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PRASATH KUMAR CLASS: III BCOM SUBJECT: BANKING THEORY LAW & PRACTICE SEMESTER: V
ORIGIN OF BANKING The word, ‘Bank’ is said to have derived from the French word ‘Banco’ or ‘Bancus’ or ‘Bank’ or ‘Banque’ which means, a ‘bench’. In fact the early Jews in Lombardy transacted their Banking business by sitting on benches. When their business failed, the benches were broken and hence the word ‘bankrupt’ came into vogue. Another common held view is that the word ‘bank’ might be originated from the German word ‘Bank’ which means a joint stock fund of course bank essentially deals with funds. In due course, it was Italianized into ‘banco’, Franchised into ‘bank’ and finally Anglicised into ‘bank’. This view is most prevalent even to day. DEFINITIONS 1.BANKING: The Banking Regulation Act’ which gives a statutory definition to the term banking According to section 5(b) of the act ‘banking’ means: “The accepting for the purpose of lending or investment of deposits of money from the public repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise”. BANKER: Dr. Herbert L.Hart defines a banker as “one who in the ordinary course of business honours cheques drawn upon him by persons from and for whom he receives money on current account. According to Sir John Paget, “no person or body corporate or otherwise, can be a banker who does no (1) take deposits accounts, (2) take current accounts, (3) issue and pay cheques, and (4) collect cheques crossed and uncrossed, for his customers. CUSTOMER:
The term ‘customer’ of a bank is not defined by law. Ordinarily a person who has an a/c in a bank is considered its customers thus, to constitute a customer the following essential requisites must be fulfilled. i) ii) A bank a/c – savings, current or fixed deposit – must be opened in his name by making necessary deposit of money and The dealing between the banker and the customer must be of the nature of banking business. A customer of a banker need not necessarily be a person. A firm, joint stock company a society or any separate legal entity may be a customer.
CHARACTERISTICS OF BANKING BUSINESS: 1. There should be acceptance of deposits: There is difference between the terms ‘loans’ and “deposits”. Generally, when amounts are borrowed on condition that they should be repaid on the expiry of a term, they are regarded as loans rather than deposits. In case of deposits, the liability to repay arises only when a demand for repayment has been made. 2. Deposits should be from the public: The acceptance of deposits by an institution from its own members does not constitute banking. This means that ‘nithis’ or ‘mutual benefit societies’ which collects deposits only from their members are not banks. However, the words, “deposits from public” have given rise to practical difficulties for example in the case of many cooperative credit institutions a substantial portion of their deposit business may be from their members. 3. Repayable on demand or otherwise: The definition covers acceptance of all deposits whether repayable on demand or on the expiry of a term or after a specified period of notice. 4. Withdrawable by cheque, draft, order, or otherwise: This means that withdrawal of deposits need not be try means of a negotiable instrument like cheque. Withdrawal may be permitted in any other firm eg. A request may be made to transfer funds from are a/c to some other a/c. 5. Purpose of acceptance of deposits:
The purpose of accepting deposits should be ‘lending’ or ‘investment’. Thus, companies which accept deposits for financing their trading or manufacturing business will not come within the definition of banking companies not banking companies can combine manufacturing or trading activities along with the banking business. to purchase durable goods such as VCRs, refrigerators, TVs, etc. These are clean loans and banks keep a lien on the goods and reserve the right to seize them if the borrower fails his part of the contract.
Some of the larger borrowers are financed by more
than one institution on a participation basis. This is done either because the amount involved is very large and beyond the resources of a single institution, or because the amount is beyond what an institution would like to risk on a single borrower. Schemes for Financing Agriculture working capital finance. CLASSIFICATION OF BANKS: Today is the age of specialization and w can find specialization in all fields including banking. The banks have specialized in a particular line of finance. Various types of banks have developed to suit the economic development and requirements of the country. The principal banking institutions of a country may be classified into the following types. I. Central Banks III. Industrial or Development Banks V. Co-operative Banks. VII. Indigenous Banks IX Supranational Bank i. Central Bank: Central Bank is the bank of a country – a nation. Its main function is to issue currency known as ‘Bank Notes’. This bank acts as the leader of the banking system and money market of the country by regulating money and credit. These banks are the bankers to the government, they are bankers’ banks and the ultimate custodian of a nations foreign exchange reserves. The aim of the Central Bank is not to earn profit, maintain price II. Commercial Banks IV. Exchange Banks (Authorized dealers in foreign exchange) VI. Land Mortgage Bank. VIII. Savings Banks X. International Bank Banks grant term-loans to small-scale industrial units for expansion, modernization, and renovation and also provide them with
industrial goods. They may serve as catalytic agents in mobilization of capital in other forms of assistance such as. etc. the RBI was established in 1935 and this Bank has since been functioning as the Central Bank of the country (this is not to be confused with ‘Central Bank of India’. etc. They supply working capital to industries and enable them to carryon production and manufacturing activities. They play an important role in the establishment and growth of industries. underwriting. building of power-supply stations. is supplied by investment banks. It is so called because it so called because it provides money and credit for public and grand short-term loans. They grant loans and advances on the stocks of agricultural commodities. and advances.. etc. which undertakes all kinds of ordinary banking business is called a commercial bank. It acts as a great engine of growth of a State. interest on investments. Both. iv) Exchange Banks (Authorised Dealers in Foreign exchange): . In India. Investment Advisory Services.S. They also perform certain agency services such as collection of cheques.K Federal Reserve System in U. dividends. There is now hardly any country. we have several Industrial Finance Corporation in addition to the “Industrial Development Bank of India”.4 stability and to strive for economic development with alround growth of the country.. letter of credit. etc.. Traveler’s Cheques. which include construction of transport facilities. which does not have a Central Bank of its own.A. which is only a commercial bank). etc. These banks are very popular in Germany and Japan.. these banks are nowadays grouped as ‘Development Financial Institutions’. they discount internal and foreign bills and thereby finance the International trade. finance infrastructure development activities. nowadays. Bank of England in U. etc.. iii) Industrial Bank or Financial Institutions An industrial Bank is one which specializes by providing loans and fixed capital to industrial concerns by subscribing to share and debenture issued by public companies. They provide long-term loans and credits for period varying between 5 and 15 years for industries to acquire fixed assets. issue of drafts. ii) Commercial Banks: A bank. guarantee.. Development Financial Institution and Commercial banks. In India. The Central Bank of different countries is known by different names like Reserve Bank in India. The block capital required for the acquisition of fixed assets.
