BANKING LAW NOTES

UNIT-1
The Indian banking system consists of commercial banks, which may be public scheduled or non-scheduled, private, regional, rural and
cooperative banks. The banking system in India defines banking through the Banking Companies Act of 1949.

In this post, we take a look at the evolution of banks in India, the different categories and the impact of nationalised banks.

Phase 1: The Pre-Independence Phase

There were almost 600 banks present in India before independence. The first bank to be established as the Bank of Hindustan was founded in
1770 in Calcutta. It closed down in 1832. The Oudh Commercial Bank was India’s first commercial bank in the history of the evolution of banking
in India.

A few other banks that were established in the 19th century, such as Allahabad Bank (Est. 1865) and Punjab National Bank (Est. 1894), have
survived the test of time and exist even today.

Some other banks like the Bank of Bengal, Bank of Madras, and Bank of Bombay – established in the early to mid-1800s – were merged as one
to become the Imperial Bank, which later became the State Bank of India.

Phase 2: The Post-Independence Phase

After independence, the evolution of the banking system in India continued pretty much the same as before. In 1969, the Government of India
decided to nationalise the banks under the Banking Regulation Act, 1949. A total of 14 banks were nationalised, including the Reserve Bank of
India (RBI).

In 1975, the Government of India recognised that several groups were financially excluded. Between 1982 and 1990, it created banking
institutions with specialised functions in line with the evolution of financial services in India.

NABARD (1982) – to support agricultural activities

EXIM (1982) – to promote export and import

National Housing Board – to finance housing projects

SIDBI – to fund small-scale industries

Phase 3: The LPG Era (1991 Till Date)

From 1991 onwards, there was a sea change in the Indian economy. The government invited private investors to invest in India. Ten private
banks were approved by the RBI. A few prominent names which exist even today from this liberalisation are HDFC, Axis Bank, ICICI, DCB and
IndusInd Bank.

In the early to mid-2000s, two other banks, Kotak Mahindra Bank (2001) and Yes Bank (2004), received their licenses. IDFC and Bandhan banks
were also given licenses in 2013-14.

Other notable changes and developments during this era were:

Foreign banks like Citibank, HSBC and Bank of America set up branches in India.

The nationalisation of banks came to a standstill.

RBI and the government treated public and private sector banks equally.

Payments banks came into existence.

Small finance banks were permitted to set up their branches throughout India.

Banks began to digitalise transactions and various other related banking operations.

Reasons Why Banks Were Nationalised in India

To get a clearer picture of the impact of nationalisation on the banking industry and the general population, let’s understand why the
government decided to nationalise banks:

To Energise Priority Sectors: Banks were collapsing at a fast rate – 361 banks failed between 1947 and 1955, which converts to about 40 banks a
year! Customers lost their deposit with no chance of recovering them.

A Neglected Agricultural Sector: Banks favoured large industries and businesses and neglected the rural sector. Nationalisation came with a
pledge to support the agricultural sector.

Expansion of Branches: Nationalisation facilitated the opening of new branches to ensure maximum coverage of banks throughout the country.

Mobilisation of Savings: Nationalising the banks would allow people more access to banks and encourage them to save, injecting additional
revenue into a cash-strapped economy.

Economic and Political Factors: The two wars in 1962 and 1965 had put a tremendous burden on the economy. The nationalisation of Indian
banks would give the economy a boost through increased deposits.

The Positive Effects of Nationalisation

The nationalisation of Indian banks was one of the most significant events in the evolution of banks in India. Today, India has 19 nationalised
banks.

Here are a few ways that nationalisation benefited the economy:

Increased Savings: There was a sharp increase in savings with the opening of new branches. As national income rose in the 1970s, gross
domestic savings almost doubled.

Improved Efficiency: The efficiency of banks improved with additional accountability. It also increased public confidence.

Empowering SSIs: Small scale industries (SSIs) received a boost resulting in a proportionate improvement in the economy.

Financial Inclusion: The overall statistics of the banking sector and the Indian economy showed a marked improvement. It reflected on
parameters like the share of bank deposits to GDP, gross savings rate, the share of advances to DGP, and gross investment rate from 1969 to
1991.

Better Outreach: Banks were now no longer only restricted to metropolitan areas. Branches were opened in the remotest corners of the
country.

A Surge in Public Deposits: The increased reach of banks helped small industries, agriculture, and the export sector grow. This growth was
accompanied by a proportionate increase in public deposits.

Elevating the Green Revolution: The Green Revolution, one of the biggest priority items on the government’s agenda, received a boost thanks
to the support that the newly-nationalised banks provided to the agricultural sector.

Drawbacks of Nationalisation

To provide an unbiased view on the subject, here are a few downsides of nationalisation:

Socio-Economic Challenges: The banks couldn’t provide sufficient support to eradicate poverty or provide adequate financing to the grassroots
levels of society. This was particularly obvious in rural India.

Competition From Private Banks: Despite government support and increased impetus through a rise in deposits, public sector banks were never
able to surpass private banks in performance.
Failure to Achieve Financial Inclusion: Although financial inclusion was the major objective of nationalising banks, it was not adequately
enabled. It was only achieved to a limited extent after the launch of a government campaign called Jan Dhan Yojana.

List of Banks in India Before Independence

Here is a list of banks before Independence. The small, brief list bears testimony of how few banks existed during that era:

Bank Year Established

Allahabad Bank 1865

Punjab National Bank 1894

Bank of India 1906

Central Bank of India 1911

Canara Bank 1906

Bank of Baroda 1908

Types of Banks in India

As we wind down our discussion on the evolution of the Indian banking system, we should touch upon the types of banks that exist in India
today. Here are the major categories of banks that you are likely to come across:

1. Public Sector Banks

The government holds the majority of the shares of a public sector bank. A prime example is the State Bank of India, with 58.6% of its shares
allocated to the Government of India. We could also consider Punjab National Bank, of which the government holds a stake of 58.87%.

Public sector banks are further divided into nationalised banks and state banks and their associated organisations.

With nationalised banks, the government has complete control and regulates the bank in all respects. But the government also has the option
to sell shares of these banks. When this happens, the government’s stakes are reduced.

Sometimes the government becomes a minority in such banks, and then that bank gets listed on the Indian stock market.

2. Private Sector Banks

Private sector banks are owned by private entities. They came into prominence in the 1990s. Due to the high-quality service that they offer,
these banks present stiff competition to public sector banks.

3. Small Finance Banks in India

Some niche banks in India provide basic banking services like deposits, lending, and bank transfers. These are small finance banks and cater to
the part of the economy that isn’t being serviced by regular banks, such as marginal farmers, small industries, and other parts of the
unorganized sector.

Examples of these banks are Ujjivan Financial Services Pvt Ltd in Bangalore and Equitas Holdings Pvt Ltd in Chennai.

4. Payment Banks in India

Payment banks are a new model created by the RBI. These banks can accept restricted deposits but are not authorized to issue loans or credit
cards. They offer both current and savings accounts and can also issue ATM cards or debit cards.
An example of a payment bank in India is Airtel Payments Bank, set up by Bharti Airtel. Such banks also have a major role to play in the
evolution of e-banking in India as they offer online payment solutions like mobile payment apps.

The Indian Banking System Drives the Economy

Over the years, Indian banks have transformed the country’s bleak financial landscape to feed its growing economy. Even today, there is no
doubt that the Indian banking system is what keeps the country’s economy afloat.

A prime example is the demonetisation of currency notes in 2016. Existing currency notes were demolished practically overnight, throwing the
nation into chaos. Banks helped the economy recover from the shock by allowing people across the country to exchange the defunct
banknotes.

As the banking industry continues to evolve in India, so does its ability to provide robust support to a nation that is ever hungry for financial
development.

What Is Banking?

Banking is the business of protecting money for others. Banks lend this money, generating interest that creates profits for the bank and its
customers.

A bank is a financial institution licensed to accept deposits and make loans. But they may also perform other financial services.

The term “bank” can refer to many different types of financial institutions — including bank and trust companies, savings and loan associations,
credit unions or any other type of institution that accepts deposits.

Why Use a Bank in the First Place?

Security

Banks protect your cash from theft and natural disasters like fires or floods. Your insurance may not cover money lost in your home, car or on
your person. But banks don’t typically carry the same risk.

Insurance

Banking security is more than just vaults and guards. Most of your assets are federally insured up to $250,000 by the federal government if the
institution fails. The FDIC (Federal Deposit Insurance Corporation) insures assets in banks and the NCUA (National Credit Union Administration)
insures assets in credit unions. Federal laws also require institutions to maintain minimum levels to help them remain solvent.

Convenience

Banks allow you to access your money when you need it. They can also provide “one-stop shopping” for financial needs from investments to
home and auto loans, along with other financial services. Convenience, along with interest rates and low fees, are major selling points for
banks.

Services to Grow Your Wealth

Banks offer many services that can help you grow wealth. These include high-yield checking or savings accounts, individual retirement accounts
(IRAs), self-directed 401(k) plans and certificates of deposit (CDs).

Banking consists of various activities that can be done through financial institutions that will accept deposits from individuals and other entities.
These financial institutions will then utilize this money to offer loans and invest it for a profit.

Banking is known to be important in the economy because it provides services to businesses and consumers, such as offering loans, checking
accounts, and various other services.
Need for Banking Systems

The purpose of banking systems is to give security and confidence to the economy. A banking system operates in line with managing the flow of
money between people and businesses.

The functions of a bank are mentioned below:

Accepting withdrawals and deposits

Providing loans

Offering different types of accounts

Internet banking features

Customer support

Credit and debit cards

Remittance of funds

Bill payments

Bank Classification in India

The table below represents the different types of banks in India and how it is further divided:

1. Central Bank

2. Commercial Banks a) Private Sector Banks

b) Public Sector Banks

c) Regional Rural Banks

d) Foreign Banks

3. Co-operative Banks a) State Co-operative Banks

b) Urban Co-operative Banks

4. Payments Banks

5. Scheduled Banks

6. Non-Scheduled Banks

7. Small Finance Banks

1) Central Bank

The central bank of India is known as the Reserve Bank of India. The R.B.I. is a financial institution that is mandated to regulate and oversee all
of the other banks in the country.

2) Commercial Banks
Commercial banks are regulated under - the Banking Regulation Act of 1949, and their business model has been constructed to make profits.

The primary function of the commercial bank is to accept deposits and offer loans to the public, businesses, and the government. A commercial
bank is further divided into the following:

a) Private Sector Banks

b) Public Sector Banks

c) Regional Rural Banks

d) Foreign Banks

a) Private Sector Banks

Private sector banks are the ones with a major stake or equity being held by private shareholders. All of the banking rules and regulations laid
down by the Reserve Bank of India (central bank) are applicable to private sector banks.

Here is the list of private sector banks in India:

I.C.I.C.I. Bank

R.B.L. Bank

I.D.F.C. Bank

South Indian Bank

IDBI Bank

b) Public Sector Banks

A public sector bank is a nationalized bank, and it accounts for more than 75% of the total banking sector in the country. They are banks with a
majority of the stakes held by the government.

Here is a list of public sector banks in India:

Bank of Maharashtra

Indian Bank

Bank of Baroda

Canara Bank

State Bank of India

Central Bank of India

Union Bank of India

Indian Overseas Bank

UCO Bank

Punjab & Sind Bank

Bank of India

Punjab National Bank

c) Regional Rural Banks

A regional bank is a scheduled commercial bank, but it is established to provide credit to the weaker section of the society, such as marginal
farmers, small businesses, and agricultural labourers. They would typically operate at a regional level in different states of the country and have
branches in selected urban areas.

d) Foreign Banks

A foreign bank is a bank with its headquarters in a foreign country but also operates in other parts of the country as a private entity. These
banks need to follow the regulations of the home country as well as the country where they operate.

Here is a list of foreign banks that operate in India:

Australia and New Zealand Banking Group Ltd.

National Australia Bank

Westpac Banking Corporation

Bank of Bahrain & Kuwait BSC

AB Bank Ltd.

Credit Agricole Corporate & Investment Bank

Societe Generale

Deutsche Bank

HSBC Bank

PT Bank Maybank Indonesia TBK

Mizuho Bank Ltd.

Sumitomo Mitsui Banking Corporation

M.U.F.G. Bank, Ltd.

Coöperatieve Rabobank U.A.

Sonali Bank Ltd.

Bank of Nova Scotia

Industrial & Commercial Bank of China Ltd.

Industrial Bank of Korea

Bank of Ceylon

D.B.S. Bank India Limited

Credit Suisse A.G.

C.T.B.C. Bank Co., Ltd.

Krung Thai Bank Public Co. Ltd.

Abu Dhabi Commercial Bank Ltd.

Mashreq Bank P.S.C.

First Abu Dhabi Bank P.J.S.C.

Emirates Bank NBD

3) Co-operative Banks

A Co-operative Bank is one that is registered under the Co-operative Societies Act of 1912 and is run by an elected managing committee. It
works on a non-profit no-loss basis, and it will mainly serve entrepreneurs, small businesses, self-employment, and more in urban areas.

In the rural areas, they will mainly function to finance agriculture-based activities like farming, livestock, and hatcheries. There are mainly these
types of Co-operative Banks:

a) State Co-operative Banks

b) Urban Co-operative Banks

a) State Co-operative Banks

A State Co-operative Bank is a federation of the central Co-operative banks that will act as a custodian of the Co-operative banking structure in
the State.

b) Urban Co-operative Banks

The Urban Co-operative Bank is the primary Co-operative bank located in urban and semi-urban areas. The banks essentially lent to smaller
borrowers and businesses centred around a community, locality, and more.

4) Payments Banks

The payments banks are a relatively new banking model in the country that has been conceptualized by the RBI. This bank is allowed to accept
a restricted deposit. This amount is limited to Rs. 1 lakh for a customer.

The bank also offers services such as ATM cards, net banking and more.

5) Scheduled Banks

These banks are covered under the 2nd Schedule of RBI Act 1934, and they need to have a paid-up capital of Rs. 5 lakh or more.

6) Non-Scheduled Banks

The non-scheduled banks are local area banks that are not listed in the 2nd Schedule of the RBI Act 1934.

7) Small Finance Banks

It Is a niche small finance bank in India with the objective of providing financial inclusion to sections of society that have not been served by
other banks. The core customers of this bank are inclusive micro industries, unorganized sector entities, marginal farmers, and more.

This type of bank is licensed under Section 22 of the Banking Regulation Act 1949 and it is governed by the Provisions Act of 1934.

AU Small Finance Bank Ltd.

Utkarsh Small Finance Bank Ltd.

Fincare Small Finance Bank Ltd.

Ujjivan Small Finance Bank Ltd.

Jana Small Finance Bank Ltd.

ESAF Small Finance Bank Ltd.

Suryoday Small Finance Bank Ltd.

Equitas Small Finance Bank Ltd.

Capital Small Finance Bank Ltd.

North East Small Finance Bank Ltd.

Meaning of E-Banking:

Banks give administrations or bank services to draw in clients, from giving advances, issuing of debit cards and credit cards, computerised
monetary services, and surprisingly personal services or administrations. Even so, some fundamental present-day administrations are
presented by many commercial banks.

Electronic banking has many names like web-based banking, e-banking, virtual banking, or web banking, and online banking. It is just the
utilisation of telecommunications networks and electronic networks for conveying different financial services and products. Through e-banking,
a client can acquire his record and manage numerous exchanges utilising his cell phone or personal computer.

Classification of E-Banking:

Banks offer different kinds of services through electronic financial stages. These are of three sorts:

Type 1:

This is the essential degree of administrations or services that banks offer through their sites. Through this assistance, the bank offers data,
information regarding its services and products to clients. Further, a few banks might respond to an inquiry through email as well.

Type 2:

In this category, banks permit their clients to submit directions or applications for various administrations, check their record balance, and so
on. Be that as it may, banks don’t allow their clients to do any fund-based exchanges with respect to their records or accounts.

Type 3:

In the third category, banks permit their clients to work or operate their records or accounts for bill payments, purchase and redeem securities
and fund transfers, and so on.

Most conventional banks offer e-banking administrations as an extra technique for offering support. Further, many new banks convey banking
administrations principally through the other electronic conveyance channels or web. Likewise, a few banks are ‘internet only’ banks with no
actual branch anyplace in the country.

In this way, banking sites are of two sorts:

Transactional Websites: These sites permit clients to go through with exchanges on the bank’s site. Further, these exchanges can go from a
plain retail account balance request to huge business-to-business liquid assets transfers. The accompanying table records some normal
wholesale and retail e-banking administrations presented by financial institutions and by banks.

Informational Websites: These sites offer general data regarding the bank and its services and products to the clients.

Wholesale services by banks: Include Account management, Cash management, Small business loan applications, Approvals or advances,
Commercial wire transfer, Business-to-business payments, Employee benefit, and Pension administration.

Retail services by banks: Include Account management, Bill payment, New account opening, Consumer wire transfers, Investment and
brokerage services, Loan application and approval, and Account Aggregation.
Services Under E-Banking:

Mobile Banking:

Mobile banking (otherwise called M-banking) is a name utilised for performing account exchanges or transactions, bill payments, credit
applications, balance checks, and other financial exchanges through a mobile phone like a Personal Digital Assistant (PDA) or cell phone.

Electronic Clearing System (ECS):

The Electronic Clearing System is a creative provision for occupied individuals. With this provision, an individual’s credit card bill is consequently
charged from the same individual’s savings bank account, so one doesn’t have to stress over missed or late payments.

Smart Cards:

A smart card is a card that stores data on a microchip or memory chip or a microprocessor in lieu of the magnetic stripe found on debit cards
and credit cards. Smart cards are not utilised for transferring or moving monetary data alone, but also they can be utilised for an assortment of
identification grounds. Exchanges made with smart cards are scrambled or encrypted to shield the exchange of data from one party to another.
Each encoded exchange can’t be hacked and doesn’t transmit any extra data past what’s required for finishing the single exchange or
transaction.

Electronic Fund Transfers (ETFs):

Electronic fund transfer (EFT) is the electronic exchange of cash starting with an individual account in the bank to another individual account of
the same bank, or within or with other financial institutions or with multiple institutions, by means of personal computers based frameworks,
without the immediate intercession of bank staff.

Telephone Banking:

Telephone banking is an assistance given by a bank or other monetary foundation or other financial institutions, that empower clients to
perform via telephone a scope of monetary exchanges which don’t include cash or financial instruments, without the need to visit an ATM or a
bank branch.

Internet banking:

Web-based banking is an assistance presented by banks that permits account holders to get their record information by means of the web or
the internet. Web-based banking or Internet banking is otherwise called “Web banking” or “Online banking.”

Internet banking through customary banks empowers clients to play out every standard exchange, for example, bill payments, balance
requests, stop-payment requests, and balance inquiries. Some banks even proposition online credit card and loan applications.

Account data can be acquired day or night, and should be possible from any place.

Home banking:

Home banking is the most common way of concluding the monetary exchange from one’s own home as opposed to using a bank’s branch. It
incorporates making account requests, moving cash, covering bills, applying for credits, and directing deposits.

Significance of E-Banking:

Importance to clients:

Lower cost per exchange: Since the client doesn’t need to visit the branch for each exchange, it saves him both time and cash.

No topographical hindrances: In conventional financial frameworks, geological distances could hamper specific financial exchanges.
Nonetheless, with e-banking, geological obstructions are diminished.

Convenience: A client can get to his record or bank account and execute from any place at any time.

Importance to Businesses:
Better efficiency: Electronic banking further develops usefulness. It permits the computerisation of ordinary, regularly scheduled payments and
provides further banking activities to upgrade the efficiency of the business.

Lower costs: Usually, costs in financial relationships and connections depend on the assets used. Assuming that a specific business needs more
help with deposits, wire transfers, and so on, then, at that point, the bank charges its higher expenses. With internet banking, these costs are
limited.

Lesser errors: Electronic financial diminishes mistakes in normal financial exchanges. Awful penmanship, mixed-up data or information, and so
on can cause mistakes that can be exorbitant. Likewise, a simple audit of the record or account activity, movement upgrades the precision of
monetary exchanges.

Diminished misrepresentation: Electronic banking gives an advanced impression to all representatives who reserve the privilege to alter
banking exercises. In this manner, the business has better perceivability into its exchanges, making it hard for any fraudsters from committing
crimes.

Account reviews: Business proprietors and assigned staff individuals can get to the records rapidly utilising a web-based financial interface. This
permits them to audit the record action and, furthermore, guarantee the smooth working of the account.

Importance to banks:

Lesser exchange costs: Electronic exchanges are the least expensive methods of exchange.

A decreased edge for human blunder: Since the data is handed-off electronically, there is no space for human mistakes or errors.

Lesser desk work: Advanced records decrease desk work, paperwork, and make the cycle simpler to deal with. Likewise, it is ecological.

Decreased fixed expenses: A lesser requirement for branches which converts into a lower fixed expense.

More steadfast clients: Since e-banking administrations or services are convenient to the clients, banks experience higher reliability from their
clients.

