Banking services

Banking has been defined under section 5(b) of the Banking Regulations Act 19491 . According to it
banking means accepting, for the purpose of lending or investment, of deposits of money from the
public, repayable on demand or otherwise. To understand the concept of Bank Fraud, we need to
understand the concept of fraud and the various types of frauds and the ways to detect the same
and the prevention of the same.

Objectives of Banking Regulation Act, 1949

The objective of Banking Regulation Act, 1949 is to:

 Provide specific legislation containing comprehensive provisions, particularly

to the business of banking in India
 Prevent such bank failures by prescribing minimum capital requirements
 Ensure the balanced development of banking companies
 Give powers to RBI to approve the appointment, reappointment, and removal
of the chairman, directors, and officers of the banks
 Safeguard the Interests of Depositors
 facilitate strengthening the banking system of the country

Lien is not permissible in the following cases:

1. Where there is an express contract like by way of counter-guarantee, providing

reimbursement. (Krishna Kishore Kar v. United Commercial Bank) 2
2. Where there is no mutual demand existing between the banker and the customer
firm. (Jaikishan Dass Jinda Ram v. Central Bank of India)3
3. Where the valuables are received for safe custody. (Cuthbert v. Roberts4 and Bank of
Africa and Cohen)5
4. Where the entrustment of goods (documents of title) is for a specific purpose stated
to the banker. (Greenhalgh v. Union Bank of Manchester)6
5. When the deposit with the banker is for a specific purpose if the banker has implied
or expressed notice of such purpose.
6. Where the valuables or documents of title are left in the banker's hands,
inadvertently.
7. Where the banker has only a contingent debt. A contingent debt is that "no amount
would be due on the date when he wants to exercise lien" Tannans banking Law.
8. Where the account is in respect of a trust.
9. Banker's Lien is not available against Term Deposit Receipt in Joint Names when the
debt is due only from one of the depositors.

Consumer protection under banking service

RBI Initiatives for Consumer Protection

Some recent initiatives of the Reserve Bank in consumer education and protection are:
  Charter of Customer Rights - The RBI has formulated a "Charter of Customer Rights" for
banks based on global best practices in consumer protection. The Charter enshrines broad,
overarching principles for protection of bank customers and enunciates the following five
basic rights of bank customers

1. Right to Fair Treatment

2. Right to Transparency, Fair and Honest Dealing
3. Right to Suitability
4. Right to Privacy
5. Right to Grievances Redress and Compensation

 Banks are required to prepare their own Board approved policy, incorporating the five rights
of the Charter, or suitably integrate their existing Customer Service Policy with the “Model
Customer Rights Policy” formulated by IBA/BCSBI.

 Internal Ombudsman Scheme for Banks- With effect from September 03, 2018, all Scheduled
Commercial Banks (excluding Regional Rural Banks) with 10 or more banking outlets have
been required to appoint Internal Ombudsman at the apex of their grievance redress
mechanism for an independent review of customer complaints that are rejected partly/
wholly by their internal grievance redress mechanism.

 Internal Ombudsman Scheme for Non-Bank System Participants (NBSPs), 2019 – On the lines
of the Internal Ombudsman Scheme for banks, an Internal Ombudsman Scheme was
introduced for NBSPs on October 22, 2019 to strengthen their internal grievance redress
mechanisms. The scheme is applicable to NBSPs (issuers of Pre-Paid Payment Instruments -
PPIs) with more than one crore outstanding PPIs as on March 31 of the previous year. The
NBSPs covered are mandated to appoint an independent authority at the apex of their
grievance redress system to review the partly/ wholly rejected complaints.

 Complaint Management System (CMS) - RBI launched the CMS on June 24, 2019, a state-of-
the-art web-based application integrating all stakeholders on one platform; customers,
officials at Offices of the RBI Ombudsman, CEPCs, CEPD and Regulated Entities for enabling
end-to-end complaint processing through digital mode. CMS provides real time status of
complaints and also hosts comprehensive material on e-learning based consumer education
to enhance awareness on financial services and consumer rights.

