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(1) SECTION A (2 marks)


Who is a customer?
To constitute a customer there must be some recognizable or habit of
dealing in the nature of regular banking business _ Sir John Paget.
Any person can become a customer provided;
If he opens any type of account with the bank
Frequency of transaction is anticipated but not insisted upon
The dealings must be in banking in nature
Person who avails the services provided by the banker
b) Define conversion?
Conversion refers to unlawful taking, using, disposing or destroying
of goods or property which is in consistent with the owners right of
possession and ownership of the goods or property to which he is
a) Expand FDR.
Fixed Depository Receipt
b) What is blank endorsement?
An endorsement is said to be in blank if the endorser puts his
signature only on the instrument and does not write the name of any
person to whom the payment should be made is called as blank or general
c) What do you mean by material alteration?
Material alteration is an alteration by which alters materially the
operation of a cheque and there by the rights and liabilities of the parties
there too.
d) What is Hypothecation?
It is a contract where by a movable property is made available by
the borrower to the lender as security without transferring the ownership
and possession of the property.
e) Define
An executor is a person appointed by the testator for the purpose of
executing his will after his death. That is winding up his estate and other
responsibilities. He gets the authority to act from the official probate
and he is required to act in accordance with the terms and conditions of
the will.

f) What is Bank Overdraft?

A bank over draft is a financial arrangement under which current
account holder is permitted by the banker to draw more than the amount
standing to his credit up to a specified limit.
This is a temporary financial arrangement made for short period
with an agreement that borrower will bring back his current account to
credit balance at the end of every financial year.
g) What is lien?
Lien is the right of one person to retain the property in his
possession belonging to another until the debt due from the owner of the
property is repaid. There are two types of lien General lien and Special
j) State any two differences between debit card and credit card
Debit Card
Credit Card
A debit card holder can buy goods Credit card holder uses credit
& services by automatically
line by making drawings within a
debiting the payments to card
specified or sanctioned limit and
holders account
makes payment on receiving the
bill along with the applicable
charges and interests.
To use a debit card a person must To use credit card one need not
have sufficient amount in his/her
have to have money amount in his
account and purchasing is limited
to the amount avail in the
account, it cannot be exceeded.

SECTION-B (8marks)
(2.) State the circumstances to refuse the payment of a cheque?
Cheque is an instrument in writing containing an unconditional order
drawn on a specified banker signed by the drawer directing the banker to
pay on demand a certain sum of money only to a certain person or to his
drawer or to the bearer of the instrument.
Circumstances to refuse the payment of a cheque
When a banker receives a notice of the drawers death, insolvency,
insanity etc.

When the drawers signature on the cheque differs from his

specimen signature.
If the funds are subject to Bankers right to set off
When the banker receives garnishee order
If the cheque is countermandated
If the cheque is mutilated
If the words and figures are differs
When a breach of trust is intended
If the endorsement is irregular
If the cheque is not drawn properly

(3.) What are







Negotiable means transferable by delivery in return for consideration

and the term instrument needs any written document by which a right
is created in favour of another person. Therefore a negotiable
instrument is a written document by which a right is vested in one
person is transferred to another person by delivery. There are three
types of negotiable instruments they are: Bills of Exchange
Promissory Note
Negotiable instruments must be in writing
It is an unconditional order or promise
The amount of the instrument must be certain
Payable to order
The payee must be a certain person
Time of payment should be specific
Signature of the drawer is important
Delivery of instrument is essential
Stamping of instrument is essential in case of BoE and
Promissory Note.
4.) What is crossing? What are the types of crossing?

Crossing takes place by drawing two parallel transverse lines across the face
of cheque with or without the words and company or not negotiable
between the parallel transverse lines.
It makes it difficult for a wrong person to get the payment
It facilitates the tracing of the person who has received the
Types of crossing:
1. General Crossing
2. Special Crossing
General Crossing
General crossing means the act of drawing two parallel transverse lines
across the face of the face of the cheque with or without words and
company, or not negotiable or account payee or any abbreviation thereof
between the parallel lines
Special Crossing
Special crossing means writing the name of the collecting banker in between
the transverse lines.
Special Crossing means writing across the face of the cheque name of some
banker with or without lines. That is it requires name of the collecting
banker between the transverse lines.
(5.) State the innovative services of modern banker.
Agency services
Payment and collection of subscriptions, dividends, salary
Purchase and sale of securities
Acting as executor
Acting as attorney
By granting power of attorney, the customer authorises the banker to
receive dividend and interest on securities belonging to him and give
valid discharge thereof.
General utility services
Safe custody of valuables
Letters of credit
Travellers cheque
Remittance of funds
Merchant banking
Dealing in foreign exchange business

