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2/4/2013 Presentation by: Prof. VIGHNESWAR 1
Definition of Banker
Banking is defined (BR Act1949) 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” (Section 5-b) Most essential functions of a banker: - Accepting of deposits - Lending or Investing the mobilised funds
Presentation by: Prof. VIGHNESWAR 2
Definition of Customer
The term „Customer of a bank‟ is not defined by law Sir John Paget‟s view is that “to constitute a customer there must be some recognisable course or habit of dealing in the nature of regular banking business” Dr. Hart says “a customer is one who has an account with a banker or for whom a banker habitually undertakes to act as such”
Presentation by: Prof. VIGHNESWAR 3
Definition of Customer ..
Kerala High Court ruling
(CBI vs. V.Gopinathan Nair and
“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 banker will honour up to the amount standing to his credit, irrespective of his connection being of short or longstanding.”
Thus, to constitute a Customer the following essential requisites: 1. a bank account 2. dealing between the banker and the customer should be of the nature of banking business
2/4/2013 Presentation by: Prof. VIGHNESWAR 4
Banker Customer Relationship The Banker Customer Relationship is a contractual relationship and is governed by Law of Contract The Banker Customer Relationship is that of Debtor and Creditor. Presentation by: Prof. Once the customer deposits funds it constitutes a debt owed by the bank to the customer When the relationship is subject to special arrangements such as a joint account etc a special authority is taken as it is necessary to have written consent to vary the relationship. VIGHNESWAR 5 2/4/2013 .
VIGHNESWAR 6 .Banker Customer Relationship Special situations are covered by the rules of: Principal and Agent Trustee and Beneficiary These require separate documentation setting out the rules of the relationship 2/4/2013 Presentation by: Prof.
Special Types of Customers Minor Married Woman 2/4/2013 Presentation by: Prof. VIGHNESWAR 7 .
Illiterate Persons Lunatics Trustees Presentation by: Prof.Special Types of Customers. VIGHNESWAR 8 2/4/2013 ..
VIGHNESWAR 9 .Special Types of Customers… Executors and Administrators Joint Accounts 2/4/2013 Partnership Firms Presentation by: Prof.
Special Types of Customers…. VIGHNESWAR 10 . charitable institutions 2/4/2013 Presentation by: Prof. Societies. Hindu Joint Family Joint Stock Company Clubs.
The Board of Directors of the banks should have in place adequate policies that establish procedures to verify the bonafide identification of individual /corporate opening an account. The customer identification should entail verification through an introductory reference from an existing account holder/a person known to the bank or on the basis of documents provided by the customer. VIGHNESWAR .KYC Norms KYC Policy "Know Your Customer” (KYC) procedure should be the key principle for identification of an individual or corporate opening an account. 2/4/2013 Presentation by: 11 Prof.
Also refer to Report on Anti-Money Laundering Guidelines for Banks in India "Know Your Customer" procedures for existing customers Ceiling and monitoring of cash transactions • • Banks are required to issue travellers cheques.000 and above only by debit to customers‟ accounts or against cheques and not against cash.50. Presentation by: Prof.KYC Norms … Customer identification • • The objectives of the KYC framework should be two fold.10 lakhs and above in deposit. The banks are required to keep a close watch of cash withdrawals and deposits for Rs. cash credit or overdraft accounts and keep record of details of these large cash transactions in a separate register and the same has to be reported to RBI every month. VIGHNESWAR 12 2/4/2013 . (i) to ensure appropriate customer identification and (ii) to monitor transactions of a suspicious nature. and telegraphic transfers for Rs. mail transfers. demand drafts.
1976 Banks should also adhere to the instructions on the provisions of the Foreign Contribution Regulation Act. 1976 cautioning them to open accounts or collect cheques only in favour of association which are registered under the Act ibid by Government of India. Adherence to Foreign Contribution Regulation Act (FCRA).KYC Norms … Internal Control Systems • • Duties and responsibilities should be explicitly allocated for ensuring that policies and procedures Controlling offices of banks should periodically monitor strict adherence Terrorism Finance Banks to exercise caution if any transaction is detected with such entities. Identification and Reporting of Suspicious Transactions Banks should ensure that the branches and controlling offices report transactions of suspicious nature to the appropriate law enforcement authorities designated under the relevant laws governing such activities. 13 .
