BANKING LAW

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

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

India?

3.      State the argument for & against nationalization

4.      What are the main functions of banks?

5.      Who is a banker and customer? Explain the general relationship

between banker & customer. OR The relation between a banker and a
customer is that of a debtor and a creditor. Explain.

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

7.      What are the obligations of a banker?

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

9.      What are the circumstances under which a disclosure by banker is

justified? OR Banker’s duty of secrecy is not absolute. Explain.

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

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11.        What are the functions of commercial banks?

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

13.        Explain the management, powers and constitution of the Reserve

Bank of India.

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

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

16.        Explain the Reserve bank’s licensing function.

17.        Write a short of Regional Rural Banks

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

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

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

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

22.        Explain the concepts of guarantee & indemnity

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

24.        What are the differences between lien & hypothecation?

25.        What are the differences between hypothecation & pledge?

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26.        Write a note of secured & unsecured loans

27.        Write a note on fixed deposits

28.        Write a note on current account

29.        Write a note on savings bank account

30.        Write a note on recurring account.

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

Banking was in existence in India during the Vedic times (2000 BC to 1400
BC). Money lending was regarded as an old art and was practiced in the
early Aryan days.

Rina (debt) is often mentioned in the ‘Rig Veda’ reflecting a normal

condition prevalent in the Vedic Society.

The transition from money-lending to banking must have occurred before

Manu-he states that a sensible man should deposit his money with a person
of good family, good conduct, well-acquainted with law, wealth and
honorable.

There are references to lending and banking in the two epics namely
Ramayana & Mahabharata. During that period banking had become a full-
fledged business

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 More details pertaining to money lending in the Sutra period (7th century
to 2nd century) are available from the Jatakas (Buddhist writings). Jatakas
establish the existence of seths (money lenders) and contain several stories
of Kings receiving financial help from the guilds. From these accounts it is
evident that money lending, banking and trading were interlinked. In the
Buddhist period even the Brahmins & Kshatriyas started taking banking as a
business. Bills of exchange came into use in this period.

The banking business was being carried out even in the Smriti period and
the Smritis explained the methods of regulation of interest.

The tradition from money-lending to banking appears to have taken place in

the 2nd or 3rd century AD. During This period, people were enjoined upon to
make deposits with respectable bankers. This period is characterized as one
in which the activities of the bankers/money lenders were well controlled
and regulated. Rules for safeguarding the interest of borrowers were
introduced.

Kautilya in his Arthashastra which was written in the Maurya period in the
4th century mentioned the maximum rate of interest which could be charged
by the lenders. The bankers during this period was known as Shakuras and
Mahajans

There is no live account of indigenous banking from the 6th to 16th century
but some stray evidence is found.

During the Moghul period indigenous banking was in its prime. There was
hardly any village without its money-lender or Sharoff who financed trade

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and commerce. The system of currency and coinage rendered money lending
a highly profitable business.

The British came to India in the 17th century. The East India company
established its Agency houses in Bombay, Calcutta & Madras. These agency
houses were the combination of trade & banking in India.

Bank of Hindustan- Appendage of Alexander & Co.1st bank under

European direction

Established in 1771 at Cal. Collapsed due to failure of parent company

Bengal bank was established in 1784

General Bank of India was established in 1786. It was the 1st joint stock
company with limited liability

Presidency banks were established in Calcutta, Bombay & Madras. It

amalgamated into the Imperial bank in 1921.

In 1865 Allahabad Bank was set up under European management

In 1875 Alliance Bank of Shimla was started

Oudh Commercial bank was the 1st purely Indian management joint bank.

Swadeshi movement stated in 1905 and the period from 1906 to 1913 was a
period of boom for Indian Banking. The Bank of Burma was established in
1904.

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Bank of India, Bank of Rangoon & Indian Specie Bank was established in
1906

Some of the important banks which were established later were Bank of
India, Central Bank of India, Bank of Baroda, etc.

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

India?

Objectives-

According to the Banking Companies Act, 1970, the aim of nationalization

of banks in India is “to control the heights of the economy and to meet
progressively and serve better the needs of development of the economy in
conformity with national policy and objectives.”

1. The elimination of concentration of economic power in the hands of a

few
2. diversification of the flow of bank economic credit towards priority
sectors such as agriculture, small industry and exports, weaker
sections and backward areas
3. fostering of new classes of entrepreneurs, so as to create, sustain and
accelerate economic growth
4. professionalisation of bank management
5. providing adequate training as well as reasonable terms of service to
bank staff

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 6. extending banking facilities to unbanked rural areas and semi-rural
areas to mobilize savings of people to the largest possible extent and
to utilize for productive purposes
7. to curb the use of bank credit for speculative and other unproductive
purposes
8. to bring banks under the control of RBI

Achievements

1. Accelerated branch expansion in rural and backward regions- in

1969 bank branches in rural areas accounted to only 22.5% of the total
number of branches. Today branches in rural areas account to 52%
2. Deposit mobilization-after nationalization banks attract deposits from
different sections by means of attractive deposit schemes
3. Finance to priority sectors- In 1969 the total credit given to priority
sectors like agriculture, small industries and rural development was
only 2% of total bank credit. By 2006-2007 in increased to around
40% of total credit
4. Increase in total transactions-the total deposits which was 4,664
crores in 1969 increased to 38.30 trillion
5. Differential rate of interest-to provide credit to weaker sections of
the society at very low rate of interest, banks came out with
Differential Rate of Interest scheme in 1972
6. Profit making-after nationalization, banks are making profits in
addition to achieving economic and social objectives.

