Bp CHAPTER 1 Banking Law in India AN INTRODUCTION — Gaurav Singht & Aditi Lodhat 4, EMERGENCE OF FINANCIAL ACTIVITIES IN INDIA India is a vast and diverse country having deep roots of cultural and economic heritage. In the early years, India was famously known as the golden bird and people across the globe were eager to know the reasons Sreconomic prosperity of this country. With an economic prosperity of this scale, it was also essential to manage the country’s economy and its financial activities. During this nascent period of economic growth, the financial activities were widely handled by moneylenders and indi- viduals. During the reign of Maurya Dynasty around 300 to 200 BC, Adesha was used, which was an order on a banker desiring him to pay the money of the note to a third.’ Merchants also began to give loans and letter of credits to other people. Trade guilds began lending and receiving deposits from people. Thereon emerged the moneylenders who used to charge high rates of interest and thepoor farmers and other borrowers were caught up in paying these high interest rates, reflecting the darker side of financial activities. According to the Central Banking Enquiry Committee (1931), money lending activity in India could be traced back to the Vedie period, i.e. 2000 to 1400 BC. The existence of professional banking in India could be traced to s00 BC. Kautilya’s Arthashastra, dating back to 400 BC contained references to creditors, lenders and lending rates, Banking was fairly varied and catered to the credit needs of the trade, commerce, agriculture as well as individuals in the economy.” Mr W.E. Preston, member, Royal Commission on Indian Currency and + Third year student, Gujarat National Law University, Gandhinagar, Gujarat. +. Ibid, 1. Fenton ’s Banking Law and Practice in India (21st Edn., Wadbw. a Nagpur) 125.ANKING LAW a 4 BANK ten, Finance set up in 1926, observed it may be accepted tha. ia’ i Ys is vas eminently suited to India’s then requirer ey of banking that was eminently ments in force in that country many centuries before the science of bang became an accomplished fact in England. i 2, NEED FOR BANKS Owing to the arbitrary practice of advancing loans and receivin aig, its, the need for a more systematic institution emerged, An insti was required to provide safeguard and security to the deposits of tomers which would inerease public faith and confidence in the The borrowers were needed to be rescued from the vicious ciel one interest rates and thus the need for an institution emerged whic with lay down equitable norms and conditions for all kinds of curr” Banks emerged as a mechanism to avoid settling of financial pail. the hands of a few individuals and controlling the demand and Supply « credit and money. 3. EMERGENCE OF BANKS The concept of banks emerged with the entry of British in the T7th century. The agency houses of Britishers in Bombay and Caleutts began banking in order to facilitate their main business of trade, They extended loans, issued paper money and established joint stock banks, namely Hindustan Bank in the year 1770.4 However, real emergence of banks happened in the 18th century in India. The first ever bank estab. lished was the General Bank of India in the year 1786. Subsequent to this three banks were established in the Presidency towns by the East India Bank, namely, Bank of Calcutta in 1809, Bank of Bombay in 1840 and Bank of Madras in 1843 and they were referred to as the Presidency banks. The first bank completely run by Indians was the Allahabad Bat which was established in the year 186s by Sir Sorabji Pochkhanawala After that, foundation of Punjab National Bank was laid in the year 1894 which was followed by the establishment of Bank of India, Bank of Baroda, Central Bank of India, Bank of Mysore and Indian Bank till 1913. All the three Presidency banks, in the year 1921 was amalgamated o comprise the Imperial Bank of India, The year 1935 was milestone in the history of banking sector as the Reserve Bank of India (RBI) was estab- lished to serve the functions of a Central supervisory bank and numerous other functions described in the later part of this chapter.5 +, As quoted by the Indian Central Banking Enquiry Committee (1932), Chap. Hh 4. Reserve Bank of India (2006), : 6. 5. DrS.R. Myneni, Law of Banking (1st Edn., Asia Law House, Hyderabad 20°1 4, FUNCTIONS OF BANK het ofines banking as ing, Regulation Act, 1949 defin 8 gcgponiane ROO ; inves The DA gerpretatione + accepting, for the purpose of lending, or invest- g-Hianking MEAN TA fgom the public repayable on demand or other- of deposit oe by cheque, daft, order or otherwise, Pndeawable b) and outlines the basic functions of the banks which are, loans. The functions of the bank can jon itsel : aed and extending -cified into two type , primary and secondary functions. 4 Primary functions 4 . 1 d with the idea to provide a secure mode of depositing vailing loans. Tl he primary functions of the banks are pro- Accepting deposits: The most important function of the banks is a 1 deposits from customers. The customers get certain inter- 10 3er deposits kept with the bank, hence it is profitable for the customers to keep their deposits with the bank. Several types of deposits are available with the banks to cater with the needs of different sections of the society. The main kinds of deposits are, savings deposits, current account deposits and fixed deposits. Current account deposits are repayable on demand, these are gen- erally maintained by the businessman who need to transact every now and then and such deposits allow the customer to withdraw as per his will. However, banks are not paid on these accounts, on the contrary service charges are levied for such deposits. Fixed deposits are also known as time deposits, these deposits are kept with the bank for a fixed amount of time and it cannot be withdrawn before the maturity of this fixed period, High rates of interest are pro- Vided for these deposits as these are the main source for the banks oe oe The last important deposit is savings deposits, it fee ee of current deposits and fixed ‘deposits. The ‘i fearriction if ae nelly to withdraw such deposits but there is fisquent vee eae er of withdrawals in order to discourage deposits ee | leposits, The rate of interest offered on these Advancing low i a that on fixed deposits, and extend these ae feeepettaiarecal from the customers economy and ieee ene i needful people and sectors of the ‘¥pes of loans and ait ged on such loans, There are different nces extended by the banks, mainly, cash 6S. 56 3, Act, 1949. 516) Banki anking Regulation ct, 1949. ‘§) srarute Pat6 BANKING LAW l and short term loans. Cash cred inst current assets like shaye’t® eit limit is mentioned arid the ame bon credit, demand loan’ on to the borrow re. Ac gi L ate borrower's account. ‘The pris can Withee amount within this prescribed shane hi on eens charged” i) on the amount withdrawn, Demand loans is credited 4a the rower’s account and interest is charged on the entite aMoune " h an be recalled by the bank at any time, Shor loan however, | t if loans, are personal loans which are extended against Some oe'tt eral security and the loan is credited to the borrower's Aceon als ; the entire sum is chargeable, i In addition to the above functions the banks also functions entity for credit creation, it also ee clearance of cheq remittance of funds and financing of.foreign trade, Wes 4.2 Secondary functions Along with the diverse variety of primary functions with the chap ing needs, the banks have started providing several other facilities as yeh which are collectively known as the secondary functions of the bank, 1. Overdraft facility: The customers having a current account are allowed to withdraw more than the available deposits up to a, agreed limit. Such facilities are generally provided to reliable cus. tomers for short period and interest is charged on the amount which is withdrawn by the customer, 2. Discounting of bills of exchange: Under this facility, the holder of: bill of exchange can get the same discounted with the bank before its maturity and after deducting the commission, the balance is paid to the customer, When the bill matures, bank receives the Payment from the party which accepted the bill. 3. General utility functions: The banks also provide certain addi tional facilities than receiving and handling deposits, locker faci ities are provided to the customers, letter of credit is given to the customers to certify their creditworthiness, banks publish statistis related to trade and commerce, ete, i 4. Agency functions: The banks also act as agents and provide vat ous facilities like, purchase and sale of foreign exchange, putthss and sale of securities, trustee, transfer of funds, ete. 5. WORLD WAR I AND ITS IMPACT ON BANKING IN INDIA 2 afer The World War was a difficult time for the entire globe but oe math and impact on the Indian banking industry was worse. TheBANKING LAW IN INDIA 7 ag hit by inflation due to the huge amount of war financing y was IM us on the war led to the deterioration of the other entre dian economy. Banking system tragically failed and ors of tHe Mh scarce liquidity and assets. Several banks extended panks WERE Hf unsecured loans. Directors and the management of the huge AMON Fegan to utilise this opportunity to the fullest and they comaty 3 sadlulent practices of availing cheap loans and advances indulged it rks, they mislead the depositors and due to the absence of ir barons the entire banking system was hit by il effects of cj the Breed of the “Daves” or the wealthy people: In order with the unorganised banking structure, the Central Banking Committee was set up in the year 1929 and it observed that a Enquiry bank needs to be established and as a result RBI was Central supervisory” tctablished in 1935+ 6. MAJOR STEPS TAKEN BY THE GOVERNMENT AFTER INDEPENDENCE The Indian Government began its active role in the development of the banking sector of the economy and hence the Industrial Policy Resolution was adopted by the government in the year 1948 which envisaged a mixed economy. Some of the most important measures taken by the gov- trament are provided hereunder: 1. In order to provide an effective control over the banking sector RBI, which had majorly private shareholders, was nationalised in the year 1949. In furtherance of this idea of effective control and structuralisation of banking functions, the Banking Regulation Act was enacted in the same year, ie. 1949. Imperial Bank of India formed in 1921 by the amalgamation of the three Presidency banks was nationalised in the year 1955 and was renamed as State Bank of India (SBI). It was supposed to act as the principal agent of RBI and more emphasis was provided to provid- ing banking facilities to rural and developing regions.* 4. SBI subsidiaries were nationalised in 1959, with an aim to provide banking facilities to several sectors of the economy and various classes of the society.? py 7. CLASSIFICATION OF BANKS I ier ti pian ae Beatle times the structure of banks was very simplified and the ser- €s provided by them were mere acceptance of deposits and advancing 7. The Indis 8.Drs.r. 9. Tannan’ ian Central Banking Enquiry Committee (1931). Myneni, Law of Banking (rst Edn., Asia Law House, Hyderabad 2006). 