Subject: BANKING LAW

Duration: 3 hours Max.Marks: 100

1.Write an explanatory note on the functions of Commercial Bank of India.

2. Discuss the constitution and functions of Reserve Bank of India.

3.Explain the features of Securitisation Act, 2002.

4.What is Negotiable Instrument? What are the kinds of Negotiable Instruments?

5.What is Endorsement? Explain different kinds of Endorsement.

6. Define Banker and Customer. Discuss the general and special relationship between
banker and customer.

7. Explain the powers and functions of Banking Ombudsman.

8. Short Notes:

a) History of Banking in India

b) Garnishee Order
c) E-Banking:

9. Solve problems

a) ‘A’ was a temporary employee in M/S XYZ & Co’ and he was to be made permanent
employee. He overdrew from the ‘Z’ bank to a sum of 50,000 Rs. On one day A did not
attend to duty. Director of XYZ Co’ telephoned the manager of Z bank to take A’s
address. In their conversation bank manager revealed information about his a/c. The
director misconceived the information and thought that A was insolvent and terminated
‘A’ from his job. Can ‘A’ claim compensation from the banker for not keeping the
secrecy of the customer’s a/c and for the job lost?

b) “I acknowledge myself to be indebted to B in Rs.1,00,000 to be paid on demand to B on

his attaining the age of majority. Is it valid Promissory Note?

c) ‘A’ drawn a post dated cheque payable to ‘B’. ‘B’ presents a post dated cheque to
banker for payment before its due date. The banker makes payment on the same before
its due date. Can banker do so?
1.Write an explanatory note on the functions of Commercial Bank of India.

Ans:

Introduction

In modern economy commercial Banks Play an important role in the financial sector. A
Bank is an institution dealing in money and credit. Credit money is the major component of
money supply in a modern economy. Commercial banks are the creators of credit. The strength
of economy of any country basically depends on a sound and solvent banking system.
A Commercial bank is a profit seeking business firms dealing in money or rather claims to
money. It safeguards the savings of the public and give loans and advances.
The Banking Companies Act of 1949, defines banking company as “accepting for the
purpose of lending or investment of deposit money from the public, repayable on demand or
otherwise and withdrawable by cheque, drafts, order or otherwise”.

FUNCTIONS OF COMMERCIAL BANKS :-

Modern commercial banks perform a variety of functions. They keep the wheels of
commerce, trade and industry always revolving. Major functions of a commercial bank are: -
Primary or Banking functions and Secondary or Non-Banking functions.

PrimaryFunctions :-

Commercial banks have two important banking functions. One is accepting deposits and other is
advancing loans.

1) Deposits :-

One of the main function of a bank is to accept deposits from the public. Deposits are accepted
by the banks in various forms.

a) Current Account Deposits :-

Current Accounts are usually opened by businessmen who have a number of regular
transactions with the bank, both deposits and withdrawls. There is no restriction on number and
amount of deposits. There is also no restriction on withdrawls. No interest is paid on current
deposits. Banks may even charge interest for providing this facility. These accounts are also
known as demand deposits as amount can be withdrawn on demand.

b) Saving Account Deposits :-

Saving Accounts are opened by salaried and other less income people. There is no restriction on
number and amount of deposits. withdrawls are subject to certain restrictions. It earns Interest
but less than fixed deposits. It encourages saving habit among salary earners and others. Saving
deposits are an important source of funds for banks.
c) Fixed Account Deposits :-

Deposits in fixed account are time deposits. Money under this account is deposited for a certain
fixed period of time varying from 15 days to several years. A high rate of interest is paid. 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 Deposits :-

In Recurring deposit, a specified amount is regularly deposited by account holder, at an internal

of usually a month. This is 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.

Thus by creating variety of deposits, banks motivate people in a variety of ways and encourage
savings in the economy.

2) Loans And Advances :-

Banks not only mobilize money but also lend to its credit worthy customers for maximizing
profits. Loans and Advances are granted To :-

a) Business And Trade :-

Commercial banks grant short-term loans to business and trade activities in following forms:-

i) Overdraft :-

Commercial banks grant overdraft facility to current account holders Under this system a
borrower is allowed to draw more than what is deposited in his account. The borrower is granted
to a fixed additional amount against collateral security. Interest is charged for actual amount
drawn.

ii) Cash Credit :-

Cash credit is given by the bank to any businessman to meet regular working capital needs,
against the security of goods or personal security. Interest is charged on actual amount drawn by
the customer.

iii) Discounting Of Bills :-

When the holder of the bill is not in a position to wait till the maturity of the bill and requires
cash urgently, he sells the bill of exchange to bank. Bank advance credit by discounting bills of
exchange, government securities or any other approved financial instruments. The bank
purchases the instruments at a discount.

iv) Money At Call :-

Banks also grant loans for a very short period, generally not exceeding 7 days. Such advances
are repayable immediately at a short notice hence they are called as Money at Call or Call
money. These loans are given to dealers or brokers in stock market against Collateral Securities.

v) Direct Loans :-

Loans are given to customers against the security of moveable properties. Their maturity
varies from 1 to 10 years. Interest has to be paid on entire loan amount sanctioned. Loans are of
many types like :- personal loans, term loans, call loans, participative loans, collateral loans etc.

b) Loans to Agriculture :-

Banks grant short-term credit to agriculture at a lower rate of interest. Loans are granted for
irrigation, purchase of equipments, inputs, cattle etc.

c) Loans To Industries :-

Banks grant secured loans to small and medium scale industries to meet their working capital
needs. The time period may be from one to five years. It may be in the form of Overdraft, cash
credit or direct loan.

d) Loans To Foreign Trade :-

Loans are granted to export and import in the form of direct loans, discounting of bills, guarantee
for deferred payments etc. Here the rate of interest is low.

e) Consumer Credit / Personal loans :-

Banks also grant credit to household in a limited amount to buy some durable consumer goods
like television sets, refrigerators, washing machine etc. Such consumer credit is repayable in
installments. Under 20-point programme, the scope of consumer credit has been extended to
cover expenses on marriage, funeral etc., as well.

f) Miscellaneous Advances :-

Banks also gives advances like packing credits to exporters, export bill purchased or discounted,
import finance, finance to self-employed, credit to weaker sections of society at concessional
rates etc.
 II. Secondary Functions :-

Banks gives various forms of services to public. Such services are termed as non- banking or
secondary functions :-

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 are :-

a) Collection :-

Commercial 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 also 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) Income – Tax Consultant :-

Commercial banks acts as income-tax consultants. They prepare and finalise the
income tax returns of their clients.

d) Sale And Purchase Of Financial Assets :-

As per the customers instruction banks undertake sale and purchase of securities,
shares and any other financial assets. Nominal charges are charged by a bank.

e) Trustee, Executor And Attorney :-

As a trustee, banks becomes the custodian and manager of customer funds. Bank also
acts as executor of deceased customer’s will. As an Attorney the banks sign the documents on
behalf of customer.

f) E- Banking :-

Through Electronic Banking, a customer can operate his bank account through internet.
He can make payments of various bills. He can even transfer money from one place to another.
2. Utility Services :-

Modern Commercial banks also performs certain general utility services for the community,
such as :-

a) Letter Of Credit :-

Banks also deal in foreign trade. They issue letter of credit and provide guarantee to
foreign traders for the soundness of their customers.

b) Transfer Of Funds :-

Banks arrange transfer of funds cheaply and safely from one place to another. Transfer
can be in the form of Demand draft, Mail transfer Travellerscheques etc.

c) Guarantor :-

Banks offer a guarantee of payment on behalf of importer to facilitate imports with

deferred payments.

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.

e) Locker Facility :-

Safe Lockers are provided to the customers. So that they can deposit their valuables
like Jewellary, Securities, Shares and otherdocuments.

f) Referee :-

Banks may act as referee with respect to financial standing, business reputation and
respectability of customers.

g) Credit Cards :-

Credit card facility have been introduced by commercial banks. It enables the holder to
minimize the use of hard cash. Credit card is a convenient medium of exchange which enables its
holder to buy goods and services from member – establishment without using money.

III. Subsidiary Activities :-

Many commercial banks also undertakes subsidiary activities such as :-

1) Housing Finance :-

Housing finance is provided against the security of immoveable property of land and buildings.
Many banks such as SBI, Bank of India etc. have set up housing finance subsidiaries.

2) Mutual Funds :-

A Mutual fund is a financial intermediary that pools the savings of investors for collective
investment in diversified portfolio securities Many banks like SBI, Indian Bank etc. have set up
mutual fund subsidiaries.

3) Merchant Banking :-

A variety of services are offered by merchant banking like :-

Management, Marketing and Underwriting of new issues, project promotion, corporate advisory
services, investment advisory services etc.

4) Venture Capital Fund :-

Venture capital fund provides start-up share capital to new ventures of little known, unregistered,
risky, young and small private business, especially in technology oriented and knowledge
intensive business. Many commercial banks like SBI, Canara Bank etc. have set up venture
Capital Fund Subsidiaries.

5) Factoring :-

Factoring is a continuing arrangement between a financial intermediary (factor) and a business

concern (client) where by the factor purchases the clients accounts receivable. Banks like SBI
and Canara Bank have established subsidiaries to provide factoring services.
2) Discuss the constitution and functions of Reserve Bank of India.

Ans:

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.In every country there is one organization
which works as the central bank. The function of the central bank of a country is to control and
monitor the banking and financial system of the country. In India, the Reserve Bank of India
(RBI) is the Central Bank.

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
where policies are formulated.Though originally privately owned, since nationalisation in 1949,
the Reserve Bank is fully owned by the Government of India.

Central Board

The Reserve Bank's affairs are governed by a central board of directors. The board is appointed
by the Government of India in keeping with the Reserve Bank of India Act.

Appointed/nominated for a period of four years

Constitution:

Official Directors

Full-time : Governor and not more than four Deputy Governors

Non-Official Directors

Nominated by Government: ten Directors from various fields and two government Officials

Others: four Directors - one each from four local boards

The RBI was established in 1935. It was nationalised in 1949. The RBI plays role of
regulator of the banking system in India. The Banking Regulation Act 1949 and the RBI Act
1953 has given the RBI the power to regulate the banking system.

The RBI has different functions in different roles. Below, we share and discuss some of
the functions of the RBI.RBI is the Regulator of Financial SystemThe RBI regulates the Indian
banking and financial system by issuing broad guidelines and instructions.
Functions performed by reserve bank of India are as follows:
As per the RBI Act 1934 it performs 3 types of functions as that of any other central bank. They
are,

I. Banking Functions

II. Supervisory Functions and

III. Promotional Functions.

The main functions of the RBI are to regulate the money supply in the country. Moreover, it has
been directed to take care of agriculture, industry, export promotion etc. The RBI is also
responsible for the maintenance of external value of rupee.

I. Banking Functions:
1. Bank of Issue:
Under section 22 of the Reserve Bank of India Act, the bank has the sole right to issue bank
notes of all denominations. The distribution of one rupee notes and coins and small coins all over
the country is undertaken by the Reserve Bank as agent of the Government.

The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency
notes. The assets and liabilities of the Issue Department are kept separate from those other
Banking Department.

Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold
coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40
crores in value. The remaining three -fifths of the assets might be held in rupees coins,
Government of India rupee securities, eligible bills of exchange and promissory notes payable in
India.

Due to the exigencies of the Second World War and the post-war period, these provisions were
considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and
foreign exchange reserves of Rs. 200 crores, of which at least Rs. 115 crores should be in gold.
The system as it exists today is known,-as the minimum reserve system.
(2) Banker to Government:
The second important function of the Reserve Bank of India is to act as Government banker,
agent and adviser. The Reserve Bank is agent of Central Government and of all State
Governments in India excepting that of Jammu and Kashmir.

The Reserve Bank has the obligation to transact Government business, via to keep the cash
balances as deposits free of interest, to receive and to make payments on behalf of the
Government and to carry out their exchange remittances and other banking operations.

The Reserve Bank of India helps the Government—both the Union and the States to float new
loans and to manage public debt. The Bank makes ways and means advances to the Governments
for 90 days. It makes loans and advances to the States and local authorities. It acts as adviser to
the Government on all monetary and banking matters.

(3) Bankers’ Bank and Lender of the Last Resort:

The Reserve Bank of India acts as the banker’s bank. According to the provisions of the Banking
Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a
cash balance equivalent to 5% of its demand liabilities and 2 percent of its time liabilities in
India.

By an amendment of 1962, the distinction between demand and time liabilities was abolished
and banks have been asked to keep cash reserves equal to 3 percent of their aggregate deposit
liabilities. The minimum cash requirements can be changed by the Reserve Bank of India.

