Banking Law 1 Notes

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Banking LAW-1 - Notes
Bba llb (Karnataka State Law University)
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Table of Contents
BANKING LAW ................................................................................................................................. 3
UNIT-1 ............................................................................................................................................. 3
ORIGIN AND EVOLUTION OF BANKING ...................................................................................... 3
KINDS OF BANK ........................................................................................................................... 5
FUNCTIONS OF COMMERCIAL BANKS/BANKS......................................................................... 10
ANCILLARY FUNCTIONS/SERVICES OF BANK.......................................................................... 12
THE STATE BANK OF INDIA ...................................................................................................... 13
Non-banking subsidiaries ................................................................................................... 15
 SBI Capital Markets Ltd .................................................................................................. 15
 SBI Cards & Payments Services Pvt. Ltd. (SBICPSL) ...................................................... 15
 SBI Life Insurance Company Limited ............................................................................. 15
 In March 2001, SBI (with 74% of the total capital), joined with BNP Paribas (with 26%
of the remaining capital), to form a joint venture life insurance company named SBI Life
Insurance company Ltd. ......................................................................................................... 15
BANKING OMBUDSMAN ............................................................................................................ 15
UNIT-2 ........................................................................................................................................... 18
FUNCTIONS OF RBI .................................................................................................................... 18
POWER OF RBI ........................................................................................................................... 20
SUPERVISORY FUNCTION OF RBI ............................................................................................. 22
VARIOUS CONTROL OF RBI OVER COMMERCIAL BANKS ........................................................ 23
DEPOSIT INSURANCE CORPORATION (DICGC ACT1961) ........................................................ 24
BANKING REGULATION ACT 1949 ............................................................................................ 26
ACTIVITIES PERMITTED BY BANKING REGULATION ACT 1949 TO BANKERS ...................... 27
UNIT – 3 ......................................................................................................................................... 28
RELATIONSHIP OF BANKER AND CUSTOMER.......................................................................... 28
PRECAUTIONS TO BE TAKEN BY THE BANK BEFORE OPENING AN ACCOUNT ...................... 31
BANKER OBLIGATION TO MAINTAIN SECRECY OF ACCOUNT ................................................ 34
BANKER DUTY TO HONOUR CUSTOMER CHEQUES ................................................................. 38
RIGHTS OF BANKER .................................................................................................................. 39
CUSTOMER DUTY TOWARDS BANKER ..................................................................................... 42
UNIT 4 ........................................................................................................................................... 43
ENDORSEMENT ......................................................................................................................... 43
HOLDER IN DUE COURSE .......................................................................................................... 45
CHEQUES .................................................................................................................................... 47
CROSSING OF A CHEQUE ........................................................................................................... 50
DISHONOUR OF CHEQUE........................................................................................................... 51
NOTING AND PROTEST ............................................................................................................. 53
PAYING BANKER ........................................................................................................................ 54
UNIT 5 ........................................................................................................................................... 56
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SOUND PRINCIPLES OF BANKING AND LENDING .................................................................... 56

PRECAUTIONS OF LENDING ...................................................................................................... 58
PRIORITY SECTOR LENDING ..................................................................................................... 61
SECURITISATION ACT, 2002...................................................................................................... 62
AGENCY SERVICES OF BANKS ................................................................................................... 66
TRENDS OF E BANKING SERVICES IN INDIA ............................................................................ 67
CREDIT CARDS ........................................................................................................................... 69
MOBILE BANKING / TELE- BANKING/ SMS BANKING ............................................................. 72
AUTOMATED TELLER MACHINES (ATM’S) .............................................................................. 74
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BANKING LAW
UNIT-1
ORIGIN AND EVOLUTION OF BANKING

Meaning
 Bank is a financial institution that accepts deposits and channels those deposits into lending activities through
capital markets.
 Deposits can be withdrawn on demand/ returned after fixed period.
Definition
 S.5(c) Banking Regulation Act, 1949: “Banking Company means a company which transacts the business of
banking in India”.
 F. E. Perry: A financial institution that accepts deposits and channels those deposits into lending activities
through capital markets deposits can be withdrawn on demand/ returned after fixed period. It connects
customer with capital deficits to customers with capital surplus.
Introduction
 The system of banking had existed in India for many centuries, and catered the credit needs of the economy
of that time.
 The famous Kautilya Arthashastra, of 4th century BC, contains references to creditors and lending. For
example, there is a reference to “Interest on commodities loaned need to be accounted as revenue of the state.
 Lending activities were not entirely unknown in the medieval India and the concepts such as priority of claims
of creditors and commodity lending’ were established in business practices.
 the roots of commercial banking in India can be traced back to the early eighteenth century when the Bank of
Calcutta was established in June 1806 –which was renamed as Bank of Bengal in January 1809 .This was
followed by the establishment of the Bank of Madras in July 1843, as a joint stock company, through the
reorganization and amalgamation of four banks viz., Madras Bank, Carnatic Bank, Bank of Madras and the
Asiatic Bank. This bank brought about major innovations in banking such as use of joint stock system,
conferring of limited liability on shareholders, acceptance of deposits from the general public, etc. The Bank
of Bombay, the last bank to be set up under the British era period.
Origin of the banking

 First bank was probably the religious temples of the ancient world where gold was stored in the form of easy-
to-carry compressed plates. Their owners just felt that temples were the safest places to store their gold as
they were constantly attended, well-built and were sacred, thus would-be best choice to save from thieves.
 There are extent records of loans from the 18th century that were made by temple priests to merchants.
 Ancient Greece holds further evidence of banking such as temples as well as private and civic entities
conducted financial transactions such as loans, deposits, currency exchange. There is evidence too for credit
transaction, whereby in return for a payment from a client, a moneylender writes a credit note for the client.
 Ancient Rome perfected the administrative aspect of banking and saw greater regulation of financial
institutions and financial practices. Charging interest on loans and paying interest on deposits became more
highly developed and competitive.
Evolution of banking institution in India
Origin
 The origin of banking in India can be traced back to the Vedic period. The transformation from pure money
lending to proper banking have taken place before the times of Manu. Manu, a great Hindu jurist devoted a
section of his work explaining the deposits and advances and laid down certain rules on rates of interest.
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 In Mauryan period and later Desi bankers played some role in the economy of the country.
 It was during the Mogul period that indigenous bankers started playing a vital role in lending money and
financing of the foreign trade and commerce.
Pre- independence period

 During British period before independence the first joint stock bank, namely The General Bank of India was
established in 1786. Later on Bank of Hindustan and Bengal Bank came into existence. East India Company
established three banks, namely The Bank of Bengal, The Bank of Bombay, and Bank of Madras. They were
collectively called Presidency Banks. All above banks were amalgamated in 1920 and a new bank called
Imperial Bank of India was established.
 A number of private banks had been established by the businessmen from mid of the 19th century onwards.
 Swadeshi movement helps to establish a number of banks with Indian management, namely, Punjab National
Bank Ltd., Bank of India Ltd., Canara Bank Ltd, and Indian Bank Ltd.
Post-independence period
 The RBI was established as the Central bank of the country in 1935 under Reserve RBI Act. Later Banking
Regulation Act passed in 1949; RBI was brought under government control. Under this act RBI was conferred
with supervision and control of the banks and licensing powers and the authority to conduct inspections was
also given to it.
 After independence, the Imperial Bank of India was nationalized and was given the name State Bank of India.
It was established under State Bank of India Act, 1955.
 In 1960, RBI was empowered to force the compulsory merger of the weak banks with the strong ones. This
led to reduction in the number of banks from 566 in 1951 to about 89 in 1969.
Nationalisation Period
 On July 19, 1969, Government of India nationalized 14 major banks whose national deposits were more than
50 crores.
 In1980, another six banks were nationalized, and thus raising the number of nationalized banks to 20.
 The Indian Banking system immensely developed after nationalization but the rural and weaker section of
the society was still not covered under the system.
 On 2nd October 1975, RRB(regional rural banks) were established with an objective to extend the amount of
credit to the rural section of the society.
Liberalization Phase (1990)

 In order to improve financial stability and profitability of Public Sector Banks, the Government of India set up
a committee under the chairmanship of Shri. M. Narasimham.
 On the suggestions of Narsimham Committee, the Banking Regulation Act was amended in 1993 and thus the
gates for the new private sector banks were opened. And committee also made some suggestions.
 No more nationalisation of banks.
 Foreign banks would be allowed to open offices in India either as branches or as subsidiaries.
 to make banks more competitive. Public sector banks and private sector banks should be treated equally
by the Government and RBI.
 Banks should be encouraged to remove traditional system of banking and adopt progressive function.
 10 Privates players got a license from the RBI to entry in the Banking sector. These were Global Trust
Bank, ICICI Bank, HDFC Bank, Axis Bank, etc.
Conclusion
 Today, Indian Banking industry is one of the most growing flourishing industries.
 Banking systems of any country need to be effective, efficient as it plays the active in the economic
development of the country.
 The Indian banking system has its foundations in the 18th century, and has had a varied evolutionary
experience since then.
 The initial banks in India were primarily traders’ banks engaged only in financing activities.
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 Banking industry in the pre-independence era developed with the Presidency Banks, which were
transformed into the Imperial Bank of India and subsequently into the State Bank of India.
 The initial days of the industry saw a majority private ownership and a highly work environment.
 Major concentration towards public ownership and accountability were made with Nationalisation in 1969
and 1980 which transformed the face of banking in India.
 The industry in recent times has recognised the importance of private and foreign players in a competitive
scenario and has moved towards greater liberalisation.
KINDS OF BANK
1. Reserve Bank of India (Central bank)

 Reserve Bank of India is the Central Bank of our country, Established on 1st April 1935 accordance with the
provisions of the RBI act 1934.
 It started operations as a private shareholder’s bank. Later it replaced the Imperial Bank of India.
 It holds the apex position in the banking structure and performs various developmental and promotional
functions.
 It has wide powers to supervise and control the banking structure. It occupies vital position in the monetary
and banking structure of the country.
 RBI is known as a banker’s bank, hence It has authority to formulate and implement monetary and credit
policies.
 It is owned by the government of a country and has the monopoly power of issuing notes.
2. Commercial Banks
 Commercial bank is an institution that offers various services services like accepting deposits and lending
loans and advances to general customers and business man.
 They cater to the financial requirements of industries and various sectors like agriculture, rural
development, etc. it is a profit making institution owned by government or private of both.
Types of commercial banks
A. Scheduled banks
 Scheduled Banks in are banks which are listed in the Second Schedule of the Reserve Bank of India Act1934.
 The scheduled banks enjoy several privileges as compared to non- scheduled banks such as refinance
facilities from the Reserve Bank of India etc. Besides commercial banks, cooperative banks may also
become scheduled banks if they fulfil the criteria stipulated by RBI.
 All commercial banks (Indian and foreign), regional rural banks, and state cooperative banks are
scheduled banks.
 These banks have to satisfy the RBI that their affairs are carried out in the interest of their depositors.
 Cooperative banks may also become scheduled banks if they fulfill the criteria stipulated by RBI.
B. Non-Scheduled Banks
 Non- scheduled banks are those which are not included in the second schedule of the RBI Act, 1934.
 These banks do not fallow to the norms of the RBI act. According to RBI these banks are not capable of
serving and protecting the interest of depositors.
 Presently there are only four non schedule banks in India.
C. Public Sector Banks

 Major/full stake in these banks are held by the Government. Even management control will have held by
Central Government.
 By default, the minimum 51% shares would be kept by the Government of India
 Till July, 1969, there were only 8 Public Sector Banks (SBI & its 7 associate banks).
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 14 commercial banks were nationalized in 1969, and 100% ownership of these banks were held by the
Government of India. Later six more private banks were nationalized in 1980.
 The public sector accounts for 75 percent of total banking business in India.
 State Bank of India is the largest commercial bank in terms of volume of all commercial banks.
 Later these banks were allowed to raise capital through IPOs and there by the share holding pattern has
changed.
 IDBI Bank and Regional Rural Banks are also included in the category of Public Sector banks.
D. Private Sector Banks

 Greater parts of stake or equity are held by the private shareholders and not by government.
 When banks were nationalized under two tranches in 1969 and in 1980), all banks were not included.
Those non nationalized banks which continue operations even today are classified as Old Generation
Private Sector Banks. Like The Jammu & Kashmir Bank Ltd, The Federal Bank, The Laxmi Vilas Bank etc.
 In July 1993 on account of banking sector reforms the RBI allowed many new banks to start banking
operations.
 ICICI Bank, HDFC Bank, Kotak Mahindra Bank, Yes Bank etc., these banks are recognized as New
Generation Private Sector Banks.
 Private sector banks established new competitive environment in Indian Banking System.
 These banks were having competitive advantages over their counterparts (existing old private banks and
public sector banks) in their IT support system, innovative products, and pricing of their products.
 Private sector banks have been rapidly increasing their presence in the recent times and offering a variety
of newer services to the customers and posing a stiff competition to the group of public sector banks.
E. Foreign Banks
 Foreign banks have their registered offices outside India, and through their branches they operate in
India.
 They are allowed to operate through branches or wholly owned subsidiaries.
 Foreign banks have to adhere to all local laws as well as guidelines and directives of Indian Regulators
such as RBI, IRDA, and SEBI.
 foreign banks are very active in:
 Forex, Trade Finance and Corporate Banking activities.
 Assist their clients in raising External Commercial Borrowings through their branches outside
India or foreign correspondents.
 They are active in loan syndication as well.
 CITI bank, HSBC, Standard Chartered etc. are the examples of foreign bank in India.
F. Regional rural bank

 Regional Rural Banks were setup based on the recommendations of a working group headed by Shri
Narasimham committee. Eg Karnataka Gramin Bank, Karnataka Vikas Grameena Bank.
 It established to serve the rural population in addition to the banking services offered by the co-
operative banks and commercial banks in rural areas.
 Joint shareholding by Central Government, the concerned State Government and the sponsoring bank.
 RRBs play a vital role in mobilizing the savings of the small and marginal farmers, artisans, agricultural
labourers and small entrepreneurs and inculcate banking habit among the rural people.
 It can rise fund through Share capital, Deposits from public, Borrowings from sponsor banks Re-finance
from NABARD.
 SBI is having 14 sponsored RRBs with a network of 3,784 branches
 It objects is to:
 Mobilize rural savings and make them available for investments in local areas.
 To develop rural economy by ensuring sufficient credit to agriculture, trade, commerce, industry
and other productive activities in the rural areas,
 Bridging credit gap in rural area.
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 Outflow of rural deposits to urban areas.

 Reduced regional imbalances and to increase rural employment.
 Functions
 accepting of deposits
 granting of loans and advances to:
A. agricultural purposes
B. small and marginal farmers and agricultural labourers,
C. To cooperative societies.
D. Artisans
E. small entrepreneurs
 Drawbacks
 lack of training to staff
 low co-operation from government
 restricted policy of lending to rural projects only
 low interest on loans
 Branches in rural areas
 lending to weaker section -defaults and problem of recover
G. Local area banks

 Local Area Banks with operations in two or three contiguous districts.
 It objects is to mobilise rural savings and make them available for investments in local areas.
 Geographical area of operation of such banks is limited and they are allowed to perform all functions of
a scheduled commercial bank.
E. Payments bank
 In July 2014, the RBI released the draft guidelines for payment banks, seeking comments from interested
entities and public at large.
 After taking in to account suggestions from respondents in November 2014, RBI released the final
guidelines for payment banks and invited applications for opening such banks from interested parties.
 There were 41 applications from various segments including some corporate houses. After a due process
RBI accorded eleven entities to launch payments banks within a period of 18 months.
 Within this period of 18 months, these entities were to comply with requirements regarding capital funds
of Rs. 100 crores.
 License was valid for 18 months within which the entities must fulfill the requirements and they were
not allowed to engage in banking activities within the period.
 The RBI will grant full licenses under Section 22 of the Banking Regulation Act, 1949 after it is satisfied
that the conditions have been fulfilled.
 Some of payment banks functioning in India. They are as follows:
1. The Airtel Payment Bank
2. Paytm Payment Bank
3. India Post Payment Bank
4. Fino Payment Bank
5. Aditya Birla Idea Payment Bank
6. Jio Payment Bank
F. Small Finance Banks

 In July 2014, draft guidelines for small finance banks, seeking comments from interested entities and the
general public was released by RBI.
 Later RBI released the list of 72 entities which had applied for a small finance bank license. After a due
screening of these applications RBI had issued 10 provisional licenses to entities, which were required to
convert themselves in Small Finance Banks within one year.
Some of them are: Ujjivan Small Finance Bank 2. Jana Small Finance Bank.
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 These banks established with an aim of financial inclusion “to sections of the economy not being served
by other banks. Such as small business units, small and marginal farmers, micro and small industries and
unorganized sector entities.
 These banks established for promoting rural and semi urban savings and extending credit for economic
activities in the local areas.
3. Co-operative banks
 Cooperative banks play an important role in the Indian Financial System, especially at the village level.
 Cooperative banks cater to the needs of agriculture, retail trade, small and medium industry and self-
employed businessmen usually in urban, semi urban and rural areas.
 They are organized and managed on the principal of co-operation and mutual help. The main objective of co-
operative bank is to provide rural credit.
 The growth of Cooperative Movement commenced with the passing of the Act of 1904.
 It registered as a cooperative under any State or Central Act. If it operating in more than one State, the Central
Cooperative Societies Act is applicable. In other cases the State laws are applicable
 In co-operative banks, the shareholders should be members of the co-operative banks
 The rural credit flow through rural cooperative sector has risen substantially in order to keep pace with the
growing demand for credit in the rural parts of India.
Types of co-operative bank
A. Short Term Agricultural Credit institutions

 Consists of the Primary Agricultural Credit Societies affiliated to District Central Cooperative (DCC)
bank and further into the State Cooperative Bank.
 The membership of the DCC bank comprises all the affiliated PACS and other functional societies.
 State Cooperative Banks support and guide the District Central Cooperative Banks (DCCBs) in India.
 These DCCBs are providing finance to more than lakhs farmers.
B. Long Term Agricultural Credit Institutions

 The long term cooperative credit structure consists of the State Cooperative Agriculture & Rural
Development Banks (SCARDBs) and Primary Cooperative Agriculture & Rural Development Banks
(PCARDBs) which are affiliated to the SCARDBs.
 Loans are given to members on the mortgages of their land usually up to 50% of their value in some
states.
C. Urban Cooperative Bank

 Primary cooperative banks located in urban and semi-urban areas.
 Allowed to lend money only to non-agricultural purposes. And provides loans to small borrowers and
businesses.
 The urban co-operative banks can spread operations to other States and such banks are called as multi
state cooperative banks. They are governed by the Banking Regulations Act 1949 and Banking Laws
(Cooperative Societies) Act, 1965.
4. Development banks
A. National Bank for Agriculture and Rural Development (NABARD)

 It is the apex institution concerned with the policy, planning and operations in the field of agriculture and
other rural economic activities.
 It concerned with the policy, planning and operations in the field of agriculture and other rural economic
activities.
 It involved several refinance and promotional schemes over the years and has been making constant efforts
to refine/ rationalize the schemes in response to the field level needs.
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 The main object of NABARD is Supplementing the resources of the cooperatives banks and RRBs for
meeting the credit needs of its clientele.
 Functions of NABARD
(a) Credit Dispensation
 It Prepares credit plan for each district annually.
 It participates in finalization of Annual Action Plan at block, district and state levels and
monitors implementation of credit plans at above levels.
(b) Developmental & Promotional
 Nurturing and strengthening of - the Rural Financial Institution.
 Development and promotional initiatives in farm and non-farm sector.
 Extending assistance for Research and Development.
(c) A Supervisory Activities
B. Small Industries Development Bank of India (SIDBI)

 It is a financial institution for the promotion, financing and development of the MSME sector.
 It is a central government undertaking. The prime aim of SIDBI is to support MSMEs by providing them
finance.
 Many institutions and commercial banks supply finance, both long-term and short-term, to small
entrepreneurs. SIDBI coordinates the work of all of them.
 SIDBI has evolved a strategy to analyze the problems faced by MSMEs and come out with tailor-made
solutions.
 It performs a series of functions in collaboration with voluntary organizations, nongovernmental
organizations, consultancy firms and multinational agencies to enhance the overall performance of the small
scale sector. Some of Functions;
 Initiates steps for technology adoption, technology exchange, transfer and up gradation and
modernization of existing units.
 Promotes employment oriented industries especially in semi-urban areas to create more employment
opportunities so that rural-urban migration of people can be checked.
 Directly discounts bills to help small scale industries.
 Enlarges marketing capabilities of the products of MSMEs in both domestic and international markets.
 Facilitates timely flow of credit to MSMEs in collaboration with commercial banks.

C. National Housing Bank (NHB)
 Financing institution for the housing sector with the mandate to promote efficient, viable and sound Housing
Finance Companies.
 Aim to regulate the flow of institutional credit for the housing sector and regulate.
 Mobilizes resources and channelizes them to various schemes of housing infrastructure development.
 It is a wholly owned subsidiary of Reserve Bank of India.
D. Export Import Bank of India (EXIM Bank)

 Established for purpose of financing, facilitating and promoting India’s foreign trade.
 Principal financial institution for coordinating the working of institutions engaged in financing exports and
imports.
 Exim Bank is fully owned by the Government of India.
 Functions:
 Financial assistance to export-oriented Indian companies for setting up new production facility,
expansion/modernization or up gradation of existing facilities and for acquisition of production
equipment or technology.
 Development for research and development activities for export oriented companies.
 Financing of joint ventures in foreign countries.
 Provides technical, administrative and financial assistance to parties in connection with export and
import.
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 Loan to Indian companies include

a. Direct financial assistance to exporters;
b. Technology and consultancy services.
c.Loans to foreign governments, companies and financial institutions.
FUNCTIONS OF COMMERCIAL BANKS/BANKS
Primary Functions
1. Acceptance of Deposits:
 This function of commercial bank mobilizes savings of the household sector.
 Banks generally accept three types of deposits viz.
 (a) Current Deposits
 Usually opened by businessmen who have a number of regular with transactions with the bank.
 There is no restriction on number of amount of deposits and withdrawls,
 No interest is paid on current deposits, but banks may charge interest for providing this facility.
These accounts are also known as demand deposits as amount can be withdrawn on demand.
(b) Savings Deposits
 Saving Accounts are opened by salaried and other less income people
 There is no restriction on number and amount of deposits.
 Withdrawals are subject to certain restrictions.
 It earns Interest but less than fixed deposits.
 Saving deposits are an important source of funds for banks.
(c) Fixed Deposits
 Money under this account is deposited for fixed period of time varying from 15 days to several
years.
 Rate of interest is very high. But if money is withdrawn before expiry date, the depositor receives
lower rate of interest.
 Deposits can be renewed for further period. Many banks sanction loans against security of fixed
deposits
(d)Recurring Account Deposit
 Specified amount is regularly deposited by account holder, usually once in a month.
 Main object to form the habit of small savings among the people.
 At the end of maturity period, the account holder gets a substantial amount.
 Interest on this type of deposit is almost equal to fixed deposits.
(2) Loans and Advances

 The public deposits are used by commercial banks for the purpose of granting loans to individuals
and businesses.
 Bank lend to its credit worthy customers for maximizing profits.
 Banks offer loans and advances in fallowing forms:
(A) Overdraft facility
 Banks grant overdraft facility to current account holders.
 Under this barrower allowed to draw more than what is deposited in his account.
 The borrower is granted amount against collateral security
 Interest is charged for actual amount drawn.
(B)Cash Credit
 Cash credit is given by the bank to any businessman or current account holders to meet
regular working needs.
 Credit is given against the security of goods or personal security.
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 Interest is charged on actual amount drawn by the customer.