's Banking Law and Practice in India (2xst Edn., Wadhwa Nagpur) 125.8 BANKING LAW logy i ew the structure of the vever, as the banking sector grew, the s © ban roan Meitcane more and more complex, a variety of specialing, Win ture beca Q : ialised b, merged and at present there are banks which deal Only with mapas secon there are banks which provide al forms of banking, also fl as universal banking and there are nion profit banking institutions ox wo pextbank) at Scheduled Non-scheduled banks banks ‘ton Co-operative Tanks 7 banks Publicsector Private sector | banks (26) banks (21) [ SBland associate 4) asia } 1414) ther nationalised {banks (18) (Other public sector] bank (1) ing as well. Regional rural banks (2) The banks can be broadly divided into scheduled and non-scheduled banks. Scheduled banks are banks which fall under the category men- tioned in the Second Schedule of the RBI Act, 1934, vide Section 42(1)” and are known as scheduled commercial banks. These banks must nec- essarily have paid capital and collected funds of minimum z5,00,000 and any activity of the bank must not adversely affect the interests of the depositors. All other banks which do not fall under the aforementioned schedule are known as non scheduled banks, Scheduled banks can be further classified as commercial and cooperative banks. The commercial banks can further be divided into the following sub-categories: 1. Public sector banks: The banks in which the majority shares ate held by the Government of India are referred to as public sector banks, like SBI, 10. 42, Cash reserves of scheduled banks to be kept with the Bank,—(x) Every bank iRelded in the Second Schedule shall maintain with the Bank am average dail balance the amount of which shall not be less than euch per cent of the rota of the demand and time liabilities in India of such bank as shown in the return referred o scunaieetion (2), a8 the Bank may from time to time, having regard to the needs 0 “scaring the monetary stability in the country, notify in the Gacovt of IndiBANKING LAW IN INDIA 2 TF gor banks: Banks in which private individuals or groups _ private sector reeare the majority stakeholders are called private oF ay ks, like ICICI bank. ey Danks having their registered head office located ee n banks, like Standard Chartered Bank. outside ural banks: ‘These are specialised banks which func: Regie) ge rural areas, established under the Regional Rural tion net, 1976, 50 as to promote deposits in rural areas and then ae proper investments out of such deposits so that the rural areas could get the benefit out of the same. These banks have been established in various States, viz. Karnataka Vikas Grameena Bank, Narmada Malwa Gramin Bank, Pragathi Grameen Bank, en Bank, Sri Venkateshwara Grameen Bank, etc. ic was the first ever regional rural bank established in banks: s India are forcigi Saptagiri Grame Prathama Ban India. Scheduled banks also cover cooperative banks, which is a coopera- tive society registered or which is deemed to be registered under any State or Central Act. Generally the relevant State laws are applicable ‘on such banks, however, if they function in more than one State then the Central Cooperative Societies Act"! is applicable on the functioning of these banks. These banks are established to function for the agricul- oral sector, retail trade, small and medium industries and self employed businessmen. 71. Specialised financial institutions (SFIs) These institutions are established by the government for providing finan- cial assistance to medium and long term industry or agriculture. These institutions provide financial assistance and motivation to the basic ral : lari ao assistance to industries and agricultural sectors and a ue ferred to as development banks or development financial ee ere a several specialised banks and institutions estab- ee sis, they can be broadly classified into All India India Development and 8 re Ingrirucions, Some of the major All pine of vacinne eet ich are playing a pivotal role in the devel- rs are as follows: a ‘i ne Development Bank (IDBI): This subsidiary of RBI was eee 7 he year 1964, but in 1976 its ownership was trans- fe aaa overnment of India. The major functions of the bank saci ng, promoting and developing of industries, technical inistrative assistance to such industries for expansion and Ig, 912, + Cent i tral Cooperative Societies Act, 1912.2 len, ‘Ap, TO BANKING LAW : management, . and undertaking mar Justries. I, ia (S Her Dents Dement Rank of i (IDDM, Th Sate by the Act"? of Parliame was established in the Me Hs nabinett of micro, sma" an aim to support and ce (MSME) ait ang Ine eo anctal Corporation of India (IPCI: THe COtporatng ‘ asta in the year 1948" by the government to Provide mediuin and long term eredit fo eligible itclustrial houses and ing tries to which banking facilities are not generally available, National Bank for Agricultural and Rural Developrrreny (NABARD): It is the apex bank established in the year 1982! 5, the recommendations of Shivaraman Committee of 198r for agri. cultural and rural development. It majorly does three functions for priority sector, credit function, developmental function and regy. rory functions. Ta Investment Bank of India Ltd. (IIBI): The bank was previously known as the Industrial Reconstruction Corporation of India Ltd., which was established in the year 1971'S for the pur- pose of rehabilitating sick industrial companies and it was recon- stituted in the year 1984 by the Industrial Reconstruction Bank of India Act, 1984. With the vision of converting the banks into a full grown institution it was incorporated in the year 1997 under the Companies Act, 1956 as IIBI. 6. Export Import Bank of India (EXIM Bank): It is the apex institu- ordinating the activities of finatclal a tition, coo ™ + search for S ‘ket and investment resea: the develon: » cd ing of exports and imports of goods and services, SFls are also Spread at State level and some of the State level institutions are as follows; YeloPment Bank of India Act, 1989, al Corporation of India Act, 1948. Aericultural and Rural Develooment Act, 1981. ished by Fesolution passed by Parlia freee ment of India under $, 617, CompaniesRANKING LAW IN INDIA Tr oT] ang development to backward and less frequent parts the providing Tey extend guarantees and financial leases. 4 institution Institutions like, Union Trust of India He ife Insurance Corporation of India (LIC)” and General ca se Company (GIC)" provide insurance and trust related asura jetanice to people sptead across the nation. assistance county: Jnvestinen linstitutions Jpanking financi various kind of banking institutions in India as discussed in aexection, in addition to this, there are non banking financial ‘a well. These institutions provide an array of financial ser- sajor intermediaries are development finance institu- financial companies, primary dealers, etc. It provides Jc loans to various sectors of the economy. 22 Non ‘There are the previo’ institutions aS some of its ™ gs. BANK NATIONALISATION tion of several positive steps by the government, as men- ious section were not able to mitigate the ill effects of These banks concentrated mostly on industrial houses mers.!? It was reported that the commercial banks ane directing their advances to large and medium scale industries and Nfuent and influential customers and the priority sectors like agriculture ig email scale industries were completely neglected.”” On x9 July 1969, v major banks, viz. the Central Bank of India Ltd., the Bank of India Lid., the Punjab National Bank Ltd., the Bank of Baroda Ltd., the United Commercial Bank Ltd., the Canara Bank Ltd., the United Bank of India Ind., the Dena Bank Ltd., the Syndicate Bank Ltd., the Union Bank of India Ltd., the Allahabad Bank Ltd., the Indian Bank Ltd., the Bank of Maharashtra Ltd. and the Indian Overseas Bank Ltd. were nationalised and taken over. The Government of India issued an ordinance, Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969 to nationalise 14 commercial banks. The implementa tioned in the pre privatised banks. Bad influential custo} 9. BANK NATIONALISATION CASE The nationalisation of banks although solved some of the problems of the banking sector and monopolies of commercial banks, ignorance of 16. Union Trust of India Act, 1963. 1g Life Insurance Corporation of India Act, 1912. i. pieorporated under Companies Act, 1956, Prakash Tandon, Banking Century: A Short History of Banking in Indi : Pioneer, Punjab National Bank (Viking, 1989), cas re eed oad Han’s Banking Law and Practice in India (21st Edn,, Wadhwa Nagpur) 125.12 BANKING LAW ley AY Toso : ce change brought by the gover ~ priority Wierik bank ational tion was chai Can, Dileep with rahe lanidmatk fudghiente OF the Supreme Court, Roc conte ‘ Union of India”, The petitioner R.C, Cooper HUEG older ° i ¥ cxsernor vita, C +s Union Ba, ate Jie Tera ed holding the pose of 1," Ing: Pep a Caveat Bank Of India, Banking COMAes (Acquisition anger, of nde ‘akings) Ordinance, 1969, was halletged Several} rout ach} hts of the petitioner were affected as the director Of th, eat dt d banks were to vacate their Position as Per the Aforema® tioned ordinance, rights of the banks were determined withoue Provigi the banks with a chance to provide their side of case, the method a computing compensation which was provided to these commeren bait Yo! which were nationalised was insufficient,?* etc. The Hon'ble Supreme oa Court held the ordinance was void and the relevant Paragraphs gc e under: ~~ When, after acquiring the assets, undertaking, organisation, the names of the named Banks they are prohibited from carry business, whereas, other banks, Indian as well as foreign, carry on banking business, a flagrantly hostile discrimina There is no explanation why the named Banks are specially subjected to this disability. Section 15(2) of the Act—wh implication prohibited the named Banks from carrying on F is, therefore, liable to be struck down, The Act violated the guarantee of compensation u + BOO will ang G On banking ate Permitted ro tion is practised, Selected for being ich by the clearess banking business undertaking of the named Banks an £0 declared could nor be regarded as compensation, Most of the problems in the banking sector remained unsolved and hence in order to tackle with this issue and study the problems Prevalent in the Indian financial system, Narasimham Committee was constituted for the first time in the year 1991, It was believed that the bank nationalisation would lead to the emergence of a new era in the banking sector, which would be directed towards the national policy of the country, extending benefits to all sectors and specially the priority sector,23 9.1 Narasimham Committee I Committee on the financial system or the Narasimham Committee was a nine member committee constituted by the Government of India on 21. (1970) x SCC 248: AIR 1970 SC 564, 2. Hans Raj, Protection of Foreign Investment, Property and Nationaisation in India (Deep and Deep 1985) 137, 23. Tannan’s Banking Law and Practice in India (21st Edn., Wadhwa Nagpur) 125.1] BANKING LAW IN INDIA 13 14 Augus ' ae an the chairmanship of M. Narasimham.* The before the Patliat ted its report in December rg9t which was presented fore the Parliament for consideration.2s ‘The major recommendations given by RBI were as follows: : 1% Ee eats Statutory Liquidity Ratio (SLR) ‘i ed and maintained from 38.5 per cent to 25 per cent for a period of five years, so that the iquidit fund 1 D hat the banks have more liquidity and funds to advance ra the needful borrowers. i Sar ‘too high and se which he to be maintained with RBI wwas too high and the committee recommended that CRR rates . : 5 per cent to a range of 3 to 5 per cent, so as to facilitate increased financing and advancing of loans. 