Professional Documents
Culture Documents
Banking Law
Course No: II
Module No: I - IX
BANKING LAW
TOPICS
4. Negotiable Instruments:
Law and Procedure (Module No. IV & V) ................................................................... 119
6. Advances, Loans and Securities (Module No.VII & VIII) ......................................... 228
Banking Law
Course No: II
Module No: I
Published By:
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore, 560 072.
Printed At
Sri Vidya Printers, Bangalore Ph. 23445594
TOPICS
10. Problems.......................................................................................................................... 32
Mutual Funds
Land Mortgage IFCI
Nationalised State Bank UTI
Banks (20) LIC Of India & Rural Credit SFCs Other MF
Associate Industrial Development IDBI and LIC,
Bank
Co-operative GIC
Private Banks ICICI
Housing Finance Bank &
IRBI
Indian Foreign Export Import Can Bank
NABARD
Private Sector
Bank of India HDFC Non-Banking
Financial Com.
1.5. SOCIAL CONTROL MEASURES ON BANK 1.6 THE NARASIMHAM COMMITTEE REPORT:
The Indian economy in the 1960’s passed though a stressful The 1980’s were the decade of private enterprise all over the
phase due to drought and wars. Political uncertainty and popular world. The collapse of the USSR at the end of the 1980’s is the
discontent too caused concern. The Government veered around end of one experiment of socialism. In India the country went
towards ensuring a socialistic pattern of society. The Banking through traumatic moments in 1990, after the heady economic
Regulation Act was amended in 1968 to provide for social growth in the 1980’s, due to a foreign exchange crisis on account
control over the banks. Under these measures the Board of of large scale external borrowings in the 1980’s, that had
Directors of the banks were reconstituted so that 51% of their weakened the country’s ability to service its debts.
number was made of persons having special knowledge or The government felt that there was a need to initiate reform in
experience in accountancy, agriculture, rural economy, small the financial system and banks, as the system had developed
scale industry, co-operation, banking, economic laws etc. A weaknesses. A great part of the savings of the community was
quota was specified for certain categories. The Reserve Bank pre-empted by the Government in the form of the Cash Reserve
of India (RBI) was given powers to reconstitute the Board. A Ratio (CRR) and the Statutory Liquidity Ratio(SLR). Banks
full time Chairman was to be appointed who was a professional were burdened by a large percentage of non- performing loans.
banker, with prior approval of the RBI. The Government also Customer service had suffered, and out-moded practices were
acquired power to acquire any bank in case it failed to comply in vogue. Internal weakness due to bad house-keeping practices
with any direction issued to it under the Banking Regulation had increased. The Narasimham Committee was set up to
Act, as regards banking policy. recommend changes in the financial system.
The Narasimham Committee made revolutionary
recommendation emphasising the need for de-regulation and
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10
Scheduled
Representative Offices
12
The role of banks in economic development is to remove the vi) Banks promote growth with stability :
deficiency of capital by stimulating savings and investment. A Banks regulate the rate of investment by influencing the rates
sound banking system mobilises the small and scattered savings of interest. The primary function of the Reserve Bank of India
of the people and makes them available for investment in was to regulate the issue of bank notes and keep adequate
productive enterprises. In this connection, the banks perform reserves to ensure monetary stability. Now, it has assumed wider
two important functions.
13
NABARD
Country wise
Agriculture AFC
SLDB
State wise
RRB
Mutual funds
LIC, GIC including UTI and its subsidiaries
Capital Market SHCI
CRSIL/ CARE / ICRA
DFHI
EXIM BANK
Export/Import ECGC
ICICI
IDBI
All India Large scale IFCI
IRBI
Industrial Development NSIC
Small Scale
SIDBI
SFC
State Level SIDC
SIIC
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2.5 ROLE AND FUNCTIONS OF NON-BANKING Having regard to the nature and range of activities of the
FINANCIAL INSTITUTIONS merchant bankers and their responsibilities to SEBI Investors
and Issuers of securities it has been decided to have four
Merchant Banking : categories of merchant bankers.
In addition to the Commercial banking and specialised banking Category I : Those authorised to act in the capacity of issue
activities merchant banking has also grown in stature and gained manager/co-advisor/consultant and portfolio manager to an
an important place in the financial system of the country. issue and underwriter to an issue as mandatorily required.
Merchant Bankers are governed by the Securities and Exchange Category II : Those authorised to act in the capacity of co-
Board of India (Merchant Bankers) Rules 1992. “Merchant manager, advisor or consultant to an issue or portfolio manager,
Banker” is defined as any person who is engaged in the business and
of issue management either by making arrangement regarding
selling, buying or subscribing to securities as Manager, Category III : Those authorised to act only in the capacity of
Consultant, Adviser or rendering corporate advisory service in advisor or consultant to an issue.
relation to such issue management. Public money plays a vital Category IV : Advisors and consultants who provide
role in financing a large number of projects both in public and consultancy and guidance to certain terms of authorisation have
private sectors. Hundreds of Crores of rupees are tapped from also been specified for merchant bankers a few of which are
Capital market every year to finance industrial projects. To listed below.
raise the money from the capital market, promoters have to a. All Merchant bankers must obtain the authorisation of SEBI
bank upon merchant bankers who manage the issue.
b. SEBI may collect from the merchant bankers an initial
Role of Merchant Bankers: authorisation fee an annual fee and a renewal fee.
Merchant bankers are designated as managers to the issue. They c. The Merchant bankers must have a minimum net worth
are specialised agencies whose main business is to attract public which is based on the category into which they are
money to Capital issues. They render the following services. classified.
a) Drafting of prospectus and getting it approved from the Category I - 1 Crore
stock exchanges. Category II - 50 Lakhs
b) Appointing, assisting in appointing bankers, underwriters, Category III - 20 Lakhs
brokers, advertisers etc. Category IV - NIL
c) Obtaining the consent of all the agencies involved in public d. Lead Manager/Merchant bankers would be responsible for
issue. ensuing timely refunds and allotment of securities to
d) Holding brokers conference/investors conference. the investor.
e) Deciding the pattern of advertising e. The merchant banker shall make available to SEBI such
f) Deciding the branches where applications money should information documents returns and reports as may be
be collected. prescribed and called for.
g) Deciding the dates of opening and closing of the issue. f. SEBI has already prescribed a code of conduct for merchant
h) Obtaining the daily report of application money collected bankers, which they should adere to.
at various branches. The above terms of authorisation have been framed to make
i) Obtaining subscription to the issue and merchant bankers more responsible and liable and any
negligence on the part of the merchant bankers can be proceed
j) After the close of issue, obtaining consent of stock exchange
against legally.
for deciding basis of allotment etc.
This will ensure that fake companies whose only intention is to
Merchant Bankers charge a heavy fee for rendering the above
defraud the Public do not have any access to the stock market
mentioned services. The fees are so lucrative that many
and the investing public at large.
nationalised banks which had separate merchant banking
divisions have now opened separate subsidiary companies for
rendering merchant banking services.