Reserve Bank of India and known as Authorised Dealers in Foreign Exchange. They do a number of incidental services such as opening of letters of credit. harvesting and for other cultivation expenses. They deal in foreign bills of exchange import and export of bullion and otherwise participate in the financing of foreign trade. v) Co-operative Banks: They are origanised on co-operative principles of mutual help and assistance. the Jains. They form unorganized part of the banking structure. The Land-mortgage banks supply loanterm loans for a period up to 15 years for development of land to improve agricultural yields. etc.5 These types of banks are primarily engaged in transactions involving foreign exchange. They require huge capital and trained staff as it is a risky business. vii) Indigenous Banks: The Central Banking Enquiry Commission defined an indigenous banker as a individual or firm accepting deposits and dealing in indigenous lending or money to the needy. The agriculture Finance Corporation was the first Indian Institution to set up finance for development of Agriculture. buildings. Thy grant short-term loans to the agriculturists for purchase of seeds. the Multanis. They provide credit and loans in foreign currency and also accept deposits in Foreign Currency. In India the Marwaris. They grant loan for permanent improvements in agricultural lands. the Sowcars.e these are unrecognized operators in receiving deposits and lending money. they raise funds by floating debentures and by borrowing from the government. In the past foreign bank operating in India would deal in foreign exchange and were known as exchange banks. the Nattukottai chettiars are some of the leading indigenous . As per foreign Exchange Regulation Act banks dealing in Foreign Exchange related activities requires the permission of Reserve Bank of India. They accept money on deposit from and make loans to their members at a low rate of interest vi) Land-mortgage Banks (Presently known as Agriculture and Rural Development Banks): They are agriculture development banks. They create negotiable bonds out of real estate like land. Thy maintain branches in foreign countries at important trade centers. This is applicable to both Indian and Foreign Banks. i. issue of Foreign Currency Drafts and Travellers’ Cheques and supply of information about foreign customers. The National Bank for Agriculture and Rural Development (NABARD) was constituted by the Government to promote rural development.
they also perform Currency Risk Management functions for clients. World Bank is otherwise known as International Bank for Reconstruction of Development (IBRD) which gives long-term loans to developing countries for their economic and agricultural development. . In India. The minimum balance which is required to be kept in the account differ from banks to banks.. While. the new-born European Currency ‘Euro’. ix) Supranational Banks: Special Banks have been created to deal with certain international financial matters. we have postal savings accounts. Asian Development Bank (ADB) is another Supranational Bank which provides finance for the economic development of poor Asian countries. Co-operative banks are normally allowed to pay an additional 0.6 bankers who charge high rates of interest on their lending. etc. The European Central Bank established in June 1998 by countries in the European Union is another example of Supranational Bank x) International Banks: International Banks are those which are operating in different countries. They specialize in Banking business pertaining to foreign trade like opening of letters of credit. Their main objects is to promote thrift and saving habits among the middle and lower income sections of the society. They generally provide finance at concessional interest rates and for loan-term needs. These institution are the creations of World bodies promoted by various countries or central banks of different countries. they operate through their branches in other countries. The rate of interest payable on the accounts by banks is determined by RBI. Presently it is 4. providing short-term finance in foreign currency. arranging foreign currency credits. These days separate savings banks as such are very rare. Japanese ‘Yen’. In rural areas. the registered office/head office is situated in one country. issue of performance guarantee. postal authorities also run savings bank account and their working is regulated by the government. etc. they still provide substantial financial to agriculturists and small traders viii) Savings Banks: These are institutions which collect the periodicals savings of the general public. The first savings bank was startedin Hamburg in 1765. In almost all countries. In India.5 per cent interest per annum. They generally provides finance for the economic development of poor Asian countries. Interest rate on savings accounts with post offices is determined by Government of India. all commercial banks have savings accounts. They have certain restrictions on number of withdrawals in a year to discourage spending. they are the main traders in International Currencies like US’ dollars’.5 per cent per annum.
• Grant of advances through cash credit.7 These banks are also known as Multinational Banks since. Relationship between a Banker and Customer: The nature of relationship between a banker and customer depends upon the type of service rendered by the banker. They help grow international trade. they operate from many countries. and telegraphic transfers. The services rendered by commercial banks in our country can be classified into two categories. • Provision of remittance facilities by issue of drafts. However. bill of exchange and other instrument (inland and foreign). overdraft and loan accounts and through purchasing/discounting demand and usance bills. • Collection of cheques. These banks make possible the follow of money /credit from one country to another country. Some of these schemes are as follows: Certificate of deposit (CD): The Certificate of Deposit (CD) is a document of title similar to a time receipt issued by a bank. 1. • Provision of facilities of safe deposit and safe custody. NEW SERVICES The banks have introduced a number of new services with the accent on deposit mobilization and grant of credit to weaker sections of society during recent years. and New Services. there is no prescribed interest rate on such funds and the banks have the freedom to . fixed and current deposit accounts. Traditional Services. Some of the important new services are as follows: Schemes for Deposit Mobilisation: A large number of new schemes have been introduced for deposit mobilization. mail transfers. savings. TRADITIONAL SERVICES These services mainly relate to: • Maintenance of different types of deposit accounts e. 2. • Issue of performance and financial guarantees.g. and • Purchase and sale of securities.
Syndicate Bank was a pioneer in this field with its Pigmy Deposit Scheme. readily negotiable. rent. in monthly installment. Farmers deposit schemes: This scheme is intended for the benefit of those farmers. It may also be credited to a recurring deposit or festival deposit account. is repaid after certain specified period. Banks usually allow loan and refund facilities before maturity on appropriate terms. when their income is received after harvest. It is a bearer document. Monthly interest income schemes: They are fixed deposit accounts on which instead of annually or half yearly. Insurance linked savings bank accounts: The scheme provides life insurance protection on the life of an account holder covered under a special Insurance Linked Savings Bank Account. Persons.8 issue it at a discount or face value. and who agree to maintain specified minimum balance and who have an independent regular income by way of salary. Withdrawal facility is also available under the scheme. Annuity or retirement scheme: Under this scheme monthly installment of deposits are collected for a period of years. dividend on shares are eligible for opening an account under this scheme. Joint accounts can be opened by two persons . Minor savings scheme: This scheme has been introduced as an attempt to encourage children to form the saving habit. monthly interest is either paid by way of cash or is credited to the current or savings deposit account of the depositor. Ladies Department: In order to attract women as depositors some banks have Ladies Departments. They also conduct special courses to acquaint the women with banking habit. Daily savings scheme: Under this scheme small depositors are expected to deposit their money with the bank every day. It is specially meant for daily wage earners. professional income. not below 18 years of age and not above 49 years of age. The amount inclusive of interest or double the amount received. hence. who can save once or twice a year. Under the scheme farmers can deposit their money once or twice a year as and when they receive the proceeds of the sale of their crop and they can withdraw up to 1/10 of deposit every month.
1000. In case of a multi-deposit scheme. the balance of Rs. Besides the insurance benefits.1000 as he wants.9 closely related to each other but only one of the joint account holders will be insured. he has to break the entire deposit. However. Insurance cover is provided by the Life Insurance Corporation of India under a special arrangement with the bank. as follows: Time-wise savings scheme: This scheme gives such facilities to a depositor that he saves more time than just money. He is entitled to withdraw as many blocks of Rs. 1. premature withdrawals earns interest at 1% less than the rate applicable for the period for which the deposit was actually paid. 100000 and decides to withdraw Rs. if the depositor needs to withdraw even a small sum. It is so structured that the depositor can use his money whenever he needs it without losing returns or breaking the entire deposit or paying interest to use his own money. The salient features of the scheme are . The City Bank is the first bank in the country to introduce multi-deposit scheme. The cheque facility is also available for withdrawing the amount. There is no compulsion to put back the money withdrawn. he will pay a higher interest on such loan or overdraft as compared to the interest that he gets on his fixed deposit. For example if one opens a 3 years multi-deposit account of Rs. As per RBI regulations. its duplicate copy can be obtained without much difficult. The depositor is required to open a deposit account with minimum amount say Ra. His money is treated as multiple of deposits of fixed sum say Rs. In the event of its being lost. a depositor gets free access to his money. 2. Innovative deposit schemes: In order to attract deposits from the public many banks (particularly foreign banks) have started innovative deposit schemes. The banks usually do not issue a Deposit Certificate to the depositor for this purposes. Multi deposit scheme: In case of a traditional fixed deposit scheme. 1000. 90000 will earn interest at an attractive rate for these 9 months. the depositor has the advantage of getting repayment of the balance with interest calculated by bank on minimum balance. Some banks permit use of their bank cards for this purpose. Alternatively he can take a loan or overdraft facility on his deposit. 10000 after 9 months. They give a Credit Advice instead.
