Professional Documents
Culture Documents
Banking Liability Notes
Banking Liability Notes
What is 'Liability'
Liability definition: -
Liability usually means that you are responsible for something, and it can also
mean that you owe someone money or services.
Liability of drawer
Section 30 of Negotiable Instruments Act,1881
Liability of 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 as
hereinafter provided.
The drawer of a bill of exchange or cheque is the original promisor. The promise
he makes is to the effect that in case the drawee or the acceptor dishonours the
bill or the cheque, if he refuses acceptance or payment then the holder will not
suffer in any way but will be able to recover the amount from him. This also
governs the drawer of a hundi who becomes liable as principal debtor after
the instrument has been dishonoured either by non-acceptance or non-payment.
But in the case of a Namjog hundi the liability of the drawer arises after dishonour
provided the hundi is returned to him in an undischarged state.
This section lays down the formality the holder has to observe before he can
enforce payment from the drawee. The drawer must have due notice of dishonour
under section 93.
https://districts.ecourts.gov.in/sites/default/files/study%20circles.pdf
Pre-independence banking
In India, the banks are not a novel concept but have been around from Vedic
period but they were not the same as the modern institution of the bank, at the end
of 18th century there were hardly any banks in India. Some banks were opened
but failed to survive as it being a foreign concept was not trusted by the common
people and due to exposure to speculative venture deposits were also lost.
At the time of colonisation European banks operated in India with the objective to
aid colonial rulers in facilitating the construction and development activities. The
first bank was English Agency House in Calcutta and Bombay in the 18th century.
In the next century, Presidency banks were established. There were three major
presidency banks in India, Bank of Madras and Bank of Calcutta which were
merged into Imperial Bank of India and also Reserve Bank of India was
established as the central bank of the country in 1935.
License Raj
License Raj means the rule of licenses or permits, the nomenclature evidenced for
the shift of powers from the Britishers (in British Raj) to the Government and the
statutes. Another reason for the extensive use of the term to refer to the period
from 1947 to 1990s is the extensive licenses required to establish a business,
expand the business or any other commercial activity leading to red-tapism.
The Constitutional Assembly made a conscious decision not to declare a
permanent economic system though largely socialism was followed. During this
period the industrial revolution was at its peak resulting in the establishment of
new industries and steep need of credit for the corporates.
All the sectors were heavily regulated by the government policies especially the
foreign investment and import and export and the banking and finance sector was
no exception.
By the time of independence, there were over 600 commercial banks however
there was not much public trust in the institutions. Therefore, the government
transformed Imperial Bank to State Bank of India in 1955.
But this was not considered a sufficient measure due to proximate relation
between the commercial houses and financial institutions resulting in advancing
credit facilities to these houses in a biased manner and not to the general public.
Nationalisation of banks
In the 1960s, it was observed that certain sectors of the economy like agriculture,
small scale industries and weaker sections of society were ignored by the banking
system, to an extent that the entire agriculture sector only availed 2.1% of the
entire credit extended by the banks in the year 1951. There was a clear need to
prevent:
1. monopolistic trends
2. the concentration of economic power
3. misuse of economic resources
In the year 1969, the government passed The Banking Companies (Acquisition
and Transfer of Undertakings) Ordinance, 1969 nationalised all the banks with
deposits greater than 500 million, a total of 14 banks i.e. 84% of all branches and
70% of the country’s deposits.
• Credit availability for big and small companies of the private sector are
met.
• Credit need of all sectors are fulfilled.
• Promotion of entrepreneurs.
Nationalisation achieved some of its objectives like the expansion of branches, the
total number of branches of commercial banks was 8,262 in June 1969 and it
increased to 30,303 in June 1979.
The average population served per bank branch approximately 65,000 which
decreased to 17,000 by the end of 1979. The percentage of branches in rural
areas increased from 22.4% in June 1969 to 44.1% in June 1979.
Another result of nationalisation was the increase in total lending to the priority
sector was 14% in June 1969 and it increased to 30.9% at the end of June 1978.
In March 1979, the Govt. suggested 33% of total credit to be directed to the
priority sector which was increased to 40% by 1980.
The reform was severely criticized due to decrease in efficiency of the entire
banking sector, i.e. the profits decreased and there was a huge increase in NPA
due to lending to priority sectors and concessional rate of interests.
• The SLR and CRR reduced the profit percentage of the bank, from 1991
to 1997 SLR was reduced from 38.5% to 25% (reduced by 13.5% ) and
the excess funds enhanced the allocation to the priority sectors like
agriculture, SMEs etc.
• Scheduled commercial banks had only minimum floor rates and maximum
ceiling rates.
