Banking Laws

Q. Define the term cheque. Explain its types. Discuss in detail its characteristics and types
of crossing.

Define the term Cheque - A cheque is a bill of exchange in which one party orders the bank to
transfer the money to the bank account of another party. It is a negotiable instrument that is covered
under the Negotiable Instruments Act, 1881

A cheque is an unconditional order in writing. The payment of the cheque is made in the form of
cash or directly in Payee’s account. A cheque is drawn on a particular bank and is always payable
on demand. The amount is always a certain sum of money that is present in one's account and
cannot exceed the same. Cheques are a popular way to pay without cash.

Types of cheques –

How many types of cheques are in use depends on elements like who is the issuer and who is the
drawee. Based on these essentials, we explore the different types of cheques in India.

Bearer Cheque - A bearer cheque is the one in which the payment is made to the person bearing or
carrying the cheque. These cheques are transferable by delivery, that is, if you are carrying the
cheque to the bank, you can be issued the payment to. The banks need no other authorisation from
the issuer to be allowed to make the payment.

Order Cheque - In these cheques, the words ‘or bearer’ is cancelled. Such cheques can only be
issued to the person whose name is mentioned on the cheque, and the bank will do its background
check to authenticate the cheque bearer’s identity before releasing the payment.

Crossed Cheque - You may have observed cheques with two sloping parallel lines with the words
‘a/c payee’ written on the top left. That is a crossed cheque. The lines ensure that irrespective of
who presents the cheque, the payment will only be made to the individual whose name is written on
the cheque, in other words, the a/c payee along with his/her account number. These cheques are
relatively safe because they can be encashed only at the drawee’s bank.

Open cheque - An open cheque is basically an uncrossed cheque. This cheque can be encashed at
any bank, and the payment can be made to the person bearing the cheque. This cheque is
transferable from the original payee (the original recipient of the payment) to another payee too. The
issuer needs to put his signature on both the front and back of the cheque.

Post-Dated Cheque - These types of cheques bear a later date of being encashed. Even if the bearer
presents this cheque to the bank immediately after getting it, the bank will only process the payment
on the date mentioned in the cheque. This cheque stands valid past the mentioned date, but not
before.

Stale Cheque - A cheque past its validity, three months after the date of being issued, is called a
stale cheque.

Traveller’s Cheque - Foreigners on vacations carry traveller’s cheques instead of carrying hard cash,
which can be cumbersome. These cheques are issued to them by one bank and can be encashed in

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 the form of currency at a bank located in another location or country. Traveller’s cheques do not
expire and can be used for future trips.

Self-Cheque - You can identify self-cheques by the word ‘self’ written in the drawee column. Self-
cheques can only be drawn at the issuer’s bank.

Banker’s Cheque - A bank is the issuer of these types of cheques. The bank issues these cheques
on behalf of an account holder to make a remittance to another person in the same city. Here the
specified amount is debited from the bank account of the customer, and then, the cheque is issued
by the bank. This is the reason banker’s cheques are called non-negotiable instruments as there is
no room for banks to dishonour these cheques. They are valid for three months. They can be
revalidated provided specific conditions are met.

Blank Cheque - When a cheque only has a drawer’s signature and all the other fields are left empty,
then such a type of a cheque is called a blank cheque.

Characteristics of the Cheque –

1. The drawer must adequately write a cheque and sign it.

2. A cheque contains an unconditional order.

3. Only one bank is authorised to receive cheques.

4. The defined amount should always be specified and indicated in words and numbers.

5. Unsigned Cheques are invalid.

6. There is always a specific payee on cheques.

7. Cheques are always due upon demand.

8. A cheque must be dated for the bank to accept; otherwise, it will be invalid.

9. The amount specified is always sure and should be clearly stated in both words and figures.

10. Cheques always have a certain payee.

Types of Cheque Crossing

 General Crossing – cheque bears across its face an addition of 2 parallel crosswise lines.
 Special Crossing – It bears the crossing across its face in which the banker’s name is included
 Restrictive Crossing – It directs the assembling banker that he has to credit the number of
cheques solely to the account of the receiver.
 Non-Negotiable Crossing – it's once the words ‘Not Negotiable’ are written between the 2
parallel crosswise lines.

General Cheque Crossing -

In general crossing, the cheque bears across its face which includes the addition of 2 parallel
crossing lines with little spacing between them, within the case of general crossing on the cheque,

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 the paying banker pays cash to any banker. For the aim of general crossing 2 crosswise parallel
lines at the corner of the cheque are necessary.
Thus, during this case, the holder of the cheque or the receiver can receive the payment solely
through a checking account and not over the counter.

Special Cheque Crossing -

In this case, the paying banker pays the quantity of cheque solely to the banker whose name seems
within the crossing or to his assembling agent. The paying banker can honor the cheque only if it's
ordered through the bank which is mentioned within the crossing. However, in special crossing 2
parallel crosswise lines don't seem to be essential, however the name of the banker is most
significant.
Account Payee Crossing -
This type of cheque crossing indicates that the amount cannot be paid into any bank account other
than the one specified on the check. This type of crossing assures that the funds are only moved to
a bank account and not supplied in the form of cash.
Restrictive Cheque Crossing -
This type of crossing restricts the negotiability of the cheque. It directs the assembling banker to
credit the amount of money in a cheque to the account of the receiver. Where the assembling banker
credits the return of a cheque bearing such crossing to the other account, he shall be guilty of
negligence. Also, he won't be eligible for the protection of the assembling banker below section 131
of the Act. However, such crossings can don't have any impact on the paying banker. This is often
therefore as a result of it's not his duty to see that the cheque is collected for the account of the
receiver.
Not Negotiable Cheque Crossing -
 It is once the words ‘Not Negotiable’ are written between the 2 parallel crosswise lines across
the face of the cheque within the case of general crossing or the case of special crossing beside
the name of a banker.
 The Non-Negotiable Crossing doesn't mean that the cheque is non-transferable. As per section
130 of Non-Negotiable Act, 1881.
 A cheque holder which has crossed any single leaf of cheque either generally or in a special
case. In either case, the words “non-negotiable”.
 Thus, he becomes the holder in due course and acquires an indisputable title thereto. Also,
once the instrument passes through a holder in due course, all the next holders conjointly
receive an honest title. But no Negotiable Crossing takes away this vital feature. During this
case, the transferee doesn't get the rights of the holder in due course, as long as the title of
the transferor is nice, the title of the transferee is additionally smart. Hence, just in case of
any trace within the title of any one of the endorsers, the title of all the next transferees
conjointly becomes tainted.
Q. Classify and explain the good lending principles followed by banks.

Banks follow the following principles of lending:

The lending process in any banking institutions is based on some core principles such as safety,
liquidity, diversity, stability and profitability.
Liquidity:

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Liquidity is an important principle of bank lending. Bank lend for short periods only because they
lend public money which can be withdrawn at any time by depositors. They, therefore, advance
loans on the security of such assets which are easily marketable and convertible into cash at a short
notice.

A bank chooses such securities in its investment portfolio which possess sufficient liquidity. It is
essential because if the bank needs cash to meet the urgent requirements of its customers, it should
be in a position to sell some of the securities at a very short notice without disturbing their market
prices much. There are certain securities such as central, state and local government bonds which
are easily saleable without affecting their market prices.

The shares and debentures of large industrial concerns also fall in this category. But the shares and
debentures of ordinary firms are not easily marketable without bringing down their market prices.
So the banks should make investments in government securities and shares and debentures of
reputed industrial houses.

Safety:

The safety of funds lent is another principle of lending. Safety means that the borrower should be
able to repay the loan and interest in time at regular intervals without default. The repayment of the
loan depends upon the nature of security, the character of the borrower, his capacity to repay and
his financial standing.

