SPECIALIST OFFICER LAW STUDY MATERIAL ON “30 IMPORTANT QUESTIONS ON BANKING LAWS”
1.
Explain the origin & development of banking in India.
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.
Objectives-
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.”
- The elimination of concentration of economic power in
the hands of a few
- diversification of the flow of bank economic credit
towards priority sectors such as agriculture, small industry and exports,
weaker sections and backward areas
- fostering of new classes of entrepreneurs, so as to
create, sustain and accelerate economic growth
- professionalisation of bank management
- providing adequate training as well as reasonable terms
of service to bank staff
- extending banking facilities to unbanked rural areas
and semi rural areas to mobilize savings of people to the largest possible
extent and to utilize for productive purposes
- to curb the use of bank credit for speculative and
other unproductive purposes
- to bring banks under the control of RBI
Achievements
- Accelerated branch expansion in rural and backward
regions- in 1969 bank branches in
rural areas accounted to only 22.5% of the total number of branches. Today
branches in rural areas account to 52%
- Deposit mobilization-after
nationalization banks attract deposits from different sections by means of
attractive deposit schemes
- Finance to priority sectors-
In 1969 the total credit given to priority sectors like agriculture, small
industries and rural development was only 2% of total bank credit. By
2006-2007 in increased to around 40% of total credit
- Increase in total transactions-the
total deposits which was 4,664 crores in 1969 increased to 38.30 trillion
- Differential rate of interest-to
provide credit to weaker sections of the society at very low rate of interest,
banks came out with Differential Rate of Interest scheme in 1972
- Profit making-after nationalization, banks
are making profits in addition to achieving economic and social
objectives.
- Safety-the government has given
importance to safety of the banks. The RBI exercises tight control over
banks and safeguards depositors interest
- Developmental functions-
after nationalization, banks provide assistance for the progress of
agriculture, rural development, industry, trade and other developmental
plans of the government
- Advances under self-employment scheme-public
sector banks play a significant role in promoting self employment through
advances to unemployed through various schemes of the government like
IRDP,JGSY, etc
For
- It would enable the government to obtain all the large
profits of the banks as its revenue
- Nationalization would safeguard interests of public and
increase their confidence thereby bringing about a rapid increase in deposits.
Thus preventing bank failures
- It would remove the concentration of economic power in
the hands of a few industrialists
- It would help in stabilizing the price levels by
eliminating artificial scarcity of essential goods
- It would enable the baking sector to diversify its
resources for the benefit of the priority sector.
- Eliminates wasteful competition and raises the
efficiency of the working of banks
- enables rapid increase in the number of banking offices
in rural & semi-urban areas & helped considerably in deposit
mobilization to a great extent
- necessary for the furtherance of socialism and in the
interest of community
- Enables the Reserve Bank to implement its monetary
policy more effectively
- It would replace the profit motive with service motive
- It would secure standardization of banking services in
the country
- Would check the incidence of tax evasion and black
money
- Through pubic ownership and control, banks function
like other public utility services by catering to the financial need of
the common man.
- Like other countries, India should also get profit by
nationalizing her banking industry.
- Essential for successful planning and all-round
progress of the national economy, community development and for the
welfare of the people.
Against
- Nationalization involves huge amounts to be paid as
compensation to the shareholders adding to the financial burden of the
government.
- Extending loans to agriculture and small scale
industries is risky and less remunerative and may weaken the economic
viability of these institutions
- It may not lead to socialism as State capitalism is not
socialism
- It may reduce the efficiency of these banks as
political interference will impair the smooth working of these
institutions
- It is not the remedy for growth of monopoly and the
concentration of wealth and power as the root cause for them lies in the
existing economic system
- Other countries like Sweden, Finland, Denmark etc have
privately run banks and are running smoothly
- Control of RBI and government authorities make the bank
officials scared to take decisions and it adversely affects the bank
services
- The rapid extension of banking into the rural ad
semi-urban areas has often been cited as a major factor affecting the
earning capacity of banks
- Inter-state rivalries and policies would raise their
ugly heads, damaging the present sound banking system.
- Banks were not at all responsible for the evasion of
taxes or for creation of black money. It was the product of an irrational
tax-structure, high deficit financing and corrupt public
administration.
