Banking Law KSLU

1. Explain the origin & development of banking in India.

2. What are the main functions of banks?
3. 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.
4.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?
5. What are the obligations of a banker?
6. Explain the banker’s right of general lien.
7. What are the circumstances under which a disclosure by banker is
justified? OR Banker’s duty of secrecy is not absolute. Explain.
8. Who are the banker’s special customers? Explain the precautions
to be taken by the banker in opening and operating their accounts.
9. What are the functions of commercial banks?
10. What are the functions of the Reserve Bank of India?
11. Explain the management, powers and constitution of the Reserve
Bank of India.
12. Explain the role of Reserve Bank in economic development.
13. In what way does the Reserve bank exercise control over the
commercial banks?
14. Explain the Reserve bank’s licensing function.
15. Write a short Note of Regional Rural Banks
16. What are the rights of a banker against surety?What are the
precautions to be taken by the banker?
17. Explain the concepts of guarantee & indemnity
18. What are the differences between lien & hypothecation?
19. What are the differences between hypothecation & pledge?
20. Write a note of secured & unsecured loans
21. Write a note on current account
22. Write a note on savings bank account

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Banking Law KSLU
1. Explain the origin & development of
banking in India.
Banking was in existence in India during the Vedic times (2000 BC to 1400 BC).
Money lending was regarded as an old art and was practiced in the early Aryan
days.
Rina (debt) is often mentioned in the ‘Rig Veda’ reflecting a normal condition
prevalent in the Vedic Society.
The transition from money-lending to banking must have occurred before Manu-he
states that a sensible man should deposit his money with a person of good family,
good conduct, well-acquainted with law, wealth and honorable.
There are references to lending and banking in the two epics namely Ramayana &
Mahabharata. During that period banking had become a full fledged business
th
More details pertaining to money lending in the Sutra period (7 century to
nd
2 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
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th th
There is no live account of indigenous banking from the 6 to 16 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
st
General Bank of India was established in 1786. It was the 1 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.
Banking Law KSLU
3) Extending some non-banking customer services like facilities of locker,
2. What are the main functions of banks? rendering services in paying directly house rent, electricity bills, share
calls, insurance premium etc
There are four types of banking services. They are as follows-

1) Central banking services.

Specialized banking services
2) Commercial banking services.
They are estd for definite specialized banking services like
3) Specialized banking services.
1) Industrial banks to lend long term loans and working capital for industrial
4) Non-banking financial services. purposes.

The various functions of each of the following banks are- 2) Land mortgage banks for granting loans on equitable mortgage.

Central banking services 3) Rural credit banks for generating funds for extending rural credit.

The central bank of any country- 4) Developmental banks to support any developmental activities.

1) Issues currency and bank notes. These types of banks accept all types of deposits but mobilize the amount in its
specially focused area.
2) Discharges the treasury functions of the Government.
Non-banking financial services
3) Manages the money affairs of the nation and regulates the internal and
external value of money. Many banks are established for carrying out non banking financial services. Mutual
funds are institutions accepting finances from its members and investing it in long
4) Acts as banker to the govt. term capital of companies both directly in primary market as well as indirectly in the
capital market. Financial institutions acting as portfolio managers receive funds
from the public and manage the funds for or on behalf of its depositors. They
5) Acts as banker’s bank.
undertake to manage the funds of the principal so as to generate maximum return.
Commercial banking services
Explain the role of banks in promoting economic
Commercial banking services include- development.
1) Receiving various types of deposits. Banks play a very significant role in the economic development of the country.
Banking system as a whole has an imp influence on the tempo of economic
2) Lending various types of loans. activity. The economic importance of banks are-

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Banking Law KSLU
1) Banks mobilize the small, scattered and idle savings of the people and
make them available for productive purposes. They help the process of
capital formation.
2) By offering attractive interests on the savings of the people deposited with
them banks promote the habit of saving in them.
3) By accepting the savings of the people banks provide safety and security to
the surplus money of the customers.
money they influence economic activities, employment, income and
general price level in the economy.
12) Banks monetize the debts of others that is cover t the debts of others into
money by exchanging bank deposits in return for securities.
Thus a strong and a sound banking system is indispensable for the economic
development of any country.

4) Banks provide a convenient and economical mean of transfer of funds from

one place to another. Even cheques are used for the movement of funds
from one place to another.

5) Banks help the movement of funds from one region where they are not very
useful to regions where they can be more usefully employed. By moving
funds from one place to another banks contribute to the economic
development of backward regions.

6) Banks influence the rate of interest in the money market, through the supply
of money. They exercise a powerful influence on the interest rate in money
market.

7) Banks help trade, commerce, industry and agriculture by meeting their

financial requirements. Without the financial assistance the growth of trade
and commerce industry would have been very slow.

8) Banks direct the flow of funds into collective channels while lending money.
They discriminate in favour of essential activities as against non-essential
activities. Thus they encourage the development of right type of activities
which the society desires.

9) Banks help the industrious, the prudent, the punctual, the honest and
discourage the dishonest by not giving finance for wrongful purpose. Thus
banks act as public conservator of commercial activities.

10) Banks serve as the best financial intermediaries between the borrowers
and the lenders.

11) Through the process of creation of money, banks acquire control over the
supply of money in the country. Through their control over supply of
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Banking Law KSLU
The term customer is not defined by law. Ordinarily, a person who has an account
3. Who is a banker and customer? Explain in a bank is called a customer.
the general relationship between banker & Acc to Dr. Hart, “a customer is one who has an account with a banker or for whom
customer. OR The relation between a a banker habitually undertakes to act as such.

banker and a customer is that of a debtor
and a creditor. Explain.
The relationship between a banker and a customer is of great significance. It
depends upon the services rendered by the banker to the customer.
Thus to constitute a customer, the following essential requisites must be fulfilled:
1) He must have some sort of an account.
2) Even a single transaction constitutes a customer.

Definition of banker 3) The dealing must be of a banking nature.

According to section 3 of the NI Act, 1881, banker includes any person acting as a
banker and any post office savings bank.
According to section 5(b) of the Banking Regulation Act, 1949, banking means the
accepting, for the purpose of lending or investment, of deposits of money from the
public, repayable on demand or otherwise, and withdrawable by cheque, draft,
order or otherwise.
To sum up a banker is who
1) Take deposit account
2) Take current accounts
3) Issue and pay cheques
4) Collect cheques crossed and uncrossed for his customers.
Money lender is not considered as a banker as mere lending does not constitute
banking business. Banker is an institution which borrows money by accepting
deposits from the public for the purpose of lending to those who are in need of
money.
Definition of customer
A customer need not be a person. A firm, joint stock company, a society or any
separate legal entity may be a customer. Explanation to section 45-Z of the BR Act
clarifies that a customer includes a Government department and a corporation
incorporated by or under any law.
Relationship between a banker and customer
Relation of a debtor and a creditor
The general relationship between banker and a customer is that of a debtor and a
creditor i.e. borrower and lender. In Foley v. Hill, Sir John Paget remarks, “the
relation of a banker and a customer is primarily that of debtor and creditor, the
respective positions being determined by the existing state of account. Instead of
the money being set apart in a safe room, it is replaced by the debt due from the
banker. The money deposited with him becomes his property, and is absolutely, at
his disposal, and, save as regards the following of the trust funds into his hands,
the receipt of money by a banker from or on account of his customer constitutes
him merely the debtor of the customer with ‘super added’ obligation to honour his
customer’s cheques drawn upon his balance, in so far the same is sufficient and
available”.
In Shanthi Prasad Jain v. Director of Enforcement, Foreign Exchange Regulation,
the SC held that the banker and customer relationship in respect of the money
deposited in the account of a customer with the bank is that of a debtor and a
creditor.

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Banking Law KSLU
On the opening of an account a banker assumes the position of a debtor. The
money deposited by the customer with the bank is in legal terms lent by the
customer to the banker who makes use of the same according to his discretion.
The creditor has the right to demand back his money from the banker, and the
banker is under an obligation to repay the debt as and when he is required to do
so.
A depositor remains a creditor of his banker so long as his account carries a credit
balance. But he does not get any charge over the assets of his debtor/banker and
remains an unsecured creditor of the banker. Since the introduction of deposit
insurance in India in 1962 the element of risk of the depositor is minimized as
Deposit Insurance and Credit Guarantee Corporation undertakes to insure the
deposits upto a specified amount.
Banker’s relation with the customer is reversed as soon as the customer’s account
is overdrawn. Banker becomes creditor of the customer who has taken a loan from
the banker and continues in that capacity till the loan is repaid. As the loans and
advances granted by a banker are usually secured by the tangible assets of the
borrower, the banker becomes a secured creditor of his customer.
Various legal relationships of banker and customer
2) Agent and Principal- Sec.182 of ‘The Indian Contract Act, 1872’ defines “an
agent” as a person employed to do any act for another or to represent another in
dealings with third persons. The person for whom such act is done or who is so
represented is called “the Principal”.
One of the important relationships between a banker and customer is that of an
agent and principal. The banker performs various services of the customer, where
he acts as the agent.
Buying and selling securities of customer
Collection of cheques, bills of exchange, promissory notes on behalf of
customer
Acting a trustee, executor or representative of a customer
Payment of insurance premium, telephone bills etc.
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1) Trustee and beneficiary- section 3 of the Trusts Act defines a trustee as one to
whom property is entrusted to be administered for the benefit of another called the
beneficiary. A banker becomes a trustee under special circumstances. When a
customer deposits securities or other valuables with the banker for safe custody,
the banker acts as trustee of customer.
2) Bailee and bailor- during certain circumstances banker becomes bailee.
When he receives gold ornaments and important documents for safe custody he
takes charge of it as bailee and not trustee or agent. He cannot make use of them
as he is bound to return the identical articles on demand.
3) Pawnee and pawner- pawn is a sort of bailment in which the goods are
delivered to another as a pawn, to be a security for money borrowed. Thus a
banker acts as a pawnee where a customer delivers he goods to him to be kept as
security till the debt is discharged. The banker can retain the goods pledged till the
debt is paid.
4) Mortgagee and mortgagor- the relation between a banker as mortgagee and
his customer as mortgagor arises when the latter executes a mortgage deed in
respect of his immovable property in favour of the bank or deposits the title deeds
of his property with the bank to create an equitable mortgage as security for an
advance.
5) Lessee and lessor- when a customer hires a locker in the bank’s safe
deposit vault, the bank undertakes to take necessary precaution for the safety of
the articles in the locker. The relation between the parties is that of a lessor and
lessee.
6) Guarantor and guarantee- a bank as guarantor gives guarantee to its
customer by issuing a ‘letter of credit’. It is a kind of credit facility to its customer to
facilitate international trade. A bank guarantee contains an undertaking to pay the
amount without any demur on mere demand of the principal amount on the ground
for non-performance or breach of contract.
7) Fiduciary relationship- every relation of trust and confidence is a fiduciary
relation. A banker who receives a customer’s money is under a duty not to part
with it which is inconsistent with the customer’s fiduciary character and duty.
In Official Assignee v. Rajaram Aiyar, it was held that where banks old money for a
specific purpose of sending it somebody the money is impressed with trust.
Banking Law KSLU
4. Explain the special relationship
between banker & customer. OR What is
the special relationship arising out of
general relationship between a banker
and a customer. OR What are the rights
and obligations of a banker towards a
customer?
By opening an account with the banker, there will be some rights conferred and
obligations imposed to the banker as well as the customer. These rights and duties
are reciprocal i.e. the banker’s duties are the customer’s rights and the banker’s
rights are the customer’s duties. These rights and obligations are called the special
features of relationship between banker and the customer.
The special relationship between banker and customer can be presented as under:
General obligations of banker towards customer
Obligation to honour cheques- banker accepts the deposits from the customer with
an obligation to repay it to him on demand or otherwise. The banker is therefore
under a statutory obligation to honour his customer’s cheques because, it is
recognized under section 31 of the NI Act, 1881-
The drawee of a cheque having sufficient funds of the drawer in his hands properly
applicable to the payment of such cheque must pay the cheque when duly
required so to do, and, in default of such payment, must compensate the drawer
for any loss or damage caused by such default.
Thus the banker is bound to honour his customer’s cheques provided the following
conditions are fulfilled-
(a) Sufficient balance in customer’s account
(b) Presentation of cheques within working hours of business
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(c) Presentation of cheques within reasonable time after ostensible date
of its issue
(d) Cheques should be presented at the branch where account is kept
(e) Fulfilment of requirements of law
Obligation to maintain secrecy and disclosure of information required by law-
the banker is under an obligation to take utmost care in keeping secrecy about
the accounts of the customers since it may affect his reputation, credit-
worthiness and business. It was firmly laid down in Tournier v. National
Provincial and Union Bank of England Ltd. in India it was made compulsory
after 1970. The duty to maintain secrecy will be continuing even after the
account is closed or the death of the customer.
This obligation is subject to certain exceptions.
Obligation to keep a proper record of transactions- the banker must keep a proper
record of transactions of the customer. If he wrongly credits the account of the
customer and intimates him with the same and the customer acts upon the
intimation bonafide and withdraws cash the banker cannot contend that the entries
were wrongly made. He shall not succeed in recovery of money from the customer.
Obligation to abide by the instructions of the customer- the banker must abide by
any express instructions of the customer provided it is within the scope of their
banker-customer relationship. In the absence of any express instructions, the
banker must according to prevailing usages at the place where the banker
conducts his business.
Rights of a banker
Banker’s right of general lien- one of the important rights enjoyed by a banker is
the right of general lien. Lien means the right of the creditor to retain goods and
securities owned by the debtor until the debt due from him is paid. It may either be
general or particular.
In Brando v. Barnet, it was held that bankers most undoubtedly have a general lien
on all securities deposited with them as bankers unless there is an express or
implied contract inconsistent with lien.
Banking Law KSLU
In India sec 171 of the Indian Contract Act confers general lien upon bankers as
follows- bankers…..may in absence of a contract to the contrary, retain as a
security for a general balance of account, any goods bailed to them.