(C) Discounting of Bill
 It occurs when holder of the bill is not in a position to wait till the maturity of the bill and
requires cash urgently.
 He sells the bill of exchange to bank. later Bank advance credit by discounting bills of
exchange, government securities or any other approved financial instruments. The bank
purchases the instruments at a discount.
(D) Money at Call
 Loans granted for a very short period, generally not exceeding7days.
 Such advances are repayable immediately at a short notice hence they are called as Money
at Call.
 These loans are given to dealers or brokers in stock market against Collateral Securities.
(E) Loans
 Loans are given to customers against the security of moveable properties
 Interest has to be paid on entire loan amount sanctioned
 Type of loans:
a. Agriculture
b. Industries
c. Foreign Trade
d. Personal loan
Secondary Functions
1. Agency services
 Banks perform certain functions on behalf of their customers.
 While performing these services, banks act as agents to their customers, hence these are called as
agency services.
 Important agency functions:
A. Collection
 Banks collect cheques, drafts, bills, promissory notes, dividends, subscriptions, rents and
any other receipts which are to be received by the customer. For these services banks
charge a nominal amount
B. payment
 Banks makes payments on behalf of their customers like paying insurance premium, rent,
taxes, electricity and telephone bills etc. for such services commission is charged.
C. Sale and Purchase of Financial Assets
 Banks undertake sale and purchase of securities, share and any other financial assets.
Nominal charges are charged by a bank.
D.E- banking
 A customer can operate his bank account through his internet. He can make payments of
various bills. He can even transfer money from one place to another.
2. Utility services
A. Locker Facilities
 Commercial banks provide locker facilities to its customers for safe keeping of jewellery, shares,
debentures, and other valuable items. This minimizes the risk of loss due to theft at homes.
B. Dealing in Foreign Exchange
 Commercial banks help in providing foreign exchange to businessmen dealing in exports and
imports.
 However, commercial banks need to take the permission of the central bank for dealing in foreign
exchange.
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C. Transfer of funds
 Bank cheaply and safely transfer fund from one place to another.
 Transfer can be in the form of Demand draft, Travellers cheques. draft, telephonic transfer, and
electronic transfer.
D. Underwriting
 This facility is provided to Joint Stock Companies and to government to enable them to raise funds.
Banks guarantee the purchase of certain proportion of shares, if not sold in the market.
ANCILLARY FUNCTIONS/SERVICES OF BANK
Introduction
 All the services provided by banks can be broadly divided into two categories.
 primary services: which consist of accepting demand deposits and lending money to its customers
as per their requirement.
 ancillary services: Apart from their daily primary activities, banks provide many other supporting
services; these are called ancillary services
Types of Ancillary services
1.Remittance services
 It means a transfer of funds from one branch of a bank to another branch of the same bank or a different
bank.
 One can make local remittances through:
 Bankers Cheque (BC)
 Demand drafts (DD)
 Telegraphic Transfer (TT),
 Mail Transfer (MT)
 National Electronic Fund Transfer (NEFT)
 Real Time Gross Settlement (RTGS) at specified service charges.
 The customer shall fill in full particulars regarding the remittance such as:
 Nature of the remittance i.e. by filling in DD/TT/MT etc.
 Name and address of the beneficiary.
 Name of the branch to which the remittance is to be made.
 Name, address, an account number of the remitter/customer if required.
2.Custodial Services
 This facility is popularly known as Safe Deposit Locker.
 It enables customer to keep their valuables/important documents in a specially designed locker.
 A prescribed rental is charged on them.
 Lockers can be hired by individuals (not minors), firms, limited companies, specified associations and
societies.
 Lockers can be rented for a minimum period of one year.
 There are four different types of lockers i.e. small, medium, large and extra-large with varying rentals.
 Nomination facility is available to an individual hirer.
 In a case of overdue rents bank can charge a penalty.
3.Forex Services
 When a person travels to different countries or wants to buy any foreign merchandises, then they require
foreign currencies.
 Bank provide these currencies to its customers.
 All transactions are done over the counter and only authorised bank branches can perform these functions.
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 When a person earns or receives foreign currencies from abroad, he can also send them to banks.
 These foreign exchange transactions are done according to the rules and regulations of the central banks of
respective countries.
 In India, all the transactions are subjected to the regulations of Foreign Exchange Management Act (FEMA),
1999.
4.Card Services
 card services were introduced for convenience and safety purposes but nowadays it has become the most
popular payment mode among people.
 The bank issues customers two basic types of cards those are credit cards and debit cards.
 With the help of a credit card, the card holder can obtain either goods or services from merchant
establishment where such arrangement exists.
 Then a bill is sent to the cardholder indicating the dues that he/she has to pay within a period of 30-40
days. It carries a fixed interest.
 Debit cards are same as credit cards. The only difference is that a number of dues for each transaction is
debited to card holder’s account as each transaction is notified.
5.E- Banking services

 it is the most popular method of doing banking operation.
 you don’t need to be physically present in the bank branch for performing any function/operation.
 It is also known as online banking or internet banking.
 One can do a number of activities by just sitting in front of one’s computer screen or smart phone.
 Customer can Transfer of funds from one account to another in the same bank or different banks, Keep
surplus funds in a fixed deposit account, Online shopping by using e banking service.
 The only thing he/she needs to do is to access his/her virtual account with the help of the ID and
PASSWORD, provided by the bank. E-Banking Services
6.Insurance services
 Banks deliver a wide range of insurance products that covers the risk of almost every aspect of a human
life, such as- Life, Health, Valuable assets like Personal vehicles, Debit and credit cards etc.
 It is also known as Bank assurance in which a bank and an insurance company form a partnership.
 The insurance company sales its different products to the bank's client base.
 This partnership is profitable for both companies.
 Banks can earn additional revenue by selling the products and the insurance company can expand its
customer base. Example- ICICI Prudential, Bajaj Allianz etc.
7.Investment services
 Some banks also offer Investment services for their corporate customers.
 It is also known as Portfolio services.
 They guide their clients especially about how to invest adequately or raise financial capital for their
business.
 Any individual customer can also avail this kind of services from their respective bank.
THE STATE BANK OF INDIA
Introduction
 SBI is an Indian multinational, public sector banking and financial services statutory body. It is a government
corporation statutory body headquartered in Mumbai.
 SBI shall:
 act as agent of RBI
 can acquire banking business of other banks in India,
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 can transact all banking activities permitted for commercial banks under s. 5 of Banking Regulations Act,
 State Bank shall not own or, acquire any immovable property except for the purpose of providing
buildings or other accommodation in which to carry on the business of the State Bank or for providing
residences for its officers and other employee
 Capital structure:
 The authorised capital of the State Bank shall be 5000 crores rupees divided into 500 crores of fully
paid-up shares.
 The issued capital of state bank on the appointed day, be 5,62,50,000 divided into 5,62,500 shares.
 all shares appointed day, stand allotted to the RBI in lieu of the shares of the Imperial Bank
transferred to state bank
 The issued capital of the State Bank shall consist of equity shares or equity and preference shares
Evolution of SBI
 The origin of the SBI goes back to the first decade of the nineteenth century with the establishment of the Bank
of Calcutta in Calcutta on 2 June 1806.
 Three years later the bank was re-designed as the Bank of Bengal. it was the first joint-stock bank of British
India sponsored by the Government of Bengal.
 Later Bank of Bombay and the Bank of Madras established followed by the Bank of Bengal. These three banks
remained at the apex of modern banking in India till their amalgamation as the Imperial Bank of India on 27
January 1921.
 Till 1951 The commercial banks of the country including the Imperial Bank of India had their operations to the
urban sector and were not equipped to respond to the emergent needs of economic regeneration of the rural
areas.
 In 1951, when the First Five Year Plan was launched, the development of rural India was given the highest
priority.
 to serve the economy in general and the rural sector. the All India Rural Credit Survey Committee
recommended the creation of a state-partnered and state-sponsored bank by taking over the Imperial Bank of
India, and integrating with it, the former state-owned or state-associate banks.
 Act was accordingly passed in Parliament in May 1955 and the State Bank of India was constituted on 1 July
1955. More than a quarter of the resources of the Indian banking system thus passed under the direct control
of the State.
 Later, the State Bank of India (Subsidiary Banks) Act was passed in 1959, enabling the State Bank of India to
take over eight former State-associated banks as its subsidiaries (later named Associates).
 The SBI was thus born with a new sense of social purpose aided by the 480 offices comprising branches, sub
offices and three Local Head Offices inherited from the Imperial Bank.
 The Bank is actively involved since 1973 in non-profit activity called Community Services Banking.
Board of directors
 The general direction of the affairs and business of the State Bank shall be entrusted to the Central Board.
Constitution shall be:
 One chairman
 Four managing directors
 Nine directors
 At each place where the State Bank has a local head office there shall be a Local Board which shall consist of the
following members:
 One chairman
 all directors of SBI from area of local board
 six members to be nominated by the Central Government.
 one ex officio member who shall be the CGM of local head office of SBI
Branches
 SBI has 16 regional hubs and 57 zonal offices that are located at important cities throughout India.
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 SBI has over 24000 branches in India. The bank had overseas offices spread over 36 countries having the largest
presence in foreign markets among Indian banks.
SBI and its associates

 Through the SBI (Subsidiary Banks) Act, 1959, major state- associated banks were converted into subsidiary
banks of SBI.
 SBI acquired the control of seven banks in 1960. They were the seven regional banks of former Indian princely
states.
 They were renamed, prefixing them with 'State Bank of':
 State Bank of Bikaner and Jaipur (SBBJ)
 State Bank of Hyderabad (SBH)
 State Bank of Indore (SBN)
 State Bank of Mysore (SBM)
 State Bank of Patiala (SBP)
 State Bank of Saurashtra (SBS) and State Bank of Travancore (SBT)
 The plans for making SBI a single very large bank by merging the associate banks started in 2008, and in
September the same year, SBS merged with SBI. In 2009 State Bank of Indore (SBN) also merged
 The merger of the 5 remaining associate banks, and the Bharatiya Mahila Bank) with the SBI was given an in-
principle approval by the Union Cabinet on 15 June 2016.This came a month after the SBI board had, on 17 May
2016, cleared a proposal to merge its five associate banks and Bharatiya Mahila Bank with itself. The merger
went into effect from 1 April 2017.
Non-banking subsidiaries
 SBI Capital Markets Ltd
 SBI Cards & Payments Services Pvt. Ltd. (SBICPSL)
 SBI Life Insurance Company Limited
 In March 2001, SBI (with 74% of the total capital), joined with BNP Paribas (with 26% of the remaining
capital), to form a joint venture life insurance company named SBI Life Insurance company Ltd.
BANKING OMBUDSMAN
Introduction
 Banking Ombudsman senior official appointed by the Reserve Bank of India to address grievance redressal
system. This service is available for complaints against a bank’s deficiency of service.
 Bank’s customer can submit complaint against the deficiency in the service of the bank’s branch and bank as
applicable, and if he does not receive a satisfactory response from the bank, he can approach Banking
Ombudsman for further action.
 Banking Ombudsman is appointed by RBI under Banking Ombudsman Scheme, 2006. RBI as per Sec 35 A of
the Banking Regulation Act, 1949 introduced the Banking Ombudsman Scheme with effect from 1995.
 All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-operative Banks are
covered under the Scheme.
 The Banking Ombudsman has to send to the Governor of RBI a report, as on 30th June every year, containing
a general review of the activities of his Office in preceding financial year.
Appointment of ombudsman
 Reserve Bank may appoint one or more of its officers in the rank of Chief General Manager or General Manager
to be known as Banking Ombudsmen.
 The appointment of Banking Ombudsman may be made for a period not exceeding three years at a time.
 The RBI shall specify the territorial limits to which the authority of each Banking Ombudsman appointed.
Powers and functions of banking ombudsman

 Power to receive and consider complaints relating to the deficiencies in banking or other services.
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 Power to facilitate settlement by agreement through conciliation and mediation between the bank concerned
and the aggrieved parties or by passing an Award in accordance with the Scheme.
 Power to superintendence and control over his Office and shall be responsible for the conduct of business
thereat.
 Power to draw up an annual budget for itself in consultation with RBI and shall exercise the powers of
expenditure.
Balla Rama Rao v. the Office of Banking Ombudsman

In this case, a house in the name of B. Narayanama was given on lease to the bank in 1982. Subsequently, the lady
died. The Bank did not pay rent from June 1992 to Feb. 1997. Balla Ramarao, the appellant approached the bank.
Bank immediately paid around Rs. 3 lacs. Balla contended that the interest should also be paid for the period of
1992 to 1997. The bank refused to pay interest. The appellant approached to the banking ombudsman. But he
rejected the complaint, holding no merit in the case as it was outside the jurisdiction of the banking ombudsman.
Balla approached to the Andhra Pradesh high court. The high court rejected the appeal, finding that it was outside
the jurisdiction of the banking ombudsman.
Grounds for complaint

Any person may file a complaint with the Banking Ombudsman having jurisdiction on any one of the following
grounds on deficiency in banking including internet banking or other services:
• Non-payment or delay in the payment and collection of
 Cheques, drafts, bills, etc.
 inward remittances
• Non-acceptance
 without sufficient cause, of small denomination notes tendered coins tendered for any purpose, and for
charging of commission for this service;
• Levying of charges without adequate prior notice to the customer.
• Forced closure of deposit accounts without due notice or without sufficient reason;
• Failure to issue/honor or delay in issue,
 drafts, pay orders or bankers' cheques;
 guarantee or letter of credit commitments;
 a banking facility (other than loans and advances)
• Non-adherence to:
 prescribed working hours;
 rule Reserve Bank on ATM/debit card operations or credit card operations;
 To the fair practices code as adopted by the bank.
 Directives issued by the Reserve Bank in relation to banking or other services.
• Delays in:
 Receipt of export proceeds,
 handling of export bills,
 collection of bills etc.
 Disbursement of pension and Non-disbursement.
• Refusal to:
 Open deposit accounts without any valid reason for refusal;
 accept or delay in accepting payment towards taxes, as required by Reserve Bank/Government;
 Issue or delay in issuing, or failure to service or delay in servicing or redemption of Government
securities.
 to close or delay in closing the account
Grounds of deficiency in service with respect to loans and advances
 Non-observance of Reserve Bank Directives on interest rates.
 Delays in sanction, disbursement disposal of loan applications.
 non-acceptance of application for loans without valid reasons to the applicant
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 non-adherence to the provisions of the fair practices code for lenders as adopted by the bank or Code of
Bank’s Commitment to Customers, as the case may be
 Non-observance of any other direction or instruction of the Reserve Bank as may be specified by the Reserve
Bank for this purpose from time to time.
Rules and regulation for filing complaint

 Person who has a grievance against a bank on any grounds mentioned in the Scheme may, himself or through
his authorized representative (other than an advocate), make a complaint.
 Complaint should within jurisdiction of the branch of the bank complain against is located.
 complaint arising out of the operations of credit cards, has to be filed within territorial jurisdiction the billing
address of the card holder is located and not the place where the bank concerned or the credit card processing
unit is located.
 Complaint in writing has to be duly signed by the complainant or his authorized representative.
 The complainant needs to make a written representation to the bank. If the bank rejects the complaint or if
he not received any reply within a period of one month after his complainant .if he not satisfied with reply
given to him by the bank.
 complaint should be made before one year, from the day complaint received the reply from bank to his
representation or, where no reply is received, before one year and one month from the date of the
representation to the bank;
 The complaint does not touch upon matter which was settled or dealt with on merits by the Banking
Ombudsman in any previous proceedings.
 The complaint does not pertain to the same subject matter, for which any proceedings before any court,
tribunal or arbitrator or any other forum is pending
 complainant has to mention the following things in the complaint:
 name and the address of the complainant,
 name and address of the branch or office of the bank against which the complaint is made,
 facts giving rise to the complaint,
 Nature and extent of the loss caused to the complainant.
 The relief sought for.
Rejection of the complaint

The Banking Ombudsman may reject a complaint at any stage on fallowing grounds;
 Complaint was not on the grounds of complaint referred.
 Beyond the pecuniary jurisdiction of Banking Ombudsman prescribed.
 Requiring documents and oral evidence and the proceedings before the Banking Ombudsman are not
appropriate for adjudication of such complaint.
 without any sufficient cause;
 In the opinion of the Banking Ombudsman there is no loss or damage or inconvenience caused to the
complainant.
Case law: India Export Corporation & ors Vs. Chairman-cum-MD, Syndicate Bank & ors,
The complainant withdrew overdraft facility sanctioned to him by the bank only after availing facility to the
extent of Rs.1, 20,000/-. The facility was availed by the complainant for business purpose. It was held that where
Complaint alleging banking service deficiency was found connected with commercial purpose, the consumer
complaint would not be maintainable.
Absence of security
In a case cash was snatched from the hands of the complainant at the gate of the respondent bank. The appellant
alleges that the absence of security on the gate and the non-provision of steps like siren/alarm system etc.
Amounts to deficiency in service on the part of the respondent bank. The State Commission held that the non-
provision of security on the gate of the bank on the date of occurrence viz. snatching of cash in bank premises
cannot be held to be amounting to deficiency in service hired by complainant.
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UNIT-2
FUNCTIONS OF RBI
Introduction
 The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve
Bank of India Act, 1934.
 The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to
Mumbai in 1937. The Central Office is where the Governor sits and policies are formulated.
 Originally it was privately owned, since nationalization in 1949 the Reserve Bank is fully owned by the
Government of India.
 RBI is the apex financial institution of the country’s financial system. It is entrusted with the task of control,
supervision, promotion, development and planning.
 The Reserve Bank of India influences the management of commercial banks through its various policies,
directions and regulations. Its role in bank management is quite unique.
 It performs the four basic functions such as planning, organizing, directing and controlling in laying a strong
foundation for the functioning of commercial banks.
Functions
 The functions of RBI derived from its objectives, such as promoting or facilitating a high growth rate, full
employment, price stability and a viable external payment positing.
 These objectives help to control the country’s currency and credit by the Central Bank as also the control it
over the country’s transactions with other countries.
I. Banking Function
A. Regulator of Currency
 The RBI is the note issuing authority of the country. Different note issue systems are adopted by the RBI.
 The Reserve Bank has the sole right to issue and management of currency in India under Section 22 of the
RBI Act.
 The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes.
 RBI handles the currency management function through two departments’ viz., the Issue Department and the
Banking Department which located in Mumbai.
 The issue department should ensure that the aggregate value of the currency notes and bank notes in
circulation from time to time should be equivalent to the eligible assets (gold coins, bullion and foreign
securities).
 RBI may issue notes of different denominations as decided by the Central Government, based on the
recommendations made by the Central Board of the bank from time to time. Such notes should be legal tender
at any place in India.
B. Banker to Government
 The Reserve Bank is agent of both Central and state Government, and it act as Government banker, agent and
adviser.
 It accepts money on account of the Central/state Government and also makes payment to the credit of its
account and under sections 20, and 21(a) of the Act.
 It makes advances and advises the government regarding the policies and measures concerning loans and
agricultural and industrial finance to co-operative organizations.
 The Reserve Bank of India helps the Government—both the Union and the States to float new loans and to
manage public debt.
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 RBI has entrusted the work of payment and receipts on behalf of Government to its agents like State Bank of
India and its Associate Banks.
 Some other commercial banks are also doing some Government transactions as agents of RBI.
C. Bankers Bank
 RBI renders services to the commercial and state co-operative banks of the country.
 All the scheduled commercial banks keep their accounts with the RBI for the purpose of maintaining cash
reserves.
 Every scheduled bank was required to maintain with the Reserve Bank cash balance equivalent to 3 percent
of their aggregate deposit liabilities.
 The minimum cash requirements can be changed by the Reserve Bank of India.
 It also supervises and controls the banking services and banking system. Even It can inspect all the books of
the banks
 RBI controls statutory cash reserves and licensing of banks and also cancel the license granted to any of the
banks in India
D. Lender of the Last Resort

 If commercial bank is not in a position to raise the financials from other sources, it may approach RBI for
necessary financial accommodation.
 Under the RBI Act, the scheduled banks are eligible to certain financial facilities from the RBI. The facilities
which are provided by RBI for the financial needs of banks are laid down in Section 17 of RBI Act.
 The facility is generally provided in the form of rediscount of eligible bills and loans and advances against
eligible securities.
 Commercial banks can always expect the RBI to come to their help in times of banking crisis .
E. Controller of Credit
 The RBI is the controller of credit; it has the power to influence the volume of credit created by banks in India.
 It can control credit through changing the Bank rate or through open market operations.
 RBI can ask any particular bank or the whole banking system not to lend to particular groups or persons on
the basis of certain types of securities.
 Each scheduled bank must send a weekly return to the Reserve Bank showing in detail, of its assets and
liabilities.
 RBI measure of credit control may be classified in to the 2 categories:
A. Quantitative Methods: Bank rate policy. Open market operations, statutory liquidity requirements.
B. Qualitative Methods: Selective credit control, credit authorization monitoring and moral suasion.
F. Custodial of Exchange Reserves