- Bank nationalization should follow and precede
nationalization of all major trades and industries of the country
- Inflation is caused by unsound monetary and fiscal
policies and nationalization of banks cannot solve this problem
- Rapid expansion of branches has increased establishment
costs and reduced the quality of supervisory and managerial staff
- Malpractices in privately owned banks can be checked by
adopting appropriate monetary and fiscal policies and through efficient
supervision, nationalization is not necessary
- Public control leaves the doors
of banks open for corruption and favoritism. Delays and lethargy in work
are common in public sector undertakings.
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.
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.
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.
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?
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.
9.
What are the circumstances under which a disclosure by
banker is justified? OR Banker’s duty of secrecy is not absolute. Explain.
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.
- Disclosure under the compulsion of Law-
Banker’s obligation to his customer is subject to his duty to the law of
the country. The baker would, therefore, be justified in disclosing
information to meet the following statutory requirements.
(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.
- Disclosure in the interest of the public-the
following grounds generally fall under this category
(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.
- Disclosure in the interest of the bank-
the banker may disclose the state of his customer’s account in order to
legally protect his own interest. For example- if the baker has to recover
the dues from the customer or the guarantor, disclosure of necessary facts
to the guarantor or the solicitor becomes necessary and is justified.
- Disclosure under the express or implied consent of a
customer- the customer may instruct his
banker to give some or all other particulars of his account to say, his
auditor, in such case banker can disclose. Banker can also disclose to a
referee whose name is suggested by the customer. It is implied that the
banker can disclose information to the guarantor.
- Disclosure under Banker’s enquiry-
it is an established banking practice to provide credit information about
their customers by one bank to another. The customer gives implied consent
to this practice at the time of opening the account.
10.
Who are the banker’s special customers? Explain the
precautions to be taken by the banker in opening and operating their accounts.
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.
Minor
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
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.
Illiterates
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.
Married women
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.
Pardhanishin women
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.
Agent
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.
Partnership firm
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.
Trust
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.
⤚
Constitution:
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.
⤚
Management:
The affairs
if the RBI are managed by the Central Board of Directors consisting of:
- Governor and not more than 4
Deputy Governors appointed for a period not more than 5 years.
- Four Directors, one from each
of the four local boards.
- The other Directors.
- One Government Official.
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.
⤚
Functions:
Mention the above functions in brief.
Powers:
- Power Of RBI To Appoint
Chairman Of A Banking Company:
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.
- Minimum Paid-up Capital And Reserves:
Every
banking company should deposit the prescribed minimum paid-up capital and
reserves with the RBI either in cash or in form.
- Cash Reserve:
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.
- RBI Control Over Banking
Companies:
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.
- Power Of RBI To Control
Advances By Banking Companies:
The RBI may
determine the policy in relation to advances to be followed by banking
companies generally or by any banking company in particular.
- Licensing Of Banking Companies:
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.
- Monthly Returns:
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.
- Accounts And Balance-Sheet:
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.
- Submission Of Returns:
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.
- Inspection:
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.
- Directions:
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
- Power To Remove Managerial And
other Persons From office:
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.
- Power Of RBI To Impose Penalty:
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-
- Checking inflation- the
government budgetary operations, owing to increasing size of government
expenditure, generate strong inflationary pressures. It is the responsibility
of the monetary authority to restrain these pressures by freezing a part
of liquidity thus generated. This, the RBI has been able to do through its
pivotal tool-rate of interest. It has made use of other methods of credit
control as well. Unless inflation is kept in check, all the development
plans are in danger of being upset.
- Providing development finance-
the RBI has helped a great deal in setting up of specialized institutions
so that the financial facilities are made available.
- Agricultural credit-The RBI
has made available short term, medium term and long term finance to
agriculture through the hierarchical network of co-operative banks and
societies. In this connection, the RBI set up two funds
(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.