3. Directed credit programmes, i.e. credit allocation under govern- ment direction, not by commercial judgement of banks under a free market competitive system, should be phased out. Also the priority sector should be redefined. 4. The committee pointed out the existing structure of interest rates was highly rigid and complex and recommended that the rates are to be deregulated and brought at par with the market rates gradually over a period of time and concessional rates to be phased out. 5. The banking structure should be reorganised comprising of three to four banks as international bank, some as national banks with branches spread throughout the country, providing universal bank- ing and rural banks to be established which would deal only with the rural areas and its financial needs. 6. Government was directed to stop further nationalisation of banks and that there shall be no bar on to start a new bank in private sector and liberalisation of foreign banks entering the country. Banks were under the dual control of RBI and the banking division of the Ministry of Finance of the government. It recommended that RBI must be the sole regulatory body in banking sector in India. 8. Asset Reconstruction Fund (ARF) to be established which: would take control of the non performing assets of the banks and finan- cial institutes, ensuring smooth and effective functioning of ARF. The assets of the banks to be categorised into four categories, namely, loss assets, doubtful assets, sub standard assets and stand- ard assets. ro, The banks having strong financia shall be permitted to raise capital | backing and good reputation I through capital market from 24, §.D. Naik, “Financial reforms and development", Business Line, The Hindu (26-4-2002). 25. T.R. Jain and O.P. Khanna, Macroeconomics (FK Publications) 345-14 BANKING LAW feria, the public and the government should give loans to the rest Of the banks to satisfy their capital requirements. ¢ to be autonomous so that they can reform 11, The public sector wer ¢ auton s so that they can their work culture and banking technology upgradation wil] hence be easy. 9,2. Narasimham Committee IT The government implemented the recommendations suggested by the Narasimham Committee I, however, it was observed that the recommen. dations were not enough to tackle various: other issues prevalent in the banking sector, Hence, yet another committee under the chairmanship of Mr Narasimham was sct-up in the year 1998 known as the Banking Sector Committee or the Narasimham Committee II. It was appointed to review the progress of banking sector reforms and to suggest and rec- ommend further steps to be taken for strengthening the banking sector in India, The committee submitted its report in April 1998 and the below mentioned changes were recommended: x. The committee recommended the strengthening of the banking sector by merger of the weaker and smaller bank into the strong banks as the strength of the banking sector was measured by its current account convertibility by managing its exchange rate and handling its domestic liquidity. 2. The government was directed to raise the capital adequacy ratio to 9 per cent to improve its absorption capacity and make the banking sector much stronger. 3. With the alarming issue of non performing assets on the go, the committee recommended narrow banking by the smaller and weak banks, i.e. these banks were to extend funds only for short term and in risk free assets. The idea of zero non performing asset was Promoted, ; 4- The committee proposed greater autonomy for the public sector banks and government was to reduce its equity.in the nationalised banks to 33 per cent so that the banks can function with equal pro- fessionalism as their international counterparts. It was also recom- mended that RBI should forego its seats in the board of directors of these nationalised banks, 5. There was a need to revisit and amend the existing banking laws, such as, the Banking Regulation Act, Bank Nationalisation Act, etc, and streamline them with the present policy and changes. 6. The committee also recommended technology upgradation, review- ing of banking recruitment, faster computerisation, depoliticising of banks, staff training, etc.q] 9.3 The BANKING LAW IN INDIA 15 Implementation of the recommendations recommendations of both the committees were comprehensively implemented and the banking system was reformed with the required changes. Some of the major changes brought by these committees were as follows: I Io. 11, 12, SLR was reduced from the high rates of 38.4 per cent to 25 per cent so as to facilitate better advancing of loafis and credit facilities as recommended by the first Narasimham Committee. The incremental CRR at the rate of 1o per cent was abolished, RBI gradually began to lower CRR from 15 per cent to 5.5 per cent till 2001, so as to release the funds lying with RBI so that can be used for sectors which have not been availing adequate credit facility. The interest rates were also relaxed by banks gradually. RBI raised the capital adequacy ratio by 1 per cent and targeted to bring it to 9 per cent by the end of 2001. A new legislation, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act was introduced in 2002 in view of the recommendation of a body for asset recon- struction of non performing assets, The mid term review of Monetary and Credit Policy of RBI brought in another set of reform in line with the recommendations of the Narasimham Committee in 1999. Prudential norms were introduced by RBI to reform the banking system, under this the assets were classified, provisioning of bad debts, etc. was done so as to ensure the real financial position of a bank is reflected in its books of accounts. The Banking Companies (Acquisition and Transfer of Undertakings) Act was amended to facilitate capital generation by bank though public, . Scheduled commercial banks were permitted to open new branches after adhering to the prudential and capital adequacy norms. The government established local area banks which would chan- nelise rural deposits and invest them in the local areas. Recovery of Debts Duc to Banks and Financial Institutions Act was passed in the year 1993 to facilitate speedy recovery of debts and under this six special recovery tribunals were set up at Kolkata, New Delhi, Jaipur, Ahmedabad, Bengaluru and Chennai, with an appellate tribunal situated at Mumbai. Some recommendations like reduction of equity in the public sector banks, removal of RBI from the Board of Directors of Scheduled Banks, etc. were not implemented,os 16 BANKING LAW len, ‘A, 9.4 Shortcoming of the recommendations The committee reports were a great boon for the economic Prosper: India and also led to the growth of the economic status of thee to a great extent, however, there were some defects and pitfalls recommendations of the Narasimham Committee Reports,26 the 1. The concept of liberalisation and regulation of the banking s, cannot go hand in Rand, in spite of this fact the committee fae mended both measntes to strengthen the Indian banking Liberalisation of financial market tackles the problem of ffage™ loss eauses de to the direct control” On the other hand the! for stronger regulation is born from the perception that goods financial markets are different and liberalisation can lead tian! vior outcomes.** Thus, both the idea are contradictory but the mec point remains that liberalisation or removing direct control may fe important for better efficiency in various sectors but this must be accompanied by a stronger regulation targeting prudential Norms, supervision and transparency. 7 2. The reduction of CRR as recommended by the committee also. seems to a difficult task as the high level of fiscal deficit puts con straint on the same, The deficit cannot be met alone by the marker and RBI needs to support the same and for this purpose adequate CRR must be available with RBI. 3. Most of the general international perception in banking are against directed credit.” As the advances given to the priority sector is generally at low interest rates and if priority sector does not involve higher costs to the banks the same should be reflected in the inter- est rates charged as banks a profit making commercial institutions, rather a better viable step could be to increase the list of the sectors included in the priority list (which included very less sectors), this would increase the range of economically viable activities for the Y of “inte 26. Montek $. Ahluwalia, “Reforming fina Commission of India. 27. Ibid. 28. Joseph E. Stiglitz and Andrew Weiss, “Credit Rationing in Markets with Imperfect Information”, The American Economie Review, Vol. 71, No. 3 (Jun 1981); Joseph E, Stiglitz, The Role of the State in Financial Markets (1994); Ajit Singh, "Financial Liberalisation, Stock Markets and Economie Development”, Econontic Journal, Vol. 107, No. 442 (May 1997) . 4 29, Stiglitz (2994) has argued that directed credit may actualy promote economic eff- ciency if itis used to push credit into areas where there are technological spin-o! and other externalities. However, this argument is based on the usual argument yvernment intervention is helpful whenever there is a market failure. The by Fry (1997) is that market failure does not mean gover ial sector of India: An overview”, Planning that the govern problem, as pointed out ment success.ae PON ] BANKING LAW IN INDIA 17 deployment of priorit prove th #0 " fi ‘i cali Seaton ¥ Sector credit and would in turn improve the banks also comes with a ri ol in anks a h a risk as it is handli i as it is handling of the assets in the hands of a few people, However, this must always be accompanied by improved regulation, supervision as the involvement of govert= ment in banking involves a lot of bureaucratisation 10. RESERVE BANK OF INDIA For an efficient banking and financial services in a country there is a need of centralised banking structure and in this respect there is a need of a Central bank of the country. Central banks are not very old inno- vation as it was the early 2oth century when most of the Central banke were established. In India this role is being played by RBI. It acts as an apex financial institution of the India’s monetary system. It was the recommendations of the Hilton Young Commission that Jed to the establishment of RBI. RBI commenced its operation on 1 April 1935 because of RBI Act, 1934 which provides the statutory basis of the functioning of the bank. 11. EMERGENCE OF RBI Before looking into the functions of RBI let us just have a brief under- standing as to how the idea of the Central bank came into light. The idea of the Central bank came up very early and there has been a long time effort to establish the Central bank in India. As we know that way ear- lier India was divided into provinces and in 1773 the Governor-General Warren Hastings suggested that there should be a Central bank in the country and thus recommended that “The General Bank of Bengal and Bihar” should be established. Later on in 1913 Prof, J.M. Keynes came up with a comprehensive plan for a centralised banking in India, He analysed the Report of the Chamberlain Commission which also came up with the idea of founding a Central bank in the country. Earlier, there were