Mumbai University

3 Years LLB- Semester VI (May 2024),

Banking Law & Negotiable Instrument Act
Questions & Answers

Q1) What is a scheduled bank?

Ans) As per section 2(e) of RBI Act 1934, scheduled bank means a bank
included in the Second Schedule of the act.

Q2) What is the purpose of constitution of RBI as per RBI Act?

Ans) RBI has been constituted for the purposes of taking over the management
of the currency from the Central Government and of carrying on the business
of banking in accordance with the provisions of the RBI Act.

Q3) Write a note on Central Board of Directors of RBI?

Ans) The Reserve Bank's affairs are governed by a central board of directors.
The CBD oversees the RBI’s affairs and exercises general superintendence
and direction. The board is appointed by the Government of India as per
Reserve Bank of India Act, 1934. The Central Board of Directors is at the
top of the Reserve Bank’s organisational structure. The Central Board shall
consist of following directors
a) A Governor and not more than 4 Deputy Governors to be appointed by
the Central Government (plus)
b) Maximum 4 director to be nominated by govt. as 1 director each from 4
local board constituted under section 9 of RBI Act, 1934 + (plus)
c) Maximum 10 other director to be nominated by govt. + (plus)
d) Maximum 2 govt. official to be nominated by govt.

Q4) What is a Negotiable instrument?

Ans) As per the Negotiable Instruments Act, 1881 of India, a “negotiable
instrument” is defined under Section 13 (1). It states that a negotiable
instrument means a promissory note, bill of exchange, or cheque payable
either to order or to bearer.

Q5) Who is holder in due course?

Ans) As per the Negotiable Instruments Act, 1881 of India, a “Holder in Due
Course” is defined under Section 9.
A “Holder in Due Course” means any person who for consideration became the
possessor of a promissory note, bill of exchange, or cheque if payable to
 Banking Law
Question & Answers

bearer, or the payee or endorsee thereof, if payable to order, before the

amount mentioned in it became payable, and without having sufficient cause
to believe that any defect existed in the title of the person from whom he
derived his title.
In simpler terms, a Holder in Due Course is a person who acquires the
negotiable instrument in good faith for consideration before it becomes due
for payment and without any idea of a defective title of the party who
transfers the instrument to him.

Q6) What are the features of Negotiable Instrument?

Ans) The features of a negotiable instrument as per the act are:
• It must be in writing.
• It must be signed by the maker.
• It should be freely transferable from one person to another.
• The title should be defect-free.
• It must contain an unconditional order or promise to pay money only.
• The sum payable, time payable, and person to whom payment is made
should be certain.
• The instrument should be delivered. Only drawing of the instrument
does not create liability.

Q7) Define Bankers Books under Bankers Books Evidence Act

Ans) Under the Bankers’ Books Evidence Act, 1891 of India, “Bankers’ Books”
are defined in Section 2(3).
“Bankers’ Books” include ledgers, day-books, cash-books, account-books and
all other records used in the ordinary business of a bank. These records can
be kept in written form or stored in a microfilm, magnetic tape or in any
other form of mechanical or electronic data retrieval mechanism, either onsite
or at any offsite location including a back-up or disaster recovery site of
both.

Q8) What are the modes of recovery of debts under Recovery of Debts
Due to Banks and Financial Institutions Act, 1993?
Ans) Under the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993 of India, the modes of recovery of debts are defined in Section
25.
The Act provides for the establishment of Tribunals for expeditious
adjudication and recovery of debts due to banks and financial institutions.
The Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals

2
 Banking Law
Question & Answers

(DRATs) were created specifically to provide quick adjudication and recovery

of debts owed to banks and financial institutions.
The modes of recovery of debts include:
➢ Issuance of a certificate of recovery
➢ Attachment and sale of the debtor’s movable property
➢ Attachment of the debtor’s bank accounts
➢ Arrest of the debtor and his detention in prison
➢ Attachment and sale of the debtor’s immovable property
➢ Appointment of a receiver for the management of the debtor’s movable
and immovable properties.

Q9) What is the meaning of debt under RDDBI Act

Ans) Under the Recovery of Debts and Bankruptcy Act (RDDBI) 1993, the
term “debt” is defined as any liability (inclusive of interest) which is claimed
as due from any person by a bank or financial institution or by a consortium
of banks or financial institutions. This liability may be secured or unsecured,
or assigned, and is payable under various legal instruments such as a court
order, arbitration award, or mortgage

Q10) Define Bill of Exchange?

Ans) As per the Negotiable Instruments Act, 1881 of India, a “Bill of
Exchange” is defined under Section 5. A “Bill of Exchange” is an instrument
in writing containing an unconditional order, signed by the maker, directing a
certain person to pay a certain sum of money only to, or to the order of, a
certain person or to the bearer of the instrument.

Q11) What are the features of Bill of Exchange?

Ans) The key features of a Bill of Exchange as per the act are:
➢ It must be in writing.
➢ It must contain an express order to pay.
➢ The order must be definite and unconditional.
➢ It must be signed by the drawer.
➢ The order must be to pay money only.
➢ The sum payable must be certain.
➢ The person to whom payment is made should be certain.
➢ The instrument should be delivered. Only drawing of the instrument does
not create liability.

3
 Banking Law
Question & Answers

Q12) What is accommodation bill?

Ans) An “Accommodation Bill” as per the Negotiable Instruments Act, 1881
of India, is a bill that is drawn and accepted by the drawer and the drawee
without having any consideration in it. These drafts, notes, or bills are
created to help either one party or all parties for their monetary aid in a bill
of exchange.

Q13) What is garnishee order?

Ans) A garnishee order is a legal directive issued by a court to a third party
that owes money to a debtor. This third party, known as the garnishee, is
ordered not to pay the debtor but instead to pay the creditor directly or to
hold the funds until the court directs otherwise.
The order is typically used to enforce a judgment where the debtor has not
voluntarily fulfilled their financial obligations. It’s a way for creditors to
secure payment from a debtor’s assets that are held by a third party. The
process involves the court, which issues the order, the creditor who requests
the order, the debtor who owes the money, and the garnishee who holds the
debtor’s assets or funds.
For example, if a debtor has a bank account with funds but has not paid a
debt they owe to a creditor, the court can issue a garnishee order to the
bank. The bank, as the garnishee, would then be required to pay the funds
from the debtor’s account directly to the creditor or to hold the funds until
the court decides how they should be distributed. This ensures that the
creditor can recover the owed amount even if the debtor is unwilling or unable
to pay directly.

Q14) What are the features of Accommodation Bill?

Ans) The key features of an Accommodation Bill as per the act:
➢ It is drawn for aside from trade dealing and issued without consideration.
➢ It is not enforceable by law since they lack consideration, and they run
on the moral understanding of the parties that draw the bill.
➢ The drawer makes the bill and the drawee acknowledges it.
➢ The bill can be discounted by the maker’s bank of the bill and drawer can
thus receive the money.
➢ The discounted sum is utilised by the drawer or both the drawee and the
drawer.
➢ Prior to the due date, the maker or the drawer of the bill sends the sum
they used to the drawee to enable the drawee to pay the bill.

4
 Banking Law
Question & Answers

➢ On the due date, the receiver or the drawee honours the bill.

Q15) What is ambiguous Instrument/bill?

Ans) As per the Negotiable Instruments Act, 1881 of India, an “Ambiguous
Instrument” is defined under Section 17.
An “Ambiguous Instrument” is a negotiable instrument that possesses the
characteristics of both a promissory note (as defined under Section 4) and a
bill of exchange (as defined under Section 5). Such instruments are called
ambiguous because they can be interpreted as either a bill or a note by the
holder.
This means that the holder of the instrument has the discretion to treat the
instrument as either a promissory note or a bill of exchange. Once the holder
makes this decision, the instrument is then treated as such for all intents and
purposes.

Q16) What is inchoate stamp instrument?

Ans) As per the Negotiable Instruments Act, 1881 of India, an “Inchoate
Stamped Instrument” is defined under Section 20.
An “Inchoate Stamped Instrument” is a paper that is signed and delivered by
one person to another, and is stamped in accordance with the law relating to
negotiable instruments. This paper can either be wholly blank or have an
incomplete details written on it.
The person who signs and delivers this inchoate instrument gives prima facie
authority to the holder to make or complete, as the case may be, a negotiable
instrument upon it for any amount specified therein and not exceeding the
amount covered by the stamp. The person signing shall be liable upon such
instrument, in the capacity in which he signed the same, to any holder in due
course for such amount.

Q17) Distinguish between Promissory note and Bill of Exchange?

Bill of Exchange Promissory Note
Definition
A negotiable instrument issued to A negotiable instrument issued by the
order the debtor to pay the debtor with a written promise to pay
creditor a certain sum of money the creditor a certain amount within a
within a specific date or on demand. specific date or on demand.
Section
Mentioned in Section 5 of the Mentioned in Section 4 of the
Negotiable Instruments Act, 1881 Negotiable Instruments Act, 1881
5
 Banking Law
Question & Answers

Issued By
Creditor Debtor
Parties Involved
Three parties involved i.e a drawer, Two parties involved i.e a
the drawee and a payee. drawer/maker and the payee
Acceptance
Drawee needs to accept the bill of No acceptance required from the
exchange before payment. drawee.
Liability
Liability of drawer is secondary and Liability of drawer is primary and
conditional. absolute.
Dishonouring of instrument
Notice served to all the concerned No notice served to the drawer in case
parties involved in the transaction of dishonouring the instrument.
on dishonouring the instrument.
Copies
Bill of exchange can have copies. The promissory note allows no copies.
Is it Payable to drawer/maker
Yes, the same person can be drawer The same person cannot be drawer and
and payee. payee.