INTRODUCTION

Indian economic environment is witnessing path breaking reform measures. The financial sector, of which the banking industry is the largest
player, has also been undergoing a metamorphic change. Today the banking industry is stronger and capable of withstanding the pressures of
competition. While internationally accepted prudential norms have been adopted, with higher disclosures and transparency, Indian banking
industry is gradually moving towards adopting the best practices in accounting, corporate governance and risk management. Interest rates have
been deregulated, while the rigour of directed lending is being progressively reduced.

Today, we are having a fairly well developed banking system with different classes of banks – public sector banks, foreign banks, private sector
banks – both old and new generation, regional rural banks and co-operative banks with the Reserve Bank of India as the fountain Head of the
system. In the banking field, there has been an unprecedented growth and diversification of banking industry has been so stupendous that it
has no parallel in the annals of banking anywhere in the world.

During the last 41 years since 1969, tremendous changes have taken place in the banking industry. The banks have shed their traditional
functions and have been innovating, improving and coming out with new types of the services to cater to the emerging needs of their
customers.

Massive branch expansion in the rural and underdeveloped areas, mobilization of savings and diversification of credit facilities to the either to
neglected areas like small scale industrial sector, agricultural and other preferred areas like export sector etc. have resulted in the widening and
deepening of the financial infrastructure and transferred the fundamental character of class banking into mass banking.
There has been considerable innovation and diversification in the business of major commercial banks. Some of them have engaged in the
areas of consumer credit, credit cards, merchant banking, leasing, mutual funds etc. A few banks have already set up subsidiaries for merchant
banking, leasing and mutual funds and many more are in the process of doing so. Some banks have commenced factoring business.

THE INDIAN BANKING SECTOR

The history of Indian banking can be divided into three main phases.

Phase I (1786- 1969) - Initial phase of banking in India when many small banks were set up

Phase II (1969- 1991) - Nationalization, regularization and growth

Phase III (1991 onwards) - Liberalization and its aftermath

With the reforms in Phase III the Indian banking sector, as it stands today, is mature in supply, product range and reach, with banks having
clean, strong and transparent balance sheets. The major growth drivers are increase in retail credit demand, proliferation of ATMs and debit-
cards, decreasing NPAs due to Securitization, improved macroeconomic conditions, diversification, interest rate spreads, and regulatory and
policy changes (e.g. amendments to the Banking Regulation Act).

Certain trends like growing competition, product innovation and branding, focus on strengthening risk management systems, emphasis on
technology have emerged in the recent past. In addition, the impact of the Basel II norms is going to be expensive for Indian banks, with the
need for additional capital requirement and costly database creation and maintenance processes. Larger banks would have a relative advantage
with the incorporation of the norms.

PERSPECTIVES ON INDIAN BANKING

In 2009-10 there was a slowdown in the balance sheet growth of scheduled commercial banks (SCBs) with some slippages in their asset quality
and profitability. Bank credit posted a lower growth of 16.6 per cent in 2009-10 on a year-on-year basis but showed signs of recovery from
October 2009 with the beginning of economic turnaround. Gross nonperforming assets (NPAs) as a ratio to gross advances for SCBs, as a
whole, increased from 2.25 per cent in 2008 - 09 to 2.39 percent in 2009 – 10. Notwithstanding some knock-on effects
of the global financial crisis, Indian banks withstood the shock and remained stable and sound in the post-crisis period. Indian banks now
compare favorably with banks in the region on metrics such as growth, profitability and loan delinquency ratios. In general, banks have had a
track record of innovation, growth and value creation. However this process of banking development needs to be taken forward to serve the
larger need of financial inclusion through expansion of banking services, given their low penetration as compared to other markets.

During 2010-11, banks were able to improve their profitability and asset quality. Stress test showed that banking sector remained reasonably
resilient to liquidity and interest rate shocks. Yet, there were emerging concerns about banking sector stability related to disproportionate
growth in credit to sectors such as real estate, infrastructure, NBFCs and retail segment, persistent asset-liability mismatches, higher
provisioning requirement and reliance on short-term borrowings to fund asset growth
GLOBAL BANKING DEVELOPMENTS

The year 2010-11 was a difficult period for the global banking system, with challenges arising from the global financial system as well as the
emerging fiscal and economic growth scenarios across countries. Global banks exhibited some improvements in capital adequacy but were
beleaguered by weak credit growth, high leverage and poor asset quality. In contrast, in major emerging economies, credit growth remained at
relatively high levels, which was regarded as a cause of concern given the increasing inflationary pressures and capital inflows in these
economies. In the advanced economies, credit availability remained particularly constrained for small and medium enterprises and the usage of
banking services also stood at a low, signaling financial exclusion of the population in the post-crisis period. On the positive side, both advanced
and emerging economies, individually, and multi-laterally, moved forward towards effective systemic risk management involving initiatives for
improving the macro-prudential regulatory framework and reforms related to systemically important financial institutions.

POLICY ENVIRONMENT

Banking sector policy during 2010-11 remained consistent with the broader objectives of macroeconomic policy of sustaining economic growth
and controlling inflation. The Reserve Bank introduced important policy measures of deregulation of savings bank deposit rate and introduction
of Credit Default Swap (CDS) for corporate bonds. It initiated the policy discussions with regard to providing new bank licenses, designing the
road-ahead for the presence of foreign banks and holding company structure for banks. The process of migration to the advanced approaches
under the Basel II regulatory framework continued during 2010-11, while also facilitating the movement towards the Basel III framework
Financial Inclusion continued to occupy centre stage in banking sector policy with the rolling out of Board-Approved Financial Inclusion Plans by
banks during 2010-11 for a time horizon of next three years.

RECENT TRENDS IN BANKING

1) Electronic Payment Services – E Cheques

Now-a-days we are hearing about e-governance, e-mail, e-commerce, e-tail etc. In the same manner, a new technology is being
developed in US for introduction of e-cheque, which will eventually replace the conventional paper cheque. India, as harbinger to the
introduction of e-cheque, the Negotiable Instruments Act has already been amended to include; Truncated cheque and E-cheque instruments.

2) Real Time Gross Settlement (RTGS)

Real Time Gross Settlement system, introduced in India since March 2004, is a system through which electronics instructions can be
given by banks to transfer funds from their account to the account of another bank. The RTGS system is maintained and operated by the RBI
and provides a means of efficient and faster funds transfer among banks facilitating their financial operations. As the name suggests, funds
transfer between banks takes place on a ‘Real Time' basis. Therefore, money can reach the beneficiary instantaneously and the beneficiary's
bank has the responsibility to credit the beneficiary's account within two hours.

3) Electronic Funds Transfer (EFT)

Electronic Funds Transfer (EFT) is a system whereby anyone who wants to make payment to another person/company etc. can approach his
bank and make cash payment or give instructions/authorization to transfer funds directly from his own account to the bank account of the
receiver/beneficiary. Complete details such as the receiver's name, bank account number, account type (savings or current account), bank
name, city, branch name etc. should be furnished to the bank at the time of requesting for such transfers so that the amount reaches the
beneficiaries' account correctly and faster. RBI is the service provider of EFT.

4) Electronic Clearing Service (ECS)

Electronic Clearing Service is a retail payment system that can be used to make bulk payments/receipts of a similar nature especially where
each individual payment is of a repetitive nature and of relatively smaller amount. This facility is meant for companies and government
departments to make/receive large volumes of payments rather than for funds transfers by individuals.

5) Automatic Teller Machine (ATM)

Automatic Teller Machine is the most popular devise in India, which enables the customers to withdraw their money 24 hours a day 7 days a
week. It is a devise that allows customer who has an ATM card to perform routine banking transactions without interacting with a human teller.
In addition to cash withdrawal, ATMs can be used for payment of utility bills, funds transfer between accounts, deposit of cheques and cash
into accounts, balance enquiry etc.

6) Point of Sale Terminal

Point of Sale Terminal is a computer terminal that is linked online to the computerized customer information files in a bank and magnetically
encoded plastic transaction card that identifies the customer to the computer. During a transaction, the customer's account is debited and the
retailer's account is credited by the computer for the amount of purchase.

7) Tele Banking

Tele Banking facilitates the customer to do entire non-cash related banking on telephone. Under this devise Automatic Voice Recorder is used
for simpler queries and transactions. For complicated queries and transactions, manned phone terminals are used.

8) Electronic Data Interchange (EDI)

Electronic Data Interchange is the electronic exchange of business documents like purchase order, invoices, shipping notices, receiving advices
etc. in a standard, computer processed, universally accepted format between trading partners. EDI can also be used to transmit financial
information and payments in electronic form.

IMPLICATIONS

The banks were quickly responded to the changes in the industry; especially the new generation banks. The continuance of the trend has re-
defined and re-engineered the banking operations as whole with more customization through leveraging technology. As technology makes
banking convenient, customers can access banking services and do banking transactions any time and from any ware. The importance of
physical branches is going down.

CHALLENGES FACED BY BANKS

The major challenges faced by banks today are as to how to cope with competitive forces and strengthen their balance sheet. Today, banks are
groaning with burden of NPA’s. It is rightly felt that these contaminated debts, if not recovered, will eat into the very vitals of the banks.
Another major anxiety before the banking industry is the high transaction cost of carrying Non Performing Assets in their books. The resolution
of the NPA problem requires greater accountability on the part of the corporate, greater disclosure in the case of defaults, an efficient credit
information sharing system and an appropriate legal framework pertaining to the banking system so that court procedures can be streamlined
and actual recoveries made within an acceptable time frame. The banking industry cannot afford to sustain itself with such high levels of NPA’s
thus, “lend, but lent for a purpose and with a purpose ought to be the slogan for salvation.”

The Indian banks are subject to tremendous pressures to perform as otherwise their very survival would be at stake. Information technology
(IT) plays an important role in the banking sector as it would not only ensure smooth passage of interrelated transactions over the electric
medium but will also facilitate complex financial product innovation and product development. The application of IT and e-banking is becoming
the order of the day with the banking system heading towards virtual banking.

As an extreme case of e-banking World Wide Banking (WWB) on the pattern of World Wide Web (WWW) can be visualized. That means all
banks would be interlinked and individual bank identity, as far as the customer is concerned, does not exist. There is no need to have large
number of physical bank branches, extension counters. There is no need of person-to-person physical interaction or dealings. Customers would
be able to do all their banking operations sitting in their offices or homes and operating through internet. This would be the case of banking
reaching the customers.

Banking landscape is changing very fast. Many new players with different muscle powers will enter the market. The Reserve Bank in its bid to
move towards the best international banking practices will further sharpen the prudential norms and strengthen its supervisor mechanism.
There will be more transparency and disclosures. In the days to come, banks are expected to play a very useful role in the economic
development and the emerging market will provide ample business opportunities to harness. Human Resources Management is assuming to be
of greater importance. As banking in India will become more and more knowledge supported, human capital will emerge as the finest assets of
the banking system. Ultimately banking is people and not just figures.

India's banking sector has made rapid strides in reforming and aligning itself to the new competitive business environment. Indian banking
industry is the midst of an IT revolution. Technological infrastructure has become an indispensable part of the reforms process in the banking
system, with the gradual development of sophisticated instruments and innovations in market practices.

IT IN BANKING

Indian banking industry, today is in the midst of an IT revolution. A combination of regulatory and competitive reasons has led to increasing
importance of total banking automation in the Indian Banking Industry. Information Technology has basically been used under two different
avenues in Banking. One is Communication and Connectivity and other is Business Process Reengineering. Information technology enables
sophisticated product development, better market infrastructure, implementation of reliable techniques for control of risks and helps the
financial intermediaries to reach geographically distant and diversified markets.
The bank which used the right technology to supply timely information will see productivity increase and thereby gain a competitive edge. To
compete in an economy which is opening up, it is imperative for the Indian Banks to observe the latest technology and modify it to suit their
environment. Not only banks need greatly enhanced use of technology to the customer friendly, efficient and competitive existing services and
business, they also need technology for providing newer products and newer forms of services in an increasingly dynamic and globalize
environment. Information technology offers a chance for banks to build new systems that address a wide range of customer needs including
many that may not be imaginable today.

 It is becoming increasingly imperative for banks to assess and ascertain the benefits of technology implementation. The fruits of
technology will certainly taste a lot sweeter when the returns can be measured in absolute terms but it needs precautions and the safety nets.

 It has not been a smooth sailing for banks keen to jump onto the IT bandwagon. There have been impediments in the path like the
obduracy once shown by trade unions who felt that IT could turn out to be a threat to secure employment. Further, the expansion of banks into
remote nooks and corners of the country, where logistics continues to be a handicap, proved to be another stumbling stock. Another challenge
the banks have had to face concerns the inability of banks to retain the trained and talented personnel, especially those with a good knowledge
of IT.

 The increasing use of technology in banks has also brought up ‘security' concerns. To avoid any pitfalls or mishaps on this account, banks
ought to have in place a well-documented security policy including network security and internal security. The passing of the Information
Technology Act has come as a boon to the banking sector, and banks should now ensure to abide strictly by its covenants. An effort should also
be made to cover e-business in the country's consumer laws.

 Some are investing in it to drive the business growth, while others are having no option but to invest, to stay in business. The choice of
right channel, justification of IT investment on ROI, e-governance, customer relationship management, security concerns, technological
obsolescence, mergers and acquisitions, penetration of IT in rural areas, and outsourcing of IT operations are the major challenges and issues in
the use of IT in banking operations. The main challenge, however, remains to motivate the customers to increasingly make use of IT while
transacting with banks. For small banks, heavy investment requirement is the compressing need in addition to their capital requirements. The
coming years will see even more investment in banking technology, but reaping ROI will call for more strategic thinking.

 The banks may have to reorient their resources in the form of reorganized branch networks, reduced manpower, dramatic reduction in
establishment cost, honing the skills of the staff, and innovative ways of attracting talented managerial pool. The Government of India and the
Reserve Bank of India (RBI) on their part would strengthen the existing norms in terms of governing and directing the functioning of these
banks. Banks needs to strengthen their audit function. They would be evaluated based on their performance in the market place. It is in this
context that we have invited the chief executive officers of Indian banks to respond to the issues mentioned earlier

FUTURE OUTLOOK

Everyone today is convinced that the technology is going to hold the key to future of banking. The achievements in the banking today would
not have make possible without IT revolution. Therefore, the key point is while changing to the current environment the banks has to
understand properly the trigger for change and accordingly find out the suitable departure point for the change.

Although, the adoption of technology in banks continues at a rapid pace, the concentration is perceptibly more in the metros and urban areas.
The benefit of Information Technology is yet to percolate sufficiently to the common man living in his rural hamlet. More and more programs
and software in regional languages could be introduced to attract more and more people from the rural segments also.

Standards based messaging systems should be increasingly deployed in order to address cross platform transactions. The surplus manpower
generated by the use of IT should be used for marketing new schemes and banks should form a ‘brains trust' comprising domain experts and
technology specialists.
CONCLUSION

Indian banking system will further grow in size and complexity while acting as an important agent of economic growth and intermingling
different segments of the financial sector. It automatically follows that the future of Indian banking depends not only in internal dynamics
unleashed by ongoing returns but also on global trends in the financial sectors. Indian Banking Industry has shown considerable resilience
during the return period. The second generation returns will play a crucial role in further strengthening the system. The banking today is re-
defined and re-engineered with the use of Information Technology and it is sure that the future of banking will offer more sophisticated
services to the customers with the continuous product and process innovations. Thus, there is a paradigm shift from the seller's market to
buyer's market in the industry and finally it affected at the bankers level to change their approach from "conventional banking to convenience
banking" and "mass banking to class banking". The shift has also increased the degree of accessibility of a common man to bank for his variety
of needs and requirements. Adoption of stringent prudential norms and higher capital standards, better risk management systems, adoption of
internationally accepted accounting practices and increased disclosures and transparency will ensure the Indian Banking industry keeps pace
with other developed banking systems.

Banks are financial institutions that perform deposit and lending functions. There are various types of banks in India and each is responsible to
perform different functions.

In terms of the government exam syllabus, a candidate must know the types of banks and the role of each of them in managing the financial
system of a country.

The bank takes deposit at a much lower rate from the public called the deposit rate and lends money at a much higher rate called the lending
rate.

Banks can be classified into various types. Given below are the bank types in India:-

Central Bank

Cooperative Banks

Commercial Banks

Regional Rural Banks (RRB)

Local Area Banks (LAB)

Specialized Banks

Small Finance Banks

Payments Banks

This is an important topic for the IAS Exam. In this article, aspirants will get information on the banking system in India, its functions, and the
type of banks in India.

The types of banks in India, their functions and the list of banks under each section forms a very important part of the banking
awareness syllabus which is included in most Government exams.

Banks in India (UPSC Notes):-Download PDF Here

Functions of Banks

The major functions of banks are almost the same but the set of people each sector or type deals with may differ. Given below the functions of
the banks in India:

Acceptance of deposits from the public

Provide demand withdrawal facility

Lending facility

Transfer of funds

Issue of drafts

Provide customers with locker facilities

Dealing with foreign exchange

Apart from the above-mentioned list, various utility functions also need to be performed by the various banks.

Aspirants can read about different bank exams at the linked article.

Central Bank

The Reserve Bank of India is the central bank of our country. Each country has a central bank that regulates all the other banks in that particular
country.

The main function of the central bank is to act as the Government’s Bank and guide and regulate the other banking institutions in the country.
Given below are the functions of the central bank of a country:

Guiding other banks

Issuing currency

Implementing the monetary policies

Supervisor of the financial system

In other words, the central bank of the country may also be known as the banker’s bank as it provides assistance to the other banks of the
country and manages the financial system of the country, under the supervision of the Government.

Cooperative Banks

These banks are organised under the state government’s act. They give short term loans to the agriculture sector and other allied activities.

The main goal of Cooperative Banks is to promote social welfare by providing concessional loans

They are organised in the 3 tier structure

Tier 1 (State Level) – State Cooperative Banks (regulated by RBI, State Govt, NABARD)

Funded by RBI, government, NABARD. Money is then distributed to the public

Concessional CRR, SLR applies to these banks. (CRR- 3%, SLR- 25%)

Owned by the state government and top management is elected by members

Tier 2 (District Level) – Central/District Cooperative Banks

Tier 3 (Village Level) – Primary Agriculture Cooperative Banks

Commercial Banks

Organised under the Banking Companies Act, 1956

They operate on a commercial basis and its main objective is profit.

They have a unified structure and are owned by the government, state, or any private entity.

They tend to all sectors ranging from rural to urban

These banks do not charge concessional interest rates unless instructed by the RBI

Public deposits are the main source of funds for these banks

The commercial banks can be further divided into three categories:

Public sector Banks – A bank where the majority stakes are owned by the Government or the central bank of the country.

Private sector Banks – A bank where the majority stakes are owned by a private organization or an individual or a group of people

Foreign Banks – The banks with their headquarters in foreign countries and branches in our country, fall under this type of bank

Regional Rural Banks (RRB)

These are special types of commercial Banks that provide concessional credit to agriculture and rural sector.

RRBs were established in 1975 and are registered under a Regional Rural Bank Act, 1976.

RRBs are joint ventures between the Central government (50%), State government (15%), and a Commercial Bank (35%).

196 RRBs have been established from 1987 to 2005.

From 2005 onwards government started merger of RRBs thus reducing the number of RRBs to 82

One RRB cannot open its branches in more than 3 geographically connected districts.

Aspirants can check the list of Regional Rural banks in India at the linked article.

Local Area Banks (LAB)

Introduced in India in the year 1996

These are organized by the private sector

Earning profit is the main objective of Local Area Banks

Local Area Banks are registered under Companies Act, 1956

At present, there are only 4 Local Area Banks all which are located in South India

Specialized Banks

Certain banks are introduced for specific purposes only. Such banks are called specialized banks. These include:

Small Industries Development Bank of India (SIDBI) – Loan for a small scale industry or business can be taken from SIDBI. Financing small
industries with modern technology and equipments is done with the help of this bank

EXIM Bank – EXIM Bank stands for Export and Import Bank. To get loans or other financial assistance with exporting or importing goods by
foreign countries can be done through this type of bank

National Bank for Agricultural & Rural Development (NABARD) – To get any kind of financial assistance for rural, handicraft, village, and
agricultural development, people can turn to NABARD.

There are various other specialized banks and each possesses a different role in helping develop the country financially.

Small Finance Banks

As the name suggests, this type of bank looks after the micro industries, small farmers, and the unorganized sector of the society by providing
them loans and financial assistance. These banks are governed by the central bank of the country.

Given below is the list of the Small Finance Banks in our country:

AU Small Equitas Small Jana Small Northeast Small

Finance Bank Finance Bank Finance Bank Finance Bank

Capital Small Fincare Small Suryoday Small Ujjivan Small

Finance Bank Finance Bank Finance Bank Finance Bank

Esaf Small Utkarsh Small

Finance Bank Finance Bank

Payments Banks

A newly introduced form of banking, the payments bank have been conceptualized by the Reserve Bank of India. People with an account in the
payments bank can only deposit an amount of up to Rs.1,00,000/- and cannot apply for loans or credit cards under this account.

Options for online banking, mobile banking, the issue of ATM, and debit card can be done through payments banks. Given below is a list of the
few payments bank in our country:

Airtel Payments Bank

India Post Payments Bank

Fino Payments Bank

Jio Payments Bank

Paytm Payments Bank

NSDL Payments Bank

UNIT-2

Banker: The expression Banking in the simple sense means carrying on business with money. The term Bank denotes any person or firm or
company, which transacts banking business. A bank is an institution which deals with money and credit. It accepts deposits from the public,
makes the funds available to those who need them, and helps in the remittance of money from one place to another.

