Course Code: 19BMC205A

Course Title: Banking and Financial Institutions

Course Leader

Mrs. Savitha Kulkarni

savitha.ms.mc@msruas.ac.in

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 Lecture No. 3
Socio economic environment

At the end of this session, students will be able to:

– Explain socio economic environment in banks

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 Contents

• Socio economic environment in Banks

• Social obligations of bank

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 Obligations of Bankers

• Bankers are under the obligations to fulfil certain duties while dealing
with customers. Such obligations are as under:

1. Obligation to honour the customer’s cheques

2. Obligation to maintain secrecy of customer’s account
3. Obligation to receive the cheques and other instruments for collection.
4.Obligation to give reasonable notice before closing the customer’s
accounts

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 Obligation to Honour the Customer’s Cheques

• Section 31 of the Negotiable Instruments Act, 1881, imposes a

statutory obligation upon the banker to honour the cheques of his
customer
• “The drawee of a cheque having sufficient funds of the drawer in his
hands, properly applicable to the payment of such cheque, must pay
the cheque when duly required so to do and in default of such
payment, must compensate the drawer for any loss or damage, caused
by such default.”
• This provision clearly indicates that the banker should honour the
customers demand for payment by cheque on certain condition

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 Obligation to Honour the Customer’s Cheques Contd..

• Sufficient Balance
• Application of the Funds
• Duly Required to Pay
• The instrument used for drawing the amount should be properly
written and fulfil and legal obligations.
• There should not be any legal restriction to pass the cheque for
payment say in case of Garnishee order, restriction is imposed in the
account.
• Consequences of Wrongful Dishonor of Cheque

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 Obligation to Maintain Secrecy of Customer’s
Account
• A bank’s profession also demands that he should maintain the
particulars of his customer’s accounts in secret
• The banker has an implied obligation to maintain secrecy of the
customers account
• He should not disclose matters relating to the customer’s financial
position since it may adversely affect the customer’s credit and
business
• This obligation continues even after the account of the customer is
closed

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 Obligation to Maintain Secrecy of Customer’s Account Contd..

• Only in the following circumstances, disclosure is justified:

• To Satisfy Statutory Requirements
• As a Common Courtesy
• Disclosure at the will of Customer
• To Protect his Own Interest
• To Protect Public Interest
 Where considerable amounts are received from other countries
 In case the bank thinks that the customer is carrying on such activities which
are not congenial in the interest of the nation
 In case the banker thinks that the customer is trying to break the provisions
of the law on the basis of his records
 When the Government calls upon the bank to give information regarding a
particular customer and when the bank feels that a particular customer has
committed an offence 8
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 Obligation to Receive Cheques and Other
Instruments for Collection
• Basically, the business of banking acceptance of money on deposit
account and payment of cheques
• It also includes collection of cheques. It may rightly be contended that
anyone who does not perform these essential services is not a banker
• Whenever a banker is entrusted with the job of collection of cheques,
they must be collected as speedily as possible through the accepted
channels
• Failure to exercise proper care and employ the recognized route for
collection may make the bank liable for any loss which the customer
may sustain

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 Obligation to Give Reasonable Notice before
Closing the Account
• According to law, a debtor and a creditor may terminate the
relationship without notice – by the debtor paying off the balance or
the creditor recalling the debt
• It is not so simple between a banker and a customer for the obvious
reason that the banker is under an obligation to honour his customer’s
cheques
• If this obligation could be terminated by the banker without notice,
the customer might be faced with an embarrassing situation

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 Disclosure of information about customers account
as required by law
• When the law requires such disclosure to be made
 Under the Income- Tax Act, 1961
 Under the Companies Act, 2013
 By order of the Court under the Banker’s Books Evidence Act, 1891
 Under the Reserve Bank of India Act,1934
 Under the Banking Regulation Act, 1949
 Under the Gift Tax Act, 1958
 Disclosure to Police
 Under the Foreign Exchange Management Act, 1999
 Under the Industrial Development Bank of India Act, 1964

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 References
a. Essential Reading
1. Class Notes
2. L M Bhole and Jitendra Mahakud (2017), financial institutions and Markets, 6th edition,
Mc Graw Hill.
3. Benton Gup (2016) Banking and Financial Institutions, Wiley Publications.

b. Recommended Reading
1. N Kannan, (2017),Banking sectors reforms in India, Abhijit publications
2. IIBF (2017) Legal and Regulatory Aspects of Banking, 3rd edition, Macmillan
3. Indian Institute Of Banking & Finance, (2015), Banking Products And Services,
Taxmann Publications Pvt. Ltd

c. Magazines and Journals

1. Business India, fortnight subscription (India Book House Ltd)
2. Business Today, fortnight subscription (Living media India Limited)
3. Money Today, monthly subscription (Living media India Limited)
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 Disclaimer

• All data and content provided in this presentation

are taken from the reference books, internet –
websites and links, for informational purposes only.

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