Q18) What are the demand and time liabilities as per RBI Act?
Ans) As per the Reserve Bank of India (RBI) Act, 1934, “Demand Liabilities”
and “Time Liabilities” are defined under Section 42.
“Demand Liabilities” include all liabilities which are payable on demand. These
refer to the liabilities that the bank has to pay on demand. Examples include
current account deposits, savings account deposits, and demand drafts.
On the other hand, “Time Liabilities” are those which are payable otherwise
than on demand. These refer to the liabilities that the bank has to pay after
a predetermined period of time. Examples include fixed deposits and recurring
deposits.

Q19) Which instruments are eligible for days of grace?

Ans) As per the Negotiable Instruments Act, 1881 of India, the concept of
“Days of Grace” is defined under Section 22. “Days of Grace” are applicable
to every promissory note or bill of exchange which is not expressed to be
payable on demand, at sight, or on presentment. This means that these

6
 Banking Law
Question & Answers

instruments are at maturity on the third day after the day on which they are
expressed to be payable.
However, it’s important to note that no days of grace are allowed for cheques,
which are always payable on demand.

Q20) What is full form of DRT?

Ans) Full Forms of DRT is Debt Recovery Tribunal.

Q21) State any four major functions of RBI?

Ans) The main functions of RBI are:
➢ To regulate the issue of banknotes;
➢ To regulate keeping of reserves with a view to securing monetary stability
in India; To operate the currency and credit system of the country to its
advantage;
➢ To maintain price stability while keeping in mind the objective of growth;
➢ To look after the monetary policy framework in India.

Q22) Define Promissory Note as per NI Act?

Ans) As per the Negotiable Instruments Act, 1881 of India, a "Promissory
Note" is defined under Section 4.
A "Promissory Note" is an instrument in writing (not being a bank-note or a
currency-note) containing an unconditional undertaking, signed by the maker,
to pay a certain sum of money only to, or to the order of, a certain person,
or to the bearer of the instrument.

Q23) What are the features of Promissory Note?

Ans) The features of a Promissory Note as per the act:
- It must be in writing. An oral promise is not valid.
- It must contain an express promise to pay and it is not a mere
acknowledgement of debt.
- The promise to pay must be certain, definite, and unconditional.
- It must be signed by the promisor/maker.
- The promise must be to pay money only.
- The sum payable must be certain.
- The person to whom the payment is made should be certain.
- The instrument should be delivered. Only drawing of the instrument does
not create liability.

7
 Banking Law
Question & Answers

Q24) What is a cheque as per NI Act?

Ans) As per the Negotiable Instruments Act, 1881 of India, a “Cheque” is
defined under Section 6.
A “Cheque” is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand. It includes the electronic
image of a truncated cheque and a cheque in the electronic form.

Q25) What are the features of Cheque?

Ans) The key features of a Cheque as per the act:
➢ It is drawn on a specified banker.
➢ It is not expressed to be payable otherwise than on demand.
➢ It includes the electronic image of a truncated cheque.
➢ It includes a cheque in the electronic form.

Q26) Define Banking Policy under Banking Regulation Act 1949?

Ans) The term “banking policy” under the Banking Regulation Act, 1949 refers
to any policy specified by the Reserve Bank of India (RBI) that serves the
interests of the banking system, monetary stability, or sound economic
growth. It takes into account the interests of depositors, the volume of
deposits, and other resources of the bank. The policy aims for equitable
allocation and efficient use of these deposits and resources.
This definition was inserted into the Act by Section 2 of Act 58 of 1968,
effective from February 1, 1969. The RBI, through these policies, regulates
the banking sector to ensure a stable and robust financial system in the
country.

Q27) What does the expressions at site and on presentment mean in Bill of
Exchange and Promissory note?
Ans) In the context of a Bill of Exchange and a Promissory Note, the
expressions “at sight” and “on presentment” have specific meanings:
➢ At Sight: This term means that the payment is due immediately upon the
presentation of the document to the drawee. It indicates that the drawee
needs to pay the specified amount as soon as they see the bill of exchange
or promissory note.
➢ On Presentment: This term is used interchangeably with “at sight” and
also signifies that the payment is due on demand, i.e., as soon as the bill
or note is presented to the drawee.
➢ In short in both above cases payment is due on demand.

8
 Banking Law
Question & Answers

Q28) What is noting and who does it?

Ans) “Noting” in the context of a Bill of Exchange or a Promissory Note is a
formal procedure that occurs when such an instrument is dishonoured due to
non-acceptance or non-payment. The holder of the dishonoured instrument
takes it to a Notary Public to record the fact of dishonor.
The Notary Public performs the noting by:
a) Presenting the instrument again to the drawee for acceptance or payment.
b) Recording the date of dishonour and the reason for non-acceptance or
non-payment, if any is given.
c) Noting down any other fact necessary to prove the dishonour.
This process provides official evidence of dishonour, which can be used in
legal proceedings if necessary. The noting must be done within a reasonable
time after the dishonour of the instrument.

Q29) Who is notary public?

Ans) A Notary Public is a public officer constituted by law to serve the public
in non-contentious matters usually concerned with general financial
transactions, estates, deeds, powers-of-attorney, and foreign and
international business.

Q30) When the day on which promissory note or bill of exchange at maturity
is public holiday, the instrument shall be deemed to be due on which date?
Ans) When the day on which a promissory note or bill of exchange is at
maturity falls on a public holiday, the instrument is deemed to be due on the
next preceding business day. This provision ensures that the payment
obligation is met on the earlier available business day when banks and financial
institutions are open, thus avoiding any delay due to the holiday. The term
“public holiday” includes Sundays and any other day declared by the Central
Government, by notification in the Official Gazette, to be a public holiday.
This is outlined in Section 25 of the Negotiable Instruments Act, 1881.
For example, if a payment is due on a Sunday (holiday), the “next preceding
business day” would be the Saturday i.e a before that Sunday, assuming
Saturday is not a holiday and businesses are operating as usual. This ensures
that transactions and official matters can be conducted on a day when banks
and businesses are open, providing consistency and predictability for financial
and legal activities.

9
 Banking Law
Question & Answers

Q31) What is the meaning of demand and time liabilities as per Banking
Regulation Act?
Ans) In banking, “demand liabilities” and “time liabilities” are terms used to
categorize the types of deposits a bank holds:
➢ Demand Liabilities (DL): These are the liabilities which are payable on
demand. They include, Current deposits, Demand liabilities portion of
savings bank deposits, Balances in overdue fixed deposits, cash
certificates, and cumulative/recurring deposits payable on demand,
demand drafts issued etc.
➢ Time Liabilities (TL): These liabilities are payable on a future date. They
include: Fixed deposits, Cash certificates etc.
Demand and Time Liabilities (DTL) is the sum of Demand Liabilities and Time
Liabilities. These liabilities are significant for banks as they form the basis
for calculating various ratios like the Cash Reserve Ratio (CRR) and Statutory
Liquidity Ratio (SLR), which are crucial for maintaining the liquidity and
stability of the banking system.

Q32) What is the capital of Reserve Bank and who holds it ?

Ans) The capital of the Reserve Bank of India (RBI) is ₹5 crore. The RBI
was nationalized in 1949, which means its ownership is entirely held by the
Government of India. Therefore, the capital is held by the Ministry of
Finance, Government of India.

******

10
 Banking Law
Question & Answers

Short Notes and Descriptive Questions

Q1) Meaning of endorsement as per negotiable instrument act and various

kinds of endorsements?
Ans) In the context of the Negotiable Instruments Act, an endorsement
refers to the act of a holder of a negotiable instrument signing their name
on the back of the instrument, which transfers the title or ownership to
another individual or legal entity. The person who makes the endorsement is
known as the endorser, and the person to whom the instrument is endorsed
is called the endorsee.
The various kinds of endorsements as per the Negotiable Instruments Act
are:
a) Blank or General Endorsement: This is the simplest form of endorsement.
The endorser just signs their name on the back of the instrument, without
specifying any endorsee. This makes the instrument payable to whoever
holds it, effectively turning it into a bearer instrument.
b) Special or Full Endorsement: In this case, the endorser not only signs
their name but also mentions the name of the endorsee. The instrument
can then only be negotiated by the named endorsee or someone to whom
they further endorse it.
c) Restrictive Endorsement: This type of endorsement restricts the further
negotiation of the instrument. An example would be an endorsement that
states “Pay to John Doe only for deposit,” which means that the
instrument can only be used for depositing into John Doe’s account and
cannot be further negotiated.
d) Partial Endorsement: This is when the endorser transfers only a part of
the amount payable under the instrument to the endorsee. However,
according to the Negotiable Instruments Act, partial endorsements are
not recognized for the purpose of negotiation.
e) Conditional or Qualified Endorsement: Here, the endorser attaches certain
conditions to the endorsement. If those conditions are not met, the
endorsement can be considered void. For example, “Pay to John Doe upon
his marriage to Jane Smith” is a conditional endorsement.
f) Sans Recourse Endorsement: By endorsing an instrument “sans recourse,”
the endorser explicitly states that they do not wish to be liable if the
instrument is dishonored. This means that the endorsee cannot claim the
amount from the endorser if the payer defaults.

11
 Banking Law
Question & Answers

g) Facultative Endorsement: This is when the endorser waives some of their

rights or adds a new condition to the instrument. For instance, an endorser
might waive the notice of dishonor, meaning they do not need to be notified
if the instrument is not honored upon presentation.
Each type of endorsement affects the rights and liabilities of the parties
involved and dictates how the instrument can be transferred or negotiated.
It’s important for holders of negotiable instruments to understand these
differences to ensure they handle the instruments correctly.

Q2) Write a short note on Debt Recovery Tribunal?