Presidency Banks in the Presidencies of Bengal, Madras and Bombay, These banks played a vital role in these Presidencies but in the year 1921 these banks were amalgamated into the Imperial Bank of India which after that performed some functions as a Central Bank in India until RBI came into existence, This bank also served as a bank to the government and up to some part, a banker's bank too, on Banking Reforms referred to in S, 3 of the paper has suggested 30. The Commit: rred to in ties related to food processing, dairying and poultry, including acti18 BANKING Law feng, Then j : indian ¢ tae Hilton-Young, Commission Royal Commins . Ney and Finance) suggested RBI as a Central Ban fort n January 1927, a bill was introduced in the Legislative Assembly j, 4! oats but because of the constitutional grounds the it was dron hen in 1931 strong recommendation was made by U Indian Cans Banking Enquiry Committee for the establishmen a fo thi «Il was introduced in the Indian Le, Rank The ea wi a a ccame an Act known 33 RBI Act, x94 statutory basis for the functionin, 5 hen commenced from April, 1939 Assembly, it was then passed to the bill and then the bill be earlier stated that this Act gave the RBI and the operation of RBI was t 11.1 From private ownership to State ownership : blished, it was a shareholder’ Inthe beginnings when Ting foreign Central banks were wworkiate Those day ioe model and thus RBI was also constituted base e the shareholding model an: : i Upon this model only. The private shareholding was pac in the bank and there was a share qualification to the Central Government but that was minimum, At that time the Central Government faced difficulties ig implementing its macroeconomic policies and thus it felt the need of the close integration of its macroeconomic policies and the monetary and credit policies of the bank and thus there was demand for the govern- ment ownership of the bank. After Independence the government was faced with many development plans in’ that regard government had to take some concrete steps to implement its’ full-fledged macroeconomic policies to give effect to the development plans and thus government ) came up with the Reserve Bank (Transfer to Public Ownership) Act, or 1948 which was passed and after that private shareholding was trans- ferred to the Government in lieu of adequate compensation. This Act nationalised RBI and on 1 January 1949, RBI started functioning asa State-owned Central banking institution, 12, OBJECTIVES Ree tte fandamental objectives of RBI, we can refer the Preamble to the RBI Act, 1934, To regulate the issue of Bank notes and the keeping of reserves with a view ‘0 securing monetary stability in India and generally to operate the cute) and credit system of the country to its advantage. The condition before the constitution of RBI was that, there was dt! control of the currency and credit by Central Government and i G Imperial Bank of India and on this account this inherent weakness oft ie Indian financial system was totally inadequate. It was the Hilton-Yous1] BANKING LAW IN INDIA 19 Commission which suggested that this problem should be solved by set- ting up a Central bank which would be called RBL and this bank would be regulating the various financial policies of the government and this bank would also develop the banking facilities in the country. ‘That was the first and foremost objective behind establishing RBI Being established as a Central Bank RBI had the objective to perform purely the Central banking functions in the country's money market and to promote the growth of the economy, These fundamental functions are discussed later. For maintaining financial stability and credit and to be successful in its operation RBI had an object to remain free from any kind of political influence. Apart from the Central banking functions RBI had an objective to assist the government in implementing the plans of the development of the Indian economy expeditiously, RBI also started the promotional and developmental functions in order to give effect to the Five Year Plans of the government. These functions are rarely performed by any of the Central banks but RBI went beyond the traditional functions of the Central bank. 13. FUNCTIONS PERFORMED BY RBI ‘As per the RBI Act, 1934 there are three types of functions which are being performed by the RBI. They are x. banking functions 2. supervisory functions and 3. promotional functions 13.1 Banking functions 1. Bank of issue: The sole right to issue banknotes of all denomina- tions is with RBI. This has been provided under Section 22, RBI Act. RBI as agent of the government has undertaken the distribu- tion of one rupee notes and coins and small coins all over the coun- try. This thing is being entrusted to a separate Issue Department. This department has to maintain minimum asset to issue notes, the assets being in the form of gold reserve and this system is known as Minimum Reserve System. 2. Banker to government: RBI acts as a government banker, agent and advisor. Except that of Jammu and Kashmir, RBI is an agent of the Central Government and of all the State Governments in India, The transactions of the government business are being done by RBI, It keeps the deposits of the government without any interest, makes and receives payments on behalf of the government. It alsoos 20 BANKING Law fettay, ‘ ic debt. Mo Provides loans to the government to manaKe publi PreOver acts as an advi te an advisor to the government, { by banks i 3. Controller of credit: The volume © credit orn nit policy a can be inflocneed by RBI, RDI thre eo 4g provides the trols the credit, The Banking REBUT" coq ask the banks te RBl can selectively contro! the cree dioey oF t0 ANY Person, fy ity til he so to lend to any particulat section eed banks. Cet ks in order to do bus. kash reserve also holds the cash reserve OF NEY he hanks in order & h investigation of any mn RBI has power to issue horous! ess in India and thus RBI does @ HY oe ranting the len ness in India ane ty its soundness °© sae se, bank with regard tO 1 fc of any bank if it is not function. ae cents Pe Moreover it ean cancel th een ny ban ditions stipulated by ee “Act and the RBI Act provide ing in a proper WaY 0! ation Banking Rep’ he banks with respect th the R t ae oaneall for the information from tl thei ‘and liabilities. : to hele Srenkand lender of thelastreso%tt ‘TheBanking Companies 4 Bankers’ bank and re every Scheduled bank has to maintain the Act, 1949 P’ tain percentage of its i i t to the cert cr oe cash balance equivalent e certal Geman liabil bilities. This minimum percentage of ities and time lial Sch requirement is decided by RBI. RBI provides financial assistance £0 f s and Sta co-operative banks in the form of rediscounting of eligible bills and loans and advances against approved securities. It is called the banker of last resort because the Scheduled banks can expect RBI to provide them loans in their hour of need. 5. Custodian of foreign reserve: The responsibility to maintain the official rate of exchange in the country has been entrusted with RBI. It has the centralised Foreign Exchange Reserve (FOREX) in this regard. When India became a member of International Monetary Fund (IMF), RBI has the responsibility of maintaining fixed exchange rates with all other member countries of IMF. RBI achieves this aim through appropriate monetary fiscal and trade policies and exchange control, RBI has to act as a custodian of the ¢ y's reserve of the international currencies besides maintain- ing the foreign exchange rate, 0 Scheduled banks and State 13.2 Supervisory functions RBI al: i eal sce anaes non eadcional Central banking functions. It ody for : sound banking system Math eee pens ia the county te progr S stated i 1 earlier also that the provisions of the Banking Regulatiot Act, 1949 and the RBI Act, 1934 have given RBI a wide powers 0!1] BANKING LAW IN INDIA 21 gupervision and control over commercial and cooperative banks, relat: ing to licensing and establishments, branch expansion, liquidity of their iesets, management and methods’ of working, amalgamation, reco struction and liquidation, Pace RBI is empowered to do periodical inspection of the banks and it can also call for other information regarding existing assets and liabilities of the bank. New responsibilities have been imposed upon RBI after the nationalisation of 14 major Indian Scheduled banks in July 1969 for directing the banks in order to achieve the objective behind the nationali- ation which was the growth of banking which will eventually lead to the development of the economy. In the landmark judgment of the Supreme Court in Joseph Kuruvilla Vellukunnel v. RBE', the Hon'ble court observed that with before the introduction of the Banking Regulation ‘Act, RBI had very limited power of inspection, however, with the inclu- Sion of periodical inspection with complete liberty to RBI to take action, the banking regulation has become effective and easy. ‘The supervisory functions of RBI have helped a great deal in improv- ing the standard of banking in India to develop on sound lines and to improve the methods of their operation. 13.3 Promotional functions ‘After independence there was an urgency of the economic growth and RBI took charge of the variety of functions to promote the desired devel- opment. During that time these functions were regarded outside the pur- view of the Central bank but RBI went ahead of the normal scope of Central banking functions. It now performs a variety of developmental and promotional functions. ‘After independence it was very well felt that sound banking system in India will benefit the economic development and in this regard RBI took various steps like promoted banking habits, promoted new specialised financing agencies, extended banking facilities to semi-urban and rural areas, With regard to financing agencies RBI has helped in the setting up of the Agricultural Refinance Corporation of India, the Industrial Reconstruction Corporation of India in 1972, Industrial Finance Corporation of India and the State Financial Corporations, Deposit Insurance Corporation, the Unit Trust of India, etc. During the initial development programmes, the agriculture sector was given a priority and in this regard the Agricultural Refinance and Development Corporation was established by RBI so that the farmers could get the loans easily. Later on the industrial finance was also pro- moted and few of the above mentioned institutions were established in this regard. 