Public Sector

Banks
During March 2005, the RBI allowed the Public Sector banks more operational
freedom. It laid down four parameters that has to be met by the bans in order
to be qualified for more autonomy.

They are :-

Capital adequacy ratio of 9% or more.

Net NPS of les than 9%

Net profit over 3 years

Minimum owned funds of 100 crs.

The stronger PSU banks were given more flexibility with respect to the
following:-

They can acquire companies or business

Merge branches, open overseas office, set up subsidiaries, exit the line of
business

Pursue new line of business as a part of overall business strategy.

Legal Identity

All the nationalized banks are a legal entity and along with that they are also State
under Article 12, and public authority under Section 2(h) of RTI, 2005.
Private Sector
Banks
Private sector banks are established under the Companies Act, 1956 in accordance
with the guidelines of RBI.

Incorporated as public Ltd companies

A bank shall not be allowed to set up a subsidiary or mutual fund for at least 3 years
after its establishment.
Min paid up capital shall be 100 crs and promoter’s contribution shall 20-25 % (RBI
on 3rd Jan, 2001, raised the minimum paid up capital to 200 crs)

Should concentrate on core banking activities initially.

Minimum capital adequacy ration of 8%

Such banks should be subjected to Income Recognition and Asset Classification

(IRAC) norms.
 Primary Functions
1. Accept Deposit
- It is the resource of a bank
There are four kinds of deposit:
Fixed Deposit- can not be withdrawn before a due date
Saving Deposit- Limited no. Of withdrawals which are small in size
Current Deposit- Generally maintained by traders and firms, a more number of
withdrawals are allowed.
Recurring Deposit- Money is deposited in monthly instalments for a fixed period
and is repaid with interest on maturity.
2. Lending of Money

- Lending of money includes loans and advances.

Loans are given on terms and conditions where as advances are without it although
both have common features of repayment

Banks allow an overdraft facilities to an account holder, they can withdraw more
than the balance account.
3. Remittance of Funds

Funds are remitted from one country to another via drafts issued by banks to their
branches or other banks on a very minimum charge.

4. Use of Cheque

Section 49 A of Banking Regulations Act, 1949: No person other than a banking

company, the Reserve Bank, the State Bank of India or any other 2[banking institution, firm
or other person notified by the Central Government in this behalf on the recommendation of
the Reserve Bank] shall accept from the public deposits of money withdrawable by cheque:
Provided that nothing contained in this section shall apply to any savings bank scheme run by
the Government.]
 Subsidiary Functions
1. Agencies of Services

Banker and customers also act as agent and principle. The services rendered by a
bank are known are Agency Services.

Like buying and selling of shares, stocks, debentures, and other securities.

Collection of dividends, dividend warrants, bonus, etc.

Collection of cheques, bill of exchange and promissory notes.

Acting as trustee, attorney, executor, correspondent.

Payment of various taxes like income tax, sales tax, service tax, etc.

Remit funds vis drafts on behalf of clients.

2. General Utility Services

These are the general services that banks render in the interest of the general
public. Some of them are as follows:

Foreign exchange transactions by authorized dealers (banks). The bank purchases

and sells foreign currency at the rate prescribed by RBI.

Issue letters of credit to customers to certify their creditworthiness.

Providing specialised advisory services to customers.

Act as executor and trustee, etc.

Issue credit cards, debit cards, etc

Automating Teller Machine service

Safe custody of vaults

 3. International Banking Services

Currently banks have a large network of branches and banking subsidiaries which
collaborate with foreign agencies.

They collect deposits, finance international enterprises, run share offices, etc.

4. Merchant Banking Services

- Provides consultancy to its clients, like financial, marketing, managerial and legal
matters.
5. Para Banking Activities

Subsidiary of banks mostly deal with these kinds of services.

Also NBFCs, they are not banks but are authorized to do banking transactions.

Eg: Insurance Companies, Chit Fund Companies, Housing Finance Corporations,

Mutual Funds, etc.
Parliament enacted Regional Rural Banks Act, 1976

Aim is to provide for incorporating, regulation and winding up of Regional Rural

Banks.