• The rate of interests over Rs. 2 lakhs was completely deregulated, and the
interest rates on deposits and advances of all co-operative banks only had
a minimum lending rate of 13%.
• Recovery of Debts due to Banks and Financial Institutions Act, 1993 was
enacted for the speedy recovery of debts to banks and financial
institutions, with 6 tribunals and one appellate tribunal.
• There was freedom of operations given to scheduled commercial banks
like the opening of new branches or closing of non-viable branches.
• Local Area Banks were established to channelize rural savings into
investment.
• Lastly, RBI set up an independent Department of Supervision for the
supervision of commercial banks.
category for 18 months in the first instance and eventually for 12 months if
it is identified but not written off.
The following measures were taken by the Government in furtherance of these
recommendations:
Basel I norms
Base-I norms came out in 1988 it focused on credit default risk and the
maintenance of adequate capital. The capital adequacy ratio was 8%. The capital
was classified as Tier 1 and Tier 2.
Tier 1 was the core capital of the banks which is permanent and reliable including
equity capital and disclosed reserves whereas Tier 2 was supplementary capital
including provisions for NPAs, cumulative non-redeemable preference shares,
undisclosed reserves.
The bank assets were clarified into 5 categories depending on their risk
percentage, 0%, 10%, 20%, 50% and 100%.
India adopted the Basel I Norm framework in 1992-93 under RBI guidelines, the
compliance was a phase for the banks having an oversea presence, the deadline
was March 1994 and the other could comply by March 1996.
Basel II norms
Basel II was released in 2004. Primarily, it has three interdependent frameworks,
minimum capital, supervisory review and market discipline.
Market Discipline: Lastly, many disclosure requirements were added like CAR, risk
exposure etc. to the central bank. This was to increase transparency in the
banking sector and to enable central banks to keep a tab on the position of the
commercial banks.
There were two types of liquidity ratio required to maintain the Liquidity Coverage
Ratio (“LCR”) and Net Stable Fund Rate (“NSFR”).
The RBI issued regulations to implement the Basel III Norms Capital Regulations,
originally the deadline was by March 2019 but it was postponed to March 2020.
Impact of globalisation
There was a profound impact of globalisation on the banking sector of the country,
some of them are:
Integration of the financial market
Globalisation, as stated above, aims to form a more connected market by free
cross border movement of capital, technology and other resources. The financial
market is no exception as the markets were opened for foreign investors. The
investors were allowed to invest in foreign markets, this was achieved by relaxing
the existing policy norms of closed economies, and developing international
standards for business.
The Indian LPG economic reforms and then subsequent adoption of international
practices and standards like enabling entry of foreign banks, enhancing private
bank operations, reducing government’s stake in banking and adoption of Basel
norms I and II are some examples of it.
After the liberalisation steps were taken to re-establish autonomy in the banking
sector, it was one of the recommendations by the Narasimham Committee like
accessing the capital market, interest rates were determined by the banks and not
the government. And most importantly the individual branch licensing was
liberalised to a large extent allowing banks to determine the number and the
locations based on commercial viability.
Alliance Diversification
Alliance Diversification (“AD”) refers to diversification by banks by tie-ups, joint
ventures or other alliances with other banking or non-banking entities. Thus these
can be NSD or BSD just there are multiple entities involved.
SBI Life is a JV with Cardiff and SBI Asset Management is a JV with Societe
Generale.
The entry of foreign banks
Currently, there are 37 foreign banks and over 270 banking branches operating in
the Indian market, however, in the year 1980, the number of foreign banks was
merely 14 banks which significantly increased in 1990 to 24 and its highest to 41
in 2000. According to RBI, before liberalisation, the share of foreign banks in total
commercial banks was 9.5 % in 1980 which increased to 13.9% in 2000.
Increase competition
Reduction in entry barriers in the banking sector led to an increase in the number
of participants like several new private banks and foreign banks which led to an
increase in efficiency and competition in the market.
The government also strengthened the PSBs by lending its capital to them and
also enabling them to raise capital from the public. Functional autonomy of PSBs
was also considerably increased.
There has been greater transparency in the banking operations after the
globalisation due to the Central Vigilance Commission (“CVC”) direction of
following open policy by the banks, including disclosures with regards to the net
Non Performing Assets, the maturity profile of loans, investments, and financial
details of subsidiaries as well.
The entry of well established foreign banks and private banks established by huge
corporates raised the level of services provided to the customers and forced the
existing banks to raise their services to the same level as well.