Banker’s right of set-off- the right to set off is a statutory right which enables debtor
to take into account a debt owing to him by a creditor, before the latter could
recover the debt due to him from the debtor. Thus when a customer keeps two or
more accounts at the same bank, some of which are overdrawn and some in
credit, the bank has a right to combine such accounts and pay the resultant
balance. In Halesowen Presscook and Assemblies Ltd v. Westminister Bank Ltd,
it was held that a banker has the right to combine two accounts and to set off
unless he has made some agreement express or implied to the contrary.

Banker’s right for appropriation of payment- when a debtor owes two or more
debts to a creditor and he pays some amount which is not sufficient to meet any
debt to the creditor appropriation is done. It applies to a banker if the customer has
more than one deposit or more than one loan account.

In Devaynes v. Noble, famously known as Clayton’s case, a principle was laid

down as to when the customer has current account and deposits and withdraws
money frequently the first item on debit side will be discharged by the first item on
credit side. The credit entries in the account adjust or set off the debit entries in
chronological order.

Banker’s right to claim incidental charges- the banker may claim incidental
charges on unremunerative accounts such as service charges, processing
charges, ledger folio charges, appraisal charges, penal charges and so on.

Banker’s right to charge compound charges- a banker has a special privilege to

charge compound interest. In Syndicate Bank v. West Bengal Cement Ltd, the
adding of unpaid interest due to the principal amount is recognized. However, the
SC abolished this in case of agricultural loans in the Bank of India case.

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Banking Law KSLU
Sometimes, he may commit some wrong which could be disastrous for the
5. What are the obligations of a banker? customer.
1. Obligation to honour cheques- the banker is under a statutory obligation
to honour his customer’s cheques in the ordinary course of business. If he
wrongfully dishonors the cheque, then he is liable to the customer for
damages.

Thus the banker is bound to honour the customers cheque provided the
following conditions are fulfilled-

(a) Sufficient funds- there must be sufficient funds of the drawer in the hands
of the drawee. A banker should be given sufficient time to release the
amount of the cheque sent for collection before the said amount can be
drawn upon by the customer. The banker can dishonor the cheques if
there are insufficient funds.

(b) Funds must be properly applicable- a customer might be having several

bank accounts in his various capacities. But is essential that the account
on which a cheque is drawn must have sufficient funds. If some funds are
earmarked by the customer for some specific purpose, they are not
available for honouring the cheques. But where the customer has overdraft
facility the banker has the obligation to honour the cheque upto the
amount of overdraft sanctioned.

(c) The banker must be duly required to pay- the banker is bound to honour
the cheque only when hi is duly required to pay. The cheque, complete
and in order, must be presented before the banker at the proper time.

2. Obligation to maintain secrecy of accounts-The customer’s account

details are recorded in the books of the banker and the true state of his
financial dealings are available with the banker. If any of these facts are made
known to others, the customer’s reputation might suffer and he might incur
losses also. The banker is therefore under an obligation to take utmost care in
keeping secrecy of the details of the customer.

However, this rule has exceptions(mention briefly)

3. Obligation to keep a proper record of transaction- the banker must keep

a proper and accurate record of all the transactions of the customer.

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Banking Law KSLU
2) Dividend warrants and interest warrants paid to the banker under mandates
6. Explain the banker’s right of general issued by the customer.
lien. 3) Securities deposited to secure specific loan but left in banker’s hand after
loan is repaid.
Lien means a legal claim to hold property as security. According to Halsbury, lien
may be defined as “a right in man to retain that which is in his possession
belonging to another, until certain demands of the person in possession is 4) Securities, negotiable or not, which the banker has purchased or taken up,
satisfied”. at the request of customer, for the amount paid.

Lien is of two kinds- 1) specific or particular lien and 2) general lien Exceptions- banker has no general lien

A particular lien is one which confers a right to retain the goods in connection with 1) On safe custody deposits.
a particular debt only while a general lien is a right to retain all the goods or any
property of another until all the claims of the holder are satisfied. It extends to all 2) On securities or bills of exchange entrusted for specific purpose.
transactions and thus more extensive.
3) On articles lefty by mistake or negligence.
Banker’s right of general lien
4) On deposit account.
One of the important rights enjoyed by a banker is the right of general lien.
In Brando v. Barnet, it was held that bankers most undoubtedly have a general lien 5) On stolen bond.
on all securities deposited with them as bankers unless there is an express or
implied contract inconsistent with lien. 6) Until due date of the loan.

In India sec 171 of the Indian Contract Act confers general lien upon bankers as 7) On trust account.
follows- bankers…..may in absence of a contract to the contrary, retain as a
security for a general balance of account, any goods bailed to them.
8) On title deeds of immovable properties.
Circumstances for exercising general lien

1) No agreement inconsistent with the right of lien.

2) Property must be possessed in his capacity as a banker.

3) Possession should be lawfully obtained.

4) Property should not be entrusted to the banker for a specific purpose.

Incidents of lien- lien attaches to

1) Bills of exchange or cheques deposited for collection or pending discount.

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Banking Law KSLU
(g) Under CrPC- the police officers conducting an investigation may also
7. What are the circumstances under inspect the banker’s books for the purpose of such investigation.
which a disclosure by banker is
2. Disclosure in the interest of the public-the following grounds generally
justified? OR Banker’s duty of secrecy fall under this category
is not absolute. Explain. (a) disclosure of the account where money is kept for extreme political
purposes in contravening the provisions of any law
The duty of the banker to maintain the secrecy is not an absolute one. It is also
subject to certain exceptions. The exceptions were stated in the landmark
(b) disclosure of the account of an unlawful association
judgment Tournier v National Provincial Bank Limited. Section 13 of the
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 also
allows certain exceptions. (c) disclosure of the account of a revolutionary or terrorist body to avert
danger to the State

1. Disclosure under the compulsion of Law- Banker’s obligation to his

customer is subject to his duty to the law of the country. The banker would,
therefore, be justified in disclosing information to meet the following
statutory requirements.
(a) Under the Income –Tax Act, 1961- Vide Section 131 & 133, Income Tax
authorities have powers to call for the attendance of any person or for
necessary information from banker for the purpose of assessment of the
bank’s customers.
(b) Under the Banker’s Books Evidence Act, 1891- a banker may be asked
for the Court to produce a certified copy of his customer’s account in his
ledger.
(c) Under the Reserve Bank of India,1934- the RBI is empowered to collect
credit information from Banking Companies relating to their customers
(d) Under the Banking Regulation Act, 1949- every bank is compelled to
submit an annual return of deposits which remain unclaimed for 10 years.
(e) Under the garnishee order- when a garnishee order nisi is received, the
banker must disclose the nature of the account of a customer to the Court.
(d) disclosure of the account of an enemy in time of war
(e) disclosure of the account where sizable funds are received from foreign
countries by a constituent.
Disclosure in the interest of the bank- the banker may disclose the state of
his customer’s account in order to legally protect his own interest. For
example- if the banker has to recover the dues from the customer or the
guarantor, disclosure of necessary facts to the guarantor or the solicitor
becomes necessary and is justified.
4. Disclosure under the express or implied consent of a customer- the
customer may instruct his banker to give some or all other particulars of
his account to say, his auditor, in such case banker can disclose. Banker
can also disclose to a referee whose name is suggested by the customer.
It is implied that the banker can disclose information to the guarantor.
5. Disclosure under Banker’s enquiry- it is an established banking practice
to provide credit information about their customers by one bank to another.
The customer gives implied consent to this practice at the time of opening
the account.

(f)Under the Companies Act, 1956- when the Central Government appoints
an inspector to investigate the affairs of any joint-stock company under
section 135 or section 137 of the Companies Act, the banker must
produce all books and papers relating of the Company.
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3) Minors are allowed to open such accounts when they have completed a
8. Who are the banker’s special particular age say twelve years in some banks and ten years in some
customers? Explain the precautions to others.

be taken by the banker in opening and 4) Banks should prudent to issue cheque books only to minors of, say sixteen
or seventeen years of age.
operating their accounts.
5) Accounts for illiterate minors are not opened in their single name.
Banks solicit deposit of money from the members of the public. Any person who is
legally capable of entering into a valid contract may apply in the proper way to 6) As a measure of precaution, banks adopt a general rule not to accept
deposit his money with the bank. deposit exceeding a particular sum.

A bank’s special customers are generally minors, married women, illiterate 7) Since a contract with a minor is void and cannot be enforced against him in
persons, lunatics, blind people, drunkards, insolvents etc who are not competent to Court of law, a minor’s account should never be allowed to be overdrawn.
open such accounts. There are also impersonal customers like schools, clubs,
partnership firm, joint stock companies etc. certain precautions are to be taken by
8) A guarantee obtained to secure the money borrowed by a minor is also of
banks while opening accounts in the name of the following customers.
no avail. However, if the guarantor undertakes to indemnify he will be held
liable though borrower is minor.
Minor
Lunatics
A minor is a person who has not attained the age of 18 and in case a guardian is
appointed, it is 21. Minors are regarded “pet children of law”.
Lunatics are persons of unsound mind. Lunatics are disqualified from contracting
but the disqualification does not apply to contract entered by lunatics during their
In Mohori Bibi v. Dharmodas Ghose, a minor executed a mortgage for Rs 20000 period of sanity. Following are banker’s duty n case of lunatics-
and received Rs 8000 from the money lender. Subsequently, the minor sued for
setting aside the mortgage. The money lender wanted refund of money which he
1) Since a lunatic has no capacity to contract, acc to sec 11 of the ICA, no
had actually paid. The PC held that an agreement by a minor was absolutely void
banker knowingly opens an account in the name of a lunatic.
and therefore, money lender was not entitled repayment of money.
2) If an existing customer becomes insane, the banker must immediately stop
Some of the precautions to be taken by the banker on opening and operating
the operation of the account. It is so because, the banker has no right to
account of a minor are-
debit his account for payment made out of his account from the moment,
the banker knows the fact of lunacy of customer, the contract between
1) The banker may open a SB account but not a current account as it incurs no them is void.
liability to the minor.
3) A banker must not be carried away by hearsay information or rumours. He
2) At the time of opening of account of minor, the bank should record the must get definite information about the lunacy of the customer.
genuine date of birth of the minor. Banker should insist on to give some
schooling record or date of birth as entered in Births and Deaths Register.
4) If a banker dishonours a cheque in a hurry, without having any proof of
lunacy, he will be liable for wrongful dishonour of cheque.

