SEMESTER - V

BANKING LAW AND PRACTICES

Unit – I

Definition of banker and customer – Relationships between banker and customer – special feature of RBI,
Banking regulation Act 1949. RBI credit control Measure – Secrecy of customer Account.

Unit – II

Opening of account – special types of customer – types of deposit – Bank Pass book – collection of banker –
banker lien.

Unit – III

Cheque – features essentials of valid cheque – crossing – making and endorsement – payment of cheques
statutory protection duties to paying banker and collective banker - refusal of payment cheques Duties holder
& holder in due course.

Unit – IV

Loan and advances by commercial bank lending policies of commercial bank - Forms of securities – lien
pledge hypothecation and advance against the documents of title to goods – mortgage.

Unit – V

Position of surety – Letter of credit – Bills and supply bill. Purchase and discounting bill Traveling cheque,
credit card, Teller system.

Books for Reference:

1. Sundharam and Varshney, Banking theory Law & Practice, Sultan Chand & Sons., New Delhi.

2. Banking Regulation Act, 1949.

3. Reserve Bank of India, Report on currency and Finance 2003-2004.

4. Basu : Theory and Practice of Development Banking

5. Reddy & Appanniah : Banking Theory and Practice

6. Natarajan & Gordon : Banking Theory and Practice

 UNIT I

INDIAN BANKING SYSTEM:

Modern banking in India organised in the last decades of the 18th century. The first banks were the
General Bank of India which started in 1786 and the bank of Hindustan .Thereafter three precedency banks
namely Bank of Bengal (1809), Bank of Bombay (1840), and the bank of Madras (1843), were setup. The
precedency Banks act as Quasi-Central Banks.

The three banks merged in 1925to from the Imperial Bank of India Manage public debt and
government funds the reserve bank of India Act was passed in the year 1934, and after independence, Reserve
Bank of India was taken over by government by passing of the transfer of public ownership Act. The
shareholders of reserve bank of India were paid compensation.

The word Bank Derived from French Word Bancus, Banco, Banc, and Banque

DEFINITION OF BANK

According to Section 5(6) of the Banking Companies Act 1949Defines Banking As “Accepting for the
purpose of lending or investment of deposits of money received from the public repayable on demand and
withdraw able by cheque draft order or otherwise”

MEANING OF BANK

A bank after accepting the deposits from the public, lends or invest in various assets which brings
revenue to the bank. Out of such earnings, the bank will not only repay the deposits as and when demanded
by the public but will also pay interest on the deposits.

The customer of a bank can withdraw money

(a) by with draw slip provided by the bank or

(b) by cheque provided by the bank to the account holder or

(c) By draft a draft is made by the bank on deposit of money. It can be made by any person for sending money
from one place to another. A draft is an instruction by a branch of a bank to another branch.

(d) The money in the bank can also be withdraw through pay order .A pay order is an instrument given by the
bank which carries the signature of the bank manager on a cheque. On other words it is a banker’s cheque.
DIFFERENT BETWEEN CHEQUE AND DRAFT

CHEQUE DRAFT
1. A cheque is a negotiable instrument defines 1.While a draft is a deemed negotiable instrument
section 5 of the Negotiable instrument act
2.Adraft is issued by a bank
2.A cheque is issued by a customer
3.A draft is made on deposit of money into the bank
3.A cheque can be issued only when customer has
sufficient credit balance in his account

4.For issuing a cheque one must be an account holder 4.For making a draft one need not be an account
of bank holder

5.For issuing a cheque,the drawer is a customer and 5.The drawer is the branch which makes the draft
drawee is the bank in which account is maintained and the drawee is that branch on which it is drawn

6.A cheque contains the signature of the customer. 6. A draft contains the signature of the bank manager

7.A cheque can be issued as a means of payment to 7.A draft I san instruction by onr branch to another
any person branch and so it can be encased only in that particular
branch on which it is drawn

8. A cheque can be dishonored for insufficient fund 8.A draft will not be dishonored normally as, it is
made after depositing of cash

FEATURES OF BANKING:

I) DEALING IN MONEY:

The bank accept deposits from the public and advance the same as loan to the needy people. The
deposits may be of different types, current, fixed, savings etc. Accounts the deposits are accepted on various
terms and conditions
II) DEPOSITS MUST BE WITHDRAWABLE:

The deposits made by the public can be withdraw able by cheque draft or otherwise (i.e) the bank
issues and pay cheque .The deposits are usually withdraw able on demand.

III) DEALING WITH CREDIT:

The banks are the institution that can create credit (i.e.) creation of additional money for lending .Thus
“creation of credit” is the unique feature of banking

IV) COMMERCIAL IN NATURE:

Since all the banking functions are carried on with the aim of making profit it is regarded as a
commercial institution

V) NATURE OF AGENT:

Besides the basic function of accepting deposits and lending money as loans, bank process the
character of an agent because of its various agency services.

DEFINITION OF BANKER:

According to Dr. Herbert L. Hart, Law of banking says “A banker is one who, in the ordinary course
of his business, honour cheques drawn upon him by person from and whom he received money on current
accounts”

According to this definition, the essential function to enable a person or firm or institution to be
regarded as a banker or bank is that of receiving current deposits against which cheque may be drawn

FUNCTIONS OF BANKER:

1) Agency services

2) Other general utility services

DEFINITION OF CUSTOMER:

The term “customer” of a bank has not been defined by any law. As per the views of Sir John Paget,
“to constitute a customer there must be same recognisable course of habit of dealing in the nature of regular
banking business.

Mr. Justice Bailhache Dserved:

“ A person become a customer of a bank when he goes to the bank with money or a cheque and asks
to have an account opened in his name and the bank accept the money or cheque and is prepared to open an
account in the name of that he is entitled be called a customer of the bank.”
 RELATION BETWEEN BANKER AND CUSTOMER:

Banker-customer relation

A) General relationship B) Special relationship

i) Debtor and creditor i) Bailor and Bailee

ii) Principle and agent

iii) Trustee and beneficiary

iv) Banker as advisor

v) Other relation

A. GENERAL RELATIONSHIP

I) Debtor and Creditor Relationship:

The relationship between a banker and his customer is mainly that of debtor and creditor

Sir, John, Paget, Remarks:” the relation of a banker and customers primarily that of debtor and creditor, the
respective position being determined by the existing state of the account.”

But, when the account is over drown, the roles are changed. The banker being a creditor and the
customer the debtor. A depositor is an unsecured creditor as he has charge over assets of his banker.

But when a loan is granted to him by a banker on some securities, the banker becomes a secured creditor of
his customer

Peculiarities industrilalities: (debtor – creditor relationship)

1. Not time –barred

The deposited with the bank does not become time- Barred on the expiry of three years. On the other hand

An ordinary debt becomes a time bared debt after the expiry of three years.

2. Creditor must demand payment:

The customer who has deposited money in the bank (debtor) must ask the bank to money.
But in the case of debt due from a banker, demand for the payment, is nessccsary.

3. Proper place and time of demand:

The bank accepts money on a current account, its promises to honour its customer’s cheques so for as
the amount is sufficient and available in other words, a customer can issue cheques on the branch of the bank
where the account is kept. The amount should have to repay during banking hours.

4. Demand to be made in proper manner:

Deposits are withdraw able by cheques draft and order otherwise .Demand for refund must be made
by means of cheque or order as permitted by the banker. The amount should never be returned on oral
instruction

B) SPECIAL RELATIONS

1. Bailor and Bailee Relationship:

The bank becomes a Bailee on case of the valuable or securities deposited with him for safe custody
and it must have to re-deliver the same goods to the bailor along with any profit or surplus that might have
accrued from the goods so bailed.

It is to be noted that money deposited with the bank is not the subject matter of bailment because the
banks do not pay the same coins or notes deposited. Nor are they liable to surrender to the customers any profit
made by them from utilisation of money so deposited.

2. Principal and Agent:

A banker also acts as an agent of his customer and performs a number of agency functions like collect
cheques, bills, interest, etc. And pay insurance premium on behalf of their customers some banks have
established tax services department to take up the tax problems of the customers.

3. Trustee and Beneficiary:

When the banker acts as a trustee with regard to securities and valuable deposited for safe custody .The
funds or assets coming into his hands in the capacity of a trustee must be applied only for the specific purpose.

4. Banker as Agent and Advisor:

When the banker buys or sells securities on behalf of his customer and renders other services,he is
acting as an agent of his customer.

5. Other Services:

The banker is a lessor, when he lets out safe deposits lockers. When the bank undertakes to render
advice to corporate customers on financial matters and to manage their new capital issues, he acts as a manager
to the issue.
SPECIAL FEATURES OF BANKER-CUSTOMER RELATIONSHIP:

A. Rights

i) Bankers Rights of General Lien:

Lien means the right of the creditor to retain the goods and securities owned by the debtor until the
debt due from him is paid lien may be either

i) Particular Lien

ii) Genetal Lien

i) Particular Lien:

Particular lien confers upon the creditor the right to retain the particular security offered for the
particular debt.

ii) General Lien:

General lien denotes the right of a creditors to retain any goods and securities bailed to him for a
general balance of account since the banker has got a general lien he can retain all the articles belonging to
customer until the whole amount due to him has been repaid

No Agreement is necessary for creation of lien:

No Agreement is necessary for creation of lien under the Indian Law.

Conditions to be satisfied for Exercising Lien:

a) The securities should have been deposited with the banker to grant loan.

b) The securities should not have been entrusted to him for a special purpose

E.g. Once Loan is repaid, the customer can take away the security

c) The lien does not arise in respect of documents or valuables left with the banker

d) The possession of securities must have been lawfully obtained in his capacity as banker

e) There should be no agreement inconsistent with lien.

f) The lien arises only in respect of articles belonging to the customer in same capacity

g) The banker cannot exercise his lien over the securities of the customers in respect of the amounts
that may become due to him on a future date.

h)It has been decided that a Banker can exercise his lien even in respect of on securities deposited
with him in respect of which he has the right to collect interest by filing in the coupons
 i) A Banker can exercise his line even in respect of securities deposited with him for which have
become time - barred
Exemption to the right of lien:
a) If the goods and securities, have been entrusted to him as a Trustee or as agent of the customer, the
banker cannot climb the right of lien on those properties.
b) When a customer send a check are able with clear instructions to utilise for specific purpose, the
banker cannot exercise the right of lien.
c) When some securities are left with the banker by mistake, he cannot exercise the right of lien.
d) The banker has no lien on the credit balance in the personal account of partner or partnership.
2. Bankers right to set off:
The right to combine or set off accounts implies the right of a debtor to adjust a Debt owed to him by
his creditor.
E.g.: A’s credit balance cannot be set off against the joint Debt of A and B unless
i) A has expressly agreed that it can be done or
ii) A and B Have agreed to the both jointly and severally responsible for the debt in their joint name.
Conditions to be fulfilled to set-off
1) Both the accounts of the customer must be in the same name and in the same right.
2) A Debit balance in a personal account cannot be set off against the credit balance in the trust account as in
name of the customer.
3) The right of setoff can be exercised only against Dept due on the date and not against a future date.
4) The amount of debts must be certain
5) The right of setoff is available to the banker only if there is no agreement to the contrary.
3. Right of appropriation:
The right of a Banker to appropriate the money paid by the customer to any one of loans including at
time-barred debt. Once the customer give specific direction regarding appropriation, the banker has no right
to alter them in the absence of such direction from customer, the banker shall have the right to appropriate the
payment to any Debt.
4. Law of limitation:
A debt become time barred if it is not repaid within 3 years after it is contracted.no action
can be brought against the debtor in respect of the money due by him after the expiry of three years from the
time of the Debt.
5. Bankers right to charge compound interest:
Banker has the right to share interest on loans and advances granted to his customers. Banka charge
interest every half year but they can charge compound interest unless there is an agreement
6. Bankers right to climb incidental charge on un-remunerative accounts:
The relation of a Banker and customer accept the banker has an implied right to climb commissions,
interest and other incidental charges for the securities rendered to the customer.
Obligations:
1. Obligation to honour cheques:
Obligations of the banker to honour the cheque of the customer in a statutory obligation
i) The drawee of cheque, having sufficient funds of the draweer in his hand
ii) The applications may be extended by an agreement, express are implied to the account of overdraft
agreed upon. In the absence of an overdraft, the banker can dishonoured cheque
iii) Sometimes a customer Mein deposit cheque and bill for collection and credit to his account. He
made a check on the banker in anticipation of such collection.
2. Application to maintain secrecy:
The banking company should not disclose matters relating to the customer’s account expect
on reasonable and proper occasions.
Disclosure must be under certain occasion such as
Disclose under compulsion of law in case of Discovery and inspection comparing the
production of books of accounts and other documents, etc.
Disclosure as duty to the public:
E g: If a customer is trading with Enemies country during times of War, the banker must disclose
interest to the public.
Disclosure and interest of bank in case when a customer fails to pay money due to the bank, the banker
has to file a suit for recovery of the debt.
Disclosure on Express or implied consent of the customer E.g.: customer directs the banker to intimate
the balance in his account to an agent or employee.
3. Obligations not to close the amount of the customer without prior notice.
The banker must close the account with prior sufficient notice in written information requesting the
customer to withdraw his balance
RESERVE BANK OF INDIA
The Reserve Bank of India Act 1934 was enacted to constituted the Reserve Bank of
India with an objective to
a) Regulate the issue of bank notes
b) For keeping reserves to ensure stability in the monetary system.
c) To operate effectively the Nation's currency and credit system
The RBI covers:
1) The constitution
2) Powers
3) Functions of the RBI
the Act does not directly deal with the regulation of the banking system accept for few
sections like section 42 which relates to the maintenance of CRR by banks and section 18 which deals
 with direct discount of bills of exchange and promissory notes as part of rediscounting facilities to
regulate the credit to the banking system.
RBI deals with:
a) Incorporation, Capital, Management and business of the RBI
b) The functions of the RBI such as issue of banknotes, monetary control, banker to the central
and state government and banks lender of last report and other functions.
c) General provisions in respect of Reserve fund, credit fund, Audit and accounts.
d) Issuing directives and imposing penalties for violation of provisions of the act
FUNCTIONS OF RBI:
The Reserve Bank of India performs all Central banking functions
i) Sole authority of issuing of currency in that country not only new currency but also regulate
the issue of currency in India.
ii) Regulate and control money supply in the country.
iii) The Reserve Bank of India Act as a Banker to the commercial banks by keeping and
maintaining their accounts just like the private individuals.
iv) Acts as a lender to commercial banks.
v) The RBI acts as a Banker to both the central government and also the state government the
RBI not only looks after the financial transactions of the government but also main is the public Dept
of the government.
vi) In order to maintain price stability, the RBI exercises its control over the volume of credit
created by the commercial banks.
vii) The RBI has the responsibility of maintaining the external value of the Indian Rupee just
like maintaining the internal value of the currency.
viii) RBI concern with the development of rural banking, Financial Institutions and
development of capital and money market in India.
ix) Promotional measures by RBI
RBI established the Bill market scheme in 1952.
RBI has helped to establish Financial Institutions to provide credit to the agricultural
and industrial sector of the economy.
Establishment of regional rural banks.
Helps commercial banks open branches in foreign countries.
RBI encourages and promotes research in the area of Banking
Recent features of RBI
1. The RBI and the state-run security printing and minting crop are both working to introduce
the revised number pattern in currency notes
2. The RBI also asked the banks to stamp notes detected as fake as “counterfeit note”
 3. The RBI also orders the banks to check the menace of fake Indian currency new notes,
especially, the rupees thousand rupees 500 denomination.
4. If a bank official found any fake notes, he should file and register FIR against the person
who give the note. If sales, the RBI will penalise the bank.
Banking Regulation Act 1949(an act to consolidate and amend the law relating to banking)
Before passing this act the banking business governed by the Indian companies act 1913
Since banking as a business has its own distinctive features, it fails necessary to have separate
at. So Banking Regulation Act 1949 was passed in February 1949. This act was amended in 1965 to
make it applicable to cooperative banks and to employment other changes
Objectives:
1. Comprehensive legislation:
The Indian Companies act 1913 was inadequate and unsatisfactory to regulate and
control the business of Banking in India, there was a need to have specific legislation containing
comprehensive passions in banking business
2. To prevent Bank failures:
Failures are common due to inadequacy of capital and hence Banking Regulation Act 1949 prescribe
minimum capital requirements.
3. To avoid cut throat competition:
The regulation avoids wasteful competition among banking business, the act also regulate the opening
of branches and changing the location of the existing branches.
4. Ensuring balanced development of banks:
In order to avoid in discriminating for opening of new branches, the system of licensing is provided
in this act.
5. Regulation of bank credit and working of banks:
The RBI has been given powers to approve the appointment appointment and removal of the
Chairman's, directors and officers of the banks. This will ensure efficient and smooth working of banks in
India.
6. Safeguarding the interests of deposits:
The at protect the interest of the depositor and the public at large by incorporating certain provisions
such as prescribing cash reserves and liquidity ratios.
7. Strengthening the banking system:
The act provides for compulsory amalgamation of weaker banks with stronger ones.
8. Controlling foreign banks:
The act contains certain provisions which restrict the foreign bank to invest funds of the Indian
depositors outside India
9. Providing quick and easy liquidations:
The act also provide for quick and easy liquidation of the banks if they are not able to continue further
are amalgamate with other banks.
RBI CREDIT CONTROL MEASURES

