BANKING LAW

MODULE 1
BANKING SYSTEMS IN INDIA
The banking system of India consists of the central bank (Reserve Bank of India -
RBI), commercial banks, cooperative banks and development banks (development
finance institutions). These institutions, which provide a meeting ground for the savers
and the investors, form the core of India’s financial sector. Through mobilization of
resources and their better allocation, banks play an important role in the development
process of underdeveloped countries.
STRUCTURE OF THE INDIAN BANKING SYSTEM
Reserve Bank of India is the central bank of the country and regulates the banking system
of India. The structure of the banking system of India can be broadly divided into
scheduled banks, non-scheduled banks and development banks.
Banks that are included in the second schedule of the Reserve Bank of India Act, 1934
are considered to be scheduled banks. 
All scheduled banks enjoy the following facilities:
 Such a bank becomes eligible for debts/loans on bank rate from the RBI
 Such a bank automatically acquires the membership of a clearing house.
All banks which are not included in the second section of the Reserve Bank of India Act,
1934 are Non-scheduled Banks. They are not eligible to borrow from the RBI for normal
banking purposes except for emergencies.
Scheduled banks are further divided into commercial and cooperative banks.
 Commercial Banks
The institutions that accept deposits from the general public and advance loans with the
purpose of earning profits are known as Commercial Banks.
Commercial banks can be broadly divided into public sector, private sector, foreign banks
and RRBs.
  In Public Sector Banks the majority stake is held by the government. An
example of Public Sector Bank is State Bank of India.
 Private Sector Banks are banks where the major stakes in the equity are owned
by private stakeholders or business houses. A few major private sector banks in
India are HDFC Bank, Kotak Mahindra Bank, ICICI Bank etc.
 A Foreign Bank is a bank that has its headquarters outside the country but runs its
offices as a private entity at any other location outside the country. An example of
Foreign Bank in India is Citi Bank.
  Regional Rural Banks were established under the Regional Rural Banks
Ordinance, 1975 with the aim of ensuring sufficient institutional credit for
agriculture and other rural sectorsAn example of RRB in India is Arunachal
Pradesh Rural Bank.
 Cooperative Banks
A Cooperative Bank is a financial entity that belongs to its members, who are also the
owners as well as the customers of their bank. They provide their members with
numerous banking and financial services. Cooperative banks are the primary supporters
of agricultural activities, some small-scale industries and self-employed workers. An
example of a Cooperative Bank in India is Mehsana Urban Co-operative Bank.
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Cooperative banks are further divided into two categories - urban and rural.
 Rural cooperative Banks are either short-term or long-term.
 Urban Co-operative Banks (UCBs) refer to primary cooperative banks located in
urban and semi-urban areas.
 Development Banks
Financial institutions that provide long-term credit in order to support capital-intensive
investments spread over a long period and yielding low rates of return with considerable
social benefits are known as Development Banks. The major development banks in India
are; Industrial Finance Corporation of India (IFCI Ltd), 1948, Industrial Development
Bank of India' (IDBI) 1964, Export-Import Banks of India (EXIM) 1982, Small Industries
Development Bank Of India (SIDBI) 1989, National Bank for Agriculture and Rural
Development (NABARD) 1982.

LEGISLATIVE FRAMEWORK FOR THE BANKING SECTOR

There are various banking laws and regulations which are mainly or partly related as to
how the banks function in the country, they are as follows:

1. Reserve Bank of India Act, 1934

It was enacted to constitute RBI with objectives to regulate the issue of bank notes,
keeping reserves to ensure stability in the monetary system and operate the nation’s
currency and credit system effectively.

The Act mainly covers the constitution, powers and functions of the RBI. The act does
not deal with the regulation of the banking system except for Section 42 which is related
to regulation of cash reserve ratio and Section 18 which mainly talks about direct
discounting of bills of exchange and promissory notes.

Hence, The RBI Act deals with:

1. Incorporation, Capital, Management and Business of the RBI.

2. Various functions of the RBI which include: the issue of bank notes, monetary
control, banker to the Central and State Governments and banks, lender of last
resort etc.
3. Provisions talking about reserve funds, credit funds, audits and accounts.
4. Issuing directives and imposing penalties for violation of provisions of the Act.
2. Banking Regulation Act, 1949

It is deemed to be one of the most important legal framework for banks. It was initially
passed as the Banking Companies Act, 1949 and it was eventually changed to the
Banking Regulation Act, 1949 (“The BR Act”). Along with the RBI Act, The BR Act
provides a lot of guidelines to the banks. They cover a wide variety of areas, some of the
major provisions are:

 Banking is defined in Section 5 (i)(b), as acceptance of deposits of money from

the public for the purpose of lending and/or investment. Such deposits can be
repayable on demand or otherwise withdraw able by means of cheque, drafts,
order or otherwise;
 Section 5 (i)(c) defines a banking company as any company which handles the
business of banking;
 Section 5(i)(f) distinguishes between the demand and time liabilities, as the
liabilities which are repayable on demand and time liabilities means which are
not demand liabilities;
 Section 5(i)(h) deals with the meaning of secured loans or advances. Secured
loan or advance granted on the security of an asset, the market value of such an
asset in not at any time less than the amount of such loan or advances. Whereas
unsecured loans are recognized as a loan or advance which is not secured;
 Section 6(1) deals with the definition of banking business; and
 Section 7 specifies banking companies doing banking business in India should
use at least on work bank, banking, banking company in its name.

The BR Act also prohibits a certain kind of activities, which are:

 Trading activities of goods are restricted as per Section 8.

 Prohibitions: Banks are prohibited to hold any immovable property subject to
certain terms and conditions as per Section 9. Furthermore, a banking company
cannot create any kind of charge upon any unpaid capital of the company as per
Sec 14. Section 14(A) further says that a banking company additionally cannot
create a floating charge on the undertaking or any property of the company
without prior permission of the RBI.
 A bank cannot declare dividend unless all its capitalized expenses are fully
written off as per Section 15.

RELATIONSHIP BETWEEN BANKER AND CUSTOMER

The relationship between a banker and a customer is the foundation on which mutual
duties, liabilities and privileges are being built. An understanding of these terms is
essential.
1. Debtor-Creditor Relationship : When a customer (debtor) deposits money
with a bank (creditor), the customer becomes a lender and the bank becomes
borrower. As such, the relationship is that of a debtor and creditor. It is a
general relationship between banker and his customer. Some important points
to note in Debtor-Creditor Relationship are,
1. The banker is the debtor of the customer with the obligation to honor his
customer's cheque drawn upon his balance.
2. When the banker lends money to his customer, the customer becomes the
debtor and the banker, the creditor.
2. Banker as an agent : Generally, bankers render agency services for their
customers. They pay insurance premium, electricity bills, taxes, etc. They collect
interest on investments, dividends on shares, collect cheques, etc. Bankers act as
per the 'Standing instructions' of their customers. For these services, the banker
charges a nominal commission from the customer. The banker, by providing these
services acts as an agent and the customer who gives the standing instructions, acts
as a principal. Hence, the relation of banker and customer is that of agent and
principal as far as these services are concerned. 
3. Creditor (i.e., customer) demanding payment : Under a commercial debt, the
liability of the debt arises only at the maturity of the debt i.e., on the due date. The
debtor i.e., the banker is to pay the debt on the maturity date. The customer must
demand in writing for repayment, only then, will the payment be made to the
customer. 
4. Banker as a bailee : Bailee is one who posses goods or articles on behalf of the
owner (called bailor) of the goods. According to the Sec. 148 of Indian Contract
Act. a bailment is the delivery of goods by one person to another for some
purpose, upon a contract, that they shall, when the purpose is accomplished, be
returned or otherwise deposited off according to the directions of the person
delivering them.  In other words, when customer leaves with the banker some
valuables for safe custody in the safe deposit vaults or lockers, the banker
performs the functions of the bailee and the relationship between the banker and
the customer in such a case is that of a bailee and the bailor. 
5. Banker as a Trustee : A trust is a relation between two persons by virtue of
which one of them (called trustee) holds property vested in him for the benefit of
the other (called beneficiary). For example. if a customer deposits securities or
other valuables with the banker for safe custody, he acts as a trustee of his
customer. The customer continues to be the owner of the valuables deposited with
the banker. The legal position of the banker as a trustee differs from that of a
debtor of his customer. In the event of bank's liquidation, such trust properties held
by the banker are not available for the distribution to general creditors of the
bank. 
6. Proper place and time of demand : The demand by the creditor (i.e., depositor)
must be made at the proper place and in proper time. A commercial bank has a
large number of branches. His / her demand for withdrawal of amount from the
deposited funds must be made at the branch where the account has been opened in
his / her name during the business hours. 
 7. Not time barred : The deposits with a bank are not time - barred on the expiry of
three years as the case with ordinary debt. The Law of Limitation Act does not
apply to a banking debt.
8. Bank as an executor : Where a customer appoints a banker as his executor and
leaves property through a will, the banker has to administer the property according
to the terms of the will after the death of such customer. Where no will is written
by the deceased, the court may appoint the banker as administrator. In such a case
the banker has to distribute the property of the deceased according to the
suggestion laws applicable.
9. Banker as an Attorney : The customer may grant a special power of attorney to
his banker to transact certain dealings on his behalf. The banker is the attorney of
the customer in such cases. 
1. Note : Power of Attorney refers to the authority to act for another person
in legal or financial matters.
10. Banker has a right to combine accounts : If a customer has two or more
accounts in his / her name at the same branch and in the same capacity, a banker as
a debtor can exercise his right to combine those accounts into one.
11. A banker has no right to close the account : A banker as a debtor has no right to
close the account of its creditor (depositor-customer) at any time without the prior
permission from him / her. 
12. A banker as a creditor : If a banker disburses loan and overdraft, it assumes the
role of a creditor and the customer assumes the role of a debtor.  
OBLIGATIONS OF BANKERS

1. It is the duty of the bank to honor the cheques of its customers up to the amount
standing to the credit of the customer’s account. The bank is liable to pay the
compensation to the customer, if it wrongfully refuses to honor the cheque.
2. It is the duty of the bank to follow the instructions given by the customers. If the
customer has not given any instructions, the bank should act as per rules and
regulations.
3. Bankers should not disclose personal information given by customers to any
outsider.
4. Banks should maintain all details of transactions made by the customer.