Introduction of IBC
Globalisation only allows the investors to invest internationally but the choice of
where to invest resides on the investors themselves. As a result, there is a
competition among the countries to make their markets the best option for the
investors. The earlier insolvency regime in the country was extremely complex and
led to a delay in the completion of the process almost 4 and a half years which
was substantially more than other developed countries like the USA and UK where
the periods were 1and a half year and 1 year respectively. Therefore, there was a
clear need to simplify and consolidate the insolvency and bankruptcy law
particularly for body corporates to increase foreign investment.
Impact of IBC
The code provided an exhaustive framework for corporate insolvency and
bankruptcy and even revival of sick companies, the clarity of legislation is an
important aspect foreign investors look into when investing in a country.
The code was proved useful in inviting new investments in the market and
increasing India’s international position in the World Bank’s Ease in Doing
Business, in 2015 the ranking was 142nd and within five years of functioning of
the Code the country is on 63rd position.
According to the World Bank, an average of 42.5% of the filled amount was
recovered through IBC in 2018-19 as compared to 14.5% under SARFAESI, 3.5%
under DRT and 5.3% in Lok Adalats.
Although there are several factors attributable to such improvement IBC is one of
the contributors to it.
Impact of Recessions
But the integration has led to the interdependence of economies which has also
paved the way for the transfer of disruptions as well, the great depression of the
1930s started with the United States of America but spread throughout the globe
leading to millions of persons getting unemployment.
Another such example was the 2007-09 financial crisis, it was started in 2006 by
the housing crises of the United States and the biggest global banks failed. Some
of them were Lehman Brothers, Douglas National Bank, ANB Financial,
Washington Mutual and a total of 465 banks failed and shut by the Federal
Deposit Insurance corporation between 2008-12.
The financial crisis impacted the European banks significantly, Romania entered
into recession in 2009. According to Eurostat Statistics, 2009 the total GDP growth
of EU15 was 3 in 2006 which reduced to -4.1 by the year 2009.
Although the Indian Banking Sector was not much affected by the 2008 recession,
the reason for this was the non- integration of Indian finance sector particularly the
banking sector to the global market. The Indian banks were also not exposed to
mortgage-backed securities which were the root cause of the crisis.
In the last decade itself, India has witnessed the biggest banking frauds in its
history all three of which were economic fugitive offenders, three such infamous
offenders are Rajiv, Nirav Modi and Vijay Mallya. There is an urgent need to better
the extradition treaties with other countries to prevent such scams concerning
public money deposited in banks.
Indian has signed extradition treaties with 48 countries and also passed Fugitive
Economic Offenders Act, 2018 but its prompt implementation is required.
Conclusion
To sum up it can be stated globalisation has aided the development of the Indian
banking sector and increased the efficiency and profitability in a manifold manner,
by providing more autonomy and less government regulation in the sector.
However the same is not devoid of challenges which are to be faced by increased
competition and disparity in the scale of operations.
E-BANKING:
Meaning of E-Banking:
Banks give administrations or bank services to draw in clients, from giving
advances, issuing of debit cards and credit cards, computerised monetary
services, and surprisingly personal services or administrations. Even so, some
fundamental present-day administrations are presented by many commercial
banks.
Electronic banking has many names like web-based banking, e-banking, virtual
banking, or web banking, and online banking. It is just the utilisation of
telecommunications networks and electronic networks for conveying different
financial services and products. Through e-banking, a client can acquire his record
and manage numerous exchanges utilising his cell phone or personal computer.
Classification of E-Banking:
Banks offer different kinds of services through electronic financial stages. These
are of three sorts:
Type 1:
This is the essential degree of administrations or services that banks offer through
their sites. Through this assistance, the bank offers data, information regarding its
services and products to clients. Further, a few banks might respond to an inquiry
through email as well.
Type 2:
In this category, banks permit their clients to submit directions or applications for
various administrations, check their record balance, and so on. Be that as it may,
banks don’t allow their clients to do any fund-based exchanges with respect to
their records or accounts.
Type 3:
In the third category, banks permit their clients to work or operate their records or
accounts for bill payments, purchase and redeem securities and fund transfers,
and so on.
Most conventional banks offer e-banking administrations as an extra technique for
offering support. Further, many new banks convey banking administrations
principally through the other electronic conveyance channels or web. Likewise, a
few banks are ‘internet only’ banks with no actual branch anyplace in the country.
In this way, banking sites are of two sorts:
Transactional Websites: These sites permit clients to go through with exchanges
on the bank’s site. Further, these exchanges can go from a plain retail account
balance request to huge business-to-business liquid assets transfers. The
accompanying table records some normal wholesale and retail e-banking
administrations presented by financial institutions and by banks.
Informational Websites: These sites offer general data regarding the bank and its
services and products to the clients.
