Professional Documents
Culture Documents
BANKING LAW
1. Explain the origin & development of banking in India.
2. What are the objectives & achievements of bank nationalization in India?
3. State the argument for & against nationalization
4. What are the main functions of banks?
5. Who is a banker and customer? Explain the general relationship between banker &
customer. OR The relation between a banker and a customer is that of a debtor and a
creditor. Explain.
6. Explain the special relationship between banker & customer. OR What is the special
relationship arising out of general relationship between a banker and a customer. OR
What are the rights and obligations of a banker towards a customer?
7. What are the obligations of a banker?
8. Explain the bankers right of general lien.
9.What are the circumstances under which a disclosure by banker is justified? OR
Bankers duty of secrecy is not absolute. Explain.
10. Who are the bankers special customers? Explain the precautions to be taken by the
banker in opening and operating their accounts.
11.What are the functions of commercial banks?
12.What are the functions of the Reserve Bank of India?
13. Explain the management, powers and constitution of the Reserve Bank of India.
14. Explain the role of Reserve Bank in economic development.
15. In what way does the Reserve bank exercise control over the commercial banks?
16. Explain the Reserve banks licensing function.
17. Write a short of Regional Rural Banks
18. Write a note on Central Co-operative banks.
19. What are the advantages & disadvantages of unit & branch banking?
20. What are the differences between schedule & non-schedule banks?
21. What are the rights of a banker against surety?What are the precautions to be taken
by the banker?
22. Explain the concept ts of guarantee & indemnity
23. What are the precautions to be taken by the banker in the case of hypothecation?
24. What are the differences between lien & hypothecation?
25. What are the differences between hypothecation & pledge?
26. Write a note of secured & unsecured loans
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The British came to India in the 17th century. The East India company established its Agency
houses in Bombay, Calcutta & Madras. These agency houses were the combination of trade
& banking in India.
Bank of Hindustan- Appendage of Alexander & Co.1st bank under European direction
Established in 1771 at Cal. Collapsed due to failure of parent company
Bengal bank was established in 1784
General Bank of India was established in 1786. It was the 1st joint stock company with
limited liability
Presidency banks were established in Calcutta, Bombay & Madras. It amalgamated into the
Imperial bank in 1921.
In 1865 Allahabad Bank was set up under European management
In 1875 Alliance Bank of Shimla was started
Oudh Commercial bank was the 1st purely Indian management joint bank.
Swadeshi movement stated in 1905 and the period from 1906 to 1913 was a period of boom
for Indian Banking. The Bank of Burma was established in 1904.
Bank of India, Bank of Rangoon & Indian Specie Bank was established in 1906
Some of the important banks which were established later were Bank of India, Central Bank
of India, Bank of Baroda, etc.
Achievements
Accelerated branch expansion in rural and backward regions- in 1969 bank branches
in rural areas accounted to only 22.5% of the total number of branches. Today
branches in rural areas account to 52%
Deposit mobilization-after nationalization banks attract deposits from different
sections by means of attractive deposit schemes
Finance to priority sectors- In 1969 the total credit given to priority sectors like
agriculture, small industries and rural development was only 2% of total bank credit.
By 2006-2007 in increased to around 40% of total credit
Increase in total transactions-the total deposits which was 4,664 crores in 1969
increased to 38.30 trillion
Differential rate of interest-to provide credit to weaker sections of the society at very
low rate of interest, banks came out with Differential Rate of Interest scheme in 1972
Profit making-after nationalization, banks are making profits in addition to achieving
economic and social objectives.
Safety-the government has given importance to safety of the banks. The RBI exercises
tight control over banks and safeguards depositors interest
Developmental functions- after nationalization, banks provide assistance for the
progress of agriculture, rural development, industry, trade and other developmental
plans of the government
Advances under self-employment scheme-public sector banks play a significant role
in promoting self employment through advances to unemployed through various
schemes of the government like IRDP,JGSY, etc
Enables the Reserve Bank to implement its monetary policy more effectively
It would replace the profit motive with service motive
It would secure standardization of banking services in the country
Would check the incidence of tax evasion and black money
Through pubic ownership and control, banks function like other public utility services
by catering to the financial need of the common man.
