1. Explain the origin & development of banking in India.
2. What are the objectives & achievements of bank nationalization in India?
3. State the argument for & against nationalization
4. What are the main functions of banks?
5. Who is a banker and customer? Explain the general relationship between banker & customer. OR The relation between a banker and a customer is that of a debtor and a creditor. Explain.
6. Explain the special relationship between banker & customer. OR What is the special relationship arising out of general relationship between a banker and a customer. OR What are the rights and obligations of a banker towards a customer?
7. What are the obligations of a banker?
8. Explain the banker’s right of general lien.
9. What are the circumstances under which a disclosure by banker is justified? OR Banker’s duty of secrecy is not absolute. Explain.
10. Who are the banker’s special customers? Explain the precautions to be taken by the banker in opening and operating their accounts.
11. What are the functions of commercial banks?
12. What are the functions of the Reserve Bank of India?
13. Explain the management, powers and constitution of the Reserve Bank of India.
14. Explain the role of Reserve Bank in economic development.
15. In what way does the Reserve bank exercise control over the commercial banks?
16. Explain the Reserve bank’s licensing function.
17. Write a short of Regional Rural Banks
18. Write a note on Central Co-operative banks.
19. What are the advantages & disadvantages of unit & branch banking?
20. What are the differences between schedule & non-schedule banks?
21. What are the rights of a banker against surety?What are the precautions to be taken by the banker?
22. Explain the concepts of guarantee & indemnity
23. What are the precautions to be taken by the banker in the case of hypothecation?
24. What are the differences between lien & hypothecation?
25. What are the differences between hypothecation & pledge?
26. Write a note of secured & unsecured loans
27. Write a note on fixed deposits
28. Write a note on current account
29. Write a note on savings bank account
30. Write a note on recurring account.
Banking was in existence in India during the Vedic times (2000 BC to 1400 BC). Money lending was regarded as an old art and was practiced in the early Aryan days.
Rina (debt) is often mentioned in the ‘Rig Veda’ reflecting a normal condition prevalent in the Vedic Society.
The transition from money-lending to banking must have occurred before Manu-he states that a sensible man should deposit his money with a person of good family, good conduct, well-acquainted with law, wealth and honorable.
There are references to lending and banking in the two epics namely Ramayana & Mahabharata. During that period banking had become a full fledged business
More details pertaining to money lending in the Sutra period (7th century to 2nd century) are available from the Jatakas (Buddhist writings). Jatakas establish the existence of seths (money lenders) and contain several stories of Kings receiving financial help from the guilds. From these accounts it is evident that money lending, banking and trading were interlinked. In the Buddhist period even the Brahmins & Kshatriyas started taking banking as a business. Bills of exchange came into use in this period.
The banking business was being carried out even in the Smriti period and the Smritis explained the methods of regulation of interest.
The tradition from money-lending to banking appears to have taken place in the 2nd or 3rd century AD. During This period, people were enjoined upon to make deposits with respectable bankers. This period is characterized as one in which the activities of the bankers/money lenders were well controlled and regulated. Rules for safeguarding the interest of borrowers were introduced.
Kautilya in his Arthashastra which was written in the Maurya period in the 4th century mentioned the maximum rate of interest which could be charged by the lenders. The bankers during this period was known as Shakuras and Mahajans
There is no live account of indigenous banking from the 6th to 16th century but some stray evidence is found.
During the Moghul period indigenous banking was in its prime. There was hardly any village without its money-lender or Sharoff who financed trade and commerce. The system of currency and coinage rendered money lending a highly profitable business.
The British came to India in the 17th century. The East India company established its Agency houses in Bombay, Calcutta & Madras. These agency houses were the combination of trade & banking in India.
Bank of Hindustan- Appendage of Alexander & Co.1st bank under European direction
Established in 1771 at Cal. Collapsed due to failure of parent company
Bengal bank was established in 1784
General Bank of India was established in 1786. It was the 1st joint stock company with limited liability
Presidency banks were established in Calcutta, Bombay & Madras. It amalgamated into the Imperial bank in 1921.
In 1865 Allahabad Bank was set up under European management
In 1875 Alliance Bank of Shimla was started
Oudh Commercial bank was the 1st purely Indian management joint bank.
Swadeshi movement stated in 1905 and the period from 1906 to 1913 was a period of boom for Indian Banking. The Bank of Burma was established in 1904.
Bank of India, Bank of Rangoon & Indian Specie Bank was established in 1906
Some of the important banks which were established later were Bank of India, Central Bank of India, Bank of Baroda, etc.
According to the Banking Companies Act, 1970, the aim of nationalization of banks in India is “to control the heights of the economy and to meet progressively and serve better the needs of development of the economy in conformity with national policy and objectives.”
There are four types of banking services. They are as follows-
1) Central banking services.
2) Commercial banking services.
3) Specialized banking services.
4) Non-banking financial services.
The various functions of each of the following banks are-
Central banking services
The central bank of any country-
1) Issues currency and bank notes.
2) Discharges the treasury functions of the Government.
3) Manages the money affairs of the nation and regulates the internal and external value of money.
4) Acts as banker to the govt.
5) Acts as banker’s bank.
Commercial banking services
Commercial banking services include-
1) Receiving various types of deposits.
2) Lending various types of loans.
3) Extending some non-banking customer services like facilities of locker, rendering services in paying directly house rent, electricity bills, share calls, insurance premium etc
Specialized banking services
They are estd for definite specialized banking services like
1) Industrial banks to lend long term loans and working capital for industrial purposes.
2) Land mortgage banks for granting loans on equitable mortgage.
3) Rural credit banks for generating funds for extending rural credit.
4) Developmental banks to support any developmental activities.
These types of banks accept all types of deposits but mobilize the amount in its specially focused area.
Non-banking financial services
Many banks are established for carrying out non banking financial services. Mutual funds are institutions accepting finances from its members and investing it in long term capital of companies both directly in primary market as well as indirectly in the capital market. Financial institutions acting as portfolio managers receive funds from the public and manage the funds for or on behalf of its depositors. They undertake to manage the funds of the principal so as to generate maximum return.
Explain the role of banks in promoting economic development.
Banks play a very significant role in the economic development of the country. Banking system as a whole has an imp influence on the tempo of economic activity. The economic importance of banks are-
1) Banks mobilize the small, scattered and idle savings of the people and make them available for productive purposes. They help the process of capital formation.
2) By offering attractive interests on the savings of the people deposited with them banks promote the habit of saving in them.
3) By accepting the savings of the people banks provide safety and security to the surplus money of the customers.
4) Banks provide a convenient and economical mean of transfer of funds from one place to another. Even cheques are used for the movement of funds from one place to another.
5) Banks help the movement of funds from one region where they are not very useful to regions where they can be more usefully employed. By moving funds from one place to another banks contribute to the economic development of backward regions.
6) Banks influence the rate of interest in the money market, through the supply of money. They exercise a powerful influence on the interest rate in money market.
7) Banks help trade, commerce, industry and agriculture by meeting their financial requirements. Without the financial assistance the growth of trade and commerce industry would have been very slow.
8) Banks direct the flow of funds into collective channels while lending money. They discriminate in favour of essential activities as against non-essential activities. Thus they encourage the development of right type of activities which the society desires.
9) Banks help the industrious, the prudent, the punctual, the honest and discourage the dishonest by not giving finance for wrongful purpose. Thus banks act as public conservator of commercial activities.
10) Banks serve as the best financial intermediaries between the borrowers and the lenders.
11) Through the process of creation of money, banks acquire control over the supply of money in the country. Through their control over supply of money they influence economic activities, employment, income and general price level in the economy.
12) Banks monetize the debts of others that is cover t the debts of others into money by exchanging bank deposits in return for securities.
Thus a strong and a sound banking system is indispensable for the economic development of any country.
The relationship between a banker and a customer is of great significance. It depends upon the services rendered by the banker to the customer.
Definition of banker
According to section 3 of the NI Act, 1881, banker includes any person acting as a banker and any post office savings bank.
According to 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.
To sum up a banker is who
1) Take deposit account
2) Take current accounts
3) Issue and pay cheques
4) Collect cheques crossed and uncrossed for his customers.
