Banking Law Notes Which Are Helpful For Exams Last Minute Studies

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Banking Law - Notes which are helpful for exams. Last-minute

studies.
Banking Law (Karnataka State Law University)
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Banking Law
Banking Law
4th Semister, 3 Year LLB
Karnataka Law University
CA Sh i va Sh an k ar a R Sh et t y
BCom , ACA
Ch ar t er ed Accou n t an t s
SSR Shetty & Co

Chartered Accountants
No. 15, 2nd Cross, 2nd Main Road

Balaji Nagara, DRC Post
Bengaluru – 560 029
M: 9980195919, 9035846043
O: 080 2678 0452
E: shetty@ssrshetty.co.in
w w w .ssrshetty.co.in

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Banking Regulation Act, 1949

Salient features of the Banking Regulation Act, 1949
1) A comprehensive definition of ‘Banking – covers all institutions which receive deposits, repayable
on demand or otherwise, for lending or investment;
2) Prohibiting non-banking companies from accepting deposits repayable on demand;
3) Prohibiting to conduct bank activities by non-banking companies;
4) Prescribe minimum capital standards;
5) Limiting the payment of dividends;
6) Covers the banks incorporated or registered outside India within the scope of the Banking
Regulation Act, 1949;
7) Issue the banking license and their branches;
8) Prescribe the special form of balance sheet, Profit and Loss Account, etc.
9) Confer the powers of RBI to call for periodical returns;
10) Inspection of books and accounts of the bank by the RBI;
11) Empowering the Central Government to take action against banks conducting their affairs in a
manner detrimental to the interests of the depositors;
12) Provisions to bring the RBI in to closer touch with the banking companies;
13) Procedure for liquidation;
14) Bringing the SBI within the purview of the some of the provisions of the Banking Regulation Act,
1949;
15) Widening the powers of the RBI so as to enable it to come to the aid of banking companies in times
of emergency;
16) Provisions for the extension of the Act to whole of India.
The provisions of this Act shall be in addition to and not in derogation of the Companies Act, 1956 and
any other law for the time being in force.

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Reserve Bank of India

The Banking Regulation Act, 1949 empowers the Reserve Bank of India [RBI] to control the banking
institutions of India. Some of them are as under:
1) Power to appoint Chairman to a Banking Company: In case where, office of the chairman appointed
on whole time basis or managing director of a banking company is vacant, then RBI can appoint a
person as Chairman.
A person who has special knowledge and practical experience of the banking activities and working
in any banking company or SBI or any subsidiary bank of SBI or a financial institution can be
appointed as a chairman.
In case where, such person is not a director of such banking company, after the appointment as a
‘Chairman”. He deemed to be a director of such banking company.
2) Minimum Paid-up Capital and Reserves: Every banking company should deposit the prescribed
minimum paid-up capital and reserves with the RBI either in cash or in the form of unencumbered
approved securities. However, it can be pay in partly in cash and partly in the form of such
securities.
3) Cash Reserves: Every banking company, not being a scheduled bank, shall maintain cash reserve
on daily basis, with RBI. The percentage of cash reserve will be computed on the basis of total
demand and time liabilities as on the last Friday of the second preceding fortnight. The percentage
will be prescribed by the RBI and it will be vary time to time.
4) Reserve Bank control over the Banking Companies: RBI empowers to issue a order to any banking
company, to call a general meeting of the shareholders within 2 months or within such further
time as RBI may allow in this behalf, to elect an fresh directors and the banking company shall
bound to comply with such order.
5) Regulation of Acquisition of shares or Voting Rights: RBI prior approval required for acquire the
share or voting rights in excess of 5% of the paid up share capital of any banking company.
6) Power of the RBI to control the Advances by the Banking Companies: RBI can formulate an policy in
relation to advances of the banking companies. The policy may be applicable to all the banking
companies or particular banking company. In such case, banking company shall be bound to follow
the policy.
7) RBI may give directions relating to any or all of the following:

a) The purpose for which advances may be or may not be made;
b) The margins to be maintained in respect of secured advances;
c) The maximum amount of advances to be made to any company, firm, AoA or individual and
having regard to the paid-up capital, reserves, etc.
d) The maximum amount of guarantees may be given by a banking company on behalf of any
one company, firm, AoA or individuals.
e) The rate of interest and other terms and conditions on which advances or other financial
accommodation may be made or guarantees may be given.

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Every banking company shall be bound to comply with any directions given to it by RBI.
However, as per Section 21-A of the Banking Regulation Act, 1949, the rate of interest
charged by the banking companies cannot be subject to scrutiny by the Courts.
8) Licensing of New Banking Companies: No company shall carry on banking business in India, unless
it holds a license issued in that behalf by the RBI and any such license may be issued subject to
such conditions as the RBI may think fit to impose.
Further, no banking company shall open a new branch without obtaining the prior permission of
the RBI. However, new branch within the same city, town or village of an existing place of the
business situated, can be opened without prior approval of the RBI.
9) Monthly Returns: Every bank should submit monthly returns to the RBI in the prescribed form. The
RBI has the power to call for other returns and information, if required.
The banking companies are bound to submit every return and information which are required by
the RBI.
10) Accounts and Balance sheet: Every banking company shall prepare a balance sheet and profit and
loss account as on the last working day of the calendar year in the prescribed form and submit to
the RBI.
11) Audit: Every bank should get audited its accounts periodically and shall submit the reports to the
RBI. Every banking company shall, before appointing, re-appointing or removing any auditor or
auditors obtain the previous approval of RBI.
12) Submission of Returns: Three copies of the accounts, balance sheet together with the Auditor’s
Report shall be furnished as a returns to the RBI within 3 months from the end of the period which
they refer.
13) Inspection: RBI empowered to inspect the books and accounts of a banking company. After the
inspection it sends a copy of it to the concerned bank. When the RBI is inspecting the particular
Bank, every Director or Officer or Employee of the Bank is under an obligation to produce all the
books, accounts and documents in his custody and furnish the information required.
14) Direction: RBI may issue a directions as it deems fit, to a banking company in particular or to the
banking companies in general and the banking company or companies shall be bound to comply
with the such directions.
15) Power to remove Managerial and other persons from the Office: To control over management, RBI
empowered to remove the managerial and other persons from the office of the banking
companies, whose conduct is detrimental to the interests of the deposits and to secure proper
management. RBI empowered to appoint additional directors.
16) Power of RBI to impose Penalty.
Functions of the RBI

a) Note Issue: RBI shall have the sole right to issue currency note in India. Currency notes are issued
under the signature of the Governor of the RBI. Notes issued by the RBI are known as ‘BANKNOTES’
while One Rupee notes of the Central Government are known as ‘Currency Notes’. However, the