KYC Norms … EFFECTIVE IMPLEMENTATION LEADS TO RISK MANAGEMENT Customer Acceptance Policy Risk Management Monitoring of Transactions Customer Identification Procedure 2/4/2013 Presentation by: Prof. VIGHNESWAR 14 .
VIGHNESWAR 15 .Termination of Banker Customer Relationship Termination by mutual agreement Termination by customer Termination by banker 2/4/2013 Presentation by: Prof.
2/4/2013 Presentation by: Prof.Termination of Banker Customer Relationship Termination by mutual agreement Termination by mutual agreement is when both the customer and bank agree to close the account. In this case the bank will pay out any credit balances. VIGHNESWAR 16 .
Termination of Banker Customer relationship Termination by Customer The customer is not obliged to give notice to a banker where the account is in credit. VIGHNESWAR 17 . 2/4/2013 Presentation by: Prof. The customer demands payment of the credit balance A credit balance is closed by paying the outstanding balance in full plus fees and charges owing provided they have satisfied all the terms and conditions of the account.
VIGHNESWAR 18 2/4/2013 .Termination of Banker Customer relationship Termination by banker The banker can terminate the bankercustomer relationship and close the customers account that has a credit balance provided notice is given allowing a reasonable time to set up to enable the customer to set up new banking arrangements. Ref: Prosperity Ltd v Lloyds Bank Ltd (1923) Presentation by: Prof.
Banker‟s Duties Duty of care Duty to issue statements Duty of confidentiality / Secrecy 2/4/2013 Presentation by: Prof. VIGHNESWAR 19 .
or on what is normally done in similar circumstances. Lloyds Bank Ltd v EB Savory & Co (1933) Saving Bank of South Australia v Wallman (1935) L Shaddock & Assoc Pty Ltd v Parramatta City Council Presentation by: Prof.Bankers Duty of Care Legally the duty of care is judged on what an ordinary reasonable person would do. VIGHNESWAR 20 2/4/2013 .
VIGHNESWAR 21 . (Except when it is a passbook account or that there have been no transactions on the account for the past six months.) 2/4/2013 Presentation by: Prof.Banker‟s Duty to Issue Statements S 14.1 Code of Banking Practice states that personal customers must receive a statement of their account at least at six monthly intervals.
2/4/2013 Presentation by: Prof.Banker‟s Duty of Confidentiality The duty of confidentiality relates to: Detail‟s of the customers account Information derived from the customers account Information acquired in the course of the banker-customer relationship The duty of confidentiality extends beyond the duration of the account. VIGHNESWAR 22 .
Banker‟s Duty of Confidentiality … Exceptions to duty of confidentiality: Where the disclosure is under compulsion of law Where there is a duty to the public to disclose Where the interests of the bank require disclosure Where the disclosure is made by express or implied consent of the customer Where disclosure is to the tax department Tournier v National Provincial & Union Bank of England (1924) 2/4/2013 Presentation by: Prof. VIGHNESWAR 23 .
VIGHNESWAR 24 . Banker‟s right of Appropriation (Rule of Claytons) Right to charge fees and interest 2/4/2013 Presentation by: Prof.Banker‟s Rights Banker‟s Right of General Lien (Sec 171 of Indian Contract Act 1872) General Lien Particular Lien Right of set-off accounts Accounts must be in the same name and same right Only in respect of present debts due not for future debts The amounts of Debt must be certain Can be exercised even in the absence of an Agreement The banker may exercise this right at his discretion The banker has the right to exercise this right even before the Garnishee Order is made effective.
Bankers Right of Set-Off … Banks tend to be cautious about combining accounts without notice and in the absence of the customer‟s express authority to do so. 2/4/2013 Presentation by: Prof. VIGHNESWAR 25 .
VIGHNESWAR 26 . The right to charge interest on unauthorised overdrafts and debit interest to the account is also an implied term of the contract. Bank of New South Wales v Brown (1982-3) 2/4/2013 Presentation by: Prof.Banker‟s Right to Charge Fees & Interest The bank’s right to charge fees & Commission is based on universal custom and is an implied term of the banker-customer contract.
Banker‟s Obligations A bankers obligation to pay cheques to the value of the credit balance of the account or to the arranged overdraft limit of the account provided: The cheque is an effective instrument drawn in proper form There are sufficient funds to meet the value of the cheque There are no legal impediments to the banks honouring the cheque Presentation by: Prof. VIGHNESWAR 27 2/4/2013 .