Like other investments, bank investments involve risk. But the degree of risk varies with the type of
security. Securities of the central government are safer than those of the state governments and
local bodies. And the securities of state government and local bodies are safer than those of the
industrial concerns. This is because the resources of the central government are much higher than
the state and local governments and of the latter higher than the industrial concerns.

In fact, the share and debentures of industrial concerns are tied to their earnings which may
fluctuate with the business activity in the country. The bank should also take into consideration the
debt repaying ability of the governments while investing in their securities. Political stability and
peace and security are the prerequisites for this.

It is very safe to invest in the securities of a government having large tax revenue and high borrowing
capacity. The same is the case with the securities of a rich municipality or local body and state
government of a prosperous region. So in making investments the bank should choose securities,
shares and debentures of such governments, local bodies and industrial concerns which satisfy the
principle of safety.

Thus from the bank’s viewpoint, the nature of security is the most important consideration while
giving a loan. Even then, it has to take into consideration the creditworthiness of the borrower which
is governed by his character, capacity to repay, and his financial standing. Above all, the safety of
bank funds depends upon the technical feasibility and economic viability of the project for which
the loan is advanced.

Diversity:
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In choosing its investment portfolio, a commercial bank should follow the principle of diversity. It
should not invest its surplus funds in a particular type of security but in different types of securities.
It should choose the shares and debentures of different types of industries situated in different
regions of the country. The same principle should be followed in the case of state governments and
local bodies. Diversification aims at minimising risk of the investment portfolio of a bank.

The principle of diversity also applies to the advancing of loans to varied types of firms, industries,
businesses and trades. A bank should follow the maxim: “Do not keep all eggs in one basket.” It
should spread it risks by giving loans to various trades and industries in different parts of the
country.

Stability:

Another important principle of a bank’s investment policy should be to invest in those stocks and
securities which possess a high degree of stability in their prices. The bank cannot afford any loss
on the value of its securities. It should, therefore, invest it funds in the shares of reputed companies
where the possibility of decline in their prices is remote.

Government bonds and debentures of companies carry fixed rates of interest. Their value changes
with changes in the market rate of interest. But the bank is forced to liquidate a portion of them to
meet its requirements of cash in cash of financial crisis. Otherwise, they run to their full term of 10
years or more and changes in the market rate of interest do not affect them much. Thus bank
investments in debentures and bonds are more stable than in the shares of companies.

Profitability:

This is the cardinal principle for making investment by a bank. It must earn sufficient profits. It
should, therefore, invest in such securities which was sure a fair and stable return on the funds
invested. The earning capacity of securities and shares depends upon the interest rate and the
dividend rate and the tax benefits they carry.

It is largely the government securities of the centre, state and local bodies that largely carry the
exemption of their interest from taxes. The bank should invest more in such securities rather than
in the shares of new companies which also carry tax exemption. This is because shares of new
companies are not safe investments.

Q. Discuss legal relationship between banker and customer. State the protection available to the
collecting banker under the Negotiable Instrument Act. / Duties of Banker towards Customer. Under
what circumstances the relation between the banker and customer is terminated.

Legal relationship between banker and customer –

The relationship between a banker and customer is basically contractual. It is regulated by -

a. the general provisions of law of contract
b. the rules of agency, where applicable, and
c. banking practice.

There may be following relationships between banker and customer –

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Debtor and Creditor Relationship - The relation of banker and customer is primarily that of debtor
and creditor. But who is what at a particular moment depends on the balance of the account of the
customer. If the account shows a credit balance, the banker will be a debtor and the customer a
creditor. But in the case of debit balance or overdraft, the banker will be the creditor and the
customer the debtor.

Trustee and Beneficiary relationship - The banker assumes the position of a trustee when he accepts
securities or valuables from the customer for safe custody. The articles deposited with the bank for
safe custody continue to be owned by the customer. The banker acts also for the benefit of the
customer, and thus, the customer is a beneficiary in this way. In New Bank of India Ltd v. P. Lal,
AIR 1962 SC 1003, the Supreme Court observed that where the amount is deposited by the customer
for a purpose, the banker acts as a trustee with regard to the balance of the amount after fulfilment
of the purpose.

Principal- Agent relationship - A banker acts as an agent of his customer and performs a number of
agency functions e.g., the banker collects cheques on his behalf and makes payment of various dues
of his customer viz., insurance premium etc.

Bailee and Bailor relationship - The bank functions as a Bailee when it keeps valuable articles, o
ornaments, title deeds etc. of its customer. The banker works as the custodian of these things, and
it is implied responsibility of the bank to return these things safely. Thus, the bank is a bailee and
the customer is a bailor.

Relationship of lesser and lessee - Section 105 of Transfer of Property Act, 1882 defines lease, lessor,
lessee, premium and rent. A lease of immovable property is transferred to the right to enjoy the
property for a certain period of time. The transferor is the lessor. The transferee is called the lessee.

Relationship of trustee and beneficiary - When a bank receives money or other valuable securities,
then the banker’s position is of a trustee. On the other hand, when a bank receives money and uses
it in various sectors, the bank becomes the beneficiary.

Under the Negotiable Instruments Act, there are certain protections available to the collecting
banker, primarily outlined in Sections 131 and 131A. Here's a brief overview:

1. Protection under Section 131:

- When a banker receives payment of a crossed cheque or draft, if the payment is made in due
course and in good faith, without negligence, and in accordance with the apparent tenor of the
instrument, the banker will be protected.

- This protection extends to the banker even if the payment later turns out to be invalid for some
reason, such as forgery or irregular endorsement.

2. Protection under Section 131A:

- This section provides protection to a banker who receives payment of a crossed cheque or draft
for a customer in good faith and without negligence.

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 - If the payment is made by a paying banker in due course and in good faith, the collecting banker
is indemnified against any loss arising from the failure of the collecting banker's customer to receive
the payment.

- However, this protection does not apply if the payment was obtained by means of fraud or
dishonesty, or if the collecting banker was negligent.

These protections are essential for ensuring confidence and security in the banking system,
particularly in the handling of negotiable instruments like cheques. They provide a degree of
assurance to collecting bankers who act in good faith and in accordance with established banking
practices.

Duties of Banker towards Customer -

The duties are given as below:

Obligation to open an account with references and sufficient documentary evidence

It is too well understood by today’s banker that the requirement to open an account only after
properly identifying the new account holder is unlikely without an introduction. The need to get a
good customer introduction is to keep away crooks and fraudsters who can open accounts to collect
forged cheques or other tools. RBI has insisted as an added precaution that photographs of the
customer and sufficient documentary evidence for constitution and address be obtained while
opening accounts.

To identify the reference where the referee is not identified or reference in absentia
As practice bankers in India require the introduction of an existing bank customer, particularly
when the branch is newly opened, this may not always be possible. In these instances, clients are
expected to obtain references from the local people or the current bankers. In such a scenario, the
banker must ask the referee to confirm that the person with a newly opened account is a genuine
person.

Obligations relating to Crossing and special crossing

The banking officer’s responsibility is to ensure the check is clearly crossed and to deny collection
if the cheque is handed over to another banker. Likewise, when the check is moved into a certain
account, the credit of the check will render him liable for negligence without requiring any required
inquiries.

Obligation to check the instruments or any obvious flaws in it

The instrument presented for collection will sometimes send a notice to the banker that a customer
who submitted the instrument is either committing a breach of trust or mismanaging the money
belonging to someone else. In the event that a banker does not heed the warning requested by a
prudent banker, he could be held liable for negligence.

The obligation to know the status of the customer’s account

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 The collecting banker is required to know the status of the customer and different dealings that have
taken place in the customer’s account. It will be the banker’s duty to take the necessary precautions
if there are any amounts coming into the account that are unlikely to be received by him and when
collecting such cheques.