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Banking Law KSLU
5) It should return all cheques of customer’s account with the word ‘refer to
drawer’ and not ‘customer insane’. It should make careful note of lunacy
order.
6) If a third party is authorised to draw on customer’s account, that authority
will cease when the customer becomes insane since when a principal
cannot act for himself his agent can no longer act for him.
7) If one party to an account opened in joint names becomes mentally
incapable of managing his or her affairs, the banker should not allow either
party to operate the account.
Illiterates
An illiterate person is competent to contract and bank may open an account in his
name, but special care should be taken by the banker before opening an account.
1) The account of an illiterate person may be opened provided he/she calls the
bank personally along with a witness who is known both to the banker and
the depositor.
2) A passport size photograph of the illiterate person is identified before the
banker in presence of the account holder. The photographs have to be
attested by the bank officer/ witness.
3) The left hand thumb impression in case of male illiterate and right hand
thumb impression in case of female illiterate are duly attested by some
responsible person on the account opening form.
4) One or two identification marks of the depositor should be noted on the
account opening form.
5) The illiterate person should be provided with a passbook which should also
contain an attested photograph of the illiterate person.
6) Normally, no cheque book facility is provided on accounts in the name of
illiterate persons.
7) At the time of withdrawal/repayment of deposit account the account holder
should attend personally with passbook and attest his/her thumb
impression or mark in the presence of an authorised person.
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8) The thumb impression of illiterate person on the withdrawal form or cheque
(if provided), and on the back of the withdrawal form or cheque should be
duly compared with the specimen impression kept by the bank.
Married women
The Hindu married women are governed by the Hindu Succession Act and other
married women by Indian Succession Act. A banker may open an account in the
name of a married woman like any other customer. However, a banker should
exercise caution while opening account for the wife of an undischarged insolvent.
1) While opening an account of a married woman, the bank should enquire
about her means and circumstances, and if she is living with her husband,
something about him and his occupation and position in life, and if he is an
employee, the name of the employer.
2) In case she applies for an overdraft, the banker should see that she owns
separate property in her own name and precaution should be kept in mind
regarding her status and capacity to pay and the purpose for which the
borrowings are made. Also he should seek suitable securities preferably
on her, which can be attached by the Courts.
3) The banker should always observe that there is credit balance in her
account.
4) Banks usually require that a married woman be independently advised by
her own solicitor when depositing security for the account of other
persons.
5) A married woman may enter into a contract of guarantee and it is
enforceable only against her separate estate.
6) In case of an illiterate married woman, her thumb impression should be
obtained on the account opening form and on the identification card.
Banking Law KSLU
Pardhanishin women
In case of a pardhanishin woman who remains completely secluded the
following presumption exists-
1) Any contract entered into by her may be subject to undue influence
2) The same might not have been done with free will and with full
understanding of what the contract actually means.
He banker should therefore due precaution while opening an account in the name
of a pardhanishin woman. As the identity of such woman cannot be ascertained
the banker generally refuses to open an account in her name.
Joint Hindu families
A JHF or a HUF consists of all persons lineally descended from a common
ancestor and included their wives. Following are the precautions to be taken by the
banker in opening and operating accounts in the name of HJF.
1) The account may be opened in the name of karta or in the name of family
business and should be duly introduced.
2) The account opening form should be signed by all adult coparceners, even
though the karta would operate the account.
3) The declaration signed by all the members as to who is the karta and who
are the other coparceners including minor coparceners should be
obtained.
4) If there are minor coparceners, the other adult coparceners should sign for
self and as guardians of minors.
5) Authority should be given to the karta to operate the account of all
concerned under their joint signature.
6) On attaining majority, the minor coparceners should be asked to join with
other coparceners in signing the existing account opening form in
ratification of previous transactions.
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7) Any member of the HUF can stop payment of a cheque drawn by karta.
When the bank receives a notice about any dispute amongst the family
members of the HUF, the operations in the account should be stopped till
further instructions from a competent court.
8) The burden of proof that loan was taken by karta for purposes beneficial to
the family lies on the banker. Thus before granting loans necessary
enquiries should be made to ensure it. Otherwise, the bank may not be
able to succeed in a suit for recovery of debt.
Agent
A person employed to do any act for another, or to represent another in dealings
with third persons, is known as an agent for another. The precautions to be taken
by a banker in opening and operating account of a customer by an agent are
1) A banker should at once suspend all operations on that account upon
hearing or being notified of the principal’s death, insanity or bankruptcy.
2) The agent must assign the cheque for and on behalf of the principal, so that
the third parties would know that he is dealing in a representative capacity.
3) Whenever a bank receives a mandate, it should be recorded in a register,
serially numbered, indexed alphabetically, and instructions should be
noted in the customer’s ledger account.
4) In case the agent is authorised to open an account on behalf of the
principal, the application should be made to sign by the principal himself,
delegating authority to agent to operate the account.
5) The agent should sign in a manner to indicate that he is signing as an agent.
6) The banker should on no account allow the agent, or in fact any person to
pay into his own private account, cheques which he has endorsed on
behalf another, without satisfying himself that the agent has the authority
of the principal to do so.
7) A banker should not allow an agent to overdraw his principal’s account
express with his express authority.
Banking Law KSLU
Partnership firm
A partnership is the relation between the persons who have agreed to share the
profits of a business carried on by all or anyone of them acting for all. The banker
should take the following precautions while dealing with a partnership firm.
1) The banker should first know the provisions of the Part Act before he opens
an account for PF.
2) The banker shall open an account in the name of a partnership firm only
when an application is submitted in writing by any one or more partners
under sec 19(2)(b) of the Act. Authority to open an account in the name of
an individual partner is positively denied.
3) To be on safer side, a banker should get a written request from all the
partners jointly for opening an account.
4) The banker should go through the partnership deed and carefully study the
objects, capital, borrowing powers etc. he should get a copy of the duly
stamped partnership deed. He should enquire about the details of the firm,
partners and their powers. If the firm is registered the banker should get a
copy of the registration certificate. Dealings with unregistered firms will
involve risks.
5) There should be a clear mandate from all the partners. Mandate must be
signed by all the parties.
6) The banker should not mix the personal and private accounts of the
partners. He has no right to set off and lien over the accounts.
7) No partner has an implied power to sell or mortgage the property of his firm.
So in case of mortgage of property, the deed of mortgage should be
signed by all the partners.
8) While advancing loans and advances to partnership firm the banks in
practice get the loan documents executed by the partners on behalf of the
firm as also in their personal capacity.
9) Since a firm stands dissolved on insolvency or insanity of a partner, a
cheque signed by an insolvent partner before the date of adjudication
should not be paid b the banker without conformation from other partners.
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Trust
A trust is an obligation annexed to the ownership of the property, and arising out of
a confidence reposed in and accepted by the owner, or declared and accepted by
him, for the benefit of another, or of another and the owner.
While opening accounts in the names of persons in their capacity as trustees, the
banker should take the following precautions.
1) The banker should examine the trust deed concerning instructions regarding
opening and operating the account contained in the trust deed. In the
absence of such instructions, all the trustees may join in opening such
account.
2) Instructions regarding limitation on withdrawal in the trust deed, if any, be
prominently noted at the ledger head and specimen signature card and
withdrawals should be restricted.
3) The banker should note the objects for which the trust has been created so
as to facilitate the passing of cheques.
4) A trustee has no individual powers. They must all act together. All must join
in signing of cheques. Unless expressly provided otherwise in the trust
deed, no trustee can delegate his power to another.
5) If one of the trustees dies or retires, the bank on receiving notice should
suspend all operations in the account. However, if the trust deed is silent
the bank can let the operations to continue.
6) In case of breach of trust the bank must see that it does not become a party
to the breach. The banker is justified in dishonouring the cheque drawn by
a trustee, if intended for breach of trust.
7) If the trustees are authorised to borrow to discharge the functions of the
trust, the banker must get specific assets of the trust as security.
Banking Law KSLU
9. What are the functions of commercial
banks?
The functions of commercial banks are very vast.
Meaning of CB- commercial banking refers to that banking which is concerned
with the acceptance of deposits from the public repayable on demand or after the
expiry of a short period and the granting of mainly short term credit to trade,
commerce and industry through wide networking of branches throughout the
country.
Functions of commercial banks- the functions of CB are numerous. They can be
broadly divided into two categories. They are-
1) Primary or basic functions
a) Receiving of deposits- deposits constitute the main source of funds for
commercial banks. CBs receive deposits from the public on various
accounts. The main types of accounts are- fixed, current, savings,
recurring (explain lil).
b) Issuing notes/cheques- this function once considered to be the most
paying part of banker’s business is in modern times performed
generally by the central bank. Its importance has dwindles to a large
extent in some developed countries where cheque currency has
replaced bank notes to a large extent.
c) Lending of funds- it is the main business of CB. Advances form the
chief source of profit for CB. Banks lend funds by way of loans, over-
drafts, cash credit, discounting of bills.
(i) Loan- it is a financial arrangement under which an advance is granted by a
bank to a borrower on a separate account called the loan
account. A loan may short, medium or long term. It is granted
either against collateral securities or against personal security
of the borrower.
(ii) Over-draft- it is a financial arrangement where a current account holder is
permitted by a bank to overdraw his account that is to draw
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more than the amount standing to his credit upon an agreed
limit.
(iii) Cash credit- it is a financial arrangement under which a borrower is allowed an
advance under a separate account called cash credit limit.
Here the borrower can withdraw the amount in installments as
and when he needs.
(iv) Discounting of bills of exchange- here the bank takes a BOE maturing
from an approved customer and pays him and credits his
account immediately with the present value of the bill.
d) Investment of funds on security- it is one of the imp functions of
comm. Banks. They invest a considerable amount of their funds in
govt and industrial securities. In India it is required by statute for CB to
invest a considerable amount of their funds in securities.
e) Creation of money- the various ways of creation of money are-
(i) By advancing loans
(ii) By allowing over draft
(iii) By providing cash credit
(iv) By discounting BOE
(v) By purchasing securities
(vi) By purchasing fixed assets
The commercial banks are prominent in today’s world because they manufacture
or create money. The bank deposits are regarded as money coz they perform the
same function as money that is they increase the purchasing power of the
community and serve as medium f exchange in purchase of goods and services
and settlement of debts.
2) Secondary or subsidiary functions- apart from performing the main function
the comm. banks also perform a num of secondary functions which may be
divided into the following two heads-
Banking Law KSLU
a) Agency services- the services rendered by a bank as the agent of his
customer are called agency services. The imp agency services are-

(i) Collection of money on behalf of customers.

(ii) Making payments on behalf of customers.

(iii) Purchase and sale of securities on behalf of customers.

(iv) Advising customers regarding investments.

(v) Acting as trustee, executor, and administrator of customers.

(vi) Rendering of merchant banking services.

b)Miscellaneous or general utility services- services rendered by

banker is not confined only to his customers but also to general public
called such as-

(i) Safe custody of valuables

(ii) Dealing in foreign exchange business

(iii) Issuing of traveller’s cheque, traveller’s letter of credit and circular notes.

(iv) Collecting information bout other businessmen for customers.

(v) Collection of statistics and data.

(vi) Lease financing.

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Banking Law KSLU
10. What are the functions of the Reserve
Bank of India?
The Central Bank is the Apex Bank of the country. It is called by different names in
different countries. It is the Reserve Bank of India in India.
The Reserve Bank of India has been defined in terms of its function. According to
Vera Smith, “The primary definition of central banking is a banking system in which
a single bank has either complete control or a residuary monopoly of note issue.”
According to A.C.L. Day, “a central bank is to help control and stabilise the
monetary banking system”.
Functions Of RBI:
1) Regulator Of Currency:
The Reserve Bank of India is the bank of issue. It has the monopoly of note issue.
Notes issued by it circulate as legal money. It has its issued department which
issued notes and coins to commercial banks.
Reserve Bank of India has been following different methods of note issue in
different countries. The monopoly of issuing notes vested in the Reserve Bank of
India ensures uniformity in the notes issued which helps in facilitating exchange
and trade within the country. It brings stability in the monetary system and creates
confidence among the public.
RBI can restrict or expand the supply of cash according to the requirements of the
economy. Thus, it provides elasticity to the monetary system.
2) Banker, Fiscal Agent and Advisor To The Government:
RBI everywhere acts as bankers, fiscal agent and advisor to their respective
governments. As banker to the government, the central bank keeps the deposits of
the central and state governments and makes payments on behalf of the
governments. But it does not pay interest on government deposits.
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It buys and sells foreign currencies on behalf of the government. It floats loans,
pays interest on them, and finally repays them on behalf of the government. Thus it
manages the entire public debts.
RBI also advices the government on such economic and money matters as
controlling inflation or deflation, devaluation or revaluation of the currency, deficit
financing, balance of payments etc. Thus it is the custodian of government money
and wealth.
3) Custodian Of Cash Reserves Of Commercial Banks:
Commercial banks are required by law to keep reserves equal to a certain
percentage of both time and demand deposits liabilities with the RBI. It is on the
basis of these reserves that the RBI transfers funds from one bank to another to
facilitate the clearing of cheques. Thus the RBI acts as the custodian of the cash
reserves of commercial banks and helps in facilitating their transactions.
4) Custody And Management Of Foreign Exchange Reserves:
The RBI keeps and manages the foreign exchange reserves of the country. It sells
gold at fixed prices to the authorities of other countries. It also buys and sells
foreign currencies at international prices.
Further, it fixes the exchange rates of the domestic currency in terms of foreign
currencies. It holds these rates within narrow limits in keeping with its obligations
as a member if IMF and tries to bring stability in foreign exchange rates.
5) Lender Of The Last Resort:
By granting accommodation in the form of re-discounts and collateral advances to
commercial banks, bill brokers and dealers, or other financial institutions, the RBI
acts as the lender of the last resort.
It acts as lender of the last resort through discount house on the basis of treasury
bills, government securities etc. Thus RBI as lender of the resort is a big source of
cash and also influences prices and market rates.
6) Clearing House For Transfer And Settlement:
As bankers` bank, the RBI acts as a clearing house for transfer and settlement of
mutual claims of commercial banks. Since the RBI holds reserves of commercial
Banking Law KSLU
banks, it transfers funds from one bank to other banks to facilitate clearing of
cheques.

To transfer and settle claims of one bank upon others, the RBI operates a
separate department in big cities and trade centres. This department is known as
clearing house and it renders free service to commercial banks.

7) Controller Of Credit:

The most important function of RBI is to control the credit creation power of
commercial bank in order to control inflation and deflation pressures within this
economy. For this purpose, it adopts quantitative and qualitative methods. These
involve selective credit control and direct action.