The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible
securities or get financial accommodation in times of need or stringency by rediscounting bills of
exchange. Since commercial banks can always expect the Reserve Bank of India to come to their
help in times of banking crisis the Reserve Bank becomes not only the banker’s bank but also the
lender of the last resort.

(4) Controller of Credit:

The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume
of credit created by banks in India. It can do so through changing the Bank rate or through open
market operations.

According to the Banking Regulation Act of 1949, the Reserve Bank of India 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. Since 1956, selective controls of credit are increasingly being
used by the Reserve Bank.

The Reserve Bank of India is armed with many more powers to control the Indian money
market. Every bank has to get licence from the Reserve Bank of India to do banking business
within India. The licence can be cancelled by the Reserve Bank if certain stipulated conditions
are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can
open a new branch.

Each scheduled bank must send a weekly return to the Reserve Bank showing in detail, its assets
and liabilities. This power of the Reserve Bank to call for information is also intended to give it
effective control of the credit system. The Reserve Bank has also the power to inspect the
accounts of any commercial bank.

As supreme banking authority in the country, the Reserve Bank of India, therefore, has the
following powers:
(a) It holds the cash reserves of all the scheduled banks.

(b) It controls the credit operations of banks through quantitative and qualitative control.

(c) It controls the banking system through the system of licensing, inspection and calling for
information.

(d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.

(5) Custodian of Foreign Reserve:

The Reserve Bank of India has the responsibility to maintain the official rate of exchange.
According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at
fixed rates any quantity of sterling in lots of not less than Rs. 10,000.

The rate of exchange fixed was Re. I = sh. 6d. Since 1935 the Bank was able to maintain the
exchange rate fixed at 1sh. 6d though there were periods for extreme pressure in favour of or
against the rupee.

After India becomes a member of the International Monetary Fund in 1945, the Reserve Bank
has the responsibility of maintaining fixed exchange rates with all other member countries of the
International Monetary Fund (I.M.F.)

Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the
custodian of India’s reserve of international currencies. The vast sterling balances were acquired
and managed by the Bank. Further, the RBI has the responsibility of administering the exchange
controls of the country.

II. Supervisory Functions:

In addition to its traditional central banking functions, the Reserve Bank has certain non-
monetary functions of the nature of supervision of banks and promotion of sound banking in
India.

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 authorised to carry out periodical inspection of the banks and to call for returns and
necessary information from them. The nationalisation of 14 major Indian scheduled banks in July
1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit
policies towards more rapid development of the economy and realisation of certain desired social
objectives.
The supervisory functions of the RBI have helped a great deal in improving the standard of
banking in India to develop on sound lines and to improve the methods of their operation.

III. Promotional Functions:

With economic growth assuming a new urgency since independence, the range of the Reserve
Bank’s functions has steadily widened. The Bank now performs a variety of developmental and
promotional functions, which, at one time, were regarded as outside the normal scope of central
banking.

The Reserve Bank was asked to promote banking habit, extend banking facilities to rural and
semi- urban areas, and establish and promote new specialised financing agencies. Accordingly,
the Reserve Bank has helped in the setting up of the Industrial Finance Corporation of India and
the State Financial Corporations; it set up the Deposit Insurance Corporation in 1962, the Unit
Trust of India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural
Refinance Corporation of Indian in 1963 and the Industrial Reconstruction Corporation of India
in 1972.

These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit
and to mobilize savings, and to provide industrial finance as well as agricultural finance. As far
back as 1935, the Reserve Bank of India set up the Agricultural Credit Department to provide
agricultural credit. But only since 1951 the Bank’s role in this field has become extremely
important.

The Bank has developed the co-operative credit movement to encourage saving, to eliminate
moneylenders from the villages and to route its short term credit to agriculture. The RBI has set
up the Agricultural Refinance and Development Corporation to provide long-term finance to
farmers.
3.Explain the features of Securitisation Act, 2002.

Ans:

Introduction:

Financial indiscipline is the hallmark of Indian industry. The ever-growing Non Performing
Assets ('NPA'), a fine euphemism coined to describe the bad loans, prompted the passing of the
Recoveries of Debts due to Banks and Financial Institutions Act, 1993 whereby a special Debt
Recovery Tribunal ('DRT') was set up for the recovery of NPA. However, this could not speed
up the recovery on one hand and on the other the strict civil law requirements rendered almost
fruitless the attachment and foreclosure of the assets given as security for the loan. Further, the
balance sheets of the banks and financial institutions were turning red due to heavy mandatory
provisions for NPAs .

Realizing that every fifth borrower is a defaulter, the Government was under pressure to make
adequate provisions for the recovery of the loans and also to foreclose the security. The
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 ('the Securitisation Act') aims to achieve these twin objectives besides providing for a
broad legal framework for asset securitisation and asset reconstruction.

Scheme of the Act

The Securitisation Act contains 41 sections in 6 Chapters and a Schedule. Chapter 1 contains 2
sections dealing with the applicability of the Securitisation Act and definitions of various terms.
Chapter 2 contains 10 sections providing for regulation of securitisation and reconstruction of
financial assets of banks and financial institutions, setting up of securitisation and reconstruction
companies and matters related thereto. Chapter 3 contains 9 sections providing for the
enforcement of security interest and allied and incidental matters. Chapter 4 contains 7 sections
providing for the establishment of a Central Registry, registration of securitisation,
reconstruction and security interest transactions and matters related thereto. Chapter 5 contains 4
sections providing for offences, penalties and punishments. Chapter 6 contains 10 sections
providing for routine legal issues.

Salient features.

The salient features of the Securitisation Act are as under:

 Incorporation of Special Purpose Vehicles viz. Securitisation Company and

Reconstruction company.
 Securitisation of Financial Assets.
 Funding of securitisation.
 Asset Reconstruction.
 Enforcing security interest i.e. taking over the assets given as security for the loan.
 Establishment of Central Registry for regulating and registering securitisation
transactions.
  Offences & Penalties.
 Boiler - plate provisions.
 Dilution of provisions of SICA.
 Exempted transactions

Incorporation & Registration of Special Purpose Companies

The Securitisation Act proposes to securitise and reconstruct the financial assets through two
special purpose vehicles viz. 'Securitisation Company ('SCO')' and 'Reconstruction Company
(RCO)'. SCO and RCO ought to be a company incorporated under the Companies Act,1956
having securitisation and asset reconstruction respectively as main object.

The Securitisation Act requires compulsory registration of SCO and RCO under the
Securitisation Act before commencing its business. Further a minimum financial stability
requirement is also provided by requiring SCO and RCO to possess owned fund of Rs.2 crore or
up to 15% of the total financial assets acquired or to be acquired. The RBI has the power to
specify the rate of owned fund from time to time. Different rates can be prescribed for different
classes of SCO and RCO. Existing SCO and RCO are also required to get registered under the
Securitisation Act. The application for registration will have to be made to RBI.

The SCO or RCO which has obtained the registration certificate under the Securitisation Act
shall be a Public Financial Institution within the meaning of Section 4A of the Companies Act,
1956.

Besides it's core business of securitisation and asset reconstruction a SCO/RCO may perform the
following functions:

 Acting as recovery agent on behalf of any bank or financial institution.

 Acting as manager1 to manage the secured assets the possession of which has been taken
over by the secured creditor.
 Acting as receiver if appointed by any Court or Debt Recovery Tribunal.

A SCOO or RCOO, which is carrying on any other business other than that of securitisation or
asset reconstruction before commencement of the Securitisation Act, has to discontinue such
other business within one year from the commencement of the Securitisation Act.

Securitisation of financial Assets

Under the Securitisation Act only banks and financial institutions can securitise their financial
assets pertaining to NPAs with a securitisation company. Securitisation means, according to the
Securitisation Act, acquisition of financial assets by any securitisation company or reconstruction
company from any financial institution or banks. The necessary funds for such acquisition may
be raised from 'qualified institutional buyers ('QIB'), by issuing security receipts3 representing
undivided interest in such financial assets or other wise.

Financial assets are as under:

  A claim to any debt or receivables or part thereof, whether secured or unsecured.
 Any debt or receivables secured by, mortgage of, or charge on, immovable property.
 A mortgage, charge, hypothecation or pledge of movable property.
 Any right or interest in the security whether full or part underlying such debt or
receivables.
 Any beneficial interest in property, whether movable or immovable, or in such debts,
receivables, whether such interest is existing, future, accruing, conditional or contingent.
 Any financial assistance.

The much-needed legal framework for the securitisation of financial assets has been made by the
enactment of the Securitisation Act. Securitisation of financial assets is a financial tool for the
lenders to securitise their future cash flows from the secured assets and thus to release their funds
blocked in them. In the hands of the SCO and RCO the secured assets become "merchandise",
realisation of which gives them their return. This aspect brings in the much-needed expertise in
adept handling in realisation of the secured assets. The legal impediments of normal civil law
procedure to foreclose the mortgaged assets have thus been effectively removed by empowering
the enforcement of the secured assets.

Securitisation of financial assets may take some time to fructify as it requires sound accounting
principles also for which standards to be prescribed. In other words there should be accounting
framework, as well, besides legal framework.

Acquisition of Rights and interests in financial assets.

This is the main part of securitisation. Section 5 provides for the acquisition of rights or interests
in financial assets of any bank or financial institution by SCO / RCO, notwithstanding any
thingcontrary contained in any agreement or any other law for the time being in force, in either
of the following manner:

 Issuing a debenture or bond or any other security in the nature of debenture, as

consideration agreed upon by a SCO /RCO and bank/financial institution, incorporating
therein the terms and conditions of issue.
 Entering into an agreement with bank/financial institution for the transfer of such
financial assets on such terms and conditions as may be agreed upon.

Upon acquiring the financial assets from the bank/financial institution, the SCO/RCO steps into
the shoes of the lender qua the borrower. The Securitisation Act has provided for all necessary
rights and powers for SCO/RCO to realize the financial assets from the borrower.

Funding of Securitisation.

The SCO/RCO may raise the necessary funds, for the acquisition of financial assets, from the
QIB by issuing a security receipt. Security receipt is exempted from compulsory registration
under the Registration Act. 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 therein the
description of financial assets under acquisition, the quantum of investment, rate of return
assured etc. Further separate and distinct accounts have to be maintained in respect of each
scheme of acquisition. Realizations made from the financial assets have to be held and applied
towards the redemption of investments and payment of assured returns.

In the event of non-realization of financial assets, the QIB holding not less than 75% of the total
value of the security receipts issued, are entitled to call a meeting of all QIB and pass resolution
and every such resolution is binding on the SCO/RCO.

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.
 Enforcing the security interest.
 Entering into settlement with the borrower for the payment of debt.

However, the above measures are subject to the provisions contained in any other law for the
time being in force.

Enforcing Security Interest

The second objective of the Securitisation Act is to provide for the enforcement of security
interest i.e. taking possession of the assets given as security for the loan. Section 13 of the
Securitisation Act contains elaborate provisions for a lender (referred to as 'secured creditor') to
take possession of the security given by the borrower. The sum and substance of the provisions
are as under:

 The Lender has to send a notice of demand, giving details of the amount payable and the
secured assets5 intended to be enforced in the event of non payment, to the defaulting
borrower to discharge his liabilities.
 No borrower, after the receipt of the demand notice, shall transfer the secured assets in
whatsoever manner without prior written consent from the lender.
 The Borrower has to discharge the liabilities within 60 days from the date of receipt of
notice of demand.
 In the event of non payment of demand by the borrower, the lender may take any one or
more of the following measures:
 o Taking possession and / or management of the secured assets of the borrower with
a right to transfer the same by way of lease, assignment or sale for realising the
secured asset.
o Appointing any person as manager to manage the secured assets the possession of
which has been taken over.
o Asking any person, who has acquired any of the secured assets from the borrower
and owes money to the borrower, to pay so much of the money which is sufficient
to pay the secured debt.
 Any transfer of secured assets made by the lender shall be deemed to be made by the
owner of such secured asset.
 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.
 When the are more than one lender or joint financing, the approval of lender(s)
representing not less than 75% of the amount due is required to take any steps to enforce
the security interest and such approval is binding on all the lenders.
 In the case of a corporate borrower under liquidation the sale proceeds from the secured
assets shall be distributed as per Section 529A of the companies Act, 1956.
 In the event of lender opts to realise his security instead of relinquishing his security and
proving his debt, may retain the sale proceeds of his secured assets after depositing the
workmen's dues with the Liquidator.
 If the sale proceeds of the secured assets are not fully satisfying the debt due, the lender
may 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 Metropoliton Magistrate or District
Magistrate, as the case may be, in taking possession of the secured assets from the
borrower.
 If any person, including the borrower, is aggrieved by any of the measures adopted by the
lender, he may prefer an appeal to the DRT within 45 days by depositing atleast 75% of
the claim of the lender. The decision of the DRT is further appealable to an Appellate
Tribunal.
 The lender can initiate any proceedings to enforce the security interest unless his claim of
the financial asset is made within the period prescribed under the Limitation Act, 1963.