- Industrial finance-The
RBI has also organized industrial finance for both big and small
industries to secure all types of loans-short term, medium term and long
term. It has helped in the creation of
(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
- Regulatory credit-When
there is an expansion of bank credit, it adds to the active demand for
goods and services. This tends to start inflationary spiral. Thus it
becomes essential for the monetary authority to stem in and restrain the
expansion of bank credit in the interest of sound and healthy economic
growth. During the last 5 decades, the RBI has tried to regulate-
(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-
- that the company is or will be
in a position to pay its present or future depositors in full as their
claims accrue
- that the affairs of the company
are not being or not liked to be, conducted in a manner detrimental to the
interests of its present or future depositors; and
- in case of a foreign bank, the
carrying on of banking business by such company in India will be in the
public interest and that the Government or law of the country in which it
is incorporated does not discriminate in any way against banking companies
registered in India and that the company complies with all the provisions
of the Act applicable to foreign banks.
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.
Objectives
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.
Functions
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.
Sponsorship
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.
Capital resources
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.
Management
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.
Conclusion
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:
- Its main function is to lend
primary credit societies
- It accepts the surplus funds of
one primary credit society and makes it available to another primary
credit society, and thus acts as a balancing centre between the primary
credit societies.
- It raises loans from the state
co-operative banks and lends the same to the primary credit societies, and
thus acts as a link between the state co-operative bank and primary credit
societies.
- It raises deposits from members
as well as non-members for the purpose of meeting the credit requirements
of the primary credit societies.
- It exercises general
supervision and control over the activities of primary credit societies.
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.
Unit Banking
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.
Advantages
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.
Disadvantages
- Cut throat competition.
- Lack the benefits of specialization and division of
labour
- No banking development in backward areas as banking
activity is uneconomical and no bank is opened there
- Limited resources restrict its ability to face
financial crises.
- There is little possibility of distribution and
diversification of risks under the localized unit banking system.
- The interest rates tend to vary at different places as
there is no movement of funds from place to place.
- The transfer of funds is very expensive as there are no
branches at other places.
- There will be high local pressure and interference
which disrupt their normal functioning.
Branch Banking
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.
Advantages
- Results in the economy of cash reserves
- Less risk and greater capacity to meet risks
- There is proper use of capital.
- Customers get better and greater facilities.
- Large scale operation with greater applicability of the
division of labour.
- It is easier and cheaper to transfer funds because
branches are spread all over the country.
- Offers a wide scope for the selection of diverse
securities and varied investments, so that a higher degree of safety and
liquidity can be maintained.
- Greater diversification of both deposits and assets
because of wider geographical coverage.
- Mobility of funds from one place to another which in
turn brings equality in interest rates.
- Banking can be extended to under developed areas and
this helps in the development of backward regions.
- It is more convenient for Central Bank or the
Government to regulate and supervise.
Disadvantages
- Proper supervision and scrutiny
become more difficult
- Suffers from red-tapism and
delays on account of inadequate authority of branch managers and the
necessity to take permission from head office
- Dealings become more impersonal
- Very expensive. Opening of many
branches, establishing and maintenance of the branches result in high
expenses and may reduce profits.
- Creates monopoly and leads to
the concentration of resources into a few banks.
- Losses and weakness of some
branches affect the other branches too due to adverse linkage effect.
- Unhealthy competition among the
branches of different banks in big cities.
- Preferential treatment is given
to the branches near the head office.
Private
sector Indian Commercial Banks are classified into two types. They
are:
- Scheduled Banks.
- Non-scheduled Banks.
Scheduled Bank:
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 Bank:
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 included in
the second schedule of the RBI Act of 1934. On the other hand,
non-scheduled banks are not included in the second schedule of the RBI
Act.
- Scheduled banks satisfy tow
important conditions, viz., (i) they have paid-up capital and reserves of
Rs. 5 lakh or more and (ii) they satisfy the RBI that their affairs are
not being conducted to the interests of the depositors. But non-scheduled
banks do not satisfy these conditions.
- Scheduled banks enjoy certain
benefits from the RBI, whereas non-scheduled banks do not enjoy those
benefits.
- Scheduled banks are subject to
greater degree of control and more obligations than the non-scheduled
banks in their day-to-day operations.
- The number of scheduled banks
is more than that of non-scheduled banks.
- Scheduled banks are, generally,
big, whereas non-scheduled banks are, ordinarily, small.
- Scheduled banks are spread over
a large area of the country, whereas non-scheduled banks are confined to a
small area.
- The share capital and reserves
of scheduled banks are more than those of non-scheduled banks.
- Deposits of scheduled banks are
more than those of non-scheduled banks.
- The advances of scheduled banks
are also more than those of non-scheduled banks.
