as regards the following of the trust funds into his hands, the receipt of money by a banker from or on account of his customer constitutes him merely the debtor of the customer with super added obligation to honour his customers cheques drawn upon his balance, in so far the same is sufficient and available. In Shanthi Prasad Jain v. Director of Enforcement, Foreign Exchange Regulation, the SC held that the banker and customer relationship in respect of the money deposited in the account of a customer with the bank is that of a debtor and a creditor. On the opening of an account a banker assumes the position of a debtor. The money deposited by the customer with the bank is in legal terms lent by the customer to the banker who males use of the same according to his discretion. The creditor has the right to demand back his money from the banker, and the banker is under an obligation to repay the debt as and when he is required to do so. A depositor remains a creditor of his banker so long as his account carries a credit balance. But he does not get any charge over the assets of his debtor/banker and remains an unsecured creditor of the banker. Since the introduction of deposit insurance in India in 1962 the element of risk of the depositor is minimized as Deposit Insurance and Credit Guarantee Corporation undertakes to insure the deposits upto a specified amount. Bankers relation with the customer is reversed as soon as the customers account is overdrawn. Banker 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 baker becomes a secured creditor of his customer. Various legal relationships of banker and customer 2) Agent and Principal- Sec.182 of The Indian Contract Act, 1872 defines an agent as a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done or who is so represented is called the Principal. One of the important relationships between a banker and customer is that of an agent and principal. The banker performs various services of the customer, where he acts as the agent. Buying and selling securities of customer Collection of cheques, bills of exchange, promissory notes on behalf of customer Acting a trustee, executor or representative of a customer Payment of insurance premium, telephone bills etc. 1) Trustee and beneficiary- section 3 of the Trusts Act defines a trustee as one to whom property is entrusted to be administered for the benefit of another called the beneficiary. A banker becomes a trustee under special circumstances. When a customer deposits securities or other valuables with the banker for safe custody, the banker acts as trustee of customer. 2) Bailee and bailor- during certain circumstances banker becomes bailee. When he receives gold ornaments and important documents for safe custody he takes charge of it as bailee and not trustee or agent. He cannot make use of them as he is bound to return the identical articles on demand.

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3) Pawnee and pawner- pawn is a sort of bailment in which the goods are delivered to another as a pawn, to be a security for money borrowed. Thus a banker acts as a pawnee where a customer delivers he goods to him to be kept as security till the debt is discharged. The banker can retain the goods pledged till the debt is paid. 4) Mortgagee and mortgagor- the relation between a banker as mortgagee and his customer as mortgagor arises when the latter executes a mortgage deed in respect of his immovable property in favour of the bank or deposits the title deeds of his property with the bank to create an equitable mortgage as security for an advance. 5) Lessee and lessor- when a customer hires a locker in the banks safe deposit vault, the bank undertakes to take necessary precaution for the safety of the articles in the locker. The relation between the parties is that of a lessor and lessee. 6) Guarantor and guarantee- a bank as guarantor gives guarantee to its customer by issuing a letter of credit. It is a kind of credit facility to its customer to facilitate international trade. A bank guarantee contains an undertaking to pay the amount without any demur on mere demand of the principal amount on the ground for non-performance or breach of contract. 7) Fiduciary relationship- every relation of trust and confidence is a fiduciary relation. A banker who receives a customers money is under a duty not to part with it which is inconsistent with the customers fiduciary character and duty. In Official Assignee v. Rajaram Aiyar, it was held that where banks old money for a specific purpose of sending it somebody the money is impressed with trust.

6.

Explain the special relationship between banker & customer. OR What is the special relationship arising out of general relationship between a banker and a customer. OR What are the rights and obligations of a banker towards a customer?

