Professional Documents
Culture Documents
What is a Bank ?
Background
Governments have always believed that banking is too important to leave
to bankers. As a result, there have always been, and always will be, laws
that regulate the business. On the other side of the same coin, bankers
have always believed that government is too important to leave to the
politicians and have never been reluctant to lobby for special legal
treatment.
Regulation and special treatment both require a definition of the business
of banking. For many years, this task was left to the judges in particular
cases, but the 1989 rewrite of the Banking Act 1959 incorporated a
definition of banking business in s 5.
The definition was almost immediately exposed as being inadequate.
Regulations authorised by the Act have added several additional activities
which are banking business. In addition, section 11 of the Act authorises
APRA to determine that certain provisions of the Act do not apply to an
individual or a corporation.
Section 7 of the Act prohibits non-corporations from carrying on any
banking business unless subject to a s 11 determination. Section 8
prohibits non-ADI corporations from carrying on any banking business
without a special determination.
There is concern about the meaning of any in these prohibitions. Does it
mean any part of banking business or something else.
To understand the operation of these provisions, it is useful to have a brief
review of both the judicial and statutory definitions.
Definition of a Bank
A bank as "an establishment for custody of money, which it pays out on
customer's order."
Judicial definitions
iii)
They accept money from, and collect cheques for, their customers
and place them to their credit;
They honour cheques or orders drawn on them by their customers
when presented for payment and debit their customers
accordingly. These two characteristics carry with them also a third,
namely:
They keep current accounts, or something of that nature, in their
books in which the credits and debits are entered.
Statutory definition
After many years of leaving the definition to the courts, the Banking Act
effectively accepted the Isaacs J definition. Section 5 now provides:
banking business means:
a a business that consists of banking within the meaning of
paragraph 51(xiii) of the Constitution; or
b a business that is carried on by a corporation to which
paragraph 51(xx) of the Constitution applies and that consists,
to any extent, of:
o i both taking money on deposit (otherwise than as partpayment for identified goods or services) and making
advances of money; or
o ii other financial activities prescribed by the regulations for
the purposes of this definition.
Note that the first part of the definition means that the Isaacs definition is
not exhaustive.
The omission of any reference to payment mechanisms means that the
definition is inadequate. This has been recognized implicitly by the addition
of two additional prescribed financial activities.
The Banking Regulations 1966 now permit APRA to determine that the
provision of certain purchased payment facilities (PPFs) is banking
business: reg 3. The definition and concept of the PPF is defined in the
Payment Systems (Regulation) Act 1998.
Regulation 4 provides that credit card acquiring and credit card issuing are
banking business if the acquirer or issuer is a participant in a credit card
scheme designated on 11 April 2001. The schemes so designated are
Bankcard, Visa and MasterCard.
Types of banks
1. Saving Banks
Saving banks are established to create saving habit among the people.
These banks are helpful for salaried people and low income groups. The
deposits collected from customers are invested in bonds, securities, etc.
At present most of the commercial banks carry the functions of savings
banks. Postal department also performs the functions of saving bank.
2. Commercial Banks
Every country of the world has a central bank. Federal Reserve and in
U.K, Bank of England. These central banks are the bankers of the other
banks. They provide specialized functions i.e. issue of paper currency,
working as bankers of government, supervising and controlling foreign
exchange. A central bank is a non-profit making institution. It does not deal
with the public but it deals with other banks. The principal responsibility of
Central Bank is thorough control on currency of a country.
7. Co-operative Banks
Hong Kong Bank, Bank of Tokyo, Bank of America are the examples of
Foreign Banks working in India. These banks are mainly concerned with
financing foreign trade. Following are the various functions of Exchange
Banks :1. Remitting money from one country to another country,
2. Discounting of foreign bills,
3. Buying and Selling Gold and Silver, and
4. Helping Import and Export Trade.
9. Consumers Banks
Consumers bank is a new addition to the existing type of banks. Such
banks are usually found only in advanced countries like U.S.A. and
Germany. The main objective of this bank is to give loans to consumers for
purchase of the durables like Motor car, television set, washing machine,
furniture, etc. The consumers have to repay the loans in easy installments.