RBI credit control

A) General are quantitative credit B) Selective Credit Control

A).General are quantitative credit: it includes

i) Bank rate or the discount rate policy
ii) Open market operations
iii) Variable reserve ratio
i) Bank rate or the discount rate policy:
RBI bank rate as the standard rate at which the bank is prepared to buy or discounted bills of exchange
or other commercial papers eligible for purchases under this act. For controlling the credit inflation and money
supply, RBI will increases the bank rate.
Pace setter to other market rate of interest
Increases in the bank rate will be followed by the change in the interest rate prevailing in the market.
Credit would be controlled.
Bank rate to effective, the effective that come the, borrowings from the bank
Available reserve ratio:
scheduled commercial banks are required to maintain minimum balance with the Reserve
Bank by varying reserves, the RBI good undertake quantitative control effect ly>
under section 42 (1)of the RBI at all scheduled banks are required to maintained with the
Reserve Bank at the close of business on any day a minimum cash reserve of 5% of the Year demand liabilities
and 2% of the Year SLR main time gold government securities, etc to keep time libraries as reserve.
ii) Open market operations:
Open market operations refer to the Purchase and sale by the central bank off a variety of assets such
as gold, 30, foreign exchange and even company shares.
Open market operations of The Reserve Bank has to interrelated aspects
1. Monetary policy
2. Public Dept management
1. Monetary policy:
The cash base of commercial banks is decreased by sale of securities and the Clash base is increased
by purchase of securities. Open market operations have been used in this way in the course of monetary policy.
2. Public debt management:
Open market operations are used to assist the government in the borrowing operation. They are mostly
used as an instrument of public debt management and to provide seasonal finance by purchasing the securities.
B) Selective credit control:
Quantitative credit control there is a possibility of credit being followed into undesirable activities
such as speculation, hoarding etc. to discourage such forms of activity qualitative controls are employed
i) Minimum margin for lending against specific securities:
Minimum margin of 50% has been fixed in respect of equity shares to contract the prevailing boom in
the stock exchange
ii) Ceiling on the amount of credit for certain purpose:
Credit authorisation scheme (CAS)
The minimum credit limit of 1 crores or more in November 1955, and it was raised to 2 crores includes
bills discounted and term loans. The cut off. Park CAS working capital limit was raised from time to time. If
banks granting any credit limit are more it should obtain paid authorisation from RBI
iii) Discriminatory rates of interest on certain types of advances:
Discriminatory Rates of interest charged by the RBI on Advance against a certain types of securities
by wearing the minimum margins also discriminatory rates are followed for different types of advances even
today depending upon the economic condition prevailing in the country
iv) Moral suasion
Moral suasion implies Preservation and request made by the Reserve Bank to the commercial bank to
follow a certain policy there is no element of legal compulsion or conversion in this method.
v) Regulations of consumer credit:
The Reserve Bank is given powers to regulate the terms and conditions of credit given to customers.
It employees two devices.
a) Maximum down payment, and
b) Maximum period of repayment.
When there is inflation and scarcity of goods the Reserve Bank raises the minimum down payment and reduce
the number of instalments.
during depression, the Reserve Bank encourage as credit to customers stop the amount of down
payment is reduced and the number of instalment are increased in other words issuing rules regarding down
payments and maximum maturities of instalment credit for purchase of goods.
vi) Publicity:
RBI regularly publishes statements of Assets and liabilities of commercial banks for information to
the public. It also publishes reports of general money market and banking conditions.
vii) Direct action:
Direct action may refer to all form of restrictions commercial banks in general or in particular relating
to lending and Investment.
What are the main provisions of Banking Regulation Act 1949?
 The following are the important provisions under Banking Regulation Act 1949 regarding control and
regulation of banking sectors in India
 The requirements regarding the minimum paid up capital and reserves for commencement of banking
business. Probation of charge of unpaid capital payment of dividend only after writing of all capitalised
expenses.
 Transfer to reserve fund out of profits. (Minimum 20%) maintenance of cash reserves by the non-
scheduled banks. (Minimum 3 percent) restrictions on holding share in other companies.
 Restrictions on loans and advances to directors and others. Licensing of banking companies. Licences
for opening of new branches and transfer of existing place of business. Maintenance of a percentage
of liquid as set (SLR). (Minimum 25% and maximum 40%)
 Maintenance of assets in India by a banking company full (minimum 75% of DTL) submission of
Return of unclaimed deposits.
1. Power call for and publish the information. Preparation of accounts and balance sheets. Audit of the
balance sheet and profit and loss account. Publication of audit accounts and balance sheet. Inspection of books
and accounts of Banking companies by RBI. Giving directions to banking companies.
2. Prior approval from RBI for appointment of managing directors.
3. Removal of managerial and any other persons from office.
4. Power of RBI to appoint additional directors.
5. Moratorium under the orders of High Court.
6. Winding up of banking companies.
7. Scheme of amalgamation to be sanctioned by the RBI.
8. Power of RBI to apply to the
9. Central government for an order of mortal Rim in respect of banking company and for a scheme of
reconstruction or amalgamation.
10. Power of RBI to examine the record of proceedings and tender advice in winding up proceedings.
11. Power of RBI to inspect and make it report to winding up.
12. Power of RBI call for returns and information from the liquidator of a banking company.
13. Issue of no objection certificate for change of name.
14. Issue of no objection certificate for the alteration of memorandum of a banking company. Central
government to consult the RBI for making rules regarding banking companies. Recommend to the central
government for accepting any bank from the provision of the Banking Regulation Act 1949.
Requirements regarding minimum paid up capital and Reserves: (Sec11 and 12)
Section 11 of the banking Companies Act less down the requirements regarding the minimum standard
of paid up capital and reserves as a condition for the commencement of business. The details of this section
are given below.
Although section 11 prescribes minimum capital of rupees 5 lakh only, Reserve Bank currently
prescribe minimum paid up capital of rupees hundred crore for setting up a new banking company. in that
case of foreign banks setting up office of business in India, they are required to bring in AP minimum 15
million US Dollars to India as capital.( A million is equal to 10 lakhs) .the minimum capital required to start
a local area bank is fixed at rupees 5 crores.
Under the provisions of section 12, that subscribed capital of the company is not less than half of the
authorised capital and the paid up capital is not less than half of its subscribed capital, provided when the
capital is increased this proportion may be permitted to be secured within a period to be determined by the
Reserve Bank not exceeding 2 years from the date of increase.
Prohibition of charge on unpaid capital: section 14
Under section 14, no banking company shall create any charge upon its unpaid capital, and any such charge
if created, shall be invalid.
Limiting the payment of dividend: Section 15
Section 15 every banking company from paying any dividend and its shares unless it has completely written
after the capitalised expenses specified there in.
According to this section no banking company shall pay any dividend on its shares until all its
capitalised expenses such as preliminary expenses, brokerage and Commission on issue of shares, etc. have
been completely written off.
However as per the banking companies (amendment) Act 1959 banking company may pay dividend
and its shares without writing of the following:
a) Depreciation in the value of investment in the approved securities provided search depreciation has
not been actually capitalised are accounted for loss.
b) The depreciation in the value of its investment in shares debentures, bands etc. (other than approved
securities) where adequate provision has been made for such depreciation. The auditor of the banking company
should approve such provision.
c) The bad debts where the adequate provision has been made in this behalf and the auditor after
banking company should approve such provisions.
Transfer to reserve fund: section 17
Under section 17, banking companies incorporated in India are obligated to transfer to the Reserve
fund as some equivalent to not less than 20% of the prophet each year, unless the amount in such fun together
with the amount in the share premium account is more than or equal to its paid up capital.
Maintenance of cash received by non-scheduled banks: section 18
according to Section 18, every banking company not being a scheduled bank is that a non-scheduled
bank has to maintain in India by way of cash reserve with itself or in current account opened with the Reserve
Bank or the State Bank of India or any notified Bank or partly in cash with itself and partly in such account
or accounts as some equivalent to at least 3% of its total time and demand liabilities.
Restrictions on holding of shares in other companies: section 19
Section 19 of the at restaurants the scope of formation of subsidiary companies by a banking
company, as well as the holding options in other companies. That is, this section prevents banking companies
from carrying on trading activities by acquiring a controlling interest in non-banking companies. The section
restaurants the scope of formation of subsidiary companies by a banking company, as well as the Holdings of
shares in other companies
A banking company made from a subsidiary company for the purpose referred to in the section, as
well as for other purposes as our incidental to the business of Banking, subject to the previous permission in
writing of the RBI.
Restrictions on loans and advances: sections 20 and 21
Section 20 lays down the restrictions on banking companies from entering into any commitment from
granting any loan to any of it director or to any firm in which a director is interested or to any individual our
home at directors stands as a director. For the banking companies are prohibited from granting loans and
advances on the security of its own share.
Under Section 21 the RBI has been empowered to determine the policy to be followed by the banks
in relation to advances. Does, RBI east direction to banking companies on the following matters;
i) The purposes for which an advance May or may not be granted
ii) The margins to be maintained in case of secured advances.
iii) The rate interest charged on advances, other financial accommodation and Commission on guarantees
iv) The maximum amount of advances are other financial accommodation that a Bank May make to our
guarantee that it may issue for a single party, having regard to the paid reserves and deposits of the concerned
Bank.
Licensing of banking companies: section 22
According to this section, no banking company can commands or carry on banking business in India
unless it holds a licence granted to eat by the Reserve Bank for the purpose. This exams dates the following
requirements for granting licence
i) Necessity of licensing and mode of applying for it
ii) Conditions for granting of licence
iii) Cancellation of licence and appeal from such orders
Before granting any licence under this section, the Reserve Bank may be satisfied by an inspection of
the books of the company that the following conditions are
i) That the companies in a position to pay its present or future depositors in full as their claims accrue;
 ii) That the affairs of the company are not likely to be conducted in a manner detrimental to the interests
of its present and future depositors
iii) in the case of the carrying on of banking business by such company in India will be in the public
interest and that the government or laws of the country in which it is incorporated does not discriminate in
anyway against banking companies are registered in India and that the company complies with all the
provisions of this act, applicable to banking business incorporated outside India. However, RRBs have been
established under a separate Act of Parliament, viz, RRBs act 1976 and not under Banking Regulation Act
The Reserve Bank May cancel licence granted to get banking company under this section
i) If the company cases to carry on banking business in India; are
ii) If the company at any time fails to comply with any of the conditions imposed upon it; or
iii) Any banking company aggrieved by that decision after Reserve Bank cancelling a licence under this
section Mein, within 30 days from the date on which search decision is communicated to eat, appeal to the
central government. The decision of the central government shall be final.
Thus every Banking company which likes to start banking business in India must obtain licence from
RBI
Control on the opening of new business: Section 23
According to section RBI has been empowered to control the opening of New and transfer of existing
places of business of banking companies. As such no banking company shall open a new place of business in
India or outside India and change the place without obtaining that prior permission of the RBI.
no permission is required for opening a branch within the same city, town or village and for opening
a temporary place of business for a maximum period of 1 month with in a city where the banking company
already has a place of business for the purpose of providing banking facilities to the public on the occasion of
an exhibition, conference, a Mela, etc.
Maintenance of a percentage of liquid asset (SLR)): section 24
Under this section, every banking company shall main time in India in liquid asset for an amount not
less than 25% of the total of its time and demand liabilities at the close of business on any day. The liquid
asset include cash, gold are unencumbered approved securities and they are valued at a price not exceeding
the current market price.
Maintenance of assets in India: section 25
Section 25 track your father maintenance of assets equivalent to at least 75% of its demand and time
liabilities in India, at the close of business of the last Friday of every quarter.
Submission of returns of unclaimed deposits: SECTION 26
According to this expand, every banking company shall submit return in the prescribed form and Main
to the RBI, giving particulars, regarding and operated accounts in India for 10 years. This return is to be
submitted within 30 days after the close of each calendar year.
In the case of fixed deposits, the ten years period is counted from the date of expiry of such fixed
period. RRBs are however required to forward such returns to NABARD.
Submission of Return, farms, etc. to RBI: section 27
under this section, every banking company share submitted to RBI return in the prescribed form 13
and manner showing its Assets and liabilities in India on the last Friday of every month,( if that Friday is a
public holiday under the Negotiable Instruments Act 1881 and the preceding working day.)
Besides the RBI May at any time direct a banking company to furnish the statements and information
relating to the business are affairs of the banking company within the specified period means and there in.
Such directions may be used when the RBI considered it is necessary are expedient to obtain for the
purpose of the act and the RBI may call for information every half year, regarding the investments of banking
companies and the classifications of advance given in respect of industry, commerce and Agriculture.
Powers to publish information: section 28
Under this section, the RBI is authorised to publish in the public interest any information obtained
under the Banking Regulation Act. The information is published in the consolidated form as the RBI May
think fit
Maintenance of account and balance sheet: section 29
This section provides for the preparation of balance sheet and profit and loss account as on the last
working day of the year in respect of all business transacted by a banking company incorporated in India and
in respect of all business transacted through its branches in India by a banking company incorporated outside
India. It is prepared in the form of set out in the third schedule.
The central government after giving not less than 3 months’ notice of its intention to do so by a
notification in the official gazette, may from time to time by a like notification amend the forms set out in the
third schedule.
Interview of the fact that in the opinion of an expert, as well as the banking enquiry committee, that
form f are required to be used by every company in preparing its balance sheet.
Audit of the balance sheet and profit and loss account: section 30
As per section the balance sheet and profit and loss account prepared in accordance with section 29
shall be audited by a person duly qualified under any law of the time being in force to be an auditor of
Companies
The auditor is required to state in his report in the case of a banking company incorporated in India,
i) Weather or information on by him have been found to be satisfactory
ii) Weather are not the transactions of the company which have come to his notice have thin within the powers
of the company.
iii) Weather Are not the returns received from the branch office of the company have been found adequate for
the purpose of this audit.
iv) Weather profit and loss account shows a true balance of profit or loss for the period covered by such
account
v) Any other matter which he can brought to the notice of shareholders of the company.
Submission of returns to RBI: section 31
This section provides for publication of the profit and loss account, balance sheet and the auditor’s
report in the prescribed manner as well as for the submission of three copies as returns to the Reserve Bank
within a period of 3 months which may be extended up to 6 months
Inspection of books of accounts: section 35
This section was incorporated with a view to safeguard the interest of shareholders and depositors of
Banking companies, as a result of which bank directors and managers are likely to be cautious in employee
the funds of their institutions.
This section provides wide powers to RBI two causes and inspection of any banking company and its
books and accounts.
Giving directions to banking companies: section 35a
Under section on 35a the Reserve Bank May caution or prohibited banking companies generally or
any banking company in particular against entering into certain types of operations.
Prior approval from RBI for appointment of managing director, etc. section 35ab
According to this section, period approval of RBI should be obtained for the appointment, re-
appointment, remuneration and removal of the chairman or a director of a banking company. And for the
amendments of provisions in the memorandum or articles or resolution of a General Meeting or board of
directors, the prior approval of RBI is necessary.
Removal of managerial and any other person from office: (Sec 36aa and Sec 36ab)
Under these sections, the RBI has power to remove managerial and other thousands from office and
to appoint additional directions
Moratorium under the orders of High Court (suspension of business) section 37
according to this section when a banking company is temporarily unable to meet its obligations it
may be applied to the high court requesting an order for staying the commencement or continuance tense of
all legal actions and proceedings against it for a period of not exceeding 6 months. Search stay is generally
called a Moratorium.
For such requisition, the Banking Company should submit an application along with the report of the
RBI in this regard. In the report the RBI indicates that the Banking companies.
IMPORTANT QUESTIONS
ONE MARK
 UNIT -2
Opening of an account:
Before opening new account, a banker should take certain precautions is that the applicant who wants
to open an account with a bank must be properly intro
Due to the banker by making necessary enquiries from the reference furnished by the new customer
the banker can easily verify and judge whether the person is wishing to open an account.
General precautions to be taken by bank in opening of a new account
By opening an account with the banker and customer enters into relationship with a Banker. Therefore
before opening an account, the banker shoot deserve the following precautions
1. Application on the prescribed format:
To open an account that customer is required to mention his name, occupation, full address, specimen
signature and the name and signature of a person for reference.
2. Introduction off the applicant:
The usual practise of the banker is to demand letter of introduction from a responsible person known
to both the parties. The responsible person who issues the letter must also be cautious because if he supplies
any falls information about a party, he would be liable to compensate for the loss.
A Letter of introduction for a letter of reference protect a Banker in the following ways.
a) Protection against fraud:
* It protect a bank against issuing cheque book and undesirable and dishonest person.
* The banker can find out the character of a new party wear only through this letter.
* The purpose of introduction is to identify the depositor and to find out whether she is a genuine party
or not
b) Protection against inadvertent overdraft:
Bank clerk Mein mystery the balance of customer and pay cheque. The result will be to emergence of
an overdraft. The banker can the customer is good one.
c) Protection against and discharge bankrupt:
*If a new party e happens to be an undischarged bankrupt the fact of which is not known to the banker,
the banker is answerable to the official assignee for the transactions
*It is the duty e of a Banker to inform the existence of an account in the name of an under charg ed
bankrupt and get his consent for the operations of such an account
d) Protection against negligence under section 131 of the Negotiable Instrument Act:
 If a Banker fails to obtain a letter of introduction at the time of opening a new account, it
constitutes negligence on the part of the collecting banker under section 131 of the Negotiable Instrument Ac.
It is the among Bankers to give reference about the financial position of the Year customers to fellow
bankers.
3) Specimen signature:
4) Interview:
At the time after opening of new account, it is always advisable to have an interview invariably
with that prospective customer.
5) Account in cash:
IT is a common and practise among Bank party to open an account only in cash. And the other
hand, if the cheque is used to open an account, the risk are greater.
6) Mandate in writing:
If a new party wants his account to be a operate by somebody is mandatory is secure the
mandate contents the agreement between the two regarding the operation of the account, the specimen
signature of the authorised person and their powers dedicated to the authorised person verification of
documents if the new party happens to be a corporate body, it is essential that the banker shoot verify some of
the documents like memorandum of association and articles of association, trust deed, etc conversant with the
provisions of special acts sincere banker has to deal with different classes of customers, he has to be conversant
with time Indian companies act, Partnership Act etc pay in slip book, cheque book and passbook
7) Pay in slip book:
It is the document which is used for depositing Cash check our bill in the account, it has a
counter file which is returned to the customer for making necessary entries in his book.
Specimen copy of pay in slip
8) Cheque book:
The customer is also supplied with a cheque book which normally contains 10 to 20 blank forms.
Cheque leaf is used for the purpose of withdrawing money, if the customer does not like the cheque book, we
can use a withdrawal form.
9) Pass Book:
A customer is also given a pass book which reflects the customer’s account in the banker’s ledger.it
usually contains the rules and regulations of the bank and the terms and conditions of the deposit
(10) Passport Size Photograph:
Must to affix for identification.
(11)Know Your Customer Norms (KYC)
Objective:
 To enable banks to know and understand their customer and their financial dealings closely.
 A letter knowledge about customer would enable banks to manage their risks lies by avoiding
loans to high risk category of customers.
  As per KYC norms, it is very essential that customers should be allowed to open an account
or have any business dealing with the bank only after by using reliable documents.