The depositor is sent statement of his account every quarter by post and that also free of charge. Any time money (ATM) scheme: The Scheme enables the depositor though ATM card. say Rs. The Time-wise Scheme was first introduced in India by ANZ Grindlays Bank. the banks at his request can hold his mail to be collected personally by him. transfer money and order for cheque book or statements. seven days a week. The Smart-money Account scheme has been launched in India by the Hong Kong Bank. check balances. The depositors account is credited with interest regularly at the rate applicable to savings deposit. On the balance. Smart-money scheme: This gives the depositor a smart alternative to his savings account. at his registered address. to withdraw. The interest is credited on the minimum balance in the depositors account between the 10th and the last day of the month. at his convenience. In case the depositor does not want to receive any bank related correspondence. Housing Deposit Scheme: These Schemes are suitable for those wishing to acquire or construct their own houses. 4. City Bank and Hong Kong Bank are pioneers in this field. Chequebook facility is also made available. Similarly he is also entitled to free transfer of funds from his account in one branch to the same titled account in any other branch.10 The depositor has to open a deposit account with a minimum amount. 3. he continues to enjoy the rate applicable to fixed deposits as per the directives of the Reserve Bank. deposit. 3000) at any of the branches of the bank. The depositor can withdraw upto 75% of his deposit whenever he wants it by just issuing a cheque.000. . In case a depositor is going out of town. The account holder can deposit or withdraw upto a fixed amount (say Rs. 10. Account holders have to deposit money in installments for a fixed period at earning an attractive rate of interest. he can have a confidence operating his account in his absence. The bank also agrees to pay the routine bills of the depositor if given instructions. The depositor is given access to all branches of the bank irrespective of the branch where he has opened the account. day or night.
this scheme is called Home Loan Account Scheme (HLAS) with the co-operation of scheduled banks. scooters. Personal Loan Scheme: The Scheme has been introduced during the last one decade. etc. are granted loans grant loans to technocrats. etc. are also granted loans to start or expand trade or vocation. either employed or engaged in business and having a steady income. construction and mechanisation of boats. lawyers.e. architects. Mediumterm loans are provided for purchase of equipment such as tractors. on hypothecation of the vehicle concerned. financing seasonal agricultural operations including purchase of inputs. rickshaws to road transport operators. Financing of Road Transport Operations and other small Borrowers: Loans are granted for purchase of vehicles i. Schemes for Agriculturists: A large number of schemes have been They provide short-term loans for introduced by banks to help agriculturists. They have also started providing loans to fishermen for purchase. Under the scheme individuals. One of such schemes of charge amounts up to a specified limit at a time from one branch of the bank for credit to any personal account with any of its branches. The National Housing Bank has introduced with effect from July 1st 1989. Many of the banks have launched schemes for financing farmbased activities such as poultry. agricultural machinery and pump sets. Automatic extension Deposit Scheme: Depositors make a lump sum payment and deposits can be automatically renewed for any term as desired after the specified period. a spurt is expected in the building activity. sinking wells. Long-term loans are provided for purchase of land and other assets of long-term durability. trucks.. etc. cheques up to a certain amount drawn on any . technicians and entrepreneurs to set up small-scale industrial units. Some banks have also introduced schemes for granting of educational loans to deserving students for graduate and post-graduate courses in India and for higher studies abroad. under another scheme known as ‘Special Cheque Transfer Scheme’. Some of the banks have adopted certain villages for providing credit facilities for all productive purposes in the villages adopted. technologists. dairy farming. Similarly. taxis.11 With the setting up of the National Housing Bank on July 9th 1988. Credit Transfer System: As a result of increased customer expectations many banks have introduced schemes for free remittance of funds by their customers subject to certain conditions. Self-employed persons like doctors.
Corporation Bank issues two types of rural cards. These cheques are issued in suitable denominations and are encashable at any office of the bank. negotiated at par for the payee of the last endorsee. instead of paying for things in cash.12 personal account can be collected. there is a risk of misusing this facility. Rural / Green Cards: Dena Bank and a number of other banks are now offering ‘Green Cards’ to farmers to provide them production credit to buy agriculture inputs without repeated visits to them. A credit card is a unique scheme in which one uses a little card and special cheques in place of money. Bank of India. Hence. Of courses. credit cards are slowly replacing the real money as a medium of economic transactions in day to day living. in the West. There is no restriction on the number of withdrawals or on the amount which one can withdraw at one time. Indian Overseas Bank. Airlines. Punjab National Bank and State Bank of India etc. Canara Bank. and agriculturist with a good track record is issued a card to avail credit facility within indicated limits for three years. Credit Cards: The Credit Cards System in India is rather a new concept. seeds. pesticides etc. The Indian banks which have ventured into the credit cards scheme are Andhra Bank. Central Bank of India. one for crop loans and the other for consumption loans. one can pay for them with credit card. Credit cards are issued to valued constituents as identification cards. etc. hence. providing general . Travellers Cheques: Travellers cheques are issued by banks to avoid the risk of loss or inconvenience in having to carry large amount of cash while traveling. The cheques issued by him are also accepted for payments by several institutions viz. hotels. Under this scheme of ‘green card’ of ‘rural card’. Bank of Baroda. He can present special cheques issued along with a card at anyone of the designated branches convenient to him. accommodation in hotels. departmental stores. On presentation of the cards. it is necessary that the banks should issue such cards only to farmers with good past records. Of course. the constituent can encash his cheques drawn on his account at any of the officers of the bank issuing the credit card upto a specified amount for a specified period. Travel Agency Work: A few banks have started travel agency work for their clients such as securing of passage. The Branch Manager after comparing his signatures on the card makes cash payments or issues a bank draft at par in the name of dealer of fertilizer.
only a few banks provide them. can lodge their cash overnight. It obviates the need for the customers to go to the bank during the customers’ own office hours and thus saves time for them. The cheque is collectable at par at all the offices of the issuing banks in India. overdrawn. General Relationship between a Banker and Customer: 1. The purchaser of the gift cheque need not be an account holder with that bank or any other bank to avail of that service. etc. Services after Banking Hours: In order to provide service to the customers after banking hours some banks have introduced “Emergency Vouchers Scheme”. if it shows a debit balance. Since these services are of a high specified nature. The bank collects them the next day and passes the necessary entries. executor and trustee. Lock-box and Night Safe Service: In case of lock-box service a box is kept at the branch of the bank in which the customers lodge the cheques and other remittances after the bank’s office hours. if it shows a debit balance i. etc. the banker becomes a debtor and the customer becomes the creditor. if the customer’s account show a credit balance. On the otherhand. Gift Cheques: These cheques are artistically designed in attractive folders and covers. particularly the traders. Some banks arrange reservation of tickets for a small charge for their customers only. On the otherhand. These vouchers. I. respective position of the banker and customer will be determined. merchant banking services. the banker be comes a debtor and the customer becomes the creditor. Other Services: These services include such as tax assistance.e. In otherwords. At some banks efforts have also been made to offer night safe facilities whereby the customers. are encashable at the bank’s branches during office hours and selected Petrol Stations after office hours. Primary Relationship (Debtor and Creditor Relationship): The relationship between a banker and customer is primarily that of debtor and creditor.13 travel information. which are sold free of any extra charge. the banker may make use of it . A number of banks have started morning and / or evening banking facilities in residential areas. On the basis of the existing state of account. the banker becomes a debtor the money deposited by the customer with a bank is a debt due from the bank to its customer and it becomes the property of the bank. Therefore.