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 7. Safety-the government has given importance to safety of the banks.
The RBI exercises tight control over banks and safeguards depositors
interest
8. Developmental functions- after nationalization, banks provide
assistance for the progress of agriculture, rural development, industry,
trade and other developmental plans of the government
9. Advances under self-employment scheme-public sector banks play
a significant role in promoting self-employment through advances to
unemployed through various schemes of the government like IRDP,
JGSY, etc.

3.    State the argument for & against nationalization

For

1. It would enable the government to obtain all the large profits of the
banks as its revenue
2. Nationalization would safeguard interests of public and increase their
confidence thereby bringing about a rapid increase in deposits. Thus
preventing bank failures
3. It would remove the concentration of economic power in the hands of
a few industrialists
4. It would help in stabilizing the price levels by eliminating artificial
scarcity of essential goods
5. It would enable the baking sector to diversify its resources for the
benefit of the priority sector.

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 6. Eliminates wasteful competition and raises the efficiency of the
working of banks
7. enables rapid increase in the number of banking offices in rural &
semi-urban areas & helped considerably in deposit mobilization to a
great extent
8. necessary for the furtherance of socialism and in the interest of
community
9. Enables the Reserve Bank to implement its monetary policy more
effectively
10.It would replace the profit motive with service motive
11.It would secure standardization of banking services in the country
12.Would check the incidence of tax evasion and black money
13.Through public ownership and control, banks function like other
public utility services by catering to the financial need of the common
man.
14.Like other countries, India should also get profit by nationalizing her
banking industry.
15.Essential for successful planning and all-round progress of the
national economy, community development and for the welfare of the
people.

Against

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

the shareholders adding to the financial burden of the government.
2. Extending loans to agriculture and small scale industries is risky and
less remunerative and may weaken the economic viability of these
institutions

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3. It may not lead to socialism as State capitalism is not socialism
4. It may reduce the efficiency of these banks as political interference
will impair the smooth working of these institutions
5. It is not the remedy for growth of monopoly and the concentration of
wealth and power as the root cause for them lies in the existing
economic system
6. Other countries like Sweden, Finland, Denmark etc have privately run
banks and are running smoothly
7. Control of RBI and government authorities make the bank officials
scared to take decisions and it adversely affects the bank services
8. The rapid extension of banking into the rural ad semi-urban areas has
often been cited as a major factor affecting the earning capacity of
banks
9. Inter-state rivalries and policies would raise their ugly heads,
damaging the present sound banking system.
10.Banks were not at all responsible for the evasion of taxes or for
creation of black money. It was the product of an irrational tax-
structure, high deficit financing and corrupt public administration.
11.Bank nationalization should follow and precede nationalization of all
major trades and industries of the country
12.Inflation is caused by unsound monetary and fiscal policies and
nationalization of banks cannot solve this problem
13.Rapid expansion of branches has increased establishment costs and
reduced the quality of supervisory and managerial staff
14.Malpractices in privately owned banks can be checked by adopting
appropriate monetary and fiscal policies and through efficient
supervision, nationalization is not necessary

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

4.    What are the main functions of banks?

There are four types of banking services. They are as follows-

1)      Central banking services.

2)      Commercial banking services.

3)      Specialized banking services.

4)      Non-banking financial services.

The various functions of each of the following banks are-

Central banking services

The central bank of any country-

1)      Issues currency and bank notes.

2)      Discharges the treasury functions of the Government.
3)      Manages the money affairs of the nation and regulates the internal
and external value of money.
4)      Acts as banker to the govt.

5)      Acts as banker’s bank.

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Commercial banking services

Commercial banking services include-

1)      Receiving various types of deposits.

2)      Lending various types of loans.

3)      Extending some non-banking customer services like facilities of

locker, rendering services in paying directly house rent, electricity
bills, share calls, insurance premium etc.

Specialized banking services

They are established for definite specialized banking services like

1)      Industrial banks to lend long term loans and working capital for
industrial purposes.

2)      Land mortgage banks for granting loans on equitable mortgage.

3)      Rural credit banks for generating funds for extending rural credit.

4)      Developmental banks to support any developmental activities.

These types of banks accept all types of deposits but mobilize the amount in
its specially focused area.

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Non-banking financial services

Many banks are established for carrying out non-banking financial services.
Mutual funds are institutions accepting finances from its members and
investing it in long term capital of companies both directly in primary
market as well as indirectly in the capital market. Financial institutions
acting as portfolio managers receive funds from the public and manage the
funds for or on behalf of its depositors. They undertake to manage the funds
of the principal so as to generate maximum return.

Explain the role of banks in promoting economic development.

Banks play a very significant role in the economic development of the

country. Banking system as a whole has an imp influence on the tempo of
economic activity. The economic importance of banks are-

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.

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.

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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

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 supply of money they influence economic activities, employment,
income and general price level in the economy.

12)  Banks monetize the debts of others that is cover t the debts of others
into money by exchanging bank deposits in return for securities.

Thus a strong and a sound banking system is indispensable for the economic
development of any country.

5.    Who is a banker and customer? Explain the general relationship

between banker & customer. OR The relation between a banker and
a customer is that of a debtor and a creditor. Explain.

The relationship between a banker and a customer is of great significance. It

depends upon the services rendered by the banker to the customer.

Definition of banker

According to section 3 of the NI Act, 1881, banker includes any person

acting as a banker and any post office savings bank.

According to section 5(b) of the Banking Regulation Act, 1949, banking

means the accepting, for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and
withdrawable by cheque, draft, order or otherwise.