Codification
The collection and systematic arrangement, usually by subject, of the laws
of a state or country, or the statutory provisions, rules, and regulations that
govern a specific area or subject of law or practice.
The term codification denotes the creation of codes, which are compilations
of written statutes, rules, and regulations that inform the public of
acceptable and unacceptable behavior.
U.S. law is often described as a Common Law system of Jurisprudence.
This means that it relies on previous cases, or precedents, to determine
procedures and to decide the outcome of cases. U.S. jurisprudence also
involves the interpretation of written laws, including constitutions,
regulations, ordinances.
Codification rearranges and displaces prior statutes and case decisions.
Codification of an area of law generally constitutes the whole source that is
relied upon for a legal question in that area. Thus, when a state codifies its
criminal laws, the statutes contained within the new code supersede the
laws that had been in place prior to the codification. There are exceptions
to this general rule, however. For example, the Michigan Supreme Court
ruled in 1994 that Dr. Jack Kevorkian could be prosecuted under Michigan
common law for assisting patient with suicide, despite the absence in
Michigan's criminal code of a statute that prohibits such action law (People
v. Kevorkian, 447 Mich. 436, 527 N.W.2d 714).
Public demand for written laws can be traced to the dawn of recorded
history. The first known codification of laws is attributed to Ur-Nammu, king
of Ur, in the twenty-fifth century B.C. Lipit-Ishtar, king of Isin, in ancient
Sumer, promulgated a written code around 2210 B.C. Hammurabi, a
monarch in Babylonia, codified laws in the eighteenth century B.C. Both
of the situations that it might cover. They further argued that precedents,
carefully developed over the centuries, were fairer than rules reflecting
moods of the moment.
Codification noun act, arrangement of laws, arrangeeent of rules, arrangement of
statutes, authoritative law, bill, bylaws, canon, capitulary, categorization of laws,
collection of statutes, commandment, compendium, compilation, doctrine,
enactment, formalization of laws, formulation of laws, lawmaking, legislation,
ordinance, precept, regulation, rule, rules and regulations, rulings, scheduling,
scheme, set of rules, standardization of laws, statute, statute book, statute law,
system, system of laws, system of regulations, systematic arrangement of laws,
systematization of laws, tabulation, written law
References
Ellinger and Lomnicka (1994)
E P Ellinger and E Lomnicka. Modern Banking Law, 2nd
ed. Oxford University Press, 1994. Tyree (1999)
Alan L Tyree. Regulating the payment system - part 4 - purchased payment
facilities. JBFLP, 10 (4): 305307, 1999. Weaver et al. (2003)
George Weaver, C R Craigie, Gregory Burton, Prudence Weaver, Rena Sofroniou,
and Alan L Tyree. The law relating to banker and customer in Australia. Thomson
Lawbook Co, third edition, 2003.
Where the funds to the credit of the customer are not applicable to
the payment of the cheque. (when the money held in trust) Where
the cheque is ambiguous or doubtful. Where the cheque is mutilated
(imperfect). Where the cheque is irregular or materially altered.
Where the cheque is not duly presented. Where the cheque is post
dated. Where the cheque has become stale. (six months from the
date of issue). Where the cheque is presented at a other branch.
Where an account is in joint names of a few persons, but they have
not all signed the cheque. Where the cheque is for an amount in
excess of the balance.
7. When must a banker dishonor a cuctomers cheque? When the
customer become insolvent. When the customer countermands
payment (order the banker not to honour the cheque.) When the
banker receive notice of the customers death. But he pays the
cheque before he receive notice, the payment is valid. When the
banker receive notice of the customers insanity (madness, lunacy).
When banker receive the legal notice about customer or dealing with
money from some other sources. When the customer gives notice to
the banker to close the account. When the customer gives notice of
assignment of the credit balance of his account. When the banker
suspects, that the title of the person presenting the cheque is
defective. When the holder gives a notice of loss the cheque to the
banker
8. Protection of Paying Banker Cheques payable to bearer Crossed
cheques Payment of cheque crossed generally. Payment of cheque
crossed specially. Payment of crossed cheque in due course.