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The court held that the provisions of Section 22 of the Banking On appeal the High Court held that though both Section 196 of
the Companies Act, 1913 & Section 45B of the Banking
Companies Act prescribed only a system of licensing with a
Companies Act, 1949, provide for public examination of a
view of regulating the banking business and was not repugnant
Director or an officer of a company as to promotion, formation
to the provisions of Article 19(1)(g) of the Constitution.
or the conduct of the business of the company or as to his
The provisions in Section 22 investing the Reserve Bank with conduct and dealings as Director or Manager or other officer,
the power to grant, refuse to grant or cancel, a licence did not Sec. 196 of the Companies Act enables the liquidator to make
amount to an excessive delegation of legislative power. There such an application for public examination only when he is of
was sufficient legislative guidance for the granting of licence opinion that fraud had been committed by a Director, while
embodied in the provisions of the Act, and of Section 22 in under Section 45G of the Banking Companies Act, all that is
particular, and delegation of the power, having been made to necessary for the liquidator to make such an application, is that
non-political body statutorily concerned with the credit structure he should be of opinion that any loss had been caused to the
of the country, the restriction imposed in the regulation of the banking company by any Act or omission of the Director,
banking business was nothing but reasonable. The power that whether or not any fraud has been committed by such Act or
was given to the Reserve Bank under the Act was a wide range Omission.
of administrative discretion which it was peculiarly competent The duties of the Directors were summarised by the court in
to undertake, and the determination whether the conditions the following terms:
which were required before the licence could be given or refused 1. The Directors are not bound to give continuous attention
exist, was peculiarly within its competence as an expert statutory to the affairs of the bank and their duty is of an intermittent
body. The legislature having prescribed the nature of a real nature to be performed at the periodical Board Meetings
banking institution in this country, it could not be said that there and the Meetings of Sub-committees of the Board. They
was any excessive delegation of power. are not bound to check the cash of the bank or the books of
The provisions of Sec.35 (4) which empowered the Central account to detect shortage of cash or manipulation of bank
Government to prohibit a banking company from continuing balances;
29
The plaintiff Managing Director of the company brought a suit The High Court held that the provisions of Sec.21 A of the
against the company for a declaration that he was the managing Banking Regulation Act, 1949, declaring that the rates of interest
director of the company and for injunction restraining the charged by banking companies shall not be subject to scrutiny
company from preventing him from discharging his duties. The by the courts from the point of view of excessiveness are within
trial court decreed both the declaration and the injunction prayed the legislative competence of parliament under entry 45 of list
for. On appeal the learned Senior Subordinate Judge dismissed I of Sch.VII of the Constitution of India, which pertains to
the suit. On second appeal the High Court allowed the appeal ‘banking’. The charging of interest is interwined with banking
as regards the declaration, but dismissed it with regard to the business and the element of interest is ingrained in the veins of
injunction. Both parties filed appeals. The plaintiff against the all dealings in society. The bank is a ‘dealer in credit’. Section
decision allowing him an injunction and the defendants against 21A strives to safeguard the levy of interst and quantum of
the decision granting the plaintiff declaration. interest charged and Section 21A is essentially concerned with
the banking operation and therefore, within the legislative
The Court held that even if the memorandum and articles of competence of Parliament.
association of a company are held not to constitute a contract
in themselves, an implied contract may be proved by the acts The Court further held that Sec. 21A does not violate the
of the parties on the terms set out in the articles of association provisions of Art.14 of the Constitution. The modalities and
of the company. Where in pursuance of certain articles acted the quantum of interest is uniform in all the banks as regulated
upon by the company a shareholder was appointed Managing by the Reserve Bank. The charging of interest is tied up with
Director and acted as Managing Director for 11 years and was the interest fixed by the Reserve Bank. The Reserve Bank is
remunerated in accordance with the terms set out in the articles, entrusted with diverse powers for regulating the banking
the articles constituted an implied contract between the company business in the country and the Reserve Bank taking stock of
and the share-holder so as to entitle him to the declaration that the prevalent economic growth, cost of living, index, purchasing
he was the managing director of the company. and paying capacity and other factors fixes the rate of interest
chargeable by the banks. Banking Companies are bound to
With regard to the second point, whether Sardar Gulab Singh adhere to the guidelines and directions given by the Reserve
is entitled to an injunction, the court held that it would not be Bank. The rate of interest chargeable by the banks is rooted in
proper to issue an injunction. In this connection the court the rate of interest fixed by the Reserve Bank and as a sequel of
observed that the position of the company and that of Sardar the decision of the experts, apparently with a view to having a
Gulab Singh as managing director was that of master and uniform rate of interest in all banking companies throughout
servant. With great respect we do not think that this is correct. the country at all times and situations, The jurisdiction of Civil
A Director or Managing Director is in no way a servant of the Courts is taken away.
company, he is the agent of the company for carrying on its
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31
[Note: Specify Your Name, I.D. No. and address while sending answer papers]
32
2. Saravanavel. P., Banking Theory Law & Practice, 1st edn., 1987, Margham Publications, Madras.
3. Sheldon & Fidler's, Practice & Law of Banking, 11th edn. (Rep.), 1984, Macdonald & Evans Ltd., Plymouth.
4. Suneja H.R., Practice & Law of Banking, Ist edn., 1990, Himalaya Publishing House, New Delhi.
5. Sundaram & Varshney, Banking Theory, Law & Practice, 8th edn. (revised), 1990, Sultan Chand & Sons, New Delhi.
6. Tannan M.L., Banking Law & Practice in India, 18th edn., 1989, Orient Law House, New Delhi.
33
Banking Law
Course No: II
Module No: II
34
Materials Checked By :
1. Mr. V. Vijaykumar, M.A., LL.M., M.Phil.
2. Mr. T. Devidas. LL.M.
3. Ms Archana Kaul, LL.M.
4. Ms Pooja Kaushik, M.A, (Eco)
Materials Edited By :
1. Mr. P.C. Bedwa LL.M., Ph.D.
2. Mr. Sunderajan, A.C.A.
3. Mr. Harihara Ayyar, LL.M., Former General Manager, SBI
35
36
TOPICS
1. Organisation ................................................................................................................... 38
2. Functions ......................................................................................................................... 43
6. Monetary Control........................................................................................................... 50
8. Promotional Functions................................................................................................... 59
10. Problems.......................................................................................................................... 63
37
W.T. GOVERNOR
CENTRAL BOARD
4 DG 10 DIR 4 DIR 1 GO
W.T. NOMINATED BY FROM LBS
CG
CENTRAL OFFICE
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Note : The Department names are given below
LOCAL BOARDS
NOTE : Each Local Board consists of 5 Members, appointed by the CG, One of whom
is elected as Chairman
39
40
41
42
Table I
Functions of RBI
Currency Banker Credit Bankers Special Bills Lending Institutional Foreign Other
Management to Govt & Monetary Bank Rural discounting & Borrowing banking & Exchange Banking
(Secs.22-29) (Sec.20, Control Credit (Ss.17&18 of Industrial dealing functions
21A & 21B) Secs. 18 & 42 (National RBI Act) finance (Ss.39&40) (Chapter
RBI Act., Ss.17, Bank for 38 of
18,20,21 & 24 Agriculture and RBI Act)
of the B.R. Act) Rural Development
S.54 of the RBI Act)
43
Interest Liquidity Ratio Open Market operations Cash Reserve Ratio Direct Action
System Sec.24(A) Sec. 42, RBI Act (Sec.58(B) of
B.R. Act Sec.18(1), 24(2A) RBI Act)
(a) (ii), B.R. Act)
Bank Rate Rate of Interest Publicity
Effecting on Credit
(Sec.49 [(Sec.21(e) of (Sec.45(E) of RBI
creating capacity of Changes in the Prices
RBI Act 1949 (BRA)] Act)
Commercial Banks of Government securities
1934)
(Sec.36(1) BRA (Sec. 17(4A) of RBI Act) Moral Susasion advice,
Sec.18(3) RBI Act) request & persuasion With
the Commercial Banks
by Central Bank
Directives by the Central
Bank (Sec.21(2) BRA Secs.35A
& 45 K of RBI Act)
Fixation of Marginal Requirement on
secured Loans
(Sec.21(2) (b) of BRA)
Regulation of Consumer
Credit instalment credit system
2.3 CONCLUDING REMARKS point of view functions of RBI are multifarious. Some of the
Different functions of the RBI are discussed hereafter in commercial banking functions are being exclusively done by
subsequent topics. In this topic a broad outline is only given. RBI. As for e.g., RBI exclusively deals with foreign exchange,
It may be pointed out in this connection that many central banks of course it may specially permit branches of some other
like BUNDS Bank in Germany, Federal Reserve System in commercial banks to deal with foreign exchange for or on its
USA, Bank of England, Bank of Mexico & many others do not behalf. Thus other commercial banks doing this particular job
carry on any ordinary commercial banking function. From that at the instance of RBI do it as the agent of RBI.