Money lender is not considered as a banker as mere lending does not constitute banking business. Banker is an institution which borrows money by accepting deposits from the public for the purpose of lending to those who are in need of money.
Definition of customer
The term customer is not defined by law. Ordinarily, a person who has an account in a bank is called a customer.
Acc to Dr. Hart, “a customer is one who has an account with a banker or for whom a banker habitually undertakes to act as such.
Thus to constitute a customer, the following essential requisites must be fulfilled:
1) He must have some sort of an account.
2) Even a single transaction constitutes a customer.
3) The dealing must be of a banking nature.
A customer need not be a person. A firm, joint stock company, a society or any separate legal entity may be a customer. Explanation to section 45-Z of the BR Act clarifies that a customer includes a Government department and a corporation incorporated by or under any law.
Relationship between a banker and customer
Relation of a debtor and a creditor
The general relationship between banker and a customer is that of a debtor and a creditor i.e. borrower and lender. In Foley v. Hill, Sir John Paget remarks, “the relation of a banker and a customer is primarily that of debtor and creditor, the respective positions being determined by the existing state of account. Instead of the money being set apart in a safe room, it is replaced by the debt due from the banker. The money deposited with him becomes his property, and is absolutely, at his disposal, and, save as regards the following of the trust funds into his hands, the receipt of money by a banker from or on account of his customer constitutes him merely the debtor of the customer with ‘super added’ obligation to honour his customer’s cheques drawn upon his balance, in so far the same is sufficient and available”.
In Shanthi Prasad Jain v. Director of Enforcement, Foreign Exchange Regulation, the SC held that the banker and customer relationship in respect of the money deposited in the account of a customer with the bank is that of a debtor and a creditor.
On the opening of an account a banker assumes the position of a debtor. The money deposited by the customer with the bank is in legal terms lent by the customer to the banker who males use of the same according to his discretion. The creditor has the right to demand back his money from the banker, and the banker is under an obligation to repay the debt as and when he is required to do so.
A depositor remains a creditor of his banker so long as his account carries a credit balance. But he does not get any charge over the assets of his debtor/banker and remains an unsecured creditor of the banker. Since the introduction of deposit insurance in India in 1962 the element of risk of the depositor is minimized as Deposit Insurance and Credit Guarantee Corporation undertakes to insure the deposits upto a specified amount.
Banker’s relation with the customer is reversed as soon as the customer’s account is overdrawn. Banker becomes creditor of the customer who has taken a loan from the banker and continues in that capacity till the loan is repaid. As the loans and advances granted by a banker are usually secured by the tangible assets of the borrower, the baker becomes a secured creditor of his customer.
Various legal relationships of banker and customer
2) Agent and Principal- Sec.182 of ‘The Indian Contract Act, 1872’ defines “an agent” as a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done or who is so represented is called “the Principal”.
One of the important relationships between a banker and customer is that of an agent and principal. The banker performs various services of the customer, where he acts as the agent.
Buying and selling securities of customer
Collection of cheques, bills of exchange, promissory notes on behalf of customer
Acting a trustee, executor or representative of a customer
Payment of insurance premium, telephone bills etc.
1) Trustee and beneficiary- section 3 of the Trusts Act defines a trustee as one to whom property is entrusted to be administered for the benefit of another called the beneficiary. A banker becomes a trustee under special circumstances. When a customer deposits securities or other valuables with the banker for safe custody, the banker acts as trustee of customer.
2) Bailee and bailor- during certain circumstances banker becomes bailee. When he receives gold ornaments and important documents for safe custody he takes charge of it as bailee and not trustee or agent. He cannot make use of them as he is bound to return the identical articles on demand.
3) Pawnee and pawner- pawn is a sort of bailment in which the goods are delivered to another as a pawn, to be a security for money borrowed. Thus a banker acts as a pawnee where a customer delivers he goods to him to be kept as security till the debt is discharged. The banker can retain the goods pledged till the debt is paid.
4) Mortgagee and mortgagor- the relation between a banker as mortgagee and his customer as mortgagor arises when the latter executes a mortgage deed in respect of his immovable property in favour of the bank or deposits the title deeds of his property with the bank to create an equitable mortgage as security for an advance.
5) Lessee and lessor- when a customer hires a locker in the bank’s safe deposit vault, the bank undertakes to take necessary precaution for the safety of the articles in the locker. The relation between the parties is that of a lessor and lessee.
6) Guarantor and guarantee- a bank as guarantor gives guarantee to its customer by issuing a ‘letter of credit’. It is a kind of credit facility to its customer to facilitate international trade. A bank guarantee contains an undertaking to pay the amount without any demur on mere demand of the principal amount on the ground for non-performance or breach of contract.
7) Fiduciary relationship- every relation of trust and confidence is a fiduciary relation. A banker who receives a customer’s money is under a duty not to part with it which is inconsistent with the customer’s fiduciary character and duty. In Official Assignee v. Rajaram Aiyar, it was held that where banks old money for a specific purpose of sending it somebody the money is impressed with trust.
By opening an account with the banker, there will be some rights conferred and obligations imposed to the banker as well as the customer. These rights and duties are reciprocal i.e. the banker’s duties are the customer’s rights and the banker’s rights are the customer’s duties. These rights and obligations are called the special features of relationship between banker and the customer.
The special relationship between banker and customer can be presented as under:
General obligations of banker towards customer
Obligation to honour cheques- banker accepts the deposits from the customer with an obligation to repay it to him on demand or otherwise. The banker is therefore under a statutory obligation to honour his customer’s cheques because, it is recognized under section 31 of the NI Act, 1881-
The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default.
Thus the banker is bound to honour his customer’s cheques provided the following conditions are fulfilled-
(a) Sufficient balance in customer’s account
(b) Presentation of cheques within working hours of business
(c) Presentation of cheques within reasonable time after ostensible date of its issue
(d) Cheques should be presented at the branch where account is kept
(e) Fulfilment of requirements of law
Obligation to maintain secrecy and disclosure of information required by law- the banker is under an obligation to take utmost care in keeping secrecy about the accounts of the customers since it may affect his reputation, credit-worthiness and business. It was firmly laid down in Tournier v. National Provincial and Union Bank of England Ltd. in India it was made compulsory after 1970. The duty to maintain secrecy will be continuing even after the account is closed or the death of the customer.
This obligation is subject to certain exceptions.
Obligation to keep a proper record of transactions- the banker must keep a proper record of transactions of the customer. If he wrongly credits the account of the customer and intimates him with the same and the customer acts upon the intimation bonafide and withdraws cash the banker cannot contend that the entries were wrongly made. He shall not succeed in recovery of money from the customer.
Obligation to abide by the instructions of the customer- the banker must abide by any express instructions of the customer provided it is within the scope of their banker-customer relationship. In the absence of any express instructions, the banker must according to prevailing usages at the place where the banker conducts his business.
Rights of a banker
Banker’s right of general lien- one of the important rights enjoyed by a banker is the right of general lien. Lien means the right of the creditor to retain goods and securities owned by the debtor until the debt due from him is paid. It may either be general or particular.
In Brando v. Barnet, it was held that bankers most undoubtedly have a general lien on all securities deposited with them as bankers unless there is an express or implied contract inconsistent with lien.
In India sec 171 of the Indian Contract Act confers general lien upon bankers as follows- bankers…..may in absence of a contract to the contrary, retain as a security for a general balance of account, any goods bailed to them.
Banker’s right of set-off- the right to set off is a statutory right which enables debtor to take into account a debt owing to him by a creditor, before the latter could recover the debt due to him from the debtor. Thus when a customer keeps two or more accounts at the same bank, some of which are overdrawn and some in credit, the bank has a right to combine such accounts and pay the resultant balance. In Halesowen Presscook and Assemblies Ltd v. Westminister Bank Ltd, it was held that a banker has the right to combine two accounts and to set off unless he has made some agreement express or implied to the contrary.
Banker’s right for appropriation of payment- when a debtor owes two or more debts to a creditor and he pays some amount which is not sufficient to meet any debt to the creditor appropriation is done. It applies to a banker if the customer has more than one deposit or more than one loan account.