BANKING OMBUDSMAN

It is a grievance redressal system. The service is available for complaints against a bank’s
deficiency of service. A customer of the bank can submit a complaint against the
deficiency in the services of the bank. If he does not get a satisfactory response from the
ban, he can go ahead and approach the banking ombudsman for further action and
investigation. Banking Ombudsman is typically appointed by the RBI under the Banking
Ombudsman Scheme, 2006. RBI as per Section 35A of the BR Act, 1949 introduced the
Banking Ombudsman Scheme with effect from 1995.
Important Features about the Banking Ombudsman Scheme:

 Banking Ombudsman is a senior official appointed by the RBI to redress

customer complaints against certain deficiencies in certain banking services
covered under the grounds of complaint specified under Clause 8 of the
Banking Ombudsman Scheme 2006.
 All Scheduled Commercial Banks, Regional Rural Banks and Scheduled
Primary Co-operative Banks are covered under the scheme.
 Twenty Banking Ombudsman have been appointed with their offices located
mostly in state capitals. The addresses and contact details of the Banking
Ombudsman offices have been mentioned under Annex I of the Scheme.
 Some of the deficiency in the banking services (including internet banking):
1. non-payment or inordinate delay in the payment or collection of cheques,
drafts, bills etc.;
2. non-acceptance, without sufficient cause, of small denomination notes tendered
for any purpose, and for charging of commission in respect thereof;
3. non-acceptance, without sufficient cause, of coins, tendered and for charging of
commission in respect thereof;
4. non-payment or delay in payment of inward remittances;
5. failure to issue or delay in issue of drafts, pay orders or bankers’ cheques;
6. non-adherence to prescribed working hours;
7. failure to provide or delay in providing a banking facility (other than loans and
advances) promised in writing by a bank or its direct selling agents;
8. refusal to open deposit accounts without any valid reason for refusal;
9. levying of charges without adequate prior notice to the customer;
10. non-adherence by the bank or its subsidiaries to the instructions of Reserve
Bank on ATM/Debit card operations or credit card operations;
11. refusal to accept or delay in accepting payment towards taxes, as required by
Reserve Bank/Government;
12. refusal to issue or delay in issuing, or failure to service or delay in servicing or
redemption of Government securities;
13. forced closure of deposit accounts without due notice or without sufficient
reason;
14. refusal to close or delay in closing the accounts;
15. non-adherence to the fair practices code as adopted by the bank or non-
adherence to the provisions of the Code of Bank s Commitments to Customers
issued by Banking Codes and Standards Board of India and as adopted by the
bank;
 16. non-observance of Reserve Bank guidelines on the engagement of recovery
agents by banks; and
17. any other matter relating to the violation of the directives issued by the Reserve
Bank in relation to banking or other services.

A customer can also make a complaint on the following groups if he feels there is a
deficiency in the service with respect to loans and advances:

1. Non-observance of Reserve Bank Directives on interest rates; – delays in

sanction, disbursement or non-observance of prescribed time schedule for
disposal of loan Applications;
2. Non-acceptance of application for loans without furnishing valid reasons to the
applicant; and
3. Non-adherence to the provisions of the fair practices code for lenders as
adopted by the bank or Code of Bank’s Commitment to Customers, as the case
may be;
4. Non-observance of any other direction or instruction of the Reserve Bank as
may be specified by the RBI for this purpose from time to time.

There are no costs involved in filing complaints with the banking ombudsman. The
banking ombudsman does not levy or charge any fee for filing and resolving customers’
complaints.

The amount to be paid by the bank to the complainant in the form of compensation
because of the loss suffered by the complainant is limited to the amount arising directly
out of the act or omission of the bank or Rs 10 Lakhs, whichever is lower.

The Banking Ombudsman can award compensation not exceeding Rs 1 lakh to the
complainant only in the case of complaints relating to credit card operations for mental
agony and harassment. The Banking Ombudsman has to take into account the loss of the
complainant s time, expenses incurred by the complainant, harassment and mental
anguish suffered by the complainant while passing such award.

LIABILITY UNDER CONSUMER PROTECTION ACT, 1986

Under this Act, Section 2(1) (o) defines what service is and “deficiency” is defined under
Section 2(1) g. Banking service is also covered under the various services mentioned
under this Act. Banking Service” here can include receiving of deposits, payment of
premium, money lending, locker facilities etc. Deficiency in respect of such services
provided by bank can be brought before Consumer forums. As per section 2(1) (d),
Consumer includes a person who avails or hires a service for consideration. Hence any
person who owns an account in bank or takes a service form bank can file complaints
under this act for “deficiency” or regarding unfair practices by the banks. Consumer
courts not only compensate for the defect but also for the mental agony suffered or
harassment faced. Listed are the few deficiencies in banking services as laid down by
consumer commissions and courts of law :
 Refusing or holding back the amount that was due on fixed deposit after
maturity
 Delay in the payment of amount on term deposits after maturity
 Dishonor of cheques because of mistake or negligence by bank.
 Dishonoring of demand drafts because of omission by bank officials.
 Refusing grant of loans without any bonafide reason
 Causing undue delay in discharging installments of loan
 Charging interest at higher rate than what has been specified in loan
agreement.
 Failure in returning securities even after the loan is repaid.
 Bank’s failure to honour guarantee, if demand was as per guarantee.
 Liability is on bank if articles in locker are lost
 loss to customers due to unavailability of securities in bank premises
 Closing bank account without any instructions in that regard from the account
holder
 Refusing cheque book facility to customer just because of the fact that the
minimum balance has not been maintained
 Failure of bank cashier to account for money deposited at the counter with
him(vicarious liability)
 Rude behavior of bank officials resulting in discomfort or mental agony to
customers
 Without even demanding repayment giving notice to “face the auction or
make payment”.
 Failure at returning the dishonored cheque
Charter of the Customer Rights
This is a recent step taken by RBI regarding consumer protection. It includes various
principles listed as follows:
 Right to Fair Treatment: Right to treatment of courtesy is with both the
service provider as well as with the financial customers. Also, no customer
should be discriminated on grounds of age, gender, caste, religion or physical
abilities.
 Right to Honest, Transparent, and Fair Dealing: Service provider must
make all efforts possible to make sure that contracts framed by it are
transparent in nature and are such that can be understood easily and is
properly communicated to common man. Price of the Product, the various
risks associated with it, and various conditions which govern over life cycle
of product, customer responsibilities must be disclosed. Also customer must
not be subject to undue influence, or business practices which are unfair or
unjust
 Right of Suitability: Needs of the customers should be kept in mind while
offering products (needs on the basis of financial circumstance of customer).
  Right to Privacy: Personal information of the customer must be confidential
unless there is consent or if this information is required as per law. They have
protection right over anything that infringes their privacy.
 Right to Grievance Redressal: The customer has a right to hold the financial
services provider answerable for the products offered. The providers of
Financial Service must let the customers know about their policy regarding
rights and duties in case of such events.
MODULE 2
TYPES OF BANK ACCOUNTS
1. Savings Account
These are deposit accounts meant to help consumers save their money. A savings account can be
opened by any individual in India who holds an Aadhaar card and a PAN card, both of which are
mandatory to open a bank account in India. 
The main benefit of opening a savings bank account is that the bank pays you interest for
opening this type of account with them. 
 There is no limit to the number of times the account holder can deposit money in
this account but there is a restriction on the number of times money can be
withdrawn from this account. 
 The rate of interest that an account holder get varies from 4% to 6% per annum
 There is no minimum balance that needs to be maintained for this type of an
account
 The savings account holders can get an ATM/Debit/Rupay Card if they want to
 Savings bank account is further divided into two types:
o Basic Savings Bank Deposit Account (BSBDA) and
o Basic Saving Bank Deposit Accounts Small Scheme(BSBDS)
 The savings bank account is mostly eligible for students, pensioners and working
professionals
Exception to minimum balance requirements is for select accounts, such as savings
accounts that have been opened under the Indian federal government’s financial inclusion
plan called the Pradhan Mantri Jan Dhan Yojana (PMJDY). 
Under PMJDY, one savings account with zero balance is opened per person. These
accounts fall under the Basic Savings Bank Deposit Accounts, which limit the number
and value of deposits that can be made, and withdrawals are capped at four per month,
including ATM withdrawals. 
2. Current Account
Current accounts are mostly business accounts where money is frequently transferred
between financial accounts. These accounts are best suited for transactions by
corporations and business owners for daily business activities. 
  This type of bank account is mostly opened by businessmen. Associations,
Institutions, Companies, Religious Institutions and other business-related works,
the current account can be opened
 There is no fixed number of times that money can either be deposited or
withdrawn from such accounts
 Internet banking is available
 This type of bank account does not have any fixed maturity
 Overdraft facility is available for current bank accounts
 There is no interest that is paid on such accounts

3. Recurring Deposit Account

Recurring Deposit account or RD account is a form of account wherein the account
holder needs to deposit a fixed amount every month until it reaches the fixed maturity
date. 
The features of the Recurring deposit account have been discussed below:
 Any individual or an Institution can open a recurring deposit account either
separately or jointly
 Periodic or monthly instalments that need to be added can be as low as Rs.50/- or
may vary from bank to bank
 The range of months for which an RD account can be opened varies from 6
months to 120 months
 The interest rate varies depending upon the bank you choose to open an account
with
 Nomination facility is also available for RC accounts
 Passbook is issued for this type of bank account
 Premature withdrawal of the amount is permitted, provided a sum of amount is
deducted as penalty
4. Fixed Deposit (FD) Accounts
These accounts are opened to earn interest on  deposits for a fixed period of time until
maturity. Fixed deposits are among the safest financial instruments to save and earn
interest on idle money. 
 It is a one time deposit and one time take away account. Under this type of
account, the account holder needs to deposit a fixed amount of sum (as per their
wish) for a fixed time period
 The amount deposited in FD account can only be withdrawn all at once and not in
instalments
 Banks pay interest on the fixed deposit account
 The rate of interest depends upon the amount you deposit and for the time duration
of the FD
 Full repayment of the amount is available before the maturity date of FD
5. Salary Account
These accounts are opened by banks upon the request of big corporations and businesses that pay
their employees through banks. Each employee is eligible to maintain a salary account in which
the company they are employed with credits a monthly salary. 