Payment of crossed cheque out of due course.
9. Protection of collecting banker Collecting banker as an agent.
Crossed cheques. Open cheques. Collecting banker as a holder in
due course.
NATURE OF RELATIONSHIP BETWEEN BANKER & CUSTOMER
Before we take up the relationship that exists between a banker and his
customer, let us understand the definitions of the terms banker and
customer.
Definition of Banking:
respect of the money deposited in the account of a customer with the bank
is that of a debtor and a creditor.
On the opening of an account a banker assumes the position of a debtor.
The money deposited by the customer with the bank is in legal terms lent
by the customer to the banker who males use of the same according to his
discretion. The creditor has the right to demand back his money from the
banker, and the banker is under an obligation to repay the debt as and
when he is required to do so.
A depositor remains a creditor of his banker so long as his account carries
a credit balance. But he does not get any charge over the assets of his
debtor/banker and remains an unsecured creditor of the banker. Since the
introduction of deposit insurance in India in 1962 the element of risk of the
depositor is minimized as Deposit Insurance and Credit Guarantee
Corporation undertakes to insure the deposits upto a specified amount.
Bankers relation with the customer is reversed as soon as the customers
account is overdrawn. Banker becomes creditor of the customer who has
taken a loan from the banker and continues in that capacity till the loan is
repaid. As the loans and advances granted by a banker are usually secured
by the tangible assets of the borrower, the baker becomes a secured
creditor of his customer.
Various legal relationships of banker and customer
2) Agent and Principal- Sec.182 of The Indian Contract Act, 1872 defines
an agent 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.
One of the important relationships between a banker and customer is that
of an agent and principal. The banker performs various services of the
customer, where he acts as the agent.
Buying and selling securities of customer
Collection of cheques, bills of exchange, promissory notes on behalf of
customer
Acting a trustee, executor or representative of a customer
1)
Trustee and beneficiary- section 3 of the Trusts Act defines a
trustee as one to whom property is entrusted to be administered for the
benefit of another called the beneficiary. A banker becomes a trustee under
special circumstances. When a customer deposits securities or other
valuables with the banker for safe custody, the banker acts as trustee of
customer.
2)
Bailee and bailor- during certain circumstances banker becomes
bailee. When he receives gold ornaments and important documents for
safe custody he takes charge of it as bailee and not trustee or agent. He
cannot make use of them as he is bound to return the identical articles on
demand.
3)
Pawnee and pawner- pawn is a sort of bailment in which the
goods are delivered to another as a pawn, to be a security for money
borrowed. Thus a banker acts as a pawnee where a customer delivers he
goods to him to be kept as security till the debt is discharged. The banker
can retain the goods pledged till the debt is paid.
4)
Mortgagee and mortgagor- the relation between a banker as
mortgagee and his customer as mortgagor arises when the latter executes
a mortgage deed in respect of his immovable property in favour of the bank
or deposits the title deeds of his property with the bank to create an
equitable mortgage as security for an advance.
5)
Lessee and lessor- when a customer hires a locker in the banks
safe deposit vault, the bank undertakes to take necessary precaution for
the safety of the articles in the locker. The relation between the parties is
that of a lessor and lessee.
6)
Guarantor and guarantee- a bank as guarantor gives guarantee
to its customer by issuing a letter of credit. It is a kind of credit facility to its
customer to facilitate international trade. A bank guarantee contains an
undertaking to pay the amount without any demur on mere demand of the
principal amount on the ground for non-performance or breach of contract.
7)
Fiduciary relationship- every relation of trust and confidence is a
fiduciary relation. A banker who receives a customers money is under a
duty not to part with it which is inconsistent with the customers fiduciary
character and duty. In Official Assignee v. Rajaram Aiyar, it was held that
where banks old money for a specific purpose of sending it somebody the
money is impressed with trust.
