BANKING LAWS

Q1 What is effect of endorsement ?

Ans : As Section 50 of Negotiable Instrument Act 1881, Effect of endorsement of a negotiable instrument
followed by delivery transfers to the endorsee the property therein with the right of further negotiation,
but the endorsement may by express words, restrict or exclude such right, or may merely constitute the
endorsee an agent to endorse the instrument, or to receive its contents for the endorser, or for some
other specified person.

Illustrations

B signs the following indorsements on different negotiable instruments payable to bearer,-

(a) “pay the contents to C only”.

(b) “pay C for my use”.

(c) “pay C on order for the account to B”.

(d) “the within must be credited to C”.

These endorsements exclude the right of further negotiation by C.

(e) “pay C”.

(f) “pay C value in account with the Oriental Bank”.

(g) “pay the contents to C, bring part of the consideration in a certain deed of assignment executed by C
to endorser and others”.

These endorsements do not exclude the right of further negotiation by C.

Q2- Essential ingredients of Promissory Notes

Ans : A Promissory note to be valid and enforceable, the following essentials are to be satisfied :

1. The Promissory note must be in writing :

2. It must contain a promise/undertaking to pay certain sum of money :

3. The promise must be unconditional and certain :

4. It must be duly signed and delivered by the maker :

5. The parties must be certain :

6. It must be stamped according to the provisions of the stamp Act, 1940.

Q3- What is ‘Banking’ as per Banking Regulation Act ?

Ans : As per Section 5(b) of the Banking Regulation Act, 1949 , “banking” means the accepting, for the
purpose of lending or investment, of deposits of money from the public, repayable on demand or
otherwise, and withdrawable by cheque, draft, order or otherwise. Explanation: Any company which is
engaged in the manufacture of goods or carries on any trade and which accepts the deposits of money
from public merely for the purpose of financing its business as such manufacturer or trader shall not be
deemed to transact the business of banking.

Q4- Difference between Holder and Holder in due course.

Ans : The significant differences between holder and holder in due course are discussed in the following
points:

1. A person who legally obtains the negotiable instrument, with his name entitled on it, to receive the
payment from the parties liable, is called the holder of a negotiable instrument. A person who acquires
the negotiable instrument bonafide for some consideration, whose payment is still due, is called holder
in due course.

2. A holder can possess negotiable instrument, even without consideration. As opposed to a holder in
due course, possess the negotiable instrument for consideration.

3. A holder cannot sue all the prior parties whereas a holder in due course, has the right to sue all the
prior parties for payment.

4. A holder may or may not have obtained the instrument in good faith. On the other hand, the holder in
due course must be a bonafide possessor of the negotiable instrument.

5. A holder in due course as against a holder enjoys more privileges in many situations like in the case of
inchoate instruments, fictitious bills and so on.

6. A person can become a holder, before or after the maturity of the negotiable instrument. On the
contrary, a person can become a holder in due course, only before the maturity of the negotiable
instrument.

Q5- Inchoate Stamped Instrument

Ans : Where one person signs and delivers to another a paper stamped in accordance with the law
relating to negotiable instruments then in force in [India], and either wholly blank or having written
thereon an incomplete negotiable instrument, he thereby gives prima facie authority to the holder
thereof to make or complete, as the case may be, upon it a negotiable instrument, for any amount
specified therein and not exceeding the amount covered by the stamp. The person so signing shall be
liable upon such instrument, in the capacity in which he signed the same, to any holder in due course for
such amount : Provided that no person other than a holder in due course shall recover from the person
delivering the instrument anything in excess of the amount intended by him to be paid thereunder.

Q6- Distinguish between Cheque and Bill of Exchange

Ans : Although a cheque, being a species of a bill of exchange must satisfy almost all the essentials of a
bill, e.g., signed by the drawer, containing an unconditional order to pay a certain sum of money, to the
order of a person or the bearer, etc., yet there are few points of difference between the two, namely:

1. A cheque is always drawn on a banker, while a bill may be drawn on any person, including a banker.

2. A cheque can only be drawn payable on demand, whereas a bill may be drawn payable on demand or
on the expiry of a certain period after date or sight.
3. A cheque drawn ‘payable to bearer on demand’ is valid but a bill drawn ‘payable to bearer on
demand’ is absolutely void and illegal (though a bill can be made payable to the bearer after a certain
time) (Sec. 31, The Reserve Bank of India Act).

4. A cheque does not require any acceptance by the drawee before payment can be demanded. But a
bill requires acceptance by the drawee before he can be made liable upon it.

5. A cheque does not require any stamp, whereas a bill of exchange must be properly stamped.

6. Three days of grace are allowed while calculating the maturity date in the case of ‘time bills’ (i.e., bills
drawn payable after the expiry of a certain period). Since a cheque is always payable on demand, there
is no question of allowing any days of grace.

7. Unlike cheques, a bill of exchange cannot be crossed.

8. Unlike cheques, the payment of a bill cannot be countermanded by the drawer.

9. Unlike bills, there is no system of Noting or Protest in the case of a cheque.

10. The drawer of a bill is discharged from liability, if it is not duly presented for payment, but the
drawer of a cheque will not be discharged by delay of the holder in presenting it for payment, unless
through the delay, the drawer has been injured, e.g., by the failure of the bank the drawer has lost the
money which would have otherwise discharged the amount of the cheque. However, where the drawer
is so discharged, the payee may rank as creditor of the bank for the amount of the cheque.

Q7- What are forms of Hundis?

Ans : A hundi is a negotiable instrument. But it is not necessary to be a bill of exchange as given in the
Act. Hundis are famous among Indian traders. Specifically, it is famous amongst those operating in
suburban areas. These are under control of the Negotiable Instrument Act,1881 unless there is a local
usage to the contrary. Hundis have a very long historical background in India. The existence of hundis
belongs from the sixteenth century. Written documents are proof to it. During the colonial, the hundi
system was indigenous or traditional for the British Government. They were reluctant to interfere with it
as it was an essential part of the Indian economy. Moreover, they put the tax on the transaction taking
place from the system.

Types of Hundis

1. Darshani : Darshani is a hundi which is payable at sight. It is like a demand bill. Moreover, it is
negotiable. The party can sell them at par, premium, and discount. The holder has to present the
darshani for payment within a reasonable time of its receipt. If the drawer faces any loss due to delay in
presentation, the holder shall be responsible for it.

2. Miadi : Also called as muddati, miadi is something which is payable after a certain time period like a
‘time bill’. Banks generally provide loans for the security of such hundis.

3. Shahjog : This is a hundi made payable only to a Shah (a respectable person of financial worth and
substance in the market). It is freely transferable. But it is not payable to bearer. In general, it is similar
to a crossed cheque.
4. Namjog : Under this hundi, the amount is payable to the party whose name is on it. Such an
instrument is similar to a bill of exchange payable on order.

5. Dhanijog : ‘Dhani’ in local terms means owner. It is generally like a bearer cheque as the holder of it
becomes a holder in due course if he takes it for value.

Q8- Banker’s right of general Lien.

Ans : One of the important rights enjoyed by a banker is the right of general lien. Lien means the right of
the creditor to retain the goods and securities owned by the debtor until the debt due from him is
repaid. It confers upon the creditor the right to retain the security of the debtor and not the right to sell
it . Such right can be exercised by the creditor in respect of goods and securities entrusted to him by the
debtor with the intention to be retained by him as security for a debt due by him (debtor.

Special Features of a Banker’s Right of General Lien

1. The banker possesses the right of general lien on all goods and securities entrusted to him in his
capacity as a banker and in the absence of a contract inconsistent with the right of lien. Thus, he cannot
exercise his right of general lien if –the goods and securities have been entrusted to the banker as a
trustee or an agent of the customer; and a contract – express or implied – exists between the customer
and the banker which is inconsistent with the banker’s right of general lien. In other words, if the goods
or securities are entrusted for some specific purpose, the banker cannot have a lien over them. These
exceptional cases are discussed later on.

2. A banker’s lien is tantamount to an implied pledge: As noted above the right of lien does not confer
on the creditor the right of sale but only the right to retain the goods till the loan is repaid. In case of
pledge8 the creditor enjoys the right of sale. A banker’s right of lien is more than a general lien. It
confers upon him the power to sell the goods and securities in case of default by the customer. Such
right of lien thus resembles a pledge and is usually called an ‘ implied pledge’. The banker thus enjoys
the privileges of a pledge and can dispose of the securities after giving proper notice to the customer.

3. The right of lien is conferred upon the banker by the Indian Contract Act: No separate agreement or
contract is, therefore, necessary for this purpose. However, to be on the safe side, the banker takes a
letter of lien from the customer mentioning that the goods are entrusted to the banker as security for a
loan

4. The right of lien can be exercised on goods or other securities standing in the name of the borrower
and not jointly with others. For example, in case the securities are held in the joint names of two or
more persons the banker cannot exercise his right of general lien in respect of a debt due from a single
person.

5. The banker can exercise his right of lien on the securities remaining in his possession after the loan,
for which they are lodged, is repaid by the customer, if no contract to contrary exists.

