7/20/2017 Banker and Customer- General Relationship

BANKING LAW
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1.����� Explain the origin & development of banking in India.

2.����� What are the objectives & achievements of bank nationalization in India?

3.����� State the argument for & against nationalization

4.����� What are the main functions of banks?

5.����� Who is a banker and customer? Explain the general relationship between banker & customer. OR The relation between a banker and a customer is that of a
debtor and a creditor. Explain.

6.����� Explain the special relationship between banker & customer. OR What is the special relationship arising out of general relationship between a banker and a
customer. OR What are the rights and obligations of a banker towards a customer?

7.����� What are the obligations of a banker?

8.����� Explain the banker�s right of general lien.

9.����� What are the circumstances under which a disclosure by banker is justified? OR Banker�s duty of secrecy is not absolute. Explain.

10.������� Who are the� banker�s special customers? Explain the precautions to be taken by the banker in opening and operating their accounts.

11.������� What are the functions of commercial banks?

12.������� What are the functions of the Reserve Bank of India?

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

14.������� Explain the role of Reserve Bank in economic development.

15.������� In what way does the Reserve bank exercise control over the commercial banks?

16.������� Explain the Reserve bank�s licensing function.

17.������� Write a short of Regional Rural Banks

18.������� Write a note on Central Co-operative banks.

19.������� What are the advantages & disadvantages of unit & branch banking?

20.������� What are the differences between schedule & non-schedule banks?

21.������� What are the rights of a banker against surety?What are the precautions to be taken by the banker?

22.������� Explain the concepts of guarantee & indemnity

23.������� What are the precautions to be taken by the banker in the case of hypothecation?

24.������� What are the differences between lien & hypothecation?

25.������� What are the differences between hypothecation & pledge?

26.������� Write a note of secured & unsecured loans

27.������� Write a note on fixed deposits

28.������� Write a note on current account

29.������� Write a note on savings bank account

30.������� Write a note on recurring account.

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.

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7/20/2017 Banker and Customer- General Relationship
���� 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.

2. What are the objectives & achievements of bank nationalization in India?
Objectives-

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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 agriculture, small industry and exports, weaker sections and backward areas
3. fostering of new classes of entrepreneurs, so as to create, sustain and accelerate economic growth
4. professionalisation of bank management
5. providing adequate training as well as reasonable terms of service to bank staff
6. 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
7. to curb the use of bank credit for speculative and other unproductive purposes
8. to bring banks under the control of RBI

Achievements

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1. 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%
2. Deposit mobilization-after nationalization banks attract deposits from different sections by means of attractive deposit schemes
3. 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
4. Increase in total transactions-the total deposits which was 4,664 crores in 1969 increased to 38.30 trillion
5. 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
6. Profit making-after nationalization, banks are making profits in addition to achieving economic and social objectives.
7. Safety-the government has given importance to safety of the banks. The RBI exercises tight control over banks and safeguards depositors interest

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4) Acts as banker to the govt. Extending loans to agriculture and small scale industries is risky and less remunerative and may weaken the economic viability of these institutions 3. banks provide assistance for the progress of agriculture. 4. etc 3. It would replace the profit motive with service motive 11. Finland. 6. 2) Discharges the treasury functions of the Government. Essential for successful planning and all-round progress of the national economy. 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. Like other countries. http://hanumant. It would help in stabilizing the price levels by eliminating artificial scarcity of essential goods 5. Enables the Reserve Bank to implement its monetary policy more effectively 10. community development and for the welfare of the people. industry. Public control leaves the doors of banks open for corruption and favoritism. Bank nationalization should follow and precede nationalization of all major trades and industries of the country 12. Nationalization would safeguard interests of public and increase their confidence thereby bringing about a rapid increase in deposits. nationalization is not necessary 15. 2. 15. 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. It would secure standardization of banking services in the country 12.General Relationship 8.com/Banking%20law%20-%20Meenakshi%20Natesan. Other countries like Sweden.html#_Toc269552287 3/24 . 10. 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.JGSY. Delays and lethargy in work are common in public sector undertakings. Inflation is caused by unsound monetary and fiscal policies and nationalization of banks cannot solve this problem 13. Nationalization involves huge amounts to be paid as compensation to the shareholders adding to the financial burden of the government. Developmental functions. Against���������������������������������� 1. It would enable the baking sector to diversify its resources for the benefit of the priority sector. ���� 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. Through pubic ownership and control. Denmark etc have privately run banks and are running smoothly 7. Eliminates wasteful competition and raises the efficiency of the working of banks 7. banks function like other public utility services by catering to the financial need of the common man. Rapid expansion of branches has increased establishment costs and reduced the quality of supervisory and managerial staff 14. enables rapid increase in the number of banking offices in rural & semi-urban areas & helped considerably in deposit mobilization to a great extent 8. Control of RBI and government authorities make the bank officials scared to take decisions and it adversely affects the bank services 8. 2) Commercial banking services.7/20/2017 Banker and Customer. 14. It would remove the concentration of economic power in the hands of a few industrialists 4. 3) Manages the money affairs of the nation and regulates the internal and external value of money. Inter-state rivalries and policies would raise their ugly heads. They are as follows- 1) Central banking services. necessary for the furtherance of socialism and in the interest of community 9. damaging the present sound banking system. 11. Would check the incidence of tax evasion and black money 13. trade and other developmental plans of the government 9. State the argument for & against nationalization For������� 1. It may not lead to socialism as State capitalism is not socialism 4. It would enable the government to obtain all the large profits of the banks as its revenue 2. 4) Non-banking financial services. 3) Specialized banking services. Thus preventing bank failures 3. Malpractices in privately owned banks can be checked by adopting appropriate monetary and fiscal policies and through efficient supervision.after nationalization. Banks were not at all responsible for the evasion of taxes or for creation of black money. high deficit financing and� corrupt public administration. India should also get profit by nationalizing her banking industry. rural development. It was the product of an irrational tax-structure. It may reduce the efficiency of these banks as political interference will impair the smooth working of these institutions 5. What are the main functions of banks? ��� There are four types of banking 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. They undertake to manage the funds of the principal so as to generate maximum return.com/Banking%20law%20-%20Meenakshi%20Natesan. 3) Rural credit banks for generating funds for extending rural credit. the prudent. Explain. through the supply of money. Financial institutions acting as portfolio managers receive funds from the public and manage the funds for or on behalf of its depositors. industry and agriculture by meeting their financial requirements. OR The relation between a banker and a customer is that of a debtor and a creditor. Thus they encourage the development of right type of activities which the society desires. Without the financial assistance the growth of trade and commerce industry would have been very slow. banks acquire control over the supply of money in the country. ���� These types of banks accept all types of deposits but mobilize the amount in its specially focused area. Through their control over supply of money they influence economic activities. 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. 2) Land mortgage banks for granting loans on equitable mortgage. 2) Lending various types of loans. Non-banking financial services ���� Many banks are established for carrying out non banking financial services. 4) Developmental banks to support any developmental activities. By moving funds from one place to another banks contribute to the economic development of backward regions. They discriminate in favour of essential activities as against non-essential activities. 5. 11) Through the process of creation of money. 2) By offering attractive interests on the savings of the people deposited with them banks promote the habit of saving in them. The economic importance of banks are- 1) Banks mobilize the small. 7) Banks help trade. 3) By accepting the savings of the people banks provide safety and security to the surplus money of the customers. 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.7/20/2017 Banker and Customer. 10) Banks serve as the best financial intermediaries between the borrowers and the lenders. the punctual. 4) Banks provide a convenient and economical mean of transfer of funds from one place to another. rendering services in paying directly house rent.html#_Toc269552287 4/24 . ���� Banks play a very significant role in the economic development of the country. They help the process of capital formation. commerce. employment. share calls. They exercise a powerful influence on the interest rate in money market. scattered and idle savings of the people and make them available for productive purposes. 8) Banks direct the flow of funds into collective channels while lending money.General Relationship 5) Acts as banker�s bank. Who is a banker and customer? Explain the general relationship between banker & customer. Explain the role of banks in promoting economic development. ������������������ http://hanumant. 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. electricity bills. 9) Banks help the industrious. 6) Banks influence the rate of interest in the money market. ������������������������������� Commercial banking services ���� Commercial banking services include- 1) Receiving various types of deposits. the honest and discourage the dishonest by not giving finance for wrongful purpose. ���� Thus a strong and a sound banking system is indispensable for the economic development of any country. Banking system as a whole has an imp influence on the tempo of economic activity. Even cheques are used for the movement of funds from one place to another. income and general price level in the economy. 3) Extending some non-banking customer services like facilities of locker. Thus banks act as public conservator of commercial activities.