Like other countries, India should also get profit by nationalizing her banking
industry.
Essential for successful planning and all-round progress of the national economy,
community development and for the welfare of the people.
Against
Nationalization involves huge amounts to be paid as compensation to the shareholders
adding to the financial burden of the government.
Extending loans to agriculture and small scale industries is risky and less
remunerative and may weaken the economic viability of these institutions
It may not lead to socialism as State capitalism is not socialism
It may reduce the efficiency of these banks as political interference will impair the
smooth working of these institutions
It is not the remedy for growth of monopoly and the concentration of wealth and
power as the root cause for them lies in the existing economic system
Other countries like Sweden, Finland, Denmark etc have privately run banks and are
running smoothly
Control of RBI and government authorities make the bank officials scared to take
decisions and it adversely affects the bank services
The rapid extension of banking into the rural ad semi-urban areas has often been cited
as a major factor affecting the earning capacity of banks
Inter-state rivalries and policies would raise their ugly heads, damaging the present
sound banking system.
Banks were not at all responsible for the evasion of taxes or for creation of black
money. It was the product of an irrational tax-structure, high deficit financing and
corrupt public administration.
Bank nationalization should follow and precede nationalization of all major trades and
industries of the country
Inflation is caused by unsound monetary and fiscal policies and nationalization of
banks cannot solve this problem
Rapid expansion of branches has increased establishment costs and reduced the
quality of supervisory and managerial staff
Malpractices in privately owned banks can be checked by adopting appropriate
monetary and fiscal policies and through efficient supervision, nationalization is not
necessary
Public control leaves the doors of banks open for corruption and favoritism. Delays
and lethargy in work are common in public sector undertakings.
4. What are the main functions of banks?
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The relationship between a banker and a customer is of great significance. It depends upon
the services rendered by the banker to the customer.
Definition of banker
According to section 3 of the NI Act, 1881, banker includes any person acting as a banker
and any post office savings bank.
According to section 5(b) of the Banking Regulation Act, 1949, banking means the
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.
To sum up a banker is who
1) Take deposit account
2) Take current accounts
3) Issue and pay cheques
4) Collect cheques crossed and uncrossed for his customers.
Money lender is not considered as a banker as mere lending does not constitute banking
business. Banker is an institution which borrows money by accepting deposits from the
public for the purpose of lending to those who are in need of money.
Definition of customer
The term customer is not defined by law. Ordinarily, a person who has an account in a bank is
called a customer.
Acc to Dr. Hart, a customer is one who has an account with a banker or for whom a banker
habitually undertakes to act as such.
Thus to constitute a customer, the following essential requisites must be fulfilled:
1) He must have some sort of an account.
2) Even a single transaction constitutes a customer.
3) The dealing must be of a banking nature.
A customer need not be a person. A firm, joint stock company, a society or any separate legal
entity may be a customer. Explanation to section 45-Z of the BR Act clarifies that a customer
includes a Government department and a corporation incorporated by or under any law.
Relationship between a banker and customer
Relation of a debtor and a creditor
The general relationship between banker and a customer is that of a debtor and a creditor i.e.
borrower and lender. In Foley v. Hill, Sir John Paget remarks, the relation of a banker and a
customer is primarily that of debtor and creditor, the respective positions being determined by
the existing state of account. Instead of the money being set apart in a safe room, it is
replaced by the debt due from the banker. The money deposited with him becomes his
property, and is absolutely, at his disposal, and, save as regards the following of the trust
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funds into his hands, the receipt of money by a banker from or on account of his customer
constitutes him merely the debtor of the customer with super added obligation to honour his
customers cheques drawn upon his balance, in so far the same is sufficient and available.
In Shanthi Prasad Jain v. Director of Enforcement, Foreign Exchange Regulation, the SC
held that the banker and customer relationship in 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
Payment of insurance premium, telephone bills etc.
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.
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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.