In Devaynes v. Noble, famously known as Clayton’s case, a principle was laid down as to when the customer has current account and deposits and withdraws money frequently the first item on debit side will be discharged by the first item on credit side. The credit entries in the account adjust or set off the debit entries in chronological order.
Banker’s right to claim incidental charges- the banker may claim incidental charges on unremunerative accounts such as service charges, processing charges, ledger folio charges, appraisal charges, penal charges and so on.
Banker’s right to charge compound charges- a banker has a special privilege to charge compound interest. In Syndicate Bank v. West Bengal Cement Ltd, the adding of unpaid interest due to the principal amount is recognized. However, the SC abolished this in case of agricultural loans in the Bank of India case.
1. Obligation to honour cheques- the banker is under a statutory obligation to honour his customer’s cheques in the ordinary course of business. If he wrongfully dishonors the cheque, then he is liable to the customer for damages.
Thus the banker is bound to honour the customers cheque provided the following conditions are fulfilled-
(a) Sufficient funds- there must be sufficient funds of the drawer in the hands of the drawee. A banker should be given sufficient time to release the amount of the cheque sent for collection before the said amount can be drawn upon by the customer. The banker can dishonor the cheques if there are insufficient funds.
(b) Funds must be properly applicable- a customer might be having several bank accounts in his various capacities. But is essential that the account on which a cheque is drawn must have sufficient funds. If some funds are earmarked by the customer for some specific purpose, they are not available for honouring the cheques. But where the customer has overdraft facility the banker has the obligation to honour the cheque upto the amount of overdraft sanctioned.
(c) The banker must be duly required to pay- the banker is bound to honour the cheque only when hi is duly required to pay. The cheque, complete and in order, must be presented before the banker at the proper time.
2. Obligation to maintain secrecy of accounts-The customer’s account details are recorded in the books of the banker and the true state of his financial dealings are available with the banker. If any of these facts are made known to others, the customer’s reputation might suffer and he might incur losses also. The banker is therefore under an obligation to take utmost care in keeping secrecy of the details of the customer.
However, this rule has exceptions(mention briefly)
3. Obligation to keep a proper record of transaction- the banker must keep a proper and accurate record of all the transactions of the customer. Sometimes, he may commit some wrong.
Lien means a legal claim to hold property as security. According to Halsbury, lien may be defined as “a right in man to retain that which is in his possession belonging to another, until certain demands of the person in possession is satisfied”.
Lien is of two kinds- 1) specific or particular lien and 2) general lien
A particular lien is one which confers a right to retain the goods in connection with a particular debt only while a general lien is a right to retain all the goods or any property of another until all the claims of the holder are satisfied. It extends to all transactions and thus more extensive.
Banker’s right of general lien
One of the important rights enjoyed by a banker is the right of general lien. In Brando v. Barnet, it was held that bankers most undoubtedly have a general lien on all securities deposited with them as bankers unless there is an express or implied contract inconsistent with lien.
In India sec 171 of the Indian Contract Act confers general lien upon bankers as follows- bankers…..may in absence of a contract to the contrary, retain as a security for a general balance of account, any goods bailed to them.
Circumstances for exercising general lien
1) No agreement inconsistent with the right of lien.
2) Property must be possessed in his capacity as a banker.
3) Possession should be lawfully obtained.
4) Property should not be entrusted to the banker for a specific purpose.
Incidents of lien- lien attaches to
1) Bills of exchange or cheques deposited for collection or pending discount.
2) Dividend warrants and interest warrants paid to the banker under mandates issued by the customer.
3) Securities deposited to secure specific loan but left in banker’s hand after loan is repaid.
4) Securities, negotiable or not, which the banker has purchased or taken up, at the request of customer, for the amount paid.
Exceptions- banker has no general lien
1) On safe custody deposits.
2) On securities or bills of exchange entrusted for specific purpose.
3) On articles lefty by mistake or negligence.
4) On deposit account.
5) On stolen bond.
6) Until due date of the loan.
7) On trust account.
8) On title deeds of immovable properties.
The duty of the banker to maintain the secrecy is not an absolute one. It is also subject to certain exceptions. The exceptions were stated in the landmark judgment Tournier v National Provincial Bank Limited. Section 13 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 also allows certain exceptions.
(a) Under the Income –Tax Act, 1961- Vide Section 131 & 133, Income Tax authorities have powers to call for the attendance of any person or for necessary information from banker for the purpose of assessment of the bank’s customers.
(b) Under the Banker’s Books Evidence Act, 1891- a banker may be asked for the Court to produce a certified copy of his customer’s account in his ledger.
(c) Under the Reserve Bank of India,1934- the RBI is empowered to collect credit information from Banking Companies relating to their customers
(d) Under the Banking Regulation Act, 1949- every bank is compelled to submit an annual return of deposits which remain unclaimed for 10 years.
(e) Under the garnishee order- when a garnishee order nisi is received, the banker must disclose the nature of the account of a customer to the Court.
(f) Under the Companies Act, 1956- when the Central Government appoints an inspector to investigate the affairs of any joint-stock company under section 135 or section 137 of the Companies Act, the banker must produce all books and papers relating of the Company.
(g) Under CrPC- the police officers conducting an investigation may also inspect the banker’s books for the purpose of such investigation.
(a) disclosure of the account where money is kept for extreme political purposes in contravening the provisions of any law
(b) disclosure of the account of an unlawful association
(c) disclosure of the account of a revolutionary or terrorist body to avert danger to the State
(d) disclosure of the account of an enemy in time of war
(e) disclosure of the account where sizable funds are received from foreign countries by a constituent.
Banks solicit deposit of money from the members of the public. Any person who is legally capable of entering into a valid contract may apply in the proper way to deposit his money with the bank.
A bank’s special customers are generally minors, married women, illiterate persons, lunatics, blind people, drunkards, insolvents etc who are not competent to open such accounts. There are also impersonal customers like schools, clubs, partnership firm, joint stock companies etc. certain precautions are to be taken by banks while opening accounts in the name of the following customers.
A minor is a person who has not attained the age of 18 and in case a guardian is appointed, it is 21. Minors are regarded “pet children of law”.
In Mohori Bibi v. Dharmodas Ghose, a minor executed a mortgage for Rs 20000 and received Rs 8000 from the money lender. Subsequently, the minor sued for setting aside the mortgage. The money lender wanted refund of money which he had actually paid. The PC held that an agreement by a minor was absolutely void and therefore, money lender was not entitled repayment of money.
Some of the precautions to be taken by the banker on opening and operating account of a minor are-
1) The banker may open a SB account but not a current account as it incurs no liability to the minor.
2) At the time of opening of account of minor, the bank should record the genuine date of birth of the minor. Banker should insist on to give some schooling record or date of birth as entered in Births and Deaths Register.
3) Minors are allowed to open such accounts when they have completed a particular age say twelve years in some banks and ten years in some others.
4) Banks should prudent to issue cheque books only to minors of, say sixteen or seventeen years of age.
5) Accounts for illiterate minors are not opened in their single name.
6) As a measure of precaution, banks adopt a general rule not to accept deposit exceeding a particular sum.
7) Since a contract with a minor is void and cannot be enforced against him in Court of law, a minor’s account should never be allowed to be overdrawn.
8) A guarantee obtained to secure the money borrowed by a minor is also of no avail. However, if the guarantor undertakes to indemnify he will be held liable though borrower is minor.
Lunatics are persons of unsound mind. Lunatics are disqualified from contracting but the disqualification does not apply to contract entered by lunatics during their period of sanity. Following are banker’s duty n case of lunatics-
1) Since a lunatic has no capacity to contract, acc to sec 11 of the ICA, no banker knowingly opens an account in the name of a lunatic.
2) If an existing customer becomes insane, the banker must immediately stop the operation of the account. It is so because, the banker has no right to debit his account for payment made out of his account from the moment, the banker knows the fact of lunacy of customer, the contract between them is void.
3) A banker must not be carried away by hearsay information or rumours. He must get definite information about the lunacy of the customer.
4) If a banker dishonours a cheque in a hurry, without having any proof of lunacy, he will be liable for wrongful dishonour of cheque.