Special relationship between banker & customer
By opening an account with the banker, there will be some rights conferred
and obligations imposed to the banker as well as the customer. These
rights and duties are reciprocal i.e. the bankers duties are the customers
rights and the bankers rights are the customers duties. These rights and
obligations are called the special features of relationship between banker
and the customer.
The special relationship between banker and customer can be presented
as under:
DUTIES AND OBLIGATIONS OF BANKER:
The primary relationship between banker and his customer is that of a
debtor and a creditor. This relationship imposes the following special
obligations on the banker:
A) OBLIGATION TO HONOR CHEQUE: The deposits accepted by a
banker are his liabilities repayable on demand or otherwise. The banker is,
therefore, under a statutory obligation to honor his customer's cheque in
the ordinary course of business. Section 31 of the Negotiable Instrument
Act, 1881, lays down that:
" 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."
Thus, a banker is bound to honor his customer's cheques provided that
following conditions are fulfilled:
1)
There must be sufficient funds of the drawer in the hands of the
drawee. By sufficient funds is meant that funds at least equal to the amount
of the cheque presented for payment. Any over draft arrangement or facility
granted in favor of the customer needs to be taken into consideration and
payment to be made within the limit.
2)
The funds must properly be applicable to the payment of the cheque.
A customer might have several bank accounts in his various capacities. If
some funds are earmarked by the customer for some specific purposes,
the said funds are not available for honoring his cheque. In addition, it is to
be noted here that in case of a few special types of accounts can not be
drawn upon in the personal capacity of a trustee, executor etc., funds are
not available for honoring the customer's cheque in such case.
3)
The banker must duly be required to pay the cheque. It means that
the cheque, complete and in order, must be presented before the banker
for payment.
LIABILITY OF THE BANKER IN CASE OF WRONGFUL DISHONOR OF
CHEQUE:
A Banker has the statutory obligation to honor his customer's cheques
unless there are valid reasons for refusing payment of the same. In case he
dishonors a cheque, intentionally or by mistake, he is liable to compensate
the customer for the loss suffered by him.
BANKER'S LIABILITY:
As already noted above, the words "loss or damage" in section mean and
include:
I)
The monetary loss suffered by the customer; and
II)
The loss of credit or reputation in the marker.
It is, therefore, to be noted that the banker is liable to compensate the
drawer not only for the actual monetary loss suffered by him; but also for
the injury to or loss of his reputation, as a result dishonor of a cheque
B) OBLIGATION TO MAINTAIN SECRECY OF ACCOUNTS:
BANKER'S RIGHT:
a)
The banker has the right to return deposit if not in proper manner and
time.
b)
The banker has the right to return the cheque if not drawn properly or
in time or for some other reasons. C) The banker has the right to debit the
customer's account for any charges, interest and commission if
recoverable. d) The banker has the right to exercise lien, right of set-off etc.
RIGHTS OF CUSTOMER:
The customer has the following rights based on his relationship with the
banker:
a)
To deposit money in his account on time;
b)
To demand repayment by issuing cheque or written order
properly in proper time and place;
c)
d)
i)
CUSTOMER'S OBLIGATION:
A customer has the following duties and obligations to perform:
I)
7.
(a) Sufficient funds- there must be sufficient funds of the drawer in the
hands of the drawee. A banker should be given sufficient time to
release the amount of the cheque sent for collection before the said
amount can be drawn upon by the customer. The banker can
dishonor the cheques if there are insufficient funds.
(b)
(c) The banker must be duly required to pay- the banker is bound to
honour the cheque only when hi is duly required to pay. The cheque,
complete and in order, must be presented before the banker at the
proper time.
2. Obligation to maintain secrecy of accounts-The customers
account details are recorded in the books of the banker and the true
state of his financial dealings are available with the banker. If any of
these facts are made known to others, the customers reputation might
suffer and he might incur losses also. The banker is therefore under an
obligation to take utmost care in keeping secrecy of the details of the
customer.
However, this rule has exceptions(mention briefly)
3. Obligation to keep a proper record of transaction- the banker
must keep a proper and accurate record of all the transactions of the
customer. Sometimes, he may commit some wrong.
