Law Students Federation

LL.B. Notes
Banking

5th Semester

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 Law of Banking & Negotiable Instruments

Q1. Explain Historical background of development of banking system with specific reference
to banking regulation act.

Ans. Bank means to collect first bank was established in England in 1640 during the period of
king Charles II & it was known as Bank of England. This bank had functions to accept
deposit of the people & make them payment whenever they demand it. Later on 1850
commercial bank was established in America. The result of bank was better & therefore
in 1890 BHARATH BANK was established in India. Later on more banks come by
different names such as Industrial bank, commercial bank & money transaction bank.

In 1934 reserve bank act was passed in India. Reserve bank had powers to print
& circulate currency notes in addition to these reserve bank have to give license to open
more banks after independence there is rapid growth of banking sector in India.
Therefore, it is called as BANKS ARE BACK BONE of Indian economy.

Kinds of banks: - There are different kinds of banks which develop in India & these
banks are as follows.

1. Private bank: - Private bank can be established by minimum 7members & maximum
50members, these founder members makes investment to start the bank.
2. Public bank: - In public bank there are minimum 7members & maximum there is no
limit, public bank collects by allotment of shares.
3. Government bank: - In 1969 the then prime minister Indra Gandhi nationalized 14
private banks, again in 1971 there was nationalization of 6more banks. Nationalization
means private banks were taken over by government, private banks were given loan
only to rich people, after banks nationalization every common man can be barrow loan
according to procedure.
4. Co-Operative bank: - There are many banks established by people of particular caste
& religion & these are called as Co-Operative banks. It includes urban co-operative bank
& rural co-operative banks.
5. Industrial finance bank:- These banks advance loan for the purpose of industries.
These loans are given for long term & also these bank give subsidy for new industries.
6. Housing development bank:- These bank advance loan for construction of house in
rural & urban areas.
7. Foreign bank:- Central government has given license to foreign country banks to start
business in India because of these banks local people gets employments & government
gets taxes.

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 Law of Banking & Negotiable Instruments

Banking Regulation Act 1949:- In order to regulate the banking regulation act 1949 &
made following provisions.
1. Any bank to be open by obtaining license from reserve bank of India.
2. Every bank has to deposit percentage of amount as deposit in reserve bank, which is for
security of small depositor up to 1lakh rupees.
3. Reserve bank has to be follows policy decision of finance ministry of India.
4. In order to open new branches permission of reserve bank is necessary.
5. Audit of every bank to be done by auditor who is charted accountant & copy of audit
report can be send to reserve bank every year.
6. Bank can also collect capital by allotment of shares.
7. Every bank to hold annual general meeting & get approval of balance sheet of profit &
loss account.
8. There is no need for government bank to hold meeting.
9. There should be elections of directors of the bank.
10. In government bank directors are appointed by government.
These are details about development of banks in India & banking regulation act
1949.

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Q2. Explain role of banking business & its importance in modern times in economy of the
country.

Ans. Banking business includes different types of transaction carried by bank after
introduction of information technology again there is rapid development in banking
business, it can be summarized by as follow.

1. Opening of new account;- Bank open new account according to procedure such as
fulfill application form, to affix photos, to give introduction by account holder & to
enclosed documents of identity proof & residence proof.
2. Issue of passbook:- Bank will issue passbook to account holder, in passbook there
are entries relating to deposit, withdraw & interest paid by banker. It is called as credit &
debit account.
3. Issue of cheque book:- Banker may issue cheque book to account holder on his
demand, he can issue cheque to any party for payment.
4. Collection of cheque amount:- Bank may accept cheque of any other bank deposited
by customer, bank may send cheque for clearance & collect your money from other bank
& deposit in the account.
5. Issue of demand draft:- When anybody makes payment of money & commission then
bank issue DED. DD may be issued in name of any party (or) legal person.
6. Loan advancement:- Bank may advance loan by taking security for lawful purpose.
Loan may be given for education, hospital expenses, to purchase property, for
construction, for business, industry, it is given by pledge of articles such as gold loan is
also given by mortgage of immovable property, bank may also take surety to advance
loan.
7. Bank guarantee:- Bank may give guarantee which is accepted by any party, these
guarantee is given after taking security from the party.
8. Fixed deposit bond (FD):- Bank accept fixed deposit for particular term, after expiry of
the term payment is made with interest called as maturity of the bond, before maturity
also bond can be cancelled & bank make payment by relating interest.
9. ATM Card:- Banker issue ATM card on request of customer there is pin code no of
ATM card by using pine code no customer can draw money round the clock.
10. Credit card:- Bank may issue credit card on request of customer & purchasing can be
done by using credit card up to its limit.
11. Debit card:- In debit card customer makes payment by using the card.
12. Bank insurance:- Bank also accept the insurance of customer according to procedure.
13. Online payment:- On instruction of customer bankers also makes online payment
such as payment of insurance, payment of electricity bills, payment of taxes.

These are details about importance of banking business in modern times.

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Q3. What is relationship of bankers & customer as creditor, debtor, trustee, beneficiary,
bailor, bailee, specified in banking law.

Ans. Bankers have different relations with customers depend on nature of transactions, these
relations can be explained as follows.

1. Bankers as creditor:- Bankers is creditor when it advance loan to a customer, if

customer makes default to repay the loan amount then bank can file recovery suit &
obtain decree against the customer, property of customer is attached & sold by public
auction for recovery of loan amount.
2. Banker as a debtor:- When customer have deposited money in his account (or) taken
fixed deposit bond then banker is Debtor. When customer demands his money then
banker have to make payment. If banker refuses payment without any reason then
customer can file case & claim damages.
3. Banker as a trustee:- Banker is like a trustee because bank should not reveal account
details of one person to any other person, bank have to maintain secrecy of transaction
of every customer, bank have to show details when there is order of court (or) to her
authorities.
4. Bankers as beneficiary:- There is benefit to bank from all customers when loan is
sanctioned then bank take interest for DD bank takes commission, for cheque book bank
takes charges, for ATM card bank takes commission, when cheque is dishonor then
banker collect penalty, therefore banker is benefited & it is beneficiary.
5. Banker as bailor:- Banker is like a bailor, when bank advance loan for vehicle such as
Auto, Car, Truck, then possession is given to customer, document of vehicle are in name
of bank. If customer makes default to pay the installments then banker can take away
the vehicle without order of court.
6. Banker as bailee:- When bank advance loan then there is hypothecation of the goods
if gold loan is taken then possession gold is given to banker if goods are given in
possession then it Is called as hypothecation & banker is bailee, goods are released
after payment of loan amount & interest.

These are details about role of the banker as creditor, debtor, trustee, bailor,
bailee & beneficiary in banking law.

Law Students Federation; Hyderabad +91 9603255350 ( W app). age 4

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