5) It should return all cheques of customer’s account with the word ‘refer to drawer’ and not ‘customer insane’. It should make careful note of lunacy order.
6) If a third party is authorised to draw on customer’s account, that authority will cease when the customer becomes insane since when a principal cannot act for himself his agent can no longer act for him.
7) If one party to an account opened in joint names becomes mentally incapable of managing his or her affairs, the banker should not allow either party to operate the account.
An illiterate person is competent to contract and bank may open an account in his name, but special care should be taken by the banker before opening an account.
1) The account of an illiterate person may be opened provided he/she calls the bank personally along with a witness who is known both to the banker and the depositor.
2) A passport size photograph of the illiterate person is identified before the banker in presence of the account holder. The photographs have to be attested by the bank officer/ witness.
3) The left hand thumb impression in case of male illiterate and right hand thumb impression in case of female illiterate are duly attested by some responsible person on the account opening form.
4) One or two identification marks of the depositor should be noted on the account opening form.
5) The illiterate person should be provided with a passbook which should also contain an attested photograph of the illiterate person.
6) Normally, no cheque book facility is provided on accounts in the name of illiterate persons.
7) At the time of withdrawal/repayment of deposit account the account holder should attend personally with passbook and attest his/her thumb impression or mark in the presence of an authorised person.
8) The thumb impression of illiterate person on the withdrawal form or cheque (if provided), and on the back of the withdrawal form or cheque should be duly compared with the specimen impression kept by the bank.
The Hindu married women are governed by the Hindu Succession Act and other married women by Indian Succession Act. A banker may open an account in the name of a married woman like any other customer. However, a banker should exercise caution while opening account for the wife of an undischarged insolvent.
1) While opening an account of a married woman, the bank should enquire about her means and circumstances, and if she is living with her husband, something about him and his occupation and position in life, and if he is an employee, the name of the employer.
2) In case she applies for an overdraft, the banker should see that she owns separate property in her own name and precaution should be kept in mind regarding her status and capacity to pay and the purpose for which the borrowings are made. Also he should seek suitable securities preferably on her, which can be attached by the Courts.
3) The banker should always observe that there is credit balance in her account.
4) Banks usually require that a married woman be independently advised by her own solicitor when depositing security for the account of other persons.
5) A married woman may enter into a contract of guarantee and it is enforceable only against her separate estate.
6) In case of an illiterate married woman, her thumb impression should be obtained on the account opening form and on the identification card.
In case of a pardhanishin woman who remains completely secluded the following presumption exists-
1) Any contract entered into by her may be subject to undue influence
2) The same might not have been done with free will and with full understanding of what the contract actually means.
He banker should therefore due precaution while opening an account in the name of a pardhanishin woman. As the identity of such woman cannot be ascertained the banker generally refuses to open an account in her name.
Joint Hindu families
A JHF or a HUF consists of all persons lineally descended from a common ancestor and included their wives. Following are the precautions to be taken by the banker in opening and operating accounts in the name of HJF.
1) The account may be opened in the name of karta or in the name of family business and should be duly introduced.
2) The account opening form should be signed by all adult coparceners, even though the karta would operate the account.
3) The declaration signed by all the members as to who is the karta and who are the other coparceners including minor coparceners should be obtained.
4) If there are minor coparceners, the other adult coparceners should sign for self and as guardians of minors.
5) Authority should be given to the karta to operate the account of all concerned under their joint signature.
6) On attaining majority, the minor coparceners should be asked to join with other coparceners in signing the existing account opening form in ratification of previous transactions.
7) Any member of the HUF can stop payment of a cheque drawn by karta. When the bank receives a notice about any dispute amongst the family members of the HUF, the operations in the account should be stopped till further instructions from a competent court.
8) The burden of proof that loan was taken by karta for purposes beneficial to the family lies on the banker. Thus before granting loans necessary enquiries should be made to ensure it. Otherwise, the bank may not be able to succeed in a suit for recovery of debt.
A person employed to do any act for another, or to represent another in dealings with third persons, is known as an agent for another. The precautions to be taken by a banker in opening and operating account of a customer by an agent are
1) A banker should at once suspend all operations on that account upon hearing or being notified of the principal’s death, insanity or bankruptcy.
2) The agent must assign the cheque for and on behalf of the principal, so that the third parties would know that he is dealing in a representative capacity.
3) Whenever a bank receives a mandate, it should be recorded in a register, serially numbered, indexed alphabetically, and instructions should be noted in the customer’s ledger account.
4) In case the agent is authorised to open an account on behalf of the principal, the application should be made to sign by the principal himself, delegating authority to agent to operate the account.
5) The agent should sign in a manner to indicate that he is signing as an agent.
6) The banker should on no account allow the agent, or in fact any person to pay into his own private account, cheques which he has endorsed on behalf another, without satisfying himself that the agent has the authority of the principal to do so.
7) A banker should not allow an agent to overdraw his principal’s account express with his express authority.
A partnership is the relation between the persons who have agreed to share the profits of a business carried on by all or anyone of them acting for all. The banker should take the following precautions while dealing with a partnership firm.
1) The banker should first know the provisions of the Part Act before he opens an account for PF.
2) The banker shall open an account in the name of a partnership firm only when an application is submitted in writing by any one or more partners under sec 19(2)(b) of the Act. Authority to open an account in the name of an individual partner is positively denied.
3) To be on safer side, a banker should get a written request from all the partners jointly for opening an account.
4) The banker should go through the partnership deed and carefully study the objects, capital, borrowing powers etc. he should get a copy of the duly stamped partnership deed. He should enquire about the details of the firm, partners and their powers. If the firm is registered the banker should get a copy of the registration certificate. Dealings with unregistered firms will involve risks.
5) There should be a clear mandate from all the partners. Mandate must be signed by all the parties.
6) The banker should not mix the personal and private accounts of the partners. He has no right to set off and lien over the accounts.
7) No partner has an implied power to sell or mortgage the property of his firm. So in case of mortgage of property, the deed of mortgage should be signed by all the partners.
8) While advancing loans and advances to partnership firm the banks in practice get the loan documents executed by the partners on behalf of the firm as also in their personal capacity.
9) Since a firm stands dissolved on insolvency or insanity of a partner, a cheque signed by an insolvent partner before the date of adjudication should not be paid b the banker without conformation from other partners.
A trust is an obligation annexed to the ownership of the property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.
While opening accounts in the names of persons in their capacity as trustees, the banker should take the following precautions.
1) The banker should examine the trust deed concerning instructions regarding opening and operating the account contained in the trust deed. In the absence of such instructions, all the trustees may join in opening such account.
2) Instructions regarding limitation on withdrawal in the trust deed, if any, be prominently noted at the ledger head and specimen signature card and withdrawals should be restricted.
3) The banker should note the objects for which the trust has been created so as to facilitate the passing of cheques.
4) A trustee has no individual powers. They must all act together. All must join in signing of cheques. Unless expressly provided otherwise in the trust deed, no trustee can delegate his power to another.
5) If one of the trustees dies or retires, the bank on receiving notice should suspend all operations in the account. However, if the trust deed is silent the bank can let the operations to continue.
6) In case of breach of trust the bank must see that it does not become a party to the breach. The banker is justified in dishonouring the cheque drawn by a trustee, if intended for breach of trust.
7) If the trustees are authorised to borrow to discharge the functions of the trust, the banker must get specific assets of the trust as security.
The functions of commercial banks are very vast.
Meaning of CB- commercial banking refers to that banking which is concerned with the acceptance of deposits from the public repayable on demand or after the expiry of a short period and the granting of mainly short term credit to trade, commerce and industry through wide networking of branches throughout the country.
Functions of commercial banks- the functions of CB are numerous. They can be broadly divided into two categories. They are-
1) Primary or basic functions
a) Receiving of deposits- deposits constitute the main source of funds for commercial banks. CBs receive deposits from the public on various accounts. The main types of accounts are- fixed, current, savings, recurring (explain lil).
b) Issuing notes/cheques- this function once considered to be the most paying part of banker’s business is in modern times performed generally by the central bank. Its importance has dwindles to a large extent in some developed countries where cheque currency has replaced bank notes to a large extent.
c) Lending of funds- it is the main business of CB. Advances form the chief source of profit for CB. Banks lend funds by way of loans, over-drafts, cash credit, discounting of bills.