31. AIR 1062 SC 1371: 1962 Supp (3) SCR 632.ow 22 BANKING LAW len, moneylenders ftom the vip in ii he , To encourage saving, to eliminate tive neealie movement, to ily P ther promotional fun the bank has developed the co-oPrrn moneylenders from the villages Trt re he need af the eon which are being performed by ‘om 1 OPERATION OF RBI 14, TOOLS O} Fa i ji ols of mo img its operation by usinB ae all mint ae, Conta) RBI performs its ree icy, Monetary policy 18 4 FeBMiatory Poli to achieve its mona netary authority of a country contro . ¢ c kor t vl he Central bank or ca availability of ban! y of moneys ei sr mt My economic management IY" RBI develops credit restriction but Through the monetary PO ey policy of RBI, it has also the gt is not the sole purpose odie requirements are met and at the same tis’ an that desi for unproductive and speculative purposes, ad Some of the important monetary control methods are: 1. Bank rate policy: Bank rate isthe rate at which the Central ban, heads money to the commercial banks for their liquidity require ments. Bank rate is also called discount rate. In other words bank rate is the rate at which the Central bank rediscounts eligible papers (like approved securities, bills of exchange, commeria papers, etc.) held by commercial banks. Bank rate is responsible to the other market rates of interest and thus it helps in adjusting other market rates. To control inflation and recession bank rates have been changed several times by RBI. 2. Open market operations: In order to expand or contract the amount of money in the banking system RBI buys or sells government sect- rities in the market and this operation works very efficiently. When a security is purchased it leads to the injection of money into the banking system while sale of securities do the opposite. ‘To conttl the unwanted liquidity in the market and in a way inflation this operation is very effective and has been used by RBI from time 0 time in way inflation this operation is very effective and has beet bn ee a time to time, During last two decades RBI he he lege shi ie Si operations, These involve the purchase 0! 3. CRRe Oise ad of another or, vice versa. = eh RBI Act, ¢ e effective instruments of credit control is = : pairs ete Provides that every commercial bank has to ke? inimum cash reserves with RBI, RBI is empower’ 0 “MC, Vaish, 2003), Macroeconomic Theory (Vikas Publishing House Pvt Ltt k credit and cost of money, that s regarded as an important toola) c NoiST] BANKING LAW IN INDIA 23 vary CRR between 3 per cent and 1 the amount of cash for lending with the bank and eventually it will lead to the less quantum of the circulation of money and a low CRR increases the amount of cash with bank for lending. From 1991 to 2011 RBI has changed CRR numerous times because of the fluctuations in the economy during this period, 4. SLR: Under SLR, the government has imposed an obligation on the banks to maintain a certain ratio to its total deposits with RBI in the form of liquid assets like cash, gold and other securities, During gos SLR used to be very high. It was on the recommendation of the Narasimham Committee SLR was lowered. 5. Repo and reverse repo rates: The repo and reverse repo rates are of “much importance in determining interest rate trends. Repo means Sale and Repurchase Agreement. Repo is a swap deal involving the immediate sale of securities and simultaneous purchase of those securities at a future date, at a predetermined price. Repo rate helps commercial banks to acquire funds from RBI by selling securities and also agreeing to repurchase at a later date. 5 percent. A high CRR reduces Reverse repo rate is the rate that banks get from RBI for parking their short term excess funds with RBI. Repo and reverse repo operations are used by RBI in its liquidity adjustment facility. RBI contracts credit by increasing the repo and reverse repo rates and by decreasing them it expands credit. 15. CONCLUSION The banking sector has its presence in India since ages and with the pass- ing centuries, the sector has grown leaps and bounds. There were several milestones in the history of banking growth, like, World War, Swadeshi Movement, Independence of India, bank nationalisation, introduction of several law relating to banking and establishment of RBI. RBI since its inception has proved to be the most beneficial step taken by the parlia- mentarians and has been able to aptly and efficiently control and regulate the various commercial and non commercial banks. RBI has proved its worth and handled the economic position of India bility in worse economic times and has been able to handle the economic meltdown of 2008 as well, when the world was hit by steep fall in econ- omy whereas India was saved from such extreme adverse situation. The banking sector and RBI has provided srowth for the years to come, and maintained sta- a strong foundation for economicCHAPTER 2 Banker—Customer Relationship —Astha Singht & Chandan Malav' 1, BANKER-CUSTOMER RELATIONSHIP 1.1 “Who needs banks?” The answer to this question is that “We all need banks”. Each one of us, be it corporate or individual, who desires to engage in any form of commerce, needs banks. Banks are surely one of the greatest inventions of humankind and undoubtedly, banks do a great service to the society. 1.2 Definition of banker Due to absence of any statutory definition of the word “banker” and dearth of legal decisions for the interpretation of the same, the meaning of the term “banker” remained unexplained and ambiguous until the Indian Companies (Amendment) Act, 1936 was passed. It incorporated parts of the definition given by the Hilton Young Commission, wherein first attempt was made to define the term “banker”. The Report stated: The term Bank or Banker should be interpreted as meaning every person, firm or company using in its description or title ‘bank’ or ‘banking’ and every company accepting deposits of money subject to withdrawal by cheque, draft or order." According to Black’s Law Dictionary a bank is defined as: A quasi public institution, for the custody and loan of money, the exchange and transmission of the same by means of bills and drafts, and the issuance of its own promissory notes, payable to bearer, as currency, or for the exer- cise of one or more of these functions.* +. Third year student, BA, LLB (Hons.), Gujarat National Law University, Gandhinagar, Gujarat. ; : a $.Third year student, BCom, LLB (Hons.), Gujarat National Law University, Gandhinagar, Gujarat. - 1. EN. Hajela, Money, Banking and International Trade (8th Edn., Ane Books, New Delhi 2009) 233- 2. A. Garner Bryan, Black’s Law Dictionary (7th Edn., West Group 1999) 139.Law log, BANKING / re n Act, 1949 as per Section 5(b), however deg 26 . _ ‘The Banking Regulatic : the term “banking”: pretation. yan neneiinr a . 5. Inter ag” means the accepting, for th RH of nding a aaa eposits of money from the public, repayable on deny": ment, of de Srherwise, and withdrawable by ), Banking Regulation Act, 1949 defines “banking compan cheque, draft, order or othernat or ction §(¢ . Interpretation... | ‘ braking company” means any company which transacts th c). “banking comps ness of banking [in Indias F Explanation. —Any company which is engaged in the manufacture e y trade and which accepts deposits of money fr, ee et egiroamer moet ome or trader shall not be deemed to transact the business of banking with ie meaning of this clause. Moreover, according to Section 6, Banking Regulation Act, 1949 ae with Section 3(5) of the two nationalising Acts—Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and the Banki Companies (Acquisition and Transfer of Undertakings) Act, 1980; in adge tion to the business of banking, a banking company and the nationalis banks may engage in any one or more forms of business enumerated in i © busi. Thus it is abundantly clear that the essence of banking is the relationship which is brought into existence at the time of the deposit; that is the core of banking. It is true that the business of banking ‘covers every Possible phase or combination of deposit, custody, investment, loan, exchange, issue and transmission of money, creation and transfer of credit and other kindred activities but if the essential characteristic of banking, namely, the Power to receive deposits from the public which are repayable in the manner indi- cated in Section s(1)(b) of the Banking Companies Act is absent and merely the power of granting loans is retained and exercised that... does not make the company a banking company. Lending of money may be one phase of a banking business but it is not the main phase or the distinguishing phase.’ The Hon'ble Supreme Court in the landmark decision of Rustom Cavasjee Cooper v. Union of India‘ opined: he expression ‘Banking’ does not include other commercial activities of @ banking institution, The essential characteristic being its ability to receive money as deposits from customers and its ability to honour their cheques and without this, mere power to Brant loans would not by itself render an Institution a ‘Banking Company’, “1G: V. Registrar of Companies, 1960 SCC OnLine Cal 225: AIR itd. v. Registrar of Companies, 1960 SCC OnLine Cal 225: AIR2] BANKE F NKER~CustomEr RELATIONSHIP Any company transacting busines ny.§ Even if a company, carrying on its functions for sometime, it sti : s >it still quali Section 3, Negotiable Instruments Act fg i 3. Interpretation clause, aa Banker.—"Banker” includes tudes aj cil ee AY person acting asa banker This definition serves as a tautology and fai However the scope of “banker” under NY A that in the Banking Regulation Act, 19, ‘| Finance Corpn. the Karnataka High Cerct Thus the scope of ‘Banker under the Negotial and enhanced that it includes an: ‘i 7 includes the post office savings Banke Beokn® geen anker. In fact, it also business run with a profit motive. As a matter of fact, Beakta nw, vate tionary concept. It cannot be said that bodies which cacy cee with a profit motive, but with the incidents with which a business ct banking makes a person a Banker is not what vith the mo obtains the use by lending it at inter- est or by investing it, but by the terms upon which he obtains deposits of money from the Banking customers. If it was the intention of the legislature to restrict the meaning of Banker as per Banking Regulation Act, spe. cific provision would have been made in the Negotiable Instruments Act to define the word ‘Banker’ as any person regulated by Banking Regulation Act. On the other hand, legislature in its wisdom has enhanced the scope of the term ‘Banker’ under Negotiable Instruments Act. The scope of term ‘Banker’ under Negotiable Instruments Act is beyond the meaning included in the Banking Regulation Act, 1949. While defining the word ‘Banker’, the language employed in the section is ‘includes’ which is meant to ensure that not only Bank, Banker, or Banking institutions incorporated by the Act of Parliament or under the Banking Regulation Act, X of 1949, are within its ambit but also to embrace business of Banking, When a word is defined to ‘include’, the definition is inclusive. Therefore, the scope of word ‘Banker under Negotiable Instruments Act is vast and stretches beyond the Banking Regulation Act of 1949." 27 s of banking in Indi i a is bankin . on the business of b, eae banking did not carry “banking company”? 1881 enunciated: and any post Is to provide any clarity, » 1881 is much wider than n Upendra Kumar v. Don of India observed: 1.3 Banking services and Consumer Protection Act, 1986 The judicial precedents on the banker—customer relationship have estab- lished that the banks render service to customers. Hence, customer is 6. All India New Bank of India Employees Federation v, Union of India, AIR 2001 All 205: (2002) 1 Bank J 67. 7. Kalipada Sinha v. Mahaluxmi 8. (2009) 4 BC 507 (Kant). 9. Ibid. 10. Ibid, so9. Bank Ltd., AIR 1961 Cal 191, @ CASE PILOTaN 28 RANKING LAW i en ing within the meaning of Section a(s)ayiiy, ¢ a consumer falling wit ning Cong Protection Act, 1986, In Standard Chartered Bank Ltd. p.ny Raney the Hon'ble Supreme Court of India opined: fan Ranking is a commercial function. Tanking’ means, Acceptance, ¢ purposes of Tending ot investment of deposit of money fron thy repayable on demand ot otherwise, The intention of the 198¢ ne" is Cul tect consumers of stich services rendered by the banks. Bani toys Fo. render service/facility tomers oF even non-customers facilites/scrvices such as remittances, accepting deposits, prov; ers, facility for discounting of cheques, collection of cheques drafts, ete. ; ia"? In Vimal Chandra Grover v. Bank of India", the Supreme Sous nounced that banking is business transaction between bank and cee ers, Such customers are consumers within the meaning of Section an) (#), Consumer Protection Act, 1986. 