Banking Law

Unit – 1
1. Define the term ‘Banker’ and ‘Customer”. Explain the general relationship and special
features of the relationship between a Banker and Customer.
2. Analyze the role of banking institutions in the socio-economic development of the country.

Public sector banks are the backbone of the Indian economy, and now more than ever, private
players are entering the fray. This is good news for customers, who will be offered a widening
menu of savings and loan products and innovative services like online banking: an
introduction to easy transaction methods. However, it is also good news for banks, as they will
be forced to improve their services and compete more aggressively to retain customers. The
banking sector in India has been undergoing transformation, driven by public sector banks
(PSBs). Banking is the process of storing money for future use, either in cash or by investing it.
Banks are where people get money from when they need it to make payments or buy goods
and services. Businesses can also borrow money to grow or expand. Banks must have a wide
network of branches across the country and overseas to perform these functions effectively.
They must also be able to keep their records safe in computerized databases that cannot be
easily hacked.

Banks handle money and valuable items such as gold, silver, diamonds, and other precious
items. They accept deposits and make loans and payments to their customers. They also
provide credit cards, debit cards, checkbooks, etc.

Banking institutions are divided into three categories:

 Commercial Banks also referred to as deposit banks

 Mutual Funds
 Central/State Governments

Banking is an important aspect of any country’s economy. And like any other industry, it has its
standards, sets of documents, and procedures. These ensure that banks carry out transactions
with ease and efficiency. The banking principles are based on the need to have a central figure
that administers all the banking activities of a country. This institution is called the apex bank or
Central Bank, and it is governed by specific laws and policies to ensure safety and security for
the people and the nation at large.
The Indian banking sector has been experiencing a wave of change over the past decade. The
growth in mobile banking and biometrics have, to an extent, affected the traditional business
models of banks. However, most banks have shown tremendous resilience to these changes
through adaptability and innovation. Mobile Banking is all about bringing banking into the
digital age. The use of spare and personal mobile phones and other handheld devices has
popularised mobile banking. Several banks have developed mobile sites for their customers,
making it easier for customers to conduct banking transactions independently. Preferred Bank
Limited, a subsidiary of Bharti Airtel, launched a mobile wallet product in 2011. Other banks are
also creating similar products to improve the customer experience.

Role of Indian Banking in Economic Development

Indian banking plays a big role in the development of the economy of India. It is the backbone
of any country’s economy, and its well functioning is essential for nation-building.

The banking system of a country performs functions like:

Advancement of Credit: Indian banking sector is one of the most active sectors in advancing
loans to individuals and institutions. It plays an important role in providing funds to different
priority sectors like Agriculture, Small scale industries, trading enterprises, real estate, etc.

Business Development: Indian banking sector helps a lot in business development by

developing strong ties with foreign countries through establishing branches. Indian banks also
facilitate trade and commerce by providing payment facilities to various local and international
business houses.

Financial Security: Indian banking system provides financial security to the people by providing
loans at competitive rates, paying reliable remittance services, etc. It helps people save their
money and invest it in different financial instruments like Government securities, long-term
bonds, etc.

Cash Management: Cash management plays a crucial role in the banking system. It allows
banks to provide quick cash and money transfer. It helps banks manage money transfers carried
out by various business houses and a large number of industrial units.

Financial stability: The Indian banking sector provides safe and secure financial services
through Money orders, Cash deposits, and cash card services.
3. Explain the origin and development of Banking in India. +

The origin of banking in India can be traced back to the ancient times. There is evidence of
money lending and banking practices in India as early as the Vedic period (1750-500 BCE).
During this period, moneylenders would lend money to farmers and traders in exchange for a
fee. They would also accept deposits from customers and provide them with safekeeping
services.

In the Mauryan period (321-185 BCE), the government established a system of state banks
called "Nidhis". These banks were responsible for collecting taxes, making payments to
government employees, and lending money to farmers and traders.

During the Gupta period (320-550 CE), banking practices became more sophisticated. Banks
started issuing letters of credit and bills of exchange. They also began to provide insurance
services.

After the decline of the Gupta Empire, banking in India went into a decline. However, it revived
during the Mughal period (1526-1857). During this period, several new banks were established,
including the Bank of Hindustan (1770) and the General Bank of India (1786).

The modern banking system in India was established after the British took over the country in
1857. The first bank to be established under British rule was the Bank of Bengal (1809). This was
followed by the establishment of the Bank of Bombay (1840) and the Bank of Madras (1843).
These three banks were later merged to form the Imperial Bank of India (1921).

After independence in 1947, the Indian government nationalized 14 major banks. This was
done to ensure that these banks would be able to provide financial services to all sections of
the society. In 1969, the government also nationalized the Imperial Bank of India, which was
renamed as the State Bank of India (SBI).

The Indian banking system has undergone a lot of changes in recent years. In 1991, the
government implemented a series of reforms that opened up the banking sector to private
players. This led to the establishment of several new private banks.

The Indian banking sector is now one of the largest and most vibrant in the world. It plays a
vital role in the country's economic development. Banks provide loans to businesses and
individuals, which helps to create jobs and boost economic growth. They also provide financial
services such as savings accounts, checking accounts, and credit cards, which help people to
manage their finances.
The development of the banking system in India
1.Early Beginnings: Banking in India dates back to the Vedic period when indigenous bankers and
moneylenders carried out financial transactions. However, modern banking started during British
colonial rule.

2.Imperial Bank of India: In 1921, the Imperial Bank of India was established, which later became
the State Bank of India (SBI). It played a pivotal role in the country's banking system.

3.Post-Independence Reforms: After India gained independence in 1947, significant banking

reforms were initiated. The Banking Regulation Act of 1949 was enacted to regulate the banking
sector.

4.Nationalization: In 1969, major banks, including SBI, were nationalized to ensure greater
control and expand banking services to rural areas. This move aimed to promote financial
inclusion.

5.Liberalization: In 1991, India embarked on economic liberalization, which included financial

sector reforms. This led to the entry of private and foreign banks into the Indian market.

6.Technological Advancements: The adoption of technology, particularly in the 21st century, has
transformed the banking sector. Online banking, ATMs, and mobile banking have become
commonplace.

7.Rural Banking: Initiatives like the establishment of Regional Rural Banks (RRBs) and the
Pradhan Mantri Jan Dhan Yojana (financial inclusion program) have expanded banking services
to rural and underserved areas.

8.Regulatory Bodies: The Reserve Bank of India (RBI) is the central regulatory authority
overseeing the banking system. It plays a crucial role in maintaining financial stability.

9.Digital Banking: The rise of fintech companies and digital payment platforms has further
revolutionized the way banking services are accessed and delivered in India.
 10.Recent Developments: The banking sector in India continues to evolve with the introduction
of new policies, regulations, and financial products to meet the diverse needs of its growing
population.
The development of the banking system in India reflects its journey from a colonial-era banking
system to a modern, technology-driven industry that plays a vital role in the country's economic
growth and financial inclusion efforts.

4. What are the objectives and achievements of bank nationalization in India.

Bank nationalization in India refers to the process by which the Indian government took control
of the majority of privately-owned banks in the country and converted them into public sector
banks. This process occurred in two phases, in 1969 and 1980, and had several objectives and
achievements:

Objectives of Bank Nationalization:

1. Social Welfare: One of the primary objectives of bank nationalization was to promote social
welfare by ensuring that the banking sector played a more significant role in the country's
economic development. By bringing banks under government control, it was expected that they
would focus on serving the broader interests of society and not just profit motives.
2. Financial Inclusion: Nationalization aimed to expand banking services to rural and
underprivileged areas, thereby promoting financial inclusion. The government believed that
public sector banks would be more inclined to open branches in remote and economically
backward regions, helping to channel financial resources to these areas.
3. Credit Allocation: The government wanted to influence the allocation of credit to priority sectors,
such as agriculture, small-scale industries, and the weaker sections of society. Nationalized banks
were expected to align their lending policies with the government's development objectives.
4. Control Over Monopolistic Practices: Another objective was to curb monopolistic practices and
concentration of economic power in the hands of a few private entities. Nationalization was seen
as a way to break the dominance of a select group of private banks.

Achievements of Bank Nationalization:

1. Increased Branch Expansion: Nationalized banks significantly expanded their branch networks,
reaching remote and rural areas that were previously underserved by banking institutions. This
helped in promoting financial inclusion and access to banking services for a broader population.
2. Priority Sector Lending: Public sector banks played a crucial role in disbursing credit to priority
sectors, including agriculture, small and medium-sized enterprises (SMEs), and the weaker
sections of society. This contributed to the growth and development of these sectors.
3. Stability and Trust: Nationalized banks brought a sense of stability and trust to the banking
system. People had more confidence in government-owned banks, which was essential for the
growth of savings and deposits.
4. Control over Banking Practices: The government was able to exercise control over the practices
and policies of public sector banks, ensuring that they aligned with national development goals.
This allowed for better coordination between fiscal and monetary policies.
5. Reduction in Monopoly: The nationalization of banks reduced the monopoly power of a few
private banks, leading to a more competitive banking environment.
6. Promotion of Banking Culture: Nationalization contributed to the promotion of a banking culture
in India. It encouraged savings and financial discipline among the population.

However, it's important to note that there have also been criticisms of bank nationalization,
including concerns about inefficiencies, political interference, and a lack of innovation in the
public sector banks. Over the years, there have been efforts to strike a balance between
government control and autonomy for public sector banks to address these issues

Impacts of bank nationalisation

 Nationalization of the Banks brought the public confidence in the banking system of India.
 After the two major phases of nationalization in India, 80% of the banking sector came
under government ownership.
 After the nationalization of banks, the deposits of the public sector banks in India rose to
approximately 800 per cent, and advances took a huge jump by 11,000 per cent.
 Government ownership gave the public implicit faith and immense confidence in the
sustainability of public sector banks.
 Indian banking system reached even to the remote corners of the country, thus ensuring
financial inclusion.
 More equitable and prioritized disbursement of credit to different sectors of economy,
particularly to agriculture sector.
 Nationalization of banks led to a smooth and streamlined Indian growth process,
particularly in the period of Green Revolution.

5. Discuss the functions of commercial banks in India. +

A commercial bank is a typical financial institution that accepts as well as deposits from the
general public and also, they give loans for the purposes of consumption activities and
investment activities, to make their own profit. Commercial banks are profit-based institutions
that offer financial services like loans, as well as services like deposits, electronic transfers of
funds, etc. to their customers. Commercial banks have a significant role in a country’s economy
as these organizations fulfill the short and mid-term financial requirements of industries. The
functions of commercial banks are primarily based on a business model of accepting public
deposits and utilizing that fund for various investment purposes. Such functions can be classified
into two categories, primary and secondary functions

Commercial banks in India perform several important functions that contribute to the overall
functioning of the financial system and the economy. Here are the key functions of commercial
banks in India:

 Commercial banks accept various types of deposits from individuals, businesses, and
institutions. These deposits can be in the form of savings accounts, current accounts, fixed
deposits, and recurring deposits.

 Banks lend money to individuals and businesses for various purposes, such as home loans,
personal loans, business loans, and agricultural loans. This helps in the economic
development of the country by providing funds for investment and consumption.

 Commercial banks have the unique ability to create credit through the process of
fractional reserve banking. They can lend out a significant portion of the deposits they
receive, which stimulates economic activity.

 Banks provide a safe and efficient payment mechanism through services like checks,
demand drafts, electronic funds transfers (EFT), and mobile banking. This facilitates the
transfer of funds and settlement of transactions.

 Banks offer services related to foreign exchange and trade finance. They help in currency
conversion, issuing letters of credit, and financing international trade transactions.

 Many commercial banks provide safe deposit lockers and vaults for the safekeeping of
valuable documents, jewelry, and other assets.

 Banks offer investment services like mutual funds, wealth management, and advisory
services to help customers grow their wealth.

 Banks act as agents for various government schemes, collect utility payments, and offer
services such as buying and selling securities on behalf of customers.

 Commercial banks play a crucial role in the clearing and settlement of checks and other
financial instruments through participation in clearinghouses.
  Banks in India are mandated to promote financial inclusion by offering basic banking
services to unbanked and underbanked regions and populations.

 Commercial banks implement monetary policy set by the central bank (RBI) by adjusting
interest rates, lending policies, and credit creation.