44
45
46
48
49
Non residents and other persons referred to in Section 28 require Acquisition of Immovable Property in India
the general or special permission of the Reserve Bank under Section 31 of FERA makes it mandatory for (i) persons who
Section 29(1) for various transactions as under : are not citizens of India; and (ii) companies which are not
(i) To establish or carry on in India a place of business incorporated under any Indian law - to obtain prior general or
for carrying on trading, commercial or industrial special permission of the Reserve Bank to acquire or hold or
activity; transfer immovable property situated in India. This does not
57
58
59
The following issues were framed by the trial court on the basis H.P. Krishna Reddy v. Canara Bank AIR 1985 Kant.228.
of the pleadings namely, The appellant was defendant against whom the respondent
i) Whether the plaintiff was not entitled to charge Canara Bank (the Bank) instituted the suit for recovery of a
compound interest ? sum of Rs.23,940.97 with current interest at 13 per cent per
ii) Whether the defendants are entitled for five equal annum on the following averments :-
instalments? On June 19, 1969 the defendant availed of a loan of Rs.15,500/
The trial court after considering the contentions urged and the - on the security of immovable properties with the deposit of
documents produced held: title deeds so as to create an equitable mortgage in favour of
the Bank. In order to ensure prompt repayment of the loan the
“It has been well settled now that for agricultural loans in defendant also executed on Demand Promissory Note for a sum
India, the conception of quarterly rate basis i.e., charging of of Rs.15,500/- in favour of the Bank. On October 14, 1969,
compound interest does not apply. That being so, the plaintiff the defendant again availed of another loan of Rs.10,500/- by
would not be entitled to charge compound interest on the loan extending the said security & on executing another Promissory
amount advanced to the defendants 1 & 2....” Note for a sum of Rs.10,500/-. The defendant also hypothecated
With that conclusion, the court directed the Bank to submit a his crops and live-stock by executing necessary agreements.
revised statement of accounts charging simple interest on the In all, the defendant had taken Rs.26,000/- as loan from the
amount due. Accordingly, the Bank submitted a revised Bank.
statement determining Rs.19,851.66 as the sum due from the The loan was not repaid as agreed on March 31, 1972. The
defendants. The Court then decreed the suit for the said amount defendant was found to owe the bank a sum of Rs.23,940.97
with future interest at 6 per cent payable in two annual including interest at the rate of 13 per cent per annum. The
instalments. defendant admitted the creation of equitable mortgage by
The question raised by this appeal relates to the right of the deposit of title deeds of his property as security for the loan
Bank to charge compound interest on agricultural advances. taken from the bank and also the execution of the Promissory
The essential question to be decided by the court was whether notes, but denied the liability to pay interest at the rest of 13 per
the Bank was justified in charging interest with half yearly rates cent per annum. He also disputed the liability of charging higher
on the agricultural loan amount due and outstanding from the rate of interest and the validity of the suit claim without
defendants. furnishing the details of the aggregate interest charged.
The court stated that in the present case, although the terms of The trial court framed the following issues :
the loan advanced to the respondents authorised the bank to 1) Whether the plaintiff has paid Rs.15,500/- to the defendant
charge interest with quarterly rates, the bank however, has on the transaction of equitable mortgage of ‘A’ schedule
charged interest only with half-yearly rates. The Counsel for properties ?
the Appellant while justifying the interest charged with half
60
62
[Specify your name, ID No. and address while sending answer papers]
63
1. RBI, “Reserve Bank of India - functions and working”, 4th Edn., 1983.
3. Tannan M.L. "Banking law and Practice in India”, 18th Edn., 1989. Orient Law House, New Delhi.
4. A. Ramaiya, “Guide of Companies Act”, 11th Edn., 1988, Wadhwa and Co., Nagpur.
64
Banking Law
Course No: II
Module No: III
Published By:
Distance Education Department
National Law School of India University
Post Bag No: 7201
Nagarbhavi, Bangalore, 560 072
66
TOPICS
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68
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81
85
86
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90
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94
95
96
100
101
103
104
106
110
113
114
116
[Note: Specify Your Name, I.D. No. and address while sending answer papers]
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2. Hapgrood, Mark, : Paget’s Law of Banking, 10th Edn, (1989), Butterworths, London and Edinburgh.
3. Ramaiaya, A., : A Guide to the Companies Act, 11th Edn. (1992), Wadhwa and Co. Pvt Ltd, Nagpur.
4. Sheldon & Fidler’s : Practice & Law of Banking, 11th Edn (1984), Macknald & Evans, Ltd, London and Plymouth.
5. Tannan, M.L., : Banking Law and Practice in India, 18th Edn, (1989), Orient Law House, New Delhi.
118
Banking Law
Course No: II
Module No: IV & V
Negotiable Instruments:
Law and Procedure
Materials Checked By :
1. Prof. P.C. Bedwa
Materials Edited By :
1. Mr. T. Devidas
Published By
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore, 560 072.
120
Negotiable Instruments form the axis on which the wheels of commerce revolve, and are the most widely need form of
securitization. The Negotiable Instrument Act itself deals with only three types of instruments, cheques, bills of exchange
and promissory notes. But according to sec. 1 of Act, though it also recognises all instruments in local language and
established by usage from the provisions of the Act. Thus negotiable instruments may be said to be of two types: (1)
those created by the statute and (2) those created by usage or practice of the society.
Though negotiable instruments are widely used by all sections of people for varied purposes, actual knowledge about
these instruments is very low. There is a widespread ignorance about the nature and scope of these instruments, the
rules relating to their presentment, acceptance or dishonour etc. An effort has been made in this module to give a
comprehensive sketch of the various aspects of negotiable instruments.
Students are advised to go through the module carefully and to make a check list at the end of every major aspect of
these instruments for easy understanding, and to keep the bare act besides you while going through the module, to
facilitate easy reference. The subject being a very complicated one you should read up atleast one of the basic books
on the subject, apart from this module so as to come to terms with the intricacies of the subject.
N.L. MITRA
Course co-ordinator
121
TOPICS
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125
In the above process Indian investors are required to put in foreign depository releases the Indian papers which goes back
their shares, stocks or debentures with a foreign depository to to the Indian investors. GDR/IDR can be listed with the stock
be created for the purpose of constituting a SPV. The foreign exchanges. The RBI provides a guideline for the issue of this
depository thereafter issues securities called GDR or IDR for type of securities and SEBI regulates the creation of these kinds
foreign investors against portfolio. Whan a GDR /IDR for of securities as well as its dealings in the market.
126
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131
132
(Drawn on set of three parts) As mentioned earlier, there are three parties to a bill of exchange,
namely, the ‘maker’ or executant of the bill, the ‘drawer’ who
First Part is ordered to pay and the ‘payee’ to whom the money is to be
No. .................... Exchange for £ paid on order. The rights and liabilities attaching to each of
these parties will be discussed in detail in a later chapter.