6. Explain the special relationship between banker & customer. OR What is the
special relationship arising out of general relationship between a banker and a
customer. OR What are the rights and obligations of a banker towards a 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:
General obligations of banker towards customer
Obligation to honour cheques- banker accepts the deposits from the customer with an
obligation to repay it to him on demand or otherwise. The banker is therefore under a
statutory obligation to honour his customers cheques because, it is recognized under section
31 of the NI Act, 1881-
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 the banker is bound to honour his customers cheques provided the following conditions
are fulfilled-
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Bankers right for appropriation of payment- when a debtor owes two or more debts to a
creditor and he pays some amount which is not sufficient to meet any debt to the creditor
appropriation is done. It applies to a banker if the customer has more than one deposit or
more than one loan account.
In Devaynes v. Noble, famously known as Claytons case, a principle was laid down as to
when the customer has current account and deposits and withdraws money frequently the first
item on debit side will be discharged by the first item on credit side. The credit entries in the
account adjust or set off the debit entries in chronological order.
Bankers right to claim incidental charges- the banker may claim incidental charges on
unremunerative accounts such as service charges, processing charges, ledger folio charges,
appraisal charges, penal charges and so on.
Bankers right to charge compound charges- a banker has a special privilege to charge
compound interest. In Syndicate Bank v. West Bengal Cement Ltd, the adding of unpaid
interest due to the principal amount is recognized. However, the SC abolished this in case of
agricultural loans in the Bank of India case.
(a) disclosure of the account where money is kept for extreme political purposes in
contravening the provisions of any law
(b) disclosure of the account of an unlawful association
(c) disclosure of the account of a revolutionary or terrorist body to avert danger to the State
(d) disclosure of the account of an enemy in time of war
(e) disclosure of the account where sizable funds are received from foreign countries by a
constituent.
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.
Disclosure under the express or implied consent of a customer- the 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.
Disclosure under Bankers enquiry- it is an established banking practice to provide credit
information about their customers by one bank to another. The customer gives implied
consent to this practice at the time of opening the account.
10. Who are the bankers special customers? Explain the precautions to be taken by the
banker in opening and operating their accounts.
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 banks special customers are generally minors, married women, illiterate persons, lunatics,
blind people, drunkards, insolvents etc who are not competent to open such accounts. There
are also impersonal customers like schools, clubs, partnership firm, joint stock companies etc.
certain precautions are to be taken by banks while opening accounts in the name of the
following customers.
Minor
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 are-
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1) The banker may open a SB account but not a current account as it incurs no liability to
the minor.
2) At the time of opening of account of minor, the bank should record the genuine date of
birth of the minor. Banker should insist on to give some schooling record or date of birth as
entered in Births and Deaths Register.
3) Minors are allowed to open such accounts when they have completed a particular age
say twelve years in some banks and ten years in some others.
4) Banks should prudent to issue cheque books only to minors of, say sixteen or seventeen
years of age.
5) Accounts for illiterate minors are not opened in their single name.
6) As a measure of precaution, banks adopt a general rule not to accept deposit exceeding
a particular sum.
7) Since a contract with a minor is void and cannot be enforced against him in Court of
law, a minors account should never be allowed to be overdrawn.
8) A guarantee obtained to secure the money borrowed by a minor is also of no avail.
However, if the guarantor undertakes to indemnify he will be held liable though borrower is
minor.
Lunatics
Lunatics are persons of unsound mind. Lunatics are disqualified from contracting but the
disqualification does not apply to contract entered by lunatics during their period of sanity.
Following are bankers duty n case of lunatics-
1) Since a lunatic has no capacity to contract, acc to sec 11 of the ICA, no banker
knowingly opens an account in the name of a lunatic.
2) If an existing customer becomes insane, the banker must immediately stop the
operation of the account. It is so because, the banker has no right to debit his account for
payment made out of his account from the moment, the banker knows the fact of lunacy of
customer, the contract between them is void.
3) A banker must not be carried away by hearsay information or rumours. He must get
definite information about the lunacy of the customer.
4) If a banker dishonours a cheque in a hurry, without having any proof of lunacy, he will
be liable for wrongful dishonour of cheque.