Lease financing
Housing financing
Housing finance
Underwriting of securities
Tax consultancy
Credit cards
Gift cheques
Consultancy services
Teller system

SECTION -C (15 marks)

(6).Briefly explain the principles of lending and factors to be considered
while making advances?
The main business of a banking company is to receive money and
lend money .Lending money always involves risk because there is no
certainty of repayment. But a banker earns bulk of his income only through
lending. A banker should be very cautious in lending, because he is not
lending money out of his own capital. A major portion of money lends
comes from the deposits received from the public. These deposits are mostly
repayable on demand. Hence, while lending money he must take into
account the following general principles of sound lending.
General principles of sound lending:
Purpose of the loan
Diversification of risks
Assured repayment
Social objectives

The law of limitation act

Since banks deals with the money of their customers, they have to ensure the
safety of the funds lent. Safety means that the borrowers should be in a
position to repay the loans borrowed with interest, as and when they are due.
The repayment of borrowers inurn depends upon (a) their capacity to repay,
(b) Their willingness to pay, (c) the collateral security offered.
A bank has to maintain liquidity position, so that he can meet the demands
of his customers at any time. Money granted for long periods are less liquid
because they cannot be received back in times of need. Liquidity also
depends upon the types of the asset a banker selects, while granting loans
and advances. Hence the principle of liquidity demands that a banker should
confine his lending to short term, against assets which can be converted into
cash immediately.
Commercial banks also exist for earning profit. A banker cannot run the
banking business without profit. Profitability demands that a banker should
employ all funds to earn maximum profit. But liquidity demands that the
banker should maintain a large cash reserve to meet the demands of
customers. An experienced banker knows that liquidity and profitability
must meet with each other at a point called safety. Hence safety and liquidity
should not be sacrificed for profitability.
To minimise the chances of risk, security should be insisted upon. The
security must be adequate and easily realisable.
Purpose of the loan:
Another important cannon of lending is that the purpose of loan must be
enquired into by the banker. Repayment of the loans mainly depends upon
the purpose for which loans are needed. Loan for productive purposes would
enhance the earning capacity of the borrower, and thus it would pay way for
easy repayment.
Diversification of risk:
This can be done by granting moderate loans to a large no. of customers,
spreading over a wide area.
Assured repayment:
When there is default in repayment, a bankers ability to create further credit
is affected. Hence while advancing money, he should see the source of

repayment. For example loan against a FDR which is going to mature

shortly, a debenture which is to be redeemed shortly etc are considered as
sound loans.
Social Objectives:
While making the advances, the banker should give the highest priority to
the national interest. It is the responsibility of each and every bank that the
bank credit flows smoothly to the neglected sectors of the economy and to
the under privileged sectors of the society.
The Law of Limitation Act:
A lending banker should also bear in mind the law of limitation of act, a debt
will become a bad one after the expiry of 3 years from the date of the loan.
Hence banker should be very careful in renewing the loan, year after the
year. Otherwise these loans would become bad subsequently.
(7)Who is a collecting banker? Explain the legal protection given to the
collecting banker?
Meaning of collecting banker
Collecting banker is a banker who collects the cheque drawn upon other
banker for and on behalf of his customers; he undertakes the work of
collection of cheques.
Legal Protection given to the collecting Banker:
The protection is given only if the collecting banker has collected
the cheque in good faith and without negligence
No protection is granted if the cheque accepted by the collecting
banker is open cheque or uncrossed cheque
Protection can be claimed only for the cheque which has been
crossed before it is presented for the payment
An open cheque cannot be send for collection
Collecting banker gets protection only when he has satisfied
himself with the equinity of the customer before opening an
account for the new customer.
Protection to the collecting banker only when he is acting as an
agent and not when he acts as a holder for value
6. Explain the precautions to be taken while opening account in the
name of:
(a) Executor
(b) Administrator
(c) Trustee