Exceptions to the Right of General Lien

1. Safe custody deposits. When a customer deposits his valuables – securities, ornaments, documents,
etc. – with the banker for safe custody, he entrusts them to the banker s a bailee or trustee with the
purpose to ensure their safety from theft, fire, etc. A contract inconsistent with the right of lien is
presumed to exist. For example, if he directs the banker to collect the proceeds of a bill of exchange on
its maturity and utilize the same for honouring a bill of exchange on his behalf, the amount so realized
will not be subject to the right of general lien.

2. (c) Right of General Lien becomes that of Particular Lien. Banker’s right of general lien is displaced by
circumstances which show an implied agreement inconsistent with the right of general lien.

3. Securities left with the banker negligently. The banker does not possess the right of lien on the
documents or valuables left in his possession by the customer by mistake or by negligence.

4. The banker cannot exercise his right of lien over the securities lodged with him for securing a loan,
before such loan is actually granted to him.

5. Securities held in Trust. The banker cannot exercise his right of general lien over the securities
deposited by the customer as a trustee in respect of his personal loan. But if the banker is unaware of
the fact that the negotiable securities do not belong to the customer, his right of general lien is not
affected.

6. Banker possesses right of set-off and not lien on money deposited. The banker’s right of lien extends
over goods and securities handed over to the banker.

Q9- What are the functions of commercial banks?

Ans : Broadly speaking, the functions are of two categories – primary and secondary.

Primary Functions of Commercial Banks : The primary functions of a commercial bank are as follows:

1. Accepting Deposits : Commercial banks accept deposits from people, businesses, and other entities in
the form of:

1. Savings deposits – The commercial bank accepts small deposits, from households or persons, in order
to encourage savings in the economy.

2. Time deposits – The bank accepts deposits for a fixed time and carries a higher rate of interest as
compared to savings deposits.

Current deposits – These accounts do not offer any interest. Further, most current accounts offer
overdrafts up to a pre-specified limit. The bank, therefore, undertakes the obligation of paying all
cheques against deposits subject to the availability of sufficient funds in the account.

1. Lending of Funds : Another important activity is lending funds to customers in the form of loans and
advances, cash credit, overdraft and discounting of bills, etc. Loans are advances that a bank extends to
his customers with or without security for a specified time and at an agreed rate of interest. Further, the
bank credits the loan amount in the customers’ account which he withdraws as per his needs. Under the
cash credit facility, the bank offers its customers a facility to borrow cash up to a certain limit against the
security of goods. Further, an overdraft is an arrangement that a bank offers to customers wherein a
temporary facility is offered to overdraw from the current account without any security. The limit is pre-
specified. Additionally, banks also discount and purchase bills. In both of these cases, a bank credits the
amount of the bill in the customer’s account after deducting discounts and commissions. Subsequently,
this amount is recovered from the debtors on the maturity of the instrument.
Secondary Functions of Commercial Banks : The secondary functions of a commercial bank are as
follows:

1. Bank as an Agent : A bank acts as an agent to its customers for various services like:

1. Collecting bills, draft, cheques, etc.

2. Paying the insurance premium, rent, loan instalments, etc.

3. Working as a representative of a customer for purchasing or redeeming securities, etc. in the stock
exchange.

4. Acting as an executor, administrator, or trustee of the estate of a customer

5. Also, preparing income tax returns, claiming tax refunds, etc.

2. General Utility Services : There are several general utility services that commercial banks offer like:

1. Issuing traveller cheques

2. Offering locker facilities for keeping valuables in safe custody

3. Also, issuing debit cards and credit cards, etc.

Q10-Winding up of Banking Company.

Ans : Banking companies are formed basically for the purpose of providing safe deposit of money to the
people and to lend money on interest to people who are in need. But due to certain contingencies
banking companies have to be closed down which is called winding up. Winding up procedure for
banking companies is almost similar to those made under Companies Act for the winding up of
companies in general, but when it is done in case of banking companies, it is to be done under the
supervision of Reserve Bank of India. Provisions relating to winding up of banking companies have been
enumerated under Ss. 38 to 44 of Banking Regulation Act, 1949. Winding up of a company basically
means closing down of its business. After the winding up procedure, the company is dissolved. Winding
up can happen because of many reasons, the most common of which is non-recovery of loans thereby
increased liabilities over assets of the Company. During the process of winding up of a banking company,
all its assets are sold out so as to repay the debts of that bank. Winding up of banking companies is
generally a very long procedure but it can even be done in a short span of time under specific provisions
of the Act. Reserve Bank of India supervises the winding up procedure for banking companies. A
liquidator is appointed during the procedure so as to ensure security of interests of the customers and
other creditors of the banking company. The situations in which winding up of banking companies may
happen have been classified under two heads:

The court should pass an order of winding up of banking company in two cases:

1. When a banking company is unable to pay its debts

2. When an application has been given by Reserve Bank of India for winding up of any bank, under
section 134 of this section.
The Reserve Bank of India should make an application of winding of company, if it is directed by them
under clause (b) and subsection (4) of section 35 of the Banking Regulation Act, 1949 .

For the following reasons, RBI require passing an application of winding up of banking company:

(a) If the banking company has failed to comply the specified requirements in Section 11 of Banking
Regulation Act, 1949.

1. If banking company has failed to comply the requirements for the reasons of provisions of Section 22
of Banking Regulation Act, 1949.

2. If the banking company is prohibited from receiving fresh deposits by an order.

3. If banking company continues such failure and contravention with any provision of this act.

When the high court has given an order of winding up, then it appoints a liquidator under Section 38A.
High court should attach an application of liquidator, which is appointed by the central government for
the purpose of conducting winding up of companies and performing such other duties, which are
referred by the High court.

Official Liquidator appointed by Reserve Bank of India: According to section 38A or 448 or 449 of the
companies act, when the proceedings of winding up of banking company, an application can be given by
any bank or individual on the behalf of RBI for appointing as an official liquidator. RBI, State Bank of
India or any other bank (which is notified by central government) or a person can become a liquidator of
banking company and perform for vacating office of winding up company. The remuneration of
liquidator and other expenses in proceedings of winding up, will be adjusted from company assets and
no fees will be payable to the central government, out of the company assets. When High court appoint
a liquidator for winding up of banking company, then according to section 38A and 39A, the liquidator
performs the functions and duties as same as an official liquidator, who get appointed for the purpose of
winding up of banking company. Therefore, at the end, we can say that the procedure of winding up of
banking company is not same as other company except few provisions which are commonly use in both
kind of winding up companies, i.e. banking and other companies.

Q11- What are the parties to Negotiable Instrument?

Ans : The parties to a negotiable instrument (bill of exchange, promissory note and a cheque)are
discussed in detail :

Parties to a bill of exchange :

1. The Drawer : The person who draws a bill of exchange is called the drawer.

2. The Drawee : The party on whom such bill of exchange is drawn and who is directed to pay is called
the drawee.

3. The Acceptor : The person who accepts the bill is known as the acceptor. Normally the drawee is the
acceptor. But a stranger can also accept a bill on behalf of the drawee.

4. The Payee : The person to whom the amount of the bill is payable is called the payee.
5. The Endorser : When the holder transfers or endorses the instrument to any other person the holder
becomes the Endorser.

6. The Endorsee : The person to whom the bill is endorsed is called the endorsee.

7. The Holder : Holder of bill of exchange means any person who is legally entitled to the possession of it
and to receive or recover the amount due thereon form the parties. He is either the payee or the
endorsee. The finder of a lost bill payable to bearer or a person in wrongful possession of such
instrument is not a holder.

8. Drawee in case of need: The drawer of a bill or even an endorser may write in the instrument the
name of a person directing the holder to resort to such person in case of need. Such a person is called a
drawee in case of need. He is merely in the position of a drawee who has not accepted the bill. The bill
cannot be presented to him for acceptance but only for payment. Where a drawee in case of need is
mentioned in the bill such a bill is not dishonoured until it has been dishonoured by such a drawee in
case of need. The effect of this provision is to make the presentment to the drawee in case of need
obligatory on the part of the holder.

9. Acceptor for Honour : Any person may voluntarily become a party to a bill as an acceptor by accepting
it for the honour of the drawer or of any person. When the original drawee refuses to accept or refuses
to furnish better security when demanded by a notary, any person may step in to safeguard the honor of
the drawer or any endorser and bind himself by an acceptance. The effect of such acceptance is that the
bill is treated as alive and is not considered to be dishonoured till it is dishonoured by the acceptor for
honor.

Parties to a promissory note

1. The Maker : He is the person who promises to pay the amount stated in the promissory note.

2. The Payee : The person named in the promissory note to whom the money is payable.

3. The Holder: He may be either the payee or someone else to whom the promissory note has been
endorsed.

4. The Endorser : When the holder transfers or endorses the instrument to any other person the holder
becomes the Endorser.

5. The Endorsee : The person to whom the bill is endorsed is called the endorsee.

Parties to a cheque

1. The Drawee : He is the person who draws the cheque.

2. The Drawee : The banker on whom the cheque is drawn.

3. The Payee : The person to whom the amount of the bill is payable is called the payee.

4. The Holder : Holder of bill of exchange means any person who is legally entitled to the possession of it
and to receive or recover the amount due thereon form the parties. He is either the payee or the
endorsee. The finder of a lost bill payable to bearer or a person in wrongful possession of such
instrument is not a holder.
5. The Endorser : When the holder transfers or endorses the instrument to any other person the holder
becomes the Endorser.