���� A customer need not be a person. ���� One of the important relationships between a banker and customer is that of an agent and principal. In Foley v. 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. borrower and lender. where he acts as the agent. 1872� defines �an agent� as a person employed to do any act for another or to represent another in dealings with third persons. 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.7/20/2017 Banker and Customer. draft. ���� 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. 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. Various legal relationships of banker and customer ���� 2) Agent and Principal. Hart.com/Banking%20law%20-%20Meenakshi%20Natesan. for the purpose of lending or investment. and the banker is under an obligation to repay the debt as and when he is required to do so. ���� According to section 5(b) of the Banking Regulation Act. The banker performs various services of the customer. joint stock company. the respective positions being determined by the existing state of account. 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. Definition of banker ��� �According to section 3 of the NI Act. http://hanumant. Instead of the money being set apart in a safe room. banking means the accepting. 1949. and. ���� Money lender is not considered as a banker as mere lending does not constitute banking business. Definition of customer ���� The term customer is not defined by law. repayable on demand or otherwise. 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. But he does not get any charge over the assets of his debtor/banker and remains an unsecured creditor of the banker. The person for whom such act is done or who is so represented is called �the Principal�.e. a person who has an account in a bank is called a customer. at his disposal. the following essential requisites must be fulfilled: 1) He must have some sort of an account.General Relationship ���� The relationship between a banker and a customer is of great significance. As the loans and advances granted by a banker are usually secured by the tangible assets of the borrower. 1881. a society or any separate legal entity may be a customer. Sir John Paget remarks. save as regards the following of the trust funds into his hands. 2) Even a single transaction constitutes a customer. Hill. 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.182 of �The Indian Contract Act.html#_Toc269552287 5/24 . ���� On the opening of an account a banker assumes the position of a debtor. banker includes any person acting as a banker and any post office savings bank. the baker becomes a secured creditor of his customer. Banker becomes creditor of the customer who has taken a loan from the banker and continues in that capacity till the loan is repaid. ���� Thus to constitute a customer.Sec. �a customer is one who has an account with a banker or for whom a banker habitually undertakes to act as such. The creditor has the right to demand back his money from the banker. ���� A depositor remains a creditor of his banker so long as his account carries a credit balance. of deposits of money from the public. The money deposited with him becomes his property. 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. order or otherwise. �the relation of a banker and a customer is primarily that of debtor and creditor. A firm. Ordinarily. It depends upon the services rendered by the banker to the customer. and is absolutely. it is replaced by the debt due from the banker. ���� Banker�s relation with the customer is reversed as soon as the customer�s account is overdrawn. Foreign Exchange Regulation. and withdrawable by cheque. ���� Acc to Dr. Director of Enforcement. ���� In Shanthi Prasad Jain v. 3) The dealing must be of a banking nature. in so far the same is sufficient and available�.

must compensate the drawer for any loss or damage caused by such default. The banker can retain the goods pledged till the debt is paid. 2) Bailee and bailor. A banker becomes a trustee under special circumstances. in default of such payment. 4) Mortgagee and mortgagor. http://hanumant. Explain the special relationship between banker & customer. The duty to maintain secrecy will be continuing even after the account is closed or the death of the customer.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. In Official Assignee v. It is a kind of credit facility to its customer to facilitate international trade. credit-worthiness and business. ���� The special relationship between banker and customer can be presented as under: General obligations of banker towards customer ���� ���� Obligation to honour cheques. it is recognized under section 31 of the NI Act. OR What are the rights and obligations of a banker towards a customer? ���� By opening an account with the banker. and. it was held that where banks old money for a specific purpose of sending it somebody the money is impressed with trust.General Relationship Buying and selling securities of customer Collection of cheques.7/20/2017 Banker and Customer. 1) Trustee and beneficiary. The banker is therefore under a statutory obligation to honour his customer�s cheques because. ���� 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. there will be some rights conferred and obligations imposed to the banker as well as the customer. 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 relation between the parties is that of a lessor and lessee. bills of exchange.a bank as guarantor gives guarantee to its customer by issuing a �letter of credit�. National Provincial and Union Bank of England Ltd.e. Rajaram Aiyar. 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. These rights and duties are reciprocal i. 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. He cannot make use of them as he is bound to return the identical articles on demand. 5) Lessee and lessor. 6) Guarantor and guarantee.com/Banking%20law%20-%20Meenakshi%20Natesan. OR What is the special relationship arising out of general relationship between a banker and a customer.during certain circumstances banker becomes bailee. to be a security for money borrowed. ���� This obligation is subject to certain exceptions.when a customer hires a locker in the bank�s safe deposit vault. the banker acts as trustee of customer. When he receives gold ornaments and important documents for safe custody he takes charge of it as bailee and not trustee or agent. executor or representative of a customer Payment of insurance premium. 6. the banker�s duties are the customer�s rights and the banker�s rights are the customer�s duties.pawn is a sort of bailment in which the goods are delivered to another as a pawn.banker accepts the deposits from the customer with an obligation to repay it to him on demand or otherwise.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. 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. the bank undertakes to take necessary precaution for the safety of the articles in the locker. These rights and obligations are called the special features of relationship between banker and the customer. telephone bills etc. 7) Fiduciary relationship.every relation of trust and confidence is a fiduciary relation. It was firmly laid down in Tournier v.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. When a customer deposits securities or other valuables with the banker for safe custody. 3) Pawnee and pawner. promissory notes on behalf of customer Acting a trustee. in India it was made compulsory after 1970.html#_Toc269552287 6/24 .

� In Halesowen Presscook and Assemblies Ltd v. In Syndicate Bank v. the customer�s reputation might suffer and he might incur losses also. He shall not succeed in recovery of money from the customer. processing charges. the banker must according to prevailing usages at the place where the banker conducts his business. 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. � ���� In Devaynes v.����������� �������������������������������������������������� ������������������������������������ http://hanumant.one of the important rights enjoyed by a banker is the right of general lien. It applies to a banker if the customer has more than one deposit or more than one loan account. The cheque. famously known as Clayton s case.the banker is under a statutory obligation to honour his customer�s cheques in the ordinary course of business. If any of these facts are made known to others. 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.may in absence of a contract to the contrary. Thus when a customer keeps two or more accounts at the same bank. But is essential that the account on which a cheque is drawn must have sufficient funds.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.the banker may claim incidental charges on unremunerative accounts such as service charges.the banker is bound to honour the cheque only when hi is duly required to pay. The credit entries in the account adjust or set off the debit entries in chronological order. must be presented before the banker at the proper time. The banker can dishonor the cheques if there are insufficient funds. (b) Funds must be properly applicable. However. the adding of unpaid interest due to the principal amount is recognized.bankers�. Barnet. If some funds are earmarked by the customer for some specific purpose. 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. 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. Lien means the right of the creditor to retain goods and securities owned by the debtor until the debt due from him is paid. Sometimes. � ���� Banker s right to charge compound charges. the bank has a right to combine such accounts and pay the resultant balance. then he is liable to the customer for damages. Westminister Bank Ltd. However. before the latter could recover the debt due to him from the debtor. � ���� Banker s right of set-off. the SC abolished this in case of agricultural loans in the Bank of India case. Thus the banker is bound to honour the customers cheque provided the following conditions are fulfilled- (a) Sufficient funds.com/Banking%20law%20-%20Meenakshi%20Natesan.7/20/2017 Banker and Customer. In the absence of any express instructions. this rule has exceptions(mention briefly) 3. Obligation to keep a proper record of transaction.a customer might be having several bank accounts in his various capacities. 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. 2. Noble. Rights of a banker � ���� Banker s right of general lien. It may either be general or particular. � ���� Banker s right for appropriation of payment. ledger folio charges. penal charges and so on.. 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. appraisal charges. What are the obligations of a banker? 1. ���� 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. West Bengal Cement Ltd. complete and in order. If he wrongfully dishonors the cheque. ���� In Brando v. The banker is therefore under an obligation to take utmost care in keeping secrecy of the details of the customer.the banker must keep a proper and accurate record of all the 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. any goods bailed to them. 7.the banker must keep a proper record of transactions of the customer. Obligation to honour cheques. � ���� Banker s right to claim incidental charges. retain as a security for a general balance of account. some of which are overdrawn and some in credit. he may commit some wrong.General Relationship ���� Obligation to keep a proper record of transactions.the right to set off is a statutory right which enables debtor to take into account a debt owing to him by a creditor. they are not available for honouring the cheques. ���� In India sec 171 of the Indian Contract Act confers general lien upon bankers as follows.html#_Toc269552287 7/24 .there must be sufficient funds of the drawer in the hands of the drawee.a banker has a special privilege to charge compound interest.