Under the Negotiable Instruments Act in India, the relationship between a banker and a customer
can be terminated under specific circumstances related to negotiable instruments such as
promissory notes, bills of exchange, and cheques. Here are some scenarios:

1. Non-payment of Cheques: If a customer issues a cheque to another party, and the cheque is
dishonored due to insufficient funds or any other reason, the banker-customer relationship may be
affected. The payee or holder of the cheque can take legal action against the drawer (the customer)
under the provisions of the Negotiable Instruments Act. This may lead to legal proceedings and, in
some cases, termination of the relationship if the bank decides to close the customer's account due
to repeated dishonoring of cheques.

2. Forgery or Fraudulent Activities: If a customer engages in forgery or fraudulent activities related

to negotiable instruments, such as issuing forged cheques or bills of exchange, the bank may
terminate the relationship and take legal action against the customer under the provisions of the
Negotiable Instruments Act and other relevant laws.

3. Violation of Banking Regulations: If a customer violates banking regulations related to negotiable

instruments, such as engaging in money laundering activities or violating the rules governing
cheque clearing and settlement, the bank may terminate the relationship and report the customer
to the appropriate regulatory authorities.

4. Closure of Account: A customer may request to close their account for various reasons, including
changes in financial circumstances or dissatisfaction with banking services. Upon receiving such a
request, the bank will close the account, effectively terminating the relationship between the banker
and the customer under the Negotiable Instruments Act.

5. Death of Customer: In the event of the death of a customer, the relationship between the banker
and the deceased customer is terminated. The bank will settle the customer's accounts and transfer
any funds or assets to the legal heirs or beneficiaries as per the provisions of the law.

These are some of the circumstances under which the relationship between a banker and a
customer can be terminated under the Negotiable Instruments Act in India. It's important to note
that each situation may involve legal complexities, and banks must adhere to the applicable laws
and regulations while handling such matters.

Q. State the provisions relating to winding up of banking companies under Banking Regulation
Act. What kind of systematic measures should be adopted for preventing winding up of Banking
Companies. Reconstruction and Reorganization of Banking Companies.

The provisions relating to the winding up of banking companies under the Banking Regulation Act,
1949, outline the circumstances and procedures under which a banking company may be wound up.
Here are the key provisions:
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1. Winding Up by Tribunal:

- Section 45 of the Banking Regulation Act empowers the Reserve Bank of India (RBI) to apply to
the appropriate High Court for the winding up of a banking company.

- The RBI can make such an application if it is of the opinion that the banking company is unable
to pay its debts, or if the banking company has failed to comply with the requirements imposed upon
it under the Act.

2. Grounds for Winding Up:

- The grounds for winding up a banking company include the inability to pay debts, persistent
default in complying with the provisions of the Act, and the conduct of the affairs of the banking
company being prejudicial to the interests of its depositors or the public.

3. Voluntary Winding Up:

- Section 45D of the Act provides for voluntary winding up of a banking company with the approval
of the RBI.

- The banking company must pass a special resolution for voluntary winding up, and the RBI must
be satisfied that the interests of the depositors will not be prejudiced by the winding up.

4. Procedures for Winding Up:

- The winding-up process is governed by the provisions of the Companies Act, 2013, and the rules
and regulations prescribed thereunder.

- The High Court has jurisdiction to oversee the winding up proceedings and may appoint a
liquidator to administer the assets of the banking company and distribute them among the creditors
and shareholders.

5. Protection of Depositors:

- The Act contains provisions aimed at protecting the interests of depositors during the winding-up
process.

- The interests of depositors are given priority over other creditors, and the Act provides for the
establishment of a Deposit Insurance and Credit Guarantee Corporation to insure deposits and
provide compensation to depositors in case of bank failures.

These provisions are designed to ensure orderly and equitable winding up of banking
companies in the event of financial distress or failure, while also safeguarding the interests of
depositors and the public.

Preventing the winding up of banking companies is essential for maintaining financial stability
and safeguarding the interests of depositors, shareholders, and the economy as a whole. Here are
some systematic measures that can be adopted to prevent the winding up of banking companies:

1. Prudential Regulation and Supervision:

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 - Implement robust prudential regulations and supervision frameworks to ensure the soundness
and stability of banking institutions.

- Regularly assess and monitor the financial health, risk exposure, and compliance of banks with
regulatory requirements

2. Risk Management Practices:

- Enhance risk management practices within banking companies, including credit risk, liquidity
risk, market risk, and operational risk management.

3. Capital Adequacy Requirements:

- Enforce stringent capital adequacy requirements to ensure that banks maintain adequate capital
buffers to absorb potential losses and withstand financial shocks.

4. Liquidity Management:

- Implement robust liquidity management frameworks to ensure that banks maintain sufficient
liquidity to meet their obligations, including depositor withdrawals and payment obligations.

5. Corporate Governance and Internal Controls:

- Promote a culture of compliance, integrity, and ethical conduct at all levels of the organization
to mitigate the risk of misconduct and fraud.

6. Early Intervention Framework:

- Establish an early intervention framework to detect and address emerging risks and weaknesses
in banking companies at an early stage.

7. Market Discipline and Transparency:

- Promote market discipline and transparency by providing stakeholders with timely and accurate
information about the financial condition and performance of banking companies.

By implementing these systematic measures, regulators, policymakers, and banking

institutions can enhance the resilience and stability of the banking sector, thereby reducing the
likelihood of banking company failures and the need for winding-up proceedings.

Kind of systematic measures should be adopted for preventing winding up of Banking

Companies

Preventing the winding up of banking companies is crucial for maintaining financial stability
and safeguarding the interests of depositors, shareholders, and the economy as a whole. Here are
some systematic measures that can be adopted to prevent the winding up of banking companies:

1. Prudential Regulation and Supervision:

- Implement robust prudential regulations and supervision frameworks to ensure the soundness
and stability of banking institutions.

- Regularly assess and monitor the financial health, risk exposure, and compliance of banks with
regulatory requirements.

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- Conduct stress tests and scenario analyses to identify potential vulnerabilities and address them
proactively.

2. Risk Management Practices:

- Enhance risk management practices within banking companies, including credit risk, liquidity
risk, market risk, and operational risk management.

- Implement effective risk assessment, monitoring, and mitigation strategies to minimize the
likelihood of adverse events impacting the bank's financial viability.

3. Capital Adequacy Requirements:

- Enforce stringent capital adequacy requirements to ensure that banks maintain adequate capital
buffers to absorb potential losses and withstand financial shocks.

- Regularly review and update capital adequacy standards in line with evolving market conditions
and international best practices.

4. Liquidity Management:

- Implement robust liquidity management frameworks to ensure that banks maintain sufficient
liquidity to meet their obligations, including depositor withdrawals and payment obligations.

- Diversify funding sources, maintain high-quality liquid assets, and establish contingency funding
plans to address liquidity challenges.

5. Corporate Governance and Internal Controls:

- Strengthen corporate governance practices and internal controls within banking companies to
enhance transparency, accountability, and risk management effectiveness.

- Promote a culture of compliance, integrity, and ethical conduct at all levels of the organization to
mitigate the risk of misconduct and fraud.

6. Early Intervention Framework:

- Establish an early intervention framework to detect and address emerging risks and weaknesses
in banking companies at an early stage.

- Provide regulatory guidance and support to troubled banks to implement corrective measures and
restore financial stability before problems escalate.

7. Resolution and Recovery Planning:

- Develop resolution and recovery plans to facilitate the orderly resolution of failing banks while
minimizing disruption to the financial system.

- Define clear procedures and mechanisms for resolving failed banks, including options such as
merger, acquisition, bridge bank, or orderly wind-down.

8. Market Discipline and Transparency:

- Promote market discipline and transparency by providing stakeholders with timely and accurate
information about the financial condition and performance of banking companies.