In 1977 a Committee was set up by RBI to evaluate the performance of RRBs.

Report Feb 1978- modify organizational structure.

Steering Committee was formed in October 1978 for policy making, periodical
review and identification of districts to set up RRBs.
Section 3 of RRB Act talks about establishment and incorporation of RRB and lays
down the duty of the Sponsor banks. It can be a PSU or private bank.

A sponsor bank must assist its RRB to:

Subscribing to its share capital

Training personnels

Manegerial and financial assistance till 5 years.

* CG can extend beyond 5

Section 18(1) of RRBs Act, 1976 lays down the business of banking which is
consonance with Section 5(b) and Section 6(1) of BR Act.

Apart from RBI NABARD is also a regulating authority for RRBs.

NABARD can conduct inspections and even recommend for opening a branch.
RRBs are important in rural institutional financing in terms of geographical
coverage, clientele outreach, business volume and contribution to the
development of the rural economy.

RBI has been taking several measures to strengthen the RRBs, one such measure is
recapitalization and amalgamation.
FOREIGN BANKS
Examples of foreign banks in India are:

ABN AMRO Bank N.V.

American Express Bank

Abu Dhabi Commercial Bank Ltd

Antwerp Diamond Bank

Bank International Indonesia

Arab Bangladesh Bank

Bank of America

Bank of Ceylon

Bank of Bahrain & Kuwait

Bank of Nova Scotia

Barclays Bank

Bank of Tokyo Mitsubishi UFJ

Foreign banks are incorporated outside of India and operate through branch or
subsidiary in India.

Countries have greater access to international market.

Provides impetus to domestic banks

Historically India saw a significant number of foreign banks in the colonial era.

The earliest banking institutions were joint stock banks, agency houses and the
presidency banks, established by the merchants during the East India Company
2013- there were 43 foreign banks from 26 countries operating as branches and 46
banks from 22 countries operating as representative offices.

Government has introduced several measures to widen the scope for foreign banks
to enter and operate in India, in alignment with liberalization.
Foreign bank is a bank organized under foreign law and located outside
country of its origin.

A foreign bank includes offices, branches, and agencies offices, branches,

commercial banks or trust companies, private banks, national banks, credit
unions, and other organizations chartered and supervised by banking
supervisors by banking supervisors of country of operation.

‘foreign bank’ does not include any foreign central bank or monetary
authority that functions as a central bank, or any international financial
authority that functions as a central bank, or any international financial
institution or regional development bank formed by treaty or international
agreement.
 CONTRACT BETWEEN BANKER AND
CUSTOMER: THEIR RIGHTS AND DUTIES.
 WHO IS A CUSTOMER

Sir John Paget relied upon the ‘time factor’ to determine the customer of a
bank. By this analogy a person who had just opened an account is not a
customer of the bank

Heber L. Hart: According to him more than time it is the Account which
determines the customer.

Generally it may be stated that a customer is any person, who has some sort of
an account with a bank and that relationship normally commences as soon as
the account is opened
Bank of India v Gopinathan Nair, AIR 1970 Kerala 74: ‘So far as the banking
transactions are concerned, the customer is one whose money has been accepted
on the understanding that the bank will honour transactions to the amount
standing to his credit, irrespective of his connection being of short or long
standing. Thus the element of time is not important.’
 Both the Bank and the customers have certain set of rights and duties towards
each other.

DUTIES OF BANKS ARE:-

Honor Cheques

Provided the following are met:

1. There must be sufficient funds of the customer in the hands of the bank.

2. The funds must be properly applicable for the payment of the customer’s cheque.

3. The cheque must be properly drawn Up i.e., it should be complete in all respects.

4. The cheque must be presented for payment within a reasonable time.

5. There must be no legal bar preventing the payment of such cheques.

 Maintain Secrecy

The bank must not disclose to any outsider the details concerning the customer’s
account; as such disclosures may adversely affect the credit and business of the
customer.

Exceptions:

If law requires such disclosures to be made.