Ans) The Debt Recovery Tribunal (DRT) is a quasi-judicial body in India,
established under the Recovery of Debt Due to Banks and Financial
Institutions Act, 1993. Its primary purpose is to facilitate/expedite recovery
of debts owed to banks and financial institutions. The mains features/points
of DRT are as under:
a) History and Objective: The DRTs were created to offer a faster
alternative to the conventional court system for the recovery of debts.
The objective is to ensure that banks and financial institutions can recover
their dues from defaulters in a timely and efficient manner.
b) Powers: The DRT functions like a district court for matters concerning
debt recovery. It has the authority to issue certificates of recovery,
order the sale of properties, and conduct other judicial proceedings as
necessary for the recovery process.
c) Composition: Each DRT is headed by a Presiding Officer appointed by the
Government of India. The tribunal also includes Recovery Officers, who
are responsible for executing the orders of the DRT.
d) Application: The DRT’s jurisdiction covers cases where the amount of debt
due is more than ₹20 lakhs. It is applicable across India, including Jammu
& Kashmir following the amendment of Article 370.
e) Challenges: Despite its significant role, DRTs often face challenges such
as understaffing and delays, which can impede the speed of debt recovery.
f) The orders passed by the DRT can be appealed to the Debt Recovery
Appellate Tribunal (DRAT).

Q3) Write a short note on accommodation bill?

Ans) An accommodation bill is a type of bill of exchange used as a financial
instrument to help someone obtain financing without any underlying transaction
of goods or services. It involves two parties: the one who draws the bill and

12
 Banking Law
Question & Answers

the one who accepts it, purely for the purpose of lending their name or credit
to the other. The party providing the accommodation does this as a favor
and may or may not receive any immediate financial benefit.
Accommodation bills are composed to offer monetary help to either one party
or all parties, and a significant inquiry is how to accomplish their work.
As far as how an accommodation bill works, the drawer makes the bill and
the drawee acknowledges it. Then, at that point, the bill can be discounted
by the maker’s bank of the bill and has received the money. The discounted
sum is utilised by the drawer or both the drawee and the drawer.
Prior to the due date, the maker or the drawer of the bill sends the sum
they used to the drawee to empower the drawee to pay the bill. On the due
date, the receiver or the drawee honours the bill.
In the context of the Negotiable Instruments Act, 1881, an accommodation
bill does not arise from any actual commercial transaction or consideration.
Accommodation bills are formed on mutual understanding between the parties
for their mutual help. These bills are formed without consideration and hence
lack liability. Accommodation bills are considered void in the eyes of the law
However, if such a bill is transferred to a holder for value, the
accommodating party becomes liable to this holder, even if the holder knew
that the bill was an accommodation bill. This is because the holder has given
value for the bill in good faith.

Q4) State the various rules as laid down under the Negotiable Instrument
Act, 1881 relating to presentment for acceptance and presentment for
payment. When presentment is unnecessary?
Ans) Presentment means showing the instrument to the drawee, maker, or
acceptor for acceptance and sight or payment.
Presentment for Acceptance (Section 61 of NI Act):
➢ Presentment for acceptance is primarily applicable to bills of exchange.
➢ A bill of exchange payable after sight must be presented for acceptance
to the drawee by the holder or someone on their behalf.
➢ A bill must be presented to the drawee for acceptance to establish the
drawee’s liability and to fix the maturity date if the bill is payable at a
certain period after sight.
➢ This presentment should occur within a reasonable time after the bill is
drawn and during business hours.
➢ If the bill is not presented for acceptance, the holder cannot enforce
payment against the drawer or any endorser.

13
 Banking Law
Question & Answers

➢ In case of need, the bill must be presented for acceptance to the referee.
Presentment for payment of Promissory Note, Bill of Exchange and cheque
(Section 64 of NI Act )
➢ Promissory notes, bills of exchange, and cheques must be presented for
payment at maturity. The presentment must be made to the maker,
acceptor, or drawee, as applicable, by the holder or on their behalf.
➢ Presentment through the post office by registered letter is also considered
valid when authorized by agreement or usage.
When Presentment is Unnecessary:
➢ Presentment for payment is unnecessary if the maker, drawer, or acceptor
has waived the requirement or cannot be found after due search.
➢ It is also unnecessary if the party to be charged has no capacity to
contract at the time of presentment or if presentment is impossible due
to some other valid reason.
➢ If a promissory note is payable on demand and not at a specified place,
presentment for payment is not necessary to charge the maker

Q5) Define Bill of Exchange : What are the essential ingredients of a valid
Bill of Exchange ? How does it differ from Promissory Note? Compare Bill of
Exchange cheque and draft.
Ans) As per the Negotiable Instruments Act, 1881 of India, a “Bill of
Exchange” is defined under Section 5. A “Bill of Exchange” is an instrument
in writing containing an unconditional order, signed by the maker, directing a
certain person to pay a certain sum of money only to, or to the order of, a
certain person or to the bearer of the instrument.
Essential Ingredients of a Valid Bill of Exchange:
a) It must be in writing.
b) It must contain an unconditional order to pay.
c) It must be signed by the drawer.
d) The drawee must be certain.
e) The payee must be certain.
f) The amount payable must be certain.
g) The order must be to pay money and money only.

Bill of Exchange Promissory Note

Definition
A negotiable instrument issued to A negotiable instrument issued by the
order the debtor to pay the debtor with a written promise to pay

14
 Banking Law
Question & Answers

creditor a certain sum of money the creditor a certain amount within a

within a specific date or on demand. specific date or on demand.
Section
Mentioned in Section 5 of the Mentioned in Section 4 of the
Negotiable Instruments Act, 1881 Negotiable Instruments Act, 1881
Issued By
Creditor Debtor
Parties Involved
Three parties involved i.e a drawer, Two parties involved i.e a
the drawee and a payee. drawer/maker and the payee
Acceptance
Drawee needs to accept the bill of No acceptance required from the
exchange before payment. drawee.
Liability
Liability of drawer is secondary and Liability of drawer is primary and
conditional. absolute.
Dishonouring of Instrument
Notice served to all the concerned No notice served to the drawer in case
parties involved in the transaction of dishonouring the instrument.
on dishonouring the instrument.
Copies
Bill of exchange can have copies. The promissory note allows no copies.
Is it Payable to drawer/maker
Yes, the same person can be drawer The same person cannot be drawer and
and payee. payee.

Comparison between Bill of Exchange cheque and draft

Bills of exchange (BoE): A bill of exchange is an instrument in writing
containing an unconditional order signed by the maker directing a certain
person to pay a certain sum of money only to, or to the order of, a certain
person or to the bearer of the instrument
Cheque: Cheque is a kind of bill of exchange, which is always drawn upon a
specific bank and is payable on demand.
Banker’s draft: It is a bill of exchange in which a bank orders its branch or
another bank, as the case may be, to pay a specified amount to a specified
person or to the order of the specified person.
Thus from above, it is observed that both cheque comes under the category
of Bill of Exchange. Though in BoE, the drawee can be any person, but in
cheque or draft the drawee is compulsorily a banker. BoE can be paid after
15
 Banking Law
Question & Answers

certain days, however, cheque/draft are always payable on demand. BoE

needs to be accepted while a cheque/draft need not be accepted by the
drawee bank. Normally cheque/draft has a validity of 3 months from the
date of issue while BoE can be for a period more than 3 months also.

Q6) "Dishonour of cheque for insufficient funds is a criminal offence."

Critically examine referring to the provisions of N.I. Act, 1881.
Ans) The term “dishonour of a cheque” refers to a situation where a bank
refuses to pay the amount specified on a cheque presented to it. This can
occur for various reasons, such as insufficient funds in the account, a
mismatched signature, an overdrawn account, or a post-dated cheque.
In legal terms, if the bank pays the amount written on the cheque to the
payee, it is called the honour of the cheque. Conversely, if the bank refuses
to pay the money to the payee, it is known as the dishonour of the cheque.
When a cheque is rejected or dishonoured, the bank issues a “Cheque Return
Memo” to the payee, detailing the reasons for non-payment.
In India, the dishonour of a cheque due to insufficient funds is considered a
criminal offense. This is primarily dealt with under Section 138 of the Act,
which was introduced to enhance the reliability of cheques as a financial
instrument and to prevent fraud.
Section 138 states that if a cheque drawn by a person on an account
maintained by him with a banker for payment of any amount of money to
another person from out of that account for the discharge, in whole or in
part, of any debt or other liability, is returned by the bank unpaid due to
insufficient funds or because it exceeds the amount arranged to be paid from
that account by an agreement made with that bank, the person who drew the
cheque shall be deemed to have committed an offense.
However, certain conditions need to be met for this section to apply:
➢ The cheque should have been presented to the bank within a period of six
months from the date on which it is drawn or within the period of its
validity, whichever is earlier.
➢ The payee or the holder in due course of the cheque should make a demand
for the payment of the said amount of money by giving a notice in writing
to the drawer of the cheque within thirty days of the receipt of
information from the bank regarding the return of the cheque as unpaid.
➢ The drawer of such cheque fails to make the payment of the said amount
of money to the payee or, as the case may be, to the holder in due course
of the cheque, within fifteen days of the receipt of the said notice.

16
 Banking Law
Question & Answers

Punishment:
The punishment for this offense can be imprisonment for a term which may
extend to two years, or with fine which may extend to twice the amount of
the cheque, or with both.
Other provisions:
The introduction of this section was to instill confidence in the efficacy of
banking operations and to give credibility to the use of cheques in business
transactions. It aims to penalize those who knowingly issue cheques without
sufficient funds, while also providing a safeguard for honest drawers by
allowing them the opportunity to rectify the situation before legal proceedings
are initiated.
The provision under Section 138 of the N.I. Act is a reflection of the balance
that the law seeks to maintain between the efficiency and credibility of
banking operations and the protection of the rights of the payee. It serves
as a deterrent against the issuance of cheques without proper backing by
funds and ensures that the drawer cannot escape liability easily. However, it
also provides a window for the drawer to make good on the payment and avoid
prosecution, thus protecting individuals from undue harassment in cases where
the dishonor of the cheque may be due to genuine errors or oversight.
As per Section, 141 of NI Act, 1881, if the person committing an offence
under section 138 is a company, every person who, at the time the offence
was committed, was in charge of, and was responsible to, the company for
the conduct of the business of the company, as well as the company, shall
be deemed to be guilty of the offence and shall be liable to be proceeded
against and punished accordingly.