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- Encourage investor vigilance, analyst scrutiny, and market feedback to incentivize prudent
behaviour and deter excessive risk-taking.

By implementing these systematic measures, regulators, policymakers, and banking

institutions can enhance the resilience and stability of the banking sector, thereby reducing the
likelihood of banking company failures and the need for winding-up proceedings.

Reconstruction and Reorganization of Banking Companies

Reconstruction and reorganization of banking companies refer to the process of restructuring

and revitalizing distressed or underperforming banks to restore their financial health and viability.
This involves various measures aimed at improving the bank's capital adequacy, profitability, asset
quality, and operational efficiency. Here's an overview of the key aspects of reconstruction and
reorganization:

1. Financial Restructuring:

- Recapitalization: Injecting additional capital into the bank to strengthen its financial position and
meet regulatory capital requirements. This can be done through equity infusion, rights issues, or
government assistance.

- Asset Quality Improvement: Addressing non-performing assets (NPAs) and distressed loans
through measures such as loan restructuring, asset sales, loan recovery efforts, and provisioning
for potential losses.

- Liability Management: Managing liabilities to improve liquidity and funding stability, including
renegotiating terms with depositors and creditors, diversifying funding sources, and optimizing the
bank's balance sheet.

2. Operational Restructuring:

- Business Model Review: Assessing the bank's business model, product offerings, market
positioning, and revenue streams to identify areas for improvement and growth opportunities.

- Cost Reduction Initiatives: Implementing cost-cutting measures and efficiency improvements to

reduce overheads, streamline operations, and enhance profitability.

- Organizational Restructuring: Reviewing the bank's organizational structure, staffing levels, and
operational processes to enhance agility, responsiveness, and risk management capabilities.

3. Governance and Risk Management Enhancements:

- Strengthening Corporate Governance: Enhancing board oversight, risk management frameworks,

and internal controls to promote transparency, accountability, and ethical conduct.

- Risk Management Upgrades: Enhancing risk management practices, systems, and processes to
identify, measure, monitor, and mitigate risks effectively, including credit, market, liquidity, and
operational risks.

- Compliance and Regulatory Alignment: Ensuring compliance with regulatory requirements and
aligning the bank's practices with industry best practices and international standards to build trust
and confidence among stakeholders.
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4. Strategic Partnerships and Alliances:

- Seeking strategic partnerships, alliances, or mergers with stronger or more diversified financial
institutions to enhance the bank's market position, scale, and competitiveness.

- Collaborating with fintech firms, technology partners, or other stakeholders to leverage innovation,
digitalization, and technological advancements to enhance customer experience and operational
efficiency.

5. Stakeholder Engagement and Communication:

- Engaging with shareholders, depositors, creditors, regulators, and other stakeholders to

communicate the bank's reconstruction plan, progress, and expected outcomes.

- Building trust, confidence, and support among stakeholders through transparent communication,
regular updates, and proactive engagement to facilitate the successful implementation of the
reconstruction and reorganization efforts.

Overall, reconstruction and reorganization of banking companies require a comprehensive

and coordinated approach involving financial, operational, governance, and strategic interventions
to address underlying challenges, restore confidence, and position the bank for sustainable growth
and success. Effective execution of these measures is essential to ensure the long-term viability and
stability of the banking institution and contribute to the overall resilience of the financial system.

Q. i) Define Negotiation. ii). Write a note on kinds of instruments. Lay down the rules regarding
presentment and payment.

Negotiation – According to Section 14 of Negotiable Instrument Act, 1881, When a promissory note,
bill of exchange or cheque is transferred to any person, so as to constitute that person the holder
thereof, the instrument is said to be negotiated.

Kinds of instruments.

Under the Negotiable Instruments Act, 1881, negotiable instruments are classified into three main
types: promissory notes, bills of exchange, and cheques. Here's a brief overview of each type:

1. Promissory Note:

- A promissory note is a written instrument in which one party (the maker) unconditionally promises
to pay a certain sum of money to another party (the payee) or their order at a specified time or on
demand.

- It must be in writing, signed by the maker, contain an unconditional promise to pay, specify the
amount payable, and be payable to a specific person or their order.

- Example: A borrower issues a promissory note to a lender promising to repay a loan amount plus
interest on a specified date.

2. Bill of Exchange:

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- A bill of exchange is an unconditional written order by one party (the drawer) to another party (the
drawee) directing them to pay a certain sum of money to a third party (the payee) either immediately
or at a future date.

- It involves three parties: the drawer, who issues the bill; the drawee, who is directed to make
payment; and the payee, who receives the payment.

- Example: A seller issues a bill of exchange to a buyer directing them to pay the purchase price at
a later date.

3. Cheque:

- A cheque is a written instrument drawn on a specified banker and not expressed to be payable
otherwise than on demand, which is used to make payments.

- It involves three parties: the drawer (the account holder who issues the cheque), the drawee (the
bank on which the cheque is drawn), and the payee (the person to whom the payment is made).

- Example: A person writes a cheque to their landlord for the monthly rent payment.

Rules regarding presentment and payment.

Regarding presentment and payment, here are the key rules:

1. Presentment for Acceptance:

- In the case of a bill of exchange, the holder may present it for acceptance to the drawee within a
reasonable time after it is drawn.

- Presentment for acceptance is optional unless the bill is payable after sight or where presentment
is required by the holder.

- If the drawee accepts the bill, they indicate their agreement to the terms of the bill by signing it,
thereby becoming liable to pay it upon maturity.

2. Presentment for Payment:

- Both bills of exchange and cheques must be presented for payment to the drawee (bank) within a
reasonable time after their maturity date.

- If the instrument is payable on demand, it must be presented for payment within a reasonable
time after it is issued.

- Failure to present the instrument for payment within the prescribed time may discharge the parties
primarily liable (drawer, maker) from their obligation to pay, although secondary parties may still
be liable.

3. Payment:

- Once presented, the drawee must make payment according to the terms of the instrument. For
bills of exchange, payment may be made to the holder or any subsequent endorser who is entitled
to receive payment.

- The drawee may dishonor the instrument by refusing to make payment due to insufficient funds,
irregularities, or other valid reasons specified under the law.
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 These rules ensure the proper negotiation, presentation, and payment of negotiable
instruments, facilitating smooth and secure transactions in commercial and financial activities.

Q. Function of RBI regard to a. Regulation of Currency, b. Bank rate, c. Banker to the

Government and Banker’s Bank.

Introduction Of RBI -

The Reserve Bank of India (RBI) is India's central bank, established on April 1, 1935, under
the Reserve Bank of India Act, 1934. It serves as the apex monetary authority responsible for
regulating and supervising the country's banking and financial system. The RBI's primary objective
is to maintain price stability and ensure the stability and resilience of the Indian financial system
while also supporting the economic growth objectives of the government.

The RBI operates with a wide range of functions and powers, covering monetary policy
formulation, currency management, regulation and supervision of banks and financial institutions,
management of foreign exchange reserves, and development of the financial infrastructure. It
operates through its headquarters in Mumbai and regional offices located across major cities in
India.

As the issuer of currency notes (except one rupee notes and coins), the RBI manages the
supply, distribution, and integrity of the currency, ensuring the stability of the monetary system. It
also formulates and implements monetary policy through tools such as open market operations,
reserve requirements, and the bank rate to achieve the objectives of price stability and economic
growth.

Additionally, the RBI plays a crucial role in regulating and supervising banks and financial
institutions to maintain financial stability, protect depositor interests, and promote the efficiency
and integrity of the banking system. It sets prudential norms, conducts inspections, and takes
corrective actions to address risks and vulnerabilities in the financial sector.

Furthermore, the RBI acts as the banker to the government, managing the government's
accounts, facilitating public debt management, and advising on fiscal matters. It also serves as the
banker's bank, providing various banking services to commercial banks, maintaining their
accounts, and ensuring the smooth functioning of the interbank payment and settlement systems.