Establishment of a Central Registry

The functions relating to securitisation, asset reconstruction and creation of security interest is
sought to be administered and regulated by a Central Registry. Branch offices of the Central
Registry may be established as and when the need is required. A Central Registrar shall head the
Registry. The functions of the Central Registry are as under:

 Particulars relating to securitisation of assets, reconstruction of financial assets and

creation of security interest are entered in a record called Central Register.
 The records can be kept in electronic form also i.e. in floppies, diskettes etc.
  The particulars of every transaction of securitisation, asset reconstruction or creation of
security interest shall be filed within 30 days of the transaction by SCO, RCO or the
lender as the case may be.
 Modifications made in the security interest registered with the Registry are to be filed
within 30 days of such modification.
 Satisfaction of security interest is required to be filed with the Registry within 30 days of
satisfaction.
 Records maintained at the Central Registry are open to inspection for any person on
payment of the prescribed fee.

Offences & Penalties

Following are the offences prescribed under the Securitisation Act:

 Default in filing particulars of transactions relating to asset securitisation, asset

reconstruction and creation of security interest.
 Default in filing particulars of modification.
 Default in giving intimation of particulars satisfaction.
 Non-compliance of RBI directives by SCO and RCO.
 Contravention, including attempt to contravene and abetting in contravention, of any of
the provisions of the Securitisation Act or any rules made thereunder.

Following are the penalties prescribed in the Securitisation Act:

 For default in filing particulars of transactions mentioned above, every company and
every officer of the company or every lender or officer of the lender shall be punished
with a fine which may extend to Rs.5000/- for every day during which the default
continues.
 For non-compliance of RBI directives every company and every officer of the company
shall be punished with a fine which may extend to Rs.5, 00,000/-; and for continuing
offence an additional fine of Rs.10, 000/- for every day during which the default
continues.
 For contravention of any provisions of the Securitisation Act, the punishment is
imprisonment for a term which may extend to one year, or with a fine, or with both.

Only a Metropolitan Magistrate or Judicial magistrate of the First Class has powers to take
cognizance and try an offence under the Securitisation Act.

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.
 Security interest created on agricultural land.
 Amount due is less than 20% of the principal sum and interest thereon.

4.What is Negotiable Instrument? What are the kinds of Negotiable Instruments?

Ans:

Introduction:

A Negotiable instrument is a written document which entitles a person to a sum of money and
which is transferable from person to person by mere delivery or indorsement and delivery.
The person to whom it is so transferred becomes entitled to the money and also to the
right to further transfer it.
The Negotiable Instruments Act, 1881 does not define a negotiable instrument and
Section 13 merely states that “A Negotiable Instrument means a promissory note, bill of
exchange or cheque payable either to order or to bearer.

Essential Features of Negotiable Instruments are given below:

1. Writing and Signature:

Negotiable Instruments must be written and signed by the parties according to the rules relating
to Promissory Notes, Bills of Exchange and Cheques. Demand Drafts are also construel as
Negotiable Instruments in the limiting case as they have the same property as N.I. Instrumes.

2. Money:

Negotiable instruments are payable by legal tender money of India. The liabilities of the parties
of Negotiable Instruments are fixed and determined in terms of legal tender money.

3. Negotiability:

Negotiable Instruments can be transferred from one person to another by a simple process. In the
case of bearer instruments, delivery to the transferee is sufficient. In the case of order
instruments two things are required for a valid transfer: endorsement (i.e., signature of the
holder) and delivery. Any instrument may be made non-transferable by using suitable words,
e.g., “pay to X only.”

4. Title:

The transferee of a negotiable instrument, when he fulfils certain conditions, is called the holder
in due course. The holder in due course gets a good title to the instrument even in cases where
the title of the transferrer is defective.

5. Notice:

It is not necessary to give notice of transfer of a negotiable instrument to the party liable to pay.
The transferee can sue in his own name.

6. Presumptions:

Certain presumptions apply to all negotiable instruments. Example: It is presumed that there is
consideration. It is not necessary to write in a promissory note the words “for value received” or
similar expressions because the payment of consideration is presumed. The words are usually
included to create additional evidence of consideration.

7. Special Procedure:

A special procedure is provided for suits on promissory notes and bills of exchange (The
procedure is prescribed in the Civil Procedure Code). A decree can be obtained much more
quickly than it can be in ordinary suits.

8. Popularity:

Negotiable instruments are popular in commercial transactions because of their easy

negotiability and quick remedies.

9. Evidence:

A document which fails to qualify as a negotiable instrument may nevertheless be used as

evidence of the fact of indebtedness.

PROMISSORY NOTES
Sec.4: “ A Promissory note is an instrument in writing, not being a bank note (A negotiable
promissory note issued by a bank and payable to the bearer on demand. The amount payable is
statedon the face of the note) or a currency note, containing an unconditional undertaking, signed
by the maker, to pay a certain sum of money only to or to the order of a certain person, or to the
bearer of the instrument.”
Two parties:
Maker: who makes the promissory note and promisses to pay.
Payee: the person to whom the payment is to be made.

From the definition given in the Act it is apparent that the following essential requirements
must be fulfilled by an instrument intended to be a promissory note:

1. The instrument must be in writing.

2. The instrument must be signed by the maker of it. A signature in pencil or by a rubber stamp
of facsimile is good. An illiterate person may use a mark or cross instead of writing out his name.
The signature or mark may be placed anywhere on the instrument, not necessarily at the bottom.
It may be at the top or at the back of the instrument.

3. The instrument must contain a promise to pay. The promise to pay must be express. It cannot
be implied or inferred. A mere acknowledgement of indebtedness is not enough.

Example: “Mr. Sen I. O. U. Rs. 1000″. Here I. O. U. stands for, “I owe you.” This is only an
admission of indebtedness. There is no promise to pay and therefore the instrument is not a
promissory note.

4. The promise to pay must be unconditional. If the promise to pay is coupled with a condition it
is not a promissory note.

Examples:

(i) “I Promise to pay B Rs. 1500 first deducting there out any money which he may owe me.”

(ii) “I promise to pay B Rs. 1500 on D’s death provided D leaves me enough to pay this sum.”

(iii) “I promise to pay B Rs. 1500, seven days after JD’s marriage.” These instruments are not
promissory notes because the promise to pay is coupled with a condition. “I promise to pay B Rs.
500 on demand” is a note with an unconditional promise.

Stipulations of the following type are not regarded as conditions: promise to pay at a specified
time or at a specified place or after the occurrence of an event which is certain to occur, or
payment after calculating interest at a certain rate.

Example:

“I promise to pay B Rs. 1500 on 1st April, 2000.” “I promise to pay B Rs. 1500 on demand at
Bombay.” “I promise to pay B Rs. 500 seven days after the death of C.” These are all valid
promissory notes.

5. The maker of the instrument must be certain and definite.

6. A Promissory note must be stamped according to the Indian Stamp Act.

7. The sum of money to be paid must be certain.

Examples:

(i) “I promise to pay B Rs. 1500 and all other sums which shall be due to him.”

(ii) “I promise to pay some money on the occasion of his marriage.” The above instruments are
not promissory notes because the sum of money to be paid is uncertain.

8. The payment must be in the legal tender currency of India. A promise to pay certain quantity
of goods or a certain amount of foreign money is not a promissory note.

9. The money must be payable to a definite person or according to his order. A note is valid even
if the payee is misnamed or is indicated by his official designation only. Evidence is admissible
to show who the payee really is.

Example:

A document, if it otherwise satisfies the definition of promissory note, will not cease to be so
merely because the words “to order” are absent in the document.

10. The promissory note may be payable on demand or after a certain definite period of time.

11. The Reserve Bank Act prohibits the creation of a promissory note payable on demand to the
bearer of the note, except by the Reserve Bank and the Government of India.

Kinds of promissory note:

Single promissory note: it is made by a single person.
Joint promissory note: made by two or more persons jointly
Joint and several promissory note: made by two or more persons in their joint and several
capacity.

BILL OF EXCHANGE

Sec 5 of the Negotiable Instrument Act defines “ A Bill of Exchange is an instrument in writing,
containing an unconditional order, signed by the maker, directing a certain person to pay a
certain sum of money only to, or to the order of , a certain person or to the bearer of the
instrument”.
Parties to a Bill of Exchange:
Three parties
Drawer: who draws( gives an order to pay) the bill.
Drawee: The person who is directed to pay
Payee: The person to whom the payment is to be made.
A Bill of Exchange is an instrument in writing containing an unconditional order, signed by the
maker, directing a certain person to pay a certain sum of money only to, or to the order of a
certain person or to the bearer of the instrument.”

The maker of a bill of exchange is called the Drawer. The person who is directed to pay is called
the Drawee. The person who will receive the money is called the Payee. When the payee has
custody of the bill, he is called the Holder. It is the holder’s duty to present the bill to the drawee
for his acceptance. The drawee signifies his acceptance by signing on the bill. After such
signature the drawee becomes the Acceptor.

In a bill of exchange sometimes the name of another person is mentioned as the person who will
accept the bill if the original drawee does not accept it. Such a person is called the Drawee in
case of Need.

A bill of exchange to be valid must fulfil the following requirements:

1. The instrument must be in writing.

2. The instrument must be signed by the drawer.

3. The instrument must contain an order to pay, which is express and unconditional.

4. The drawer, drawee and the payee must be certain and definite individuals.

5. The amount of money to be paid must be certain.

6. The payment must be in the legal tender currency of India.

7. The money must be payable to a definite person or according to his order.

8. A bill of exchange must be properly stamped.

9. The bill may be made payable on demand or after a definite period of time. But no one except
the Reserve Bank and the Government of India can draw a bill payable on demand to the bearer
of the bill.

The requirements are more or less the same as in promissory notes and are subject to similar
conditions as regards signature etc.

If any of the requirements mentioned above is not fulfilled, the document is not a bill of
exchange.

Examples:

(i) “Please let the bearer have seven pounds and oblige.” This is not a bill of exchange because it
is a request and not an order. Little v. Slackford.
(ii) “We hereby authorise you to pay on our account to the order of X, £600.” This is not a bill of
exchange because it is not an order to pay. Hamilton v Spottiswoode.

CHEQUE

DEFINITION OF CHEQUE
Sec. 6 of Negotiable Instruments Act, 1881: “Cheque”. —A “cheque” is a bill of exchange
drawn on a specified banker and not expressed to be payable otherwise than on demand and it
includes the electronic image of a truncated cheque and a cheque in the electronic form.
Explanation I. —For the purposes of this section, the expressions—

(a) “a cheque in the electronic form” means a cheque which contains the exact mirror image of a
paper cheque, and is generated, written and signed in a secure system ensuring the minimum
safety standards with the use of digital signature (with or without biometrics signature) and
asymmetric crypto system;

(b) “a truncated cheque” means a cheque which is truncated during the course of a clearing
cycle, either by the clearing house or by the bank whether paying or receiving payment,
immediately on generation of an electronic image for transmission, substituting the further
physical movement of the cheque in writing.
Explanation II. —For the purposes of this section, the expression “clearing house” means the
clearing house managed by the Reserve Bank of India or a clearing house recognised as such by
the Reserve Bank of India.

There are three parties in cheque these are :

Drawer: The person who draws the cheque is known as the drawer. The person whose name the
account stands is the drawer.

Drawee: The bank on which the cheque is drawn is known as the drawee.

Payee: The person in whose favor the cheque is made payable is the payee. If the cheque is
drawn payable to self, the drawer himself would be the payee of the cheque.

ESSENTIALS OF CHEQUE

1. In Writing :-The cheque must be in writing. It can not be oral.

2. Unconditional :- The language used in a cheque should be such as to convey an unconditional

order. If the banker is ordered to pay upon the condition of payee's signing the receipt, then the
instrument is a conditional order and thus not a cheque. 'But if the order regarding receipt is too
construed as addressed to the payee, the instrument can be treated as a cheque.

3. Signature of the Drawer :- It must be signed by the maker.

4. Certain Sum of Money :-The amount in the cheque must be certain.

5. Payees Must be Certain :-It must be payable to specified person.

6. Only Money :-The payment should be of money only.

7. Payable On Demand :-It must be payable on demand.

8. Upon a Bank :-It is an order of a depositor on a bank.

9. The date column: Date is the first item to be filled in by a customer. The date should not be
incomplete.

10. Stale Cheques: (out of date): The date on a cheque may be a current one, or an ante one or a
post one. A cheque which bears date before the date of issue, is said to be ante – dated.
Ex: A cheque issued on 7th of July, 2015 may bear the date of 1stjuly 2015.
Cheque should be produced before the expiry of the term 3 months. After 3 months cheque will
become stale cheque.