This is because if the would amount to summarily closing the customer’s account without notice. the banker is under an obligation to repay the debt as and when demanded by the customer. But such repayment need not be made in terms of the same currency notes and coins deposited by the customer. dones not apply in case of banks.14 according to his discretion. Though branch forms part of one legal entity. this relationship of debtor and a creditor between a banker and its customer differs from similar relationship arising out of ordinary commercial debts. Similarly the customer cannot also treat two different accounts at the same branch as one. it shall not be taken to be a payment in due course and it may be held liable to the customer for loss. the banker cannot generally combine these accounts unless it obtains prior approval of the customer or has given prior notice to the customer. He cannot draw a cheque on one with insufficient balance presuming that the banker will pay it since the balance in the other account is sufficient. This may damage its customer credit on account of possible dishonour of cheques already issued by him. The demand for repayment should be made during normal working hours of the bank on a working Trustee and Beneficiary: . in the following respects: (a) Demand for repayment necessary: The general rule that demand for repayment by creditor is unnecessary and applicable in case of ordinary commercial debts. 3. In case a banker makes. yet the banker obligation to repay is confined to the place where the accounts is kept. (b) Demand should be made at proper time and place: day. More over. However. The customer must make and express demand for repayment to make the debt actually due for payment by the bank. the demand should be made at the branch of the bank where the customer has his account unless otherwise agreed. (d) Demand must be made in the proper manner: The demand for repayment of money should be made through a cheque or any other written order as per the common usage among the bankers. (c) payment during any other time. A verbal or telephonic demand will not be taken as a proper demand. Such payment may be in any kind of legal tender money. In case the customer has two more accounts with the same branch of the bank. However.
Revolving Credit Facilities. For example.Evergreening of loan. In such cases the customer continues to be the owner of the valuable or securities deposited with the bank and they are not available for distribution among the bank’s creditors in the event of bank going into liquidation. This has to be viewed in the light of specific instructions given by the customer regarding the purpose or use of the documents or money entrusted to the banker. Types of Financing: 1.Take out Financing. 4. such instrument will not be available for distribution among the creditors of the bank. The position of a banker as a trustee or debtor depends upon the practical art circumstances of each case. when the money is paid to a bank with special instructions to retain it till further instructions. Recent Trends In Indian Banking. purchasing and selling securities. the banker acts as a trustee of the cheque or bill till it is collected.Bridge loan. bills of exchange. on behalf of his customer.Consortium Finance. the banker will be considered as a trustee for the funds and not as a mere debtor. .Syndicated loan. 3. payment of insurance premium etc. But once the cheque or bill is collected and the proceeds are credited to the customer’s account. purpose of finance. 3. 7. 5. the bank goes into liquidation.Preferred Financing.Non-Fund Based Business. Commercial Banks extend financial assistance or the credit facilities in many ways depending upon their period of finance. quantum of finance. If specific instruments are given at the time to deposit of money the banker is taken as a trustee for the money and not as debtor. The Indian Banking system has developed enormously after independence particularly after Nationalization of banks I. Principal and Agent: Banker acts as the agents of the customer in those cases where it performs agency functions such as collection of cheques. Similarly when a cheque or bill is deposited with the bank for collection.. 8.15 The banker acts as a trustee for its customers in those case where it accepts securities and other valuable for safe custody. 2. 6.
) VII. Venture Capital. . Revolving Credit Facility: Ever greening of Loan: A bank fixes up a credit limit to a borrower for certain A bank provides a second finance facility to a borrower to help period. Syndicated loans are arranged to finance projects needing large sums of money where the credit risk is also high. Automated teller machine (A. him to pay back the original loan. Deposit Insurance Scheme X.M. Phone Banking VIII. Net Banking or Internet Banking IX.16 II. Factoring services V. Automatic renewal facility is available. Bank net VI. Gold Deposit Scheme XI. Bridge loan: It is a short-term temporary loan extended by financial institutions to These loans are for financing medium to long-term It is long term finance provided for the projects like help the borrower to meet the immediate expenditure pending disposal of requests for long-term funds or regular loans.Balloon Payment System III. Types of Repayment System: 1. requirements. Multi Dimensional Development a) Number of commercial banks b) Expansion of branches in India c) Concentration in rural areas d) Deposit Mobilisation e) Changes in composition of Deposits f) Population per office g) Expansion of credit facilities h) Advance to priority sector RECENT TRENDS IN BANKING Types of Financing: Take Out Financing: infrastructure facilities. Syndicated Loan: It is a loan facility provided to a single borrower by a group of banks.Bullet Payment System 2. IV.T.
particularly high net worth or wealthy customers. One area of lucrative finance for bankers is consumer finance. Drawn on a speicified bank: The cheque can be drawn only on the banker of the customer and on none else. The person who writes the cheque is the ‘drawer’. more particularly car finance. A cheque is presumed to be payable on demand unless an express provision is made in the cheque disturbing this feature. banks are reaching out to customers.17 Consortium Finance: It is a large credit facility may be jointly arranged by a The word consortium refers to ‘a combination of many combination of several banks. the person to whom it is expressed to be payable is the ‘payee’ and the bank on which the cheque is drawn is the ‘drawee’. A Cheque. and Secondly. . the sheque should always be drawn upon a banker. under Section 6 of the Negotiable Instruments Act. Requisites of a valid cheque: 1. But writing of cheques by lead pencil is to be discouraged as alterations can be easily effected on such cheques. The instrument to be in writing: The instruments to pay the maount should be in writing. Payable on demand: The cheque should not be expressed to be payable It is not necessary that the words “on demand” should otherwise than on demand. Guarantee Services / Non-fund Based Business: Guarantee Service refers to a legal undertaking by the bank to pay a certain sum of money to a third-party or a creditor in the event of the bank’s client / customer fails to fulfill his part of obligation. is “a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than appear on the cheque. signed by the maker. Also the cheque should be drawn only on the branch of the bank at which the account of the drawer is maintained and the amount in the account should sufficient to pay the cheque. 2. Preferred Financing: banks who have agreed to extend the credit facility’. Definition: Section 5 defines a bill of exchange as “an instrument in writing containing an unconditional order. Thus. CHEQUE Meaning: on demand”. directing a certain person to pay a certain sum of money only to. or to the order of a certain person or to the bearer of the instrument”. a cheque is a specie of bill of exchange with two qualifications fulfilled: First. it is always payable on demand. 3. In the highly competitive world of banking today. The writing may be done by pen or typewriter or even by a lead pencil as it is not prohibited under law.