To sum up a banker is who

1)      Take deposit account

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 2)      Take current accounts

3)      Issue and pay cheques

4)      Collect cheques crossed and uncrossed for his customers.

Money lender is not considered as a banker as mere lending does not

constitute banking business. Banker is an institution which borrows money
by accepting deposits from the public for the purpose of lending to those
who are in need of money.

Definition of customer

The term customer is not defined by law. Ordinarily, a person who has an
account in a bank is called a customer.

Acc. to Dr. Hart, “a customer is one who has an account with a banker or for
whom a banker habitually undertakes to act as such.

Thus to constitute a customer, the following essential requisites must be

fulfilled:

1)      He must have some sort of an account.

2)      Even a single transaction constitutes a customer.

3)      The dealing must be of a banking nature.

A customer need not be a person. A firm, joint stock Company, a society or

any separate legal entity may be a customer. Explanation to section 45-Z of

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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.

On the opening of an account a banker assumes the position of a debtor. The

money deposited by the customer with the bank is in legal terms lent by the
customer to the banker who males use of the same according to his

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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 up to 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 baker becomes a secured creditor
of his customer.

Various legal relationships of banker and customer

2) Agent and Principal- Sec.182 of ‘The Indian Contract Act, 1872’ defines
“an agent” as a person employed to do any act for another or to represent
another in dealings with third persons. The person for whom such act is done
or who is so represented is called “the Principal”.

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One of the important relationships between a banker and customer is that of
an agent and principal. The banker performs various services of the
customer, where he acts as the agent.

Buying and selling securities of customer

Collection of cheques, bills of exchange, promissory notes on behalf of

customer

Acting a trustee, executor or representative of a customer

Payment of insurance premium, telephone bills etc.

1)      Trustee and beneficiary- section 3 of the Trusts Act defines a

trustee as one to whom property is entrusted to be administered for the
benefit of another called the beneficiary. A banker becomes a trustee under
special circumstances. When a customer deposits securities or other
valuables with the banker for safe custody, the banker acts as trustee of
customer.

2)      Bailee and bailor- during certain circumstances banker becomes

bailee. When he receives gold ornaments and important documents for safe
custody he takes charge of it as bailee and not trustee or agent. He cannot
make use of them as he is bound to return the identical articles on demand.

3)      Pawnee and pawner- pawn is a sort of bailment in which the goods
are delivered to another as a pawn, to be a security for money borrowed.
Thus a banker acts as a pawnee where a customer delivers he goods to him
to be kept as security till the debt is discharged. The banker can retain the
goods pledged till the debt is paid.

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 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.

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

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-

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 (a)   Sufficient balance in customer’s account

(b)   Presentation of cheques within working hours of business

(c)   Presentation of cheques within reasonable time after ostensible

date of its issue

(d)   Cheques should be presented at the branch where account is kept

(e)   Fulfilment of requirements of law

Obligation to maintain secrecy and disclosure of information required by

law- 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.

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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.

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

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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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7.    What are the obligations of a banker?

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 up to 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.

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 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.
Sometimes, he may commit some wrong.

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

Lien means a legal claim to hold property as security. According to

Halsbury, lien may be defined as “a right in man to retain that which is in his
possession belonging to another, until certain demands of the person in
possession is satisfied”.

Lien is of two kinds- 1) specific or particular lien and 2) general lien

A particular lien is one which confers a right to retain the goods in

connection with a particular debt only while a general lien is a right to retain

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all the goods or any property of another until all the claims of the holder are
satisfied. It extends to all transactions and thus more extensive.

Banker’s right of general lien

One of the important rights enjoyed by a banker is the right of general lien.
In Brando v. Barnet, it was held that bankers most undoubtedly have a
general lien on all securities deposited with them as bankers unless there is
an express or implied contract inconsistent with lien.

In India sec 171 of the Indian Contract Act confers general lien upon
bankers as 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.

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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 2)      Dividend warrants and interest warrants paid to the banker under
mandates issued by the customer.

3)      Securities deposited to secure specific loan but left in banker’s hand
after loan is repaid.

4)      Securities, negotiable or not, which the banker has purchased or

taken up, at the request of customer, for the amount paid.

Exceptions- banker has no general lien

1)      On safe custody deposits.

2)      On securities or bills of exchange entrusted for specific purpose.

3)      On articles lefty by mistake or negligence.

4)      On deposit account.

5)      On stolen bond.

6)      Until due date of the loan.

7)      On trust account.

8)      On title deeds of immovable properties.

28
9.    What are the circumstances under which a disclosure by banker is
justified? OR Banker’s duty of secrecy is not absolute. Explain.

The duty of the banker to maintain the secrecy is not an absolute one. It is
also subject to certain exceptions. The exceptions were stated in the
landmark judgment Tournier v National Provincial Bank Limited. Section
13 of the Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1970 also allows certain exceptions.

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

customer is subject to his duty to the law of the country. The baker
would, therefore, be justified in disclosing information to meet the
following statutory requirements.

(a)   Under the Income –Tax Act, 1961- Vide Section 131 & 133,
Income Tax authorities have powers to call for the attendance of any
person or for necessary information from banker for the purpose of
assessment of the 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

29
(d)   Under the Banking Regulation Act, 1949- every bank is
compelled to submit an annual return of deposits which remain
unclaimed for 10 years.

(e)   Under the garnishee order- when a garnishee order nisi is received,
the banker must disclose the nature of the account of a customer to the
Court.

(f)     Under the Companies Act, 1956- when the Central Government
appoints an inspector to investigate the affairs of any joint-stock
company under section 135 or section 137 of the Companies Act, the
banker must produce all books and papers relating of the Company.