There is no satisfactory definition, since it is very difficult to define the term Banking or Banker. However, many attempts were made to define
the term. Following are some of the prominent definitions :

General Definition : “A bank is what a bank does”. It implies that the nature of a bank can be better understood by studying the functions
performed by a bank. Among all definition, this definition is the simplest.

Negotiable Instruments Act, 1881 : According to section 3 of the Negotiable Instruments Act 1881. Banker includes a person, corporation or
company acting as a banker”. This definition is not satisfactory.

The Banking Regulation Act, 1949 : Section 5 (b) of the Act defines the term Banking as “accepting, for the purpose of lending or investment, of
deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise”.

Ingredients or constituents of the definition :

The very purpose of the acceptance of the deposits is for the purpose of lending or investment.
The acceptance of deposits is from the public.

These deposits can be withdrawable through cheques, drafts, orders or otherwise.

This definition covers the most important functions viz. the borrowing (acceptance of deposits of money from the public) and lending
(sanction/payment of loans and advances to the public viz. individuals, traders, industrialists etc.) and hence it is regarded workable and is
accepted.

Customer: The expression ‘Customer’ in the simple sense means, one who transacts himself with the bank subject to certain terms and
conditions as imposed by the Banker. In other words, a person, who maintains an account with the bank may be regarded as customer.

The term ‘customer of a bank’ has not been defined in the Banking Regulation Act, 1949 or any other Act. By the term it is generally understood
or mean an account holder of bank. But this general understanding of the term has been qualified by banking experts and judgements of law
courts. Hence, there is no satisfactory definition for the term ‘customer’. However, some attempts were made to define the term ‘customer’ as
stated below: -

Sir John Paget : Sir John Paget defines ‘Customer’ as “To constitute a customer, there must be some reasonable course or habit of dealing in the
nature of regular banking business”. According to him, mere opening an account with bank would not confer the status of customer. There
must be a regular course of dealing with the bank, to be designated as a customer. However, this view was subject to criticism on the ground
that, this definition puts emphasis on duration of dealing with a bank as an account holder. It is not correct to say that there must be regular
course of dealing with Banker.

Dr. Hart’s Definition : According to Dr. Hart, “a customer is one, who has an account with a banker or for whom a banker habitually undertakes
to act as bank”. According to him, a single transaction is sufficient to constitute a customer. Therefore, to constitute customer, the following
two conditions are to be satisfied :

He must open an account with the Bank to have a dealing with the Bank,

The nature of such dealing must be a form of a banking transaction.

The Kerala High Court in Central Bank of India Ltd. Bombay vs Gopinathan Nair & others1) has laid down : “Broadly speaking, a customer is a
person who has the habit of resorting to the same place or person to do business. So far as banking transactions are concerned he is a person
whose money has been accepted on the footing that the banker will honour upto the amount standing to his credit, irrespective of his
connection being of short or long standing”.

Rights and Duties of Banker and Customer

It is very difficult to live without a bank account as it is required for many things. As more than 50% of Indians have bank accounts, it is very
important for you to know the rights and duties of both bankers and customers. In this blog, we will discuss the rights and duties of bankers and
customers.

Rights of a Banker

1. Right to charge interest

Every bank in India has the right to charge interest on the loans and advances sanctioned to customers. Interest is usually charged monthly,
quarterly, semiannually or annually.

2. Right to levy commission and service charges

Along with interest, banks also have the right to levy a commission and service charges for the services rendered. The service rendered by the
bank might be SMS notification service, retail banking and so on. Banks can also debit these charges from the customer's bank account.

3. Right of Lien

Another important right enjoyed by banks is the Right of Lien. Banks have the right to keep goods and securities belonging to the debtor as a
security, until the loan is repaid by the debtor. Banks have only the right to maintain the security of the debtor and not to sell.

4. The Right of Set-off

The banker has the right to set off customer accounts. Banks can merge a couple of accounts which are in the name of the customer and set off
the debit balance in one account with the credit balance in the other, provided the funds belong to the customer.

5. Right of Appropriation

Let us consider that a customer has taken many loans from the bank and he deposits some money in the bank without any instructions. If that
amount is not sufficient to discharge all loans, the bank has the right to appropriate the amount deposited to any loan, even to a time-barred
debt. But the customer should be informed on the same.

6. Right to Close the Account

If the customer’s account is not properly maintained, banks have all the right to close the account by sending a notice to the customer. Bankers
have no right to close the account, without sending a written notice.

See Also: 6 Banking services which attract GST in India

Rights of a Customer

1. Right to fair treatment

According to this right, banks cannot discriminate between customers on the basis of gender, age, religion, caste, and physical ability while
providing services. This does not mean that banks cannot offer schemes which are designed for a particular set of people. Banks have all the
right to offers differential rates of interest or products to customers.

2. Right of transparent, fair and honest dealing

The contract between the banks and customers should be easily understood by the common man. It is the responsibility of the bank to make
the customer understand interest rates, the risk involved and all other terms and conditions. Banks should not hide anything from the customer
before the signing of the agreement. Even if there are any short comings, they should be communicated to the customer. The language in the
contract should be simple and easily understood.

3. Right to suitability

You might have come across a lot of cases of mis-selling of financial products, especially life insurance policies. Usually, customers are forced to
buy the product which offers the highest commission to an agent. As per this right, customers should be sold the product which is suitable to
them. So, banks should always keep customers needs in mind, before selling any product.

4. Right to privacy

As per this law, the personal information provided by the customers to the bank, must be kept confidential. Bankers can disclose only such
information, which is required by law or only after customers have given permission. Banks are not allowed to provide your details to
telemarketing companies or for cross-selling.

5. Right to grievance redressal and compensation

Banks are responsible for all the products and services offered by them and customers have the right to easy and simple grievance redressal
systems in case the bank fails to adhere to basic norms. Along with their own products, bankers are responsible for the products of third parties
like insurance companies and fund houses. If the customer complaint is not resolved by the bank, customers can go to the banking
ombudsman.

See Also: How your bank may cheat you?

Duties of customers to banks

1. It is the duty of customers to present the cheque and other negotiable instruments only during the business hours of the bank.

2. In the case of any disagreement in the bank statement, customers should inform the bank.

3. Whenever photographs of customers are required by the bank, it should be submitted.

4. It is the duty of the customer to present the instrument of credit within the due time from the date of issue.

5. The cheque should be filled by customers very carefully.

6. If the cheque book is lost or stolen, it is the duty of the customers to inform the bank.

7. If the customer notices any forgery in the amount of the cheque, he/she should inform it to the bank immediately.

8. Customers should provide proper information in the Know Your Customer (KYC) form.

9. Customers should make the repayment of all the dues on time.

10. It is the duty of the customers to read the MITC ( Most Important Terms and Conditions)

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

The general legal relationship between bank and its customer

The general legal relationship of bank and customer is contractual relationship, started from the date of opening an account. [1] When
customer deposits money into his bank account, the bank becomes a debtor of the customer. [2] No new contract is created every time there is
a new deposit as the account is continuing in nature. [3] The banker is not, in the general case, the custodian of money. The money paid into a
bank account becomes the property of the bank and bank has a right to use the money as it likes. The bank is not bound to inform the
depositor the manner of utilization of funds deposited by him. Bank does not give any security to the debtor (depositor). The bank has
borrowed money but does not pay money on its own, as banker is to repay the money upon payment being demanded. [4] Thus, bank’s
position is quite different from normal debtors. On the other hand, when the bank lends money to his customer, the relationship between the
bank and customer is reversed. Then the bank takes the position as a creditor of the customer and the customer becomes a debtor of the bank.
Borrower executes documents and offer security to the bank before utilizing the credit facility. Therefore, the general relationship between
bank and its customer is that of a debtor and a creditor.

On the other hand, the relationship between the customer and the banker can be that of principal and agent. Agent can be defined as a person
employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done or who is so
represented is called “the principal”. In acting on instructions to make periodical payment or transfer money from customer’s account to
others, to collect cheques or bills, the bank acted as agent of its customer. Prima facie every agent for reward is bound to exercise reasonable
skill and care in carrying out the instructions of his principal. The standard of care expected is one of an ordinary and prudent banker and not
that of a detective.

Building society vs. Bank

Building societies, like bank, are deposit-taking institution. Generally speaking, the relationship between building society and its customer is
that of a debtor and a creditor. This is the similarity between bank and building society. But specifically building societies are differs from banks
as building societies are owned by their customers, this simply means that those who have a savings account, or mortgage, are members and
have certain rights to vote and receive information, as well as to attend and speak at meetings. Each member has one vote, regardless of how
much money they have invested or borrowed or how many accounts they may have. Each building society has a board of directors who run the
society and who are responsible for setting its strategy. In contrast, banks are normally companies listed on the stock market and are therefore
owned by, and run for, their shareholders.

Investment Company [5] vs. Bank

The relationship between the investment company and its customer is fiduciary in character. As such, an investment adviser stands in a special
relationship of trust and confidence with its clients. As a fiduciary, an investment adviser has an affirmative duty of care, loyalty, honesty, and
good faith to act in the best interests of its clients. The parameters of an investment adviser’s fiduciary duty depend on the scope of the
advisory relationship and generally include the duties to make reasonable basis investment advice, to seek best execution for client securities
transactions where the adviser directs such transactions and to make full and fair disclosure to clients of all material facts about the advisory
relationship, particularly regarding conflicts of interest.

As a result, the legal rights and duties of an investment manager also differ from that of bank. An investment company will owe to his client
both a common law duty of care in tort and fiduciary duties. Generally, a bank does not have a duty to advise its customer on the suitability of a
transaction; nor does it has a duty to protect the customer from imprudent transactions. [6] The relationship between a bank and its customer
is not fiduciary in character. [7] As noted by Lord Justice Dunn, “Banks are not charitable institution”. [8] Moreover, bank is not under an
implied duty to bring to the attention of the customer a new type of banking facility which may reasonably be capable of being applied to or
being utilised by customer in the known circumstances of its business and banking requirements. [9]

Nonetheless, it must be borne in mind that the limits of a banker’s business cannot be defined as a matter of law. [10] If a banker undertakes to
advice, he must exercise reasonable care and skill in giving the advice. [11] Furthermore, under the Hedley Byrne principle, a bank which
assumes responsibility towards a customer for advising on investments or on the commercial merits of a proposed transaction owes a duty of
care even if the advice is gratuitous. [12] Prior to the case of Hedley Byrne v Heller, [13] the court in Woods v Martins Bank Ltd [14] held that it
is possible for a bank to owe fiduciary duties to its customer. This is largely because the bank agreed to a request from a customer to manage
his financial affairs. Indeed, the bank manager knew the customer relied on his advice and there were conflicts of interest because the advice
was to invest in a company that was also in debt to the bank.

However, it has been argued that Salmon J was forced to rely on the fiduciary principle to impose liability on the bank since there was no
remedy in tort for a negligent misstatement at that time. [15] Thus, it is very unlike the court will resort to the device of a fiduciary relationship
if it happens again. [16]

Insurance Company vs. Bank

Similarly, insurance company are different from bank because there is a “special relationship” between the insurance company and the
policyholder. The special relationship consists of a combination of elements such as the fiduciary duties insurance companies owe to its
policyholders and the duty of good faith and fair dealing inherent in every insurance policy between an insurance company and its policyholder.
Among an insurer’s fiduciary responsibilities is the duty of disclosure. [17]

Insurance companies’ duty of disclosure requires that they provide certain information to their prospective and current policyholders, such as
the scope and limitations of the insurance coverage being agreed to, the consequences of various events, the responsibilities of the insurance
company and all other terms of the insurance policy. When an insurance company failed to meet its duty of disclosure, it is considered an act of
bad faith that gives actionable cause to the policyholder to seek relief for any resulting losses. In contrast, the bank is only required to supply
the customer with relevant information such as APR calculation, copy of agreement, balance and etc. [18]

Trust Company vs. Bank

A trust company is a corporation organized to perform the fiduciary of trusts and agencies. The “trust” name refers to the ability of the
institution’s trust department to act as a trustee, who administers financial assets on behalf of customer (settlor). The assets are typically held
in the form of a trust, a legal instrument that spells out the beneficiaries and what the money can be spent for. A trustee’s power to dispose of
the trust property or to arrange the property is subject to the wishes of the customer (settlor). In contrast, the receipt of money on deposit
account constitutes the banker a debtor to the depositor [19] but not a trustee of the customer. [20] Therefore, the customer has no right to
inquire into, or question the use of, the money by the banker. [21] A trust involves the administration of assets on behalf of an individual
whether he is living or dead. Therefore, the trust arrangement will still be going on after the death of the customer (settlor). However, the
relationship between a bank and a customer ceases on the death, insolvency, lunacy of the customer.

However, the position is otherwise if the banker assumes the office of trustee [22] . Moreover, a banker is affected by the existence of a trust
where an account is opened by a customer acting in the capacity of trustee15, or where the banker is on notice that a payment into or out of
the account is in breach of trust16, or where money is paid to a banker for a particular purpose in circumstances such as to impress the
payment with a trust17.

Duty of Confidentiality

One of the similarities between bank and other service providers is that the legal relationship between them and their customers will give rise
to a duty of confidentiality. They are disallowed to disclose the information about their customer to third party even when the person is no
longer their customer. However, the decision of the Court of Appeal in Tournier v. National Provincial and Union Bank of England enunciated
four exceptional cases in which disclosure is justified:(1) Where disclosure is under compulsion of law (2) Where there is a duty to the public to
make the information known (3) Where the interests of the bank require disclosure (4) Where the disclosure is made by the express or implied
consent of the customer. Other than that, banker and all other service providers are under duty to disclose when it involves in cases of money
laundering. [23] Currently, there are two statutes of primary importance in governing the duty of confidentiality: Data Protection Act 1998 and
the Human Right Act 1998. The Data Protection Act 1998 gives effect to European Council Directive 95/46 on the protection of personal
information. On the other hand, Article 8 of the Human Rights Act 1998 enshrines the right to respect for private and family life.

Undue Influence

The relationship between banker and customer will not generally give rise to a presumption of undue influence. In the ordinary course of
banking commerce, a banker is allowed to explain the nature of a proposed transaction without laying himself open to a charge of undue
influence [24] . However, comparing with other service providers, the relationship between investment advisors and investor, insurance
company and policy holder, trustee and beneficiary, all of them will give rise to a presumption of undue influence. [25] This is because there is
certain degree of trust and confidence between them and their customers. It has been regarded as a norm.

The concept of the holder

It is important to understand the complexities of the parties involved for the purpose of understanding the operation of negotiable
instruments. Let us discuss these two matters one by one. Section 8 and Section 9 of the Negotiable Instruments Act talk about them.

What is Holder

Any person who has the custody of promissory note, bill of exchange or cheque can be termed as a holder. The negotiable instruments should
be entitled in his own name.

According to Section 8 of The Negotiable Instruments Act 1881, the ‘holder’ means ‘any person entitled in his own name to the possession
thereof and to receive or return the amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its
holder is the person so entitled at the time of such loss or destruction.[1]

Essential elements of Holder

Following are the essential elements to be satisfied to be a holder.

1. Possession of instrument

The person must be entitled to possessing the instrument in his own name. Actual physical possession of the instrument is not necessary.

The person must be named as a payee or indorsee in the instrument. He can also be a bearer of instrument, in such cases if the holder dies the
heir of such holder becomes the holder even when that person is not payee or indorsee or a bearer of instrument.

He must be holder as per law (de jure) not as per fact (de facto).

2. Entitled to receive the amount

When a person has possession of a negotiable instrument and he does not have a title to possess it then he will not become a holder. For
example, a person who finds an instrument lying somewhere or a thief who acquires possession of such an instrument. They cannot be termed
as a holder.

Not only the possession of negotiable instrument but the right to receive or recover amount is also an important aspect of becoming a holder.

When the amount is received by the holder the person who is liable to pay is discharged from the liability.

A person who acquires an instrument by either committing theft or finding is not a holder.[2]

Kinds of holder

De jure: It means the holder of a negotiable instrument as a matter of legal right.

De facto: It means the holder of a negotiable instrument by virtue of possession but not entitled in his / her own name.[3]

Rights of holder

Following are the rights available to a holder.

1. Right to possess an instrument and to receive and recover the amount due as per the instrument. It is provided in Section 8 of the Act.[4]

2. Right to endorse the instrument. It is provided in Section 50 of the Act.[5]

3. Right to convert blank endorsement to full endorsement by Section 49 of the Act.[6]

4. Right to cross the instrument after it is issued. When a cheque is crossed, the holder can cross it generally or specifically. In such cases, he has
the option of adding words like not negotiable or account payee. This right is discussed in Section 125 of the Act.[7]

5. Right to get a copy of instrument which is lost by Section 45A of the Act.[8]

6. Right to present the instrument door approval if it is bill and if it is some other instrument then get paid for it. It is by virtue of Section 61 and
Section 64 of the Act.[9]

Concept of Holder in due course

In simple terms holder on the due course means a person who has possession of the negotiable instrument.

Section 9 of the Negotiable Instruments Act 1881 provides that ‘ any person who becomes the possessor of a promissory note, bill of exchange
or cheque for consideration and the instrument is payable to bearer or payee or endorsee before the became payable and he believes that no
defect exists in the title of the person from whom he derived his title is called a holder in due course.[10]

For instance, a person holds a negotiable instrument bonafide for a value and he believes that there is no defect in title from whom he took
that in good faith then he becomes the true owner of the instrument.

Essentials elements

There should be the possession of instruments.

Holder has to acquire it in good faith for some consideration ie; consideration is necessary.

He should acquire the instrument with bonafide intention.

He should be free from the defective title of the prior party.

A person can become a holder in due course only before the maturity of a negotiable instrument.

If a person obtains an instrument after it has matured then he doesn’t become a holder in due course.

Rights of the holder in due course

Following are the rights available.

1. As per Section 118 they can file suit in his own name against the parties who are liable to pay.[11]

2. As per Section 20 the holder in due course gets a good title even though the instruments were originally stamped but were incomplete
instruments. The person who has signed and delivered an incomplete instrument cannot plead as against the holder in due course that the
instrument has not been filled in accordance with the authority given by him but a holder who himself completes the instrument is not a holder
in due course.[12]

3. As per Section 46 the other parties liable to pay cannot claim that the delivery of the instrument was for a specific purpose.[13]

4. As per Section 36 every prior party to the instrument is liable to a holder in due course till the instrument is duly satisfied.[14]
5. As per Section 42 acceptor cannot claim against a holder in due course that the bill is drawn in a fake name.[15]

In Bank of England v. Vagilano Brothers [16] it was held that before signing acceptance in the bill the acceptor should consider whether the bill
is genuine or false.

6. As per Section 53 he gets a good title to the instrument even though the title of the transferor is defective. He can recover the full amount
unless he was a party to fraud; or if the instrument is negotiated by means of a forged endorsement.[17]

7. If a negotiable instrument gets into the hands of the holder in due course which is made without consideration, he can recover the amount
on it from any of the prior parties thereto.

8. As per Section 58 the person liable cannot claim against the holder in due course that the instrument has lost or was acquired by means of
committing fraud or for an unlawful consideration.[18]

9. As per Section 120 the validity of the instrument originally made cannot be denied by the maker of a negotiable instrument or by the
acceptor of a bill of exchange for the honor drawer.[19]

10. By Section 121 the maker of note or acceptance of a bill payable to order cannot deny the payee’s capacity to indorse the same at the date
of the note or bill.[20]

11. By Section 122 the endorser is not permitted as against the holder in due course to deny the sign or capacity to contract of any prior party
to the instrument.[21]

In Sukhan Rajkhim Raja a firm of Merchants, Bombay v. N. Raja Gopalan,[22] and the court held that the plaintiff was conscious that the
cheque has been dishonoured and endorsement in his favour was only after it was returned by the bank. Moreover, it has lost its negotiability.
Thus, the plaintiff cannot beholder in due course.[23]

Difference between holder and holder in due course

Basis Holder Holder in due course

A holder is a person who is

A holder in due course is a
entitled in his own name to a
person who obtains a
negotiable instrument and
negotiable instrument in
Meaning the instrument is obtained
good faith for a
lawfully. So he can receive the
consideration, whose
payment from the parties
payment is still due.
liable to pay.

If the title of the prior party is

defective and he has no legal Holder in due course is free
Title right to deliver the instrument from such defective title of
to the holder, then the holder the prior party.
also has no such right.

The holder may or may not be Holder in due course is

Possession in possession of the always in the possession of
negotiable instrument. the instrument.

Consideration
For the holder, consideration For holders in due course,
is not necessary. consideration is necessary.
 Entitled to the possession of a Holder has to obtain
Entitlement negotiable instrument in his entitlement in good faith for
own name. some consideration.

May or may not obtain the

Always obtain the
negotiable instrument with
Good faith instrument with bonafide
bonafide intentions (in good
intentions or in good faith.
faith)

Doesn’t have a right to sue

Has complete right to sue
Right to sue prior parties related to the
the prior parties.
transaction.