Besides the above noted functions, the RBI in a number of developing countries
have been entrusted with the responsibility of developing a strong banking system
to meet the expanding requirements of agriculture, industry, trade and commerce.

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Banking Law KSLU
11. Explain the management, powers and
constitution of the Reserve Bank
of India.
st
The Reserve Bank of India was established on 1 April, 1935 under the Reserve
Bank of India Act, 1943 as the Central Bank of the country to regulate the issue of
bank notes and the keeping of reserves for the stability in India and generally to
operate the currency and credit system of the country.
Constitution:
The bank was established as a shareholder`s bank with an authorized and paid-up
capital of Rs. 5 crores divided into shares of Rs. 100 each. After independence,
under the Reserve Bank Act, 1948, the bank was nationalized, after paying
compensation to the shareholders at the market price of the share.
Management:
The affairs if the RBI are managed by the Central Board of Directors consisting of:
• Governor and not more than 4 Deputy Governors appointed for a period
not more than 5 years.
• Four Directors, one from each of the four local boards.
• The other Directors.
• One Government Official.
All the Directors and the officials are nominated for 4 years each by the Central
Government. To look after the affairs there are 4 local Boards, one at each of the
cities of Bombay, Calcutta, Delhi and Madras, each Board consisting of 5
members appointed for 4 years by the Central Government.
Functions:
Mention the above functions in brief.
Powers:
• Power Of RBI To Appoint Chairman Of A Banking Company:
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RBI has the authority to appoint Chairman of Banking Company where the office of
the Chairman of the Board of Directors appointed on a whole-time basis.
• Minimum Paid-up Capital And Reserves:
• Every banking company should deposit the prescribed minimum paid-up
capital and reserves with the RBI either in cash or in form.Cash Reserve:
Every banking company, not being a Scheduled Bank, shall maintain in India by
way of cash reserves or by way of balance in a current account with the RBI.
• RBI Control Over Banking Companies:
The RBI may, by order, require any banking company to call a general meeting of
the shareholders of the company within such time, not less than two months from
the date of order.
• Power Of RBI To Control Advances By Banking Companies:
The RBI may determine the policy in relation to advances to be followed by
banking companies generally or by any banking company in particular.
• Licensing Of Banking Companies:
No company shall carry on banking business in India unless it holds a licence
issued in that behalf by the RBI and any such licence may be issued subject to
such conditions as the RBI may think fit to impose.
• Monthly Returns:
Every bank should submit monthly returns to the RBI in the prescribed form and
manner showing its assets and liabilities in India. The RBI has the power to call for
other returns and information if required.
• Accounts And Balance-Sheet:
At the expirations of each calendar year, every banking company incorporated in
India shall prepare, a balance-sheet, profit and loss accounts as on the last
working day of the year.
Banking Law KSLU
• Submission Of Returns:

The accounts and balance-sheet together shall be published in the prescribed

manner and three copies thereof shall be furnished as returns to the RBI within
three months form the end of the period to which they refer.

• Inspection:

The RBI had got the power to inspect the books and accounts of a banking
company. After the inspections it sends a copy of it to the concerned bank. The
inspection by the RBI may be on its own or under the direction of the Central
Government.

• Directions:

The RBI may from time to time, issue directions as it deems fit, to a banking
company in particular or to the banking companies in general and the banking
company or companies shall be bound to comply with such directions

• Power To Remove Managerial And other Persons From office:

RBI has to powers to remove managerial and other persons from office of the
banking companies, whose conduct is to the interest of the deposits and to secure
proper management. RBI also appoints additional directors.

• Power Of RBI To Impose Penalty:

The RBI has a wide range of powers of supervision and control over commercial
and cooperative banks. The RBI control frauds in entire banking industry in India.

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Banking Law KSLU
12. Explain the role of Reserve Bank in
economic development.
In developed countries, the role of Central Bank is regulatory. But in a developing
economy like that of India, the role of Central Bank is developmental or
promotional. The Central Bank is to help in the mobilization of required productive
resources and in their efficient allocation. It has to bring about economic
development with stability.
The RBI has been quite active in the maintenance of a proper atmosphere of
economic development and mobilization of financial resources for economic
development. The RBI has assisted economic development in the following ways-
1. Checking inflation- the government budgetary operations, owing to
increasing size of government expenditure, generate strong inflationary
pressures. It is the responsibility of the monetary authority to restrain these
pressures by freezing a part of liquidity thus generated. This, the RBI has
been able to do through its pivotal tool-rate of interest. It has made use of
other methods of credit control as well. Unless inflation is kept in check, all
the development plans are in danger of being upset.
2. Providing development finance- the RBI has helped a great deal in
setting up of specialized institutions so that the financial facilities are made
available.
3. Agricultural credit-The RBI has made available short term, medium term
and long term finance to agriculture through the hierarchical network of co-
operative banks and societies. In this connection, the RBI set up two funds
(a) National Agricultural Credit(long term operations) Fund
(b) National Agricultural Credit(stabilization) Fund
These fund loans were given to SCB’s & RRB’s for agricultural credit and
during floods and famines.
It has also been instrumental in setting up Agricultural Refiance &
Developmental Corporation and more recently Export-Import Bank and the
NABARD.
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4. Industrial finance-The RBI has also organized industrial finance for both
big and small industries to secure all types of loans-short term, medium
term and long term. It has helped in the creation of
(a) Industrial Finance Corporation of India
(b) National Small Industries Corporation
(c) State Financial Corporations
(d) Industrial Development Bank of India.
It has also introduced a scheme of guarantee of bank loans to small industry
and till the establishment of Export-Import Bank, also provided refiance to
banks for export credit
5. Regulatory credit-When there is an expansion of bank credit, it adds to
the active demand for goods and services. This tends to start inflationary
spiral. Thus it becomes essential for the monetary authority to stem in and
restrain the expansion of bank credit in the interest of sound and healthy
economic growth. During the last 5 decades, the RBI has tried to regulate-
(a) cost of credit
(b) quantity of credit
(c) purpose or use of credit
Conclusion-Thus the RBI has helped to broaden and deepen the structure of
institutional finance for accelerating development of the country with itself as
the central arch of banking and monetary framework of the country.
Banking Law KSLU
13. In what way does the Reserve bank
exercise control over the commercial
banks?
The RBI acts as supervisor and controller of banks in India. By virtue of the powers
conferred on the RBI by the RBI Act, 1934 and the Banking Regulation Act, 1949,
the relationship between the RBI and the commercial banks are very close. The
RBI has a 3 fold control over the commercial banks—
(a) as supervisory & controlling authority over banks
1. Each bank in India is required to obtain license from the RBI before conducting
banking business-section 22. The RBI is required to conduct an inspection of the
books of the banking company and issue a license, if it is satisfied that all or any of
the conditions are fulfilled. The provision is intended to ensure the continuance and
growth only of banks which are established or are operating on sound lines and to
discourage indiscriminate floating of banking companies
2. According to Section 23 of the Act, no banking-company shall open a new
place of business in India or change otherwise than within the same city, town or
village, the location of an existing place of business situated in India without
obtaining the prior permission of the RBI.
3. It has powers to inspect books and accounts of commercial banks-Section 35
The RBI may on its own initiative or at the instance of the Central government,
inspect any banking company and its books and accounts. The Central
Governemnt may on the basis of this report direct the company to wind up.
4. RBI may remove managerial an other persons from office-Section 36AA-where
the RBI is convinced that a banking company is not conducting its affairs in the
public interest, or is conducting them in a manner detrimental to the interests of the
depositors, or where the RBI is satisfied that for securing the proper management
of the banking company it would be necessary to do so, the RBI may after
recording the reasons and by order, remove from office, with effect from a
specified date, any chairman, director, chief executive director or other such officer
or employee.
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5. RBI may appoint additional directors of the banking company-Section 36 AB- in
the interest of banking policy or in the public interest or in the interests of the
banking company or its depositors, the Bank may, from time to time by order in
writing, appoint with effect , one or more persons to hold office as directors of the
banking company.
6. It may issue directions to commercial banks and may prohibit banks to enter into
particular transactions- Section 36
(b) as controller of credit
1. By changing the statutory liquidity rate- Section 24 of the Banking Regulation
Act, 1949 requires that every banking company has to maintain cash, gold or
approved securities of an amount not less than 25% of its net demand and
liabilities at the close of business everyday. This is called statutory liquidity rate
and the RBI is empowered to step up the rate upto 40%
2. The RBI controls credit by changing the statutory reserve maintained by the
scheduled banks-section 42 of the RBI Act.
3. Controls credit by changing the bank rate and its policy of granting
accommodation to commercial banks
4. It controls credit through its credit monitoring arrangement
5. It controls credit by exercising moral influence on the banks.
(c) as banker to the banker
As banker to the banks, the RBI acts as the lender of last resort and grant
accommodation to the scheduled banks in the following forms-
1. re-discounting or re-purchasing eligible bills
2. grant loans and advances against securities
Emergency advances-the RBI advances loans when it is satisfied that the loan is
necessary for the purpose of regulating credit in the interest of trade, commerce
and industry.
Banking Law KSLU

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Banking Law KSLU
14. Explain the Reserve bank’s licensing
function.
Section 22 of the Banking Regulation Act, 1949 contains a comprehensive
system of licensing of banks by RBI. This section makes it essential for every
banking company to hold a license issued by the RBI. The RBI is required to
conduct an inspection of the books of the banking company and issue a license, if
it is satisfied that all or any of the following conditions are fulfilled-

1. that the company is or will be in a position to pay its present or future

depositors in full as their claims accrue
2. that the affairs of the company are not being or not liked to be, conducted
in a manner detrimental to the interests of its present or future depositors;
and
3. in case of a foreign bank, the carrying on of banking business by such
company in India will be in the public interest and that the Government or
law of the country in which it is incorporated does not discriminate in any
way against banking companies registered in India and that the company
complies with all the provisions of the Act applicable to foreign banks.

It is clear from the above that the grant of a license depends upon the
maintenance of satisfactory financial position. The provision is intended to ensure
the continuance and growth only of banks which are established or are operating
on sound lines and to discourage indiscriminate floating of banking companies. To
ascertain the position, the inspecting officer of the RBI has to make an estimate of
the liquid and other readily realizable assets and also to judge whether the assets
are enough to meet the claims of the depositors as and when they arise. The
assessment about the whole gamut of operations of the banking company and its
organizational set-up is necessary to judge the conditions before the license is
granted.

According to Section 23 of the Act, no banking-company shall open a new place

of business in India or change otherwise than within the same city, town or village,
the location of an existing place of business situated in India without obtaining the
prior permission of the RBI.

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Banking Law KSLU
in its establishment, recruitment and training of personnel. They may also provide
15. Write a short of Regional Rural Banks managerial and financial assistance with mutual agreement.

The RRBs are relatively new banking institutions which were added to the Indian Capital resources
banking scene since October 1975 to strengthen the institutional rural credit
structure. Prior to that, the then existing credit agencies lacked in meeting the Each RRB may have an authorized capital of Rs. five crore divided into one lakh
needs of rural masses. A committee under the chairmanship of N.Narasimhan shares of Rs. 100 each and issued capital of Rs. 1 crore to improve their viability.
suggested the institutions of RRBs as low cost banking for rural areas should be
set up to meet their credit needs.
Management
Objectives
The management of each RRB is vested in nine members Board of Directors,
headed by a Chairman. The chairman is appointed by the Central Govt. The
1) To identify a specific and functional gap in the present institutional structure. chairman is a paid servant of the sponsoring bank while the members are
honorary.
2) To supplement the other institutional structure.
Conclusion
3) To fill the gap within a reasonable period of time.
RRBs are playing an important role as an alternative agency to provide institutional
Functions credit. According to RBI the RRBs have fared well in achieving the objective of
providing access to weaker sections of society.
1) To provide financial facility to small and marginal farmers, agricultural
labourers, co-operative societies for agricultural purposes or other
purposes related to agriculture.

2) To grant loans and advances to artisans, small entrepreneurs, persons of

small means engaged in trade, commerce etc.

3) To relieve the rural masses from the clutches of money lenders.

4) To provide easy credit facility to weaker sections of society.

5) To establish branches in unbanked rural areas.

6) To take the banks to the doorsteps of the poorest people in remote rural
areas.