1961. Barnet. http://hanumant. lien may be defined as �a right in man to retain that which is in his possession belonging to another. 8) On title deeds of immovable properties. 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. Explain the banker�s right of general lien. 2) On securities or bills of exchange entrusted for specific purpose. until certain demands of the person in possession is satisfied�. 4) Property should not be entrusted to the banker for a specific purpose. 1. 9.banker has no general lien 1) On safe custody deposits. 1891. Circumstances for exercising general lien 1) No agreement inconsistent with the right of lien. retain as a security for a general balance of account. Disclosure under the compulsion of Law. Incidents of lien. (b) Under the Banker�s Books Evidence Act.General Relationship 8. at the request of customer. Exceptions. 2) Dividend warrants and interest warrants paid to the banker under mandates issued by the customer. 4) On deposit account. 1949. ���� Lien means a legal claim to hold property as security. 1970 also allows certain exceptions.may in absence of a contract to the contrary. It extends to all transactions and thus more extensive.lien attaches to 1) Bills of exchange or cheques deposited for collection or pending discount. 3) Possession should be lawfully obtained. 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. which the banker has purchased or taken up. ���� In India sec 171 of the Indian Contract Act confers general lien upon bankers as follows. (a) Under the Income �Tax Act. The exceptions were stated in the landmark judgment Tournier v National Provincial Bank Limited.bankers�. What are the circumstances under which a disclosure by banker is justified? OR Banker�s duty of secrecy is not absolute. 5) On stolen bond. 4) Securities. In Brando v.com/Banking%20law%20-%20Meenakshi%20Natesan. 3) Securities deposited to secure specific loan but left in banker�s hand after loan is repaid. any goods bailed to them.a banker may be asked for the Court to produce a certified copy of his customer�s account in his ledger.the RBI is empowered to collect credit information from Banking Companies relating to their customers (d) Under the Banking Regulation Act. (c) Under the Reserve Bank of India.every bank is compelled to submit an annual return of deposits which remain unclaimed for 10 years. Explain.html#_Toc269552287 8/24 . � Banker s right of general lien ���� One of the important rights enjoyed by a banker is the right of general lien. 3) On articles lefty by mistake or negligence. The baker would. therefore. 6) Until due date of the loan. (e) Under the garnishee order. According to Halsbury. ���� Lien is of two kinds. the banker must disclose the nature of the account of a customer to the Court.. 7) On trust account.1934. negotiable or not.7/20/2017 Banker and Customer. for the amount paid. It is also subject to certain exceptions. ���� The duty of the banker to maintain the secrecy is not an absolute one.Vide Section 131 & 133.Banker�s obligation to his customer is subject to his duty to the law of the country.when a garnishee order nisi is received.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. Section 13 of the Banking Companies (Acquisition and Transfer of Undertakings) Act. be justified in disclosing information to meet the following statutory requirements. 2) Property must be possessed in his capacity as a banker.

General Relationship (f) Under the Companies Act. ���� In Mohori Bibi v. However. Minor ���� A minor is a person who has not attained the age of 18 and in case a guardian is appointed. The customer gives implied consent to this practice at the time of opening the account. his auditor. if the guarantor undertakes to indemnify he will be held liable though borrower is minor. For example. There are also impersonal customers like schools. 4) Banks should prudent to issue cheque books only to minors of. (g) Under CrPC. ������������������������������������������������������������ ���� Banks solicit deposit of money from the members of the public. 8) A guarantee obtained to secure the money borrowed by a minor is also of no avail. a minor executed a mortgage for Rs 20000 and received Rs 8000 from the money lender.if the baker has to recover the dues from the customer or the guarantor.the customer may instruct his banker to give some or all other particulars of his account to say. It is implied that the banker can disclose information to the guarantor. drunkards. 10.html#_Toc269552287 9/24 . The money lender wanted refund of money which he had actually paid. 3. the banker must produce all books and papers relating of the Company. Disclosure in the interest of the bank. married women.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. insolvents etc who are not competent to open such accounts. disclosure of necessary facts to the guarantor or the solicitor becomes necessary and is justified. 7) Since a contract with a minor is void and cannot be enforced against him in Court of law. it is 21. ���� 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. http://hanumant. lunatics. in such case banker can disclose. 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. Disclosure under the express or implied consent of a customer.com/Banking%20law%20-%20Meenakshi%20Natesan. Disclosure under Banker�s enquiry. Banker should insist on to give some schooling record or date of birth as entered in Births and Deaths Register. clubs. The PC held that an agreement by a minor was absolutely void and therefore.7/20/2017 Banker and Customer. the bank should record the genuine date of birth of the minor. a minor�s account should never be allowed to be overdrawn. Subsequently. 6) As a measure of precaution. Dharmodas Ghose. 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. banks adopt a general rule not to accept deposit exceeding a particular sum.the banker may disclose the state of his customer�s account in order to legally protect his own interest. say sixteen or seventeen years of age. joint stock companies etc. 2) At the time of opening of account of minor. Minors are regarded �pet children of law�. 2. 1956. Who are the� banker�s special customers? Explain the precautions to be taken by the banker in opening and operating their accounts. certain precautions are to be taken by banks while opening accounts in the name of the following customers. money lender was not entitled repayment of money. Banker can also disclose to a referee whose name is suggested by the customer. 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. the minor sued for setting aside the mortgage. partnership firm.it is an established banking practice to provide credit information about their customers by one bank to another. 5) Accounts for illiterate minors are not opened in their single name. illiterate persons. 4.the police officers conducting an investigation may also inspect the banker�s books for the purpose of such investigation. 5. ���� A bank�s special customers are generally minors. blind people.

4) One or two identification marks of the depositor should be noted on the account opening form. 3) The banker should always observe that there is credit balance in her account. Lunatics are disqualified from contracting but the disqualification does not apply to contract entered by lunatics during their period of sanity. 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. ���� He banker should therefore due precaution while opening an account in the name of a pardhanishin woman. without having any proof of lunacy. the contract between them is void. something about him and his occupation and position in life. 4) Banks usually require that a married woman be independently advised by her own solicitor when depositing security for the account of other persons. her thumb impression should be obtained on the account opening form and on the identification card. 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. and if she is living with her husband. 5) It should return all cheques of customer�s account with the word �refer to drawer� and not �customer insane�. He must get definite information about the lunacy of the customer. 2) If an existing customer becomes insane. 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. no cheque book facility is provided on accounts in the name of illiterate persons. 6) In case of an illiterate married woman.html#_Toc269552287 10/24 . Also he should seek suitable securities preferably on her. 6) If a third party is authorised to draw on customer�s account. It is so because.7/20/2017 Banker and Customer. the name of the employer. 1) While opening an account of a married woman.General Relationship Lunatics ���� Lunatics are persons of unsound mind. 4) If a banker dishonours a cheque in a hurry. Following are banker�s duty n case of lunatics- 1) Since a lunatic has no capacity to contract. 6) Normally. It should make careful note of lunacy order. he will be liable for wrongful dishonour of cheque. the banker knows the fact of lunacy of customer. acc to sec 11 of the ICA. 5) A married woman may enter into a contract of guarantee and it is enforceable only against her separate estate. However. As the identity of such woman cannot be ascertained the banker generally refuses to open an account in her name. 3) A banker must not be carried away by hearsay information or rumours. 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. the banker has no right to debit his account for payment made out of his account from the moment. Illiterates ���� An illiterate person is competent to contract and bank may open an account in his name. 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. 7) If one party to an account opened in joint names becomes mentally incapable of managing his or her affairs. and on the back of the withdrawal form or cheque should be duly compared with the specimen impression kept by the bank. but special care should be taken by the banker before opening an account. the banker must immediately stop the operation of the account. which can be attached by the Courts. The photographs have to be attested by the bank officer/ witness. 5) The illiterate person should be provided with a passbook which should also contain an attested photograph of the illiterate person.com/Banking%20law%20-%20Meenakshi%20Natesan. the bank should enquire about her means and circumstances. A banker may open an account in the name of a married woman like any other customer. Married women ���� The Hindu married women are governed by the Hindu Succession Act and other married women by Indian Succession Act. 2) A passport size photograph of the illiterate person is identified before the banker in presence of the account holder. and if he is an employee. http://hanumant. a banker should exercise caution while opening account for the wife of an undischarged insolvent. the banker should not allow either party to operate the account. 8) The thumb impression of illiterate person on the withdrawal form or cheque (if provided). 2) In case she applies for an overdraft. 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. no banker knowingly opens an account in the name of a lunatic.