 Strengthening of grievance redress mechanism in banks - A comprehensive framework for

strengthening of the internal grievance redress mechanism in banks was put in place in
January 2021 comprising of the following aspects: (a) Enhanced disclosures on complaints
(b) Recovery of cost of redress of maintainable complaints received against the banks in
excess of their peer-group averages based on certain parameters, and (c) Intensive review of
grievance redress mechanism of banks and initiation of required supervisory and regulatory
actions.

Other steps recently initiated for customer protection are:

  Abolition of penal charges on non-maintenance of minimum balances in inoperative
accounts

 Streamlining penal charges levied for non-maintenance of minimum balances in savings

bank accounts

 Uniformity in inter-sol charges

 Limiting the liability of customers in unauthorised electronic banking transactions

 Conduct of Root Cause Analysis based on complaints received at RBI to initiate the required
remedial measures

 A Framework for Financial Education has been formulated from a consumer protection
perspective with the following components – (i) Target Group, (ii) Content, (iii) Delivery
Channels, (iv) Coordination Aspects, and (v) Impact Analysis

 Harmonisation of Turn Around Time (TAT) and customer compensation for failed
transactions using authorised Payment Systems

 Online Dispute Resolution System for Digital Payments

Meaning of negotiable instrument

As per definition it is "an instrument, the property in which is acquired by

anyone who takes it bona fide, and for value, notwithstanding any defect of
title in the person from whom he took it, from which it follows that an
instrument cannot be negotiable unless it is such and in such a state that the
true owner could transfer the contract or engagement contained therein by
simple delivery of instrument.
Three major conditions to be met are:
The instrument should be freely transferable.
 An instrument cannot be negotiable unless it is such and in such state that the
true owner could transfer by simple delivery or endorsement and delivery.
 The person who takes it for value and in good faith is not affected by the defect
in the title of the transferor.
 Such a person can sue upon the instrument in his own name.

Following are the important characteristics of negotiable instruments:
(1) The holder of the instrument is presumed to be the owner of the property
contained in it.
(2) They are freely transferable.
(3) A holder in due course gets the instrument free from all defects of title of
any previous holder.
(4) The holder in due course is entitled to sue on the instrument in his own
name.
(5) The instrument is transferable till maturity and in case of cheques till it
becomes stale (on the expiry of 6 months from the date of issue).
(6) Certain equal presumptions are applicable to all negotiable instruments
unless the contrary is proved.

Under the Negotiable instrument act, it recognises only three types of

instruments viz., ci Promissory Note, a Bill of. Exchange and a Cheque as
negotiable instruments. However, it does not mean that other instruments are
not negotiable instruments provided that they satisfy the following conditions
of negotiability: 1. The instrument should be freely transferable by the custom
of trade. Transferability may be by
(i) delivery or
(ii) endorsement and delivery.
(iii) 2. The person who obtains it in good faith and for
consideration gets it free from all defects and can sue
upon it in his own name.
(iv) 3. The holder has the right to transfer. The negotiability
continues till the maturity.

What Is a Bank Endorsement?

A bank endorsement is a guarantee by a bank confirming that it will uphold
a check or other negotiable instrument, such as a banker's acceptance,
from one of its customers. This assures any third-party that the bank will
back the obligations of the creator of the instrument in the event the
creator cannot make payment.

KEY TAKEAWAYS

 Bank endorsements are guarantees from a bank that ensure it will

uphold the commitments of its client.
 Common bank endorsements include banker's acceptances and
letters of credit.
 A banker's acceptance works as a time draft, specifying payment at
a future date. Letters of credit guarantee payment and come in
different forms.
 These types of guarantees make international trade between parties
easier, particularly when they are unknown to one another.
 Some bank endorsements also remove the need for financing a
payment.

Understanding a Bank Endorsement

Bank endorsements are common in international trade, where the
business parties are typically unknown to one another. Banks stand in the
middle by assuring good funds to the recipient. A bank endorsement, in
the case of a banker's acceptance, for example, is the equivalent of a
guarantee. A banking institution will generally not provide a banker’s
acceptance without a reasonable likelihood that it will be able to provide
the funds as specified.

Types of Bank Endorsements

As noted above, bank endorsements accompany specific negotiable
instruments. Negotiable instruments, including bills of exchange,
promissory notes, drafts, and certificates of deposit, represent payment
promises to a specified person (the assignee). Checks are common forms
of negotiable instruments but the most common types of bank
endorsements are a banker's acceptance, also known as a time draft, and
a letter of credit.