Sponsorship

Each RRB is sponsored by a nationalized bank known as a sponsoring bank which

provides all sorts of helps to these RRBs. The sponsoring bank will assist the RRB
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Banking Law KSLU
terminates. The banker should make a formal demand upon the guarantor for
16. What are the rights of a banker against repayment of the amount unless it is paid by those in charge of the estate of
surety?What are the precautions to be the deceased.

taken by the banker?
Rights of banker against surety
1. Right of lien-the banker can exercise his right of lien on the balance of the
account of the guarantor in his possession notwithstanding the fact that his
claim under the guarantee is time-barred. Right to exercise a general lien
does not arise until a default has been ade by the principal debtor, in
which case the banker should immediately inform the guarantor that the
former has exercised his lien on the latter’s money or securities deposited
with him.
2. Surety’s liability is co-extensive with that of the principle debtor-
according to Section 128 of the Indian Contract Act, the liability of the
surety is co-extensive with that of the principal debtor, unless it is
otherwise provided for by the contract of guarantee.
3. Banker’s claim against a bankrupt surety’s estate-in the event of the
bankruptcy of the surety, the banker is entitled to prove his claim against
the estate of the surety. When the banker hears of the death or bankruptcy
of the surety he should close the account guaranteed by the surety and if
the principal debtor makes a default in the payment of the amount, the
banker should at once claim the amount from the legal representative of
the deceased or from the Official Receiver of the bankrupt surety.
3.Notice of debtor’s bankruptcy-a banker should stop the operation on a
guaranteed account as soon as he receives notice, actual or constructive, f his
debtor’s bankruptcy. In such a case, the banker should also demand the
repayment of the amount due by the surety. The banker need not first resort to
the sale of the securities held by him in the account.
4.Notice of lunacy of the debtor or surety-a banker on receipt of reliable
notice of the lunacy of the principal debtor or surety should close the account.
The lunacy of a surety is to be taken as terminating the guarantee so far as
future advances are concerned. Consequently, any advance made by the
banker after receipt of the notice of lunacy of his customer is not recoverable
from the estate of the lunatic despite the fact that the contract of guarantee
may provide for a month’s notice from the surety for the termination of the
guarantee.
5.Change in the condition of the bank-unless it is provided in the contract of
guarantee that changes in the constitution of a bank will not affect the
guarantee, it will terminate in case the bank having the guarantee in
amalgamated with or absorbed by another bank. The guarantee should
provide for such contingencies.

Precautions

1. Advisability of getting the contract of guarantee signed in the bank

manager’s presence-usually bankers require the guarantors to execute the
guarantee in the bank manager’s presence. It is not advisable to allow the
customer to take the guarantee form away and himself obtain the signature of
the guarantor thereto. This si because, firstly, the guarantor’s signature may
turn out to be a forgery or he may later on allege that he signed in ignorance of
the nature of the document and secondly, the guarantor when called upon to
discharge his obligation, may put forth the plea that he signed under a
misrepresentation.

2.Notice of principal debtor’s death- the notice of the death of a customer

puts an end to his account and consequently te guarantee automatically
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Banking Law KSLU
Contracts of indemnity appear to be analogous to contracts of guarantee. Section
17. Explain the concepts of guarantee & 124 defines a contract of indemnity as “a contract by which one party promises to
indemnity save the other from loss caused to him by the conduct of the promisor himself, or
by the conduct of any other person.”

Guarantee Ex: A contracts to indemnify B against all the consequences of any proceedings
which C may initiate against B. this is a contract of indemnity.
A guarantee is the most common form of security taken by the bankers to ensure
safety of the funds lent. Section 126 of the ICA defines a contract of guarantee as
a contract to perform the promises or discharge the liability of a third person in
case of his default.

Ex: A wanting a loan of Rs.500 induces B to promise C to repay the loan in case of
A’s default. This is a contract of guarantee.

It will be seen that there are 3 parties to this contract- A the principal debtor, B the
surety and C the creditor. A contract of guarantee is thus a secondary contract the
principal contract being between the principal debtor and the creditor himself. The
liability of the surety therefore arises only if the principal contract is not fulfilled.

Kinds of guarantee

1) Specific guarantee- guarantee given for a single debt is called a specific

guarantee and is discharged on repayment of the particular debt it was
given to secure.

2) Continuing guarantee- a guarantee extending to series of distinct and

separable transactions is said to be continuing guarantee. It can be
revoked by the surety at any time.

3) Joint and several guarantee- where two or more persons join in executing a
guarantee, their liability may be joint or several or joint and several. In a J
and S guarantee each co-guarantor is jointly and severally liable for the
debt.

4) Limited guarantee- in limited guarantee, the guarantees have some clauses

which either restrict the liability of the guarantor or limit the scope.

Indemnity
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Banking Law KSLU
18. What are the precautions to be taken
by the banker in the case of
hypothecation?
Precautions-
1. Stocks should be fully insured against fire, theft and other risks
2. The banker must periodically inspect the hypothecated goods and
the account books of the borrower should be checked to ascertain
the position of stocks under hypothecation
3. The borrower should be asked to submit a statement of stocks
periodically giving current position about the stocks and its
valuation and declaration that the borrower possesses clear title or
person.
4. An undertaking should be obtained from the borrower that he shall
not charge the same goods to other bank or person.
5. The banker should also ensure that the borrower is not enjoying
similar hypothecation facilities on the same stocks from some
other bank.
6. During inspection, if the banker finds that the financial position is
weak, it is advisable to get the personal guarantees of
directors/officers to strengthen the charge.
7. While granting loans against hypothecation, the banker should
obtain a letter of hypothecation containing several clauses to
protect his interest.
8. Character, capacity and capital must be thoroughly verified before
granting loans on the basis of hypothecation. This facility should
be given to genuine and financially sound parties.
9. A name plate of the bank, mentioning that the stocks are
hypothecated to it, must be displaced at a prominent place of the
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hypothecated goods for public notice to avoid the risk of a second
charge being created on the same stock.
10. The banker should get the charge registered under Section 125 of
the Companies Act, if borrower happens to be a joint stock
company.
Section 58(a) of Transfer of Property Act,1882-“The transfer of an interest in
specific immovable property for the purpose of securing the payment of money
advanced or to be advanced by way of loan, an existing or future debt or the
performances of an engagement which may give rise to pecuniary liability.”
Transferor- mortgagor
Transferee-mortgagee
Instrument-mortgage deed
Characteristics-
1. the interest to be transferred is always with respect to a ‘specific property’
2. a mortgage implies transfer of interest in a specific immovable property. It
does not mean transfer of ownership.
3. if there is more than one owner of an immovable property, each co-owner
can mortgage his share
4. 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.
5. the mortgage need not always be given the actual possession of the
property
6. on repayment of the loan together with interest, the interest in specific
immovable property is recovered to the mortgagor
7. in the evnt of non-payment of the loan, the mortgagee has a right to sell
the mortgaged property trough the intervention of the Court.
Banking Law KSLU
8. an agreement in writing between the mortgagor and the mortgagee is Anamolous mortgage-a mortgage other than any of the mortgages explained
essential for creating a mortgage. The mortgage deed should contain all above is a anamolous mortgage. Such a mortgage includes a mortgage formed by
safety clauses. combination of two or more types of mortgage. It takes various forms based on
custom, local usage or contract.
Kinds

1. Simple mortgage- in simple mortgage the borrower binds himself

personally to pay the mortgage money without giving possession of
property. He agrees to pay according to his contract and also gives the
banker the right ot sell and adjust the sale proceeds to the mortgage
money. But court intervention is necessary for selling the mortgage
property.
2. 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. Usufructuary mortgage-in this mortgage the mortgagee gets the

possession of the property (physical possession not necessary) and is
entitled to recover the rents and profits relating to the property till the loans
are repaid. He can also appropriate such rents or profits to interest or
payment of mortgage money and partly interest and partly in payment of
the mortgage money.
4. English mortgage-the mortgagor makes a personal promise to repay
money on a certain due date. Mortgagee is entitled to immediate
possession and to retain possession until the money is repaid. The
transfer is absolute with all interests and seeking the permission of the
Court.
5. Mortgage by deposit of title deeds or equitable mortgage-where a
person delivers to a creditor or his agent documents of title to immovable
property with the intention to create a security thereon, the transaction is
called a “mortgage by deposit of title deeds”. This mortgage does not
require registration.

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Banking Law KSLU
19. What are the differences between lien
& hypothecation?
Lien
1.Possession of securities is transferred
to the banker
2. No such agreement
3. The borrower holds possession of
goods as owner and not as an agent of
the bank
4. There is no such constructive
possession even of the banker
5. To take possession of the property
under lien by way of security directly
the banker has to move the Court
6. Lien also creates a charge but it is
not so convenient to proceed as in case
of hypothecation
25. What are the differences between hypothecation & pledge?
Hypothecation
1. the possession of the movable
property is retained by the owner and
certain right in that property are
transferred to the person in whose
favour the property is hypothecated
2. since the possession of the goods
remains with the owner, the hypothecate
cannot have the right of lien. He may sell
the property in default
lien over the goods
1. if an agreement empowers the hypothecate to take possession of
the goods and then sell the same in case of default of payment, he
can proceed in accordance with the agreement to sell the goods,
Hypothecation without intervention of the Court.
Neither ownership nor possession is
transferred to the creditor. Only an
equitable charge is created in favour of
the creditor.
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
The borrower holds possession of the
goods not in his own right as the owner
of the goods but as an agent of the
bank
The banker has constructive possession
over the hypothecated goods
It is essential for the bank to take
possession of the hypothecated goods
by itself directly.
It is convenient device to create a
charge over the movable property when
transfer of its possession is
inconvenient or impracticable
Pledge
There is delivery of goods from one
person to another as security for
payment of debt or performance of a
promise.
Since the pledge has got the
possession of the goods, in the event
of default by the pawnor, apart from
other rights, the pledge has a right of
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Banking Law KSLU
The characteristics of unsecured advances are
20. Write a note of secured & unsecured
loans 1) UAs are made on the goodwill and reputation of the customer.

Loan is a contract by which property or money is transferred by a lender to a
borrower on the promise of the borrower to return the property, or its exact
equivalent, at a stated time or on demand.
The loans and advances granted by banks are broadly classified into
1) Secured advances
2) They are generally made by way of overdraft facilities.
3) Unsecured advances are made at the discretion of the concerned bank
manager himself.
4) Grant of loans depend on the credit worthiness of the borrowers. Such
creditworthiness depends on- 1) character 2) capacity 3) capital

2) Unsecured advances

Definition

According to section 5(a) of the Banking Regulation Act, 1949, 'a secured loan or
advance' means a loan or advance' made on the security of assets, the Market
value of which is not at any time less than the amount of such loan or advance;
and 'unsecured loan or advance' means a loan or advance' not so secured.

Secured advances

The distinguishing features of a secured loan or advance are as follows-

1) The loan must be made on the security of tangible assets like goods and
commodities, lands and buildings, hold and silver, corporate and government
securities etc. A charge on any such assets offered as security must be created in
favour of the banker.

2) The Market value of such security must not be less than the amount of the loan
at anytime till the loan is repaid. If the former falls below the latter, the loan is
considered as partly secured.

Unsecured advances

They are also called clean loans or advances.

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Banking Law KSLU
What is ‘overdaraft’? Categories-

‘Overdraft’ means allowing the customer to overdraw his account. It is allowed only 2. Secured overdraft- when a party is allowed regular limits against
to current account holders. But some banks allow casual overdraft in savings some tangible security, it is known as secured overdraft.
accounts of Government servants, etc. An overdraft is a running account wherein
thy balance goes on fluctuating from debit to credit or vice versa. 3. Clean overdraft-Overdrafts which are not backed up by any
security are called clean or temporary overdrafts. Clean overdrafts
Under an overdraft arrangement, a customer is allowed to draw cheques upto an are allowed purely on the personal credit of the party. They are
agreed limit over and above the credit balance in the account. allowed for small amounts to meet the party’s sudden
requirements.
Benefits-The bank provides overdraft facility to its customers to earn interest, and
its customers enjoy the overdraft facility in order to develop their business. The
overdraft facility is ideal to cover short term requirements. The interest on overdraft
is calculated on the amount actually utilized by the debtor-customer at regular
intervals and hence it is cheaper than the other loans.

There is no restriction on operations in the account and withdrawals and deposits

may be upto any number of times.

Banker’s obligation.-If a bank has agreed to give an overdraft, it cannot refuse to

honour cheques or draft within the limit of that overdraft which have been drawn
and put in circulation. If the banker refuses any cheque it becomes ‘wrongful
dishonor’ and he will be liable for damages.

Customer’s obligation-where a customer even without any express grant of an

overdraft facility, overdraws on his account and the cheques issued by him are
honoured, without there being sufficient balance in the account, the transaction
amounts to a loan and the customer is bound pay reasonable interest-Bank of
Maharashtra v United Construction Co & Ors.

Procedure-It is safe course for the banks that they should obtain a letter and a
promissory note from the customer in which terms and conditions of the facility
including the rate of interest chargeable on the overdraft is given. But written
transactions are not necessary all the time.

Time period-The period of overdraft is 7 years at maximum. But in practice, the

banker grants an overdraft for one year, and renews it every year.

Overdraft agreement is a contract-Overdraft arrangement between bank and its

customer is a contract and it cannot be terminated by the bank unilaterally even if it
is a temporary one.-Indian Overseas Bank, Madras v Narayanprasad Patel
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Banking Law KSLU
21. 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. There is no restriction on the number and
amount of withdrawals from a current account. As the banker is under an
obligation to repay these deposits on demand, they are called deemed liabilities or
deemed deposits.

