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BANKING LAW

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, wellacquainted 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 3 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.
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Kautilya in his Arthashastra which was written in the Maurya period in the 4th century mentioned the maximum rate of interest which could be charged by the lenders. The bankers during this period was known as Shakuras and Mahajans There is no live account of indigenous banking from the 6th to 16th century but some stray evidence is found. During the Moghul period indigenous banking was in its prime. There was hardly any village without its money-lender or Sharoff who financed trade and commerce. The system of currency and coinage rendered money lending a highly profitable business.

The British came to India in the 17th century. The East India company established its Agency houses in Bombay, Calcutta & Madras. These agency houses were the combination of trade & banking in India. Bank of Hindustan- Appendage of Alexander & Co.1st bank under European direction Established in 1771 at Cal. Collapsed due to failure of parent company Bengal bank was established in 1784 General Bank of India was established in 1786. It was the 1st joint stock company with limited liability Presidency banks were established in Calcutta, Bombay & Madras. It amalgamated into the Imperial bank in 1921. In 1865 Allahabad Bank was set up under European management In 1875 Alliance Bank of Shimla was started Oudh Commercial bank was the 1st purely Indian management joint bank. Swadeshi movement stated in 1905 and the period from 1906 to 1913 was a period of boom for Indian Banking. The Bank of Burma was established in 1904. Bank of India, Bank of Rangoon & Indian Specie Bank was established in 1906 Some of the important banks which were established later were Bank of India, Central Bank of India, Bank of Baroda, etc. According to the Banking Companies Act, 1970, the aim of nationalization of banks in India is to control the heights of the economy and to meet progressively and serve better the needs of development of the economy in conformity with national policy and objectives.

1. The elimination of concentration of economic power in the hands of a few 2. diversification of the flow of bank economic credit towards priority sectors such as 3. 4. 5. 6. 7. 8.
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

1. Accelerated branch expansion in rural and backward regions- in 1969 bank 2. 3. 4. 5. 6. 7. 8. 9.


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

Argument for & against nationalization


For

1. It would enable the government to obtain all the large profits of the banks as its revenue 2. Nationalization would safeguard interests of public and increase their confidence thereby 3. 4. 5. 6. 7. 8. 9.
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

10. It would replace the profit motive with service motive 11. It would secure standardization of banking services in the country 12. Would check the incidence of tax evasion and black money 13. Through pubic ownership and control, banks function like other public utility services by
catering to the financial need of the common man. 14. Like other countries, India should also get profit by nationalizing her banking industry. 15. Essential for successful planning and all-round progress of the national economy, community development and for the welfare of the people.

Against

1. Nationalization involves huge amounts to be paid as compensation to the shareholders


adding to the financial burden of the government. 2. Extending loans to agriculture and small scale industries is risky and less remunerative and may weaken the economic viability of these institutions 3. It may not lead to socialism as State capitalism is not socialism 4. It may reduce the efficiency of these banks as political interference will impair the smooth working of these institutions 5. 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 6. Other countries like Sweden, Finland, Denmark etc have privately run banks and are running smoothly 7. Control of RBI and government authorities make the bank officials scared to take decisions and it adversely affects the bank services 8. 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 9. Inter-state rivalries and policies would raise their ugly heads, damaging the present sound banking system. 10. 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. 11. Bank nationalization should follow and precede nationalization of all major trades and industries of the country 12. Inflation is caused by unsound monetary and fiscal policies and nationalization of banks cannot solve this problem 13. Rapid expansion of branches has increased establishment costs and reduced the quality of supervisory and managerial staff 14. Malpractices in privately owned banks can be checked by adopting appropriate monetary and fiscal policies and through efficient supervision, nationalization is not necessary

15. Public control leaves the doors of banks open for corruption and favoritism. Delays and lethargy in work are common in public sector undertakings.

What are the main functions of banks?


There are four types of banking services. They are as follows1) 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 country1) 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 bankers bank.

Commercial banking services Commercial banking services include1) 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 are1) 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.

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 customers 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. Bankers relation with the customer is reversed as soon as the customers 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 banks 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 customers money is under a duty not to part with it which is inconsistent with the customers 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.

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 bankers duties are the customers rights and the bankers rights are the customers 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 customers cheques because, it is recognized under section 31 of the NI Act, 1881The 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 customers cheques provided the following conditions are fulfilled(a) Sufficient balance in customers 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

Bankers 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 followsbankers..may in absence of a contract to the contrary, retain as a security for a general balance of account, any goods bailed to them.

Bankers 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.

Bankers 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 Claytons 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.

Bankers 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.

Bankers 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.

What are the obligations of a banker?


1. Obligation to honour cheques- the banker is under a statutory obligation to honour his customers 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 customers 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 customers 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.

Explain the bankers right of general lien.


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. Bankers 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 followsbankers..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 bankers 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.

What are the circumstances under which a disclosure by banker is justified? OR Bankers 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.

1. Disclosure under the compulsion of Law- Bankers 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 banks customers. (b) Under the Bankers Books Evidence Act, 1891- a banker may be asked for the Court to produce a certified copy of his customers 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 bankers books for the purpose of such investigation.

2. 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.

3. Disclosure in the interest of the bank- the banker may disclose the state of his

customers 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.

4. 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.

5. Disclosure under Bankers 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.

Who are the bankers 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 banks 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 are1) 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 minors 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 bankers duty n case of lunatics1) 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 customers 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 customers 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 exists1) 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 principals 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 customers 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 principals 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.

What are the functions of commercial banks?


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 bankers 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 todays 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 headsa) 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 travellers cheque, travellers letter of credit and circular notes. (iv) Collecting information bout other businessmen for customers. (v) Collection of statistics and data. (vi) Lease financing.

What are the functions of the Reserve Bank of India?

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.

Explain the management, powers and constitution of the Reserve Bank of India.
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.