If practices amongst the banks permit such disclosure.

 Follow Customer’s Instructions

There is a contractual relation between the bank and its customers.

Maintain Proper Records

KYC?

Give Notice before Closing the Account

Reasonable notice.
 RIGHTS OF A BANK

Right of General Lien

Lien is a right to retain goods belonging to another; until the demands are
satisfied.

This right is available to banks only as bankers but not as Bailee.

Becomes available only if a proper notice is given to customers.

Section 171 of the Indian Contract Act confers the right of general lien on
the bankers.

‘Bankers, factors, wharfingers, attorneys of a High Court and policy-brokers may, in

the absence of a contract to the contrary, retain as a security for a general balance of
account, any goods bailed to them; but no other persons have a right to retain, as a
security for such balance, goods bailed to them, unless there is an express contract to
that effect.’
Exceptions

1. If valuables are deposited for safe custody.

2. If money or documents are deposited for a specific purpose.

3. If some securities are left with the bank by mistake,.

4. If property is held by the customer as trustee and the bank has the notice of trust.

5. If there is an express agreement that the bank shall not exercise the right of general
lien.
 To create general lien, no special contract is required, banks can sell the
property under the right of lien.

A banker’s general lien tantamount to an implied pledge.

Fulfillment of the following gives rise to the right of lien:-

1. The property must come into the hands of the banker in his capacity as a
banker in the ordinary course of business.

2. There should be no entrustment for a special purpose inconsistent with the lien.

3. The possession of the property must be lawfully obtained in his capacity as a

banker.

4. There should be no agreement inconsistent with the lien.

 Right of Set-off

It is a cross claim for a liquidated amount

The right of set off is also known as the right of combination of accounts.

When a customer has two or more accounts in the same name in a bank, the bank
has the right to adjust the amount standing to the credit of the customer against the
debit balance in the other account.
Illustration:

Mr X has overdrawn his current account to the extent of Rs. 10,000 and he has a
credit balance of Rs.8,000 in his savings account.

The bank can combine these two accounts and claim the balance of Rs.2,000 after
adjusting the credit balance of savings account against the debit balance of current
account.
Official Liquidator ,Hanuman Bank Ltd. v. K.P.T. Nadar and Others 26
Comp.Cas .81: A banker’s right of set off cannot be exercised after the money in
his hands has been validly assigned or in any case after he has been notified of
the fact of an assignment
Two conditions must be fulfilled for banks to set off:

Mutuality in terms of the amount owed to the bank and the account held.

Claim can only be set off if both the claims are within the same periods

No agreement to the contrary

Can joint accounts be combined?

 Right of Appropriation

A customer may owe several distinct debts to the bank. When the customer deposits
some money in the bank without specific instructions and the amount is not
sufficient to discharge all debts, then the problem arises as towards which debt this
amount should be adjusted. In the absence of any specific instructions, the bank has
the right to appropriate the deposited amount to any loan, even to a time barred
debt.

But the banker must inform the customer about the appropriation.
 Right to close an account

Closing the account and stopping operation of the account are different.

The contractual relationship between banker and customer is terminated by closing

the account. There is no opportunity for the customer to operate the account once
again.

On the other hand, stopping operation of an account refers to the suspension of the
operation of an account for the time being, at the advent of certain events.

It is purely suspension of the relationship between a banker and a customer and the
customer can operate the account, after such events come to a close
 Right to Charge Interest and Commission

A bank has the right to charge interest on the loans it advances and a commission on
the services provided by them.
 DUTIES OF CUSTOMER

1. Presenting checks and other negotiable instruments during the business hour of

the bank.

2. Present instruments of credit in due time from their dates of issue

3. Safe keeping of cheque books issued.

4. Report forgery in cheques immediately

 RIGHTS OF CUSTOMERS

1. Can draw check on his account up to the extent of his credit balance or according
to overdrawing limit sanctioned by the bank.

2. Receive statement of accounts from the bank.

3. Sue and demand compensation if the bank fails to maintain the secrecy of his
account