To meet the requirement of the current account the banker keeps sufficient
reserves against such deposits vis-à-vis the savings and the fixed deposits.
Current accounts suit the requirements of big businessman, joint stock companies,
institutions, public authorities, corporations etc. whose banking transactions
happen to be numerous per day. Cheque facility is available for the depositors.

Banker’s obligation- by taking RDs the banker undertakes to honour his customer’s
cheques as long as his account is in credit. The banker may have to suffer loss if
he pays a forged cheque, or a cheque contrary to the instructions of his customer
(s 129, NI Act).

Privileges- a current account carries certain privileges which are not given to other
account holders

1) Third party cheques and cheques with endorsements may be deposited in

the current account for collection and credit.

2) Overdraft facilities are given in case of current accounts only.

3) The loans and advances granted by banks to their customers are not given
in the form of cash but through the current accounts. Current accounts
thus earn interest on all types of advances granted by the banker.

Interest- normally no interest is paid on current accounts. Rather, the depositors

have to pay certain incidental charges to the bank for services rendered by it.
Sometimes customers are required to maintain a minimum balance failing which
bank charges some commission half yearly thus helping them to earn something
on minimum balance kept.

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Banking Law KSLU
4) Bodies depending upon budgetary allocations for performance of their
22. Write a note on savings bank account functions.

Savings accounts are maintained for encouraging savings of households. It is 5) Municipal corporations/committees.
useful to save a part of the current income to meet future needs and also to earn
higher incomes from savings. The main characteristics of savings account are- 6) Panchayat samitis.

Restriction on withdrawals- in pursuance of the objective of savings bank 7) State housing boards.
accounts, the banks impose certain restriction on the right of depositor to withdraw
money within a given period. The number of withdrawals over a period of six
months is limited to 50. A depositor cannot withdraw by withdrawal form a sum
smaller than Re 1. The minimum amount of a cheque is Re 5.
LN start
Restriction on deposits- the customer may deposit any amount in the savings bank
account subject to a minimum of Re 5. The banks do not accept cheques or other
instruments payable to a third party for the purpose of deposit in the savings
account.

Minimum balance- banks prescribe the minimum balance that is to be maintained

in the SB accounts. For this purpose they take into consideration the cost involved
in maintaining and servicing such accounts. Levy specific charges if the minimum
balance is not maintained.

Payment of interest- the rate of interest payable by the banks on deposits

maintained in savings accounts is prescribed by the RBI. Interest is calculated at
quarterly or longer rests of period.

Cheques- cheque facility is provided to the depositors subject to the condition that
he will keep a minimum balance with the bank according to the rules of the bank.
Only cheques payable to the customers having SB accounts are collected.

Prohibition on savings account- the RBI has prohibited the banks to open a
savings account in the name of

1) Trading or business concern, proprietary or partnership.

2) A company or an association.

3) Government departments.

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Banking Law KSLU
Letter of Indication/Interest
A person traveling overseas may purchase a letter of credit from a applicant, an Letter of interest can be renewed at six-month intervals,
bank. The letter can be drawn upon by the traveler, by writing drafts for up to two years; however, its terms are subject to change. Please
against the credit amount. A letter of indication is provided by the
bank to the traveler in order to identify the traveler as the party to note that an Letter of interest is not a commitment to finance a
whom the letter of credit was issued. transaction or project. Bank may request additional information in
connection with an Letter of interest application. Issuance of a Letter
Letter of Interest (LI) is a pre-export tool to help you get your
of Interest is at the sole discretion of Bank.
financing off to a quick start. The Letter of interest is an indication of
the Bank's willingness to consider financing for a given export Review of an LI application includes comparing transaction
transaction. information to Bank's cover policy and identifying any potential
issues that may need to be analyzed in more detail, should a formal
Apply for an Letter of interest during the bidding or negotiating stage
application be submitted.
of an export sale when the following conditions exist:

• You need an indication from Bank on the general eligibility of
the transaction participants and the goods and services to be
exported.
• The repayment terms and other program guidelines in the
LIs are not available for credit guarantee facilities and may be
restricted for the export of items to be used for nuclear power plants,
nuclear fuel research reactors or related facilities. They may also be
restricted in other circumstances, including, but not limited to,
country conditions, economic impact and excessive transaction or

Letter of interest provides you with specific enough guidance exposure amounts.

for your transaction.

An Letter of interest is generally issued within seven business days

of Bank's receipt of an LI application. The terms and conditions in the
Letter of interest are valid for six months. At the request of the

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Banking Law KSLU
Guarantees by a negotiable instrument by prohibiting from recovering the
This ensures the payment will be made as long as the services are
performed. A bank guarantee, like a line of credit, guarantees a debt and the debtor from making payment thereof. The creditor
sum of money to a beneficiary. Unlike a line of credit, the sum is at whose request the order is issued is called the judgement
only paid if the opposing party does not fulfill the stipulated creditor the debtor whose money is frozen is called the
obligations under the contract.
A bank guarantee is a guarantee from a lending institution ensuring judgement debtor. And the banker who is the debtor of the
the liabilities of a debtor will be met. In other words, if the debtor fails judgement debtor is called the garnishee.
to settle a debt, the bank covers it. A bank guarantee enables the
customer, or debtor, to acquire goods, buy equipment or draw
down loans, and thereby expand business activity. This order is issued in two parts. First the court directs the
banker to stop payment out of the account of the called as
A bank guarantee is a lending institution’s promise to cover a loss if
ORDER NISI. On receipt of the confirmation of the banker court
a borrower defaults on a loan. The guarantee lets a company buy
what it otherwise could not, helping business growth and promoting issued another order known as order absolute whereby the
entrepreneurial activity. For example, Company A is a new entire balance in the account or a specified amount is attached.
restaurant wanting to buy $3 million in kitchen equipment. The
equipment vendor requires Company A to provide a bank guarantee
to cover payments before shipping the equipment. Company A GARNISHI ORDER IS APPLICABLE
requests a guarantee from the lending institution keeping its cash a. Where there is a credit balance
accounts. The bank essentially cosigns the purchase contract with
the vendor. b. Attaches the amount drawn by a cheque but payment not yet
effected.
Performance Guarantees, Financial Guarantees, Direct (foreign & c. All bank branches of a bank are treated as one entity.
domestic) & indirect (export) Guarantees are a few types.
d. Attaches future maturing term deposits also.
Garnishee Order e. attaches joint account if issued so
Garnishment: Is a legal procedure by which a creditor can collect what a
debtor owes by reaching the debtor's property when it is in the hands of
f. Attaches personal account of partners if an order is served on
someone other than the debtor. a partnership account.
The obligation of a banker to honour his customer’s cheque is
extinguished on receipts of an order of the court known as
garnishee order issued under order 21 Rule 46 of civil
procedure code. Such an order attaches the debts not secured

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Banking Law KSLU
WHERE THE GARNISHEE ORDER IS NOT APPLICABLE
a. Where a cheque has been marked for good payment.
b. Attaches the amount specified only
c. Not applicable to sanctioned limit.
d. Where any assignment of balance has been made and
acknowledged
e. Not applicable to deceased and insolvents
f. Salary is not attached.
g. Bank can exercise the right of set off before complying with
Garnishee Order.Garnishee Order is an order passed by an
executing court directing or ordering a garnishee not to pay money to
judgment debtor since the latter is indebted to the garnisher (decree
holder). It is an Order of the court to attach money or Goods
belonging to the judgment debtor in the hands of a third person. The
third party is known as 'Garnishee' and the court's order is known as
Garnishee Order. It is a remedy available to the Decree holder. This
Order may be made by the Order of the court to holders of funds, i.e.
a third party that no payments have to be made until the court
authorizes them. The purpose of the Order is to protect the interest
of the Decree holder. This is an Order served upon a garnishee
requiring him not to pay or deliver the money or property of the
debtor (defendant) to him and/or requiring him to appear in the court
and answer to the suit of the plaintiff to the extent of the liability to
defendant.

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Banking Law KSLU
23. Explain salient features of Banking Regulation Act, 1949
The following are the important provisions under Banking Regulation Act,
1949 regarding control and regulation of Banking Sector in India.
The requirements regarding the minimum paid-up capital and reserves for
commence mint of banking business. Prohibition of charge on unpaid capital.
Payment of Dividends only after writing off all Capitalized expenses.
Transfer to reserve fund out of Profits. (Minimum 20 per cent) Maintenance of
cash reserves by the non- scheduled banks. (Minimum 3 per cent) Restrictions
on holding shares in other companies.
Restrictions on loans and advances to directors and others. Licensing of
banking companies. Licences for opening of new branches and transfer of
existing place of business. Maintenance of a percentage of liquid as sets (SLR).
(Minimum 25 per cent and maximum 40 per cent)
Maintenance of Assets in India By a banking company. (Minimum 75 per cent
of DTL) Submission of Return of unclaimed Deposits.
1. Power to call for and publish the information. Preparation of Accounts and
Balance Sheets. Audit of the Balance sheet and Profit & Loss Account.
Publication of Audited Accounts and Balance Sheet. Inspection of books and
accounts of banking companies by RBI. Giving directions to banking
companies.
2. Prior approval from RBI for appointment of managing directors.
3. Removal of managerial and any other persons from office.
4. Power of RBI to appoint additional directors
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5. Moratorium under the orders of a High Court.
6. Winding up of banking companies.
7. Scheme of amalgamation to be sanctioned by the RBI.
8. Power of RBI to apply to the
9. Central Government for an order of mortal rim in respect of a banking
company and for a scheme of reconstruction or amalgamation.
10. Power of RBI to examine the record of proceedings and tender advice in
winding up proceedings.
11. Power of RBI to inspect and make its report to winding up.
12. Power of RBI to call for Returns and information from the Liquidator of a
Banking company.
13. Issue of No Objection Certificate for change of name.
14. Issue of No objection certificate for the Alteration of memorandum of a
banking company. Central Government to consult the RBI for making rules
regarding banking companies. Recommend to the Central Government for
exempting any bank from the provisions of the Banking Regulation Act 1949.
Requirements regarding minimum paid up capital and reserves:
Sections 11 & 12:
Section 11 RBI - prescribes minimum paid-up capital of Rs.100 crore for
setting up a new banking company, Foreign banks - minimum of ten million
US dollars to India as Capital, & Local Area Bank Rs. 5.00 crores.
Prohibition of charge on unpaid capital: Section 14
Banking Law KSLU
Under Section 14, no banking company shall create any charge upon its unpaid
capital, and any such charge if created, shall be invalid.
Limiting the payment of dividends: Section 15
Section 15 prohibits every banking company from paying any dividend on its
shares unless it has completely written off the capitalized expenses such as
Preliminary Expenses, Brokerage and Commission on issue of shares, etc.,
have been completely written off.
Transfer to Reserve Fund: Section 17
Under Section 17, obligated to transfer to the reserve fund a sum equivalent to
not less than 20% of the profit each year subject to certain rules.
Maintenance of cash reserve by non-scheduled banks: Section 18
According to Section 18, every banking company not being a scheduled bank
(i.e., a non-scheduled bank) has to CRR with Reserve Bank or the State Bank of
India or any notified Bank or partly in cash with itself and partly in such
account or accounts a sum equivalent to at least 3% of its total time and
demand liabilities.
Restrictions on holding of shares in other companies: Section 19
Section 19 of the Act restricts the scope of formation of subsidiary companies
by a banking company, as well as the holding of shares and prevents banking
companies from carrying on trading activities except with the previous
permission in writing of the RBI subject to conditions.
Restrictions on loans and advances to Directors & Firms of
Directors, and loans on own shares of the bank: Sections 20 & 21
Thus, RBI gives directions to banking companies on the following matters:
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Licensing of banking companies: Section 22
(i) Necessity of licensing and mode of applying for it
(ii) Conditions for granting of licenses
(iii) Cancellation of licenses and appeals from such orders
The Reserve Bank may cancel a license granted to a banking company under
this section:
(i) If the company ceases to carry on banking business in India; or
(ii) If the company at any time fails to comply with any of the conditions
imposed upon it; or*
(iii) Any banking company aggrieved by the decision of the Reserve Bank
cancelling a licence under this section may, within thirty days from the date on
which such decision is communicated to it, appeal to the Central Government.
The decision of the Central Government shall be final.
Thus, every banking company which likes to start banking business in India
must obtain licence from RBI.
Control on the opening of new business: Section 23
According to this section, the RBI has been empowered to control the opening
of new and transfer of existing places of business of banking companies. As
such, no banking company shall open a new place of business in India or
outside India and change the place without obtaining the prior permission of
the RBI.
Maintenance of a percentage of liquid assets (SLR): Section 24
Every banking company shall maintain in India in liquid assets for an amount
not less than 25% of the total of its time and demand liabilities at the close of
business on any day. The liquid assets include cash, gold or unencumbered
Banking Law KSLU
approved securities and they are valued at a price not exceeding the current
market price.
Maintenance of Assets in India: Section 25
Section 25 requires for the maintenance of assets equivalent to at least 75% of
its demand and time liabilities in India, at the close of business of the last
Friday of every quarter.
Submission of Returns of unclaimed Deposits: Section 26
According to this section, every banking company shall submit a return in the
prescribed form and manner to the RBI, giving particulars, regarding
unoperated accounts in India for 10 years. This return is to be submitted
within 30 days after the close of each calendar year.
In the case of fixed deposits, the 10 years period is counted from the date of
expiry of such fixed period. RRBs are however required to forward such
returns to NABARD.
Submission of Return, Forms, etc., to RBI: Section 27
Powers to Publish Information: Section 28
Under this section, the RBI is authorized to publish in the public interest any
information obtained under the Banking Regulation Act. The information is
published in the consolidated form as the RBI may think fit.
Maintenance of Accounts and Balance Sheets: Section 29
Audit of the Balance Sheet and Profit & Loss Account: Section 30
Submission of returns to RBI: Section 31
This section provides for publication of the Profit & Loss Account, Balance
Sheet and the Auditor's report in the prescribed manner as well as for the
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submission of three copies thereof as returns to the Reserve Bank within a
period of three months which may be extended up to six months.
Inspection of books of accounts: Section 35
This section provides wide powers to RBI to cause an inspection of any banking
company and its books and accounts.
Giving directions to Banking Companies: Section 35A
Under Section on 35A, the Reserve Bank may caution or prohibit banking
companies generally or any banking company in particular against entering
into certain types of operations.
Prior approval from RBI for appointment, re-appointment, remuneration and
removal of Managing Director, etc. Section 35 AB
Removal of managerial and any other persons from office: Section 36AA and
Section 36AB
Under these sections, the RBI has power to remove managerial and other
persons from office and to appoint additional directors.
Moratorium under the orders of High Court (Suspension of
Business) Section 37
According to this section when a banking company is temporarily unable to
meet its obligations it may apply to the High Court requesting an order for
staying the commencement or continuance of all legal actions and proceedings
against it for a period of not exceeding 6 months. Such stay is generally called a
moratorium.
Winding up of Banking Companies: Section 38 to 44
Banking Law KSLU
Sections 38 to 44 of the Act lay down the provisions for winding up of a
banking company. The RBI may apply for the winding up of a banking
company if,