132 enable the IT authorities to require even banks to furnish information in relation to bank accounts. Under Companies Act 1956 – Sec 235 to 237.Sec 131. Banks are required to the information to the Govt. Court can order the bank to disclose the information Under the RBI Act 1934. Presentation by: Prof.Banker‟s Obligations (Owing to Statutes) Disclosure of information required by law: Under I T Act 1961. appointed Inspectors can seek the information about the bank accounts of the companies from the banks Under Banker’s Books of Evidence Act 1891. VIGHNESWAR 28 2/4/2013 . the Central Govt. RBI can seek the information Under BR Act 1949.
Sec 36. VIGHNESWAR 29 .Banker‟s Obligations (Owing to Statutes)… Under Gifts Tax Act 1958 . Tax Authorities are conferred with the powers to seek information Under Criminal Procedure Code – Sec 94(3) Disclosure to Police during investigations FEMA Act 1999 – Sec 43 enables the Officers of the Directorate of Enforcements and Reserve Bank to investiogate the bank accounts 2/4/2013 Presentation by: Prof.
VIGHNESWAR 30 .Banker‟s Obligations Disclosure permitted by Banker’s Practices and Usages With implied of Express consent To protect bank’s interest ( to guarantor) Banker’s Reference 2/4/2013 Presentation by: Prof.
2/4/2013 Presentation by: Prof.Liability of the banker in case of wrongful dishonour of Cheques Sec 31 of NI Act: the banker is liable to compensate the drawerfor loss or damage caused by default on his part in dishonouring the cheque without sufficient reason. VIGHNESWAR 31 .
Its Theory and Practice states that an “Instrument is negotiable when it is.N I Act 1881 2/4/2013 Definition of Negotiable Instrument Negotiable Instruments Act does not define Negotiable Instrument but merely states that “a negotiable instrument means a promissory note. VIGHNESWAR 32 . bill of exchange or cheque payable either to order or bearer” (Sec 13). transferable by delivery or by endorsement and delivery.C. Justice K. the property in which is acquired by any one who takes it bona fide and for value notwithstanding any defect of title in the person from whom he took it” Thomas in his Commerce. by a legally recognised custom of trade or by law.” Presentation by: Prof.Willis defines Negotiable Instrument as “one. without notice to the party liable in such a way that (a) the holder of it for the time being may sue upon it in his own name. and (b) the property in it passes to a bona fide transferee for value free from any defect in the title of the person from whom he obtained it.
it is an exception to the general rule of law. Given the above example. Special feature of Negotiable Instrument A negotiable instrument is an exception to this general rule of law The privilege of the holder of a negotiable instrument in due course constitutes the main difference between a transferable instrument or article and a negotiable instrument (For example. then X is bound to loose the title over the book as Y had no valid title over the book. But Y had stolen the book from the house of Z. Whereas. In case the thief – Y is caught for this theft and since the stolen book is with X. X purchases a book from Y against full value. Z will have the right against Y. he will have a good title therto and will not be responsible to the true owner Z. 33 . If X has taken a Cheque. in the case of Negotiable Instrument.Essentials of a Negotiable Instrument Transferability: Easily transferable from one person to other person Ownership of the property in the instrument may be passed on by mere delivery or by endorsement and delivery Negotiability: Confers absolute and good title on the transferee who takes it in good faith for value and without notice of the fact that the transferor had defective title thereto.
Types of Negotiable Instruments Negotiable Instruments by Statute Cheque Bill of Exchange Promissory Notes Negotiable Instruments by Custom or Usage Shah jog hundis. delivery orders and railway receipts Exceptional Cases of Negotiable Instruments The drawer of the instrument can take away or alter the essential characteristic of negotiability ( “ Not Negotiable” ) 2/4/2013 Presentation by: Prof. VIGHNESWAR 34 .
(Sec 4) A Promissory Note is drawn and signed by the debtor.Definitions of a „Promissory Note‟ A Promissory Note is an instrument in writing ( not being a bank note or currency note) containing an unconditional undertaking. who promises to pay the creditor a certain sum of money. signed by the maker.05. VIGHNESWAR 2/4/2013 To X 35 . to pay a certain sum of money only to. Signed On a Revenue Stamp Presentation by: Prof. or to the bearer of the instrument. or to the certain person. Specimen of Promissory Note: Hyderabad Rs.2008 Three months after date I promise to pay X the sum of Rupees Fifty Thousands for value received. 50000 19.