6. The Endorsee : The person to whom the bill is endorsed is called the endorsee.

Q12- Difference between Negotiation and Assignment

Ans : The following are the differences between Negotiation and Assignment

1. Mode of Transfer : Negotiation can be effected by mere delivery or endorsement followed by

delivery. Mode of transfer is not so undemanding. Assignment is always done by writing, usually by
executing a separate document signed by the transferor.

2. Consideration : Consideration is normally presumed in case of negotiation. The endorsee is not

required to prove that he has obtained the instrument for consideration. The burden of proof, in fact,
lies on the opposite party. In case of assignment, consideration is not presumed. The assignee has to
prove that he has obtained the instrument for consideration.

3. Title : In case of negotiation the transferee, as a holder-in-due course , takes the instrument free from
defect in the title of the transferor, if any and acquires the better title than his transferor. In assignment,
the Assignee of an actionable claim takes it subject to the defect(s) that may exist in the title of the
transferor.

4. Notice of Transfer : Notice of transfer by the transferee to the debtor is not necessary in assignment.
In case of transfer by endorsement, if the debtor, e.g., maker, payee, etc., is not given any notice, he will
still be liable to pay the amount on maturity. In case of transfer by assignment, notice of transfer must
be given to the debtor by the transferee.

5. Relevancy : Negotiation is relevant chiefly in case of negotiable instruments. Assignment is usually

done in case of other documents but may be done in respect of negotiable instrument as well.

6. Suit against : A transferee can sue the third third party in assignment. But in Negotiations, an assignee
cannot do so. Party in his own name.

7. Governing Act : Transfer by negotiation is regulated by the Negotiable Instruments Act, 1881. Transfer
of negotiable instruments by means of assignment is regulated by the Transfer of the Property Act.

Q13- Discuss the silent features of Banking Regulations Act 1949.

Ans : Principal Provisions of Banking Regulation Act, 1949

1. Prohibition of Trading (Sec. 8):

According to Sec. 8 of the Banking Regulation Act, a banking company cannot directly or indirectly deal
in buying or selling or bartering of goods. But it may, however, buy, sell or barter the transactions
relating to bills of exchange received for collection or negotiation.

2. Non-Banking Assets (Sec. 9):

According to Sec. 9 “A banking company cannot hold any immovable property, howsoever acquired,
except for its own use, for any period exceeding seven years from the date of acquisition thereof. The
company is permitted, within the period of seven years, to deal or trade in any such property for
facilitating its disposal”. Of course, the Reserve Bank of India may, in the interest of depositors, extend
the period of seven years by any period not exceeding five years.

3. Management (Sec. 10): 10 (a) states that not less than 51% of the total number of members of the
Board of Directors of a banking company shall consist of persons who have special knowledge or
practical experience in one or more of the following fields: Accountancy; Agriculture and Rural Economy;
Banking; Cooperative; Economics; Finance; Law; Small Scale Industry. The Section also states that at
least not less than two directors should have special knowledge or practical experience relating to
agriculture and rural economy and cooperative. Sec. 10(b) (1) further states that every banking company
shall have one of its directors as Chairman of its Board of Directors.

4. Minimum Capital and Reserves (Sec. 11): 11 (2) of the Banking Regulation Act, 1949, provides that no
banking company shall commence or carry on business in India, unless it has minimum paid-up capital
and reserve of such aggregate value as is noted below:

1. Foreign Banking Companies: In case of banking company incorporated outside India, aggregate value
of its paid-up capital and reserve shall not be less than Rs. 15 lakhs and, if it has a place of business in
Mumbai or Kolkata or in both, Rs. 20 lakhs.

2. Indian Banking Companies: In case of an Indian banking company, the sum of its paid-up capital and
reserves shall not be less than the amount stated below:

5. Capital Structure (Sec. 12): According to Sec. 12, no banking company can carry on business in India,
unless it satisfies the following conditions:

1. Its subscribed capital is not less than half of its authorized capital, and its paid-up capital is not less
than half of its subscribed capital.

2. Its capital consists of ordinary shares only or ordinary or equity shares and such preference shares as
may have been issued prior to 1st April 1944. This restriction does not apply to a banking company
incorporated before 15th January 1937.

3. The voting right of any shareholder shall not exceed 5% of the total voting right of all the shareholders
of the company.

6. Payment of Commission, Brokerage etc. (Sec. 13): According to Sec. 13, a banking company is not
permitted to pay directly or indirectly by way of commission, brokerage, discount or remuneration on
issues of its shares in excess of 2½% of the paid-up value of such shares.

7. Payment of Dividend (Sec. 15):

According to Sec. 15, no banking company shall pay any dividend on its shares until all its capital
expenses (including preliminary expenses, organisation expenses, share selling commission, brokerage,
amount of losses incurred and other items of expenditure not represented by tangible assets) have been
completely written-off.

8. Reserve Fund/Statutory Reserve (Sec. 17): According to Sec. 17, every banking company incorporated
in India shall, before declaring a dividend, transfer a sum equal to 20% of the net profits of each year (as
disclosed by its Profit and Loss Account) to a Reserve Fund. The Central Government may, however, on
the recommendation of RBI, exempt it from this requirement for a specified period. The exemption is
granted if its existing reserve fund together with Securities Premium Account is not less than its paid-up
capital.

9. Cash Reserve (Sec. 18): Under Sec. 18, every banking company (not being a Scheduled Bank) shall, if
Indian, maintain in India, by way of a cash reserve in Cash, with itself or in current account with the
Reserve Bank or the State Bank of India or any other bank notified by the Central Government in this
behalf, a sum equal to at least 3% of its time and demand liabilities in India.The Reserve Bank has the
power to regulate the percentage also between 3% and 15% (in case of Scheduled Banks). Besides the
above, they are to maintain a minimum of 25% of its total time and demand liabilities in cash, gold or
unencumbered approved securities. But every banking company’s asset in India should not be less than
75% of its time and demand liabilities in India at the close of last Friday of every quarter.

10. Liquidity Norms or Statutory Liquidity Ratio (SLR) (Sec. 24): According to Sec. 24 of the Act, in
addition to maintaining CRR, banking companies must maintain sufficient liquid assets in the normal
course of business. The section states that every banking company has to maintain in cash, gold or
unencumbered approved securities, an amount not less than 25% of its demand and time liabilities in
India.

11. Restrictions on Loans and Advances (Sec. 20): After the Amendment of the Act in 1968, a bank
cannot:

1. Grant loans or advances on the security of its own shares, and

2. Grant or agree to grant a loan or advance to or on behalf of:

1. Any of its directors;

2. Any firm in which any of its directors is interested as partner, manager or guarantor;

Any company of which any of its directors is a director, manager, employee or guarantor, or in which he
holds substantial interest; or

1. Any individual in respect of whom any of its directors is a partner or guarantor

Q14- Discuss the various powers and functions of reserve bank of India

Ans : Introduction :The Reserve Bank of India was established in the year 1935 according to the Reserve
Bank of India Act, 1934. It is the central Bank of India which has various roles. It performs important
monetary functions. From issuing currency note to maintaining monetary stability in the country is one
of the reserve bank’s roles.

The Reserve Bank of India was a private share holder’s company initially, which later was nationalized in
1949. Affairs of RBI are governed by the Central Board of Directors which is appointed by the
Government of India. Since, after becoming the central bank of India, the Reserve Bank of India had
played an important role in the economic development and monetary stability in the country.

Functions of Reserve Bank of India There are various functions which are performed by Reserve Bank of
India, which are following:

1. A) Traditional functions There are some traditional functions which are as followed:
2000. RBI issues Currency Notes – Section 22 of the Reserve Bank of India Act 1934 provides that RBI has
sole right to issue currency notes except one rupee note and coins of smaller denomination. RBI issues,
against the security of gold bullion, foreign securities, rupee coins, exchange bills, promissory notes and
government of India bonds etc, currency notes of Rs. 2, 5, 10, 20, 50, 100, 500, 2000.

2001. As a banker to other Banks – RBI guides, helps and directs other commercial banks of the country.
RBI keeps control the bank reserves. Every commercial bank has to maintain a part of their reserves with
RBI which is called Cash Reserve. If bank need fund they approach to RBI for fund and RBI lend to them.

Banker of the Government– RBI also works as an agent of the governments. RBI makes payments, taxes
and deposits etc on the behalf of governments. It represents the government at international level also.
It maintains accounts of government and also provides financial advice to the government whenever
required.

1. Management of Exchange Rate- RBI prepares domestic policies for maintaining value of rupee. It also
prepares and implements also the foreign exchange rate policy which helps in attaining the exchange
rate stability. It brings demand and supply of foreign currency (U.S.) dollar close to each other for
maintenance of exchange rate stability.

2. Credit Control- RBI has to balance growth with stability. Thus it checks the credit creation capacity of
commercial banks by using various credit control tools. If the credit creation by commercial banks is
unregulated then it may lead the economy into inflationary cycles.

3. Supervision- RBI has to supervise the commercial banks. It has the power to give license to new banks
which are going to open or to new branches to be established. It guides and conducts the audit of other
banks.