(i) compliance failure with the requirements as to minimum Paid-up capital

and reserves as laid down in Section 11, or disobedience to RBI & the Act

(ii) license not valid under Section 22, or

(iii) prohibited from receiving fresh deposits by the Central Government or the
Reserve Bank, or

(v) The Reserve Bank thinks that a compromise or arrangement sanctioned by

the court cannot be worked satisfactorily, or

(vi) The Reserve Bank thinks that according to the returns furnished by the
company it is unable to pay its debts or its continuance is prejudicial to the
interests of the depositors.

The banking company cannot be voluntarily wound up unless the Reserve

Bank certifies that it is able to pay its debts in full.

Amalgamation of Banking Companies: Section 44A

The procedures for amalgamation of banking companies are given under this
section.

Application by RBI for Moratorium: Section 45

Under this section the RBI may apply to the Central Government for an order
of Moratorium in respect of banking company. During the period of
Moratorium the RBI may prepare a detailed scheme for its reconstruction or
amalgamation with any other banking company.

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Banking Law KSLU
24. Discuss pros and cons of accepting 'Guarantee' as
security for banker's advance. Would you like to suggest
remedies for apparent drawbacks?
DEFINITION OF GUARANTEE :-
"Contract to perform the promise or discharge the liability of a third
person in case of his default".
Guarantee as security for bankers advances arises only when
borrower is not able to satisfy the banker of his credit worthiness.
The person who gives the guarantee is called guarantor, the person
who borrows the money is called principal debtor and who accepts
the guarantee is called creditor.
There are two types of guarantees, one is specific and other is
continuing. If the guarantee is for specific loan then it will be called
specific guarantee. If guarantee is for whole transaction and
payments carried out by the debtor then it will be called creditor.
Description of bank guarantee
A bank guarantee is a written instrument guaranteeing by bank to a
party (seller / creditor / beneficiary) on behalf of his customer (buyer /
debtor / principal), to effect payment on default of obligation against
submittal of written demand or other documents specified in the
guarantee.
Thus, if the customer defaults on the payment to other party or
refuses to pay, the Bank will cover the loss at its own account.
The International bank guarantee is a written instrument
guaranteeing payment to a party abroad against the submittal of its
written demand or other documents indicated in letter of guarantee.
Advantages of bank guarantee
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• Customer (Buyer) is not required to make the advance
payment in case of bank guarantee, thus the funds are used more
effectively;
• Buyer gains reliable partner status at local and international
markets, benefits from various partnership opportunities and is able
to demand more relevant conditions from partners;
• Seller is protected from default of Buyer on payment and is
able to perform prompt sales without asking advance payment;
• Bank guarantee requires less number of documents, no
necessity for collateral and, as a result, the customer receives the
letter of guarantee within shorter period of time and commission fee
for services is also very low.
Main types of bank guarantees
1. Guarantee of payment. This type of guarantee is a security of
payment obligations of Buyer to Seller.
2. Guarantees of advance payment return. This guarantee
represents an obligation of the bank to return advance payment
in the event that, after receiving an advance, the Seller does not
perform its contractual obligations.
3. Contract execution guarantee. This guarantee is a security of
timely delivery of goods or performance of services according to
a contract.
4. Tender guarantees. This guarantee plays a role of security in
those cases when the Company fails to perform its obligations to
tender organization or other party that is stipulated in the order
received by winning the tender.
Banking Law KSLU
5. Guarantee in favor of the customs authorities. This guarantee
is a security of obligation of the company performing import and
export operations to the Customs authorities for payment of
customs taxes and duties.
6. Guarantees of warranty execution. This guarantee plays a
role of security of quality for delivery to the contract terms.
7. Guarantee of credit return. This guarantee is a security for
repayment of credit.
2. A married women is not considered a free agent. She can only
contract against her separate property.
3. Normally registered companies can borrow the loan but have no
power to become a guarantor if the firm is authorized then it is
possible.
4. In case of partnership a single partner can not become the
guarantor. If such powers are given by all the partners to any one
then it is possible, otherwise partners should sign on the deed.

CHARACTERISTICS OF GUARANTEE :-
DIFFERENCE IN GUARANTEE AND INDEMNITY :-
Following are the main features of guarantee :
1. Contract of guarantee requires written evidence while in contract
1. Parties :-
of indemnity there is no need of written evidence.
There are three parties involved in a guarantee, creditor, debtor and
guarantor.
2. In case of indemnity there is one contract of liability while in case
of guarantee there are two contracts.
2. Liability :-
Basic liability of payment of debt falls on the debtor. If he fails to pay
then responsibility falls on the guarantor.
ADVANTAGES OF GUARANTEE :-
3. Interest :-
Following are the important advantages of the guarantee :
Creditor and debtor has interest in the contract but guarantor has no
interest in the contract.
1. It is very easier security as compared to mortgage of property.

2. It gives maximum protection to the lender.

ELIGIBILITY OF GUARANTOR :-
3. The sign can be easily obtain from the guarantor on the form by
Any person or firm who is eligible to do the contract can become a
the bank and there is no need of preparing deed.
guarantor. But in the following cases banker must be careful in
accepting the guarantee.
4. The banker may call guarantor and tell him about the default of
debtor.
1. Minors and unsound minded person can not become a guarantor.
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Banking Law KSLU
5. By a simple court action a guarantee can be enforced.

6. In case of default a banker and guarantor both pressurize the

borrower to repay the debt.

DISADVANTAGES OF GUARANTEE :-

1. If the guarantors property is destroyed or sold during the period

of contract and borrower also fails to pay the debt. In this case it is
very difficult to recover the amount from both the parties.

2. Sometimes if the bank changes the constitution then guarantee

is terminated.

3. Sometimes the loan is not returned and bank claims in the court
against the guarantor but it is rejected on technical ground.

4. In case of amalgamation with other banks the guarantee is

terminated.

Keeping in view the above facts we may say that its importance can
not be ignored.

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Banking Law KSLU
25. Discuss the various types of crossing of cheques with 4. The cheque bears the words "A/c. Payee" between the two
their legal effects.
What is Crossing of Cheque ? parallel lines.
A crossed cheque can be made bearer cheque by cancelling the
crossing and writing that the crossing is cancelled and affixing the full
A cheque is a negotiable instrument. During the process of signature of drawer.
circulation, a cheque may be lost, stolen or the signature of payee
may be done by some other person for endorsing it. Under these Specimen of General Crossing ↓
circumstances the cheque may go into wrong hands.
Crossing is a popular device for protecting the drawer and payee of a
cheque. Both bearer and order cheques can be crossed. Crossing
prevents fraud and wrong payments. Crossing of a cheque means
"Drawing Two Parallel Lines" across the face of the cheque. Thus,
crossing is necessary in order to have safety. Crossed cheques must
de presented through the bank only because they are not paid at the 2. Special or Restrictive Crossing :-
counter.

When a particular bank's name is written in between the two parallel

Different Types of Crossing ↓
lines the cheque is said to be specially crossed.

1. General Crossing :- Specimen of Special or Restrictive Crossing ↓

Generally, cheques are crossed when

1. There are two transverse parallel lines, marked across its face
or
2. The cheque bears an abbreviation "& Co. "between the two
parallel lines or
3. The cheque bears the words "Not Negotiable" between the In addition to the word bank, the words "A/c. Payee Only", "Not
two parallel lines or Negotiable" may also be written. The payment of such cheque is not
made unless the bank named in crossing is presenting the cheque.
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Banking Law KSLU
The effect of special crossing is that the bank makes payment only to
the banker whose name is written in the crossing. Specially crossed
cheques are more safe than a generally crossed cheques.
(3) However, there is yet another type of crossing which is
recognized by usage and custom, called restrictive crossing:
(4) Not negotiable crossing.
cheque for any other person than the account payee. In that case
collecting banker will be liable to the true owner.
4. Not negotiable Crossing (Sec. 130):
A person taking is cheque crossed generally or specially, bearing in
either case the words 'not negotiable' shall not be able to give a
better title to the holder than that of the transferor.

3. Restrictive crossing: The effect of a not negotiable crossing is that the cheque can be
transferred but the transferee will not acquire a better title to the
Besides the two statutory types of crossing discussed above, there is
cheque. Thus a cheque is deprived of its essential feature of
one more type of crossing namely, restrictive crossing. This type of
negotiability.
crossing has been recognised by usage and custom of the trade.
The objects of "not negotiable" crossing is to protect the drawer
In a restrictive crossing the words 'Account Payee' or Account Payee
against loss or theft in the course of transit.
Only' are added to the general or special crossing.
Example:
The effect of restrictive crossing is that the payment of the cheque
will be made by the bank to the collecting banker only for the account A cheque was drawn in favour of a firm B & Co. The cheque was
payee named. If the collecting banker collects the amount for any crossed 'not negotiable'; one of the partners, A in fraud of his Co-
other person, he will be liable for wrongful conversion of funds. partner B, endorsed the cheque to P who encashed it. Held that B,
who under the terms of the partnership agreement was entitled to the
It should be noted that the duty of the paying banker is only to
cheque could recover the amount from P as A could not transfer
ensure that the payment is made through the named bank, if there is
better title than he himself had [Fisher v. Roberst]
any. He is not liable, in case the collecting banker collects the