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Central Govt. shall put into circulation of rupee coins and reupee currency notes through RBI only.
One Rupee note shall bear the signature of the Finance Secretary, Ministry of Finance, Government
of India.
All bank notes are legal tender throughout the country and are guaranteed by the Central
Government. At present, the highest bank note issued is the bank note of denomination of Rs.
1,000/-
b) Banker to the Government: The RBI is the banker to the Central Government statutorily and to the
State Governments by virtue of agreement entered into with them. The Central Government
conduct all its transactions through the RBI.
The RBI conducting banking business of the Central Government free of charges viz., accepting the
money on government account, making payment on its behalf, effecting exchange remittance,
management of public debts, floating of new loans and treasury bills, etc.
The RBI also provides advisory services to the Government on all monetary and banking matters
e.g., industrial and agricultural finance, legislation affecting banking and credit, financial aspects
of planning, cooperative organisations, international finance, etc.
Apart from, the RBI provides funds to the Government to tide over its short-term financial needs
by issue of Treasury Bills. According to Section 45, it is obligatory on the part of the RBI to appoint
the SBI as its sole agent of all places where the RBI has no branch office of its banking department.
c) Banker’s Bank: The RBI serves as a banker to the scheduled commercial banks in India. All the
scheduled commercial banks keep their accounts with the RBI for the purpose of maintaining cash
reserves as also for settlement of clearing transactions.
d) Lender of the Lost Resort: In case a commercial bank is not in a position to raise the financials from
other sources, then as a lost resort, it may approach RBI for necessary financial accommodation.
e) Custodial of the Funds: The RBI holds the cash reserves of commercial and other banks and thus
acts as custodian of the ultimate reserves of the country which support its credit and banking
system.
f) Clearing House: The RBI acts as a clearing house for member banks for settling their mutual
transactions by book entries.
g) Control of the Banks: The RBI acts as supervisor and controller of the banks in India,
i. Each bank is required to obtain license from RBI before conducting the banking business,
ii. RBI prior permission required for open new branch or change in the location of any existing
branch,
iii. It has power to inspect books and accounts of commercial banks,
iv. It may issue a directions to the commercial banks and may prohibit banks to enter in to the
particular transaction,
v. RBI may remove any top executive of a bank,
vi. RBYmay appoint additional director of any Bank.

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h) Control of the Credit: The RBI exercise its control over the volume of the credit created by the
commercial banks. The measure of credit control may be classified in to the 2 categories:
i. Quantitative Methods: Bank rate policy. Open market operations, statutory liquidity
requirements, etc.
ii. Qualitative Methods: Selective credit control, credit authorisation monitoring and moral
suasion.
i) Custodial of Exchange Reserves: The RBI is the custodial of the country’s foreign exchange reserves.
It has authority to enter into foreign exchange transactions both on its own and on behalf of the
Govt. all Indian remittances to the foreign countries and foreign remittance to India are made
through the RBI.
j) Collection of Data and Publications: The RBI empowered to collect credit information from banking
companies and to furnish such information in a consolidated form to any banking company
applying for the same along with the prescribed fee. The RBI is the principal source of certain
financial and banking data. It publishes a monthly bulletin with weekly statistical supplements and
annual reports.
k) Promotional and Developmental Functions:

i. Encourage the commercial banks to extend their branches in the semi-urban and rural
areas;
ii. Helps to develop the banking system, increase the depositors confidence and avoids the
bank failure,
iii. Helps to mobilise the savings in a country through the institutions like, UTI,
iv. It provides a security to the depositors,
v. Appoints ad-hoc committees/expert groups from time to time to enquire banking problems
and make recommendations to solve them,
vi. Banker’s Training College has been set-up to extend training to supervisory staff of
commercial banks,
vii. Promote institutional agricultural credit by developing co-operative credit institutions,
viii. Undertakes measures for developing bill market in the country.

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Banking System
A banking company defined in the Banking Regulation Act, 1949 as one ‘which transacts the business
of banking which 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”.
Difference betw een Banking and Money Lending

Banking Money Lending
1. Banker accepts the deposits from the 1. A money lender usually advances his own
public and lent to needy customers against funds.
goods or securities or by discounting bills.
2. The bank pays interest to its deposits and 2. A money lender do not receive deposits
the deposits are withdrawal by the from public. Therefore, no interest is
cheques. payable. Money lender can’t issue cheques
for withdrawal.
3. Bank can borrow from other banks or RBI 3. Money lender has no option to borrow from
to lend to their customers. banks and RBI. However, they may go to
other moneylenders for adjustments.
Functions of the Commercial Banks

1. Accepting the deposits from public: Generally, banks accept the deposits in the following types of
accounts:
a. Saving Bank Account;
b. Current Bank Account;
c. Fixed Deposit Account, and
d. Recurring Deposit Account.
2. Lending of Funds: After keeping required cash reserves, the bank lend their surplus deposits to the
needy borrowers against approved securities such as gold, stock and shares, etc. Bank advances
to the customer may be made in the following ways:
a. Overdraft facility,
b. Cash credit,
c. Discounting on bill of exchange,
d. Short term loan, Term loans, and
e. House loan, personal loan, vehicle loan, gold loan, etc.
3. Use of Cheque system,

4. Remittance of the Funds,
5. Agency Services: Bank may act as agent of the customer, such as –
a. Collect and make the payment for bills, cheques, interest, dividend, rent, insurance
premium, etc.
b. Remit funds behalf of the client by draft or mail or telegraphic transfers,
c. To act as executor, trustee and attorney for customer’s will,
d. Preparing the Income Tax Returns for their customers.
6. General utility services: Modern commercial banks usually perform certain general utility services
for the community;
a. Issue of Demand Draft [DD] and Traveller’s Cheque,

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b. Deed in foreign currency cheque,

c. Arrange the safe deposit locker facility,
d. Advisory services to the customers, i.e., investment in share, mutual funds, insurance
policies, etc.
Types of the Banks

1. Scheduled Commercial Banks
a) Scheduled Bank means a bank included in the second schedule to the RBI Act, 1944. The
scheduled banks are entitled to avail of certain facilities from the RBI such as
i. Obtain a finance facilities,
ii. Grant of authorised dealer’s license to handle foreign exchange business,
b) Banks should maintain the cash reserves with the RBI, as per prescribed level. A fortnightly
return has to be submitted to the RBI.
c) The following conditions must be fulfilled before a bank is included in the second schedule:
i. Paid up capital and reserves shall not less than 5 lakh rupees; and
ii. The affairs of the company are not being conducted in a manner detrimental to the
interest of its depositors, and
iii. It musts be State Co-operative Bank or a Company as defined under the Companies Act or
an institution notified by the Central Government.
2. Non-Scheduled Commercial Banks

Those banks are not included in the second schedule to the RBI Act, 1934 are called non-scheduled
commercial banks. On account of failure to comply with the minimum requirement for being
scheduled, these banks are excluded in the second schedule.
Today, there is no non-scheduled commercial bank in the country.
3. Public Sector Banks

In India, public sector banks are reached in 3 stages:
a) Conversion of Imperial Bank of India into the State Bank of India [SBI] in 1955 followed by the
establishment of its 7 subsidiary banks;
b) Nationalisation of 14 major commercial banks on 1966; and
c) The nationalisation of 6 more commercial banks on 1980.
One of them, the New Bank of India was later merged with the Punjab National bank. Thus, today
27 banks constitute in Indian Commercial Banks. Under the privatisation policy of India, the
shares of these banks were issued to the public in open market.
Objectives of the Nationalisation of Banks

a) Elimination of concentration of economic power in the hands of few,
b) Diversification of funds towards priority sectors such as agriculture, small industry and
exports, weaker sections and backward areas,
c) Professionalization of bank’s management,
d) Providing adequate training to the bank staff,
e) Extending banking facilities to un-banked rural areas and semi-urban areas to mobilise savings
of people to the largest possible extent and to utilise for productive purposes,
f) To curb the use of bank credit for speculative and other un-productive purposes.