1.4 English Law In English Law the definition of banker is not available in ANY Of the statutes. However, based on the judicial precedents various writers have tried to define the essentials of being a “banker”, Dr Herbert L. Hart in his book, Law of Banking stated that, “A banker is one who in the ordinary course of his business, honours cheques drawn upon him by persons from and for whom he receives money va Sictie accounts."!* This definition is the reiteration of the observation vr the court in a plethora of decisions. A landmark judicial decision of Foley y, Hill clarified this point wherein the essential function to be a bank or banker is that of receiving current deposits against which cheques may be drawn. In Birkbeck Permanent Benefit Building Society, re'S the court observed as follows: I opened current and deposit accounts and in every essential particular, nay nore think I may say, in every particular, it did that whicha banker deen in the course of banking business and offered its customers all such facilities as a bank commonly offers, Halsbury’s definition of banker oes as follows: An individual, partnership or corporation, whose sole predominating busi- ness is banking, that is the receipt of money on eurrent or deposit account 11. (2006) 5 SCC 727: AIR 2006 SC 2810, 12. (2000) § SCC 122: AIR 2000 $C 2181, ae 13. R. Rajesh and T, Sivagnanasithi, Banking Theory: Law and Practice (1st Edn., Tat Mceravs Hill Publishing Company Limited, New Delhi toro) srs 14, (1848) 2 HLC 28: 9 ER 1002, HL). 1S: (1912) 2 Ch 185 (CA\; Sinclar v, Broughann 1914 AC 398: 83 LJ Ch 465 (HL).2 J BANKER—CUSTOMER RELATIONSHIP 29 ¢ payment of el and Ca =nt of cheques drawn by and the collection of cheques paid in ‘According to Sit John Paget, reviewing Bi puilding Society, r2™ eid other legal decisone, baeler e one who in the ordinary course of his business, honours cheques drawa upon him by persons from and for whom he receives money on their account. No person or body corporate can be a banker who does not 1) take depdak vevpuints, 2) talce curteht wBeSunt;4) tasle'ada pay éheques, and areal? ject cheques trossed and uflerossed for its customers, Moreover, a goes sort say thar Ohetlainiinp tolbe-e banker tust acknowlddge hits co Pe one, andthe publie mube accept hii as’ such; his matn bitstrfes suse be that of banking out of which normally, he should be able to earn his [velihood.'® The essentials provided by Sir John Paget in his book Law of Banking was reiterated by Lord Denning in United Dominions Trust Ltd. v. Kirkwood". 1.5 Definition of customer “Customer” was also not given any statutory definition and hence, the meaning had to be derived from various judicial decisions. According to Sir John Paget, to constitute a customer, there must be some recognizable course or habit of dealing in the nature of regular banking business... .It is difficult to recon- cile the idea of a single transaction with that of a customer. The word surely tically, some minimum of custom antithetic to an ‘d that tradesmen differentiate between a customer predicates even gramm: isolated act. It is believe and a casual purchaser.” In Mathews v. Williams, Brown & Co- acustomer, one should have some sort o! opening an account, the initial transactior a banker-customer relationship. The same shou! nuity, custom and regularity in availing services. Tn other words Sir John Paget defined the customer based on the duration theory and the frequency of transaction. However, this was rejected and condemned by Lord Dunedin in the landmark decision of Commissioners of Taxation v. English, Scottish and Australian Bank”, wherein he said: 16. Lord Mackay, Halsbury's Law of England, Vol. 3 (4th Edn UK Lexisnexis Butterworths 2010) 31. 17. (rg12) 2 Ch 183 (CA). 18, Sir John Paget, The Law of Banking (4th Edn., Butterworth & Co., 1930) 5+ 19, (1966) » QB 431: (1966) 2 WLR 1083: (1966) 1 AILER 968 (CA). 33. 1966) = OF 43 anking Law and Practice in India, Vol. x (24th Edn. Lexisnexis Butterworths, Nagpur 2011) 623. 21. (1894) 10 TLR 386. 22. 1920 AC 683: 123 LT 34 (PC). 21, it was observed that for being f account with the bank, Also, in 'n will not serve in establishing Id be marked with conti- case PLOT © CASE PILOT30 BANKING LAW long, ¢ word ‘customer’ signifies a relationship in which duration ; r * signifies a relations ceri vord ‘customer’ sign : «the wor person whose money has been accepted by a bank o, i, the essence. A pers : ; honor cheques up to the amoure It : ank undertakes} to i stan TE aa aa ihe view of thf Ltdahige, 8 custofler st the bank ite to his eredit is, Y a eae net ofthe statute irrespective of whether his conncetion is of long at sense of the sta if NOt op standing. ' ; The same was reiterated in the decision o ine fetal High Court, a Central Bank of India Ltd. v. V. Gopinathan rs enunciated herein below: y speaking, a customer is a person who has the habit of resortin Co uetedaens to do business. So far as banking transactions ace gered he is person, whose money las been accepred on the footing the Banker will honour up to the amount standing to his credit, itcespectin of his connection being of short or long standing. Thus, we can safely conclude that there were two schools of thoughts regarding the classification as a “customer”. One which Considereg duration was of essence for building a banker-customer relationship and the other which did not. The settled position now is that frequency of transaction is not an essential feature, However, Certain checks and balances have to be there in pursuance of establishing a banker customer relationship. This means that at the juncture when banker is in receipt of cash or cheque, he should not allow drawing against it till the time: 1. The cheque is cleared. 2. The precautions taken do not bring to light any objection to the relationship and termination of the relations in case the banker finds plausible reasons for discontinuing the same. The bankers maintained with him, This was clarified in the decision of Commissioners of Taxation v. English, Scottish and Australian Bank® wherein it was clarified: The contrast is not between an habitné and a newcomer, but between a Person for whom the bank Performs a casual service, such as, for instance, cashing a cheque for a person introduced by one of their customers, and 4 Person who has an account of his own at the bon. 23. AIR 1970 Ker 74, 24. 1920 AC 683: 123 LT 34 (PC),e BANKER-cusr } KER-CUSTOMER RELATIONSHIP 31 ne relationship of a banker arid custom . TRG amt was NOt Well settled. Buty wil he pees erence fo 4 deposic accoign of Anti-Moncy Laundering CAMPS peaks of time and intro- Chsvomer, OYE) norms tesued hy: RB, “the postion seems to have changed. Now, while opening deposit accounts banke are mandatocily wired and under an obligation to comply with AML puldelies ant KYC norms. Banks are supposed to take Feguiaiee decatiehi nea se photographs, residence proof, Permancue Aree eee ie inerodue- ER" For the purpose of KYC policy, a “customers fe denmedae PAN)» q. a person or entity that maint: ‘ relations h the banks 2. one on whose behalf the account is maintained (i.e. the beneficial owner). “Beneficial owner” means the natural person who. ulti mately owns or controls a client and or the person on whose behalf a transaction is being conducted, and includes a person who exer- Gises ultimate effective control over a juridical persons 3. beneficiaries of transactions conducted by professional intermedi- aries, such as stock brokers, chartered accountants, solicitors, ete. as permitted under the law; and any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction. Upon intricate observation we can conclude that a customer can be divided into four categories: x. Existing customers: Customers who maintain account relationship with banks. 2. Former customers: Customers who previously had relationship with a bank. 3. Prospective/Potential customers: Even in cases when a person has duly filled in and signed the account opening form and has submit- ted the same to the bank and the bank in return has accepted the request for opening the account, in spite of the fact that no account hag actually come into existence or been opened by the bank in its books or record, the person will be termed as a “customer”. These are the categories of customers who intend to have an account rela- tionship with the bank. 4. That category of customers any account relationship wit ins an account and/or has a business who do not keep or intend to maintain ‘h the bank but often visit branch of a © Customer (KYC) norms/ lar — Know ¥« 25. Reserve Bank of India, Master Cir Anti-Money Laundering (AML) standards/Combating of Financing of Terrorism (CETVObligation of banks under PMLA, 2002 dr. 1-7-2011, last accessed To-r2-20%4:32 BANKING LAW ter hank for availing banking facilities such hi for Puttchasing i eae ehing a cheque, etc. In principle such people availing 29h, eens va fall under the definition of customers oath any account with the bank branch, fot maintain ans jon 131, NI Act, 1881 does not define the term Customer, tatha Section 1315} + 188 ne the tot a Section 13720 an liability of banker reeivine PAY MERE of cheques i vis Hows: it rovision reads as fo Pp Non-liability of banker receiving: payment of cheque.—\ vh has th ood faith and without neptligence received payment fop whos Fchqe crossed generally or specially €0 Kimsel shall nog, tomer Je to the cheque proves defective, ineur any lia ility to the true ow, md one of having received such payment, a of the cheque by reason only provision arises only when the collecting bank er The protection of the pro’ ¢ acts i good faith and without negligence. He should receive Paymens Fee in ver and the cheque should be crossed generally or speci) it is the duty of the bank to open account with to the bank. Moreover, 1 references and follow up references when referee is not known. [t ig i act of care, precaution and diligence to be initiated by a banker to derive protections under NI Act. : ; Every person who approaches the bank for services will automatically not be considered as a customer. In the leading case of Great Western Railway Co. v. London and County Banking Co. Ltd.’ a rate collec. tor who regularly cashed his cheques at the bank was not considered as customer as he did not maintain an account with the bank and neither intended to do so. Ay vice 18 they gp 2, LEGAL CHARACTER OF BANKER-CUSTOMER RELATIONSHIP 2.1 Debtor-creditor relationship As general law of banking goes deposit of money by a customer toa banker establishes a relationship of a debtor and creditor. Here, the banker assumes the role of a debtor while the customer assumes the role of a creditor due to the deposits kept with the bank, ‘The money depos ited with the bank becomes the sole property of the bank, Banker takes a sits and agrees to pay interest at a fixed rate and this entitles him (© eda the money deposited in whatever way he chooses so as t pa interest on his de Profits for himself, In case the customer does not i and is und posit, by the banker, the latter continues to be a de ; er an obligation to repay the amount so deposited as and whe 26. 