(g)   Under CrPC- the police officers conducting an investigation may

also inspect the banker’s books for the purpose of such investigation.

2. Disclosure in the interest of the public-the following grounds

generally fall under this category

(a)   disclosure of the account where money is kept for extreme political
purposes in contravening the provisions of any law

(b)   disclosure of the account of an unlawful association

(c)   disclosure of the account of a revolutionary or terrorist body to avert

danger to the State

(d)   disclosure of the account of an enemy in time of war

30
(e)   disclosure of the account where sizable funds are received from
foreign countries by a constituent.

3. Disclosure in the interest of the bank- the banker may disclose the
state of his customer’s account in order to legally protect his own
interest. For example- if the baker has to recover the dues from the
customer or the guarantor, disclosure of necessary facts to the
guarantor or the solicitor becomes necessary and is justified.

4. Disclosure under the express or implied consent of a customer- the

customer may instruct his banker to give some or all other particulars
of his account to say, his auditor, in such case banker can disclose.
Banker can also disclose to a referee whose name is suggested by the
customer. It is implied that the banker can disclose information to the
guarantor.

5. Disclosure under 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.

31
10. Who are the banker’s special customers? Explain the precautions to
be taken by the banker in opening and operating their accounts.

Banks solicit deposit of money from the members of the public. Any person
who is legally capable of entering into a valid contract may apply in the
proper way to deposit his money with the bank.

A bank’s special customers are generally minors, married women, illiterate

persons, lunatics, blind people, drunkards, insolvents etc. who are not
competent to open such accounts. There are also impersonal customers like
schools, clubs, partnership firm, joint stock companies etc. certain
precautions are to be taken by banks while opening accounts in the name of
the following customers.

Minor

A minor is a person who has not attained the age of 18 and in case a
guardian is appointed, it is 21. Minors are regarded “pet children of law”.

In Mohori Bibi v. Dharmodas Ghose, a minor executed a mortgage for Rs

20000 and received Rs 8000 from the money lender. Subsequently, the
minor sued for setting aside the mortgage. The money lender wanted refund
of money which he had actually paid. The PC held that an agreement by a
minor was absolutely void and therefore, money lender was not entitled
repayment of money.

Some of the precautions to be taken by the banker on opening and operating

account of a minor are-

32
1)      The banker may open a SB account but not a current account as it
incurs no liability to the minor.

2)      At the time of opening of account of minor, the bank should record
the genuine date of birth of the minor. Banker should insist on to give
some schooling record or date of birth as entered in Births and Deaths
Register.

3)      Minors are allowed to open such accounts when they have
completed a particular age say twelve years in some banks and ten
years in some others.

4)      Banks should prudent to issue cheque books only to minors of, say
sixteen or seventeen years of age.

5)      Accounts for illiterate minors are not opened in their single name.

6)      As a measure of precaution, banks adopt a general rule not to

accept deposit exceeding a particular sum.

7)      Since a contract with a minor is void and cannot be enforced

against him in Court of law, a minor’s account should never be
allowed to be overdrawn.

8)      A guarantee obtained to secure the money borrowed by a minor is

also of no avail. However, if the guarantor undertakes to indemnify he
will be held liable though borrower is minor.

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Lunatics

Lunatics are persons of unsound mind. Lunatics are disqualified from

contracting but the disqualification does not apply to contract entered by
lunatics during their period of sanity. Following are banker’s duty n case of
lunatics-

1)      Since a lunatic has no capacity to contract, acc to sec 11 of the ICA,
no banker knowingly opens an account in the name of a lunatic.

2)      If an existing customer becomes insane, the banker must

immediately stop the operation of the account. It is so because, the
banker has no right to debit his account for payment made out of his
account from the moment, the banker knows the fact of lunacy of
customer, the contract between them is void.

3)      A banker must not be carried away by hearsay information or

rumours. He must get definite information about the lunacy of the
customer.

4)      If a banker dishonours a cheque in a hurry, without having any

proof of lunacy, he will be liable for wrongful dishonour of cheque.

5)      It should return all cheques of 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.

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 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.

35
 6)      Normally, no cheque book facility is provided on accounts in the
name of illiterate persons.

7)      At the time of withdrawal/repayment of deposit account the

account holder should attend personally with passbook and attest
his/her thumb impression or mark in the presence of an authorised
person.

8)      The thumb impression of illiterate person on the withdrawal form

or cheque (if provided), and on the back of the withdrawal form or
cheque should be duly compared with the specimen impression kept
by the bank.

Married women

The Hindu married women are governed by the Hindu Succession Act and
other married women by Indian Succession Act. A banker may open an
account in the name of a married woman like any other customer. However,
a banker should exercise caution while opening account for the wife of an
undischarged insolvent.

1)      While opening an account of a married woman, the bank should

enquire about her means and circumstances, and if she is living with
her husband, something about him and his occupation and position in
life, and if he is an employee, the name of the employer.

2)      In case she applies for an overdraft, the banker should see that she
owns separate property in her own name and precaution should be
kept in mind regarding her status and capacity to pay and the purpose

36
 for which the borrowings are made. Also he should seek suitable
securities preferably on her, which can be attached by the Courts.

3)      The banker should always observe that there is credit balance in her
account.

4)      Banks usually require that a married woman be independently

advised by her own solicitor when depositing security for the account
of other persons.

5)      A married woman may enter into a contract of guarantee and it is

enforceable only against her separate estate.

6)      In case of an illiterate married woman, her thumb impression

should be obtained on the account opening form and on the
identification card.

Pardhanishin women

In case of a pardhanishin woman who remains completely secluded the

following presumption 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.