5) It should return all cheques of customers account with the word refer to drawer and not
customer insane. It should make careful note of lunacy order.
6) If a third party is authorised to draw on customers account, that authority will cease
when the customer becomes insane since when a principal cannot act for himself his agent
can no longer act for him.
7) If one party to an account opened in joint names becomes mentally incapable of
managing his or her affairs, the banker should not allow either party to operate the account.
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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) The account of an illiterate person may be opened provided he/she calls the bank
personally along with a witness who is known both to the banker and the depositor.
2) A passport size photograph of the illiterate person is identified before the banker in
presence of the account holder. The photographs have to be attested by the bank officer/
witness.
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) One or two identification marks of the depositor should be noted on the account
opening form.
5) The illiterate person should be provided with a passbook which should also contain an
attested photograph of the illiterate person.
6) Normally, no cheque book facility is provided on accounts in the name of illiterate
persons.
7) At the time of withdrawal/repayment of deposit account the account holder should
attend personally with passbook and attest his/her thumb impression or mark in the presence
of an authorised person.
8) The thumb impression of illiterate person on the withdrawal form or cheque (if
provided), and on the back of the withdrawal form or cheque should be duly compared with
the specimen impression kept by the bank.
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) While opening an account of a married woman, the bank should enquire about her
means and circumstances, and if she is living with her husband, something about him and his
occupation and position in life, and if he is an employee, the name of the employer.
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) The banker should always observe that there is credit balance in her account.
4) Banks usually require that a married woman be independently advised by her own
solicitor when depositing security for the account of other persons.
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5) A married woman may enter into a contract of guarantee and it is enforceable only
against her separate estate.
6) In case of an illiterate married woman, her thumb impression should be obtained on the
account opening form and on the identification card.
Pardhanishin women
In case of a pardhanishin woman who remains completely secluded the following
presumption exists-
1) Any contract entered into by her may be subject to undue influence
2) The same might not have been done with free will and with full understanding of what
the contract actually means.
tHe banker should therefore due precaution while opening an account in the name of a
pardhanishin woman. As the identity of such woman cannot be ascertained the banker
generally refuses to open an account in her name.
Joint Hindu families
A JHF or a HUF consists of all persons lineally descended from a common ancestor and
included their wives. Following are the precautions to be taken by the banker in opening and
operating accounts in the name of HJF.
1) The account may be opened in the name of karta or in the name of family business and
should be duly introduced.
2) The account opening form should be signed by all adult coparceners, even though the
karta would operate the account.
3) The declaration signed by all the members as to who is the karta and who are the other
coparceners including minor coparceners should be obtained.
4) If there are minor coparceners, the other adult coparceners should sign for self and as
guardians of minors.
5) Authority should be given to the karta to operate the account of all concerned under
their joint signature.
6) On attaining majority, the minor coparceners should be asked to join with other
coparceners in signing the existing account opening form in ratification of previous
transactions.
7) Any member of the HUF can stop payment of a cheque drawn by karta. When the bank
receives a notice about any dispute amongst the family members of the HUF, the operations
in the account should be stopped till further instructions from a competent court.
8) The burden of proof that loan was taken by karta for purposes beneficial to the family
lies on the banker. Thus before granting loans necessary enquiries should be made to ensure
it. Otherwise, the bank may not be able to succeed in a suit for recovery of debt.
Agent
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A person employed to do any act for another, or to represent another in dealings with third
persons, is known as an agent for another. The precautions to be taken by a banker in opening
and operating account of a customer by an agent are
1) A banker should at once suspend all operations on that account upon hearing or being
notified of the principals death, insanity or bankruptcy.
2) The agent must assign the cheque for and on behalf of the principal, so that the third
parties would know that he is dealing in a representative capacity.
3) Whenever a bank receives a mandate, it should be recorded in a register, serially
numbered, indexed alphabetically, and instructions should be noted in the customers ledger
account.
4) In case the agent is authorised to open an account on behalf of the principal, the
application should be made to sign by the principal himself, delegating authority to agent to
operate the account.