Q7) What is the difference between holder and Holder in due course as per
NI Act? Discuss various privileges of Holder in due course ?
Ans) A holder is a person who legally obtains a negotiable instrument, such as
a cheque, bill of exchange, or promissory note, with his/her name entitled on
the instrument, to receive payment from the parties liable. The party that
transfers the negotiable instrument should be legally capable. It does not
include someone who finds a lost instrument payable to bearer or someone who
is in the unethical possession of the negotiable instrument. A holder cannot
sue all prior parties. The instrument may or may not be obtained in good faith
by the holder

17
 Banking Law
Question & Answers

As per the Negotiable Instruments Act, 1881 of India, a “Holder in Due

Course” is defined under Section 9. A “Holder in Due Course” means any person
who for consideration became the possessor of a promissory note, bill of
exchange or cheque if payable to bearer, or the payee or endorsee thereof,
if payable to order, before the amount mentioned in it became payable, and
without having sufficient cause to believe that any defect existed in the title
of the person from whom he derived his title.
In simpler terms, a Holder in Due Course is a person who acquires the
negotiable instrument in good faith for consideration before it becomes due
for payment and without any idea of a defective title of the party who
transfers the instrument to him.

Holder Holder in Due Course (HDC)

Meaning
A holder is a person who has HDC is a person who acquires negotiable
legally obtained a negotiable instrument in a good faith for
instrument, with name entitled consideration before it becomes due for
on it, for receiving the payment payment and without any knowledge of
from the parties liable. the defective title of a party who
transfers the instrument to him
Consideration
Not Required Required
Right to Sue
A holder is not allowed to sue A holder in due course is allowed to sue
any prior parties. every prior party.
Good Faith
The instrument may or may not The instrument must be obtained in good
be obtained in good faith. faith.
Maturity
A person can become a holder, A person is eligible to become a holder
before or after the maturity of in due course, only prior to the maturity
the negotiable instrument. of the negotiable instrument.
Title
Holder does not acquire a good Holder in due course gains a good title
title in case the title of any of even though there was a defect in the
the prior parties is defective. title of any prior parties to the
instrument.

18
 Banking Law
Question & Answers

Advantages of being an Holder in Due Course

➢ Good Faith Acquisition: He/she acquires the instrument in good faith and
for value, indicating that they have exchanged something of value to obtain
the instrument.
➢ Protection Against Title Defects: Even if there is a defect in the title of
any of the prior parties to the instrument, the person still obtains a good
title to the instrument.
➢ Right to Sue All Prior Parties: This entity can legally sue all prior parties
to the instrument until the due amount is fully satisfied.
➢ Acquisition Before Maturity: He/she acquires the instrument before its
due date, which can be advantageous in certain financial transactions.
➢ Greater Protection: The person enjoys more privileges and protections
under the law compared to a regular holder.

Q8) Crossing of cheques under Negotiable Instrument Act?

Ans)
I) Meaning of Cheque
As per Section 6 of Negotiable Instrument act 1881, A cheque is a bill of
exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand and it includes the electronic image of a truncated
cheque and a cheque in the electronic form.
II) Meaning of Crossed Cheque
➢ The provisions concerning the crossing of cheques are sets out in Section
123 – 131 of The Negotiable Instruments Act, 1881
➢ Crossing is an instruction given to the paying banker to pay the amount of
the cheque through a banker only and not directly to the person presenting
it at the counter.
➢ Crossing a cheque means drawing two parallel transverse lines between the
lines on the cheque with or without additional words such as “& CO.” or
“Account Payee” or “Not Negotiable.”
III) Why Cross a Cheque/Importance of Crossing
➢ Minimizing the risk: The crossing of the cheque gives the paying banker
instructions to pay the amount only through the banker and not directly
to the payee or holder presenting the amount at the counter. It is an
effective way to minimize the risk of loss or falsification.
➢ Paying instructions: Crossing is a way for the paying banker to generally
pay the money to a bank or to a particular bank, as applicable.

19
 Banking Law
Question & Answers

➢ Payment through the bank: Only a banker can secure the payment of a
crossed cheque, which makes it easy for the holder to present it with a
quarter of the respectability and credit that is known. By using a crossed
cheque, you can ensure that the specified amount cannot be cashed but
can only be credited to the bank account of the payee.
➢ The receiver of the amount: As only a banker secures the payment of a
crossed cheque, the money received can easily be traced for whose use.
➢ Negotiability: Merely a cheque crossing does not affect its negotiability.

IV) Types of Crossing of Cheque:

General Crossing
Section 123 of the Negotiable Instruments Act deals with the general
crossing of cheque. In the following cases, a cheque is considered to be
crossed generally:
➢ If two parallel transverse lines are marked across the cheque face.
➢ If the cheque has an abbreviation “& C” between the two parallel
transverse lines.
➢ If the cheque is written between the two parallel lines, the words “Not
Negotiable”.
➢ When the cheque comes with the words “A / C. Payee” between the two
parallel transverse lines.
Implications of General Crossing
➢ The effect of the general crossing is that any other banker must submit
such a cheque to the paying banker.
➢ Payment can only be made by bank account and should not be made at the
bank’s payment counter.
➢ The banker then credits the cheque amount to either the owner of the
cheque or the payee ‘s account.
Special Crossing:
In special crossing, the cheque bears across its face an addition of the
banker’s name, with or without the words ‘not negotiable’.
In this case, the paying banker will pay the amount of cheque only to the
banker whose name appears in the crossing or to his collecting agent. Thus,
the paying banker will honor the cheque only when it is ordered through the
bank mentioned in the crossing or its agent bank.
However, in special crossing two parallel transverse lines are not essential
but the name of the banker is most important.

20
 Banking Law
Question & Answers

Restrictive Cheque Crossing or Account Payee’s Crossing

This type of crossing restricts the negotiability of the cheque. It directs the
collecting banker that he needs to credit the amount of cheque only to the
account of the payee, or the party named or his agent. Where the collecting
banker credits the proceeds of a cheque bearing such crossing to any other
account, he shall be guilty of negligence.
Also, he will not be eligible for the protection to the collecting banker under
section 131 of the Act. However, such crossing will have no effect on the
paying banker. This is so because it is not his duty to determine that the
cheque is collected for the account of the payee.

Q9) Explain powers and functions of Securities and Exchange Board of

India.?
Ans) The Securities and Exchange Board of India (SEBI), owned by the
Government of India was established on 12th April 1992 under the Securities
and Exchange Board of India Act, 1992 to protect the interests of the
investors in securities along with promoting and regulating the securities
market. Headquartered in Mumbai, the SEBI has four regional offices located
in Ahmedabad, Chennai, Delhi and Kolkata. SEBI was initially formed in the
year 1988 as a non-statutory body for the regulation of the securities market
and later acquired statutory status on 30th January 1992.
SEBI is an autonomous organization that works under the administration of
the Union Finance Ministry. The Security and Exchange Board of India (SEBI)
is managed by the following members:
a) The chairman, nominated by the Union Government of India.
b) Two members, i.e., Officers from the Union Finance Ministry.
c) One member from the Reserve Bank of India.
d) The remaining five members are nominated by the Union Government of
India. Three of the five members should be full-time members.

Functions of SEBI:
a) Protecting interest of Security issuers: Securities issuers are corporate
entities that raise capital from a variety of sources in the market. This
organisation ensures that they have a safe and transparent environment
in which to operate.
b) Protection to Investors: Investors are the ones who keep the financial
markets afloat. SEBI is responsible of ensuring a free-of-misconduct
environment in order to regain the trust of the general public, who invest

21
 Banking Law
Question & Answers

their hard-earned money in the markets. SEBI’s main goal is to safeguard

investors’ interests in the stock market and to create a healthy
environment for them.
c) Facilitating Intermediaries in the Financial Sector: SEBI ensure that
financial transactions are simple and secure and acts as a facilitating
agency to financial intermediaries.
d) Enforcement: SEBI has broad powers and authority to enforce the
Securities Contracts Act of 1956, the Depositories Act of 1996, BIFR
(Bankruptcy laws), and various central government directives.
e) Appointment of officers/workers: It has the authority to select its own
officers or employees, as well as co-opt any government officer as an
officer.
f) Investigation: It has the authority to conduct investigations under the
Act’s provisions or to investigate incidents on its own.
g) Other Authorities’ Subordination to SEBI: Any person, authority, or
authority establishing any schemes, regulating, or controlling any markets
may place themselves under SEBI’s control.
h) Financial Assistance: The Board can provide funds to SEBI sub-committees
for investigations and other purposes.

Powers of SEBI
a) SEBI has the authority to search any premises or place where it believes
any books of accounts, documents, vouchers, computer discs or storage
devices used in connection with the securities market are maintained and
to confiscate them if necessary, under Section 10.
b) It has the authority under Section 11 of the Act to issue search warrants
for any location or premises occupied by a person reasonably suspected of
having committed an offence punishable under the Act, and so on.
c) SEBI has the power to arrest without a warrant anyone who has committed
an offence punishable under the Act, according to Section 12. Any officer
of SEBI or any other police officer not lower in rank than an Assistant
Superintendent of Police may arrest without a warrant anyone who has
committed an offence punishable under the Act.
d) Power of service or attachment: SEBI, or any officer authorised by it in
this capacity, has the authority to serve a copy of any order made by it
on the concerned person through its officers, as well as attach their
property pending the outcome of any proceedings under the Act.