37
Joint Hindu families

A JHF or a HUF consists of all persons lineally descended from a common

ancestor and included their wives. Following are the precautions to be taken
by the banker in opening and operating accounts in the name of HJF.

1)      The account may be opened in the name of karta or in the name of
family business and should be duly introduced.

2)      The account opening form should be signed by all adult

coparceners, even though the karta would operate the account.

3)      The declaration signed by all the members as to who is the karta
and who are the other coparceners including minor coparceners
should be obtained.

4)      If there are minor coparceners, the other adult coparceners should
sign for self and as guardians of minors.

5)      Authority should be given to the karta to operate the account of all
concerned under their joint signature.

6)      On attaining majority, the minor coparceners should be asked to

join with other coparceners in signing the existing account opening
form in ratification of previous transactions.

7)      Any member of the HUF can stop payment of a cheque drawn by
karta. When the bank receives a notice about any dispute amongst the

38
 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.

39
 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.

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

40
 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

41
 adjudication should not be paid b the banker without conformation
from other partners.

Trust

A trust is an obligation annexed to the ownership of the property, and arising

out of a confidence reposed in and accepted by the owner, or declared and
accepted by him, for the benefit of another, or of another and the owner.

While opening accounts in the names of persons in their capacity as trustees,

the banker should take the following precautions.

1)      The banker should examine the trust deed concerning instructions
regarding opening and operating the account contained in the trust
deed. In the absence of such instructions, all the trustees may join in
opening such account.

2)      Instructions regarding limitation on withdrawal in the trust deed, if

any, be prominently noted at the ledger head and specimen signature
card and withdrawals should be restricted.

3)      The banker should note the objects for which the trust has been
created so as to facilitate the passing of cheques.

4)      A trustee has no individual powers. They must all act together. All
must join in signing of cheques. Unless expressly provided otherwise
in the trust deed, no trustee can delegate his power to another.

42
 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.

11.           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.

43
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

44
 to draw more than the amount standing to his credit upon an
agreed limit.

(iii)      Cash credit- it is a financial arrangement under which a borrower is

allowed an advance under a separate account called cash
credit limit. Here the borrower can withdraw the amount in
installments as and when he needs.

(iv)      Discounting of bills of exchange- here the bank takes a BOE

maturing from an approved customer and pays him and
credits his account immediately with the present value of the
bill.

d)      Investment of funds on security- it is one of the imp functions

of comm. Banks. They invest a considerable amount of their funds
in govt and industrial securities. In India it is required by statute
for CB to invest a considerable amount of their funds in securities.

e)      Creation of money- the various ways of creation of money are-

(i)      By advancing loans

(ii)      By allowing over draft

(iii)      By providing cash credit

(iv)      By discounting BOE

(v)      By purchasing securities

(vi)      By purchasing fixed assets

45
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-

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-

46
(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 about other businessmen for customers.

(v)      Collection of statistics and data.

(vi)      Lease financing.

12.           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”.

47
Functions of RBI:

1) Regulator of Currency:

The Reserve Bank of India is the bank of issue. It has the monopoly of note
issue. Notes issued by it circulate as legal money. It has its issued
department which issued notes and coins to commercial banks.

Reserve Bank of India has been following different methods of note issue in
different countries. The monopoly of issuing notes vested in the Reserve
Bank of India ensures uniformity in the notes issued which helps in
facilitating exchange and trade within the country. It brings stability in the
monetary system and creates confidence among the public.

RBI can restrict or expand the supply of cash according to the requirements
of the economy. Thus, it provides elasticity to the monetary system.

2) Banker, Fiscal Agent and Advisor To The Government:

RBI everywhere acts as bankers, fiscal agent and advisor to their respective
governments. As banker to the government, the central bank keeps the
deposits of the central and state governments and makes payments on behalf
of the governments. But it does not pay interest on government deposits.

It buys and sells foreign currencies on behalf of the government. It floats

loans, pays interest on them, and finally repays them on behalf of the
government. Thus it manages the entire public debts.

RBI also advices the government on such economic and money matters as
controlling inflation or deflation, devaluation or revaluation of the currency,

48
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.

49
It acts as lender of the last resort through discount house on the basis of
treasury bills, government securities etc. Thus RBI as lender of the resort is a
big source of cash and also influences prices and market rates.

6) Clearing House for Transfer and Settlement:

As bankers` bank, the RBI acts as a clearing house for transfer and
settlement of mutual claims of commercial banks. Since the RBI holds
reserves of commercial banks, it transfers funds from one bank to other
banks to facilitate clearing of cheques.

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

7) Controller of Credit:

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

Besides the above noted functions, the RBI in a number of developing

countries have been entrusted with the responsibility of developing a strong
banking system to meet the expanding requirements of agriculture, industry,
trade and commerce.

50
13.           Explain the management, powers and constitution of the
Reserve Bank of India.

The Reserve Bank of India was established on 1st April, 1935 under the
Reserve Bank of India Act, 1943 as the Central Bank of the country to
regulate the issue of bank notes and the keeping of reserves for the stability
in India and generally to operate the currency and credit system of the
country.

⤚ Constitution:

The bank was established as a shareholder`s bank with an authorized and

paid-up capital of Rs. 5 crores divided into shares of Rs. 100 each. After
independence, under the Reserve Bank Act, 1948, the bank was
nationalized, after paying compensation to the shareholders at the market
price of the share.

⤚ Management:

The affairs if the RBI are managed by the Central Board of Directors
consisting of:

 Governor and not more than 4 Deputy Governors appointed for a

period not more than 5 years.
 Four Directors, one from each of the four local boards.
 The other Directors.
 One Government Official.