ELEMENTS OF KYC NORMS:

*Customer acceptance policy
* Customer identification procedures
*Monitoring of transaction
* Risk of management
i) CUSTOMER ACCEPTANCE POLICY:
(A) No account should be opened inbenamic names.
(B) Clear categorisation of customers into low, medium and high risk
(C)Necessary documents required to be complied with depending upon the above perceived risk
(D) If it is not possible to identify necessary documents it is advisable not to open an account, or even close
an existing a/c.
ii) CUSTOMER IDENTIFICATION PROCEDURES:
(A) For identify –passport, Aadhaar card, Driving license, etc.
(B)For permanent address – ration card, telephone bill, etc.
iii) MANITORING OF TRANSACTIONS:
Banks should pay a special attention to transaction that involve large amounts of cash (I.e) 10 lakh
and above either deposits or withdrawals.
iv) RISK MANAGEMENT
Banks may apply monetary limit based on the nature and type of the account. The internal auditors
should check whether KYC norms and procedures are strictly followed and lapses, if any should be brought
to light immediately.
SPECIMEN:
Special types of customer
1. Minor or infant
2. A married women
3. Lunatic
4. Illiterate person
5. Drunkard
6. Prada women
7. A partnership firm
8. A joint stock company
9. Non- trading companies
10. Private companies
11. Clubs, societies and non-trading Association
12. Actors, administration and trustees
13. Joint account
14. Bankrupts
1. MINOR OR INFANT

A minor is a person who has not attained the age of 18.

According to sec.3 of the Indian majority act, 1875,” A minor is a person who has not attained the age of
18 and in case a guardian is appointed, it is 21”.

The Privileges of A Minor Guaranteed By Law

1) As per sec.11 of the Indian contract act, a contract entered into by a minor is void and is not all enforceable.

2) Even if he borrows money by safely representing himself as an adult, he cannot complied to repay the loan.

3) An adult, who gives a bill of exchange for the debt contracted during the period of his infancy cannot be
used.

4) Minors debt is not valid since the primary contract between and the banker and customers void.

5) A minor borrows money who cannot be complied to repay.

6) A minor has the right to get back the securities pledged for the purpose of securing a loan even without
repaying the loan.

7) A minor can recover even a third party’s securities pledged without repaying the debt.

8) A minor can never be appointed as a trustee.

9) A minor can enjoy the benefits of a partnership firm .but, he is not liable for the debts of the partnership
firm.

10) A minor can act as an agent of an adult who has given the necessary authority to him.

11) Sec.26 of the negotiable instruments act permits a min or to draw and endorse any cheque, bill or
promissory note it will be valid against all parties excepting a minor.

12) A minor can be appointed as an executor, but he can commence his work only after is coming of age.

13) Even a guarantee given by a minor is not valid.

14) A minor cannot be adjudged as an incident either on his own petition or of others.

Bankers duty:

1) To open savings account -10 years of age or above and can sign uninformally.
2) To open current account –always shows a credit balance.

3) It is advisable to open the account in the name of guardian or a joint account in the name of the minor and
guardian.

iii) In case a banker is compelled to grant a loan to the minor, he must see.

a) Either for the necessaries of his life against sufficient securities, or

b) Against a joint promissory note.

c) Against an indemnity bond given by an adult.

iv) If the minor dies, the amount of his credit, is to be paid to his next kin.

2) A MARRIED WOMEN

1) Married women can open and operate an account without the consent of her husband.

2) She can now own properties in her own name even after marriage.

3) She can enjoy only the income from those properties and the ownership would not have been transferred.

4) She can make her husband liable for the overdraft enjoyed by her.

5) The husband can escape from his liability, if he proves that, he has already supplied her with the necessaries
of life.

6) Women enjoys certain privileges.

a) She cannot be imprisoned for non –payment of a judgement debt.

b) She cannot be made an insolvent.

Banker’s Duty:

*A banker can very well open in the name of a married women and it is safe as long as her account shows
a credit balance.

*In case she applies for an OD, the banker should see that she owns separate property in her own name.

* For illiterate women, their left thumb impression should be obtained on the account opening form.

3) LUNATIC:

1) A lunatic is a person of unsound mind according to sec .12 of the Indian contract ac t, 1872, persons of
unsound disqualified from entering into contract.

II) Disqualification Does Not Apply:

(a) To contract entered into by lunatics, during the period of sanity, or

(b) To contracts which are ratified during such periods.

A banker’s duty:

1. No banker will knowingly open an account in a lunatic’s name.

2. If an existing customer may income under such circumstances a banker must immediately stop the operation
of the account.

3. A banker must not be carried away by hearsay information or rumours he must get a definite proof for the
lunacy of his customers.

4. If a banker distances cheque without any proof of the lunacy, he will be liable for wrongful dishonour of
the cheque.

5. The court appoints a receiver when a customer becomes insane through him the bank can carry out hid
operations.

4. ILLITERATE PERSON:

1) The banker can open an account in the name of an illiterate person who cannot sign but the banker can take
his thumb impression as a substitute for signature.

2) The bank should also insist on a copy of the photograph affixed on the account opening form

3) Withdrawals form this account will be allowed only if he comes personally to the bank

5. DRUNKARD:

1) The contract of drunkard with the bank is void.

2) If the customer draws a cheque under the influence of liquid, he will be allowed to avoid the contract.

3) When a drunked presents, the banker should make payment only in the presence of a witness know to both
the parties.

6. PARDA WOMAN:

A contract entered into by a pardanaship women is not a contract free from all defects. The banker should
therefore take due precaution in opening an account in the name of such woman.

7. A PARTNERSHIP FIRM:

* Opening of an Account
 A banker will open an account for a partnership firm only when an application in writing to
submitted by one or more partners.

* Connect of all partners:

Should get a written request from all the partners jointly for opening an account.

*Partnership Deed:

The banker should get a copy of the duty stamped partnership deed to know about details of
organisation the names and address of all the partners and their powers

* Mandate:

(a)The name of the person who is authorised to operate an account.

*It is advisable that the account is operated by more than one partner.

* The authority given to one partner to revote the account.

(b) The Extent of Authority Given To Such Persons:

The nature and extent of authority delegated to the authorised persons must be put
down in clear-cut term such as to draw, endorses and accept bills, overdraw the partnership account, etc.

(c) Personal Account and a Firm’s Account:

*Should not mix one account with another

* A cheque payable to the firm must not be accepted for collection of private account
of the partner without prior enquiry

* If cheque is drawn against the partnership account and is payable to the personal
account, the banker can honour the cheque

* Transfer of funds should be consent with all the partners

CREATION OF MORTAGE:

In the case of mortgage for a partnership loan, the deed of mortgage must be signed by all the
partners.

THE RETRIMENT OF A PARTNER:

At the time of retirement if the partnership account shows the partnership accounts shows the debit
balance and if the banker wants to make
 Lettering partner liable for his share the banker should immediately close the account and open a new
account to avoid the operations
The death of a partner
*Account-credit balance-no objection to continue the operations of an account.
*Account -debit balance-banker must immediately close the account and open a new account in order
to make the decreased partner liable for his shares.
The insolvency / insanity of a partner:
*If the account shows a credit balance Kama the solvent partners are answerable to the insolvent for
his legitimate shares.
*If the account shows a Debit balance, the banker must immediately close the account and open a new
account to make the insolvent liable for his shares.
8) A JOINT STOCK COMPANY:
1) Before opening of an account, the banker should find out whether the company has a legal existence
are not.
2) The banker should obtain the latest copies of the memorandum of association and articles of
association.
3) The Banker must get a copy of the prospectus of the company.
4) The banker should carefully note whether the names of the first directors have been mentioned in
the document are not.
5) If it is and existing company, the banker should demand copies of recent balance sheet and profit
and loss account which will reflect financial soundness.
The board resolution:
The first step in in connection with the opening of bank account is taken by the board of directors.
They pass a resolution authorising the secretary to supply the necessary document to the proposed banker and
open an account. The banker must get certified copy of the resolution and securities it.
*Mandate:
1) The names of person who are authorised to operate the account and their specimen signature on
cheque must be expressed to be on behalf of the company.
2) The Banker should find out whether the authority be transactions, advances, bills securities and safe
custodies as well.
3) Then ever the company wants to introduce any charge in the operation of the account, it must be
done by passing fresh mandate to the bank.
*Borrowing powers:
Every time the company approaches the banker for a loan he should ensure that it is within the powers
of the company. To be on the safer side the banker should obtain certificate from the chairman of the board of
directors to the effect that the proposed advances are in fat within the scope of the unutilized powers of the
directors.
*Powers of loan:
i) If money for the purpose of the Company's business is misappropriated for the different purposes
and if it is unknown to the bank, the bank is not liable for it.
ii) If that Banker has knowledge of it, he must immediately stop the operations of the account
otherwise that company will not be liable.

* Internal procedure:
The articles of association May imposes some internal procedures to be carried out before obtaining
alone. Here comes the banker need not worry about it.
* Registration of charges:
A banker should pay considerable attention to Section 125 of the Companies Act 1956, which gives
a list of charges to be registered within 30 days off signing rose charges. Therefore when a Banker creates a
charge on the Asset of a company he must register it immediately.
*Non registration will affect the security of the bank only.*
I) In the event of the company going into liquidation.
II) Weather is accredited force charge has already been registered on the same property. It may be
possible that debentures might have been issued by creating a floating charge over the Asset of the company.
There for the banker must be very careful in finding out the existence of prior charges.
Directors personal account and the company account:
Old company:
Profit and loss account and balance sheet required to know financial soundness company
* Winding up of a company:
Get company maybe wind up voluntarily by the creditor or by Court, the liquidator has the power to
operate the account, if there is a solution is passed to bank, the bank must stop the operations of the account.
9.) NON TRADING COMPANIES:
Companies limited by guarantee are generally promoted for the purpose of promotion of education,
science, etc. they do not have any implied powers to Baharoful stop hours to 12 must be expressly given in
the document. The banker should take the above mentioned precautions do this type of Companies.
10) PRIVATE COMPANIES:
Private Limited companies are those companies, where in the number of shareholders is limited to 50
and that transferability of the shares is restricted. The banker should pay special attention to the formation of
private companies.
11) CLUBS, SURITIES AND CHARITABLE INSTITUTIONS:
Before opening an account, the banker should observe
1. Incorporation:
The banker should ensure that the society is a properly incorporated body. The unregistered
society cannot be issued in law.
2. Constitution:
Every organisation should have a constitution of its won in the name of buy-law or rules or
memorandum and articles of association. This documents enable the banker to know exactly the rights
and powers of the organisation.

3) Resolution of the managing committee:

For opening and bank account the Managing committee must pass a resolution
a) Appointing the bank concerned as bank by the society.
b) Mentioning the name of person who are authorised to operate the account
c) Giving any other directions for the operations of the said account,
4) Death or resignation:
In case the authorised person dies, the banker should stop the operations of an account.
5) While granting loans do such non-trading club, the banker should examine the borrowing powers
found in the constitution of that club transfer of funds the banker should not transfer societies funds to
personal account of authorised person unless it is affected by the society
12. Execution administrators and Trusty:
Executive and administrators are person who are appointed to conduct the affairs of repose and
after his death. their duties and powers are mentioned in the will (execution ) and in that case of administrators,
it will be defined by the letters of Administration is used by Court went to our person are appointed as execute
as administrator, they should open and joint account with the bank the banker should be buy krashen's to
prevent misappropriating refund of the decrease the banker should not permit transfer of funds the executive
class administrator me played the property at will to obtain and overdraft from the banker..
13) Joint accounts
joint account is one which is opened by 2 are more individuals full staff while opening a joint account,
the banker must get clear mandate in writing, containing instructions excreta how the account is to be operated
M and it should contain the following details
1. Drawing of Cheques:
A banker should get very clear instructions as to whether all of them are some of them are any one of
them can run on the account full staff usually bankers put down such conditions in the application from itself
which should be signed by all.
2. Powers to overdrawn:
Dumb and it must contain clear instructions as to whether the authorised person have the right to
overdrawn the joint account....
3. Survivorship:
Dumb and it should also deal with the problem of survivorship. as per ordinary rules on the death of
any one of the joint account holder, survivor is entitled to get all the account. this right is an implied term of
the contract between the banker and customer full stops the banker is not answerable to the representative of
the decrease person..
4. Delegation of power
Joint account holders can delicate jointly the authority to operate the account to an outsiders also.

5. Insolvency / insanity / death of the joint deposit holders:

In the case of bank robbery are insanity of one of the joint account holders, the banker should stop the
operation of the account. in solvent are insane person, the rule of survivorship is not applicable in case of
death of any one of them, the rule of survivorship is applicable.
6. Borrowing:
In that case of borrowings, all the joint account holder must make a joint demand, signed by all. No
banker will accommodate them in the absence of such ad joint request letter
7. Joint account in the name of husband and wife:
Joint account can be opened in the name of your husband and wife. it has been clearly established
that a joint account in the name of the husband and wife does not come on the death of the husband, constituted
gift to his wife.
Types of deposits:
1. Demand deposit - popularly known as current accounts in India.
2. Time deposit- known as fixed deposit.
3. Saving deposit.
4. Combination of Above mentioned deposits.
1. Recurring deposit account
2. Insurance of bank deposit
3. Deposit scheme for Indians abroad
Demand deposit
Demand deposit are popularly known as current accounts and are technically referred to as floating
deposits. It includes savings bank deposits also.
a) Current deposit:
Current account is running account between banker and his customer and it has and unrestricted
operations. A customer can operate account any number of times during a working day. It is a Banker demand
liabilities since they are to be replied on demand that current deposits are more important than the fixed
deposits. By accepting current deposit the banker undertakes to his customers check up to the credit balance
in his account. The bank will only be liable when he pays forget check the banker has to supply the check
from and passbook to the current account holder free of charge no interest is allowed on current account by
banker in India. The banker must have to keep reserve to return deposits whenever they demand current
account are generally opened by large scale Businessman, joint stock companies etc.
Features of current account
1. Object objective- objective- handling of cash dealing and reducing the risk involved in it.
2. No interest is allowed on current account by bankers
3. Most Bank charge incidental charges and search account which depend on the balance kept.
4. Cheque book facility can a way to all current account holders but only if you to Savings Bank
deposit account holder
5. Third party cheque can be collected only through current
6. Overdraft facilities are available to only current account holder
7. Cash credit can be availed only if current account are maintained
8. The loans and advances provided by banks to these customers are made available through current
account.
Advantages of having a current account:
1. As cash cheque and draught are deposited in the bank account, they will preferably safe.
2. The customer can make his payment more conveniently by issuing cheque, it saves time.
3. Payment to creditors situated at a distant place is facilitated.
4. Collection of cheques drawn on bank situated outside the place of business become easier.
5. Check farms at the bank serves as a receipt. It can be referred to be case of dispute.
6. Nomination facility is available for current account holders open the other individually or jointly.
7. Current account can be transferred from one branch to another.
8. If that cheque issued by the customer shows Debit balance, it would be deemed by the bank as an implied
authority by the customer to the bank to pass the cheque and allowing a temporary Debt.
9. Standing instructions for remittance such as insurance premium subscription for clubs, etc., will be carried
out by his bank object to levy charge.
(*Opening of a new account (Refer unit 1)
(*Operating the account (Refer unit 1))
Entries in passbook:
a) Entries favourable to customer.
b) Entries favourable to banker.
a) Entries favourable to customer:
Example;
i) Double credits.
ii) Credit of higher amount.
iii) Omission of certain debit items etc.
b) Favourable to the banker
i) These entries are favourable to the customer and against the banker
ii) Under the circumstances can the customer is get the mistake rectified as soon as he happens to
detect it
 iii) The rights of the customer does not lapse even if he returned the passbook without rising objection
regarding any entry or if he remains silent
iv) Limitation period for recovery of money paid under mistake
Limitation period is restricted to 3 years from the date of detection of mistake
Specimen:

2. Fixed deposit account

*Fixed deposits are also known as time deposit, being repayable only after expiry of a particular time
or period. It is defined as a deposit of a definite some for a fixed period attach fix rate of interest
*Fixed deposits carries relative Li higher rate of interest because fixed deposits enable the banker to
employee the funds profitably for relative longer period
*Fixed deposits are not refundable as and when customer likes
*The term deposit usually where is between 3 month and 5 years
*Can use fixed deposits for lending are investment without keeping any reserve to earn income and so
it pays interest on fixed deposit.
Features of fixed deposits:
1. Fixed deposit can withdraw only after maturity period. Often banker permit the customer to withdraw one
period to the fix period as a sort of convenience and in such cases interest is foregone are premature repayment
is allowed on a loan basis.
2. On the deposits being made the banker issues deposit receipts as acknowledgement.
3. Relationship between banker and customer in respect of fixed deposit is that of fixed deposit is that of
debtor and creditor.
4. Not negotiable the banker should not pay the fixed deposit to any third party even if it bears the signature
of the depositor the depositor has to execute assignment deed and notify to the bank in case he wants to transfer
the deposit receipt to anyone else...
5. Fixed deposits may be opened in the name of minors and they can give valid discharge for the deposit
amount repaid to them.
6. Deposit receipt given by banker is exempt from stamp duty.
7. In case of insolvency the amount should go to the official assignee in case of death the amount should go
to his legal heirs.
8. A less of fixed deposit receipt:
* Deposit receipt should be returned to the bank duty discharged before payment can be made the depositor
cannot claim money unless he return the fixed deposit to the bank
*In case of loss deposit receipt a court may exercise its equitable jurisdiction and allow the depositor to
claim the money without producing deposit receipt but it is not negotiable
9. Law of limitation:
* Even through the fixed deposit receipt is to be for produced for repayment the period of limitation will not
begin till its return
* The law of limitation does not apply to a fixed deposit no long as internet is bring paid on it or till is renewal
* If the deposit account is repayable after the expiry of period the law of limitation begin to operate
immediately after the money due to be repaid
*If the deposit account is repayable on demand the law of demand begins to operate when demand repayment
has been made
10. Garnishee cader
A fixed deposit is attachable by the garnishee order which attaches all debt due or occurring due if a
debtor fail to pay the debt owned by him to his creditor the lader may apply to the cart for the issue of a
garnishee order on the banker of his debtor the banker is porabitierd from paying any amount to the customer
from the date of receipt of the order nisi.
(Garnishee order must be attached to the following deposits
i) A deposit repayable on demand of
ii) A deposit repayable after the expiry of a fixed notice
iii) A deposit repayable at fixed future date
11. Donator mortis cause:
A deposit receipt can be given as a donation .the dime can claim the amount.in the event of deals and the
court will compact the legal representatives of the deceased donor.
12. Disallowance of drawing of cheque:
Fixed deposit account cannot be operated upon through the issuing of cheques but where a customer has
given instruction to the banker to transfer the fixed deposit amount along with interest to the former’s current
account with the same bank then cheques can be drawn.
13. Deposit in joint names:
Bankers deposits in joint names also in such a case both parties should join in for withdrawal except where
one of them is deceased in such circumstance, banker can repayment to any one of the survivor.
14. Rates of interest on fixed deposit:
* Interest at a specified rate is admissible on the amount held in the deposit account for the concert period
* Interest is not allowed with expiry of the deposit period unless renewed
* The rates of interest terms and conditions on which the bank accepts these deposits are regulated by
the reserve bank of India.
* Fixed deposits are now classified into different categories with varying periods of maturity starting
from 15 days.
15. Renewal before maturity:
The reserve bank has permitted the bankers to renew an existing term deposit before maturity without
invoking the penalty provided.
16. Payment of interest:
The banker usually pay interest quarterly or half- yearly also at the request of the depositor the depositor
is required to present the receipt for the purpose of necessary entry regarding payment of interest and
withdrawal of interest or the principal since cheque are not permitted.