Over the years, the RBI has evolved into a dynamic institution, adapting to changes in the
economic and financial landscape while playing a pivotal role in steering India's economic
development and financial stability. Its independence, expertise, and credibility are fundamental
pillars of India's monetary and financial system, making it a vital institution in the country's
governance and economic management.

Function of RBI

The Reserve Bank of India (RBI) plays several crucial roles in the Indian financial system, including
regulating currency, setting the bank rate, acting as banker to the government, and functioning as
the banker's bank.

a. Regulation of Currency:

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- The RBI has the sole authority to issue currency notes (except one rupee notes and coins, which
are issued by the Government of India).

- It regulates the supply, availability, and distribution of currency throughout the country.

- The RBI is responsible for maintaining the stability of the currency and managing currency
reserves to ensure the smooth functioning of the monetary system.

- It also monitors and regulates the circulation of counterfeit currency to safeguard the integrity of
the currency.

b. Bank Rate:

- The bank rate, also known as the discount rate, is the rate at which the RBI lends money to
commercial banks for short-term purposes.

- By adjusting the bank rate, the RBI influences the cost of borrowing for commercial banks, which
in turn affects the interest rates they charge on loans and advances to their customers.

- Changes in the bank rate signal the RBI's monetary policy stance and are used to control inflation,
stimulate economic growth, or stabilize financial markets.

c. Banker to the Government and Banker’s Bank:

- As banker to the government, the RBI manages the central government's accounts, including
receipts and payments, and acts as an advisor on matters related to public debt management.

- It also facilitates the sale and redemption of government securities, conducts government
borrowing programs, and manages the government's cash balances.

- As the banker's bank, the RBI provides various banking services to commercial banks, including
maintaining their accounts, clearing and settlement of interbank transactions, and providing
liquidity support through rediscounting facilities.

- Commercial banks hold their reserves with the RBI and rely on it for emergency funding and
liquidity management.

Overall, these functions of the RBI are essential for maintaining monetary stability, ensuring
the smooth functioning of the financial system, and supporting the government's fiscal operations.
By effectively carrying out these roles, the RBI plays a central role in India's economic development
and financial well-being.

Q. a) Explain the meaning of the term bank. State the main functions of the bank regarding
lending of money and accepting deposits from the public.

b). Discuss the main functions of Banking Regulation Act, 1949, regarding Licensing of
Banking Companies and Power of Bank to acquire undertakings.

a. As per Section 5(b) of the Banking Regulation Act, 1949 , "banking" means the accepting, for the purpose
of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and
withdrawable by cheque, draft, order or otherwise.

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The term "bank" refers to a financial institution that offers a wide range of financial services to
individuals, businesses, and governments. Banks serve as intermediaries between those who have
surplus funds (depositors) and those who need funds (borrowers), facilitating the flow of money in
the economy. Here's a more detailed explanation of what a bank does and its essential
characteristics:

1. Financial Intermediation:

- Banks play a crucial role in financial intermediation by accepting deposits from savers and
providing loans and other credit facilities to borrowers.

- Depositors entrust their money to banks for safekeeping, liquidity, and potential returns, while
borrowers rely on banks to access funds for various purposes, including investment, consumption,
and working capital needs.

2. Accepting Deposits:

- One of the primary functions of banks is to accept deposits from individuals, businesses, and other
entities.

- Banks offer various types of deposit accounts, such as savings accounts, current accounts, fixed
deposits, and recurring deposits, each tailored to meet the specific needs and preferences of
depositors.

3. Lending Money:

- Banks are major providers of credit in the economy, extending loans, overdrafts, lines of credit,
and other credit facilities to borrowers.

- The lending function of banks involves assessing the creditworthiness of borrowers, managing
risks, and disbursing funds to finance investments, purchases, and other expenditures.

4. Payment Services:

- Banks facilitate payments and transactions through various channels, including checks, electronic
fund transfers, debit cards, credit cards, and mobile banking platforms.

- By providing payment services, banks enable individuals and businesses to transfer money, make
purchases, settle bills, and conduct financial transactions efficiently and securely.

5. Financial Services:

- In addition to deposit-taking and lending, banks offer a wide range of financial services, including
wealth management, investment advisory, insurance, foreign exchange, and trade finance services.

- Banks serve as one-stop financial hubs, catering to the diverse needs of customers and providing
comprehensive solutions to meet their financial goals and objectives.

6. Risk Management:

- Banks are responsible for managing various risks inherent in their operations, including credit
risk, liquidity risk, market risk, operational risk, and compliance risk.

- Through prudent risk management practices, banks aim to safeguard the interests of depositors,
maintain financial stability, and ensure the safety and soundness of the banking system.

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 Overall, banks play a critical role in the economy by mobilizing savings, allocating capital,
facilitating transactions, and promoting economic growth and development. Their functions and
services are essential for individuals, businesses, and governments to manage their finances, invest
in productive activities, and achieve their financial objectives.

The main functions of banks regarding lending money involve facilitating access to credit for
individuals, businesses, and governments while managing risks and promoting financial stability.
Here are the key functions of banks in lending money:

1. Credit Assessment and Risk Management:

- Banks evaluate the creditworthiness of potential borrowers by assessing their financial condition,
repayment capacity, credit history, and collateral offered.

- Through rigorous credit appraisal processes, banks analyse the risks associated with lending
money, including credit risk, liquidity risk, market risk, and operational risk.

- By applying prudent lending criteria and risk management practices, banks aim to minimize the
likelihood of loan defaults and preserve the safety and soundness of their loan portfolios.

2. Loan Origination and Disbursement:

- Banks originate loans and credit facilities tailored to the financing needs of borrowers, including
term loans, working capital loans, overdrafts, lines of credit, and trade finance facilities.

- Upon approval of loan applications, banks disburse funds to borrowers in accordance with the
terms and conditions of the loan agreements.

- Loan disbursement involves the transfer of funds to the borrower's account or the issuance of a
cheque or draft, depending on the nature of the loan and the borrower's preferences.

3. Interest Rate Determination:

- Banks charge interest on loans as compensation for the use of funds and the risk assumed.

- The interest rates on loans are determined based on factors such as the prevailing market rates,
the creditworthiness of the borrower, the duration and type of loan, and the overall economic
environment.

- Banks may offer fixed or floating interest rates, depending on market conditions and borrower
preferences.

4. Loan Servicing and Monitoring:

- Banks monitor the performance of loans throughout their tenure, tracking repayment schedules,
interest payments, and compliance with loan covenants.

- Borrowers are required to make periodic repayments of principal and interest as per the terms of
the loan agreement.

- Banks provide loan servicing support, including issuing statements, reminders, and notifications
to borrowers, and assisting with repayment arrangements or restructuring, if necessary.

5. Risk Mitigation and Recovery:

18
- In cases of loan delinquency or default, banks undertake various measures to mitigate losses and
recover outstanding amounts.

- This may involve initiating collection efforts, negotiating repayment plans, restructuring loans,
enforcing collateral rights, or initiating legal proceedings for recovery.

- Banks maintain provisions and reserves to cover potential loan losses and ensure adequate risk
mitigation measures are in place.

Overall, the lending function of banks plays a critical role in fuelling economic growth,
supporting investment and consumption, and promoting financial inclusion and development. By
efficiently allocating capital and providing access to credit, banks contribute to the stability and
prosperity of individuals, businesses, and economies.

b. Main functions of Banking Regulation Act, 1949, regarding Licensing of Banking Companies and
Power of Bank to acquire undertakings

The Banking Regulation Act, 1949, provides a comprehensive regulatory framework for the
functioning of banking companies in India. It outlines several functions related to the licensing of
banking companies and the power of the Reserve Bank of India (RBI) to acquire undertakings. Here's
an overview:

1. Licensing of Banking Companies:

- The Banking Regulation Act, 1949, empowers the RBI to regulate and supervise banking
companies operating in India.