6. NRI Account
These accounts are opened by non-resident Indians who wish to maintain a financial bank
account in India. There are three kinds of NRI accounts that can be opened:
1. NRO ( Non-Resident Ordinary Rupees) Account – This shall allow you to
transfer your foreign earnings easily to India. It can be opened in the form of an
FD/RD/Current/Savings account. These accounts can be opened by an individual
or jointly opened
2. NRE ( Non-Resident External Rupees) Account – When an Indian citizen
moves abroad to work there, his/her account needs to be converted into an NRE
account. This account can be jointly opened with an Indian resident
3. FCNR ( Foreign Currency Non-Resident ) Account – This type of account can
be opened to manage an international currency. It can only be in the form of Term
deposit and can be withdrawn after the maturity period only. 
OPENING A BANK ACCOUNT
India has the world’s second largest unbanked population, and women make up nearly 60% of
unbanked adults in India, despite the government’s national mission for financial inclusion—the
Pradhan Mantri Jan-Dhan Yojana scheme—that took the percentage of people who have a bank
account in India to 80%. 
To open a bank account in India, an applicant needs to own a list of documents that are outlined
by all state-owned and private banks in India as must-haves to meet the Know Your Customer
(KYC) requirements.
 Aadhaar Card 
Aadhaar is a verifiable 12-digit identification number issued by the Unique Identification
Authority of India, based on a customer’s biometric and demographic data.
To open a bank account, the Aadhaar card has become the single valid proof of identity,
proof of residence and proof of the bank account holder’s phone number.
 Permanent Account Number (PAN) 
The Permanent Account Number, or PAN, is a 10-digit unique alphanumeric number
issued by the Income Tax Department of India. PAN enables the tax department to
identify and link all transactions such as tax payments, returns of income and specified
transactions of the PAN holder. 
It is mandatory to produce your PAN card at the time of application for a new bank
account.
Procedure
  Visit Bank Branch or Apply Online
To open any type of bank account, you need to visit the bank’s branch or visit the bank’s
website to procure the bank account opening form. 
This form requires you to fill personal details such as your name, permanent address, date
of birth, the names of parents or spouse, along with your signatures to commit to basic
terms and conditions of the bank.
 Submit Documents of Proof for KYC
Indian banks have been mandated by the central bank Reserve Bank of India to authorise
the opening of a bank account only when certain documents are produced as proof of
identity.
In the case of opening a new account, customers need to submit mandatory documents
such as an Aadhaar Card or PAN Card, and submit two recent photos of themselves.
Other documents of proof will vary from one bank to another. 
 Wait for Bank to Assess Documents
Banks usually take one to two days for new account approvals. Once you’ve submitted
your documents, wait for the bank to reach out to you for verification or clarifications on
any errors they see in your KYC document submissions.
 Collect Your Account Details, Debit Card and Internet Banking Details
Once the bank approves your account-opening documents by analyzing the proofs
submitted, new account opening is sanctioned and the bank issues you your bank account
number, along with a customer ID to enable online banking. Online banking is a way to
carry out banking transactions electronically using the internet, instead of making in-
person transactions at a physical bank branch.
You are also provided a debit card to start accessing your bank account and conducting
financial transactions. A debit card is a plastic card issued by your bank to enable you to
make payments using the card instead of paying in cash. 
As a mandatory requirement, you are expected to change your ATM pin by visiting a
bank ATM and selecting a new pin for your debit card. 
You are also provided a cheque book, which helps you sign cheques to transfer funds
from one bank account to another.
KYC
KYC means “Know Your Customer”. It is a process by which banks obtain information
about the identity and address of the customers. This process helps to ensure that banks’
services are not misused. The KYC procedure is to be completed by the banks while
opening accounts. Banks are also required to periodically update their customers’ KYC
details.
Why is KYC Required?
The KYC process helps financial entities verify that investments/ transactions are being
made in a real person's name. This helps cut down unlawful practices like money
laundering, fraud or financing illegal activities. KYC compliance is required to open bank
accounts, Demat and trading accounts, start fixed deposits or invest in mutual funds. It is
even needed if you want to apply for a home or a personal loan.

Types of KYC

There are different types of KYC in India based on the verification process. These are

 Aadhaar based KYC (eKYC)

 Offline KYC or In-Person-Verification (IPV) KYC
 Centralised KYC (CKYC)

KYC Documents Required

Documents needed to complete a KYC procedure include a recent photograph,

documents to prove NRI/PIO status, PAN card copy, Aadhaar card copy, Indian and
overseas address proof.

For proof of NRI/PIO status, you can submit:

 Copy of passport
 Copy of visa or work/residence permit
 PIO or OCI card (for Foreign passport holders)

Proof of Indian address can be established via

 Passport
 Driver's Licence
 Election Card

Proof of overseas address can be established via

 Passport
 Bank statement of India or overseas bank (not more than three months old from
the date of application)
 Permanent overseas driving license
 Utility bills like electricity, gas, water (not more than three months old).
DECEASED ACCOUNTS
Deceased accounts are bank accounts that are owned by a person who is no more alive
(deceased). Banks will freeze the account(s) when they get notified that the account has
been deceased. The money and belongings (if stored in a bank locker) will be handed
over to the legal heirs as per the court's directions.
Creditors are given the preference over legal heirs and kins when an account becomes
deceased. Hence, deceased accounts become extremely important for the lenders if the
deceased has any unpaid debt. The legal heirs and kins are not liable to settle the
liabilities of the deceased, and therefore, the creditors can recover their dues only by
whatever is left in the deceased account and estate.
When the account holder is no more, the legal heirs are to inform the banks at the earliest
about the same. They must notify the bank about the death by furnishing death certificate,
ID proof, and account details (if they know).
If there is nothing that the deceased person owes to creditors, then the proceeds from the
deceased accounts will be handed over to the legal heirs. If there is any unpaid debt, then
the account balance would be recovered by the creditors. The remaining amount, if any,
will be handed over to the kins.
If the deceased accounts are pay-on-death accounts, then the bank will hand over the
proceeds to the nominee or beneficiary when the account holder gets deceased. The
nominee or beneficiary should report the death of the account holder with proper proof of
identification.
The proceeds in the case of joint accounts held with a deceased person will result in the
surviving owner gaining full ownership over the account. The surviving owner may
continue to operate on the account or close the same. Joint accounts held with a deceased
person are not considered deceased accounts.
GARNISHEE ORDERS
The word “Garnish” has been derived from an old French word “Garnir” which generally
aims to warn or to prepare. The word “Garnishee” means a person who is debtor to the
judgment debtor or against whom a decree has been passed. He is a person on record in
the court of law who is responsible or liable to pay the debts to the judgment debtor and
liable to deliver the possession of any movable property.  He is generally required to pay
the debt and whose property has been subjected to garnishment.
Garnishee Order is an order passed by an executing court directing or ordering a
garnishee not to pay money to judgment debtor since the latter is indebted to the garnisher
(decree holder). It is an Order of the court to attach money or Goods belonging to the
judgment debtor in the hands of a third person. The third party is known as 'Garnishee'
and the court's order is known as Garnishee Order. It is a remedy available to the Decree
holder. Garnishee proceedings are the proceedings in rem as well as in personam. It
operates on the personam of the garnishee as on the debt. Therefore it is classified as a
proceeding quasi in rem. 
This power of the court is enshrined under Order 21 Rule 46 A of the Code and is
discretionary to the court whether to pass such order or not, depending upon the
circumstances and sometimes it leads to prejudice to the garnishee. However, the
discretion of the court is not absolute and must be adopted judicially. 
A garnishee order is a legal notice the court issues that allows the creditor to collect the
amount from either:
1. the debtor’s wages,
2. the debtor’s bank account, or
 3. other people who owe the debtor money (e.g. a real estate agent who is collecting
rent).
A garnishee order can often result in payment within 7 days of obtaining a judgment debt.
Features of the Garnishee Order

The bank upon whom the order is served is called Garnishee. The depositor who owes
money to another person is called judgement debtor. Features of the Garnishee Order are
as under;

Garnishee Order applies to existing debts as also debts accruing due i.e.

SB/CD, RD/FD Accounts.
 Garnishee Order applies only to those accounts of Judgement Debtor which
have credit balance.
 The relationship between bank and judgement debtor is of debtor and
creditor. Bank is the debtor of Judgement Debtor who is a creditor of the
bank.
 Garnishee Order does not apply to money deposited subsequent to receipt of
Garnishee Order. It also does not apply to cheques sent for collection but yet
to be realized. But if credit was allowed in the account before realization
with power to withdraw to customer, Garnishee order will be applicable on
this amount.
 Garnishee Order does not apply to unutilized portion of overdraft or cash
credit account of the borrower as no debt is due to judgement debtor. For
example, if limit is Rs 4 crore and outstanding is debit Rs 3 crore, Garnishee
order is not applicable on the balance Rs 1 crore.
 Bank can exercise right of set off before applying Garnishee Order.
 Garnishee Order is applicable only if both debts are in same right and same
capacity.
 Garnishee Order issued in a single name does not apply to accounts in the
joint names of judgement debtor with another person(s). But if Garnishee
Order is issued in joint names, it will apply to individual accounts also of the
same debtors. When Garnishee Order is in the name of a partner it will not
apply to partnership account but when Garnishee Order is in the name of
firm, accounts of individual partners are covered.
 If amount is not specified in the order, then it will be applicable on the entire
balance in the account. However, if it is for specific amount, the cheques can
be paid from the balance available after setting aside the amount as
mentioned in the Garnishee Order.
 Not applicable on fixed deposits taken as security for some loan.
 If loan given against fixed deposits, applicable on the amount after adjusting
the loan.
ILLUSTRATIONS
Suppose A owes Rs. 1000 to B and B owes Rs. 1000 to C. by a garnishee order the court
may require A not pay money owed to him to B, but instead to Pay C, since B owes the
said amount to C, who has obtained the order.
Suppose A owes B Rs 2,000/. A refuses to repay the amount to B and B sues A. He
obtains a decree in his favor. Here B is a judgment-creditor and A is the judgment-debtor.
B comes to know that A has some money in a bank account and would like to have his
decree satisfied by attaching the funds in the hands of A's bank. For this purpose he
approaches a court and obtains a Garnishee order attaching funds at the bank standing to
the credit of A. In this e.g., A, is the garnishee and B is the Garnisher (Person who
initiates action).

RIGHT TO SET OFF

Right of set off is the right of the bank to combine the two accounts of the same person
where one account which is in credit balance and the other account is in debit balance in
order to cover a loan default. The banker can exercise the right of set-off only when the
money owed to him is a sum certain, which is due and where there is no agreement,
express or implied to the contrary.
A bank cannot set-off a debt owed by the customer personally against a credit balance if
the bank is aware that the customer holds the account in credit as a trustee. The opposite
side of this principle, however, is that if the bank has clear and indisputable evidence that
two accounts are beneficially held by the same customer it is entitled to combine them
even if they are held in different names (Saudi Arabian Monetary Authority Agency v
Dresdner Bank AG).
ESSENTIAL CONDITIONS
There are certain conditions to be followed before using right to set off.
 Relationship
The right can be exercised when the relationship is that of debtor/creditor on one hand
and creditor/debtor on the other and exist simultaneously.
 Notice
The right can be exercised only after sending a prior notice to the depositor, expressing
the intention to exercise the right. The notice will be of a reasonable period.
 Type Of Loan
The loan should be certain, determined, due and not a future debts and where no
agreement to the contrary exists. In other words, the right can be used, for those loans,
which have become due for payment and customer has defaulted. Where the customers
has been paying the loan as per agreed terms, the right is not available.
 Time Barred Loans
Time barred loans can be recovered by use of right of set-off, since such loans continue to
be lawful.
 Same Name And Capacity
It is essential that the account must be in the same name and in the same capacity. The
money belonging to someone else cannot be made available to satisfy personal debts of
some other person.
 Partners/Partnership
Where a partner’s account shows credit balance, the right can be exercised for the dues of
the partnership firm. But where the firm’s account shows credit balance, the bank cannot
set off the credit balance against the debts due from the individual partner.