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4. Private Banks
Private Banks can be classified into 2 category. They are:
a) Indian Banks: Other than nationalised banks, owned and controlled by the Indian
entrepreneurs.
Example: ICICI Bank Ltd, HDFC Bank Ltd, Axis Bank Ltd.
b) Foreign Bank: Banks incorporated outside India but having place of business in India.
Example: Citi Bank NA, Standard Chartered Bank, HSBC
5. Regional Rural Banks [RRB’s]

a) The authorised share capital is 5 crore and issued share capital shall be 1 crore. 50% shall be
subscribed by the Central Govt., 15% shall be subscribed by State Govt. and 35% by the
sponsor bank.
b) There are 196 RRB’s having a network of multiplied branches in the states. They are closely
linked with some commercial banks. These are separate body corporate with perpetual
succession and common seal. The local limits of such banks are specified to the function.
c) The RRB’s are the scheduled commercial banks having been included in the second schedule
to the RBI Act, 1934 and therefore, they enjoy the same privileges and facilities as the
scheduled banks, including access to the central money market.
d) A rural bank carries on the normal business of banking. The main object of these banks to
develop the rural economy by providing credit and other facilities to small and marginal
formers, agricultural labourers, small entrepreneurs, small traders, etc.
e) The area of operation is limited specified region comprising one or more districts in any state.
f) The lending rate of these banks will not be higher than the lending rates of co-operative
societies in any particular State.
g) The establishment of RRB’s will help in providing employment to the rural educated youth’s.
6. Local Area Banks

Local area banks are setup in the private sector to cater to credit needs of the local people and to
provide financial assistance in their area of the operation. These banks may be promoted by the
individuals, corporate entities, trusts and societies. Normally, these banks are setup in district
towns with local customers being focused of their activities.
These banks, have a target of 40% of their total credits, should lend to the priority sector and out
of which 25% shall be given to weaker section.
Local area banks are registered as public limited companies and licenses under the Banking
Regulation Act, 1949 and would be eligible for inclusion in the second Schedule to the RBI Act,
1934.
The area of the operation shall be maximum of 3 geographically contiguous districts and head
office being located at a centre within the area of the operation of the bank.
7. Co-operative Banks
The co-operative banks are based on the principles of self-reliance and mutual cooperation. These
banks are functioning under the provisions of the Co-operative Societies Act of the states. These
co-operative societies and banks provide short-term and medium-term credit to agricultural and
village industries, while the land development banks provide long term finance for agriculture.
Co-operative banking system in India is 3 tier structure, constituted by –

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a) Primary Credit Societies:

i. It is at village level and it can be started with 10 or more persons of the village.
ii. The membership fee is nominal, so that even the poorest agriculturist can become a
member.
iii. Each member liability is unlimited.
iv. The management of the society is under the control of elected body.
v. The working capital of the primary society comes from their own capital, membership fee
and reserve funds. Deposits are received from both members and non-members.
vi. Borrowings are mainly from central co-operative banks.
b) Central Co-operative Banks

i. They are federations of primary societies belonging to a specific district.
ii. The main function is to provide loan to the primary credit societies.
iii. It will not lend to individuals directly.
iv. It will raise working capital from own funds, deposits, borrowings and other sources.
Borrowings are mostly from the RBI and Apex Banks of Cooperation.
c) State Co-operative Banks

i. These banks are Apex Institutions in the 3-tier structure and operating in State level.
ii. Every state has a cooperative bank. Its basic function is to furnish loans to the central
cooperative banks in order to enable them to help and promote the lending activities.
iii. Their working capital comes from own funds, deposits, borrowings and other sources.
Borrowings are mainly from the RBI and the remaining from State Government and others.
Business prohibited for Banking Company

a) As per Section 6(2) of the Banking Regulation Act, 1949, no banking company shall engage in any
form of business other than banking business,
b) Banking company prohibited from engaging directly or indirectly dealing with buying and selling of
goods, except in connection with the realisation of security given to or held by it,
c) Banking company prohibited from engaging in any trade or buy or sell goods for others, otherwise
than in connection with the bills of exchange received for collection,
d) No banking company shall hold any immovable property, howsoever acquired, except such as is
required for its own use for any period exceeding 7 years from the acquisition date,
However, within said 7 years, bank can sell such immovable property. However, the RBI may
extend such period not exceeding 5 years where it is satisfied that such extension would be in the
interest of the depositor of the banking company
This is intended to prohibit a bank from engaging directly or indirectly in trading activities and
undertaking trading risks in additions to ordinary banking risks.
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Customer
Now, only two requisites are essential to constitute a customer. They are:
1) He must have a bank account opened in his name by making the minimum required money to
open such account. The account may be saving, current or fixed deposit account.
2) The dealing between the banker and the customer must be of the nature of banking business,
The frequency of transaction is not a necessary condition to make a person ‘customer’. In simple words,
a person who has a bank account in his name and doing the banking activities with such banker is
considered to be a customer.
A customer of a bank need not be a person, it may be a firm, a joint stock company and even a
Government department as considered as ‘customer’.
General precautions before opening a Bank Account

When a banker accepts deposits, he is said to borrow money. He should be very careful that he should
not be exploited by the fraudulent persons. As such, before opening a deposit account, the banker
should observe certain general precautions. They are:
1. Application form: A customer, who want open bank account, has to fil and submit prescribed form
of application. He shall disclose certain details, i.e., name, address, father name, contact number,
date of birth, etc.
2. Introduction: The RBI has issued directions to all commercial banks requiring them to obtain
introduction in all types of account with view to checking ‘benami’ or fictitious transactions.
There is no legal responsibility of the introducer in the event of any loss or damage caused on
account of his having introduced a party. He will not liable for the act of the account holder. The
responsibility of the introducer is confined only to the identity of the depositor being known to
him and not beyond this.
It is important that, the signature of the introducer must be genuine. If, the signature of the
introducer is a forgery one, the account is treated as having not been introduced at all and the
manager shall be held responsible.
3. Photograph of the Applicant: The applicant has to affix his recent passport size photo on the
application and sign across the photo.
4. Compulsory quoting PAN: The applicant has compulsorily quote his Permanent Account Number
[PAN] on the application and photocopy of the same shall be provided along with the application.
5. Specimen Signature: The manager has to obtain 2 or more specimen signature of the person in a
separate thick card, printed specifically for the purpose of taking specimen signature. The person
has to write his name in capital letters first and has to sign his full signature in the pointed places.
6. Mandate: It is an authority in writing by which the account holder empowers another person to
operate on the account on his behalf. A mandate is generally used for delegating powers to
operate on the account during the temporary absence of the account holder.
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7. Verification of Documents: The manager or authorised person shall be verify the originals before
complete the process.
8. Enquiry: This enquiry will be helpful to great extent to assess the integrity, character, capacity of
income, etc., of the new person.
9. Initial Deposit: The new customer should pay the minimum amount or greater amount as wish. It
is a common practice among bankers to allow only in cash.
10. Pay-in-Slip Book, Cheque Book and Pass Book: After the account opening, the manager will hand
over the pay-in-slip book, cheque book and pass book to the customer. Pay-in-slip requires
whenever, the customer want deposit cash or cheque as the case may be. Cheque book required
for withdraw the money by himself or to give to other person. Pass book will record the transaction
and periodically updated by the bank officer.
Joint Account
A joint account is one which is opened by two or more persons. The request for opening a joint account
and the mandate in respect of it, constitute a ‘contract’. The joint account holders enters into the
contract with the bank both jointly, and individually. So, that each of them has right enforceable against
the bank, and the bank has right against them which it can enforce individually or collectively.
The performance of contract is governed by Section 45 of the Contract Act. The banker should take the
additional precautions while opening the joint account.
1) Drawing of Cheques
2) Power to Overdraw: The mandate must contain clear instructions whether the persons operating
the joint account are also authorised to overdraw the account and withdraw the article under safe
custody.
3) The rule of survivorship, in case of death of any one of them.
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Pass Book
Pass book is a book in which the banker keep a record of his customer’s account for the future use and
it is so called because, it passes periodically between the banker and his customer. It contains a copy
of the customer’s ledger account, as it appears in the banker’s book. Customer should not record
anything in the passbook.
In case of saving bank account, the submission of pass book to the banker is necessary for every
withdrawal.
Authentication or Position of the Pass Book in the Law of Banking