Bangalore, March 25, 1995
......... months after sight of this first of exchange (the second 2.5 CHEQUES
and third of the same date remaining unpaid), pay to CD, etc.,
or to his order ..... pound sterling (in words) (and charge the Section 6 of the Act defines cheque as “ a bill of exchange
same to the account of XY against your letter of credit No. drawn on a specified banker and not expressed to be payable
........ dated ...........). otherwise than on demand”.
137
138
139
144
145
146
151
154
155
156
(4)
XY Bank, Ltd
157
158
160
Discharge
A] By act of parties Sec.82(a) deals with a situation where the holder with
(i) By cancellation: When the holder or his agent deliberately deliberation cancels out not the instrument as such, but the name
cancel a bill and the cancellation is apparent on the face of it, of the acceptor or indorser. When the name of the ‘acceptor’ is
the bill is discharged and the parties to the bill are released cancelled, all other subsequent parties being sureties for the
from their liability. If the cancellation is not apparent then the acceptor are also discharged from their liability i.e., the effect
instrument remains valid in the hands of a bonafide holder. Thus of cancelling the acceptor’s name is the same as the effect of
in Ingham V.Primrose[141 ER 745], A accepted a bill and cancelling the instrument itself. But, where the holder cancels
gave it to B for the purpose of getting it discounted and handing out the name of an ‘indorser’ then the parties subsequent to the
over the proceeds to A.B, having failed to discount it, returned cancelled indorser stand discharged but those prior to such an
the bill to A, who tore it in half intending to cancel it, threw the indorser remain liable on the instrument.
two pieces into the street. B picked them up and afterwards (ii) By release: A holder of an instrument can release the
pasted the two pieces in such a manner that the bill seemed to acceptor or indorser from their liability either by a separate
have been folded for safe custody rather than cancelled. B agreement or by an act which has the effect of discharging them.
then put the bill into circulation and it finally reached the plaintiff Effect of release is the same as that of cancelling a name.
a holder in due course. The plaintiff sued A on the basis of the (iii) By payment: The most obvious way of discharging the
bill. It was held that ‘A was liable, because the tearing of the liability is by making the payment on the bill. Payment acts as
bill into two pieces was not so clearly manifested on the face of discharge only if it is made in due course as defined in sec.10
the bill as to indicate to a reasonably careful person that it had which states that:
been cancelled. Tearing of the instrument must be such that a
man of ordinary intelligence and caution should at once come “ ‘Payment in due course’ means payment in accordance with
to know that it has been cancelled’. the apparent tenor of the instrument in good faith and without
negligence to any person in possession thereof under
circumstances which do not afford a reasonable ground for
161
ii) By merger: Merger as the name implies means ‘joining’. “At common law it has been held that a deed, bill of exchange,
The joining may be of cause of action & of parties. Thus, when promissory note, guarantee, is avoided by an alteration in a
a judgement is obtained against the acceptor maker or indorser, material part, made while it is in the custody of the plaintiff
the debt under the bill is merged with the judgement debt. But although that alteration is by a stranger. For a person who has
such a merger acts as discharge only when the judgement debt a custody of an instrument is bound to preserve it in its integrity;
is paid off i.e., mere obtaining a judgement does not act as a and as it would be avoided by his fraud in altering it himself, so
discharge. Secondly, when the acceptor of a bill becomes the it shall be avoided by his laches in suffering another to alter it”
holder of it also either at or after its maturity in his own right [Avtar Singh, p.784].
the bill is discharged. Section 87, 88 & 89 deal with alteration of an instrument and
iii) Lapse of time: If the holder does not file a suit for recovery its effects. For these sections to apply the following conditions
of the bill amount till the time prescribed by Limitation Act is have to be satisfied, viz.,:
prescribed, his remedy to enforce his right is extinguished. It a) Intenational - The alteration to the instrument must be
is to be noted that his right itself does not get extinguished nor intentional and deliberate i.e., it should not be by mistake or by
is the acceptor etc., discharged of his liability but because the accident. Thus in Hongkong and Shanghai Banking Corpn.,
right to enforcement is not there, the acceptor is effectively v. Lo Lee Shi [(1928) AC 181 (PC)], the respondent was given
discharged unless he wants to pay the time barred debt. two notes of $ 500 each by her husband. She placed then in the
iv) Discharge of one party: In certain exceptional situations pockets of her garment and then having forgotten, she washed,
discharge of one of the several joint drawers would release the dried, and starched the garments. While proceeding to iron
remaining also from their liability. them she found a wad of paper in the pocket. Subsequently,
the identity of the notes was restored to a certain extent, except
C] Other circumstances for the numbers on them. When she presented them for payment
i) Allowing more than 48 hrs for acceptance - If the holder the bank refused to pay. The lower courts held the bankers
allows the drawee more than 48 hrs for deciding on whether he liable. On appeal, the Privy Council holding the bankers liable
wants to accept it or reject it, then all prior parties who have not observed, “The alternation contemplated is one to which all
consented to such extended allowance are discharged from their parties might assent. It is not reasonable to assume parties
liability to the holder (sec.83). assenting to a part of the document being effected by the
operation of a mouse, by the hot end of a cigarette or by any
ii) Qualified acceptance - The acceptance of a bill should be
other means by which accidental disfigurement can be effected.
unconditional and unqualified. If the holder acquiesces in a
It cannot reasonably apply to the ravages of a rat, white-ant or
conditional or qualified acceptance from a drawee/indorser then
any other animal pest”.
according to sec.84 the previous parties to the bill are discharged
of their liability. b) Material: For an alteration to act as a discharge it should be
iii) Delay in presenting cheque - A cheque once issued should of a material part of the instrument. As observed by Devlin, J
be presented to the banker-drawee within a reasonable time. If in Qwei Tek Choo v. British Traders and Shippers Ltd.
the holder fails to do so and in the meantime something happens [(1954) 2 QB 459], “ One must examine the nature of the
alteration and see whether it goes to the whole or to the essence
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Once a negotiable instrument has been dishonoured whether Sec.94 of the Act deals with the mode in which a notice may be
for acceptance or payment a notice of such dishonour has to be given and states as follows :
given in accordance with the requirements of sec.93 which states “Notice of dishonour may be given to a duly authorised agent
that : of the person to whom it is required to be given, or, where he
“When a promissory note, bill of exchange or cheque is has died, to his legal representative, given, or where he has
dishonoured by non-acceptance or non-payment, the holder been declared an insolvent, to his assignee, may be oral or
thereof, or some party thereto who remains liable thereon, must written; may, if written, be sent by post, and may be in any
give notice that the instrument has been so dishonoured to all form; but it must inform the party to whom it is given, either in
other parties, whom the holder seeks to make severally liable express terms or by reasonable intendment,that the instrument
thereon, and to some one of several parties whom he seeks to has been dishonoured, and in what way, and that he will be
make jointly liable thereon. held liable thereon; and it must be given within a reasonable
time after dishonour, at the place of business or (in case such
Nothing in this section renders it necessary to give notice to party has no place of business) at the residence of the party for
the maker of the dishonoured promissory note, or the drawee whom it is intended.
or acceptor of the dishonoured bill of exchange or cheque”.