6) On attaining majority. Following are the precautions to be taken by the banker in opening and operating accounts in the name of HJF. 1) The banker should first know the provisions of the Part Act before he opens an account for PF. 2) The agent must assign the cheque for and on behalf of the principal. 5) The agent should sign in a manner to indicate that he is signing as an agent. insanity or bankruptcy. Mandate must be signed by all the parties. the other adult coparceners should sign for self and as guardians of minors. 7) Any member of the HUF can stop payment of a cheque drawn by karta. so that the third parties would know that he is dealing in a representative capacity. 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. it should be recorded in a register. Dealings with unregistered firms will involve risks. or in fact any person to pay into his own private account. even though the karta would operate the account. 4) If there are minor coparceners. 5) There should be a clear mandate from all the partners. capital. Thus before granting loans necessary enquiries should be made to ensure it.html#_Toc269552287 11/24 . indexed alphabetically. Otherwise. the application should be made to sign by the principal himself. or to represent another in dealings with third persons. Trust http://hanumant.7/20/2017 Banker and Customer. a cheque signed by an insolvent partner before the date of adjudication should not be paid b the banker without conformation from other partners. is known as an agent for another. 1) The account may be opened in the name of karta or in the name of family business and should be duly introduced. 3) Whenever a bank receives a mandate. 7) No partner has an implied power to sell or mortgage the property of his firm. If the firm is registered the banker should get a copy of the registration certificate. So in case of mortgage of property. delegating authority to agent to operate the account. 7) A banker should not allow an agent to overdraw his principal�s account express with his express authority. a banker should get a written request from all the partners jointly for opening an account. cheques which he has endorsed on behalf another. 6) The banker should on no account allow the agent. he should get a copy of the duly stamped partnership deed. 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. Agent ���� A person employed to do any act for another. without satisfying himself that the agent has the authority of the principal to do so. 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. and instructions should be noted in the customer�s ledger account. partners and their powers. 3) To be on safer side. 4) In case the agent is authorised to open an account on behalf of the principal. 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. 2) The account opening form should be signed by all adult coparceners.com/Banking%20law%20-%20Meenakshi%20Natesan. 5) Authority should be given to the karta to operate the account of all concerned under their joint signature. the bank may not be able to succeed in a suit for recovery of debt. He has no right to set off and lien over the accounts.General Relationship Joint Hindu families ���� A JHF or a HUF consists of all persons lineally descended from a common ancestor and included their wives. the deed of mortgage should be signed by all the partners. 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. 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. serially numbered. borrowing powers etc. The banker should take the following precautions while dealing with a partnership firm. 4) The banker should go through the partnership deed and carefully study the objects. 6) The banker should not mix the personal and private accounts of the partners. the minor coparceners should be asked to join with other coparceners in signing the existing account opening form in ratification of previous transactions. 9) Since a firm stands dissolved on insolvency or insanity of a partner. He should enquire about the details of the firm. Authority to open an account in the name of an individual partner is positively denied. When the bank receives a notice about any dispute amongst the family members of the HUF.

no trustee can delegate his power to another.this function once considered to be the most paying part of banker�s business is in modern times performed generally by the central bank. 3) The banker should note the objects for which the trust has been created so as to facilitate the passing of cheques. all the trustees may join in opening such account. 6) In case of breach of trust the bank must see that it does not become a party to the breach.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.General Relationship ���� A trust is an obligation annexed to the ownership of the property.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. Here the borrower can withdraw the amount in installments as and when he needs. be prominently noted at the ledger head and specimen signature card and withdrawals should be restricted. recurring (explain lil). They can be broadly divided into two categories. Its importance has dwindles to a large extent in some developed countries where cheque currency has replaced bank notes to a large extent.deposits constitute the main source of funds for commercial banks. (iii) Cash credit. A loan may short. or declared and accepted by him. 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. Meaning of CB. In the absence of such instructions.html#_Toc269552287 12/24 . They must all act together.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. 2) Instructions regarding limitation on withdrawal in the trust deed.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.it is the main business of CB.fixed. It is granted either against collateral securities or against personal security of the borrower.the functions of CB are numerous. over-drafts. They invest a considerable amount of their funds in govt and industrial securities. d) Investment of funds on security. e) Creation of money. the bank on receiving notice should suspend all operations in the account. Functions of commercial banks. (i) Loan. 5) If one of the trustees dies or retires. or of another and the owner. if any. if the trust deed is silent the bank can let the operations to continue. 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. http://hanumant. b) Issuing notes/cheques. savings. commerce and industry through wide networking of branches throughout the country. medium or long term.it is a financial arrangement under which a borrower is allowed an advance under a separate account called cash credit limit. ���� While opening accounts in the names of persons in their capacity as trustees. 7) If the trustees are authorised to borrow to discharge the functions of the trust. cash credit. The banker is justified in dishonouring the cheque drawn by a trustee. Banks. In India it is required by statute for CB to invest a considerable amount of their funds in securities. and arising out of a confidence reposed in and accepted by the owner. They are- 1) Primary or basic functions a) Receiving of deposits.7/20/2017 Banker and Customer. All must join in signing of cheques.it is one of the imp functions of comm. Banks lend funds by way of loans. 1) The banker should examine the trust deed concerning instructions regarding opening and operating the account contained in the trust deed. 11. discounting of bills. for the benefit of another. current. (ii) Over-draft. if intended for breach of trust.com/Banking%20law%20-%20Meenakshi%20Natesan. CBs receive deposits from the public on various accounts. Advances form the chief source of profit for CB. c) Lending of funds.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. 4) A trustee has no individual powers. the banker should take the following precautions. The main types of accounts are. However. Unless expressly provided otherwise in the trust deed. (iv) Discounting of bills of exchange.