(a) Executor:
An executor is a person appointed by the testator for the purpose of
executing his will after his death. That is winding up of his estate and
other responsibilities. He gets the authority to act from the official
probate and he is required to act in accordance with the terms and
conditions of the will.
Precautions to be taken while opening the account;
On receipt of notice of the death of the testator banker has to stop
the operations of the account.
Banker should ask the executor to produce the official probate to
allow them to open the account.
After the receipt of the probate banker should allow them to open
the account in the name of Executor for the estate of Mr. X..
Banker is required to ensure that the credit balances will be
transferred to the new account which is opened in the name of
Banker has to make sure that executor is not misappropriating/
misusing the funds which are available.
Banker can extent the services of loans and advances but before
that he has to make sure the money will be used properly and he
has to make sure the money will be used properly and he has to
keep sufficient security for the loans and advances.
In case of insolvency of an executor that will not stop him to
continue to act as executor, but in case of death or lunatic
conditions court has to appoint a new executor by releasing a new
a probate.
Trustee is a person with whom the confidence is reposed; the person
for whose benefit the trust is found is called as beneficiary.
Precautions to be taken while opening the account;
Banker must examine the original trust deed and ascertain the
nature of the trust, names of trustees and power vested in them.
Banker has to keep a certified copy of the trust deed for his future
Banker should get the account opening form signed by all the
He should get the declaration from all trustees that they are entitled
to act as trustees and work for the beneficiary.
He should obtain the specimen signature of the trustee who will be
operating the account. but in case of any financial advances or

mortgaging the trust property signature and approval of all the

trustees is very essential.
(9)Explain the relationship between banker and customer.
Essentially the relationship between banker and customer is that of a
contractual relationship. This relationship is of two types
-general relationship
-special relationship
Primary General Relationship:
Banker is not a bailee or depository of customers money.
A bailee accepts the bailment of certain things on the conditions that
the things bailed will not be utilised by him and the identical things
will be returned. He cannot act as a depository because he has to
perform his basic banking business.
Banker is not a trustee of customers money
Banker is not an agent in respect of customers money
Banker is only a debtor in respect of customers money
1. banker is a privileged, honoured debtor
2. customer is only a general creditor
3. demand for repayment is necessary
4. Customer can demand the money whenever he wants
5. The demand should be made at proper place and proper
Secondary General Relationship:
1. Banker is a bailee for customers assets
2. banker acts as a trustee
3. Banker acts as an agentAgent-principle relationship
Special Relationship:
Rights and obligations of a banker towards the customer
Bankers obligation to honour customers account
The bankers primary contract is to repay the money repaid from his
customers account by honouring customers cheque subject to
following conditions:
1. There should be sufficient balance in the account
2. Funds must be properly applicable for the payment
3. Banker must cross check that there is no legal bar preventing
the payment of that particular cheque
Bankers obligation to maintain the secrecy of customers account
Banker has no tight to disclose the account details of a customer.
Exception of bankers obligation to observe secrecy:
1. Disclosure as per law
2. Disclosure as per the interest of the bank as a common courtesy

3. Disclosure as per the will of the customer

4. Disclosure in the interest of the public
Bankers Right to general lien
Lien is the right of one person to retain the property in his possession
belonging to another until the debt due from the owner of the property
is repaid. There are two types of lien
(1) particular lien (2) general
(1) Particular lien
Particular lien refers to property which is retained by the lender
against a particular debt is cleared by the debtor.
(2) General lien
It is the right of the creditor to retain any property until general balance is
The securities obtained by the banker should How to exercise lien? /
conditions to be satisfied for the enjoyment of general lien.
The property should come to the possession of the banker and that
possession should be obtained lawfully
The security must belong to the customer
not be kept by the customer for special purpose and lien can be
exercised on deposits only when it is due for payment.
Circumstances under which banker cannot exercise lien:
No lien on safe custody
No lien on money deposited on specific purposes
Lien obtained by force or securities left with the banker for
availing the loan cannot be considered as general lien.
No lien on securities furnished to cover specific loans.
Bankers right to charge compound interest
Right to charge incidental charge
Incidental charges are the charges which can be in the form of service
charges, ledger folio charges, processing charges, handling charges etc.
and incidental charges are also levied on unremunarative current accounts
where the credit balance is very small where it cannot be used for
productive purpose.
Charge Commitment Charge
This is the charge levied on over drafts and cash credit A/c besides
charging interest on the utilised portion of the overdraft there will be
charge on unutilised portion of the overdraft which is called as
commitment charges.
Bankers Right to Charge Commission