 Guardian
Where account is opened in the name of minor child in the capacity of a guardian, the
account with the bank. Hence, bank cannot exercise right of set-off on such accounts.
 Trust
The funds held by a person in a trust account are to be treated in a different right from his
own liability as an individual. Theses cannot be used by the bank for set-off.
 Joint Accounts
If the account of a person shows debit balance, such dues cannot be recovered from his
joint account with others. To settle the loan in the joint names, the funds lying in the
individual account of one or more of them, can be used to settle the joint liability.
 Guarantor's Account
The right can be exercised against the lying in the account of a guarantor but only when
demand is made on the guarantor which determines his liability.
 Term Deposits Which Are Not Due
Though the right is available, but the right can be used only after the term deposit
becomes due.
PROMISSORY NOTES
A promissory Note is defined under Section 4 of the Negotiable Instruments Act 1881
and Section 2(22) of the Indian Stamp Act 1899.
A promissory note is a convenient way of repayment of huge amounts of money taken as
loan. By way of a promissory note the mode of repayment of loan gets pre defined. Since,
it is in writing and legally binding, both the parties are therefore assured that they are
backed by law in case of any future hassles.

Pre-requisites of Promissory Notes

1. Must be in writing – A promissory note should always be in writing. Mere
agreement to pay back the debt is not a promissory note. The promise to pay
should be lucid and express. Mere acknowledgement is no good.
 2. Unconditional promise to pay – The promise to pay should be unconditional,
eg : “I promise to pay, on the 5th day after my marriage” is not an unconditional
promise to pay. The undertaking to pay must not be contingent on the happening
or non-happening of the event.
3. Should be signed by the maker – It is mandatory for the person making the
promissory note to sign it. The promissory note can even be signed by maker’s
agent, who has been so authorised to do so by the maker himself. The pro note
should be clear about the identity of the person undertaking to pay.
4. Maker should be a certain defined person – The person who promises to pay,
should be a certain person. Even if the person takes up an assumed name, he’d be
bound to pay as the maker.
5. The payee should also be a certain person – Every promissory note should
clearly mention the name of the payee or the name of the person to whom the
payment is promised.
6. The promise must be to pay money only – “I promise to pay Neha 300 Rs and
10 kgs of rice” shall not be constituted as a promissory note. Only legal tender
money is acceptable as promissory note. Rare currencies or coins wouldn’t be
taken as valid promissory notes. The amount to be paid should also be certain.
7. It is not payable to bearer – It is illegal to make promissory note payable to
bearer under the provisions of the RBI Act.
8. Duly stamped – A promissory note is covered under Section 2 (22) of the Indian
Stamps Act and it has to be adequately stamped as per the provisions of the Act.
An inadequately stamped promissory note shall not be admissible in evidence.
BILLS OF EXCHANGE
A bill of exchange is a negotiable instrument in writing under Section 5 of the Negotiable
Instrument Act, 1881. It is an unconditional order requiring a certain person to pay a certain
sum of money on a specific date. There are three parties to a bill of exchange i.e. Drawer,
Drawee, and Payee. The drawer is the person who draws or makes the bill and sends it to the
drawee or the payer for the acceptance. The bill is also endorsable to another person who
then becomes the holder of the bill. On the due date, the holder of the bill presents it to the
drawee for receiving the payment. 
DISHONOR
 Dishonor by non-acceptance (Section 91)
A little kind of negotiable tools, i.e., bill of exchange, promissory note, or cheque may be
desecrated by non-payment by the acceptor thereof. But a bill may also be despoiled by
non-acceptance because bill of disagreement is the only negotiable instrument which
supplies its presentment for acceptance and non-acceptance thereof, can sum to disgrace.

Dishonor means failure to honor a negotiable instrument. This may be by non-acceptance,

when a bill of argument is accessible for receipt and this is declined or cannot be obtained
or by non-payment, when the bill is presented for payment and payment is refused or
cannot be obtained.

A negotiable tool is made-up to be violated any by non-acceptance or non-payment.

  Dishonor by non-payment (section 92)

An instrument is dishonored by non-payment when the party mainly answerable e.g., the
acceptor of a bill, the maker of a not or the drawee of a cheque, make default in sum. A
tool is also violated for non-payment when a formal presentation of information to a court
for payment relieved and the instrument, when overdue, remains unpaid, under section 76
of the Act.

Distinction between dishonor by non-acceptance and by non-payment. If a bill is

dishonored by non-acceptance, there is no right of action against the drawee as he is not a
party to the bill. The holder of the bill can proceed only against the drawer or endorser, if
any, on Dishonor by non-payment the drawee can be sued.

Consequences of dishonour of cheque: (REMEDIES)

 Notice- According to section 93 of the Negotiable Instruments Act, 1881, a

notice regarding the dishonor shall be given to all the concerned parties.
 Compensation- According to section 117 of the Negotiable Instruments Act,
1881, the compensation payable in case of dishonour of promissory note, bill of
exchange or cheque, by any party liable to the holder or any endorsee, shall be
determined by the following rules:
o the holder is entitled to the amount due upon the instrument together with
the expense properly incurred in presenting, noting and protesting it;
o when the person charged resides at a place different from that at which the
instrument was payable, the holder is entitled to receive such sum at the
current rate of exchange between the two places;
o an endorser who, being liable, has paid the amount due on the same is
entitled to the amount so paid with interest at 31[eighteen per centum] per
annum from the date of payment until tender or realization thereof, together
with all expenses caused by the dishonour and payment;
o when the person charged and such endorser reside at different places, the
endorser is entitled to receive such sum at the current rate of exchange
between the two places;
o the party entitled to compensation may draw a bill upon the party liable to
compensate him, payable at sight or on demand, for the amount due to him,
together with all expenses properly incurred by him. Such bill must be
accompanied by the instrument dishonoured and the protest thereof (if
any). If such bill is dishonoured, the party dishonouring the same is liable
to make compensation thereof in the same manner as in the case of the
original bill.
 Liability of banker for negligently dealing with bills presented for
payment- According to section 77 of the Act when a bill of exchange, accepted
payable at a specified bank, has been duly presented there for payment and
 dishonoured, if the banker so negligently or improperly keeps, deals with or
delivers back such bill as to cause loss to the holder, he must compensate the
holder for such loss.
 Criminal liability of Drawer of a cheque on dishonour – According to
section 138 of Negotiable Instruments Act, 1881, where any cheque that was
duly presented to the bank is returned unpaid either because of the amount of
money standing to the credit of that account is insufficient to honour the
cheque or that it exceeds the amount arranged to be paid from that account by
an agreement made with the bank, such person shall be deemed to have
committed an offence, and shall be imprisoned for a term which may be
extended up to two years, or with fine which may extend to twice the amount
of the cheque, or both.

BANK GUARANTEE
Bank Guarantee a promise made by the bank to any third person to undertake the
payment risk on behalf of its customers. Bank guarantee is given on a contractual
obligation between the bank and its customers. Such guarantees are widely used in
business and personal transactions to protect the third party from financial losses. This
guarantee helps a company to purchase things that it ordinarily could not, thus helping
business grow and promoting entrepreneurial activity.
For Example- Xyz company is a newly established textile factory that wants to purchase
Rs.1 crore fabric raw materials. The raw material vendor requires Xyz company to
provide a bank guarantee to cover payments before they ship the raw material to Xyz
company. Xyz company requests and obtains a guarantee from the lending institution
keeping its cash accounts. The bank essentially cosigns the purchase contract with the
vendor. If Xyz company defaults in payment, the vendor can recover it from the bank.
Similarly, a large manufacturer of furniture wishes to enter into a contract with a small
woodshop vendor. The large manufacturer will require the small vendor to provide a bank
guarantee before entering into a contract for Rs.50 lakh worth of wood material. In this
case, the large manufacturer is the beneficiary who requires a guarantee before entering
into a contract. If the small vendor is unable to deliver the wood material, the large
manufacturer of furniture can claim the losses from the bank.
Types of Bank Guarantee
1. Guarantee of payment. This type of guarantee is a security of payment obligations of
Buyer to Seller.
2. Guarantees of advance payment return. This guarantee represents an obligation of
the bank to return advance payment in the event that, after receiving an advance, the
Seller does not perform its contractual obligations.
3. Contract execution guarantee. This guarantee is a security of timely delivery of
goods or performance of services according to a contract.
4. Tender guarantees. This guarantee plays a role of security in those cases when the
Company fails to perform its obligations to tender organization or other party that is
stipulated in the order received by winning the tender.
5. Guarantee in favor of the customs authorities. This guarantee is a security of
obligation of the company performing import and export operations to the Customs
authorities for payment of customs taxes and duties.
6. Guarantees of warranty execution. This guarantee plays a role of security of quality
for delivery to the contract terms.
7. Guarantee of credit return. This guarantee is a security for repayment of credit.

Advantages and Disadvantages of Bank Guarantees

Bank guarantee has its own advantages and disadvantages. The advantages are:
 Bank guarantee reduces the financial risk involved in the business transaction.
 Due to low risk, it encourages the seller/beneficiaries to expand their business on a
credit basis.
 Banks generally charge low fees for guarantees, which is beneficial to even small-
scale business.
 When banks analyse and certify the financial stability of the business, its
credibility increases and this, in turn, increase business opportunities.
 Mostly, the guarantee requires fewer documents and is processed quickly by the
banks (if all the documents are submitted).
On the flip side, there are some disadvantages such as:
 Sometimes, the banks are so rigid in assessing the financial position of the
business. This makes the process complicated and time-consuming.
 With the strict assessment of banks, it is very difficult to obtain a bank guarantee
by loss-making entities.
 For certain guarantees involving high-value or high-risk transactions, banks will
require collateral security to process the guarantee.
LETTER OF CREDIT

A Letter of Credit (LC) is a document that guarantees the buyer’s payment to the sellers.
It is issued by a bank and ensures timely and full payment to the seller. If the buyer is
unable to make such a payment, the bank covers the full or the remaining amount on
behalf of the buyer.
A letter of credit is issued against a pledge of securities or cash. Banks typically collect a
fee, ie, a percentage of the size/amount of the letter of credit.
Parties to a Letter of Credit
 Applicant (importer) requests the bank to issue the LC.
 Issuing bank (importer’s bank which issues the LC [also known as the Opening
banker of LC]).
 Beneficiary (exporter).
Types of letter of credit

 Revocable and irrevocable letter of credit

The issuing bank in its power can cancel or amend the letter of credit without the consent
or prior notice to the beneficiary; such type is called a revocable letter of credit. This type
of credit is considered very non-reliable as no bank will be ready to act as a confirmation
bank in such scenarios and whereas an irrevocable letter of credit cannot be made subject
to amendment or cancellation without the consent of the parties.