1901 AC 414 (HL),BANKER-CUSTOMER RELATIONSHIP a 33 the customer. It is also nec: anded by reat ecessary to n « dema™ are deposited in a bank, the owner Nip cre here that, “When s ‘i tship of tl moan and the right of the bank over the shoriehs eee Passes to the en at all.”27 The customer cannot put forth a claim for eel pins oF notes which he has deposited. The banker is free t i com nt in any kind of legal tender. © pay the In the landmark decision of Foley v. Hill, Lord Cottenham ied the view stated below which was supported by Lord Atkin: he money paid into the banker’s, is money known face Te td there for the purpose of being Gide eerie ike beaten Mita the banker's money; he is known to deal with it as his own; he makes inat profit he can, which profit he retains to himself...he has contracted, having received that money, to repay to the principal, when demanded, a sum alent to that paid into his hands. Ih amoul equiv: The relationship of a debtor-creditor in case of a banker-customer is slightly different from an ordinary borrower. In such cases the creditor has to make a demand on the debtor and the demand is supposed to be made at that branch of the bank, where customers account is main- tained. This is an exception to the general rule that debtor should find his own creditor.2? This viewpoint was also strongly mooted in Delhi Cloth & General Mills Co. Ltd. v. Harnam Singh® wherein it was held: In banking transactions the following rules are now settled: (1) the obligation of a bank to pay the cheques of a customer rests pri- marily on the branch at which he keeps his account and the bank can rightly refuse to cash a cheque at any other branch:... (2) a customer must make a demand for payment at the branch where his current account is kept before he has a cause of action against the bank! Banker is thus a privileged debtor. An express demand by a customer has to be made for the repayment of a current account and if the banker fails to repay it after the demand is made, only then can he be sued.” The decision of Arab Bank Ltd. v. Barclays Bank® held: vis a right which survives [the out- can assign or bequeath by his “accrued right” ....It [is] ... sus- «the right to be paid a credit balance... break of war], It is a right which the credito will; it passes on his intestacy and it is...an pended, and not destroyed, by the outbreak of wat... 3 Hanuman Bank Led. v, K.P-P. Nadar, (1986) 26 Comp Cas 8. 8 (1848) 2 HLC 28: 9 ER 1002. ' Joachimson v. Swiss Bank Corpn. 30. AIR 1 955 SC sg0: SCR 402. ; 7 31. New York Lie insane Co. y bublic Trustee, (1924) 2 Ch rox: 131 LT 438 (CA). 32. Joachimson v. Swiss Bank Corp (1922) 3 KB 110: 125 17 338 (CA). + 1954 AC 495: (1954) 2 WLR 1022: (1954) 2 AILER 226 (HL). , (1921) 3 KB 110: 125 LT 338 (CA). oO CASE PILOT © (CASE PLOTo~ 1G LAW 34 BANKIN len,, 2.2 Creditor-debtor relationship t customer reverses as the bank ran, The ek of pas ine customer. In this case the monen oe an any fsinthe hiiids of the custohack, Hehte customer steps in the shoe ies ands of i cases, i eee avails a loan or an een oa his relations with the banker undergoes a change to pee ew en he is q eporn holder. In circumstances when a eee a is Overdrayn ot relationship changes from debtor—cre: ‘itor to cre itor—deby th p tor, Where te bank becomes the creditor and the customer ig the debtor, the 2.3. Trustee—beneficiary relationship tS) The concept of trust can be understood by Section 35 Indian Trusts Ae mureror 1882. It is reproduced herein below: f 3. Interpretation-clause.—“Trust”,—A “tryst is an obli to the ownership of property, and arising out of a confidence accepted by the owner, or declared and accepted by him, another, or of another and the owner; The person who Teposes or declares the. confidence is Called the « gation Annexe TePosed in ang the person for whose benefit the confidence is accepted is called the “bene. ficiary"; the subject-matter of the trust is called “trust-property” of “rug, money”; the “beneficial interest” or “interest” of the beneficiary is his right against the trustee as Owner of the trust-property; and the instrument, if, ‘any, by which the trust is declared is called the “instrument of trust”, According to Section 15, Indian Trusts Act, 1882; ly ! 0 Be Out of the frust-property, all expenses pone incurred in or about the execution of the trust, or the realization, prese vation or benefit Of the ¢ Thus, a trustee has a right to reimbursement of expenses which are incurred by him for the trust Property, ion ing discussion we can deduce that the relat T and a customer draws similarity from He P» 48 the customer Bives instruction to the ban Use of money or documents entrusted by him to the banker.BANKER~custom: RELATIONSHIP 3¢ S ER RELATIONS 3 7 rity we can understand it with few exam, les: - it wit P| a s cheque f ‘ a romae anaeconnt in bank X for collection from bane ya get WhO has case becomes the trustee tll the time amoune of are eat Xin this Nest ang nOWledge ince mer, trustee, 2.4 Principal-agent relationship ) Section 182, Indian Contract Act, 1872 defines an “agent” as; imor 182, “Agent” and “Principal” defined.—An “agent” isa person employes to do any act for another, or to represent another in dealings with third pe. sons. The person for whom such act is done, or who is so representel called the “principal”, A banker acts as an agent of his customer and performs a number of agency functions for the convenience of his customers, Banker buys or sells securities on behalf of his customer, collects cheques, dividends, bills or promissory notes on his behalf, acts in various other agency capacities like trustee, attorney, executor, correspondent or a representative and makes payment of various dues of his customers, for example, insurance premium, etc, In the landmark case of Travancore National and Quilon Bank Ltd, re", as per facts a certain amount was paid into the bank as deposits for temittance as telegraphic transfer to Great Indian Trading Co." Bombay, It was opined by the court; On the facts of this case the bank as property of th money was received by th it seems to me that the money was held apa ¢ applicant, I am also inclined to the view that ¢ Bank in the capacity of a mere agent. 39. 1983 BCLC 325 (Ch D), 40. 1987 Ch agp, 41, AIR 1g 40 Mad ogg) ® WER 1193; (1992) 4 AMER 308,BANKER-~cusrt : R-=CUSTOMER RELATIONSHIP 37 gecision of the Hon'ble Jammu and K Lid. v. Kashyap Industries” wnderlin that of an age ashinit High Court in Bharat rlines the relationship of a banker nt and principal. The relevant part is cited The pank 7 pay customer 3 herein below: ant was acting as an agent i ‘The defendan n agent on behalf of the principal for Ti of the amount mentioned in the draft, There was hoameninn of wee Hom pent of the draft in this case. The draft was ientd But ie wd h at first presented but Sefyced de tO the mistake of the plaintiff himself. The mistake was rectified fy the plaintiff but the Bank presented the amended draft after a considers: ble delay. “There was negligence on the part of the Bank in presenti ere way msgs othe Dv ofthe Bank in pesnng the raf and umeonable diligence and to use such skill as he possesses and to make com. pensation in respect of the direct consequences of his own neglect. As pointed eet above, it is fully established that the defendant Bank has been negligent prtausing delay in the presentment of the draft to the drawee and thereby the plaintiff has suffered some loss. a 2.5. Bailor-bailee relationship Section 148, Indian Contract Act, 1872 defines bailment, bailor and bailee as follows: 148. “Bailment”, “bailor” and “baile” defined.—A “bailment” is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the “bailor”. The person to whom they are delivered is called the “bailee”.... ‘Advances are secured by banks by obtaining tangible securities, physi- cal possession of secured goods, cash credit against inventories, valuable bonds and shares. The collateral securities are kept by the banks and thus the bank acts as the bailee and the customer acts as the bailor. Safe custody deposit facility of the bank signifies the bailor—bailee relation~ ship, as the depositing customer acts as the bailor and the bank as the bailee. It was observed and explained in the dicta of UCO Bank v. Hem Chandra Sarkar’: Banks take charge of goods, articles and securities as bailee and not as trus- tee or agent, Bailment is the delivery or transfer of possession of a chattel (or other item of personal property) with a specific mandate which requires the identical res either to be returned to the bailor or to be dealt with in a par- ticular way by the bailee as per directions of the bailor. One important di tinguishing feature between agency and bailment is that the bailee does not a AIR 1958 J8&cK 25. . (1990) 2 SCC 28a: ATR raan SC 1329.> | 38 BANKING LAW ly : Mp, represent the bailor. He merely exercises, wth the leave of the ball contract or otherwise), certain powers of the bailor in Tespect of hig ln Secondly, the bailee has no power to make contracts on the ballon, py, nor ean he make the bailor Hable, simply as bailor, for any acte ye cet 2.6 Lessor-lessce relationship Section 105, Transfer of Property Act, 1882 defines the concept ofa lessor, lessee, premium and rent: : 105. Lease defined. —A lease of immovable property is a tran Fight to enjoy such property, made for a certain time, express of in perpetuity, in consideration of a price paid or promised, or share of crops, service or any other thing of value, to be rendered or on specified occasions to the transferor by the transferee, whe transfer on such terms, Lessor, lessee, premium and rent defined. —The trasteor is cate the lessor, the transferee is called the lessee, the price is called ‘ the premium, and the money, share, service or other thing to be so rendered is ated rent, ser of implied, f money eriodicly Accepts the Banker and the customer share the relationshi certain circumstances, banks lease (hire locker facility) their immonb, Property to the customer and provide them the right to enjoy such prop- erty during the specified period of time, that is, during the office/banking hours and charge rentals on the same. Safe deposit vault/locker facility are services provided by banks to their customers upon entering into an Sereement, which is popularly known as “memorandum of letting” and attracts stamp duty. In case of default by the customer/locker hold in Payment of rent, the bank has wide power and right to break open the locker. Banks are under no obligation or liability to take care/insure the things kept in the locker and hence are not responsible for any damages jat happen to the contents of the locker excepr due to negligence of anks, ip of lessor and lessee, In 2.7 Mortgagor-mortgagee relationship According to Section 58, Transfer of Property Act, 1882: 58. "Mortgage", “mortgagor”, gagerdeet” defined. —(a) A mort “mortgage-money” and “m0 wable Bake isthe transfer of an interest in specific immo" Be ert for the purpose of securing the Payment of money advanced oF. be advanced by way of loan, an existing or future debr, or the perform of an engagement which ma Y Bive tise to a pecuniary liability. @ mortgagor, the transferee a mortgagee i a aise’ he transferor is called The relation between a bai : nker as mortgagee and his customer 3S Sagor, with whom the right eaten ts and interests of the property is vestedyy Al BANKER=CUSTOMER RELATIONSHIP 39 n the mortgagor executes a mortgage deed in respect of his immova: perty in favour of the bank or deposits the title deeds of his prop- h the bank to create an equitable mortgage. wher ble prol orty Wit 2,8 Pawnor-pawnee relationship Section 1725 Indian Contract Act, 1872 defines pledge, pawnor and paw- vee as follows: ‘ 172. “Pledge”, “pawnor” and “pawnee" defined.