In either case. need not be on the cheque. Or he should endorse it to a person having a bank account and collect the cheque through his banker. the identity of the payee or the person who has obtained payment can easily be established. Any person who comes into possession of a lost or stolen cheque may obtain payment and decamp without leaving a trace. The cheque can be drawn payable to a certain person or his order or it may be drawn payable to a certain person or the bearer of the instrument. The payee should have an account with any bank through whom the cheque is collected. 5. General Crossing: It is defined under Section 123 of the Negotiable Instruments Act as follows: “Where a cheque bears across it face an addition of the words ‘and company’ or any abbreviation thereof. The words “I order you to pay”. Crossing may be done generally or specially. Further. A generally crossed cheque is payable to any bank while a specially crossed cheque is payable only to the banker to . Likewise. An open cheque is payable to any person who presents it and it would be very difficult to locate the payee at a later date. 500’. etc. or two parallel transverse lines simply. Crossing is an indication appearing on the face of the cheque that it should be paid only through a banker. and the cheque shall be deemed to be crossed generally”. A cheque drawn in foreign currency is valid and is payable at the exchange rate current at he time of payment.18 4. either with or without the words ‘not negotiable’ that addition shall be deemed a crossing. Payee to be certain: The person to whom the cheque is drawn payable should be certain. Crossing has been evolved to prevent wrongful persons from obtaining payment on a cheque. direction to pay two kilograms of rice is not a cheque. the words “pay” or “please pay” sufficiently convey the order. the order should not attach any condition to the payment of the cheque. is not certain. It may be omitted in the case of bearer cheques. Instructions to pay ‘about Rs. CROSSING: A cheque may be either an open cheque or a crossed cheque. between tow parallel transverse lines. but can be any legal person recognized under law like corporations. Unconditional order: The cheque should contain an order to the bank to pay and this order should be unconditional. Certain sum of money: The direction should be to pay a sum of money which is certain and it should be payable in monetary units. 6. Order cheque should contain the name of the payee. A crossed cheque is payable only through a banker. it is usually done by drawing two parallel lines on the face of the cheque. whom it is crossed. He need not be an individual as is understood generally.
the banker to whom it is ‘not negotiable’. generally or specially. The drawer after cancellation of crossing will put his signature and write ‘Pay Cash’ on the cheque. DOUBLE CROSSING: When a cheque bears two separte special crossings. who has simply to see that the cheque has been presented it for payment by any bank in case of general crossing and by the particular bank (named in crossing) in case of special crossing. Where a cheque is crossed generally the holder may cross it specially. Who can cross a cheque: 1. the holder may cross it on a cheque before issuing it. except when crossed to an agent for the purpose of collection.19 Special Crossing: It is defined in Section 124 of the Negotiable Instruments Act as follows: “Where a cheque bears across its face an addition of the name of a banker. Restrictive Crossing: Besides the above two types of statutory crossing. 2. . The cancellation can be done only by the drawer of the cheque. Example: BANK OF INDIA TO PUNJAB NATIONAL BANK AS AGENT FOR COLLECTION Opening of crossing: Cancellation of crossing of a cheque is called opening of crossing. crossed may again cross it specially to another banker to work as its agent for collection. Where a cheque is crossed generally or specially the holder may add the words The banker: Where a cheque is crossed specially. it may be held liable for wrongful conversion of funds. Restrictive crossing is only a direction to the collecting banker that the proceeds are to be credited only to the account of payee named in the cheque. The drawer: The holder: The drawer can make general. (ii) (iii) 3. in recent years the practice of crossing cheques with the words “account payee” or “account payee only” has sprung up. In case the collecting banker allows the proceeds to be credited to some other account. special or restrictive crossing (i) Where a cheque is uncrossed. Such a crossing is termed as ‘restrictive crossing’. either with or without the words ‘Not Negotiable’ that addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially. It does not in any way affect the paying banker. it is said to have been doubly crossed. the banker on whom it is drawn shall refuse payment thereon”. and to be crossed to that banker”. It is under no duty to ascertain that the cheque is in fact collected for the account of the person named as payee. According to Section 127 “where a cheque is crossed specially to more than one banker.
the payment must be specifically made to that banker. the paying banker need not worry. without any prior arrangement.Presentation of the cheque:First of all. It can be found out by paying attention to the following factors: a) Type of the cheque:Before honouring a cheque. Cheques may generally be of two types – open or crossed. the payment may be made at the counter. Precautions before Honouring a Cheque: In order to safeguard his position. he must find out the type to which it belongs. the paying banker has to observe the following precautions before honouring a cheque. the banker can safely return the cheque.20 PAYING BANKER: A banker on whom a cheque is drawn should pay the cheque when it is presented for payment. If there are ‘A/c Payee’ and ‘Not Negotiable’ crossings. If it is an open one. as they are the directions only to the collecting banker. b) Branch:Then the paying banker should see whether the cheque is drawn on the branch where the account is kept. the payment must be made only to a fellow banker. If it is drawn on another branch. in whose favour it has been crossed. c) Account:- . I. If it is crossed. a paying banker should note whether the presentation of the cheque is correct. If it is specially crossed.
failing which. it may be paid if it has not become stale by that time. Supposing. d) Amount:The next important precaution is that the banker should see whether the amount stated in the cheque. the banker may refuse to honour it. For each account. II. the banker can take any one of the following courses available to him:- . b) Unconditional order:The cheque should not contain any condition. the paying banker’s position will become critical and he may not honour it. d) Banking hours:The paying banker should also note whether the cheque is presented during the banking hours on a business day. If a cheque is ante dated. then. the paying banker should see that the cheque of one account is not used for withdrawing money from another account. e) Mutilation:If the cheque is torn into pieces or cancelled or mutilated. both in words and figures. Payment outside the banking hours does not amount to payment in due courses. from the date of its issue is a state one. Form of the Cheque:Before honoring a cheque. It must satisfy all the requirements of law. then. He should return the cheque for the drawer’s confirmation. a banker should see the form of the cheque and find out whether it is regular or not. agree with each other. the bank must see whether there is a date on the instrument. c) Date:Before honouring a cheque. The customer should draw cheques only on the printed leaves supplied by the bakers.21 Even in the same branch. the paying banker should not honour it. a separate cheque book would have been issued. a customer might have opened two or more accounts. it cannot be regarded as a valid instrument. Hence. If it is a conditional one. If a cheque is post-dated. he should honour it only on its due date. If it is undated. there is a difference in the amount stated in words and figures. a) Printed form:The cheque must be in the proper form. A cheque which is presented after six months.
22 i) ii) iii) he can dishonour the cheque with a memorandum “words and figures differ. It is more so in the case of an order cheque. then. before honoring a cheque. if any. An alteration of the crossing on a cheque. Endorsement:Before honouring a cheque. he cannot claim protection. III. Examples of material alterations are as follows: Alteration of the date of the cheque. By altering the date a fraudulent holder can secure payment of a post-dated cheque or a stale cheque. Hence. If he fails to do so and if he pays a cheque. he muse check up the present state of his customer’s account. Alteration of the place of payment. the payment will not amount to payment in due course. e) Material alteration:A paying banker should be very cautions in finding out the alterations that may appear on a cheque.” or he can honour the amount stated in words. the banker must . Alteration in the names of the parties or the relationship between them or affecting their legal status. or he can honour the smaller amount. that appears on the instrument. If the funds available are not sufficient to honour a cheque. So. which contains a forged signature of the drawer. Alteration of amount of the cheque. “Any change in an instrument which causes to speak a different language in legal effect from that which it originally spoke or which changed the legal identity or character of the instrument either in its terms or in the relation of parties thereto is a material alteration”. which requires an endorsement before its delivery. Sufficient Balance:There must be sufficient balance to meet the cheque. which a banker is not authorized to make. IV. The substitution of the word ‘bearer’ in place of ‘order’ in the cheque. Signature of the Drawer:The next important duty of a paying banker is to compare the signature of his customer found on the cheque with that of his specimen signature. the banker should return it with a memorandum “ Alteration requires drawer’s confirmation”. For instance. If there is any material alteration. the banker must verify the regularity of endorsement. the paying banker is justified in returning it. if there is per pro endorsement.