A person can become a A person can become a

Maturity of the holder either before or after holder in due course only
instrument the maturity of the before the maturity of the
instrument. instrument.

Related Case Laws

In Milind Shripad Chandurkar v. Kalim khan, [24] it was held that the holder in due course of a negotiable instrument is the only person who can
file a suit for recovery of the amount which is liable through that instrument.

In the case of Braja Kishore Dikshit v. Purna Chandra Panda [25]court stated certain prerequisites for a person to become a holder in due course
of a negotiable instrument.

He must become a holder by way of consideration.

He must have got the possession of the instrument before its maturity or become overdue, he must be transferor in good faith and he should
have any cause to believe that the title was defective of the transferor.

In S V Prasad v. Suresh Kumar [26] it was held that the holder in due course obtains a right to recover the amount from the holder of the
instrument. The endorsement can take place without having participation from the maker of the instrument.

The holder in due course obtains the same right which was with the holder. He can neither upgrade nor alter the liability.

In the case of Gemini v. Chandran, [27] It was held that a holder in due course cannot be presumed to be a holder by the Negotiable
Instruments Act 1881 i.e.; there is no provision for it. There is a presumption as per section 118 of the Act that a holder is a holder in due course
in some specific situations. So holders in due course and holder do not mean the same.

TYPES OF BANK CUSTOMERS

During the opening of accounts, the banker deals with different types of customers. The banker should acquaint himself with various laws
governing different types of customers. The customers can be classified as follows:

1. Personal accounts: Banker should take care and verify the certain fact while opening of accounts of individual. As per Indian Contract Act
1872, a person is competent to enter into a valid contract and open a bank account provided:

i) Individual should be major, i.e. of 18 years of age;

ii) He should be sound mind;

iii) He is otherwise not disqualified by any law;

iv) He Should not be an insolvent;

v) Drunken person is not legally competent to enter into a contract;

vi) He should be in good sense while lending a loan and entering into a contract.

Various types of personal accounts in banks are as under:

a) Accounts of Single Individual: This is purely a personal account in the name of an individual and is normally operated upon by the account
holder himself. The account holder may authorise another person to operate on his account. For this purpose, he gives a Mandate or executes a
Power of Attorney in favour of such a person.

In order to avoid legal complications that may arise after the death of the account holder, it is desirable to suggest opening of a joint account in
the names of two individuals (unless it is essential in certain circumstances to open an account in the single name only), and/or to obtain proper
nomination.

b) Joint Accounts of Individuals: A joint account is opened in the names of more than one individual for convenience of operations and/ or to
avoid legal complications upon death of one of the joint account holders. A joint account is neither a partnership nor a trust account. It is
important to obtain clear and unambiguous instructions regarding the mode of operation and repayment of balance of a joint account in the
event of death of one or more joint account holder(s). Different types of operational instructions are as under:

(i) Jointly or Survivor (ii) Either or Survivor

(iii) Former or Survivor (iv) any one or Survivor

One or more of the joint account holders can authorise operation on the account on his/their behalf by giving a Mandate or executing a Power
of Attorney, but, such Mandate or Power of Attorney must be given by all the parties to the accounts. Addition/deletion of any name, material
alteration, closure of account & operational instructions in the joint account can be changed by all the account holders jointly. However, in joint
accounts with operational instructions “Former or Survivor”, instructions can be changed/revoked only by Former.

c) Illiterate person: Illiterate person is a person who cannot read or write. Such persons are competent to enter in to a valid contract. The
account(other than Current Account) of such a person may be opened provided he calls on the Bank with a latest passport size photograph.
Photograph is essential for identification. Thereupon, his thumb impression or mark should be obtained on the account opening form/card in
the presence of the Bank’s official. Such thumb impressions or marks affixed by illiterate persons on instruments are equivalent to their
signatures. Any withdrawal/repayment of deposit amount and/or interest by way of withdrawal form or otherwise should similarly be affixed
with the thumb impression or mark of the depositor.

d) Blind Persons: Blind Persons can operate the account in bank. Signature of Thumb impression of blind person in the A/c opening form to be
witnessed by a person who should certify that contents of the A/c opening form were explained to the blind person in his presence. The sign
may be authorised by bank officer and a witness known to both the bank and the blind person. He should always visit the branch for cash
withdrawal. As per all banking facilities including net banking, ATM, Cheque Book, Locker facility, loans to be offered to visually challenged
customers without discrimination.

e) Minors’ Accounts: A minor is a person below the age of 18 years. A minor is under legal incapacity to contract by himself and, therefore, a
guardian recognised by law along can deal with the person and property of the minor. The term “guardian” includes a natural guardian or
guardian appointed by the Court of Law. Ordinarily, an account of a minor is opened and operated upon by the natural guardian of the minor
or by the guardian appointed by the Court.

According to RBI guidelines (RBI/2013-14/581DBOD. No. Leg. BC. 108/09.07.005/ 2013-14) with a view to promote the objective of financial
inclusion and also to bring uniformity among banks in opening and operating minors’ accounts, banks are advised as under:

A savings /fixed / recurring bank deposit account can be opened by a minor of any age through his/her natural or legally appointed guardian.

Minors above the age of 10 years may be allowed to open and operate savings bank accounts independently, if they so desire. Banks may,
however, keeping in view their risk management systems, fix limits in terms of age and amount up to which minors may be allowed to operate
the deposit accounts independently. They can also decide, in their own discretion, as to what minimum documents are required for opening of
accounts by minors.

On attaining majority, the erstwhile minor should confirm the balance in his/her account and if the account is operated by the natural
guardian / legal guardian, fresh operating instructions and specimen signature of erstwhile minor should be obtained and kept on record for all
operational purposes.
 Banks are free to offer additional banking facilities like internet banking, ATM/ debit card, cheque book facility etc., subject to the safeguards
that minor accounts are not allowed to be overdrawn and that these always remain in credit.

It is permissible to open any type of deposit account in the name of and/or to be operated upon by a minor within the framework of rules of
business of the Bank as outlined hereunder,but no Current Account should be opened.

According to Section 26 of NI Act, a minor can draw, endorse or negotiate a cheque or a bill but he cannot be held liable on such cheques or bill.
Minor can be admitted to the benefits of partnership with the consent of other partners but cannot be made liable for the losses. A minor may
be appointed as an agent on behalf of his principal but legally he cannot be held responsible to his principal.

When the minor becomes major he has the sole right to operate the account and guardian’s power ceases. The payment should be made to the
erstwhile minor upon provided his identity. When the account is operated upon by the guardian on behalf of the minor a Balance Confirmation
Letter duly signed by the erstwhile minor and verified by the guardian. If account is operated by the minor himself, the erstwhile minor should
be asked to sign a Balance Confirmation Letter.

2. Hindu Undivided Family(HUF): Hindu Undivided Family’ otherwise known as ‘Joint Hindu Family’ property, business or ancestral estates and
its common possession, enjoyment ownership is the basis of formation of HUF.As per Hindu law, the Hindus, Sikhs & Jains can form HUF.

HUF is governed basically by two schools of thought. In Bengal, it is governed by Dayabhag Law.In other parts of India, it is governed by
Mitakshara Law. The law governing Hindu Undivided Family is codified under Hindu Code and now, succession among Hindu is governed by
Hindu Succession Act, 1956. Parts of this Act was amended in 2005 by the Hindu Succession (Amendment) Act, 2005.Creation of Hindu Law
under which all major members of the family get right by birth in the ancestral property of the family.

HUF property is managed by senior most major male member called ‘Manager’ or ‘Karta’. Upon death of Karta, next senior male coparcener
becomes Karta. Joint owners of HUF are known as coparceners. It consists of one common living ancestor and his all male & female (female
included from Sept. 2005) descendent up to three generations next to him. HUF cannot enter into a partnership as per Supreme Court
judgement of 1998.

HUF account is operated by Karta. Karta has authority to borrow money for the family necessities & for ancestral family business. Documents
are to be executed by Karta. All major coparceners are to be made guarantors. The liability of the ‘Karta’ is unlimited, whereas the liability of
the coparceners is limited to their shares in the joint family estate.

3. Sole Proprietary Firms: Business is wholly owned by an individual. In law, there is no difference between proprietor & the firm. In all respects,
it is an account in the name of an individual only except that it is operated upon by the proprietor on behalf of firm. The firm should have PAN
or GST Number. Proprietorship letter in bank’s Performa is to be obtained. Proof of proprietorship to be obtained. Creditors have recourse not
only against assets of the firm but also against private assets of the proprietor. Proprietor can authorize another person to operate the account
through Mandate or Power of Attorney.

For opening an account in the name of a sole proprietary firm, CDD of the individual (proprietor) shall be carried out. In addition to the above,
any two of the following documents as a proof of business/ activity in the name of the proprietary firm shall also be obtained:

(a) Registration certificate

(b) Certificate/licence issued by the municipal authorities under Shop and Establishment Act.

(c) Sales and income tax returns.

(d) CST/VAT/ GST certificate (provisional/final).

(e) Certificate/registration document issued by Sales Tax/Service Tax/Professional Tax authorities.

(f) IEC (Importer Exporter Code) issued to the proprietary concern by the office of DGFT or Licence/certificate of practice issued in the name of
the proprietary concern by any professional body incorporated under a statute.

(g) Complete Income Tax Return (not just the acknowledgement) in the name of the sole proprietor where the firm’s income is reflected, duly
acknowledged by the Income Tax authorities.

(h) Utility bills such as electricity, water, landline telephone bills, etc.
In cases where the Regulated Entities (REs) are satisfied that it is not possible to furnish two such documents, Regulated Entities (REs) may, at
their discretion, accept only one of those documents as proof of business/activity.

Provided Regulated Entities (REs) undertake contact point verification and collect such other information and clarification as would be required
to establish the existence of such firm, and shall confirm and satisfy itself that the business activity has been verified from the address of the
proprietary concern.

4. Partnership Firm: Partnership is the relation between persons who have agreed to share profits of business carried on by all or any one them
acting for all (Indian Partnership Act 1932). As per RBI instruction now Registration Certificate and Partnership deed to be obtained. As per
Indian Companies Act 2013, Maximum number of partner can be up to 100 in a firm (Earlier number of partner was restricted to 20 for other
businesses & 10 for banking business). Partnership is not a distinct legal person from the partners who have made partnership firm. HUF cannot
enter into a partnership as per Supreme Court judgement of 1998. The firm should have PAN or GST Number. A partner cannot delegate his
authority to operate the account.

A minor cannot be a partner, but he can be admitted for his benefit in an existing partnership firm. The particulars of minor partner, particularly
the DOB should be properly recorded.

In case of death/retirement/insolvency of a partner account should be stopped, if the balance is in debit and a fresh account should opened
after fresh sanction of limit. In case of dispute when one partner revokes the authority against the other partner, operation in the account
should be stopped.

Dissolution of the Partnership firm can take place by following ways:

By mutual consent;

Death/insolvency/retirement of a partner;

Operation of Law (insolvency of all partners, business becoming unlawful, dissolution by a competent court; and

In case of automatic dissolution.

5. Limited Liability Partnership (LLP): A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the
jurisdiction) have limited liabilities. LLP is governed by limited liability partnership Act 2008. Liability is limited to the extent of his contribution
in the LLP. Minimum 2 designated partner and no limit on maximum number of Partners. A partner is not liable for another partner’s
misconduct or negligence, except in certain cases. LLP is a legal entity separate from its partner. It has own assets in his name, sure and be
sued. Since LLP contains element of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a
company and a partnership. It has perpetual succession (death of a partner does not affect the existence of LLP). Partners have a right to
manage the business directly. Firms and companies can get themselves converted into LLP. LLP cannot raise fund from public.

6. Companies: Companies are defined in Indian Company Act 1956. As per the provision of Company Act 2013 (implemented with effect from
1st April 2014), recognizes a joint Stock Company is a legal person with perpetual entity & is distinct from its members. A company or
association of persons can be created at law as legal person so that the company in itself can accept limited liability for civil responsibility.
Because companies are legal persons, they also may associate and register themselves as companies otherwise it will be treated as illegal.
Address of the registered office is compulsory. It is the address at which all the documents & notices may be served upon the company.
Cheques favouring company are not to be credited to the personal accounts of the Directors or other officers of the company.

UNIT -3

Dishonour of cheque is a criminal offence in India and is punishable by law with imprisonment up to two years or with the monetary penalty or
with both.
A cheque contains a mandate of the drawer to pay some specific amount of money to the bearer or the person whose name is mentioned
therein.

When a cheque is dishonoured, the drawee bank issued a ‘cheque return memo’ to the banker of the payee wherein he mentions the reasons
for non-payment.
The payee can legally sue the drawer for dishonour of cheque only if the amount so mentioned in the cheque is due for the discharge of any
liability or debt.
Hence if the cheque was issued as a gift deed or for some unlawful purposes, then the drawer can’t be accused of the same.

Dishonour of cheque is of 2 kinds: –

1. Dishonour of bill of exchange by non-acceptance

2.Dishonour of promissory note, cheque by non-payment or bill of exchange.

There is dishonour of instrument when the maker, acceptor or the drawee makes any default in making the payment. Thus when this maker,
acceptor or drawee purposely prevents the presentment of instrument is considered to be dishonoured even without the presentment.

Notice of dishonour

Communication of dishonour is done stating about the fact that the cheque has been dishonoured. Notice of dishonoured cheque is given to
the issuer of the cheque who is actually liable and therefore is served with the warning about how he could be made liable.

Notice by whom?

The notice of dishonour is to be given by a person who is aggrieved by such act or by a person who wants to make some party of his liable on
the instrument. Hence, the notice can be served by :

1. By the holder (the aggrieved party himself)

2.A party to the instrument who remains liable for it.

Dishonour of cheque

If a cheque is dishonoured due to the insufficiency of funds or mismatch of signatures or any other as may be, the aggrieved party suffers a lot.
To discourage this act, dishonour of cheque has been made a criminal offence under Negotiable Instruments (Amendment) Act, 1988.

Chapter VII was inserted in the said act consisting of sections 138 to 142 which deals with offences.

Section 138 of the NI Act makes dishonour of cheque an offence in particular. The holder, in due course, may have recourse against the drawer
of the cheque, who is to be held liable for the offence.

Essential for an action under section 138

1. There should be dishonour of the cheque- section 138 makes dishonour of cheque, a punishable offence, only in certain cases. So for it to fall
under the same, requirements must be fulfilled.

2. Payment in the discharge of debtor liability – The cheque should have been drawn by any person on account with the banker for payment of
money to another person to discharge the debt in part or in whole.

3. Presentment of the cheque within the period of its validity – One important requirement is that the cheque should be presented before it
becomes stale and invalid. Cheque should be presented within a period of 6 months from the date of issuing.

4. Dishonour due to insufficient fund –

one requirement is that the cheque should be returned by the bank unpaid.

Dishonour mainly is because of 2 reasons-

1. Either the amount is insufficient

2. The signatures on the cheque do not match to the original ones.

LEGAL REMEDIES TO CHEQUE BOUNCE

A bounced cheque is one where the account holder does not have sufficient amount and hence the required transaction cannot be carried out.
A survey was conducted by Supreme Court which claims that over 40 lakh cases of cheque bounce are pending in our country. Lack of
knowledge is the basic reason that has brought the majority of people in this situation. There can be various legal remedies available to a
person. Listed below are some of them-

FILING A CRIMINAL COMPLAINT

Whenever a cheque bounces, the bank on first-hand issues a ‘cheque return memo’ which states the reasons for non- payment. The holder has
an option of resubmitting the cheque to the bank within three months of the date on it provided that he believes that it will be honoured the
second time.

An alternative to the same is to prosecute the defaulter legally. Section 138 of Negotiable Instruments Act provides penalties in case a cheque
gets dishonoured for insufficiency of funds. When the cash is withdrawn by the person, the cheque may bounce because of mainly two reasons:
1. Insufficiency of funds
2. The cheque amount exceeds the agreed amount to be paid to the person from that account.

In both the above-mentioned incidents, the person drawing the cheque is taken to be the committer of the offence and is therefore liable to be
punished through the act (138 of NIA) by imprisonment that can extend up to two years. Also, the person whose cheque gets dishonoured
becomes liable to pay the fine which can be up to twice the amount of cheque.

PROCEDURE IN BRIEF

A legal notice is to be sent to the defaulter within 30 days of receiving the cheque return memo. It should contain the following info:

1. Relevant facts and circumstances of the case,

2. The nature of the transaction,
3.Amount,
4.Date of depositing the instrument in the bank,
5. Subsequent date of dishonouring should be clearly mentioned in the notice.

Now, if the debtor fails to make a fresh payment within 30 days of receiving the notice, the payee has complete right to file a criminal
complaint under section 138 of Negotiable Instruments Act. The complaint should, however, be registered in a magistrate’s court within a
month of the expiry of the notice period.

If the bearer fails to file a complaint within this period, his suit will exceed the time limit, and hence, will not be entertained by the court unless
it is shown some sufficient and reasonable cause for the delay. After receiving the complaint, along with an affidavit and relevant paper trial,
the court will issue summons and hear start with the proceedings.
The defaulter can approach to appeal to the sessions court within one month from the date of judgment from the lower court. Also, if accepted
by both parties, there can be midway to this issue by having an attempt for out-of-court settlement at any point of time. A case can also be
filed under section 420 of IPC but the other way is always preferred as it is quick.

FILING A CIVIL SUIT

While the criminal process is helpful in taking a defaulter to the task, it may not always result in the discovery of the dues and hence an
alternative solution for the same can be to file a civil suit for recovery of the cheque amount along with the exact same amount and lost
interest.

EXCEPTIONS

All the legal remedies are available only where pending liability can be clearly established. Hence, if a cheque was issued for the purpose of
donation or gift, the holder cannot be held legally liable for the same.

CONCLUSION

The 2002 amendment and insertion of penal provisions have given relied on the drawee. This has also helped in curtailing the dishonest and
fraudulent intentions of the issuer. This can be termed as one remarkable step in the banking sector.

--Negotiable Instruments are written contracts whose benefit could be passed on from its original holder to a new holder. In other words,
negotiable instruments are documents which promise payment to the assignee (the person whom it is assigned to/given to) or a specified
person. These instruments are transferable signed documents which promises to pay the bearer/holder the sum of money when demanded or
at any time in the future.

As mentioned above, these instruments are transferable. The final holder takes the funds and can use them as per his requirements. That
means, once an instrument is transferred, holder of such instrument obtains a full legal title to such instrument.

Types of Negotiable Instruments

Promissory notes

A promissory note refers to a written promise to its holder by an entity or an individual to pay a certain sum of money by a pre-decided date. In
other words, Promissory notes show the amount which someone owes to you or you owe to someone together with the interest rate and also
the date of payment.

For example, A purchases from B INR 10,000 worth of goods. In case A is not able to pay for the purchases in cash, or doesn’t want to do so, he
could give B a promissory note. It is A’s promise to pay B either on a specified date or on demand.
In another possibility, A might have a promissory note which is issued by C. He could endorse this note and give it to B and clear of his dues this
way. However, the seller isn’t bound to accept the promissory note. The reputation of a buyer is of great importance to a seller in deciding
whether to accept the promissory note or not

Bill of exchange

Bills of exchange refer to a legally binding, written document which instructs a party to pay a predetermined sum of money to the
second(another) party. Some of the bills might state that money is due on a specified date in the future, or they might state that the payment is
due on demand.

A bill of exchange is used in transactions pertaining to goods as well as services. It is signed by a party who owes money (called the payer) and
given to a party entitled to receive money (called the payee or seller), and thus, this could be used for fulfilling the contract for payment.
However, a seller could also endorse a bill of exchange and give it to someone else, thus passing such payment to some other party.

It is to be noted that when the bill of exchange is issued by the financial institutions, it’s usually referred to as a bank draft. And if it is issued by
an individual, it is usually referred to as a trade draft.

A bill of exchange primarily acts as a promissory note in the international trade; the exporter or seller, in the transaction addresses a bill of
exchange to an importer or buyer. A third party, usually the banks, is a party to several bills of exchange acting as a guarantee for these
payments. It helps in reducing any risk which is part and parcel of any transaction.

Cheques

A cheque refers to an instrument in writing which contains an unconditional order, addressed to a banker and is signed by a person who has
deposited his money with the banker. This order, requires the banker to pay a certain sum of money on demand only to to the bearer of
cheque (person holding the cheque) or to any other person who is specifically to be paid as per instructions given.

Cheques could be a good way of paying different kinds of bills. Although the usage of cheques is declining over the years due to online banking.

Individuals still use cheques for paying for loans, college fees, car EMIs, etc.
Cheques are also a good way of keeping track of all the transactions on paper.
On the other side, cheques are comparatively a slow method of payment and might take some time to be processed.

The Negotiable Instruments (Amendment) Bill, 2017

The Negotiable Instruments (Amendment) Bill, 2017 has been introduced in the Lok Sabha earlier this year on Jan 2nd, 2018. The bill seeks for
amending the existing Act. The bill defines the promissory note, bill of exchange, and cheques. The bill also specifies the penalties for dishonor
of cheques and various other violations related to negotiable instruments.