All the Directors and the officials are nominated for 4 years each by the
Central Government. To look after the affairs there are 4 local Boards, one at

51
each of the cities of Bombay, Calcutta, Delhi and Madras, each Board
consisting of 5 members appointed for 4 years by the Central Government.

⤚ Functions:

Mention the above functions in brief.

Powers:

 Power Of RBI To Appoint Chairman Of A Banking Company:

RBI has the authority to appoint Chairman of Banking Company where the
office of the Chairman of the Board of Directors appointed on a whole-time
basis.

 Minimum Paid-up Capital And Reserves:

Every banking company should deposit the prescribed minimum paid-up

capital and reserves with the RBI either in cash or in form.

 Cash Reserve:

Every banking company, not being a Scheduled Bank, shall maintain in

India by way of cash reserves or by way of balance in a current account with
the RBI.

 RBI Control Over Banking Companies:

The RBI may, by order, require any banking company to call a general
meeting of the shareholders of the company within such time, not less than
two months from the date of order.

52
  Power of RBI To Control Advances By Banking Companies:

The RBI may determine the policy in relation to advances to be followed by

banking companies generally or by any banking company in particular.

 Licensing Of Banking Companies:

No company shall carry on banking business in India unless it holds a

licence issued in that behalf by the RBI and any such licence may be issued
subject to such conditions as the RBI may think fit to impose.

 Monthly Returns:

Every bank should submit monthly returns to the RBI in the prescribed form
and manner showing its assets and liabilities in India. The RBI has the
power to call for other returns and information if required.

 Accounts And Balance-Sheet:

At the expirations of each calendar year, every banking company

incorporated in India shall prepare, a balance-sheet, profit and loss accounts
as on the last working day of the year.

 Submission Of Returns:

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

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

53
  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.

54
14.           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

55
(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 Refinance &

Developmental Corporation and more recently Export-Import Bank and
the NABARD.

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
refinance 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

56
 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.

15.           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

57
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 Government may on the basis of this report direct the company to
wind up.

4. RBI may remove managerial and 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.

58
 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 every day. This is called
statutory liquidity rate and the RBI is empowered to step up the rate up to
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.

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(c) as banker to the baker

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.

16.           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

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 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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17.           Write a short of Regional Rural Banks

The RRBs are relatively new banking institutions which were added to the
Indian banking scene since October 1975 to strengthen the institutional rural
credit structure. Prior to that, the then existing credit agencies lacked in
meeting the needs of rural masses. A committee under the chairmanship of
N.Narasimhan suggested the institutions of RRBs as low cost banking for
rural areas should be set up to meet their credit needs.

Objectives

1)      To identify a specific and functional gap in the present institutional

structure.

2)      To supplement the other institutional structure.

3)      To fill the gap within a reasonable period of time.

Functions

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.

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 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 in its establishment, recruitment and training of personnel.
They may also provide managerial and financial assistance with mutual
agreement.

Capital resources

Each RRB may have an authorized capital of Rs. five crore divided into one
lakh shares of Rs. 100 each and issued capital of Rs. 1 crore to improve their
viability.

Management

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 chairman is a paid servant of the sponsoring bank while the
members are honorary.

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Conclusion

RRBs are playing an important role as an alternative agency to provide

institutional credit. According to RBI the RRBs have fared well in achieving
the objective of providing access to weaker sections of society.

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

A central co-operative bank is a federation of primary credit societies

operating in a specified area, usually a district. All types of primary credit
societies, rural and urban are affiliated to it. Some co-operative banks have
even individual members, besides the affiliated primary credit societies. A
central co-operative bank is located at district head-quarters or in some
prominent town in the district.

The funds of a central co-operative bank consist of share capital, reserve

fund, deposits from members and non-members and loans from state co-
operative banks. Sometimes, loans are taken even from the commercial
banks.

A central co-operative bank is managed by a board of directors constituted

by the representatives of the constituent primary credit societies and
individuals of business capacity and influence.

Functions of Central Co-operative Banks:

 Its main function is to lend primary credit societies

 It accepts the surplus funds of one primary credit society and makes it
available to another primary credit society, and thus acts as a
balancing centre between the primary credit societies.

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  It raises loans from the state co-operative banks and lends the same to
the primary credit societies, and thus acts as a link between the state
co-operative bank and primary credit societies.
 It raises deposits from members as well as non-members for the
purpose of meeting the credit requirements of the primary credit
societies.

 It exercises general supervision and control over the activities of

primary credit societies.

Besides the above functions, it also carries on ordinary commercial banking

operations, such as the acceptance of deposits, granting of loans, collection
of cheques and bills on behalf of the customer, etc.

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

Unit Banking

In the unit banking system, the bank’s operations are generally confined to a
single office only. It is a corporation that operates from one office and that is
not related to other banks through either ownership or control. USA is the
birth place of unit banking.

Advantages

3.      The funds of the locality are utilized for the local development

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4.      The management and supervision is much easier and effective

5.      There are less chances of fraud and irregularities in the management

6.      They are in a better position to solve problems as they know the local
problems better.

7.      There is no possibility of generating monopolistic tendencies

8.      There will be no inefficient banks as weak and inefficient banks are
automatically eliminated

9.      Unit banking is free from the diseconomics and problems of large scale
operations.

Disadvantages

1. Cut throat competition.

2. Lack the benefits of specialization and division of labour
3. No banking development in backward areas as banking activity is
uneconomical and no bank is opened there
4. Limited resources restrict its ability to face financial crises.
5. There is little possibility of distribution and diversification of risks
under the localized unit banking system.
6. The interest rates tend to vary at different places as there is no
movement of funds from place to place.
7. The transfer of funds is very expensive as there are no branches at
other places.
8. There will be high local pressure and interference which disrupt their
normal functioning.