By opening an account with the banker, there will be some rights conferred and obligations imposed to the banker as well as the customer. These rights and duties are reciprocal i.e. the bankers duties are the customers rights and the bankers rights are the customers duties. These rights and obligations are called the special features of relationship between banker and the customer. The special relationship between banker and customer can be presented as under: General obligations of banker towards customer Obligation to honour cheques- banker accepts the deposits from the customer with an obligation to repay it to him on demand or otherwise. The banker is therefore under a statutory obligation to honour his customers cheques because, it is recognized under section 31 of the NI Act, 1881The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default. Thus the banker is bound to honour his customers cheques provided the following conditions are fulfilled(a) Sufficient balance in customers account (b) Presentation of cheques within working hours of business
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(c) Presentation of cheques within reasonable time after ostensible date of its issue (d) Cheques should be presented at the branch where account is kept (e) Fulfilment of requirements of law Obligation to maintain secrecy and disclosure of information required by law- the banker is under an obligation to take utmost care in keeping secrecy about the accounts of the customers since it may affect his reputation, credit-worthiness and business. It was firmly laid down in Tournier v. National Provincial and Union Bank of England Ltd. in India it was made compulsory after 1970. The duty to maintain secrecy will be continuing even after the account is closed or the death of the customer. This obligation is subject to certain exceptions. Obligation to keep a proper record of transactions- the banker must keep a proper record of transactions of the customer. If he wrongly credits the account of the customer and intimates him with the same and the customer acts upon the intimation bonafide and withdraws cash the banker cannot contend that the entries were wrongly made. He shall not succeed in recovery of money from the customer. Obligation to abide by the instructions of the customer- the banker must abide by any express instructions of the customer provided it is within the scope of their banker-customer relationship. In the absence of any express instructions, the banker must according to prevailing usages at the place where the banker conducts his business. Rights of a banker Bankers right of general lien- one of the important rights enjoyed by a banker is the right of general lien. Lien means the right of the creditor to retain goods and securities owned by the debtor until the debt due from him is paid. It may either be general or particular. In Brando v. Barnet, it was held that bankers most undoubtedly have a general lien on all securities deposited with them as bankers unless there is an express or implied contract inconsistent with lien. In India sec 171 of the Indian Contract Act confers general lien upon bankers as followsbankers..may in absence of a contract to the contrary, retain as a security for a general balance of account, any goods bailed to them. Bankers right of set-off- the right to set off is a statutory right which enables debtor to take into account a debt owing to him by a creditor, before the latter could recover the debt due to him from the debtor. Thus when a customer keeps two or more accounts at the same bank, some of which are overdrawn and some in credit, the bank has a right to combine such accounts and pay the resultant balance. In Halesowen Presscook and Assemblies Ltd v. Westminister Bank Ltd, it was held that a banker has the right to combine two accounts and to set off unless he has made some agreement express or implied to the contrary. Bankers right for appropriation of payment- when a debtor owes two or more debts to a creditor and he pays some amount which is not sufficient to meet any debt to the creditor

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appropriation is done. It applies to a banker if the customer has more than one deposit or more than one loan account. In Devaynes v. Noble, famously known as Claytons case, a principle was laid down as to when the customer has current account and deposits and withdraws money frequently the first item on debit side will be discharged by the first item on credit side. The credit entries in the account adjust or set off the debit entries in chronological order. Bankers right to claim incidental charges- the banker may claim incidental charges on unremunerative accounts such as service charges, processing charges, ledger folio charges, appraisal charges, penal charges and so on. Bankers right to charge compound charges- a banker has a special privilege to charge compound interest. In Syndicate Bank v. West Bengal Cement Ltd, the adding of unpaid interest due to the principal amount is recognized. However, the SC abolished this in case of agricultural loans in the Bank of India case. Q. What are the obligations of a banker? 1. Obligation to honour cheques- the banker is under a statutory obligation to honour his customers cheques in the ordinary course of business. If he wrongfully dishonors the cheque, then he is liable to the customer for damages. Thus the banker is bound to honour the customers cheque provided the following conditions are fulfilled(a) Sufficient funds- there must be sufficient funds of the drawer in the hands of the drawee. A banker should be given sufficient time to release the amount of the cheque sent for collection before the said amount can be drawn upon by the customer. The banker can dishonor the cheques if there are insufficient funds. (b) Funds must be properly applicable- a customer might be having several bank accounts in his various capacities. But is essential that the account on which a cheque is drawn must have sufficient funds. If some funds are earmarked by the customer for some specific purpose, they are not available for honouring the cheques. But where the customer has overdraft facility the banker has the obligation to honour the cheque upto the amount of overdraft sanctioned. (c) The banker must be duly required to pay- the banker is bound to honour the cheque only when hi is duly required to pay. The cheque, complete and in order, must be presented before the banker at the proper time. 2. Obligation to maintain secrecy of accounts-The customers account details are recorded in the books of the banker and the true state of his financial dealings are available with the banker. If any of these facts are made known to others, the customers reputation might suffer and he might incur losses also. The banker is therefore under an obligation to take utmost care in keeping secrecy of the details of the customer. However, this rule has exceptions(mention briefly) 3. Obligation to keep a proper record of transaction- the banker must keep a proper and accurate record of all the transactions of the customer. Sometimes, he may commit some wrong.

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