The habit of saving on regular basis in order to take the advantages of getting higher rate of interest than
that of saving deposit account. Under this deposit account, customer is required to deposit fixed sum generally
are multiple of rupees 50 or rupees 1000 for every month for a specified period. Therate of interest on this
account east almost equal to the amount of fixed deposit account.
Some bank refer to these account as cumulative time deposit account. Account maybe opened by
● A person in his own name
● To or more person, the amount being payable to all of them jointly or to either
● A minor join with his guardian
A minor in his own name is provided to enough comprehend the transactions may be 14 years of age.
A loan against recurring deposit account may also be allowed to the extent of 75%of the amount
standing to the credit of the account. Recurring deposit can be offered as security for grants of loans or
overdrafts.
Insurance of bank deposit:
An important and unique feature of the Indian banking system is that deposit of the public with the banks are
insured up to RS 1, 00,000 in each account.
Features
The scheme of deposit insurance applied to all banks including non-scheduled commercial banks,
cooperative banks and regional rural banks. Hence all the banks are called insured banks.
The insurance cover is available to all the deposits made by the public except the deposit of the central
and state government, foreign government and commercial banks.
The insurance cover is limited to the deposits held in the bank up to RS 1 lakh The Corporation
maintains two funds:
* Deposit insurance fund
*General fund
Deposit scheme for Indian abroad:
Banks in India are operating 2 types of
1. Rupee account
2. Foreign currency account
To open an account under any of the above schemes means for non-resident Indians he has to qualify
following conditions.
1. He is an Indian citizen, who stays abroad for employment or carrying on a business indicating an
indefinite period of stay outside India.
 2. He is an India citizen ,working abroad with international organisation like UNO, IMF etc.
3. He is an official of state or central government undertaking depute abroad for temporary assignment
4. Spouse of Indian citizen is also deemed to be of Indian origin.
Rupee account:
A).NRO accounts
An account opened by a resident Indian to which local funds are credited .these not qualify for remittance
outside India
. B) .Non resident account scheme: The accounts are maintained in Indian rupees. The money in these
account can also be invested in govt securities. Interest on these accounts are tax free.
2.Foreign currency notes:
Foreign currency account scheme 1993:
Under this scheme banks permit exchange rate guarantee to the depositors. Deposit of one year or above
up to 3 years are permitted and these deposit moblisied need not be surrender to RBI..
These deposits are accepted in five currencies viz, US dollars ,UK pound Sterling ,German despatch mark
,Japanese yen, and Euro entries for pass book.
Collection of banker
The term collecting banker refers to a function of receiving cheques by a banker from the customer for
the purpose of collecting proceed and crediting them to the respective customers account.
The collecting banker accepts the bankers cheque, bills of exchange and other negotiate instrument issued
or endorsed in favour of his customer and forward them to the paying banker to collect the amount specified
there in and credit the respective accounts with the proceed there of.
Capacity of the collecting banker:
● Holder for the value
● Agent of the customer
With the bank receives a cheque for collection from the customer the banker act as an agent of the customer
but he becomes a holder he pays amount of cheque or credit the amount of the cheque to his customer in
anticipation of collection .He becomes holder in a due course.
Collecting banker as a holder for value:
A banker becomes it's holder for value by giving it's value to the customer in any of the following ways
: ● By lending on the strength of the cheque
● By paying the amount of the check
● By agreeing to allow the customer to withdraw before the cheque is cleared.
● By giving cash over the counter of the cheque at the time it is paid in for collecting
. ● By accepting the cheque vowed reduction of an existing overdraft.
B) .Collecting banker as an agent:
The customer will be allowed to withdraw the amount of cheque after the payment is realised from the drawee
bank. As an agent of his customer the collecting banker does not get a better title than that of his customer.
Suppose the customer has a defective title ,the collecting banker cannot have a good title to the cheque. In
case the cheque collected by him did not belong to his customer he will be held liable for “conversion of
money".
Functions of an agent banker:
1.Presentment of cheque without delay:
It is the duty of the bank to present the cheque for payment without delay.It must be presented to the
drawee bank within a reasonable period of time.In case the collecting and paying bankers are in the same place
the collecting banker should present the cheque the next day after receiving the same.
Reasonable time depends upon the circumstances of each cases.Reasonable time is determined having
regard to:
1. The nature and of the credit instrument
2. Usage of trade and bankers
3. Facts of a particular case
2.To serve notice of dishonour:
In case the cheque is returnedto the collecting banker without payment for one reason or the other the
banker must serve a notice of dishonour on his customer to enable the letter to claim the amount from previous
parties including the drawer.
If the banker fails to send such notice within reasonable time ,he will be liable to the customer for any
loss suffered by him as a result of such mission on the part of the banker.
If the banker is the holder of the value and is not an agent of the customer while collecting the cheque
he must give notice of dishonour to all parties to the cheque. So as to make all or any of them liable for the
payment of amount of the cheque.
3.Duty to make over the proceeds:
In crediting the proceeds of a draft paid into the bank for collection to the account of customer there should
not be any delay on the part of the collecting banker.The draft should be enabled strictly in accordance with
the instructions of the customer.
The collecting banker is given statutory protection subject to the fulfilment off the following conditions:
1. The cheque must be a crossed cheque
The statutory protection is available to the banker only in case of cheques crossed generally or specially to
himself. He can claim no protection in case of open cheques in case of uncrossed cheques by collecting banker
himself after having received it
. 2. Collection must be on behalf of customer
A customer is one who has an account with the banker and his dealings with the banker are in the nature of
banking business.
Suppose a cheque has been collected for a person who has not been a customer of a banker then the
banker is not entitled to claim protection under this section. The statutory protection is available to the banker
if he collects the cheque as an agent of the customer and not as if holder for value.
3. Payment must be received in good faith and without negligence:
The collecting banker can claim protection only if he received payment in good faith and the without
negligence. A thing is deemed the to be done in good faith when it is in fact done honestly whether negligently
in receiving payment.
Negligence depends upon the circumstances of each cases . Generally negligence indicates lack of cases
which so ought to be taken in any circumstances
Precaution to be taken by the collecting banker:
1. He must have received payment only for a customer and not for a stranger
2. He must receive payment in his capacity as an agent of his customer
. 3. The title of the customer to the cheque should be closely examines by verifying the regularity of
endorsement of other contents of the cheques.
4. He must have acted in good faith and without negligence.
5. The cheque must have been crossed before it came into the possession of the collecting banker.
Circumstances in which the banker become liable:
1. Commission to obtain reference from a new customer when opening the current account:
When a customer is requested to open an account with cheque payable to his employer. He was duly
introduced by another customer of the bank. The bank asked the prospective customer to get a written
confirmation of his right to deal with the cheque
E.g.: one of the account was in the name of the clerk and other in the name of the wife of the other clerk.
He name of the clerk employee or the employees of the customer husband were not obtained by the bank when
these accounts were opened. It was held that the bank was negligent.
2. Emmission to verify the correctness of endorsement on cheques payable to orders:
The collecting banker has to ensure that all the endorsement on cheque presented to him are regular .It
was held in one case that the collecting banker was negligent in not detecting that an endorsement and a
signature to a receipt on a cheque did not correspond with the name of the payee.
 UNIT 3

CHEQUE:

Definition:

Section 5 of the negotiable instrument act defines a bill of exchange as follows:

“An instrument in writing containing an unconditional order, signed by the maker, directing a certain
person to pay a certain sum of money only to, or to the order of certain person or to the bearer of the
instrument.”

Chalmers points out that “all cheques are bills of exchange but all bills of exchange are not cheque.”

Distinction:

Cheque Bills of exchange

1. A cheque is always drawn on a printed Need not to be drawn in printed form.
form
2. The drawer (banker) need not accept a Acceptance by the drawer is essential
cheque.
3. A cheque in always supposed to be There is no such supposition
drawn against the funds in the hands of
the banker.
4. A cheque is an instrument of immediate It is drawn for specified period and so it is
payment interested for circulation

5. The liability of the drawer continues for Unreasonable delay in the presentation will
six months discharge the bill
6. A cheque is free from stamp duty A bill is subject to advalorem duty
7. It is not drawn in sets Foreign bills are always drawn in sets
8. It may be traced to ensure safety It cannot be traced
9. A cheque may be countermanded Countermanding is not possible.
10. It is not protected of note on dishonor. It is usually protected and noted for
dishonor.
 11. In case of dishonor notice of dishonor to Notice of dishonor must be sent to hold the
the drawer is essential party liable
12. Statutory protection applies only to Statutory protection is not possible in the
cheques case of bills.

Salient features of a cheque:

1) It is an instrument in willing
2) A cheque is to be drawn only on the branch in which the customer is maintaining an account.
3) Before drawing a cheque, the customer must have sufficient funds in his account otherwise it will get
dishonoured.
4) A cheque is an order by the customer on the bank and so the cheque should be very clear instruction
given to the banker.
5) As the cheque is meant for payment of money the amount mentioned in the cheque should be specific
and should be written in both words and figures.
6) A cheque is payable to specific person.
7) To receive payment on a cheque an individual on whom the cheque is drawn need not have an account.
8) But when the cheque is given to an individual is crossed he must have an account in the bank or else
he cannot receive payment.
9) A cheque is payable either to order or bearer.
10) An order cheque is one which is payable only to a specific person or whom so ever he orders. Ex. ‘pay
to y or bearer’.
11) When Y wants to transfer, he will have to endorse the cheque by signing on the back side of the cheque
and deliver it to the transferee.
12) But when it is a bearer cheque Y can simply hand over the cheque to any party to whom he wants to
transfer. In the case of a bearer cheque, the word or bearer will not be cancelled.
13) Signature is an important aspect in a cheque. A cheque should be signed by the customer and the
signature in the cheque should be as per the specimen signature given by account holder at the time of
opening an account.
14) Date appearing on the cheque is a date on which the cheque is said to have been issued. A post dated
cheque will never be honoured by the bank.
15) The number appearing on the cheque at the bottom represent the cheque number and code number of
the bank.
16) Endorsement are done when an order cheque is transferred and the endorsements appearing on the
cheque mention clearly the manner in which the cheque is transferred from one person to another.

CROSSING:
 In Bellay Vs Morjori, Banks, it was also said that “…. Crossing is a mere memorandum on the face of
the cheque and forms no part of the instrument itself and in no way alters its effects..”

KINDS OF CROSSING:

1) General crossing
2) Special crossing

GENERAL CROSSING:

Sec. 123 of the Negotiable Instruments act, 1881 defines general crossing as follows. “where a cheque
bears across into face, an addition of the words; ‘ and company’ or any abbreviation thereof, between two
parallel transverse lines or of two parallel transverse lines of two parallel transverse lines simply, either with
or without the words “not negotiable”, that addition shall be deemed to be a crossing and the cheque shall be
demanded to be crossed generally.

Essential of general crossing:

1) Two lines are paramount Importance in crossing.

2) The lines must be drawn parallel and transverse. Transverse means, that they should be arranged in a
cross wise direction. They should not be straight lines.
3) The lines are generally drawn on the left hand side. Preferably the line should cut across some of the
writings.
4) Two transverse line has been write on the practice when the drawer does not know the name of the
payee’s banker Ex. ‘and company’.
5) The words ‘ not negotiable’ may be added to a crossing, but, they themselves do not constitute a
crossing.

Forms of crossing:

Significance of general crossing:

 1) It gives a direction to the paying bankers.
2) Payment is made through an account a
3) and hot at the counter. Sec 12b of the act clearly says that, “where a cheque is crossed generally, the
banker on whom it is drawn, shall not pay it otherwise than to a banker.”
4) If a crossed cheque is paying at the counter.
a. The paying banker will lose his statutory protection.
b. He has no right to debit his customer account.
c. He will be liable to the drawer for any loss.
d. He will be liable to the true owner of the cheque who may be a third party, irrespective of the
fact, that there is no contract between the banker and third party.
5) The main attention of crossing cheque is to give protection to it. When a cheque is crossed generally,
a person who is not entitled to receive its payment, is prevented from getting that cheque cashed at the
counter of paying banker.

SPECIAL CROSSING:

Sec 124 of the negotiable instrument act of 1881, defines, “where a cheque bears across its face, an
addition of the name of a banker with or without the words ‘not negotiable’, that addition shall be deemed a
crossing, and the cheque shall be deemed to be crossed specially and to be crossed to that banker”.

Essentials of special crossing:

1) Two parallel transverse lines are not at all essential.

2) The name of a banker must be necessarily specified the name of the banker itself constitute special
crossing.
3) It must appear on the left hand side preferably on the corner.
4) The two parallel lines and the words ‘not negotiable’ may be added to a special crossing.

Significance of special crossing:

1) The direction is that the paying banker should pay the cheque only to the banker. Where name
appears in the crossing. Sec 126 of the act clearly lays down that ‘ where the cheque is crossed
specially the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it
is crossed or his agent for collection.
2) If a cheque specially crossed to a bank, not in the capacity of its agent, the paying banker is justified
in returning the cheque.
3) A special crossing gives more protection than a general crossing.
4) In special crossing, the cheque is specially crossed to the payee’s banker. Hence, the banker in
whose favour the cheque has been crossed, knows to payee and his specimen signature so well.
5) Supper who has an account in the come lank but different branch an incruplous person can encash
it by flogging the signature of the payee.
Forms of special crossing:

NOT NEGOTIABLE CROSSING:

Sec 123 and 124 of act permit the where of the world ‘ Not Negotiable’ in the crossing

Forms of not negotiable crossing:

Significance of not negotiable crossing:

1. Not negotiable does not mean not transferable.

2. Negotiability is a broader term which include transferability. It means transferability by mere delivery
or endorsement and delivery plus transferability free from defect.
3. If a document is a negotiable one, bonofide transferee who receive it in good faith and for value paid
can obtain a good title despite the facts.
4. In case, a document is a not negotiable instrument, the transferee cannot obtain a good title, when there
is a prior bad title.
5. A cheque crossed not negotiable can be transferred like any other cheque.
 6. Sec 130 of the negotiable instruments act that, A person taking a cheque crossed generally or specially
; in either case bearing the words Not negotiable shall not have and shall not be capable of giving a
better title to the cheque than that which the person from whom he took it had.’’
7. Not negotiable is a warning to the person. Who take this document, that he should be very careful in
receiving it.
8. A cheque crossed ‘not negotiable’; transferee should know the previous endorsers and their good title
to that cheque.
9. Ex; drawer makes the cheque and cross it .when combines sending dividends to shareholders in the
form of cheque. there may be chance of over change in payee’s name .if it is crossed as “not
negotiable’’ gives caution to the banker and the bank has to take utmost precaution while making
payment. The banker will be held liable for negligence.

ENDROSEMENT:

Meaning:

When the maker or holder of a negotiable instrument sign the same otherwise than as such maker, for
the purpose of negotiation on the back or face there of or on a slip of paper annexed there to he is said to
endorse the same and is called the endorser.

Definition:

Section 15 of the negotiable instruments act defines endorsement as follows:

“When the maker or holder of a negotiable instrument sign the same, otherwise than as such maker. purpose
of negotiation ,on the back or face thereof or on a slip of paper annexed thereto ,or so signs for the same
purpose a stamped paper intended to the completed as a negotiable instrument ,he is said to have endorsed the
same and is called endorser’’.

Thus an endorsement consists of the signature of the maker (drawer) of the negotiable instrument or any
holder thereof but it is essential that the intention of putting the signature on the instruments should be
negotiation, otherwise it well not constitute an endorsement.

The person who signs the instrument for the purpose of negotiation is called the “endorser” and the person
is whose favour instrument is transferred is called the “endorsee”

Legal provisions recording endorsement:

1. Effect of endorsement;
 Sec 50 provides that the endorsement of a negotiable instrument followed by delivery transfers to the
endorse the value therein with the right of further negotiation thus ,the endorsee acquires the property and also
the right in the instrument as its holder and he can also negotiate it further.

Ex ;In kanju pillai and others vs periasamy (1969).The trial round held that the endorsement for collection
created the relationship of principal and agent between the original payee and the endorsee and on the death
of the payee .the agency came to an end in terms of section 201 of the Indian contract act ,1872.