(i) Loan- it is a financial arrangement under which an advance is granted by a bank to a borrower on a separate account called the loan account. A loan may short, medium or long term. It is granted either against collateral securities or against personal security of the borrower.
(ii) Over-draft- it is a financial arrangement where a current account holder is permitted by a bank to overdraw his account that is to draw more than the amount standing to his credit upon an agreed limit.
(iii) Cash credit- it is a financial arrangement under which a borrower is allowed an advance under a separate account called cash credit limit. Here the borrower can withdraw the amount in installments as and when he needs.
(iv) Discounting of bills of exchange- here the bank takes a BOE maturing from an approved customer and pays him and credits his account immediately with the present value of the bill.
d) Investment of funds on security- it is one of the imp functions of comm. Banks. They invest a considerable amount of their funds in govt and industrial securities. In India it is required by statute for CB to invest a considerable amount of their funds in securities.
e) Creation of money- the various ways of creation of money are-
(i) By advancing loans
(ii) By allowing over draft
(iii) By providing cash credit
(iv) By discounting BOE
(v) By purchasing securities
(vi) By purchasing fixed assets
The commercial banks are prominent in today’s world because they manufacture or create money. The bank deposits are regarded as money coz they perform the same function as money that is they increase the purchasing power of the community and serve as medium f exchange in purchase of goods and services and settlement of debts.
2) Secondary or subsidiary functions- apart from performing the main function the comm. banks also perform a num of secondary functions which may be divided into the following two heads-
a) Agency services- the services rendered by a bank as the agent of his customer are called agency services. The imp agency services are-
(i) Collection of money on behalf of customers.
(ii) Making payments on behalf of customers.
(iii) Purchase and sale of securities on behalf of customers.
(iv) Advising customers regarding investments.
(v) Acting as trustee, executor, and administrator of customers.
(vi) Rendering of merchant banking services.
b) Miscellaneous or general utility services- services rendered by banker is not confined only to his customers but also to general public called such as-
(i) Safe custody of valuables
(ii) Dealing in foreign exchange business
(iii) Issuing of traveller’s cheque, traveller’s letter of credit and circular notes.
(iv) Collecting information bout other businessmen for customers.
(v) Collection of statistics and data.
(vi) Lease financing.
The Central Bank is the Apex Bank of the country. It is called by different names in different countries. It is the Reserve Bank of India in India.
The Reserve Bank of India has been defined in terms of its function. According to Vera Smith, “The primary definition of central banking is a banking system in which a single bank has either complete control or a residuary monopoly of note issue.”
According to A.C.L. Day, “a central bank is to help control and stabilise the monetary banking system”.
Functions Of RBI:
1) Regulator Of Currency:
The Reserve Bank of India is the bank of issue. It has the monopoly of note issue. Notes issued by it circulate as legal money. It has its issued department which issued notes and coins to commercial banks.
Reserve Bank of India has been following different methods of note issue in different countries. The monopoly of issuing notes vested in the Reserve Bank of India ensures uniformity in the notes issued which helps in facilitating exchange and trade within the country. It brings stability in the monetary system and creates confidence among the public.
RBI can restrict or expand the supply of cash according to the requirements of the economy. Thus, it provides elasticity to the monetary system.
2) Banker, Fiscal Agent and Advisor To The Government:
RBI everywhere acts as bankers, fiscal agent and advisor to their respective governments. As banker to the government, the central bank keeps the deposits of the central and state governments and makes payments on behalf of the governments. But it does not pay interest on government deposits.
It buys and sells foreign currencies on behalf of the government. It floats loans, pays interest on them, and finally repays them on behalf of the government. Thus it manages the entire public debts.
RBI also advices the government on such economic and money matters as controlling inflation or deflation, devaluation or revaluation of the currency, deficit financing, balance of payments etc. Thus it is the custodian of government money and wealth.
3) Custodian Of Cash Reserves Of Commercial Banks:
Commercial banks are required by law to keep reserves equal to a certain percentage of both time and demand deposits liabilities with the RBI. It is on the basis of these reserves that the RBI transfers funds from one bank to another to facilitate the clearing of cheques. Thus the RBI acts as the custodian of the cash reserves of commercial banks and helps in facilitating their transactions.
4) Custody And Management Of Foreign Exchange Reserves:
The RBI keeps and manages the foreign exchange reserves of the country. It sells gold at fixed prices to the authorities of other countries. It also buys and sells foreign currencies at international prices.
Further, it fixes the exchange rates of the domestic currency in terms of foreign currencies. It holds these rates within narrow limits in keeping with its obligations as a member if IMF and tries to bring stability in foreign exchange rates.
5) Lender Of The Last Resort:
By granting accommodation in the form of re-discounts and collateral advances to commercial banks, bill brokers and dealers, or other financial institutions, the RBI acts as the lender of the last resort.
It acts as lender of the last resort through discount house on the basis of treasury bills, government securities etc. Thus RBI as lender of the resort is a big source of cash and also influences prices and market rates.
6) Clearing House For Transfer And Settlement:
As bankers` bank, the RBI acts as a clearing house for transfer and settlement of mutual claims of commercial banks. Since the RBI holds reserves of commercial banks, it transfers funds from one bank to other banks to facilitate clearing of cheques.
To transfer and settle claims of one bank upon others, the RBI operates a separate department in big cities and trade centres. This department is known as clearing house and it renders free service to commercial banks.
7) Controller Of Credit:
The most important function of RBI is to control the credit creation power of commercial bank in order to control inflation and deflation pressures within this economy. For this purpose, it adopts quantitative and qualitative methods. These involve selective credit control and direct action.
Besides the above noted functions, the RBI in a number of developing countries have been entrusted with the responsibility of developing a strong banking system to meet the expanding requirements of agriculture, industry, trade and commerce.
The Reserve Bank of India was established on 1st April, 1935 under the Reserve Bank of India Act, 1943 as the Central Bank of the country to regulate the issue of bank notes and the keeping of reserves for the stability in India and generally to operate the currency and credit system of the country.
The bank was established as a shareholder`s bank with an authorized and paid-up capital of Rs. 5 crores divided into shares of Rs. 100 each. After independence, under the Reserve Bank Act, 1948, the bank was nationalized, after paying compensation to the shareholders at the market price of the share.
The affairs if the RBI are managed by the Central Board of Directors consisting of:
All the Directors and the officials are nominated for 4 years each by the Central Government. To look after the affairs there are 4 local Boards, one at each of the cities of Bombay, Calcutta, Delhi and Madras, each Board consisting of 5 members appointed for 4 years by the Central Government.
Mention the above functions in brief.
RBI has the authority to appoint Chairman of Banking Company where the office of the Chairman of the Board of Directors appointed on a whole-time basis.
Every banking company should deposit the prescribed minimum paid-up capital and reserves with the RBI either in cash or in form.
Every banking company, not being a Scheduled Bank, shall maintain in India by way of cash reserves or by way of balance in a current account with the RBI.
The RBI may, by order, require any banking company to call a general meeting of the shareholders of the company within such time, not less than two months from the date of order.
The RBI may determine the policy in relation to advances to be followed by banking companies generally or by any banking company in particular.
No company shall carry on banking business in India unless it holds a licence issued in that behalf by the RBI and any such licence may be issued subject to such conditions as the RBI may think fit to impose.
Every bank should submit monthly returns to the RBI in the prescribed form and manner showing its assets and liabilities in India. The RBI has the power to call for other returns and information if required.
At the expirations of each calendar year, every banking company incorporated in India shall prepare, a balance-sheet, profit and loss accounts as on the last working day of the year.
The accounts and balance-sheet together shall be published in the prescribed manner and three copies thereof shall be furnished as returns to the RBI within three months form the end of the period to which they refer.
The RBI had got the power to inspect the books and accounts of a banking company. After the inspections it sends a copy of it to the concerned bank. The inspection by the RBI may be on its own or under the direction of the Central Government.
The RBI may from time to time, issue directions as it deems fit, to a banking company in particular or to the banking companies in general and the banking company or companies shall be bound to comply with such directions
RBI has to powers to remove managerial and other persons from office of the banking companies, whose conduct is to the interest of the deposits and to secure proper management. RBI also appoints additional directors.