22
 Banking Law
Question & Answers

e) Appointment of officials and others: Under Section 19, SEBI may appoint
its officers, employees, and others as necessary to carry out the Act’s
functions. It can also appoint any government or law enforcement personnel
as a SEBI officer.
f) Power to make regulations: The Board may make rules consistent with the
Act for carrying out the Act’s purposes, with the prior approval of the
Central Government, by notification in the Official Gazette. The
‘Securities and Exchange Board of India (Futures Trading) Regulations,
2004’ are the rules in question.
g) SEBI has the power to grant sanctions: Under Section 21, SEBI has the
power to grant sanctions to initiate any proceedings before the Appellate
Tribunal or even to sanction prosecution under the Act by itself. It
preserves a detailed record of all proceedings that come before it.

Q10) Explain various provisions of Banking regulation act 1949 relating to

maintenance of reserve fund, cash reserve and restrictions on loans and
advance?
Ans) Section 17 of the Banking Regulation Act, 1949, pertains to the creation
and maintenance of a Reserve Fund by banking companies incorporated in
India. The main provisions of this section 17 are as under:
a) Creation of Reserve Fund: Every banking company incorporated in India is
required to create a reserve fund.
b) Transfer of Profits: The banking company must transfer to the reserve
fund a sum equivalent to not less than twenty per cent of the profit of
each year. This profit is as disclosed in the profit and loss account
prepared under section 29, and the transfer must be made before any
dividend is declared.
c) Exemption by Central Government: Notwithstanding the above, the Central
Government may, on the recommendation of the Reserve Bank and
considering the adequacy of the paid-up capital and reserves of a banking
company in relation to its deposit liabilities, declare by order in writing
that the provisions of sub-section (1) shall not apply to the banking
company for such period as may be specified in the order.
d) Conditions for Exemption: No such order of exemption shall be made
unless, at the time it is made, the amount in the reserve fund under sub-

23
 Banking Law
Question & Answers

section (1), together with the amount in the share premium account, is
not less than the paid-up capital of the banking company.
e) Reporting Appropriation from Reserve Fund: If a banking company
appropriates any sum or sums from the reserve fund or the share premium
account, it must report the fact to the Reserve Bank within twenty-one
days from the date of such appropriation, explaining the circumstances
relating to such appropriation.
These provisions ensure that banks maintain a certain level of reserves, which
contributes to the financial stability of the banking system and protects the
interests of depositors.
Provisions of Banking regulation act 1949 relating to maintenance of Cash
Reserve (Section 18 of Banking Regulation Act)
➢ Cash reserve.—(1) Every banking company, not being a scheduled bank,
shall maintain in India on a daily basis, by way of cash reserve with itself
or by way of balance in a current account with the Reserve Bank, or by
way of net balance in current accounts or in one or more of the aforesaid
ways, a sum equivalent to such per cent of the total of its demand and
time liabilities in India as on the last Friday of the second preceding
fortnight as the Reserve Bank may specify, by notification in the Official
Gazette, from time to time, having regard to the needs of securing the
monetary stability in the country and shall submit to the Reserve Bank
before the twentieth day of every month a return showing the amount so
held on alternate Fridays during a month with particulars of its demand
and time liabilities in India on such Fridays or if any such Friday is a
public holiday under the Negotiable Instruments Act, 1881 (26 of 1881),
at the close of business on the preceding working day.
➢ A scheduled commercial bank is required to maintain Cash Reserve under
Section 42(1) of RBI Act 1934
➢ The present rate of Cash Reserve Ratio as notified by Reserve Bank of
India is 4.50%
➢ “liabilities in India” shall not include— (i) the paid-up capital or the
reserves or any credit balance in the profit and loss account of the banking
company; (ii) any advance taken from the Reserve Bank or from the Exim

24
 Banking Law
Question & Answers

Bank or from the Reconstruction Bank or from the National Housing Bank
or from the National Bank, or from the small Industries Bank ,or from
the National Bank for Financing Infrastructure and Development or from
the other development financial institution by the banking company; (iii) in
the case of a Regional Rural Bank, also any loan taken by such bank from
its Sponsor Bank;
➢ “fortnight” shall mean the period from Saturday to the second following
Friday, both days inclusive;
➢ “net balance in current accounts” shall, in relation to a banking company,
mean the excess, if any, of the aggregate of the credit balances in current
account maintained by that banking company with the State Bank of India
or a subsidiary bank or a corresponding new bank over the aggregate of
the credit balances in current account held by the said banks with such
banking company;
➢ for the purposes of computation of liabilities, the aggregate of the
liabilities of a banking company to the State Bank of India, a subsidiary
bank, a corresponding new bank, a regional rural bank, another banking
company, a co-operative bank or any other financial institution notified by
the Central Government in this behalf, shall be reduce by the aggregate
of the liabilities of all such banks institutions to the banking company;
Provisions of Banking regulation act 1949 relating to restrictions on loans and
advance (Section 20 of Banking Regulation Act)
The Banking Regulation Act of 1949, specifically Section 20 imposes
certain restrictions on loans and advances by banking companies. Here are
the main provisions of the section:
a) Prohibition on Loans on Own Shares (Section 20(1)(a)): A banking
company is not allowed to grant any loans or advances on the security of
its own shares.
b) Restrictions on Loans to Directors and Related Entities (Section
20(1)(b)): A banking company cannot enter into any commitment for
granting any loan or advance to or on behalf of:
i. Any of its directors

25
 Banking Law
Question & Answers

ii. Any firm in which any of its directors is interested as a partner,

manager, employee, or guarantor
iii. Any company (not being a subsidiary of the banking company or a
company registered under section 25 of the Companies Act, 1956, or
a Government company) of which any of the directors of the banking
company is a director, managing agent, manager, employee, or
guarantor or in which he holds substantial interest
iv. Any individual in respect of whom any of its directors is a partner or
guarantor.
c) Recovery of Loans (Section 20(2)): If a loan or advance is granted that
could not have been made, steps must be taken to recover the amounts
due to the banking company on account of the loan or advance together
with interest, if any, due thereon within the period stipulated at the
time of the grant of the loan or advance.
d) Remission of Loans (Section 20(3)): No loan or advance, or any part
thereof shall be remitted without the previous approval of the Reserve
Bank, and any remission without such approval shall be void and of no
effect.
e) Vacation of Office (Section 20(4)): If any loan or advance payable by
any person, has not been repaid to the banking company within the period
specified, then, such person shall, if he is a director of such banking
company on the date of the expiry of the said period, be deemed to
have vacated his office as such on the said date.
f) In this section— (i) “loans or advance” shall not include any transaction
which the Reserve Bank may, having regard to the nature of the
transaction, the period within which, and the manner and circumstances
in which, any amount due on account of the transaction is likely to be
realised, the interest of the depositors and other relevant
considerations, specify by general or special order as not being a loan
or advance for the purpose of this section; (ii) “director” includes a
member of any board or committee in India constituted by a banking
company for the purpose of managing, or for the purpose of advising it
in regard to the management of, all or any of its affairs.

26
 Banking Law
Question & Answers

g) If any question arises whether any transaction is a loan or advance for

the purposes of the section, it shall be referred to the Reserve Bank,
whose decision thereon shall be final.
The above provisions are designed to ensure the financial stability of banking
institutions and prevent conflicts of interest. They also aim to maintain the
integrity of the banking system by preventing the misuse of funds.

Q11) Explain the provisions relating to licencing of banking companies and

their branches?
The Section 22 of the Banking Regulation Act, 1949 deals with the Licensing
of Banking Companies in India. For commencing banking business in India,
every banking company is required to obtain a licence from the Reserve Bank
of India, under the provisions of Section 22 of the Banking Regulation Act,
1949. No company can carry on banking business in India unless it holds a
license issued by the Reserve Bank of India. Every banking company in
existence on the commencement of this Act, before the expiry of six months
from such commencement, and every other company before commencing
banking business, shall apply in writing to the Reserve Bank for a license.
Conditions to be satisfied for Licensing of Banking Companies
Before granting any license, the Reserve Bank may have to be satisfied by
an inspection of the books of the company or otherwise the following
conditions are fulfilled:
➢ The company is or will be in a position to pay its present or future
depositors in full as their claims accrue
➢ The affairs of the company are not being, or are not likely to be,
conducted in a manner detrimental to the interests of its present or future
depositors
➢ The general character of the proposed management of the company will
not be prejudicial to the public interest or the interest of its depositors
➢ The company has adequate capital structure and earning prospects
➢ The public interest will be served by the grant of a licence to the company
to carry on banking business in India
➢ Having regard to the banking facilities available in the proposed principal
area of operations of the company, the potential scope for expansion of
27
 Banking Law
Question & Answers

banks already in existence in the area and other relevant factors the
grant of the licence would not be prejudicial to the operation and
consolidation of the banking system consistent with monetary stability and
economic growth
➢ the fulfilment of any other condition which is necessary to ensure that
the carrying on of banking business in India by the company will not be
prejudicial to the public interest or the interests of the depositors.
➢ Before granting any banking license to a company incorporated outside
India, the RBI may seek fulfilment of following additional conditions (a)
The carrying on of banking business by such company in India will be in
the public interest; (b) The Government or law of the country in which it
is incorporated does not discriminate in any way against banking companies
registered in India.
Branch Licensing:
The opening of branches by banks is governed by the provisions of Section
23 of the Banking Regulation Act, 1949 (the Act). In terms of these
provisions, banks without the prior approval of the RBI, cannot open a new
place of business in India or abroad or change otherwise than within the same
city, town or village, the location of the existing place of business. Foreign
banks are allowed to operate in India through branches only. A foreign bank
desirous of opening its maiden branch in India may apply to RBI giving relevant
information about the bank, its major shareholders, financial position, etc.
The branch licensing falls within the ambit of RBI. The Reserve Bank of India
may grant permission for opening new branch or transfer existing place of
business, if is satisfied with:
➢ financial condition and history of bank
➢ the general character of its management
➢ the adequacy of its capital structure and earning prospects
➢ public interest will be served by the opening or as the case may be
The Reserve Bank may require to be satisfied by an inspection under section
35 of Banking Regulation Act.
The regional rural bank requires the permission of the Reserve Bank shall
forward its application to the Reserve Bank through the NABARD which shall

28
 Banking Law
Question & Answers

give its comments on the merits of the application and send it to the Reserve
Bank.