Endorser:

1) Every role maker, drawer, payee or endorsee of a negotiable instruments may endorse and negotiate
the same.
2) Section 51 provides that this is subject to the condition that the right to negotiate has not been restricted
or included. Ex; A bill is drown payable to x or order .endorsers it to y but the endorsement does not
contain the words “or order” or any equivalent words. This does not restrict y from further negotiation
of the instrument
3) Time :
a. As Per section 60 a negotiable instrument may negotiated until its payment has been made
by the banker drawee or acceptor, at or after maturity but not thereafter.
4) Endorsement for a part of the amount :

Sec 56 provides that if an endorsement is made on the instrument for transferring only a part of the
amount appearing to be due on the instrument, the endorsement is not valid .therefore, the instrument
must be endorsed for the entire amount. But in case an instrument has been partly paid, it may be
negotiated for the balance of the amount provided a note to that effect is given on the instrument.

5) if the endorser dies after endorsing the instrument payable to order but without delivering the same to
the endorsee , such endorsement shall not be valid and this legal representative cannot complete its
negotiation by mere delivery thereof
6) Unless contrary is provide, it is presumed under section 118 that the endorsement which appears on
the instrument first has been made earlier to the second one.

Rules for endorsement or essential of a valid endorsement:

1. The endorsement must be written on the instrument itself or on a slip of paper annexed
thereto.
2. It must be made by the holder of the instrument.
3. It must be signed by the endorser .the endorser must sign his name in the same spellings
as appearing on the face of the cheque.
4. An endorsement written on an along is deemed to be written on the instrument itself.
 5. The endorser should endorse the instrument in full and not part.
6. If an instrument is payable to the order of two or more payees or endorsees who or not
partners, all must endorse unless the one endorsing has authority to endorse for all others.
7. Endorsement is complete only when the instrument is delivered .the delivery must be
made by the endorser himself.
8. Endorsements can be made by the endorser merely by signing his name on the instrument
or by adding the name of a specified person to whom the endorser likes to endorse

Kinds of endorsement:

1. General or blank endorsement:

If the endorser just put his signature without specifying the name of the endorse, endorsement
is said to be blank.

E.g.; A cheque payable to

Mr.b.senthilnathan may be endorsed as ‘b.senthilnathan’, i.e ., merely sign on its back .

according to sec 54 ,a cheque which is endorsed is blank becomes payable to bearer even through it was
originally payable to order but if a cheque is crossed one ,its payment cannot be made at the counter of the
bank ,even if it is this endorsed in blank .

2. Special or full endorsement:

If the name of the endorse is specified in whose favour it is being endorsed, along with the signature of the
endorser is called endorsement in full

Eg ; “pay to A. Kumaran ‘or’pay to A.kumaran or order”,are made ,such endorsement is called endorsement
in full .

An endorsement in blank may be converted into ‘endorsement is full’ by the holder by merely adding above
the endorser’s signature, direction to pay to any other person

Eg; A cheque is endorsed is blank by B.Senthilnathan and transferred to A.Kumaran who endorsers it in favour
of B. Raman the better transfers it A.sita without any endorsement.

If the cheque is dishonoured, he cannot else A.kumaran or B.Raman but she can use B.Senthilnathan only.

3. Conditional endorsement:

It is an endorsement under which the endorser lays down some conditions to be full filled by the payee
before making the payment this type of endorsement involves a special problem because, according to the
definition of a cheque, it is an unconditional order payable on demand
 Eg; endorsement ‘pay to x after he signs the enclosed receipt’

4. sans resource endorsement:

In this case, the endorser make it clear to the endorsee that the endorser would not be liable in case the
instrument is dishonoured.

E.g.; pay to x without recourse to me.

5. Restrictive endorsement:

Restrictive endorsement, by written words restricts the right of further negotiation in this case, an endorser
specifies that the banker should pay the amount to a particular endorsee only.

Eg; pay to x only.

6. Facultative endorsement:

The endorser waiving the right of “notice of dishonour “of the instrument, while making the endorsement
is called facultative endorsement .it means that future endorsers need not serve a notice of dishonour to the
endorsers who has made search facultative endorsement.

Eg; pay to x or order –notice of dishonour waived.

7. Partial endorsement:

If the endorsement is made for the part of the amount of the instrument it is called “partial endorsement
“but such an endorsement is not valid

Marketing of cheques:

Marketing of certification refers to the practice of indicating on the cheque that there are funds in the
account of the drawer to meet the cheque.

When the payee is unknown to the customer of the bank hesitates to accept a cheque for the goods
supplied ,the customer may require the banker to mark the cheque as good for payment .the authorised officer
to the bank writes the words ‘good for payment ‘or ‘approved ‘or ‘certified ‘and then puts his signature on
behalf of the bank.

Marketing of a cheque means making remarks by the banker testifying to the adequacy of the drawer to
meet its effects.

Advantages:

1. Marked cheques are useful to traders because they increase their credit worthiness.
 2. If a trader wants to buy goods from a stranger against payment by cheque. Marked cheque will coneince
the seller about the payment of the cheque.

3. It gives additional currency by sharing on its face that it was drawn in good faith on funds sufficient to
meet its payment.

4. It adds credit of the drawer as well as the banker on whom it is drawn.

Procedure of marking cheque:

1. Marking may be done by the banker at the instance of:

a) Customers (drawers)

b) At the request of holders.

c) At the request of another banker

if the marking is done on the request of the drawer ,the banker has to honour the cheque on its
presentation by the holder .the banker marking the cheque at drawer’s request is entitled to earmark money
out of drawer’s account for the purpose of honouring such cheque.

When the marking is done by the banker at the request of the holder, the banker‘s liability is limited on
presentation .it may be honoured if the funds are sufficient.

If the marking is done for another banker, it is construed as a promise to pay. The banker is entitled to
take into account the cheques so marked, in estimating the balance available the marked cheques.

Marking of post-dated cheque is invalid in India.

When the cheque is marked by a banker, he should make note of it in the respective account in the
ledger.

Effect of marking (or) significance of marking

The effect of marking depends upon is to give a cheque additional currency by showing on the face of it
that the cheque was drawn in good faith and on funds sufficient to meet its payment by adding the credit of
the banker to that of the drawee.

Marking may be done at the instance of the drawer of the cheque of at the instance of the holder.

Marketing at the instance of the drawer:

In this case, the banker is entitled to appropriate the amount of the cheque from the balance standing to
the customer’s account .he is justified is treating the balance in the customer’s account after the dedurtirm of
the amount of the marked cheque as the effective balance standing to the customer’s credit, as such he is
entitled to dishonour a customer’s cheque when the effective balance is insufficient to meet it.
 The banker has the right to debit the customer’s account with the amount of the cheque even after the
accordance of an event, which has the legal effect of stopping the account such as the death or insolvency of
the customer

It must be understand that the banker only certified the geniuses of the drawers and signature and
sufficiency of funds at the time of marking the cheque.

2. Marking at the inotance of the holder:

If the marking is done at the instance of the Payee or holder, the banker doesn’t find himself to make
payment on Presentation.

E.g.: Leading case in India.

Punjab National Ltd., Vs The Bank of Baroda Ltd., The facts of the case are as follows : On 13 th Jun 1939,
the manager of the Calcutta branch of the bank of baroda marked crossed post-dated cheque for Rs. 2,75,000
bearing the date 20th June 1939, with the words marked good for payment on 20.6.1939. The cheque drawn
by a person who had an account with the bank of Baroda as well as with the Punjab national bank.

The cheque after marking, was paid into the Punjab national bank by the customer, obtained payment
of the amount of the cheque.

On 19.6.1939 the manager of the bank Baroda was suspended for some regularization committed by
him, and the notice of the cancellation of his power of attorney was duly give to all banks concerned.

When the cheque was presented to the bank of Baroda on 20th June it was dishourned. Therefore the
PNB failed assured against the bank of Baroda for the recovery of the amount of the cheque.

It was held that PNB couldn’t recover money from Bank of Baroda.

1. Marking of cheque doesn’t amount to acceptance, since a cheque doesn’t require acceptance at all.
The holder of a cheque had neither the need nor the authority to require the acceptance of the
drawee bank.
2. There was no commercial practice or custom according to which marking was treated as
acceptance.
3. Certification can be taken as a representation as to the geniuses of the cheque and the signature of
the drawer. But as representation regarding the sufficiency of funds at a future date, it has no
meaning.

Marking at the instance of the collecting banker:

A banker who receives a cheque too late for inclusion in that days clearing may send it to the drawee
bank for the certification if a such a cheque is certified the certifying bank is bound to honour it but the marking
is not acceptance, while marking is inconsistent with further negotiation.
Marking as between bankers:

Marking between bankers has been recognised as a judicially established custom they do it for the
purpose of the clearance and they become bound to each other. When a cheque is presented for clearing after
clearing it may be marked.

PAYING BANKER:

The term paying banker is used to denote the position and duties of the drawee bank in regard to the
payment of cheque drawn on into by customer. The money of the customer in his bank account is payable on
demand by honouring the cheque drawn by the customer. Thus the paying banker in the drawee bank who
pays on the cheque of his customers.

Duties of a Paying Banker:

1. According to the provision of section SI, if the drawee of a cheque has sufficient funds of the drawee
in his hands which can be properly used to pay cheque, he must pay the cheque when required to do so. If
there is any loss or damage to the cheque paying banker liable to compensate the drawer.

2. The paying banker must pay the cheque to the genuine payee as per the directions of the customer.

3. The payment should be made during bank hours.

4. He has to honour the cheque that is drawn against the account maintained at the branch of the bank
where the cheque is presented.

5. He should not make payment of crossed cheque at the counter (i.e) crossed cheque should be paid
through a banker if cheques are crossed generally are through the specified banker in case of crossing.

Statutory Protection to the paying banker:

A paying banker pays a cheque which bears a forget signature of the payee endorsee, he is liable to the
true owner of the cheque. But, the paying banker is not accepted to know the signature of the payee or
endorsee. Therefore, law relives the paying banker from his liability to the true owner in such case.

Statutory Protection under Indian Law:

Where a cheque payable to order purport to be endorsed by or on behalf of the payee, the drawee is
discharged by payment in due course. To claim protection under sec 85, the banker should fulfil the following
conditions:

(i).He should have paid an order cheque

(ii).Such a cheque should have been endorsed by the payee or his order

(iii).It should have been paid in due course.

 1) Protection in case of order cheque:
The paying banker is granted protection if he makes payment of order cheque with forget
endorsement on behalf of the payee.

To condition must be fulfilled to avail such protection:

1) endorsement must be regular
E.g.: if a cheque payable to ‘Ravindran’ in endorsed with the signature of the same name and
in the same spelling, it is a regular endorsement.
But if the endorser sings as ‘Ravi’ the endorsement will be irregular.
Hence, the banker need not verify the identification of the person who sings on the
cheque.

2) Payment must be due course:

1) Payment in due course should be made at or after maturity .e.g.; payment of a post-
dated cheque is not a payment in due course.
2) The payment must be made in good faith and without negligence.
3) The payment must be made to the person in possession of the instrument.
4) Payment must be made under circumstances which do not afford a reasonable ground
for believing that he is not entitled to receive payment of the amount mentioned therein.
5) Payment must be made in money only (bank notes or currency notes)
Payment in case of bearer cheque:
A cheque originally issued as a bearer one continues to be a bearer cheque
irrespective of the fact that it bears endorsement in full or in blank or whether any endorsement
restrict further negotiation or not .
Protection in case of crossed cheque:
Sec 128 says, where a banker on whom a crossed cheque is drawn has paid the same in
due course, the banker paying the cheque and the drawer thereof , shall respectively be entitled
to the same lights and be placed in the same position in all respects ,as they would respectively
be placed if the amount of the cheque had been paid to and received by the true owner thereof.
Protection of payment of crossed cheque has to fulfil to following requirements:
1. He has made payment in due course. (ie)in good faith and without negligence .
2. The payment has been made in accordance with the requirements of crossing.

Collective banker:

The term collection banker refers to the function of receiving cheque by a banker from custom for the
purpose of collecting the proceeds and crediting them to the respective customers account.
 The collecting banker accepts the cheques, bills of exchange and other negotiable instruments issued
or endorsed in favour of his customer and forwards them to the paying banker to collect the amount specified
them and credit the respective accounts.

Statutory Protection of collecting Banker:

According to sec 131, a banker who has in good faith and without negligence received payment for a
customer of a cheque, crossed generally or specially to himself, shall not, in case the title to the cheque proves
defective, incur liability to the due owner of the cheque reason only of having received such payment.

The statutory protection is available on the collecting banker only if he fulfils the following conditions:

1) The Cheque he collects must be a crossed cheque.

2) He must collect such crossed cheque only for his customer as an agent and not as a holder for
value.
3) He must collect such crossed cheques in good faith and without negligence.

1) Crossed cheques only:

Statutory protection can be claimed by a collecting banker only for crossed cheques. In the case of an
open cheque, it is not absolutely necessary for a person to sick the service of a bank, so a banker when
collecting and open cheque, in which his customer has no title, becomes liable for conversion.

2) Collection on behalf of customers as an agent:

The above protection can be claimed by a banker only for those cheques collected by him as agent
for his customer. If he acts as a holder for value, he will acquire a personal interest in them, and so he cannot
claim protection. So also if he collects a cheque for a person other than a customer, he will not be protected.

If the stranger (Other than the customer) for whom he collects a cheque has no title , then the banker
will be liable for conversion.

3) In good faith and without negligence:

In order to get the protection under the section, a collecting banker must act in good faith and without
negligence. This applies to the whole transaction from the receipt of the cheque from the customer to the
receipt of the proceeds from the paying banker.

Duties and responsibilities of a collecting banker:

1) Due care and diligence in collection of cheques. As an Agent of the customer the collecting banker
is bound to show due care and diligence in the collection of cheques given to him if the banker
fails in this regard and as a consequence the customer suffers as loss, the collecting banker shall
be required to compensate that loss.
2) Reasonable time:
  The collecting banker should present the cheques deposited by his customers for
collection within a reasonable time.
 If the banker and the drawee banker in the same place, the collecting banker should
present the cheque the next day after he receives it.
 In the case of out station cheques the collecting banker should despatch the same to the
paying banker on the day after it is received by him.
 If the cheque is presented for payment with undue delay and the customer suffers loss,
the banker has to make good the losses provided by law.

3) Advising the customer about Collection:

It is the duty of the collecting banker to inform his customer immediately about the collection if the
cheque is collected .as soon the proceeds on collected he can debit his customers account is respect of his
commission and credit to gross proceeds to the customer account.

The banker also provides credit slip to the customer. Then only he can to know that cheque has been
collected.

4) To serve notice of dishonour:

If the cheque disposed for collection stands dishonoured and the collecting banker gets the information
in writing from the paying banker .the collecting banker should immediately intimate his customer is writing
giving reasons thereof.

Along with this notice. He must also return the dishonoured cheque to the concerned customer.

Refusal of payment of Cheque:

1) When the customer does not have sufficient funds belonging to him, the banker can refused to
honour the cheque.

E.g.: if a customer draws a cheque for Rs: 1000, but only 6990, it will be dishonoured.

2) When the cheque is hot drawn in proper form.

3) When the cheque is post –dated and is presented .before the appearing of date of issue.

4) When the cheque is state (no longer new) this is of presented after the appearing date of issue.

5) When the cheque is not presented during working hours.

6) In case of trust funds, when the banker has knowledge that the cheque was drawn is branch of trust
(a failure to the act responsibly for someone who has given you something to keep safe).

7) When the or material alteration in the cheque.

8) When the signature of the cheque does not correspond with the specimen signature.
 9) When one or more endorsement or irregular.

10) When the cheque is presented at the branch of the bank. Different from the one where he has the
account.

11) When the banker receives notice of the customer’s insolence.

12) When the customer has countermanded (cancel or revoke) the cheque.

13) When the banker has a notice of a customer’s death.

14) When the banker receives a garnishee order from the court.

15) When the banker has got a general lien on the customer’s funds and there or no funds belonging
to the customer after the exercise of line.

Circumstance under the banker can refuse payment of cheques:

1) When the drawer countermands payment:

(1)It should be in written. Oral instruction should not be accepted by the banker.

(2) The written instruction should be received by the banker before the cheque is actually
presented for payment.

(3) The written instruction should contain all particulars such as date of the cheque, number of
the cheque, the amount, payee’s name, whether crossed or otherwise, etc.

(4) The order stopping payment should be signed by the drawer of the cheque.

(5) A telephonic message of stopping payment is also valid, provide the banker is able to
identify the voice of the customer.

2) Death of the drawer:

As soon as the banker comes to know officially about a customer’s death, the customer’s man date
stands, terminated and the account becomes inoperative .therefore, no cheques on that account can be
honoured.

3) Insolvency of the customer:

When the banker receives information of insolvency of the customer, the banker stop payment from
customer’s account and the whole property of insolence person bests in the court.

4) Customer’s insanity:
 The banker is bound to honour the cheques of his customer on receipt of information about the latter
has become absolutely instance or of unsound mind.

5) Notice of assignment of credit balance:

The credit balance in the account of customer can be transferred by the customer to another person.
On receipt of a notice of such assignment, the banker must stop payment of the cheque drawn by the assignor.

6) Receipt of notice of garnishee order:

Once such a garnishee order in received, the banker should withhold the customer funds and refuse
payment of cheques presented.

7) Defective title of the party:

Suppose a person presenting a cheque has defective title of the cheque and the banker knows it,the
banker can refuse payment of such a cheque.

8) Branch of trust:

Suppose the customer is operating a trust account and the banker comes to know that the customer
uses the funds of the trust account in branch of the banker can stop payment of the cheque drawn on such an
account.

9) Insanity of the customer:

 When the banker receive notice of the insanity of the customer, the banker should stop honouring the
cheque.
 If a notice is received from the court the banker should act according to the terms and condition of the
court.
 The banker should not honour the cheque until he receive the certificate of regaining of insanity

10) Usual answer for dishonouring cheque:

1) Usually the drawee attaches a slip to dishonoured cheques and marks the number of appropriate
answer.

2) When refusing payment, he should not ever into any discussion with the payee.

Duties of holder:

A holder is a person in possession of an instrument payable to bearer or to the identified person

possessing it.
 The holder of a promissory note bill of exchange or cheque means any person entitled in his own name
to the passion thereof and to receive or recover the amount due there and from the parties threats. Where the
note bill or cheque lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.