5) The agent should sign in a manner to indicate that he is signing as an agent.
6) The banker should on no account allow the agent, or in fact any person to pay into his
own private account, cheques which he has endorsed on behalf another, without satisfying
himself that the agent has the authority of the principal to do so.
7) A banker should not allow an agent to overdraw his principals account express with
his express authority.
Partnership firm
A partnership is the relation between the persons who have agreed to share the profits of a
business carried on by all or anyone of them acting for all. The banker should take the
following precautions while dealing with a partnership firm.
1) The banker should first know the provisions of the Part Act before he opens an account
for PF.
2) The banker shall open an account in the name of a partnership firm only when an
application is submitted in writing by any one or more partners under sec 19(2)(b) of the Act.
Authority to open an account in the name of an individual partner is positively denied.
3) To be on safer side, a banker should get a written request from all the partners jointly
for opening an account.
4) The banker should go through the partnership deed and carefully study the objects,
capital, borrowing powers etc. he should get a copy of the duly stamped partnership deed. He
should enquire about the details of the firm, partners and their powers. If the firm is registered
the banker should get a copy of the registration certificate. Dealings with unregistered firms
will involve risks.
5) There should be a clear mandate from all the partners. Mandate must be signed by all
the parties.
6) The banker should not mix the personal and private accounts of the partners. He has no
right to set off and lien over the accounts.
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7) No partner has an implied power to sell or mortgage the property of his firm. So in case
of mortgage of property, the deed of mortgage should be signed by all the partners.
8) While advancing loans and advances to partnership firm the banks in practice get the
loan documents executed by the partners on behalf of the firm as also in their personal
capacity.
9) Since a firm stands dissolved on insolvency or insanity of a partner, a cheque signed by
an insolvent partner before the date of adjudication should not be paid b the banker without
conformation from other partners.
Trust
A trust is an obligation annexed to the ownership of the property, and arising out of a
confidence reposed in and accepted by the owner, or declared and accepted by him, for the
benefit of another, or of another and the owner.
While opening accounts in the names of persons in their capacity as trustees, the banker
should take the following precautions.
1) The banker should examine the trust deed concerning instructions regarding opening
and operating the account contained in the trust deed. In the absence of such instructions, all
the trustees may join in opening such account.
2) Instructions regarding limitation on withdrawal in the trust deed, if any, be prominently
noted at the ledger head and specimen signature card and withdrawals should be restricted.
3) The banker should note the objects for which the trust has been created so as to
facilitate the passing of cheques.
4) A trustee has no individual powers. They must all act together. All must join in signing
of cheques. Unless expressly provided otherwise in the trust deed, no trustee can delegate his
power to another.
5) If one of the trustees dies or retires, the bank on receiving notice should suspend all
operations in the account. However, if the trust deed is silent the bank can let the operations
to continue.
6) In case of breach of trust the bank must see that it does not become a party to the
breach. The banker is justified in dishonouring the cheque drawn by a trustee, if intended for
breach of trust.
7) If the trustees are authorised to borrow to discharge the functions of the trust, the
banker must get specific assets of the trust as security.
Meaning of CB- commercial banking refers to that banking which is concerned with the
acceptance of deposits from the public repayable on demand or after the expiry of a short
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period and the granting of mainly short term credit to trade, commerce and industry through
wide networking of branches throughout the country.
Functions of commercial banks- the functions of CB are numerous. They can be broadly
divided into two categories. They are-
a) Receiving of deposits- deposits constitute the main source of funds for commercial
banks. CBs receive deposits from the public on various accounts. The main types of accounts
are- fixed, current, savings, recurring (explain lil).
b) Issuing notes/cheques- this function once considered to be the most paying part of
bankers business is in modern times performed generally by the central bank. Its importance
has dwindles to a large extent in some developed countries where cheque currency has
replaced bank notes to a large extent.
c) Lending of funds- it is the main business of CB. Advances form the chief source of
profit for CB. Banks lend funds by way of loans, over-drafts, cash credit, discounting of bills.
d) Investment of funds on security- it is one of the imp functions of comm. Banks. They
invest a considerable amount of their funds in govt and industrial securities. In India it is
required by statute for CB to invest a considerable amount of their funds in securities.