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Branch Banking

Under the branch banking system, a bank operates as a single institution

under single ownership with branches spread all over the country. Branch
banking developed in Great Britain.

Examples- SBI, Barclays.

Advantages

1. Results in the economy of cash reserves

2. Less risk and greater capacity to meet risks
3. There is proper use of capital.
4. Customers get better and greater facilities.
5. Large scale operation with greater applicability of the division of
labour.
6. It is easier and cheaper to transfer funds because branches are spread
all over the country.
7. Offers a wide scope for the selection of diverse securities and varied
investments, so that a higher degree of safety and liquidity can be
maintained.
8. Greater diversification of both deposits and assets because of wider
geographical coverage.
9. Mobility of funds from one place to another which in turn brings
equality in interest rates.
10.Banking can be extended to under developed areas and this helps in
the development of backward regions.

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 11.It is more convenient for Central Bank or the Government to regulate
and supervise.

Disadvantages

1. Proper supervision and scrutiny become more difficult

2. Suffers from red-tapism and delays on account of inadequate authority
of branch managers and the necessity to take permission from head
office
3. Dealings become more impersonal
4. Very expensive. Opening of many branches, establishing and
maintenance of the branches result in high expenses and may reduce
profits.
5. Creates monopoly and leads to the concentration of resources into a
few banks.
6. Losses and weakness of some branches affect the other branches too
due to adverse linkage effect.
7. Unhealthy competition among the branches of different banks in big
cities.
8. Preferential treatment is given to the branches near the head office.

20.           What are the differences between schedule & non-schedule

banks?

Private sector    Indian Commercial Banks are classified into two types.
They are:

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  Scheduled Banks.
 Non-scheduled Banks.

Scheduled Bank:

Scheduled Banks are those private sector Indian commercial Banks which
are included in the second scheduled to the RBI Act, 1934. Foreign banks
also are included in the second schedule to the RBI Act.

Non-scheduled Bank:

Non-scheduled banks are those banks which are not included in the second
schedule of the RBI Act. The non-scheduled banks do not enjoy from the
RB all the facilities enjoyed by the Scheduled Banks.

Difference between Scheduled Banks and Non-scheduled Banks:

 Scheduled banks are included in the second schedule of the RBI Act
of 1934. On the other hand, non-scheduled banks are not included in
the second schedule of the RBI Act.
 Scheduled banks satisfy tow important conditions, viz., (i) they have
paid-up capital and reserves of Rs. 5 lakh or more and (ii) they satisfy
the RBI that their affairs are not being conducted to the interests of the
depositors. But non-scheduled banks do not satisfy these conditions.
 Scheduled banks enjoy certain benefits from the RBI, whereas non-
scheduled banks do not enjoy those benefits.
 Scheduled banks are subject to greater degree of control and more
obligations than the non-scheduled banks in their day-to-day
operations.

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  The number of scheduled banks is more than that of non-scheduled
banks.
 Scheduled banks are, generally, big, whereas non-scheduled banks
are, ordinarily, small.
 Scheduled banks are spread over a large area of the country, whereas
non-scheduled banks are confined to a small area.
 The share capital and reserves of scheduled banks are more than those
of non-scheduled banks.
 Deposits of scheduled banks are more than those of non-scheduled
banks.
 The advances of scheduled banks are also more than those of non-
scheduled banks.

Scheduled banks are more important that non-scheduled banks

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

Rights of banker against surety

1. 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.

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 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. Bankers 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.

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 terminates. The banker should make a formal demand upon

71
the guarantor for repayment of the amount unless it is paid by those in
charge of the estate of the deceased.

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.

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22.           Explain the concepts of guarantee & indemnity

Guarantee

A guarantee is the most common form of security taken by the bankers to

ensure safety of the funds lent. 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

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 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

Contracts of indemnity appear to be analogous to contracts of guarantee.

Section 124 defines a contract of indemnity as “a contract by which one
party promises to save the other from loss caused to him by the conduct of
the promisor himself, or by the conduct of any other person.”

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.

23.           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 baker must periodically inspect the hypothecated goods and the
account books of the borrower should be checked to ascertain the position of
stocks under hypothecation

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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 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.

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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 event of non-payment of the loan, the mortgagee has a right to
sell the mortgaged property through the intervention of the Court.

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 8. an agreement in writing between the mortgagor and the mortgagee is
essential for creating a mortgage. The mortgage deed should contain
all safety clauses.

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.

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 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.

Anomalous mortgage-a mortgage other than any of the mortgages

explained above is an anomalous mortgage. Such a mortgage includes a
mortgage formed by combination of two or more types of mortgage. It takes
various forms based on custom, local usage or contract.

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24.           What are the differences between lien &
hypothecation?

Lien Hypothecation

1.Possession of securities is Neither ownership nor possession is

transferred to the banker transferred to the creditor. Only an
equitable charge is created in favour of
the creditor.

2. No such agreement The borrower binds himself under an

agreement to give possession of the
goods hypothecated to the banker
whenever the banker requires the
borrower to do so

3. The borrower holds possession of The borrower holds possession of the

goods as owner and not as an agent goods not in his own right as the owner
of the bank of the goods but as an agent of the
bank

4. There is no such constructive The banker has constructive possession

possession even of the banker over the hypothecated goods

5. To take possession of the property It is essential for the bank to take

under lien by way of security directly possession of the hypothecated goods
the baker has to move the Court by itself directly.