If the notice is duly directed and sent by post and miscarries
Thus, notice of dishonour must be given by the holder of the such miscarriage does not render the notice invalid.
instrument or any other party who has remained liable on it to
all those persons whom he seeks to charge. If such a notice is Given below are two specimen forms of notice of dishonour.
not given the parties to the instrument stand discharged. “I hereby give you notice that the undermentioned bill upon
which you are liable as drawer (or indorser) has been
dishonoured by non-payment (or non-acceptance) and that you
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10.4 CRIMINAL PROSECUTION UNDER N.I. ACT, a) a notice of dishonour to be given to the drawer by the payee
1881 within 15 days of receipt of communication form the bank
regarding dishonour of the cheque ;
Chapter XVII containing sections 138-142 was incorporated
in the Negotiable Instruments Act, by the Banking, Public b) the drawer does not make the payment on that cheque within
Financial Institutions and Negotiable Instruments Laws 15 days of receipt of notice;
(Amendment) Act, 1988. These sections deal with prosecution c) the payee or holder in due course shall file a complaint within
for dishonour of cheques. Sec.138 of the Act states as follows: 30 days from the date of failure of the drawer to make the
“Where any cheque drawn by a person on an account maintained payment on the dishonoured cheque.
by him with a banker for payment of any amount of money to In Richard Samson Sherrat v. Sudhir Kumar Sanghi
another person from out of that account for the discharge, in [1992(2)APLJ 27], the A.P. High Court held that “when the
whole or in part, of any debt or other liability, is returned by the statute has not laid down any limitation on the number of times
bank unpaid, either because of the amount of money standing that a cheque may be presented within the period of six months
to the credit of that account is insufficient to honour the cheque or any shorter period under clause (a) of proviso to section 138,
or that it exceeds the amount arranged to be paid from that it will not be desirable to read into the said clause any such
account by an agreement made with the bank, such person shall restriction as to the number of times a cheque may be presented.
be deemed to have committed an offence and shall, without It is common knowledge that in commercial practice, a cheque
prejudice to any other provision of this Act, be punished with may be presented any number of times within the period of its
imprisonment for a term which may extend to one year, or with validity”. Suppose the payee presents the cheque a second time
fine which may extend to twice the amount of cheque or with and it is again dishonoured, the question that arises is, does the
both : second dishonour give rise to a second cause of action ?
Provided that nothing contained in this section shall apply Answering this question in Kumaresan v. Ameerappa [AIR
unless - 1992 Ker 23] the Kerala High Court observed : “from the
(a) the cheque has been presented to the bank within a period scheme of the provisions in Chapter XVII of the Act two factors
of six months from the date on which it is drawn or within loom large; first is that more than one cause of action on the
the period of its validity, whichever is earlier ; same cheque is not contemplated or envisaged. Second is,
institution of prosecution cannot be made after one month of
(b) the payee or holder in due course of the cheque, as the case
the cause of action. If more than one cause of action on the
may be, makes a demand for the payment of the said amount
same cheque can be created, its consequence would be that the
of money by giving a notice, in writing, to the drawer of
same drawer of the cheque can be prosecuted and even convicted
the cheque, within fifteen days of the receipt of the
again and again on the strength of the same cheque. Legislature
information by him from the bank regarding the return of
cannot be imputed with the intention to subject a drawer of a
the cheque as unpaid; and
cheque to repeated prosecution and convictions on the strength
(c) the drawer of such cheque fails to make the payment of the of the same cheque”.
said amount of money to the payee, or as the case may be,
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Art 7 Art 12
1. An incomplete instrument which satisfies the requirements
The sum payable by an instrument is deemed to be a definite
set out in paragraph 1 of article 1 and bears the signature of
sum although the instrument states that it is to be paid :
the drawe or the acceptance of the drawee, or which satisfies
a) with interest; the requirements set out in paragraph 2 of article 1 and
b) by instalments at successive dates; paragraph 2(d) of article 3, but which lacks other elements
c) by instalments at successive dates with a stipulation in the pertaining to one or more of the requirements set out in
instrument that upon default in payment of any instalment articles 2 and 3, may be completed, and the instrument so
the unpaid balance becomes due; completed is effective as a bill or a note.
d) according to a rate of exchange indicated in the instrument 2. If such an instrument is completed without authority or
or to be determined as directed by the instrument; or otherwise than in accordance with the authority given :
e) in a currency other than the currency in which the sum is a) a party who signed the instrument before the
expressed in the instrument. completion may invoke such lack of authority as a
defence against a holder who had knowledge of such
Art 9
lack of authority when he became a holder;
1. An instrument is deemed to be payable on demand :
b) a party who signed the instrument after the completion
a) if it states that it is payable at sight or on demand or is liable according to the terms of the instrument so
on presentment or if it contains words of similar completed.
import; or
Art 13
b) if no time of payment is expressed.
An instrument is transferred :
2. An instrument payable at a definite time which is accepted
or endorsed or guaranteed after maturity is an instrument a) by endorsement and delivery of the instrument by
payable on demand as regards the acceptor, the endorser the endorser to the endorsee: or
or the guarantor. b) by mere delivery of the instrument if the last
3. An instrument is deemed to be payable at a definite time if endorsement is in blank.
it states that it is payable : Art 14
(a) on a stated date or at a fixed period after a stated date 1. An endorsement must be written on the instrument or on a
or at a fixed period after the date of the instrument; slip affixed thereto “allonge”. It must be signed.
(b) at a fixed period after sight; 2. An endorsement may be :
(c) by instalments at successive dates; or a) in blank, that is, by a signature alone or by a signature
(d) by instalments at successive dates with the stipulation accompanied by a statement to the effect that the
in the instrument that upon default in payment of any instrument is payable to a person in possession of it ;
instalment the unpaid balance becomes due. b) special, that is, by a signature accompanied by an
4. The time of payment of an instrument payable at a fixed indicatin of the person to whom the instrument is
period after date is determined by reference to the date of payable.
the instrument. 3. A signature alone, other than that of the drawee, is an
5. The time of payment of a bill payable at fixed period after endorsement only if placed on the back of the instrument.
sight is determined by the date of acceptance or, if the bill Art 15
is dishonoured by non-acceptance, by the date of protest 1. A person is a holder if he is :
or, if protest is dispensed with, by the date of dishonour.
a) the payee in possession of the instrument; or
6. The time of payment of an instrument payable on demand
is the date on which the instrument is presented for payment. b) in possession of an instrument which has been
endorsed to him, or on which the last endorsement is
7. The time of payment of a note payable at a fixed period in blank, and on which there appears an uninterrupted
after sight is determined by the date of the visa signed by series of endorsements, even if any endorsement was
the maker on the note, if his visa is refused, by the date of forged or was signed by an agent without authority.
presentment.
2. If an endorsement in blank is followed by another
8. If an instrument is drawn, or made, payable one or more endorsement, the person who signed this last endorsement
months after a stated date or after the date of the instrument is deemed to be an endorsee by the endorsement in blank.
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The plaintiff agreed on 4-7-1956 to purchase a land from the It was held that the drawee of a NI was not liable on it to the
defendant and his son for a sum of Rs.12,000/-. A memorandum payee unless he had accepted it u/sec.32. Under sec.7 of the
was drafted stating that Rs.2000/- had been paid as advance Act, the drawee becomes an acceptor only when has signed his
and the signatures were attested by the plaintiff. Three days assent on the bill. There cannot be, apart from any mercantile
later, the defendants informed the plaintiff by a letter that since usage, an oral acceptance of the hundi much less an acceptance
only Rs.350/- had been paid and not Rs.2000/-as agreed upon, by conduct, where atleast no question of estoppel arises. Hence
the agreement was cancelled. On receipt of the letter, the the mere fact of possession of a bill by the drawee is not
plaintiff filed a suit for specific performance and also deposited sufficient to constitute valid acceptance. What is requisite for
in the Court Rs.10,000 which according to him was the balance fixing the drawee with liability under S.32 is the acceptance by
on purchase price. The defendants contended that since the him of the instrument and not an acknowledgement of liability.
plaintiff had paid only Rs.350/- and had obtained possession of Assuming that a plea of discharge of a hundi implies an
the memorandum on a representation that he will pay the balance acknowledgement of liability under it, that is not sufficient to
of Rs.1650/- within three days and had failed to do so the fix the liability on the drawee under S.32 when the
agreement was cancelled. Further, the agreement having been acknowledgement is neither in writing nor signed by him. The
altered in material particulars, after it was executed by adding appeal was hence dismissed.
the words : “Clear the debts and execute the sale deed free from Canara Bank, New Delhi v. M/s Sanjeev Enterprises [AIR
encumberance’, the suit was not maintainable. 1988 Del 372].