The RBI has a wide range of powers of supervision and control over commercial and cooperative banks. The RBI control frauds in entire banking industry in India.
In developed countries, the role of Central Bank is regulatory. But in a developing economy like that of India, the role of Central Bank is developmental or promotional. The Central Bank is to help in the mobilization of required productive resources and in their efficient allocation. It has to bring about economic development with stability.
The RBI has been quite active in the maintenance of a proper atmosphere of economic development and mobilization of financial resources for economic development. The RBI has assisted economic development in the following ways-
(a) National Agricultural Credit(long term operations) Fund
(b) National Agricultural Credit(stabilization) Fund
These fund loans were given to SCB’s & RRB’s for agricultural credit and during floods and famines.
It has also been instrumental in setting up Agricultural Refiance & Developmental Corporation and more recently Export-Import Bank and the NABARD.
(a) Industrial Finance Corporation of India
(b) National Small Industries Corporation
(c) State Financial Corporations
(d) Industrial Development Bank of India.
It has also introduced a scheme of guarantee of bank loans to small industry and till the establishment of Export-Import Bank, also provided refiance to banks for export credit
(a) cost of credit
(b) quantity of credit
(c) purpose or use of credit
Conclusion-Thus the RBI has helped to broaden and deepen the structure of institutional finance for accelerating development of the country with itself as the central arch of banking and monetary framework of the country.
The RBI acts as supervisor and controller of banks in India. By virtue of the powers conferred on the RBI by the RBI Act, 1934 and the Banking Regulation Act, 1949, the relationship between the RBI and the commercial banks are very close. The RBI has a 3 fold control over the commercial banks—
(a) as supervisory & controlling authority over banks
1. Each bank in India is required to obtain license from the RBI before conducting banking business-section 22. The RBI is required to conduct an inspection of the books of the banking company and issue a license, if it is satisfied that all or any of the conditions are fulfilled. The provision is intended to ensure the continuance and growth only of banks which are established or are operating on sound lines and to discourage indiscriminate floating of banking companies
2. According to Section 23 of the Act, no banking-company shall open a new place of business in India or change otherwise than within the same city, town or village, the location of an existing place of business situated in India without obtaining the prior permission of the RBI.
3. It has powers to inspect books and accounts of commercial banks-Section 35
The RBI may on its own initiative or at the instance of the Central government, inspect any banking company and its books and accounts. The Central Governemnt may on the basis of this report direct the company to wind up.
4. RBI may remove managerial an other persons from office-Section 36AA-where the RBI is convinced that a banking company is not conducting its affairs in the public interest, or is conducting them in a manner detrimental to the interests of the depositors, or where the RBI is satisfied that for securing the proper management of the banking company it would be necessary to do so, the RBI may after recording the reasons and by order, remove from office, with effect from a specified date, any chairman, director, chief executive director or other such officer or employee.
5. RBI may appoint additional directors of the banking company-Section 36 AB- in the interest of banking policy or in the public interest or in the interests of the banking company or its depositors, the Bank may, from time to time by order in writing, appoint with effect , one or more persons to hold office as directors of the banking company.
6. It may issue directions to commercial banks and may prohibit banks to enter into particular transactions- Section 36
(b) as controller of credit
1. By changing the statutory liquidity rate- Section 24 of the Banking Regulation Act, 1949 requires that every banking company has to maintain cash, gold or approved securities of an amount not less than 25% of its net demand and liabilities at the close of business everyday. This is called statutory liquidity rate and the RBI is empowered to step up the rate upto 40%
2. The RBI controls credit by changing the statutory reserve maintained by the scheduled banks-section 42 of the RBI Act.
3. Controls credit by changing the bank rate and its policy of granting accommodation to commercial banks
4. It controls credit through its credit monitoring arrangement
5. It controls credit by exercising moral influence on the banks.
(c) as banker to the baker
As banker to the banks, the RBI acts as the lender of last resort and grant accommodation to the scheduled banks in the following forms-
1. re-discounting or re-purchasing eligible bills
2. grant loans and advances against securities
Emergency advances-the RBI advances loans when it is satisfied that the loan is necessary for the purpose of regulating credit in the interest of trade, commerce and industry.
Section 22 of the Banking Regulation Act, 1949 contains a comprehensive system of licensing of banks by RBI. This section makes it essential for every banking company to hold a license issued by the RBI. The RBI is required to conduct an inspection of the books of the banking company and issue a license, if it is satisfied that all or any of the following conditions are fulfilled-
It is clear from the above that the grant of a license depends upon the maintenance of satisfactory financial position. The provision is intended to ensure the continuance and growth only of banks which are established or are operating on sound lines and to discourage indiscriminate floating of banking companies. To ascertain the position, the inspecting officer of the RBI has to make an estimate of the liquid and other readily realizable assets and also to judge whether the assets are enough to meet the claims of the depositors as and when they arise. The assessment about the whole gamut of operations of the banking company and its organizational set-up is necessary to judge the conditions before the license is granted.
According to Section 23 of the Act, no banking-company shall open a new place of business in India or change otherwise than within the same city, town or village, the location of an existing place of business situated in India without obtaining the prior permission of the RBI.
The RRBs are relatively new banking institutions which were added to the Indian banking scene since October 1975 to strengthen the institutional rural credit structure. Prior to that, the then existing credit agencies lacked in meeting the needs of rural masses. A committee under the chairmanship of N.Narasimhan suggested the institutions of RRBs as low cost banking for rural areas should be set up to meet their credit needs.
1) To identify a specific and functional gap in the present institutional structure.
2) To supplement the other institutional structure.
3) To fill the gap within a reasonable period of time.
1) To provide financial facility to small and marginal farmers, agricultural labourers, co-operative societies for agricultural purposes or other purposes related to agriculture.
2) To grant loans and advances to artisans, small entrepreneurs, persons of small means engaged in trade, commerce etc.
3) To relieve the rural masses from the clutches of money lenders.
4) To provide easy credit facility to weaker sections of society.
5) To establish branches in unbanked rural areas.
6) To take the banks to the doorsteps of the poorest people in remote rural areas.
Each RRB is sponsored by a nationalized bank known as a sponsoring bank which provides all sorts of helps to these RRBs. The sponsoring bank will assist the RRB in its establishment, recruitment and training of personnel. They may also provide managerial and financial assistance with mutual agreement.
Each RRB may have an authorized capital of Rs. five crore divided into one lakh shares of Rs. 100 each and issued capital of Rs. 1 crore to improve their viability.
The management of each RRB is vested in nine members Board of Directors, headed by a Chairman. The chairman is appointed by the Central Govt. The chairman is a paid servant of the sponsoring bank while the members are honorary.
RRBs are playing an important role as an alternative agency to provide institutional credit. According to RBI the RRBs have fared well in achieving the objective of providing access to weaker sections of society.
A central co-operative bank is a federation of primary credit societies operating in a specified area, usually a district. All types of primary credit societies, rural and urban are affiliated to it. Some co-operative banks have even individual members, besides the affiliated primary credit societies. A central co-operative bank is located at district head-quarters or in some prominent town in the district.
The funds of a central co-operative bank consist of share capital, reserve fund, deposits from members and non-members and loans from state co-operative banks. Sometimes, loans are taken even from the commercial banks.
A central co-operative bank is managed by a board of directors constituted by the representatives of the constituent primary credit societies and individuals of business capacity and influence.
Functions Of Central Co-operative Banks:
Besides the above functions, it also carries on ordinary commercial banking operations, such as the acceptance of deposits, granting of loans, collection of cheques and bills on behalf of the customer, etc.
In the unit banking system, the bank’s operations are generally confined to a single office only. It is a corporation that operates from one office and that is not related to other banks through either ownership or control. USA is the birth place of unit banking.
3. The funds of the locality are utilized for the local development
4. The management and supervision is much easier and effective
5. There are less chances of fraud and irregularities in the management
6. They are in a better position to solve problems as they know the local problems better.
7. There is no possibility of generating monopolistic tendencies
8. There will be no inefficient banks as weak and inefficient banks are automatically eliminated
9. Unit banking is free from the diseconomics and problems of large scale operations.
Under the branch banking system, a bank operates as a single institution under single ownership with branches spread all over the country. Branch banking developed in Great Britain.