 Banks provide various risk management products, including insurance, to protect

customers and businesses from financial losses.

 They offer a wide range of customer-centric services, such as internet banking, mobile
banking, and 24/7 customer support.

 Banks act as intermediaries between savers and borrowers, channeling funds from
surplus sectors to deficit sectors of the economy.

 Many banks engage in corporate social responsibility (CSR) activities, contributing to

social and community development.

Commercial banks play a pivotal role in the Indian economy by facilitating financial transactions,
mobilizing savings, and providing the necessary funds for economic growth and development.
Their functions are closely regulated and supervised by the Reserve Bank of India (RBI) to
maintain stability and protect the interests of depositors and the financial system.

6. Explain the ancillary services of a bank. (6M)

Main objective of emergence of banks was to keep the people’s money safe and provide loan to
the people with requirement. People used to deposit their hard-earned money in banks and
banks used to lend this money who are worthy to get loans (Repayment capacity). Now a days
along with basic banking functions like deposit and lending facilities banks are rendering various
other types of financial services to its customers. These expansion in products and services are
due to various factor such as high competition among public, private and foreign banks,
advancement of technology, openness to national economies for business transitions and many
more. As time value of money is commonly known concept among public now a days and they
know the future opportunities for their money. They don’t just rely only on saving accounts
investment and investing in other investment schemes. Thus, for the existence banks can not
depend on the money being deposited by the customers in the bank and had to venture in other
financial services to earn profit. These banking services other than lending and deposit are known
as ancillary services. Some ancillary services are as following: ·
1. Bank draft
 2. Mail/ telex transfer
3. Fund Transfer (NEFT/RTGS)
4. Travelers cheque
5. Custodial Services
6. Pension
7. Merchant banking
8. Retail banking
9. Factoring
10. Bank assurance/ Guaranty
11. Mutual funds
12. Sale and purchase of gold
13. Insurance
14. Foreign exchange / Forex services
15. Notary services
16. Bank cards
17. Venture capitalist
18. Internet banking
19. Mobile banking

Bank Drafts: Negotiable investment Act, Section 85 (A) says that a bank draft is an order to pay
money drawn by one office to the bank upon other offices of the same bank for a sum of money
payable to order on demand. In other words, a bank draft is a payment on behalf of a payer that
is guaranteed by the issuing bank. Bank draft provide assurance to the payee for the payment. A
bank draft is kind of cheque where payment is guaranteed by issuer bank which is issues after
confirming enough in the payers’ account. It is more complex process in comparison to issue a
bank cheque.
RTGS: The acronym 'RTGS' is known as Real Time Gross Settlement. According to RBI, RTGS a
system where there is continuous and real-time settlement of fund-transfers, individually on a
transaction by transaction basis. Its an instant service as it does not take time to be transferred
form one account to another.

NEFT: According to RBI National Electronic Funds Transfer (NEFT) is a nation-wide payment
system facilitating one-to-one funds transfer. Under this Scheme, individuals, firms and
corporates can electronically transfer funds from any bank branch to any individual, firm or
corporate having an account with any other bank branch in the country participating in the
Scheme.
Custodial Services: These services are commonly known a bank locker services. Customer can
keep your valuables like jewels, documents, etc in these lockers. These lockers can be availed
based on availability in the bank and after paying some charges to the bank as fee for locker. In
case of theft or loos bank only pay insured money to the customers instead of real value of the
articles were placed in the locker.
Pension services: Pension is a social security scheme where a fixed sum amount is paid to the
retired and superannuated employees. EPF (Employee’s Provident Fund) office helps in
distributing the pension and banks provide them banking and financial support. Different banks
and its branched have responsibilities to distribute the pension for different organizations.
Retail banking: Retail banking, also recognised as consumer banking or personal banking, is
banking that offers financial services to the general public. Retail banking is a way for the daily
customer to manage their money, have access to credit, and deposit their money in a secure
manner.

Mutual funds: The basic purpose of mutual funds is to collect investment form large number of
the investors and depositors, then invent the capital in diversified manner. These investment
schemes reduce the risk of loss like equity investments. These services are very beneficial for the
investors who have little or no knowledge of the investment and equity market.
Sale and purchase of gold: Commercial banks also deal in sale and purchase of gold. Now a days
all the banks are providing goad bonds on regular basis. Apart form that bank also deals in
purchasing and selling of cold coins and bars. Customer purchase and sell gold through banks to
avoid any chances or fraudulent.
Insurance: Commercial banks provide wide variety of the insurances like life insurance, health
insurance, vehicle insurance, insurance on loans etc. Banks are providing insurance with the help
of joint ventures with insurance companies like PNB MetLife, SBI life etc.
Foreign exchange / Forex services: Commercial banks also deal with foreign currency. These
banks provide wide range of forex services mainly conversion of currency. They also help the
customers in selling and purchasing of foreign exchange.
Notary services: Banks in India work according to the guidelines of the RBI. These days Know
your customer (KYC) is mandatory for all types of commercial bank operations. Apart from that
banks also provide life certificate which can be used in other government schemes as well as id
proof
Bank cards: Banks provide various types of cards to the customers like debit cards, credit cards,
gift cards etc. With the help of these cards the card holder can transact without the help of hard
cash currency. These cards are also known as plastic money.
Venture capitalist: Venture is a concept where a new high-risk project is dealt by an
entrepreneur. Making the availability of fund for high risk project is known as venture capital.
These ventures have high risk with high returns. After calculating the risk bank provide capital for
such projects for higher returns.
Internet Banking: Such types of banking services provide the customer facility to complete all the
banking transactions without even visiting to the bank physically. Sometimes bank charge
nominal maintenance fee for availing the internet services to the customers.
Mobile banking: As name says such services can be enjoyed with the help of a smart phone and
banking applications. Such services are similar like internet banking with some limitations.
Usually such applications can be installed in the smart phone for free of cost.

Six Marks
1. Co-operative banks.

The genesis of the cooperative movement and its implementation in a modern technical sense
can be traced after the Industrial Revolution in England during the period of 18th and 19th
century. The idea of Hermann Schulze and Friedrich Wilhelm Raiffeisen during the economic
meltdown to provide easy credit to small businesses and poor sections of the society took shape
as cooperative banks of today across the world.
A co-operative bank is a financial entity which belongs to its members, who are at the same time
the owners and the customers of their bank. It is often established by people belonging to the
same local or professional community having a common interest. It is formed to promote the
upliftment of financially weaker sections of the society and to protect them from the clutches of
money lenders who provide loans at an unreasonably high-interest rate to the needy. The co-
operative structure is designed on the principles of cooperation, mutual help, democratic
decision making and open membership. It follows the principle of ‘one shareholder, one vote’
and ‘no profit, no loss’.

Cooperatives Banks are registered under the Cooperative Societies Act, 1912. These are
regulated by the Reserve Bank of India and National Bank for Agriculture and Rural Development
(NABARD) under the Banking Regulation Act, 1949 and Banking Laws (Application to Cooperative
Societies) Act, 1965.

Cooperative banks differ from commercial banks on the grounds of organisation, governance,
interest rates, the scope of functioning, objectives and values.

Functions of Cooperative Banks

 It provides financial assistance to people with small means and protects them from
the latches of money lenders providing loans and other services at a higher rate at the
expense of the needy.
  It supervises and guides affiliated societies.
 Rural financing- It provides financing to rural sectors like cattle farming, crop farming,
hatching, etc. at comparatively lower rates.
 Urban financing- it provides financing for small scale industries, personal finance,
home finance, etc.
 It mobilises funds from its members and provides interest on the invested capital.

2. Credit policy in India.

Credit administration is an important division in any lending organization. They are responsible
for overlooking the entire credit procedure and ensuring that loans are provided only to low-risk
customers. It also helps the banks take necessary measures to retrieve the loan if it is overdue.

The credit policy is a document that determines all the guidelines which allow these lending
companies to make these critical lending decisions. These guidelines are important for risk
management and provide necessary guidelines to the staff to effectively manage clients'
portfolio.

It also allows the customers to get a clear understanding of what is expected from them in order
to avail credit. For example, it is a good idea to carry out a free CIBIL score check to ensure higher
chances of approval on the application based on the bank's credit policy.

Importance of credit policy

Banks use different types of credit policy when providing a loan or a credit card. The credit policy
is an agreement between the bank and the customer. It communicates the following to the
customer with complete clarity:

 The eligibility criteria for the individual to avail of the loan.

 The margin and security required to avail a loan.
 The repayment terms for the loan or credit card.
 The penalties that the customer is liable to pay for delayed payments, prepayment,
foreclosure etc.
 The process of collection in case of any default.
 Legal action may be taken if the loan is overdue beyond a given time.

3. Different kinds of banks.

Scheduled and Non-Scheduled Banks
The banking sector is divided into scheduled and non-scheduled banks.
  Scheduled Banks are listed in the second schedule of the Reserve Bank of India (RBI) Act,
1934. The paid-up capital and collected funds of scheduled banks must be 5 Lakh and
above. The RBI grants loans at the bank rate, and these banks are eligible to become
clearing house members.
 Non-Scheduled Banks are banks not listed in the second schedule of the RBI Act, 1934.
The paid-up capital and collected funds are less than INR 5 Lakh. Such banks need not
borrow funds from the RBI.
Commercial Banks
Commercial banks can be scheduled or non-scheduled and are regulated under the Banking
Regulation Act, 1949. These banks accept deposits and grant loans to the general public,
businesses, and even the Government. Commercial types of banking systems are:

 Public Sector Banks: More than 75% of the total banking business in India comes under
the public sector, also known as nationalised banks. The Indian Government and RBI are
the major stakeholders in this sector.
 Private Sector Banks: Most stakeholders of Private Sector Banks are individual investors,
not the RBI or Indian Government. Nevertheless, these banks must adhere to all the RBI
regulations for their operations.
 Foreign Banks: Foreign Banks have their headquarters in a foreign country but operate as
a private entity in India. They abide by the regulations of their home country and the
country in which they operate.
 Regional Rural Banks: These scheduled commercial banks serve the economically weaker
sections, such as marginal farmers, agricultural labourers, and small businesses.
Operating at regional levels, RRBs offer banking facilities like debit cards, bank lockers,
complimentary insurance etc.

Small Finance Banks

Licensed under section 22 of the Banking Regulation Act, 1949, these types of banking systems
cater to sections of societies not usually served by large banks. They serve micro and cottage
industries and small business units.

Payments Banks
RBI restricts these banks to offer deposit facilities only, with a deposit limit of INR 1 Lakh per
customer. You can avail of debit cards and e-banking facilities.

Cooperative Banks
These banks are registered under the Cooperative Societies Act, 1912, and function on a no-profit
no-loss basis. They offer banking services to entrepreneurs, small businesses, and industries
4. State Bank of India. +
The State Bank of India is the biggest and oldest commercial bank in the country, which came
into existence after the nationalisation of the Imperial Bank of India in 1955. The Imperial Bank
of India was the central bank of British India and the government took control of it in 1955 and
renamed it the State Bank of India by passing the State Bank of India Act, 1955.
The Act received the President's assent on May 8th, 1955, and it came into force on July 1st,
1955. The Act is divided into 57 sections, which are contained in 8 chapters and 2 schedules. It
originally had four schedules, but two were repealed in 1960.
Establishment of the State Bank of India
Section 3 of the Act provides for the establishment of a State Bank of India to carry on the
business of banking and other businesses and for the purpose of taking over the Imperial Bank
of India.
Establishment of the State Bank of India
Section 3 of the Act provides for the establishment of a State Bank of India to carry on the
business of banking and other businesses and for the purpose of taking over the Imperial Bank
of India.
Business of the State Bank
It includes −
 The State Bank shall act as an agent of the Reserve Bank of India for paying, receiving,
collecting, and remitting money on behalf of the government. It undertakes and transacts
other businesses which the RBI entrusts to it from time to time.
 The SBI has to function as a banker to the government. It collects money and makes
payments on behalf of the government. It manages public debt, collects charges, and
grants loans.
 SBI is considered a banker's bank as it receives deposits and provides financial assistance
to commercial banks that have their accounts in SBI.
 It acts as a clearing house where RBI has no branch.
It may transact other banking business as is provided in the Banking Regulation Act, 1949.