4. B) Developmental functions

1. Financial System Development- The financial system includes many things like, financial institutions,
financial markets and financial instruments. For rapid economic development of the nation’s economy,
sound and efficient financial system is necessary for which RBI encourages the banking and non –
banking institutions.

2. Agricultural Development- RBI always pays attention to agriculture sector by assessing credit needs of
this particular sector. Regional Rural Banks (RRBs), National Bank for Agriculture and Rural Development
(NABARD) which are only for agriculture finance are under the direct control of RBI.

Industrial Finance – For economic growth of the country, Industrial development is necessary and for
this purpose RBI supports the industrial sector as well. RBI plays vital role for setting up of industrial
finance institutions like ICICI Limited, IDBI, SIDBI, EXIM etc.

1. Promotion of Export– RBI always encourage the facilities for providing finance for foreign trade
especially exports from India. The Export Import Bank of India (EXIM), and the Export Credit Guarantee
Corporation of India (ECGC) are supported by RBI.

2. Reports Publication – RBI has a separate publication division. It collects and publishes data on
different sector of the economy. The reports and bulletins are regularly published by the RBI and
available for public.
3. Collection of Data- RBI collects important statistical data about several topics like interest rates,
inflation, savings, investments, deflation etc. the data collected by RBI is very much useful for policy
makers and researchers.

4. C) Supervisory Functions

5. License to Banks – RBI provides license to the banks going established. It also provide license to the
new branches of existing banks.

6. Inspection of Banks- RBI may as and when required, may inspect the assets and liabilities of the banks
which are under its control.

Control on Non-Bank Financial Institutions – RBI may issue directives to the NBFIs from time to time with
regard to their functioning. It can control the NBFIs through periodic inspection.

1. Initiatives taken by Reserve Bank of India

2. Computerization

3. Pre-paid payment instruments

Cheque Truncation System (CTS)

1. Electronic Clearing Service (ECS)

2. National Electronic Clearing Service (NECS)

3. Electronic Funds Transfer (EFT)

The Real Time Gross Settlement (RTGS) system

Conclusion

Reserve Bank of India is the central bank of India which plays important role for the banking industry,
development and growth of economy. From formulating policies, issuing currency to monetary stability
in and maintenance of such monetary stability is the duty of RBI. It plays the parent role to the
commercial banks and other banking institutions.

Q15- What is endorsement? Discuss the various types of endorsements under the Negotiable
Instrument Act 1881.

Ans : The act of a person who is a holder of a negotiable instrument in signing his or her name on the
back of that instrument, thereby transferring title or ownership is an endorsement. An endorsement
may be in favour of another individual or legal entity. An endorsement provides a transfer of the
property to that other individual or legal entity. The person to whom the instrument is endorsed is
called the endorsee. The person making the endorsement is the endorser. Let us discuss the
Endorsement of Instruments here in detail.

Types of endorsement under Negotiable Instrument Act, 1881:

1. Blank endorsement : : If the endorser signs his name only, the endorsement is said to be in blank and
it becomes payable to bearer. Blank endorsement can be converted to full endorsement by writing
name of endorsee. This can be done by holder without his signatures by writing name above the
endorser’s signatures.

2. Special or Full endorsement : If the endorser also directs to pay to a certain person or to his order,
endorsement is said to be be ‘in full’ or special endorsement. Eg. “Pay to Mr. Kuber or order”.

3. Conditional endorsement : The endorser puts some condition alongwith endorsement. Say, pay to
Miss Zira or order on her attaining the age of 21 years.

4. Restrictive endorsement: When the endorser restricts further negotiation of instrument. For example
if it is written that ‘Pay to Mr. Kuber only’.

5. Partial endorsement: In case, part payment of bill has been made and a note to that effect has been
given in the instrument, it can be endorsed only for the balance unpaid amount. Otherwise, a NI can be
endorsed for full amount and not for partial amount.

6. Sans Recourse endorsement : The endorser excludes his liability and in case of dishonor, endorser will
not be liable for payment.

7. Facultative endorsement : When the endorser gives up some of his rights under the negotiable
instrument. Eg. “Pay Mr. Rajiv or order, notice of dishonour waived”. In this case the endorsee is not
required to notice of dishonour in case of dishonor and the endorser will be liable to the endorsee for
the non-payment of the instrument, even if notice of dishonour has been given to him.

Q16- What is E-Banking? What are the features, advantages and disadvantages of e-banking?

Ans : Electronic banking has many names like e banking, virtual banking, online banking, or internet
banking. It is simply the use of electronic and telecommunications network for delivering various
banking products and services. Through e-banking, a customer can access his account and conduct many
transactions using his computer or mobile phone. Banks offer various types of services through
electronic banking platforms. These are of three types:

Level 1 – This is the basic level of service that banks offer through their websites. Through this service,
the bank offers information about its products and services to customers. Further, some banks may
receive and reply to queries through e-mail too.

Level 2 – In this level, banks allow their customers to submit instructions or applications for different
services, check their account balance, etc. However, banks do not permit their customers to do any
fund-based transactions on their accounts .

Level 3 – In the third level, banks allow their customers to operate their accounts for funds transfer, bill
payments, and purchase and redeem securities, etc.

Advantages of e-banking : We will look at the importance of electronic banking for banks , individual
customers, and businesses separately.

Banks

1. Lesser transaction costs – electronic transactions are the cheapest modes of transaction
2. A reduced margin for human error – since the information is relayed electronically, there is no room
for human error

3. Lesser paperwork – digital records reduce paperwork and make the process easier to handle. Also, it
is environment -friendly.

4. Reduced fixed costs – A lesser need for branches which translates into a lower fixed cost.

5. More loyal customers – since e-banking services are customer-friendly, banks experience higher
loyalty from its customers.

Customers

1. Convenience – a customer can access his account and transact from anywhere 24x7x365.

2. Lower cost per transaction – since the customer does not have to visit the branch for every
transaction, it saves him both time and money.

3. No geographical barriers – In traditional banking systems, geographical distances could hamper

certain banking transactions. However, with e-banking, geographical barriers are reduced.

Businesses

1. Account reviews – Business owners and designated staff members can access the accounts quickly
using an online banking interface. This allows them to review the account activity and also ensure the
smooth functioning of the account.

2. Better productivity – Electronic banking improves productivity. It allows the automation of regular
monthly payments and a host of other features to enhance the productivity of the business.

3. Lower costs – Usually, costs in banking relationships are based on the resources utilized. If a certain
business requires more assistance with wire transfers, deposits, etc., then the bank charges it higher
fees. With online banking, these expenses are minimized.

4. Lesser errors – Electronic banking helps reduce errors in regular banking transactions. Bad
handwriting, mistaken information, etc. can cause errors which can prove costly. Also, easy review of
the account activity enhances the accuracy of financial transactions.

5. Reduced fraud – Electronic banking provides a digital footprint for all employees who have the right
to modify banking activities. Therefore, the business has better visibility into its transactions making it
difficult for any fraudsters to play mischief.

Disadvantages of e-banking

1. Difficult for Beginners : Newbies often face difficulty in trying to get the hang of e-banking. Initially,
customers are scared of losing their money and are often hesitant to explore all the options and features
that are available on the website or on the app. New users often give up and stick to traditional banking
if timely assistance isn’t provided.

2. Trust and Responsibility : Fake websites and phishing sites are common in this age of technology. Can
you really trust all websites? Is it wise to trust an online site with all your money? What if the website
folds up and all your money is gone? This wouldn’t happen in a real bank. There is trust between the
bank and their customers – you know your money is safe with the bank – because they take
responsibility for your money. Real banks are permanent and reliable while some websites are not.

3. Inconvenience : Sure, online banks are open throughout the year but they are a serious cause of
inconvenience in certain instances. For example, if you get locked out of your account you will be unable
to perform any banking transactions. However, in a real bank, you establish relationships with the staff,
who know you on a personal level and will be willing to assist you in such cases. You wouldn’t have to be
on the phone explaining your situation to an unknown customer service agent which by the way, might
also take several days. Also, a few online banks don’t allow cash deposits. To deposit cash, you will be
required to email a check and transfer money from another account or bank, or use their e-check
deposit service.

4. Inability to Handle Complex Transactions : While you can easily pay bills and transfer funds, you can’t
perform complex transactions online. When a large sum of money is involved, it is advisable to visit a
real bank and sort it out in-person rather than doing it online. Some financial transactions also need a
document verification (like buying a house) so it is better to submit them physically than digitally.

5. Financial Jargon : Financial jargon can often get between you and your money. Knowledge is power-
or, in this case, knowledge is money. Though financial literacy can’t be achieved overnight, it can be
helped along by a grasp of the basic terms that are commonly used by advisors, analysts, economists,
and commentators.

6. Security Issues : Sure, most banks are well-reputed and established, there are times when you face
security issues. There’s always a risk of actual and/or identity theft. It’s also possible to get unauthorized
access to your account via a stolen or hacked log-in credentials.

7. Technology Issues : If you don’t have a decent connection or there are bugs in the software, or say,
there is a power cut or maybe the servers have gone down – websites are bound to crash and you will
undoubtedly face a lot of technological issues. While you may get various types of customer service at
the moment but sooner or later, you will get frustrated. However, someone is always around to help
you in a real bank.