 The RBI is the custodial of the country’s foreign exchange reserves. It has authority to enter into foreign
exchange transactions both on its own and on behalf of the Govt.
 RBI has got the powers under Foreign Exchange Management Act, 1999 (FEMA) to prohibit, restrict and
regulate.
 All Indian remittances to the foreign countries and foreign remittance to India are made through the RBI.
 It also buys and sells foreign currencies at international prices.
 The Reserve Bank does not deal in foreign exchange directly with the public. It gives license to certain
Scheduled Commercial Banks and other entities to deal in foreign exchange and those are known as
authorized dealers (ADs) in foreign exchange.
G. Collection of Data and Publications

 The Reserve Bank collect supplies necessary information for the formation and execution of the monetary
policy.
 It has to be made available all the economic finance and banking data, therefore, it is economic
department and department of statistics as well.
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 It publishes a weekly statement showing the working of its issuing and banking department.
 A monthly bulletin showing the banking and monetary trends and an annual report analysing the banking
and monetary affairs of the national and international plans is prepared.
Promotional and Developmental Functions

A. Encourage the commercial banks to extend their branches in the semi -urban and rural areas.
B. develops the banking system, increase the depositors confidence and avoids the bank failure,
C. mobilize the savings in a country through the institutions like, UTI,
D. Provides a security to the depositors.
E. Appoints ad-hoc committee’s/expert groups from time to time to enquire banking problems and make
recommendations to solve them.
F. Banker’s Training College has been set -up to extend training to supervisory staff of commercial banks.
G. Promote institutional agricultural credit by developing co-operative credit institutions.
H. Undertakes measures for developing bill market in the country.
Supervisory Functions
 The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of
supervision and control over commercial and co-operative banks, relating to:
 Licensing and establishments,
 branch expansion,
 liquidity of their assets,
 management and methods of working,
 Amalgamation, reconstruction and liquidation.
 The RBI is authorized to carry out periodical inspection of the banks and to call for returns and necessary
information from them.
POWER OF RBI
Power under Under Banking Regulation Act
A. power to appoints Chairman of the Board of Directors. (Section 10 BB)

 Can be appointed on a whole-time basis or a Managing Director of a banking company.
 After appointment if RBI feels that the continuation of such vacancy is likely to adversely affect the interests
of the banking company, appoint a person as Chairman of the Board of Directors or a Managing Director of
the banking company.
B. power to control advances by banking companies (Section 2)

 Reserve Bank has the powers to determine policies and direct banking companies to follow the same.
C. power to Licensing of banking companies (Section 22)

 All Banking companies need to get a license from RBI and it issues license only after ‘tests of entry’ are
fulfilled.
D. Power to exempt a Co-operative bank (Section 24A)

 Without prejudice to the provisions of section 53, the RBI by notification in the Official Gazette, declare that,
the whole or any part of the provisions of section 18 or section 24, as may be specified therein, shall not apply
to any co-operative bank.
E. power to ask Monthly returns call or other returns and information (Section 27)
 At any time, the RBI may direct a banking company to furnish it with statements and information relating to
the business or affairs.
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 RBI can obtain information for the purposes of this Act, from the banking company (including any business
or affairs with which such banking company is concerned.
 RBI can call for information every half-year regarding the investments of a banking company and the
classification of its advances in respect of industry, commerce and agriculture.
F. Power in respect of associate enterprises (Section 29A)

 The RBI may direct associate enterprise of the banking company to submit financial statements, business and
affairs within stipulated time.
 It can also conduct an inspection of any associate enterprise of a banking company and its books of account
jointly by one or more of its officers or employees or other persons along with the Board or authority
regulating such associate enterprise.
F. power to order Special audit (Section 30)

 In the public interest or in the interest of the banking company or its depositors, the RBI may at any time by
order direct that a special audit of the banking company’s accounts.
G. power to Inspection of Banking Companies (Section 35)

 Reserve Bank on its own or direction by the Central Government, inspect any banking company and its books
accounts.
 RCI need to supply to the banking company a copy of its report on such inspection.
H. power to give directions (Section 35A)

 In the public interest or in the interest of Banking policy RBI has powers to issue, modify or cancel as it deems
fit, and the banking companies or the banking company, are bound to comply with such directions.
The following Sections have been inserted with effect from May 2017 Section
A. Power to Central Government (35AA)

 Authorize RBI to issue directions to any banking company or banking companies to initiate insolvency
resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.
B. Section 35AB
1) Power to RBI:, To issue directions to any banking company or banking companies for resolution of stressed
assets.
(2) Power to RBI to specify one or more authorities or committees with such members as the Reserve Bank may
appoint or approve for appointment to advise any banking company or banking companies on resolution of
stressed assets.
C. Further powers and functions of Reserve Bank (Section 36)

 RBI may prohibit banking companies or any banking company in particular against entering into any
particular transaction or class of transactions.
 On a request by the companies concerned and subject to the provision of section 44A, assist, in the
amalgamation of such banking companies.
 Give assistance to any banking company by means of a loan or advance in terms of under section 18 of the
RBI Act
 Direct the banking company to:
 call for a meeting of Directors
 discuss such matters with Officers of RBI
 depute an officer to such meeting, appoint observers to such meetings
 furnish information of such meetings
 Make changes in management. In addition to the above the RBI has also been vested with powers
to remove managerial and other persons from
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SUPERVISORY FUNCTION OF RBI
 Narasimham committee suggested for setting up autonomous banking supervisory board under
Banking Regulation Act, 1949
 There are mainly Department of supervision from 1993
 Department of Banking Supervision,
 Department of Non-Banking Supervision
 Department of Co-operative Bank Supervision.
1.Supervision over Commercial banks

 appoint a Chairman or Managing Director on a banking company
 provides power to appoint additional directors on the boards of banking companies.
 power to remove directors
 It can even supersede the board of banking companies.
 power to control advances by banking companies
 power to issue and cancel licenses of banking companies.
 to inspect banking companies on its own or at the instance of Central Government
 power to issue directions to banking companies in the public interest / interests of the depositors
 provides power for handling cases relating to stressed assets Stressed assets are loans where the borrower
has defaulted in repayment or where the loan has been restructured.
 permit for new branch
 lender of last resort
 control of credit creation operations
 amalgamation, reconstruction, winding up etc.
2.Supervision over non-financial banking companies
 powers to regulate or prohibit issue of prospectus or advertisements soliciting deposits of money by non-
banking financial companies.
 power to determine policy and issue directions
 Power to call for information
 Power to inspect books
 Power to prevent the affairs of any non-banking financial company being conducted in a manner
detrimental to the interest of the depositors or in a manner prejudicial to the interest of the non-banking
financial Company
 the power of the RBI to regulate and supervise banking companies emanate from the provisions of the Act
3. Supervision over co-operative banks

 Section 56 of the BR Act, 1949, makes it applicable to co-operative societies involved in the
business of banking.
 the powers to issue licenses and cancel licenses supersede their boards
 power to inspect.
 issue directions to them in the public interest, interest of banking policy, control over loans and
advances
 Case law: Janata Sahakari Bank Ltd. V/s. State of Maharashtra,
Bombay High Court has held that though the control over management of Co-operative Society where it is
Cooperative Banking Society or otherwise is vested in the Registrar of Co-operative Societies, but insofar a
banking is concerned, by virtue of S.56 of the Banking Regulation Act, 1949, read with S.35A of the Banking
Regulation Act, 1949, it will be a subject with which the Reserve Bank of India has full power”.
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VARIOUS CONTROL OF RBI OVER COMMERCIAL BANKS
Introduction
 Most important functions of RBI are to fill in as regulator and supervisor of financial system.
 The financial system in India incorporates Commercial Banks, Regional Rural Banks, Local Area Banks,
Cooperative Banks, Financial Institutions including Development Financial Institutions (DFIs) and Non-
Banking Financial Companies.
 RBI infers its controlling forces for Indian Banking System from the arrangements of the Banking
Regulation Act 1949.
 Goals of this to keep up the wellbeing and soundness of the banking and Financial System of the nation.
After the progression of the Indian
Forms of controls
1.licensing requirements
 To complete a business of commercial banking in India,or Foreign, a permit from RBI is required.
 Opening of Branches is dealt with by the Branch Authorization Policy. At present
 Indian banks never again require a permit from the Reserve Bank for opening a branch at a place with
populace of beneath 50,000.
2.Corporate Governance in Banks

 One of the approach destinations of RBI is to guarantee high calibre corporate governance in banks
 RBI has issued guidelines for 'fit and legitimate' criteria for executive of banks.
 directors of the banks ought to have unique learning/involvement in the different banking related areas.
 RBI can likewise select extra directors to the board of a banking organization.
3.Statutory Pre-emptions
 Every commercial bank is required to keep up certain segment of their Net Demand and Time Liabilities
 (NDTL) as cash with the Reserve Bank, called Cash Reserve Ratio (CRR)
4.Interest Rates
 The interest rates on the majority of the classes of deposits and lending transactions have been deregulated
and are to a great extent dictated by RBI.
 Reserve Bank manages the interest rates on investment funds ledgers and deposits of non-resident Indians
5.Prudential Norms
 Prudential Norms up by the banks.
 RBI issues "Prudential Norms" to be trailed by the commercial banks to reinforce the balance sheets of
banks.
6.Disclosure Norms
 One of the important apparatuses for marketing discipline is to keep up open disclosure of pertinent data.
 RBI's mandates, the banks are required to make disclosures of their yearly reports and some different
records about their capital ampleness, asset quality, liquidity, etc.
7.Anti-Money Laundering Norms

 KYC norms (Know Your Customer) Anti-Money Laundering (AML) and Combating Financing of Terrorism
(CFT) guidelines are a portion of the significant issues on which RBI keeps issuing its norms and guidelines.
8.Protection of Small Depositors

 RBI has set up the Deposit Insurance and Credit Guarantee Corporation (DICGC) to secure the interest of
small depositors, in the event of bank disappointment.
 The DICGC gives insurance cover to all qualified bank depositors up to Rs.1 lakh per investor per bank.
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9.Annual Onsite Inspection

 RBI attempts annual on-site inspection of banks.
 Bank survey their financial wellbeing and to assess their performance regarding nature of management,
capital ampleness, asset quality, income, liquidity position.
10.OSMOS
 OSMOS means Off Site Surveillance and Monitoring System.
 The RBI expects banks to submit itemized and organized information periodically under OSMOS.
 Based on OSMOS, RBI breaks down the strength of the banks.
DEPOSIT INSURANCE CORPORATION (DICGC ACT1961)
Introduction
 This Act came into force from 1-1-1962 for the purpose of insurance deposits and guaranteeing of credit
facilities and for other matters related there.
 This Act in the first place, aims at giving a certain measure of protection to the depositors.
 The interests of small depositors needed protection against the risk of a bank’s failure to pay back the
deposits, for over a hundred years of the evolution of modern banking in India.
 The rate of bank failures was very high.
 During the first half of the twentieth century two world wars and a great depression had caused a sense of
uncertainty in the minds of people.
 besides the traditional India banking was more familiar and more trustworthily in the eyes of the people.
 But to speeding up of the pace of economic development for which capital formation was a crucial factors for
this purposes deposit mobilization was necessary.
 therefore, set in line a chain of objectives which called for the establishment of the deposit insurance and
credit guarantee corporation i.e. DICGC.
 This Act extends to whole of India. The Central Govt shall establish a corporation with its head office at
Mumbai.
Establishment and Management of DICGC

 The corporation was established with fully paid up capital by the Reserve Bank of India of ' 1crore, under
section 4(2) of the Act.
 under the same section the authorization of capital can be increased in consultation with the Government
of India.
 under section 26 empowers the DICGC to borrow from the RBI upto a limit which originally was ' 5 crores.
 In order to get a clear picture of the insurance activities of the corporation, the Act requires a separate
deposit insurance fund to which are credited.
a. All amounts received as premium by the corporation.
b. All amounts received from the liquidator by the corporation.
c. All amount transferred to this fund from the General fund.
d. Advance given by the Reserve Bank and
e. All investment income of the corporation resulting from the investment made out of this fund.
Management of DICGC
The general superintendence, direction and the management of affairs and business of the corporation are under
section 5 vested in a board of directors.
The Board consists of

a) the Governor of the RBI or a Deputy Governor nominated by him as chairman,
b) A Deputy Governor or any other officer nominated by the RBI.
c) An officer of the central Government nominated by that Government,
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d) two Director nominated by the central Government in consolation with the RBI, who shall have special
knowledge of Industry.
e) The board of directors can constitute an executive committee and such other committee the
f) corporation thinks fit and the board can delegate some of the powers and functions to them.
g) A person cannot be nominated as director if
 has been removed or dismissed from a government job, (
 he is / was adjudged insolvent,
 he is of an unsound mind,
 he has been convicted of any offence involving moral turpitude.
Registration as Insured Banks

 All existing banks were to be immediately registered (section 51 of banking companies Act).
 All new banks also are to be registered as insured banks after they are licensed.
 similarly, every eligible co-operative bank has to be registered as an insured bank.
 There are provisions for cancellation of registration, how: RBI prohibits the concerned bank for accepting
deposit or if it goes into liquidation or if its deposits have been transferred to any other bank, of if it has
ceased to be a banking company, or if it has been ordered to wind up, or it is amalgamated with another bank
etc.
 Where the corporation has registered any banking company or Regional Rural Bank or a Co-Operative Bank
as an Insured Bank, it shall within thirty days send an intimation in writing to concerned Bank.
Premium to be paid by an Insured Bank

 The corporation being in the business of insurance has to lay down and collect premium for the service it
renders, section 35 has the following provisions in this regard.
 Every insured bank registered be liable to pay a premium to the corporation on its deposits at such a rates as
may with the previous approval of the central Government, be notified by the corporation in the official
Gazette from time to time.
 The promotion shall be payable for such period at such times and in such manner as may be prescribed.
 If an insured bank makes any default in payment of any amount of premium it shall for the periods such
default, be liable to pay to the corporation interest on such amount at such rate not exceeding eight percent
per annum as may be prescribed.
Inspection of Insured Banks

 The corporation may for any of the purposes of this Act request the Reserve Bank to cause an inspection of
the banks and accounts or an investigation of the affairs of an insured bank.
 inspection to be made and a such request the Reserve Bank shall cause such inspection or investigation to be
made by one or more of its officers.
 When an Inspection or Investigation has been made under this section, the Reserve Bank shall furnish a copy
of its report to the corporation and neither the bank inspected or investigated nor any other bank shall be
entitled to be furnished with a copy of such report.
Co-operative Banks and Insured Banks

 it was suggested that the co-operative banks also should be brought within the purview of the Deposit
Insurance scheme.
 but because the co-operative banks were exempted from the application of the Banking Companies Act, they
were not subject to the same degree of control of the RBI as were the Commercial Banks.
 This turned out to be a practical difficulty.
Credit, Guarantee Functions

 the DICGC may guarantee credit facilities given by any credit institution and may also indemnify credit
institutions in respect of credit facilities granted by them.
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BANKING REGULATION ACT 1949
Introduction
 The provision of the Indian Companies Act 1913 was found inadequate to regulate banks in India.
 Therefore, a need was felt to introduce a specific legislation having comprehensive coverage on issues
relating to the banking business in India.
 Due to inadequacy of capital, many banks failed and therefore prescribing a minimum capital requirement
was felt necessary.
 To ensure sound banking through regulations covering the opening of branches and the maintenance of liquid
assets.
 The act provides a framework that regulates and supervises commercial banks in India. all banking firms will
be regulated under this act.
 The act came into force on March 16 1949.
 There are a total of 55 Sections under the banking regulating act.
 Initially the law was only applicable to banks, but after 1965, it was amended to make it applicable to co-
operative banks and also to introduce other changes.
 This act gives power to the RBI to exercise control and regulate banks under supervision.
 The Banking Regulation Act, 1949 is one of the important legal frame works.
 Initially the Act was passed as Banking Companies Act,1949 and it was changed to Banking Regulation Act
1949.
 Along with the Reserve Bank of India Act 1935, Banking Regulation Act 1949 provides a lot of guidelines to
banks covering wide range of areas.
Objectives of banking regulation act 1949:

 To ensure sound banking through regulations covering the opening of branches.
 maintenance of liquid assets and to cut competition among banks.
 The act has regulated the opening of branches and also changing th location of existing branches.
 To prevent random opening of new branches and ensure balanced development of banks through the system
of licensing.
 Assigning power to RBI to appoint, reappoint and remove the chairman, director and officers of the banks.
This could ensure the smoot and efficient functioning of banks in India.
 To protect the interest of depositors and public at large by incorporating certain provisions like prescribing
cash reserve ratio and liquidity reserve ratios.
 Provide compulsory amalgamation of weaker banks with senior banks, and thereby strengthen the banking
system in India.
 Introduce provisions to restrict foreign banks investing funds of Indian depositors outside India.
 Provide quick and easy liquidation of banks, when they are unable to continue operations or amalgamate
with other banks.
Features of banking regulation act 1949:
1.Prohibition of trading (Section 8)

 bank cannot directly or indirectly deal with buying or selling or bartering of goods.
 However, it may barter the transactions relating to bills of exchange received for collection or negotiation.
2.Non-banking asset (Section 9)

 A bank cannot hold any immovable property, howsoever acquired, except for its own use, for any period
exceeding seven years from the date of acquisition.
 The company is permitted, within a period of seven years, to deal or trade in any such property for facilitating
its disposal.
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3.Management (Section 10)

 every bank shall have one of its directors as Chairman on its Board of Directors.
 Bank should have 51% its Board of Directors with special knowledge or practical
experience in accountancy, agriculture, banking, economics, finance, law and co-
operatives.
4.Minimum capital (Section 11):

 no bank shall commence or carry on business in India, unless it has minimum paid-up capital and cash reserve
prescribed by the RBI.
5.payment of commission (Section 13)

 bank is not permitted to pay directly or indirectly by way of commission, brokerage, discount or remuneration
on issues of its shares in excess of 2.5% of the paid-up value of such shares.
6.Payment of dividend (Section 15)

 no bank shall pay any dividend on its shares until all its capital expenses including preliminar expenses,
organisation expenses, share selling commission, brokerage, amount of loses incurred and other items have
been completely written-off.
Some other features

 power to RBI to license banks and also the regulation of the shareholding.
 It grants power to RBI to conduct appointment of the boards and management members of banks.
 It also lays down directions for audits to be managed by RBI, and control merging and liquidation.
 RBI issues directives on banking policy in the interests of public good and can impose penalties if required.
 Co-operative Banks were incorporated under this act in the amendment of 1965.
 Provision for bringing the Reserve Bank of India into closer touch with banking companies;
 Prohibiting non-banking companies from accepting deposits repayable on demand;
 Covers the banks incorporated or registered outside India within the scope of the Banking Regulation Act,
1949;
 Issue the banking license and their branches;
 Inspection of books and accounts of the bank by the RBI;
 Empowering the Central Government to take action against banks conducting their affairs in a manner
detrimental to the interests of the depositors; classified companies into banking and non-banking companies’
ACTIVITIES PERMITTED BY BANKING REGULATION ACT 1949 TO BANKERS
1.Borrowing, raising, or taking up of money

 the lending or advancing of money either upon or without security
 the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, etc
promissory notes etc.
 the granting and issuing of letters of credit, traveller’s cheques and circular notes; the buying, selling and
dealing in bullion and specie.
 the buying and selling of foreign exchange including foreign bank notes
 the acquiring, holding, issuing on commission, underwrit-ing and dealing in stock, funds, shares,
debentures, debenture stock, bonds, obligations, securities and investments of all kinds;
2.Acting as agents for any Government/local authority/ other person or persons

 The carrying on of agency business of any description.
 including the clearing and forwarding of goods, giving of receipts and discharges.
 acting as an attorney on behalf of customers, but excluding the business of a 39 [managing agent or
secretary and treasurer] of a company;
3.Other services
 Contracting for public and private loans and negotiating and issuing the same
 insuring, guaranteeing, underwriting, carrying out of any issue, public or private, of State.
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 municipal or other loan

 shares, stock, debentures, or debenture stock of any company, corporation or association and the lending of
money for the purpose of any such issue;
 carrying on and transacting every kind of guarantee and indemnity business;
 managing, selling and realising any property which may come into the possession of the company in
satisfaction or part satis-faction of any of its claims;
 undertaking and executing trusts;
 undertaking the administration of estates as executor, trus-tee or otherwise
 establishing and supporting or aiding in the establishment and support of associations, institutions, funds,
trusts.
 acquisition, construction, maintenance and alteration of any building or works necessary or convenient for
the purposes of the company;
 selling, improving, managing, developing, exchanging, leas-ing, mortgaging, disposing all or any part of the
property and rights of the company;
 doing all such other things as are incidental or conducive to the promotion or advancement of the business
of the company.
 any other form of business which the Central Government may, by notification in the Official Gazette,
specify as a form of business in which it is lawful for a banking company to engage.
 no banking company shall directly or indirectly deal in the buying or selling or bartering of goods, except in
connection with the realisation of security given to or held by it,
UNIT – 3
RELATIONSHIP OF BANKER AND CUSTOMER
Introduction
 The relationship between a banker and his customer depends upon the nature of service provided by a
banker.
 Accepting deposits and lending and/or investing are the core banking businesses of a bank.
 The relationship between a banker and customer is the transactional relationship.
 Bank’s business depends much on the strong bondage with the customer.
 “Trust” plays an important role in building healthy relationship between a banker and customer.
 In addition to its primary functions, it deals with various customers by providing other services like:
 safe custody services,
 safe deposit lockers,
 assisting the clients by collecting their cheques and other instruments as an agent and trustees for
them.
 So, based on the above a banker customer relationship can be classified.
Meaning of Banker
 Banker is one who in the ordinary course of his business, honors cheques drawn upon him by persons from
and for whom he receives money on current accounts.
 Banker includes any person acting as a banker.
 banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise;
 5 (c) "banking company" means any company which transacts the business of banking in India.
Meaning of Customer
 The term customer of a bank is not defined by law.
 Ordinarily, a person who has an account in a bank is considered its customer.
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 Banking experts and legal judgment in the past, used to qualify this statement by laying emphasis on the
period for which such account had actually been maintained with the bank.
 customer of a bank lays emphasis on the duration of the dealing between the banker and the customer and
is, therefore, called the duration theory.
 a person does not become a customer of the banker on the opening of an account; he must have been
accustomed to deal with the banker before he is designated as a customer.
 The “Duration Theory” was exploded by Mr. Justice Bailhache in Ladbroke v. Todd
 Who observed that the relation of banker and customer begins as soon as the first cheque is paid in
and accepted for collection and not merely when it is paid.
 the Kerala High Court observed in the case of Central Bank of India Ltd. Bombay vs. V. Gopinathan Nair
and others “Broadly speaking, a customer is a person who has the habit of resorting to the same place or
person
to do business. So far as banking transactions are concerned he is a person whose money has been accepted
on the footing that banker will honour up to the amount standing to his credit, irrespective of his connection
being on short or long standing.”
 bank customers can be categorized in to four broad categories as under:
 Existing customers: Those who maintain account relationship with banks i.e.
 Former Customers: Those who had account relationship with bank i.e. Those who do not maintain
any account relationship with the bank but frequently visit branch of a bank for availing banking
facilities such as for purchasing a draft, encashing a cheque, etc. Technically they are not customers,
as they do not maintain any account with the bank branch.
 Prospective/ Potential customers: Those who intend to have account relationship with the bank. A
person will be deemed to be a 'customer' even if he had only.
Relationship between Banker and Customer

 Banking is a trust-based relationship.
 There are numerous kinds of relationship between the bank and the customer.
 The relationship between a banker and a customer depends on the type of transaction.
 Thus the relationship is based on contract, and on certain terms and conditions.
 These relationships confer certain rights and obligations both on the part of the banker and on the customer.
 However, the personal relationship between the bank and its customers is the long lasting relationship.
 Some banks even say that they have generation-to-generation banking relationship with their customers.
 The banker customer relationship is fiducial relationship.
 The terms and conditions governing the relationship is not be leaked by the banker to a third party.
Classification of relationship
1.Relationship as Debtors and Creditors.