Thus the RBI acts as the custodian of the cash reserves of commercial banks and helps in facilitating their transactions. ���� RBI also advices the government on such economic and money matters as controlling inflation or deflation. The Reserve Bank of India has been defined in terms of its function. But it does not pay interest on government deposits.html#_Toc269552287 13/24 . Thus it is the custodian of government money and wealth. It is on the basis of these reserves that the RBI transfers funds from one bank to another to facilitate the clearing of cheques. Day. 12. (v) Collection of statistics and data. It floats loans. (v) Acting as trustee. devaluation or revaluation of the currency. Functions Of RBI: 1) Regulator Of Currency: ���� The Reserve Bank of India is the bank of issue. and finally repays them on behalf of the government.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.7/20/2017 Banker and Customer. (ii) Making payments on behalf of customers. Thus. and administrator of customers. According to Vera Smith. �a central bank is to help control and stabilise the monetary banking system�. (iv) Advising customers regarding investments. deficit financing.the services rendered by a bank as the agent of his customer are called agency services. �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. it provides elasticity to the monetary system. It has the monopoly of note issue. fiscal agent and advisor to their respective governments. It is the Reserve Bank of India in India. traveller�s letter of credit and circular notes. Notes issued by it circulate as legal money. (iv) Collecting information bout other businessmen for customers.L. the central bank keeps the deposits of the central and state governments and makes payments on behalf of the governments. Thus it manages the entire public debts.� ���� According to A.C. b) Miscellaneous or general utility services. The imp agency services are- (i) Collection of money on behalf of customers. executor. pays interest on them. banks also perform a num of secondary functions which may be divided into the following two heads- a) Agency services. balance of payments etc.General Relationship 2) Secondary or subsidiary functions. (iii) Purchase and sale of securities on behalf of customers. ���� RBI can restrict or expand the supply of cash according to the requirements of the economy. (vi) Lease financing. It has its issued department which issued notes and coins to commercial banks.com/Banking%20law%20-%20Meenakshi%20Natesan. Fiscal Agent and Advisor To The Government: ���� RBI everywhere acts as bankers. What are the functions of the Reserve Bank of India? ���� The Central Bank is the Apex Bank of the country. (vi) Rendering of merchant banking services. As banker to the government. It brings stability in the monetary system and creates confidence among the public. ���� It buys and sells foreign currencies on behalf of the government. It is called by different names in different countries.apart from performing the main function the comm. 4) Custody And Management Of Foreign Exchange Reserves: http://hanumant. 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. 2) Banker. ���� 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.

6) Clearing House For Transfer And Settlement: ���� As bankers` bank. powers and constitution of the Reserve Bank of India. The other Directors. bill brokers and dealers. ⤚ 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. 1948. These involve selective credit control and direct action. industry. under the Reserve Bank Act. ⤚ Functions: Mention the above functions in brief. it transfers funds from one bank to other banks to facilitate clearing of cheques. It also buys and sells foreign currencies at international prices. 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. 100 each. 1935 under the Reserve Bank of India Act.com/Banking%20law%20-%20Meenakshi%20Natesan. Four Directors. ���� All the Directors and the officials are nominated for 4 years each by the Central Government. Calcutta. or other financial institutions. ⤚ Constitution: ���� The bank was established as a shareholder`s bank with an authorized and paid-up capital of Rs.html#_Toc269552287 14/24 . the bank was nationalized. Since the RBI holds reserves of commercial banks. For this purpose. http://hanumant. each Board consisting of 5 members appointed for 4 years by the Central Government.7/20/2017 Banker and Customer. 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. one from each of the four local boards. Explain the management. the RBI acts as a clearing house for transfer and settlement of mutual claims of commercial banks. the RBI acts as the lender of the last resort. To transfer and settle claims of one bank upon others. one at each of the cities of Bombay. ���� Further. One Government Official. To look after the affairs there are 4 local Boards. ���� The Reserve Bank of India was established on 1st April. after paying compensation to the shareholders at the market price of the share. Thus RBI as lender of the resort is a big source of cash and also influences prices and market rates. 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. it fixes the exchange rates of the domestic currency in terms of foreign currencies. it adopts quantitative and qualitative methods.General Relationship ���� The RBI keeps and manages the foreign exchange reserves of the country. It sells gold at fixed prices to the authorities of other countries. trade and commerce. 5) Lender Of The Last Resort: ���� By granting accommodation in the form of re-discounts and collateral advances to commercial banks. government securities etc. Delhi and Madras. 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. �������������������� �������������������������������������������������������� 13. 5 crores divided into shares of Rs. the RBI operates a separate department in big cities and trade centres. 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. ���� It acts as lender of the last resort through discount house on the basis of treasury bills. 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. After independence. ���� Besides the above noted functions. This department is known as clearing house and it renders free service to commercial banks.

the RBI has been able to do through its pivotal tool-rate of interest. 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. 2. It has to bring about economic development with stability. issue directions as it deems fit. Agricultural credit-The RBI has made available short term. http://hanumant. medium term and long term finance to agriculture through the hierarchical network of co-operative banks and societies.7/20/2017 Banker and Customer. The RBI has assisted economic development in the following ways- 1. Power Of RBI To Impose Penalty: ���� The RBI has a wide range of powers of supervision and control over commercial and cooperative banks. RBI Control Over Banking Companies: ���� The RBI may. every banking company incorporated in India shall prepare. RBI also appoints additional directors. It has made use of other methods of credit control as well. the role of Central Bank is regulatory. require any banking company to call a general meeting of the shareholders of the company within such time. shall maintain in India by way of cash reserves or by way of balance in a current account with the RBI. all the development plans are in danger of being upset.General Relationship Cash Reserve: ���� Every banking company. This. 14. After the inspections it sends a copy of it to the concerned bank. the role of Central Bank is developmental or promotional.com/Banking%20law%20-%20Meenakshi%20Natesan. The Central Bank is to help in the mobilization of required productive resources and in their efficient allocation. ���� In developed countries. whose conduct is to the interest of the deposits and to secure proper management. Checking inflation. Providing development finance. 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.html#_Toc269552287 15/24 . The RBI control frauds in entire banking industry in India. Explain the role of Reserve Bank in economic development. not less than two months from the date of order. It is the responsibility of the monetary authority to restrain these pressures by freezing a part of liquidity thus generated. The RBI has been quite active in the maintenance of a proper atmosphere of economic development and mobilization of financial resources for economic development. 3. 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. not being a Scheduled Bank. a balance-sheet. Unless inflation is kept in check. In this connection. Accounts And Balance-Sheet: ���� At the expirations of each calendar year. Inspection: ���� The RBI had got the power to inspect the books and accounts of a banking company. It has also been instrumental in setting up Agricultural Refiance & Developmental Corporation and more recently Export-Import Bank and the NABARD.the RBI has helped a great deal in setting up of specialized institutions so that the financial facilities are made available. The inspection by the RBI may be on its own or under the direction of the Central Government. 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 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.the government budgetary operations. by order. owing to increasing size of government expenditure. profit and loss accounts as on the last working day of the year. 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. generate strong inflationary pressures. Directions: ���� The RBI may from time to time. But in a developing economy like that of India. The RBI has the power to call for other returns and information if required.

also provided refiance to banks for export credit 5. 4. The RBI controls credit by changing the statutory reserve maintained by the scheduled banks-section 42 of the RBI Act. It controls credit by exercising moral influence on the banks. or where the RBI is satisfied that for securing the proper management of the banking company it would be necessary to do so. 3. Controls credit by changing the bank rate and its policy of granting accommodation to commercial banks 4. In what way does the Reserve bank exercise control over the commercial banks? ���� The RBI acts as supervisor and controller of banks in India. According to Section 23 of the Act. (c) as banker to the baker As banker to the banks.in the interest of banking policy or in the public interest or in the interests of the banking company or its depositors. the location of an existing place of business situated in India without obtaining the prior permission of the RBI. 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. RBI may appoint additional directors of the banking company-Section 36 AB. During the last 5 decades. the RBI may after recording the reasons and by order. It controls credit through its credit monitoring arrangement 5. This tends to start inflationary spiral. http://hanumant. 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. no banking-company shall open a new place of business in India or change otherwise than within the same city. 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. This is called statutory liquidity rate and the RBI is empowered to step up the rate upto 40% 2. with effect from a specified date. 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. town or village. 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. director. 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. it adds to the active demand for goods and services. the RBI acts as the lender of last resort and grant accommodation to the scheduled banks in the following forms- 1.General Relationship 4. from time to time by order in writing. medium term and long term. the Bank may.Section 24 of the Banking Regulation Act. It has also introduced a scheme of guarantee of bank loans to small industry and till the establishment of Export-Import Bank. Industrial finance-The RBI has also organized industrial finance for both big and small industries to secure all types of loans-short term. 1949. 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. It may issue directions to commercial banks and may prohibit banks to enter into particular transactions. or is conducting them in a manner detrimental to the interests of the depositors. Each bank in India is required to obtain license from the RBI before conducting banking business-section 22. if it is satisfied that all or any of the conditions are fulfilled. The Central Governemnt may on the basis of this report direct the company to wind up. re-discounting or re-purchasing eligible bills 2. inspect any banking company and its books and accounts. By changing the statutory liquidity rate.7/20/2017 Banker and Customer.html#_Toc269552287 16/24 . 1934 and the Banking Regulation Act.Section 36 (b) as controller of credit���������������������������� 1. 3.com/Banking%20law%20-%20Meenakshi%20Natesan. Regulatory credit-When there is an expansion of bank credit. gold or approved securities of an amount not less than 25% of its net demand and liabilities at the close of business everyday. By virtue of the powers conferred on the RBI by the RBI Act. commerce and industry. ������������������������������������� 15. appoint with effect . the relationship between the RBI and the commercial banks are very close. 6. remove from office. 1949 requires that every banking company has to maintain cash. The RBI is required to conduct an inspection of the books of the banking company and issue a license. 5. any chairman. chief executive director or other such officer or employee. one or more persons to hold office as directors of the banking company. The RBI has a 3 fold control over the commercial banks� (a) as supervisory & controlling authority over banks 1.