05.2008 Three months after date I pay to X or order the sum of Rupees One lakh for value received.Definitions of a „Bill of Exchange‟ A Bill of Exchange is an “instrument in writing containing an unconditional order. 100000 19. The maker of the bill is called the „Drawer‟ The person who is directed to pay is called the „Drawee‟ The person who is entitle to receive payment is called the „Payee‟ Specimen of A Bill of Exchange: Hyderabad Rs. or to order of. directing a certain person to pay a certain sum of money only to. a certain person or to the bearer of the instrument. Accepted Signed Stamped 2/4/2013 Presentation by: Prof. VIGHNESWAR 36 . signed by the maker.” (Sec 5) A Bill of Exchange contains an order from the creditor to the debtor to pay a certain amount to a person mentioned therein.
Definitions of a „Cheque‟ A Cheque is a “Bill of Exchange drawn on a specified banker and not expressed to payable otherwise than on demand” (Sec 6) A Cheque is a bill of exchange which is alsways (i) drawn on a banker specified therein (ii) payable on demand The author of the Cheque is called the „Drawer‟ The Bank who is directed to pay is called the „Drawee bank‟ The person who is entitle to receive payment is called the „Payee‟ The bank which pays the cheque is called the „Payee bank‟ Specimen of A Cheque: 19.2008 Pay……………………………………………………………………….. ……………………………………….or Bearer ………………………………………………………………………………….05.Intls. ……. …… STATE BANK OF INDIA Signed KUKATPALLY. VIGHNESWAR 37 . LF.. HYDERABD 2/4/2013 Presentation by: Prof.. Rs. ………. 150000 A/ c No.
8. 4.Distinguishing features of Negotiable Instruments 1. 3. 5. VIGHNESWAR 38 2/4/2013 . 7. 10. 6. 9. 2. Instruments should be in writing Unconditional order / promise The amount of the instrument should be certain The instrument must be payable either „to order‟ or „bearer‟ (sec 13) The payee must be a certain person (Sec 5) The payee may be more than on person (Sec 13-2) The time of payment (Sec 19) Signature of the drawer or promisor Delivery of the instrument is essential Stamping of Promissory Notes and Bills of Exchange is necessary Presentation by: Prof.
Bill of Exchange or Cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. Presentation by: Prof. VIGHNESWAR 39 2/4/2013 .” (Sec 8) The Conditions: He must be entitled to the possession of the instrument in his own name and under a legal title.Holder and „Holder in Due Course‟ Holder: “Holder of a Promissory Note. He must be entitled to receive or recover the amount from the parties concerned in his own name.
Holder in Due course must obtain an instrument after taking all possible care about the transferor‟s good title. or became the payee or endorsee thereof if payable to order before the amount mentioned in it became payable. became the possessor of a promissory note. and without having sufficient cause to believe that defect existed in the title of the person from whom he derived his title. for consideration. 40 .Holder in Due Course: “Holder in Due Course means any person who. if payable to bearer. bill of exchange or cheque.” The Conditions: The instrument must be in the possession of the holder in due course The instrument must be regular and complete in all respects The instrument must have been obtained for full value and consideration The instrument must have been obtained before the amount mentioned therein becomes payable ( not applicable for Cheques) The Holder in Due Course should have obtained the instrument without having sufficient cause to believe that any defect existed in the title of the transferor.
Rights of a Holder The Holder of Negotiable Instrument enjoys the following rights: 1. 3. VIGHNESWAR . 5. if such negotiation is not prohibited by the direction given in the cheque He can claim payment of the instrument and can sue in his own name on the instrument. 2/4/2013 An endorsement in blank may be converted by him into an endorsement in full. He is entitled to cross a cheque generally or specially and also with the words “Not Negotiable” He can negotiate a cheque to a third person. 4. A duplicate copy of lost cheque may be obtained by a holder Presentation by: 41 Prof. 2.