There are two views relating to the position of the pass book in the law of banking:
1) Pass Book constitute an Authentic Record: It is duty of the customer to verify the pass book and
failure to verify the entries in the pass book and it becomes a settled account, between the banker
and the customer.
In Keptigalla Rubber Estates Co. Vs. National Bank of India (1909), it was held that, when a
passbook is taken out of the bank by the customer or some clerk of his and returned without
objection, the account between the bank and the customer is regarded as settled and is binding
on both.
2) Divergent view, No such duty in India: Some persons have the opinion that the passbook by itself
cannot be relied on as a settled account because:
a. Banker always busy,
b. It is common to commit mistake by the banker,
c. It is duty of the customer to verify the entries made in the pass book.
In Essa Ismail Vs. India Bank Ltd [AIR1963 Ker. 104], the banker sent the pass book and also the balance
confirmation letter to the customer, who acknowledged them. After a long term, his heirs disputed
with some entries in pass book. The Court dismissed the appeal of his heirs stating that entries in pass
book and balance confirmation letter were acknowledged by the customer and remained silent.
However, in Allahabad bank Ltd Vs. Kul Bhushan and Others [AIR, 1961, Punjab 1971], the decision was
in the favour of the customer in spite of the fact that balance confirmation slips were received from his
bank.
In the view of several legal decisions, the law in England and in India regarding the pass book is not well
settled. In many cases, the pass book is not accepted as on account settled. Thus, the law is
unsatisfactory from the view of the banker. In any case, it would not be correct to consider, the pass
book as a conclusive evidence of settled account between the banker and the customer.
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Banker’s Special Customer

1. Minor:
According to Section 3 of the Indian Majority Act, 1875, a minor is a person who has not attained
the age of 18 and in case of guardian is appointed, it is 21. In the case of a person not domiciled in
India, the age of majority is according to the law of his domicile. In England until a person
completes his age of 21. He is regarded as a minor or an infant.
The privileges of a Minor – Guaranteed by Law

a) A contract by a minor is not contract at all. Hence, an agreement with a minor has been held
to be void ab initio.
b) A minor who has deceived the other party to the agreement by representing that he was of
full age is not prevented from asserting later that he was a minor at the time, he entered into
the agreement. The rule of estoppel cannot be applied against a minor.
c) A minor cannot be promisor, but can be promise or beneficiary.
d) A minor has the right to get back the securities pledged even without repaying the loan.
e) A minor can recover even third party’s securities pledged, without repaying the debts,
f) A minor cannot be declared as insolvent,
g) A minor cannot be a partner in a firm since partnership arises on the basis of a contract.
However, he can admitted to the benefit of the partnership if all partners agree. His liability
is limited to the extent of his interest in the partnership.
h) A minor can be appointed as an agent. However, the principal will be responsible to the third
parties for the act of his minor agent. The principal, cannot hold the minor agent personally
responsible for any wrongful acts,
i) A minor cannot act as a guarantor,
j) A minor cannot become a member of a company since he is incompetent to enter into a
contract. He cannot purchase shares of a company,
k) Minor is liable for negligently causing injury or damage for property that does not belong to
them. Thus, they are subject to the law of tort (civil wrong) in the ordinary way. Minors are
thus liable in tort,
l) The facility of safe deposit lockers cannot be extended to a minor. However, the minor can
be made a nominee of a safe deposit locker facility,
m) A minor never can be appointed as a trustee,
n) Joint account of 2 minors should not be opened,
o) The guardian is prohibited to operate the account in case of premature death of the minor,
p) In the event of death of a minor, the money will be payable to his guardian. In case, guardian
dies before the minor attains majority, the money should be paid by the bank to the minor
on attaining majority or to some person appointed by the Court as his guardian.
Provisions under the Negotiable Instrument Act, 1881 relating to the Minor
According to Sec. 26 of Negotiable Instruments Act, 1881 ‘A minor can draw, indorse, deliver and
negotiate such instruments so as to bind all parties except himself’.
When a minor can validly draw a cheque; the bank would be bound to pay the same and be discharged
by making the payment in due course. It is only on the basis of this reason that the banks allow a minor
to open and operate bank account, in the name of the minor without any guardian.
A minor can validly draw a cheque and if there is a wrongful dishonour or wrongful payment such as
the payment of a forged cheque, the minor can sue the bank for damages and for wrongful dishonour.
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Banker’s Duty towards Minor’s Account

The banker may open a saving account but not a current account. Bank account may be opened in the
following ways:
i. Account in the name of the Minor: An account can be opened by the minor himself. There is nothing
unlawful in such case, since section 26 of the Negotiable Instruments Act, 1881 provides that, 1
minor can draw, endorse, deliver and negotiate a negotiable instrument.
With a view to inculcating the saving habit in children and since there are no unusual risks involved
and no additional obligations are incurred by the banks, a minor’s account is opened in the same
was as that of a minor, the account opening form is signed by the minor himself.
Minors are allowed to open such accounts when they have completed 12 years or in some banks
even 10 years. Banks will issue cheque book only to minors of, 16 or 17 years of age. Accounts of
illiterate minors are not opened in their single name.
At the time of opening of the account of minor, banker should insist on to give some academic
records or date of birth as entered in Births and Deaths Register of the Municipality or the Gram
Panchayat or Town areas, etc.
Since, a loan contract with the minor is void and cannot be enforceable against him at a Court,
therefore, the minor’s account should not be allowed to be overdrawn.
ii. In the Joint names of the Minor and his Guardian: The guardian must be an adult and the banker
can make the guardian liable for all the transactions of the minor. The minor can operate the
account as on ‘agent’. The lawful guardian may be a natural guardian or a guardian appointed by
the Court or a Testamentary Guardian.
iii. In the Name of the Guardian: The bank account is opened in the name of minor alone, but
operated by the lawful guardian including draw the cheques, etc. The guardian should not be
allowed to operate the account of a minor after the minor has attained the majority or after the
minor’s death.
2. Lunatics
Lunatics are persons of unsound mind. They are disqualified from contracting, but the
disqualification does not apply to the contracts entered into by lunatics during the period of their
sanity or contracts which are ratified by them during such period.
A person who is usually of unsound mind, but occasionally of sound mind, may make a contract
when he is of sound mind. A person who is usually to sound mind, but occasionally of unsound
mind, may not make a contract when he is of unsound mind.
Banker’s Duty in the case of Lunatics