6. Lien also creates a charge but it is It is convenient device to create a

not so convenient to proceed as in charge over the movable property

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case of hypothecation when transfer of its possession is
inconvenient or impracticable

25.  What are the differences between hypothecation &

pledge?

Hypothecation Pledge

1. the possession of the movable There is delivery of goods from one

property is retained by the owner and person to another as security for
certain right in that property are payment of debt or performance of a
transferred to the person in whose promise.
favour the property is hypothecated

2. since the possession of the goods Since the pledge has got the possession
remains with the owner, the of the goods, in the event of default by
hypothecate cannot have the right of the pawnor, apart from other rights, the
lien. He may sell the property in pledge has a right of lien over the
default 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, without intervention of the Court.

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26.   Write a note of secured & unsecured loans

Loan is a contract by which property or money is transferred by a lender to a

borrower on the promise of the borrower to return the property, 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) 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.

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2) The Market value of such security must not be less than the amount of the
loan at any time 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.

The characteristics of unsecured advances are

1) UAs are made on the goodwill and reputation of the customer.

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

What is ‘overdraft’?

‘Overdraft’ means allowing the customer to overdraw his account. It is

allowed only to current account holders. But some banks allow casual
overdraft in savings accounts of Government servants, etc. An overdraft is a
running account wherein thy balance goes on fluctuating from debit to credit
or vice versa.

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Under an overdraft arrangement, a customer is allowed to draw cheques up
to an agreed limit over and above the credit balance in the account.

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 up to 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.

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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

Categories-

2. Secured overdraft- when a party is allowed regular limits against some

tangible security, it is known as secured overdraft.

3.  Clean overdraft-Overdrafts which are not backed up by any security are

called clean or temporary overdrafts. Clean overdrafts are allowed purely on
the personal credit of the party. They are allowed for small amounts to meet
the party’s sudden requirements.

27.           Write a note on fixed deposits

The relation between a banker and his customer begins with the opening of
an account by the former in the name of the latter. Initially the accounts are
opened with a deposit of money by the customer and hence these accounts
are called deposit accounts. Deposits are broadly divided into two kinds- 1)
payable on demand (demand deposit) and 2) payable after certain time
(time deposit). Demand deposits are- savings and current account. Time
deposits are- fixed deposit and recurring deposit.

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Fixed account

The term fixed deposits means deposits repayable after the expiry of a
certain period, which ordinarily varies from three months to five years. The
fixing of the period enables the banker to invest money or employ it in
business without having to keep a reserve and hence are very popular with
the bankers.

Rate of interest- the banker offers higher rates of interest on fixed deposits as
the depositor parts with liquidity for a definite period. The longer the period,
the higher will be the rate of interest.

FD for senior citizens- RBI has permitted the banks to formulate FD

schemes specially meant for senior citizens on which they offer higher and
fixed rates of interest.

Opening and operation- to open an account the depositor is required to fill in

an application form wherin he mentions the amount of the deposit and the
period for which the deposit is to be made. He also gives his specimen
signature. A fixed deposit receipt is thereafter issued to the depositor
acknowledging the same.

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FD in joint names- FDs can be opened in joint names of two or more
persons payable to either or survivor in accordance with the terms of the
receipt. The problems faced by the banker before date of maturity are

1)      Request for premature repayment by one of the depositor

2)      Loan against FDR by one of the depositor

3)      Request for duplicate receipt by one of the depositor

In all these cases the banker should obtain consent of other depositor/s.

Payment before due date- though a FD is payable after expiry of fixed

period, banks permit encashment even before due date. In such a case certain
interest will be charged for the same. According to the RBI directive banks
should not charge the penalty in case of premature withdrawal for immediate
reinvestment in another FD for a longer term than the remaining period of
the original contract.

Overdue deposits- if the receipt is not encashed on the date of maturity, the
interest ceases to run from that date. The banks allow interest as per RBI
directives, if it is renewed.

28.           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

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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

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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.

29.           Write a note on savings bank account

Savings accounts are maintained for encouraging savings of households. It is

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-

Restriction on withdrawals- in pursuance of the objective of savings bank

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.

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

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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.

4)      Bodies depending upon budgetary allocations for performance of

their functions.

5)      Municipal corporations/committees.

6)      Panchayat samitis.

7)      State housing boards.

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30.           Write a note on recurring account.

The banks have in recent years started various daily, weekly, or monthly
deposit schemes in order to inculcate the habit of savings on a regular or
recurring basis. Generally money in these accounts is deposited in monthly
installments for a fixed period and repaid to the depositors along with
interest on maturity. These are called as recurring deposits.

A depositor opening a RD account is required to deposit an amount chosen

by him, generally a multiple of Re 5 or 10, in his account every month for a
period selected by him. The period of recurring deposit varies from bank to
bank. Generally banks open such accounts ranging from one to ten years.

Opening and functioning of account- the RD account can be opened by any

person, more than one person jointly or severally, by a guardian in the name
of a minor and even by a minor.

While opening the account, the depositor is given a pass book which is to be
presented to the bank at the time of monthly deposits and repayment of
amount. Installments for each month should be paid before the last working
day of that month. Accumulated amount with interest will be payable after a
month of the payment of the last installment.

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Rate of interest- the rate of interest on RD stands favourably as compared to
the rate of interest on savings bank accounts. According to the directive of
the RBI, the interest provided by banks on RD must be in accord with the
rates prescribed for various term deposits. The rate of interest is therefore
almost equal to that of fixed deposits.

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