8. Virtual Assistance : When you need assistance during e-banking, your concern is generally assigned to
an anonymous customer service agent who is unlikely to know you. Wouldn’t you rather talk to a
personal banker when you’re in a fix than an unknown agent? A personal banker will also know your
transaction history, your personal details and will be in a better position to assist you.

9. Complicated Websites : Some websites look like a page straight from a super complex scientific
experiment. Written in a secret code language with bizarre fonts and colors. I mean, sure some websites
are simple and you can get all the things done in a jiffy. But some websites are downright complicated
and confusing. With pop-ups, errors, links, and interlinks, redirections to probably a million pages, it gets
really difficult to understand.

10. Other Limitations : E-banking isn’t for everyone. Illiterate and the elderly cannot use online banking.
Neither can an individual access their accounts if they don’t have an internet connection.

Q17- Define Cheque. What are the various types of Cheques ?

Ans : Cheque is a negotiable instrument used to make payment in day to day business transaction
minimizing the risk and possibility of loss. It is used by individuals, businesses, corporate and others to
transact for making and receiving payment. As per negotiable instrument act 1881, A “cheque” is a bill
of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.
Payment by Cheque is safest way to conduct business transactions as it helps to maintain record in
account statement to whom the payment is made by whom payment is received. So it becomes easier
to track the transactions through bank account statement.

Different types of cheque with their features in detail :

1. Open / Bearer Cheque : This type of Cheques are risky in nature for drawer. When the word “Bearer”
on the cheque is not crossed or cancelled, the cheque is called a bearer cheque. Open / Bearer Cheques
are payable to person specified in the instrument or any person who posses it and present for payment
over the counter. In case of cheque is lost, person who find it can collect payment from the bank.

2. Order Cheque : When the word “Bearer” written on cheque is crossed or cancelled it becomes an
order cheque. An order Cheque is payable to a specified person named in the cheque or any other to
whom it is endorsed.

3. Crossed Cheque or Account Payee Cheque : The person who issue or write the cheque specify its as
account payee by simply making two parallel lines on top left or middle or right hand corner of the
cheque. This type of cheque can not be encashed over the counter. Considered as safest type of cheque,
it can only be credited to payee’s account whose name is mentioned in the Cheque.

4. Anti Dated Cheque : Cheque bearing the date earlier than the date of presentation for payment is
known as anti dated cheque.

5. Post Dated Cheque : Cheque bearing the date which is yet to come in future is called Post Dated
Cheque. Cheque is honoured only on or after the date (upto three months) written on cheque.

6. Stale Cheque : A Cheque turns stale after three months of the date written on cheque. A Stale Cheque
can not be honoured by the bank.

7. Mutilated Cheque : When cheque gets torn into two or more pieces and presented in bank for
payment. Such cheques are called mutilated cheque. Bank requires confirmation by the drawer before
honouring such cheques.

Q18- What are the Negotiable Instruments?

Ans : Negotiable instruments by Statute are;

1. Promissory Notes as Negotiable Instrument : The promissory note is an instrument in writing

containing an unconditional rule signed by one party to pay a certain sum of money only to, or to the
order of a certain person or to the bearer of the instrument.

2. Bill of Exchange as Negotiable Instrument : The Bill of Exchange contains an order from the creditor to
the debtor to pay a certain person after a certain period. The person who draws it is called drawer
(creditor) and the person on whom it is drawn is called drawee (debtor) or acceptor.
3. Cheque as Negotiable Instrument: A Cheque .is a bill of exchange drawer a specified banker not
expressed to be payable otherwise than on demand.

Q19- What is meant by Protest?

Ans: As per Section 100 of Negotiable Instrument Act 1881, When a promissory note or bill of exchange
has been dishonoured by non-acceptance or non-payment, the holder may, within a reasonable time,
cause such dishonour to be noted and certified by a notary public. Such certificate is called a protest.
When the acceptor of a bill of exchange has become insolvent, or his credit has been publicly
impeached, before the maturity of the bill, the holder may, within a reasonable time, cause a notary
public to demand better security of the acceptor, and on its being refused may, with a reasonable time,
cause such facts to be noted and certified as aforesaid. Such certificate is called a protest for better
security.

Q20- What is crossed Cheque?

Ans : A crossed cheque is basically any cheque which is crossed with two parallel lines. The lines can be
drawn either across the whole cheque or through the top left-hand corner. What does it signify? It
simply means that the specific cheque can only be deposited straightway into a bank account and
cannot be instantly cashed by a bank or any credit institution. This ensures a level of security to the
payer since it requires the funds to be handled through a collecting bank. Cross cheque focuses on the
instruction given by the drawer (maker) of the particular cheque to the drawee bank. This instruction
demands to pay the cheque at the counter of the bank, but with a strict direction to pay it to a person
who offers it through a banker. Crossing makes it possible to trace the person to whom the
amount/payment has been made.

Q21- What is difference between Promissory Note and Cheque?

Ans : Differences between a Cheque and Promissory Note are as follows:-

1. A Promissory Note is an unconditional promise to make payment either in instalment or in one go at a

future date or on demand. While cheque in an order to make payment in one time.

2. Promissory note can never be conditional while cheque can be conditional.

3. There are two parties to a Promissory note – Maker and Payee. In Case of Cheque, three parties –
Drawer, Drawee and Payee.

4. Cheque is drawn on a bank while Promissory Note can be made by any individual in favour of his
creditor.

5. Cheque can be drawn in favour of self-mean drawee can be payee but promissory note is always
drawn in favour of another person.

6. Acceptance is not necessary in case of promissory note but in case of cheque, acceptance is required
of the payee before it written.

Q22-Difference Between Bill of Exchange and promissory note ?

Ans : In continuation of our series of Bill of Exchange and Promissory Note, today we are presenting to
you the difference between both of them. Hope you like the post!!!
1. : There are three parties to a bill of exchange, namely, the drawer, the drawee and the payee; while in
a promissory note there are only two parties – maker and payee.

2. Nature of payment :In a bill of exchange, there is an unconditional order to pay, while in a promissory
note there is an unconditional promise to pay.

3. Acceptance . A bill of exchange requires an acceptance of the drawee before it is presented for
payment, while a promissory note does not require any acceptance since it is signed by the persons who
is liable to pay.

4. Liability . The liability of the maker of a promissory note is primary and absolute, while the liability of a
drawer of bill of exchange is secondary and conditional. It is only when the drawee fails to pay that the
drawer would be liable as a surety.

5. Notice of dishonour. In case of dishonour of bill of exchange either due to non-payment or non-
acceptance, notice must be given to all persons liable to pay. But in the case of a promissory note, notice
of dishonour to the maker is not necessary.

6. Maker’s position.: The drawer of a bill of exchange stands in immediate relationship with the acceptor
and not the payee. While in the case of a promissory note, the maker stands in immediate relationship
with the payee.

7. Nature of acceptance. A promissory note can never be conditional, while a bill of exchange can be
accepted conditionally.

8. A bill of exchange can be drawn in sets, but a promissory note cannot be drawn in sets.

9. Payable to bearer . A promissory note cannot be made payable to a bearer, while a bill of exchange
can be so drawn provided it is not payable to bearer on demand.

10. Payable to maker. : In a promissory note, the maker cannot pay to himself. While in the case of a bill
of exchange, the drawer and the payee may be one person.

11. Foreign bills must be protested for dishonour when such protest is required by the law of the place
where they are drawn. But no such protest is required in the case of a promissory note.

Q23- Cash Reserve Ratio

Ans : Cash Reserve Ratio (CRR) is the share of a bank’s total deposit that is mandated by the Reserve
Bank of India (RBI) to be maintained with the latter in the form of liquid cash. The Cash Reserve Ratio
acts as one of the reference rates when determining the base rate. Base rate means the minimum
lending rate below which a bank is not allowed to lend funds. The base rate is determined by the
Reserve Bank of India (RBI). The rate is fixed and ensures transparency with respect to borrowing and
lending in the credit market. The Base Rate also helps the banks to cut down on their cost of lending to
be able to extend affordable loans. Apart from this, there are two main objectives of the Cash Reserve
Ratio: Cash Reserve Ratio ensures that a part of the bank’s deposit is with the Central Bank and is hence,
secure. Another objective of CRR is to keep inflation under control. During high inflation in the economy,
RBI raises the CRR to lower the bank’s loanable funds. When the RBI decides to increase the Cash
Reserve Ratio, the amount of money that is available with the banks reduces. This is the RBI’s way of
controlling the excess flow of money in the economy. The cash balance that is to be maintained by
scheduled banks with the RBI should not be less than 4% of the total NDTL, which is the Net Demand
and Time Liabilities. This is done on a fortnightly basis. Cash Reserve Ratio (CRR) is one of the main
components of the RBI’s monetary policy, which is used to regulate the money supply, level of inflation
and liquidity in the country. The higher the CRR, the lower is the liquidity with the banks and vice-versa.

Q24- Define the term ‘Negotiation’

Ans : An instrument is negotiated when it is transferred from one person to another in such manner
as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if
payable to order, it is negotiated by the indorsement of the holder and completed by delivery.