a) Since, a lunatic has no capacity to enter into a contract, no banker will be knowingly open an
account in a lunatic’s name.
b) It may so happen that, an existing customer may become insane. Under such circumstances:
i. Banker must immediately stop the operation of the account,
ii. The banker has no right to debit his account for payment made.
c) From the moment, the banker knows the fact about the lunacy of his customer, the contract
between him and the lunatic customer becomes void.
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d) Banker must get a definite proof for the lunacy of his customer. He must not believe on
rumours. In doubtful cases, he has wait for written proof. If a customer is judicially declared
as insane, it is official proof.
e) So long as a banker has no knowledge of his customer’s insanity, he can go on honouring his
cheques and the operation of the account cannot be questioned.
f) If the Court appoints a Receiver, banker can honour the cheques draw by him. it is the usual
practice to pay the balance to the guardian or receiver appointed by the competent Court.
g) If one party to an account opened in joint names becomes mentally incapable of managing
his or her affairs, neither of the party should be allowed to operate the account.
h) If the customer is suffering from temporary mental deceases, it is practicable to allow the
spouse to operate the account, provided certificate from at least 2 doctors shall be obtained.
3. Drunkards
Generally, drunkenness is not considered to affect a person’s power to contract, he is allowed,
then the Court may decide that the person was so drunk as to be unable to know what he was
doing.
As a drunkard is a person who is not in his senses and as such he cannot enter in to a lawful
contract, a banker will not open an account and shall not prefer to have a drunkard as a customer
of the bank.
A customer presents a cheque at the counter in a drunken position, it is better to, not paid the
cheque and in case the cheque is paid then it better to have a witness for payment.
4. Insolvent or Bankrupt
When a person unable to discharge his debts, in full, it results in his being an insolvent. When a
customer gives notice to his creditors, banker should stop all business transactions with him. No
further loan or advances should be allowed to him. The Court will appoint a person who distributes
the property of the insolvent among the creditors as per the procedure laid down in the Provincial
Insolvency Act, 1920.
When a person is adjudged as insolvent, the balance in his account has to be paid to the Official
Receiver by a crossed banker’s cheque. If any cheque is received signed by the account holder
subsequently, the same has to be returned with the objection ‘Payees title requires confirmation’.
An insolvent person cannot act as a Director of a Company. But he can act as an agent of another
person. Agency is terminated on the death, insanity of a principal or agent, but insolvency of the
agent does not terminate the agency, therefore, cheque drawn by such agent can be paid.
Similarly, it can be paid even after the death of an agent, as the principal is alive. However, if
principal is dead the bill cannot be paid. In case, insolvency of one of the joint account, the credit
balance in the account is disposed in accordance with the joint instructions of the Official Receiver
and the solvent party.
In the event of partnership becomes insolvent, the partners cannot be operate the bank account.
Therefore, the bank account, irrespective of credit or debit balance, must be stopped and the
Official Receiver advise the position. The credit balance shall be disposed according to the
instructions of the Official Receiver.
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Insolvency of the firms involves, insolvency of all the parties. Insolvency of the partners, however,
does not necessarily involve insolvency of the firm, but it results in the dissolution of the firm. In
case of company, insolvency of director does not affect the company’s account at all and no action
is required to be taken. Such director will have to resign his directorship.
5. Illiterate Person
A person who cannot read or write and also cannot sign his name is known as illiterate. Due to his
sound mind, an illiterate person is competent to contract and the bank may open the account.
Since, he is illiterate person, a special care should be taken by the banker before opening an
account:
i. Witness,
ii. Photograph,
iii. Left hand thumb impression in case of male illiterate and the right hand thumb impression in
the case of a female illiterate are duly attested by some responsible person on the account
opening form.
iv. One or two identification marks shall be noted on the account opening form,
v. Pass book should contain an attested photograph of account holder,
vi. No cheque book facility provided.
6. Blind Person
A blind person is competent to contract and bank cannot refuse to open bank account. A bank
should allow the person when well introduced to open an account jointly with another person,
who can see, read and write and the bank may allow a joint operation on the account.
7. Married Women
Married women can open the bank account. She has power to draw cheques and give a sufficient
discharge.
a) If an unmarried women not a minor, insane or a person of unsound mind, then the bank
should open a account,
b) Bank has to obtain some basic information about her living husband i.e., name, occupation,
name of employer, etc.
c) Under certain circumstances, she can make her husband liable for the overdraft enjoyed by
her, if –
i. She borrows money for the necessaries of her life,
ii. She borrows money for the necessaries of her husband,
iii. She acts as the agent of her husband.
However, husband can escape from his liability, if he proves that he has already supplied
her with the necessaries of life and household and he has never allowed her to act as his
legal agent.
d) A married woman cannot be committed to prison in execution of a decree and even if the
bank obtains a decree against the married woman, it would be useless as it cannot be
executed like the other cases.
e) She cannot be made an insolvent unless she carries on some trade or business,
f) On the account of marriage, she may be allowed to change the title of the account so far as
the surname is concerned, the marriage certificate has to be obtained.
In case of Pardahnashin Women
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A pardahnashin women does not deal with the people other than the members of her own
family. As she remains completely secluded, a presumption in law exists that:
i. Any contract entered into her might have been subject to undue influence, and
ii. The same might have been made with her free will and with full understanding of what
the contract actually means.
Therefore, the other party to the contract shall have to prove that the contract with her,
was free from the above mentioned defects in order to enforce the same. In case, the
identity of such women cannot be ascertained the banker generally refuses to open an
account in her name.
8. Joint Hindu Family [HUF]

The eldest male member of the HUF is known as ‘Karta’ or manager of the family. He manages the
affairs of the HUF. A minor male child can act as ‘karta’ of the family through his natural guardian
mother, where the father’s whereabouts are not known at the time.
The membership to a HUFis acquired by birth. The karta has implied authority to act for the benefit
of the family business and bind the HUF property of all other coparceners also. The daughters do
not acquire right in HUF and as such females are not included in Hindu Coparcenary. However,
after enactment of the Hindu Succession Act, 1956, the share of a deceased coparcenary is divisible
not only amongst his sons but also amongst female members.
So far as the liability of the coparceners is concerned it is presumed that the karta of the family is
working with their consent and acquiescence and thus they are bound by his action and an
responsible for all the best. However, their liabilities are limited to the extent of their interest to
the family property and not beyond that.
When the karta of HUF conducts the family business, it is implied that he has an implied authority
to make, draw, accept and endorse a negotiable instrument in the interest of the family business.
Not only the other members but by his action the karta also bind himself. All members of HUF are
liable for all acts done by the karta in the ordinary course of the family business.
Accounts in the name of Joint Hindu Family