 Transferable letter of credit

In the case of transferable credit, the credit can be transferred by the original beneficiary
to others. It is pertinent to note that transfer can be allowed only once and works only on
the letter of credit which has a clause that allows the transfer. This type of credit gives
sellers their right to instruct the advising bank to give credit to all the beneficiaries
involved in the transaction.

 Back-to-back letter of credit

In the event of the buyer unwilling to disclose his identity and unwilling to initiate a
transferable letter of credit, back-to-back credit comes into play. In this type of credit, the
beneficiary requests his banker to issue a letter of credit in favour of the beneficiary’s
supplier to help him with the procurement of raw materials and goods required to fulfill
the contract made on the terms of the letter of credit.

 Red and green clause letter of credit

In the case of the red clause of the letter of credit, as per the authority given by issuing
bank to the nominated bank, the nominated bank verifies the request of the beneficiary
and provides pre-shipment credit to the beneficiary. In the course of failure by the
beneficiary to pay the given advance amount to the nominated bank, the issuing bank
shall be held liable to make the due payment. 

The green clause is similar to the red clause with certain additional features like providing
advance for the charges incurred in the process of warehousing and insurance by
obtaining warehouse receipts as security.

 Confirmed letter of credit

Confirmed letter of credit deals with only irrevocable credits. Along with issuing bank,
the confirmed banker also adds its own confirmation to the letter of credit and becomes
the party to such letter of credit.
  Standby credit

In the event of indebtedness, borrowing of money, or any default in performance of a

contract suffered by the beneficiary, the issuing bank is put forth in a position to be
obligated to step forward to help the beneficiary to perform his obligation.

 Payment letter of credit

Payment or sight credit is a type that is more immediate and efficient compared to other
types of letter of credit. In this type, upon presentation of the eligible documents to the
issuing or nominating banks, they are made available for payment on sight basis.

 Deferred payment and acceptance letter of credit

The deferred payment is more like usance credit type, where the issuing bank shall be
responsible for the payment on the due date mentioned on the letter of credit without
drawing the bill of exchange. Whereas acceptance letter is similar to deferred payment,
except for the fact that it mandates drawing of a bill of exchange. 

 Negotiation letter of credit

The negotiation in negotiation letter of credit can be restricted to a specific bank or may
be open to any bank willing to negotiate. Moreover, in the failure of a negotiating bank to
negotiate, it is always the responsibility of the issuing bank to make the payments. A
negotiating bank becomes the holder in due course if its negotiation was effective.
KEY DIFFERENCES BETWEEN LETTER OF CREDIT AND BANK
GUARANTEE

1. Letter of Credit is a commitment of buyer’s bank to the seller’s bank that it will
accept the invoices presented by the seller and make payment, subject to certain
conditions. A guarantee given by the bank to the beneficiary on behalf of the
applicant, to effect payment, if the applicant defaults in payment, is called Bank
Guarantee.
2. In a letter of credit, the primary liability lies with the bank only, which collects
payment from the client afterwards. On the other hand, in a bank guarantee, the
bank assumes liability, when the client fails to make payment.
3. When it comes to risk, the letter of credit is more risky for the bank but less for the
merchant. As opposed, the bank guarantee is more risky for the merchant but less
for the bank.
4. There are five or more parties involved in a letter of credit transaction, as in
applicant, beneficiary, issuing bank, advising bank, negotiating bank and
confirming bank (may or may not be). As opposed, only three parties are involved
in a bank guarantee, i.e. applicant, beneficiary and the banker.
5. In a letter of credit, the payment is made by the bank, as it becomes due, such that
it does not wait for applicant’s default and beneficiary to invoke undertaking.
Conversely, a bank guarantee becomes effective, when the applicant defaults in
making payment to the beneficiary.
6. A letter of credit ensures that the amount will be paid as long as the services are
performed in a defined manner. Unlike, bank guarantee mitigates loss, if the
parties to the guarantee, does not satisfy the stipulated conditions.
7. A letter of credit is appropriate for import and export business. In contrast, a bank
guarantee suits government contracts.
BASIS FOR
LETTER OF CREDIT BANK GUARANTEE
COMPARISON

Meaning Letter of credit is an financial A bank guarantee is a guarantee

document for assured payments, given by the bank to the
i.e. an undertaking of the buyer's beneficiary on behalf of the
bank to make payment to seller, applicant, to effect payment, if the
against the documents stated. applicant defaults in payment.

Liability Primary Secondary

Risk Less for merchant and more for More for merchant and less for
bank. bank.
 BASIS FOR
LETTER OF CREDIT BANK GUARANTEE
COMPARISON

Parties Involved 5 or more 3

Default Doesn't wait for applicant's Becomes active only when the
default and beneficiary to invoke applicant defaults in making
undertaking. payment.

Payment Payment is made only when the Payment is made on the non-
condition specified is fulfilled. fulfillment of obligation.

Suitable for Import and Export business Government contracts

MODULE 3

PRINCIPLES OF LENDING

A banker follow certain basic principles of lending while doing carrying out their

lending and credit operations. Banks deals with public money accepting deposit and lend
to their borrowers to earn profit. Banks follow some fundamental principles of lending in
order to ensure safety, security and profitability on money it lend. Lending is one of the
most important functions performed by the commercial banks and is major source of
income of bank.

Borrower may differ in terms of their purpose of advance, activities, financial health,
repayment capacity, risk so some important principles / considerations are followed by
bank before taking lending decision.

IMPORTANT PRINCIPLES OF LENDING IN BANKING/CREDIT PRINCIPLES

These basic principles of bank lending affect bank’s loan policies, credit operations to a
great extent. Here are some important principles of lending :

 Safety
 Liquidity
 Purpose
 Diversity or Risk Spread
  Profitability
 Security

 Safety
Safety is the most important fundamental principle of lending. Banks deal with public
money so safety of money from public is first priority of bank. When a banker lends, he
must be sure about that the money is in safe hand and will definitely come back at regular
interval as per repayment schedule without any default. Safety of funds depends on nature
of security, character of borrower, repayment capabilities and financial health of the
borrower.

A banker must ensure that finance extended by him goes to right type of borrower and is
being used for the intended purpose. And also after utilizing it for right purpose it should
be repaid with interest.

 Liquidity

Liquidity is also an important principle of lending in banking. Bank lend public money
which is repayable on demand by depositors so bank lends for a short period. A banker
must ensure that money will come back on demand or as per repayment schedule. The
borrower must be able to repay the loan within a reasonable time after demand for
repayment is made.

‘Liquidity’ has as much importance as ‘safety’ of funds. The reason behind it is that a
bulk of their deposit is repayable on demand or at a very short notice. Banker must ensure
that money is locked up for a long time. If loan becomes illiquid, it may not be possible
for bankers to meet their obligations vis a vis depositors.

 Purpose

The underlying purpose for which an applicant is seeking a loan should be productive.
The purpose of loan helps in determining level of risk and also impact interest rate on
loan.

Purpose of loan should be productive in order to ensure safety of funds while it should be
extended for short term to ensure liquidity.

 Diversity / Risk Spread

Do not put all eggs in one basket – Bank follow this approach (principle of diversity)
while creating its advances portfolio. Risk is always present while extending any kind of
advance to any type of borrower. To minimize the risk, bank should lend to borrowers
from different trades, industries like agriculture, education, IT, pharma, educational etc.
Lending surplus to a particular sector may have adverse affect on bank in time of slump.
A banker must follow principle of diversity also while choosing its investment portfolio.
He must invest the funds over different share and debentures of different industries rather
than investing in particular type of security.

 Profitability

Banks accept deposits from public and lend it to make profit. Banks also incur expenses
to maintain deposits such as rent, stationary, premises rent, provision for depreciation of
their fixed assets, bad loans. After incurring such expenditures, a bank must earn some
profit like other financial institutions.

So a banker must extend the advance in such a way that it is profitable for bank and also
at competitive lending rate.

 Security

A banker avoid lending to a borrower without any security. Security act as an insurance
to lender bank in case of default by the borrower. The banker carefully scrutinizes all the
different aspects of an advance before granting it. At the same time, he provides for an
unexpected change in circumstances which may affect the safety and liquidity of the
advance. It is only to provide against such contingencies that he takes security so that he
may realize it and reimburse himself if the well-calculated and almost certain source of
repayment unexpectedly fails.

LOAN TO WEAKER SECTIONS

The weaker sections of our society are the socially backward/ minority communities at
national level or the people belonging to economically low income group. Normally, such
people may not easily get timely and adequate credit without the priority credit
dispensation of RBI.  As per RBI’s priority sector approved plan, Banks have to achieve
weaker section target of 10 percent of ANBC (Adjusted Net Banking Credit) or Credit
Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.
The Priority sector loans to the following category borrowers will be considered as Loans
to ‘Weaker Sections’.
Priority sector loans to the following borrowers will be considered as loans under Weaker
Sections category:

 Small and Marginal Farmers

 Artisans, village and cottage industries where individual credit limits do not
exceed ₹ 1 lakh
 Scheduled Castes and Scheduled Tribes
 Self Help Groups
 Distressed farmers indebted to non-institutional lenders
  Distressed persons other than farmers, with loan amount not exceeding ₹ 1 lakh
per borrower to prepay their debt to non-institutional lenders
 Women
 Persons with disabilities
 Overdrafts upto ₹ 5,000/- under Pradhan Mantri Jan-Dhan Yojana (PMJDY)
accounts, provided the borrowers’ household annual income does not exceed ₹
100,000/- for rural areas and ₹ 1,60,000/- for non-rural areas
 Minority communities as may be notified by Government of India from time to
time.
Small and marginal farmers: As per RBI definition, a farmer cultivating more than 1
hectare   up to 2 hectares(5 Acres)  and a farmer who is cultivating agriculture land up to
1 hectare (2.5 Acres) are respectively called Small and marginal farmers. The loan
granted to a farmer for investment up to Rs.50000/- for allied activities irrespective of
size of the land holding is considered as advances to small and marginal farmer under
weaker section.
Besides small and marginal farmers the advance made to Artisans, village and cottage
industries where individual credit limit does not exceed Rs.1 lakh is classified as
advances to weaker section category.
DRI Loans, loans to Self Help Groups, loans to SC/STs, persons with disabilities, loans to
minority Communities such as Muslims, Christians, Sikhs, Jains, Buddhist, Parsis (The
Muslims in J&K, and Lakshadweep, Sikhs in Punjab, the Christians in Nagaland,
Mizoram and Meghalaya who are minority population at national level and majority
population in the states are not considered as minority category in those states),
Beneficiaries of Government sponsored schemes such as NRLM, NULM and SRMS are
also considered as weaker section.
Overdrafts up to Rs.5000/- under Pradhan Mantri Jan-DhanYojana (PMJDY) accounts
wherein  the borrowers’ household annual income does not exceed Rs.100,000/- for rural
areas and Rs.1,60,000/- for non-rural areas, loan granted to distressed farmer to clear
his/her indebtedness to non-institutional lender, other distressed persons to whom loans
are granted to prepay the loan amount to the non-institutional lenders up to Rs.1 lakh per
borrower and individual women beneficiaries up to Rs.1 lakh per borrower is considered
as loan to weaker section.
SECURITY AND RISK INVOLVED
A security is a financial instrument, typically any financial asset that can be traded. The
nature of what can and can’t be called a security generally depends on the jurisdiction in
which the assets are being traded.
DEBT RECOVERY WITHOUT COURT INTERVENTION