5. Agency Bank
An agent bank is a bank that performs services in some capacity on behalf of an entity. An agent
bank, also known as agency bank, can offer a wide variety of services for businesses looking to
expand internationally. These banks generally act on behalf of another bank or group of banks,
but they can act on behalf of a person or business.

Agent banks can serve the needs of both individuals and businesses through a broad range of
services. They can include various forms and are willing to partner on a variety of different
offerings. The specific roles of the agent bank will depend on the arrangement made with the
client.

An agent bank can also be syndicate, where it’s the point-of-contact for a borrower that’s taking
loans from several banks. In this case, it is the lead bank in a syndicated loan and it keeps the
other banks appraised of developments while sending them interest payments.

Individuals and businesses partner with banks to support the management of their financial and
cash transaction needs. These entities rely on an agent bank for managing funds in
a deposit account. These banks can also support customers and other banks by facilitating
letters of credit or extensions of new credit.

The benefits of an agent bank include the fact that it can operate internationally. These banks
allow businesses to expand their geographic presence, as having a bank that knows how to
operate in various countries is advantageous. These types of banks make accessing funds while
abroad easier.

Agency banks also allow businesses to delegate administrative tasks, where the agency bank can
handle the finances of a business. While the best retail banks might offer competitive interest
rates, the best agent banks are those that can most effectively facilitate their clients'
transactions

6. Supervisory role of Reserve Bank of India.

The Reserve Bank of India performs the following supervisory functions. By these functions it
controls and administers the entire financial and banking systems of the country.
1. Granting License to Banks
The RBI grants license to the banks, which like to commence their business in India. Licenses are
also required to open new branches or closure of branches. With this power RBI can ensure
avoidance of unnecessary competitions among banks in particular location evenly growth of
banks in different regions, adequate banking facility to various regions, etc. This power also helps
RBI to weed out undesirable people from starting banking business.

2. Function of Inspection and Enquiry

RBI inspects and makes enquiry in respect of various matters covered under Banking Regulations
act and RBI act. The inspection of commercial banks and financial institutions are conducted in
terms of the provisions contained in Banking Regulation act. These refer to their banking
operations like loans and advances, deposits, investment functions and other banking services.
"under such inspection RBI ensures that the banks and financial institutions carry on their
operations in a prudential manner, without taking undue risk but aiming at profit maximization
within the existing rules and regulations.

3. Implementing the deposit Insurance Scheme

 RBI Implements the deposit Insurance scheme for the benefit of bank depositors. This
supervisory function has improved the standard of banking in India due to this confidence
building exercise. "under this system, deposits up to Rs. 10 lakh with the bank branch are
guaranteed for payment. Deposits with the banking system alone are covered under the scheme.
For this purpose banking system include accounts maintained with commercial banks, co &
operative banks and RRBs. Fixed deposits with other financial institutions like ICICI, IDBI, etc. and
those with financial companies are not covered under the scheme. ICICI is since merged with ICICI
Bank Ltd. and IDBI is getting converted into a bank
4. Periodically review of commercial bank
The RBI periodically reviews the work done by commercial banks. It takes suitable steps to
enhance the efficiency of the banks and make various policy changes and
implement programmes for the well & being of the nation and for improving the banking system
as a whole.

5. Controls the Non-Banking Financial Corporations

RBI issues necessary directions to the on & Banking financial corporations and conducts
inspections through which it exercises control over such institutions. deposit taking NFBCs
require permission from RBI for their operations .

7. IDBI
The Industrial Development Bank of India (hereinafter referred to as ‘IDBI’) was established as a
subsidiary wholly owned by the Reserve Bank of India in the year 1964, to act as a principal
financial institution for managing the activities of all institutions which deal with financing,
promoting and development in India. In 2003, RBI formed a committee to formulate policies and
recommendations for the diversification of the activities of IDBI. The Committee suggested that
to coordinate the activities of development financing and banking, there is a need to bridge the
gap between commercial banking and development banking. Hence, The Industrial Development
Bank (Transfer of Undertaking and Repeal) Act, 2003 (hereinafter referred to as the ‘Act’) was
enacted which made IDBI a commercial institution from a development finance institution. IDBI
acquired the status of a limited company, thereby making it IDBI Ltd.

Salient features of the Act

The following are the salient features of the Act:

1. The Act transfers and vests the undertaking of IDBI to a company formed under the
Companies Act, 1956 to carry out banking business which is IDBI Ltd.
2. The Act repeals the Industrial Development Banking of India Act, 1964.
 3. For this Act, ‘Development Bank’ means IDBI, whereas ‘Company’ means IDBI Ltd.
which is the company formed under the Companies Act, 1956.
4. As per the Act, IDBI shall function as a banking company and follow the provisions of
the Banking Regulation Act, 1949.
5. The documentations such as bonds, contracts, deeds shall terminate against IDBI after
the appointed day, as specified by the Act, which will render them inapplicable against
IDBI.
6. All such documentation including litigation matters shall be continued by the Company
formed under the Companies Act, 1956.
7. All tax exemptions and the monetary and fiscal policies which were applicable on IDBI
before the appointed day will continue to apply to the Company.

Unit – 2
1. Explain the powers of functions of Deposit insurance cooperation of India.
Introduction

Deposit Insurance and Credit Guarantee Corporation (DICGC) is a wholly-owned subsidiary of the
Reserve Bank of India (RBI). It provides deposit insurance that works as a protection cover for
bank deposit holders when the bank fails to pay its depositors. The agency insures all kinds of
deposit accounts of a bank, such as savings, current, recurring, and fixed deposits up to a limit of
Rs. 5 lakh per account holder per bank. In case an individual's deposit amount exceeds Rs.5 lakh
in a single bank, only Rs.5 lakh, including the principal and interest, will be paid by DICGC if the
bank becomes bankrupt.

Working of DICGC

DICGC protects depositors' money kept in all commercial and foreign banks located in India;
central, state, and urban co-operative banks; regional rural banks; and local banks, provided that
the bank has opted for DICGC cover. The agency's operations are performed as per The Deposit
Insurance and Credit Guarantee Corporation Act, 1961 and The Deposit Insurance and Credit
Guarantee Corporation General Regulations, 1961, framed by RBI under the provisions of sub-
section (3) of Section 50 of the act. The act states that the establishment of this corporation is
with the aim of insuring deposits, guaranteeing credit facilities, and other related matters.

Powers of DICGC:

The powers of the Deposit Insurance Corporation of India (DICGC) are defined in the Deposit
Insurance and Credit Guarantee Corporation Act, 1961. These include:
 To insure deposits in banks up to a certain limit. The current insured limit is Rs. 5 lakh per
depositor per bank. This means that if a bank fails, depositors will be able to get their money back
from DICGC, up to the insured limit.
 To provide financial assistance to banks in distress. This may be done by providing loans or
guarantees to banks. This helps to prevent bank failures and protect depositors.
 To promote financial stability in the country. DICGC does this by taking measures to protect
depositors and prevent bank failures. For example, DICGC conducts inspections of banks to assess
their financial health and identify any potential risks.
 To regulate the banking sector. DICGC has the power to issue regulations to protect depositors.
For example, DICGC has regulations that require banks to maintain a certain level of capital
reserves.
 To protect the interests of depositors. DICGC does this by taking steps to ensure that depositors
are able to get their money back if a bank fails. For example, DICGC has a process for depositors
to file claims and receive their insurance payout.

Functions of DICGC:

The main function of DICGC is to protect depositors and promote financial stability in India. It
does this by:

 Insuring deposits in banks up to a certain limit. The current insured limit is Rs. 5 lakh per depositor
per bank.
 Providing financial assistance to banks in distress. This may be done by providing loans or
guarantees to banks. This helps to prevent bank failures and protect depositors.
 Promoting financial stability in the country. DICGC does this by taking measures to protect
depositors and prevent bank failures. For example, DICGC conducts inspections of banks to assess
their financial health and identify any potential risks.
 Regulating the banking sector. DICGC has the power to issue regulations to protect depositors.
For example, DICGC has regulations that require banks to maintain a certain level of capital
reserves.
 Protecting the interests of depositors. DICGC does this by taking steps to ensure that depositors
are able to get their money back if a bank fails. For example, DICGC has a process for depositors
to file claims and receive their insurance payout.

In addition to these functions, DICGC also plays a role in educating depositors about their rights
and the deposit insurance scheme. It publishes brochures and other materials on its website and
through its branches. DICGC also conducts awareness programs for depositors and bank staff.
2. Explain the functions of RBI. ++
Introduction

The Reserve Bank of India is India’s central bank (RBI). The RBI was established by the RBI Act
1934, which went into force on April 1, 1935. The RBI’s primary functions include acting as a
banker’s bank, a custodian of foreign reserves, a credit controller, and overseeing the printing
and circulation of currency notes. The Reserve Bank of India (RBI) seems to be the country’s
central bank. The Reserve Bank of India is a government-owned corporation. It is responsible for
printing currency notes and regulating India’s economic money supply. The RBI serves bankers
to the government for both the federal and state governments. It conducts all government
banking activities, including the receipt or payment of money.

Functions of Reserve Bank

The Government’s Banker: The Reserve Bank’s second major responsibility is to perform as a
banker, agent, or advisor to the Indian government and the states. It conducts all of the State
and Central Government’s financial tasks and provides useful economic and financial policy
recommendations to the government. It is also in charge of the government’s public debt.

The Banker’s Bank: The Reserve Bank provides the other commercial banks with the same tasks
that the other banks conduct for their clients. The Reserve Bank of India provides money to those
countries’ commercial banks.

The Credit Controller: The Reserve Bank of India oversees credit generated by commercial banks.
The RBI employs two ways to manage the additional money flow in the economy. These are
quantitative and qualitative ways of controlling and regulating the country’s credit flow. When
the RBI determines that perhaps the economy possesses sufficient money supply and could lead
to inflation, it tightens the money supply through its monetary policy.

Foreign Reserves Custodian: The Reserve Bank involves buying and selling foreign currencies and
preserves the country’s foreign currency funds to keep foreign exchange rates constant.
Whenever the supply of foreign currency in the economy falls, the RBI sells it in the foreign
exchange market and inversely. India now maintains a Foreign Exchange Reserve of
approximately US$ 487 billion.

Additional Functions: The Reserve Bank has a variety of other developmental responsibilities.
These responsibilities involve clearinghouse functions such as organising credit for agriculture
(which has been transmitted to NABARD), trying to collect as well as publicise economic data,
buying and selling government securities (gilt edge, treasury bills, etc.) & trade bills, lending to
the government, sale, and purchase of important commodities, and so on.
 RBI’s Role as a Banker to the Government
The RBI serves as a banker to the government. It conducts all of the government’s banking
activities, including the receipt or payment of the money just on the government’s behalf and
the government’s exchanges, remittances, and other financial processes. The governments keep
their cash reserves in the RBI’s bank account.

The RBI, like that of the banker to the government, provides the government with short-term
credit to cover any gaps in revenues over expenditures. It also offers state governments short-
term loans in the form of means and methods of advances. However, certain state governments
use overdrafts for limited periods. The RBI has been unable to put an end to this behaviour. The
RBI, like that of the government’s banker, is also responsible for handling the public’s (i.e.,
government’s) debt. The RBI is responsible for managing all new government loan issuance,
servicing ongoing public debt, and maintaining the government securities market. The last role is
critical to the government’s borrowing plan from the general public (including banks), which
became increasingly important for mobilising money for public-sector project funding.

(6M)

The Reserve Bank of India (RBI) is the central bank of India and is responsible for regulating the
non-banking financial company (NBFC) sector. The RBI's role in regulating NBFCs includes:

 Registration and licensing: All NBFCs must be registered with the RBI and obtain a license to
operate. The RBI has the power to cancel the registration or license of any NBFC that fails to
comply with the regulations.
 Prudential regulation: The RBI prescribes prudential regulations for NBFCs to ensure that they
are financially sound and able to meet their obligations to depositors and creditors. These
regulations include requirements on capital adequacy, liquidity, and asset quality.
 Supervision and inspection: The RBI supervises and inspects NBFCs to ensure that they are
complying with the regulations. The RBI has the power to take corrective action against NBFCs
that are found to be non-compliant.
 Consumer protection: The RBI has a number of measures in place to protect consumers of NBFC
services. These measures include requirements on fair practices, disclosure, and grievance
redressal.