Q12) What are the powers and functions of RBI?

Ans) The Reserve Bank of India (RBI) is India’s central banking institution,
which controls the monetary policy. It commenced its operations on April 1,
1935 in accordance with the Reserve Bank of India Act, 1934. As the central
bank of India, RBI is an independent apex monetary authority which regulates
banks and provides important financial services like storing of foreign exchange
reserves, control of inflation, formulation of monetary policy etc. A central
bank is a vital financial apex institution of an economy and the key objectives
of central banks may differ from country to country. Still, they perform
activities and functions with the goal of maintaining economic stability and
growth of an economy.
Main functions of RBI
Monetary Authority: RBI formulates, implements and monitors the monetary
policy. The main objective of this function is maintaining price stability while
keeping in mind the objective of growth.
Regulator and supervisor of the financial system: It prescribes broad
parameters of banking operations within which the country’s banking and
financial system functions. The main objective of this function is to maintain
public confidence in the system, protect depositors’ interest and provide cost-
effective banking services to the public.
Manager of foreign exchange: It manages the Foreign Exchange Management
Act, 1999. The main objective of this function is to facilitate external trade
and payment and promote orderly development and maintenance of foreign
exchange market in India.
Issuer of currency: RBI issues and exchanges or destroys currency and coins
not fit for circulation. The main objective of this function is to give the
public adequate quantity of supplies of currency notes and coins and in good
quality.
Developmental role: It performs a wide range of promotional functions to
support national objectives.
Regulator and supervisor of payment and settlement systems: It introduces
and upgrades safe and efficient modes of payment systems in the country to
meet the requirements of the public at large. The main objective is to
maintain public confidence in payment and settlement system.

29
 Banking Law
Question & Answers

Banker to the government: It performs merchant banking function for the

central and the state governments. Also acts as their banker.
Banker to banks: Maintains banking accounts of all scheduled banks. It acts
as a lender of last resort to banks in their stressed times
RBI also maintains the Central Repository of Information on Large Credits
(CRILC) on aggregate fund-based and non-fund-based exposures of Rs 5
crore and above of all banks. RBI maintains the Central Fraud Registry and
banks report all frauds involving amounts above Rs 1 lakh to RBI. In addition,
RBI’s Master Directions on Frauds lay out guidelines on categorisation,
reporting and review of frauds, along with norms for consequent provisioning.
Powers of the RBI
The RBI regulates and supervises public sector and private sector banks.
The powers of RBI are wide-ranging and comprehensive to deal with various
situations that may emerge in all banks.
Under the provisions of the Banking Regulation Act, 1949, it can:
i) Inspect the bank and its books and accounts.
ii) Examine on oath any director or other officer of the bank.
iii) Cause a scrutiny to be made of the affairs of the bank.
iv) Give directions to secure the proper management of the bank.
v) Call for any information of account details.
vi) Determine the policy in relation to advances by the bank.
vii) Direct special audit of the bank.
viii) Direct the bank to initiate insolvency resolution process in respect of a
default, under the provisions of Insolvency and Bankruptcy Code, 2016.
ix) Issue directions to banks for resolution of stressed assets.
x) Direct changes in management of the bank.
xi) Caution or prohibit banks in particular against entering into any particular
transaction or class of transactions, and generally give advice to any bank.
xii) Give assistance to any bank by means of the grant of a loan or advance.
xiii) Direct banks to call a meeting of its directors for the purpose of
considering any matter relating to or arising out of the affairs of the bank,
or require an officer of the bank to discuss any such matter with an officer
of the RBI.
xiv) Appoint one or more of its officers to observe the manner in which the
affairs of the bank or of its offices or branches are being conducted and
make a report thereon.

30
 Banking Law
Question & Answers

Q13) Discuss various provisions of Negotiable Instruments Act 1881 relating

to noting and protesting?
Ans) When a negotiable instrument is dishonoured the holder may sue his
prior parties i.e the drawer and the endorsers after he has given a notice of
dishonour to them. The holder may need an authentic evidence of the fact
that a negotiable instrument has been dishonoured. When a cheque is
dishonoured generally the bank who refuses payment returns back the cheque
giving reasons in writing for the dishonour of the cheque.
Sections 99 and l00 provide convenient methods of authenticating the fact
of dishonour of a bill of exchange and a promissory note by means of ‘noting’
and ‘protest’.
“Noting” in the context of a Bill of Exchange or a Promissory Note is a formal
procedure that occurs when such an instrument is dishonoured due to non-
acceptance or non-payment. The holder of the dishonoured instrument takes
it to a Notary Public to record the fact of dishonour. A Notary Public is a
public officer constituted by law to serve the public in non-contentious
matters usually concerned with general financial transactions, estates, deeds,
powers-of-attorney, and foreign and international business. The Notary
Public performs the noting by:
a) Presenting the instrument again to the drawee for acceptance or payment.
b) Recording the date of dishonour and the reason for non-acceptance or
non-payment, if any is given.
c) Noting down any other fact necessary to prove the dishonour.
This process provides official evidence of dishonour, which can be used in
legal proceedings if necessary. The noting must be done within a reasonable
time after the dishonour of the instrument.
Protest is a formal certificate of the notary public attesting the dishonour
of the bill by non-acceptance or by non-payment. After noting, the next step
for notary is to draw a certificate of protest, which is a formal declaration
on the bill or a copy thereof. The chief advantage of protest is that the
court on proof of the protest shall presume the fact of dishonour. Besides
the protest for non-acceptance and for non-payment the holder may protest
the bill for better security. When the acceptor of a bill becomes insolvent
or suspends payment before the date of maturity, or when he absconds the
holder may protest it in order to obtain better security for the amount due.
For this purpose, the holder may employ a notary public to make the demand
on the acceptor and if refused, protest may be made. Notice of protest may
be given to prior parties. When promissory notes and bills of exchange are

31
 Banking Law
Question & Answers

required to be protested, notice of protest must be given instead of notice

of dishonour. (Sec. 102) Inland bills may or may not be protested. But foreign
bills must be protested for dishonour when such protest is required by the
law of the place where they are drawn (Sec. 104).
Where a bill is required to be protested under the Act within a specified
time, it is sufficient if it is ‘noted for protest’ within such time. The formal
protest may be given at anytime after the noting (Sec. 104A).
Section 101 of the Act lays down the contents of a regular and perfect
protest which are as follows:
The instrument itself or a literal transcript of the instrument; and of
everything written or printed thereupon.
The name of the person for whom and against whom the instrument has been
protested.
The fact of and reasons for dishonour i.e. a statement that payment or
acceptance or better security, as the case may be, has been demanded of
such person by the notary public from the person concerned and he refused
to give it or did not answer or that he could not be found.
The time and place of demand and dishonour.
The signature of the notary public.
In the case of acceptance for honour or payment for honour the person by
whom or for whom such acceptance or payment was offered and effected.

Q14) Discuss various provisions of RBI Act and Banking Regulation act
regarding maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity
Ratio (SLR)?
Ans) The cash flow of the entire economy is constantly worked and monitored
by RBI. The Reserve Bank of India has several monetary instruments to
control the economy in terms of different aspects. One such monetary tool
is the cash reserve ratio or CRR rate. Every commercial bank is mandated
by RBI to abide by the specified CRR rules provided to each bank.
CRR rate is the minimum percentage of cash deposits (as specified by RBI)
that must be maintained by every commercial bank as per the requirement of
the Central Bank i.e. RBI.
Cash Reserve Ratio Rate is computed as a percentage of the net demand and
time liabilities of each bank. Net Demand and Time Liability is reached with
the total of the savings account, current account, and fixed deposit balances.
The cash reserve Ratio is a particular minimum amount of the total deposits
of customer that needs to be maintained by the commercial bank as a reserve

32
 Banking Law
Question & Answers

either is cash or as deposits with RBI. The CRR rate will be fixed as per the
guidelines of the Central Bank
The amount specified as the Cash Reserve Ratio is held or reserved in cash
or cash equivalents with RBI. CRR aims to ensure that banks do not run out
of cash to meet their depositors’ payment demands.
When the CRR rate for the amount maintained with RBI is high, the liquidity
in the economy will be low. The Cash Reserve ratio works vice versa, the
lower the CRR reserved with the RBI, the higher will be the economy’s overall
liquidity. The overall liquidity is managed and administered thoroughly when
all the commercial banks maintain the necessary CRR rate, thus benefiting
each bank. Maintaining the specified Cash Reserve ratio helps banks hold the
right amount of funds with them and never fall short of it when needed by
their depositors for personal needs.
Advantages Of CRR
CRR helps in regulating money circulation in the economy to manage the overall
liquidity. CRR rate is fixed as per the money supply in the financial market.
When there is an increase in monetary supply, the RBI instantly increases
the CRR to remove the excess funds. Similarly, during the case of a liquidity
shortage or a decrease in the monetary supply in the economy, RBI will
decrease the CRR rate to let out more money into the market. Let’s take a
look at other advantages of the Cash reserve ratio.
➢ CRR helps commercial banks to build and sustain the solvency position.
➢ It ensures the liquidity system is consistent and maintained well in all
commercial banks.
➢ RBI gets to control and coordinate the credit maintained by banks through
the CRR rate which helps to have a smooth supply of cash and credit in
the economy.
➢ When the CRR rate is reduced by RBI, commercial banks can offer more
advances to borrowers which in turn increases the flow of cash to the
public.
➢ CRR helps in improving the declining rate by absorbing the liquidity when
market interest rates go down intensely.
➢ Cash reserve ratio implementation is more effective than the other
monetary instruments Like Market Stabilization Scheme bonds. Mainly
because MSS bonds take a lot of time in controlling the liquidity system
in the country.
➢ During the surplus rupee situation, CRR plays a constructive role in easing
the financial environment.