What are the circumstances under which a disclosure by banker is
justified? OR Bankers duty of secrecy is not absolute. Explain.
The duty of the banker to maintain the secrecy is not an absolute one. It is
also subject to certain exceptions. The exceptions were stated in the
landmark judgment Tournier v National Provincial Bank Limited.
Section 13 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970 also allows certain exceptions.
(e)
(f)
(g)
3. Disclosure in the interest of the bank- the banker may disclose the
state of his customers account in order to legally protect his own
interest. For example- if the baker has to recover the dues from the
customer or the guarantor, disclosure of necessary facts to the
guarantor or the solicitor becomes necessary and is justified.
4. Disclosure under the express or implied consent of a customerthe customer may instruct his banker to give some or all other
particulars of his account to say, his auditor, in such case banker can
disclose. Banker can also disclose to a referee whose name is
suggested by the customer. It is implied that the banker can disclose
information to the guarantor.
Banks solicit deposit of money from the members of the public. Any person
who is legally capable of entering into a valid contract may apply in the
proper way to deposit his money with the bank.
A minor is a person who has not attained the age of 18 and in case a
guardian is appointed, it is 21. Minors are regarded pet children of law.
In Mohori Bibi v. Dharmodas Ghose, a minor executed a mortgage for Rs
20000 and received Rs 8000 from the money lender. Subsequently, the
minor sued for setting aside the mortgage. The money lender wanted
refund of money which he had actually paid. The PC held that an
agreement by a minor was absolutely void and therefore, money lender
was not entitled repayment of money.
Some of the precautions to be taken by the banker on opening and
operating account of a minor are1)
2)
3)
4)
5)
Accounts for illiterate minors are not opened in their single name.
6)
7)
8)
Illiterates
An illiterate person is competent to contract and bank may open an account
in his name, but special care should be taken by the banker before opening
an account.
1)
2)
3)
The left hand thumb impression in case of male illiterate and right
hand thumb impression in case of female illiterate are duly attested
by some responsible person on the account opening form.
4)
5)
6)
7)
Married women
The Hindu married women are governed by the Hindu Succession Act and
other married women by Indian Succession Act. A banker may open an
account in the name of a married woman like any other customer. However,
a banker should exercise caution while opening account for the wife of an
undischarged insolvent.
1)
2)
In case she applies for an overdraft, the banker should see that
she owns separate property in her own name and precaution should
be kept in mind regarding her status and capacity to pay and the
purpose for which the borrowings are made. Also he should seek
suitable securities preferably on her, which can be attached by the
Courts.
3)
4)
5)
6)
Pardhanishin women
In case of a pardhanishin woman who remains completely secluded
the following presumption exists1)
2)
The same might not have been done with free will and with full
understanding of what the contract actually means.
1. The creditor (the customer) must demand payment. On his own, the
debtor (banker) will not repay the debt. However, in case of fixed
deposits, the bank must inform a customer about maturity.
2. The creditor must demand the payment at the right time and place.
The depositor or creditor must demand the payment at the branch of
the bank, where he has opened the account. However, today, some
banks allow payment at all their branches and ATM centres. The
depositor must demand the payment at the right time (during the
working hours) and on the date of maturity in the case of fixed
deposits. Today, banks also allow pre-mature withdrawals.
3. The creditor must make the demand for payment in a proper manner.
The demand must be in form of cheques; withdrawal slips, or pay
order. Now-a-days, banks allow e-banking, ATM, mobile-banking, etc.
2. Relationship of Pledger and Pledgee
The relationship between customer and banker can be that of Pledger and
Pledgee. This happens when customer pledges (promises) certain assets
or security with the bank in order to get a loan. In this case, the customer
becomes the Pledger, and the bank becomes the Pledgee. Under this
agreement, the assets or security will remain with the bank until a customer
repays the loan.
3. Relationship of Licensor and Licensee
The relationship between banker and customer can be that of a Licensor
and Licensee. This happens when the banker gives a sale deposit locker to
the customer. So, the banker will become the Licensor, and the customer
will become the Licensee.
executor,
correspondent
or