The RBI's role in regulating NBFCs is important to protect depositors and creditors, and to
promote financial stability in the country. NBFCs play a significant role in the financial sector,
and their failure could have a negative impact on the economy. The RBI's regulations and
supervision help to reduce the risk of NBFC failures and protect the interests of consumers. In
addition to the above, the RBI also plays a role in developing the NBFC sector. The RBI has
issued guidelines on a number of new products and services that NBFCs can offer. The RBI also
has a number of initiatives in place to promote financial inclusion through NBFCs. Overall, the
RBI plays a vital role in regulating and developing the NBFC sector in India.

Conclusion

The Reserve Bank has only a monopoly on printing currency notes in-country. The Reserve Bank’s
Central Office had first been founded in Kolkata, although in 1937, it was completely relocated
to Mumbai. The Governor sits at the Central Office, where policies were made. The government
of India had owned the Reserve Bank of India until 1949 when it was nationalised. A central board
of directors oversees the Reserve Bank’s functioning. The Reserve Bank of India Act allows the
government of India to select the board. Now you have all the necessary information regarding
RBI as a banker to the government.

4. Explain salient features of Banking Regulation Act, 1949. +

5. Explain the general principles relating to secured loan.
6. Describe the objectives and major features of the Deposit Insurance and Credit Guarantee
Corporation of Indian Act, 1961.

Six Marks
1. Priority sector lending.
Priority sector lending (PSL) is a policy under which banks in India are required to lend a certain
percentage of their total lending to certain sectors of the economy that are considered to be of
priority. These sectors include agriculture, small and medium enterprises (SMEs), education,
housing, and renewable energy. The objective of PSL is to promote the development of these
sectors and to ensure that all sections of the society have access to credit. PSL also helps to
reduce poverty and inequality.

The Reserve Bank of India (RBI) sets the PSL target for each bank. The current PSL target for all
scheduled commercial banks in India is 40% of their Adjusted Net Bank Credit (ANBC). Banks can
meet their PSL targets by lending to borrowers in the priority sectors. However, banks are also
allowed to meet their PSL targets by investing in certain financial instruments, such as bonds
issued by companies in the priority sectors.

The RBI monitors the PSL performance of banks on a regular basis. Banks that fail to meet their
PSL targets are subject to penalties. PSL has played an important role in the development of the
Indian economy. It has helped to promote the growth of the priority sectors and to improve the
lives of millions of people. Here are some of the benefits of PSL:
 It promotes economic growth: PSL helps to promote economic growth by providing credit to
sectors that are important for the economy, such as agriculture and SMEs.
 It reduces poverty: PSL helps to reduce poverty by providing credit to people who would
otherwise not be able to access it. This can help people to start businesses, invest in education,
and improve their living standards.
 It promotes social justice: PSL helps to promote social justice by providing credit to people from
disadvantaged sections of society. This can help to reduce inequality and create a more equitable
society.

PSL is an important policy that has helped to improve the lives of millions of people in India. It is
a policy that should be continued and strengthened.

2. Nationalization.
Nationalization is the process of transferring ownership of a private entity to the government. In
the context of banking law, nationalization refers to the government taking over the ownership
and control of a bank. The first bank in India to be nationalized was the Reserve Bank of India which
happened in January 1949. Further, 14 other banks were nationalized in July 1969. Bank of India,
PNB, and many others were part of this nationalization. While the next phase of nationalization saw
6 other commercial banks were nationalized in 1980. These included Vijaya bank, a new bank of
India, Corporation Bank, and others. The needs for nationalization of banks arose due to many
reasons. These were catering to the needs of big business houses and large industries. Further,
sectors such as exports, agriculture, and the small-scale industries were lagging behind. The
moneylenders used to export the poor masses in India. These all were taken into consideration
during the nationalization of banks. Also, for a rural section of India, the regional rural banks (RRBs)
were formed. The objective was to serve large masses of the unreserved rural population. There are
many reasons why a government might nationalize a bank. Some of the most common reasons
include:

 To protect depositors' money: If a bank is in financial trouble, the government may nationalize it
to protect the money of its depositors.
 To promote economic development: The government may nationalize a bank to ensure that it
provides adequate credit to businesses and individuals.
 To achieve social goals: The government may nationalize a bank to promote social goals, such as
providing financial services to low-income people or to rural areas.

The process of nationalizing a bank is typically governed by a specific law or ordinance. In India,
the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (BCAT Act) governs
the nationalization of banks. The BCAT Act provides for the following:

 The government can nationalize a bank by an ordinance.

 The government must pay compensation to the shareholders of the nationalized bank.
 The government must take over the assets and liabilities of the nationalized bank.
 The government must appoint a board of directors for the nationalized bank.

The nationalization of banks can have a significant impact on the banking sector. It can lead to
changes in the ownership structure of banks, the way banks are managed, and the types of
services banks offer. The nationalization of banks can also have a political impact, as it can be
seen as a sign of government intervention in the economy. The nationalization of banks is a
complex issue with both potential benefits and risks. It is important to carefully consider the
reasons for nationalizing a bank and the potential impact of nationalization before taking such a
step.

3. Credit Control
Credit control is a set of measures used by banks and other financial institutions to manage the
risk of lending money to borrowers. It is an important part of banking law, as it helps to protect
banks from losses and to ensure that credit is used wisely.

There are two main types of credit control: quantitative control and qualitative control.

Quantitative control refers to measures that are used to limit the overall amount of credit that
banks can lend. This can be done by setting limits on the amount of credit that banks can extend
to a single borrower or to a particular sector of the economy.

Qualitative control refers to measures that are used to assess the creditworthiness of borrowers
and to ensure that loans are made to borrowers who are likely to be able to repay them. This can
be done by requiring banks to conduct thorough credit checks on borrowers and to set loan terms
that are appropriate to the borrower's financial situation.

Banking law in most countries includes provisions that require banks to have adequate credit
control systems in place. These provisions are designed to protect depositors and to ensure that
banks are able to operate in a safe and sound manner.

Here are some specific examples of credit control measures that are commonly used under
banking law:

 Lending limits: Banks are typically required to set lending limits for individual borrowers and for
particular sectors of the economy. These limits are designed to prevent banks from lending too
much money to any one borrower or to any one sector, which could increase the risk of losses.
 Capital adequacy requirements: Banks are required to hold a certain amount of capital against
their lending exposures. This capital acts as a buffer against losses and helps to protect
depositors.
 Asset quality reviews: Banks are required to conduct regular reviews of their loan portfolios to
assess the creditworthiness of their borrowers. This helps to identify borrowers who may be at
risk of default and to take early action to prevent losses.
 Loan covenants: Banks often require borrowers to agree to certain covenants, such as
maintaining a certain level of profitability or maintaining a certain level of collateral. These
covenants help to protect banks from losses in the event that a borrower defaults on their loan.

Credit control is an important part of banking law and helps to protect banks, depositors, and the
economy as a whole. In addition to the measures listed above, banking law in many countries
also includes provisions that give regulators the power to take action against banks that are not
complying with credit control regulations. This can include imposing fines, issuing cease and
desist orders, or even revoking the bank's license. The goal of credit control is to ensure that
banks are lending money responsibly and that they are taking steps to mitigate the risk of losses.
By doing so, credit control helps to promote financial stability and economic growth.

4. The Deposit Insurance Cooperation Act, 1961. +

The Deposit Insurance and Credit Guarantee Corporation Act, 1961 (DICGC Act) is an Act of the
Parliament of India that established the Deposit Insurance and Credit Guarantee Corporation
(DICGC) to provide deposit insurance to depositors of commercial banks and select co-operative
banks in India.

The DICGC Act provides for the following:

 Establishment of the DICGC: The DICGC is a corporation established by the Central Government
with a capital of 50 crores. The DICGC is managed by a Board of Directors, of which a Deputy
Governor of the Reserve Bank of India is the Chairman.
 Registration of banks: All commercial banks and select co-operative banks in India are required
to register with the DICGC.
 Insurance coverage: The DICGC insures deposits up to a maximum of ₹5 lakh per depositor per
bank.
 Premium: Depositors are required to pay a premium to the DICGC for deposit insurance.
 Payment of claims: In the event that a bank is unable to meet its obligations to its depositors, the
DICGC will pay out claims to depositors up to the insured amount.
 The DICGC Act has been amended several times over the years, most recently in 2021. The
amendments have made the DICGC more robust and have strengthened its ability to protect
depositors. The DICGC Act is an important piece of legislation that helps to protect depositors in
India. It provides depositors with the peace of mind that their deposits are insured up to a certain
amount, even if their bank fails.

Here are some of the benefits of the DICGC Act:

 It provides depositors with a safety net: The DICGC Act ensures that depositors will not lose all of
their money if their bank fails. Depositors are insured up to a certain amount, which protects
them from financial hardship.
 It promotes confidence in the banking system: The DICGC Act helps to promote confidence in the
banking system by providing depositors with a safety net. This makes it more likely that
depositors will keep their money in banks, which helps to support the banking system.
 It reduces the risk of bank runs: The DICGC Act helps to reduce the risk of bank runs by providing
depositors with a safety net. This is because depositors are less likely to withdraw their money
from a bank if they know that their deposits are insured.

The DICGC Act is an important piece of legislation that helps to protect depositors and promote
financial stability in India.

5. Bank Rate Policy Information.

Bank rate policy is a monetary policy tool used by central banks to control the money supply and
interest rates. It is the interest rate at which the central bank lends money to commercial banks.
When the central bank raises the bank rate, it makes it more expensive for commercial banks to
borrow money. This, in turn, makes it more expensive for businesses and consumers to borrow
money. This can help to cool down the economy and reduce inflation. When the central bank
lowers the bank rate, it makes it cheaper for commercial banks to borrow money. This, in turn,
makes it cheaper for businesses and consumers to borrow money. This can help to stimulate the
economy and boost economic growth. The Reserve Bank of India (RBI) uses bank rate policy to
achieve its inflation target and to maintain financial stability. The RBI sets the bank rate at regular
intervals, typically every two months.

The current bank rate in India is 6.50%. This rate was last changed in June 2023.

The RBI uses bank rate policy in conjunction with other monetary policy tools, such as open
market operations and reserve requirement ratio. These tools are used to manage the money
supply and interest rates in order to achieve the RBI's monetary policy goals.
 Here are some of the benefits of using bank rate policy:

 It is a flexible tool: Bank rate policy is a flexible tool that can be used to respond to changes in
economic conditions. The RBI can raise or lower the bank rate quickly and easily, which allows it
to react quickly to changing economic conditions.
 It is transparent: The RBI sets the bank rate in public, and it publishes its reasons for doing so.
This transparency helps to build confidence in the central bank and its monetary policy.
 It is effective: Bank rate policy has been shown to be effective in influencing interest rates and
economic activity.

However, there are also some drawbacks to using bank rate policy:

 It can be slow to work: It can take some time for changes in the bank rate to have a noticeable
impact on the economy. This is because the economy is complex and there are many factors that
affect it.
 It can be disruptive: Changes in the bank rate can be disruptive to businesses and consumers. For
example, a rise in the bank rate can make it more expensive to borrow money and invest, which
can slow down economic growth.

Overall, bank rate policy is a powerful tool that can be used to manage the money supply and
interest rates in order to achieve the central bank's monetary policy goals.

Unit – 3
1. Elucidate the organizational structure and functions of reserve bank of India.
The Reserve Bank of India (RBI) is the central bank of India, and it plays a pivotal role in the
country's monetary policy formulation, currency issuance, banking regulation, and financial
stability. Here is an overview of the organizational structure and functions of the Reserve Bank
of India:

Organizational Structure of RBI:

1. Central Board of Directors: The Central Board of Directors is the highest decision-making body
of the RBI. It is composed of various officials, including the Governor (the head of RBI), Deputy
Governors, and directors nominated by the Government of India. The Central Board sets the
overall policies and objectives of the RBI.
2. Governor: The Governor is the chief executive officer of the RBI and is responsible for the day-
to-day administration and management of the central bank. The Governor represents the RBI in
various domestic and international forums and is appointed by the Government of India.
3. Deputy Governors: There are typically four Deputy Governors who assist the Governor in various
aspects of RBI's operations, including monetary policy, banking regulation, and financial stability.
4. Departments: The RBI is organized into several departments and divisions, each responsible for
specific functions. Some of the key departments include the Department of Currency
Management, Department of Banking Regulation, Department of Economic and Policy Research,
and Department of External Investments and Operations.
5. Regional Offices: The RBI has regional offices located in various parts of India. These regional
offices help in implementing RBI's policies and directives at the grassroots level and cater to
regional banking needs.