11. Post dated cheque: A cheque which bears a date subsequent to the date of issue is said to be
post dated cheque.
Ex: If a cheque drawn on 1st march 2015, bears the date of 15th March 2015. it is post dated
cheque.

12. Payee column: The term Payee denotes the person towhom the amount of the cheque is
payable. Payee must be a certain person.

13. The amount Column: The amount of the cheque must be certain and expressed both in words
and figures. The amount is very correctly and legibly written. If it is not done, either the cheque
will be dishonoured or a delay will be caused in the payment.
The amount should always be written clearly with a pen. If there is any overwriting or alteration,
it should be confirmed by the drawer himself with his full signature.

14. The signature Column: A banker usually obtains specimen signatures of customers at the
time of opening new accounts. A banker should always compare the signature on the cheque
with the specimen signature.

TYPES OF CHEQUES:

1. Bearer cheques or open cheques

2. Crossed cheques

1. A bearer cheque:
A bearer cheque is one which has no crossing and which can be presented by the holder to the
banker upon whom it is drawn and is paid over the counter of the bank.
This cheque is payable by the drawee bank over the counter to the Bearer or presenter of the
cheque.
A Bearer cheque can be negotiated or pass to another person by mere delivery. In other words,
the holder (or the Transferer), when giving it to another person need not endorse the cheque.

No identification is needed when a bearer cheque is presented for encashment. However, in

normal banking practice, where the amount of the cheque is substantial, the identity of the
encasher is insisted on.

A bearer cheque can be collected by the bank for the credit of anyone's account.

In banking practice, the need for the encasher's signature on the back of the cheque is merely to
evidence that the encasher has received the money from the bank.
A bearer cheque:
A bearer cheque is one which has no crossing and which can be presented by the holder to the
banker upon whom it is drawn and is paid over the counter of the bank.
This cheque is payable by the drawee bank over the counter to the Bearer or presenter of the
cheque.

A Bearer cheque can be negotiated or pass to another person by mere delivery. In other words,
the holder (or the Transferer), when giving it to another person need not endorse the cheque.

No identification is needed when a bearer cheque is presented for encashment. However, in

normal banking practice, where the amount of the cheque is substantial, the identity of the
encasher is insisted on.

A bearer cheque can be collected by the bank for the credit of anyone's account.

In banking practice, the need for the encasher's signature on the back of the cheque is merely to
evidence that the encasher has received the money from the bank.

What is an Order Cheque?

This is a cheque whereby the printed word "Bearer" on the cheque is cancelled. The cancellation
of the word "Bearer" automatically makes the cheque an "order" cheque.

An order cheque can be paid to the named payee across the bank's account if so presented.

Identification must be insisted on by the bank when encashing the order cheque for the presenter.
The ID number and the named payee's signature will be asked for on the back of the cheque.

A cheque drawn thus:

Pay Cash... or Order (the bearer is cancelled) is not a cheque at all. Hence, it must not be
encashed or paid. The Act states that if a cheque is to be made payable to order, the payee must
be specified with certainty.
An order cheque can be negotiated to another person by the endorsement of the transferer. The
mere signature of the transferer will be sufficient to transfer or negotiate the cheque.
Banks will collect cheques made payable to order if deposited for collection by any person other
than the named payee.

An order cheque can be a bearer cheque if the words or bearer are not cancelled out.
A crossed cheque is a cheque that has been marked to specify an instruction about the way it is to
be redeemed. A common instruction is to specify that it must be deposited directly into an
account with a bank and not immediately cashed by a bank over the counter. The format and
wording varies between countries, but generally two parallel lines and/or the words 'Account
Payee' or similar may be placed either vertically across the cheque or in the top left hand corner.
By using crossed cheques, cheque writers can effectively protect the cheques they write from
being stolen and cashed.

2.A crossed cheque is a cheque that is payable only through a collecting banker and not directly
at the counter of the bank. Crossing ensures security to the holder of the cheque as only the
collecting banker credits the proceeds to the account of the payee of the cheque.
When two parallel transverse lines, with or without any words, are drawn generally, on the left
hand top corner of the cheque. A crossed cheque does not affect the negotiability of the
instrument.

1. General crossing: Section 123 of the Act refers to general crossing.

Where a cheque bears across its face two traverse lines with or without the words or the words
‘not negotiable, the cheque is said to have been crossed generally. Where a cheque is crossed
generally, the banker shall not pay it, otherwise than to the banker” (Section 126).

Generally, cheques are crossed when

There are two transverse parallel lines, marked across its face or
The cheque bears an abbreviation "& Co. "between the two parallel lines or
The cheque bears the words "Not Negotiable" between the two parallel lines or
The cheque bears the words "A/c. Payee" between the two parallel lines.
A crossed cheque can be made bearer cheque by cancelling the crossing and writing that the
crossing is cancelled and affixing the full signature of drawer.

2. Special crossing: Section 124 of the Act refers to Special crossing.

Where a cheque bears across its face in addition to the name of the banker either with or without
the words or the words ‘not negotiable, then the cheque is said to have been crossed specially.
The object of special crossing is to direct the banker to pay the cheque only if it is presented
through the particular bank mentioned.
When a particular bank's name is written in between the two parallel lines the cheque is said to
be specially crossed.
Specimen of Special or Restrictive Crossing
In addition to the word bank, the words "A/c. Payee Only", "Not Negotiable" may also be
written. The payment of such cheque is not made unless the bank named in crossing is presenting
the cheque. The effect of special crossing is that the bank makes payment only to the banker
whose name is written in the crossing. Specially crossed cheques are more safe than a generally
crossed cheques.
Not Negotiable crossing:
The words 'not negotiable' can be added to general-crossing as well as special-crossing and a
crossing with these words is known as not negotiable crossing. The effect of such a crossing is
that it removes the most important characteristic of a negotiable instrument:
the transferee of such a crossed cheque cannot get a better title than that of the transferor (cannot
become a holder in due course) and cannot convey a better title to his own transferee, but the
instrument remains transferable.

Account Payee Crossing Cheque:

This crossing can be made in both general and special crossing by adding the words 'account
payee' or 'A/C payee only'. In this type of crossing, the collecting banker is supposed to credit the
amount of the cheque to the account of the payee only. The cheque remains transferable but the
collecting banker has more liability if he credits the cheque proceeds to someone other than the
payee and the endorsement in favour of the last payee is proved forged. Thus, the collecting
banker must first investigate the title of the last endorsee from the original payee named in the
cheque, before collecting.

Other Instruments

1.Banker’s Drafts (Demand Drafts):

Banker’s draft is a payment order issued by one office of a bank on another office of the same
bank, for a certain sum of money payable to order on demand. For remitting money from one
place to another, bankers issue demand drafts on their branches at the palce of destination. It is
issued on the request of a customer who has to make a guaranteed payment, that is in
circumstances where the payee wishes to be certain that the cheque will be paid upon
presentation.
Banker’s drafts can, and should be crossed with a view to protecting the interests of the
parties thereto viz. the drawer(issuing branch), the drawee(the paying branch) and the payee.

2. Dividend Warrants: The profit made by a company divided among its shareholders
according to their number of shares is called ‘dividend’. A dividend warrant is an order, issued
by a joint stock company and drawn on its bankers for payment of the specified sum of money to
the registered holder of one or more of its shares or debentures.
In India, dividend warrants are issued in conformity with the legal definition of a cheque.
Hence dividend warrants are treated as cheques.

3. Traveller’scheque: Traveller’scheque is a method whereby travellers take currency to another

place in India or abnroad to provide for their expenses. When a person wants to travel without
taking the risk of carrying cash with him, he may avail of the facility of traveller’scheque.
A traveller’scheque can be encashed at any office of the issuing bank and at any other
place with arrangements viz. hotels, petrol pumps, showrooms, departmental store etc.
Traveller’scheque is one of the negotiable instruments. It possesses all characvteristic
features of a cheque.
Holder, Holder in Due Course and Holder for value
Holder: Sec.8 of N.I.Act1881 defines: The holdr of a promissory note, bill of exchange or
cheque means any person entitled in his own name to the possession thereof and to receive or
recover the amount due thereon from the parties thereto.
To a holder, he should have a right to possess. A person in possession of an instrument without
having a right to possess the same cannot be called the holder.

5.What is Endorsement? Explain different kinds of Endorsement.

Ans:

Introduction:

A negotiable instrument payable to order is negotiable by the holder by indorsement and delivery
thereof. Thus, the negotiation of an order instrument requires two formalities viz, first the holder
should indorse it and then deliver it to the indorsee. Unless the transferor signs his indorsement
on the instrument and delivers it, the transferee does not become a holder. Where an instrument
payable to order is transferred without indorsement, the transferee is not entitled to the rights of a
holder in due course, and he cannot negotiate it to a third pary.

Definition of Endorsement
Sec. 15 of Negotiable Instruments Act 1881 defines: When the maker or holder of an
negotiable instrument signs the same, otherwise than as such maker, for the purpose of
negotiation, one the back or face thereof or on a slip of paper annexed thereto, or so signs for the
same purpose a stamped paperintended to be completed as a negotiable instrument, he is said to
indorse the same, and is called the endorser.

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 therin. 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. He may, if he, likes put down the
correct spellings after he has signed in the manner already appearing on the cheque. 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.
Endorsement in blank and in full-endorsee
If the endorser signs his name only, the endorsement is said to be “in blank”, and if he adds a
direction to pay the amount mentioned in the instrument to, or to the order of, a specified person,
the endorsement is said to be “in full”, and the person so specified is called the “endorsee” of the
instrument.
Important kinds of endorsements are given below:
1. Blank or general endorsement:
If the endorser signs his name only and does not specify the name of the endorsee, the
endorsement is said to be in blank Sec. 16(1). The effect of a blank endorsement is to convert the
order instrument into bearer instrument (Sec. 54), which may be transferred merely by delivery.

2. Endorsement in full or special endorsement:

If the endorser, in addition to his signature, also adds a direction to pay the amount mentioned in
the instrument to, or to the order of, a specified person the endorsement is said to be in full [Sec.
16(1)].

If, for example, A, the holder of a bill of exchange, wants to make an endorsement in full to B,
he would write thus: “Pay to B or order, SdA4.” After such an endorsement it is only the
endorsee, i.e., B, who is entitled to receive the payment of the instrument and to further negotiate
the instrument by his endorsement.

A blank endorsement can easily be converted into an endorsement in full, According to Section
49, the holder of a negotiable instrument endorsed in blank may, without signing his own name,
by writing above the endorser’s signature a direction to pay to any other person as endorsee,
convert the endorsement in blank into an endorsement in full; and since such holder does not
sign himself on the instrument he does not thereby incur the responsibility of an endorser.

3. Partial Endorsement:
Section 56 provides that a negotiable instrument cannot be endorsed for a part of the amount
appearing to be due on the instrument. In other words, a 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 subject the prior parties to
plurality of actions (one action by holder for part value and another action by endorsee for part
value) “and will thus cause inconvenience to them.
Moreover, it would also interfere with the free circulation of negotiable instruments. It may be
noted that an endorsement which purports to transfer the instrument to two or more endorses
separately, and not jointly is also treated as partial endorsement and hence would be invalid.

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.

Section 56, however, further provides that where an instrument has been paid in part, a note to
that effect ma; be endorsed on the instrument and it may then be negotiated for the balance.

Thus, if in the above illustration the acceptor has already paid Rs 1,000 to A, the holder of the
bill, A can then make an endorsement saying “Pay B or order” Rs 1,000 being the unpaid residue
of the bill.” Such an endorsement would be valid.

4. Restrictive endorsement:
Stating the effect of endorsement, Section 50 provides that “the endorsement of negotiable
instrument followed by delivery transfers to the endorsee the property herein with the right of
further negotiation.” However, Section 50 permits restrictive endorsement.

An endorsement which, by express words, prohibits the endorsee from further negotiating the
instrument or restricts the endorsee to deal with his instrument as directed by the endorser is
called ‘restrictive’ endorsement.

The endorsee under a restrictive endorsement gets all the rights of an endorser except the right of
further negotiation. In other words, such an endorsement entitles the endorsee to receive the
payment on due date and sue the parties for it but he cannot further negotiate the instrument.

Illustrations:
(a) 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.
(b) B, the holder of the bill, makes an indorsement on the bill, saying “Pay C for my use or “Pay
C or order for the account of B.” In either case there is a restrictive endorsement as the right of
further negotiation by C has been excluded thereby.

The person liable on the hill must pay by drawing a cheque in the name of the holder (or the
endorser) B. If he makes the payment to C on C’s own account, he will still be liable to B, the
endorser; Hence C cannot endorse the bill further in his own name.
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 (Sec. 52).

