THE NATIONAL LAW INSTITUTE UNIVERSITY, BHOPAL

SYLLABUS
For
LL.B.(Hons.)
X SEMESTER
BANKING LAW
COURSE TEACHER
DR. MONICA RAJE

INTRODUCTION

The banking sector has been an important sector which has reformed the country’s economy
to a great extent. An efficient banking system helps in the nation’s economic development.
Various stakeholders of the society use banks for their different requirements. Banks act as
the financial intermediaries between depositors and the borrowers. Apart from accepting
deposits and lending money, banks in todays changed global business environment offer
many more services to their customers. The present course is deigned to acquaint the students
with the fundamental concepts of banking law and the varying nature of relationship that
exists between a banker and his customer depending on the services that a bank provides to
its customer. The course examines the role of the Reserve Bank of India as the central bank
of the country as a regulator, supervisor and facilitator of the Indian banking system. Banking
industry in India is mainly governed by the Reserve Bank of India Act,1934 and the Banking
Regulation Act,1949. There are other legal frame works which are supplementary to the
Reserve Bank of India Act,1934 and the Banking Regulation Act,1949.

The Negotiable Instruments Act was enacted, in India, in 1881. The main object of the
Negotiable Instruments Act, 1881 is to legalise the system by which instruments
contemplated by it could pass from hand to hand by negotiation like any other goods. The
Act brings within its ambit three kinds of instruments, namely, promissory notes, bills of
exchange and cheques. Negotiable Instruments have been used in commercial world for a
long period of time as one of the convenient modes for transferring money. Before 1988 there

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was no effective legal provision to restrain people from issuing cheques without having
sufficient funds in their account or any stringent provision to punish them. Of course, on
dishonour of cheques, a civil liability accrued. With a view to protect drawee of the cheque
need was felt that dishonour of cheque be made punishable offence. With that purpose
Sec.138 to 142 were inserted by Banking, Public Financial Institutions and Negotiable
Instruments Laws (Amendment) Act, 1988. This was done by making the drawer liable for
penalties in case of bouncing of the cheque due to insufficiency of funds with adequate
safeguards to prevent harassment of the honest drawer.

It has now become customary for the commercial banks to execute guarantee on behalf of
their customers in favour of third party to compensate a person who has suffered a loss due to
non-performance of an obligation. In case the person on whose behalf the guarantee is given
commits default the bank is called upon to make good the monetary loss arising out of the
default. Banks also issue letters of credit to facilitate a trade transaction. A letter of credit is a
formal undertaking given by the banker of the buyer to the supplier of a commodity,
confirming that the supplier will be duly paid by the banker on presentation of necessary
documents. The course studies the law pertaining to bank guarantees and letters of credit as
spelt out in great detail by the Hon’ble Supreme Court in a catena of cases.

With the rising menace of non-performing assets, a need was felt to provide banks and
financial institutions with a speedier and more efficient means of recovering debts. With this
objective, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, which
provides for establishment of the Debt Recovery Tribunal and Appellate Tribunal, was
enacted. In addition, the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 as also been enacted to facilitate securitisation of
financial assets of banks and financial institutions.

Technology has entered into every sphere of the life and financial sector is no exception to
them. Electronic banking is the talk of the day. Every transaction carried out by banks are
computerized which has made working easier. However, the risk associated with technology
has complicated the story of introduction of e-banking. Numerous legislation deal with
electronic banking and have tried to do away or minimize the risk associated with it. The
course will also introduce students to the different forms of electronic banking and the risks
and challenges associated with it.

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COURSE OBJECTIVES

The following are the objectives of the course:

 To acquaint the students with the basic concepts involved in banking law;
 To acquaint the students about Reserve Bank of India and its role in Banking;
 To familiarise the students with the meaning and characteristics of negotiable
instruments;
 To understand the concept and law relating to bank guarantee and letters of credit;
 To have knowledge of the mechanisms in place for recovery of bank loans; and
 To study the concept of electronic banking and the risks associated with it.

COURSE OUTCOME

At the conclusion of the course students should be able to:

 Understand the fundamental legal concepts of banking
 Understand the role and functions of the Reserve Bank of India
 Understand the nature and characteristics of the different negotiable instruments as
enumerated in the Negotiable Instruments Act, 1881
 Understand the concept of bank guarantee and letters of credit
 Understand the laws relating to recovery of bank loans
 Understand the risks associated with electronic banking in India.

COURSE OUTLINE

UNIT I: INTRODUCTION TO BANKING LAW

Evolution of Banking Institutions: Origin of the word Bank, Early History of Banking –
History of Banking in India – Banks in India: Commercial Banks, Public Sector Banks,
Private Sector Banks, Foreign Banks, Regional Rural Banks, Development Banks, Co –
operative Banks, Functions of Commercial Banks –Types of Bank Accounts: Saving
Account, Current Account, Fixed Deposit Account, Recurring Deposit Account – Electronic
Banking: Meaning and Types: National Electronic Fund Transfer (NEFT), Real Time Gross
Settlement (RTGS), Electronic Clearing System, Automated Teller Machine (ATM) – Legal
Framework For Electronic Transactions.