2.Privileges of a „Holder in Due Course‟ A Holder in Due Course enjoys the following privileges: 1. VIGHNESWAR 42 2/4/2013 . 8. 4. 3. 7. He possesses better title free from defects (Sec 53) Liability of prior parties to „Holder in Due Course‟ (Sec 36) Right of the „Holder in Due Course‟ in case of Inchoate Instrument ( i. 9. incomplete) (Sec 20) Right in case of fictitious bills (Sec 42) Right in case the instrument is obtained by unlawful means or for unlawful consideration (Sec 58) Estoppel against denying original validity of the instrument (Sec 120) Estoppel against denying capacity of payee to endorse (Sec 121) Estoppel against denying signature or capacity to prior party Presentation by: Prof. 6. 5.e.
2/4/2013 The payment should be made in accordance with the apparent tenor of the instrument The payment should be made in good faith and without negligence The payment must be made to the person in possession of the instrument. 2.Payment in Due Course Definition: „Payment in Due Course‟ means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned. (Sec 10) Essential Features: 1. 3. Presentation by: Prof. VIGHNESWAR 43 .
Negotiation Meaning of Negotiation: “When a promissory note. bill of exchange or cheque payable to order is negotiable by the holder by endorsement and delivery thereof”. (Sec 48) 2/4/2013 Presentation by: Prof. (Sec 14) An instrument may be negotiated in any of the following two ways: By Delivery “A promissory note. so as to constitute that person. (Sec 47) By Endorsement and Delivery “A promissory note. bill of exchange or cheque is transferred to any person. VIGHNESWAR 44 . the holder thereof. the instrument is said to be negotiated”. bill of exchange or cheque payable to bearer is negotiable by delivery thereof”.
on the back or face thereof or on a slip of paper annexed thereto or so signs for the same purpose on a stamped paper intended to be completed as a negotiable instrument. drawee or acceptor at or after maturity but not thereafter”. (Sec 60) Endorsement not for a part of the amount The instrument must be endorsed for its entire amount. otherwise than as such maker. No addition or omission of initial of the name 4. 2/4/2013 Presentation by: Prof. Prefixes and suffixes to excluded 1. he is said to have endorsed the same and is called endorser. payee or endorsee or all of several joint makers. of a negotiable instruments may endorse and negotiate the same. Spelling 3. for the purpose of negotiation.Endorsement Definition: “When the maker or holder of a negotiable instrument signs the same. payees or endorsees.” (Sec 51) Time A negotiable instrument may be negotiated until its payment has been made by the banker. (Sec 56) General Rules regarding the Form of Endorsements Signature of the endorser 2. drawer.” – (Sec 15) Legal Provisions of Endorsements Effect of Endorsement “The endorsement of a negotiable instrument followed by delivery transfers to the endorsee the property therein with the right of further negotiation.” (Sec 50) Endorser “Every sole maker. drawers. VIGHNESWAR 45 .
by express words restrict or exclude the right to negotiate or may merely constitute the endorsee an agent to endorse the instrument or to receive its contents for the endorser or for some other specified person. But under this Facultative Endorsement the „Notice of dishonour may be waived‟. exclude his own liability thereon (Sec 52) Facultative Endorsement: It is responsibility of the endorsee to give the notice of dishonour of the instrument to the endorser. dependent on the happening of a specified event. or the right of the endorsee to receive the amount due thereon. or to the order of. by express words in the endorsement. the endorser adds a direction to pay the amount mentioned in the instrument to. a specified person. (Sec 16) Endorsement in full: If in addition to his signature. (Sec 16) Conditional Endorsement: If the endorser of a negotiable instrument. The endorser remains liable to the endorsee for the non-payment of the instrument.Types of endorsements Endorsement in blank: If the endorser signs his name only the endorsement is said to be “in blank”. such endorsement is called a conditional endorsement. (Sec 50) Endorsement Sans Recourse: An endorser may. (Sec 52) Restrictive Endorsement: The endorsement may. such an endorsement prohibits further endorsement and is called Restrictive Endorsement. by express words in the endorsement. makes his liability. VIGHNESWAR 46 . 2/4/2013 Presentation by: Prof. the endorsement is said to be „endorsement in full‟. although such event may never happen.
e. cannot combine accounts if one is a personal account the other a trust account). VIGHNESWAR 47 2/4/2013 .Banker‟s Right of Set-Off The following conditions must apply: The account must be held by the customer in the one capacity (i. There must be no contract precluding the right to set off The customers indebtedness must have been incurred to it as a banker not under some other service Presentation by: Prof.
2/4/2013 Presentation by: Prof. VIGHNESWAR 48 .
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