The law permits a conditional endorsement and therefore it does not in any way affect the
negotiability of the instrument. Thus, endorsements can validly be made in the following terms:

(i) “Pay B or order on his marriage;”

(ii) “Pay B on the arrival of Pearless 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. But the endorsee can sue other prior parties, e.g., the maker,
acceptor, etc., if the instrument is not duly met at maturity, even though the specified event did
not happen.

6. Sans recourse endorsement (Sec. 52):

When the endorser expressly excludes his own liability on the negotiable instrument to the
endorsee or any subsequent holder in case of dishonour of the instrument, the endorsement is
known as ‘sans recourse’ endorsement.

Such an endorsement is generally made by adding the words ‘sans recourse’ or ‘without
recourse.’ Thus, “Pay X or order sans recourse” or “Pay X without recourse to me” or “Pay X or
order at his own risk” is examples of this type of endorsement.

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, even though no notice of dishonour has been given to him.
6. Define Banker and Customer. Discuss the general and special relationship between
banker and customer.

Ans:

Introduction:

The relationship between a banker and a customer depends on the activities; products or services
provided by bank to its customers or availed by the customer. Thus 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.

Definition of a Banker:

The Banking Regulations Act (B R Act) 1949 does not define the term ‘banker’ but defines what
banking is?

As per Sec.5 (b) of the B R Act “Banking' means 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."

As per Sec. 3 of the Indian Negotiable Instruments Act 1881, the word “banker includes any
person acting as banker and any post office savings bank”.

According to Sec. 2 of the Bill of Exchange Act, 1882, ‘banker includes a body of persons,
whether incorporated or not who carry on the business of banking.’

Sec.5(c) of Bandking Regulation Act, 1949 defines "banking company" as a company that
transacts the business of banking in India. Since a banker or a banking company undertakes
banking related activities we can derive the meaning of banker or a banking company from Sec
5(b) as a body corporate that: (a) Accepts deposits from public. (b) Lends or (c) Invests the
money so collected by way of deposits. (d) Allows withdrawals of deposits on demand or by any
other means.

Accepting deposits from the ‘public’ means that a bank accepts deposits from anyone who offers
money for the purpose. Unless a person has an account with the bank, it does not accept deposit.
For depositing or borrowing money there has to be an account relationship with the bank. A bank
can refuse to open an account for undesirable persons. It is banks right to open an account.
Reserve Bank of India has stipulated certain norms “Know Your Customer” (KYC) guidelines
for opening account and banks have to strictly follow them.

In addition to the activities mentioned in Sec.5 (b) of B R Act, banks can also carry out activities
mentioned in Sec. 6 of the Act.

Who is a ‘Customer’?

The term Customer has not been defined by any act. The word ‘customer’ has been derived from
the word ‘custom’, which means a ‘habit or tendency’ to-do certain things in a regular or a
particular manner’s .In terms of Sec.131 of Negotiable Instrument Act, when a banker receives
payment of a crossed cheque in good faith and without negligence for a customer, the bank does
not incur any liability to the true owner of the cheque by reason only of having received such
payment. It obviously means that to become a customer account relationship is must. Account
relationship is a contractual relationship.

It is generally believed that any individual or an organisation, which conducts banking

transactions with a bank, is the customer of bank. However, there are many persons who do
utilize services of banks, but do not maintain any account with the bank.

Thus bank customers can be categorized in to four broad categories as under:

(a)Those who maintain account relationship with banks i.e. Existing customers.
(b)Those who had account relationship with bank i.e. Former Customers
(c)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.
(d)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
handed over the account opening form duly filled in and signed by him to the bank
and the bank has accepted the it for opening the account, even though no
account has actually been opened by the bank in its books or record.

The term 'customer' is used only with respect to the branch, where the account is maintained. He
cannot be treated as a ‘customer' for other branches of the same bank. However with the
implementation of’ ‘Core Banking Solution’ the customer is the customer of the bank and not of
a particular branch as he can operate his account from any branch of the bank and from
anywhere. In the event of arising any cause of action, the customer is required to approach the
branch with which it had opened account and not with any other branch.

Banker-Customer Relationship:

Banking is a trust-based relationship. There are numerous kinds of relationship between the bank
and the customer. The relationship between a banker and a customer depends on the type of
transaction. Thus the relationship is based on contract, and on certain terms and conditions.

These relationships confer certain rights and obligations both on the part of the banker and on the
customer. However, the personal relationship between the bank and its customers is the long
lasting relationship. Some banks even say that they have generation-to-generation banking
relationship with their customers.The banker customer relationship is fiducial relationship. The
terms and conditions governing the relationship is not be leaked by the banker to a third party.

Classification of Relationship:

The relationship between a bank and its customers can be broadly categorized in to General
Relationship and Special Relationship.

If we look at Sec 5(b) of Banking Regulation Act, we would notice that bank’s business hovers
around accepting of deposits for the purposes of lending. Thus the relationship arising out of
these two main activities are known as General Relationship. In addition to these two activities
banks also undertake other activities mentioned in Sec.6 of Banking Regulation Act.
Relationship arising out of the activities mentioned in Sec.6 of the act is termed as special
relationship.

General Relationship:

Debtor-Creditor: When a 'customer' opens an account with a bank, he fills in and signs the
account opening form. By signing the form he enters into an agreement/contract with the bank.
When customer deposits money in his account the bank becomes a debtor of the customer and
customer a creditor. The money so deposited by customer becomes bank’s property and bank has
a right to use the money as it likes. The bank is not bound to inform the depositor the manner of
utilization of funds deposited by him. Bank does not give any security to the depositor i.e.
debtor. The bank has borrowed money and it is only when the depositor demands, banker pays.
Bank’s position is quite different from normal debtors.
Banker does not pay money on its own, as banker is not required to repay the debt voluntarily.
The demand is to be made at the branch where the account exists and in a proper manner and
during working days and working hours.
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
have been read and understood or has been explained. In fact the terms and conditions are
mentioned in the passbook, which is issued to the customer only after the account has been
opened.

In the past while opening account some of the banks had the practice of giving a printed handbill
containing the terms and conditions of account along with the account opening form. This
practice has since been discontinued. For convenience and information of prospective customers
a few banks have uploaded the account opening form, terms and conditions for opening account,
rate charge in respect of various services provided by the bank etc., on their web site.

While issuing Demand Draft, Mail / Telegraphic Transfer, bank becomes a debtor as it owns
money to the payee/ beneficiary.

2. Creditor–Debtor: Lending money is the most important activities of a bank. The resources
mobilized by banks are utilized for lending operations. Customer who borrows money from bank
owns money to the bank. In the case of any loan/advances account, the banker is the creditor and
the customer is the debtor. The relationship in the first case when a person deposits money with
the bank reverses when he borrows money from the bank. Borrower executes documents and
offer security to the bank before utilizing the credit facility.

In addition to opening of a deposit/loan account banks provide variety of services, which makes
the relationship more wide and complex. Depending upon the type of services rendered and the
nature of transaction, the banker acts as a bailee, trustee, principal, agent, lessor, custodian etc.
3. Bank as a Trustee:

As per Sec. 3 of Indian Trust Act, 1882

‘ A "trust" is an obligation annexed to the ownership of property, and arising out of a confidence
reposed in and accepted by the owner, or declared and accepted by him, for the benefit of
another, or of another and the owner.’ Thus trustee is the holder of property on behalf of a
beneficiary.

As per Sec. 15 of the ‘Indian Trust Act, 1882 ‘A trustee is bound to deal with the trust-property
as carefully as a man of ordinary prudence would deal with such property if it were his own; and,
in the absence of a contract to the contrary, a trustee so dealing is not responsible for the loss,
destruction or deterioration of the trust-property.’ A trustee has the right to reimbursement of
expenses (Sec.32 of Indian Trust Act.).

In case of trust banker customer relationship is a special contract. When a person entrusts
valuable items with another person with an intention that such items would be returned on
demand to the keeper the relationship becomes of a trustee and trustier. Customers keep certain
valuables or securities with the bank for safekeeping or deposits certain money for a specific
purpose (Escrow accounts) the banker in such cases acts as a trustee. Banks charge fee for
safekeeping valuables.

3. Bailee – Bailor:

Sec.148 of Indian Contract Act, 1872, defines "Bailment""bailor" and "bailee".

A "bailment" is the delivery of goods by one person to another for some purpose,

upon a contract that they shall, when the purpose is accomplished, be returned or otherwise
disposed of according to the directions of the person delivering them. The person delivering the
goods is called the "bailor". The person to whom they are delivered is called, the "bailee".
Banks secure their advances by obtaining tangible securities. In some cases physical possession
of securities goods (Pledge), valuables, bonds etc., are taken. 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.

4. Lessor and Lessee:

Sec.105 of ‘Transfer of property Act 1882’ defines lease, Lessor, lessee, premium and rent. As
per the section

“A lease of immovable property is a transfer of a right to enjoy such property, made for a certain
time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of
money, a share of crops, service or any other thing of value, to be rendered periodically or on
specified occasions to the transferor by the transferee, who accepts the transfer on such terms.”

4. Definition of Lessor, lessee, premium and rent :

(1)The transferor is called the lessor,

(2)The transferee is called the lessee,
(3)The price is called the premium, and
(4)The money, share, service or other thing to be so rendered is called the rent.”

Providing safe deposit lockers is as an ancillary service provided by banks to customers. While
providing Safe Deposit Vault/locker facility to their customers bank enters into an agreement
with the customer. The agreement is known as “Memorandum of letting” and attracts stamp
duty.
The relationship between the bank and the customer is that of lessor and lessee. Banks lease (hire
lockers to their customers) their immovable property to the customer and give them the right to
enjoy such property during the specified period i.e. during the office/ banking hours and charge
rentals. Bank has the right to break-open the locker in case the locker holder defaults in payment
of rent. Banks do not assume any liability or responsibility in case of any damage to the contents
kept in the locker. Banks do not insure the contents kept in the lockers by customers.

5. 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”.

Thus an agent is a person, who acts for and on behalf of the principal and under the latter’s
express or implied authority and the acts done within such authority are binding on his principal
and, the principal is liable to the party for the acts of the agent.

Banks collect cheques, bills, and makes payment to various authorities viz., rent, telephone bills,
insurance premium etc., on behalf of customers. . Banks also abides by the standing instructions
given by its customers. In all such cases bank acts as an agent of its customer, and charges for
theses services. As per Indian contract Act agent is entitled to charges. No charges are levied in
collection of local cheques through clearing house. Charges are levied in only when the cheque is
returned in the clearinghouse.

6. As a Custodian: A custodian is a person who acts as a caretaker of some thing. Banks take
legal responsibility for a customer’s securities. While opening a dmat account bank becomes a
custodian.
7. As a Guarantor: Banks give guarantee on behalf of their customers and enter in to their
shoes. Guarantee is a contingent contract. As per sec 31,of Indian contract Act guarantee is a "
contingent contract ". Contingent contract is a contract to do or not to do something, if some
event, collateral to such contract, does or does not happen.
It would thus be observed that banker customer relationship is transactional relationship.
Termination of relationship between a banker and a customer:
The relationship between a bank and a customer ceases on:
(a) The death, insolvency, lunacy of the customer.
(b) The customer closing the account i.e. Voluntary termination
(c) Liquidation of the company
(d) The closing of the account by the bank after giving due notice.
(e) The completion of the contract or the specific transaction.

Special relationship between banker and customer

Buy opening an account with the banker there will be some rights conferred and responsibilities
or obligations imposed to the banker and customer. These rights and duties are reciprocal the
bankers duties are the customers rights and the bankers rights are the customers duties. These
rights and responsibilities or duties are called the special features of relationship between banker
and customer.

Duties of a banker:

A 'Banker' has certain duties vis-à-vis his customer. These are:

(a)Duty to maintain secrecy/confidentiality of customers' accounts.

(b)Duty to honourcheques drawn by customers on their accounts and collect cheque,
bills on his behalf.
(c)Duty to pay bills etc., as per standing instructions of the customer.
(d)Duty to provide proper services.
(e)Duty to act as per the directions given by the customer. If directions are not
given the banker has to act according to how he is expected to act.
(f)Duty to submit periodical statements i.e. informing customers of the state of the
account
(g)Articles/items kept should not be released to a third party without due
authorization by the customer

Duty to maintain secrecy:

Banker has a duty to maintain secrecy of customers' accounts. Maintaining secrecy is not only a
moral duty but bank is legally bound to keep the affairs of the customer secret. The principle
behind this duty is that disclosure about the dealings of the customer to any unauthorized person
may harm the reputation of customer and the bank may be held liable. The duty of maintaining
secrecy does not cease with the closing of account or on the death of the account holder.