 When customer deposits money in his account the bank becomes a debtor of the customer and customer a
creditor.
 The money so deposited by customer becomes bank’s property and bank has a right to use the money as it
likes.
 A depositor remains a creditor of his banker so long as his account carries a credit balance. But he does not
get any charge over the assets of his debtor/banker and remains an unsecured creditor of the banker.
 The bank is not bound to inform the depositor the manner of utilization of funds deposited by him.
 Bank does not give any security to the depositor i.e. debtor.
 The bank has borrowed money and it is only when the depositor demands, banker pays.
 Bank’s position is quite different from normal debtors. Banker does not pay money on its own, as banker is
not required to repay the debt voluntarily.
 The demand is to be made at the branch where the account exists and in a proper manner and during working
days and working hours.
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 The debtor has to follow the terms and conditions of bank said to have been mentioned in the account opening
form.
 Though the terms and conditions are not mentioned in the account opening form, but the account opening
form contains a declaration that the terms and conditions.
 Since the introduction of deposit insurance in India in 1962, the element of risk to the depositor is minimized
as the DICGC undertakes to insure the deposits up to a specified amount.
2.Creditor–Debtor
 Banker’s relationship with the customer is reversed as soon as the customer’s account is overdrawn. Banker
 Lending money is the most important activities of a bank.
 The resources mobilized by banks are utilized for lending operations.
 Customer becomes creditor of the customer who has taken a loan from the banker and continues in that
capacity till the loan is repaid.
 As the loans and advances granted by a banker are usually secured by the tangible assets of the borrower, the
banker becomes a secured creditor of his customer.
3.Banker as Trustee
 In certain circumstances banker acts as a trustee also.
 A trustee holds money or assets and performs certain functions for the benefit of some other called the
beneficiary.
 The position of a banker as a trustee or as a debtor is determined according to the circumstances of each case.
 If he does in ordinary course of his business, without any specific direction from the customer, he acts as a
debtor/ creditors.
 In case of money or bills etc., deposited with the bank for specific purpose,the bankers position will be
determined by ascertaining whether the amount was actually debited or credited to the customer‘s account
or not.
 On the other hand, if a customer instructs his bank to purchase certain securities out of his deposit ,but the
bank fails before making such purchase, the bank will continue to be a debtor of his customer (and not a
trustee) .
 The relationship between the banker and his customer as a trustee and beneficiary depends upon the specific
instruction by customer.
4.Banker as an Agent
 A banker acts as an agent of his customer and performs a number of agency functions for the convenience of
his customers.
 Banks also abides by the standing instructions given by its customers. and charges for theses services.
 For example, he buys or sells securities on behalf of his customer, collect cheques on his behalf and makes
payment of various dues of his due customers, e.g. insurance premium, etc.
 The range of such agency functions has become much wider and the banks are now rendering large number
of agency service of diverse nature.
5.Banker as a Bailee – Bailor

 Section 148 of Indian Contract Act,1872, defines bailment, bailor, and bailee.
 A bailment is the delivery of goods by one person to another for some purpose upon a contract.
 The person delivering the goods is called the "bailor". The person to whom they are delivered is called,
the "bailee".
 As per the contract, the goods should be returned when the purpose is accomplished, as per the directions
of the person delivering the goods.
 Banks secure their loans and advances by obtaining tangible securities. In certain cases, banks hold the
physical possession of secured goods (pledge) – cash credit against inventories; valuables – gold jewels
(gold loans); bonds and shares (loans against shares and financial instruments).
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 While taking physical possession of securities the bank becomes bailee and the customer bailor.
 Banks also keeps articles, valuables, securities etc., of its customers in Safe Custody and acts as a Bailee.
 As a bailee the bank is required to take care of the goods bailed.
6.Banker as Lessor and Lessee: AS A LESSER / LESSEEBANKER AS A LESSER / LESSE BANLESSEE

 In case of safe deposit locker accounts, the banker and customer relationship of lesser/lessee is applicable.
 Banks lease the safe deposit lockers (bank’s immovable property) to the clients on hire basis.
 Banks allow their locker account holders the right to enjoy (make use of) the property for a specific period
against payment of rent.
 Bank has the right to break-open the locker in case the locker holder defaults in payment of rent.
7.Banker as Custodian
 A custodian is a person who acts as a caretaker of something.
 Banks take legal responsibility for a customer’s securities. While opening a demat account bank becomes
a custodian.
Termination of relationship between a banker and a customer:

The relationship between a bank and a customer ceases on:
 The death, insolvency, lunacy of the customer.
 The customer closing the account i.e. Voluntary termination
 Liquidation of the company
 The closing of the account by the bank after giving due notice.
 The completion of the contract or the specific transaction.
PRECAUTIONS TO BE TAKEN BY THE BANK BEFORE OPENING AN ACCOUNT
Introduction
 Opening of an account binds the banker and customer into a contractual relationship.
 Every person who is competent to contract can open an account with a bank.
 The capacity of certain classes of person, to make valid agreement is subject to certain legal restrictions, as is
the case with minors, lunatics, drunkards, married women, undischarged insolvents, trustees, executors.
 Extra care is also needed for the banker while he deals with customers like public authorities, societies,
joint stock companies, partnership firms etc.
Precautions
 Proper introduction of the customer is essential.
 The manager should ‘verify whether the new customer is a person with integrity and reputation to be ‘a
"desirable customer", to open the Account. This is to prevent any fraud,
 The bank manager may make enquiries from references given by the customer or banks about the status of
the customer.
 He should make 'reasonable enquiry' as is necessary in the circumstances, to convince himself that the person
is bonafide customer.
 He need not act like a master detective and put the new customer to serious cross examination.
 The manager should not act negligently in making enquiries; if proper enquiries are made, he gets protection
under Sn.131 of the Negotiable Instruments Act.
1.Minor:
 As a minor has legal incapacity (incapax) to enter into contracts, generally he cannot open a Bank account.
 Above rule is made only to give protection and to safeguard the interests of the minor.
 there should be a guardian according to law to deal with minor's property. The father is the natural
guardian, and after his demise, the mother.
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 The court in suitable cases may appoint a court guardian, Hence, the general rule is. that the Guardian
may open and operate the Bank Account on behalf of the minor.
 He ceases to act, on the minor attaining majority.
 In practice, the banks allow a minor above 12 years, to open an account in his own name and to issue
cheques as per Sn.26(a) of the Negotiable Instruments Act.
 This is valid and the minor may continue his account on attaining majority at 18 (or if under Court of
Wards, age 21).
 No overdraft can be given to a minor, as overdraft involves a contract which would be void ab initio
2.Lunatics
 A person of unsound mind cannot make a valid contract. So, the bankers should not open an account in
the name of a person of unsound mind.
 But a customer may become lunatic after opening an account with the bank.
3. Illiterate persons
 An illiterate person means a person who can’t sign his name.
 While opening of an account of such a person is unavoidable.
 the banker should obtain Left thumb impression on the account opening form and specimen signature
card in the presence of an authorized bank official.
 Details of identification marks should be noted on the account opening form and specimen signature card
 At least two copies of photograph duly attested by any account holder/authorized bank official.
4.Married Woman
 A married woman (Hindu) has the contractual capacity (if about 18 years of age) and has the right to
acquire or dispose of her personal property called "Stridhana" in Hindu Law.
 The manager should make the usual essential enquiries in opening the account of a married woman.
 In the application (account opening form), she should fill up in addition to her name, address etc., the
name of her husband,, his address (and the address of the employer of the husband).
 Proper introduction is necessary.
 As a competent person, she can draw and endorse cheques and other documents and these can be debited
to her account.
 As long as credit balance is there in her account, there will be no risks.
 if loan or overdraft is to be given the Bank should ascertain her credit worthiness, her personal properties
(Stridhana) the nature of the properties held by her etc.
 The Husband is not liable for her debts, except for those loans incurred for "necessaries of life" for her
and her family.
 Precautions in granting loans or overdraft are necessary as
 she may have no property as stridhana.
 Her Husband's property is not liable except for necessaries.
 she may plead undue influence or ignorance of the nature of loan transaction.
 she cannot be committed to civil prison.
6.Purdanashin Woman
 She is one who wears a veil (Purdah), as per her customs, and is secluded except the members of her
family.
 Some Muslim women observe this as custom in their community.
 The Manager should of course follow the preliminary enquiries as usual and may allow such a woman to
open an account.
 Her identity and that she is opening the account out of her freewill are essential.
 To be on the safer side the manager may require a responsible person known to the bank attest her
signature.
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5. Executors and administrators

 Executors and Administrators are allowed to open bank account. Formalities are to be observedwhile
opening the account in the name of executor/administrator.
6. Trustees
 A banker must be cautions in opening/operating a trust account as the trustees are responsible for public
money.
 Trust deed is to be observed carefully.
7. Joint Account
 While opening the joint account, all the concerned persons should sign the application form.
 The necessary forms are filled up and signed to specify how the account is to be operated and also who is
authorized on all matters including cheques, bills, securities, advances etc.
 Operation of the account may be by one or more persons but clear instructions are essential to draw
cheques etc.
 Instructions regarding survivorship are also a part of the process of opening of accounts.
 The joint holders may nominate a person, if they so desire.
 Example of Joint Account is Husband and Wife. In a case of an account with instructions payable to either
or survivor it is held that on the demise of the husband, the wife would be entitled to the amount if the
husband had such an intention to benefit her, but, if there is no intention, it becomes part of the estate of
the husband and hence heirs will be entitled as per law.
 Death of the husband, will not constitute a gift to the wife. The burden of proving the intention is on the
wife (Marshall V. Crulwell; Foley V. Foley; Panikar V. TWQ Bank Ltd.)
8. Partnership firm
 Partnership Account A banker may open a Current Account in the name of the Partnership Firm.
 application made and duly signed by all the Partners along with the partnership deed (original or certified
copy).
 The banker should make enquiries as usual and also about the nature of the business, names' and
addresses, of partners etc.
 He should get an authority letter signed by all partners authorizing a partner or two or more partners to
draw cheques and other documents, to endorse bills or to accept bills etc., to mortgage, and sell property
of the firm.
 The partnership deed is an important document to know the nature of the authority of the partners.
 From the provisions of the Partnership Act
 A partner's act will bind the firm if such an act is done in usual business of the firm or on behalf of the
firm, with an intention to bind the firm. This authority is implied.
 Registration under Sn.69 of the Partnership Act is optional. However, if the firm is not registered, it
gets no locus standi to sue an outsider.
 Partner cannot sue the firm or other partners. But, third parties may sue the firm.
 To maintain a suit, (a) the firm should be registered; (b) names of Partners are to be on records of
Register of Firm. - . (iii) Implied Authority does not enable a partner to open an account on behalf of
the firm in his own name.
 the manager should ensure that the acts of the partner bind the firm, and that a partner does not act
on his own behalf.
10. Joint Stock Companies

 The manager should take the usual precautions while opening a Current Account.
 Application for opening the current account should be filled up and signed by the duly authorised director
or officer of the company.
 The following documents are essential
 Certified copy of the latest
 Memorandum of Association
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 Certified copy of the latest Articles of Association

 Certificate of incorporation of a private company, as that itself is the certificate ofcommencement in
case of Private Companies
 Certificate of Authority, to commence business, issued by the Registrar of Joint Stock Companies,
for Public Limited Companies;
 Copy of the extract of the Resolutions passed by the Board of Directors, authorising the opening in
the Bank, a current account (and such other accounts) in the name of the company mentioning the
names of directors authorised to operate the account, to draw or endorse cheque, bill of exchange
etc.
 A complete list of current directors (with addresses) ot the company duly signed by the Chairman of
the Company
 Balance Sheet of 3 years (if not a new company)
 From above documents the manager will get a picture of the:
 objects, Capital (authorized and paid-up)
 nature and functions of Board of Directors,
 the borrowing powers of the company etc.
 with the other documents he will be in a position to ascertain whether the company has already
commenced its business,
 if so with what results, its financial status, profits and losses etc
 The certified copy of resolution enables the manager to restrict the operations of the accounts of the
company strictly according to the resolutions. As
 When the company puts up a proposal for a loan or overdraft, the bank should follow a number of
formalities.
 The company should have the powers to borrow; it should submit a certified copy of resolution of the
Board, authorizing the borrowing and the amount, terms, and conditions etc. (within the limits allowed).
 Balance sheets for 3 years should be submitted. This would give a clear picture of the financial status of
the company.
BANKER OBLIGATION TO MAINTAIN SECRECY OF ACCOUNT
Introduction
 The account of the customer in the books of the banker records all of his financial dealings and true state of
his financial position.
 If any of these facts is made known to others, the customer’s reputation may suffer and he may incur losses
also.
 The banker is, therefore, under an obligation to take utmost care in keeping secrecy about the accounts of his
customers.
 By keeping secrecy is meant that the account books of the bank will not be thrown open to the public or
Government officials.
 Banker need take all necessary precautions to ensure that the state of affairs of a customer’s account is not
made known to others by any means.
 The banker is thus under an obligation not to disclose—deliberately or intentionally—any information
regarding his customer’s accounts to a third party.
 The nationalized banks in India are also required to fulfill this obligation.
Secrecy of customer’s accounts may be dispensed with in the following circumstances
A. Disclosure of Information required by Law.

 A banker is under statutory obligation to disclose the information relating to his customer’s account when
the law specially requires him to do so.
 The banker would, therefore, be justified in disclosing information to meet statutory requirements:
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1.Under the Income- Tax Act, 1961.

 According to Section 131, the income tax authorities possess the same powers as are vested in a Court.
 IT authorities are authorized for enforcing the attendance of any person, officer of banking company to
furnish information in relation to such matters, as in the opinion of the income-tax authorities will be useful
for or relevant to any proceedings under the Act.
 The income –tax authorities are thus authorized to call for necessary information from the banker for the
purpose of assessment of the bank customers.
 Income- tax Act, 1961, requires the banks to furnish to the Income-tax Officers the names and addresses of
all persons to whom they have paid interest exceeding ` 400 mentioning the actual amount of interest paid
by them.
2.Under the Companies Act, 1956.

 Central Government can appoint an Inspector or to investigate the affairs of any joint stock company under
Companies Act, 1956.
 It shall be the duty of all officers and other employees and agents (including the bankers ) of the company to-
 produce all books and papers of, or relating to, the company, which are in their custody or power,
 give the Inspector all assistance in connection with investigation which they are reasonably able to
give.
 Thus the banker is under an obligation to disclose all information regarding the company but not any other
customer for the purpose of such investigation.
3.By order of the Court under the Banker’s Books Evidence Act, 1891.
 When the court orders the banker to disclose information relating to a customer’s account, the banker is
bound to do so.
 In order to avoid the inconvenience likely to be caused to the bankers from attending the Courts and
producing their account books as evidence, the Banker’s Books Evidence Act, 1891, provides that certified
copies of the entries in the banker’s book are to be treated as sufficient evidence and production of the books
in the Courts cannot be forced upon the bankers.
 a certified copy of any entry in a banker’s book shall in all legal proceedings be received as prima facie
evidence of the matters.
 Thus if a banker is not a party to a suit, certified copy of the entries in his book will be sufficient evidence.
 The Court is also empowered to allow any party to legal proceedings to inspect or copy from the books of the
banker for the purpose of such proceedings.
4.Under the Reserve Bank of IndiaAct,1934.

 The RBI collects credit information from the banking companies and also furnishes consolidated credit
information from the banking company.
 Every banking company is under a statutory obligation under Section of the Reserve Bank.
 The Act, however, provides that the Credit information supplied by the Reserve Bank to the banking
companies shall be kept confidential.
 After the enactment of the RBI (Amendment) Act, 1974, the banks are granted statutory protection to
exchange freely credit information mutually among themselves.
5.Under the Banking Regulation Act, 1949

 Under Section 26, every banking company is requires to submit a return annually of all such accounts in India
which have not been operated upon for 10 years.
 Banks are required to give particulars of the deposits standing to the credit of each such account.
6.Under the Gift Tax Act, 1958.

 Gifts Tax Act, 1958, confers on the Gift Tax authorities powers similar to those conferred on Income- Tax
authorities under Section 131 of the Income Tax Act.
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7.Disclosure to Police.
 Under Section 94 (3) of the Criminal Procedure Code, the banker is not exempted from producing the account
books before the police.
 The police officers conducting an investigation may also inspect the banker’s books for the purpose of such
investigations.
8.Under the Foreign Exchange Management Act, 1999

 Banking companies dealing in foreign exchange business are designated as ‘authorized persons’ in foreign
exchange
 This Act empowers the officer of the Directorate of Enforcement and the Reserve Bank to investigate any
contravention under the Act.
9.Under the Industrial Development Bank of India Act, 1964.

 the Industrial Development Bank of India is authorized to collect from or furnish to the Central Government,
the State Bank, any subsidiary bank,
 it can furnish credit information or other information as it may consider useful for the purpose of efficient
discharge of its functions.
B. Disclosure permitted by the Banker’s Practices and Usages.
1.With Express or Implied Consent of the Customer.

 The banker will be will be justified in disclosing any information relating to his customer’s account with the
consent.
 the implied term of the contract between the banker and his customer is that the banker enters into a
qualified obligation with the customer to abstain from disclosing information as to his affairs without his
consent.
 The consent of the customer may be expressed or implied.
A. Express consent
 Express in case the customer directs the banker in writing to intimate the balance in his account or any
other information to his agent, employee or consultant.
 The banker would be justified in furnishing to such person only the required information and no more.
 It is to be noted that the banker must be very careful in disclosing the required information to the customer
or his authorized representative.
 if an oral enquiry is made at the counter, the bank employee should not speak in louder voice so as to
be heard by other customers.
 Similarly, the pass-book must be sent to the customer through the messenger in a closed cover.
 A banker generally does not disclose such information to the customer over the telephone unless he
can recognize the voice of his customer; otherwise he bears the risk inherent in such disclosure.
B. Implied consent
 Implied of the customer permits the banker to disclose necessary information.
 For example, if the banker sanctions a loan to a customer on the guarantee of a third person and
the latter asks the banker certain questions relating to the customer’s account. The banker is
authorized to do so because by furnishing the name of the guarantor, the customer is presumed
to have given his implied consent for such disclosure.
 The banker should give the relevant information correctly and in good faith.
 Implied consent should not be taken for granted in all cases even where the customer and the enquirer
happen to be very closely related.
 For example, the banker should not disclose the state of a lady’s account to her husband without
the express consent of the customer.
2.To protect interest of banker.
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 The banker may disclose the state of his customer’s account in order to legally protect his own interest.
 For example, if the banker has to recover the dues from the customer or the guarantor, disclosure of
necessary facts to the guarantor or the solicitor becomes necessary and is quite justified.
3.Banker’s Reference
 Banker follows the practice of making necessary enquires about the customers, their sureties or the
acceptors of the bills from other bankers.
 This is an established practice amongst the bankers and is justified on the ground that an implied consent
of the customer is presumed to exist.
 By custom and practice necessary information or opinion about the customer is furnished by the banker
confidentially.
 the banker should be very careful in replying to such enquiries.
Precautions to be taken by the banker.