HOLDER IN DUE COURSE:

According to sec 9 of the negotiable instruments act, “holder in due course means any person, who for
consideration become the possessory of a promissory note, bill of exchange or cheque if payable to bearer are
the payee or endorsee thereof, if payable to the order before the amount mentioned in it become payable and
without having sufficient cause to believe that any defect existed in the title of the person from whom he
derived his title”.

A holder in due course in the person

1. Who receives and instrument innocently in good faith and without negligence.
2. Who has paid value for the same.
3. Who has received the instrument before its maturity, and
4. Who is in possession of the instrument as a bearer or payee or endorsee

We said, “Every holder in due course in a holder but, every holder is not a holder in due course”.

RIGHTS AND DUTIES OF A HOLDER IN DUE COURSE:

1. He obtains a letter to the instrument than that of a true owner.

2. The defective title of the previous endorsers (if any) will not adversely affect his rights.
3. He can pass letter title to others since, ones the instrument passes through his hands, it’s burged of
all defects.
4. Until the instrument is finally discharged every party to that instrument is liable to him.
5. Even the drawer of a negotiable instrument cannot claim invalidity of the instrument.
6. His claim cannot be denied on the ground that the payee has no capacity to endorse.
7. The principle of estoppels is applicable against the endorser deny the capacity of previous parties.
IMPORTANT QUESTIONS
One words
1............. render or cheque invalid material alteration
2. Convention of the bearer cheque into an order cheque in case of............... (Immaterial
attention)
3. Crossing the cheque without knowledge of the drawer case of authorised attention
4. The paying banker can get protection for a material attired cheque provided the attention is not
apparent and he............... (Makes payment in due course)
5............. (Stale) cheque is a dead cheque.
6............. (bankers) cheque is always meant for local payment only.
7............ (Bankers cheque) is always meant for local payment only.
8. To get statutory protection, the paying banker must make (payment in due course)
9. When the amount stated in words and figures differs the banker can honour the amount in
words
10. A collecting banker is given protection only when he collects (a crossed cheque)
11. A collecting banker is given the statutory protection only when he acts as (an agent)
FIVE MARKS:
1. Describe the essential features of valid cheque.
2. What its meant by the term paying banker? State briefly his duties in regard to honouring his
customer’s cheque.
3. Distinguish between cheque and bill of exchange.
4. What is crossing? Explain the different types of crossing.
5. Essentials of valid endorsement.
EIGHT MARKS:
1. Kinds of endorsement.
2. Legal provisions regarding endorsement.
3. Marking of cheques proceeds.
4. Significance and advantages of marking.
5. Explain the statutory protection to the paying banker’s
5. Explain the statutory protection to the paying banker.
 UNIT-4

LOANS AND ADVANCES BY COMMERCIAL BANK:

A commercial bank is a type of financial institution that provide services such as accepting deposits,
making business loans and offering basic investment products.

Commercial banks provide loans and advances of various forms, including an overdraft facility,
cash credit, bill discounting, money at call etc. they also give demand and term loans to all type of clients
against proper security.

LOANS AND ADVANCES:

A loan is a type of debt like all debt instruments, a loan entails the redistribution of financial assets
over time between the lender and borrower.

Loans and advances can be arranged from banks in keeping with the facility in business operations.

Loans and advances are utilized for making payment of current liability, wages and salaries of
employees and also the tax liability of business.

It is economical for the traders and businessman because bank charge a reasonable rate of interest
on such loans and advances.

TYPES OF LOANS:

 Demand loan.
 Term loan.
 Secured loan.
 Unsecured loan

DEMAND LOAN:

 In a demand loan account, the entire amount is paid to the debtor at one time, either in cash or by
transfer to his savings account or current account
 A demand loan is a loan which is REPAYABLE ON DEMAND BY THE BANK. In other words,
it is repayable at a short notice.
 The borrower can repay the loan either in lump sum (one time) or as agreed with the bank.
 If the repayable amount is with instalments, such loans are normally granted banks against
securities. The security may be personal or in the form of shares, govt paper, fixed deposit receipt
etc.
 There is usually a stipulation that in the event of any instalment, remaining unpaid, the entire
amount of loan will become due.
  Interest is charged on the debit balance. Usually with monthly rests unless there is an arrangement
to the contrary.
 No cheque book is issued.

TERM LOAN:

 When a loan is granted for a fixed EXCEEDING THREE YEARS and is repayable
according to the schedule of repayment, it is known as term loan.
 The period of loan may extend up to 10 years and in some cases up to 20 years.
 A term loan is generally granted for FIXED CAPITAL REQUIREMENTS.eg investment
in plant and machinery, land and building, etc. These may be required for getting up new
projects or expansion or modernization of the plant and equipment.
 Advances granted for purchasing land /building/flat are TERM LOANS.
 These loans are generally secured against the mortgage of land, plant and machinery,
building and the like.

TWO CATORIES OF TERM LOAN:

SECURED LOAN:

Secured loans are those which are granted against the security of tangible asset, like stock in
trade and immovable property. Thus, while granting loan against the security of some assets, a charge is
created over the assets of the borrower in favour of bank. This enables the bank to recover the dues from the
customers out of the sale proceeds of the assets in case the borrower fails to repay the loan.

UNSECURED LOAN:

Unsecured loans are those loans which are not covered by the security of tangible assets. Such
loans are granted to the firms or institution against the personal securities of owner, manager or director.

FORMS OF ADVANCES:

 Loans, cash credits and overdrafts.

 Bills discounted and purchased.

CASH CREDIT:

This account is the primary method in which BANKS LEND MONEY against the SECURITY OF
COMMODITIES and DEBT. It runs like a current account except that the money that can be withdrawn from
this account is not restricted to the amount deposited in the account.

The principal advantages of a cash credit account to a borrower are that, unlike the party borrowing
on a fixed loan basis. He can operate the account within the stipulated limit as and when required and can save
interest by reducing the debit balance.
 Cash credits are normally granted against the security of goods. E.g.: Raw materials, stock in
progress, finished goods, etc.

OVERDRAFT:

The word overdraft means the act of overdrawing from a bank account. In the other words, the
account holder withdraws more money from a bank account that has been deposited in it.

BILLS DISCOUNTED:

Usance bills, maturity within 90 days or so after date or right, are discounted by banks for approved
parties.

E.g.: In case a bill, say for Rs 10000 due for 90 days hence, is discounted today at 20% p.a, the
borrower is paid Rs. 95.00. Its present worth. However the full amount is collected from the drawee on
maturity.

BILLS PURCHASED:

An advance facility provided by banks against the security of bills.In case of purchasing bill, the
charges are less because the bank can collect the payment immediately by presenting it before the drawee for
payment.

Bills which are accompanied by documents of title to goods such as bills of ladings or railway
receipt are purchased by bankers. In such cases, the banker grant loan in the form overdraft or cash credit
against the security of the bills.

LENDING POLICIES OF COMMERCIAL BANK:

The major business of banking company is to grant loans and advances to trades as well as
commercial and industrial institutes. The most important use of banks money is lending. Yet, there are risks
in lending. So, the banks follow certain principles to minimize the risk.

Following are the important areas is to be taken care while lending:

PRINCIPLES OF SOUND LENDING SYSTEM

 Safety.
 Liquidity.
 Profitability
 Purpose of loan.
 Principle of diversification of risks
 Security
 Sources of payment
 Recent concept of sound lending
SAFETY:

Normally, the bank uses the money of depositors in granting loans and advances. Because of that about
the safety of depositor’s money. The purpose behind the safety is to see the financial position of the borrower.
Whether he can pay the debt as well as interest easily.

LIQUIDITY:

It is a legal duty of a banker to pay the deposited money to the depositor on demand. So, the banker
has to keep certain present cash of the total deposits in hand. However, the bank grants loan. It is also for the
addition of short term or productive capital. Such type of lending is recovered on demand.

PROFITABILITY:

Like all other commercial institutions, banks are RUN FOR PROFIT. Banks earn profit to pay interest
to depositors, declare dividend to shareholders, meet establishment charges and other expenses, provide for
reserve, maintenance and improvements of property owned by the bank and sufficient resources to meet
contingent loss. So, profit is an essential consideration. A banker should employ his funds in such a way that
they will bring him adequate return. The main source of profit comes from the difference between the interest
received on loans and those paid on deposit.

PURPOSE OF THE LOAN:

Banks never lend or advance for any type of purpose that will lead to loose of money. The banks
grant loans and advances for the safety of its wealth, and assurance of recovery of loan and the BANK LENDS
ONLY FOR THE PRODUCTIVE PURPOSES. Before giving a loan the bank has to make sure that whether
the purpose for which the loan has given is productive or not.

PRINCIPLE OF DIVERSIFICATION OF RISKS:

The SECURITY CONSCIOUSNESS of a banker the INTEGRITY OF THE BORROWER are not
adequate factors to keep the banker on a safe side. What is more important is diversification of risk. This
means he should not lend a major portion of the loanable funds to any single borrower or to an industry or to
a particular region.

The bank must advance moderate sums to a large number of customer spread over a wide area and
belonging to different industries and different strata of society.

SECFURITY:

Customers may offer different kinds of securities. (via) land, buildings, machinery, goods, and
raw materials to get advances. The securities of the customers are like insurance to fall back upon them in
times of necessity. For the sake of security, he should ensure that the securities are adequate, marketable and
free from encumbrances.
SOURCES OF REPAYMENT:

Before giving financial accommodation, a banker should consider the source from which
repayment is promised. In some times, debentures which are to be redeemed in few month time or a life policy
which is to mature in near future may be offered as security.

Sometimes, customers may apply for loans for additional working capital for their business
and undertake to repay out of the profits over a period. In such cases, the rate at which the customer can
reasonably hope to repay should be ascertained.

RECENT CONCEPT OF SOUND LENDING:

PRODUCTIVITY OF THE LOAN:

In the wake of nationalization of the 14 banks, banking has undergone a metamorphosis.

Banks are catalytic agents in catering to the letter needs of development in conformity
with the national objectives. If rapid progress is to be realized, bank credit should be made available to the
neglected sectors of economic activity and to the underprivileged sections of the society.

A sound credit is one where timely repayment is assured. This largely depends on the
earning power of the business unit and the repaying capacity of the borrower. So, great emphasis is laid on
the productivity of the loan.

TYPES OF LENDING:

A. FUND BASED (current and fixed assets)

 Overdrafts.
 Cash credits.
 Bills finance – demand or usance bills.
 Demand loans.
 Term loans.
 Other loans – car loans, consumer durables, educational loans, housing loans
etc.
B. NON – FUND BASED(fee based)
 Issue of guarantees.
 Issue of letters of credit.
 Deferred payment guarantees.

C. OTHERS

1. Lease finance.

2. Hire purchase.
B. NON-FUND BASED (fee based)

1. Issue of guarantees:

Any person or corporate entity with an account held at a mainstream bank can apply to issue a
bank guarantee.

The account holder will simply request his bank to issue a guarantee and supply them with the
reasons behind is issue. The bank would have a simple application for this service. The account holder will
submit the bank the application containing details of the underlying commitment being entered into.

A. How long the guarantee should be for.

B. Any condition on the payment.
C. The amount and currency and of course.
D. Details of the beneficiary and their bank details.

EG: If an account holder wanted to issue a third party with a bank guarantee for 50 million, it would be
necessary to pledge cash, stocks or bonds to his bank for a minimum of this amount.

2. Issue of letters of credit:

A letter of credit is a letter from a bank guaranteeing that a buyer’s payment to the seller
will be received on time and for the correct amount. In the event that the buyer is unable to make payment on
purchase, the bank will be required to cover the full or remaining amount of the purchase.

Issuing bank issues letter of credit based on buyers request.

3. Deferred payment guarantees:

Deferred payment guarantees is a guarantee for a payment which has been deferred or
postponed.

Deferred payment guarantee is issued by the bank at request of customer when he

purchases goods or machineries from a creditor on the terms of payment after a specified time in lump sum or
in instalments. The creditor requires such deferred payment terms to be guaranteed by the bankers of the
principal debtor.

C.OTHERS:

1. Lease finance:

Lease financing is one of the important sources of medium and long term financing where
the OWNER OF AN ASSET GIVES ANOTHER PERSON the right to use that asset against periodical
payments. The OWNER OF THE ASSET is known as LESSOR and the USER is LESSEE.

The periodical payment made by the lessee to the lessor is known as LEASE RENTAL.
DIFFERENT TYPES OF LEASE:

Depending upon the transfer of risk and rewards to the lessee, the periods of lease and the number
of parties to the transaction lease financing can be classified into two categories

1. Finance lease.
2. Operating lease.

FINANCE LEASE:

 Long term, non-cancellable lease contracts are known as FINANCE LEASE.

 At lease, it must give an option to the lessee to purchase the asset he has used at the expiry
of lease.

OPERATING LEASE:

 Contrast to the financial lease.

 A lease agreement gives to the lessee only a limited right to use the asset.

2. HIRE PURCHASE FINANCE:

A hire purchase is a method of buying goods through making instalment payment over
time under a hire purchase contract, the buyer is leasing the goods and does not obtain ownership until the full
amount of the contract is paid.

FORMS OF SECURITIES:

A wide range of securities such as goods, shares, life policies and title of deeds are offered to
banks as cover for loan.

In order to make the securities available to the banker, In case of default by a customer, a
charge should be created on the security. Creating a charge means making it available as a cover for an
advance.

Forms or types or important METHODS of charging a security are the followings:

 Lien.
 Pledge.
 Mortgage.
 Assignment.
 Hypothecation.

The bank needs these above securities to provide security to the company.
 1. LIEN:
Lien is the right of a credited (bank) retain the properties belonging to the debtor until the debt due
to the bank is paid lien are of two types
 Particular lien.
 General lien.

Bank enjoys general lien only.

2. PLEDGE:
Pledge is a mode of security in which the bank extends the assistants to the company against the
security of movable property. But the possession of the goods is with the bank and the goods pledged
are in the custody of the bank. Thus, it becomes the duty of the bank to take case of the goods in the
custody.
Section 172 of Indian contract act, 1872, defines a pledge, as the “Bailment of goods as security
for payment of a debt or performance of a promise.”
It means,
A PLEDGE OCCURS when GOODS are DELIEVERED for
GETTING ADVANCE.
The goods pledged will be RETURNED to owner ON REPAYMENT
of the DEBT.
The goods servers as SECURITY for the DEBT.
A pledge may be in respect of goods, stocks, shares, documents of title
to goods and any OTHER MOVABLE PROPERTY.
The person who TRANSFER the GOODS is called PLEDGER.
To WHOM it is TRANSFERRED is called the PLEDGEE.

ESSENTIALS OR IMPORTANCE OF PLEDGE:

1. DELIVERY OF GOODS:
The delivery of goods may be
A. Physical delivery.
B. Symbolic delivery.

PHYSICAL DELIVERY:

It refers to physical transfer of goods from a pledger to the pledgee.

SYMBOLIC DELIVERY:

It refers no actual delivery of goods.

The possession of goods must be transferred to the pledgee.

 EG:

A. Delivery of key of warehouse in which goods are stored.

B. Delivery of document title to goods like bill of trading, warehouse warrant if goods
are kept in public warehouse, railway receipt, etc.
2. TRANSFER OF OWNERSHIP:
The ownership of goods remains with the pledger. The possession of the goods
bests with pledgee till the loan is repaid.
3. RIGHT IN CASE OF FAILURE TO REPAY:
A. Sell the goods pledged after giving a reasonable notice.
B. File a civil suit against the pledger for the amount due.
C. File a suit for the sale of the goods pledged and realisation of money due
to him.

ADVANTAGES OF PLEDGE:

1. The goods under pledge being in possession of the bank, it is easy, to dispose them of, if
necessary.
2. There is no possibility of the same goods being charged.
3. Manipulation of stock is difficult as the stock is under full possession of the bank.
4. In the event of loss or damage to the pledged goods, the banker can recover the amount under
insurance policy.

RIGHTS OF A BANKER AS A PLEDGEE:

1. The pledgee has a right to retain the goods pledged till the payment of debt, interest on debt
or expenses incurred for preservation of the goods pledged
2. The pledgee has the right to retain its possession over the goods only for the particular debt
and not for all debts.
3. The pledgee can claim any extraordinary expenses incurred by him for the preservation of the
goods.
4. If the pledger makes a default in payment,
A. He may file a suit for the recovery of the amount.
B. He may sue for the sale of goods.
C. He may himself sell the goods after giving a reasonable notice.

If the sale proceeds are insufficient to meet his dues, he may recover the balance from the pledger and if
there is surplus, it will be paid to him.
 5. If a third person wrongfully deprives the pledgee of the use of the possession of the goods
bailed, he has the remedies against the third person as the owner would have had. The pledgee
may file suit for conversion or damages.
6. If the pledgee suffers any damage as a result of non- disclosure of any fault by the pledger,
the latter is responsible for it.
7. If the pledgee suffers loss, when the title of the pledger to the goods pledged is defective, the
pledger shall be responsible.

DUTIES OF THE PLEDGEE:

1. The pledgee is bound to take that much care of the goods pledged which as ordinary
prudent man would take of his own goods under similar- circumstances.
2. The pledgee must make use of the goods pledged according to the agreement between the
two parties. If he makes any unauthorized use, the pledger is entitled to terminate the
contract.
3. The pledgee must deliver the goods to the pledger on repayment of the debt. It is the duty
of the pledgee to deliver the goods according to the direction of the pledger.
4. The pledgee must deliver to the pledger any increase or profit which may have occurred
from the goods bailed. EG: dividend on shares.
5. The pledgee is responsible to the pledger for any loss destruction or deterioration of the
goods.

MORTGAGE:

A mortgage is the TRANSFER OF AN INTEREST in SPECIFIC IMMOVABLE PROPERTY for

the purpose of SECURING the PAYMENT OF MONEY advanced or to be advanced by way of loan, an
existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability.

A legal document by which the owner (i.e., the buyer) transfers to the lender as interest in real estate
to secure the repayment of debt, evidenced by mortgage note.