Bankers Acceptances

A banker's acceptance is short-term debt. It is an instrument from a bank

that promises to pay the holder a specified amount at a specified date,
usually between 30 to 180 days. A company issues a banker's
acceptance, which a commercial bank guarantees. Certain documents are
required before a bank guarantees a bankers acceptance. Documents can
include a bill of lading and an invoice.

Letters of Credit

A letter of credit is similar to a banker's acceptance in that a bank will

guarantee an exporter payment for goods or services in the event that
payment for the goods or services are not made on time or for the right
amount. A letter of credit does not work on a time draft function like a
banker's acceptance. There are many different types of letters of credit,
including commercial letters of credit, standby letters of credit, and
revolving letters of credit.

Transfer of Negotiable Instruments:

A negotiable instrument can be transferred from one person to
another by a simple process. In the case of bearer instruments,
simple delivery to the transferee is sufficient. In case of order
instrument, two things are required for a valid transfer:
endorsement or signature of the holder and delivery.
1. Banker’s Draft:
A bill of exchange is sometimes called a Draft. A bill of exchange
drawn by a bank on its branch or on any other bank is called a
banker’s draft. A banker’s draft cannot be made payable to the
bearer as, in that event, it will become at par with currency note.

2. Accommodation Bills:
An accommodation bill is one which has been signed by a person, as
drawer, acceptor or endorser without any consideration with a view
to obliging some other person, i.e., to provide him with funds. The
party accommodating is called the ‘accommodation party’ and the
party accommodated is called the ‘accommodated party’.

The accommodation party is liable to pay the money due on the

instrument to any holder or value. The accommodated party cannot
demand the money from the accommodation party if he holds the
bill till maturity. Non-presentation of an accommodation bill to the
acceptor for payment does not discharge the drawer.

3. Documentary Bills:
When the bill of exchange is accompanied by documents of title
such as Bill of Lading, Airway Bill, Railway Receipt, etc., it is called
a documentary bill. When the bill is accepted or paid, the
documents of title are handed over.

Payment of Negotiable Instruments:

Time of payment – A promissory note or a bill of exchange may be
payable either on demand or on a specific date or after a specified
period of time. The time of payment is usually mentioned in the
instrument. If no time of payment is mentioned, the instrument is
payable on demand. A cheque is always payable on demand.

In a promissory note or a bill of exchange, the expressions ‘at sight’

or ‘on presentment’ mean on demand. In a promissory note, the
expression ‘after sight’ means after presentment for sight. In a bill
of exchange it means after acceptance or noting for non-acceptance
or protest for non-acceptance.

1. Payment in Due Course:

Payment in due course means payment in accordance with the
apparent tenor (prescribed time of payment) of the instrument in
good faith and without negligence to any person in possession
thereof under circumstances which do not afford a reasonable
ground for believing that he or she is not entitled to receive
payment of that amount therein mentioned.

Payment in due course completely discharges the obligations of the

party liable to pay, even though if subsequently it transpires that
payment has been made to a wrong person.

2. Negotiation:
Negotiation of any instrument is the process by which the
ownership of the instrument is transferred from one person to
another. When a promissory note, a bill of exchange or cheque is
transferred to any person, so as to constitute that person the holder
thereof, the instrument is said to be negotiated.

3. Endorsement:
There are two kinds of endorsement: (i) endorsement in full, and
(ii) endorsement in blank. When the endorser mentions the name of
the person to whom the money due on an instrument is to be paid,
it is said to be endorsed in full. Where the name of the party is not
mentioned, it is said to be endorsed in blank. Mere signature
without any words amounts to an endorsement in blank provided
the endorsement was made with the intention of transferring the
instrument.

The holder of an instrument endorsed in blank is entitled to put in

his own name or the name of any other person above the
endorsement and thereby convert the endorsement in blank to an
endorsement in full.

Rights of the Parties:

The capacity to make, draw, accept, negotiate and endorse a
negotiable instrument depends on the capacity to enter into
contracts. Every person capable of contracting may bind himself
and be bound by a negotiable instrument. A person incapable of
contracting cannot bind himself but may, under certain
circumstances, bind others. The provisions of law regarding the
different cases of incapacity, as regards negotiable instruments are
summarised below.