As per a recent circular, up to INR 10,000 along with interest at the rate of 6%-9% would have to be paid by an individual for cheques being
dishonored. The Bill also inserts a provision for allowing the court to order for an interim compensation to people whose cheques have
bounced due to a dishonouring party (individuals/entities at fault). Such interim compensation won’t exceed 20 percent of the total cheque
value.
---Presentment of Negotiable Instrument

Presentment means showing an instrument to the drawee, acceptor or maker for acceptance, sight or payment.

Kinds of Presentment

Presentment of bills of exchange for acceptance.

Presentment of promissory notes for sight.

Presentment for payment.

Presentment for Acceptance

Certain instruments require acceptance. The drawee puts his signature signifying his assent and the bill is considered to be accepted.
Sometimes, the word ‘accepted‘ is also added (though not mandatory). The drawee accepting bill is now known Acceptor.

Essentials of valid acceptance

Signed: The instrument is validly accepted only when it is signed by the drawee or by a duly authorised agent. In case of a bill drawn in set, the-
acceptance should be put on one part only, otherwise he becomes liable to all the parts.

Delivery: The acceptance comes into effect when the accepted bill is delivered to the holder.

Acceptance: Acceptance must be appeared on the bill that is it not important that the acceptance not be on the face of the bill. The assent of
acceptance, written on the back of a bill, is also a sufficient acceptance in law.

Time: A bill, if no time is given therein for presentment be presented for acceptance within a reasonable time after it is drawn.

Place: The bill should be presented for acceptance at the placed mentioned therein. If no place is mentioned the bill should be presented at the
drawees place of business.

Bills in set: Where a bill is drawn in sets, the acceptance should be put on one part only.

Way of making: Acceptance may be absolute or conditional.

When presentation for acceptance is not necessary

The following type of Bills need not be presented for acceptance unless it is specifically mentioned:

Bill payable on demand

Bill payable after specified number of days

Bill payable on specified fixed date.

When a bill must be presented

In the following cases, the must be presented to make the party liable:

Bill payable at specified days after sight, or after presentment (Sec. 61)

Where there is an express stipulation for presentment for acceptance before it is presented for payment.

Even if the presentment is not mandatory, it is always desirable to get a bill accepted as soon as possible, because it provides:

additional security of the acceptor’s name on the bill

immediate right of recourse against the drawer and the other parties on dishonour.

Presentment for acceptance must be made at a reasonable hour on a business day and before the bill is overdue (Sec. 61).

4.3.4 Types of Acceptance

General Acceptance : Where the drawee accepts the bill without attaching any qualification or condition, it is called as general acceptance.

Qualified Acceptance : If the drawee writes some conditions while giving his acceptance, it is called qualified acceptance

An acceptance is qualified in the following cases :

Conditional : If drawee puts a condition that payment depends on the happening of an event (e.g when a cargo consigned is sold).

Partial : If the drawee accepts the bill only for the part of the sum stated in the bill (bill drawn for Rs.5000 accepted for Rs.2000 only).

Qualified as to place : If the drawee places a condition that the bill will be paid at a specified place (eg.’Payable at Bank of Baroda, Calcutta).

Qualified as to time : A condition to pay at a time other than that specified in the Bill (e.g. A bill drawn payable three months after date but
accepted as payable after six months from date).

Joint Drawees: Where the bill is not accepted by all the named drawees (e.g. Bill drawn on E, F and G but accepted by E only).

Presentment for acceptance to whom : Presentment for acceptance may be made to :

the drawee

all or some of several drawees

drawee in case of need (s. 33)

all the drawees, if there are several drawees, unless they are partners or agents (s. 34)

the duly authorised agent of the drawee

legal representative if the drawee has died

Official Receiver or Assignee, if the drawee is declared insolvent (s. 75).

Presentment to multiple Drawees : When a Bill is drawn on several drawess, the following rules apply:

Where Drawees are Partners: If a bill is addressed to several partners of a trading firm, it may be accepted by in the name of the firm for its
usual business, by any partner having an implied authority to accept the bill.

Where drawees are not Partners : Where there are several drawees of a bill who are not partners, each of them can accept it for himself but
none of them can accept it for another without his authority (s. 34).

Place and Time for Presentment for acceptance

Time of Presentment:

If the presentment of acceptance time is specified, It must be presented accordingly

If the bill is payable after sight, it must be presented within a reasonable time after it is drawn

In other cases, it may be presented at any time before payment.

It must be presented before maturity.

The bill should be presented on a business day and within business hour.
The holder must allow the drawee forty-eight hours (exclusive of public holidays) to decide for acceptance of the bill (s. 63).

Place of Presentment:

The bill should be presented at the place specified

If no place for presentment is specified, the bill should be presented at the drawee’s place of business or residence.

Effect of non-presentment

Ifan Instrument is not presented where the presentment is obligatory, the drawer and all the indorsers are discharged from liability to him.

When presentment for acceptance is excused

Presentment for acceptance is excused :

When the drawee cannot, after reasonable search, be found, the bill is dishonoured (s. 61).

Where the drawee is dead or insolvent (but must be presented to legal representative or assignee)

When the drawee is a fictitious person

Where, though presentment has been irregular, acceptance has been refused on some other ground.

For a dishonoured bill, presentment for acceptance is excused.

When presentment for acceptance is excused, the bill is treated as dishonoured.

Acceptor for honour

A person who accepts the bill for honour of any person is called ‘acceptor for honour’ (s. 7, para 4).

A person desiring to accept for honour must (by writing on the bill under his hand), declare that he accepts under protest the protested bill for
the honour of the drawer or of a particular indorser whom he names, or generally for honour (s. 109).

Conditions for valid acceptance for honour

The bill must have been noted or protested for non-acceptance or for better security.

The acceptance for honour must be made with the consent of the holder.

It must clearly be stated on the Bill that it is an acceptance for the honour of party who is already liable on the bill.

It must be signed by the acceptor for honour who must not already be liable on the bill (s.108).

Where the acceptance does not state the Party for whose honour it is made, it is deemed to be made for the honour of the drawer (s. 110).

Rights and Obligations of an acceptor for honour (s. 111 and 112)

The rights and obligations of an acceptor are as follows:

Rights of Acceptor for Honour (s.111)

On paying the bill, the acceptor for honour can sue the party for whose honour the bill is accepted. Such party and all prior parties are liable to
compensate the acceptor for honour for any loss or damage caused to him

Obligations of Acceptor for Honour (s.112)

An acceptor for honour binds himself to pay the amount of the bill if the drawee does not pay the bill at maturity. Thus the liability of ‘accept of
honour ‘is conditional.
An acceptor for honour is liable only to the parties subsequent to the party for whose honour he accepts.

An acceptor for honour is liable if :

On maturity, the bill is presented to the drawee for payment.

The bill is dishonoured by non-payment and noted or protested for such dishonour.

The bill is presented to the ‘acceptor for honour’ for payment of the bill by the next working day of maturity.

Presentment for sight

Presentment for sight is applicable to Promissory Note as Acceptance is not applicable. The maker himself is primarily liable for the note.

A note payable at certain period after sight must be presented to the maker to determine the maturity date.

In case of a note which is not payable at a certain period after sight, is not needed to be presented.

Presentment should be made during business hours on a business day and in default of such presentment, no party thereto is liable thereon to
the person making such default (s. 62).

Presentment for Payment

Presentment for payment means placing the negotiable instrument for payment to the person liable to pay and delivery of the instrument
when it is paid.

Presentment through post by registered letter is valid if authorised by agreement or usage (Sec. 64).

Where a promissory note is payable on demand and is not payable at a specified place, no presentment is necessary.

If an electronic image of a truncated cheque is presented for payment, the drawere bank is entitled to demand the truncated cheque itself or
any further information in case of suspicion. [Ghania Lal vs. Karam Chand], [Srinivasa Gownder vs Kannu Gownder]

Presentment for payment not necessary (s. 76)

Presentment for payment is not necessary when :

The maker, drawee, or acceptor intentionally prevents presentment of the instrument.

The place at which the instrument is payable is closed on the due date during the usual business hours.

The instrument is payable at a specified place, and neither he nor any person authorised to pay it, is present at the specified place during the
usual business hours.

The instrument is not payable at a specified place, and the payer cannot after due search be found.

There is a pomise to pay notwithstanding non-presentment.

Presentment for payment is waived.

The bill is dishonoured by non-acceptance.

The drawer is a fictitious person (or the drawer and the drawee are same).

Presentment becomes impossible.

In all these cases, the instrument is deemed to be dishonoured on the due date of presentment for payment.

Rules regarding Presentment for payment

Hours for presentment: The presentment must be made during the usual hours of business, or during banking hours in case of a cheque (s. 65).

Payable after date or sight: A note or bill payable at a specified period after date or sight, must be presented for payment at maturity (s. 66).

Payable by instalments: A note payable by instalments must be presented on third day after the date fixed for payment of each instalment. In
case of default, it has the same effect as non-payment of a note at maturity (s. 67)

Place of presentment:

Where the place is specified it must be presented accordingly (Sees. 68 and 69) or otherwise at the usual residence, as case may be.

if no place is specified, it should be presented at the place of business (if any), or at the usual residence of the maker, drawee or acceptor, as
the case may be (s. 70).

in any other case (i.e., where no place of business or any fixed residence is there) the Instrument may be presented to him wherever he can be
found.( s. 71).

Reasonable time: The instrument must be presented within reasonable time in the usual course of dealing with similar instrument. Public
holidays shall be excluded (s. 105)

Presentment of cheque: A cheque must be presented at the bank where upon it is drawn before any alteration in the relation between the
drawer and his banker (s. 72). To charge any other than drawer, the cheque must be presented within a reasonable time after its delivery by
such person (s. 73).

Demand Instrument: An Instrument payable on demand must be presented for payment within a reasonable time after it is received by the
holder (s. 74).

Presentment to agent: Presentment may be made to the duly authorised agent, representative, or to a assignee as the case may be.( s. 75)

Delay in presentment: It is excused if the delay is caused by circumstances beyond the control of the holder. But when the cause of delay
ceases to operate, presentment must be made within a reasonable time (s. 75-A).

Banker’s Responsibility: Incase of dishonour of the bill presented for payment,the bank must take proper care of it and return it to the holder. If
he is negligent, he shall have to compensate the holder for such loss (s. 77).

Payment for honour

If a person pays a bill for the honour of any party liable on the bill is called the ‘payment of honour’.

The Bill due for payment should be noted and protested after being dishonoured for non-payment (or where drawee has failed to provide
better security). It may be paid by any other person for the Honour of the party liable to pay the Bill. (s. 113)

The payer for honour acquires the rights of the holder for recovery of any sum paid by him along with interest and all expenses incurred in
relation to the honour. (s.114)

Rules for Delivery of Instrument

Any person liable to pay the amount due on an instrument, is entitled to have it delivered (in case of loss, be indemnified) before payment.

In case of electronic image of truncated cheque, the banker receiving payment is entitled to retain the truncated cheque.

Certificate issued on foot of the printout of image of a truncated cheque is proof of payment.

Examples

Presentment of Bills

Ex.4.1 A bill was accepted payable at Syndicate Bank. It fell due for payment on October 15 2000 but it was not presented there till October 16
2004. Held, the defendant indorser was discharged from liability. [(s. 66)]
----Discharge of a Negotiable Instruments

When the liability of the party, primarily and ultimately liable on the instrument, comes to an end, the instrument is said to be discharged. The
discharge of the instrument results in extinguishment of all rights of action under it and the instrument ceases to be negotiable. After discharge
of a negotiable instrument, even a holder-in-due-course acquires no right under it and he cannot bring a suit on the face of it.

Ways in which Negotiable Instruments are discharged?

A negotiable instrument may be discharged in any one of the following ways.

By payment in due course

By the principal debtor becoming the holder

By renunciation of the rights by the holder

By cancellation of the instrument

By an act that would discharge an ordinary contract

1. By payment in due course

Payment-in-due-course, is the payment made in good faith and in accordance with the apparent tenor of the instrument to the rightful holder
thereof. Accordingly, it is the payment made in money only on maturity of the instrument and of the entire amount due on it and the person to
whom it is made should be in possession of the instrument. It may be noted that a payment of a post-dated cheque before maturity is not
according to the apparent tenor of the instrument and hence, does not discharge the instrument unless the instrument is cancelled or the fact
of payment is duly recorded on the instrument to prevent its further negotiation.

The person making the payment is entitled to have the instrument delivered back to him upon payment or if the instrument is lost or cannot be
produced, to be indemnified against any further claim thereon against him. Moreover, in order to discharge a negotiable instrument by
payment-in-due-course, the payment should be made by the party who is primarily liable on the instrument. So if a party, who is not primarily
liable, makes payment, the instrument is not discharged. The payment-in-due-course discharges not only the negotiable instrument in question
but also the parties who are primarily and ultimately liable on the instrument as well.

2. By the principal debtor becoming the holder

When the acceptor of a bill of exchange becomes its holder on or after maturity thereof, all rights of actions thereon are extinguished. As a
result, the instrument is discharged. An acceptor may become the holder of a bill by the process of negotiation back. But in order to discharge
the bill it is essential that this happens after maturity because if he becomes holder of the bill before maturity, he may again endorse the same.
Thus, a negotiable instrument is discharged if the acceptor has become the holder of the instrument at or after maturity in his own rights, i.e.,
not in any other capacity such as agent, executor, trustee, etc. For instance, A accepts a bill drawn on him by B. B later on transfers the
instrument to C, and C endorses it to D, who endorses it to A. The instrument-in-question stands discharged by acceptor (A) becoming holder of
it. This rule is based on the principle that a present right and liability united in the same person cancel each other.

3. By renunciation of the rights by the holder

If the holder of a negotiable instrument expressly gives up or renounces his rights against all the parties, the instrument is discharged. The
renunciation can be made by surrendering or delivering the instrument to the party who is primarily liable thereon or declaring in writing the
fact of renunciation. Such renunciation discharges the instrument as well as all the parties thereto.

4. By cancellation of the instrument

If the holder intentionally cancels the name of the drawer or acceptor of a promissory note or bill of exchange, the instrument is automatically
discharged. It is important to note that the cancellation should be made with an intention to release the party primarily liable on it, which in
turn would discharge the other parties thereto. Cancellation of the instrument can be executed either by physical destruction or by crossing out
signatures of drawer, acceptor, etc., on the instrument.

5. By an act that would discharge an ordinary contract

A negotiable instrument may also be discharged by an act that would discharge a simple contract for payment of money. This is technically
called discharge of negotiable instrument by operation of law. Such a discharge may occur due to expiry of period prescribed for recovery of
sum of money due on the instrument, or by substitution of another negotiable instrument for the original instrument or by an agreement
between the parties in the form of novation. It may also take place by way of merger of one or more debt into another or by the debtor being
adjudicated insolvent.

---What is Endorsement -

Endorsement means signing at the back of the instrument for the purpose of negotiation. The act of the signing a cheque, for the purpose
of transferring to the someone else, is called the endorsement of Cheque. Section 15 of the Negotiable Instrument Act 1881 defines
endorsement. The endorsement is usually made on the back of the cheque. If no space is left on the Cheque, the Endorsement may be made on
a separate slip to be attached to the Cheque. There are six Kinds of Endorsement i) Endorsement in Blank / General ii) Endorsement in Full /
Special iii) Conditional Endorsement iv) Restrictive Endorsement v) Endorsement Sans Recourse vi) Facultative Endorsement.

Definition of Endorsement -

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

Kinds of Endorsement -

Endorsement is essentially is of two kinds - Endorsement in Blank and Endorsement in full. According to Section 16 of the Negotiable
Instrument Act, 1881, If the endorser signs his name only, the endorsement is said to be “in blank”, and if he adds a direction to pay the
amount mentioned in the instrument to, or to the order of, a specified person, the endorsement is said to be “in full”, and the person so
specified is called the “endorsee” of the instrument. There are some other kinds which are constitutional but not very popular which are given
below

(a) Endorsement in Blank / General -

An endorsement is said to be blank or general when the endorser puts his signature only on the instrument and does not write the name
of anyone to whom or to whose order the payment is to be made.

(b) Endorsement in Full / Special -

An endorsement is 'special' or in 'full' if the endorser, in addition to his signature also mention the name of the person to whom or to
whose order the payment is to be made. There is direction added by endorse to the person specified called the endorsee, of the instrument
who now becomes its payee entitled to sue for the money due on the instrument.

(c) Conditional Endorsement -

The conditional endorsement is negotiation which takes effect on the happening of a stated event, or not otherwise. Section 52 of the
Negotiable Instrument Act 1881 provides - The endorser of a negotiable instrument may, by express words in the endorsement, exclude his
own liability thereon, or make such liability or the right of the endorsee to receive the amount due thereon depend upon the happening of a
specified event, although such event may never happen.

Where an endorser so excludes his liability and afterwards becomes the holder of the instrument all intermediates endorsers are liable to
him.

Illustrations -

(a) The endorser of a negotiable instrument signs his name, adding the words “without recourse”. Upon this endorsement, he incurs no liability.

(b) A is the payee and holder of a negotiable instrument. Excluding personal liability by an endorsement, “without recourse”, he transfers the
instrument to B, and B endorses it to C, who endorses it to A. A is not only reinstated in his former rights but has the rights of an endorsee
against B and C.

(d) Restrictive Endorsement -

Restrictive endorsement seeks to put an end the principal characteristics of a Negotiable Instrument and seals its further negotiability. This
may sound a little unusual, but the endorsee is very much within his rights if he so signs that its subsequent transfer is restricted.
This prevents the risk of unauthorized person obtaining payment through fraud or forgery and the drawer losing his money.

(e) Endorsement Sans Recourse -

Sans Recourse which means without recourse or reference.As such a when the property in a negotiable instrument is transferred sans
recourse, the endorser, negatives his liability and excludes himself from responsibility to all subsequent endorsees. It is one of the commonest
form of qualified endorsement and virtually prohibits negotiation since the endorser says in effect.

(f) Facultative Endorsement -

Faculatative Endorsement is an endorsement where the endorser waives some right to which he is entitled. For example, the endorsee is
liable to give notice of dishonor to the endorser and normally failure to give notice will absolve the endorser from his liability.

Endorsement of Instrument:

Section 15 of the Negotiable Instrument Act, 1881 deals with the concept of Endorsement.

Meaning of Endorsement of Instrument:

The word Endorsement means, signatures of the person which are generally made at the back of the instrument, for the purpose of negotiation
i.e. transfer of rights to another person. The signature may also be on the face of the instrument. No particular form of words is necessary for
an Endorsement.

The maker or holder of a negotiable instrument is said to endorse the same and called as the Endorser.

The person to whom the instrument is endorsed is called the Endorsee.

It is a legal term that refers to the signing of a document which allows for a legal transfer of a negotiable from one person to another.

When the maker or holder of a negotiable instrument signs the same :

1.for the purpose of negotiation

2.on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be
completed as a negotiable instrument

3.he i.e. the maker or holder is said to endorse the same, and is called the “Endorser”.

Essential of Valid Endorsement:

1.Endorsement is on the back or face of the instrument.

2.It must be made by the maker or holder.

3.It must be properly signed by the endorser.

4.It must be for the entire Negotiable Instrument.

5.There is no specific form of words are necessary for Endorsement.

Effects of Endorsement:

1.The property in instrument is transferred from endorser to Endorsee.

2.The Endorsee gets right to negotiate the instrument further.

3.The Endorsee gets the right to sue in his own name to all other parties.

UNIT-4

BRIEF HISTORY OF RBI

The Reserve Bank, as the central bank of the country, started its operations as a private shareholder’s bank. RBI replaced the Imperial Bank of
India and started issuing the currency notes and acting as the banker to the government. Imperial Bank of India was allowed to act as the agent
of the RBI. RBI covered all over undivided India. To have close integration between policies of the Reserve Bank and those of the Government, it
was decided to nationalize the Reserve Bank immediately after the independence of the country. From 1st January 1949, the Reserve Bank
began functioning as a State-owned and State-controlled Central Bank. To streamline the functioning of commercial banks, the Government of
India enacted the Banking Companies Act,1949 which was later changed as the Banking Regulation Act 1949. RBI acts as a regulator of banks,
banker to the Government, and banker’s banks. It controls the financial system in the country through various measures.

STRUCTURE OF THE RBI

The Reserve Bank of India is a central bank and was established on 1st April 1935 by the provisions of the Reserve Bank of India Act 1934. RBI
works as a central bank where commercial banks are account holders. The central office of RBI is located in Mumbai since its inception. It was
inaugurated with a share capital of Rs. 5 Crores divided into shares of Rs. 100 each fully paid up. RBI was Nationalised on 1st January 1949
based on the Reserve Bank of India (Transfer to Public Ownership) Act, 1948. RBI is fully owned by the Government of India. The Reserve Bank
of India has 20 regional offices, most of them in state capitals and 11 Sub-offices.

RBI is governed by a central board (headed by a governor) appointed by the central government of India. The general superintendence and
direction of the bank are entrusted to the central board consisting of:

One Governor;

Not more than four Deputy Governors;

Two Governmental officials from the Ministry of Finance;

Ten nominated directors from various fields by the government to give representation to important elements in the economic life of the
country, and
The four-nominated director by the Central Government to represent the four local boards with the headquarters at Mumbai, Kolkata, Chennai,
and New Delhi.