 The banker should observe the following precautions while giving replies about the status and financial
standing of a customer:
 The banker should disclose his opinion based on the exact position of the customer as is evident
from his account.
 He should not take into account any rumour about his customer’s creditworthiness.
 He is also not expected to make further enquiries in order to furnish the information.
 The basis of his opinion should be the record of the customer’s dealings with banker.
 He should give a general statement of the customer’s account or his financial position without
disclosing the actual figures.
 In expressing his general opinion, he should be very cautious—he should neither speak too low
about the customer nor too high.
 He should furnish the required information honestly without bias or prejudice and should not
misrepresent a fact deliberately.
 In such cases he incurs liability not only to his own customer but also to the enquirer.
C. Duty to the public to disclose

 Banker may justifiably disclose any information relating to his customer’s account when it is his duty to the
public to disclose such information.
 In practice this qualification has remained vague and placed the banks in difficult situations.
 The Banking Commission, therefore, recommended a statutory provision clarifying the circumstances when
banks should disclose in public interest information specific cases cited below:
 when a bank asked for information by a government official concerning the commission of a crime
and the bank has reasonable cause to believe that a crime has been committed and that the
information in the bank’s possession may lead to the apprehension of the culprit,
 where the bank considers that the customer’s is involved in activities prejudicial to the interests
of the country.
 where the bank’s books reveal that the customer is contravening the provisions of any law, and
 where sizable funds are received from foreign countries by a constituent.
D. Risks of Unjustifiable Disclosure

 The obligation of the banker to keep secrecy of his customer’s accounts – except in circumstances noted above
– continue even after the account is closed.
 If a banker discloses information unjustifiably, he shall be liable to:
 Liabilities to customer
 The customer may sue the banker for the damages suffered by him as a result of such disclosure.
 Substantial amount may be claimed if the customer has suffered material damages.
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 Such damages may be suffered as a result of unjustifiable disclosure of any information or extremely
unfavorable opinion about the customer being expressed by the banker.
 Liabilities to third parties.
 The banker is responsible to the third parties also to whom such information is the banker furnishes
such information with the knowledge that it is false.
 Such party relies on the information and suffers losses.
 Such third party may request the banker to compensate him for the losses suffered by him for relying
on such information.
 But the banker shall be liable only if it is proved that it furnished the wrong or exaggerated
information deliberately and intentionally. Thus he will be liable to the third party on the charge of
fraud but not for innocent misrepresentation.
BANKER DUTY TO HONOUR CUSTOMER CHEQUES
Introduction
 When account is opened by a banker in the name if a customer, there is an obligation on the banker to honour
the customer’s cheques.
 as long as there are sufficient funds available in the customer’s account the banker need to honour cheques.
 whenever the customer demands the repayment of his deposits by issuing cheques there is a contractual
obligation on the banker to honour his customers’ cheques and repay his deposits.
 This obligation is provided by stature in section 31 of the Indian Negotiable Instruments Act of 1881.
Conditions to be satisfied to honour the cheques of the customers:
1.Sufficient funds must be available

 The customer should have credit balance in his account.
 which should be equal to the amount stated in the cheque.
2. Funds must be properly applicable to the payment of the cheque:

 The funds available to the credit of the trust account are applicable only for the purposed covered by the
trust.
 If the banker has received a notice of the assignment of the customer’s credit balance to a third party or If
certain funds in the customer’s account are set-aside for some specific purpose. Such funds will not be
available for the payment of the customer’s cheques.
3. Banker must be duly required to pay the cheque

 The instrument used for drawing the amount should be properly written and fulfill all legal obligations.
 It should be presented within a reasonable time after its date of issue.
 as per the Banking custom and practice, a cheque must be presented for payment within 3 months from the
date of issue.
 Otherwise it becomes stale and invalid and such a cheque need not be honored
 If a cheque is not properly drawn, then the banker need not honour the cheque.
 Similarly, if a cheque is presented for payment before the date of payment mentioned in the cheque (if the
cheque is postdated) the banker is not required to pay the cheque.
 If a cheque is presented outside business hours the banker is not required to honour the same.
4. There must be no legal ban preventing the payment of cheque

 A cheque drawn against an account on which a garnishee order has been issued by the court need not be
honored by the banker.
 Similarly, if there is any order issued by the income-tax authorities attaching the customer’s funds in an
account, such a cheque need not be honored.
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5. No obligation to honour cheques drawn against the uncleared cheques or bills:

 If cheques are drawn by a customer against uncleared cheques or bills i.e. cheques or bills deposited by
the customer for collection but not yet collected and credited to the customer’s account.
RIGHTS OF BANKER
1.Right of Appropriation
 In case of his usual business, a banker receives payments from his customer.
 If the customer has more than one account or has taken more than one loan from the banker, the question of
the appropriation naturally arises.
 right of appropriation is vested in the debtor, who makes a payment to his creditor to whom he owes several
debts.
 He can appropriate the payment by
 an express intimation.
 under circumstances implying that the payment is to be applied to the discharge of some particular
debt. If the creditor accepts such payment, it must be applied accordingly
 Example: A owes B several debts, including ` 1,000 upon a promissory note which falls due on 1st
December, 1986. He owes B no other debt of that amount. On 1-12-1986 A pays B ` 1,000. The
payment is to be applied to the discharge of the promissory note.
 If the debtor does not intimate or there is no other circumstances indicating to which debt the payment is to
be applied, the right of appropriation is vested in the creditor.
2.Right of general lien
Introduction
 Lien means the right of the creditor to retain the goods and securities owned by the debtor until the debt due
from him is repaid.
 creditor has the right to retain the security of the debtor and not the right to sell it .
 There is no express or implied contract, to the banker’s lien.
 It is a legal claim by one person on the property of another as security for payment of a debt.
Types of lien
1. General lien
 general lien applicable for the general balance due.
 One of the important rights enjoyed by a banker is the right of general lien.
 the creditor can retain the goods and securities of the debtor.
 Banks in India enjoy not only right of general lien, they can even sell the goods and securities of the debtor in
case of need to recover debts.
 Banker’s lien is therefore called as an Implied Pledge. Since Limitation Act is not applicable to right of lien,
banks can recover time barred debts also.
2. Particular lien
 particular lien applicable only those goods and securities in respect of which debts are incurred, can be
retained by the creditor.
 A particular lien can be exercised by a person who has spent his time, labour and money on the goods
retained. In such cases goods are retained for a particular debt only.
 Example 1: if a wrist-watch is given to watch repairer for repairing, till the repairing charges are paid, the
watch repairer has right to retain the wrist watch in his possession. He cannot sell the watch for the recovery
of service charges or also cannot retain any other security of the debtor for these repairing charges.
 Example 2: a tailor has the right to retain the clothes made by him for his customer until his tailoring charges
area paid by the customer.:
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Conditions necessary for exercising right of lien

 Goods and securities (cheques, bills, shares, debentures etc.) must be owned by the debtor in his own name.
 Securities must be received for securing loan and not for other purpose like safe custody, safe deposit vaults.
 Reasonable notice must be given before the sale of securities.
 There should not be any contract inconsistent to the right of lien.
 (Sometimes borrower gives an undertaking to the banker as regards his assets that, the assets are free from any
charge and without the permission of the bank, no charge will be created on it. This undertaking is called
Negative Lien. This undertaking, however, has no legal standing and has moral value only.)
Features of General Lien
1.The banker possesses the right of general lien on all goods and securities
 The banker possesses the right of general lien on all goods and securities entrusted to him in his capacity.
 Thus, he cannot exercise his right of general lien if –
 the goods and securities have been entrusted to the banker as a trustee or an agent of the customer.
 a contract – express or implied – exists between the customer and the banker which is inconsistent
with the banker’s right of general lien.
 if the goods or securities are entrusted for some specific purpose, the banker cannot have a lien over
them.
2.A banker’s lien is an implied pledge

 the right of lien does not confer on the creditor the right of sale but only the right to retain the goods till the
loan is repaid.
 In case of pledge the creditor enjoys the right of sale.
 A banker’s right of lien is more than a general lien. It confers upon him the power to sell the goods and
securities in case of default by the customer.
 Such right of lien thus resembles a pledge and is usually called an ‘implied pledge’.
 The banker thus enjoys the privileges of a pledge and can dispose of the securities after giving proper notice
to the customer.
3.The right of lien is conferred upon the banker by the Indian Contract Act
 No separate agreement or contract is, therefore, necessary for this purpose.
 To be on the safe side, the banker takes a letter of lien from the customer mentioning that the goods are
entrusted to the banker as security for a loan.
 The banker is also authorized to sell the goods in case of default on the part of the customer.
4.The right of lien can be exercised only if goods in the name of the borrower.
 The right of lien can be exercised on goods/securities in name of the borrower
 Lien cannot be exercised if goods and securities not jointly with others.
 For example, in case the securities are held in the joint names of two or more persons the banker cannot
exercise his right of general lien in respect of a debt due from a single person.
5.Right of lien can exercise by banker on the securities remaining in his possession after the loan,
 Bank can exercise lien on securities for which they are lodged, is repaid by the customer.
 If no contract to contrary exists, it is an implied presumption that the customer has re-offered the same
securities as a cover for any other advance outstanding on that date or taken subsequently.
Exceptions to the Right of General Lien
1.Safe custody deposits
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 When a customer deposits his valuables, securities, ornaments, documents, with the banker for safe custody,
he entrusts them to the banker s a Bailee or trustee with the purpose to ensure their safety from theft, fire,
etc.
 Example: if a customer hands over to the banker some shares with the instruction to sell them at or above a
certain price and the same are lying unsold with the banker, the latter cannot exercise his right of lien on the
same, because the shares have been entrusted for a specific purpose and hence a contract inconsistent with
the right of lien comes into existence.
 But if no specific purpose is mentioned by the customer, the banker can have lien on bills or cheques etc.
2. Securities left with the banker negligently.

 The banker does not possess the right of lien on the documents or valuables left in his possession by the
customer by mistake or by negligence.
3.The banker cannot exercise his right of lien over the securities lodged with him for securing a loan,
before such loan is actually granted to him.
4.Securities held in Trust.

 The banker cannot exercise his right of general lien over the securities deposited by the customer as a trustee
in respect of his personal loan.
 But if the banker is unaware of the fact that the negotiable securities do not belong to the customer, his right
of general lien is not affected.
5.Banker possesses right of set-off and not lien on money deposited.

 The banker’s right of lien extends over goods and securities handed over to the banker.
 Money deposited in the bank and the credit balance in the accounts does not fall in the category of goods and
securities.
 The banker may, therefore, exercise his right of set –off rather the right of lien in respect of the money
deposited with him.
3. Right of set- off

 Right of set off enables a banker, to combine two accounts in the name of the same customer and to adjust
the debit balance in one account with the credit balance in the other.
 For example, a has taken an overdraft from his banker to the extent of ` 5,000 and he has a credit balance of
2,000 in his savings bank account, the banker can combine both of these accounts and claim the remainder
amount of ` 3,000 only.
 This right of set-off can be exercised by the banker if there is no express or implied agreement.
 Notice is served on the customer intimating the latter about the former’s intention to exercise the right of
set off
 To be on the safer side, the banker takes a letter of set-off from the customer authorizing the banker to
exercise the right of set-off without giving him any notice.
Conditions
1.The accounts must be in the same name and in the same right
 The first condition for the application of the right of set-off is that the accounts with the banker must not only
be in the same name but also in the same right.
 The same right’ meant that the capacity of the accountholder in both the accounts must be the same.
 principle involved in this rule is that funds belonging to someone else, but standing in the same name of the
account – holder, should not be made available to satisfy his personal debts.
 Examples:1. In case of a sole trader the account in his personal name and that in the firm’s name are deemed
to be in the same right and hence the right of set-off can be exercised in case either of the two accounts is
having debit balance.
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Example 2; In case the partners of a firm have their individual accounts as well as the account of the firm
with the same bank, the latter cannot set-off the debt due from the firm against the personal accounts of the
partners. But if the partners have specially undertaken to be jointly liable for the firm’s debt due to the banker,
the latter can set-off such amount of debt against in the personal accounts of the partners.
2.The right can be exercised in respect of debts due and not in respect of future debts
 a banker can set-off a credit balance in the account of customer towards the payment of a bill which is already
due but not in respect of a bill which will mature in future.
 If a loan given to a customer is repayable on demand or at a future date, the debt becomes due only when the
banker makes a demand or on the specified date and not earlier.
3.The amount of debts must be certain

 it is essential that the amount of debts due from both the parties to each other must be certain.
 If liability of any one of them is not determined exactly, the right of setoff cannot be exercised.
 For example, if A stands as guarantor for a loan of ` 50,000 given by a bank to B, his liability as guarantor will
arise only after B defaults in making payment. The banker cannot setoff the credit balance in his account till
his liability as a guarantor is determined.
4.The right may be exercised in the absence of an agreement to the contrary

 If there is agreement, express or implied inconsistent with the right of set-off, the banker cannot exercise
such right.
5.The Banker may exercise this right at his discretion

 For the purpose of exercising this right bank can combine two or more accounts in the name of the same
customer at more than one branch.
 The customer, however, cannot compel or pursue the banker to exercise the right and to pay the credit
balance at any other branch.
6.The banker has right to exercise this right before the garnishee order is made effective
 In case a banker receives a garnishee order in respect of the funds belonging to his customer, he has the right
first to exercise his right of set-off and thereafter to surrender only the remainder amount to the judgement
creditor.
5.Right to charge Interest and Incidental Charges and services

 As a creditor, a banker has the implied right to charge interest on the advances granted to the customer.
 Bankers usually follow the practice of debiting the customer’s account periodically with the amount of
interest due from the customer.
 Interest is usually charged monthly, quarterly, semi-annually or annually.
 Along with interest, banks also have the right to levy a commission and service charges for the services
rendered.
6.Right to Close the Account

 If the customer’s account is not properly maintained, banks have all the right to close the account by sending
a notice to the customer.
 Bankers have no right to close the account, without sending a written notice.
CUSTOMER DUTY TOWARDS BANKER
 comply with the KYC norms that have become universal now.
 co-operate with the bank in following all the standard rules and procedures, without asking for any
exemption/waiver.
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 must remember his bank account number.

 sign the same way each time and his signature must always match with his specimen signature scanned and
uploaded in the bank’s computers.
 The customer has to bring his Passbook (in case of S.B. Accounts) and Cheque Book (if he enjoys this
facility), whenever he visits the bank in person.
 The customer must be aware of his bank’s business hours and shall not unnecessarily trouble the bank staff
to comply with his requests outside the business hours.
 The customer is expected to know the distinction between the ‘Home Branch’ and other branches of the
same bank.
 The customer must behave decently and politely when he is inside a bank or when he contacts his bank
over phone or email
 The customer must approach the right person (bank staff), for attending to his particular need.
 The customer shall not demand any privilege or concession or service to which he is not entitled, as per the
bank rules
 Once the bank manager has given his oral approval for any credit proposal, it is the duty of the customer to
submit all the necessary papers and documents in one bunch,
UNIT 4
ENDORSEMENT
Introduction:
 Endorsement is the act of signing a cheque for the purpose of transferring it to somebody else.
 Under Negotiable Instruments Act it means the writing of ones name on the back of the instrument or any
paper attached to it with the intention of transferring the rights.
 A bearer cheque can be transferred by mere delivery but an order cheque is transferred by endorsement and
delivery.
 Endorsements are usually made on the back of the cheque, though they can be made on its face as well. If,
however, no space is left on the instrument, it may be made on a separate paper attached to it.
 Endorsement on the cheque must be made in proper fashion, otherwise the bank will not pay it.
 The endorser must sign his name exactly as it has been written on the cheque.
 He must sign his name with the same spellings as already appear on the cheque.
 Unless the transferor signs his indorsement on the instrument and delivers it, the transferee does not become
a holder.
 it is essential that the intention of signing the instrument must be negotiation, otherwise it will not constitute
an endorsement.
 The person who signs the instrument for the purpose of negotiation is called the ‘endorser’ and the person in
whose favour instrument is transferred is called the ‘endorsee’.
 Where a cheque is endorsed on behalf of a company, a firm or some other institution, the person signing. the
endorsement must so sign as to make it clear that he is so doing on behalf of the company or the firm and not
in his personal capacity.
General Rules regarding the Endorsements
1.Signature of the endorser

 The signature on the document for the purpose of endorsement must be that of the endorser or any other
person who is duly authorized to endorse on his behalf.
 If a cheque is payable to two persons, both of them should sign their names in their own handwriting.
 If the endorser signs in block letters, it will not be considered a regular endorsement.
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2. Spelling
 The endorser should spell his name in the same way as his name appears on the cheque or bill as its payee or
endorsee.
 If his name is mis-spelt or his designation has been given incorrectly, he should sign the instrument in the
same manner as given in the instrument.
 Thereafter, he may also put his proper signature in the same handwriting, if he likes to do so. For
3. No addition or omission of initial of the name

 An initial name should neither be an added nor omitted from the name of the payee or endorsee as given in
the cheque.
 For example, a cheque is payable to S.C. Gupta should not be endorsed as S. Gupta or vice versa. Similarly, a
cheque payable to Harish Saxena should not be endorsed as H. Saxena because it will be doubtful for the
paying banker to ascertain that H. Saxena is Harish Saxena and nobody else. It is possible that some Hari
Saxena has signed on the cheque as H. Saxena.
4. Prefixes and suffixes to be excluded

 The prefixes and suffixes to the names of the payee or endorsee need not be included inthe endorsement.
 For example, the words “Mr., Messrs, Mrs., Miss, Shri, Shrimati, Lala, Babu, General, Dr., Major, etc
 However, an endorser may indicate has title or rank, etc., after his signature. For
 example, a cheque payable to Mojor Raja Ram or Dr. Laxmi Chandra .
Kinds of endorsements
1. Blank or general endorsement

 If the endorser signs his name only and does not specify the name of the endorsee, the endorsement is said
to be in blank.
 The effect of a blank endorsement is to convert the order instrument into bearer instrument which may be
transferred merely by delivery.
2. Endorsement in full or special endorsement

 If the endorser, in addition to his signature, adds a direction to pay the amount mentioned in the instrument
to, a specified person, then endorsement considered to be in full.
 Example, A, the holder of a bill of exchange, wants to make an endorsement in full to B, he would write thus:
“Pay to B or order, SdA4. After such an endorsement it is only the endorsee, i.e., B, who is entitled to receive
the payment of the instrument and to further negotiate the instrument by his endorsement.
 A blank endorsement can easily be converted into an endorsement in full, According to Section
3. Partial Endorsement
 partial endorsement which transfers the rights to receive only a part payment of the amount due on the
instrument is invalid.
 Such an endorsement has been declared invalid because it would cause inconvenience to them.
 Example; Thus, where A holds a bill for Rs 2,000 and endorses it in favour of B for Rs 1,000 and in favour of
C for the remaining Rs 1,000, the endorsement is partial and invalid.
4. Restrictive endorsement
 An endorsement which, by express words, prohibits the endorsee from further negotiating the instrument
 The endorsee under a restrictive endorsement gets all the rights of an endorser except the right of further
negotiation.
 It entitles the endorsee to receive the payment on due date and sue the parties for it but he cannot further
negotiate the instrument.
 Illustrations: B, the holder of the bill, makes an endorsement on the bill saying “Pay C only.” It is a restrictive
endorsement as C cannot negotiate the bill further.
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 This prevents the risk of unauthorized person obtaining payment through fraud or forgery and the drawer
losing his money.
5. Conditional endorsement
 If the endorser of a negotiable instrument, by express words in the endorsement, makes his liability,
dependent on the happening of a specified event, although such event may never happen, such endorsement
is called a ‘conditional’ endorsement.
 The law permits a conditional endorsement and therefore it does not in any way affect the negotiability of
the instrument.
 Example; Pay B or order on his marriage; “Pay B on the arrival of Peerless ship at Bombay.”
 In the case of a conditional endorsement the liability of the endorser would arise only upon the happening of
the event specified.
6. Sans recourse endorsement

 When the endorser expressly excludes his own liability on the negotiable instrument to the Endorsee.
 Such an endorsement is generally made by adding the words ‘sans recourse’ or ‘without recourse.’
 Thus, “Pay X or order sans recourse” or “Pay X without recourse to me” or “Pay X or order at his own risk” is
examples of this type of endorsement.
 It is one of the commonest form of qualified endorsement and virtually prohibits negotiation since the
endorser says in effect.
7. Facultative endorsement:
 When the endorser expressly gives up some of his rights under the negotiable instrument, the endorsement
is called a ‘facultative’ endorsement.
 Thus, “Pay X or order, notice of dishonour waived” is a facultative endorsement.
 As a result of such an endorsement the endorsee is relieved of his duty to give notice of dishonour to the
endorser and the latter remains liable to the endorsee for the non-payment of the instrument
HOLDER IN DUE COURSE
Meaning of holder
 holder of a negotiable instruments means any person who is entitled in his own name and right to the
possession of the instrument and to receive and recover the amount due on the instrument.
 A person who has obtained possession of the instrument by illegal means, e.g. by theft, or under a forged
indorsement, is not a holder.
 A person can become the holder of a negotiable instrument only if the following conditions were satisfied:
 He must be entitled to the possession of the instrument in his own name and under a legal title.
 He must be entitled to receive or recover the amount from the parties concerned in his own name.
Kinds of Holders
1.de jure holder

 holder of a negotiable instrument as a matter of legal right.
2.A de facto holder

 holder of a negotiable instrument merely by virtue of possession but not entitled in his own right or name.
 A clerk or servant possessing an instrument for collection or custody is a holder de facto not a holder de
jure
Holder in Due Course
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 Holder in due course means any person who for consideration become the possessor of a promissory note,
bill of exchange, cheque etc and payable to bearer, before its maturity, (i.e. before the amount mentioned in
it becomes payable),
 Holder in due course had no cause to believe that any defect existed in the title of the person from whom he
derived title.
Conditions
 The holder must have taken the instrument for value.
 He must have obtained the instrument before its maturity.
 The instrument must be complete and regular on its ace.
 He must have taken the instrument in good faith and without notice of any defect either in the instrument or
in the title of the person negotiating it to him.
 He should not have obtained the instrument:
 By gift
 By unlawful consideration.
 After its maturity.
 Illegal method
 In Braja Kishore Dixit v. Purna Chandra Panda (AIR 1957 SC 153), the court held that three conditions are
necessary to be holder in due course. Firstly, he must be a holder for consideration, second, the instrument
must have been transferred to him before it becomes overdue, and third, he must be a transferee in good faith
and that he should not have any reason to believe that there was any defect in the title of the transferor.
Privileges of a Holder in due course
1.Good title
 Holder gets a good title to the instrument even though the title of the transferor is defective.
 Thu, he may get a better title than that of the transferor; e.g. if A steals a bill from B and endorses to C,a holder
due course, C can recover the amount from B, although A cannot recover from B.
2.Liability of prior parties

 All prior parties to a negotiable instrument (i.e., its maker or drawer, acceptor and intervening endorsers)
continue to remain liable to a holder in due course both jointly and severally.
 he can hold any or all prior parties liable until the instrument is duly satisfied.
3.sueing opportunity
 A holder in due course can sue all the parties liable to pay in his own name.
4.Privilege in case of Fictitious bills

 When a bill of exchange is drawn in a fictitious name and is made payable to the drawer’s the bill is said to
be a fictitious bill.
 Such a bill is not a good bill and cannot be enforced at law.
 Initially acceptor of such a bill is liable to a holder in due, latter he can show that the first indorsement on
the bill and the signature of the supposed drawer are in the same handwriting.
5.Privilege in case of inchoate stamped instruments