In this second appeal the issues before the Court was : (1) Plaintiff is a nationalized banking company, constituted under
whether the plaintiff paid Rs.350/- only as contended by the the Banking Companies (Transfer & Acquisition) undertaking
defendants on 4-7-1956 and obtained possession of the Act, 1970. Plaintiff signed and verified by Ms. Prabhu, Sr.
agreement on a false representation; and (2) whether the Manager of the Delhi Branch. Defendant enterprise had
memorandum was altered in maternal particulars after dealings with the bank from 1976, which included a current
execution, and was on that account discharged ? It was held account with open cash credit facilities, one of the persons who
that, a material alteration is one which varies the rights, had quick personal guarantee being Baljit Kaur. On her death
liabilities, or legal position of the parties as ascertained by the deposits 2, 3, 4 were liable being her legal representatives and
deed in its original state. But if the alteration merely expresses on March 1981, they executed a fresh deed where they specified
that which was implied by law in the deed as originally written the amount of the firm’s liability they guaranteed and also
or which carries out the intention of the parties already apparent acknowledged this liability under OCC A/C.
on the face of the deed, it is not material provided that the Subsequently on the department’s request, overdrafts OCC, bill
alteration does not otherwise prejudice the party liable discounting facilities were granted. 1981 Sept, documents for
thereunder. Ordinarily, when property is agreed to be sold for the above purpose were drafted. One of the department’s bill
a price, it would be the duty of the vendor to clear it of all of exchange had been dishonoured.
encumbrances before executing the sale deed. Hence, even if a
covenant that the vendor would clear the debts and execute the Due to the defendant’s failure to pay in the manner promised
sale deed free of encumbrances is inserted in a memorandum by them a suit was been filed for various amounts. The issues
of agreement of sale after its execution cannot be regarded as a which were raised were as follows:
material alteration. The appellants were therefore entitled to a (1) Whether the claim pertains to year 1976 and hence is barred
decree of specific performance. by limitation. (2) Whether the senior manager had the authority
Seth Jagjivan Mavji v. Messrs Ranchhoddas Meghji [AIR to verify the plaintiff & file a suit. (3) Whether the amount
1954 SC 554] claimed by the bank has been inflated. (4) Whether defendant’s
were entitled to concessional interest rates. (5) Whether the
The appellant had instituted a suit on a hundi for Rs.10,000 bank was responsible for the dishonour of the BE? (6) Whether
dated 4-12-1947, drawn in his favour by one H of Basra on the the signatures of defendants had been obtained on blank papers/
respondents who were merchants and commission agents in form.
Bombay. The hundi was sent by registered post to the appellant
in Bombay, and was actually received by one P who presented It was held that The transactions in question took place over
it to the respondents on 10-12-1947 and received payment on 1981 -82 as the documents show hence suit is not barred by
it. P had been acting as a commission agent for the appellants. limitation.
On 12-1-48 the respondents repudiated the authority of P to act (2) Mr. Prabhu, was authorized to sign by a power of attorney.
as their agent and demanded the hundi back. The respondents (3) No proof to show that signatures on blank forms had been
denied their liability, stating that P was the agent of the appellant, obtained
and that the amount was paid to him bona fide on his
(4) The amounts claimed by the bank were found to be correct.
representation that he was authorised to receive payment. The
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Banking Law
Course No: II
Module No: VI
Banker-Customer Relation
191
Published By:
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore, 560 072.
192
In the subject of Banking and Financial Institutions the banker-customer relation has developed a jurisprudence
based upon litigations. In the classical concept of banking, a banker is the custodian of the deposits made by
the customers. The Common Law Courts describe the relation as a debtor-creditor one. Of course, in the
nineteenth century with the development of equity to be fused with law the role of a banker as a trustee of
the customer’s fund has also been emphasised in certain situations. But both Common Law Courts and Civil
Law Courts confirm the idea that once the customer deposits the money with the bank the banker becomes
the owner of the money. The developments of banking business as the key of financial institutions is based
upon this principle of ownership of the funds kept with the bank.
In this module we have tried to explain not only some concepts like ‘bank’, ‘banker’, and ‘banking and
customer’ but we have discussed about various types of deposits kept by the customers with the bank. We
have discussed in detail the nature of the banking business developed through case laws in the last hundred
years or so. During this time a lot of special category of customers came in the field of trade and commerce
making the banking business not only challenging but also complicated. Discussions have been made about
the functioning of the banking business with the special group of customers.
One of the basic duties of a banker in the duty of secrecy which is presently under attack due to many
practical reasons. Often disclosure is demanded by the tax authority or some other department of the
government on the ground of public interest. It is also found that non-accessibility of information about
doubtful customers leads to a huge drainage of public exchequer. Therefore, often there is a demand for
access to information about a debtor from sister banking institutions.
It is quite certain that with the development of tribunalised justice in the settlement of banking claims and
disputes this duty of maintaining secrecy will come under further attack. A banker has a right of ‘general
lien’ on the properties of the debtor left with the banker against any of its claim. This right is a general right
unlike the right of a bailee, in the sense that a banker can extend his right of possession on any account or
things in possession for a non-payment of loan on any other account. Similarly the banker has a right to set-
off its claim on any head from the available amount on any other head. You will be benefitted by referring
to the general principles of settlement of accounts as specified in sections 57 to 59 of the Indian Contract Act
as well as principle laid down in Clayton’s case [(1816) 1 Mer 572].
We must understand that the transaction cost of loans and advances goes higher because the litigational cost
is high. The litigation cost is high on account of system cost involved due to unnecessary, avoidable delay in
settlement of disputes. In some cases the delays are due to a prolonged legal process, specially in the event
of insolvency. The alternative dispute resolution is also not efficiently managing the banker-customer litigation.
The essence of banker customer relation is based on mutual trust and faith but the relation begins with trust
and in many cases ends up with litigations. It is necessary now to think and design a system readjustment so
that the cost of litigation can be restricted and the other operational costs is minimised by increasing efficiency.
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TOPICS
8. Problems.......................................................................................................................... 226
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These are generally made between the branches of the same Banks call it ‘credit report’, ‘opinion report’ or ‘status report’.
bank or that of a bank and its correspondent bank branch. Unlike 7) Trade Information
demand drafts these are not handed over to the customers. Banks
themselves undertake the work and charge an exchange at a This service also does not attach any responsibility for the
graduated scale to the customers/applicant’s account. bankers. Bankers by practice have a bundle of information
about a particular trade, a particular country and the political
The mail transfer system is ineffective as there is undue delay stability of another country. To encourage exports, banks
and generally the purpose for which the amount is transferred whenever a customer asks for, furnish or obtain from various
becomes frustrated on sources, this type of information to their customers.
account of the delay. In the case of telegraphic transfers also
there is a system of bunching the telegrams and telegrams 8) Letters of Introduction
generally leave the bank branch only after 5/6 p.m. Whenever a customer wants to open another account at another
This is also another agency function. centre, the banks insist on a letter of introduction. Further,
when V.I.P. customers visit another place or country such letters
4) Executor and Trustee will be of great help to the customer, not only to open an account
This service has its origin to the colonial rule. People who but also to obtain information from the other banks to know the
execute wills and keep the same in the custody of banks customers, trade practices etc. This is also a service function
authorise the banks to open their sealed envelopes containing done without any cost.
the wills on receipt of the notice of the death. The bank is
9) Letter of Credit
instructed to act as a trustee to execute the terms of the will.