As per Sec. 13 of “Banking Companies Acquisition and Transfer of Undertakings Act 1970”-

“Every corresponding new bank shall observe, except as otherwise required by law, the practices
and usages customary among bankers, and, in particular, it shall not divulge any information
relating to or to the affairs of its constituents except in circumstances in which it is, in
accordance with law or practices and usages customary among bankers, necessary or appropriate
for the corresponding new bank to divulge such information.”

Maintaining secrecy is implied terms of the contract with the customer which bank enters into
with the customer at the time of opening an account.

Bank has not only to maintain secrecy of transactions, but secrecy is also to be maintained in
respect of operations through ATM/ debit cards. Bank has also to maintain secrecy of user ID
pins with due care so that it does fall in wrong hands.

Failure to maintain secrecy:

Bank is liable to pay damages to the account holder for loss of money and reputation if it fails in
its duty to maintain secrecy and discloses information relating to a customer's account or conduct
of the account to any unauthorized person.
Bank can also be liable to the third party if its wrongful disclosure harms the interest of the third-
party. If a bank Knowingly furnishes wrong information. There has been a
misrepresentation Over estimation of favourable opinion

Circumstances under which banker can disclose information of customer's account:

A bank can disclose information regarding customer's account to a person(s) under the following
circumstances.

(a)Under compulsion of law.

(b)Under banking practices.
(c)For protecting national interest.
(d)For protecting bank’s own interest
(e)Under express or implied consent of the customer
Disclosure under compulsion of law:

Banks disclose information to various authorities who by virtue of powers vested in them under
provisions of various acts require banks to furnish information about customer’s account. The
information is called under:

(i)Section 4 of Banker's Book Evidence Act, 1891

(ii)Section 94 (3) of Code of Civil Procedure Act, 1908
(iii)Section 45 (B) of Reserve Bank of India Act, 1934
(iv)Section 26 of Banking Regulation Act, 1949
(v)Section 36 of Gift Tax Act, 1958
(vi)Sections 131, 133 of Income Tax Act, 1961
(vii)Section 29 of Industrial Development Bank of India Act, 1964
(viii)Section 12of Foreign Exchange Management Act, (FEMA) 1999
(ix)Section 12 of the Prevention of Money Laundering Act, 2002

Banks are required to furnish only the called for information (no additional information is to be
furnished) on receipt of written request of the person who is vested with the authority to call for
such information under the said acts. The customer is kept informed about the disclosure of the
information.

Disclosure under banking practices:

In order to ascertain financial position and credit worthiness of the person banks obtain
information from other banks with which they are maintaining accounts. It is an established
practice among bankers and implied consent of the customer is presumed to exist. The opinion is
given in strictest confidence and without responsibility on the part of the bank furnishing such
information. Credit information is furnished in coded terms to other banks on IBA format and
without signatures.

2.Duty to provide proper accounts :

Banks are under duty bound to provide proper accounts to the customer of all the transactions
done by him. Bank is required to submit a statement of accounts / passbook to the customer
containing all the credits and debits in the account.

3.Duty to honour cheques:

As 'banking' means accepting of deposits withdrawable by cheque, draft, order or otherwise, the
banker is duty bound to honourcheques issued by the customers on their accounts.
Sec. 31of Negotiable Instruments Act, 1881 specifies the liability of drawee of cheque. As per
Sec. 31 “The 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.”

Therefore it is the duty of a bank to honour the cheques issued by the account holder if:

The cheque has been properly drawn and is in order in all respects i.e. it is properly dated,
amount in words and figures have been expressed properly, is neither stale nor post dated nor
mutilated and the signature of accountholder tallies with the specimen recorded with the bank.
The cheque should be drawn on the branch where the account is maintained. (Due to
implementation of technology and core banking solution a customer can present cheques on any
branch of a bank. RBI has advised banks to issue multi city cheques to account holders.)
(a)There is sufficient balance in the account and the balance is properly
applicable for payment of the cheque.
(b)The cheque is presented for payment on a working day and during the business
hours of the branch.

(c)Endorsements on the cheque are regular and proper.

(d)The payment of the cheque is not countermanded by the drawer

Duty to honourcheques ceases on receipt of:

(a)Stop payment instructions from the account holder.

(b)Notice about the death of the drawer.
(c)A garnishee order attaching the balance in the account or an income-tax
attachment order received by the banker.
(d)Drawer of the cheque becoming insolvent and/or a lunatic at the time of drawing
the cheque.
Bank can refuse to honour the cheques if:There is in sufficient 1balance in the account to
make payment of the cheque.
Cheque issued does not pertain to the account on which it has been drawn.
1.If the cheque is not in order (post dated, stale, payment countermanded, amount in
words and figure differs, etc.)
2.The balances held in account are earmarked for some specific purpose and the
remaining balance is not sufficient to honour the cheque.
Rights of a banker:
It is not that the bank has only duties to wards its customers, it too has certain rights vis-à-vis his
customers. The rights can broadly be classified as:

Right of General Lien

a)Right of Set-Off
b)Right of Appropriation
c)Act as per the mandate of customer
d)Right to Charge Interest, Commission, Incidental Charges etc.

Lien:

A lien is the right of a creditor in possession of goods, securities or any other assets belonging to
the debtor to retain them until the debt is repaid, provided that there is no contract express or
implied, to the contrary. It is a right to retain possession of specific goods or securities or other
movables of which the ownership vests in some other person and the possession can be retained
till the owner discharges the debt or obligation to the possessor. The creditor (bank) has the right
to maintain the security of the debtor but not to sell it. There are two types of lien viz.

1.Particular Lien and

2.Right of General Lien

(a) Particular Lien:

A 'particular lien' gives the right to retain possession only of those goods in respect of which the
dues have arisen. It is also termed as ordinary lien. If the bank has obtained a particular security
for a particular debt, then the banker's right gets converted into a particular lien.

(b) Right of General Lien:

Banker has a right of general lien against his borrower. General lien confers banks right in
respect of all dues and not for a particular due. It is a statutory right of the bank and is available
even in absence of an agreement but it does not confer the right to pledge. A 'general lien' gives
the right to retain possession of any goods in the legal possession of the creditor until the whole
of the debt due from the debtor is paid.
Section 171 of Indian Contract Act, 1872 confers the right of general lien to banks. As per the
section “ Bankers, factors, wharfingers, attorneys of a High Court and policy-brokers may, in the
absence of a contract to the contrary, retain, as a security for a general balance of account any
goods bailed to them; but no other persons have a right to retain, as a security for such balance,
goods bailed to them, unless there is an express contract to the effect.”

Bank has a right of lien only when goods, securities are received in the capacity as a creditor.
While granting advances banks take documents. These documents confer right to convert general
lien as an implied pledge. A banker’s lien is more than a general lien, it is an implied pledge and
he has the right to sell the goods in case of default Bank has a 'Right of Sale' of goods under lien.
Banker's right of lien is not barred by the Law of Limitation.

Exercising Right of Lien:

Bank has the right of lien on goods and securities entrusted to him legally and standing in the
name of the borrower.

Bank can exercise right of lien on the securities in its possession for the dues of the same
borrower, even after the loan taken against that particular security has been re-paid. Right of lien
can be exercised on bills, cheques, promissory notes, share certificates, bonds, debentures etc.

Where right of lien cannot be exercised:

Bank cannot exercise right of lien on goods received for safe custody, goods held in capacity as a
trustee, or as an agent of the customer, SDV, or left in bank by mistake

Right of set-off:

The banker has the right to set off the accounts of its customer. It is a statutory right available to
a bank, to set off a debt owned to him by a creditor from the credit balances held in other
accounts of the borrower. The right of set-off can be exercised only if there is no agreement
express or implied to the contrary. This right is applicable in respect of dues that are due, are
becoming due i.e. certain and not contingent. It is not applicable on future debts. It is applicable
in respect of deposits that are due for payment.

The right of set off enables bank to combine all kinds of credit and debit balances of a customer
for arriving at a net sum due.
The right is also available for deposits kept in other branches of the same bank. The right can be
exercised after death, insolvency, and dissolution of a company, after receipt of a garnishee/
attachment order .The right is also available for time barred debts.

Deposits held in the name of a guarantor cannot be set off to the debit balance in borrowers
account until a demand is made to the guarantor and his liability becomes certain. Banks cannot
set off the credit balance of customer's personal account for a joint loan account of the customer
with another person unless both the joint accountholders are jointly and severally liable. Banks
exercise the Right of set off only after serving a notice on the customer informing him that the
bank is going to exercise the right of set-off.

Automatic right of set off:

Depending on the situation, sometimes the set off takes place automatically without the
permission from the customer. In the following events the set off happens automatically i.e.
without the permission from the customer.

a)On the death of the customer,

b)On customer becoming insolvent.

c)On receipt of a Garnishee order on customer’s account by court.
d)On receipt of a notice of assignment of credit balance by the customer to the
banker.
e)On receipt of notice of second charge on the securities already charged to the
bank.

Conditions while exercising right of Set - Off:

a)The account should be in the sole name of the customer.

b)The amount of debts must be certain and measurable.
c)There should not be any agreement to the contrary
d)Funds should not be held in trust accounts
e)The right cannot be exercised in respect of future or contingent debts.
f)The banker has the right to exercise this right before a garnishee order is received by it.
Right of Appropriation:

It is the right of the customers to direct his banker against which debt (when more than one debt
is outstanding) the payment made by him should be appropriated. In case no such direction is
given, the bank can exercise its right of appropriation and apply it in payment of any debt.
Section 59,60 and 61 of Indian Contract Act, 1872 lays down the rules of appropriation.

7. Explain the powers and functions of Banking Ombudsman.

Ans:

Introduction:

An official appointed to investigate individual’s complaint against maladministration especially

that of public authorities. The Banking Ombudsman Scheme enables an expeditious and
inexpensive forum to bank customers for resolution of complaints relating to certain services
rendered by banks. To ensure redressal of grievances of users of banking services in an
inexpensive, expeditious (speedy) and fair manner that will provide impetus(movement) to
improve customer services in the banking sector on a continuous basis. To facilitate quick and
fair (non-discriminatory) redressal of grievances through use of IT systems, comprehensive and
easily accessible database and enhanced capabilities of staff through training.

POWERS AND FUNCTIONS OF BANKING OMBUDSMAN

The 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 to carry out the functions
entrusted to them by or under the Scheme. The appointment of Banking Ombudsman under the
above Clause may be made for a period not exceeding three years at a time.

1) The Reserve Bank shall specify the territorial limits to which the authority of each
Banking Ombudsman appointed under Clause 4 of the Scheme shall extend.
2) The Banking Ombudsman shall receive and consider complaints relating to the
deficiencies in banking or other services filed on the grounds mentioned in clause 8 and
facilitate their satisfaction or settlement by agreement or through conciliation and
mediation between the bank concerned and the aggrieved parties or by passing an Award
in accordance with the Scheme.
3) The Banking Ombudsman shall exercise general powers of superintendence and control
over his Office and shall be responsible for the conduct of business thereat.
 4) The Office of the Banking Ombudsman shall draw up an annual budget for itself in
consultation with Reserve Bank and shall exercise the powers of expenditure within the
approved budget on the lines of Reserve Bank of India Expenditure Rules, 2005.
5) The Banking Ombudsman shall send to the Governor, Reserve Bank, a report, as on 30th
June every year, containing a general review of the activities of his Office during the
preceding financial year and shall furnish such other information as the Reserve Bank
may direct and the Reserve Bank may, if it considers necessary in the public interest so to
do, publish the report and the information received from the Banking Ombudsman in
such consolidated form or otherwise as it deems fit.

PROCEDURE FOR REDRESSAL OF GRIEVANCE GROUNDS OF COMPLAINT

(1) Any person may file a complaint with the Banking Ombudsman having jurisdiction on any
one of the following grounds alleging deficiency in banking including internet banking or other
services.