Functions of the Reserve Bank of India:

1. Monetary Policy: The RBI is responsible for formulating and implementing monetary policy in
India. It uses tools like the repo rate, reverse repo rate, and open market operations to control
inflation, stabilize prices, and promote economic growth.
2. Currency Issuance and Management: The RBI is the sole issuer of currency notes and coins in
India. It manages the supply of currency to meet the demands of the economy efficiently.
3. Banker to the Government: The RBI acts as the banker, agent, and advisor to the Government
of India and state governments. It manages their accounts, facilitates the government's
borrowing program, and provides financial advice.
4. Banker's Bank: The RBI serves as a banker to commercial banks in India. It maintains their
accounts, provides liquidity support, and regulates their activities to ensure the stability of the
banking system.
5. Banking Regulation and Supervision: The RBI regulates and supervises banks and other financial
institutions in India to maintain the stability and integrity of the financial system. It issues
licenses, sets prudential norms, and conducts inspections.
6. Foreign Exchange Management: The RBI manages India's foreign exchange reserves and
formulates policies related to foreign exchange transactions. It also regulates foreign exchange
markets and oversees cross-border transactions.
7. Developmental Functions: The RBI plays a crucial role in the development of financial markets
and institutions in India. It promotes financial inclusion, facilitates payment systems, and
supports the growth of the financial sector.
8. Financial Stability: The RBI monitors and assesses the overall financial stability of the Indian
economy. It takes measures to prevent and mitigate systemic risks and crises in the financial
sector.
9. Research and Data Analysis: The RBI conducts economic research, compiles and publishes
financial data, and provides economic analysis and policy advice to the government and other
stakeholders.
10. Customer Education and Protection: The RBI focuses on consumer education and protection,
ensuring that the interests of depositors and borrowers are safeguarded.
11. Promotion of Payment Systems: The RBI promotes the efficiency and security of payment
systems in India, including electronic funds transfer systems and digital payment methods.
 Overall, the Reserve Bank of India plays a crucial role in India's economic and financial landscape,
working to ensure price stability, financial stability, and the efficient functioning of the banking
and financial sectors while fostering economic growth and development.

2. Define ‘Credit Control’. Explain the methods of credit control adopted by the Central Bank
in U.K and India.
Credit control is the process of managing the credit that a business extends to its customers. It
involves setting credit terms, assessing customer creditworthiness, monitoring customer
payments, and collecting debts. Effective credit control can help businesses to reduce their risk
of bad debt and improve their cash flow. The key elements of credit control include:

 Credit policy: A credit policy is a document that outlines a business's credit terms and procedures.
This includes things like the credit limit that a customer is eligible for, the payment terms that
are offered, and the late payment penalties that are charged.
 Credit scoring: Credit scoring is a process of assessing a customer's creditworthiness. This
involves reviewing the customer's credit history, financial statements, and other relevant
information.
 Credit monitoring: Credit monitoring is the process of tracking customer payments and
identifying any potential problems. This can be done through regular account reviews, credit
bureaus, and other monitoring tools.
 Debt collection: Debt collection is the process of recovering money from customers who have
not paid their bills on time. This can be done through a variety of methods, such as phone calls,
letters, and legal action.
Both the United Kingdom and India have central banks responsible for implementing monetary
policy and regulating the banking and financial sectors. These central banks use various methods
of credit control to influence the money supply, interest rates, and inflation levels in their
respective economies. Here, I will explain the methods of credit control adopted by the Central
Bank in the UK (the Bank of England) and India (the Reserve Bank of India).

Methods of Credit Control in the United Kingdom (Bank of England):

1. Bank Rate Policy: The Bank of England sets the official Bank Rate, which influences the interest
rates at which commercial banks lend and borrow money. By raising or lowering the Bank Rate,
the central bank can encourage or discourage borrowing and lending by commercial banks. A
higher rate tends to reduce borrowing and spending, while a lower rate stimulates economic
activity.
2. Open Market Operations (OMOs): The Bank of England conducts OMOs by buying or selling
government securities (gilts) in the open market. When the central bank buys securities, it injects
money into the banking system, increasing liquidity and lowering interest rates. Conversely,
when it sells securities, it absorbs money, reducing liquidity and raising interest rates.
3. Reserve Requirements: While the UK does not have a formal reserve requirement system as
some other countries do, the Bank of England can influence banks' reserve levels through
regulatory measures and adjustments to capital adequacy standards.
4. Forward Guidance: The central bank may use forward guidance to communicate its future
monetary policy intentions to the public and financial markets. This can influence expectations
about future interest rates and economic conditions.

Methods of Credit Control in India (Reserve Bank of India):

1. Repo Rate and Reverse Repo Rate: The Reserve Bank of India sets the Repo Rate, which is the
rate at which it lends money to commercial banks against government securities. The Reverse
Repo Rate is the rate at which banks can park their surplus funds with the central bank. By
adjusting these rates, the RBI can influence the cost of borrowing and the amount of liquidity in
the banking system.
2. Cash Reserve Ratio (CRR): The RBI mandates that banks maintain a certain percentage of their
deposits as reserves with the central bank. By changing the CRR, the RBI can control the amount
of money banks have available for lending. An increase in the CRR reduces bank lending capacity,
while a decrease has the opposite effect.
3. Statutory Liquidity Ratio (SLR): Banks in India are required to maintain a certain percentage of
their deposits in the form of government-approved securities. The RBI can change the SLR to
influence banks' liquidity positions and their ability to lend.
4. Marginal Standing Facility (MSF): The RBI provides funds to banks through the MSF at a rate
higher than the Repo Rate. Banks can access these funds in case of emergency or liquidity
shortages. Adjustments to the MSF rate can impact short-term interest rates.
5. Open Market Operations (OMOs): Similar to the Bank of England, the RBI conducts OMOs by
buying or selling government securities. These operations affect the money supply and liquidity
in the banking system.
6. Credit Policy: The RBI can also use credit policy measures to encourage or restrict lending to
specific sectors or purposes through instruments like priority sector lending targets.

Both the Bank of England and the Reserve Bank of India employ a combination of these credit
control methods to achieve their monetary policy objectives, which include maintaining price
stability, promoting economic growth, and ensuring financial stability in their respective
economies. The specific tools and strategies used may evolve over time in response to changing
economic conditions and policy goals. Credit control is an important tool that central banks use
to manage the economy. By controlling the supply of credit, central banks can influence
economic growth, inflation, and interest rates.

3. Explain the term ‘customer’. State the general relationship between banker and customer.
Introduction
According to Sir. John Paget “to constitute a customer, there must be some recognizable course
or habit of dealing in the nature of regular banking business”. So,
a) A customer is one who deals with the bank
b) The dealing of the customer must be in the nature of regular banking business
There is no statutory definition of the term ‘Customer’ in India under Banking Regulation Act,
1949 or and other relevant Act. We have to look to the judicial pronouncement for its definition.
For example, the judgement pronounced in the Great Western Railway Co vs. London and County
Banking co Itd., (1901 A.C414) defines a customer as follows: "A customer is a person who has
some sort of account, either deposit or current account or some similar relations with a bank.
From this, it follows that any person may become a customer by opening a deposit or current
account or similar relation with a bank".
1. Banker-Customer Relationship:
The main relationship between bank and a customer is that of debtor -creditor in the case of
deposit account and creditor-debtor in the case of overdraft or loan account. The bank acts
trustee in case of valuables entrusted with the bank branch and as agent or bailee in other kinds
of transactions. These kinds of relationships enjoin different rights and duties on the bank,
involving different degrees of care and diligence as below:
The Relationship between banker and customer can be in the form of 1. Debtor - Creditor 2.
Trustee - Beneficiary 3. Agent - Principal 4. Bailor - Bailee 5. Assignor – Assignee
2. Trustee – Beneficiary
Trustee is an individual who is responsible for a property or an organization on behalf of some
other individual or a third party. Trustee is supposed to make profitable decision for the entity
under it authorization. It is a legal relationship between the trustee and the party, where the
trustee is totally responsible for the maintenance, performance, and profitability of the trust
under his guidance. A beneficiary is any person who gains an advantage and/or profits from
something.

3 Agent – Principal
An agent is a person who acts for or represents another. The principal is the person who gives
authority to another, called an agent, to act on his or her behalf. Banker acts as an agent of a
customer, when

 Purchasing and selling securities on behalf of the customers

 Collecting dividend warrants and interest warrants
 Paying club subscription, insurance premium, rent and other bills, as per instruction of
the customer.
 Here again, the relationship cannot be called in the true sense as agent - principal. In the case of
a normal agent-principal relationship, the agent has to render accounts to the principal and
should also inform the principal how the amount given to him by the principal has been spent or
invested. In other words, the agent has to render accounts to the principal while dealing with the
funds of the principal.

4 Bailor – Bailee
A bailor is a person who entrusts a piece of his or her property to another person (the bailee). A
bailee does not have ownership of the property. When a customer borrows from a bank against
the security under pledge, the bank is regarded not only a pledgee but also a bailee and so the
bank has to take care of the security until it is returned to the customer. But the goods kept in
the safe deposit vault will not come under bailment. The customer is keeping the goods in the
safe deposit vault secretly and hence the banker will not be a bailee. As a bailee, the goods
coming into his custody will be protected and the banker is totally aware of the nature of the
goods. Thus, the banker will act as a bailee only when goods are entrusted to him for a specific
purpose. Any expenses incurred towards maintenance of the security or goods have to be borne
by the customer.
5.Assignor – Assignee
An assignor is a person who transfers property rights or powers to another. An assignee is a
person or entity to which property rights or powers are transferred. An assignee is the one to
whom assignments are made. Whenever a bank gives loan against life insurance policy or book
debts or supply bills, the banker is the assignee and the customer the assignor. Under assignment,
the actionable claim of the customer is transferred to the bank as security for loan. Thus,
assignment is done by customers whenever they take loan against insurance policy or book
debts. Even contractors after undertaking public works for the government, obtain loan from the
bank by assigning the supply bills in favour of the bank.

4. “Bankers duty to secrecy is not absolute”. Explain when disclosure of account is justified.
(Discuss the banker’s obligation to maintain secrecy of customer’s account) ++

5. Explain the duties of a banker to honour customer’s cheque.

A banker has certain fundamental duties when it comes to honoring a customer's cheque. These
duties are grounded in the principles of trust, responsibility, and customer service. When a
customer presents a cheque for payment, the banker must fulfill these duties:

1. Verification of Signature: The banker must verify that the signature on the cheque matches the
specimen signature provided by the customer when the account was opened. This is done to
ensure that the cheque has not been tampered with or forged.
2. Funds Availability: The banker must check whether the customer has sufficient funds in their
account to cover the amount specified on the cheque. If there are insufficient funds, the banker
should dishonor the cheque.
3. Crossing and Endorsement: The banker should check for any crossing or special instructions on
the cheque. For example, if a cheque is crossed, it indicates that the payment should be made
only through a bank account and not in cash. The banker must adhere to these instructions.
4. Date Validity: The cheque should be checked to ensure that it is not post-dated (i.e., dated for a
future date). Banks usually do not honor post-dated cheques until the specified date has arrived.
5. Drawer's Account Status: The banker must ensure that the drawer's account is in good standing.
If the account is frozen or subject to legal restrictions, the banker may have to dishonor the
cheque.
6. Stale Cheques: Cheques are typically considered "stale" after a certain period, usually six months
or more from the date of issue. The banker should verify the date on the cheque and may
dishonor it if it is stale.
7. Cancellation and Countermand: If the customer reports that their chequebook has been lost or
stolen or if they request a stop payment on a particular cheque, the banker must take immediate
action to prevent the payment of the cheque.
8. Forgery and Fraud Prevention: The banker has a duty to employ anti-fraud measures and
internal controls to prevent the payment of fraudulent or forged cheques. Suspicious signatures
or alterations on the cheque should be thoroughly examined.
9. Prompt Payment: Once all the necessary checks and verifications have been made, the banker
must ensure that the payment is made promptly and accurately to the payee's account or as per
the instructions on the cheque.
10. Recording Transactions: The banker must maintain accurate records of all transactions involving
customer's cheques, including the cheque number, amount, date of payment, and the respective
account details. This record-keeping is crucial for both the bank and the customer for auditing
and reconciliation purposes.
11. Confidentiality: The banker is bound by strict confidentiality regarding the customer's financial
transactions. The details of the cheque and the transaction must not be disclosed to unauthorized
parties.
12. Communication with the Customer: If the cheque cannot be honored for any reason, the banker
should promptly communicate the reason to the customer and provide clear information on the
steps the customer needs to take to rectify the situation.