The local Board consists of five members each central government-appointed for a term of four years to represent territorial and economic
interests and the interests of cooperative and indigenous banks.

OBJECTIVES OF RBI

The main objectives of RBI may be stated as follows in specific terms:

To maintain monetary stability such that the business and economic life of the country can deliver the welfare gains of a mixed economy;

To maintain the financial stability and ensure sound financial institutions so that economic units can conduct their business with confidence;

To maintain stable payment systems, so that financial transactions can be safely and efficiently executed;

To ensure that credit allocation by the financial system broadly reflects the national economic priorities and social concerns;

To regulate the overall volume of money and credit in the economy to ensure a reasonable degree of price stability;

To promote the development of financial markets and systems to enable itself to operate/regulate efficiently.

ROLE OF RESERVE BANK OF INDIA

Chapter III of the RBI Act, 1934 describes the role and functions of RBI. These functions are as under:

Monetary policy

Issuer of currency

Transact government business

Banker to banks

Regulator and supervisor of the financial system

Manager of Foreign Exchange

Supervisory Functions

Developmental role

Other Control and Supervisory Roles

1. MONETARY POLICY:

Monitory policy refers to the use of instruments under the control of the Central Bank to regulate the availability, cost, and use of money to
maintain price stability, inflation, and credit. The Central Government may, by notification in the Official Gazette, constitute a Committee to be
called the Monetary Policy Committee of the Bank. The Monetary Policy Committee shall determine the Policy Rate required to achieve the
inflation target. The Central Government shall, in consultation with the Bank, determine the inflation target in terms of the Consumer Price
Index, once every five years. The Central Government shall, upon such determination, notify the inflation target in the Official Gazette.

The primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth; The decision of the
Monetary Policy Committee shall be binding on the Bank. RBI uses several direct and indirect instruments in the formulation and
implementation of monetary policy.

DIRECT INSTRUMENTS

A) CASH RESERVE RATIO (CRR):

Cash Reserve Ratio is a certain percentage of bank deposits that banks are required to keep with RBI in the form of reserves or balances. Higher
the CRR with the RBI lower will be the liquidity in the system and vice versa. RBI is empowered to vary CRR between 15 percent and 3 percent.

MAINTENANCE OF CRR DAILY:

To provide flexibility to banks in choosing an optimum strategy of holding reserves depending upon their intra fortnight cash flows, all SCBs are
required to maintain minimum CRR balances up to 95 percent of the average daily required reserves for a reporting fortnight on all days of the
fortnight with effect from the fortnight beginning September 21, 2013.

All SCBs are required to submit to Reserve Bank a provisional Return in Form ‘A’ within 7 days from the expiry of the relevant fortnight which is
used for preparing press communique. The final Form ‘A’ Return is required to be submitted to RBI within 20 days from expiry of the relevant
fortnight.

The Reserve Bank does not pay any interest on the CRR balances maintained by SCBs with effect from the fortnight beginning March 31, 2007.

PENALTIES:

From the fortnight beginning June 24, 2006, penal interest is charged as under in cases of default in maintenance of CRR by SCBs:

In case of default in maintenance of CRR requirement daily which is currently 95 percent of the total CRR requirement, penal interest will be
recovered for that day at the rate of three percent per annum above the Bank Rate on the amount by which the amount maintained falls short
of the prescribed minimum on that day and if the shortfall continues on the next succeeding day/s, penal interest will be recovered at the rate
of five percent per annum above the Bank Rate.

In cases of default in maintenance of CRR on an average basis during a fortnight, penal interest will be recovered as envisaged in sub-section (3)
of Section 42 of Reserve Bank of India Act, 1934.

SCBs are required to furnish the such as date, amount, percentage, the reason for default in maintenance of requisite CRR, and action taken to
avoid recurrence of such default.

B) STATUTORY LIQUIDITY RATIO (SLR):

All commercial banks in the country have to maintain a stipulated proportion of their net demand and time liabilities in the form of liquid assets
like cash, gold, and unencumbered securities. Treasury bills, dated securities issued under market borrowing program and market stabilization
schemes (MSS), etc also form part of the SLR. Banks have to report to the RBI every alternate Friday their SLR maintenance and pay penalties
for failing to maintain SLR as mandated. The value of such assets of an SCB shall not be less than such percentage not exceeding 40 percent of
its total DTL in India as on the last Friday of the second preceding fortnight as the Reserve Bank may, by notification in the Official Gazette,
specify from time to time.

PENALTIES:

If a banking company fails to maintain the required amount of SLR, it shall be liable to pay to RBI in respect of that default, the penal interest for
that day at the rate of three percent per annum above the Bank Rate on the shortfall and if the default continues the next succeeding working
day, the penal interest may be increased to a rate of five percent per annum above the Bank Rate for the concerned days of default on the
shortfall.

INDIRECT INSTRUMENTS

Liquidity Adjustment Facility:

A liquidity adjustment facility (LAF) is a tool used in monetary policy that allows banks to borrow money through repurchase agreements. This
arrangement allows banks to respond to liquidity pressures and is used by governments to assure basic stability in the financial markets. LAF is
used to aid banks in adjusting the day-to-day mismatches in liquidity. LAF helps banks to quickly borrow money in case of any emergency or for
adjusting their SLR/CRR requirements. LAF consists of repo and reverses repo operations.

Repo Rate and Reverse Repo Rate:

Repo or repurchase option is collateralised lending i.e. banks borrow money from the Reserve bank of India to meet short-term needs by selling
securities to RBI with an agreement to repurchase the same at a predetermined rate and date. The rate charged by RBI for this transaction is
called the repo rate. Repo operations, therefore, inject liquidity into the system. Reverse repo operation is when RBI borrows money from
banks by lending securities. The interest rate paid by RBI in this case is called the reverse repo rate.

Open Market Operations (OMO):

Open market operations refer to the buying and selling of government securities in the open market to expand or contract the amount of
money in the banking system. Securities’ purchases inject money into the banking system and stimulate growth, while sales of securities do the
opposite and contract the economy.

Marginal Standing Facility (MSF):

RBI announced that the MSF scheme has become effective from 9th May 2011. Marginal Standing Facility is a liquidity support arrangement
provided by RBI to commercial banks if the latter doesn’t have the required eligible securities above the SLR limit. Under MSF, a bank can
borrow one-day loans from the RBI, even if it doesn’t have any eligible securities excess of its SLR requirement (maintains only the SLR). This
means that the bank can’t borrow under the repo facility. MSF, being a penal rate, is always fixed above the repo rate. The MSF would be the
last resort for banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging government securities,
where the rates are lower in comparison with the MSF.

Bank Rate:

A bank rate is the interest rate at which a nation’s central bank lends money to domestic banks, often in the form of very short-term loans.
Managing the bank rate is a method by which central banks affect economic activity.

2. ISSUER OF CURRENCY:

RBI shall have the sole right to issue banknotes in India. Banknotes shall be of the denominational values of 2, 5, 10, 20, 50, 100, 500, 1000,
5000, and 10000 rupees or such other denominational values, not exceeding ten thousand rupees, as the Central Government may, on the
recommendation of the Central Board, specify in this behalf. Every banknote shall be legal tender at any place in India in payment or on account
for the amount expressed therein and shall be guaranteed by the Central Government.

3. TRANSACT GOVERNMENT BUSINESS:

The Reserve Bank shall undertake to accept monies for the account of the Central Government and to make payments up to the amount
standing to the credit of its account, and to carry out its exchange, remittance, and other banking operations, including the management of the
public debt of the Union.

4. BANKER TO BANKS:

An important role and function of RBI are to maintain the banking accounts of all scheduled banks and act as the banker of last resort. RBI
works as a central bank where commercial banks are account holders. The RBI must control the credit through the CRR, bank rate, and open
market operations.

5. REGULATOR AND SUPERVISOR OF THE FINANCIAL SYSTEM:

RBI prescribes broad parameters of banking operations within which the country’s banking and financial system functions. Their main objective
is to maintain public confidence in the system, protect depositors’ interests and provide cost-effective banking services to the public.

6. MANAGER OF FOREIGN EXCHANGE:

The manager of the exchange control department manages the foreign exchange, according to the foreign exchange management act, 1999.
The manager’s main objective is to facilitate external trade and payment and promote orderly development and maintenance of the foreign
exchange market in India. The RBI plays a crucial role in foreign exchange transactions. It does due diligence on every foreign transaction,
including the inflow and outflow of foreign exchange. It takes steps to stop the fall in the value of the Indian Rupee. The RBI also takes the
necessary steps to control the current account deficit. They also give support to promote export and the RBI provides a variety of options for
NRIs.

7. SUPERVISORY FUNCTIONS:
In addition to its traditional central banking functions, the Reserve Bank performs certain non-monetary functions of the nature of supervision
of banks and promotion of sound banking in India. The Reserve Bank Act 1934 and the banking regulation act 1949 have given the RBI wide
powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion,
liquidity of their assets, management, and methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorized to carry
out periodical inspections of the banks and to call for returns and necessary information from them. The nationalization of 14 major Indian
scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more
rapid development of the economy and retaliation of certain desired social objectives.

8. DEVELOPMENTAL ROLE:

Being the banker of the Government of India, the RBI is responsible for the implementation of the government’s policies related to agriculture
and rural development. The RBI also ensures the flow of credit to other priority sectors as well. Section 54 of the RBI gives stress on giving
specialized support for rural development. Priority sector lending is also in the key focus area of the RBI.

9. OTHER CONTROL AND SUPERVISORY ROLES:

The other control and supervisory roles of the Reserve Bank of India are done through the following:

ISSUE OF LICENCE:

Under the Banking Regulation Act 1949, the RBI has been given powers to grant licenses to commence new banking operations. The RBI also
grants licenses to open new branches for existing banks. Under the licensing policy, the RBI provides banking services in areas that do not have
this facility.

DIRECTED CREDIT FOR LENDING TO PRIORITY SECTOR AND WEAKER SECTIONS:

RBI issues guidelines for lending to Priority Sector and Weaker Sections advances. Banks have to follow the guidelines and have to achieve
Priority Sector and Weaker Sections advance targets.

PRUDENTIAL NORMS:

The RBI issues guidelines for credit control and management. The RBI is a member of the Banking Committee on Banking Supervision (BCBS). As
such, they are responsible for the implementation of international standards of capital adequacy norms and asset classification.

CORPORATE GOVERNANCE:

The RBI has the power to control the appointment of the chairman and directors of banks in India. The RBI has powers to appoint additional
directors in banks as well.

KYC NORMS:

To curb money laundering and prevent the use of the banking system for financial crimes, The RBI has “Know Your Customer” guidelines. Every
bank has to ensure KYC norms are applied before allowing someone to open an account and monitor transactions in the accounts.

TRANSPARENCY NORMS:

This means that every bank has to disclose their charges for providing services and customers have the right to know these charges.

RISK MANAGEMENT:

The RBI provides guidelines to banks for taking the steps that are necessary to mitigate risk. They do this through risk management in Basel
Norms.

AUDIT AND INSPECTION:

The procedure of audit and inspection is controlled by the RBI through the off-site and on-site monitoring systems. An on-site inspection is done
by the RBI based on “CAMELS”. Capital adequacy; Asset quality; Management; Earning; Liquidity; System and control.

PUBLISH PERIODICALS:
Apart from the above, the RBI publishes periodical reviews and data related to banking. The RBI plays a very important role in every aspect
related to banking and finance.

REGULATORY RESTRICTIONS ON LENDING

RBI provides a framework of the rules and regulations issued to Scheduled Commercial Banks on statutory and other restrictions on loans and
advances. Banks should implement these instructions and adopt adequate safeguards to ensure that the banking activities undertaken by them
are run on sound, prudent and profitable lines.

LOANS AGAINST OWN SHARES:

A bank cannot grant any loans and advances on the security of its shares.

LOANS TO THE DIRECTORS:

BR Act also lays down the restrictions on loans and advances to the directors and the firms in which they hold a substantial interest.

RESTRICTIONS ON HOLDING SHARES IN COMPANIES:

While granting loans and advances against shares, statutory provisions contained in Sections 19(2) and 19(3) of the Banking Regulation Act,
1949 should be strictly observed.

RESTRICTIONS ON CREDIT TO COMPANIES FOR BUY-BACK OF THEIR SECURITIES:

In terms of provisions of the Companies Act, 2013, companies are permitted to purchase their shares or other specified securities out of their
free reserves, or securities premium account, or the proceeds of any shares or other specified securities, subject to compliance with various
conditions specified therein. Therefore, banks should not provide loans to companies for buy-back of shares/securities.

LENDING TO DIRECTORS AND THEIR RELATIVES ON A RECIPROCAL BASIS:

There have been instances where certain banks have developed an informal understanding or mutual/reciprocal arrangement among
themselves for extending credit facilities to each other’s directors, their relatives, etc.

RESTRICTIONS ON GRANT OF LOANS & ADVANCES TO OFFICERS AND RELATIVES OF SENIOR OFFICERS OF BANKS:

The statutory regulations and/or the rules and conditions of service applicable to officers or employees of public sector banks indicate, to a
certain extent, the precautions to be observed while sanctioning credit facilities to such officers and employees and their relatives.

ADVANCES AGAINST FDRS OR OTHER TERM DEPOSITS OF OTHER BANKS.

The banks should desist from sanctioning advances against FDRs or other term deposits of other banks.

LOANS AGAINST CERTIFICATE OF DEPOSITS (CDS):

Banks may lend against CDs and buy back their CDs, until further notice, only in respect of CDs held by mutual funds, subject to the provisions
of paragraph 44(2) of the SEBI (Mutual Funds) Regulations, 1996.

advance for subscription to Indian Depository Receipts (IDRs).

No bank should grant any loan/advance for subscription to Indian Depository Receipts (IDRs).

No additional facilities to wilful defaulters.No additional facilities should be granted by any bank/FI to the listed wilful defaulters.

CONTROL OVER MANAGEMENT

POWER OF RESERVE BANK TO REMOVE MANAGERIAL AND OTHER PERSONS FROM OFFICE (SECTION 36AA):

Where the Reserve Bank is satisfied that it is necessary so to do, the Reserve Bank may, for reasons to be recorded in writing, by order, remove
from office, with effect from such date as may be specified in the order, any Chairman, Director, Chief Executive Officer (by whatever name
called) or other officer or employee of the banking company. Such person, within 30 days from the date of communication to him of the order,
prefers an appeal to the Central Government. The decision of the Central Government on such appeal, and subject thereto, the order made by
the Reserve Bank, shall be final and shall not be called into question in any court. Where an order has been made for removal, the Reserve Bank
may, by order in writing, appoint a suitable person in place of the Chairman or Director or Chief Executive Officer or other officer or employee
who has been removed from his office, with effect from such date as may be specified in the order.

Any person appointed as Chairman, Director or Chief Executive Officer or other officer or employee under this section, shall hold office during
the pleasure of the Reserve Bank and subject thereto for a period not exceeding 3 years or such further periods not exceeding three years at a
time as the Reserve Bank may specify;

POWER OF RESERVE BANK TO APPOINT ADDITIONAL DIRECTORS (SECTION 36AB):

If the Reserve Bank is of opinion that in the interest of banking policy or the public interest or the interests of the banking company or its
depositors it is necessary so to do, it may, from time to time by order in writing, appoint, with effect from such date as may be specified in the
order, one or more persons to hold office as additional directors of the banking company.

Any person appointed as additional Director in pursuance of this section shall hold office during the pleasure of the Reserve Bank and subject
thereto for a period not exceeding 3 years or such further periods not exceeding 3 years at a time as the Reserve Bank may specify and shall not
be required to hold qualification-shares in the banking company.

----What is the Central Bank?

The Central Bank is the autonomous entity that is responsible for managing, regulating, and issuing the legal currency of a given nation,
controlling interest rates, exchange rates, and the country's monetary system.

The main objective of the Central Bank is to ensure the balance of the value of the currency by regulating financial policy, in order to avoid
possible inflation in the country.

In addition, it can also provide banking services to commercial banks and even the government, such as money loans; however, it does not offer
its activities to individual citizens or entities.

Characteristics of the Central Bank

The main characteristics of the Central Bank are the following:

Performs bank functions to commercial banks.

Its decisions do not depend directly on the government but are made by its leaders.

It is the entity in charge of regulating monetary policy(interest, amount of money in circulation).

Regulates the stability of the financial system.

It administers the legal currency of a nation.

It exercises the functions of a bank to the State.

Manages the reserves of a country, such as special drawing rights (international currency whose purpose is to save debts acquired with the
international fund or between the same central banks), gold, or convertible currencies.

Central bank functions

The main functions of the Central Bank are the following:

Manage the monetary policy of the country.

Issue legal tender.

Protect and manage the nation's reserves.

Provide banking services to commercial banks and even the government.

Guarantee the proper functioning of the financial system.

ADVICE TO GOVERNMENT- It keeps the banking accounts and balances of the government after making disbursements and remittances. As an
adviser to the government it advises the government on all monetary and economic matters. The central bank also acts as an agent to the
government where general exchange control is in force.

Central Bank Instruments

The Central Bank uses monetary policy as a tool to improve the regulation of wealth and balance inflation rates, through the following
instruments:

Interest rates: minimum price imposed on loans and financial entities through OMA (Open Market Operations). These are used to intervene in
the amount of money circulating in the economy.

Exchange rate: the relationship between the price of one country's currency and another. It is determined by the supply and demand of each of
these in the foreign exchange market.

Money supply: corresponds to the money that is circulating in the hands of the public, as well as bank deposits deposited in financial
institutions. That is, the money supply is the amount of money circulating in the economy.

Legal reserve: it is the percentage of money in the form of a deposit destined to the obligatory reserve by the Central Bank.

Examples of Central Bank

The following are some examples of central banks:

Federal Reserve System. (United States).

Bank of the Republic. (Colombia).

European Central Bank. (ECB).

Reserve Bank of India. (RBI).

Central Bank of the Argentine Republic.

Central Bank of Chile.

Central Bank of Brazil.

Central Reserve Bank of Peru.

----What is meant by Monetary Policy?

Monetary policy refers to the policy of the central bank – ie Reserve Bank of India – in matters of interest rates, money supply and availability of
credit.

It is through the monetary policy, RBI controls inflation in the country.

RBI uses various monetary instruments like REPO rate, Reverse RERO rate, SLR, CRR etc to achieve its purpose. (This is explained well in one of
our earlier articles – basics of economy concepts).

In short, Monetary policy refers to the use of monetary instruments under the control of the central bank to regulate magnitudes such as
interest rates, money supply and availability of credit with a view to achieving the ultimate objective of economic policy.

Expansionary and Contractionary Monetary Policy

We have already seen that monetary policy refers to the actions undertaken by a nation’s central bank to control the money supply. Control of
money supply helps to manage inflation or deflation.

The monetary policy can be expansionary or contractionary.

An expansionary monetary policy is focused on expanding (increasing) the money supply in an economy. An expansionary monetary policy is
implemented by lowering key interest rates thus increasing market liquidity.

A contractionary monetary policy is focused on contracting (decreasing) the money supply in an economy. A contractionary monetary policy is
implemented by increasing key interest rates thus reducing market liquidity.

How does the Reserve Bank of India get its mandate to conduct monetary policy?

The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under
the Reserve Bank of India Act, 1934.

Recently there were many changes in the way Monetary Policy of India is formed – with the introduction of Monetary Policy Framework (MPF),
Monetary Policy Committee (MPC), and Monetary Policy Process (MPP). We shall see each of these terms in detail soon.

What is the main goal of Monetary Policy of India?

Maintain price stability.

The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a
necessary precondition for sustainable growth.

To maintain price stability, inflation needs to be controlled. The government of India sets an inflation target for every five years. RBI has an
important role in the consultation process regarding inflation targeting. The current inflation-targeting framework in India is flexible in nature.

Flexible Inflation Targeting Framework (FITF)

Flexible Inflation Targeting Framework: Now there is a flexible inflation targeting framework in India (after the 2016 amendment to the Reserve
Bank of India (RBI) Act, 1934).

Who sets the inflation target in India: The amended RBI Act provides for the inflation target to be set by the Government of India,
in consultation with the Reserve Bank, once every five years.

Current Inflation Target: The Central Government has notified 4 per cent Consumer Price Index (CPI) inflation as the target for the period from
August 5, 2016, to March 31, 2021, with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent.

Factors that constitute a failure to achieve the inflation target: (1) the average inflation is more than the upper tolerance level of the inflation
target for any three consecutive quarters, OR (2) the average inflation is less than the lower tolerance level for any three consecutive quarters.

The Monetary Policy Framework (MPF)

While the Government of India sets the Flexible Inflation Targeting Framework in India, it is the Reserve Bank of India (RBI) which operates the
Monetary Policy Framework of the country.

The amended RBI Act explicitly provides the legislative mandate to the Reserve Bank to operate the monetary policy framework of the country.

The framework aims at setting the policy (repo) rate based on an assessment of the current and evolving macroeconomic situation,
and modulation of liquidity conditions to anchor money market rates at or around the repo rate.
Note: Repo rate changes transmit through the money market to the entire financial system, which, in turn, influences aggregate demand – a
key determinant of inflation and growth.