1. Minor:
A minor can draw, endorse, deliver and negotiate a negotiable
instrument so as to bind all parties except himself. Thus, a minor
party to a negotiable instrument is not personally liable but the
adult parties are certainly so.

2. Lunatic, Idiot and Drunken Persons:

The legal position is the same as in the case of minors. A lunatic can,
however, bind himself by a negotiable instrument if he signs it
during a lucid interval.

3. Insolvent:
After the order of adjudication of insolvency is passed, the
properties of the insolvent vest in the official assignee or the official
receiver. The insolvent, therefore, cannot draw, make, accept or
endorse a negotiable instrument.

4. Agent:
Every person capable of binding himself may so bind himself or be
bound by a duly authorised agent acting in his name. The agent
must indicate that he is signing as an agent by using specific words
to that effect. Otherwise, he will be personally responsible.

5. Legal Representative:
The estate of a deceased person vests in his legal representative
(heir, executor, etc.). The legal representative can deal with the
negotiable instruments belonging to the deceased to the same
extent as the deceased could have done. If a person endorses a
negotiable instrument payable to or order but dies before he can
deliver the instrument to the endorsee, his legal representative
cannot complete the transaction by delivering the instrument to the
party intended to receive it.

Liability of the Parties to a Negotiable Instrument:

The liability of the parties to a negotiable instrument is
determined by the following rules:
1. Maker and Acceptor:
The maker of a promissory note and the acceptor of a bill of
exchange are primarily responsible for the payment due. The
relative law states that, in the absence of a contract to the contrary,
the maker of a promissory note and acceptor of a bill of exchange
before maturity are bound to pay the amount thereof at maturity
according to the apparent tenor of the note or acceptance,
respectively.

The money must be paid at or after maturity to the holder and the
acceptor is bound to compensate any party to the note or bill for any
loss or damage sustained by him and caused by such a default.

2. Drawer:
The drawer of a bill of exchange or cheque is bound, in case of
dishonour by the drawee or acceptor thereof, to compensate the
holder, provided due notice of dishonour has been given to, or
received by, the drawer.

Before acceptance, the drawer’s liability is primary; after

acceptance, the drawer’s liability is secondary, i.e., he is liable to pay
only if the acceptor fails to do so.

3. Drawee of a Cheque:
The drawee of a cheque having sufficient funds of the drawer, in his
hands, properly applicable to the payment of such cheque must pay
the cheque when duly required to do so, and, in default of such a
payment, must compensate the drawer for any loss or damage
caused by such a default.

4. Endorser:
The endorser of a negotiable instrument is liable to all subsequent
parties in case of dishonour of the instrument provided: (i) There is
no contract to the contrary; and (ii) The endorser had not limited or
qualified his liability by using appropriate words and expressions
for the purpose.

After dishonour, every endorser is liable as, upon being dishonest,

an instrument becomes payable on demand.

The general rule regarding liability is the principle of Surety-ship.

Every prior party to a negotiable instrument is liable thereon to a
holder in due course until the instrument is duly satisfied.

5. Material Alteration:
A material alteration is one:
(i) which substantially changes the rights and liabilities of the
parties, or any of the parties, to the instrument; or

(ii) which changes the identity and the legal character of the
instrument.

Changes in the following items are considered to be

material alteration:
(i) Amount of money payable;

(ii) Date and time of payment;

(iii) Rate of interest; addition of party;

(iv) The medium of payment.

Dishonour of a Negotiable Instrument:

A negotiable instrument may be dishonoured either by non-
acceptance or by non-payment. Only usance bills of exchange can be
dishonoured by non- acceptance, whereas, promissory notes and
bills of exchange and cheques payable on demand or presentation
can be dishonoured by non-payment.

Consequence of Dishonour:
When a negotiable instrument is dishonoured, the holder becomes
entitled to file a suit for the recovery of the amount due from the
parties liable to pay. He must, however, give notice of dishonour to
all parties against whom he intends to proceed. He may also have
the instrument noted and protested before a Notary Public.