It's important to note that the specific duties of a banker may vary depending on the bank's
policies, local banking regulations, and the terms and conditions of the customer's account
agreement. However, the core principles of ensuring the security of funds, accurate processing,
and adherence to customer instructions are consistent across banking institutions. Customers
can rely on these principles to ensure the safe and efficient handling of their cheques by their
bankers.
 Six Marks
1. Deficiency of ‘Banking service’.
A deficiency in banking service is a failure by a bank to meet the reasonable expectations of its
customers. This can include a wide range of issues, such as:

 Delays in processing transactions: This can include delays in opening accounts, processing checks,
or transferring funds.
 Errors in account statements: This can include incorrect balances, charges, or fees.
 Poor customer service: This can include rude or unhelpful staff, long wait times, or difficulty
resolving problems.
 Unauthorized transactions: This can include fraudulent use of debit or credit cards, or
unauthorized withdrawals from accounts.
 Security breaches: This can include data breaches, hacking, or other incidents that compromise
the security of customer information or accounts.

Deficiencies in banking service can have a significant impact on customers. They can cause
financial losses, inconvenience, and stress. In some cases, they can even lead to identity theft or
other serious problems. If you believe that you have experienced a deficiency in banking service,
you should first contact your bank to try to resolve the issue. If you are not satisfied with the
bank's response, you may want to file a complaint with a regulatory body, such as the Consumer
Financial Protection Bureau.

 A bank takes several weeks to process a check deposit, causing the customer to overdraft their
account.
 A bank charges a customer a late fee on a loan payment, even though the customer made the
payment on time.
 A bank representative gives a customer incorrect information about a product or service,
resulting in financial losses for the customer.
 A bank fails to properly protect customer data, leading to a data breach.
 A bank's website or mobile app is frequently unavailable or difficult to use.

Banks have a responsibility to provide their customers with high-quality service. If you experience
a deficiency in banking service, you should not hesitate to contact your bank to try to resolve the
issue.

2. Special classes of customers. +

 In banking law and practice, there isn't a specific or standardized definition for a "special class of
customers." However, banks often categorize customers into various groups based on their
banking needs, financial profiles, and the level of services provided. These categories are not
universally standardized but can vary from one bank to another. Special classes of customers in
banking are those who may require additional attention or care due to their age, abilities, or
financial circumstances. These customers may include:

 Minors: Minors are individuals who are not yet of legal age. In most countries, this is 18 years
old. Banks have special rules and procedures for opening accounts for minors and managing their
money.
 Seniors: Seniors are individuals who are older than a certain age, which varies depending on the
country. Banks may offer special products and services for seniors, such as accounts with lower
fees or services that help them to manage their finances more easily.
 People with disabilities: People with disabilities may have difficulty accessing or using banking
services. Banks have a responsibility to make their services accessible to everyone, including
people with disabilities. This may involve providing special accommodations, such as accessible
teller stations or sign language interpreters.
 Low-income individuals and families: Low-income individuals and families may have difficulty
accessing banking services due to high fees or lack of identification. Banks have a responsibility
to offer affordable banking services to everyone, regardless of their income. This may involve
offering low-cost accounts or waiving fees for certain customers.

In addition to these special classes of customers, banks may also offer special products and
services to businesses, nonprofits, and other organizations.

Banks have a responsibility to meet the needs of all of their customers, including special classes
of customers. Banks should offer products and services that are accessible and affordable to
everyone. Banks should also take steps to accommodate the needs of customers with disabilities.

3. Banker’s lien.
A banker's lien is a legal right that a bank has to retain possession of a customer's property as
security for a debt owed by the customer. This right extends to all property in the bank's
possession, including cash, securities, and other valuables. Banker's liens are generally implied,
meaning that they do not need to be explicitly agreed to by the customer. However, there are
some exceptions to this rule. For example, a banker's lien does not apply to property that is
deposited with the bank for safekeeping only. Bankers can exercise their lien rights in a number
of ways. For example, the bank may sell the customer's property to satisfy the debt. The bank
may also hold the property as security until the debt is repaid.
 Banker's liens are an important tool for banks to protect themselves from financial losses.
However, banks must exercise their lien rights in a reasonable manner. For example, the bank
must give the customer notice before selling the customer's property.

Here are some examples of situations where a banker's lien may apply:

 A customer deposits a check with a bank, but the check bounces. The bank may have a lien on
the customer's account until the check is made good.
 A customer borrows money from a bank and pledges securities as collateral. The bank has a lien
on the securities until the loan is repaid.
 A customer leaves valuables in a safe deposit box at a bank. The bank has a lien on the valuables
until the customer pays any outstanding fees or charges.

Bankers' liens are an important part of the banking system. They help to protect banks from
financial losses and allow them to lend money to customers with confidence. However,
customers should be aware of their rights and responsibilities when dealing with banker's liens.

4. Pass Book.
A passbook is a physical notebook that is used to record bank transactions. It is typically provided
to customers who open savings accounts. Passbooks are used to track deposits, withdrawals, and
other account activity. To use a passbook, customers simply present it to a bank teller when they
make a transaction. The teller will then record the transaction in the passbook. Customers should
keep their passbooks up-to-date by regularly bringing them to the bank to be updated. Passbooks
are still used in some countries, but they are becoming less common as banks move towards
digital banking services. However, passbooks can still be useful for customers who prefer to keep
a physical record of their bank transactions, or for customers who do not have access to digital
banking services. Here are some of the advantages and disadvantages of using a passbook:

Advantages:

 Passbooks provide a physical record of bank transactions. This can be useful for customers who
want to keep track of their spending or who do not have access to digital banking services.
 Passbooks are relatively easy to use. Customers simply need to present them to a bank teller
when they make a transaction.
 Passbooks are generally free or low-cost to obtain.

Disadvantages:
 Passbooks can be lost or stolen. This can be a problem for customers who rely on their passbooks
to keep track of their bank transactions.
 Passbooks can be inconvenient to update. Customers need to regularly bring them to the bank
to have them updated.
 Passbooks are not as secure as digital banking services. If a passbook is lost or stolen, it could be
used to access the customer's account.

Overall, passbooks are a simple and effective way to keep track of bank transactions. However,
customers should be aware of the disadvantages of using passbooks, such as the risk of loss or
theft.

Unit – 4
1.Examine the RBI guidelines to be followed while lending to priority sectors.

The Reserve Bank of India (RBI) has established guidelines for banks and financial institutions in
India to follow when lending to priority sectors. These guidelines are designed to promote
inclusive growth, support the agriculture and rural economy, and ensure that credit is extended
to sectors that are vital for the overall development of the country. Here are some key RBI
guidelines for lending to priority sectors:

1. Definition of Priority Sectors: The RBI has defined specific sectors and sub-sectors that are
categorized as priority sectors. As of my last knowledge update in September 2021, these sectors
include agriculture, micro, small and medium enterprises (MSMEs), export credit, education,
housing, social infrastructure, renewable energy, and others.

2. Mandatory Credit Target: Banks are required to allocate a certain percentage of their total
lending to priority sectors. These targets are typically specified by the RBI and are subject to
periodic review and adjustment. Banks must meet these targets to ensure that credit is
effectively channeled to priority sectors.

3. Sub-targets: Within the overall priority sector lending target, banks are often required to allocate
a portion of their lending to specific sub-sectors. For example, within agriculture, there may be
sub-targets for lending to small and marginal farmers or for financing the agriculture value chain.

4. Weaker Sections: Banks are also required to ensure that a portion of their priority sector lending
is directed to "weaker sections" of society, such as scheduled castes, scheduled tribes, and other
marginalized groups. These weaker sections are given special attention to promote financial
inclusion.
5. Priority Sector Certificates (PSCs): The RBI introduced the Priority Sector Lending Certificates
(PSC) scheme, which allows banks to buy and sell PSCs to meet their priority sector lending
targets. This mechanism provides flexibility to banks in meeting their obligations.

6. Classification of Advances: Banks are required to classify their advances to priority sector
borrowers under the appropriate categories, ensuring that the funds are used for the intended
purposes.

7. Monitoring and Reporting: Banks are expected to monitor and report their progress in achieving
priority sector lending targets to the RBI regularly. These reports help the central bank assess
compliance and make necessary adjustments to the guidelines.

8. Non-priority Sector Lending (NPSL) Limit: Banks that do not meet their priority sector lending
targets may be subject to penalties. They are required to invest a certain percentage of their
incremental deposits in specified instruments, known as Non-priority Sector Lending (NPSL)
investments, as a form of penalty.

9. Risk Management and Due Diligence: While lending to priority sectors, banks must adhere to
prudent risk management practices and conduct thorough due diligence to ensure the
creditworthiness of borrowers.

10. Technology Adoption: The RBI encourages banks to leverage technology for efficient delivery of
credit to priority sectors, including the use of digital banking channels and fintech solutions.

11. Training and Capacity Building: Banks are encouraged to provide training and capacity-building
programs for their staff to better serve priority sector customers and understand the unique
needs of these sectors.

These RBI guidelines for lending to priority sectors aim to ensure that credit flows to sectors that
need it the most for economic development and social welfare. The guidelines are periodically
reviewed and updated to align with the changing economic and social priorities of the country.
Banks and financial institutions in India are expected to comply with these guidelines to fulfill
their role in promoting inclusive and sustainable growth.

2. Critically analyze the legal aspects of various types of negotiable instruments and the rights
and duties of parties to these instruments.

3. Define ‘Holder’ and ‘Holder in Due Course’. Are there any differences between them?
4. What is endorsement? (6M) Explain the different types of endorsement. +
An endorsement under banking law is a signature or other equivalent stamp that authorizes
payment or a transfer of funds, or another financial transaction. It is a way for the holder of a
 negotiable instrument, such as a check or bill of exchange, to transfer ownership of the
instrument to another person or entity.

Endorsements can be further classified as restrictive or non-restrictive. A restrictive endorsement

places some limitation on how the instrument can be negotiated or paid. For example, an
endorser may write "for deposit only" on the back of a check to prevent the endorsee from using
the check for any other purpose. A non-restrictive endorsement does not place any limitations
on the negotiability or payment of the instrument. Endorsements are important in banking law
because they allow for the efficient transfer of funds and other financial assets. They also help to
protect against fraud and other financial crimes.

Types of endorsement:

1. Blank Endorsement: In a blank endorsement, the endorser signs their name on the back of the
instrument without specifying a particular endorsee. This essentially converts the instrument into
a bearer instrument, meaning it can be negotiated by delivery alone. Anyone who possesses the
instrument can further negotiate it or cash it. For example, if John Doe writes a check to Jane
Smith and Jane signs it with a blank endorsement, anyone who comes into possession of the
check can cash it.
2. Special (or Full) Endorsement: In a special endorsement, the endorser specifies the name of the
person to whom the instrument is to be payable. This restricts the negotiation of the instrument
to the specified person or entity. For example, if John Doe writes a check to Jane Smith and Jane
signs it with a special endorsement "Pay to the order of Sarah Johnson," only Sarah Johnson can
further negotiate or deposit the check.
3. Restrictive Endorsement: A restrictive endorsement places conditions or restrictions on the
further negotiation of the instrument. Common restrictive endorsements include phrases like
"For deposit only" or "For collection." When an instrument is restrictively endorsed, it can only
be deposited into the specified payee's account or collected for payment. It cannot be further
negotiated.
4. Qualified Endorsement: A qualified endorsement is one where the endorser disclaims liability
for the instrument. This type of endorsement is often used to protect the endorser from potential
liability if the instrument is not paid. For example, an endorser might write "Without recourse"
along with their signature, indicating that they are not responsible for the payment of the
instrument.
5. Conditional Endorsement: A conditional endorsement places certain conditions on the payment
of the instrument. For example, an endorser might write "Payable upon completion of the
project" or "Payable on delivery of goods." The conditions must be met before the instrument
can be paid.
6. Facultative Endorsement: A facultative endorsement is an endorsement that authorizes but does
not require the endorsee to comply with specific instructions. It gives the endorsee the option to
follow the instructions but does not make it mandatory.
7. Partial Endorsement: A partial endorsement occurs when only a portion of the instrument is
endorsed. Partial endorsements are generally not allowed, and they may result in the instrument
being treated as irregular or invalid.
8. Irregular Endorsement: An irregular endorsement is one that does not conform to the standard
endorsement types or violates the legal requirements for endorsements. Irregular endorsements
may result in the instrument being dishonored or questioned.