by mistake. before honouring a cheque. he should stop payment of that cheque only through its drawer. Failure to do so constitutes negligence on the part of the paying banker. honours a countermanded cheque: . It is so because. breach of trust. Any countermanding instruction given to one branch is not effective. till written instructions are received. a) He must see whether there is any order of the customer not to pay a cheque. Failure to note those instructions will land him in trouble. must be in writing. Minor Precautions:A paying banker should look into the following minor details also. In the case of a draft. date number of the cheque.. b) He must see whether there is any evidence of misapporiation of money. the banker should diplomatically delay the payment. name of the payee and the amount. If so. as a notice given to another branch. If a customer informs by telephone or telegram regarding the stopping payment of a cheque. In case a cheque is lost by a holder. Circumstances Under Which A Cheque Can Be Dishonoured: a) Countermanding: Countermanding is the instruction given by the customer of a bank requesting the bank not to honour a particular cheque issued by him. Legal Bar:The existence of legal bar like Garnishee Order limits the duty of the banker to pay cheque. a banker is always answerable only to the drawer. received. c) He must see whether he has got any information about the death or insolvency or insanity of his customer. Countermanding. The written mandate should contain all the details of the cheque. the banker must refuse to pay the cheque. The drawer alone has the right to countermand the payment of a cheque.23 find out the existence of authority. the cheque should be returned eg. When such an order is If a banker. in the case of dishonour of a cheque. viz. its purchaser has no right to countermand its payment. in order to be really effective.
When a banker receives written information form an authoritative source. the customer) in the hands of a third party (ie the banker). A ‘stopped payment’ register may be maintained for ready reference. d) He may have to dishonour the customer’s subsequent cheques for want of funds in the account.24 a) the payment does not amount to payment in due courses. Usually. . f) Upon the receipt of notice of assignment:The bank balance of a customer constitutes an asset and it can be assigned to any person by giving a letter of assignment to the banker. he should not honour any cheque drawn by that deceased customer. b) He will have to answer for having disobeyed his customer’s mandate. Once an assignment has been made. c) Upon the receipt of notice of insolvency:Once a banker has knowledge of the insolvency of a customer. b) Upon the receipt of notice of death of a customer:Death puts an automatic end to the contractual relationship between a banker and his customer. once received. the banker will be served with a notice of the presentation of petition upon which he can take necessary action. countermanding instructions. Therefore. d) Upon the receipt of notice of insanity:Where a banker receives notice of a customer’s insanity. e) Upon the receipt of notice of Garnishee Order:Garnishee Order refers to the order issued by a court attaching the funds of the judgement debtor (ie. he is justified in refusing payment of the cheque drawn by him. c) He has no right to debit his customer’s account with the amount of the countermanded cheque. the assignor has no legal rights over the bank balance and therefore. The banker should make a careful note. he must refuse to pay cheques drawn by him. when the lunacy order is received. if any cheque is drawn by him. the banker should refuse to honour it. (preferably from the nearest relatives) regarding the death of a particular customer. must be kept as a constant record.
25 g) When a breach of trust is intended:In the case of a trust account. But. the banker should refuse to honour the cheque presented by him. the banker should have fulfilled the following conditions:1) he should have paid an order cheque. 10)If the signature of the customer is forged.85. 9) If there is no sufficient funds. 8) If the words and figures differ. . Statutory Protection Under Indian Law:To claim protection under Sec. i) Other grounds:A banker is justified in dishonouring a cheque under the following circumstances also: If a cheque is : 1) a conditional one. he is not expected to know the signature of the payee or endorsee. mere knowledge of the customer’s intention to use the trust funds for his personal use. 7) Presented during non-banking hours. he is liable to the true owner of the cheque. it is quite unjustifiable to make the banker responsible for such errors. h) Defective title:If the person who brings a cheque for payment has no title is defective. STATUTORY PROTECTION TO A PAYING BANKER Supposing. 2) drawn on an ordinary piece of paper 3) a stale one 4) a post dated one 5) mutilated 6) drawn on another branch where the account is not kept. is a sufficient reason to dishonour his cheque. It is so because. and 12)If a crossed cheque is presented at the counter. 11)If the endorsement is irregular. a paying banker pays a cheque which bears a forged signature of the payee or endorsee.
26 2) Such a cheque should have been endorsed by the payee or his order 3) It should have been paid in due courses. he is not entitled to receive payment of the amount therein mentioned”. The apparent tenor refers to the intention of the parties as it is evident from the face of the instrument. PAYMENT IN DUE COURSE “Payment in due course means payment in accordance with the apparent tenor of the instrument. Example of an order cheque is “pay to X or order”. As regards negligence. he is entitled to get protection. to any person in possession thereof under circumstances which do not afford a reasonable ground for believing. b) Payment in good faith and without negligence:Good faith forms the basis for all banking transactions. in good faith and without negligence. c) Payment to a person who is entitled to receive payment:- . When such a cheque is paid by the banker. If negligence is proved. it is taken for granted. that . Order Cheque:The statutory protection has been extended to an order cheque. Endorsement is a must for an order cheque and so protection is mainly extended to an order cheque. This concept of payment in due course has three essential features: a) Apparent tenor of the instrument:To avoid of the statutory protection. Endorsement by payee or his order:Protection cannot be claimed if such a cheque is not endorsed by a payee or any third party. the payment should have been made according to the apparent tenor of the instrument. the banker may sometimes be careless in his duties which constitutes as act of negligence. and so.85 Example: a) payment of a crossed cheque over the counter b) payment of a post-dated cheque before maturity c) failure of verify the regularity of an endorsement. the banker will lose the statutory protection given under sec.
Holder in Due Course:Sec 9 of the N. in good faith and without negligence).. bill of exchange or cheque. Thus a holder in due course is the person i) who receives an instrument innocently 9ie. is drawn has paid the same in due course. This was made possible by the amendment of Sec 84 in 1930. or the payee or endorsee thereof”. In other words. means any person entitled. PROTECTION OF A BEARER CHEQUE Protection to a crossed cheque:Originally. the banker paying the cheque and (in case such cheque has come to the hands of the payee) the drawer thereof. in his own name. to the possession thereof and to receive or recover amount due thereon from the parties thereto”. 128 of the N. it was held that the statutory protection is available only when a bank acts for a paying banker and not as both paying and collecting banker. Protection to a Materially Altered Cheque:Protection to a Draft: Protection has been extended to drafts drawn by one office of a bank of the same bank.27 The banker should have made the payment to the ‘holder’ of the instrument.I.I. who presents the cheque. who for consideration became the possessor of a promissory note. it comes into the possession of the payee. shall respectively be entitled to the same rights and be placed in the same position in all respects. Sec. if the amount of the cheque had been paid to and received by the true owner thereof”. British Mutual Banking company Ltd. Sec 8 of the N. provided. Acts lays down that ‘ holder due course’ means “any person. bill of exchange or cheque if payable to bearer. is in possession of the instrument and he is entitled to receive the amount of the cheque. Act gives protection in respect of crossed cheque to the drawer as well. this has been extended to crossed cheques also. this protection was extended only to open cheques. it would be as a collecting banker that a decision would be taken. Now. and ii0 who has paid value for the same. as they would respectively be entitled to and placed in.I. In worshipful carpenter’s company vs. Act defines a holder as “the holder” of a promissory note. When a Banker acts both as paying and Collecting banker:When a banker acts both as a collecting banker and a paying banker. iii) who has . Sec 128 of the Act runs as follows “ where a banker on whom a crossed cheque. the banker must see that the person..