 In the case of inchoate stamped instrument, if the holder or original payee fills more amount than that was
authorised, he cannot enforce the instrument for the whole amount.
 only actual authorised amount can be recovered
 If such instrument is transferred to a holder in due course, he can claim the whole of the amount so entered
is covered by the stamp affixed thereon.
 Thus he cannot be taken against a holder is due course.
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CHEQUES
Definition (Section 6)
 A cheque is a bill of exchange drawn on a specified banker and it is Payable on demand.
 Electronic image of a truncated cheque is recognized under law.
 The Information Technology Act, 2002recognizes (a) digital signatures and (b) electronic transfer as well
 It must be in writing and signed by the drawer.
 The cheque is always accepted into the account of the payee.
 sometimes cheque cannot be processed due to the insufficiency of funds in the account holder. Banks will
always return such cheques as (cheque bounce).
Parties to a Cheque:
1.Drawer
 This is the person who draws the cheque.
 He is the maker of the cheque.
 He is the account holder who draws the cheque for drawing money from his bank account.
 He is the person who issues cheque directing the bank to pay a certain sum of money to a certain person or
to the bearer.
 Thus, the person who signs the cheque is known as drawer.
2.Drawee.
 Drawee is the bank.
 It is the party to whom the drawer gives order to pay the amount to the person named on the cheque or his
order to the bearer.
 When the bank follows the order and pays the amount of the cheque then the cheque is
said to be honoured.
 In case of refusal of the order, the cheque is said to be dishonoured
3. Payee.
 This is the person to whom the amount mentioned in the cheque is made payable.
 Payee is the party who presents the cheque for payment.
 He is the person who receives money from bank.
 He is the party in favour of whom cheque is issued.
 The payee is the person whose name is mentioned on the cheque.
 If the cheque is made payable to self, the drawer himself becomes the payee
Essentials of a Valid Cheque:
1.In writing/ use of printed form –

 A cheque must necessarily be an instrument in writing.
 Oral orders therefore do not constitute a cheque.
 There is no specific rule regarding the writing materials to be used.
 It may be done by means of a nib, a pencil, a type writer or any other printed character.
2. Definite and Unconditional Order

 A cheque is an order to pay and it is not request.
 It is not essential that the word order must form a part of the writing because pay itself denotes a command
and words like please or kindly are dispensed with in cheque.
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3. Signed by the Drawer

 The cheque must be signed by the drawer.
 the drawer normally puts his- signature at the bottom right hand comer of the cheque.
 The signature must be the person in whose name the account is kept or his authorised agent.
 When the signature differs from the specimen or it is slightly different, the banker need not honour the
cheque.
4. Order to Pay Certain Sum (Pay Money Only)

 A cheque is usually drawn for a definite sum of money.
 Indefiniteness has no place in monetary transaction.
 Phrase like less than Rupee One Hundred Only or Above rupees two hundred only does not give a clear and
concrete idea to the parties concerned and it will render the cheque invalid.
 So bankers request their customers to draw the amount both in words and figures even through, the
Negotiable Instruments Act is silent on this point.
 If there is any difference between the amount in figures and words, the bankers can return the cheque, since,
the amount is not certain.
5. Payees name
 cheque may be a valid one, it must be made payable to the order of a certain specified person or to his agent
or the bearer thereof.
 A normal cheque is one in which there is a drawer, a drawee whom the amount the cheque is payable.
 The payee must, therefore, be a certain person.
 He may be a human being or an artificial person i.e., a body corporate, e.g., a company, an authority, a trade
union etc.
6. Drawn upon a Specified Banker

 A cheque drawn on any person other than a banker is not valid.
 A Cheque is always drawn on a particular banker only.
 Usually the name and address of the banker is clearly printed of the cheque leaf itself.
 It is advisable that the full name of the banker is mentioned in the cheque. For e.g. instead of O B; it must be
written Indian Overseas Bank.
 A cheque drawn on a particular branch of a particular bank cannot be encashed at another branch of the
same bank, unless there is an agreement between the parties.
7. Payable on Demand
 A cheque is always payable only on demand.
 It is not necessary to use the word on demand as in the case of a demand bill.
 As per Sec.19 of the Negotiable Instruments Act, unless a time factor is specified by the drawer, the cheque
is always payable on demand.
Different Kinds / Types of Cheques
1.Bearer Cheque
 When the words "or bearer" appearing on the face of the cheque are not cancelled, then the cheque is called
a bearer cheque.
 The bearer cheque is payable to the person specified therein or to any other else who presents it to the bank
for payment.
 However, such cheques are risky, this is because if such cheques are lost, the finder of the cheque can collect
payment from the bank.
2.Order Cheque
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 An order cheque is a cheque which is payable to a particular person or to to anyone else to whom it is
endorsed (transferred).
 In case of order cheque, the word ‘bearer’ might have been cancelled and the word ‘order’ is written.
written on the face of the cheque.
3.Uncrossed / Open Cheque

 When a cheque is not crossed, it is known as an "Open Cheque" or an "Uncrossed Cheque".
 The payment of such a cheque can be obtained at the counter of the bank.
 An open cheque may be a bearer cheque or an order one.
4.Crossed Cheque
 Crossing of cheque means drawing two parallel lines on the face of the cheque with or without additional
words like "& CO." or "Account Payee" or "Not Negotiable".
 A crossed cheque cannot be encashed at the cash counter of a bank but it can only be credited to the payee's
account.
5. Anti-Dated Cheque
 If a cheque bears a date earlier than the date on which it is presented to the bank, it is called as "anti-dated
cheque".
 Such a cheque is valid up to three months from the date of the cheque.
6. Post-Dated Cheque
 If a cheque bears a date which is yet to come (future date) then it is known as post-dated cheque.
 A post-dated cheque cannot be honoured earlier than the date on the cheque.
7. Stale Cheque
 If a cheque is presented for payment after three months from the date of the cheque it is called stale cheque.
 A stale cheque is not honoured by the bank.
Distinction between Cheque/Bill of exchange/promissory note
Cheques Bill of exchange

Meaning A document used to make easy A written document that
payments on demand and can shows the indebtedness of
be transferred through hand the debtor towards them
delivery is known as cheque.
creditor.
Defined in Section 6 of The Negotiable Section 5 of The Negotiable

Instrument Act, 1881 Instrument Act, 1881.
Validity period 3 months Not Applicable
Payable to beare Always Cannot be made payable on demand as per

on demand 1934.
Acceptance A cheque does not require Bill of exchange needs to be

acceptance. Accepted
Stamping No such requirement. Must be stamped
Crossing Yes No
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Drawee Bank Person or Bank
Cheques Promissory note

Meaning A document used to make easy promissory note is an unconditional
payments on demand and can promise in writing made by one person
be transferred through hand to another, signed by the maker, engaging
delivery is known as cheque.
to pay on demand or at a fixed or
determinable future time, a sum certain
in money to the order of a specified person,
or to bearer.
Defined in Section 6 of The Negotiable According to Section 4 of the Negotiable

Instrument Act, 1881 Instrument Act 1881
Payable to bearer Always It may be payable on demand or after a

on demand Specified time
Stamping No such requirement. Must be stamped
Crossing Yes No
Drawee Bank A promissory note can be made by any person.
CROSSING OF A CHEQUE
Introduction
 Crossing is an ‘instruction’ given to the paying banker to pay the amount of the cheque through a banker
only.
 It not allows bank to pay amount directly to the person presenting it at the counter.
 A cheque bearing above instruction is called a ‘crossed cheque.
 others without such crossing are ‘open cheques’ which may be encashed at the counter of the paying banker
as well.
 The crossing on a cheque is intended to ensure that its payment is made to the right payee.
 Section 123 to 131 of the Negotiable Instruments Act contain provisions relating to crossing.
 Thus not only cheques but bank drafts also may be crossed.
Types of Crossing
A. General crossing.
 cheque bears across its face (generally, on the left hand top corner) two parallel transverse lines without
any words, or with such words as ‘and company or & Co.’ ‘not negotiable’ written in between the parallel
lines, it is called general crossing
 The holder may deposit his cheque with any bank of his choice and collect his money through that bank.
 it gives a direction to the paying banker that, he should not pay the cheque at the counter
 payment is made through an account and not at the counter.
 The main intention of crossing a cheque is to give protection for banker and customer.
 When a cheque is crossed generally, a person who is not entitled to receive its payment is prevented from
getting that cheque cashed at the counter of the paying banker
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B. Special crossing
 cheque bears across its face the name of a banker, that additional name of a bank itself (without any parallel
lines) Or, the name of the banker may be put within the parallel lines.
 The special thing in this is the mention of name of a special bank which alone could be the collecting banker
for this cheque.
 paying banker has to pay on the cheque only when it is presented through the banker specially mentioned
in the crossing.
 the collecting banker can always act through an agent bank.
 Sometimes, a cheque may be specially crossed to more than one bank. Sec.127 does not allow this. It
requires that if the second bank has to be mentioned, it must be as the agent of the first bank.
 A special crossing gives more protection to the cheque than a general crossing
Cheque bearing “not negotiable”

 A person taking a cheque crossed generally or specially, bearing in either case the words “not negotiable”,
Shall not have, and shall not be capable of giving, a better title to the cheque than that which the person
form whom he took it had.
 Thus, mere writing words ‘Not negotiable’ does not mean that the cheque is not transferable.
 It is still transferable, but the transferee cannot get title better than what transferor had.
Account Payee
 It’s an additional protection to the payee of a cheque is the practice of restrictive crossing.
 This is commonly known as “Account Payee Only” crossing.
 Such crossing can be made in the case of both the ‘general’ as well as ‘special’ crossing by putting in
between the parallel lines some restrictive words.
 Examples: ‘Account payee (A/c Payee)’, ‘Account Payee only (A/c Payee only)’ or ‘Ram Nath’s account only.’
Double Crossing
 When a cheque bears two separate special crossing, it is said to have been doubly crossed.
 cheque is crossed specially, the banker to whom it is crossed may be again cross it especially to
another banker, his agent for collection.
 It cannot, therefore, be crossed specially again to another banker.
 cheque cannot have two special crossings, as the very purpose of the first special crossing is
frustrated by the second one.
DISHONOUR OF CHEQUE
Introduction
 dishonored of the cheque means the refusal by the bank to pay the amount of cheque to the payee.
 The bank should pay the amount mentioned on the cheque as soon as it is presented.
 If the amount of cheque is paid by the bank to the payee, the cheque is said to be honored.
 If the bank refuses to pay the amount of cheque, then the cheque is said to be dishonored.
Conditions for dishonor of a cheque by a paying banker

 date is not written or written incorrectly.
 date given is of three months before or if the advance date is given.
 name of the payee is not written or not written clearly.
 ordered or crossed cheques are transferred without proper endorsement and delivery.
 amount is not written in words and figures.
 Amount written incorrectly or if the amount written in words and figures does not match with each other.
 alteration made on the cheque is not proved by the drawer giving signature.
 account number is not mentioned or if it is not clear or if it is not mentioned clearly.
 signature is not given or if the signature given in the cheque does not match with the signature given on the
signature specification card kept by the bank.
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 amount mentioned on the cheque is more than the amount that the drawer has in his bank account.
 cheque is overwritten.
 cheque is not found in proper condition or it is found wet, torn or spotted.
 drawer has given order to the bank to stop payment of the cheque.
 bank has got the information regarding the death or insolvency or lunacy of the drawer of depositor.
 court of law orders the bank to stop payment of the cheque.
 bank balance remains shortage on account of not collecting the cheque deposited.
 If the drawer has closed his/her account before presenting the cheque.
Grounds for refusing payment of a customer’s cheque

 A cheque is said to be bounced or dishonored by non-payment when the drawee banker of the cheque
refuses payment upon being duly required to pay the same.
 Unless there are valid reasons to dishonor a cheque, the bankers must take utmost care to see that the
cheques drawn by their customers are duly paid when presented.
 Dishonouring a cheque is different from refusing payment on a cheque.
 Dishonour takes place when there is defect in the instrument or when there are insufficient funds in the
accounts.
 Refusing payment of a cheque takes place on the happening of certain events.
 We can see the grounds under which a bank refuses payment.
1. Countermanding of payment:
 customer after having issued the cheque to third party.
 Later instructs the banker to stop payment on the cheque before the instrument is presented,
 It is the responsibility of the customer to inform the banker before the payment is affected.
2. Death of customer:
 Notice of death of customer has to be given by the close relative of the deceased.
 On receipt of the notice, banker will close the account and any cheque received thereafter, payment will be
refused.
3. Insolvency of the customer:

 court adjudged the customer of a bank as insolvent.
 the account of that customer will be taken over by an official assignee appointed by the court.
 any cheque received thereafter will be refused payment.
4. Lunacy (Mental Illness):

 customer is of unsound mind, then account cannot be operated.
 lunacy of the customer has to be certified by a doctor and the nature of the lunacy must also be stated.
 If it is of a temporary nature, the account may be suspended till such time the lunacy is cured.
 If lunacy is of a permanent nature, on the advice of the doctor, the account will have closed and cheques
received thereafter will be refused payment.
5. Garnishee order:
 court gives order to the bank to close the account of the customer partially or completely and according to
that order cheques will be refused payment.
6. Closing of account voluntarily:

 customer on his, closes the account by giving a written declaration, the bank will close the account
 customer has to surrender all the unused cheques and the passbook. The banker will close the account after
arriving at the balance.
7. Assigning the entire balance to a third party

 When a customer gives in writing to the bank to assign his entire credit balance to a third parties’.
8. Other grounds
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When a cheque is
 Conditional one
 Drawn on ordinary piece of paper
 Mutilated
 Post dated
 In sufficient funds
 Irregular endorsement etc.
Consequences of wrongful dishonor of customer’s cheque

 If a banker, without justification, dishonors his customer’s cheque, the banker makes himself liable to
compensate the customer for any loss or damage.
 The words ‘loss or damage’ used in Section 31, not only mean the pecuniary loss but also loss of credit or
injury to reputation of the customer.
 if the customer is a trader or a business man, the damages may be substantial.
 a non-trader is not entitled to recover substantial damages for the wrongful dishonor of his cheque.
Sec. 138 - punishment to drawer for bouncing of cheque
a) Imprisonment for a term which may extend to two years, or

b) A fine which may extend to twice the amount of the cheque, or
c) Both of these.
NOTING AND PROTEST
Noting (Section 99)

 It applies When a promissory note or bill of exchange has been dishonoured by non-acceptance or non-
payment,
 It is the duty of notary public and holder to note dishonoured upon the instrument or upon a paper
attached there to or partly upon each.
 Such note must be made within a reasonable time after dishonour.
How a negotiable instrument should be noted?

 the holder of the bill approaches the Notary Public with the dishonoured instrument to secure official
evidence of dishonour.
 The Notary Public on receipt of the complaint, re-present the dishonoured instrument for acceptance or
payment as the case may be to the defaulting parties.
 If the drawee or acceptor still refuses for acceptance or payment of bill, the Notary Public makes noting of
reason for dishonour of the bill. which comprises following details as provided under sec.99 of NI Act.
 The date of dishonour.
 Reasons if any assigned for dishonour.
 If the instrument is not expressly dishonoured, then the reason for holder coming to the
conclusion that the bill is dishonoured.
 The Notary Charges.
 Noting must take place at a reasonable time after dishonour date (Generally ‘noting ’takes place on
dishonour date or the next succeeding business day).
Protest (Section 100 &101)

 When a promissory note or bill has been dishonoured, the holder within a reasonable time dishonour to be
noted and certified by a notary public.
 Protest is a more formal Process of noting
 When the notary public issues a certificate stating the particulars regarding the dishonour such certificate is
called a protest.
 noting is merely a record of the fact of dishonour.
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 protest is not compulsory, in the case of an inland bill or note, but a foreign bill must be protested, if so
required by the law of the place where it is drawn.
 Protest for Better Security
 the acceptor of a bill of exchange has become insolvent, or his credit has been publicly impeached,
 before the maturity of the bill, the holder may within a reasonable time, employ a notary public to
demand better security of the acceptor and on its request, may cause facts to be noted and certified
within a reasonable time. Such certificate is called a “Protest for better security”.
 The Protest must contain following
 The transcript of the instrument or instrument itself.
 The names of persons against whom the instrument has been protested.
 A statement of (payment, acceptance, better security) that has been demanded of such person by
the notary public.
 The place and time of dishonour and place and time of refusal when better security is demanded.
 Signature of the Notary.
 The subscription of notary public
PAYING BANKER
Introduction
 The paying banker is the bank whose name is printed on a given cheque.
 bank pays the specified amount by the cheque to the collecting banker and withdraws that amount from the
customer account.
 This is only done if the customer has sufficient funds within their account in order to enable the transaction.
 It is the duty of the paying banker to examine the cheque and ensure that it has been properly signed, the
endorsements are correct and that the cheque is generally in order.
Meaning of Paying Banker

 A Paying banker is one who is a drawee of a cheque.
 He takes the responsibility of making payment on a cheque to the true owner.
 Any wrong payment will make the paying banker liable to the true owner of cheque and also to the drawer
of the cheque
Precautions of paying banker
1. Presentment of the cheque

 Presentment of the cheque means that the banker has to look into the correctness of following things, type
of the cheque, branch, account, banking hours, mutilation, etc.
 Open cheque or crossed cheque

 The paying banker must also see whether the cheque is an open cheque or a crossed cheque and
accordingly make the payment.
 The paying banker must also be careful about the validity of the endorsement, if any, on the cheque.
 Place of presentment of Cheque

 The paying banker must see the account against which the cheque has been drawn is maintained in
the same branch.
 If the cheque is drawn against account which is maintained in some other branch of the bank, the
banker should refuse to pay the amount.
2. Proper Form
 On receiving the cheque, the paying banker must see that the cheque must be in the proper form as
supplied by the banker.
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 Here it must be in printed form, unconditional order of payment, date , amount, material alteration etc
 Date of the Cheque

 The paying banker must be cautious regarding the time of presentation and payment date of the
cheque.
 A cheque must be presented for payment within the normal business hours of the bank.
 Moreover, the banker must see the date for payment. Because a cheque can be honoured only on the
date of payment as mentioned on the cheque or within three months from that date.
 At the same time, cheque without date or a post- dated cheque before the due date cannot be paid.
 Words & figures

 Another aspect that the paying banker must observe is that the amount of the cheque must be
written both in figures and in words and they must be similar.
 Alteration Over writing

 The paying banker must be cautious about the material alteration of the cheque.
 Material alteration means altering the contents of the cheque to make it invalid.
 If such material alteration is visible, the banker can make the payment of the cheque only after
getting full signature of the customer at the places of material alteration.
3. Sufficiency of Funds
 The banker should see whether the credit balance in the customer’s account is sufficient to pay the cheque
or not.
 If there is an over draft agreement, then should see that the limit is not exceeded.
 The banker should not make part payment of the cheque. The banker should pay either full amount or
refuse payment.
4. Verification of Drawer’s Signature

 Signature of the customer is another important aspect where the banker must exercise due care.
 The signature of the customer on the cheque must be similar with the specimen signature that he has given
at the time of opening the account.
 endorsement needs to be verified before honouring a cheque.
Protection to Paying Banker
1.Protection in case of order cheque:

 In case of an order cheque, Section -85(1) provides statutory protection to the paying banker
 However, two conditions must be fulfilled to avail of such protection.
(a) Endorsement must be regular: To avail of the statutory protection, the banker must
confirm that the endorsement is regular.
(b) Payment must be made in Due Course: The paying banker must make payment in
due course. If not, the paying banker will be deprived of statutory protection.
2. Protection in case of Bearer Cheque:

 Section -85(2) provides protection to the paying banker in respect of bearer cheques.
 This section implies that a cheque originally issued as a bearer cheque remains always bearer.
 it retains its bearer character irrespective of whether it bears endorsement in full or in blank or whether
any endorsement restricts further negotiation or not.
 banks are not required to verify the regularity of the endorsement on bearer cheque even if the instruments
bear endorsement in full.
 The banker shall free from any liability (discharged) if he makes payment of an uncrossed bearer cheque to
the bearer in due course.
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 If such cheque is a stolen one and the banker makes its payment without the knowledge of such theft, he
will be discharged of his obligation and will be protected under Section -85(2).
3. Protection in case of Crossed cheque