33
 Banking Law
Question & Answers

Statutory Liquidity Ratio:

Statutory Liquidity Ratio or SLR is the minimum percentage of deposits that
a commercial bank has to maintain in the form of liquid cash, gold or other
securities. It is basically the reserve requirement that banks are expected
to keep before offering credit to customers.
The Reserve Bank of India is the body which sets the SLR. The Reserve Bank
of India increases the SLR at the time of inflation to control bank credit.
At the time of recession, RBI decreases the SLR to increase bank credit.
The SLR was prescribed by Section 24 (2A) of Banking Regulation Act, 1949.
Currently, the statutory liquidity ratio rate is 18% (As of February, 2022).
RBI has kept 40% as the maximum limit for SLR.
Why SLR is maintained.
➢ To check the expansion of bank credit.
➢ To ensure the solvency of commercial banks.
➢ To compel banks to invest in government securities like bonds.
➢ To fuel growth and demand; this is done by decreasing the SLR so that
there is more liquidity with the commercial banks.
If a bank fails to maintain the prescribed SLR, it is liable to pay a penalty
to the Reserve Bank of India. The defaulter bank has to pay a penalty of
3% above the bank rate on the deficient amount for that particular day.
SLR plays a very important role in fixing the minimum rate at which a bank
can lend money to its customers. This minimum amount is called the base
rate. This helps in building transparency between the Reserve Bank of India
and other public dealing banks.

Q15) What are the various modes in which a party is discharged from his
liabilities under negotiable instrument act?
Ans) Discharge from liability implies when the liability of the parties ceases
to exist. Following are the different modes of discharge of instrument.
Modes of discharge: One or more parties to a negotiable instrument may be
discharged from liability in either of the following ways:
i) By cancellation, Release or Payment (Section 82 (a), b and c of NI Act):
a) By cancellation: Cancellation of acceptor’s name will discharge the
instrument and cancellation of any other party will discharge the party.
b) By release: Release of acceptor will discharge the instrument and
release of any other party will discharge the party. c) By payment: When
the amount due on the instrument is paid by the party primarily liable on
the instrument, the instrument is discharged.

34
 Banking Law
Question & Answers

ii) By allowing drawee more than 48 hours: If the holder of a bill of exchange
allows the drawee more than 48 hours, exclusive of public holiday(s) to
consider whether he will accept the same, all previous parties not
consenting to such allowance are discharged from liability to such holder.
iii) By delay in presenting cheques: If a cheque is not presented within a
reasonable time of its issue, and the bank fails and drawer suffers actual
damages through such delay, he is discharged from the liability to the
holder to the extent of such damage.
iv) Forgery of Endorser’s signature in case of Cheque: The Bank is discharged
even if the signature of endorser is forged.
v) By qualified acceptance: If the holder of a bill of exchange agrees to
accept qualified acceptance, all the previous parties whose consent is not
obtained to such acceptance are discharged from liability, unless the
holder gives notice thereof and the parties give their assent to such
qualified acceptance.
vi) By material alteration.: Any material alteration of a negotiable instrument
renders the same void as against anyone who is a party thereto at the
time of making such alteration and does not consent thereto, unless it was
made in order to carry out the common intention of the original parties.
Again, it may be noted that alteration should be material and immaterial
alterations will not affect the instrument and will not discharge any
liability.
vii) As per Section 90, when the acceptor of bill of exchange or maker of
promissory note becomes holder on or after maturity, the instrument is
discharged.

35
 Banking Law
Question & Answers

Situational Problem:

Q1) Format of Promissory Note: Mr. A promises Mr. B to pay Rs.500/-

after 3 months from the date for the value received.

Promissory Note

I, Mr. A S/o. Mr. Modi promise to pay Mr. B or order, on demand, the sum
of Rs.500 (Rupees Five Hundred only) along with interest at the rate of 7%
p.a after 3 months from the date of these presents, for value received.

IN WITNESS WHEREOF, I set my hand under seal this 3rd day of May 2024
and I acknowledge receipt of a complete copy of this instrument.

Sd/-
Mr. A
Place:

Date:

Notary Public.
Seal & Date.
*****

Q2) Draft a Promissory Note for an amount of Rs.100000/- obtained on

June 01, 2024 by Mr. Salman Khan from Mr. Amitabh Bacchan taken as a
loan to be repaid in 24 instalments commencing from July 01, 2024 along with
interest at 10% p.a.
Promissory Note

I, Mr. Salman Khan S/o. Mr. ABC Khan promise to pay Mr. Amitabh Bacchan
or order, the sum of Rs.100000 (Rupees One Lakh only) along with interest

36
 Banking Law
Question & Answers

at the rate of 10% p.a in 24 equal instalments commencing from July 01,
2024 towards repayment of a loan taken on June 01, 2024.

IN WITNESS WHEREOF, I set my hand under seal this 1st day of June
2024 and I acknowledge receipt of a complete copy of this instrument.

Sd/-
Salman Khan
Place:

Date:

Notary Public.
Seal & Date.
*****
Q3) Draft a Bill of Exchange with following information
Drawer/Creditor: Mr. Amitabh Bacchan
Drawee/Debtor: Mr. Salman Khan
Amount: Rs. 500000/-
Period 4 months
Date of Bill: June 01, 2024.
Ans)
Bill of Exchange
Stamp

Drawer:
Mr. Amitabh Bacchan
15, HIG Colony, Bandra East,
Mumbai 400 051.
Rs. 50000/-

Four months after date pay to Amitabh Bacchan or his order the sum of
Rupees Five Lakh only for the value received.

Sd/-
Mr. Amitabh Bacchan

37
 Banking Law
Question & Answers

June 01, 2024

Accepted For Rs. 500000/- only

Sd/-
Mr. Salman Khan
25, MIG Colony, Bandra East,
Mumbai 400 051.
Date: June 01, 2024

*****
Q4) State with reason whether the following instruments are inland
instruments or foreign instruments
i) A Bill drawn in Dubai upon a merchant in Florida and accepted payable in
Florida.
ii) Bill drawn in Mumbai on a merchant in Karnataka and accepted payable in
Switzerland.
iii) A Bill drawn in Mumbai on a merchant in Karnataka but endorsed in
Switzerland.
Ans) As per Section 11 of Negotiable Instrument Act 1881, an inland
instrument includes promissory notes, bills of exchange, or cheques that are
drawn or made within India and are either Payable in India, or Drawn upon
any person resident in India. Any other bill that does not meet these criteria
is considered a foreign bill.
i) A Bill drawn in Dubai upon a merchant in Florida and accepted payable in
Florida. This scenario involves a bill drawn in Dubai (which is outside India)
on a merchant in Florida (also outside India) but accepted for payment in
Florida. According to the Negotiable Instruments Act, any instrument that
is not an inland instrument is considered a foreign instrument. Since this bill
is drawn outside India and involves parties residing outside India, it falls
under the category of foreign instruments.
ii) Bill drawn in Mumbai on a merchant in Karnataka and accepted payable in
Switzerland. In this case, the bill is drawn in Mumbai (within India) on a
merchant in Karnataka (also within India) but accepted for payment in
Switzerland (outside India). According to the meaning of inland instrument as
given above, any bill drawn within India is considered an inland instrument.
Therefore, this bill is classified as an inland instrument.

38
 Banking Law
Question & Answers

iii) A Bill drawn in Mumbai on a merchant in Karnataka but endorsed in

Switzerland. Here, the bill is drawn in Mumbai (within India) on a merchant
in Karnataka (within India) and subsequently endorsed (transferred) in
Switzerland (outside India). The initial drawing of the bill occurred within
India, making it an inland instrument. However, the endorsement took place
in Switzerland, which does not change its classification. Therefore, this bill
remains an inland instrument.

Q5) whether the Bank is justified in refusing the payment of a cheque in

the following conditions. Give reasons.
i) A cheque is dated 01.03.2018 and presented for payment on 25.02.18.
ii) A cheque is dated 01.03.201 and presented as for payment on
01.07.2018.
iii) The amount of the cheque written in words as Rs. Five lakhs only whereas
in figures Rs.50,000/-.
Ans)
i) A cheque dated 01.03.2018 presented for payment on 25.02.18:
In this case, the cheque was postdated (dated for a future date) to March
1, 2018, but it was presented for payment on February 25, 2018. According
to Section 13 of the Negotiable Instruments Act, 1881, a postdated cheque
is not payable before the date mentioned on it. Therefore, the bank
is justified in refusing payment because the cheque was presented before its
specified date.
ii) A cheque dated 01.03.201 presented for payment on 01.07.2018:
Here, the cheque is dated March 1, 201, but it was presented for payment
on July 1, 2018.The cheque is stale (expired) because it is more than three
months old from the date mentioned on it. According to the Act, a cheque
becomes stale after the expiration of six months from the date of issue (or
three months in the case of a bearer cheque). The bank is justified in
refusing payment due to the cheque’s staleness.
iii) When the amount written in words (Rs. Five lakhs) differs from the amount
in figures (Rs. 50,000/-), it creates an inconsistency. According to Section
18 of NI Act, if there is a discrepancy between the amount in words and
figures, the amount written in words prevails. Since the written amount is
Rs. Five lakhs, the bank should honor the cheque for that amount. If the
bank refuses payment based on the figure (Rs. 50,000/-), it would
be unjustified.