The Central Bank is the Apex Bank of the country. It is called by different names in different
countries. It is the Reserve Bank of India in India.
The Reserve Bank of India has been defined in terms of its function. According to Vera
Smith, The primary definition of central banking is a banking system in which a single bank
has either complete control or a residuary monopoly of note issue.
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According to A.C.L. Day, a central bank is to help control and stabilise the monetary banking
system.
Functions Of RBI:
1) Regulator Of Currency:
The Reserve Bank of India is the bank of issue. It has the monopoly of note issue. Notes
issued by it circulate as legal money. It has its issued department which issued notes and
coins to commercial banks.
Reserve Bank of India has been following different methods of note issue in different
countries. The monopoly of issuing notes vested in the Reserve Bank of India ensures
uniformity in the notes issued which helps in facilitating exchange and trade within the
country. It brings stability in the monetary system and creates confidence among the public.
RBI can restrict or expand the supply of cash according to the requirements of the economy.
Thus, it provides elasticity to the monetary system.
Commercial banks are required by law to keep reserves equal to a certain percentage of both
time and demand deposits liabilities with the RBI. It is on the basis of these reserves that the
RBI transfers funds from one bank to another to facilitate the clearing of cheques. Thus the
RBI acts as the custodian of the cash reserves of commercial banks and helps in facilitating
their transactions.
The RBI keeps and manages the foreign exchange reserves of the country. It sells gold at
fixed prices to the authorities of other countries. It also buys and sells foreign currencies at
international prices.
Further, it fixes the exchange rates of the domestic currency in terms of foreign currencies. It
holds these rates within narrow limits in keeping with its obligations as a member if IMF and
tries to bring stability in foreign exchange rates.
It acts as lender of the last resort through discount house on the basis of treasury bills,
government securities etc. Thus RBI as lender of the resort is a big source of cash and also
influences prices and market rates.
7) Controller Of Credit:
The most important function of RBI is to control the credit creation power of commercial
bank in order to control inflation and deflation pressures within this economy. For this
purpose, it adopts quantitative and qualitative methods. These involve selective credit control
and direct action.
Besides the above noted functions, the RBI in a number of developing countries have been
entrusted with the responsibility of developing a strong banking system to meet the
expanding requirements of agriculture, industry, trade and commerce.
13. Explain the management, powers and constitution of the Reserve Bank of
India.
The Reserve Bank of India was established on 1st April, 1935 under the Reserve Bank of
India Act, 1943 as the Central Bank of the country to regulate the issue of bank notes and the
keeping of reserves for the stability in India and generally to operate the currency and credit
system of the country.
Constitution:
The bank was established as a shareholder`s bank with an authorized and paid-up capital of
Rs. 5 crores divided into shares of Rs. 100 each. After independence, under the Reserve Bank
Act, 1948, the bank was nationalized, after paying compensation to the shareholders at the
market price of the share.
Management:
The affairs if the RBI are managed by the Central Board of Directors consisting of:
Governor and not more than 4 Deputy Governors appointed for a period not more than 5
years.
Four Directors, one from each of the four local boards.
The other Directors.
One Government Official.
All the Directors and the officials are nominated for 4 years each by the Central Government.
To look after the affairs there are 4 local Boards, one at each of the cities of Bombay,
P a g e | 25
Calcutta, Delhi and Madras, each Board consisting of 5 members appointed for 4 years by the
Central Government.
Functions:
Cash Reserve:
Every banking company, not being a Scheduled Bank, shall maintain in India by way of cash
reserves or by way of balance in a current account with the RBI.
Monthly Returns:
Every bank should submit monthly returns to the RBI in the prescribed form and manner
showing its assets and liabilities in India. The RBI has the power to call for other returns and
information if required.
Submission Of Returns:
The accounts and balance-sheet together shall be published in the prescribed manner and
three copies thereof shall be furnished as returns to the RBI within three months form the end
of the period to which they refer.