6) To take the banks to the doorsteps of the poorest people in remote rural areas. and 3.Narasimhan suggested the institutions of RRBs as low cost banking for rural areas should be set up to meet their credit needs. if it is satisfied that all or any of the following conditions are fulfilled- 1.��� ���� It is clear from the above that the grant of a license depends upon the maintenance of satisfactory financial position.com/Banking%20law%20-%20Meenakshi%20Natesan. Functions 1) To provide financial facility to small and marginal farmers. To ascertain the position. 4) To provide easy credit facility to weaker sections of society. 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. Sponsorship ���� Each RRB is sponsored by a nationalized bank known as a sponsoring bank which provides all sorts of helps to these RRBs. agricultural labourers.7/20/2017 Banker and Customer. They may also provide managerial and financial assistance with mutual agreement. 1 crore to improve their viability. The sponsoring bank will assist the RRB in its establishment.General Relationship 16. Objectives 1) To identify a specific and functional gap in the present institutional structure. the location of an existing place of business situated in India without obtaining the prior permission of the RBI. the then existing credit agencies lacked in meeting the needs of rural masses. Prior to that. conducted in a manner detrimental to the interests of its present or future depositors. 1949 contains a comprehensive system of licensing of banks by RBI. 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. 2) To grant loans and advances to artisans. 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. five crore divided into one lakh shares of Rs. Conclusion ���� RRBs are playing an important role as an alternative agency to provide institutional credit. town or village. commerce etc. 100 each and issued capital of Rs. co-operative societies for agricultural purposes or other purposes related to agriculture. The chairman is a paid servant of the sponsoring bank while the members are honorary. Explain the Reserve bank�s licensing function.html#_Toc269552287 17/24 . persons of small means engaged in trade. headed by a Chairman. 3) To fill the gap within a reasonable period of time. This section makes it essential for every banking company to hold a license issued by the RBI. Management ���� The management of each RRB is vested in nine members Board of Directors. A committee under the chairmanship of N. 2) To supplement the other institutional structure. Capital resources ���� Each RRB may have an authorized capital of Rs. The RBI is required to conduct an inspection of the books of the banking company and issue a license. that the affairs of the company are not being or not liked to be. 5) To establish branches in unbanked rural areas. 17. small entrepreneurs. The chairman is appointed by the Central Govt. According to Section 23 of the Act. that the company is or will be in a position to pay its present or future depositors in full as their claims accrue 2. According to RBI the RRBs have fared well in achieving the objective of providing access to weaker sections of society. 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. no banking-company shall open a new place of business in India or change otherwise than within the same city. in case of a foreign bank. 3) To relieve the rural masses from the clutches of money lenders. Write a short of Regional Rural Banks ���������������������������� ���� 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. ���� Section 22 of the Banking Regulation Act. recruitment and training of personnel. http://hanumant.

The interest rates tend to vary at different places as there is no movement of funds from place to place. it also carries on ordinary commercial banking operations. loans are taken even from the commercial banks. Branch banking developed in Great Britain. 6. Lack the benefits of specialization and division of labour 3. Barclays. 7. Some co-operative banks have even individual members. 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. 2. deposits from members and non-members and loans from state co-operative banks. Advantages 3. http://hanumant. There is proper use of capital. 5. and thus acts as a balancing centre between the primary credit societies. Examples. Customers get better and greater facilities. 8. Offers a wide scope for the selection of diverse securities and varied investments. 19. What are the advantages & disadvantages of unit & branch banking? Unit Banking In the unit banking system. 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. Write a note on Central Co-operative banks. No banking development in backward areas as banking activity is uneconomical and no bank is opened there 4. Large scale operation with greater applicability of the division of labour. Less risk and greater capacity to meet risks 3. It raises loans from the state co-operative banks and lends the same to the 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. Limited resources restrict its ability to face financial crises. They are in a better position to solve problems as they know the local problems better. There will be no inefficient banks as weak and inefficient banks are automatically eliminated 9. The management and supervision is much easier and effective 5. 9. Disadvantages 1. 7. the bank�s operations are generally confined to a single office only. There is no possibility of generating monopolistic tendencies 8. Greater diversification of both deposits and assets because of wider geographical coverage. Branch Banking Under the branch banking system. 4. ���� Besides the above functions. 8.com/Banking%20law%20-%20Meenakshi%20Natesan. such as the acceptance of deposits. Sometimes. All types of primary credit societies. It is a corporation that operates from one office and that is not related to other banks through either ownership or control. Cut throat competition. Advantages 1. and thus acts as a link between the state co-operative bank and primary credit societies. usually a district. granting of loans.SBI. etc. Results in the economy of cash reserves 2.html#_Toc269552287 18/24 . Mobility of funds from one place to another which in turn brings equality in interest rates. It is easier and cheaper to transfer funds because branches are spread all over the country. USA is the birth place of unit banking. collection of cheques and bills on behalf of the customer. ���� 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. There are less chances of fraud and irregularities in the management 6. 10. It exercises general supervision and control over the activities of primary credit societies. 5. ���� The funds of a central co-operative bank consist of share capital. 6. rural and urban are affiliated to it.7/20/2017 Banker and Customer. ���� A central co-operative bank is a federation of primary credit societies operating in a specified area. besides the affiliated primary credit societies. so that a higher degree of safety and liquidity can be maintained. There is little possibility of distribution and diversification of risks under the localized unit banking system. reserve fund. Banking can be extended to under developed areas and this helps in the development of backward regions. The funds of the locality are utilized for the local development 4. Unit banking is free from the diseconomics and problems of large scale operations. A central co-operative bank is located at district head-quarters or in some prominent town in the district.General Relationship 18. 7. a bank operates as a single institution under single ownership with branches spread all over the country.