It's important to note that the specific rules and regulations governing endorsements can vary by
jurisdiction and may be subject to changes in banking laws. Additionally, the type of endorsement
used can have significant implications for the rights and obligations of the parties involved in the
negotiation of the instrument, so it's crucial to understand the implications of each endorsement
type when dealing with negotiable instruments.

5. Define cheque. Bring out the distinction between a cheque and a promissory note. +

A cheque is a negotiable instrument that is used to make payments from one person or entity to
another. It serves as a written order directing a bank or financial institution to pay a specific sum
of money to a designated person or entity from the drawer's bank account. Cheques are widely
used for various financial transactions, including paying bills, making purchases, and transferring
funds.

Key characteristics of a cheque include:

1. Drawer: The person or entity that writes and issues the cheque is known as the drawer.
2. Payee: The person or entity to whom the payment is directed is called the payee.
3. Drawee: The bank or financial institution on which the cheque is drawn is referred to as the
drawee.
4. Amount: The cheque specifies the exact amount of money to be paid, both in words and figures.
5. Date: It includes a date on which the cheque is issued.
6. Signature: The drawer must sign the cheque to make it valid.
7. Negotiability: Cheques are generally transferable, meaning they can be further negotiated to a
third party by endorsement.

Now, let's distinguish between a cheque and a promissory note:

Cheque:

 A cheque is an order to the bank or financial institution to pay a specified sum of money to the
payee.
 It is drawn by the drawer on their own bank account.
 It involves three parties: the drawer (issuer), the payee (recipient), and the drawee (bank).
 The primary purpose of a cheque is to make payments or transfer money from the drawer's
account to the payee.
 Cheques are typically used in day-to-day financial transactions, including bill payments, salary
disbursements, and purchases.

Promissory Note:

 A promissory note is a written promise by one party (the maker or debtor) to pay a specific sum
of money to another party (the payee or creditor) at a future date.
 It does not involve a bank or financial institution as a third party. It is a direct promise to pay.
 A promissory note may be bilateral (two parties) or unilateral (one party making a promise).
 The primary purpose of a promissory note is to evidence a debt or loan, with the maker
committing to repay the amount to the payee.
 Promissory notes are commonly used in lending and borrowing situations, such as personal loans,
business loans, and financing agreements.

In summary, while both cheques and promissory notes are negotiable instruments, they serve
different purposes and involve distinct parties. A cheque is an order for a bank to pay a specified
amount from the drawer's account to the payee, typically used for payments and transfers. A
promissory note is a direct promise to pay a specified sum at a future date, used primarily in
lending and borrowing arrangements.

6. Who is a Banker? Explain general relationship of Banker and Customer.

7. Who is holder in due course? Explain the privileges of a holder in due course.
A "holder in due course" (HDC) is a legal term that refers to a person who holds a negotiable
instrument (such as a promissory note or a bill of exchange) and meets certain criteria under
commercial law. Being an HDC grants certain privileges and protections to the holder, which are
intended to encourage the free flow of negotiable instruments in commerce. A holder in due
course (HDC) is a person who is in possession of a negotiable instrument, such as a check or bill
of exchange, and who has taken it in good faith, for value, and without notice of any defects in
the title of the person from whom it was acquired.

To be considered an HDC, a person must meet all of the following requirements:

 They must be in possession of the negotiable instrument.

 They must have taken the instrument for value. This means that they must have given something
of value in exchange for the instrument, such as money, goods, or services.
 They must have taken the instrument in good faith. This means that they must have been honest
and unaware of any defects in the title of the person from whom they acquired the instrument.
 They must have taken the instrument without notice of any defects in the title of the person from
whom they acquired the instrument. This means that they must have been unaware of any facts
 that would have put a reasonable person on notice that something was wrong with the
instrument.

If a person meets all of the requirements for being an HDC, they have certain rights, including the
right to receive payment on the negotiable instrument, even if there are problems with the
underlying transaction. For example, if a person is given a check in payment for goods that are
never delivered, the person may still be able to collect on the check if they are an HDC. The
concept of a holder in due course is important in commercial law because it promotes the
negotiability of commercial instruments and protects innocent purchasers of such instruments.

Here are the privileges and rights of a holder in due course:

1. Protection Against Certain Defenses: One of the primary privileges of an HDC is protection
against certain defenses and claims that might otherwise be raised against the negotiable
instrument. This means that even if there are disputes or issues between prior parties (such as
the maker of a promissory note or the drawer of a check), those disputes generally cannot be
used as a defense against the HDC when they attempt to collect on the instrument.
2. Clean Title: An HDC acquires a "clean" or "good" title to the instrument, free from many defects,
claims, or equities that might exist between prior parties. This allows them to enforce the
instrument as if they had a valid claim to it, regardless of any disputes or issues that might have
occurred between prior parties.
3. No Notice of Defenses: To qualify as an HDC, the holder must typically meet certain criteria, one
of which is that they must have taken the instrument for value, in good faith, and without notice
of any claims, defects, or issues that would impair its validity. This means that the HDC cannot
have knowledge of any circumstances that would suggest the instrument is problematic.
4. Enforcement Rights: An HDC has the right to enforce the instrument according to its terms. This
includes the right to demand payment from the party primarily liable (such as the maker of a
promissory note or the drawee of a bill of exchange) and to pursue legal remedies for non-
payment.
5. Ability to Sue Endorsers: If the instrument is endorsed (signed) by prior parties, an HDC has the
right to sue these endorsers for payment if the primary party fails to pay. The HDC can seek
compensation from each endorser in the order of endorsement.
6. Protection from Fraud and Forgery: An HDC is generally protected from fraud, forgery, or other
wrongful acts committed by prior parties that might have altered the instrument or its terms.
7. Priority over Conflicting Claims: If there are multiple claimants to the same instrument, and one
of them qualifies as an HDC, that HDC generally has priority over other claimants who do not
qualify as HDCs.

It's important to note that becoming an HDC involves meeting specific legal requirements, and
not all holders of negotiable instruments automatically enjoy HDC status. To qualify, the holder
must typically demonstrate that they acquired the instrument in good faith, for value, and
without notice of any claims or issues that would impair its validity. Meeting these criteria is
essential for enjoying the privileges and protections associated with HDC status. Additionally, the
 laws governing negotiable instruments and HDC status can vary from one jurisdiction to another,
so it's important to consult local legal authorities or experts for specific guidance.

Six Marks

1. Advances on goods and documents to title to goods.

Advances on goods and documents to title to goods are loans that are made against the security
of goods or documents of title to goods. This type of financing is often used by businesses to
finance the purchase of inventory or to finance the export of goods. To obtain an advance on
goods or documents to title to goods, a business will typically need to provide the lender with
the following:

 A detailed inventory of the goods that are being used as collateral

 Documents of title to the goods, such as a bill of lading or a warehouse receipt
 A personal guarantee from the business owner or another principal of the business

The lender will then assess the value of the goods and the creditworthiness of the business before
approving the advance. If the advance is approved, the lender will typically make a loan to the
business for a percentage of the value of the goods. The business will then be required to repay
the loan, with interest, over a period of time.

Advances on goods and documents to title to goods can be a useful way for businesses to finance
their operations. However, it is important to note that this type of financing can be risky for both
the borrower and the lender. The borrower is at risk of losing the goods if they fail to repay the
loan. The lender is at risk of losing money if the value of the goods declines or if the goods are
damaged or lost.

Here are some examples of advances on goods and documents to title to goods:

 A bank provides a loan to a company to finance the purchase of inventory. The company uses the
goods as collateral for the loan.
 A bank provides a loan to a company to finance the export of goods. The company uses the
documents of title to the goods as collateral for the loan.
 A warehouse company provides a loan to a customer against the security of goods that are stored
in the warehouse.

Advances on goods and documents to title to goods can be a valuable tool for businesses, but it
is important to understand the risks involved before obtaining this type of financing.
 2. Criminal liability of drawer for dishonor of cheques.
The criminal liability of a drawer for the dishonor of cheques is governed by Section 138 of the
Negotiable Instruments Act, 1881 (NIA). Section 138 states that:

Whoever, for the purpose of cheating, knowingly issues or puts into circulation a cheque for the
discharge, in whole or in part, of any debt or other liability, knowing that on presentation for
payment the cheque will not be honoured, or that the drawer has no sufficient funds in that
account to cover the amount of the cheque, or by any other trick, device or means, obtains credit,
shall be punished with imprisonment for a term which may extend to two years, or with fine, or
with both.

To constitute an offence under Section 138, the following ingredients must be present:

 The drawer must issue or put into circulation a cheque for the discharge, in whole or in part, of
any debt or other liability.
 The drawer must know that on presentation for payment the cheque will not be honoured, or
that the drawer has no sufficient funds in that account to cover the amount of the cheque.
 The drawer must have the intention to cheat.

If the drawer is convicted of an offence under Section 138, they may be punished with
imprisonment for a term of up to two years, or with fine, or with both.

It is important to note that the offence under Section 138 is a cognizable offence, meaning that
the police can arrest the drawer without a warrant. The offence is also bailable, meaning that the
drawer can be released on bail if they can provide sufficient security.

If a cheque is dishonoured, the payee can file a complaint with the police or the magistrate's
court. The police will then investigate the matter and, if they find sufficient evidence, they will
file a chargesheet against the drawer. The magistrate's court will then hear the case and decide
whether the drawer is guilty or not guilty.

If the drawer is found guilty, they may be sentenced to imprisonment, or fined, or both. The
drawer may also be ordered to pay the payee the amount of the cheque.

It is important to note that the offence under Section 138 is a serious offence and should not be
taken lightly. If you are considering issuing a cheque, you should make sure that you have
sufficient funds in your account to cover the amount of the cheque. You should also avoid issuing
cheques for the purpose of cheating.
 3. Bills in sets

Bills in sets are a type of negotiable instrument that is issued in multiple copies. All of the copies
of a bill in a set are considered to be one instrument, and the holder of any one copy is entitled
to payment of the full amount of the instrument. Bills in sets are often used in international
trade transactions, as they can help to reduce the risk of loss or theft. If one copy of a bill in a
set is lost or stolen, the holder of another copy can still collect payment. Bills in sets are
governed by the law of the country in which they are issued. However, there is also a uniform
law on bills of exchange and promissory notes, which has been adopted by many countries. This
uniform law provides that bills in sets must be numbered and contain a provision that states
that they are only payable if the others remain unpaid.

Here is an example of how bills in sets might be used in an international trade transaction:

 A company in the United States sells goods to a company in the United Kingdom.
 The US company issues a bill of exchange to the UK company for the value of the goods.
 The bill of exchange is drawn in sets of three.
 The US company sends one copy of the bill of exchange to the UK company and keeps the other
two copies.
 The UK company accepts the bill of exchange by signing it.
 The UK company sends one copy of the accepted bill of exchange back to the US company and
keeps the other two copies.
 The US company discounts the bill of exchange at a bank.
 The bank pays the US company the value of the bill of exchange, minus a discount.
 The bank presents the bill of exchange to the UK company for payment on the due date.
 The UK company pays the bill of exchange to the bank.

Bills in sets are a useful tool for international trade transactions, as they can help to reduce the
risk of loss or theft and facilitate the financing of transactions.

4. Paying Banking and Collecting Banker.

A paying banker is a bank that pays a negotiable instrument, such as a check, drawn on it by its
customer (the drawer). A collecting banker is a bank that collects a negotiable instrument drawn
on another bank on behalf of its customer (the payee).
Paying banker

The paying banker has a contractual obligation to pay the negotiable instrument if it is presented
for payment within a reasonable time and if the drawer has sufficient funds in their account to
cover the amount of the instrument. If the paying banker pays the instrument without sufficient
funds in the drawer's account, the paying banker is liable to the payee for the amount of the
instrument.