he should not bring any disadvantages to a party. Recovery of Money paid by Mistake: Since. every part to that instrument is liable to him. it is purged of all defects. 5. it is quite natural that mistakes do occur. The defective title of the previous endorsers (if any) will not adversely affect his rights. In the same way. But. The principle of estoppels is applicable against the endorser to deny the capacity of previous parties. 7. the money is recoverable. once the instrument passes through his hands. then. then. His claim cannot be denied on the ground that the payee has no capacity to endorsee. Until the instrument is finally discharged. in a bank thousands of transactions take place every day. He obtains a better title to the instrument than that of a true owner. 2. Money paid under a mistake of law is not recoverable:- . 2. Money cannot be Recovered:1. He can pass on a better title to others. 3. then. Money received in badfaith is recoverable:When a person receives money by mistake in bad faith. Money can be recovered:Under the following circumstances. has every right to rectify the same. 6. a banker can recover the money paid by mistake without adversely affecting the other party. money wrongly paid can be recovered. knowing that he is not entitled to receive that money. a banker may pay money to a wrong person. Mistake between the party paying and the party receiving:If the mistake is between the party paying and the party receiving. of fact. a person who has committed a mistake. since. Money paid under a mistake of fact is recoverable:If the mistake is a mistake. 4.28 received the instrument before its maturity iv) who is in possession of the instrument as a bearer or payee or endorsee. RIGHTS AND PRIVILEGES OF A HOLDER IN DUE COURSES:The following are some of the important rights and privileges of a holder in due course:1. in rectifying the mistake. the banker is entitled to recover the same. 1. Can a banker recover money paid by mistake? The law on this subject is not yet clear. As a general rule. the money wrongly paid is recoverable. 3. Even the drawer of a negotiable instrument cannot claim invalidity of the instrument against him. By mistake.
If he allows his customers to withdraw money before cheques paid in for collection are actually collected and credited. need not return the same. who receives money in good faith by mistake. and /or 3. . 2. during collection. The banker would be regarded as a holder for value: 1. the banker is the holder in due course with a good independent title against all the prior parties on the cheque”. in his capacity as an agent. So. if the customer has either no title to the cheque or his title is defective. 2. He will be regarded only as an agent. collects a cheque which belongs to some other person. recover it. He collects a cheque on behalf of a customer. when a person. the banker can act in two capacities namely 1) as a holder for value. John Paget “ apart from the question of forged endorsement. he cannot A banker as an Agent:In practice. This is so because. if a banker. If there is a reduction in the overdraft account of the customer before the cheque is collected and credited in the respective account. alters his position relying upon it. according to Sir. he can not have a title better than that of the customer himself. The title of the holder in due course is superior to that of the true owner. He ahs to act only as an agent of the customer. 3. a collecting banker can not choose the capacity in which he wants to act as his discretion. Money paid on a negotiable instrument to an innocent holder is not recoverable:When money is paid by mistake on a negotiable instrument to a holder in due course. to the account of his customer. he will beheld liable for “conversion” of money received. COLLECTING BANKER A collecting banker is one who undertakes to collect the amount of a cheque for his customer from the paying banker. So. If any open cheque is accepted and the value is paid before collection. his rights will be the same as those of a holder in due courses. If the banker acts as holder for value.29 Ignorance of law is no excuse. he can not acquire any of the rights of a holder for value. no banker credits a customer’s account even before a cheque is collected. When a banker pays money mistaking law. Banker as a holder for value:In collecting a cheque. Thus. it cannot be reclaimed after a lapse of time. So. In all these cases. the banker acquires a personal interest. and 2) 2) as an agent for collection.
in which his customer has no title. 3. and so. crossed generally or specially to himself. shall not. he will be held personally liable. has converted the goods of another. The cheque he collect must be crossed cheque. if a collecting banker.131. he cannot claim protection under sec. by reason only of having received such payment”. in the case of an open cheque. will be liable for conversion.I. 1. 2. Collections 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 of his customers. Conversion may be committed innocently. The above statutory protection is available to the collecting banker only if he fulfills the following conditions:1. Statutory Protection:According to sec. it is to absolutely necessary for a person to seek the service of a bank. Act. Conversion is a wrong that renders the person committing it personally liable. “ A banker who has in good faith and without negligence. a collecting banker must act in good faith and without negligence. 3. This applies to the whole transaction form the receipt of the cheque from the customer to the receipt of the proceeds from the paying banker. This liability exists even when a person acts merely as an agent. he will sequire a personal interest in them. he will not be protected. This liability exists because the banker is acting as an agent and not as a holder of value. In good faith and without negligence:In order to get the protection under this Section. so also.30 CONVERSION: ‘ Conversion’ is a wrongful interference or meddling with the goods of another. A banker’s liability:Hence. incur any liability to the true owner of the cheque. if he collects a cheque for a person other than a customer. received payment for a customer of a cheque. It is so because. 2. a banker when collecting an open cheque. 131 of the N. He must collect such crossed cheques only for his customer as an agent and not as a holder for value. becomes liable for conversion. in case the title to the cheque proves defective. The question of That is. If he acts as a holder for value. So. however innocent he may be. Crossed cheques only:Statutory protection can be claimed by a collecting banker only for crossed cheques. if the stranger(other than the customer) for whom he collects a cheque has no title then the banker . He must collect such crossed cheque in good faith and without negligence.
Notice to customer in the case of dishonour of a cheque:If the cheque. he collects. 5. As per or a person Acceptance gives an additional currency to the bill because. Act has prescribed a reasonable time for giving the notice is dishonour. If a banker undertakes to collect bills. As an agent he should exercise reasonable care. b) where the drawee is either a fictitious person. the banker should bear the loss. 4. Present the cheque for collection without any delays:The banker must present the cheque for payment without any delay. diligence and skill in collection work. the drawee becomes liable thereon form the date of . DUTIES OF A COLLECTING BANKER 1. the customer may suffer losses due to the insolvency of the drawer or insufficiency of funds in the account of the drawer or insolvency of the banker himself. the presentment cannot be effected.I. 3. If he fails to do so. insane or bankrupt having no capacity to enter into a contract. Present the bill for acceptance at an early date:Sec 61 of the N. the banker will be liable. d) where. acceptance. the drawee has refused to accept it on some other ground. dead. he acts only as an agent of the customer. c) where. Sooner a bill is presented and got accepted. If there is delay in presentment.I. and consequently. joint stock banks do not act otherwise than in good faith. has been dishonoured. if he fails to do so and if any loss occurs to the customer. Present the bill for payment:The banker should present the bills for payment in proper time and at proper place. According to sec.I. the banker has to bear the loss. He should observe atmost care when presenting a cheque or a bill for payment. earlier is its maturity. Exercise reasonable care and diligence in his collection work:When a banker collects a cheque for his customer. he should inform his customer without any delay.31 good faith is not very material because. Act a bill of exchange must be accepted. 2. then. However presentment for acceptance is excused in the following cases: a) where a bill is payable on demand. Act a bill must be presented for payment on maturity. although the presentment is not quite regular. In all such cases. inspite of a reasonable diligence on the part of the banker. it is his duty to present them for acceptance at any early date. 66 of the N. The N. any loss arises to the customer.