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. Creates monopoly and leads to the concentration of resources into a few banks. Precautions����������������������������������������������������� 1. Scheduled banks satisfy tow important conditions. Preferential treatment is given to the branches near the head office. The non-scheduled banks do not enjoy from the RB all the facilities enjoyed by the Scheduled Banks. actual or constructive. 3.7/20/2017 Banker and Customer. 2. 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.. But non-scheduled banks do not satisfy these conditions. whereas non-scheduled banks are. Unhealthy competition among the branches of different banks in big cities. non-scheduled banks are not included in the second schedule of the RBI Act. ordinarily. Non-scheduled Bank: ���� Non-scheduled banks are those banks which are not included in the second schedule of the RBI Act. 3. f his debtor�s bankruptcy. Scheduled banks are subject to greater degree of control and more obligations than the non-scheduled banks in their day-to-day operations.Notice of debtor�s bankruptcy-a banker should stop the operation on a guaranteed account as soon as he receives notice. 6. Banker�s claim against a bankrupt surety�s estate-in the event of the bankruptcy of the surety. (i) they have paid-up capital and reserves of Rs. may put forth the plea that he signed under a misrepresentation.Notice of principal debtor�s death.General Relationship 11. small. It is not advisable to allow the customer to take the guarantee form away and himself obtain the signature of the guarantor thereto. Very expensive. Scheduled banks enjoy certain benefits from the RBI. Scheduled banks are more important that non-scheduled banks 21. On the other hand.com/Banking%20law%20-%20Meenakshi%20Natesan. 5 lakh or more and (ii) they satisfy the RBI that their affairs are not being conducted to the interests of the depositors. 8. Scheduled banks are spread over a large area of the country. the liability of the surety is co- extensive with that of the principal debtor. viz. whereas non-scheduled banks do not enjoy those benefits. They are: Scheduled Banks. The advances of scheduled banks are also more than those of non-scheduled banks. 2. Proper supervision and scrutiny become more difficult 2. This si because. 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. Suffers from red-tapism and delays on account of inadequate authority of branch managers and the necessity to take permission from head office 3. http://hanumant. Dealings become more impersonal 4. Surety�s liability is co-extensive with that of the principle debtor-according to Section 128 of the Indian Contract Act. establishing and maintenance of the branches result in high expenses and may reduce profits. unless it is otherwise provided for by the contract of guarantee. 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. whereas non-scheduled banks are confined to a small area. Opening of many branches. firstly. Right to exercise a general lien does not arise until a default has been ade by the principal debtor. generally. big. The share capital and reserves of scheduled banks are more than those of 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. 5. Scheduled banks are. 20.html#_Toc269552287 19/24 . Difference Between Scheduled Banks And Non-scheduled Banks: Scheduled banks are included in the second schedule of the RBI Act of 1934. In such a case. the guarantor when called upon to discharge his obligation. What are the differences between schedule & non-schedule banks? ���� Private sector Indian Commercial Banks are classified into two types. the banker should also demand the repayment of the amount due by the surety. Non-scheduled Banks. The number of scheduled banks is more than that of non-scheduled banks.the notice of the death of a customer puts an end to his account and consequently te guarantee automatically terminates. 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. Disadvantages 1. the banker should at once claim the amount from the legal representative of the deceased or from the Official Receiver of the bankrupt surety. 7. 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. the banker is entitled to prove his claim against the estate of the surety. 1934. The banker need not first resort to the sale of the securities held by him in the account. Losses and weakness of some branches affect the other branches too due to adverse linkage effect. Foreign banks also are included in the second schedule to the RBI Act. It is more convenient for Central Bank or the Government to regulate and supervise. What are the rights of a banker against surety?What are the precautions to be taken by the banker? Rights of banker against surety 1. Deposits of scheduled banks are more than those of non-scheduled banks.

if borrower happens to be a joint stock company.7/20/2017 Banker and Customer. ���� Ex: A wanting a loan of Rs. Consequently.� ���� Ex: A contracts to indemnify B against all the consequences of any proceedings which C may initiate against B. mentioning that the stocks are hypothecated to it. this is a contract of indemnity. it will terminate in case the bank having the guarantee in amalgamated with or absorbed by another bank. 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.where two or more persons join in executing a guarantee.in limited guarantee. it is advisable to get the personal guarantees of directors/officers to strengthen the charge.500 induces B to promise C to repay the loan in case of A�s default. theft and other risks 2. This is a contract of guarantee. or by the conduct of any other person. �������������������������������������� 22. 6.General Relationship 4. 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. Section 58(a) of Transfer of Property Act. While granting loans against hypothecation. their liability may be joint or several or joint and several.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. The banker should also ensure that the borrower is not enjoying similar hypothecation facilities on the same stocks from some other bank. 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.html#_Toc269552287 20/24 .A the principal debtor. 4. Stocks should be fully insured against fire. B the surety and C the creditor. 7.com/Banking%20law%20-%20Meenakshi%20Natesan. The lunacy of a surety is to be taken as terminating the guarantee so far as future advances are concerned. 23. An undertaking should be obtained from the borrower that he shall not charge the same goods to other bank or person. 3) Joint and several guarantee. 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. ���� It will be seen that there are 3 parties to this contract. 9. the guarantees have some clauses which either restrict the liability of the guarantor or limit the scope. This facility should be given to genuine and financially sound parties. What are the precautions to be taken by the banker in the case of hypothecation? Precautions- 1. Explain the concepts of guarantee & indemnity Guarantee ���� A guarantee is the most common form of security taken by the bankers to ensure safety of the funds lent.� http://hanumant.a guarantee extending to series of distinct and separable transactions is said to be continuing guarantee.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. 4) Limited guarantee. 10. During inspection. Indemnity ���� Contracts of indemnity appear to be analogous to contracts of guarantee. The banker should get the charge registered under Section 125 of the Companies Act. an existing or future debt or the performances of an engagement which may give rise to pecuniary liability. capacity and capital must be thoroughly verified before granting loans on the basis of hypothecation. Character. 2) Continuing guarantee. In a J and S guarantee each co-guarantor is jointly and severally liable for the debt. It can be revoked by the surety at any time. The guarantee should provide for such contingencies. the banker should obtain a letter of hypothecation containing several clauses to protect his interest. if the banker finds that the financial position is weak.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. Kinds of guarantee 1) Specific guarantee. 5. A name plate of the bank. 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. 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.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. 5. A contract of guarantee is thus a secondary contract the principal contract being between the principal debtor and the creditor himself. 8. The liability of the surety therefore arises only if the principal contract is not fulfilled.

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 3. 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. an agreement in writing between the mortgagor and the mortgagee is essential for creating a mortgage. the mortgage need not always be given the actual possession of the property 6.html#_Toc269552287 21/24 . a mortgage implies transfer of interest in a specific immovable property. 4. To take possession of the property under It is essential for the bank to take possession lien by way of security directly the baker has of the hypothecated goods by itself directly. 3. in the evnt of non-payment of the loan. What are the differences between hypothecation & pledge? Hypothecation��������� Pledge 1. Kinds������������������������������������������ 1. 8. 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. each co-owner can mortgage his share 4. Lien also creates a charge but it is not so It is convenient device to create a charge convenient to proceed as in case of over the movable property when transfer of hypothecation its possession is inconvenient or impracticable ����������������������� ��������������������������������������������������������������������� 25. Mortgagee is entitled to immediate possession and to retain possession until the money is repaid.in simple mortgage the borrower binds himself personally to pay the mortgage money without giving possession of property. English mortgage-the mortgagor makes a personal promise to repay money on a certain due date. �������� 24. It does not mean transfer of ownership. the transaction is called a �mortgage by deposit of title deeds�.Possession of securities is transferred to Neither ownership nor possession is the banker transferred to the creditor. Such a mortgage includes a mortgage formed by combination of two or more types of mortgage. if there is more than one owner of an immovable property. the possession of the movable property is There is delivery of goods from one person to http://hanumant. The mortgage deed should contain all safety clauses. to move the Court 6. 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. the interest in specific immovable property is recovered to the mortgagor 7. 5. It takes various forms based on custom. 2. on repayment of the loan together with interest.com/Banking%20law%20-%20Meenakshi%20Natesan. There is no such constructive possession The banker has constructive possession over even of the banker the hypothecated goods 5. the mortgagee has a right to sell the mortgaged property trough the intervention of the Court. 5. But court intervention is necessary for selling the mortgage property. local usage or contract.mortgagor Transferee-mortgagee Instrument-mortgage deed Characteristics-������� 1. Only an equitable charge is created in favour of the creditor.7/20/2017 Banker and Customer. This mortgage does not require registration. 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. What are the differences between lien & hypothecation? Lien Hypothecation 1. Anamolous mortgage-a mortgage other than any of the mortgages explained above is a anamolous mortgage. 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. 2. the interest to be transferred is always with respect to a �specific property� 2. The borrower holds possession of goods The borrower holds possession of the goods as owner and not as an agent of the bank not in his own right as the owner of the goods but as an agent of the bank 4.General Relationship Transferor. The transfer is absolute with all interests and seeking the permission of the Court. Simple mortgage. 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.