—The bai . . vail f oods as security for payment of a debt or performance of a promise called Epledge”. The bailor is in this case called the “pawnor”. The bailee is called “pawnee”. 2 Those situation in which collateral security of movable property or cer- Tip assets are provided by the customer for availing credit facilities or Joan; existence of the relationship of pawnor and pawnee comes into play, In such cases customer becomes the pledger and banker, the pled- gee. After repayment of the debt, pledged goods have to be returned intact to the pawnor. 2.9 Hypothecator-hypothecatee relationship Relationship of the customer and banker is that of a hypothecator- hypothecatee. Customer hypothecates (pledges) property which might be movable or immovable in nature or assets with the banker, in order to secure a loan. The customer herein becomes the hypothecator and the banker becomes the hypothecatee. In case of hypothecation of goods, banks are treated as secured creditors. 2.10 Custodian Custodian is someone who acts as a caretaker of something. Banks undertake legal responsibility for securities of a customer. While open- ing a dematerialised account bank becomes a custodian. ‘A depository putticipane is typically a financial organisation like a bank, broker, financial institution, or custodian acting as an agent of the depository to make its services available to the investors. Hence, the bank serves as a custodian, 2.11 Guarantor in lieu of their customers and As a guarantor, bank gives guarantee ii ' ; enter into the shoes of a customer, Guarantee Is a contingent contract. According w Section 31, Indian Contract Act, 1872ING LAW len, » defined. —A “contingent contract” jg , if some event, collateral to such ¢, °°, nti et, go BANKI 1 contract” “Contingent : 3 Coy do somethings do or not t Goes not happen. ¢ banker-customer tract to does oF apa relationship serves as a transac $aCtiongy Hence, th relationship. HTS AND DUTIES OF A BANKER Rightsof banker 3. RIG Right of| appropriation Right of set-off ight to charge interest rates and commissions 3.1 Right to charge interest rates and commissions Banker is having an impli and sold to a customer. advanced, processing char, tion of credit facilities sancti ied right to charge for services rendered, provided Bank has a right to charge interest on amount ges for the advance, charges for non-utilisa- ioned, charges commission, exchange, inci- dental charges, etc. depending on the terms and conditions of advances, Banks generally charge interest on a monthly, quarterly, semiannually or annually basis. Circumstances in which balance in deposit account falls below the prescribed amount, banks become entitled to charge from the customers. Generally information regarding such charges are communi- cated to the customer by the bank. These charges in the form of interest rates and commissions are fixed by the association of bankers and are determined by an express agreement between the banker tomer. Sometimes, the determination of charges can also implied agreement from the usual course of dealings between # and customer, rand the cus- be done by an he banker 3.2 Right of lien “Lien” can be understood as the creditor’s right to retain goods and securities owned by the debtor until the debt due from him is Fert Precisely it is a legal claim by one person on the property ‘of another deposited as security against payment of a debt, Section 171 Indian Contract Act, 1872 explicates the right of gener lien to banks. As per the section 171, General lien of bankers, factors, wharfingers, attorneys and pol cy-brokers.— Bankers, factors, wharfingers, attorneys of a Hig} ‘Court au policy-brokers may, in the absence of a contract to the contrary, security for a general balance of account, any goods bailed to themsBANKER=CUSTOMER RELATIONSHIP 4 ve a right to fetain, asa secusi sons have a right t » as @ Security for such balance, goods oot Fo them, unless there is an express contract to that effect, . ai : . - 1 6(1)(/), Banking Regulation Act, 1949 confers right of lien on the Fag orms of business in which banking companies may engage.) ta oe the business of banking, a banking com any ma 2 es of business, namely. — Pany may engage... the fallow > managing, Selling and realising any prey possession of the company in satisf its claims. dao v. Barnett it was observed: operty which may come into the ction ot part satisfaction of any of In Bran i A sankers most undoubtedly have a general lien on all secur pen as bankers by a customer, unless there be an express commen ss Mrwances that show an implied contract inconsistent wih fon a ble Delhi High Court, in Vijay Kumar vy, fullundur Bod; tr Jia followed the decision in Brandao v. Bache acl bed that tanker has a right to general lien, This is a right to retain the Property/ security belonging to the customer until the debt is repaid, Provided there js no contract to the contrary. It is a Possessory lien and can thus be called as an “implied pledge”. Inthe landmark decision of Firm Jaikishen Dass Jinda Ram v. Central Bank of India Ltd. it was held: ‘Two rights flow out of the relationship of debtor and creditor, namely (x) the right of the customer to demand repayment of the amounts due to him if and when he so desires and (2) the right of the bank to appropriate the monies, funds and securities of the customer coming into its possession in the course of their dealings for repayment of the customer's indebtedness. This latter tight is known as banker's lien and it rests on the principle of the law-mer- chant that any credit given by a bank to a customer is given on the faith that sufficient monies and securities belonging to the customer will come into the possession of the bank in the due course of further transactions, The tight is akin to the right of set-off which obtains between Persons occupying the relation of debtor and creditor and between whom there exist mutuel demands. As mutuality is essential to the validity of a set-off, itis necessary that before one demand can be set off against another both must mutually Rist between the same parties and between them in the same capacity, The mutual nature of the debt and not the mutual nature of the parties should be Considered, Debts accruing in different rights cannot be set off against each whic, A bank can enforce its lien if mutual demands exist between, itself and wattomer, that is when they mutually exist between the same parties and “tween them in the same capacity. ies deposited with 4 19308 59 an, (1 46 AIR 1360 Pane Se (1983) 54 Comp Cas 125. © CASE PLoT>> | CI 42 BANKING LAW [ May ere two partnership firms having same paring In this case there pie opined that bank had right to appro tiate ie ceounts. ate 4 separate feet for payment of an overdraft of another aS the fs i a I ities, firme do not signify two separate fae We san fed “by firms do ne ilaind v. Vysya Bank’ the court held, anker is ae In S. ee the debt due from amounts which are IN its Dosen, tled to pe vob to the principal debtor or Surety.” This stateg thay bank's right of len is available on all forme bf securitice, bank's nah ae decision of City Union Bank Ltd. y. Thangarajay's i Eagar nk oes gee el estes ca Securities 1 eld that a ba eee ace tomer which includes negotiable instruments and fixed deposit seated However, this extends only to the extent to which the CUstomer is liable, If bank defaults or fails in returning the balances thereby is liable. : : customer suffers any loss, bank will be required to pay the damasee” the customer. 3.2.1 Exceptions to right to lien 1. Where there is an express contract. like by way of counter. guarantee, providing reimbursement, In Krishna Kishore Kar v. United Commercial Bank® the Calcutta High Court stated: For this principle, we need not look into the English cases as $. 171 of te Contract Act ieelf clearly lays down that the provisions of this oegoo will dated 27-11-1962....the Bank was not claims under Section 171 of the Contra 2. Where there js the customer, Lien can only be exercised and enforced, banker and Jinda Ram entitled to appropriate or adjust its ct Act, d no mutual demand existing between the banker and if mutual demand exists between v. Conntt a8 observed in the decision of Firm Jaikisben Dass % Central Bank of India Ltd, (Disevesed above). 3. Where the valuables are rece Banks generally receive for sof securities, document. left with the bank, general lien and a ived for safe custody, its custody, customer’s valuables, suc 2 c paguth articles, being regarded as those er for specific Purpose, are not subject to the banker contract to the contrary is implied,s! 47. (2002) 1 BC gos, 48. (2003) 46 SCL > 7 (Mad), 49. AIR 1982 Cal 6 :B. E ANKER-CUSTOMER REL. 7 TIONSHIP 43 in 0" ' hen", court observed: Pajocaments had been originally delivered ote etody and the customer subsequently fo Se peporting to charge them, the banker noe documents. thos ec entrustment of goods (docny 800as nent itle) j 4 Vie purpose stated to banker. S of title) is for a spe- ¢ ei y important decision of W.P. Greenhalgh and 3, the court observed: tof Africa Ltd. v. Cohen Y A customer to the bank by became a party t0 a void not have any lien over where ale Sons v. Union Bank of von making a payment of Money to another, states defini reve to be used for a particular purpose, and the pers nitely that such te not dissent, he accepts it for the purpose and must use eons c for which he receives it; and if the purpose for whieh he ots the money to a third party, and that third party Po per ie iris informed of the fact that the payment has been mode snd vee is instructed to pay it to him, the third party is in lave cine he money from the person into whose, hands i¢ har been gue a received for his benefit. eer ae mde d the purpos iris to Pay rold to Pi that the pay to recover money had and Ieswas thus stated: Abanker who has agreed with a customer to open two accounts in his name, and who holds bills which the customer has specifically appropriated to one account, is not entitled, without the customer’s consent, to transfer the pro- ceeds of such bills to the other account. s. When the deposit with the banker is for a specific purpose. No right of lien can be exercised in respect of money deposited, or a credit balance earmarked for a specific purpose by the customer and the same is in the knowledge of the banker. 6. Where the valuables or documents of title are left in hands inadvertently, No lien can arise in respect of docu’ ; ently with the banker, or on property which is placed in his hands With the object of covering an advance which is not granted, Banker will not get the lien till the time true owner of the valuables has given his consent or was aware that the securities were being deposited to the banker.5# the banker's ments or valuables left inadvert- y the securities it of lien ove loan is actually 7. The banker cannot exercise his righ before such lodged with him for securing a loan, ranted to him, 2, 53, (1209) 2 Ch 129 (CA). 4 (24) 2 KB 153, " leas v, Dorrein, (1817) 7 Taunt 278: 18 RR 480