Scheduled banks are more important
that non-scheduled banks
21.
What are the rights of a banker against surety?What are the
precautions to be taken by the banker?
Rights of banker against surety
- Right of lien-the
banker can exercise his right of lien on the balance of the account of the
guarantor in his possession notwithstanding the fact that his claim under
the guarantee is time-barred. Right to exercise a general lien does not
arise until a default has been ade by the principal debtor, in which case
the banker should immediately inform the guarantor that the former has
exercised his lien on the latter’s money or securities deposited with him.
- Surety’s liability is
co-extensive with that of the principle debtor-according
to Section 128 of the Indian Contract Act, the liability of the surety is
co-extensive with that of the principal debtor, unless it is otherwise
provided for by the contract of guarantee.
- Banker’s claim against a
bankrupt surety’s estate-in the event of the bankruptcy
of the surety, the banker is entitled to prove his claim against the
estate of the surety. When the banker hears of the death or bankruptcy of
the surety he should close the account guaranteed by the surety and if the
principal debtor makes a default in the payment of the amount, the banker
should at once claim the amount from the legal representative of the
deceased or from the Official Receiver of the bankrupt surety.
Precautions
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.
Guarantee
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.
Indemnity
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.
Precautions-
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.”
Transferor- mortgagor
Transferee-mortgagee
Instrument-mortgage deed
Characteristics-
- the interest to be transferred
is always with respect to a ‘specific property’
- a mortgage implies transfer of
interest in a specific immovable property. It does not mean transfer of
ownership.
- if there is more than one owner
of an immovable property, each co-owner can mortgage his share
- the object of mortgaging the
property is to give security for the loan to be taken or already taken for
performance of an engagement giving rise to pecuniary liability.
- the mortgage need not always be
given the actual possession of the property
- on repayment of the loan
together with interest, the interest in specific immovable property is
recovered to the mortgagor
- in the evnt of non-payment of
the loan, the mortgagee has a right to sell the mortgaged property trough
the intervention of the Court.
- an agreement in writing between
the mortgagor and the mortgagee is essential for creating a mortgage. The
mortgage deed should contain all safety clauses.
Kinds
- Simple mortgage-
in simple mortgage the borrower binds himself personally to pay the
mortgage money without giving possession of property. He agrees to pay
according to his contract and also gives the banker the right ot sell and
adjust the sale proceeds to the mortgage money. But court intervention is
necessary for selling the mortgage property.
- Mortgage by conditional sale-in
this mortgage the borrower sells the mortgaged property on the condition
that:
(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
- Usufructuary mortgage-in
this mortgage the mortgagee gets the possession of the property (physical
possession not necessary) and is entitled to recover the rents and profits
relating to the property till the loans are repaid. He can also
appropriate such rents or profits to interest or payment of mortgage money
and partly interest and partly in payment of the mortgage money.
- English mortgage-the
mortgagor makes a personal promise to repay money on a certain due date.
Mortgagee is entitled to immediate possession and to retain possession
until the money is repaid. The transfer is absolute with all interests and
seeking the permission of the Court.
- Mortgage by deposit of title
deeds or equitable mortgage-where a person delivers to a
creditor or his agent documents of title to immovable property with the
intention to create a security thereon, the transaction is called a
“mortgage by deposit of title deeds”. This mortgage does not require
registration.
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.
Lien
|
Hypothecation
|
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
|
Hypothecation
|
Pledge
|
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
Definition
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.
Secured advances
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.
Unsecured advances
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
Categories-
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.
Fixed account
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.
TO PURCHASE SPECIALIST OFFICER MARKETING/IT/HR/LAW STUDY MATERIAL CALL DAS SIR AT 08961556195/09874581055 OR EMAIL AT tamal253@yahoo.com
Buy IBPS LAW
Buy IBPS Specialist Officers CWE SPL
Buy IBPS Specialist Officers Cadre Law Officer
Buy IBPS Practice Test Papers 1500+ Question in Professional Knowledge (English) 1st Edition
Buy IBPS Specialist Officers CWE SPL
Buy IBPS Specialist Officers Cadre Law Officer
Buy IBPS Practice Test Papers 1500+ Question in Professional Knowledge (English) 1st Edition
Buy Banking Laws
Comments