There are several laws and legislations in force that regulate the process of debt recovery.
The creditors could approach the Adjudicating Authorities/other Judicial Forum through a
civil suit or through legislations, not limited to the Companies Act, 2013, Recovery of
Debt Due to Banks and Financial Institutions Act, 1993 (DRT Act), Sick Industrial
Companies Act, 1985. Specialized Tribunals/ Adjudicatory Bodies have been created
over the period for dispensing justice under the abovementioned Statutes.
However, the said enactments were not able to provide satisfactory results to the
Creditors. The Banks & the Financial Institutions were unable to recuperate their debts
for years before these tribunals as the adjudication process has been time consuming and
the said circumstances have crippled the viability of strength of the Banks and the
Financial Institutions. Further, the provision of appeal etc., led to delay in the process of
recovery which ultimately caused huge losses to the banks resulting in decrease in the
value of the mortgaged properties.
However, the other side of the coin reveals the existence of certain model/laws enacted
and enforced in the country, where the creditors including private and government
Financial Institutions without the intervention of courts are entitled to take over the assets
of the debtor in case of default. The said legislations are iterated as under:
 Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (SARFAESI)
The legislature with an intention to speed up the recovery process and convert the Non-
Performing Assets (NPA) of Banks and Financial Institutions. The Government of India
has enacted the Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (SARFAESI) which empowers the Banks / FI’s to recover
their NPA without the intervention of the Court. SARFAESI Act has also been given a
green flag by the Hon’ble Supreme Court of India in case titled “Mardia chemicals Ltd
Vs Union of India [2017] ibclaw.in 16 SC” upholding the constitutional validity of the
act.
As per the provision of section 13 of the Act, a secured creditor can enforce his interest
without the intervention of the court, in case of default by the borrower towards the
repayment of his loan. The borrower who defaults in the repayment of the loan as a whole
or in installments, the bank reserves a right to hold his account as a non-performing asset.
A secured creditor serves a notice to the borrower to discharge his liability within a
period of 60 days. If the borrower fails to do so, the secured creditor has the following
remedies in order to enforce his rights:-
 The creditor can take possession of such security and have the right to transfer
such security by the way of sale, lease or assignment till the extent of debt
recoverable.
 The creditor can take over the management of the business of the borrower till the
extent of debt due and sell, lease or assign it.
 He can appoint a manager to manage the secured asset. In case where the secured
asset is sold by the borrower to a third party, a notice should be given to such bank
or financial institution that the responsibility to pay the due debt shall now lie with
the third party.
 Further, the secured creditor or an officer authorized by him can sell the secured
asset through auction.
The SARFAESI legislation was passed with the intent to avoid judicial intervention,
however when the law was implemented it was found there were litigations before the Ld.
DRTs etc. However, the success rate of recovery was far better in case if compared with
the laws implement before the SARFAESI. The Act has been proved to be a success in a
majority of the cases, however in certain cases where issues relating to possession arises,
the banks may approach the Chief Judicial Magistrate for the resolution of the same.
 The State Financial Corporations Act, 1951
In order to meet the financial needs of Micro, Small and Medium Enterprise (MSME)
which are not governed by Industrial Finance Corporation, the Government of India
passed the State Finance Corporation Act in 1951.  As per section 29 of the Act, in case
of default by the debtor, the Financial Corporation reserves a right to take over the
management or possession or both as well as the right to transfer by way of lease or sale
and realise the property pledged, mortgaged, hypothecated or assigned to the Financial
Corporation without the intervention of Court/Judicial Forum.
The Act empowers and allows the borrower to make use of their right to get hold of the
assets of Company.
Further, as per Section 3(1) of the said Act, the State Government may, by notification in
the Official Gazette, establish a Financial Corporation for the State under such name as
may be specified in the notification. In light of the said Section, various sates in India had
passed the law in their respective states and had similar provision (Section 29) in the state
act.
 Transfer of Property Act 1882 – English Mortgage
In general terms, a mortgage is a loan sanctioned against an immovable asset, such as a
house or a commercial property. It helps the borrower unlock the otherwise locked
liquidity. While understanding the terms of mortgage, we may come across its various
types, one of which is English Mortgage.
English mortgage, as defined under Section 58 (e) of the Transfer of Property Act, 1882,
is a scheme; wherein, the lender is entitled to take the possession of the mortgaged
property in case the buyer defaults on payment. Moreover, the lender may also proceed to
sell the property, sans any judicial intervention. Considered to be the safest form of
mortgage, an English mortgage is usually preferred by banks and other financial
institutions.
 Indian Contract Act, 1872 – Pledge
As per section 172 of Indian Contract Act 1872 – The bailment of goods as security for
payment of a debt or performance of a promise is called “pledge”. The person who
delivers the goods as security is case called “pledgor/ pawnor”. The person to whom the
goods are delivered is called the “pledgee /pawnee”.   However, in pledge, there is no
change in ownership of the property.
As per section 176 of the Contract Act: If the Pledgor makes default in payment of the
debt, or performance, at the stipulated time of the promise, in respect of which the goods
were pledged, the pawnee/ pledgee may bring a suit against the pledgor /pawnor upon the
debt or promise, and retain the goods pledged as a collateral security; or he may sell the
goods pledged on giving the pledgor /pawnor a reasonable notice of the sale.  If the
proceeds of such sale are less than the amount due in respect of the debt or promise, the
pledgor /pawnor will still be held liable to pay the balance amount. If the proceeds of the
sale are greater than the amount so due, the pawnee/ pledgee shall pay over the surplus to
the pledgor /pawnor.
 Bank Guarantees
In general terms, a Bank Guarantee is a promise made by the bank to any third party to
undertake the payment risk on behalf of its customers. A bank guarantee is given on a
contractual obligation between the bank and its customers. Such guarantees are widely
used in business and personal transactions to protect the third party from financial losses.
This guarantee helps a company to enter into transactions that it ordinarily cannot, thus
helping the Companies to grow their business and promote entrepreneurial activity.
However, the banks take into account the Company’s performance in the preceding
financial year while providing a bank guarantee. The Banks charge some commission
while providing for such guarantee which is again subject to the guidelines as set and laid
down by the banks and approval from the sanctioning authority. Further, it has been laid
down by the Government that with effect from July 01, 2017, GST @ rate of 18% p.a.
will be levied on banking services and products. The Bank Guarantees are issued against
some margin money or at 100% margin which is keep in the form of FDR.
Enforcement of Bank Guarantee and its encashment does not involve the intervention of
court/Judicial authority. As soon as it is established that the party in whose favour the
Bank Guarantee has been issued is satisfied and default has been occurred, the bank can
enforce the Bank Guarantee and collect the money. It is pertinent to mention that the
Bank Guarantees are issued against some margin money or at 100% margin or some
collateral security which is kept in the form of FDR. 
RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS
ACT (1993)

The Recovery of Debts Due to Banks and Financial Institutions  Act (1993) is the act
which aims to establish and provide establishing of tribunals that can recover debts which
are due by people to banks and financial institutions. The Recovery of Debts Due to
Banks and Financial Institutions  Act  contains total number of 37 sections and 6
chapters.
The Narasimhan and Tiwari committee had the same point of view in 1991 , to set up
special tribunals for matters related to debt recovery . Their recommendation resulted in
the enactment of an act known as “The Recovery of Debts Due to Banks and Financial
Institutions  Act (1993)” . under this act 2 types of tribunals were created

1. “Debt recovery tribunals”

2. “Debt recovery appellant tribunals”
Objects And Purpose Of This Act
“An Act to provide for the establishment of Tribunals for expeditious adjudication and
recovery of debts due to banks and financial institutions and for matters connected
therewith or incidental thereto”
 Overcome problems which were being faced by banks from a long time.
 Easy recovery of loans given .
 Speedy justice on specific matters.
 Unblock the money which is blocked .
 Debt Recovery Tribunal
The debt recovery tribunals are the tribunals created under the act the aim is to provide
speedy justice to lenders  .  They are made so that the borrowers can be helped by easy
unblocking on repayment of  loans . They ensure the recovery of debt . They are
constitued under section 3 of the act , The matters under it are adjudicated under 180 days
and appeal can be filled under DRAT under 30 days. A total of 39 Debt recovery tribunal
are their currently present in india and 5 Debt recovery appelant tribunal.

Role/Objective Of Drt
The first aim of drt is to Recovery of money/loan from borrowers which is due to banks
and other financial institutions. They provide speedy trial  to ensure that the money is
reached in the hands as soon as possible .

Jurisdiction Of Drt
Section 18 of the act bars/prohibits all the courts except high courts and supreme court to
adjudicate the matters related to recovert of debts.

 Releif
 Against the order of DRT = DRAT
 Against the orders of DRAT = High courts and supreme court.
Debt Recovery Tribunal Process

Chapter 4 of the recovery of debt due to banks and financial institutions act (1993) deals
with the process follwed by DRT while adjudicating the cases.

 ”Filling of application” – The banks and financial institutions can fill the
applications in the DRT which are within there jurisdiction. They can file the
application by 2 routes . Either direct applicatin or through SARFAESI route The
application should be filled along with proper requisite fees.
 “Issue of summon/Notice” shall be made by the bank after considering the
application and getting the proper prescribed fees.
 “Filling of reply” – the defendant shall present a written statement for his defence
within 30 days alomg with proper documents of his defence. If he fails the DRT
can extend timeof not more than 15 days .
  Claim for counterclaim can be made on first hearing
 If the defendant admits it liability than the order to be made and the amount to be
paid within 30 days.
 The DRT can also pass interim orders (injunction , stay order) to restrict or
transfer the property further .
 The tribunal after hearing both the parties shall give final judgement.
Appeal Against  Debt Recovery Tribunal
Any person aggrieved from the order of DRT can file an appeal to the DEBT
RECOVERY APPELANT TRIBUNAL within 30days of the order passed by DRT and
appeal can be made to High court and supreme court for the order passed by DRAT
( Debt recovery appeallant tribunal).
CASE : Axis bank V. SBS organic pvt.ltd  & ors.
“The supreme court of india held that the appeal in DRAT would be entertained only on
the condition that the borrowers deposits the 50% of the amount in terms of the orders
passed by DRT or 50% of the sum duefrom the borrowers as asserted by the secured
creditors whichever is less”
SARFESI ACT

The Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest or SARFAESI Act, as it is popularly referred to as, is meant to
empower banks and other financial institutions, to attach the  secured assets ( that serves
as security) of a loan defaulter. These attached assets can then be managed by the bank or
put up for sale or auction, without requiring any court intervention. (Agricultural land is
beyond SARFAESI Act).