(3) Right to charge incidental charges. A banker can exercise his right to set-off. Hence it is prudent to combine these accounts after informing the customer and getting his consent. For instance. (6) Right to appropriate payments. Sec 22 lays down that the maturity of the bill is the date on which it is due for payment. Notice of Set-off Not Essential: . Protest and note a foreign bill for non-acceptance:In case of dishonour of a bill by non-acceptance or non-payment. In the absence of specific instructions.32 Sec 21 sight bills are payable on demand. Moreover mere opening of two accounts implies that the customer wants to operate them separately. (e) The debt must be mutual. to which. the remaining rights have been discussed at length in this chapter.' Hence. RIGHTS OF A BANKER The following important rights are available to banker's in general: (1) Right to exercise lien. the first three have been already discussed under the chapter 'Banker and Customer. (5) Right to close an account. a contingent is not a certain debt. subject to the fulfillment of the following conditions: (a) The two or more accounts must be in the name of the same customer. 3 days of grace are added. the banker should have it protested and noted by a notary public and then forwarded it to the customer. (f) The amount and the debt should be a certain one. (d) One or more accounts must show a debit balance and the other or others must show a credit balance. 6. collecting bankers do not get the inland bills noted and protested for dishonour. RIGHT TO SET-OFF The right to set -off is nothing but a right to combine two or more accounts of a customer. Of these rights. (2) Right to charge compound interest. (c) They must be in the same bank though at different branches. (4) Right to set-off. (b) They must be in the same capacity. So. it is essential that the banker should get the consent of his customer before exercising his right to set-off. If the bill in question happens to be a foreign bill. it is the duty of the collecting banker to inform the customer immediately. Notice of Set-off Essential: Exercising this right without prior notice would involve the dishonor of this customer's cheques and bring damage to his credit for which the banker is liable. Generally he returns the bill to the customer.
So it is a permanent affair and once for all. Vestal and naugle). (f) Where the accounts are 'stopped'. that. a banker should not exercise the right of set-off. 'stopping operation of an account' refers to the suspension of the operation of an account for the time being at the advent of certain events. (b) A contingent liability that is not certain. (e) If the liability of the party is not arise unless the customer fails to pay. ( First National Bank of Denton Vs. The contractual relationship between a banker and a customer is terminated by closing an account . the credit balance of a partner is first used in payment of his personnel debt. a banker can exercise his right to set-off without giving any prior notice3 under the following circumstances: (a) If the credit balance is claimed in any way other than by the presentment of a cheque. RIGHT TO CLOSE AN ACCOUNT: One should not confuse the term 'closing of an account' with that of the 'stopping operation of an account'. the account will be closed. Set-off Not Available: The bankers right of set off is subjected to certain limitations. they obtain a letter of set off duly signed by the customer at the time of opening two or more accounts. For 'running accounts. This prevents the occurrence of any unpleasant happenings in future. (c) A debt due from a partner to a firm or vice versa. (d) A debt due by him in the capacity of a trustee or agent or officer of any institution. On the other hand. . There is no opportunity for the customer to operate the account once again. (f) The account of a deceased customer cannot be combined with that of the excerpts account (g) Where there is an express provision. after giving due notice to the customer the right of set-off can be exercised. He can not exercise the right to set -off the credit balance of a customer against: (a) A debt that is not due. (b) On the death or insolvency or insanity of a customer. It is purely a temporary suspension of the relationship between a banker and a customer and the customer can operate the account after such events come to a close. (e) On receiving a notice of the creation of a second mortgage on any security over which the banker has a prior charge.In insolvency. Safest course: The safety method. then he cannot do so. (d) On the strength of a letter of set off given by the customer while opening two or more accounts.33 However. which most of the bankers follow in practice is that. (c) On the receipt of a garnishee order.
Generally. to the extent of the amount that is not garnished. namely a doctor. it attaches the whole amount. However. An insane customer may be permitted to operate his account. If the order does not specify the amount. c) Customer’s death:As soon as the banker receives a notice of the death of a customer. When the customer is not a desirable customer.. the banker also has a right to do so. if the sanity is a permanent one. The banker should apply for an official copy of the lunacy order. the banker should close his account and give the balance to the duly appointed representatives of the insane customer.55 of the Provincial Insolvency Act and Sec 57 of the Presidency Towns Insolvency Act provide for an exception of the application of the ‘Doctrine of Relation Back’ to the banker. f) Upon the receipt of Garnishee Order:As soon as the banker receives a Garnishee Order Nisi. Upon the receipt of a Garnishee order absolute. he should stop the operation of the account concerned. Just as a customer has a right to discontinue his dealings with the banker. a customer may close his account for any one of the following reasons: i) ii) iii) if he does not agree to the terms of a banker such as the rate of interest. The banker may close the account of a customer for anyone of the following reasons: i) ii) when the account is not a remunerative one. when his confidence in the bank is shaken. by a competent authority. b) Banker’s intention to close the account:- . he must study the terms of the order. If it attaches only a part of the amount. he should immediately stop the operation of the account. e) Customer’s insolvency:Even though Sec. the banker must allow the customer to operate his account. death puts an end to a contract. then. who used to draw cheques in the absence of sufficient balance or who is convicted of forging cheques. d) Customer’s insanity:The notice of insanity of a customer results in the immediate stopping of the operation of his account. If the order attaches the whole amount. if he is certified to be sane.34 Circumstances for Exercising Either the Right to close an Account or Stop the operation of an Account: (a) Customer's intention to close the account: A customer has a right to close his account at any time. the banker should close the account in order to comply with the order of the court. if he cannot enjoy such facilities as are offered by some other banking. bank charges etc. as per the Lunacy order. he must immediately stop the operation of his account. it is subjected to certain conditions. It is so because. If a banker has knowledge of the presentation of the petition or the commitment of an act of insolvency by a customer.
In other words. the rule given in the Clayton’s case will apply for the appropriation of payment. then. which is already showing a credit balance. Once a notice of assignment is given. it cannot be revoked. In case. 2. If the customer fails to indicate his choice.35 g) Upon the receipt of notice of assignment:As per Sec 130 of the Transfer of Property Act. Right to Appropriate Payments: Yet another right of a banker is to appropriate the money deposited by a customer to any one of the loan accounts due by him. Noble. Where account goes into credit. as general rule. The question of appropriation arises only when a customer has more than one account one or more showing a credit balance and others showing a debit balance. Rule in Clayton’s Case: The rule in Clayton’s case deals with appropriation of payments. the customer is given the first option to decide the account to which the amount should be credited. it can be transferred in favor of third parties. the bank balance constitutes an asset. appropriation takes place in the order of time. Since. then. the partnership account of X. He should exercise his option at the time of depositing money and he can even ask his banker to credit this amount to an account. Y and Z shows a debit balance of Rs. For instance. appropriation takes place in a chronological order. Thus. In fact. which is showing a debit balance.e. the banker does not close the old amount. the banker has every legal right to credit the amount in any one of the accounts of that customer. any subsequent payment . instead of an account. He can even cancel a time -barred debt or reduce an unsecured loan by exercising this right and inform the same to the customer.5000/-. the first item on the credit side is extinguished by the first item on the debit side and so on. the first item on the debit side is cancelled by the first item on the credit side i. the appropriation is deemed to be completed as soon as the information regarding such appropriation is given to the customer. Supposing.. This rule was laid down in the important case Devaynes Vs. a person has a right to transfer his interest in the asset. The rule is : 1. The principle laid down in Clayton’s case is of great practical significance to bankers. Significance of the rule: A banker should always bear in mind the rule laid down in Clayton’s case. Where the account goes into debit. at the time of retirement of partner X. particularly in the case of running accounts like current account and cash credit account. both of them do not exercise their option.
5000/-. The banker stands to bear the loss of extend of the retiring partner’s share since the deposit of Rs.36 made by the other partners will be entered only in this account. For instance.5000/. . the retiring partner’s liability is automatically discharged.belongs to the remaining partners Y and Z only. if the remaining partners make a deposit of Rs.due to the operation of the rule in Clayton’s case and thereby.5000/. it will cancel the debit balance of Rs.
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