 If it is done, he is protected by Section -128.
 Section -128 given protection if he fulfils two requirements:
 That he has made payment in due course under Section -10 i.e. in good faith and without negligence
and according to the apparent tenor of the cheque, and
 That the payment has been made in accordance with the requirement of crossing (Section -126), i.e.
through any banker in case of general crossing and through the specified banker in case of special
crossing.
 Thus, the paying banker is free from any liability on a crossed cheque even if the payment was received by
the collecting banker on behalf of a person who was not a true owner.
 For example, a cheque in favour of X is stolen by Y. He endorses it in his own favour by forging the signature
of X and deposits it in his bank for collection. In this case, the paying banker shall be discharged if he makes
payment as mentioned above and shall not be liable to pay the same to X, the true owner of the cheque. The
drawer of the cheque is also discharged since protection is also granted to him under this Section.
 banker cannot avail of the protection granted by other Section of the Act, the protection under Section -128
if the paying bankers makes payment of a cheque crossed with
 Irregular endorsement or
 A material alteration or
 Forged signature of the drawer,
 he loses statutory protection granted to him under the Act for these lapses on his part. Hence
 he cannot avail of the statutory protection under Section -1289, even if he pays the cheque in
accordance with the crossing.
UNIT 5
SOUND PRINCIPLES OF BANKING AND LENDING
Introduction
 It is a fundamental principle of banking that advances are made to customers in reliance on his promise to
repay, rather than the security held by the banker.
 All lending involves some degree of risks.
 it is necessary for any bank to develop sound and safe lending policies and new lending techniques in order
to keep the risk to a minimum.
 the banks are required to follow certain principles of sound lending.
1.Safety
 When a loan or investment is made, the banker will have to ensure that the money advanced is
returned by the borrower along with interest within the stipulated period.
 This is possible only when the borrower does not face any risk and strictly adheres to the terms
and conditions of the loan.
 It’s a duty of the banker to type of borrowers who are prompt in repayment of the principal and
interest amount.
2.Liquidity
 An asset is said to be liquid when it converted into cash within a short notice, without loss.
 bank has to take more precaution while doing lending.
 The depositor may demand his/her moneyat any time and the bank must be in a position to repay the same.
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 It necessary that it money must come back on demand or in accordance with agreed terms of repayment.
 The borrower must be in a position to repay within a reasonable time after a demand for repayment is made.
 This can be possible only if the money is employed by the borrower for short-term requirements.
 The source of repayment must also be definite.
 ‘Liquidity’ has as much importance as ‘safety’ of funds. Because bulk of bank deposit is repayable on demand
or at a very short notice.
 Banker must ensure that money is locked up for a long time.
 If loan becomes illiquid, it may not be possible for bankers to meet their obligations vis a vis depositors.
 liquid assets held by bank, depends upon the following factors
 Statutory Requirements
 Nature of Money Market
 Banking Habits
 Structure of Banks
 Business Conditions
 Monetary Transactions
 Number and Size of Deposits
 Nature of Deposits
 Clearing House Facility
3.Profitability
 Banks accept deposits from public and lend it to make profit.
 Banks also incur expense to maintain deposits such as rent, stationary, premises rent, provision for
depreciation of their fixed assets, bad loans.
 After incurring such expenditures, a bank must earn some profit like other financial institutions.
 The bank has profit as its main business motive.
 the bank must earn higher interest or higher return.
 Factors Affecting Profitability of Banks
 Cost of Funds
 Yield On Funds
 Non-Interest Income
 Amount of Working Capital
 Non-performing Asset
 Competition
 Operating cost
 Risk Cost
 Burden
4. Purpose of loan
 A banker would not throw away money for any purpose for which the borrower wants.
 The purpose should be productive so that the money not only remains safe but also provides a definite
source repayment.
 The purpose of loan helps in determining level of risk and also impact interest rate on loan.
5. Shift ability
 Sometimes bank is giving loan against the security.
 in case of bad debts, the bank must be able to sell the security and realize the loan amount.
 In some cases, the bank will not sell the security, but will shift the same to the Central bank which will grant
the commercial bank additional fund against the security.
6. National Interest
 The bank must keep in mind national interest while lending or investing depositor’s money.
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 When a country is facing unemployment, the bank must give more loans to employment oriented
industries, so that the problem of unemployment can be reduced.
 Similarly, when a country is faced with food problem, more loans should be given for agriculture so that,
food production can be increased.
7. Safety Margin
 While granting loan against security, the bank will have to keep sufficient safety margin.
 bank will lend only unto 50 or 60% of the value of security as loan by keeping a safety margin of 4 or 50%.
For example: when loan is given against a jewel whose market value is Rest. 10,000/-. the loan amount will
be Rest. 6,000/- and the safety margin Rest. 4,000/- now even if the market value of the jewel fluctuates to
Rest. 9,000/- or Rs. 8,000/- still the banker will be able to realize the loan amount in case the borrower
defaults.
8. Diversification of risk
 banker cannot invest all his resources in a single industry or with a single borrower.
 The banker should not keep all the eggs in the same basket.
 By choosing a single industry such as iron and steel or sugar, the banker is inviting more risks.
 It is likely that these industries may face depression and the banker will find it difficult to recover the loan
or realize his investment.
9. Law of Limitation Act

 banker should also bear in mind the Law of Limitation Act.
 According to this Act, a debt will become a bad one after the expiry of three years from the date of loan.
 It is applicable to loans and advances granted by banks.
 each and every banker should be very careful in renewing the loan, year after year. Otherwise, these loans
would become bad subsequently.
10. Security:
 It has been the practice of banks to lend against security.
 Security is considered as a insurance in case of an emergency.
 The banker carefully scrutinizes all the different aspects of an advance before granting it.
PRECAUTIONS OF LENDING
INTRODUCTION
 Nearly 90% of total loans and advances given by banks are secured against varied types of assets.
 Secured lending provide sense of protection to the banker
 In case of non- payment, the banker is entitled to dispose them and realise his debt.
 Though the banker’s position is safe he is likely to suffer losses through his own negligence or mistakes.
Therefore, he should take some precautions before lending against assets.
1. Against goods
 For various reasons the commercial banks in the past never considered the goods as a perfect security for a
loan.
 Goods have difficulties like storage, transport, supervision, valuation, risk of deterioration etc. but now
about 60% of bank loans are given against the security of goods.
Advantages
 Easy marketability
 goods are tangible securities and are better than guarantee and bill of exchange.
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 If the borrower defaults, then bank can realise the loan amount by selling the goods
 Ready market
 Most of the goods have ready market. They can easily be sold.
 Advances for short period
 normally loans on goods are given for short period as few goods have seasonal character.
 Easy to evaluate the prices of the goods in the market.
 Free from fluctuations
 generally, banks accept all goods which necessaries of life like wheat, rice, sugar etc
 so there is less fluctuation of their market demand and prices.
Disadvantages
 Risk of deterioration
 some goods of perishable nature and some goods attain depreciation in their values
 Risk of fraud
 there is no proper standardization and branding.
 there is scope for the unscrupulous people to adulterate the goods.
 Storage and verification
 the banker has to find godowns to keep the goods pledged and secure the service of honest
godowns keepers for ensuring proper supervision on the goods
 Fall in the value of security
 the value of security is subject to wide fluctuation in case of luxury goods.
 Unexpected change in demand may cause their price fall
 High transport cost
Precautions
 Integrity of the borrower
 Banker should ascertain that the borrower is a trustworthy person, honest.
 It is needed to avoid fraud.
 Purpose of the loan

 The repayment of loan depends on the purpose of the loan.
 The borrower should not be a person involved in speculation.
 Because then the chances of losses are more
 Nature of the commodity

 Banker should have some working knowledge about the commodity given as a security.
 They should be easily disposable, not subject to deterioration; it should have price stability etc.
 Knowledge of the different markets

 Banker should be conversant about the marketability of different goods.
 It is needed to ensure margin of the goods according to available market price.
 Proper care in valuation

 Experts should be appointed for the price evaluation.
 Care should be taken to provide sufficient sale margin too avoid loss resulting from market
fluctuations.
 Banker should see if the given price matches the market price or not.
 Ascertain the title of the owner

 The owner’s title to goods should be clear before he pledges them for a loan.
 Proper storage
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 Godowns should be well built and safe.

 It should not leak from the roof during rains or collapse.
 The building should be well locked. Godown should be nearby and easily accessible by bank
inspectors.
 In case of rented godowns the banker should take an undertaking from the owner of building
stating that bank has prior lien.
 Under no circumstances should the keys of the godowns be allowed to pass into the hands of the
borrower. The keys should be kept in locker.
 Periodical inspection of the goods in godown should be done to check their quality and quantity are
intact as per the bank records.
 Insurance up to full market values

 Goods should be insured for their full market value.
 Banks should keep insurance policy and time to time collect the premium payment receipts from
the borrower.
 Supervision regarding release of goods

 When borrower is allowed to repay the debt in instalments, the banker should release the goods
only in proportion to the amount repaid
 RBI directives
 RBI directives are issued from time to time regarding lending against goods.
 it may require some special conditions for such loans or restrict lending against certain listed
commodities. These must be followed.
2. Against Land and building (immovable property)
Introduction
 Land is immovable property.
 S. 3 (6) of general clauses act 1897 – immovable property shall include land ,benefits arise out of land and
things attached to earth or permanently fastened or anything attached to earth except standing timber,
growing crops and grass
 A loan that you can avail by mortgaging property.
 Banks and financial institutions provide LAP (loan against property) on residential, commercial property
and on land property.
 It is a Secured loan and so in case of default bank can take over the property and auction it to recover loan
dues.
 Ownership stays with the borrower and he can use or rent out the property
Purpose
 May be for Business
 May be for Personal purposes like –wedding, education, home loans or home improvements etc.
 Loan size – rs 5lakh to 10 crore
 Tenure –upto 15-20 years
Precautions
 financial soundness of the borrower
 The banker should ascertain the financial soundness of the borrower.
 His annual income and other source of income must be inquired
 Banker should ask for latest tax payment receipts
 And that owner has nor arrears of land revenue
 There should not be any prior mortgage
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 Banker should evaluate the property

 Experienced surveyor and architects must be appointed for this.
 Value information can be collected by sale transaction of neighbouring lands or properties and also
from the local authorities.
 Land revenue, municipal taxes must be paid.
 Certificate from the local tax authority should be obtained regarding the value of property exceeds
50,000.
 Building should be insured for fire for its full value
 Titles deeds
 Title deeds of the property should be checked
 his bank will appoint a legal advisor.
 Customer should have clear and absolute title over the property.
 It should be free from all forms of encumbrances
documents should be given to the bank

 Application form with photograph duly signed
 identity residence and age proof, Education qualification
 Last 6 months’ bank statement, Last 3-month salary slips\
 Processing fee cheque
 Proof of business existence, Business profile.
PRIORITY SECTOR LENDING
Introduction
 it was emphasised that commercial banks should increase their involvement in the financing to priority
sectors.
 Reserve Bank prescribed a modified return for reporting priority sector advances and certain guidelines
were issued in this connection.
 Priority sector refers to sectors of the economy which may not get timely and adequate credit in the
absence of this special dispensation.
 Typically, these are small value loans to farmers for agriculture and allied activities, micro and small
enterprises, poor people for housing, students for education and other low income groups and weaker
sections.
Categories of priority sector
1.Agriculture (Direct and Indirect finance):

 Direct finance to agriculture shall include short, medium and long term loans.
 It is given for agriculture and allied activities directly to individual farmers, Self- Help Groups (SHGs) or
Joint Liability Groups (JLGs) of individual farmers.
 Indirect finance to agriculture shall include loans given for agriculture and allied activities to those engaged
in distribution of inputs like fertilizers, pesticides, seeds, cattle and poultry feeds etc
2.Small Scale Industries (Direct and Indirect Finance):

 Direct finance to small scale industries (SSI) shall include all loans given to SSI.
 Which are engaged in manufacture, processing or preservation of goods and.
 SSI units which are engaged in manufacture, processing or preservation of goods and whose investment in
plant and machinery
 Indirect finance to SSI shall include finance to any person providing inputs to or marketing the output of
artisans, village and cottage industries, handlooms and to cooperatives of producers in this sector.
3.Micro Credit
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 Provision of credit and other financial services and products of very small amounts not exceeding Rs.
50,000 per borrower.
 It is mainly to the poor in rural, semi-urban and urban areas, either directly or through a group mechanism,
 It main intention to enable them to improve their living standards, will constitute micro credit.
4.Education loans
 Education loans include loans and advances granted to only individuals for educational purposes up to Rs.
10 lakhs for studies in India and Rs. 20 lakhs for studies abroad, and do not include those granted to
institutions
5.Housing loans
 Loans up to Rs. 15 lakh for construction of houses by individuals, (excluding loans granted by banks to their
own employees) and loans given for repairs to the damaged houses of individuals up to Rs.1 lakh in rural
6. Others
 Small road and water transport operators (owning up 10 vehicles)
 Small business (Original cost of equipment used for business not exceed Rs. 20 lacs)
 Retail trade (advances to private retail traders up to 10 lacs
 Professional and self-employed persons
 State sponsored organisations for SC / ST
 Housing
 Consumption loans (under the consumption credit scheme for weaker
 sections)
 Micro-credit provided by banks either directly or through any
 intermediatory; loans to self help groups (SHGs) / Non Governmental
 Organisations (NGOs) for onlending to SHGs
 Loans to the software industry (having credit limit not exceeding Rs. 1
 crore from the banking system)
 Loans to specified industries in the food and agro-processing sector
 having investment in plant and machinery up to Rs. 5 Crore
 (vii) weaker sectors withtin priority sectors
 Small and marginal farmers with land holding of 5 acres and less ad
 landless labourers, tenant farmers and share croppers.
 Artisans, village and cottage industries where individual credit limits do
 no exceed rs. 50,000.
 Beneficiaries of Swarnjayanti Gram Swarojgar Yojana (SGSY)
 SC / ST
 Beneficiaries of Differential Rate of Interest (DRI) scheme
 Beneficiaries under Swarna Jayanti Shahari Rojgar Yojana (SJSRY)
 Beneficiaries under the Scheme for Liberation and Rehabilitation of
 Scavangers (SLRS)
 Self Help Groups (SHGs)
SECURITISATION ACT, 2002.
Introduction
 Financial indiscipline is the hallmark of Indian industry.
 The growing Non-Performing Assets ('NPA'), forced the government to bring more reform in financial
industry. whereby a special Debt Recovery Tribunal ('DRT') was set up for the recovery of NPA.
 However, DRT could not speed up the recovery
 Further, the balance sheets of the banks and financial institutions were turning red due to heavy mandatory
provisions for NPAs.
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 Realizing that every fifth borrower is a defaulter, the Government brought Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, (SARFAESI 2002).
 This Act empowers the banks and financial institutions to recover their dues in Non- Performing Asset (NPA)
accounts, without the intervention of a court.
 This Act also empowers the banks and financial institutions to issue notice for recovery from the defaulting
borrowers and guarantors, calling upon them to discharge the dues in full within 60 days.
Features:
1.Incorporation & Registration of Special Purpose Companies

 The Securitisation Act proposes to securitise and reconstruct the financial assets through two special
purpose:
 Securitisation Company ('SCO')
 Reconstruction Company. (RCO)
 SCO and RCO ought to be a company incorporated under the Companies Act,1956having securitisation and
asset reconstruction respectively as main object.
 The Securitisation Act requires compulsory registration of SCO and RCO under the Securitisation Act before
commencing its business.
 Further a minimum financial stability requirement is also provided by requiring SCO and RCO to possess
owned fund of Rs.2 crore or up to 15% of the total financial assets acquired or to be acquired.
 The RBI has the power to specify the rate of owned fund from time to time.
 Different rates can be prescribed for different classes of SCO and RCO.
 The application for registration will have to be made to RBI.
 The SCO or RCO which has obtained the registration certificate under the Securitisation Act shall be a Public
Financial Institution within the meaning of Section 4A of the Companies Act 1956.
 Besides its core business of securitisation and asset reconstruction a SCO/RCO may perform the following
functions:
 Acting as recovery agent on behalf of any bank or financial institution.
 Acting as manager to manage the secured assets the possession of which has been taken over by the
secured creditor.
 Acting as receiver if appointed by any Court or Debt Recovery Tribunal.
 SCO and RCO companies cannot carry any business other than that of securitisation or asset reconstruction.
2.Securitisation of financial Assets

 Under the Securitisation Act only banks and financial institutions can securitise their financial assets
pertaining to NPAs with a securitisation company.
 Securitisation means, acquisition of financial assets by any securitisation company or reconstruction
company from any financial institution or banks.
 The necessary funds for such acquisition may be raised from 'qualified institutional buyers ('QIB')
 Financial assets are as under:
 A claim to any debt or receivables or part thereof, whether secured or unsecured.
 Any debt or receivables secured by, mortgage of, or charge on, immovable property.
 A mortgage, charge, hypothecation or pledge of movable property.
 Any right or interest in the security whether full or part underlying such debt or receivables.
 Any beneficial interest in property, whether movable or immovable, or in such debts, receivables,
whether such interest is existing, future, accruing, conditional or contingent.
 Any financial assistance.
 Securitisation of financial assets is a financial tool for the lenders to securitise their future cash flows from
the secured assets and thus to release their funds blocked in them.
 In the hands of the SCO and RCO the secured assets become "merchandise", which gives them their return.
 Securitisation of financial assets may take some time to fructify as it requires accounting framework, as well,
besides legal framework.
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3.Acquisition of Rights and interests in financial assets

 This is the main part of securitisation.
 Section 5 provides for the acquisition of rights or interests in financial assets of any bank or financial
institution by SCO / RCO, notwithstanding any Thing contrary contained in any agreement or any other law
for the time being in force, in either of the following manner:
 Issuing a debenture or bond or any other security in the nature of debenture, as consideration agreed
upon by a SCO /RCO and bank/financial institution, incorporating therein the terms and conditions of
issue.
 Entering into an agreement with bank/financial institution for the transfer of such financial assets on
such terms and conditions as may be agreed upon.
 Upon acquiring the financial assets from the bank/financial institution, the SCO/RCO steps into the shoes of
the lender and the borrower.
 Act provided all necessary rights and powers for SCO/RCO to realize the financial assets from the borrower.
4.Funding of Securitisation.
 The SCO/RCO may raise the necessary funds, for the acquisition of financial assets, from the investors by
issuing a security receipt.
 Security receipts issued by any SCO or RCO shall be "securities" within the meaning of Section 2(h)(ic) of the
Securities Contracts (Regulation) Act, 1956.
 A Scheme of acquisition has to be formulated for every acquisition detailing the description of financial assets,
value of investment, rate of return assured etc.
 separate and distinct accounts have to be maintained in respect of each scheme of acquisition.
5.Assets Reconstruction
 A SCO or RCO may, according to the guidelines prescribed by RBI, carry out asset reconstruction in any one
of the following manners:
 Taking over the management of the business of the borrower.
 Changing the management of the business of the borrower.
 Selling or leasing of a part or whole of the business of the borrower.
 Rescheduling of the payment schedule of the debt.
 Entering into settlement with the borrower for the payment of debt.
6.Enforcing Security Interest

 objective of the Securitisation Act is to provide for the enforcement of security interest i.e. taking possession
of the assets given as security for the loan.
 Act contains elaborate provisions for a lender (referred to as 'secured creditor') to take possession of the
security given by the borrower. The sum and substance of the provisions are as under:
 The Lender has to send a notice of demand, giving details of the amount payable and the secured
assets intended to be enforced in the event of non-payment.
 No borrower, after the receipt of the demand notice, shall transfer the secured assets without prior
written consent from the lender.
 The Borrower has to discharge the liabilities within 60 days from the date of receipt of notice of
demand.
 In the event of non-payment of demand by the borrower, the lender may take any one or more of the following
measures:
 Taking possession and / or management of the secured assets of the borrower.
 transfer the same by way of lease, assignment or sale.
 Appointing any person as manager to manage the secured assets the possession of which has been
taken over.
 Asking any person, who has acquired any of the secured assets from the borrower and owes money
to the borrower, to pay so much of the money which is sufficient to pay the secured debt.
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 If the borrower pays all the dues together with all costs, charges and expenses incurred by the lender before
the date fixed for the sale of the secured assets, the lender shall not transfer or sell the secured assets.
 If the sale proceeds of the secured assets are not fully satisfying the debt due, the lendermay file a claim before
the DRT or before a competent court for the recovery of the shortfall.
 The lender also has an option to proceed against any of the guarantors or sell the pledged assets without
taking any measures against the borrower.
 The lender can take the assistance of the Chief Metropolitan Magistrate or District Magistrate, as the case may
be, in taking possession of the secured assets from the borrower.
7.Establishment of a Central Registry

 The functions relating to securitisation, asset reconstruction and creation of security interest is administered
and regulated by a Central Registry.
 Branch offices of the Central Registry may be established as and when the need is required.
 A Central Registrar shall head the Registry.
 The functions of the Central Registry are as under:
 Particulars relating to securitisation of assets, reconstruction of financial assets.
 creation of security interest are entered in a record called Central Register.
 The records can be kept in electronic form also i.e. in floppies, diskettes etc.
 The particulars of every transaction of securitisation, asset reconstruction or creation of security interest
shall be filed within 30 days of the transaction by SCO, RCO or the lender.
 Modifications made in the security interest registered with the Registry are to be filed within 30 days of such
modification.
 Records maintained at the Central Registry are open to inspection for any person on payment of the
prescribed fee.
8.Offences & Penalties

 Following are the offences and penalty prescribed under the Securitisation Act:
 Default in filing particulars of transactions relating to asset securitisation, asset reconstruction and
creation of security interest.
Penalty: officer/lender/company shall be punished with a fine which may extend to Rs.5000/- for every
day during which the default continues.
 Default in filing particulars of modification.
 Default in giving intimation of particulars satisfaction.
 Non-compliance of RBI directives by SCO and RCO.
Penalty: every company and every officer of the company shall be punished with a fine which may
extend to Rs.5, 00,000/-; and for continuing offence an additional fine of Rs.10, 000/- for every day
during which the default continues.
 Contravention of any of the provisions of the Securitisation Act or any rules made thereunder.
Penalty: imprisonment for a term which may extend to one year, or with a fine, or with both.
Only a Metropolitan Magistrate or Judicial magistrate of the First Class has powers to take
cognizance and try an offence under the Securitisation Act.
9.Exempted transactions
The following transactions are exempted from the provisions of the Securitisation Act:
 Lien on any goods, money or securities given under the Contract Act,1872.
 Pledge of movables under the Contract Act,1872.
 Creation of security on aircraft.
 Creation of security interest on vessel.
 Conditional sale, hire-purchase or lease in which no security interest is created.
 Rights of unpaid seller under the Sale of Goods Act,1930.
 Non attachable properties under the civil Procedure Code.
 Security interest on an amount less than or equal to Rs.1 lakh.
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 Security interest created on agricultural land.
AGENCY SERVICES OF BANKS
1.Collection of Cheques, Dividends, Interests etc.

 Bank Collecting cheques, drafts, bill of exchange, dividends, interests etc. on behalf of its customers.
 credit the amount in their account is one of the most important agency services rendered by the banks.
 Banker accepts standing instructions from the customers and arranges to collect dividend, interest,
pension, salaries, bills etc. on behalf of his customers.
2. Payment of Subscription, Rent, Insurance Premium

 Banks undertake the payment of subscriptions, rent, insurance premium etc. on behalf of the customers and
debit the account with the amount.
 It accepts the standing instructions of the customer and arranges for the payment of such expenses on their
behalf.
 It charges a small amount by way of commission for these services.
3. Conduct of Stock Exchange Transactions

 Banks purchase and sell various securities such as shares, debentures, bonds etc. of joint stock companies
both private and Government on behalf of their customers.
4. Acting as Executor, Trustees, Attorneys etc.