Reason for bringing in SARFAESI Act: Banks and other financial institutions (FIs)
faced various problems in recovering the defaulted loans and advances due to the usual
delay by our courts in disposal of recovery proceedings. Therefore, the Government
enacted the Recovery of Debts due to Banks & Financial Institutions (RDBF) Act in 1993
and the SARFAESI Act in 2002 to expedite recovery of these non-performing assets
(NPAs) of the banks and Financial Institutions.

Authorities under the act:

1. The Debt Recovery Tribunal (“DRT”) -with the limit of more than Rs.10 Lakhs
due amount.
2. The DRT has exclusive jurisdiction. 
3. The Debt Recovery Appellate Tribunal.
The Act gives vast powers to the Banks and Financial Institutions dealing with Non-
Performing Assets.

 They can issue a notice of default to borrowers, asking them to clear their

liabilities and dues within 60 days from the issue of notice.
 If the borrower does not comply and fails to repay the loan, the bank/FI can resort
to either of the following three courses of action:
1. They can take possession of the security
2. They can take over the management/administration of the security asset
3. They can put it up for lease, sale, or appoint a person to manage the asset
concerned.
 This act also provides for sale of these financial assets by banks to Asset
Reconstruction Companies, also known as ARCs. The Act has provision for
their establishment, to be regulated by the RBI, with a mandate to securitize the
acquired financial assets.
REMEDIES UNDER SARFESI
 Representation/objection to notice u/s 13(2) before banks
The most Important section of Sarfaesi Act is section 13(2), which provides that if a
borrower who is under a liability to a secured creditor, makes any default in repayment of
secured debt and his account in respect of such debt is classified as non-performing asset,
then secured creditor may require the borrower by notice in writing to discharge his
liability within sixty days from the date of notice with an indication that if he fails to do
so, the secured creditor shall be entitled to exercise all or any of its rights in terms of
section 13(4) of the Act.
 Writ petition challenging notice under section 13(2)
The borrower can challenge the notice u/s. 13(2) of Act in the Civil Court as well as in
the High Courts by way of writ jurisdiction to defend his case. However, that is hardly
sustainable.
 Borrowers’ right of appeal
If the borrower or any other person who had any tangible grievance against the notice
issued u/s. 13(4) or action taken u/s. 14, then he/she could have availed remedy by filing
an application u/s. 17(1) within 45 days from the date on which such measures were
taken.
 Appeal to DRT
On receipt of possession notice u/s. 13(4) the borrower can prefer appeal before DRT u/s.
17, seeking stay of proceedings and to set aside the action initiated. 
The Appellate powers of DRT u/s 17 of the Act   
The DRT has elaborate powers and it can even restore the possession back to the
borrower, in the event it finds the actions by the bank are illegal or incorrect.
MODULE 4
BANKING FRAUDS

Fraud is a real operational risk for the banking system. The Reserve Bank of India
(“RBI”) has defined ‘Fraud’ as “A deliberate act of omission or commission by any
person, carried out in the course of a banking transaction or in the books of accounts
maintained manually or under computer system in banks, resulting into wrongful gain to
any person for a temporary period or otherwise, with or without any monetary loss to the
bank.”

In simple terms, Bank fraud can be defined as an unethical and/or criminal act by an

individual or organization to illegally attempt to possess or receive money from a bank or
financial institution. 

TYPES OF BANK FRAUDS

1. Advance Fees Fraud

An advance-fee fraud occurs when the victim pays money to someone in expecting of
receiving something. such as receiving a loan, contract, investment, or gift and then
receives little or nothing in return.

Example – Fraudster doing calls as custom duty officer to random people to pay this
amount via bank and get your order clearance. Sometimes, people get trapped by
thinking they really got a gift but in end, people end up losing the money and get
nothing.

2. Phishing Fraud
Phishing is an online scam that uses to steal private user data which includes login
details, OTP, Password, and credit card numbers. Moreover, Phishing can be done by
giving bank details to fake email, text, phone calls.

For example – Fraudsters often call people to renew their bank account or credit card,
to get bank account details and OTP from their victims so they can commit fraud.

3. Card Skimming
Card skimming is a method used by fraudsters to record information of people’s
payment cards like debit and credit cards to conduct fraudulent transactions.

Example- Fraudsters do this type of fraud by capturing your payment card

information by way of copying is known as a skimmer. The captured information will
be stored and transferred to an appointed computer so can be used later for fraudulent
activities.

4. Accounting data fraud
In order to hide some serious financial problem. Some companies use fraudulent
bookkeeping to overstate sales, profit, and worth of the company. When the company
is operating at a loss. These fake records can help the company to get loans from a
bank etc.

5. Account opening fraud

Account opening fraud means opening a bank account to deposit and cashing
fraudulent cheques. This fraud is one of the most common frauds in the world.
Moreover, mostly these accounts are opened with fake proofs so no one can get
busted.

Example:- An bank account opens to send illegal money to another account or a fake
account to get benefits from the government like the name of the old aged person to
take advantage of pensions.

6. Cheque kiting
Cheque kiting is the illegal process of writing a cheque off to a bank account with
inadequate funds to cover that amount. This relies on the fact that it takes banks a
few days (or even longer for international checks) to determine that a cheque is bad.

Example – Deposit 1000 in one bank, write a cheque on that amount, and deposit it
to your account in the second bank, you now have 2000 until the cheque clears.

7. Cheque frauds:  There are three main types of cheque fraud:

1. Counterfeit – a simple paper made into the same as bank cheque paper to
make a real cheque but it relates to a real bank account, which has been
created and written by a fraudster.
2. Forged – This fraud is related to a stolen real cheque and not signed by the
account holder. The fraudster has signed the signature on the cheque
themselves.
3. Altered – a cheque that has been properly issued by the account holder but has
been altered or changes made by fraudsters like the payee name or the amount
of the cheque have been altered.
8. Counterfeit securities
Documents, securities, bonds, shares, and certificate is forged, duplicated, adjusted,
or altered are presented to a bank to get a loan by using these securities as collateral.

9. Bank hacking fraud
Hacking and tampering with a Computer to gain access to bank data for illegally
transferring money, deposits, removing any transactions entry. Though, Computer
fraud can be happened by spreading malware or by hacking bank computers or
systems.

10. Loan fraud

Loan fraud means when funds are lent to a borrowing customer that has exceeded his
credit limit or a non-borrowing customer.
Example – When individuals present false information in order to obtain a loan, that
is loan fraud. Similarly, if a thief uses someone’s identity to get a loan in name of
that person, that is another type of loan fraud.

11. Money laundering fraud

Money laundering  is illegal obtained money and deposits the money in banks by
converting the cash into untraceable transactions. Fraudsters try to make the funds
look as though they have come from a legal source.For example – If someone is
selling drugs, they may try to pretend that the cash is from a business, and they may
deposit the funds in that business’s account. For more detail – visit here

12. Money transfer fraud

Scammers use a lot of schemes to get your money by using money transfers through
companies like Western Union and Money-Gram. Scammers create pressure on
people to use money transfers as quickly, so fraudsters can get the money before that
victims realize they’ve been cheated.

Money transfers are online cash transfers same as sending cash and there are no
protections for the sender. At last, there is no way any person can reverse the
transaction or trace the money.

13. OTP Fraud
The OTP messages that are passed through telex in form of codes could be altered to
divert the funds to another account so that code could help fraudsters to make fund
transfer.

14. Letters of Credit

Letter of credit generally used for taking importing goods on credit. This is mostly
used in international trading. Letters of credit frauds are mostly tried against banks by
providing false documentation showing that goods were shipped but In fact, no goods
were shipped.

LEGAL PROVISIONS
Banking fraud is not recognized as a separate offence, under the Indian Penal Code, 1860.
Rather, different provisions of the Indian Penal Code, 1860 are interpreted depending
upon the facts of each case, which includes Section 403 which deals with the dishonest
misappropriation of property, Section 415 that deals with cheating, Section 405 that deals
with criminal breach of trust, Section 463 that deals with forgery and Section 477A that
deals with the falsification of accounts. Other statutes that contain provisions relating to
Bank Frauds are:
 The SARFAESI Act, 2002
 The Negotiable Instruments Act, 1881
 Banking Regulation Act, 1949
 Insolvency and Bankruptcy Code, 2016
 Fugitive Economic Offenders Act, 2018
In addition, each bank has a Chief Vigilance Officer to investigate a fraud committed by
the staff up to 25 lakh, after informing the police and the RBI. Any fraud going beyond 
25 lakh is referred to CBI. Additionally, banks are required to report frauds of 1 crore and
above to the RBI records the event on a database and issues a circular on all cases of
fraud reported. In June 2016, RBI also set up a fraud monitoring cell and stated bank
entities that fraud risk management, fraud monitoring and fraud investigation function, at
least in respect of large value frauds, must be owned by the bank's CEO, Audit
Committee of the Board, and the Special Committee of the Board. The system of Legal
Entity Identifier (LEI) was also introduced to scrutinize and prevent banking frauds. RBI
has also introduced the concept of the Red Flags Account (RFA) based on Early Warning
Signals (EWS) for the detection and prevention of fraud.
Despite such strenuous efforts, instances of bank fraud are still on the rise. The major
reasons behind this are ineffective risk assessment, difficulty in detecting financial
statements fraud, a lack of appropriate monitoring of third parties, willful misconduct,
and dereliction of duties of bank staff, non-observance of Know Your Customers (KYC)
norms, etc. There have been instances where some professionals like valuers, chartered
accountants, and advocates involved in the loan assessment and sanctioning processes
have facilitated the perpetration of fraud by conspiring with borrowers to fabricate or
fudge financial statements, inflate security valuation reports, and craft defective search
reports for title deeds of the mortgaged property. Further, delays by the bank in reporting
fraud to the appropriate authorities, investigating and shielding the main culprit from
accountability are all factors that perpetuate the rise of cases of bank fraud.
ROLE OF RBI
RBI has advised banks to introduce certain minimum checks and balances like :
 introduction of two factor authentication in case of ‘card not present’ transactions,
 converting all strip based cards to chip based cards for better security,
 issuing debit and credit cards only for domestic usage unless sought specifically
by the customer,
 putting threshold limit on international usage of debit/ credit cards,
 constant review of the pattern of card transactions in coordination with customers,
 sending SMS alerts in respect of card transactions etc.,
 to minimize the impact of such attacks on banks as well as customers.