Q25- Discuss the provisions regarding the presentment of Negotiable instrument under the Negotiable
Instrument Act 1881.

Ans : Introduction : Presentment is a demand by which the holder of a negotiable instrument is required
to do something as per the directives of the instrument. It is the showing of the instrument to the
drawee, acceptor or maker for acceptance, sight or payment.

Kinds of Presentment : There are different modes in which presentment can happen. They are:

Presentment for acceptance

Presentment of promissory notes for sight

Presentment for payment

Presentment for acceptance : There are only certain types of bills of exchange which require acceptance.
A bill gets accepted when the drawee affixes his signature on the instrument signifying his consent to
the order of the drawer that he will pay the bill when it becomes due. The drawee is not liable until he
accepts the bill.

A bill may be accepted by:

1. General Acceptance : An acceptance is general or absolute where the drawee, when he accepts the
bill, does not attach any condition or qualification to it. If the acceptance is not absolute, the holder may
treat the bill as dishonoured due to non acceptance.

2. Qualified Acceptance : When a condition is imposed to in order to accept the presentment then it is
called a qualified acceptance. A qualified acceptance in express terms varies the effect of a bill. In such
cases the holder may refuse to accept the condition and treat the bill

Presentment for acceptance is made to:

Drawee;

All or some of several drawees;

Drawee in case of need;

All the drawees, if there are several drawees unless they are partners or agents of one another;

Duly authorised agent of the drawee;

Legal representative if the drawee has dies;

His official receiver or assignee it the drawee has been declared insolvent.

Presentment to be made when and where

If a time is specified in a bill then it must be presented for acceptance at any time before payment. If the
bill is payable at sight then presentment is obligatory within a reasonable time after the same has been
drawn.

The bill should be presented for acceptance at the place which is specified in the bill for presentment. If
no place has been specified then the bill is to be presented at the place where drawee has his business
or residence.

As per sec 63 of the Act, the holder must provide at least 48 hours for acceptance of the bill.

If the bill is not presented for acceptance then all the endorsers and the drawer is absolved of liability.

Cases where presentment for acceptance is excused : Presentment for acceptance is excused when:

The drawee cannot be found after a reasonable search;

Where the drawee is dead or insolvent. Sec 75 of the act contemplates that the instrument may be
presented to the legal representatives of the deceased drawee or assignee of the insolvent however it is
not compulsory;

The drawee is a fictitious person or one incapable of contracting;

Where, although presentment has been irregular, acceptance has been refused due to some other
ground.

Presentment for Sight : Sec 62 of the act contemplates that in cases of promissory notes no question of
acceptance arises since the maker is himself liable for it. However, a note which is payable at a certain
period after sight must be presented to the maker for sight in order to get its maturity fixed. If the
maker is not found presentment is excused and the instrument may be treated as dishonoured.

Presentment for Payment : Sec 64 of the act contemplates that promissory notes, bills of exchange and
cheque must be presented to the maker, acceptor or drawee on behalf of the holder. If the same is not
done then the parties to the instrument are not liable to the holder. If authorised by agreement or
usage, a presentment by way of post is sufficient.

Presentment for payment when not necessary :

Sec 76 contemplates as to when presentment is not necessary:

The maker, drawee, or acceptor intentionally prevents presentment of the instrument;

The instrument is payable at a certain place of business and this place of business is closed during the
usual business hours thereby not letting the presentment to go through. It will be presumed that the
person liable to pay is evading payment;
The instrument is payable at a certain place and neither the maker, acceptor or drawee or any
authorised person to pay is present during the usual business hours;

The instrument is not payable at a certain place and the payer cannot be found;

There is a promise to pay without presentment;

Presentment for payment has been waived either expressly or impliedly before or after maturity by the
party entitled to presentment;

Presentment becomes impossible;

Drawee and drawer is the same person;

Bill gets dishonoured for non-accepatnce;

Drawer is a fictitious person;

In all the above the instrument is deemed to be dishonoured on the due date of presentment.

Presentment of cheque to charge drawee bank : A cheque must be presented for payment during the
banking hours and at the bank upon which it has been drawn and also within a reasonable time after it is
received by the holder.

Presentment of truncated cheque : Sec 64 (2) of the act contemplates that if an electronic image of a
truncated cheque has been presented for payment then the bank can ask for information regarding the
truncated cheque from the bank holding the truncated cheque if there is suspicion about such a cheque.
It can also demand verification of such a cheque. A truncated cheque which is so demanded by the
drawee bank shall be retained by it if the payment gets made.

Conclusion : Thus it can be concluded that presentment is a demand by which the holder of a negotiable
instrument is required to do something as per the directives of the instrument. Once the same is done it
becomes payable . There are only certain types of bills of exchange which require acceptance. A bill gets
accepted when the drawee affixes his signature on the instrument signifying his consent to the order of
the drawer that he will pay the bill when it becomes due. The drawee is not liable until he accepts the
bill. A note which is payable at a certain period after sight must be presented to the maker for sight in
order to get its maturity fixed and promissory notes, bills of exchange and cheque must be presented to
the maker, acceptor or drawee on behalf of the holder for presentment.

Q26- What are the provisions relating to the discharge from the liability on negotiable instruments.

Ans : The discharge of liabilities may be either the discharge of instrument itself or the discharge of one
or more parties to the instrument. An instrument is discharged when all rights of action come to an end,
with the result that if it subsequently comes into the hands of a person, who takes it bona fide and value
he acquires no rights under it. The discharge of one or more parties from liability on an instrument may
not affect the liability of the other than is the non-presentment of a bill of exchange on the due to date
discharges all parties except the acceptor from liability. The maker, acceptor on endorser respectively of
a negotiable instrument is discharged from liability thereon in the following ways.

1. Payment : When the maker, acceptor or drawee makes payment of the instrument to the holder
thereof, all the parties are thereby discharged from liability. In the case of an instrument payable to
bearer, the discharge takes place of means of a payment in due course made to the possessor, not
necessarily the holder.

2. Cancellation : When the holder cancels the name of the acceptor or any endorser with the intention
of discharging him, such party is discharged from liability to the holder and to all parties claiming under
such holder.

3. By Release : When the holder releases the maker, acceptor or endorser otherwise than by
cancellation, the party so released is discharged from liability to the holder and to all parties’ title under
such holder after notice of such release.

4. By defaults : The following defaults on the part of the holder operate as a discharge of a party or
parties to an instrument

1. Failure to present : If the holder fails to present the bill for acceptance, no party is liable to such
holder.

2. Failure to present for payment : If the holder fails to present the instrument for payment, no party is
liable to such holder unless there is a legal excuse for presentment.

3. Time allowed : If the holder of bill allows the drawee more than 48 hours to consider for acceptance
(exclusive of Public Holidays) all previous parties not consenting to such allowance are discharged of
liabilities to such holder.

4. Qualified acceptance: If the holder agrees to a qualified acceptance, all previous parties whose
consent is not obtained to such acceptance are discharged of liabilities as against the holders and those
claiming under him.

5. Notice of dishonour : If the holder fails to give notice of dishonour to all previous parties, they are
discharged as against the holder and those claiming under him. But the acceptor of a bill or the maker
thereof still remains liable to the holder as they are already parties to the bill.

5. Relation with the bank : If a holder of a cheque fails to present it before the relation between the
drawer and the banker is altered to the prejudice of the drawer and the drawer suffers damage due to
such delay, the drawer is discharged of all liabilities to the holder.

6. By material alteration or charge : Any material charge or alteration of a negotiable instrument while in
the possession of the holder discharges the liability of all parties prior to or at the time of such alteration
who do not commit to such alteration. Alteration by a stranger will have the same effect as it were made
by the party himself. Alternation can be in such things

1. Date

2. Time of payment

Place of payment

1. The amount payable

2. Mode of payment
3. Of parties etc

In the following cases of alteration the liability is not discharged

1. Alteration made before the completion of the instrument

2. Alteration made to rectify of error.

Alteration made with the consent of parties.

1. Alteration made to change blank endorsement into full endorsement.

2. Alteration made by way of crossing a bearer cheque.

3. Alteration made by an accident and circumstances of such accident should be shown.

Q27- Explain the Constitution and Objectives of the Reserve Bank of India

Ans : The Reserve Bank of India (RBI) was constituted under the Reserve Bank of India Act, 1934 and
started functioning with effect from 1 April, 1935. RBI is the oldest among the central banks operating in
developing countries, though it is much younger than the Bank of England and the Federal Reserve
Board operating as the central banks in UK and USA respectively, being developed countries. RBI is a
state-owned institution under the Reserve Bank (Transfer of Public Ownership) of India Act, 1948. This
Act empowers the Union Government, in consultation with the Governor of the RBI, to issue such
directions to RBI as considered necessary in public interest.

Constitution

The Governor and four Deputy Governors of RBI are appointed by the Union Government. The control of
the RBI vests in the Central Board of Directors that comprises the Governor, four Deputy Governors and
15 Directors nominated by the Union Government. The RBI’s internal management is based on
functional specialization and coordination amongst about 20 departments, with headquarters at
Mumbai, which is the financial capital of the country.