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Banking Law KSLU
Who may cross a cheque? As a rule, it is the drawer who can cross
a cheque. However, Sec. 125 provides that even a holder can cross
the cheque. It further provides that a banker can cross the cheque
specially for collecting to another banker as his agent for collection.
26. Analyse the penal provisions under Negotiable
Instrument Act.
The basic essentials of S.138 :
1. Cheque Drawn by the person who has a account
in the Bank i.e existence of Bank-Customer
Relationship.
2 Cheque Drawn in discharge – debt or liability.
3. Discharge may be of full – part liability.
4. Cheque returned unpaid.
(returned to Payee/Holder/Person entitled to receive
money)
Reasons for Return
5. Insufficiency of Funds
Means either the balance was insufficient – or it exceeded
the amount arranged to be paid for overdraft.
The above essentials being fulfilled – the
proviso lays down certain conditions that need to be
satisfied before an offence u/s 138 is made out :-
6. Cheque presented in bank within 6 months from date of
cheque.
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7. Payee gave notice to drawer within 30 days of the
refund of the cheque.
(notice of demand for payment)
8. Drawer must make payment within 15 days from receipt
of notice.
9. Cause of Action arises on 16th Day. (S.12(1) Limitation
Act – excludes 16th Day)
If the above condition are fulfilled the offence u/s 138 is
made out – the Cognizance of which would then be taken
by Metropolitan Magistrate/ Judicial Magistrate 1st Class as
per S.142.
According to S.142 – the complaint has to be made to the
JM1 of the MM concerned within 1 months from the
accrual of Cause of Action as per S.138 – Proviso (c).
However the proviso enables the court to take cognizance
even if the complaint is made after the lapse of 1 year
provided sufficient cause is given for the delay. (it is to be
noted that this provision is pari material to S.5 of the
Limitation Act & may safely be accorded a similar
interpretation)
S.142 further lays down that the procedure followed would
be the same as following in complaint cases.
It is also pertinent note here that by Virtue of S.147 – the
offence is compoundable.
Banking Law KSLU
PUNISHMENT
Maximum 2 years (earlier it was 1 year – to make the
act more stringent vide 2002 Amendments – to was
extended to the present 2 years.
Upto twice the amount of cheque as FINE.
Sonu couldn't present the cheque received from his friend due
to busy schedule. Period of limitation is about to expire on a
day which happens to be a holiday. Advice Sonu.
Section 72
(1) Payment of a bill of exchange which falls due on legal holiday
cannot be demanded until the next business day. So, too, all other
proceedings relating to a bill of exchange, in particular presentment
for acceptance and protest, can only be taken on a business day. (2)
Where any of these proceedings must be taken within a certain
limit of time the last day of which is a legal holiday, the limit of
time is extended until the first business day which follows the
expiration of that time. Intermediate holidays are included in
computing limits of time.
27. Krishnamurthy has given a cheque for Rs. 10,000/-in
the name of his minor son Srikanth. Can the banker honour
the same?
28.
29. Who is a paying banker? State the statutory
protections available to paying banker.
The bank on which a cheque is drawn (the bank whose name is
printed on the cheque) and which pays the amount for which the
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cheque is written and deducts that sum from the customer's
account.
01. Protection in case of order cheque :
In case of an order cheque, Section -85(1) provides
statutory protection to the paying banker as follows : "Where a
cheque payable to order purports to be endorsed by or on behalf of
the payee, the drawee is discharged by payment in due
course".However, two conditions must be fulfilled to avail of
such protection.
(a) Endorsement must be regular : To avail of the
statutory protection, the banker must confirm that the endorsement
is regular.
(b) Payment must be made in Due Course : The paying banker
must make payment in due course. If not, the paying banker will be
deprived of statutory protection.
02. Protection in case of Bearer Cheque :
Section -85(2) provides protection to the paying banker in respect
of bearer cheques as follows : "Where a cheque is originally
expressed to be payable to bearer, the drawee is discharged by
payment in due course to the bearer thereof, notwithstanding any
endorsement whether in full or blank appearing thereon and
notwithstanding that any such endorsement purports to restrict or
exclude further negotiation". This section implies that a cheque
originally issued as a bearer cheque remains always bearer. In other
words it retains its bearer character irrespective of whether it bears
endorsement in full or in blank or whether any endorsement
restricts further negotiation or not. So the banks are not required to
verify the regularity of the endorsement on bearer cheque, even if
Banking Law KSLU
the instruments bears endorsement in full. The banker shall free
from any liability (discharged) if he makes payment of an
uncrossed bearer cheque to the bearer in due course. If such cheque
is a stolen one and the banker makes its payment without the
knowledge of such theft, he will be discharged of his obligation and
will be protected under Section -85(2).
03. Protection in case of Crossed cheque :
The paying banker has to make payment of the crossed cheques as
per the instruction of the drawer reflected through the crossing. If it
is done, he is protected by Section -128. This section
states "Where the banker on whom a crossed cheque is drawn has
paid the same in due course, the banker paying the cheque and (in
case such cheque has come to the hands of the payee) the drawer
thereof shall respectively be entitled to the same rights, and be
placed in if the amount of the cheque had been paid to and received
by the true owner thereof".
It is clear that the banker who makes payment of a crossed cheque
is by the Section -128 given protection if he fulfils two
requirements (a) That he has made payment in deuce course under
Section -10 i.e. in good faith and without negligence and according
to the apparent tenor of the cheque, and (b)That the payment has
been made in accordance with the requirement of crossing (Section
-126), i.e. through any banker in case of general crossing and
through the specified banker in case of special crossing.
Thus, the paying banker is free from any liability on a crossed
cheque even if the payment was received by the collecting banker
on behalf of a person who was not a true owner. For example, a
cheque in favour of X is stolen by Y. He endorses it in his own
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favour by forging the signature of X and deposits it in his bank
for collection . In this case, the paying banker shall be discharged if
he makes payment as mentioned above and shall not be liable to
pay the same to X, the true owner of the cheque.
The drawer of the cheque is also discharged since protection is also
granted to him under this Section. There is, however, one limitation
to the protection granted under this Section. If the banker cannot
avail of the protection granted by other Section of the Act,
theprotection under Section -128 shall not be available to him.
For example, if the paying bankers makes payment of a cheque
crossed with (a) Irregular endorsement or (b) A material alteration
or (c) Forged signature of the drawer, he loses
statutory protection granted to him under the Act for these lapses
on his part. Hence he cannot avail of the statutory protection under
Section -1289, even if he pays the cheque in accordance with the
crossing.
30. Explain the precautions to be taken by banker while
lending against goods.
Before advancing loans against the good or documents
of title of goods, the banker mustthoroughly satisfy
himself about the honesty, trustworthiness and
experience of the borrower in the trade. In the words of
John Paget provided the baker is dealing with honest
and responsible persons documents of title to goods
are convenient securities for advances. The
banker must be familiar with the fluctuations of the
prices in the commodities against which he is to
advance loans or has advanced loans earlier. The up-
Banking Law KSLU
to-date knowledge of the different markets enables the
banker to regulate the margin for loans
against produce goods.
The banker should advance loans against those
commodities which are ofseasonal nature and are
readily saleable in the market. The banker must take
every care in property storing the goods pledged with
the bank. Deterioration and pilferage in the
commodities reduces the security of the bank. In order
to secure the loan the banker should take possession
actual or constructive of the goods. He should also
have a direct contract with the owner or the agent who
is in possession of commodities.
1. Integrity of the borrower
The banker should ascertain that the borrower is
trustworthy, honest and man of sufficient experience in his
business. Such a precaution is necessary to avoid
fraudulent dealings.
2. Purpose of the loan
The repayment mostly depends upon the purpose for
which the loan is obtained, not for speculation etc.
3.Nature of the commodity
The banker should have working knowledge of some of
the special features of the commodities offered as
security.
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4. Knowledge of different markets
A banker should be conversant with the markets for
different commodities. This is essential to regulate the
margin for the goods according to the price prevailing in
the market.
5. Proper care in valuation
The banker should appoint experts to value the goods.
6. Ascertain the title of owner
Before accepting goods as security, the banker should
ascertain the title of the borrower to the goods by
inspection of the original invoice or cash memos.
7. Proper storage
The banker should select warehouse which are properly
built and safe in every way for the storage of goods.
8. Rented godown
If the borrower makes use of a rented godown, the bank
must obtain an undertaking from the owner of the building
stating that the bank has a prior lien.
9. Insurance up to the full market
value
Goods should be insured against all known risks up to their
full market value.
Banking Law KSLU

10. Creation of charge by Pledge and

Hypothecation
A banker may create a charge over the goods either by
pledge or hypothecation. In pledge the goods or title
thereto is delivered to the banker.
11. Handling of godown keys
Under no circumstances should the keys of godowns be
allowed to pass into the hands of the borrower.
12. Inspection
Periodical inspection of the go down should be undertaken
as to the quantity and quality of the goods.
13. Supervision regarding release of
goods
When the borrower is allowed to repay the debt in
installments, the banker should release the goods only in
proportion to the amount repaid.
14. Reserve bank directives
The Reserve Bank issues directives from the time to time
prohibiting advances against specific goods or stipulating
minimum margin against certain commodities.

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Banking Law KSLU
31. Examine the advantages, objects and features of
Securitisation Act to the banker.

32. What type of documents of the title to goods can be

accepted by banker as security for loan. What precaution he
has to take?

33. Explain the rules relating to presentment Bill of Exchange.

34. Define cheque. Distinguish cheque from Bill of Exchange.
When presentment unnecessary?
35. Define cheque, What is crossing of cheque?
36. Explain the different kinds of crossing of cheque and its
effects.
44. Explain the general principles relating to Loans and
Advances.
45. What are the Special Banking Services? Explain.
46. Define Bill of Exchange and what are the distinction
between Bill of Exchange and Cheque.

37. Define holder and holder in due course. What are the rights 47. Discuss the ways by which a banker can make profitable uses of
& privileges of holder in due course? Are there any differences funds with him.
between them? 48. Discuss the advantages of advances secured by
collateral securities.

38. Critically examine the contributions of Regional Rural Bank
in promoting rural economy.
39. Discuss the management and functions of Reserve Bank
of India
49. ABC and D are partners in the"X Firm", They informed
the banker that 'B and C' will operate the firm's current
account. Can Banker honour the cheques of the firm signed by
"B and D"?
50. What precautions should a Banker take in opening a new
account in the name of minor and company?

40. Discuss the various types of banks and their functions.

Discuss powers and functions of Banking Ombudsman.

41. Explain general principles relating to secured loan. Examine the grounds under which the banking
42. Explain the objects and features of Securitisation Act, 2002. Ombudsman may reject the complaint.
43. Explain the various E-banking services & E-Banking
Remitances.
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Banking Law KSLU
Discuss the provisions relating to establishment of office
of banking Ombudsman under Banking Ombudsman
Scheme 2002. Banker's lien

Explain the general principles relating to Loans and Advances,

'Protection to paying banker'. 1. (a) Explain the function of commercial bank.

What are the activities permitted by the Banking Regulation
Explain the Ancillary Services of Bank. Act,
1949 to be taken up by banker?

What is endorsement? Explain different kinds of endorsement. Define promissory note and explain the essential requirements
of promissory note.

Discuss Demand Draft and Traveller's Cheques.

Explain the Banker's duty to honour cheques.

Explain the objectives and features of Securitisation Act, 2002. 4. (a) Who is a customer of a Bank? Discuss the general
relationship between banker and customer.
What precautions should a Banker lake in opening a new
account in the name of minor and company?

Critically examine the contributions of Regional Rural Banks in

promoting rural economy.

Discuss the management and functions of Reserve Bank (a) What do you mean by gilt-edged securities? What are
of India. the advantage and disadvantage of these securities?

b)'X'and'Y' maintain a Joint savings Bank Account. 'Y informs the

Discuss the Internet Banking and Computerised Banking. bank that 'X' is dead and produces a death certificate thereof 'Y'
requests the banker for the payment to him of the balance in the
Explain the functions of Reserve Bank of India, account. What would you do as a banker?

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Banking Law KSLU
Decide. (b) Write a short note on
A customer of a Canara Bank approaches another branch of the Bank orders
same Bank for loan facility against F.D. receipt of Rs. 1,00,000.00 A standing order (or a standing instruction) is an instruction
issued in his favour. Decide. a bankaccount holder ("the payer") gives to his or her bank to
pay a set amount at regular intervals to another's ("the
payee's") account. The instruction is sometimes known as a
banker's order.
(a) Explain the objects and features of securitisation Act, 2002.
Explain the precautions to be taken by a banker while lending State Bank of India
against goods. afafas
Scheduled and non-scheduled banks
1. (a) Define cheque and explain the different kinds of crossing afafas
of cheque and its effects. Definition of customer
afafas
3. (a) What is Negotiable Instrument? What are the kinds Joint Account
of Negotiable Instruments? How Negotiable Instruments afafas
are different froTransferable Instruments? Credit card
afafas
Safe deposit vaults-facility by the Banker
afafas
OR Travellers cheques
Analyse the penal provisions under Negotiable Instrument Act. Collateral Security

OR Agency services

Protest
OR
Who is a paying banker? State the statutory Bills in sets
protections available to paying banker. Unit Trust of India

Types of Banks

1. (a) Explain the function of commercial bank. Bills in sets

What are the activities permitted by the Banking
Regulation 1949 to be taken up by banker? Payment for Honour

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Banking Law KSLU
Gift cheques Banker's liability

Money Transfer
Garnishee Order

Definition of banker
Material alteration

Collecting Banker Priority sector advances

Pass book
Advances to priority sectors
Banker's liability
'Dishonouring of cheque'
Condominium Assignment and Negotiation

Priority sector advances

UTI (Axis bank) Financing of exports

Banker's right to set-off

Regional Rural Bank
Saving account and current A/c Origin of Indian Banking
Travellers cheques Banker's right to set-off
Saving account and current A/c
Priority sector advances Travellers cheques
Material alteration
Financing of exports Collecting Banker
Garnishee Order
Definition of banker
IDBI or Banker's right of set-off
'Travellers cheque'
UTI (Unit Trust of India) Cyber evidence
E-Banking
Promissory note Material altleration
Bills In sets
Pass book Types of Banks
RBI
56/57
Banking Law KSLU
Noting and protest

ATM
Priority sector advances

Material alteration

Bills in sets

customer

Gift cheques

Money Transfer

Unit Trust of India

Types of Banks

Credit Guarantee Scheme

Explain the priority sectors of Credit Guarantee Schemes

57/57