a) Opening of Account
i. A banker may open an account for HUFeither in the name of karta or in the name of family
business,
ii. The account should be duly introduced.
iii. The account opening form should be signed by all the adult coparceners, even though the
karta operate the account,
iv. The banker has to obtain declaration signed by all the adult coparceners stating that, the
business carried on by the family is ancestral and that any changes in the constitution of
the family through births and deaths will be advised to the banker,
v. Another declaration signed by all the members should be obtained by the banker affirming
who is karta and who are the coparceners including minor coparceners. The date of birth
of minor coparceners should also recorded.
vi. If there are minor coparceners, the other adult coparceners should sign for self and as
guardian of the minors,
vii. Authority is given to karta to operate the account by all concerned under their joint
signature,
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viii. On attaining the majority, the minor coparcener should be asked to join with other
coparceners in signing the existing account opening form in ratification of the previous
transactions,
ix. Death/Lunacy/Insolvency of coparceners does not dissolve the HUF. It continues till
partition of the property. On receiving a notice of death of the karta, when the account is
in credit, the eldest surviving male coparcener will become the karta and the account will
be allowed to be operated by him.
x. It must be noted that any member of HUF can stop the cheque payment issued by the
karta of HUF. When a bank receives a notice about any dispute amongst the family
members of the HUF, the operation in the account should be stopped till future
instructions from the competent Court.
b) Borrowings by Karta
i. The karta has power to borrow the money for a purpose necessary for or beneficial to the
family and for meeting the needs of the usual business of the family but not for any
speculative transactions or for starting a new business,
ii. He can create charge over the ancestral property and pledge the securities on behalf of
the family for this purpose,
iii. The burden of proof that the loan was taken by the karta for purposes beneficial to the
family lies on the banker,
iv. Before granting any credit facility necessary enquiries should also be made to ensure that
it is required for the family business. If this is not done, the bank may not be able to
succeed in a suit for the recovery of debts in case of default.
v. In order to protect itself from such a liability, it will be safe for the banker to ask for
signature of all adult male members of the family on the document charging joint family
estate in the favour of the banker.
vi. In case there is a minor coparcener in the family, the document should be signed by the
guardian of minor’s behalf. On the attaining the age of majority, he should also give his
assent to the undertaking given by major coparceners, ratifying the earlier transaction.
9. Joint Stock Company

A joint stock company means a company incorporated under the Companies Act, 2013. A joint
stock company is an artificial person with perpetual succession brought into existence under the
provisions of the Companies Act. Legally, a company is considered as an entity separate from its
members and hence it possesses all powers to enter in to valid contracts. It can own property in
its own name, carry on lawful business and incur liabilities in its name.
A company has a common seal. As it is an artificial creation, it cannot act by itself. It has to act only
through human beings.
A banker should take the following precautions, before opening and operating an account in the
name of a company.
i. Account opening form,

ii. Certificate of Incorporation,
iii. Certificate of Commencement of Business,
iv. Memorandum and Articles of Association,
v. List of Promoters,
vi. Balance sheet, Profit & Loss Account,
vii. List of Directors,
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viii. Resolution copy,

ix. Mode of signing the cheques,
x. Borrowing powers of the company,
xi. Registration of charges,
xii. Winding up of the Company,
xiii. Liquidation of the Company,
10. Clubs, Societies and Non-Trading Associations

a) Banker should obtain registration certificate, certified copy of the bye-laws/rules and
regulation,
b) A copy of the general member’s or guardian’s resolution electing the executive committee
certified by the chairman of such general meeting,
c) A copy of the resolution passed by the managing committee appointing the bank as their
banker and specifying the names and designations of the office-bearers who are authorised
to operate on the account,
d) The account opening for duly completed by the office-bearers authorised to open the
account. They should sign the form on behalf of the club, society, etc. in their official capacity.
Proper identification of the signatories should also be obtain if they are not known to the
banker,
e) The banker should observe changes if any in the constitution, elected body, etc. of such
association. It is the duty of such association to intimate the changes if any to the banker,
f) In the event of death, lunacy of the person entitled to operate the account, the banker should
stop operation of the account till the managing committee communicates the appointment
of a new person in his place,
To safeguard his position, the banker should grant loans only against either the guarantee of
a financially sound person or property of a club, society, etc will be vested in the names of the
trustees.
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General Relationship between the Banker and Customer

Based on the functions of banking, there are the following general relationships between the banker
and customer:
1. Debtor and Creditor Relationship

A depositor remains a creditor of his banker, so long as his account carried a credit balance. But
he does not get any charge over the assets of his banker and remains unsecured creditor of the
banker.
Banker’s relationship with the customer is reversed as soon as the customer’s account is
overdrawn. Banker becomes creditor of the customer and continues in that capacity till the loan
is repaid. As the loans and advances granted by a banker are usually secured by the tangible assets
of the borrower, the banker becomes a secured creditor of his customer.
2. Principal and Agent Relationship

Section 182 of the Indian Contract Act, 1872 defines that, ‘An agent is a person employed to do
any act for another, or to represent another in dealings with their person. The person for whom
such act is done or who is so represented, is called the ‘Principal’.
Any person may become an agent and it is not necessary that an agent should be competent to
the contract. (Example: Minor, person of unsound mind)
In the course of business incidental to the banking, a banker may perform many services of the
customer. These services includes:
a) Buying and selling securities on behalf of the customer;

b) Collection of cheques, dividend warrants, bills of exchange, promissory notes, etc
c) Payment of insurance premium, telephone bills, etc.
3. Fiduciary Relationship
It means relationship of trust and confidence. If the money is paid to the bank by a customer for
the purpose of effecting specific transaction and such amount is credited to suspense account in
order to awaiting the instructions from the customer to their disposal, the amount received by the
bank in a fiduciary relationship.
4. Trust and Beneficiary Relationship

A banker becomes a trustee under certain circumstances. For instance, when a money is deposited
for a specific purpose, till that purpose is fulfilled, the banker is regarded as trustee for that money.
If the customer deposits securities and other valuables with the banker for safe custody, the
banker acts a trustee of his customer.
The difference between the banker as a debtor and a banker as a trustee is as under: A person
deposits Rs. 1,000/- in his saving bank account, he is a debtor of his bank. In case, the same person
give the banker a sealed cover of Rs. 1,000/- and leaves it for safe custody, the banker becomes a
trustee,
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5. Bailee and Bailor Relationship [Custody of Pledged Goods]

Bailment means, ‘one person delivers some goods upon a contract, to the other person, for some
purpose. When the purpose fulfilled, the goods must be returned or otherwise disposed according
to the directions given earlier.
During the certain occasions, a banker becomes a bailee. It happens when he receives gold
ornaments and important documents for safe custody. The banker takes charge of goods, articles,
etc. as bailee and not as trustee or agent.
In such case, he cannot make use of them to his best advantage, because he is bound to return on
demand. A banker does not allow any interest on these articles.
Duties of the Banker as a Bailee

a) Safe custody,
b) Reasonable care shall be taken,
c) No liability,
d) No to make unauthorised use of bailed goods,
e) Not to mix bailor’s goods with his own goods,
f) Duty to return the goods on fulfilment of the purpose,
g) Handover any profit arising out of such bailed goods to the bailor.
Rights of the Bailee Bank

a) Recover necessary expenses incurred,
b) Lien on the goods bailed,
c) Suit against wrongdoer,
d) Recover compensation from the bailor.
Example: Safe deposit lockers
6. Pawnee and the Pawnor Relationship

A pawn is defined as bailment and the goods can be kept till the debt is discharged. The goods kept
as a security against money lent to the customers.
7. Mortgage and Mortgager Relationship

Mortgage is one that transfer of an interest in specific immovable property for the purpose of
securing the payment of money advanced or to be advanced by way of loan.
When the customer executes a mortgage deed in respect of his immovable property in the favour
of the banker, the relationship between banker and the mortgager is exist.
8. Lessee and Lessor Relationship