Banker has the right to charge commission when he is acting as an agent

Bankers Right to set off or bankers right to combine Account
It refers to the right of a banker to adjust the amount due to him from a
customer on one account against the amount due from him to the customer
on another account.
It is the right of the banker to combine or adjust the debit and credit balance
of two or more similar accounts held by the customer in his name.
Conditions to be satisfied for the exercise of right to set off
The debts must be mutual and it must be due for payment by the same
The customer should open the account only in his name
Banker cannot set off the account when the customer is having a joint
account for his personnel account
When customer is acting as a trustee banker cannot set off the trust
Banker cannot set off companys with personal account
Bankers Right on a customers account is attached with Garnishee Order
When a customer fails to pay the amount due from him to his creditor and
when the creditor knows that some money is due to his debtor from another
party he may apply to the court for the issue of garnishee order, directing the
debtors debtor not to make any payment till he gets further instructions
from court of law.
The word garnishee is derived from the Latin word garnire which
means to warn
Funds attachable for garnishee order
Deposits repayable on demand
Savings bank account
Deposits repayable at affixed rate after the expiry of specific time
which is due for payment
Funds not attachable by a garnishee order
Funds held by the customer as a trustee
Deposits held as security for advances
Assets kept in safe custody
Bankers right of appropriation
The general rule regarding the appropriation of payment is that the party
who makes the payment that is the debtor has the right to appropriate the
payment to any debt or any accounts as he likes.
If the debtor fails to make any specific appropriation of payment made by
him ,at the time of payment the creditor can appropriate and apply the rule of
appropriation. But it is obligatory of the banker that to inform the customer
about the appropriation

Rule in Claytons case

If neither the debtor nor the creditor makes any appropriation then it should
be made in accordance with the rule known as Claytons case. That is the
sum first paid will be the sum first drawn out.
Bankers Right to follow law of limitation
As per the provisions of limitations Act 1963 in case of any debt which is
due by the debtor, creditor becomes time barred if the debts are not cleared
within three years.
In case of current account the limitation period starts from the date of when
the customer demands for repayment.
In case of F.D account the period of limitation starts from the date of
producing deposit receipts for payments.
In case of loan account the period of limitation starts after three years from
the date of availing the loan by the customer.
(10.) What precautions banker has to take while advancing money on
security of
(a) Life insurance policy
(b) Land and building
(c) Goods
Precautions has to be taken while sanctioning loans against:
(a)Life insurance policy
Banker should be careful in accepting life insurance policy as security
against advances he should examine the terms and conditions of the
Banker should see the policy provisions will not restrict for the
assignment of the policy.
He has to verify the type of the policy. In case of some policies the
sum assured is payable only on the death of the policy holder
Banker has to make sufficient provisions for future payment of
premium. He should get a letter signed by the customer to debit the
premium amount from his account in case of any failure in paying the
The loan and advances will be calculated as per the paid up value of
the premium by keeping 20% of margin
Banker has to make sure that policy will not be re assigned after
taking the loans and advances.
(b)Land and building
Banker has to verify the original documents of the property
Banker should verify the ownership of the property
Banker has to get the valuation of the payment done

Banker has to verify building has already been mortgaged to some

other lender
Banker has to verify the age of the building and quality of
Banker should take into account the honesty, integrity and trust
worthiness of the customer
Banker must enquire into the purpose for which the loan is taken
Banker should verify the nature of the goods
Proper valuation of the goods
Proper storage of the goods
All goods subject to the charge must be insured upto the market value
of the goods
Banker should conduct periodical inspection to see that the quality
and quantity of the of the goods in stock tally with the records
Loans against goods must be granted only for short period.