Examples- SBI, Barclays.
Private sector Indian Commercial Banks are classified into two types. They are:
Scheduled Banks are those private sector Indian commercial Banks which are included in the second scheduled to the RBI Act, 1934. Foreign banks also are included in the second schedule to the RBI Act.
Non-scheduled banks are those banks which are not included in the second schedule of the RBI Act. The non-scheduled banks do not enjoy from the RB all the facilities enjoyed by the Scheduled Banks.
Difference Between Scheduled Banks And Non-scheduled Banks:
Scheduled banks are more important that non-scheduled banks
Rights of banker against surety
1. Advisability of getting the contract of guarantee signed in the bank manager’s presence-usually bankers require the guarantors to execute the guarantee in the bank manager’s presence. It is not advisable to allow the customer to take the guarantee form away and himself obtain the signature of the guarantor thereto. This si because, firstly, the guarantor’s signature may turn out to be a forgery or he may later on allege that he signed in ignorance of the nature of the document and secondly, the guarantor when called upon to discharge his obligation, may put forth the plea that he signed under a misrepresentation.
2.Notice of principal debtor’s death- the notice of the death of a customer puts an end to his account and consequently te guarantee automatically terminates. The banker should make a formal demand upon the guarantor for repayment of the amount unless it is paid by those in charge of the estate of the deceased.
3.Notice of debtor’s bankruptcy-a banker should stop the operation on a guaranteed account as soon as he receives notice, actual or constructive, f his debtor’s bankruptcy. In such a case, the banker should also demand the repayment of the amount due by the surety. The banker need not first resort to the sale of the securities held by him in the account.
4.Notice of lunacy of the debtor or surety-a banker on receipt of reliable notice of the lunacy of the principal debtor or surety should close the account. The lunacy of a surety is to be taken as terminating the guarantee so far as future advances are concerned. Consequently, any advance made by the banker after receipt of the notice of lunacy of his customer is not recoverable from the estate of the lunatic despite the fact that the contract of guarantee may provide for a month’s notice from the surety for the termination of the guarantee.
5.Change in the condition of the bank-unless it is provided in the contract of guarantee that changes in the constitution of a bank will not affect the guarantee, it will terminate in case the bank having the guarantee in amalgamated with or absorbed by another bank. The guarantee should provide for such contingencies.
A guarantee is the most common form of security taken by the bankers to ensure safety of the funds lent. Section 126 of the ICA defines a contract of guarantee as a contract to perform the promises or discharge the liability of a third person in case of his default.
Ex: A wanting a loan of Rs.500 induces B to promise C to repay the loan in case of A’s default. This is a contract of guarantee.
It will be seen that there are 3 parties to this contract- A the principal debtor, B the surety and C the creditor. A contract of guarantee is thus a secondary contract the principal contract being between the principal debtor and the creditor himself. The liability of the surety therefore arises only if the principal contract is not fulfilled.
Kinds of guarantee
1) Specific guarantee- guarantee given for a single debt is called a specific guarantee and is discharged on repayment of the particular debt it was given to secure.
2) Continuing guarantee- a guarantee extending to series of distinct and separable transactions is said to be continuing guarantee. It can be revoked by the surety at any time.
3) Joint and several guarantee- where two or more persons join in executing a guarantee, their liability may be joint or several or joint and several. In a J and S guarantee each co-guarantor is jointly and severally liable for the debt.
4) Limited guarantee- in limited guarantee, the guarantees have some clauses which either restrict the liability of the guarantor or limit the scope.
Contracts of indemnity appear to be analogous to contracts of guarantee. Section 124 defines a contract of indemnity as “a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person.”
Ex: A contracts to indemnify B against all the consequences of any proceedings which C may initiate against B. this is a contract of indemnity.
1. Stocks should be fully insured against fire, theft and other risks
2. The baker must periodically inspect the hypothecated goods and the account books of the borrower should be checked to ascertain the position of stocks under hypothecation
3. The borrower should be asked to submit a statement of stocks periodically giving current position about the stocks and its valuation and declaration that the borrower possesses clear title or person.
4. An undertaking should be obtained from the borrower that he shall not charge the same goods to other bank or person.
5. The banker should also ensure that the borrower is not enjoying similar hypothecation facilities on the same stocks from some other bank.
6. During inspection, if the banker finds that the financial position is weak, it is advisable to get the personal guarantees of directors/officers to strengthen the charge.
7. While granting loans against hypothecation, the banker should obtain a letter of hypothecation containing several clauses to protect his interest.
8. Character, capacity and capital must be thoroughly verified before granting loans on the basis of hypothecation. This facility should be given to genuine and financially sound parties.
9. A name plate of the bank, mentioning that the stocks are hypothecated to it, must be displaced at a prominent place of the hypothecated goods for public notice to avoid the risk of a second charge being created on the same stock.
10. The banker should get the charge registered under Section 125 of the Companies Act, if borrower happens to be a joint stock company.
Section 58(a) of Transfer of Property Act,1882-“The transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt or the performances of an engagement which may give rise to pecuniary liability.”
(a) on default of payment of the mortgage on a certain date the sale shall become absolute
(b) on such payment being made the sale shall become void
(c) on such payment being made the buyer shall transfer the property to the seller
Anamolous mortgage-a mortgage other than any of the mortgages explained above is a anamolous mortgage. Such a mortgage includes a mortgage formed by combination of two or more types of mortgage. It takes various forms based on custom, local usage or contract.
1.Possession of securities is transferred to the banker
Neither ownership nor possession is transferred to the creditor. Only an equitable charge is created in favour of the creditor.
2. No such agreement
The borrower binds himself under an agreement to give possession of the goods hypothecated to the banker whenever the banker requires the borrower to do so
3. The borrower holds possession of goods as owner and not as an agent of the bank
The borrower holds possession of the goods not in his own right as the owner of the goods but as an agent of the bank
4. There is no such constructive possession even of the banker
The banker has constructive possession over the hypothecated goods
5. To take possession of the property under lien by way of security directly the baker has to move the Court
It is essential for the bank to take possession of the hypothecated goods by itself directly.
6. Lien also creates a charge but it is not so convenient to proceed as in case of hypothecation
It is convenient device to create a charge over the movable property when transfer of its possession is inconvenient or impracticable
1. the possession of the movable property is retained by the owner and certain right in that property are transferred to the person in whose favour the property is hypothecated
There is delivery of goods from one person to another as security for payment of debt or performance of a promise.
2. since the possession of the goods remains with the owner, the hypothecate cannot have the right of lien. He may sell the property in default
Since the pledge has got the possession of the goods, in the event of default by the pawnor, apart from other rights, the pledge has a right of lien over the goods
1. if an agreement empowers the hypothecate to take possession of the goods and then sell the same in case of default of payment, he can proceed in accordance with the agreement to sell the goods, without intervention of the Court.
Loan is a contract by which property or money is transferred by a lender to a borrower on the promise of the borrower to return the property, or its exact equivalent, at a stated time or on demand.
The loans and advances granted by banks are broadly classified into
1) Secured advances
2) Unsecured advances
According to section 5(a) of the Banking Regulation Act, 1949, 'a secured loan or advance' means a loan or advance' made on the security of assets, the Market value of which is not at any time less than the amount of such loan or advance; and 'unsecured loan or advance' means a loan or advance' not so secured.
The distinguishing features of a secured loan or advance are as follows-
1) The loan must be made on the security of tangible assets like goods and commodities, lands and buildings, hold and silver, corporate and government securities etc. A charge on any such assets offered as security must be created in favour of the banker.
2) The Market value of such security must not be less than the amount of the loan at anytime till the loan is repaid. If the former falls below the latter, the loan is considered as partly secured.
They are also called clean loans or advances.
The characteristics of unsecured advances are
1) UAs are made on the goodwill and reputation of the customer.
2) They are generally made by way of overdraft facilities.
3) Unsecured advances are made at the discretion of the concerned bank manager himself.