Once the repo rate is announced, the operating framework designed by the Reserve Bank envisages liquidity management on a day-to-day
basis through appropriate actions, which aim at anchoring the operating target – the weighted average call rate (WACR) – around the repo rate.

Monetary Policy Committee (MPC)

Now in India, the policy interest rate required to achieve the inflation target is decided by the Monetary Policy Committee (MPC). MPC is a six-
member committee constituted by the Central Government (Section 45ZB of the amended RBI Act, 1934).

The MPC is required to meet at least four times a year. The quorum for the meeting of the MPC is four members. Each member of the MPC has
one vote, and in the event of an equality of votes, the Governor has a second or casting vote.

The resolution adopted by the MPC is published after the conclusion of every meeting of the MPC. Once in every six months, the Reserve Bank
is required to publish a document called the Monetary Policy Report to explain: (1) the sources of inflation and(2) the forecast of inflation for 6-
18 months ahead.

The present Monetary Policy Committee (MPC)

The Central Government constituted the present MPC as under:

Governor of the Reserve Bank of India – Chairperson, ex officio;

Deputy Governor of the Reserve Bank of India, in charge of Monetary Policy – Member, ex officio;

One officer of the Reserve Bank of India to be nominated by the Central Board – Member, ex officio;

Shashanka Bhide, Senior advisor at National Council for Applied Economic Research (NCAER) – Member;

Ashima Goyal, Professor at the Indira Gandhi Institute of Development Research in Mumbai – Member; and

Jayanth Varma, Professor, Indian Institute of Management, Ahmedabad – Member.

Note: Members referred to at 4 to 6 above, will hold office for a period of four years or until further orders, whichever is earlier.

The Monetary Policy Process (MPP)

The Monetary Policy Committee (MPC) determines the policy interest rate required to achieve the inflation target.

The Reserve Bank’s Monetary Policy Department (MPD) assists the MPC in formulating the monetary policy. Views of key stakeholders in the
economy and analytical work of the Reserve Bank contribute to the process of arriving at the decision on the policy repo rate.

The Financial Markets Operations Department (FMOD) operationalises the monetary policy, mainly through day-to-day liquidity management
operations.

The Financial Market Committee (FMC) meets daily to review the liquidity conditions so as to ensure that the operating target of monetary
policy (weighted average lending rate) is kept close to the policy repo rate. This parameter is also known as the weighted average call money
rate (WACR).

Monetary Policy Instruments (MPI)

There are several direct and indirect instruments that are used for implementing monetary policy.

Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and
other approved securities under the liquidity adjustment facility (LAF).
Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the
collateral of eligible government securities under the LAF.

Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo auctions. Progressively, the Reserve Bank has increased
the proportion of liquidity injected under fine-tuning variable rate repo auctions of a range of tenors. The aim of term repo is to help develop
the inter-bank term money market, which in turn can set market-based benchmarks for pricing of loans and deposits, and hence improve the
transmission of monetary policy. The Reserve Bank also conducts variable interest rate reverse repo auctions, as necessitated under the market
conditions.

Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow an additional amount of overnight money
from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a
safety valve against unanticipated liquidity shocks to the banking system.

Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.

Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is
published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes
automatically as and when the MSF rate changes alongside policy repo rate changes.

Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such percentage of
its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.

Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe and liquid assets, such as unencumbered
government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the
private sector.

Open Market Operations (OMOs): These include both, outright purchase and sale of government securities, for injection and absorption of
durable liquidity, respectively.

Market Stabilisation Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring
nature arising from large capital inflows is absorbed through the sale of short-dated government securities and treasury bills. The cash so
mobilised is held in a separate government account with the Reserve Bank.

Summary

Monetary policy refers to the use of monetary instruments under the control of the central bank to regulate magnitudes such as interest rates,
money supply and availability of credit with a view to achieving the ultimate objective of economic policy.

-----RBI uses a Credit control monetary policy strategy to ensure that the country’s economic development is accompanied by stability. It means
that banks will not only contain inflationary trends in the economy but will also stimulate economic growth, resulting in increased real national
income stability in the long run. Because of its functions, including issuing notes and keeping track of cash reserves, the RBI does not regulate
credit because it would cause social and economic instability in the country.

RBI- The Reserve Bank of India is India’s central bank and regulatory organisation in charge of overseeing the country’s financial sector. It is
owned by the Government of India’s Ministry of Finance. It is in charge of issuing and distributing the Indian rupee.

Credit Control Policy

Credit control is a monetary policy tool used by the Reserve Bank of India to control the demand and supply of money, or liquidity, in the
economy. The Reserve Bank of India (RBI) supervises the credit granted by commercial banks.

Credit Control Objectives

The following are the broad aims of India’s credit control policy:

To maintain an acceptable amount of liquidity in order to achieve a high rate of economic growth while maximising resource use without
causing severe inflationary pressure.
To achieve stability in the country’s currency rate and money market.

To meet financial obligations during a downturn in the economy as well as in regular times.

Controlling the business cycle and meeting the needs of the company.

Methods Used By Rbi For Credit Control And Types Of Credit Control

RBI uses two types of credit control methods for money supply in the Indian economy, Qualitative and Quantitative.

Qualitative Method

By quality, we refer to the purposes for which a bank loan is used. Qualitative approaches regulate how money is channelled, and credit is
extended in the economy. It is a selective approach of control in that it restricts credit for some sections while expanding credit for others,
referred to as the ‘priority sector,’ depending on the scenario.

The Following Are The Types That Are Used In This Method

Marginal Requirement

Loan current value of security supplied for ban-value of loans authorised is a minimum criterion. For those commercial activities whose credit
flow is to be controlled in the economy, the marginal requirement is raised.

Credit Rationing

There is a maximum limit to the number of loans and advances that can be made using this approach, which commercial banks cannot exceed.
The Reserve Bank of India establishes a ceiling for various categories. This type of rationing is utilised when credit flow needs to be monitored,
especially for speculative operations. The Reserve Bank of India can also impose a minimum “capital: total assets” ratio (the ratio of capital to
total assets).

Publicity

The Reserve Bank of India (RBI) uses the media to publicise its opinions on the current market situation and the directives that commercial
banks must follow in order to contain the turmoil. However, this strategy is not very effective in poor countries because of the high rate of
illiteracy, which makes it difficult for people to understand laws and their repercussions.

Quantitative Method

The control of the overall amount of credit is referred to as quantitative credit control.

Bank Rate

The discount rate is another name for the bank rate. It’s the official lowest rate at which the country’s central bank is willing to re-discount
approved bills of exchange or lend on recognised securities. Bank Rate is defined as “the standard rate at which it (RBI) is prepared to acquire or
re-discount bills of exchange.

When a commercial bank, for example, has lent or invested all of its available funds and has little or no cash above the regulatory minimum, it
may request funding from the central bank.

Working on the Bank Rate

Changes in bank rates are implemented in order to manage price levels and economic activity by altering loan demand. Its operation is based
on the idea that changes in the bank rate cause changes in the market interest rate. Consider a country that is experiencing inflationary
pressures. In such circumstances, the central bank will raise the bank rate, resulting in a higher loan rate. Borrowing will be discouraged as a
result of this rise.

Role Of Rbi In Controlling Credit In India

The Reserve Bank of India, as the country’s central bank, takes essential actions to keep credit under control. The Reserve Bank of India (RBI)
uses credit control to implement monetary policy and keep inflation under control. The RBI’s role in credit control makes it one of the most
important bodies for the development of the Indian economy. Control of credit can be thought of as money control for a better understanding.

Credit control is used to control the demand and supply of money. The credit-control system is utilised by the Reserve Bank of India to ensure
the long-term development of the Indian economy.

Controlling credit helps the RBI and the government achieve economic growth while also keeping inflation under control.

In India, the RBI is the only authority for currency issuance and the custodian of cash reserves.

The RBI’s role in credit control in India ensures that the country maintains social and economic stability.

Conclusion

In the Indian economy, the RBI’s role in credit control is crucial. The Reserve Bank of India controls the flow of credit in our economy in order to
keep inflation and economic growth in check. Credit changes can cause market instability, so credit control policies must be carefully planned
before being implemented.

UNIT -5

What is Merchant Banking in India?

It is an institution that offers consultancy to its customers regarding financial, managerial, marketing, and legal concerns. They usually offer
assistance to business loans for big companies, international finance, and underwriting. These banks are specialists in trading with multinational
companies.

Merchant bank helps a business person to commence a business and raising finance. Furthermore, they help them to expand, modernizing, and
restructuring the business. They also grant support in registering, buying, and selling shares at the stock exchange.

Features of Merchant Banking

Here are some of the must-know characteristics of merchant banking in India-

High ratio of decision-makers as a percentage of the complete staff

Loose organizational structure

Fast decision mechanism.

Refined services on both national and international levels.

Huge amount of information.

Profound contact with the environment.

Priority on fee and commission returns.

Innovative instead of monotonous operations

Elevated liquidity ratio

Consolidation of short and medium-term engagements

Low ratio of profit allocation.

History of Merchant Banking

You would be amazed to know that merchant banks were established back in the 17 and 18 centuries in France and Italy by the Italian grain
merchants. Initially, in merchant banking, a few merchant bankers were included who were intermediates in financing other transactions or
their own.

After a couple of years, the practice of merchant banking evolved in the modern era from London. Merchants began to finance foreign trade by
acceptance of the bill. With time they started using other services such as underwriting the issues, loan syndication, portfolio management, etc.

Merchant banking in India began in 1967 by National Grindlays; later, Citi Bank started it in 1970. In the year 1972, SBI became the first
commercial bank to set up a distinct division for merchant banking. Then it was followed by ICICI in 1973, and then various banks started these
services such as PNB, Bank of India, UCO Bank, etc.

It was in 1973 when FERA came into existence that helped increase merchant banking activities in India. After that, various banks such as IDBI
and IFCI entered the market.

Also Read: Banking System in India Explained

Reasons for growth of Merchant Banking

There are a few reasons that accelerated the growth of these banks in India. Some of the reasons are:

1. Globalization: After the 1991 reforms, the Indian economy saw a drastic change as it opened gates for foreign companies. It helped in getting
funds from abroad; thus, it led to the growth of merchant banks.

2. Elevated Competition: Because of the globalization of the economy, the market scenarios became lucrative, and business options became
favorable for various individuals. This pivoted the Indian corporate sector, and a huge expansion was seen in this sector. This motivated the
Merchant Bankers to play an important role by offering specialized services to corporate.

3. Switch in consumer trends: There was a huge transformation in the industrial and corporate sectors because of the foreign players in the
market.

The major benefit was that the Indian massed started getting better quality products as the Indian companies also started working on quality to
match the foreign products. In such prevailing environments, financial products and instruments became more prominent.

4. Government Reforms: Government intervention was reduced, and privatization was increased. It also raised the limits of investment and
lessened direct interventions that led to an increase in the proposition of foreign players.

These were some of the causes that hastened the increase of Merchant Banking in India. Let us also know the services that merchant banking
offers to corporate and big business houses.

Services of Merchant Banking

1. Portfolio Management: It refers to decreasing the risk and maximizing the profits. This expression is usually used in connection to shares and
debentures only. Merchant bankers offer these services to their customers and guide the investors in selecting the right securities as per their
needs. Thus, merchant bankers ensure that they are updated with the complete market information.

2. Corporate Counseling: This is the basic service that merchant banks offer as all industrial units, whether new or existing, require this service.
There is a wide range of services that come under corporate counseling, such as project counseling, capital restructuring, project management,
working capital management, public issue management, loan syndications, fixed deposit, and lease financing.

3. Management of Capital Issues: This service comprises selling securities, equity shares, debentures, preference shares, etc., to the investors.
The role of the merchant banker here is to make an action plan and budget for expenses for coordinating with underwriters, the expense for
the issues, choosing the advertising agency for pre and post-issue.

For doing this, they have to be in touch with agencies that are involved in public issues.

4. Underwriting services: This is one of the most important services given by merchant banks as in this, the bank gives a guarantee that states
that if the agreement is below the specified level, then the bank would have to contribute to the stated expense.
5. Loan Syndication: This service is pretty unusual from what the other banks offer. Here the merchant banks arrange a loan for a borrower who
can be a big company, a government department, or a local authority. But, there are a lot of measures that a merchant banker has to take
before a loan.

Firstly, they check and analyze the cost of the project, then they design the capital structure, see how much the promoter is contributing, and
then decides on the amount of loan and approaches the financial institution for a loan. They also have to ensure that the company adheres to
all the guidelines.

Other services that merchant banks offer are:

Project Counseling

Issue Management

Foreign Currency Financing

Advisory Services to Mergers and Takeovers

Broking Corporate Advisory Services Leasing

Consultancy to Sick Industrial Units

Providing Venture Capital Financing

Act as Debenture Trustee

Types of the organization that offer Merchant Banking services

Here are the organizations that provide Merchant banking services in India:

Commercial Banks and their sub-banks

Foreign Banks comprise Citi Bank, National Grindlays bank, Hong Kong Bank, etc.

State Level Financial Institutions are State Industrial Development Corporations (SIDC’s) and State Financial Corporations.

All India Financial Institutions and Development Banks like ICICI, IFCI, IDBI, etc.

Private Financial Consultancy Firms and Brokers, like J.M. Financial and Investment Services Ltd.; Fnam Financial Consultants, Ceat Financial
Services, DSP Financial Consultants, Kotak Mahindra, etc.

Professional Merchant Banking Houses.

Technical Consultancy Organisations.

Also Read: List of Banks in India

Functions of Merchant Bankers

There are a lot of functions that merchant banks do; let’s have a look at some of them:

Help raise funds: The highlighting part about merchant banks is that they assist their clients in raising funds from the market by issuing shares,
debentures, and bank loans. They help to raise funds from both domestic and international markets.

Revival of sick units: They support the companies in rebuilding the disabled manufacturing units. They meet a lot of long-term financial
institutions and the Industrial and Financial Restoration Council for backing them.

Handling government permission: Almost all the business needs the consent of government for commencing a fresh project. In fact, there are a
lot of industries that need permission for expansion and modernization; hence merchant banks handle government permissions for their
clients.
Advice on various issues: Merchant Banking in India is relatively different from other countries as here they also offer advice to their clients on
modernization and expansion of business.

Brokers in the stock exchange: They also serve as a broker in the stock exchange for their clients, plus they also buy and sell shares on account
of them.

Promotional Activities: They also play the role of industrial business promoters as well. They enable the developers to build innovations, make
feasibility studies, define ventures, and receive public bodies and opportunities permits.

Services to private sector units: They provide services to public sector units by offering numerous services like help in getting long term capital,
foreign collaboration, marketing of securities, and also manage their long term finance

Management of interest and dividend: They also guide their clients in managing both dividends on shares and interest on debentures.
Merchant bank proffers them directions on the rate of dividend and timing as well.

Money Market operation: They also trade with short-term money market instruments such as government bonds, commercial paper issues by
big corporate enterprises, treasury bills issued by RBI, etc.

Managing Public issue of companies

Assistance to small companies

Leasing services

Managing public issue

Merchant Bankers in India

There are more than 130 merchant bankers who are registered with SEBI. Here is the list of some significant ones:

Public Sector Merchant Bankers

State Bank of Bikaner and Jaipur

Karur Vysya Bank

SBI Capital markets Ltd.

IFCI Financial Services Ltd.

Punjab National Bank

Bank of Maharashtra

Private Sector Merchant Bankers

Yes, Bank Ltd.

ICICI Securities Ltd.

Kotak Mahindra Capital Company Ltd.

Axis Bank Ltd.

Tata Capital Markets Ltd.

Reliance Securities Ltd.

Bajaj Capital Ltd.

ICICI Bank Ltd.

Foreign Players in Merchant Banking

FedEx Securities Ltd.

Goldman Sachs (India) Securities Pvt. Ltd.

DSP Merrill Lynch Ltd.

Deutsche Equities India Private Limited

Morgan Stanley India Company Pvt. Ltd.

Citigroup Global Markets India Pvt. Ltd.

Barclays Securities (India) Pvt. Ltd.

Barclays Bank Plc

Deutsche Bank
Also Read: List of Scheduled Banks in India

Classification of Merchant Bankers

Merchant bankers have been divided into four categories for registration-

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Category 1: The role of merchant bankers in this category is to act as a consultant, advisor, issue manager, portfolio manager, and underwriter.

Category 2: Merchant Bankers in this category act as a consultant, advisor, portfolio manager, and underwriter. They cannot be an issue
manager of their own but can act as co-manager.

Category 3: In this category, merchant bankers cannot do activities related to portfolio management, plus they can neither take issue
management of their own nor act as a co-manager. They can act as a consultant, advisor, and underwriter.

Category 4: If the merchant banker lies in this category, then they can just act as a consultant or advisor to an issue of capital.

Regulations for Merchant Banking in India

SEBI was established in 1992 as a regulatory body for protecting the interests of investors in the securities market. They made a few rules and
guidelines for merchant bankers so that there is no monopoly, plus the interest of the customers is not harmed.

They are called Securities Exchange Board of India (SEBI) Regulations, 1992. These guidelines are amended regularly as per the dynamic market
conditions:

Rules and regulations for merchant banks in India have been classified into five chapters and four schedules:
The first chapter comprises the definitions and meanings of numerous terms that are frequently used in merchant banking.

In the second chapter, you would locate the Registration and Certification of Merchant Bankers in India. It also holds several Operational
Capabilities and Capital Requirements required to be finished for registering as a merchant banker.

The third chapter deals with the General Obligations and Responsibilities that the merchant banker would have to undertake. Some of the
major things are the General Code of Conduct, disclosure of information, auditing of accounts, and other important operating guidelines.

Now comes the fourth chapter, which comprises the right of the Board to examine the merchant bankers and the actions that can be taken
based on the report.

In the fifth chapter, you will find the cases of defaults and the actions that are taken if anything wrong is done or if the guidelines are not
followed.

This was about the chapters; the schedule by SEBI comprises of the format of forms and reports, which are substantial and also states the fees
that are required to be paid for different purposes.

One of the most important things to remember is that no organization would be able to become a merchant banker until and unless they get a
certificate of registration from SEBI. Plus, he must get himself registered under these regulations if they want to persevere any of the merchant
banker activities.

For getting the certificate of registration, you would have to apply through the form and complete two sets of norms, which are:

Operational capabilities

Capital Adequacy norms

1. Operational capabilities: As per operational capabilities, merchant bankers are divided as per their roles.

2. Capital Adequacy Norms: For registration of the different categories of a merchant banker, SEBI has laid a few norms. Capital adequacy is
calculated by taking capital contributed to the business plus free reserves.

Overview of the SEBI

The Securities and Exchange Board of India owned by the Government of India was established on 12th April 1992 under the Securities and
Exchange Board of India Act, 1992 to protect the interests of the investors in securities along with promoting and regulating the securities
market. Headquartered in Mumbai, the Securities and Exchange Board of India (SEBI) has four regional offices located in Ahmedabad, Chennai,
Delhi and Kolkata. SEBI was initially formed in the year 1988 as a non-statutory body for the regulation of the securities market and later
acquired statutory status on 30th January 1992. To know more about SEBI, refer to the table given below:

SEBI

SEBI full form Securities And Exchange Board of India

Year of formation 1988

Headquarters Mumbai, Maharashtra

SEBI Chairman Ms. Madhabi Puri Buch

Sector Securities Market

Formation of SEBI

The Securities and Exchange Board of India (SEBI) was first established as a non-statutory body in 1988 for the regulation of the securities
market. It acquired the statutory powers on 30th January 1992 in accordance with the SEBI Act 1992. SEBI became an autonomous body on 12
April 1992 and was soon constituted as the regulator of capital markets under the Government of India. The headquarters of the Security and
Exchange Board of India is located in Mumbai, Maharashtra and has four regional offices in New Delhi, Kolkata, Chennai and Ahmedabad.

During the Financial Year 2013-2014, SEBI opened several local offices in the cities namely- Jaipur, Bangalore, Guwahati,
Bhubaneshwar, Patna, Kochi and Chandigarh.

Structural Organisation of SEBI

SEBI is an autonomous organization that works under the administration of the Union Finance Ministry. The Security and Exchange Board of
India (SEBI) is managed by the following members:

The chairman was nominated by the Union Government of India.

Two members, i.e., Officers from the Union Finance Ministry.

One member from the Reserve Bank of India.

The remaining five members are nominated by the Union Government of India. Three of the five members should be full-time members.

Ms Madhabi Puri Buch is the current SEBI Chairman who was appointed to take charge of the chairman’s office on 02 March 2022, by replacing
the former chairman Ajay Tyagi.

To know about the Major Stock Exchanges in India, visit the linked article.

SEBI Functions & Powers

The scope of SEBI’s activities is rather wide. It is empowered to frame rules, regulations, guidelines and direction etc. in respect of both primary
and secondary securities markets. Intermediaries and certain financial institutions operating in securities markets are also subjected to SEBI’s
directions and norms. SEBI has the power to regulate the following branches:

Depositories, participants and custodians

Debenture trustees and trust deeds

Insider trading, FII’s merchant bankers and mutual funds

Portfolio managers, investment advisors, registrars to capital issues and share transfer agents

Stockbroker, sub-brokers, underwriters, bankers to the issues and venture capital funds and

Substantial acquisition of shares and takeovers.