When a customer hires a locker in the bank’s safe deposit locker, the bank undertakes to take
necessary precautions for the safely of the articles left in that locker. The relationship between the
parties is that of a lessor and a lessee.
9. Bank as a Guarantor
Guarantor is one who gives a promise to answer of the payment of some debt or the performance
of some duty in the case of the failure of another person, who, is in the first instance, is liable to
such payment or performance.
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A bank as guarantor gives guarantee to its customer by issuing a ‘letter of credit’. A letter of credit
can be used in international trade and transactions. In a number of circumstances, a bank gives
bank guarantee to its customers, through letter of credit to provide facilities for international
trade.
A bank which gives a performance guarantee must honour guarantee according to its terms. A
bank guarantee is not an indemnity. It is a peculiar type of guarantee. All the provisions of the India
Contract Act, 1872 shall apply to the bank guarantee.
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General Obligations of a Banker towards Customer

By opening can account with the banker, there will be some rights conferred and responsibilities or
obligations imposed to the banker as well as the customer. These rights and responsibilities are called
the special features of relationship between the banker and the customer.
1. Obligation to Honour the Cheques

The banker is under a statutory obligation to honour his customer’s cheques because, it is
recognised in the section 31 of the Negotiable Instruments Act, 1881. However, the banker is
bound to honour his customer’s cheque provided the following conditions are fulfille:
Conditions for honour the Cheque

i. Sufficient balance
ii. Presentation of cheques within the working hours of banker,
iii. Presentation of cheques within a reasonable time,
iv. Cheques should be presented at the bank where the account is kept,
v. Signature of the customer must be tally,
vi. Proper form of the cheques,
vii. Cheques should not be mutilated, torned or cancelled. It should be good in appearance. If a
cheque is torned, which does not affect any printed or written matter of the cheque, the
drawer should carefully on it with the words “This cheque accidentally torn by me” and then
put his signature underneath it.
In case of cheque is torned effecting the number, amount, name of the payee, then that
cheque should not be honoured.
viii. Correctness of amounts in words as well as figures,

ix. Material alteration should not be done on the face of the cheque,
x. Proper application of the funds. For instance, if trust funds are withdrawn by cheque for
private use, the banker will not honour it.
xi. Reasonable time for collection.
xii. Existence of legal bar: A banker is relieved from his statutory duty of honouring his customer’s
cheque if there is any legal bar like ‘Garnishee Order’ attaching the customer’s account. The
bank should note such instructions of the attachments by the Courts, Income Tax officers
immediately in the accounts ledger and all concerned records and avoid the payment on
cheques to such customers.
xiii. Death, Insolvency, etc. of the Customer: A soon the banker receives the reliable information
about the customer’s death, insolvency, etc., he should note it on the concerned records and
should stop payment on cheques presented before him after the intimation of the death,
insolvency, etc., of the customer.
xiv. Cheques of partnership firm, company accounts: Whenever, a cheque from the firm or
company is presented, the banker should verify whether the cheque is signed by the
authorised person or not.
2. Obligation to maintain Secrecy

The foundation of the banker and customer relationship is of confidence and secrecy. The banker
is under an obligation to take utmost care in keeping the secrecy about the accounts of the
customer. The banker should not disclose his customer’s financial position and the nature and the
details of his account to anybody, since it may affect his reputation, credit worthiness and business.
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Exceptions to the Obligation to maintain Secrecy by a Banker

i. Disclosure under the compulsion of law,
ii. Under the Income Tax Act, 1961,
Section 285 of the Income Tax Act, 1961, requires the bank to furnish to the Income Tax
officers the name and addresses of all persons to whom they have paid interest exceeding Rs.
5,000/- mentioning the actual amount of interest paid by them.
iii. Under the Banker’s Bank Evidence Act, 1891

A banker may be asked by the Court to produce a certified copy of his customer’s account in
his ledge.
iv. Under RBI Act, 1934

The RBI empowered to collect the credit information from Banking Companies relating to
their customers.
v. Under the Garnishee Order

When a Garnishee order, nisi is received, the banker must disclose the nature of the account
of a customer to the Court.
vi. Disclosure in the interest of the public.

vii. Disclosure in the interest of the bank
Protect his own interest. Example: If the banker has to recover the dues from guarantor,
disclosure of necessary facts to the guarantor.
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The Rights of a Banker

1. Banker’s Right of general Lien
Lien means a legal claim to hold the property as security. A lien does not require any special
agreement, written or oral, but it arises only by operation of law subject to the condition that the
following requirements are fulfilled:
a) Creditor is in possession of goods, securities, ect. And has come in the possession thereof in
the ordinary course of the business,
b) The owner of the goods, securities, etc. has the lawful debt to pay to the person in possession
thereof, and
c) There is no contract, express or implied to the contrary.
Kindsof the Lien

There are two types of the lien. They are –
i. Specific or Particular Lien: Right to retain the goods in connection with a particular debt only. In
other words, a particular lien applies to one transaction or certain transaction only. For example,
a watch repairer has a lien over the watch till the repair charges due from the owner of the watch
are paid to him
ii. General Lien: Right to retain all the goods or any property which is in possession of the holder of
another until all the claims of the holder are satisfied. It extends to all transactions and thus more
extensive than of a particular loan.
Special feature of a Banker’s General lien

a) The bank possesses the right of general lien on all the goods and securities entrusted to him in
his capacity as a banker,
b) The right of lien can be exercised on goods or other securities standing in the name of the
borrower only and not jointly with the others,
c) General lien is to apply only in the absence of express contract to the contrary,
d) No separate agreement or contract is necessary to create the right of lien as the right of lien is
conferred upon the bank by the section 171 of the Indian Contract Act, 1871,
e) The right of general lien applies to all those securities, goods and documents that come into the
banker’s possession in the ordinary course of his banking business as the banker of his customer
and not in any other capacity,
f) Banker’s general lien is an implied pledge. It confers upon the bank the power to sell the goods
and securities in case of default by the customers. Of course, this right can be exercised only
after giving a reasonable notice to the customer,
g) Money is not goods and the deposit of money with the bank is not bailment. But, following the
rules of English Law, various High Courts in India have decided that a banker can exercise lien
over money deposited with it.
Exceptions to the Banker’s General Lien

a) No general lien on safe custody deposits,
b) No lien on securities or bill of exchange or other documents entrusted for a specific purpose,
c) No lien on article left by mistake or negligence,
d) No lien on fixed deposits,
e) No lien on stolen bond,
f) No lien until the due date of a loan,
g) No lien in respect of trust account,
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h) No lien on title deeds of immovable properties
The banker cannot exercise his lien over the title deeds of immovable properties submitted by the
customer. However, the banker can recover his dues in a civil proceedings against such properties.
2. Banker’s Right of Set-off

A person who owes a debt may deduct it from any debt which is immediately payable to him by
his creditor and may satisfy his indebtedness by paying the net balance to the creditor unless there
is an agreement to the contrary between the parties.
Conditions necessary to Set-off

i. The accounts must be in the same name and in the same right;
ii. The right of set-off can be exercised in respect of debts due and not in respect of future debts
or contingent debts,
iii. The amount of debts must be certain,
iv. The right of set-off is exercisable in the absence of an agreement to the contrary,
v. The banker may exercise this right at his discretion,
vi. The banker has the right to set-off before the Garnishee Order is made effective.
vii. The customer has been given a formal notice regarding the banker’s indemnity to exercise
the right of set-off.
The right to set-off all accounts arises immediately in the following instance:
a) On the death, mental incapacity or insolvency of a customer,
b) On the insolvency of a firm or on the liquidation of a company,
c) On the receipt of a garnishee order,
d) On the receiving notice of a second mortgage over security charges to the bank.
3. Banker’s Right for Appropriation of the Payment