Collecting banker

The collecting banker has a duty to collect the negotiable instrument on behalf of its customer.
This duty includes presenting the instrument for payment to the paying bank within a reasonable
time and notifying the customer of any dishonor of the instrument. If the collecting banker fails
to collect the instrument or fails to notify the customer of dishonor in a timely manner, the
collecting banker may be liable to the customer for losses caused by the failure.

The relationship between the paying banker and the collecting banker is contractual. The
collecting banker acts as the customer's agent in collecting the instrument on the customer's
behalf. The paying banker has no contractual relationship with the collecting banker.

Example

Suppose that Customer A has a checking account at Bank X and Customer B has a checking
account at Bank Y. Customer A writes a check for $100 payable to Customer B. Customer B
deposits the check into his account at Bank Y.

Bank Y is the collecting banker. Bank Y will present the check to Bank X for payment. Bank X is
the paying banker. If Bank X has sufficient funds in Customer A's account, Bank X will pay the
check. Bank Y will then credit Customer B's account with the $100.

If Bank X does not have sufficient funds in Customer A's account, Bank X will dishonor the check.
Bank Y will then notify Customer B of the dishonor. Customer B may then pursue collection of
the check from Customer A directly.

The relationship between the paying banker and the collecting banker is essential for the smooth
functioning of the banking system. By efficiently collecting and paying negotiable instruments,
paying and collecting bankers help to facilitate the exchange of goods and services.

5. Crossing
 Crossing under banking law refers to the process of writing "crossed" on a cheque. This means
that the cheque can only be cashed by a bank and not by a person.

There are two types of crossing:

 General crossing: This type of crossing is indicated by two parallel transverse lines with or without
the words "and company" between them.
 Special crossing: This type of crossing is indicated by two parallel transverse lines with the name
of a particular bank between them.

A cheque with a general crossing can be cashed by any bank. A cheque with a special crossing
can only be cashed by the named bank. Crossing a cheque is a way to protect the cheque from
being stolen or lost. It also makes it more difficult for the cheque to be cashed by someone who
is not authorized to do so. Crossing a cheque is not required by law, but it is a good practice to
do so. It is especially important to cross cheques that are large or that are being sent through the
mail.

Here are some of the benefits of crossing a cheque under banking law:

 It protects the cheque from being stolen or lost. If a cheque is lost or stolen, it is less likely to be
cashed if it is crossed.
 It makes it more difficult for the cheque to be cashed by someone who is not authorized to do
so. A cheque with a special crossing can only be cashed by the named bank.
 It can help to reduce fraud. Crossing a cheque makes it more difficult for someone to alter the
cheque or to forge the signature of the payee.

Overall, crossing a cheque is a good way to protect yourself and your money. It is a simple process
that can make a big difference. However, it is important to note that crossing a cheque may not
always prevent fraud. For example, a cheque with a special crossing can still be cashed by
someone who has stolen the cheque and has the necessary information to impersonate the
payee.

6. Noting and protesting. +

Noting and protesting under banking law can be used to hold banks accountable for their actions.
Noting can be used to document specific events or actions that may be considered illegal or
unethical. For example, a customer could note a bank employee making discriminatory remarks
or a bank refusing to provide a loan to a qualified borrower. Protesting can be used to express
 disapproval of a bank's policies or practices. For example, a group of customers could protest a
bank's high fees or its predatory lending practices. Noting and protesting can be an effective way
to pressure banks to change their behavior. For example, if a customer notes a bank employee
making discriminatory remarks, the bank may be more likely to investigate the matter and take
disciplinary action against the employee. If a group of customers protests a bank's high fees, the
bank may be more likely to lower its fees in order to avoid losing customers.

Here are some examples of how noting and protesting have been used to hold banks accountable
under banking law:

 Customers note a bank employee making discriminatory remarks. The bank investigates the
matter and takes disciplinary action against the employee.
 A group of customers protest a bank's high fees. The bank lowers its fees in order to avoid losing
customers.
 A customer notes a bank refusing to provide a loan to a qualified borrower. The bank investigates
the matter and determines that the borrower was qualified for a loan. The bank then approves
the loan.
 A group of customers protest a bank's predatory lending practices. The bank changes its lending
practices in order to avoid further scrutiny.

Noting and protesting are important tools for holding banks accountable under banking law. By
documenting events and expressing disapproval, people can make a difference and create a more
fair and equitable banking system.

It is important to note that there are some limitations on noting and protesting under banking
law. For example, banks may have policies that restrict employees from discussing their work
with customers or the public. Additionally, banks may be able to take legal action against
customers who protest their policies or practices.

However, despite these limitations, noting and protesting can still be an effective way to hold
banks accountable. By understanding the limitations and using caution, customers can still use
noting and protesting to make a difference

Unit – 5
1. What is E-Banking? Explain the advantages and disadvantages of e-banking.
 2. Discuss the summary of observations and recommendations of the Tandon Committee
Report.
3. Explain the principles of sound lending. (6M)
4. Explain the various trends of E-Banking services. +
5. Narrate the reference of Debt Recovery Tribunals.

6. Examine the grounds under which the banking ombudsman may reject the complaint.
7. Explain E-Banking Remittances.

Six Marks
1. Reforms in Indian Banking law.

The Indian banking sector has undergone a number of reforms in recent years. These reforms
have been aimed at improving the efficiency and stability of the banking system, and at
promoting financial inclusion.

Some of the key reforms in Indian banking law include:

 Liberalization of the banking sector: The Indian government has liberalized the banking sector by
allowing new banks to enter the market and by allowing foreign banks to operate in India. This
has increased competition in the banking sector and has helped to improve the quality of banking
services.
 Strengthening of the regulatory framework: The Reserve Bank of India (RBI), the central bank of
India, has strengthened the regulatory framework for banks. This has included introducing new
capital adequacy requirements, liquidity requirements, and risk management standards. This has
helped to make banks more resilient to financial shocks.
 Promoting financial inclusion: The government has taken a number of steps to promote financial
inclusion, such as introducing the Pradhan Mantri Jan Dhan Yojana (PMJDY), which has provided
bank accounts to over 400 million people. The government has also introduced a number of other
schemes to make it easier for people to access financial services.

These reforms have had a positive impact on the Indian banking sector. The banking system is
now more efficient, stable, and inclusive than ever before.

Here are some of the benefits of the reforms in Indian banking law:
 Improved efficiency: The reforms have helped to improve the efficiency of the banking system
by increasing competition and by strengthening the regulatory framework. This has led to lower
costs for consumers and businesses.
 Increased stability: The reforms have helped to increase the stability of the banking system by
strengthening the capital adequacy requirements and liquidity requirements. This has made
banks more resilient to financial shocks.
 Promoted financial inclusion: The reforms have helped to promote financial inclusion by making
it easier for people to access financial services. This has helped to reduce poverty and inequality.

Overall, the reforms in Indian banking law have had a positive impact on the banking sector and
on the Indian economy as a whole. However, there are still some challenges that need to be
addressed. For example, the banking sector is still relatively concentrated, and there is a need
for more competition. Additionally, the quality of credit assessment needs to be improved.
Despite these challenges, the reforms in Indian banking law have been a success. The banking
sector is now more efficient, stable, and inclusive than ever before.

2. Credit Card. ++

A credit card is a type of payment card that allows users to borrow money from a bank or other
financial institution to make purchases. Credit cards are typically issued with a credit limit, which
is the maximum amount of money that the user can borrow. Credit cards can be used to purchase
goods and services at merchants that accept them. The user pays back the borrowed money, plus
interest, over time. Credit cards offer a number of benefits to users, including:

 Convenience: Credit cards can be used to make purchases without having to carry cash or checks.
 Flexibility: Credit cards can be used to make purchases online, in stores, and over the phone.
 Rewards: Many credit cards offer rewards programs that allow users to earn points or miles for
every dollar they spend. These rewards can be redeemed for travel, merchandise, and other
items.
 Security: Credit cards offer fraud protection, which means that users are not liable for
unauthorized charges.

However, there are also some risks associated with using credit cards, including:

 Debt: If users do not pay their credit card bill in full each month, they will accrue interest charges.
This can lead to debt if users are not careful.
 Fraud: Credit cards can be vulnerable to fraud, such as identity theft and credit card cloning.
 Annual fees: Some credit cards charge annual fees.
 Overall, credit cards can be a convenient and flexible way to pay for goods and services. However,
it is important to be aware of the risks associated with using credit cards and to use them
responsibly.

3. ATM +
An automated teller machine (ATM) is a computerized machine that allows customers to
perform financial transactions without the assistance of a teller. ATMs are typically
located in banks, shopping malls, and other public places. ATMs allow customers to
withdraw cash, deposit money, check their account balance, and transfer money
between accounts. Some ATMs also allow customers to pay bills, purchase goods and
services, and apply for loans.

ATMs are convenient and efficient way for customers to access their financial accounts.
They are also available 24 hours a day, 7 days a week.

Here are some of the benefits of using ATMs:

 Convenience: ATMs are available 24 hours a day, 7 days a week. This means that
customers can access their money whenever they need it.
 Efficiency: ATMs are a quick and easy way to withdraw cash, deposit money, check
account balances, and transfer money between accounts.
 Security: ATMs are equipped with security features to protect customer accounts from
fraud.
 Flexibility: ATMs offer a variety of financial services, such as bill payment, purchase of
goods and services, and loan applications.

However, there are also some risks associated with using ATMs:

 Fraud: ATMs can be vulnerable to fraud, such as skimming and card cloning.
 Hacking: ATMs can be hacked, which could allow criminals to steal customer
information.
 Safety: ATMs can be dangerous places, especially at night. Customers should be aware
of their surroundings and take precautions to protect themselves.

Overall, ATMs are a convenient and efficient way for customers to access their financial
accounts. However, it is important to be aware of the risks associated with using ATMs
and to take steps to protect yourself.

4. Cyber Evidence.
 Cyber evidence is any digital data that can be used to prove or disprove a fact in a legal
proceeding. It can include a wide variety of data, such as emails, social media posts, internet
browsing history, and computer files. Cyber evidence is often used in criminal cases, such as cases
involving fraud, theft, and child pornography. It can also be used in civil cases, such as cases
involving intellectual property theft and breach of contract. Cyber evidence can be very valuable
in legal proceedings. It can provide concrete proof of what happened, and it can help to
corroborate testimony from witnesses. However, cyber evidence can also be complex and
difficult to understand. It is important to have an experienced cyber forensics expert to help
collect and analyze cyber evidence in a legal case.

Here are some examples of cyber evidence that can be used in a legal proceeding:

 Emails: Emails can be used to prove or disprove communications between individuals. They can
also be used to track the movement of money or other assets.
 Social media posts: Social media posts can be used to prove or disprove someone's whereabouts,
activities, or intentions. They can also be used to identify witnesses or other relevant individuals.
 Internet browsing history: Internet browsing history can be used to track someone's online
activity. This can be useful for proving or disproving someone's knowledge of certain information
or for identifying websites that they visited.
 Computer files: Computer files can contain a variety of information, such as documents, images,
and videos. This information can be used to prove or disprove certain facts or to identify suspects.

Cyber evidence can be collected in a variety of ways. One common method is to use a computer
forensics tool to copy the contents of a hard drive or other storage device. Another method is to
use a network sniffer to capture data that is being transmitted over a network. Once cyber
evidence has been collected, it needs to be analyzed to determine its relevance and value. This
analysis can be done by a cyber forensics expert or by a specialized software tool. Cyber evidence
can be a powerful tool in a legal proceeding. It can be used to prove or disprove certain facts and
to identify suspects. However, it is important to have an experienced cyber forensics expert to
help collect and analyze cyber evidence in a legal case.

Here are some of the benefits of using cyber evidence in a legal proceeding:

 Accuracy: Cyber evidence is often more accurate than traditional forms of evidence, such as
eyewitness testimony. This is because cyber evidence is not subject to human error.
 Verifiability: Cyber evidence can be verified by multiple experts. This makes it more reliable than
other forms of evidence, such as hearsay.
 Permanence: Cyber evidence is permanent. This means that it cannot be changed or destroyed.
Overall, cyber evidence can be a very valuable tool in a legal proceeding. It can help to prove or
disprove certain facts and to identify suspects. However, it is important to have an experienced
cyber forensics expert to help collect and analyze cyber evidence in a legal case.