When the debt is repaid, the mortgage is discharged, and a satisfaction of mortgage is recorded with
the register or recorder of deeds in the country where the mortgage was recorded. IN OTHERWISE, BE WAY
IT AS,

1. A loan for the purchase of real property, secured by a lien on the property.
2. The document specifying the terms and conditions of the repayment of such a loan.
3. The repayment obligation associated with such a loan; A FAMILY WHO CANNOT
AFFORD THEIR MORTGAGE.
4. The right to payment associated with such as a loan; A BANK THAT GUYS MORTGAGE
FROM ORIGINATORS.
 5. To make subject to a claim or risk, pledge against a doubtful outcome.

CHARACTERISTICS OF A MORTGAGE:

1. A mortgage can be effected only an immovable property (i.e.) land, the benefits that arise out
of land and things attached to earth like trees, buildings and machinery.
2. A mortgage is the transfer of interest in the specific immovable property. The means the owner
transfers some of his rights only to mortgagee.
3. The object of transfer of interest in property must be to secure a loan or performance of a
contract which result in monetary obligation.
4. The property to be mortgage must be a specific one (EG: it can be identified by its size,
location, boundaries etc.
5. The actual possession of the mortgaged property is generally with the mortgager.
6. The interest in the mortgaged property is reconvened to the mortgager on repayment of the
loan with interest due thereon.
7. In case, the mortgager fails to repay the loan, the mortgagee gets the right to recover the debt
out of the sale proceeds of the mortgaged property.

FORMS OF MORTGAGE:

There are six kinds of mortgages. They are:

1. Simple mortgage.
2. Mortgage by conditional sale.
3. Unsufructuary mortgage.
4. English mortgage.
5. Mortgage by deposit of title deeds.
6. Anomalous mortgage.

SIMPLE MORTGAGE:

The mortgage DOES NOT DELIVER THE possession of the mortgaged property. He bind
himself personally to pay the mortgage money and agrees either expressly or impliedly. In case, any failure to
repay the debt, the mortgagee shall have the right to cause to mortgaged property to be sold and apply the sale
proceeds is payment of mortgaged property.

The essential feature of the simple mortgage has no power to sell the property without the
intervention of the court. The mortgage can:

1. Apply to the court for permissions to sell the mortgaged property.

2. File a suit for recovery of the whole amount without selling the property.
MORTGAGE BY CONDITIONAL SALE:

Mortgager sells the property to the mortgagee on the following conditions:

1. The sale shall become void on payment of the mortgage money.

2. The mortgagee will retransfer the property on the payment of the mortgage money.
3. The sale shall become absolute if the mortgager fails to repay the amount on a
certain date.
4. The mortgagee has no right of sale but he can sue for foreclosure.
Foreclosure means the loss of right possessed by the mortgager to redeem the
mortgaged property. The mortgagee has the right to suit for recovery of the whole
amount. Without the foreclosure order, the mortgagee will not become the owner
of the property.

USUFRUCTUARY MORTGAGE:

Under this form of mortgage, the mortgager delivers the possession of the property or binds
himself to deliver the possession of the property to the mortgagee. The mortgagee is authorized to retain the
possession of the property until the debt due is repaid.

The mortgager reserves the right to recover the property when the money is repaid.

FEATURES:

1. The mortgaged on receive rents and profits relating to the mortgaged property till the loan is
repaid.
2. The mortgager is not personally liable to repay the mortgage money. He can neither sue
foreclosure nor sue for sale of the mortgaged property.
3. The only remedy for the mortgagee is to remain in possession of the property and pay himself
out of the rents or profits of the mortgaged property.
4. There is no time limit, he has to wait for a very time to recover the due.

ENGLISH MORTGAGE:

CHARACTERISTICS:

1. The mortgager transfers the property absolutely to the mortgagee.

2. The mortgagee is entitled to take immediate possession of the property.
3. The transfer is subject to the condition that the property shall be retransferred on repayment
of the loan.
4. The mortgager also binds himself to pay the mortgage money on a certain date.
 5. In case of non-payment the mortgagee has the right to sell the mortgaged property without
seeking the permission of the court in circumstances mentioned in section 69 of the transfer
of property act.

MORTGAGE BY DEPOSIT OF THE DEEDS:

When a debtor delivers to a creditor or his agent document of title to immovable property with an
intention to create a security thereon the transaction is called mortgage by deposit of title deeds such a
mortgage is restricted to the towns of Kolkata, Mumbai and Chennai and other towns notified by the state
government for this purpose in the official gazette. This type of mortgage requires no registration. This form
of mortgage is also known as equitable mortgage.

ANOMALOUS MORTGAGE:

1. An anomalous mortgage is one which does not fall under any one of the five terms of
mortgages. Such a mortgage can be effected according to the terms and conditions of the
mortgager and mortgagee.
2. It is a combination of two or more of the above said mortgages.
3. It takes various forms depending on custom, usage or contract.

LEGAL MORTGAGE VS EQUITABLE MORTGAGE:

 LEGAL MORTGAGE:

In a legal mortgage, the legal title to the property is transferred is favour of

mortgagee by a deed. The deed is to be registered when the principal money is RS. 100 on
more. On repayment of the loan, the legal title is transferred to the mortgager. This method of
creating change is expensive as it involves registration changes and stamp duty.

 EQUITABLE PROPERTY:
An equitable mortgage is effected by a mere delivery of documents of title to
property to the mortgagee. The mortgager through a memorandum of deposit undertakes
to grant a legal mortgage if he fails to pay the mortgage money.

ESSENTIALS REQUIREMENTS OF EQUITABLE MORTGAGE:

1. An equitable mortgage requires three essential features:

A. There must be a debt existing or future.
B. There must be deposit of title deeds.
C. The title deeds should be deposited as security for the debt.
2. Registration of documents is not necessary.
3. An equitable mortgage can be effected only in the towns of Kolkata, Mumbai and
Chennai and in certain places notified by the state government.
EG: Sabasiva ras vs bank of baroda (1989).

It was held that even if certified copies of documents of title to goods are deposited, if the
intention of the deposit is for security to cover a loan, it would amount to equitable mortgage.

4. The documents are to be transferred to the mortgager on repayment of the debt.

5. The mortgagee is empowered to apply to the court to convert the equitable mortgage
into a legal mortgage, if the mortgager fails to repay the loan on a specified date.

ADVANTAGES OF EQUITABLE MORTGAGE:

1. No registration sis required in equitable mortgage and so stamp duty is saved.

2. It involves minimum formalities.
3. The information regarding such mortgage is kept confidential between the lender and borrower.
So, the reputation of the borrower is not affected.

DISADVANTAGES OF EQUITABLE MORTGAGE:

1. If the mortgager fails to repay, the mortgagee must get a decree for the sale of the property. Getting
a decree is expensive and time-consuming.
2. The borrower may hold the title deeds not on his own account, but in the capacity of a trustee. If
an equitable charge is created, the claim of the beneficiary under the trust will prevail over
equitable mortgage.
3. There is the risk of subsequent legal mortgage in favour of another party.

But if the equitable mortgagee parts with the security, even for a short period, the debtor
may create a second legal mortgage over the same property.

RIGHTS OF MORTGAGER:

1. RIGHTS OF REDEMPTION:

The mortgager has a right to redeem the mortgaged property provided:

A. He pays the mortgage money on due date at the proper place and time.
B. The right of redemption has not been terminated by an act of the parties or by decree of
the court.

The mortgager who has redeemed the mortgage is entitled to the following rights:

A. To get back the mortgage deed and all other documents related to the mortgaged
property.
B. To obtain possession of the mortgaged property from the mortgagee, as in the case
of English mortgage.
 C. To have the mortgaged property retransferred at his cost to him or to such third
person as he may direct.
2. ACCESSION TO MORTGAGED PROPERTY:
During the possession of the property, if the mortgagee has voluntarily made any
improvement in the property, the mortgager on redeeming the property, is entitled to all such
additions or improvements, unless there is contract.
3. RIGHT TO TRANSFER TO THIRD PARTY:
The mortgage may require the mortgagee to transfer the mortgaged property to a third
person instead of retransfer to him.
4. RIGJHT TO INSPECTION AND PRODUCTION OF DOCUMENTS:
The mortgager has the right to inspect and make copies of all documents of title in the
custody of mortgagee.

RIGHTS OF MORTGAGEE:

1. RIGHTS TO SUE FOR MORTGAGED MONEY:

The mortgagee has the right to file a suit in a court of law for the mortgage money in the
following cases:
A. Where the mortgager binds himself to repay the mortgage money, as in the case of
simple and English mortgage.
B. Where the mortgaged property is wholly or partly destroyed or the security is rendered
insufficient and the mortgager has not provided further security
C. Where the mortgagee is deprived of the whole or part of his security by the wrongful
act of the mortgager.
D. Where the mortgager fails to deliver the mortgaged property in case the mortgagee is
entitled to it.
2. RIGHT OF SALE:
The mortgagee in case of a simple, English and equitable mortgage has the right to sell the
property. After filing a suit and getting a decree from a court.
A mortgagee has a right of sale without the intervention of the court under certain
circumstances mentioned in sec 69 of the transfer of property act.
3. RIGHT OF FORECLOSURE:
The mortgagee has a right to obtain from the court a decree for foreclosure against the
mortgager, that is, the mortgager is absolutely debarred of his right to redeem the property. The right
of foreclosure is allowed in
A. A mortgage by a conditional sale.
B. Anomalous mortgage.
4. RIGHT OF ACCESSION TO PROPERTY:
 If any addition is made to the mortgaged property, the mortgagee is entitled to such addition
for the purpose of security provided there is no contract to the contrary.
EG: A mortgages a certain plot of land to B and afterwards constructs a building on it. B is entitled
to the building and land as security for the loan.
5. RIGHT OF POSSESSION:
The mortgagee is entitled to the possession of the mortgaged property as per the terms of
mortgage deed. Such a right is available in unsufructuary mortgage.

SUB-MORTGAGE:

A sub-mortgage is created, when the mortgagee gives the mortgaged property as security for advance.
The mortgaged security is the property of the mortgagee and so he has the right to re-mortgage for securing
loans. Qa sub-mortgage is also known as “MORTGAGE OF MORTGAGEE”.

ASSIGNMENT:

Assignment means TRANSFER of ANY EXISTING or FUTURE RIGHT, PROPERTY or DEBT by

ONE PERSON TO THE ANOTHER. The person who assigns the property is called ASSIGNOR and the
person to whom it is transferred is called ASSIGNEE.

Usually, assignments are made in banking business as,

1. Book debts.
2. Money due from government department.
3. Insurance policies.

Assignments are of two types:

1. Legal assignment.
2. Equitable assignment.

LEGAL ASSIGNMENT:

A legal assignment is an absolute transfer of actionable claim. It must be in writing signed by the
assignor. The assignor informs his debtor in writing intimating the assignee’s name and address.

EQUITABLE ASSIGNMENT:

An equitable assignment is one which does not fulfill all the above requirements.

HYPOTHECATION:

The mortgage of movable property for securing a loan is called hypothecation.

It means, a charge over movable property like goods, raw materials, goods in progress is created.

DEFINITION:
 Hart defines hypothecation is, “A charge against property for an amount. Where neither ownership
nor possession is passed to the creditor.

According to hart, when goods are made available as SECURITY for A DEBT WITHOUT
TRANSFERRING THE POSSESSION OF PROPERTY to the LENDER, the transaction is a hypothecation.
The goods remain with the borrower and under a hypothecation agreement, he undertakes to transfer the
possession whenever required to do so. Thus, hypothecation is only an extended idea of a pledge.

In other words, a mere intention to give a specific property as security for a particular loan
constitutes hypothecation.

1. It applies to MOVABLE GOODS and commodities movable machinery, book debts,

etc.
2. POSSESSION as well as OWNERSHIP of the security REMAIN with the
BORROWER
3. A CHARGE created by DEED called HYPOTHECATION.
4. The borrower undertakes to give a right to POSSESSION to the BANK when
REQUIRED.
5. The borrower submits stock statements periodically.
6. The banker has a right to inspect the security at any time.
EG: Bank of Baroda VS bachubhai, hirabhai and others. It was held that the bank
is not liable to compensate the injured passengers when a vehicle hypothecated to it is
met with an accident. Since under hypothecation, neither ownership nor possession is
transferred to the creditor. The creditor simply gets an interest over the security without
actual or physical possession of the goods hypothecated.
7. Hypothecation facility is also called open loan facility.
8. Hypothecation is the convenient method of borrowing for some concerns. For instance,
a manufacturing concern cannot pledge its raw material which are required for
production every day. By hypothecating them, the company can continue the production
and also avail the credit facility.

As goods under hypothecation remain in the possession of the borrower, extra care has to be exercised to see
that the bank’s security is complete, adequate, safe and available at times when required.

The banker should take the following precautions:

1. He must get STOCK STATEMENTS PERIODICALLY which contain a

declaration by the borrower regarding his title to goods and correctness of the
quality, quantity, etc.
2. 0n the basis of the statement, he should inspect the stock and books of accounts of
the borrower.
 3. An undertaking from the DEBTOR in writing, stating that he has not hypothecated
the same goods to any other bank must be obtained.
4. The banker should get a letter of hypothecation containing several clauses to
protect his interest under all circumstances.
5. The banker should insist on the borrower for insuring the goods against all risks.

1.The most important principle of sound lending is

a) Safety c) profitability
b) security d) All of these above
2. Businessmen prfer
a) Loan c) overdraft
b) Cash credit d) All of these above
3. Neither possession nor ownership is transferred in
a) Pledge c) Mortgage
b) Lien d) Hypothecation
4. Discounting of bills of exchange is
a) Clean Advance c) Secured Advance
b) Neither d) None of the above
5. Capacity of the borrower is determined by
a) willingness to repay
b) viability of the project
c) managerial ability
d) account balance of the borrower
6. A pledge can be made in respect of
a) Shares c) Building
b) Book debts d) Goodwill
7. Advance against document of title to goods may take the for of
a) Cash credit c) Loan
b) Both (a) and (b) d) None
8. A mortgage can neither sue for foreclosure nor for sale of the property in
a) English mortgage
b) Usufructuary mortgage
c) Mortgage by conditional sale
d) Conditional mortgage
9. The most risky advance from the banker’s point of view is against
a) Lien c) Hypothecation
b) Pledge d) Mortgage
10. Consumer credit loans are available to
a) salaried persons c) Depositors of the bank
b) Professionals d) All of the above

SECTION B
1. State the advantages of Legal and Equitable mortgages
2. What are the different forms of banker’s advances?
3. What are the characteristics of a mortgage?
4. Discuss the rights of mortgagee.
5. What is Equitable mortgage? What are the essential requirements of Equitable mortgage?
6. What are the things the banker should take necessary care while lending?
7. What are unsecured advances? What precautions should a banker take while making unsecured advances?
8. What is pledge? State the importance of pledge.
9. What is hypothecation? Explain its characteristics.
10. Explain the term ’Assignment’.
SECTION C
1. What is mortgage? Discuss the various kinds of mortgage.
2. What are secured and unsecured advances of the bank?
3. What are the types of securities lodged with the banker for securing advances? Explain in brief.
4. Discuss the principles of sound lending.
5. Explain the rights of mortgager.
6. State the difference between Hypothecation and Mortgage.
7. What is Pledge? State the importance of pledge. Explain the difference between pledge and mortgage.
8. Distinguish between loans, advances and overdraft.
9. Explain the principles that guide a banker in granting loans and advances.
10. Discuss in detail the significance of lien to a banker.
 UNIT-5

LETTER OF CREDIT:

A letter of credit is a document or order by a banker in one place authorizing some other banker
in some other place to honor the drafts or cheques of a person named in the document up to the amount stated
I n the letter and the issuing banker himself binds to pay the money paid.

TYPES OF LETTER OF CREDIT:

TWO TYPES:

1 Travellers letter of credit.

2. Letters of commercial credit.

TRAVELLARS LETTER OF CREDIT:

A Traveller incurs great risk if he carries with him sufficient amount of money in order
to avoid the risk bank issues traveller letter of credit to grant protection to the travellers.
 Under this the banker giving such a letter of credit asks another banker to whom it is
addressed to place a specific sum of money at the disposal or to the credit of one in whose favour letter is
issued.

When this letter of credit is addressed to more than one banker it is known as circular
letter of credit.

With a circular letter of credit a letter of identification along with the specimen
signature of the customer is also issued.

CIRCULAR NOTES:

Circular notes are just like cheques out in specific denomination to suit the convenience of the
holder the letter of credit issued along with circular notes becomes a letter of identification the holder of
circular noes can get the money by exchanging the circular notes to the bank concerned.

CIRCULAR CHEQUES:

There are different forms of circular notes and are issued without the letter of identification these
cheques are issued by the banks to their agents abroad for the purpose of selling these cheques to persons
intending to visit the country of the issuing bank.

TRAVELERS CHEQUES:

Traveller’s cheque can be obtained from any bank but the holder is required to place his signature
on all the cheques issued by him. At the time of endorsement he is required to sign once again the two
signatures must tally.

LETTERS OF COMMERCIAL CREDIT:

These letters of credit play on important role particularly in international trade in foreign trade
exporters and importers do not know each other and hence the exporters might loss if the importers default in
accepting the bill of payment.

To avoid such risks the exporter asks the importer to get a letter of credit from his bank in favor
of the exporter based on the letter of credit the good may be exported to the foreign importer.

A letter of credit is a letter issued by the banker of the foreign buyer by which the issuing banker
undertakes to accept the bills drawn in respect of exports made to the foreign buyer specified therein.

PARTIES TO THE LETTER OF CREDIT:

 1-The importer who is arranging for a letter of credit with a bank is called the opener or applicant he
request his banker to issue a letter of credit.

2-The bank issuing a letter of credit is called opening bank or issuing bank the bank gives an
undertaking to the exporter to accept and honor the bill drawn by the exporter.

3-The exporter in whose favor a letter of credit is issued is called the beneficiary because he gets the
benefit of the undertaking given by the issuing bank.

4-The issuing bank generally sends the letter of credit to the beneficiary country such branch or bank
is called the advising bank.

5-When the exporter draws the bill as per the letter of credit he negotiates the bill with a banker who
pays the amount of the bill to the exporter such banker is called the negotiating banker.