The question of appropriation arises only when debtor owes two or more different debts to the
creditor and he pays some amount (which is not sufficient to meet any debt) to the creditor. The
rule in appropriation of payment is that, where a customer pays in money for a stated purpose,
the banker is obliged to apply such payment only for such stated purpose.
In India, appropriation of payment divided into 2 types. They are:

i. Appropriation by the Debtor: The debtor has the right to instruct expressly, when debt, if he
owes more than one, can be cancelled by the money, he tenders to the credit. He can
appropriate the payment by
¾ An express intimation; or
¾ Under the circumstances implying that the payment is to be applies to the discharge of
some particular debt.
ii. Appropriation by the Creditor: Where the debtor has omitted to intimate and there are no
other circumstances indicating to which debt the payment is to be applied, the creditor has
the right to appropriate it, at his direction to any lawful debt actually due and payable to him
from the debtor.
This is called the creditors right of appropriation. Creditor will exercise such a right of
appropriation only after the debtor had the opportunity to exercise his right, but has omitted
to do so. Creditor may exercise his right of appropriation at any time.
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Banking Law
Rule in Clayton’s Case

The question of appropriation of payments arises when a customer owing two or more debts to the
banker, pays in money which is not sufficient to discharge all the debts. Here the problem is to which
debt this amount should be adjusted or realised.
In England, the law of this subject was laid down in the Rule of Clayton’s case and the same was followed
in India before the enactment of the Indian Contract Act.
The rule in Clayton’s case is:

i. Where the account goes in to debt, the first item on the debit side is cancelled by the first item on
the credit side,
ii. Where the account goes into credit, the first item on the credit side is extinguished by the first
item on the debit side as soon.
In other words, appropriation takes place in chronological order.
Conditions for the application of the Rule in Clayton’s case

1) The account should still running. The closed account, new account and the separate account is
opened – this rule does not apply to the old account.
2) There should be no other agreement contrary to it, between the debtor and the creditor.
Exceptions to the Rule in Clayton’s case

1) In case, the parties have number of separate transactions apart from the current account, this rule
does not applicable.
2) Rule in Halletts is an exception to the rule in Clayton’s case

In Knatchbull Vs. Hallet (1897), it was held that, when the customer’s account consists partly of
trust money and partly of his own money, the withdraws are to be debited first to his own money
and then to the trust funds and the deposits are to be credited first to trust funds and next to his
own funds.
Applicability of the Rule in Clayton’s case to Banking Transactions

The Rule in Clayton’s case affects all current accounts, whether in credit or in debit. However, this rule
is applicable only to overdraw accounts when the liability of any party for an overdraft is determined.
The effect of the rule can be seen in the following situation:

i. Death or Insolvency of a Partner or Joint Account Holder
In the case of death of a partner, his estate is liable for the debts created before his death. If the
overdraft or cash credit account of the firm is continued unbroken after the notice of death, all
credits reduce the liability of the deceased estate, while fresh advances are the sole responsibility
of the surviving partners by operation of the rule in Clayton’s case.
ii. Determination of a Guarantee

It is also determined by death or insolvency of the guarantor. In any of these situations, the
borrower’s account should be broken. Otherwise, the rule of Clayton’s case will apply and all
subsequent credits will reduce the liability of the guarantor, or his estate, while all payments out
will constitute a new debt unsecured by the guarantee.
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Banking Law
iii. Notice of Second Charge

When the bank receives a notice of second charge or mortgage over the properties of the
customer, the account of the customer should be stopped to avoid application of the rule in
Clayton’s case.
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Banking Law
Bankers and Garnishee Order

The expression ‘Garnishee’ is derived from the French word ‘garnir’ which means ‘to warn’. A garnishee
order is an order issued by a Court, at the instance of judgement creditor attaching funds in the hands
of third party who owed money to the judgement debtor.
Generally, when debtor owes some money to his creditor and he fails to pay the amount, the creditor
may file a suit against the debtor and he may get a decree from the Court for payment of his debt.
Sometimes, creditor may not get any property to execute the decree, but there may be some person
who is in possession of the debtor’s property. In such case, the creditor may request the Court to issue
an order so as to attach the debtor’s property which is in the hands of third party.
Since, banker is also a third party who is always keeping customer money, Court may also issue an order
to the banker to freeze the customer’s deposits in his hand. Banker must obey the order. Since it is a
warning to the party with regard to property of others in his hand, it is named as ‘Garnishee Order”.
Order Nisi: The term ‘nisi’ means rule, order, decree, judgement, etc. A decree or judgement or order
‘nisi’ is one that is conditional and requires something more to be done to make it absolute.
The order nisi is a preliminary order issued to the banker:

a) To stop the payment over the customer’s account,
b) To give explanation, why the judgement debtors credit balance in his account should not use for
the purpose of payment of the judgement creditor, and
c) It is also duty of the banker to inform the same to his customer.
Cases where the Garnishee Order is not applicable: The garnishee order served on the bank does not
apply when:
i. The debt is not actually due to the customer,
ii. The account is in joint names,
iii. The bank is entitled to set-off the balance against a debt due to it from the judgement debtor.
iv. The name or description of the customer as appearing on the garnishee order is wrong or
incorrect,
v. When a cheque is marked for ‘Good for Payment’,
vi. The amount is overdrawn,
vii. Money held abroad by the ‘judgement debtor’
viii. Money held by a bank in the name of the liquidator.
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Karnataka Law University

SSR Shetty & Co

No. 15, 2nd Cross, 2nd Main Road

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Banking Regulation Act, 1949

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Reserve Bank of India

7) RBI may give directions relating to any or all of the following:

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16) Power of RBI to impose Penalty.

Functions of the RBI

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k) Promotional and Developmental Functions:

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Difference betw een Banking and Money Lending

Functions of the Commercial Banks

3. Use of Cheque system,

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b. Deed in foreign currency cheque,

Types of the Banks

2. Non-Scheduled Commercial Banks

Today, there is no non-scheduled commercial bank in the country.

3. Public Sector Banks

Objectives of the Nationalisation of Banks

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5. Regional Rural Banks [RRB’s]

6. Local Area Banks

Co-operative banking system in India is 3 tier structure, constituted by –

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a) Primary Credit Societies:

b) Central Co-operative Banks

c) State Co-operative Banks

Business prohibited for Banking Company

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General precautions before opening a Bank Account

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3) The rule of survivorship, in case of death of any one of them.

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Authentication or Position of the Pass Book in the Law of Banking

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Banker’s Special Customer

The privileges of a Minor – Guaranteed by Law

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Banker’s Duty towards Minor’s Account

Banker’s Duty in the case of Lunatics

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In case of Pardahnashin Women

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8. Joint Hindu Family [HUF]

Accounts in the name of Joint Hindu Family

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9. Joint Stock Company

i. Account opening form,

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viii. Resolution copy,

10. Clubs, Societies and Non-Trading Associations

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