4) Grant of loans depend on the credit worthiness of the borrowers. Such creditworthiness depends on- 1) character 2) capacity 3) capital
What is ‘overdaraft’?
‘Overdraft’ means allowing the customer to overdraw his account. It is allowed only to current account holders. But some banks allow casual overdraft in savings accounts of Government servants, etc. An overdraft is a running account wherein thy balance goes on fluctuating from debit to credit or vice versa.
Under an overdraft arrangement, a customer is allowed to draw cheques upto an agreed limit over and above the credit balance in the account.
Benefits-The bank provides overdraft facility to its customers to earn interest, and its customers enjoy the overdraft facility in order to develop their business. The overdraft facility is ideal to cover short term requirements. The interest on overdraft is calculated on the amount actually utilized by the debtor-customer at regular intervals and hence it is cheaper than the other loans.
There is no restriction on operations in the account and withdrawals and deposits may be upto any number of times.
Banker’s obligation.-If a bank has agreed to give an overdraft, it cannot refuse to honour cheques or draft within the limit of that overdraft which have been drawn and put in circulation. If the banker refuses any cheque it becomes ‘wrongful dishonor’ and he will be liable for damages.
Customer’s obligation-where a customer even without any express grant of an overdraft facility, overdraws on his account and the cheques issued by him are honoured, without there being sufficient balance in the account, the transaction amounts to a loan and the customer is bound pay reasonable interest-Bank of Maharashtra v United Construction Co & Ors.
Procedure-It is safe course for the banks that they should obtain a letter and a promissory note from the customer in which terms and conditions of the facility including the rate of interest chargeable on the overdraft is given. But written transactions are not necessary all the time.
Time period-The period of overdraft is 7 years at maximum. But in practice, the banker grants an overdraft for one year, and renews it every year.
Overdraft agreement is a contract-Overdraft arrangement between bank and its customer is a contract and it cannot be terminated by the bank unilaterally even if it is a temporary one.-Indian Overseas Bank, Madras v Narayanprasad Patel
2. Secured overdraft- when a party is allowed regular limits against some tangible security, it is known as secured overdraft.
3. Clean overdraft-Overdrafts which are not backed up by any security are called clean or temporary overdrafts. Clean overdrafts are allowed purely on the personal credit of the party. They are allowed for small amounts to meet the party’s sudden requirements.
The relation between a banker and his customer begins with the opening of an account by the former in the name of the latter. Initially the accounts are opened with a deposit of money by the customer and hence these accounts are called deposit accounts. Deposits are broadly divided into two kinds- 1) payable on demand (demand deposit) and 2) payable after certain time (time deposit). Demand deposits are- savings and current account. Time deposits are- fixed deposit and recurring deposit.
The term fixed deposits means deposits repayable after the expiry of a certain period, which ordinarily varies from three months to five years. The fixing of the period enables the banker to invest money or employ it in business without having to keep a reserve and hence are very popular with the bankers.
Rate of interest- the banker offers higher rates of interest on fixed deposits as the depositor parts with liquidity for a definite period. The longer the period, the higher will be the rate of interest.
FD for senior citizens- RBI has permitted the banks to formulate FD schemes specially meant for senior citizens on which they offer higher and fixed rates of interest.
Opening and operation- to open an account the depositor is required to fill in an application form wherin he mentions the amount of the deposit and the period for which the deposit is to be made. He also gives his specimen signature. A fixed deposit receipt is thereafter issued to the depositor acknowledging the same.
FD in joint names- FDs can be opened in joint names of two or more persons payable to either or survivor in accordance with the terms of the receipt. The problems faced by the banker before date of maturity are
1) Request for premature repayment by one of the depositor
2) Loan against FDR by one of the depositor
3) Request for duplicate receipt by one of the depositor
In all these cases the banker should obtain consent of other depositor/s.
Payment before due date- though a FD is payable after expiry of fixed period, banks permit encashment even before due date. In such a case certain interest will be charged for the same. According to the RBI directive banks should not charge the penalty in case of premature withdrawal for immediate reinvestment in another FD for a longer term than the remaining period of the original contract.
Overdue deposits- if the receipt is not encashed on the date of maturity, the interest ceases to run from that date. The banks allow interest as per RBI directives, if it is renewed.
A current account is a running and active account which may be operated any number of times during a working day. There is no restriction on the number and amount of withdrawals from a current account. As the banker is under an obligation to repay these deposits on demand, they are called deemed liabilities or deemed deposits.
To meet the requirement of the current account the banker keeps sufficient reserves against such deposits vis-à-vis the savings and the fixed deposits. Current accounts suit the requirements of big businessman, joint stock companies, institutions, public authorities, corporations etc. whose banking transactions happen to be numerous per day. Cheque facility is available for the depositors.
Banker’s obligation- by taking RDs the banker undertakes to honour his customer’s cheques as long as his account is in credit. The banker may have to suffer loss if he pays a forged cheque, or a cheque contrary to the instructions of his customer (s 129, NI Act).
Privileges- a current account carries certain privileges which are not given to other account holders
1) Third party cheques and cheques with endorsements may be deposited in the current account for collection and credit.
2) Overdraft facilities are given in case of current accounts only.
3) The loans and advances granted by banks to their customers are not given in the form of cash but through the current accounts. Current accounts thus earn interest on all types of advances granted by the banker.
Interest- normally no interest is paid on current accounts. Rather, the depositors have to pay certain incidental charges to the bank for services rendered by it. Sometimes customers are required to maintain a minimum balance failing which bank charges some commission half yearly thus helping them to earn something on minimum balance kept.
Savings accounts are maintained for encouraging savings of households. It is useful to save a part of the current income to meet future needs and also to earn higher incomes from savings. The main characteristics of savings account are-
Restriction on withdrawals- in pursuance of the objective of savings bank accounts, the banks impose certain restriction on the right of depositor to withdraw money within a given period. The number of withdrawals over a period of six months is limited to 50. A depositor cannot withdraw by withdrawal form a sum smaller than Re 1. The minimum amount of a cheque is Re 5.
Restriction on deposits- the customer may deposit any amount in the savings bank account subject to a minimum of Re 5. The banks do not accept cheques or other instruments payable to a third party for the purpose of deposit in the savings account.
Minimum balance- banks prescribe the minimum balance that is to be maintained in the SB accounts. For this purpose they take into consideration the cost involved in maintaining and servicing such accounts. Levy specific charges if the minimum balance is not maintained.
Payment of interest- the rate of interest payable by the banks on deposits maintained in savings accounts is prescribed by the RBI. Interest is calculated at quarterly or longer rests of period.
Cheques- cheque facility is provided to the depositors subject to the condition that he will keep a minimum balance with the bank according to the rules of the bank. Only cheques payable to the customers having SB accounts are collected.
Prohibition on savings account- the RBI has prohibited the banks to open a savings account in the name of
1) Trading or business concern, proprietary or partnership.
2) A company or an association.
3) Government departments.
4) Bodies depending upon budgetary allocations for performance of their functions.
5) Municipal corporations/committees.
6) Panchayat samitis.
7) State housing boards.
The banks have in recent years started various daily, weekly, or monthly deposit schemes in order to inculcate the habit of savings on a regular or recurring basis. Generally money in these accounts is deposited in monthly installments for a fixed period and repaid to the depositors along with interest on maturity. These are called as recurring deposits.
A depositor opening a RD account is required to deposit an amount chosen by him, generally a multiple of Re 5 or 10, in his account every month for a period selected by him. The period of recurring deposit varies from bank to bank. Generally banks open such accounts ranging from one to ten years.
Opening and functioning of account- the RD account can be opened by any person, more than one person jointly or severally, by a guardian in the name of a minor and even by a minor.
While opening the account, the depositor is given a pass book which is to be presented to the bank at the time of monthly deposits and repayment of amount. Installments for each month should be paid before the last working day of that month. Accumulated amount with interest will be payable after a month of the payment of the last installment.
Rate of interest- the rate of interest on RD stands favourably as compared to the rate of interest on savings bank accounts. According to the directive of the RBI, the interest provided by banks on RD must be in accord with the rates prescribed for various term deposits. The rate of interest is therefore almost equal to that of fixed deposits.