Objectives:

The main objectives of the RBI are contained in the preamble of the RBI Act, 1934. It reads ‘Whereas it is
expedient to constitute a Reserve Bank for India to regulate the issue of bank notes and keeping of
reserves with a view to securing monetary stability in India and generally to operate the currency and
credit system of the country to its advantage’, The main objectives of RBI may be stated as follows in
specific terms:

1. To maintain monetary stability such that the business and economic life of the country can deliver the
welfare gains of a mixed economy.

2. o maintain financial stability and ensure sound financial institutions so that economic units can
conduct their business with confidence,

3. To maintain stable payment systems, so that financial transactions can be safely and efficiently
executed,
4. To ensure that credit allocation by the financial system broadly reflects the national economic
priorities and social concerns.

5. To regulate the overall volume of money and credit in the economy to ensure a reasonable degree of
price stability,

6. To promote the development of financial markets and systems to enable itself to operate/regulate
efficiently.

Q28- Explain restriction as to payment of Dividend under Banking Regulation Act.

Ans :Under Section 15 of the Banking Regulation Act 1949, Restrictions as to payment of dividend on
Banking Companies as follows :-

1. No banking company shall pay any dividend on its shares until all its capitalised expenses (including
preliminary expenses, organisation expenses, share-selling commission, brokerage, amounts of losses
incurred and any other item of expenditure not represented by tangible assets) have been completely
written off.

2. Notwithstanding anything to the contrary contained in sub-section (1) or in the Companies Act, 1956
(1 of 1956), a banking company may pay dividends on its shares without writing off—

1. the depreciation, if any, in the value of its investments in approved securities in any case where such
depreciation has not actually been capitalised or otherwise accounted for as a loss;

2. the depreciation, if any, in the value of its investments in shares, debentures or bonds (other than
approved securities) in any case where adequate provision for such depreciation has been made to the
satisfaction of the auditor of the banking company;

the bad debts, if any, in any case where adequate provision for such debts has been made to the
satisfaction of the auditor of the banking company.

Q29- Restriction on Loans and Advances as per Banking Regulation Act 1949.

Ans : (1) Notwithstanding anything to the contrary contained in section 77 of the Companies Act, 1956
(1 of 1956), no banking company shall-

1. grant any loans or advances on the security of its own shares, or

2. enter into any commitment for granting any loan or advance to or on behalf of-

1. any of its Directors,

2. any firm in which any of its Directors is interested as Partner, Manager, Employee or Guarantor, or

any company (not being a subsidiary of the banking company or a company registered under section 25
of the Companies Act, 1956 (1 of 1956), or a government company, of which 15[or the subsidiary or the
holding company of which] any of the Directors of the banking company is a Director, Managing Agent,
Manager, Employee or Guarantor or in which he holds substantial interest, or

1. any individual in respect of whom any of its Directors is a partner or guarantor.

Q30-Payment for Honour

Ans : When a bill of exchange has been noted or protested for non-payment, any person for the honour
of any party liable to pay the same, provided the intention to pay before a Notary Public and has been
noted by him on the bill (Sec. 113).

Essentials of a valid payment for honour :

1. The bill must have been dishonoured for non-payment.

2. It must have been noted and protested for non-payment.

3. The declaration to pay for the honour must be made before the notary public.

4. The fact of such declaration must be recorded by the notary public on the bill. However, it should be
noted that a drawee in case of need can accept and pay the bill without such protesting or noting.

5. Payment for honour must be made for the honour of any party liable on the bill.

6. Payment for honour may be made by any party, whether or not already liable on the bill.

It should be noted that acceptance for honour cannot be made by a person who is already liable on the
bill, whereas payment for honour may be made even by a person who is already liable on the bill.

Rights of a Payer for Honour :

1. A payer for honour, after paying the amount, steps into the shoes of the holder.

2. Any person so paying is entitled to all the rights in respect of the bill, of the holder at the time of such
payment. He may recover from the party for whose honour he pays all sums so paid, with interest there
on with all expenses properly incurred in making such payment (Sec. 114).

Q31- Licencing of Banking Companies

Ans : According to Sec. 22 of Banking Regulation Act 1949, no company shall carry on banking business
in India unless it holds a license issued by the Reserve Bank of India. If the following conditions are
satisfied, the Reserve Bank of India may grant a license:

1. “That the company is or will be in a position to pay its present and future depositors in full as their
claims accrue;

2. That the affairs of the company are not being or are not likely to be conducted in a manner
detrimental to the interests of its present or future depositor;

3. That, in the case of a foreign banking company, the carrying on of a banking business by such
company in India will be in the public interest, that the Government or law of the country of its origin
does not discriminate against Indian banking companies carrying on business in that country, and that it
complies with all the requirements of law applicable to it”.

Cancellation of License: The Reserve Bank of India may cancel a license if:

1. The company ceases to carry on banking business in India;

2. The company at any time fails to comply with any of the conditions on which the license was granted;
or

3. At any time, any of the conditions, on the satisfaction of which the Reserve Bank of India granted the
license, has not been fulfilled.

Q32- Explain Rights and Duties of Bakers and Customers

Ans : Followings are the rights and duties of Bakers and Customers :-

Rights of a Banker

1. Right to charge interest : Every bank in India has the right to charge interest on the loans and
advances sanctioned to customers. Interest is usually charged monthly, quarterly, semiannually or
annually.

2. Right to levy commission and service charges : Along with interest, banks also have the right to levy a
commission and service charges for the services rendered. The service rendered by the bank might be
SMS notification service, retail banking and so on. Banks can also debit these charges from the
customer’s bank account.

3. Right of Lien : Another important right enjoyed by banks is the Right of Lien. Banks have the right to
keep goods and securities belonging to the debtor as a security, until the loan is repaid by the debtor.
Banks have only the right to maintain the security of the debtor and not to sell.

4. The Right of Set-off : The banker has the right to set off customer accounts. Banks can merge a couple
of accounts which are in the name of the customer and set off the debit balance in one account with the
credit balance in the other, provided the funds belong to the customer.

5. Right of Appropriation : Let us consider that a customer has taken many loans from the bank and he
deposits some money in the bank without any instructions. If that amount is not sufficient to discharge
all loans, the bank has the right to appropriate the amount deposited to any loan, even to a time-barred
debt. But the customer should be informed on the same.

6. Right to Close the Account : If the customer’s account is not properly maintained, banks have all the
right to close the account by sending a notice to the customer. Bankers have no right to close the
account, without sending a written notice.

Rights of a Customer

1. Right to fair treatment : According to this right, banks cannot discriminate between customers on the
basis of gender, age, religion, caste, and physical ability while providing services. This does not mean
that banks cannot offer schemes which are designed for a particular set of people. Banks have all the
right to offers differential rates of interest or products to customers.

2. Right of transparent, fair and honest dealing : The contract between the banks and customers should
be easily understood by the common man. It is the responsibility of the bank to make the customer
understand interest rates, the risk involved and all other terms and conditions. Banks should not hide
anything from the customer before the signing of the agreement. Even if there are any short comings,
they should be communicated to the customer. The language in the contract should be simple and easily
understood.

3. Right to suitability : Lot of cases of mis-selling of financial products, especially life insurance policies
are handled by Banker now a days. Usually, customers are forced to buy the product which offers the
highest commission to an agent. As per this right, customers should be sold the product which is suitable
to them. So, banks should always keep customers’ needs in mind, before selling any products.

4. Right to privacy : As per this law, the personal information provided by the customers to the bank,
must be kept confidential. Bankers can disclose only such information, which is required by law or only
after customers have given permission. Banks are not allowed to provide your details to telemarketing
companies or for cross-selling.

5. Right to grievance redressal and compensation :Banks are responsible for all the products and
services offered by them and customers have the right to easy and simple grievance redressal systems in
case the bank fails to adhere to basic norms. Along with their own products, bankers are responsible for
the products of third parties like insurance companies and fund houses. If the customer complaint is not
resolved by the bank, customers can go to the banking ombudsman.

Duties of customers to banks

1. It is the duty of customers to present the cheque and other negotiable instruments only during the
business hours of the bank.

2. In the case of any disagreement in the bank statement, customers should inform the bank.

3. Whenever photographs of customers are required by the bank, it should be submitted.

4. It is the duty of the customer to present the instrument of credit within the due time from the date of
issue.

5. The cheque should be filled by customers very carefully.

6. If the cheque book is lost or stolen, it is the duty of the customers to inform the bank.

7. If the customer notices any forgery in the amount of the cheque, he/she should inform it to the bank
immediately.

8. Customers should provide proper information in the Know Your Customer (KYC) form.

9. Customers should make the repayment of all the dues on time.

10. It is the duty of the customers to read the MITC ( Most Important Terms and Conditions)

Obligations of Bankers

1. It is the duty of the bank to honor the cheques of its customers up to the amount standing to the
credit of the customer’s account. The bank is liable to pay the compensation to the customer, if it
wrongfully refuses to honor the cheque.

2. It is the duty of the bank to follow the instructions given by the customers. If the customer has not
given any instructions, the bank should act as per rules and regulations.
3. Bankers should not disclose personal information given by customers to any outsider.

4. Banks should maintain all details of transactions made by the customer.

Q33- What is Garnishee Order ?