- One of the main functions of the Act is to establish a licensing regime for banking companies,
ensuring that only entities meeting certain criteria and standards are allowed to operate as banks.

- The Act specifies the conditions and requirements for obtaining a banking license, including
minimum capital requirements, corporate structure, governance standards, and fit and proper
criteria for promoters and management personnel.

- The RBI assesses applications for banking licenses based on these criteria and may grant licenses
to eligible entities to commence banking operations.

2. Power of Bank to Acquire Undertakings:

- The Banking Regulation Act, 1949, grants the RBI the authority to acquire the undertakings of
banking companies in certain circumstances deemed necessary for protecting the interests of
depositors, maintaining financial stability, or promoting the orderly functioning of the banking
system.

- Under Section 45 of the Act, the RBI may apply to the Central Government for the acquisition of
the undertakings of a banking company in the public interest.

- The RBI may exercise its power to acquire undertakings if it is satisfied that the banking company
is unable to pay its debts, or if the banking company has failed to comply with the provisions of the
Act or the directions issued by the RBI.

- Upon the acquisition of the undertakings of a banking company, the RBI may take various
measures to protect the interests of depositors, creditors, and other stakeholders, including

19
restructuring the operations, appointing administrators or liquidators, and facilitating the transfer
of assets and liabilities to another bank.

Overall, the Banking Regulation Act, 1949, plays a critical role in ensuring the stability,
integrity, and efficiency of the banking system in India. By establishing a licensing regime and
providing powers for regulatory intervention, the Act aims to safeguard the interests of depositors,
promote financial stability, and maintain public confidence in the banking system.

Q. Privileges of Holder in Due Course:

1. Rights Free from Defenses: A holder in due course (HDC) enjoys certain rights free from most
defenses that could be raised against the original payee of the instrument. This means they can
enforce payment even if there are defects or disputes in the underlying transaction.

2. Enforceability of Negotiable Instrument: An HDC can enforce a negotiable instrument according

to its terms, irrespective of any prior disputes or issues between previous parties.

3. Protection against Personal Defenses: HDC status protects against personal defenses such as
lack of consideration, fraud, or failure of consideration. This encourages the free flow of negotiable
instruments in commerce.

4. Value Given in Good Faith: To qualify as an HDC, one must acquire the instrument for value, in
good faith, without notice of any defects. This ensures that the HDC has genuinely invested in the
instrument and is not party to any fraudulent activity.

5. Priority over Prior Parties: The rights of an HDC typically take priority over those of prior parties
in the chain of endorsement or transfer. This prioritization ensures the security and reliability of
negotiable instruments.

6. Protection of Innocent Purchasers: HDC status protects innocent purchasers who acquire
negotiable instruments without knowledge of any defects. It promotes confidence in commercial
transactions by providing a safeguard against potential disputes.

7. No Liability for Prior Defects: An HDC is not liable for any prior defects in the instrument, unless
they have notice of such defects before acquiring it. This shields the HDC from bearing the
consequences of issues that occurred before their involvement.

8. Holder in Due Course Doctrine: These privileges stem from the "holder in due course" doctrine,
which seeks to uphold the integrity of negotiable instruments by protecting bona fide holders who
meet the criteria outlined by law.

Q. Legal Perspectives of Automation

1. Regulatory Compliance: Automation poses challenges and opportunities for regulatory

compliance. Laws and regulations may need to be updated or interpreted to accommodate
automated processes, ensuring that they adhere to legal standards and requirements.

2. Liability and Responsibility: Questions of liability arise when errors or malfunctions occur in
automated systems. Determining responsibility may involve assessing the actions of programmers,
operators, or the technology itself, and establishing legal frameworks to address such issues.

3. Data Privacy and Security: Automation often involves the processing of large amounts of data,
raising concerns about privacy and security. Legal frameworks such as data protection laws and
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cybersecurity regulations play a crucial role in governing the collection, storage, and use of data in
automated systems.

4. Intellectual Property: Automation technologies, including AI algorithms and software, may raise
intellectual property issues related to ownership, licensing, and infringement. Clear legal
frameworks are needed to protect the rights of creators and innovators in this rapidly evolving
landscape.

5. Ethical and Social Implications: As automation becomes more prevalent, ethical and social
considerations come to the forefront. Legal frameworks may need to address issues such as job
displacement, algorithmic bias, and the impact on marginalized communities, ensuring that
automation is implemented in a fair and equitable manner.

6. Consumer Protection: Automated systems often interact directly with consumers, whether
through e-commerce platforms, chatbots, or virtual assistants. Legal regulations may be necessary
to safeguard consumer rights, ensure transparency and accountability, and address issues such as
fraud or deceptive practices.

7. International Regulations: Automation transcends national borders, posing challenges for

international regulations and legal harmonization. Collaborative efforts are needed to develop
common standards and frameworks that govern the use of automation technologies across different
jurisdictions.

8. Government Oversight and Regulation: Governments play a crucial role in overseeing and
regulating automation to protect public interests and ensure safety, fairness, and accountability.
This may involve the establishment of regulatory bodies, the enactment of new legislation, or the
adaptation of existing laws to address emerging challenges.

9. Ethical and Legal Standards: Automation should adhere to ethical principles and legal standards,
including transparency, accountability, fairness, and respect for human rights. Legal frameworks
should provide guidance on ethical conduct and establish mechanisms for oversight and
enforcement.

10. Emerging Legal Issues: As automation technologies continue to evolve, new legal issues are likely
to emerge, requiring ongoing analysis and adaptation of legal frameworks. These may include issues
related to autonomous vehicles, AI-powered decision-making, and human-robot interaction, among
others.

Q. Banker’s Right to Claim Over Securities and Set Off.

1. Security Interest : A banker often extends credit or provides services to customers, backed by
security interests such as mortgages, pledges, or liens on assets. These security interests serve as
collateral, giving the banker a right to claim ownership or possession of the assets in case of default.

2. Right of Appropriation : In the event of default or non-payment by the customer, the banker
has the right to appropriate the securities held as collateral to satisfy the outstanding debt. This
right allows the banker to enforce their claim over the pledged assets to recover the amount owed.

3. Enforcement Procedures : Legal procedures and mechanisms exist for the banker to enforce
their security interests, such as foreclosure, repossession, or sale of the pledged assets. These

21
procedures are typically governed by applicable laws and contractual agreements between the
banker and the customer.

4. Priority of Claims : The banker's right to claim over securities may be subject to the priority of
other creditors or claimants with competing interests in the same assets. Legal principles such as
priority rules and lien perfection determine the order in which claims are satisfied from the proceeds
of the collateral.

5. Set-Off Rights : In addition to claiming over securities, a banker may have the right to set off
debts owed by the customer against any funds or assets held by the banker on behalf of the
customer. This right allows the banker to offset mutual debts and liabilities, reducing the amount
owed by the customer.

6. Mutuality of Debts : Set-off rights generally require a mutual relationship between the banker
and the customer, where both parties owe each other debts or obligations that are capable of being
set off against each other. This mutuality of debts is essential for the exercise of set-off rights.

7. Common Law and Statutory Provisions : The right to claim over securities and set-off is
recognized and regulated by common law principles and statutory provisions in many jurisdictions.
These laws provide clarity and guidance on the rights and obligations of bankers and customers in
relation to secured transactions and set-off arrangements.

8. Protection of Customer Interests : While bankers have rights to claim over securities and set-
off, legal frameworks often include safeguards to protect the interests of customers and ensure
fairness in the enforcement of these rights. These may include requirements for notice, opportunity
to cure defaults, or judicial oversight of enforcement proceedings.