39
 Banking Law
Question & Answers

Q6) In respect of an account held by a customer 'A' the bank receive an

attachment order for a value of Rs.1,00,000/-. Can it honour cheques out
of funds over Rs.1,00,000/-?
'A' is an account holder with a bank. On the 21.6.2017 suit of insolvency is
filed in the High Court by his creditors. The court appoints an official
receiver on the 22.09.2017. The bank received a cheque of Rs. 50,000/-
signed by the account holder on the 27.09.2017. Should the bank honour the
cheque
Ans) Attachment Order: An attachment order is a legal directive issued by
a court or other competent authority. It allows the creditor (the party owed
money) to recover the debt by attaching or seizing the debtor’s assets,
including funds in their bank account.
i) In this case, the bank has received an attachment order for a value of Rs.
1,00,000/- against customer ‘A’. The attachment order restricts the bank
from allowing withdrawals or payments upto the specified amount (Rs.
1,00,000/-).Thus, the bank must comply with the attachment order and
ensure that the attached amount (Rs. 1,00,000/-) is not disbursed to the
customer.Any cheques presented by the customer for payment should be
honored only up to the remaining balance after deducting the attached
amount. If the customer’s account balance exceeds Rs. 1,00,000/-, the bank
can honor cheques up to the remaining available balance. Example: Suppose
the customer’s account balance is Rs. 1,50,000/-. The bank can honor
cheques up to Rs. 50,000/- (remaining balance after deducting the attached
amount of Rs. 1,00,000/-). Cheques exceeding this limit cannot be honored
until the attachment order is lifted.

ii) When insolvency proceedings are initiated against an account holder (‘A’),
it signifies financial distress or inability to pay debts. The court appoints an
official receiver to manage the debtor’s assets during insolvency proceedings.
The cheque in question was signed by ‘A’ on September 27, 2017. Prior to
that, insolvency proceedings were filed on June 21, 2017, and the official
receiver was appointed on September 22, 2017.Thus, in this case, the
insolvency proceedings and the appointment of the official receiver create a
legal bar. The official receiver assumes control over the debtor’s assets,
including the bank account. Given the insolvency situation, the bank
should not honor the cheque. The official receiver’s authority supersedes that
of the account holder. Honoring the cheque would be contrary to the legal
process and the protection of creditors’ interests.

40
 Banking Law
Question & Answers

Q7) Analyse the following under the provisions of Banking Regulation Act
1949.
(i) ABC Bank has been doing banking business in India for last 10 years and
has also been engaging in trading of goods. Is the act valid as per Banking
Regulation Act, 1949?
Ans) According to the Banking Regulation Act, 1949, a company engaged in
banking business in India must adhere to certain provisions. One of these
provisions is prohibition of trading (Section 8). Banking companies are not
allowed to engage in trading activities beyond their core banking functions.
Since ABC Bank has been involved in trading of goods, it would be in violation
of this provision. Therefore, the act would not be valid under the Banking
Regulation Act.
(ii) The bank transfers 45% of its profits to its reserve fund to strengthen
its capital base. Is the act valid as per provisions of banking regulation act?
Ans) As per BR Act 1949, every banking company incorporated in India shall
create a reserve fund and shall, transfer to the reserve fund a sum equivalent
to not less than twenty per cent out of the balance of profit of each year
as disclosed in the profit and loss account prepared under section 29 and
before any dividend is declared. RBI, vide the powers entrusted to it has
notified that the minimum amount to be transferred to Reserve Fund shall
not be less than 25%.
In the captioned case, bank has transferred 45% (which is greater than the
minimum threshold limit of 25% as such the same is valid as per the provisions
of BR Act 1949.
(iii) ABC Bank in Mumbai without taking permission of RBI, opens up a new
place of business in Goregaon East for the month of May to facilitate a trade
fair whether it is valid as per Banking Regulation Act, 1949.
Ans) According to the section 23 of Banking Regulation Act, 1949, banks
are required to obtain prior approval from the Reserve Bank of India
(RBI) before opening a new place of business in India or abroad. This includes
setting up branches or extension counters. In the case of ABC Bank opening
a new place of business in Goregaon East without RBI permission, it would
be in violation of the Act.

41
 Banking Law
Question & Answers

Q8) An Income tax Officer approaches the bank and request to know the
balance in the account of a valuable customer. He informs the bank that this
information is required to recover areas of tax payable to the Income Tax
Department. Can the bank share the information as per indian banking laws
Sent by you: An Income tax Officer approaches the bank and request to
know the balance in the account of a valuable customer. He informs the bank
that this information is required to recover areas of tax payable to the
Income Tax Department. Can the bank share the information as per indian
banking laws
Banker’s Secrecy Obligations: Banks have a duty to maintain customer
confidentiality. The implied contract between a banker and a customer
includes not divulging the state of the customer’s account or any transaction
details without the customer’s consent. However, there are exceptions:
Court Order: Banks may disclose information if compelled by a court order.
Public Duty: If there’s a public duty of disclosure, the bank can share
information.
Protection of Bank’s Interests: In certain cases, the bank may disclose
information to protect its own interests.
Therefore, the bank should exercise caution when sharing customer
information.
Income Tax Authorities and Bank Notices: Income tax authorities can serve
notices to banks under sections 133(6) and 226(3) of the Income Tax Act,
1961. Banks must respond appropriately to these notices while ensuring
compliance with secrecy obligations.
Thus, while Indian banking laws prioritize customer confidentiality, there are
scenarios where banks may share information with tax authorities when the
information is sought by IT Authorities backed by official notice to the
effect. Thus, if the IT Authority is having official notice from Income Tax
Department, the information may be shared, else the IT Officer can be
informed to share the copy of official IT Notice.

Q9) A customer has deposited jewels worth ₹5,00,000 to the safe custody.
Subsequently he become indebted to the bank. Can the bank adjust the
amount of deposit?
Ans) When a customer deposits valuables (such as jewels) for safe custody,
the bank acts as a custodian. However, if the customer becomes indebted to
the bank (for example, due to a loan default), the bank may have the right

42
 Banking Law
Question & Answers

to set off the debt against the deposit. In other words, the bank can adjust
the amount of the deposit to satisfy the customer’s outstanding debt.
he relevant section in the Banking Regulation Act, 1949 regarding the
adjustment of a customer’s deposit against their indebtedness is Section 45.
This section empowers the bank to set off any sum due from a customer
against any sum standing to the credit of the customer in their account.
Therefore, the bank can adjust the deposit of jewels worth ₹5,00,000
against the customer’s debt.

Q10) On 01.03.2015 a customer 'A' keeps a fixed deposits of Rs.50 lakhs

in a bank in his own name for a period of five years and nominates 'B' as his
nominees who is not related to him. A dies on 25.01.2017 and 'B' claims the
deposits. 'C' the nephew of ‘A' also claims a will which has not been probated.
What are the provisions under Banking Regulation Act 1949 regarding
nomination for payment of depositors money.
How should the bank deal with the claim of 'B' and C
As per provisions of Section 45ZA of Banking Regulation Act 1949, when a
deposit is held by a banking company to the credit of one or more persons,
the depositor (or all the depositors together) may nominate a person. In the
event of the death of the sole depositor or the death of all the depositors,
the nominated person is entitled to receive the amount of the deposit from
the banking company.
The rights of a legal heir supersede those of a nominee. However, in case of
a nomination in a bank account, banks responsibility ends after making the
payment to the nominee. The nominee acts as the trustee of the funds and
must transfer them to the legal heir.
Thus in the above case, since B is the nominee while C, the nephew of A also
claims the money under a will but which is not probhated, bank can release
the money to nominee as full discharge of their liability, C can claim the
amount from B on getting the will probhated through court of law.

Q11) ABC bank wants to open two new branches whether rbi permission is
required and give relevant provisions along with sections
Ans) Section 23 of the Banking Regulation Act, 1949 governs the opening of
branches by banks. As per this section, banks cannot open a new place of
business in India or abroad or change the location of an existing place of
business without prior approval from the Reserve Bank of India (RBI).The

43
 Banking Law
Question & Answers

RBI evaluates factors such as financial condition, management quality, capital

structure, and public interest before granting permission. Thus, ABC Bank
must seek RBI approval before opening new branches, ensuring compliance
with legal requirements.
Approval Process:
➢ Banks should obtain approval from their Board/Committee of Directors
before opening, shifting, or closing branches.
➢ The proposal for opening or shifting branches must be submitted to the
RBI using the prescribed application form (Form VI) under the Banking
Regulation (Companies Rules), 1949.

Q12) PQR Bank wants to shift its branch to another location in the same
city. Whether RBI permission is required and also give the relevant provisions
under Banking Regulation Act?
Ans) Section 23 of the Banking Regulation Act, 1949 governs the opening of
branches by banks. As per this section, banks cannot open a new place of
business in India or abroad or change the location of an existing place of
business without prior approval from the Reserve Bank of India (RBI).The
RBI evaluates factors such as financial condition, management quality, capital
structure, and public interest before granting permission.
However, RBI approval Not Required for Same City Shift: Banks can shift
their branches within the same city without seeking prior approval from the
RBI. However, rural and sole-urban branches still require prior permission.
Banks should inform their customers before planning to shift, close, or merge
a branch.

*****

44