Wholesale services by banks: Include Account management, Cash management,
Small business loan applications, Approvals or advances, Commercial wire
transfer, Business-to-business payments, Employee benefit, and Pension
administration.
Retail services by banks: Include Account management, Bill payment, New
account opening, Consumer wire transfers, Investment and brokerage services,
Loan application and approval, and Account Aggregation.
Services Under E-Banking:
Mobile Banking:
Mobile banking (otherwise called M-banking) is a name utilised for performing
account exchanges or transactions, bill payments, credit applications, balance
checks, and other financial exchanges through a mobile phone like a Personal
Digital Assistant (PDA) or cell phone.
Electronic Clearing System (ECS):
The Electronic Clearing System is a creative provision for occupied individuals.
With this provision, an individual’s credit card bill is consequently charged from the
same individual’s savings bank account, so one doesn’t have to stress over
missed or late payments.
Smart Cards:
A smart card is a card that stores data on a microchip or memory chip or a
microprocessor in lieu of the magnetic stripe found on debit cards and credit
cards. Smart cards are not utilised for transferring or moving monetary data alone,
but also they can be utilised for an assortment of identification grounds.
Exchanges made with smart cards are scrambled or encrypted to shield the
exchange of data from one party to another. Each encoded exchange can’t be
hacked and doesn’t transmit any extra data past what’s required for finishing the
single exchange or transaction.
Electronic Fund Transfers (ETFs):
Electronic fund transfer (EFT) is the electronic exchange of cash starting with an
individual account in the bank to another individual account of the same bank, or
within or with other financial institutions or with multiple institutions, by means of
personal computers based frameworks, without the immediate intercession of
bank staff.
Telephone Banking:
Telephone banking is an assistance given by a bank or other monetary foundation
or other financial institutions, that empower clients to perform via telephone a
scope of monetary exchanges which don’t include cash or financial instruments,
without the need to visit an ATM or a bank branch.
Internet banking:
Web-based banking is an assistance presented by banks that permits account
holders to get their record information by means of the web or the internet. Web-
based banking or Internet banking is otherwise called “Web banking” or “Online
banking.”
Internet banking through customary banks empowers clients to play out every
standard exchange, for example, bill payments, balance requests, stop-payment
requests, and balance inquiries. Some banks even proposition online credit card
and loan applications.
Account data can be acquired day or night, and should be possible from any
place.
Home banking:
Home banking is the most common way of concluding the monetary exchange
from one’s own home as opposed to using a bank’s branch. It incorporates making
account requests, moving cash, covering bills, applying for credits, and directing
deposits.
Significance of E-Banking:
Importance to clients:
• Lower cost per exchange: Since the client doesn’t need to visit the branch
for each exchange, it saves him both time and cash.
• No topographical hindrances: In conventional financial frameworks,
geological distances could hamper specific financial exchanges.
Nonetheless, with e-banking, geological obstructions are diminished.
• Convenience: A client can get to his record or bank account and execute
from any place at any time.
Importance to Businesses:
Better efficiency: Electronic banking further develops usefulness. It permits the
computerisation of ordinary, regularly scheduled payments and provides further
banking activities to upgrade the efficiency of the business.
Lower costs: Usually, costs in financial relationships and connections depend on
the assets used. Assuming that a specific business needs more help with
deposits, wire transfers, and so on, then, at that point, the bank charges its higher
expenses. With internet banking, these costs are limited.
Lesser errors: Electronic financial diminishes mistakes in normal financial
exchanges. Awful penmanship, mixed-up data or information, and so on can
cause mistakes that can be exorbitant. Likewise, a simple audit of the record or
account activity, movement upgrades the precision of monetary exchanges.
Diminished misrepresentation: Electronic banking gives an advanced impression
to all representatives who reserve the privilege to alter banking exercises. In this
manner, the business has better perceivability into its exchanges, making it hard
for any fraudsters from committing crimes.
Account reviews: Business proprietors and assigned staff individuals can get to
the records rapidly utilising a web-based financial interface. This permits them to
audit the record action and, furthermore, guarantee the smooth working of the
account.
Importance to banks:
• Lesser exchange costs: Electronic exchanges are the least expensive
methods of exchange.
• A decreased edge for human blunder: Since the data is handed-off
electronically, there is no space for human mistakes or errors.
• Lesser desk work: Advanced records decrease desk work, paperwork, and
make the cycle simpler to deal with. Likewise, it is ecological.
• Decreased fixed expenses: A lesser requirement for branches which
converts into a lower fixed expense.
• More steadfast clients: Since e-banking administrations or services are
convenient to the clients, banks experience higher reliability from their
clients.