UNIT II: REGULATION AND CONTROL ON BANKING IN INDIA

Reserve Bank of India and Its Role: The Reserve Bank of India Act, 1934 (2 of 1934) -
Organisation of the RBI – Reserve Bank of India and Commercial Banks – Functions of the
RBI: Commercial Banks maintain Account with RBI, RBI issues licence to Commercial
Banks, Power to Control Volume of Credit, Bank Rate, Open Market Operation, Cash
Reserve Ratio, Statutory Liquidity Ratio – Banking Regulation Act (10 of 1949).

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UNIT III: BANKER AND CUSTOMER
Meaning of term Banker and Customer – Types of Customers: Individuals, Hindu Undivided
Family (HUF), Firms, Companies, Trusts, Co – operative Societies – ‘Know Your Customer’
(KYC) Guidelines of the RBI – Relation between Banker and Customer: Debtor and
Creditor, Banker as Agent of Customer, Banker as a Trustee, Banker as a Bailee – Banker’s
Duty towards Customer: Banker Obligation to Honour Cheques, Bankers Duty as a Bailee of
Articles, Duty of Banker to Act as per Directions, Secrecy of Customer’s Account.

UNIT IV: NEGOTIABLE INSTRUMENTS

The Negotiable Instruments Act, 1881 (26 of 1881) – Objects of the NI Act – Characteristics
of Negotiable Instruments – Types of Negotiable Instruments: Promissory Note, Bill of
Exchange, Cheque including electronic cheque – Bankers Draft: Bill of Exchange and
Negotiable Instrument, Issue of Duplicate, Stop Payment/Cancellation of Draft.

UNIT V: NEGOTIABLE INSTRUMENTS: CHEQUE

Definition of Cheque – Difference between bill of exchange and cheque – Requisites of
Cheque: Form of cheque, Instrument in writing, Unconditional order, certain sum of money,
amount of cheque, payee to be certain – Ante dating and Post – dating, Crossing of Cheque –
Purpose – Types of crossing – General Crossing, Special Crossing, Not Negotiable Crossing,
Account Payee Crossing – Transfer and Endorsement of Cheque

UNIT VI: NEGOTIABLE INSTRUEMNTS: DISHONOUR OF CHEQUE

Object of Section 138 of the Negotiable Instruments Act, 1881 – Ingredients of Section 138
of NI Act: Cheque drawn on the drawer’s account, cheque for discharge of Debt or Liability,
Presumption as to Debt or Liability – Dishonour Due to Insufficiency of Funds – m Bankers
Return Memo or Bank Slip – Stop payment of Cheque – Account Closed – Notice of Demand
under Section 138 – Statutory Time for Drawer to Pay – Innocence not Allowed as Defence

UNIT VII: LETTERS OF CREDIT AND BANK GUARANTEES

Letters of Credit: Their Nature and Advantages – Types of Letter of Credit: Revocable,
Irrevocable, Confirmed, Unconfirmed, Credit with red Clause, Credit with Green Clause –
Principles Governing a Letter of Credit Transaction – Autonomy Principle and the Doctrine
of Strict Compliance – Fraud Exception to the Letter of Credit
Bank as a Guarantor – Kinds of Bank Guarantee: Performance Bank Guarantee,
Unconditional and Conditional Bank Guarantee – Rights of Bank as Guarantor – Invocation
of Bank Guarantee: Principles for Injunction Restraining Invocation of Bank Guarantee,
Fraud, irreparable injury

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UNIT IX: RECOVERY OF DEBTS DUE TO BANKS
The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) –
Meaning of Debt – Need for Debt Recovery Tribunals (DRT and DRAT) – Composition of
the Tribunals – Jurisdiction and Power of the Tribunals – Application and Procedure of
Tribunal: Impleading of Parties, Banks and Financial Institutions – Appeals to the Appellate
Tribunal: Pre-Deposit on Filing Appeal and Waiver
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 (54 of 2002): Salient Provisions of the Act – Securitisation – Asset
Reconstruction – Enforcement of Security Interest – Remedy Under the SARFAESI Act,
2002 and The RBD Act, 1993: Simultaneous Resort to RBD Act, 1993 and SARFAESI Act,
2002, Doctrine of Election of Remedies.

UNIT X: BANKING SERVICES AND THE CONSUMER

The Banking Ombudsman Scheme, 2006 – Objectives of the Scheme –Ombudsman bound by
the Reserve Bank of India Act, 1934 The Consumer Protection Act, 2019 (35 of 2019) –
Banking Services – Deficiency in Banking Services

ESSENTIAL READING:
JOHN ODGERS (ed.), PAGET’S LAW OF BANKING (London: LexisNexis, 2018).
VINOD KOTHARI (ed.), TANNAN’S BANKING LAW AND PRACTICE IN INDIA (New
Delhi: LexisNexis, 2017).