Ans : A garnishee order is typically issued when a creditor you owe money to has obtained a default
judgement from a court or other authority against you. The judgement then allows the creditor to issue
a court order that instructs a third party such as your employer, bank or financial institution to redirect
your wages or holdings to the creditor you owe money to. Once a garnishee order has been issued, your
employer, bank or financial institution is legally obligated to comply with it.

Q34- Explain the ancillary services provided by commercial banks in India.

Ans : Each bank has two main activities as the sourcing or borrowing of funds ( as deposits and capital
from the market) and the deploying or lending the funds as Loans and Investments): these form the
traditional and core activities of all the banks. Apart from these basic activities, the banks provide a
variety of other services or products. The most popular ones are listed below.

1. Funds transfer service : Useful for sending and receiving money from all over the world.The products
that cover these services are Demand Drafts, Bankers Checks/Pay orders, EFT(Electronic Funds
Transfer ),etc.

2. Forex service: You can buy the foreign exchange for any purpose of expenditures like travel, buying
merchandise etc. and sell the same to the bank when you earn or receive from abroad. Of course, these
forex transactions are subject to the rules and regulations prevailing in a country and they are provided
by only those bank branches which are approved by the Banking Authority or Regulator for this purpose.

3. Custodial Service: You can keep your valuables like jewels, documents, etc. Under this service which is
commonly known as Locker facility (Safe Deposit Vaults in banking parlance. The bank will collect a
nominal fee for the service.

4. Gold sale: You can buy pure gold for self-consumption or for trading by the jewellery businesses. Here
also, only a few selected branches of banks or banks are allowed to provide this .The products usually
range from a coin to a 100 gm biscuit or bar.

5. Investment service: Invest your money in the mutual funds run by the banks. The service comes as
Portfolio service( the decision to maximize the returns on your money is left with the banker or portfolio
manager) and as Stand-alone product where the decision to get maximum returns is borne by you. Both
have the plus and minus but these products are offered to suit the convenience of the investors.

6. Insurance sale: A range of insurance products covering the risk of life, health, assets like vehicle, credit
and debit cards, travel etc.. are offered by almost all the banks by themselves or in collaboration with
the leading insurer companies ,which again may be local or multinational

7. Card services: Primarily intended for safety and convenience purpose but now, has become a
payment mode and a symbol of economic status. The card products usually are called as Debit card,
Credit card.
8. eBanking : also known as Net banking or Internet banking is the latest and most convenient facility of
the banks .You can get id and password to operate your account online : for transfer of funds to another
account in the same bank or another bank. You can keep the surplus funds in fixed deposit by using this
facility. The best use of this facility is for shopping online.

Q35- Banking Ombudsman

Ans : Banking ombudsman, a quasi-judicial authority is formed with an intent to resolve the complaints
of the customers of the Bank. Section 35A of the Banking Regulation Act, 1949 deals with Banking
Ombudsman Scheme. It came into effect in 1995 and presently the Banking Ombudsman Scheme 2006
is in operation. The scheme covers not just scheduled Commercial Banks but also Regional Rural Banks
and Scheduled Primary Co-operative Banks. Recently, RBI also extended the concept of Banking
Ombudsman to NBFC’s as well. An unhappy customer can lodge a complaint with the Banking
Ombudsman with respect to the following banking services

Non-payment or unreasonable delay in the payment /collection/ issue of cheques, drafts, bills etc.;

Non-acceptance, without sufficient cause, of small denomination notes and coins tendered for any
purpose, and for charging of commission in respect thereof;

Non-payment or delay in payment of inward remittances;

Non-adherence to prescribed working hours;

Delay/failure to provide any banking facility (other than loans and advances) which has been promised
in writing by the Bank

Delay/ non-credit of proceeds to the respective parties’ accounts, non-payment of deposit or non-
observance of the RBI directives, with respect to the rate of interest on bank deposits

Complaints from NRIs having accounts in India in relation to their remittances from abroad, deposits and
other bank related matters;

Refusal to open deposit accounts without any valid reason for this refusal;

Levying charges without adequate prior notice to the customer;

Non-adherence to RBI instructions on ATM / Debit Card /Prepaid Card / Credit Card operations in India
by the bank or its subsidiaries

Non-adherence to RBI instruction with regard to Mobile Banking / Electronic Banking service in India.

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);

Refusal to accept or delay in accepting payment towards taxes, as asked by Reserve Bank/Government;

Failure /Delay with regard to the issue, service or redemption of Government securities;

Forced closure of deposit accounts without any notice or without giving sufficient reason;

Refusal to close or delay in closing accounts;

Not following the fair practices code as adopted by the bank;

Non-observance of Reserve Bank guidelines on engagement of recovery agents by banks;

Non-adherence to RBI guidelines on allied-banking activities like sale of insurance or mutual fund or
other investment products by banks

Any other matter relating to the violation of RBI directives

Regarding loans and advances, complaints with respect to the following areas can be lodged:

Non-observance of Reserve Bank Directives on interest rates;

Delays in sanction, disbursement or non-observance of prescribed time schedule for disposal of loan
applications;

Not accepting application for loans without furnishing valid reasons to the applicant; and

Non-observance of any other direction or instruction given by the Reserve Bank as may be specified by
the RBI for this purpose from time to time.

Q36- Ambiguous Instrument

Ans : An ambiguous instrument is basically 0ne that may be either a bill or a note for its holder. Such
situations arise in peculiar circumstances only. For example, sometimes the drawee may be a fictitious
person or he may be incompetent to contract. Under such circumstances, the holder of such
instruments may treat them either as bills of exchange or as promissory notes. Section 17 of the
Negotiable Instruments Act deals with such situations.

Illustration: ‘A’ draws a bill on ‘B’ and negotiates it himself. ‘B’ is a fictitious drawee. The holder may
treat the bill as a note made by ‘A’

Q37- Drawee in case of need.

Ans : Drawee in case of need, when in the bill or in any endorsement thereon the name of any person is
given in addition to the drawee to be resorted to in case of need, such person is called a ‘drawee in case
of need’. As per Section 115 of Negotiable Instrument Act 1881, Where a drawee in case of need is
named in a bill of exchange, or in any indorsement thereon, the bill is not dishonoured until it has been
dishonoured by such drawee.

Q38- Fictitious Bill of Exchange

Ans : When the name of the drawer or payee or both are fictitious, the bill is called a fictitious bill (sec.
42) . The word ‘fictitious’ means (i) a non-existing person and (ii) a pretended person, i.e., a person other
than the actual person intended by the parties. Where a bill is drawn in the name of a fictitious person
and payable to the drawer’s order, the acceptor is liable to pay to the order of the person who signed it
as drawer. Therefore, the endorsee can recover the amount as against the acceptor provided he is in a
position to show that the signature of the supposed drawer of the bill and the first endorsement on it
are in the handwriting of the same person. In case of fictitious instruments, only a holder in due course
can recover the money as against the acceptor.
Q39- What is priority Sector Lending?

Ans : India consider as important for the development of the basic needs of the country and are to be
given priority over other sectors. Lending by a commercial bank for certain sectors which are identified
as “Priority Sector” by the Reserve Bank of India is called as Priority Sector Lending Norms. Priority
Sector Lending is an important role given by the Reserve Bank of India (RBI) to all scheduled banks for
providing a specified portion of the bank lending to few critical sectors like agriculture and allied
activities, micro and small enterprises, poor people for housing, students for education and other low
income. The overall objective of the Priority Sector Lending Program is to ensure that adequate
institutional credit flows into some of the vulnerable sectors of the economy. In line with the objective,
Reserve Bank of India (RBI) direct the other banks for providing a specified portion of the bank lending
to few specific sectors like –

1. Agriculture

2. Micro, Small and Medium Enterprises

3. Export Credit

4. Education

5. Housing

6. Social Infrastructure

7. Renewable Energy

8. Others

Q40- Forged Instruments

Ans : An instrument (negotiable instrument like cheque/bill of exchange/promissory note) is called

forged instrument when forgery takes place in signature of the drawer, signature of the endorser, and
alteration in name of the payee, alteration in amount, alteration in date etc. validated by forged
signature.

A forged instrument is meaningless as far as drawer/endorser whose signature is forged is concerned

because holder of such instruments is not protected under law. Forgery is void ab-initio and confers no
title to the holders. Therefore, transferee will not be able to enforce payment from parties to the bill,
cheque and promissory note. In case such transferee gets payment by mistake such payment can be
claimed back from him/her. For example, when the forged cheque is paid by the drawee bank, it is
deemed payment without actual mandate of the customer. The paying bank is required to make good of
loss to the customer. Similarly, a bank which collected the cheque on the basis of forged endorsement,
will be held responsible and may have to return the proceeds collected by it.

Q41- Negotiation Back

Ans : One of the important characteristics of a negotiable instrument is that it is freely transferable from
one person to another. Negotiation of. an instrument is a process by which the ownership of the
instrument is transferred by one person to another. An instrument payable to bearer is negotiable by
mere “delivery” of the instrument itself. But in case of an instrument payable to ‘order’, negotiation is
done by endorsement and delivery. Sometimes, an endorser after he has negotiated an instrument,
again becomes its holder before its maturity. In such a case, he is called holder by Negotiation back. In
such a case, none of the intermediate holders is liable to him.

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