Such creditworthiness depends on. If the former falls below the latter. ����������������������������������������������������������� 26. 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. the Market value of which is not at any time less than the amount of such loan or advance. apart from other rights. Unsecured advances They are also called clean loans or advances. ���� 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. lands and buildings. ���� 2) The Market value of such security must not be less than the amount of the loan at anytime till the loan is repaid. or its exact equivalent. An overdraft is a running account wherein thy balance goes on fluctuating from debit to credit or vice versa. in the event of default by the the right of lien. corporate and government securities etc. without intervention of the Court. 1949. the hypothecate cannot have the goods.7/20/2017 Banker and Customer. and its customers enjoy the overdraft facility in order to develop their business.-If a bank has agreed to give an overdraft. since the possession of the goods remains Since the pledge has got the possession of with the owner. 'a secured loan or advance' means a loan or advance' made on the security of assets. The characteristics of unsecured advances are ���� 1) UAs are made on the goodwill and reputation of the customer. the pledge default has a right of lien over the goods 1. ���� 4) Grant of loans depend on the credit worthiness of the borrowers. Benefits-The bank provides overdraft facility to its customers to earn interest.html#_Toc269552287 22/24 . The overdraft facility is ideal to cover short term requirements. He may sell the property in pawnor. ���� 2) They are generally made by way of overdraft facilities. 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. a customer is allowed to draw cheques upto an agreed limit over and above the credit balance in the account. Write a note of secured & unsecured loans ���� 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. etc. If the banker refuses any cheque it becomes �wrongful dishonor� and he will be liable for damages. it cannot refuse to honour cheques or draft within the limit of that overdraft which have been drawn and put in circulation.1) character 2) capacity 3) capital��������� ������������������������������������������������������������ What is �overdaraft�? �Overdraft� means allowing the customer to overdraw his account. A charge on any such assets offered as security must be created in favour of the banker. But some banks allow casual overdraft in savings accounts of Government servants. if an agreement empowers the hypothecate to take possession of the goods and then sell the same in case of default of payment. whose favour the property is hypothecated 2. It is allowed only to current account holders. he can proceed in accordance with the agreement to sell the goods. at a stated time or on demand. hold and silver.com/Banking%20law%20-%20Meenakshi%20Natesan. Banker�s obligation. http://hanumant.General Relationship retained by the owner and certain right in that another as security for payment of debt or property are transferred to the person in performance of a promise. the loan is considered as partly secured. ���� 3) Unsecured advances are made at the discretion of the concerned bank manager himself. and 'unsecured loan or advance' means a loan or advance' not so secured. Under an overdraft arrangement. There is no restriction on operations in the account and withdrawals and deposits may be upto any number of times.

���� FD in joint names. Write a note on current account�������� ����� A current account is a running and active account which may be operated any number of times during a working day. � ���� Banker s obligation.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. 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.the banker offers higher rates of interest on fixed deposits as the depositor parts with liquidity for a definite period. They are allowed for small amounts to meet the party�s sudden requirements. ���� To meet the requirement of the current account the banker keeps sufficient reserves against such deposits vis-�-vis the savings and the fixed deposits. Clean overdraft-Overdrafts which are not backed up by any security are called clean or temporary overdrafts. ���� Rate of interest�. or a cheque contrary to the instructions of his customer (s 129. The longer the period. 3. There is no restriction on the number and amount of withdrawals from a current account. Cheque facility is available for the depositors.if the receipt is not encashed on the date of maturity.when a party is allowed regular limits against some tangible security. ���� Overdue deposits.though a FD is payable after expiry of fixed period. 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. institutions.1) payable on demand (demand deposit) and 2) payable after certain time (time deposit). 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. Deposits are broadly divided into two kinds. Time deposits are. The banks allow interest as per RBI directives. But in practice. ���� Payment before due date. ���� FD for senior citizens. corporations etc.by taking RDs the banker undertakes to honour his customer�s cheques as long as his account is in credit. Write a note on fixed deposits ���� The relation between a banker and his customer begins with the opening of an account by the former in the name of the latter.com/Banking%20law%20-%20Meenakshi%20Natesan. NI Act).fixed deposit and recurring deposit. they are called deemed liabilities or deemed deposits. 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.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 transaction amounts to a loan and the customer is bound pay reasonable interest-Bank of Maharashtra v United Construction Co & Ors. 28. overdraws on his account and the cheques issued by him are honoured. whose banking transactions happen to be numerous per day.-Indian Overseas Bank. Madras v Narayanprasad Patel Categories- ������������������������������������������������������������������������� 2. joint stock companies. it is known as secured overdraft. banks permit encashment even before due date. Secured overdraft. Time period-The period of overdraft is 7 years at maximum.7/20/2017 Banker and Customer. The banker may have to suffer loss if he pays a forged cheque.a current account carries certain privileges which are not given to other account holders http://hanumant. 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. A fixed deposit receipt is thereafter issued to the depositor acknowledging the same.RBI has permitted the banks to formulate FD schemes specially meant for senior citizens on which they offer higher and fixed rates of interest. Demand deposits are.General Relationship Customer�s obligation-where a customer even without any express grant of an overdraft facility. ���� Privileges. the banker grants an overdraft for one year. Initially the accounts are opened with a deposit of money by the customer and hence these accounts are called deposit accounts.savings and current account. and renews it every year. 27. without there being sufficient balance in the account. which ordinarily varies from three months to five years. But written transactions are not necessary all the time. ���� Opening and operation. the higher will be the rate of interest. Fixed account ���� The term fixed deposits means deposits repayable after the expiry of a certain period. He also gives his specimen signature. if it is renewed. In such a case certain interest will be charged for the same. the interest ceases to run from that date. Clean overdrafts are allowed purely on the personal credit of the party. public authorities.html#_Toc269552287 23/24 . As the banker is under an obligation to repay these deposits on demand. Current accounts suit the requirements of big businessman.

29. These are called as recurring deposits. Accumulated amount with interest will be payable after a month of the payment of the last installment. It is useful to save a part of the current income to meet future needs and also to earn higher incomes from savings. 4) Bodies depending upon budgetary allocations for performance of their functions. Only cheques payable to the customers having SB accounts are collected. Generally money in these accounts is deposited in monthly installments for a fixed period and repaid to the depositors along with interest on maturity. For this purpose they take into consideration the cost involved in maintaining and servicing such accounts. weekly. 2) Overdraft facilities are given in case of current accounts only.the RD account can be opened by any person.the rate of interest payable by the banks on deposits maintained in savings accounts is prescribed by the RBI. Generally banks open such accounts ranging from one to ten years.normally no interest is paid on current accounts. According to the directive of the RBI. Rather. The banks do not accept cheques or other instruments payable to a third party for the purpose of deposit in the savings account. 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. Interest is calculated at quarterly or longer rests of period. Write a note on recurring 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. Current accounts thus earn interest on all types of advances granted by the banker. The rate of interest is therefore almost equal to that of fixed deposits. Levy specific charges if the minimum balance is not maintained.in pursuance of the objective of savings bank accounts. in his account every month for a period selected by him.7/20/2017 Banker and Customer. the banks impose certain restriction on the right of depositor to withdraw money within a given period.General Relationship 1) Third party cheques and cheques with endorsements may be deposited in the current account for collection and credit. the depositors have to pay certain incidental charges to the bank for services rendered by it.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. ���� Opening and functioning of account.com/Banking%20law%20-%20Meenakshi%20Natesan.html#_Toc269552287 24/24 . 5) Municipal corporations/committees.banks prescribe the minimum balance that is to be maintained in the SB accounts. ���� Minimum balance. ���� A depositor opening a RD account is required to deposit an amount chosen by him. ���� Rate of interest.the RBI has prohibited the banks to open a savings account in the name of 1) Trading or business concern. ����������������������������������������������������� 30. The number of withdrawals over a period of six months is limited to 50. more than one person jointly or severally. ���� Interest. the interest provided by banks on RD must be in accord with the rates prescribed for various term deposits. The minimum amount of a cheque is Re 5. 3) The loans and advances granted by banks to their customers are not given in the form of cash but through the current accounts. 7) State housing boards.the customer may deposit any amount in the savings bank account subject to a minimum of Re 5. http://hanumant. proprietary or partnership. ���� The banks have in recent years started various daily. The main characteristics of savings account are- ���� Restriction on withdrawals. Installments for each month should be paid before the last working day of that month. Write a note on savings bank account ���� Savings accounts are maintained for encouraging savings of households. A depositor cannot withdraw by withdrawal form a sum smaller than Re 1. 2) A company or an association. 3) Government departments. generally a multiple of Re 5 or 10. or monthly deposit schemes in order to inculcate the habit of savings on a regular or recurring basis. ���� Prohibition on savings account. ���� Payment of interest.the rate of interest on RD stands favourably as compared to the rate of interest on savings bank accounts. The period of recurring deposit varies from bank to bank. ���� While opening the account. 6) Panchayat samitis. ���� Restriction on deposits. ���� Cheques. by a guardian in the name of a minor and even by a minor.