Q. Debt Recovery Tribunal (DRT):

1. Purpose : Debt Recovery Tribunals (DRTs) are special courts established under the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act). The primary purpose of
DRTs is to facilitate the speedy adjudication and recovery of debts owed to banks and financial
institutions.

2. Jurisdiction : DRTs have jurisdiction over cases involving the recovery of non-performing assets
(NPAs) above a specified threshold from banks, financial institutions, and certain specified entities.
They have the authority to hear and decide cases related to debt recovery, including loan defaults,
mortgage enforcement, and asset securitization.

3. Composition : Each DRT is typically headed by a presiding officer who is a judicial member,
often a retired judge of the High Court. The tribunal may also include technical members with
expertise in banking, finance, or accounting, to assist in the adjudication of complex financial
matters.

4. Powers : DRTs are vested with quasi-judicial powers to summon witnesses, examine evidence,
and issue orders for the recovery of debts. They have the authority to pass various orders, including
attachment and sale of properties, garnishee orders, and appointment of receivers, to enforce the
recovery of debts.

22
5. Procedures : DRTs follow summary procedures aimed at expediting the resolution of debt
recovery cases. They are empowered to hear cases expeditiously, with timelines prescribed for
various stages of the proceedings to ensure swift disposal of cases.

6. Appellate Mechanism : Decisions of DRTs can be appealed before the Debt Recovery Appellate
Tribunals (DRATs), which serve as appellate bodies at the regional level. Further appeals from the
orders of DRATs may lie before the High Court and, ultimately, the Supreme Court.

7. Debts Covered : DRTs handle cases involving debts owed to banks, financial institutions, and
specified entities, including loans, advances, guarantees, and other financial accommodations. They
have jurisdiction over both secured and unsecured debts, subject to certain limitations and
thresholds prescribed under the RDDBFI Act.

8. Enforcement of Orders : Orders passed by DRTs are enforceable as decrees of civil courts and
can be executed through the same mechanisms available for the enforcement of decrees, such as
attachment and sale of properties, recovery certificates, and other legal remedies.

9. Alternative Mechanisms : In addition to adjudication by DRTs, various alternative mechanisms

such as debt restructuring, settlement negotiations, and arbitration may be explored by parties to
resolve debt recovery disputes outside the formal judicial process.

10. Role in Financial Sector : DRTs play a crucial role in the financial sector by providing an
efficient and specialized forum for the resolution of debt recovery cases, contributing to the stability
of the banking system and the effective management of non-performing assets.

Q. Internet and Phone Banking.

1. Convenience : Internet and phone banking offer convenient access to banking services anytime,
anywhere, allowing customers to perform a wide range of transactions without visiting a physical
branch.

2. Transaction Capabilities : Both internet and phone banking platforms enable users to conduct
various transactions, including checking account balances, transferring funds between accounts,
paying bills, and managing investments.

3. Accessibility : Internet banking can be accessed through web browsers on computers, laptops,
or mobile devices with internet connectivity. Phone banking, on the other hand, typically involves
accessing banking services through a dedicated phone line or mobile app.

4. Security Measures : Banks implement robust security measures to protect customer data and
transactions conducted through internet and phone banking platforms. These measures may
include encryption, multi-factor authentication, and transaction monitoring to mitigate the risk of
fraud and unauthorized access.

5. Customer Support : Both internet and phone banking services often provide customer support
channels, such as helplines, live chat, or email support, to assist customers with inquiries, technical
issues, or transaction-related concerns.

6. Transaction Limits : Banks may impose transaction limits or authentication requirements for
internet and phone banking transactions to prevent unauthorized access and minimize the risk of
fraud or misuse.

23
7. Integration with Other Services : Internet and phone banking platforms may be integrated with
other banking services, such as mobile wallets, digital payments, and account aggregation, to offer
a seamless and comprehensive banking experience to customers.

8. Cost Savings : Internet and phone banking can help banks reduce operational costs associated
with maintaining physical branches and staff, potentially leading to cost savings that can be passed
on to customers in the form of lower fees or better interest rates.

9. Technological Advancements : Advances in technology, such as biometric authentication,

artificial intelligence, and machine learning, are increasingly being leveraged to enhance the
security, efficiency, and user experience of internet and phone banking platforms.

10. Regulatory Compliance : Banks are required to comply with regulatory requirements and
guidelines governing internet and phone banking services, including data protection, privacy, anti-
money laundering (AML), and know your customer (KYC) regulations, to ensure the safety and
integrity of banking operations.

Q. Smart Card, Debit Card, and Credit Card.

1. Smart Card :

- A smart card is a plastic card embedded with an integrated circuit chip that stores and processes
data.

- It can be used for various applications, including payment transactions, access control,
identification, and authentication.

- Smart cards may require a PIN (Personal Identification Number) or biometric authentication for
security purposes.

- Examples of smart cards include EMV (Europay, Mastercard, and Visa) chip cards, government-
issued ID cards, and transit cards.

2. Debit Card :

- A debit card is a payment card linked to a checking or savings account, allowing the cardholder
to make purchases or withdraw cash.

- When a transaction is made using a debit card, the funds are deducted directly from the
cardholder's bank account.

- Debit cards can be used at ATMs, point-of-sale (POS) terminals, and online for purchases and
payments.

- Debit cards may offer additional features such as rewards programs, purchase protection, and
overdraft facilities, depending on the issuing bank.

3. Credit Card :

- A credit card is a payment card that allows the cardholder to borrow funds from the issuing bank
to make purchases.

- Unlike debit cards, where funds are deducted directly from the cardholder's bank account, credit
card transactions result in a line of credit extended by the bank.

24
 - Cardholders are required to repay the borrowed amount, usually with interest, by the due date
specified on the credit card statement.

- Credit cards offer various benefits and features, including rewards programs, cashback offers,
travel benefits, and purchase protection.

- Credit cards may also have credit limits, fees, and interest rates, which vary depending on the
card issuer and the cardholder's creditworthiness.

4. Differences :

- Smart cards contain an embedded chip for data storage and processing, while debit and credit
cards may or may not have a chip depending on the type and issuer.

- Debit cards are linked to a bank account and allow direct access to funds, while credit cards
provide a line of credit for borrowing money.

- Credit cards typically offer rewards and benefits not available with debit cards, such as cashback,
travel rewards, and extended warranties.

- Debit card transactions are limited by the available funds in the linked bank account, while
credit card transactions are limited by the card's credit limit.

- Smart cards can serve multiple purposes beyond payments, such as access control and
identification, whereas debit and credit cards are primarily used for financial transactions.

Q. ATM and Use of Internet Banking.

1. ATM (Automated Teller Machine) :

- An ATM is a self-service banking terminal that enables customers to perform various financial
transactions without the need for human assistance.

- Common ATM transactions include cash withdrawals, balance inquiries, funds transfers
between accounts, depositing checks or cash, and bill payments.

- ATMs are typically available 24/7, providing convenient access to banking services outside of
regular banking hours.

- Security features such as PIN entry, encryption, and surveillance cameras help ensure the safety
and integrity of ATM transactions.

- ATMs are located in various locations such as bank branches, retail stores, airports, and
standalone kiosks, offering widespread accessibility to customers.

2. Internet Banking :

- Internet banking, also known as online banking or e-banking, allows customers to conduct
banking activities over the internet using a computer or mobile device.

- Common internet banking services include account management, bill payments, fund transfers,
transaction history inquiries, and account statement downloads.

- Internet banking platforms are secured using encryption, firewalls, and multi-factor
authentication to protect customer data and transactions from unauthorized access.

25
 - Internet banking offers convenience and flexibility, allowing customers to bank from anywhere
with internet access, without the need to visit a physical branch.

- Additional features such as mobile banking apps, alerts, and notifications enhance the user
experience and provide real-time access to account information and transaction updates.