TYPES OF LETTERS OF COMMERCIAL CREDIT:

1-DOCUMENTARY LETTER OF CREDIT AND CLEAN LETTER OF CREDIT:

If the issuing bank adds a clause in the letter of credit that the document of title to the goods such
as bill of trading, insurance policy, invoice, consular invoice, certificate of origin, etc… have to be attached
with the bill of exchange drawn under the letter of credit such letter of credit is called a documentary letter of
credit.

If the letter of credit does not contain any cash clauses is called a clean letter of credit.

2-FIXED CREDIT AND REVOLVING CREDIT:

If the letter of credit specifies the amount up to which one or more bills may be drawn within the
specified period of time such credit is called as fixed credit.

If the opening bank does not specify the total amount up to which the bills may be drawn but specifies
the total amount that may remain outstanding at a time of the type of credit is called revolving credit.

3-REVOCABLE AND IRREVOCABLE LETTER OF CREDIT:

In case of revocable letter of credit the opening banker reserves the right or modify the credit at any
time without notice to the beneficiary such letter of credit does not provide any security to the exporter.

Under irrevocable letter of credit the opening bank gives an absolute undertaking to honor the bills
strictly in accordance with the terms of the credit such letters of credit cannot be cancelled or modified in any
way by the issuing banker except with the consent of the beneficiary.

4-CONFIRMED AND UNCONFIRMED LETTERS OF CREDIT:

 If an irrevocable letter of credit issued by issuing bank is passed through an advising bank by
confirming it the letter of credit is called irrevocable and confirmed letter of credit.

If the advising bank does not add his confirmation the letter of credit remains an unconfirmed the letter
of credit remains an unconfirmed one.

5-WITH AND WITHOUT RECOURSE CREDITS:

The drawer of a bill of exchange drawn under the letter of credit will be required to pay to the holder
of the bill if drawee fails to honour it in order to avoid such liability the exporter may ask the importer to
arrange credit without recourse to the drawer.

6-TRANSFERRABLE AND NON –TRANSFERRABLE LETTERS OF CREDIT:

Under a transferable letter of credit beneficiary can transfer his right to draw a bill to somebody else
but it can be done only if the letter of credit is expressly stated as transferable by the issuing bank.

If a special mention is not made then it is a non-transferrable letter of credit.

7-BACK TO BACK LETTER OF CREDIT:

When a beneficiary has a non-transferable letter of credit in favour of some order person on the
security of the letter of credit issued in his favour such letter of credit is called as back to back letter of credit.

ADVANTAGES OF A LETTER OF CREDIT TO THE BENEFICIARY:

Certainty of payment and avoidance of risk:

As the exporter is unfamiliar with the importer the letter of credit provides him an absolute
assurance that the bills drawn under letter of credit will be honoured.

Immediate negotiation of the bills is possible under letter of credit:

Bills drawn under letter of credit are readily negotiated by the confirming/advising banker.

The issuing banker issues a letter of credit after having been satisfied that its exchange control regulations of
his own country do not suppose any restriction on the transfer of money.

Advance can secured by the exporter on the basis of letter of credit to meet the expenses in connection with
export of goods.

CONTRACT OF INDEMNITY:

A contract by which one party promises to save the other (beneficiary) from loss caused to him by the
conduct of the promissory (indemnifier) himself.

CONTRACT OF GUARANTEE:
 SEC126 of the Indian contract act, 1872 defines a contract of guarantee as, “a contract to perform the
promise or discharge the liability of a third person in case of his default” The person who gives the guarantee
is called the surety or the guarantor.

The person in respect of whose default the guarantee is given is called the principal debtor and the
person to whom the guarantee is given is called the creditor.

CONTRACT OF INDEMNITY:

A contract by which one party promises to save the other (beneficiary) from loss caused to him by the
conduct of the promissory himself (indemnifier) or by the conduct of any other person is called a “contract of
indemnity”.

For example: A contracts to indemnify B against the consequences of any legal proceedings which C may
take against B in respect of a certain sum of Rs.5000 this is a contract of indemnify if the beneficiary is sued
he is entitled to recover from the indemnifier all sums including costs and damages which he may have been
compelled to pay in respect of any matter to which his promise to indemnify applied.

DISTINCTION BETWEEN A CONTRACT OF GUARANTEE AND CONTRACT OF INDEMNITY:

CONTRACT OF GURANTEE CONTRACT IF INDEMNITY

 1-There are three parties (viz) the principal There are two parties (viz) Indemnifier and
debtor, the creditors and surety. the indemnified.

2-It must be in writing. It need not be in writing.

3-The liability of surety is subsidiary. The liability of the indemnifier is primary.

4-The surety can sue the principal debtor in The indemnifier cannot sue third party in his
his own name after paying the creditor. name even after making good the loss unless
there is an assignment in his favor from the
indemnified.

ESSENTIAL FEATURES OF A CONTRACT OF GUARANTEE:

1-A contract of guarantee may be either oral or written.

2-The contract of guarantee requires the concurrence of all the three parties concerned to the contract of
guarantee.

3-Under certain special circumstances a contract of guarantee is implied

FOR EXAMPLE: The endorser of a bill of exchange is liable to pay as a surety the amount of the bill of
exchange to the payee in the case the acceptor of the bill defaults to fulfill his promise.

4-A contract of guarantee like any other liable contract must have consideration received by the principal
debtor is sufficient for the surety and it is not necessary that it must necessarily result in some benefit to the
surety himself.

KINDS OF GUARANTEE:

TWO KINDS:

a) Specific guarantee.

b) Continuing guarantee.

A- SPECIFIC GUARANTEE:

It refers to a specified transaction only guarantee will lapse as soon as the specific transaction
is liquidated it relates to one particular debt only and it is not applicable to fresh loan renewed immediately
after the first loan.

B- CONTINUING GUARANTEE:
 It is one which extends to a series of transactions between the banker and customers within an
agreed limit it is not affected by any payments for it is framed to secure the final debt balance.

It is advisable to the banker to take continuing guarantee so that the surety is made liable for the
subsequent advances granted to the customers

EXAMPLE:

SPECIFIC GUARANTEE: An and purchases goods from bharat on credit

Chandra agrees to stand as a surety which means that if an and does not pay the price of goods he will pay.

EXAMPLE:

CONTINUING GUARANTEE: Ashok in consideration that bhagwan will employ charan in

collecting the rents of bhaguran’s zamindari promises bhaguwan to be responsible to be responsible to the
amount of Rs.6000 for due collection and payment by charan of those rents.

LIABILITY OF THE SURETY:

1-NATURE AND EXTENT OF LIABILITY:

According to section 128 of the Indian contract act, “the liability of the surety is co-
extensive with that of the principal debtor unless otherwise provided by the contract”.

That is the liability of the surety can neither be more nor less than that of the principal
debtor though by a special contract it may be made less than that of the principal debtor but never greater.

2-LIMITATIONS OF SURETY’S LIABILITY:

Though the liability of the surety is co-extensive with that of the principal debtor he
may unit his liability.

3-THE TIME LIABILITY ARISES:

The liability of the surety arises as soon as the principal debtor makes the default the
creditor is not bound to proceed first against the principal debtor before recovering the amount from the surety
in otherwise the creditor can sue the surety without sue the principal debtor.

4-LIABILITY OF CO-SURETIES:

If there are more than one person guaranteeing a debt all of them are called co-sureties
and are liable to the principal debtor if one of the sureties paid the entire amount to the creditor he is entitled
to claim contribution from his co-sureties.
RIGHTS OF SURETY AND THE CIRCUMSTANCES UNDER WHICH A SURETY IS
DISCHARGED:

RIGHTS OF SURETY CAN BE CLASSIFIED AS UNDER:

a) Rights against the principal debtor.

b) Rights against the creditor.

c) Rights against the co-sureties.

d) Rights to revoke continuing guarantee.

RIGHTS AGAINST THE PRINCIPAL DEBTOR:

1-RIGHT OF SUBROGATION:

When the principal debtor defaults to pay the creditor and the surety pays the surety steps into the
shoes of the creditor and acquires all right of the creditor against the principal debtor.

Thus the surety is entitled to the benefit of every security which the creditor has against the
principal debtor provided such security was in existence at the time of the contract of guarantee.

The surety is identified for all payments entitled to be rightfully made him.by

The rights circumstances at which surety is discharged of surety and the:

Rights of surety can be classified as under:
1. Rights against the principal debtor
2. Rights against the creditor
3. Right against the cosureties
4. Rights to revoke continuing guarantee
1. Rights against the principal debtor:
● Rights of subrogation
When the principal debtor default to pay the creditor and the surety pays the surety steps into the shoes
of the creditor and acquire all right of the creditor against the principal debtor.
● Thus the surety is entitled to the benefit of every security which the creditor has against the principal
debtor provided such security was in existence at the time of the contract of guarantee.
● The surety is entitled to be indemnified for all payments sign fully made by him.

2. Rights against the creditor:

● The surety may require creditor to sue debtor while giving guarantee to the creditor
● In the case of fidelity contract he can insist upon the creditor to dispense with the service of the
principal debtor when principal debtors dishonesty is established.
● He can counter claim which the principal debtor could have obtained against the creditor.
 ● On payment of the guaranteed debt, he can require the creditor to assign to him all the securities held
by the creditor in respect of the debt.
3. Rights against the cosureties:
● All the securities shall bear equally the loss caused by the insolvency of the principal debtor.
● When the cosecurities agreed to become liable in different sums they should contribute accordingly.
4. Rights to revoke continuing partner.
The surety has the right to revoke at any time a continuing guarantee by giving notice of such
revocation to the creditor. Thus right is acceptable only for future transaction, but he remains liable in
respect of the transactions which have already taken place.
Discharge of surety from liability:
1. When the principal debtor pays the debt as full in case of specific guarantee, the contract of guarantee
is discharged.
2. The surety is discharged by revocation as to future transaction in case of continuing guarantee.
3. The surety is discharged from the liability of the contract of guarantee becomes void or voidable on
the ground of misrepresentation by the creditor.
4. The surety is discharged
○ By variance of contract
○ By realease or discharge of principal debtor
○ By compromising with debtor.
○ By act of omission or commission impairing surety remedy
○ By loss of security by creditor.

Obligation of creditor (banker) towards surety:

1. The banker as creditor not to change the original terms if the contract, without taking the consent of
the surety. If he does so without the consent of the surety, the surety is discharged from obligation.
2. The banker as creditor should not release the principal debtor. If he does so the surety is discharged
from liability.
3. The creditor should not give any extension of time to the debtor unless the same is provided for in the
contract of guarantee. If the time is extended it is possible that in the meantime of debtor may die or
insolvent with the effect that the surety may not able to recover the amount from the debtor.
4. It is the duty of the creditor to protect the rights of surety.
5. The banker should not make unauthorised dealings in securities belonging to the debtor without the
concurrence of the surety.
6. The banker should not release principal debtor from liability without the consent of the surety.
7. In case of debtors securities deprecation by usage of creditors the surety will not held liable.
Rights of the banker against surety:
1. In case of default of payment of principal debtor, the banker has the right to claim it from the surety.
 2. The banker has a right to claim or on the estate of the surety, in case he dies surety's death does not
underline the guarantee and the banker, the banker is entitled to recover money due from the legal
representative of the deceased surety on default of the debtor.
3. If the surety has any account in the bank, the banker has a right of lien on the balance of account when
the principal debtor fails to repay debt.
4. Where there are cosecurities a release by the banker one of them does not discharge the other surety
or sureties.
Purchase and discounting of bills:
Purchasing and discounting of bills is another form by which a banking institution sanction loans and
advances without any collateral security.
Discounting of bill is nothing but purchasing a bill by a bank as transfer for value
The holder of a bill of exchange can get the bill discounted by getting cash from a bank before it's date of
maturity.
Generally bills of exchange arise out of commercial transaction both in inland and foreign trade.
When the seller of goods has to realize a due from the buyer at the distant place immediately or after the
lapse of an agreed period of time , the instrument of bill of exchange facilitate this task with the help of the
banker.
The bills of exchange or classified into
● Demand bills and usance bills
● Clean bills and documentary bills

1. When a bill is payable on demand it is called demand bill.

2. If a bill is drawn payable after a certain period of time, say 30, 60 or 90 days after demand it is called
usance bill.
3. No stamp duty in case of demand bills whereas usance bills are to be properly stamped till 1989
4. When a drawer of a bill enclosed with the bill the documents of title to goods, such as railway receipt
, lorry receipt etc. To be delivered to the drawee of the bill on payment or against acceptance of the bill is
called a documentary bills.
5. In the absence of such documents it is called a clean bill.
Advantages of discounting of bills by banks:
Discounting of bill is an ideal form of bank leading.
● Certainity of payment on due date:
It is almost certain that the amount invested in first class bills realized on the due date because a trader
who has accepted the bill would definitely honour it as otherwise his credit suffers.

Secondly , if the acceptor fails to honour on the maturity of bill ,the banker will get money from his
customer for whom he discounted the bill.
 ● Employment of funds for a definite period:
As a bill is drawn for a definite period ,the banker is able to employ his funds for a definite period
by discounting bills for definite period.eg. if a banker receive a deposit of RS 1,00,000 for 3 months
he can use the amount in discounting bills which will mature just a day or two before the deposit falls
due.
Simple legal remedy:
In the event of non payment of bill on maturity the legal remedy for recovering the amount is relatively
simple.
In case of dishonour of bill on the date of maturity ,what the banker has to do is simply have it noted and
then the amount of bill is debited to customer's account.
Precautionary steps to be taken before advancing loans by discounting of bills.
1. Intergrity of parties:
● The banker has to satisfy himself regarding the credit standing and integrity of not only the drawer of
the bill ,but also of the acceptor and other endorsing parties.
● If the endorser or acceptor happens to have an account with another bank an enquiry can be made in
the ordinary way and will be obtained easily.
● Generally the banks keep detailed information regarding credit standing of different customers whose
names likely to appear on commercial bills.
Stability in value:
The value of bill will not change as in the case of many securities such as stock exchange securities.Though
there may be some fluctuations in discount rate depending on the changes in the credit policies.
Liquidity:
Bills are highly liquid assets. In case if urgent or unforeseen situation ,the banker can convert the bills held
by him into cash by having them discounted with the central bank of the country.
High and quick yield:
The yield from the discounting of bills is slightly higher than that of loans or advances and further interest
known as discount at the time of discounting of bills where as in the case of other loans or advances it becomes
payable only when the principal fails due or to pay quartely half yearly or yearly.

Genuine trade bills:

The banker should see that the bill he discounted are genuine commercial billa and not in the nature of
accommodation paper, as the former have the advantage of being lacked up by goods while the batter is
without any packing.
E.g.:. When a cloth merchant in Bombay buys a few packs of nit wares from a tiruppur manufacturer of nit
wares and being unable to pay cash for this purpose, accept the bill drawn upon him by the tirupur
manufacturer he hopes to sell the goods and meet his acceptance with their sale proceeds. Thus the bill is
lacked up by actual goods i.e nit wares.
On the other hand, if the bill is discounted as kite or accommodation bill which so merely a means reduce
the drawer and acceptor of raising money. It will not have such goods as a packing. Though it seems that it
may be difficult to distinguish the genuine bills and commercial papers. The banker do not have much
difficulty in differentiating them.
Preference to short term bills:
Banks should also prefer the bills drawn for the short period, not exceeding three months to those drawn
for long periods. Generally bills drawn for more than three months and above are not discounted.

Bills must be completed and free from defects:

The banker should see that the bill is complete in every respect i.e the bill must not be overdue or defective
in any other respect.
In case the banker comes to know of the defect on the title of his customer to the bill, he should refuse to
discount it.
Proper endorsement:
While discounting a bill, the banker should see that the bill is in proper form. The endorsement, if any on
the bill must be complete and regular the bill must comply with the requirements of the law regarding the
acceptance and that the customer endorsement on the bill.
Discounted only for customers:
The banker must also see that the bill is discounted only for his customer and not for others who are not
customers.
Customer's account credited:
When a banker discount bills he will credit the customer account with the amount of the bill less discount.
The bill is then entered in the bills receivable look and its date of maternity noted in the bills receivable
book diary.
Payment of stamp duty:
The payment must be duly stamped and confirm to the provisions of the Indian stamp act 1899.
● Procedure on the dishonour of a bill.
If the customer has sufficient credit balance his account should be firstly debited with the amount
of the bill plus changes in connection with dishonour. The bills should been returned to him with an
advice for debiting the account.
If the customer account does not have sufficient balance to meet the bill notice of dishonour and a
request / notice for payment should be made to the customer and to all parties liable to the bill.
Notice of dishonour:
 The banker should also be careful in sending the notice of dishonour. If the customer resides in a locality of
the banker, the notice of dishonour should be sent to reach the customer on the same date of dishonour. When
they reside in different places the notice must be despatched at least on the same day after dishonour.
Otherwise the banker will lose his rights to claim the amount.
IMPORTANT QUESTIONS
1 mark:
1. Letter of credit is a letter or order by a banker in one place, authorising some other banker in some
other place
2. Bankers issue travellers letter of credit to grant protection to the travellers.
3. When letter of credit is addressed to more than one banker it is known as circular letter of credit.
4. If an irrevocable letter of credit issued by an issuing bank is passed through the advising bank’s called
irrevocable or confirm letter of credit.
5. Contract of indemnity is a contract by which one party promise to save other from loss.
6. The person who gives the guarantee is called the. Surety or the guarantor.
7. Purchasing and discounting of bills is by which loans and advances are sanctioned by banks without
collateral security.
5 marks:
1. What are the parties involved in letter of credit?
2. What are the advantages of letter of credit?
3. Explain teller system and its uses?
4. What are the precautionary steps to be taken before advancing loans by discounting of bills?
8 marks:
1. Explain travelling cheque and its uses?
2. What are the advantages of discounting bills to banks?
3. What are the types of letter of credit?
4. Difference between contracts of indemnity vs contract of guarantee.
5. What are the essential features if contract of guarantee?
6. What are the rights and liabilities of surety?
7. What are the kinds of guarantee?

Reference:
1.Banking theroy law and practices-F.Gordon and K.Natarajan
2.Banking law and practices- S.Natarajan