 Banks act as executors of will, trustees, attorneys and administrators.
 As an executor it preserves the “Wills” of the customers and executes them after their death.
 As a trustee, it takes care of the funds of the customers.
 As an attorney, it signs transfer forms and documents on behalf of the customer.
5. Preparation of Income Tax Returns

 Banks prepare income tax returns for their customers through their tax service departments.
6. Conducting Foreign Exchange Transactions

 Commercial banks purchase and sell foreign exchange for their customers.
 In the case of foreign transactions or even domestic transactions, the banks will undertake collection of
funds on behalf of customers.
7. Banker acts as an agent to the customer

 When a customer deposits cheques, drafts, bills or any other promissory notes, the banker collects them
and on realization credits the account of the customer.
 For this activity, the banker is given commission.
 Banks also act as a correspondent, representative of their customers.
 Some banks may even get the travellers’ tickets, passport etc. for their customers.
 customer has to pay certain periodical payments such as monthly, quarterly, half yearly, the banker is
informed by a standing instruction.
 Thus, club subscription, insurance premium, road tax, electricity charges and telephone bills of the
customers are paid by the bank after debiting the customers’ account.
8. Salary disbursement
 In a huge factory, employing thousands of persons, salar disbursement can be done through bank branches.
 The salary of the employee will be credited to his individual account every month and he can either make
cheque payment or even withdraw cash.
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TRENDS OF E BANKING SERVICES IN INDIA
Introduction
 Electronic banking has many names like e banking, virtual banking, online banking, or internet banking.
 It is simply the use of electronic and telecommunications network for delivering various banking products
and services.
 In India ICICI Bank first offered internet banking services,
 Through e-banking, a customer can access his account and conduct many transactions using his computer
or mobile phone.
 it is the most popular method of doing banking operation.
 E banking enable customers to perform all routine transactions, such as account transfers, balance
inquiries, bill payments, and stop-payment requests, and some even offer online loan and credit card
applications.
 Account information can be accessed anytime, day or night, and can be done from anywhere.
Types of e banking
1. Automated Teller Machine (ATM)

 It is a machine that helps a bank’s customer to deposit money in a bank or withdraw it.
 It helps to transfer amount and check the debit it one’s account accurately without the help of the bank
employees.
 According to ATM system any time money will get to customer.
 customer can withdraw through ATM card from his bank account, deposit money into his bank account, check
the balance in his bank account at any time, day or night non-stop basis and all the 365 days.
 There are two types of ATM:
a) On site ATM: An ATM installed at the bank premises.
b) Off site ATM: ATM installed by a bank at important places, such as Railway stations, Bus stand,
supermarkets
2.Online Banking
 Online Banking refers to the use of today’s computer technology to avoid the time consuming, paper based
aspects of traditional banking.
 It helps to order and manage our finances more quickly and efficiently.
3. Core Banking
 Core banking is nothing but centralised banking.
 All the information such as account of other branches are channalised through computer to the head office
or corporate office.
 all the branch maintains records at branch level.
 The information about the branch working is sent by the branch to the head office periodically.
 Because of core banking system all the information of branch will be recorded at corporate office (head office)
through Electronic media by computer.
 With the help of electronic media core banking and internet the head office can observe the performance of
the branch manager at any time he needs it.
4. Tele Banking
 Telephone banking is a service provided by a bank or other financial institution, that enables customers to
perform a range of financial transactions over the telephone, without the need to visit a bank branch or
automated teller machine.
 Telephone banking times are usually longer than branch opening times, and some financial institutions offer
the service on a 24-hour basis.
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 telephone banking minimises the cost of handling transactions by reducing the need for customers to visit a
bank branch for non-cash withdrawal and deposit transactions.
 To use telephone banking facility, a customer must first register with the institution for the service, and set
up some password (under various names) for customer verification.
 To access telephone banking, the customer would call a special phone number set up by the financial
institution.
 The service can be provided using an automated system.
 The types of financial transactions which a customer may transact through telephone banking include
obtaining account balances and list of latest transactions.
 Transactions involving cash or documents (such as cheques) are not able to be handled using telephone
banking,
5. Net Banking
 Internet enables one to connect to other computer systems so that they can look up for an information,
documents data programs and images.
 They can be used to search for information on all sorts of services.
 One can do a number of activities by just sitting in front of one’s computer screen or smart phone.
 Net banking help to Transfer of funds from one account to another in the same bank or different banks, Keep
surplus funds in a fixed deposit account, Online shopping etc.
 The only thing he/she needs to do is to access his/her virtual account with the help of the ID and PASSWORD,
provided by the bank. E-Banking Service.
6. Credit card
 A card issued by a financial company giving the holder an option to borrow funds.
 borrowing limits are pre-set according to
 the individual's credit rating.
 Credit cards charge interest and are primarily used for short-term financing.
 Credit cards have higher interest rates than most consumer loans o lines of credit.
 Almost every store allows for payment of goods and services through credit cards.
 Because of their wide spread acceptance, credit cards are one of the most popular forms of payment for
consumer goods and services.
7.Debit Card
 A payment card that deducts money directly from a consumer’s account to pay for a purchase.
 Debit cards eliminate the need to carry cash or physical checks to make purchases.
 Unlike credit cards, they do not allow the user to go into debt, except perhaps for small negative balances
 debit cards usually have daily purchase limits, meaning it may not be possible to make an especially large
purchase with a debit card.
Advantages of e-banking
1.For Banks
 Lesser transaction costs
electronic transactions are the cheapest modes of transaction
 A reduced margin for human error
since the information is relayed electronically, there is no room for human error
 Lesser paperwork
digital records reduce paperwork and make the process easier to handle. Also, it is environment-friendly.
 Reduced fixed costs
A lesser need for branches which translates into a lower fixed cost.
 More loyal customers
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since e-banking services are customer-friendly, banks experience higher loyalty from its customers.
2.Customers
 Convenience
a customer can access his account and transact from anywhere 24x7x365.
 Lower cost per transaction
since the customer does not have to visit the branch for every transaction, it saves him both time and money.
 No geographical barriers
In traditional banking systems, geographical distances could hamper certain banking transactions. However,
with e-banking, geographical barriers are reduced.
3.Businesses
 Account reviews
Business owners and designated staff members can access the accounts quickly using an online banking
interface. This allows them to review the account activity and also ensure the smooth functioning of the
account.
 Better productivity
Electronic banking improves productivity. It allows the automation of regular monthly payments and a host
of other features to enhance the productivity of the business.
 Lower costs
Usually, costs in banking relationships are based on the resources utilized. If a certain business requires more
assistance with wire transfers, deposits, etc., then the bank charges it higher fees. With online banking, these
expenses are minimized.
 Lesser errors
Electronic banking helps reduce errors in regular banking transactions. Bad handwriting, mistaken
information, etc. can cause errors which can prove costly. Also, easy review of the account activity enhances
the accuracy of financial transactions.
CREDIT CARDS
Introduction
 Credit cards are considered a boon for the ready convenience.
 you don't have to worry about carrying enough cash when you go shopping or to a restaurant.
 Just flash your card, sign and walk out.
 Thus the age of plastic money has finally come to India.
 A credit card in simple words is a plastic card which can be used as substitute for cash.
 It is widely used by people for make payment whether it is a small sum involving buying a movie
ticket or big sum like purchasing some furniture or payment at hospitals.
 Banks issue it to their customers to enable them to purchase on credit.
 These cards store the information relating to customers account.
Features
1.Alternative to cash
 Credit card is a better alternative to cash. It removes the worry of carrying various currency denominations
to pay at the trade counters.
 It is quite easy and faster than waiting for completion of cash transactions.
 As an alternative, credit card helps a cardholder to travel anywhere in the world without a need to carry an
ample amount of cash.
 It also reduces the possible risk of money theft and gives its user a complete peace of mind.
2. Credit limit
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 The credit cardholder enjoys the facility of a credit limit set on his card.
 This limit of credit is determined by the credit card issuing entity (bank or NBFC) only after analysing the
credit worthiness of the cardholder.
 The credit limit is of two types, viz.,
 Normal credit limit- Normal credit limit is usual credit given by the bank or NBFC at the time of issuing a
credit card.
 Revolving credit limit. - Revolving credit limit varies with the financial exposure of the credit cardholder.
3. Aids payment in domestic and foreign currency

 Credit card aids its cardholder to make payments in any currency of choice.
 it gives its holder a unique facility to make payments either in domestic (native) currency or if necessary,
also in foreign (non-native) currency, that too as and when required.
 Credit card reduces the process of currency conversion.
 it removes the financial complexities often encountered in converting a domestic currency into a foreign
currency.
 a credit cardholder can possibly make payments to merchants present in any corner of the world.
4. Record keeping of all transactions

 Credit card issuing entities like banks or NBFCs keeps a complete record of all transactions made by their
credit cardholders.
 Such a record helps these entities to raise appropriate billing amounts payable by their cardholders, either
on a monthly or some periodic basis.
5. Regular charges
 Regular charges are basic routine charges charged by the credit card issuing entity on the usage of credit
card by its cardholder.
 These charges are nominal in nature.
 The regular charges are primarily classified into two types, viz.,
 Annual charges- Annual charges are collected on per annum or yearly basis
 Additional charges. - Additional charges are collected for other supplementary services provided
by the credit card issuing entity. Such services include, add-on-card (an additional
 credit card), issue of a new credit card, etc.
6. Grace period
 The grace period is referred to those minimum numbers of additional days.
 Within which a credit cardholder has to pay his credit card bill without any incurring interest or financial
charges.
7. Bonus points
 The competition among the credit card providers is unbending (adamant).
 Offering various incentives is usually a trendy (fashionable) way to improve the sale of the
products in the ordinary course of business.
 credit card providers also give bonus points on the financial value of the transactions compiled by
their customers.
8. Gifts and other offers
 bonus points are redeemed either by converting them into gifts, cash back offers, or any other
similar compelling offers.
 To collect many bonus points, the credit cardholder has to carry out a considerable number of
transactions through his credit card.
Facilities and Services:
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Besides providing credit, the credit card organization extends some additional facilities to attract
customers.
1.Risk Coverage
 Depending on the type of card issued, some banks ensure the card holders a fixed percentage on the value
of a particular sum for covering the risk.
2.Travel Privileges
 Banks provide travel assistance to their card holders by offering a wide range of services linked to airline
and hotel bookings, discounted holiday packages, car rentals etc.
3.Credit Line Increase

 Temporary credit line is provided by banks depending on the ability of the cardholder to pay the bank
based on the card holder’s financial resources and past spending and payment patterns.
 This credit line is increased usually by 25% for 3 months.
4.Purchase Protection
 This facility protects the purchases against damage or loss caused due to fire and theft at no extra cost.
 The card holder can claim the value of the product damaged or lost from the Insurance Company.
 This protection is available for a period of 90 days from the date of purchase of the product using the card.
5.Supplementary Cards
 These cards are issued to the family members of cardholders.
 A cardholder of any bank can obtain supplementary cards at the prevailing card fee for the immediate
family members.
6.Personal Accident Insurance

 Credit card issuers have introduced a free insurance cover to the cardholder against loss of life due to
accidents.
Types of Credit Cards
1.Standard Credit Card

 This is the most commonly used.
 One is allowed to use money up to a certain limit.
 The account holder has to top up the amount once the level of the balance goes down.
 An outstanding balance gets a penalty charge.
2.Premium Credit Card

 This is a card with higher fees.
 Incentives are offered in this over and above that in a standard card.
 This card holder is offered travel incentives, reward points, cash back and other rewards on the use of this
card.
 This is also called the Reward Credit Card.
 Some examples are airlines’ frequent flier credit card, cash back credit card, automobile manufacturers'
rewards credit card. Platinum and Gold, MasterCard and Visa card fall into this category.
3.Secured Credit Card

 People without credit history or with tarnished credit can avail this card.
 A security deposit is required amounting to the same as the credit limit.
 Revolving balance is required according to the 'buying and selling' done.
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4.Limited Purpose Credit Card

 There is limitation to its use and is to be used only for particular applications.
 This is used for establishing small credits such as gas credits and credit at departmental stores. Minimal
charges are levied.
5.Charge Credit Card

 This requires the card holder to make full payment of the balance every month and therefore there is no
limit to credit.
 Because of the spending flexibility, the card holder is expected to have a higher income level and high credit
score.
 Penalty is incurred if full payment of the balance is not done in time.
Advantages.
 Credit card reduces need to carry cash or checks.
 If you make an unforeseen, large purchase, credit allows you to buy it at once and settle up later. Besides it
gives you the opportunity to spread the cost of a large payment over several months.
 credit companies offer consumers flexible rewards schemes in which points earned by purchasing goods
with the card can be redeemed for further goods and services.
 you can make purchases abroad without having to worry about local currency. They have now spread
worldwide.
 credit cards can help you build a positive credit history. Having a good credit history is also very important,
when the credit card owner is applying for loans, rental or even jobs.
 Many credit cards offer some type of insurance if your purchase is stolen. Some credit companies provide
extended warrantees on certain types of purchases.
 In general, credit cards enhance our personal responsibility and independence.
Disadvantages of credit cards

 Banks are inviting cardholders to spend more money that they don’t yet have.
 It is far too easy to spend more than you can afford using a credit card.
 Most credit cards do not ask you to pay off your balance each month. While this may feel like “free money”
at the time, you will absolutely must to pay it off.
 The longer you wait; the more money you will lose with interest which accrues every day until you pay the
balance.
 Credit cards can be stolen, as can cash. They may be physically stolen or someone may steal your credit
card number from a website, over the phone etc.
 Credit cards issue a monthly spending limit. While they are mostly high, if you exceed it, you may face even
bigger charges.
 So if a credit card is not used wisely Free Articles, people can get into debt or even bankruptcy.
MOBILE BANKING / TELE- BANKING/ SMS BANKING
Introduction
 Mobile Banking can be described as a mechanism which allows customer of a financial institution to carry
out various financial transactions with the help of their mobile
 It is a quite popular method of banking that fits in well with a busy, technologically oriented lifestyle.
 It might also be referred to as M-banking or SMS banking.
 The amount of banking you are able to do on your cell phone varies depending on the banking institution
you use.
 Some banks offer only the option of text alerts, such as deposits,
 Mobile Banking Service include: -
 Account Balance Enquiry
 Account Statement Enquiries.
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 Cheque Status Enquiry.

 Cheque Book Requests.
 Fund Transfer between Accounts.
 Credit/Debit Alerts.
 Minimum Balance Alerts.
 Bill Payment Alerts.
 Bill Payment.
 Recent Transaction History Requests.
 Information Requests like Interest Rates/Exchange Rates.
Advantages of Mobile banking

 Edge over internet banking
 Mobile banking has an edge over internet banking.
 In case of online banking, you must have an internet connection and a computer.
 This is a problem in developing countries.
 However, with mobile banking, connectivity is not a problem.
 You can find mobile connectivity in the remotest of places also where having an internet connection
is a problem.
 User friendly
 Mobile banking thorough cell phone is user friendly.
 You can make transactions or pay bills anytime.
 It saves a lot of time. The interface is also very simple.
 You just need to follow the instructions to make the transaction.
 It also saves the record of any transactions made.
 cost effective
 Various banks provide this facility at a lower cost as compared to banking by self.
 Banking through cell phone benefits the banks too. It cuts down on the cost of tele- banking and is
more economical.
 reduces the risk of fraud
 Banking through mobile reduces the risk of fraud.
 You will get an SMS whenever there is an activity in your account. This includes deposits, cash
withdrawals, funds transfer etc.
 you will get a notice as soon as any amount is deducted or deposited in your account.
 Banking relation
 Mobile banking through cell phone is very advantageous to the banks .
 it serves as a guide in order to help the banks improve their customer care services.
 Banks can be in touch with their clients with mobile banking.
 Banks can also promote and sell their products and services like credit cards, loans etc. to a specific
group of customers.
 This gives the bank ability to cross-sell up-sell their other complex banking products and services
such as vehicle loans, credit cards etc.
 Mobile banking offers the next surest way to achieve growth. Service providers are increasingly
using the complexity of their supported mobile banking services to attract new customers and
retain old ones.
Limitations of Mobile Banking
 Costly for normal mobile holders

 the customers who have non-android phones or cannot afford iPhones/BlackBerry cannot dream of
complete reliance on mobile banking.
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 Besides, internet connection on phones may be costly depending on the phone features and
network providers.
 Restricted scope
 Mobile Banking has not been fully adopted by people as of yet.
 according to the data, only 14% of Indian customers are familiar with mobile banking.
 mobile phones have a very small screen compared to a laptop or a computer and this proves to be a
disadvantage when doing banking through mobiles.
 While, new web designs aim to take care of it, but still it is nowhere near a desktop.
 Working in the virtual world proves to be a loss of personal banking experience especially for those
who find mobile banking more complicated.
 A two-way communication becomes almost impossible between the customers and the bank.
 Non-uniformity of services
 It is very important to understand that not all banks provide same services through Mobile Banking.
 While few been allowed to provide mobile banking services to customers by Reserve Bank of India,
there are still many in line who are being kept out of the purview.
 Threat of virus and spams

 Mobile Banking comes with a huge risk to the customer of being under attack by a virus or even by a
spam message.
 The customer must be very careful to analyse whether the message sent to him seeking his
password or bank information is authentic and actually from the bank or not.
 Similarly, virus can attach the mobile device and cause limitations of mobile banking errors in the
software causing disturbances in transactions.
 Theft of mobile
 This is one of the major disadvantages of mobile banking.
 In case the mobile gets stolen, the person is almost bound to lose money if the bank account
information gets leaked and the criminals gain access to the bank account through mobile web or
mobile apps
 Not considered for bulky or large volume of transactions
 Mobile banking is not considered an option for a very large transaction or even for a big volume o
transactions due to mobile banking rules.
 The total upper limit of the worth of such transactions has been limited.
 This can be a hindrance for those who need to transact for more.
AUTOMATED TELLER MACHINES (ATM’S)
Introduction
 Automatic teller machines have transformed the concept of banking in India.
 It has eliminated the requirement of to stand in long queue and filling of forms for routine banking
transaction.
 The first bank to introduce the ATM concept in India was the Hong Kong and Shanghai Banking Corporation
(HSBC) in the year 1987.
 Now customers of banks can access their money with the scratch of a ATM E-banking
 ATM is an electronic computerised device that allows banks customers to directly use a secured method of
communication to access their bank accounts.
 There is no need for a customer to visit branches for their day to day banking transaction like cash deposits,
cash withdrawals, balance enquiry, dropping cheque etc.
 This is expected to result in more efficient banking system.
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75 | P a g e
 ATM delivers multiple services 24x7, which is major cause of making it a success in the history of banking
industry.
 ATM services became profitable and successful due to various services delivered.
Facilities provided to the ATM customers

 Anytime, anywhere access to cash, withdrawal of cash is available 24x7.
 Transfer of money from one account to another account is possible with the help of ATM‟s.
 can check his/her last transactions and current balance.
 a mini statement can also be generated with the help of ATM‟s.
 Change of personal identification number of ATM/debit card can be made with ATM‟s.
 Cheque book request can be made by the customers through ATM‟s.
 Fixed deposits can be done with the help of ATM‟s.
 Utility bills can be paid by the customers with the help of ATM‟s.
Advantages
 24 hours’ service
 ATMs provide service round the clock.
 The customer can withdraw cash upto a certain a limit during any time of the day or night.
 More convince
 ATM gives convenience to bank and customers
 ATMs are located at convenient places, such as at the air ports, railway stations, etc. and not
necessarily at the Bank premises.
 It is to be noted that ATMs are installed off-site. (away from bank premises) as
 ATMs reduce the work pressure on bank’s staff and avoid queues in bank premises.
 ATMs are of great help to travellers. They need not carry large amount of cash with them. They can
withdraw cash from any city or state, across the country and even from outside the country with the
help of ATM.
 ATMs provide privacy in banking transactions of the customer.
 service with less error

 ATM provide service without any error
 The customer can obtain exact amount.
 There is no human error as far as ATMs are concerned.
 customers do not get soiled notes from ATMs.
Disadvantages
 ATMs may be unreliable especially when they are down.
 In case of system failure, there is nothing you can do until they are restored.
 What happens if you forget your PIN? You will have to engage in hassles with the management before a new
one is issued usually after some days.
 In case of serious theft, you may lose the ATM card. The thieves can further hack the ATM card and be able
to withdraw cash from your account.
 The ATM machine does not guarantee a 100% availability of cash. In some cases, it may run low of cash and
you will have to wait until it is restored by the management.
 The cost of levied to an individual using an ATM could be higher although this vary with the banks.

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Banking LAW-1 - Notes

Bba llb (Karnataka State Law University)

Studocu is not sponsored or endorsed by any college or university

SOUND PRINCIPLES OF BANKING AND LENDING .................................................................... 56

ORIGIN AND EVOLUTION OF BANKING

Origin of the banking

Evolution of banking institution in India

Pre- independence period

Liberalization Phase (1990)

1. Reserve Bank of India (Central bank)

Types of commercial banks

C. Public Sector Banks

D. Private Sector Banks

F. Regional rural bank

 Outflow of rural deposits to urban areas.

G. Local area banks

F. Small Finance Banks

Types of co-operative bank

A. Short Term Agricultural Credit institutions

B. Long Term Agricultural Credit Institutions

C. Urban Cooperative Bank

A. National Bank for Agriculture and Rural Development (NABARD)

B. Small Industries Development Bank of India (SIDBI)

D. Export Import Bank of India (EXIM Bank)

 Loan to Indian companies include

FUNCTIONS OF COMMERCIAL BANKS/BANKS

(2) Loans and Advances

 Interest is charged on actual amount drawn by the customer.

ANCILLARY FUNCTIONS/SERVICES OF BANK

Types of Ancillary services

5.E- Banking services

THE STATE BANK OF INDIA

SBI and its associates

Powers and functions of banking ombudsman

Balla Rama Rao v. the Office of Banking Ombudsman

Grounds for complaint

Rules and regulation for filing complaint

Rejection of the complaint

D. Lender of the Last Resort

F. Custodial of Exchange Reserves

G. Collection of Data and Publications

Promotional and Developmental Functions

Power under Under Banking Regulation Act

A. power to appoints Chairman of the Board of Directors. (Section 10 BB)

B. power to control advances by banking companies (Section 2)

C. power to Licensing of banking companies (Section 22)

D. Power to exempt a Co-operative bank (Section 24A)

F. Power in respect of associate enterprises (Section 29A)

F. power to order Special audit (Section 30)

G. power to Inspection of Banking Companies (Section 35)

H. power to give directions (Section 35A)

A. Power to Central Government (35AA)

C. Further powers and functions of Reserve Bank (Section 36)

SUPERVISORY FUNCTION OF RBI

1.Supervision over Commercial banks

3. Supervision over co-operative banks

VARIOUS CONTROL OF RBI OVER COMMERCIAL BANKS

2.Corporate Governance in Banks

7.Anti-Money Laundering Norms

8.Protection of Small Depositors

9.Annual Onsite Inspection

DEPOSIT INSURANCE CORPORATION (DICGC ACT1961)

Establishment and Management of DICGC