It also issues guidelines for disclosure of information and operational transparency for investor protection, pricing of issues, bonus and
preferential issues and other financial instruments.

According to the Preamble of SEBI, one of the major functions of the Security and Exchange Board of India is to protect the interests of
investors in securities along with promoting the development and regulation of the securities market.

SEBI is also responsible for the needs of the following three groups which constitute the securities market:

Issuers of securities

Investors

Market intermediarie
What are Debt Recovery Tribunals (DRT)?

DRTs and DRATs are established by the Central Government and consist of one person each referred to as the Presiding Officer of the Tribunal
and the Chairperson of the Appellate Tribunal respectively.

DRTs are empowered to go beyond the Civil Procedure Code and pass comprehensive orders. It can hear cross-suits, counterclaims and allow
set-offs.

DRTs were empowered to adjudicate claims equal to or greater than ten lakh rupees. This limit was raised to twenty lakh rupees in 2018.

After adjudication, the DRT issues order and Recovery Certificate, certifying the amount payable by the borrower. This is executed by Recovery
Officers as per the procedure for recovery of income tax.

There are 39 DRTs and 5 DRATs at present.

Jurisdiction of Debt Recovery Tribunals

DRTs can entertain applications from banks and financial institutions for recovery of debts which are due to them.

The banks may make an application to the Tribunal within the local limits of whose jurisdiction the defendant resides or carries on business.

The Act bars all other Courts from the adjudication of matters relating to debt recovery apart from the Supreme Court and High Court.

Proceedings of Debt Recovery Tribunals

Banks need to make an application to the DRT which has jurisdiction in the region in which the bank operates and pay the required fees.

The defendant shall present a written statement of his defence before the first hearing and set up a counter-claim during the course of the
hearing.

The Tribunal may, after giving the applicant and the defendant an opportunity of being heard, pass such interim or final order.

The interim order passed against the defendant can restrict him from disposing or transferring his property without the prior assent of the
Tribunal.

DRT after hearing both the parties and their submissions would pass the final judgment within 30 days from hearing. DRT will issue a Recovery
Certificate within 15 days from the date of judgment and pass on the same to Recovery Officer.

The Tribunal may direct the conditional attachment of the whole or any portion of the property specified by the applicant.

The Tribunal may also appoint a receiver and confer him all powers to defend the suit in the court and to manage the property.

Where a certificate of recovery is issued against a company registered under the Companies Act, 1956 the Tribunal may order the sale proceeds
of such company to be distributed among its secured creditors.

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002

Even after the enactment of the RDDBFI Act, problems like lack of liquidity, asset-liability mismatch, and long-term blocking of assets persisted.
Banks could not recover their dues to the extent expected even after the constitution of DRTs. This led to the enactment of the SARFAESI Act in
2002.

This Act provides access to banks and financial institutions covered under the Act for recovery of secured debts from the borrowers without the
intervention of the Courts at the first stage.

When a loan is classified as a Non-Performing Asset (NPA), a notice is sent to the borrower. If the borrower fails to comply with it, then the
creditor is entitled to take ownership of the secured asset including the right to transfer the asset.

The transition into DRTs happens when the collateral asset is not sufficient enough to fulfil obligations to the creditors. In such cases, the
creditors may file an application to the DRT for the recuperation of the rest of the part of the dues.
Issues with Debt Recovery Tribunals

Most DRTs are over-burdened with some Tribunals in major cities handling far more cases it can ideally handle at a given time. This is adversely
affecting the success rate of the Tribunals.

DRTs got tangled with peripheral issues such as state dues, dues of workmen, etc.

Borrowers also tend to adopt delaying tactics by filing claims against lenders in civil courts.

Some courts have interpreted some provisions of the Act to be in favour of debtors and invoking principles of natural justice to protect debtors.

DRTs are not equipped to deal with complex questions of law and evolving methods and techniques of committing fraud.

Less than 40 DRTs are established right now and they are not sufficient to handle the large volume of cases arising across the country.

Corrective Measures connected with DRTs

Amendments made to the RDDBFI Act in 2016

It provides time limits in the various steps of the adjudication process.

Central Government is empowered to uniform procedural rules across all DRTs and DRATs.

Increasing the retirement age of Presiding Officers and Chairpersons.

Banks to file cases in DRTs having jurisdiction over the area of the bank branch where the debt is pending, instead of the defendant’s area of
residence or business.

Insolvency and Bankruptcy Code give powers to DRTs to consider cases of bankruptcy from individuals and unlimited liability partnerships.

Conclusion

The rising NPAs and debt issues are hurting the banking industry and the economy as a whole.

--Origin of RDDBFI Act – An Introduction

Banks and financial institutions duly registered with Reserve Bank of India (RBI) provide loan facility to legal entities and individuals (borrowers). In the event where the borrower fails
to repay loan amount or any part thereof which also includes unpaid interests and other charges and/or debt becomes Non-Performing Asset (NPA), banks and financial institutions can
recover the debt by approaching appropriate judicial forums.

Before, the enactment of the RDDBFI Act, banks, and financial institutions were facing huge challenges in recovering debts from the borrowers as the courts were overburdened with
large numbers of regular cases due to which courts could not accord priority to recovery matters of the banks and financial institutions. The Government of India in 1981 constituted a
committee headed by Mr T. Tiwari, this committee suggested a quasi-judicial setup exclusively for banks and financial institutions which by adopting a summary procedure can quickly
dispose-off the recovery cases filed by the banks and financial institutions against the borrowers.

Again in 1991, a committee was set up under Mr Narashmam, which endorsed the view of the Mr T. Tiwari Committee and recommended the establishment of quasi-judicial for the
speedy recovery of debts. Pursuant to which Government of India enacted the RDDBFI Act. Through, the RDDBFI Act quasi-judicial authorities were constituted, and the procedure was
specified for the speedy recovery of debt.
Authorities under RDDBFI Act

Debt Recovery Tribunal

Section 3, provides for the establishment of Debt Recovery Tribunal (DRT), by notification to be issued by the Central Government, for exercising, jurisdiction, powers, and authority
conferred on such tribunal under the RDDBFI Act. First DRT was established in Kolkata in the year 1994. Presently 33 DRTs are functioning at various places in India, and 6 more DRTs
are also being established[1]. As per section 4, DRT consists of sole member only, known as Presiding Officer. Section 5, provides that a person who has been or is qualified to become
District Judge can be appointed as Presiding Office of DRT. Section 6 provides that the terms of the Presiding Office shall end after the expiry of the period of 5 years from the date he
enters the office and he will be eligible for reappointment provided he has not attained the age of 65 years.

Debt Recovery Appellate Tribunal

Sections 8 -11 deals with the establishment, qualification, and term of the Chair Person of the Debt Recovery Appellate Tribunal (DRAT). DRAT is established to exercise control and
powers conferred under the RDDBFI Act. DRAT consist of sole member to be known as Chair Person. A person is eligible to become a Chair Person, if he has been an or qualified to
become a High Court Judge, or has been a member of the Indian Legal Services and held a Grade 1 post as such member for the minimum period of three years or has held office of
Presiding Officer of Tribunal for period of at least three years. The Chair Person of DRAT can hold his office for the period of five years and is also eligible for reappointment, provided,
that he has not attained the age of seventy years. Presently there are 5 DRATs in India in Delhi, Chennai, Mumbai, Allahabad, and Kolkata. DRAT has appellate and supervisory
jurisdiction over DRTs.

Who can recover money from DRT under RDDBFI Act

As per section 1(4), the provisions of RDDBFI Act does not apply where the amount of debt due to the bank or financial institution or the consortium of banks and financial institutions is
less than Rupees Ten Lakh or any other amount not below Rupees One Lakh, cases where the central government may by notification specify. Thus, in essence, minimum debt which is
to be recovered from DRT should not be less than Rupees Ten Lakh. In the case of SARFESAI Act, if the asset has been declared as Non-Preforming Asset (NPA), eligible banks and
financial institutions after enforcing security can recover remaining amount under RDDBFI Act which is in excess, of Rupees One Lakh.

What type of debt can be recovered under the RDDBFI Act

As per section 2 (g) debt is any liability inclusive of interest, which is claimed to due from any person by any bank or financial institution or consortium thereof. Such liability may be
secured or unsecured or assigned, whether payable under the order of court or arbitration award or under the mortgage. Such a liability shall be subsisting and validly recoverable on
the date of application.

The debt also includes liability towards debt securities which remains unpaid in full or part after notice of ninety days served upon the borrowers by the debenture trustees or any
authority in whose favor a security interest is created for the benefit of the holder of the debt security. Clause 2(ga) defines debt security as securities listed in accordance with
regulations defined by SEBI under Securities and Exchange Board of India Act, 1992.

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 Click Above

Jurisdiction, Powers, and Authority of DRT and DRAT

As per section 17 of RDDBFI Act, vests jurisdiction, power and authority on DRT to entertain and decide application from banks and financial institutions to recover a debt due to such
banks and financial institutions. Further, section 17A confers on DRAT power of general superintendence and control and confers appellate jurisdiction on DRAT. DRAT is also
empowered to transfer a case from one DRT to another DRT. DRAT is also empowered to call for information from DRT, about cases pending and disposed of them. DRAT is also
empowered to convene the meeting of Presiding Officers. It also empowered to conduct an inquiry of Presiding Officer and recommend suitable action to the Central Government.

Section 18 bars the jurisdiction of any civil court or authority for recovery of debt, except High Court and Supreme Court in the exercise of their writ jurisdiction under Article 226 and
227 of the Constitution of India. Thus in essence order of DRAT can be challenged in writ jurisdiction of High Court or Supreme Court

Procedure for filing cases for recovery of money under RDDBFI Act[2]
Now having understood the basics of RDDBFI Act, including DRT and DRAT, now understand the procedure which is to be followed or the process of recovering money under this Act:

Types of pleadings/applications generally filed before DRT

Following are the pleadings which are filed in DRT by the parties

1. Original Application (O.A) refers to the claim filed by the bank or financial institution for recovery of debt from the borrower.
2. Interlocutory Application (I.A) refers to the applications filed during the pendency of the case. Miscellaneous Interlocutory Application (Misc. I.A) refers to applications
filed under clause e,g or h of section 22(2) of the RDDBFI Act.
3. Written Statement/ reply refers to defense of the borrower

Application to be filed in local jurisdiction of DRT

An Application has to be filed within the local jurisdiction of relevant DRT, as per section 19(1) of the Act, Application can be filed within the local limit of DRT in whose jurisdiction
where:

1. the branch or any other office of the bank or financial institution is maintaining an account in which debt claimed is outstanding;
2. the defendant voluntarily resides or carries on his business or works for gain;
3. in case there are more than one defendant, at the place where any one of the defendants voluntarily resides or carries on his business or works for gain;
4. where the cause of action wholly or partly arose.
Further, where a bank or a financial institution, which has to recover its debt from any person, has filed an O.A and against the same person another bank or financial institution also
has claim to recover its debt, then, the later bank or financial institution may join the applicant bank or financial institution at any stage of the proceedings, before the final order is
passed, by making an application to that DRT.

Application contents
Along with the Application certified true copies of the documents on which the bank or financial institution is relying in support of its claim needs to be filed. Further, Applicant inter-alia
should state the following:

1. Grounds of an application under different heads should be stated concisely;

2. Particulars of debt secured by a security interest in the property or assets belonging to the debtor and estimated value thereof;
3. If the secured assets are not sufficient to cover the debt then the particulars of any other property or assets owned by the debtor should be stated;
4. If the value of other assets is not sufficient to cover the debt, then a prayer must be made requesting for direction to the debtor for disclosing his other property or assets
details.

Language and forms of pleading and other formalities

All pleadings shall be done in English or Hindi language. If in the English language then font should be Times New Roman with a font size of 13. There should be double spacing between
the lines. Left-hand margin should be 5 centimetres and right-hand margin should be 2.5 centimetres. In all pleadings, legal size (A3) paper should be used.
A paper book is made which should include following:

1. Index in Form 1
2. List of dates and events
3. Pleadings i.e Application
4. Interlocutory Application, if any
5. Affidavit
6. Index of documents/Annexure
7. Original/attested copy of documents
8. Power of attorney/board resolution/ authorization letter
9. Vakaltnanma, if represented by counsel
While filing O.A a copy of the statement of account, certified in accordance with the provisions of the Bankers’ Books Evidence Act, 1891, needs to be filed along with the O.A., stating
the rate of interest with a certificate that the interest has been charged at such rate. Also, details of penal interest charged from the borrower needs to be mentioned along with a
certificate that the penal interest has not been capitalised.

While submitting torn or small document which is smaller than legal size paper, such documents need to be pasted on legal size paper to ensure that they fit the paper book.

All the pages of the paper book need to be signed, and the name of the person who is signing the pleadings must be written in each page in capital letters. Also, the party can affix
digital signature, and in the case of illiterate person thumb impression is affixed, and his/her name be written in capital letters.

All the Annexures/documents should be attested with the following sentence mentioned on each page

“This Annexure is the true copy of the original document”, with all the pages of document duly signed.

One complete set of the paper book needs to be served to the other party.

Fee
While filing O.A or I.A or review or appeal. The fee must be paid by way of Demand or Postal Order in favour of Register, of DRT, payable at the place where DRT is situated. The
amount of fee payable is as under:

Application for
recovery of debts
due under section
19(1) or section
19(2) of the Act
Rs. 12 000/-
(a) Where amount
of debt due is Rs. 10
Rs. 12 000/- plus Rs. 1
lakhs
000/- for every one lakh
rupees of debt due or
part thereof in excess of
(b) Where the Rs. 10/- lakhs subject to
amount of debt due a maximum of Rs. 1 50
is above Rs. 10 000/-
lakhs

Application to
counterclaim under
section 19(8) of the
Act—

Rs. 12 000/-
(a) Where the
amount of claim
made is up to Rs. 10
lakhs
Rs. 12 000/- plus Rs. 1
000/- for every one lakh
 rupees or part thereof in
(b) Where the excess of Rs. 10 lakhs
amount of claim subject to a maximum of
made is above Rs. Rs. 1 50 000/-.
10 lakhs

Application for
Review including
review application
in respect of the
counterclaim

Rs. 125/-
(a) against an
interim order
-50% of fee payable at
rates as applicable to the
(b) against a final applications under
order excluding section 19(1) or 19(8) of
review for the Act subject to a
correction of maximum of Rs. 15
clerical or 000/-
arithmetical
mistakes
Application for
Rs. 250/-
interlocutory order

Appeals against
orders of the
Recovery Officer

If the amount
appealed against is Rs. 12 000/-

(i) less than Rs. 10 Rs. 20 000/-

lakhs

Rs. 30 000/-
(ii) Rs. 10 lakhs or
more but less than
Rs. 30 lakhs
 (iii) Rs. 30 lakhs or
more
Vakaltnama Rs. 5/-

Presentation/filing of application for recovery

After completing pre-filing formalities as mentioned above, the application can be filed before Registrar or any other officer of DRT as authorised by the Registrar. The application can be
filed before 4:30 PM on any working day. The application can also be filed through e-filing.

One presentation of application Registrar or the officer authorised by him shall give diary number, date of filing with his endorsement, to the party filing the application. The application
so filed will be securitized by Registrar or the officer authorised by him within 15 days. In the case of defects were found applicant will be given 15 days’ time to remove the deficiency,
in case applicant failed to cure the deficiency within the period of 15 days, he can apply for extension and registrar can give him extension subject to a maximum of one month. Even
after extension if the applicant fails to cure the defect application will not be registered by the Registrar.

Once all the defects are cured, or there are no defects in the application, Registrar of DRT will get the application/case registered and allot a serial number to the application. Cause list
of cases to be listed before Registrar will be placed in board or website of DRT a day before scheduled hearing.

Service of Summon/Notice
The Registrar of DRT or any other officer authorised by Presiding Officer will issue Summon/Notice, which will be served by the applicant to the defendant/respondent. Following the
details of the forms in which Summons/Notice was issued:

1. Summons in respect of O.A in Form-3

2. Notice in respect of S.A. in Form-4
3. Notice in respect of an application filed under section 31-A of the Act in Form-5
4. Notice in respect of Misc. I.A. in Form-6
5. Notice in respect of an appeal in Form-7.
The Summon/Notice which also contains the paper book of petition/application is generally served on to the defendant/respondent by hand or registered post with acknowledgement
due (AD) or speed post or courier. With the permission, of Registrar, Summon/Notice can also be also sent through email or fax, however, in such event, it must be ensured that
defendant/respondent gets a copy of the paper book on the first date of his appearance. If the Summon/Notice is delivered to any adult family member of respondent/defendant at his
address, it shall be deemed to be delivered. In case Summon/Notice has been sent through registered post with AD or speed post or courier or email or fax, an affidavit should be filed
stating mode of dispatch and the correctness of the address where it was sent. In such case Summon/Notice shall be deemed to be delivered irrespective of the fact delivery
acknowledgement has not be received back. If the defendant/respondent is deliberately avoiding the service of the Summons/Notice in that event with the permission of DRT
Summon/Notice can be pasted at the visible place of the premises of the respondent/defendant or publication can be made in leading daily newspaper and in both cases service will be
deemed to be effected on respondent/defendant. This is also known as substituted service.

Hearing of the case before Presiding Officer

Filing of reply/written statement – Defendant/Respondent within one month from the date of service of Notice/Summon on him is required to file the reply. However, with the
permission of DRT respondent/defendant can seek time for filing reply/written statement. Even if in the extended time period the defendant/respondent failed to file his reply then DRT
may proceed ex-prate.

The claim of set off /counter claim – Defendant at the first date of hearing can file a claim for set off/counterclaim. He cannot file it afterwards without the permission of DRT. The claim
of set off/counterclaim shall have the same effect as a counter suit in any proceedings.

Admission of liability by respondent/defendant – If the respondent/defendant admits his liability, in that event Presiding Officer will pass an order directing respondent/defendant to pay
the admitted amount within the period of 30 days from the date of the order of the DRT. If defendant/respondent fails to pay the admitted amount within that period, then Presiding
Office may issue a certificate of debt due in terms of section 19 of the Act.

Affidavits- In the case where defendant/respondent denies his obligation, in that event Presiding Office may require the parties to him to prove any fact by filing an affidavit and such
affidavits shall be read in the hearing in the manner which DRT deems fit. After filing of the affidavits by the respective parties where it appears to DRT that either the applicant or the
defendant/respondent desires the production of a witness for cross-examination and that such witness can be produced and it is necessary for the case, DRT shall for sufficient reasons
to be recorded, order the witness to be present for cross-examination, and in the event of the witness does not appears for cross-examination, then, the affidavit shall not be taken into
evidence.

Interim Order by DRT

In cases where the applicant apprehends that the borrower may take steps which may frustrate attempt of execution may make an application to DRT along with details of property to
be attached and value thereof, and on such application may pass an interim order directing respondent/defendant, directing him to deposit before it amount equivalent to property
value or amount which may be sufficient to recover the debt or as and when required by DRT to place before it disposal the property.

Wherever DRT finds it fit, it may also pass following orders;

1. appoint a receiver of the property, before or after the grant of Recovery Certificate (RC);
2. remove any persons from possession or custody of any property;
3. commit the same to custody, management of the receiver;
4. confer power on the receiver to file/defend the suit on behalf of property, or to act in any manner for the improvement of the property;
5. appoint a commissioner for collecting details of defendant/respondent’s property or sale thereof.

Judgment and Recovery Certificate by DRT

DRT after giving both the parties opportunity of hearing and hearing their submissions will within 30 days of the conclusion of such hearing pass its interim or final order. Within 15 days
of the passing of the order, DRT will issue RC and forward the same to Recovery Officer. RC will contain the details of the amount to be paid by recovered by the borrower debtor. RC
shall have the same effect as the decree of the civil court.

Appeal
An appeal by any aggrieved party against the order of DRT can be filed within the period of 30 days from the date of receipt of the order. No appeal can be filed against any order which
has been filed with the consent of the parties. DRAT shall endeavour to dispose-off appeal finally within the period of six months.

Amount to be deposited for filing an appeal – Where the appeal is being preferred by the debtor, who as per the order of DRT is liable to pay money to bank or financial institution at
the time of filing appeal is required to deposit before DRAT 50% of the amount he is required to pay as per the order of the DRT. However with the permission of DRAT, this amount can
be reduced by DRAT, but reduced amount should not below 25% of the debt amount which Borrower is required to pay as per DRT order.
Recovery of debt by Recovery Officer
After receipt of RC from DRT, Recovery Office will initiate recovery by one or more of following modes:

1. Attachment and sale of movable or immovable property of defendants/debtors;

2. Taking possession of property over which security interest was created or any other property of defendant/debtor and appointing receiver for the management of the
same;
3. Arrest of defendant/debtor and his detention in prison;
4. Appointment of receiver for management of movable or immovable property of defendant/debtor;
5. Any other mode as may be prescribed by the central government.
Apart from above modes Recovery Officer may also, direct any person who is liable to pay any amount to defendant/borrower, deduct from such amount the recovery amount, and
transfer to the credit of Recovery Officer the amount so deducted. However, Recovery Officer will not deduct any such amount which is exempt from attachment under Code of Civil
Procedure, 1908