When two unknown parties transact business without knowing
5) Travellers Cheques each other, the buyers require this facility. Issue of Letters of
Whenever a person/customer does not want to carry cash while Credit is essentially a credit decision. The issuing bank
on travel, he/she avails of this facility. Banks on receipt of undertakes the responsibility to honour the bills drawn by the
cash issue the travellers cheques which are payable at all the seller and pay to the seller’s bank, provided the documents are
branches of the bank in India and at the offices of the encashing drawn strictly in conformity with terms of the letter of credit.
agents appointed by the bank. Before issuing the travellers Bank charges a commission for this facility and issues letter of
cheques the bank obtains the signature of the applicant on the credit only after satisfying itself that the customer will have the
face of the cheques itself. At the time of encashment, the holder resources to honour when the bills are presented to him by the
has to sign again on the face of the cheque at another space seller’s bank. Here, although it is a financial service, the
provided for the purpose. Foreign Travellers cheques are also relationships between the opener of the letter of credit and his
payable by banks in India. On account of Exchange Control banker can become a debtor creditor relationship.
Regulation, Indian banks issue foreign travellers cheques subject
10) Letters of Comfort
to various guidelines issued by the Reserve Bank of India. When
the Indian rupee becomes fully convertible we can hope that Valued customers often approach their banks for this facility.
the banks in India will also issue travellers cheques payable Such valued customers often require the import of heavy
abroad across the counters of foreign banks. machinery and the seller of the machinery in a foreign country
requires a letter of credit or guarantee for payment before
There is provision for issue of duplicate travellers cheques, in
shipment from a first class banker in the buyer’s country. In
case of loss. Banks issue travellers cheques without any charges.
many cases sanctions from the Government may not have been
This is because banks could utilise the money in the pipeline.
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On account of experience banks achieve the capacity to render This is also of recent origin. Following the success of the
technical advice. After all the success of any project depends scheme abroad the Government of India/Reserve Bank of India
upon the technical feasibility and economic viability of the permitted the opening of State Bank of India/Factors Ltd and
project. The technical inputs, the type of machinery and the Canara Bank Factors Ltd. Both have not made any headway.
technology to be used for a viable or profit making proposition In factoring the factor, that is, the banker purchases the book
is advised by the banks to its customers. With the resources debts of a company at a discounted price. In the case of bills
available at the disposal of the promoters banks render technical payable abroad the service is called forfeiting. The bank
advices and appraises the projects so that the projects are becomes the sole owner of the factored debt. In almost all
technically feasible and economically viable. business transactions in U.S.A., these services are very much
This is an agency function and banks charge a fee. in use by the businessmen. The relationship is that of buyer
and seller between the bank and its customer.
13) Capital Market Functions
18) Collection of Pensions
This is also an agency function. The banks after appraising the
projects advise the customers as to how to go ahead with the The collection of pension amount from the Government
financial structuring and requirements of the customers. They Treasuries used to be agonising for the pensioners. They were
advise the customer about the lines of credit available to the required to go and stand in long queues. Banks undertake, as
customer. They agree to underwrite a portion of the public agents, the collection of Government or other pensions and
issue if the customer chooses to go to the public for subscription. charge commission for this agency transaction.
If the public response is not good, the liability under the 19) Credit Cards
underwriting the shares will devolve on the bank.
This is known as ‘plastic money’ abroad. Again, this is an
In case where banks appraise and underwrite they agree to act agency facility provided by the banks. The banks depending
as registrars to issue. They collect the public money through on the value of the customer’s accounts issue what is called a
their branches. After the issue is closed they advise the credit card. These credit cards enable the holder to purchase
customers about the total amount collected. within India or a specified area anything and everything from
14) Collection of Periodical Interest on Various Types of shops and business houses authorised by the credit card issuing
Securities bank or organisation. The shops and business houses are
provided with a decoder in most of the cases to prevent the
This function and the legal relationship have been already dealt unlawful use of this facility. The shops and business houses
with in detail. This service is rendered only to customers. claim the amount of the bills from the issuing banks or credit
Customers keep their Government bonds, debentures of card issuing organisations. The service is charged at periodical
companies, fixed deposit receipts of its own or of other banks intervals.
in safe custody. The collection of periodical interests require
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SUB TOPICS The English law on the subject is relevant to India. In Canara
5.1 General principles Bank v. Canara Sales Corporation [(1987)62 Comp.Cas 280],
5.2 Entries the Supreme Court has held that it is the law that obtains in
5.3 Customer’s Responsibilities England which has been followed by the Supreme Court and
High courts in this country.
5.4 Balance Confirmation Letters
According to Sir John Paget “the position of the Pass Book in
5.1 GENERAL PRINCIPLES law is unsatisfactory from the standpoint of the banker. Saving,
negligence, or reckless disregard on the part of either banker or
In a fast and evergrowing economy all over the world, the customer,its proper function is to constitute a conclusive
banker’s pass books have been replaced to a great extent by unquestionable record of the transactions between them, and it
computer statements. Complete computerisation is now should be recognised as such. After full opportunity of
available in all the developed countries like UK, Europe, USA, examination on the part of the customer, all entries, at least to
Japan and Singapore. Even in India, computerisation is in fast his debit, ought, to be final and not liable to be reopened later,
progress. The State Bank of India is the biggest bank in India at any rate to the detriment of the banker. Such is, however,
with over 8000 branches. Of these, 100 branches contribute to definitely not the effect of the pass book”.
80% of the bank’s entire business. All these branches have
now a Computer set up. Shortly, 1000 branches of the bank In Devaynes v. Noble [(1816) 1 Meriavale 529 at p.535], the
will be fully computerised. So is the case with the other major Court of Chancery ordered an enquiry into the nature and effect
commercial banks in India. All the foreign banks having offices of the pass book. The enquiry report stated, that on delivery of
in India are fully automated. the pass book to the customer, he examines it, and if there
appears any error or omission, brings or sends it back to be
Banks now supply to the customers statement of their accounts rectified; or, if not, his silence is regarded as an admission that
in the form of loose sheets periodically. Some customers are the entries are correct.
given daily, weekly, fortnightly or monthly statements. This
has the merit that it raises a presumption that the customer has However, in view of the various decisions in England and India,
notice of his account, though there is no return of the statement the position obtaining today is far from what is stated above.
to the bank which was the pass book’s main claim to be an There are a large number of cases on the topic the extracts of
account as stated, and from which it derives its name. The pass which are not reproduced in this paper. In Chatterton v.
book has not yet been completely replaced by the computer London and County Bank [1891 - The Times Jan 21] the jury
statements. Legal nature of the computer statements, its nature had found for the plaintiff and it was held that there was no
and contents have not yet been tested by courts. As all the duty on the customer to examine the pass book and thus there
legal incidents of pass book apply with equal force to a was no negligence. Similarly, in Kepatigalla Rubber Estates
statement we shall see the position of the pass book. Pass Books Ltd v. National Bank of India Ltd [(1909) 2 K.B. 1010], it
are issued to all customers who keep Savings Bank Accounts. was held that the company was under no obligation to organise
In the case of current accounts pass books are issued only when its business as to make forgeries unpracticable. If this was so,
demanded by the customer. then according to Bray.J. a secretary of the company, by going
to the bank on his own purpose in order to prevent the discovery
The pass books contain the name or names of the customer/s, of his own fraud and without knowledge on the part of any of
the account number, the ledger number, the name and address the directors and getting the pass book, can bind the company
of the customer and the mode of operation. If it is a joint account for all purposes. Clearly, an officer of a company cannot bind
it will contain ‘Either or Survivor’ ‘Former or Survivor’ or the company by approving the balance shown in the company’s
‘Any one’. It will also contain the date of opening the account, pass book. In the case of forged cheques, the primary cause of
the name of the branch and signature in full of the branch the loss is the negligence of the bank in honouring the forgery
manager of the branch. and the forger may be in a position to suppress the evidence in
It is a replica of the ledger at the bank branch. The only change the pass book from his employers.