(a) non-payment or inordinate delay in the payment or collection of cheques, drafts, bills etc.;

(b) non-acceptance, without sufficient cause, of small denomination notes tendered for any
purpose, and for charging of commission in respect thereof;

(c) non-acceptance, without sufficient cause, of coins tendered and for charging of commission
in respect thereof;

(d) non-payment or delay in payment of inward remittances ;

(e) failure to issue or delay in issue of drafts, pay orders or bankers’ cheques;

(f) non-adherence to prescribed working hours ;

(g) failure to provide or delay in providing a banking facility (other than loans and advances)
promised in writing by a bank or its direct selling agents;

(h) delays, non-credit of proceeds to parties' accounts, non-payment of deposit or non-

observance of the Reserve Bank directives, if any,

applicable to rate of interest on deposits in any savings, current or other account maintained with
a bank ;

(i) complaints from Non-Resident Indians having accounts in India in relation to their
remittances from abroad, deposits and other bankrelated matters;

(j) refusal to open deposit accounts without any valid reason for refusal; (k) levying of charges
without adequate prior notice to the customer;
(l) non-adherence by the bank or its subsidiaries to the instructions of Reserve Bank on
ATM/Debit card operations or credit card operations;

(m) non-disbursement or delay in disbursement of pension (to the extent the grievance can be
attributed to the action on the part of the bank concerned, but not with regard to its employees);

(n) refusal to accept or delay in accepting payment towards taxes, as required by Reserve
Bank/Government;

(o) refusal to issue or delay in issuing, or failure to service or delay in servicing or redemption of
Government securities;

(p) forced closure of deposit accounts without due notice or without sufficient reason;

(q) refusal to close or delay in closing the accounts;

(r) non-adherence to the fair practices code as adopted by the bank;

(s)non-adherence to the provisions of the Code of Bank's Commitments to Customers issued by

Banking Codes and Standards Board of India and as adopted by the bank ;

(t) non-observance of Reserve Bank guidelines on engagement of recovery agents by banks; and

(u) any other matter relating to the violation of the directives issued by the Reserve Bank in
relation to banking or other services.

(2) A complaint on any one of the following grounds alleging deficiency in banking service in
respect of loans and advances may be filed with the Banking Ombudsman having jurisdiction:

(a) non-observance of Reserve Bank Directives on interest rates;

b) delays in sanction, disbursement or non-observance of prescribed time schedule for disposal

of loan applications; (c) non-acceptance of application for loans without furnishing valid reasons
to the applicant; and (d) 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; (e) non-
observance of Reserve Bank guidelines on engagement of recovery agents by banks; and (f) 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. (3) The Banking Ombudsman may also deal
with such other matter as may be specified by the Reserve Bank from time to time in this behalf.

PROCEDURE FOR FILING COMPLAINT

(1) Any person who has a grievance against a bank on any one or more of the grounds
mentioned in Clause 8 of the Scheme may, himself or through his authorised representative
(other than an advocate), make a complaint to the Banking Ombudsman within whose
jurisdiction the branch or office of the bank complained against is located. 3 Provided that a
complaint arising out of the operations of credit cards and other types of services with
centralized operations, shall be filed before the Banking Ombudsman within whose territorial
jurisdiction the billing address of the customer is located.

(2) (a) The complaint in writing shall be duly signed by the complainant or his authorized
representative and shall be, as far as possible, in the form specified in Annexure ‘A’ or as near as
thereto as circumstances admit, stating clearly: (i) the name and the address of the complainant,
(ii) the name and address of the branch or office of the bank against which the complaint is
made, (iii) the facts giving rise to the complaint, (iv) the nature and extent of the loss caused to
the complainant, and (v) the relief sought for. (b) The complainant shall file along with the
complaint, copies of the documents, if any, which he proposes to rely upon and a declaration that
the complaint is maintainable under sub-clause (3) of this clause. (c) A complaint made through
electronic means shall also be accepted by the Banking Ombudsman and a print out of such
complaint shall be taken on the record of the Banking Ombudsman. (d) The Banking
Ombudsman shall also entertain complaints covered by this Scheme received by Central
Government or Reserve Bank and forwarded to him for disposal.

(3) No complaint to the Banking Ombudsman shall lie unless:- (a) the complainant had, before
making a complaint to the Banking Ombudsman, made a written representation to the bank and
the bank had rejected the complaint or the complainant had not received any reply within a
period of one month after the bank received his representation or the complainant is not satisfied
with the reply given to him by the bank;

(b) the complaint is made not later than one year after the complainant has received the reply of
the bank to his representation or, where no reply is received, not later than one year and one
month after the date of the representation to the bank; (c) 4 the complaint is not in respect of the
same cause of action which was settled or dealt with on merits by the Banking Ombudsman in
any previous proceedings whether or not received from the same complainant or along with one
or more complainants or one or more of the parties concerned with the cause of action ; (d) 5 the
complaint does not pertain to the same cause of action, for which any proceedings before any
court, tribunal or arbitrator or any other forum is pending or a decree or Award or order has been
passed by any such court, tribunal, arbitrator or forum; (e) the complaint is not frivolous or
vexatious in nature; and (f) the complaint is made before the expiry of the period of limitation
prescribed under the Indian Limitation Act, 1963 for such claims.

POWER TO CALL FOR INFORMATION: (1) For the purpose of carrying out his duties
under this Scheme, a Banking Ombudsman may require the bank against whom the complaint is
made or any other bank concerned with the complaint to provide any information or furnish
certified copies of any document relating to the complaint which is or is alleged to be in its
possession. Provided that in the event of the failure of a bank to comply with the requisition
without sufficient cause, the Banking Ombudsman may, if he deems fit, draw the inference that
the information if provided or copies if furnished would be unfavourable to the bank. (2) The
Banking Ombudsman shall maintain confidentiality of any information or document that may
come into his knowledge or possession in the course of discharging his duties and shall not
disclose such information or document to any person except with the consent of the person
furnishing such information or document. Provided that nothing in this clause shall prevent the
Banking Ombudsman from disclosing information or document furnished by a party in a
complaint to the other party or parties to the extent considered by him to be reasonably required
to comply with any legal requirement or the principles of natural justice and fair play in the
proceedings.

SETTLEMENT OF COMPLAINT BY AGREEMENT: (1) As soon as it may be practicable

to do, the Banking Ombudsman shall send a copy of the complaint to the branch or office of the
bank named in the complaint, under advice to the nodal officer referred to in sub-clause (3) of
clause 15, and endeavour to promote a settlement of the complaint by agreement between the
complainant and the bank through conciliation or mediation. (2) For the purpose of promoting a
settlement of the complaint, the Banking Ombudsman may follow such procedure as he may
consider just and proper and he shall not be bound by any rules of evidence. (3) The proceedings
before the Banking Ombudsman shall be summary in nature.

AWARD BY THE BANKING OMBUDSMAN (1) If a complaint is not settled by agreement

within a period of one month from the date of receipt of the complaint or such further period as
the Banking Ombudsman may allow the parties, he may, after affording the parties a reasonable
opportunity to present their case, pass an Award or reject the complaint. (2) The Banking
Ombudsman shall take into account the evidence placed before him by the parties, the principles
of banking law and practice, directions, instructions and guidelines issued by the Reserve Bank
from time to time and such other factors which in his opinion are relevant to the complaint. (3)
The award shall state briefly the reasons for passing the award. (4) 6 The Award passed under
sub-clause (1) shall contain the direction/s, if any, to the bank for specific performance of its
obligations and in addition to or otherwise, the amount, if any, to be paid by the bank to the
complainant by way of compensation for any loss suffered by the complainant, arising directly
out of the act or omission of the bank. (5) Notwithstanding anything contained in sub-clause (4),
the Banking Ombudsman shall not have the power to pass an award directing payment of an
amount which is more than the actual loss suffered by the complainant as a direct consequence of
the act of omission or commission of the bank, or ten lakh rupees whichever is lower. (6) 7 In the
case of complaints, arising out of credit card operations, the Banking Ombudsman may also
award compensation not exceeding Rs 1 lakh to the complainant, taking into account the loss of
the complainant's time, expenses incurred by the complainant, harassment and mental anguish
suffered by the complainant.

(7) A copy of the Award shall be sent to the complainant and the bank. (8)8 An award shall lapse
and be of no effect unless the complainant furnishes to the bank concerned within a period of 30
days from the date of receipt of copy of the Award, a letter of acceptance of the Award in full
and final settlement of his claim. Provided that no such acceptance may be furnished by the
complainant if he has filed an appeal under sub.clause (1) of clause 14. (9)9 The bank shall,
unless it has preferred an appeal under sub. clause (1) of clause 14, within one month from the
date of receipt by it of the acceptance in writing of the Award by the complainant under sub-
clause (8), comply with the Award and intimate compliance to the Banking Ombudsman.

REJECTION OF THE COMPLAINT:

The Banking Ombudsman may reject a complaint at any stage if it appears to him that the
complaint made is; (a) not on the grounds of complaint referred to in clause 8 or otherwise not in
accordance with sub clause (3) of clause 9; or (b) beyond the pecuniary jurisdiction of Banking
Ombudsman prescribed under clause 12 (5) and 12 (6) or (c) requiring consideration of elaborate
documentary and oral evidence and the proceedings before the Banking Ombudsman are not
appropriate for adjudication of such complaint; or (d) without any sufficient cause; or (e) that it
is not pursued by the complainant with reasonable diligence; or (f) in the opinion of the Banking
Ombudsman there is no loss or damage or inconvenience caused to the complainant.

8. Short Notes:

a) History of Banking in India

Banking is as old as the civilization itself. As early as 2,000 B.C. the Babylonians had
developed a system of banks. They used the temples for lending at higher rates of interest against
gold and silver which had been left with them for safe custody.
Around the same time the Greek temples were used as depositories for people’s surplus funds
and these were the centres of money lending transactions. The priests of the temples acted as
financial agents.

Banking was in existence in India during Vedic times (from 2000 BC to 1400 B.C.). Loans
were well understood in those days.

The transition from money-lending to banking must have occurred before Manu. He says, “A
sensible man should deposit his money with a person of good family, of good conduct, well
acquainted with the law, wealthy and honorable.
More details pertaining to money lending in the Sutra period (from seventh to second century
BC) are available from the Buddhist writings called the Jatakas. The Jatakas clearly establish the
existence of moneylenders called Seths who performed the functions of a banker.

The banking business, even though it was in rudimentary (elementary) form, was being carried in
the smrithi period.

Kautilya in his Arthasastra, which was written in the maurya period in 4th century B.C.
mentioned the maximum rate of interest which could be charged by the lenders.

The bankers during the mourya period were known as Sahukars and Mahajans.

During moghal period indigenous banking was in its prime(main). There was hardly a village
in India without its moneylender or Sharoff who financed trade and commerce.
However, There was a great fall in the banking system during this period as the Muslims
regarded taking of interest as a sin.
The East India Company came to India during 17th century as trader and it established its
Agency Houses at Mumbai, Kolkata, and Madras in India. These Agency Houses were the
combination of trade and banking in India.
The Bank of Hindustan was the earliest bank set up under European direction in India the year
1771 at Calcutta. It was failed in the year 1832.
Three Presidency Banks viz. Bank of Calcutta, Bank of Bombay and bank of Madras were
established in 1806, 1840 and 1843 respectively.
These Presidency Banks were amalgamated into the Imperial Bank of India on 27th Jan,
1921.The reserve bank of india is the central bank of our country the reserve bank of india was
established in 19 35 by the reserve bank of india act 1934.

The Reserve Bank of India was nationalised in1949. In 1955 the imperial bank of india was
nationalised and its undertaking was taken over by the state bank of india and its 7 subsidiaries.

b) Garnishee Order

The concept of 'Garnishment' has been introduced in civil procedure code by the amendment
Act, 1976 and is a remarkable piece of legislation. This term has been derived from the French
word 'garnir' which means to warn or to prepare. In simple words the garnishee is the person who
is liable to pay a debt to a debt to judgment debtor or to deliver any movable property to him.
Besides Judgment Debtor and decree Holder, Garnishee is a third person in whose hands debt of
the judgment debtor is kept.

Garnishee Order is an order passed by an executing court directing or ordering a garnishee not to
pay money to judgment debtor since the latter is indebted to the garnisher (decree holder). It is an
Order of the court to attach money or Goods belonging to the judgment debtor in the hands of a
third person. The third party is known as 'Garnishee' and the court's order is known as Garnishee
Order. It is a remedy available to the Decree holder. This Order may be made by the Order of the
court to holders of funds, i.e. a third party that no payments have to be made until the court
authorizes them. The purpose of the Order is to protect the interest of the Decree holder. This is
an Order served upon a garnishee requiring him not to pay or deliver the money or property of
the debtor (defendant) to him and/or requiring him to appear in the court and answer to the suit
of the plaintiff to the extent of the liability to defendant.

The power of the court enshrined under Rule 46A to issue court notice, is discretionary and the
court may refuse to pass such Order if it is Inequitable and the court apprehends that it can cause
prejudice to the garnishee, or that the grounds of the application seeking that remedy is not
sufficient or if the affidavit is filed by decree holder is frivolous or ambiguous, etc. The
discretion, however, must be exercised judicially. Where the court finds that there is bonafide
dispute against the claim and the dispute is not false or frivolous, it should not take action under
this rule.

The executing Court has been given power to recover any of the amounts of the judgment debtor,
which is in the hands of other. The rule of 46 A requires a notice to be issued to a garnishee
before a garnishee order is passed against him. If such notice is not issued and an opportunity of
hearing is not provided by the court, the order would be null and void. In the eyes of law, there is
no existence of such an order and any step taken pursuant to or an in enforcement of such an
order would also be void. The object of this rule is to render debt due by the debtor of the
judgment debtor available in execution to the decree holder and not to drive him to a suit. It
applies to a debt, other than a debt secured by a mortgage or a Charge, which has been attached
under rule 46.