RBI has advised banks to introduce preventive measures such as :

 putting a cap on the value/ number of beneficiaries,
 introducing system of issuing alert on inclusion of additional beneficiary, and
 velocity checks on number of transactions effected per day/ per beneficiary.
RBI has further recommended Banks to consider introduction of digital signature for
large value payments, and capturing internet protocol check as an additional
validation check for any transaction, etc.
RECENT TRENDS IN BANKING
Banking through electronic channels has gained increasing popularity in recent years.
This system, popularly known as ‘e-banking’, provides alternatives for faster delivery of
banking services i.e. offering, supplying and delivering banking products and services to
a wide range of customers at their office or home through various electronic delivery
channels via electronic devices. It is a generic term encompassing internet banking,
telephone banking, mobile banking etc. It provides lot of benefits which add value to
customers’ satisfaction and to reach out consumers through many routes in terms of better
quality of service offerings such as ATMs, telephone, internet and wireless channels
which are now available to the consumers to perform their banking transactions in
addition to the traditional branch banking and at the same time enables the banks gain
more advantage over other competitors. The simple way to define the E-banking is
banking through the means of internet. Through e-banking customer can access his
account through his mobile phone or computer. It includes fund transfer to another bank
or within the same, any investment, and account related details or to avail any services all
through the means of internet.

Previously, the customers had to stand in a long queue to avail of the bank transaction. In
fact, customers were ignorant about the services or the products of the banks. But today,
by just one click we can avail of the easily transfer the funds and manage our accounts.

The e-banking services are offered by the means of:-

1. Automatic Teller Machine

2. Debit Cards

3. Credit Cards

4. RTGS

5. Mobile Banking

 Automatic Teller Machine

It is also called ATM. An ATM is a computerized machine installed in different places

that helps the customer to make financial transactions without going to the bank branches.
To avail, this service customer has to obtain the ATM card or debit card from the
specified bank. The services like depositing and withdrawing of cash, mini statement
(which shows the account activity), issue of passbooks, check the balance inquires, etc.
The system is recognized as “Any Time Money” or “Anywhere Money”.

Importance:-

• It is very helpful in the metropolitan city.

• The major importance of ATM is customer can access their account from any bank’s
ATM machine and for foreign travellers.
• When the money is withdrawn in any foreign nation the currency gets converted at the
financial institution exchange rate and the customer gets the money without any delay.

Disadvantage:-

• Loss of card or password so necessary care needs to be taken.

• Proper knowledge to access the machine.

• The chances of theft also increase in fact it has been increased. There have been
instances where the ATM machine has been stolen by the thieves which make a great loss
to the banks.

 Debit Card

A debit card is a plastic card with encryption on its debit card number, name of the bank
and cardholder. A cardholder can just swipe his card to make card payments at various
shops. A debit card has reduced the paper money transaction. People prefer more to carry
just one card instead of carrying money and coins. But to access debit card one must have
balance in his account. The Debit cards are used in the ATM machine to withdraw and
deposit the cash.

It is of many forms like Visa card, Master Card, Rupay card, etc.

 Credit Card
It is the same as the debit card. The two differences are

First, there is no need to maintain balance in the account as there is a balance or say credit
provided by the bank to the customer to use whenever necessary. Later, the bank debits
the amount from the customer account.

It is basically a post-paid card.

 RTGS

RTGS was introduced in India in March 2004. It is a system through which a bank receives
instruction in the form of electronic for transferring the funds from one bank account to the
other bank accounts.

As the name suggests, the transfer of funds between the accounts takes place in ‘real time’.
The RTGS system is kept running and maintained by the RBI.
So, it is operated by the RBI who provides it the faster and efficient way to transfer the
funds while facilitating the various financial operations.

Thus, the money send under this system is instantaneous and the beneficiary gets the money
within two hours.

 Mobile Banking

The customer uses mobile for banking transactions it includes Google pay, Paytm,
PayPal, etc. The customer needs to download the application and then link it with the
bank account. It is totally password secured. Nowadays the most used is mobile banking
either for purchasing online or paying at shops or restaurants. The best part which attracts
the customer the most the ‘cash back or reward or gift or coupons receive’.

MODULE 5
ROLE OF RBI IN INDIAN BANKING SYSTEM
1. The main aim of RBI is to ensure stability of price which is done through
monetary policies. Monetary policies are those actions taken by RBI to
control the supply of money in order to ensure economic growth.
2. RBI makes regular changes in the credit control measures as it seems fit to
ensure economic stability which may include changing the Bank Rate,
Repo Rate etc. It ensures low and stable inflationary and deflationary
trends.
3. RBI sets the Mumbai Inter bank Offer Rate (MIBOR), which is the interest
charged by one bank on the loan given to another bank. Hence, RBI sets
the datum line for all interest related matters in India.
4. RBI owns the right to manage all foreign exchange so as to facilitate
external trade and also to ensure proper development of foreign exchange
market in India. The Forex and gold exchange of our country is also
maintained by RBI.
5. RBI is the only bank who has the authority to issues currency and coins in
our country which means that RBI can create or destroy as it seems fit.
6. All the banks maintain an account with the Reserve Bank of India. Hence,
RBI acts as a bank for other commercial banks. Maintaining an account in
RBI ensures that the banks maintain the reserve requirements. Also, RBI
acts as a lender for all the other banks.
7. RBI regulates the financial system of our country. It regulates and
supervises the activity of other banks by various methods like supervising
the bank license, inspections, off site surveillance etc thereby, building the
confidence of the public in the banking system. It issues banking license
without which no bank or new branch of any of the existing bank is
authorized to function.

BRANCH OPENING
The opening of branches by banks is governed by the provisions of Section 23 of
the Banking Regulation Act, 1949 (the Act). In terms of these provisions, banks without
the prior approval of the RBI, cannot open a new place of business in India or abroad or
change otherwise than within the same city, town or village, the location of the existing
place of business. Foreign banks are allowed to operate in India through branches only. A
foreign bank desirous of opening its maiden branch in India may apply to RBI giving
relevant information about the bank, its major shareholders, financial position, etc. The
branch licensing falls within the ambit of RBI.
Condition for Branch Licensing

The Reserve Bank of India may grant permission for opening new branch or transfer
existing place of business, if is satisfied with:

 financial condition and history of bank

 the general character of its management
 the adequacy of its capital structure and earning prospects
 public interest will be served by the opening or as the case may be

The Reserve Bank may require to be satisfied by an inspection under section 35 of

Banking Regulation Act.

The regional rural bank requires the permission of the Reserve Bank shall forward its
application to the Reserve Bank through the NABARD which shall give its comments on
the merits of the application and send it to the Reserve Bank.

CRR AND SLR

CRR, or cash reserve ratio, is a requirement set by the Reserve Bank of India for
domestic banks to determine the minimum amount of cash reserve they need to keep to
meet payment obligations.
Under CRR, a certain percentage of total bank deposits has to be kept in a current account
with the central bank, which means banks do not have access to that money for any
purpose other than defined.
Objectives –
 Cash Reserve Ratio ensures that a part of the bank’s deposit is with the Central
Bank and is hence, secure.
 Another objective of CRR is to keep inflation under control. During high inflation
in the economy, RBI raises the CRR to reduce the amount of money left with
banks to sanction loans. It squeezes the money flow in the economy, reducing
investments and bringing down inflation.
SLR, or statutory liquidity ratio, determines the amount of money a bank needs to invest
in certain specified securities, which are predominantly securities issued by the central
government and state governments. RBI fixes this limit.
Section 24 and Section 56 of the Banking Regulation Act 1949 mandates all scheduled
commercial banks, local area banks, Primary (Urban) co-operative banks (UCBs), state
co-operative banks and central co-operative banks in India to maintain the SLR.

BASIS FOR
CRR SLR
COMPARISON

Meaning CRR is the amount of money SLR is the amount of funds which
that the banks are obligated to the banks are required to maintain
park with the central bank, in as liquid assets, i.e. cash, gold,
the form of cash. approved securities. etc.

Regulates Monetary stability in the Bank's leverage for credit

country expansion

Use To drain out excess money out To ensure the solvency of the
of the economic system. commercial bank.

Maintenance with Central Bank of India i.e. RBI Bank itself

Form Cash and cash equivalents Liquid Assets

Return Banks don't earn any Banks usually earn interest as

interest as return on the money return on the funds kept as SLR.
kept as CRR.

BANK INSPECTION
As per Sec 35 of the Banking Regulation Act, the Reserve Bank of India is empowered to
conduct an inspection of any banking company. After conducting the inspection of the
books, accounts and records of the banking company a copy of the inspection report to be
furnished to the banking company. The banking company, its directors and officials are
required to produce the books, accounts and records as required by the RBI inspectors,
also the required statements and/or information within the stipulated time as specified by
the inspectors.
Government’s Role

The Central Government may direct the Reserve Bank to conduct inspection of any
banking company. In such cases, a copy of the report of inspection needs to be forwarded
to the Central Government. On review of the inspection report, the Central Government
can take appropriate action. In the opinion of the Central Government if the affairs of the
banking company are not being carried out in the interests of the banking company,
public and or depositors, the Central Government may

 prohibit the banking company to accept fresh deposits

 direct the Reserve Bank to apply for winding up of the banking company
under the provisions of the Banking Regulation Act.
Before taking action, the Government has to give an opportunity to the banking company
to explain their stand. Based on the response, the Government can initiate appropriate
action as required.

FIXATION OF RATE OF INTERESTS

Initial period of fixation of the interest rate (IRF) means a period agreed-upon in advance
at the beginning of a contract during which the interest rate may not be changed. Interest
rate statistics for new loan contracts reports only the interest rate agreed-upon for the
initial fixation period at the beginning of the contract. Loans without interest rate fixation
are put into the category „variable rate and initial rate fixation up to one year“.
Three periods of initial rate fixation are defined for new loans:
1. variable rate and up to (and including) one year IRF,
2. over one and up to (and including) five years IRF, and
3. over five years IRF.
For loans for house purchases four periods of IRF are distinguished:
1. variable rate and up to (and including) one year IRF,
2. over one and up to (and including) five years IRF,
3. over five and up to (and including) ten years IRF, and
4. over ten years IRF.
AMALGAMATION
Amalgamation includes combining the assets and liabilities of the two banking
amalgamating companies into one amalgamated company while also swapping shares
based on their market value. An amalgamation of two banking companies increases their
resources, thereby resulting in increased lending capacity. Some recent examples of
amalgamation of banking companies are:
An amalgamation of Vijaya Bank (VB) and Dena Bank (DB) with Bank of Baroda
(BoB).

Benefits of Banking Merger

1. After these mergers, the lending capacity of the Public Sector Banks will increase and
their balance sheet would also be strong.
2. These big banks would also be able to compete globally and increase their operational
efficiency by reducing their cost of lending.
3. India needs investment in huge quantities to turned India into a 5 trillion economy. If
banks have sufficient money to fund big projects than the economic development of the
country would speed up.
4. The merger would help in better management of banking capital. 
So after the merger of the 10 PSBs in the four major banks seems a good step in ensuring
the availability of the money for the investment purpose in the country.