is that, instead of the word “Debit” and “Credit” and balance in Any number of decisions by the highest courts in England are
the ledger, the pass book will have columns for amount available. A reference to Paget’s Law on banking will make all
withdrawn and amount deposited ; and balance. The pass book such references with ease.
also contains a column “initials” which indicates that the entries
are authenticated by an authorised person of the bank with his So far as Indian law on this topic is concerned, the law has
initials. Some banks print out the extracts of the Savings Bank been clearly laid down by our Supreme Court in Canara Bank
Rules in the pass book itself for the convenience of the v. Canara Sales Corporation & others [(1987)62 Comp.Cases
customers. 280]. The Supreme Court has held that the plea of implied
terms, indirectly constructive notice, and estoppel by negligence,
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Banking Law
Course No: II
Module No: VII & VIII
Materials Checked by :
Prof. T. Devidas
Materials Edited by :
Prof. N. L. Mitra
Prof. P. C. Bedwa
Published by :
Distance Education Department
National Law School of India University
Post Bag No. 7201
Nagarbhavi, Bangalore - 560 072
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Living in a complex, competitive age has its own disadvantages. People tend to fiercely compete about
everything and anything, be it the extent of their possessions, or assets, the number of degrees they hold, or
even the place of their vacationing. The problem is also compounded by the fact that the market is flooded
with both a variety of consumer goods in seemingly affordable ranges, and also a horde of opportunities
inviting people to invest in something and reap high rewards. The problem arises when a person wants to
buy these goods or invest in these opportunities but lacks the funds to do so. The only option left to him in
such cases is to take a loan, for which purpose he can either approach a private money-lender or public
financial institutions or banks. The option of going to a money-lender is not open to all because of the high
rate of interest charged by them and the accompanying risks.
Banks on the other hand provide a safe haven for such loan takers. A major part of the banking business is
concerned with giving of loans and advances. Depending on the purpose and time period of the loan, the
loans are divided into various categories. The government and the Reserve Bank of India also issue guidelines
from time to time to regulate the giving of advances by the banks. In general, these guidelines are issued
keeping in mind the economic status of the country and the current financial policy of the government, as
for example, at present the banks are required to give loans to agricultural sector and women entrepreneurs
etc.
In the present module, we have dealt with the various types of loans and advances given by the banks. these
loans are generally given against securities, which are taken by the banker to protect himself in case of
default by the debtor. The security against which loans are given are themselves of various kinds and may be
broadly categorised as direct, collateral and miscellaneous, though such a categorisation is only for academic
purposes and does not have any practical basis. An effort has been made to deal with each of these securities
in detail.
This module deals more with the nature and kinds of loans, advances and security - but does not directly
deal with the recovery of loans aspect. This is not because recovery of loans is an unimportant topic, but
more appropriately because that aspect has been dealt with indirectly at various places in the module, as for
example, remedies available to a banker if the debtor to whom a loan has been given against a mortgage has
commited a default. But you would be well advised to study the various problems in loan recovery and the
extent of bad debts of the nationalised banks for a more comprehensive understanding of the topic.
This module refers to various other Acts like the Transfer of Property Act, Contract Act, and Companies Act
while dealing with various types of securities. You would be well advised if you go through the bare acts of
these subjects while doing this module in order to have a better understanding of the subject.
N. L. MITRA
Course Co-ordinator
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TOPICS
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3) Loans : A lumpsum advance made by a banker, the entire Since ‘loans’ from a substantial part of banking transactions
amount being withdrawn by the customer at one stretch, and we would now deal in detail with the various kinds of loans
which he is expected to repay in one single installment, is called given by the banks.
a loan. Loan accounting have a lower operating cost than the
other two types of advances because the latter involve a larger 1.4 TYPES OF LOANS
amount of operations compared to the loans. Having a precise or exact classification of loans is a fairly
In case the customer repays the same either wholly or partially difficult job because we might have different types of
and subsequently wants to be accommodated, this would be classifications depending on the criteria involved. As for
treated as a separate transaction entered into (provided the bank example, based on the time period you may have a short term
agrees to do so) and would be subject to a new set of terms and loan or a long term loan, based on the security involved you
conditions which the bank may seek to impose. The bank thus may have secured loan or unsecured loan; based on the maturity
does not suffer from any loss of interest as a consequence to period you may have loans payable on demand or term loans;
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[Note: Please specify your name, I.D.No., and address while sending in your answer sheets].
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1. Chatterjeee, A., Legal Aspects of Bank Lending, 1992, Skylark Publications, New Delhi.
2. Gupta, S.N., The Banking Law in Theory and Practice, 1992, Universal Book Traders, New Delhi.
4. Holden, J.M., The Law and Practice of Banking (Vol.2), 1991, ELBS with Pitman, London.
5. Kataria, S.K., Banking and Public Financial Institutions, 1990, Orient Law House, New Delhi.
6. Suneja, H.R., Practice and Law of Banking, 1990, Himalaya Publishing House, New Delhi.
7. Tannan, M.L., Tannan’s Banking Law and Practice in India, 1991, Orient Law House, New Delhi.
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Banking Law
Course No: II
Module No: IX
Procedural Aspects
of Banking Law
Published By:
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore, 560 072.
272
Similarly in India, 'procedure established by law' is equally important because life and liberty of a perosn
cannot be taken away without the 'procedure established by law'. In Banking, the procedure is equally
important. Banking litigations are civil in nature and therefore, these litigations are dealth with in Civil
Procedure Code. It is advisable that you refer to the Civil Procedure Code (CPC) in detail. But in this
module we have dealt with only those sections, orders and rules of CPC that are frequently needed in the
banking litigations.
It may also be noted that the status of documentary evidence is required to be carefully examined in a
banking litigation. In this connection, please note that there is a separate Evidence Act for banking litigations.
This Act was passed in 1891 and is known as Bankers' Books Evidence Act, 1891. In this Act the mode of
proof of entries in banker's book is provided. In this connection you have to also examine the evidentiary
value of entries in books of accounts of a bank as included in the Evidence Act.
In this connection it is also to be noted that debt recovery tribunals are now being constituted in order to quicken
the decision in banking litigations. We have to examine how far our conventional framework of banker-customer
relation can be reconciled with the tribunalised justice. In this module, therefore, we have to learn:
While preparing the lesson you can prepare a checklist for yourself at every step. That shall help you at the
end to review your position.
If you have any problem either write to us or raise the issue in the contact programme.
N.L. Mitra
Course Co-ordinator
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TOPICS
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[Note: Specify your Name, I.D Card No. and address while sending answer papers]
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2. Gupta, S.N., The Banking Law in Theory and Practice, 22nd Edn. (1992), Universal Book Traders, New Delhi.
3. Hapgrood, Mark, Paget’s Law of Banking, 10th Edn. (1989), Butter-worths, London and Edinburgh.
4. Holden, J.M., The Law and Practice of Banking, 5th Edn. (1991), Vol.I, Pitman, London.
5. Shelden & Fidler’s, Practice and Law of Banking, 11th Edn. (1984), Macknald & Evans Ltd, London and Plymouth
6. Tannan, M.L., Banking Law & Practice in India, 18th Edn. (1989), Orient Law House, New Delhi.
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