Prior to this amendment in 1976, there was no provision relating to garnishee order in the code of
civil procedure, 1908. After insertion of this amendment, a direct provision was added to the
code of civil Procedure, which empowers the court to issue such an order on the application duly
filed. It is the discretionary power of the court to issue a garnishee order and not a mandatory
provision.

The court has to use this power with caution thinking properly and after being ensured that the
case is prima facie and that no innocent is harassed, otherwise the very purpose of the legislation
of providing the concerned remedy as discussed above shall come to be at a stake.

Garnishee proceedings provide the simplest method of enforcement where the judgment debtor is
himself the creditor of a third party. Through garnishee proceedings, the obligation of the third
party to pay money to the judgment debtor is transformed into an obligation of the third party to
pay the money directly to you (as the judgment creditor).
Garnishee proceedings is most commonly used to attach or freeze the sums of money which
belong to the judgment debtor located in his bank account.

stating, where the garnishee is a bank having more than one place of business, the name and
address of the branch at which the judgment debtor's account is believed to be held or, if it be the
case, that this information (about the debtor's account) is not known to you.

A garnishee order must at first be an order nisi. That is, an order directed to the garnishee
instructing him to show cause (to give any reasons to object the application) why the debt
claimed to be due or accruing from him to the judgment debtor should not be utilized to satisfy
the judgment debt and the costs of the garnishee proceedings.

The order nisi specifies the time and place for further consideration of the matter, and in the
meantime attaches the debt claimed to be due or accruing from the garnishee to the judgment
debtor, or so much of it as may be specified in the order

Unless the court otherwise directs, the garnishee order nisi must be served (delivered) on the
garnishee by hand, at least 15 days before the day appointed thereby for the further consideration
of the matter; and on the judgment debtor, at least 7 days after the order has been served on the
garnishee and at least 7 days before the day appointed for the further consideration of the matter.

As from the service of the garnishee order nisi on the garnishee, the order binds in his hands any
debt specified in the order or so much of it as may be so specified.

Where, on the further consideration of the matter, the garnishee does not attend the court hearing
or does not dispute the debt due or claimed to be due from him to the judgment debtor, the court
may make a garnishing order absolute (finalized order) against the garnishee. Upon granting of
the garnishee order absolute, the garnishee should pay the amount specified in the garnishee
order to the judgment creditor. The garnishee order absolute may be enforced in the same
manner as any other order for the payment of money.

Where, on further consideration of the matter, the garnishee disputes liability to pay the debt due
or claimed to be due from him to the judgment debtor, the court may have to examine the
questions at issue in order to determine the liability of the garnishee. If the garnishee has paid
you the amount specified in the relevant garnishee order, he will be deemed to have settled his
debt to the judgment debtor.

c) E-Banking:

E-banking is defined as the automated delivery of new and traditional banking products and
services directly to customers through electronic, interactive communication channels. E-
banking includes the systems that enable financial institution customers, individuals or
businesses, to access accounts, transact business, or obtain information on financial products and
services through a public or private network, including the Internet. Customers access e-banking
services using an intelligent electronic device, such as a personal computer (PC), automated
teller machine (ATM). A system allowing individuals to perform banking activities at home, via
the internet. Some online banks are traditional banks which also offer online banking, while
others are online only and have no physical presence. Online banking through traditional banks
enable customers to perform all routine transactions, such
as account transfers, balance inquiries, billpayments, 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.

Forms of Electronic Banking

1. Automated Teller Machine (ATM)

It is a machine that helps a bank’s customer to deposit money in a bank or withdraw it, transfer
it, and check the debit it one’s account accurately without the help of the bank employees.
According to ATM system any time money will get to customer i.e. customer can withdraw
through ATM card from his bank account, deposit money into his bank account, check the
balance in his bak account at any time, day or night non stop basis and all the 365 days.

There are two types of ATM: a) On site ATM: An ATM installed at the bank premises.

b) Off site ATM: ATM installed by a bank at important places, such as Railway stations, Bus
stand, supermarkets

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, in order to 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 arechannalisedthrough computer to the head office or corporate office. Till today 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 corporateoffice (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. From the bank's point of view, 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 a financial institution's 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, and a customer
needs to visit an ATM or bank branch for cash withdrawals and cash or cheque deposits.

5. Net Banking

The internet is a network of thousands of computer networks. Together the networks making up
the internet consist of over a million computer systems. 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 topics.

Advantages:

a) It reduces costs for the bank:

b) It reduces the cost for customers

C) shopping:

D) Bill payment

e) Railway and Buses booking

f) prepaid and postpaid bill of mobile

g) Fund transfer
6. CREDIT CARD

A card issued by a financial company giving the holder an option to borrow funds, usually at
point of sale. Credit cards charge interest and are primarily used for short-term financing. Interest
usually begins one month after a purchase is made and borrowing limits are pre-set according to
the individual's credit rating. Credit cards have higher interest rates than most consumer loans or
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.

Debit Card

A payment card that deducts money directly from a consumer’s checking account to pay for a
purchase. Debit cards eliminate the need to carry cash or physical checks to make purchases. In
addition, debit cards, also called check cards, offer the convenience of credit cards and many of
the same consumer protections when issued by major payment processors like Visa or
MasterCard. Unlike credit cards, they do not allow the user to go into debt, except perhaps for
small negative balances that might be incurred if the account holder has signed up for overdraft
coverage. However, debit cards usually have daily purchase limits, meaning it may not be
possible to make an especially large purchase with a debit card.

9. Solve problems

b) ‘A’ was a temporary employee in M/S XYZ & Co’ and he was to be made permanent
employee. He overdrew from the ‘Z’ bank to a sum of 50,000 Rs. On one day A did not
attend to duty. Director of XYZ Co’ telephoned the manager of Z bank to take A’s
address. In their conversation bank manager revealed information about his a/c. The
director misconceived the information and thought that A was insolvent and terminated
‘A’ from his job. Can ‘A’claim compensation from the banker for not keeping the
secrecy of the customer’s a/c and for the job lost?

Ans: Yes, ‘A’ can claim compensation from the banker for not keeping the secrecy of the
customer’s a/c and for the job lost.

The foundation of a banker and customer relationship is of confidence and secrecy. The
banker is under an obligation to take utmost care in keeping secrecy about the accounts of the
customers. By keeping secrecy is meant that the account books of the bank will not be
thrown open to the public or Government officials and the baker will 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. This duty of maintenance of secrecy by the banker is a legal one arising
out of the contract entered into with the customer not to disclose his affairs without his
consent.

Banker’s duty of secrecy has been described in Halsbury’s Laws of England “It is an
implied term of the contract between a banker and his customer that the banker will not
divulge to third person without the express or implied consent of the customer either the state
of the consumer’s account or any of his transactions with the bank of any information
relating to the customer acquired through the keeping of his account unless the banker is
compelled to do so by order of a court or the circumstances give rise to a public duty of
disclosure or protection of the banker’s own interest requires it.”

The banker should not disclose his customer’s financial position and the nature and the
details of his account to anybody, since it may effect his reputation; credit worthiness and
business.

The nature of the duty cast upon the banker to maintain secrecy about the customers
affairs has been discussed in Tournier v. National Provincial and Union Bank of England
Ltd.

Tournier was a temporary employee in M/s. Kenyon & Co. and he was to be made
permanent employee. He overdrew from the National Provincial and Union Bank of England
Ltd to a sum of 9856 and he agreed to pay by weekly instalments of 15. Out of this amount,
he paid some amount to a book maker towards the purchaser of certain goods.

On one day, tournier did not attend to duty. The Director of the Kenyon & Co.,
telephoned the Bank Manager of the National Provincial and Union Bank of England Ltd to
know the tournier’s address. In their conversation, the Bank Manager revealed that Tournier
was taken overdraft and made payment to a bookmaker. The Director misconceived the
information and came to conclusion that Tournier turned to be a gambler and was in practice
of betting and also he was insolvent.

Hence, he did not make him permanent and ousted him from the employment.
This caused Tournier grievance and he filed a suit against the banker for not keeping the
secrecy of the customer, and for the compensation of the job he lost.

The lower court dismissed his petition. He preferred appeal. The Court of Appeal
allowed his appeal and gave the judgment in his favour.
 In the case of Shankarlal v. State Bank of India, it was observed that breach of the
duty to maintain secrecy of customer’s account gives a claim for nominal damages or for
substantial damages if injury is resulted from the breach.

In India, the provisions contained in Section 44(1) of the State Bank of India Act,
1955, Section 52(1) of the State Bank of India (subsidiary Banks) Act, 1959 and Section 13
of the Banking companies (Acquisition and Transfer of Undertakings) Act, 1970 impose a
statutory duty on these public sector banks to maintain secrecy in connection with the affairs
of their constituents.

Hence, in the said problem bank manager revealed the information about A’s a/c
to the Director of XYZ Co’ where A was working. Due to this A lost his job. Here, bank
manager breached the duty of keeping secrecy of customer’s a/c and injury was resulted
from the breach. So, ‘A’ can claim compensation from the banker for not keeping the
secrecy of the customer’s a/c and for the job lost.

b) “I acknowledge myself to be indebted to B in Rs.1,00,000 to be paid on demand to B on

his attaining the age of majority. Is it valid Promissory Note?

Ans: No. It is not valid Promissory Note. Because it contains conditional undertaking to pay
1,00,000 to be paid on demand to B on his attaining the age of majority.

Sec.4 of the Negotiable Instruments Act 1881 states: “ A promissory note’ is an

instrument in writing (not being a bank note or a currency-note) containing an unconditional
undertaking signed by the maker, to pay a certain sum of money only to, or to the order of, a
certain person, or to the bearer of the instrument.”

According to the definition- a promissory note, to be valid, must contain an unconditional

promise to pay i.e. the payment should not be made subject to happening of aparticular event or
fulfillment of any condition.

If there is a conditional promise to pay, a promissory note will not be valid one. It was
upheld in the case of Beardsley v. Baldwin. In this case, a written undertaking to pay a sum of
money within so many days after the defendant’s marriage was not recognized as a promissory
note, because possibly the defendant may never marry and the sum may never become payable.

In another case Palmer v. Pratt, an instrument payable “at thirty days after the arrival of
the ship Paragon at Calcutta” was held to be not valid because if the ship did not arrive, the bill
would never be paid.

In the case of MuthuGounder v. Perumayammal, The instrument was payable “on

demand after two years”. The Court held that it was not an unconditional promise to pay because
the words “on demand” did not make the instrument payable immediately, it being not payable
for a period of two years. The making of a demand after two years was a condition precedent to
payment and, therefore the promise was not unconditional.

It must be free from contingencies or conditions that would embarrass it in its course.
There should be nothing which would materially obstruct its circulation.

c) ‘A’drawn a post dated cheque payable to ‘B’. ‘B’ presents a post dated cheque to banker
for payment before its due date. The banker makes payment on the same before its due
date. Can banker do so?

Ans: Banker cannot make payment on the cheque which is post-dated before its due date.

It is the duty of the banker not to honour post dated cheque before its due date. A post
dated cheque cannot be considered as a valid cheque till the date of maturity.

The banker who pays a post-date cheque before its date, disobeys his customer’s
mandate, since a cheque is nothing but a customer’s mandate. If the banker honours a post-dated
cheque before its date, he has no authority to debit his customer’s account until its date. The
banker may be compelled to reverse the debit entry.

If a banker makes payment on a post-dated cheque before its due date, this payment does
not amount to payment in due course. Since the payment does not amount to payment in due
course, the paying banker will lose the statutory protection given under Section 85 of the
Negotiable Instruments Act, 1881.

The prepayment of the cheque would reduce the balance in the account of the customer,
and so, the subsequent cheques would have to be dishonoured for want of funds. In such a case,
the drawee bank would be liable to pay damages for wrongful dishonor and the drawer will be
entitled to claim damages for its dishonor under Section 31 of Negotiable Instrument Act 1881.

If the customer dies, becomes insolvent or insane after the banker has made the payment
but before the date mentioned in the cheque, the amount cannot be debited to the customer’s
account because the latter’s mandate becomes ineffective on the occurrence of any of these
events.

Thus, the prepayment of a post-dated cheque exposes the banker to the danger of loss,
litigation and disputes, which might arise, if the drawer should countermand its payment or
attempt to withdraw the funds before that date or if a subsequent cheque should be wrongfully
dishonoured. Hence, the banker should return the post-dated cheque, when it is presented before
the date, with the remark “post-dated”.