3. Integration and Complementarity :

- ATM and internet banking services are often integrated and complementary, offering customers
multiple channels to access and manage their accounts.

- For example, customers can use an ATM to withdraw cash or deposit funds and then use internet
banking to review transaction details or transfer money between accounts.

- Many banks offer functionalities such as cardless cash withdrawal, where customers can initiate
a cash withdrawal transaction using internet banking or a mobile app and then collect the cash
from an ATM without using a physical card.

4. Security Considerations :

- Both ATM and internet banking transactions require security measures to protect customer
information and prevent fraudulent activities.

- Customers should exercise caution and follow best practices such as keeping PINs and
passwords confidential, using secure internet connections, and regularly monitoring account
activity for unauthorized transactions.

- Banks continuously invest in technology and security protocols to safeguard customer data and
enhance the security of ATM and internet banking services.

Q. Presumptions as to Negotiable Instruments.

1. Presumption of Consideration : A negotiable instrument is presumed to have been issued for

valuable consideration. This means that unless proven otherwise, the courts assume that there was
a valid consideration exchanged between the parties involved in the transaction.

2. Presumption of Date : A negotiable instrument is presumed to have been issued on the date it
bears. This presumption helps establish the timeline of the instrument's creation and ensures clarity
regarding its validity and enforceability.

3. Presumption of Order and Regularity : In the absence of evidence to the contrary, it is presumed
that every negotiable instrument was created, executed, and negotiated in the proper order and
according to the regular course of business.

4. Presumption of Holder in Due Course : If a negotiable instrument is in possession of a person

who is in lawful possession of it, it is presumed that the person is a holder in due course unless
proven otherwise. This presumption provides protection to bona fide holders who acquire negotiable
instruments in good faith and for value.

5. Presumption of Negotiable Instrument : If an instrument meets the requirements of negotiability

prescribed by law, it is presumed to be a negotiable instrument unless proven otherwise. This
presumption facilitates the smooth functioning of commercial transactions by providing clarity and
uniformity in the treatment of such instruments.

26
6. Presumption of Delivery : A negotiable instrument is presumed to have been delivered when it
is properly completed, signed, and transferred to another party with the intention of passing title or
ownership. Delivery is a crucial element in the negotiation and enforceability of negotiable
instruments.

7. Presumption of Validity : Negotiable instruments are presumed to be valid and enforceable

unless proven otherwise. This presumption places the burden of proof on the party challenging the
validity of the instrument to provide evidence supporting their claim.

8. Presumption of Holder's Title : A holder of a negotiable instrument is presumed to have valid

title to it, which entitles the holder to enforce payment against parties liable on the instrument. This
presumption reinforces the principle of negotiability and facilitates the transfer of rights in
negotiable instruments.

These presumptions serve as legal guidelines in the interpretation and adjudication of

disputes involving negotiable instruments, providing clarity, efficiency, and predictability in
commercial transactions.

Q. Features of a Promissory Note and Bill of Exchange.

Promissory Note:

1. Unconditional Promise to Pay: A promissory note contains an unconditional promise by one party
(the maker or debtor) to pay a specified sum of money to another party (the payee or creditor) at a
determined time or on demand.

2. Signed by Maker: The promissory note is signed by the maker, indicating their commitment to
repay the specified amount according to the terms outlined in the note.

3. Promise to Pay: Unlike a bill of exchange, which involves three parties (drawer, drawee, and
payee), a promissory note involves only two parties: the maker, who promises to pay, and the payee,
who receives the payment.

4. Absence of Acceptance: Unlike a bill of exchange, a promissory note does not require acceptance
by the drawee. The maker's signature is sufficient to create a legally binding obligation to pay.

5. Negotiability: Promissory notes can be negotiated by endorsement and delivery, allowing the payee
to transfer their rights to another party. The transferee becomes the new holder and can enforce
payment against the maker.

6. Fixed Maturity Date or On Demand: A promissory note may specify a fixed maturity date on which
the payment becomes due, or it may be payable on demand, allowing the payee to demand payment
at any time.

7. No Requirement for Acceptance: Unlike bills of exchange, promissory notes do not require
acceptance by the maker. The mere act of signing the note creates a binding obligation to pay.

Bill of Exchange:

1. Three Parties: A bill of exchange involves three parties: the drawer (issuer), who orders the drawee
(usually the debtor) to pay a specified sum of money to the payee (creditor).

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2. Order to Pay: The bill of exchange contains an unconditional order by the drawer to the drawee
to pay a specified sum of money to the payee or their order, either at sight (immediately) or at a
future date.

3. Acceptance by Drawee: Unlike a promissory note, a bill of exchange requires acceptance by the
drawee (debtor) to become legally binding. Acceptance signifies the drawee's commitment to pay the
specified amount as per the terms of the bill.

4. Transferability: Bills of exchange are negotiable instruments that can be transferred by

endorsement and delivery. The payee can transfer their rights to another party, who becomes the
holder and can enforce payment against the drawee.

5. Accepted and Payable by Drawee: Once accepted by the drawee, the bill of exchange becomes a
binding obligation on the part of the drawee to pay the specified amount to the payee or their order
on the maturity date.

6. Maturity Date: Bills of exchange typically have a specified maturity date on which the payment
becomes due. The maturity date may be a fixed future date or a certain period after sight or
acceptance, depending on the terms of the bill.

7. Requirement for Acceptance: Unlike promissory notes, bills of exchange require acceptance by
the drawee to become legally enforceable. Acceptance is indicated by the drawee's signature or an
express statement of acceptance on the bill.

Q. Essentials of a Valid Promissory Note.

1. Unconditional Promise to Pay: A promissory note must contain an unconditional promise by the
maker (debtor) to pay a specified sum of money to the payee (creditor) or their order. The promise to
pay must be clear, unequivocal, and not subject to any conditions or contingencies.

2. Signed by the Maker: The promissory note must be signed by the maker, indicating their
acknowledgment and acceptance of the obligation to repay the specified amount according to the
terms outlined in the note. The signature may be handwritten, electronic, or in any other legally
recognized form.

3. Certain Sum of Money: The promissory note must specify a definite and certain sum of money
that the maker promises to pay to the payee. The amount must be clearly stated in numerical and
written forms to avoid ambiguity or confusion.

4. Fixed Maturity Date or On Demand: The promissory note must specify a fixed maturity date on
which the payment becomes due, or it may be payable on demand. If the note is payable on demand,
the payee has the right to demand payment at any time.

5. Identifiable Parties: The promissory note must clearly identify the parties involved, including the
maker (debtor) who promises to pay, the payee (creditor) to whom payment is to be made, and any
other relevant parties such as endorsers or guarantors.

6. In Writing: A promissory note must be in writing to be enforceable. While there is no specific

requirement for the format or structure of the note, it must be recorded in a tangible form that can
be preserved and presented as evidence in case of disputes.

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7. Intention to Create Legal Obligation: The promissory note must demonstrate the intention of the
maker to create a legally binding obligation to repay the specified amount to the payee according to
the terms and conditions outlined in the note. This intention is typically implied by the language
used in the note and the circumstances surrounding its execution.

8. Delivery of the Note: The promissory note must be delivered by the maker to the payee or their
authorized representative to be valid and enforceable. Delivery signifies the transfer of ownership
and possession of the note from the maker to the payee, creating the legal relationship between the
parties.

9. Stamp Duty: Depending on the jurisdiction, promissory notes may be subject to stamp duty
requirements imposed by the relevant tax authorities. Failure to comply with stamp duty
requirements may render the note invalid or unenforceable.

10. Compliance with Legal Requirements: The promissory note must comply with any applicable
legal requirements, including those related to form, content, and execution, as prescribed by the
relevant laws and regulations governing negotiable instruments in the jurisdiction where the note
is executed or enforced.

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