Inspection:
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The RBI had got the power to inspect the books and accounts of a banking company. After
the inspections it sends a copy of it to the concerned bank. The inspection by the RBI may be
on its own or under the direction of the Central Government.
Directions:
The RBI may from time to time, issue directions as it deems fit, to a banking company in
particular or to the banking companies in general and the banking company or companies
shall be bound to comply with such directions
In developed countries, the role of Central Bank is regulatory. But in a developing economy
like that of India, the role of Central Bank is developmental or promotional. The Central
Bank is to help in the mobilization of required productive resources and in their efficient
allocation. It has to bring about economic development with stability.
The RBI has been quite active in the maintenance of a proper atmosphere of economic
development and mobilization of financial resources for economic development. The RBI has
assisted economic development in the following ways-
These fund loans were given to SCBs & RRBs for agricultural credit and during floods and
famines.
Industrial finance-The RBI has also organized industrial finance for both big and small
industries to secure all types of loans-short term, medium term and long term. It has helped in
the creation of
(a) Industrial Finance Corporation of India
It has also introduced a scheme of guarantee of bank loans to small industry and till the
establishment of Export-Import Bank, also provided refiance to banks for export credit
Regulatory credit-When there is an expansion of bank credit, it adds to the active demand for
goods and services. This tends to start inflationary spiral. Thus it becomes essential for the
monetary authority to stem in and restrain the expansion of bank credit in the interest of
sound and healthy economic growth. During the last 5 decades, the RBI has tried to regulate-
(a) cost of credit
Conclusion-Thus the RBI has helped to broaden and deepen the structure of institutional
finance for accelerating development of the country with itself as the central arch of banking
and monetary framework of the country.
15. In what way does the Reserve bank exercise control over the commercial
banks?
The RBI acts as supervisor and controller of banks in India. By virtue of the powers
conferred on the RBI by the RBI Act, 1934 and the Banking Regulation Act, 1949, the
relationship between the RBI and the commercial banks are very close. The RBI has a 3 fold
control over the commercial banks
1. Each bank in India is required to obtain license from the RBI before conducting banking
business-section 22. The RBI is required to conduct an inspection of the books of the banking
company and issue a license, if it is satisfied that all or any of the conditions are fulfilled. The
provision is intended to ensure the continuance and growth only of banks which are
established or are operating on sound lines and to discourage indiscriminate floating of
banking companies
of an existing place of business situated in India without obtaining the prior permission of the
RBI.
The RBI may on its own initiative or at the instance of the Central government, inspect any
banking company and its books and accounts. The Central Governemnt may on the basis of
this report direct the company to wind up.
4. RBI may remove managerial an other persons from office-Section 36AA-where the RBI is
convinced that a banking company is not conducting its affairs in the public interest, or is
conducting them in a manner detrimental to the interests of the depositors, or where the RBI
is satisfied that for securing the proper management of the banking company it would be
necessary to do so, the RBI may after recording the reasons and by order, remove from office,
with effect from a specified date, any chairman, director, chief executive director or other
such officer or employee.
5. RBI may appoint additional directors of the banking company-Section 36 AB- in the
interest of banking policy or in the public interest or in the interests of the banking company
or its depositors, the Bank may, from time to time by order in writing, appoint with effect ,
one or more persons to hold office as directors of the banking company.
6. It may issue directions to commercial banks and may prohibit banks to enter into particular
transactions- Section 36
1. By changing the statutory liquidity rate- Section 24 of the Banking Regulation Act, 1949
requires that every banking company has to maintain cash, gold or approved securities of an
amount not less than 25% of its net demand and liabilities at the close of business everyday.
This is called statutory liquidity rate and the RBI is empowered to step up the rate upto 40%
2. The RBI controls credit by changing the statutory reserve maintained by the scheduled
banks-section 42 of the RBI Act.
3. Controls credit by changing the bank rate and its policy of granting accommodation to
commercial banks
As banker to the banks, the RBI acts as the lender of last resort and grant accommodation to
the scheduled banks in the following forms-
Emergency advances-the RBI advances loans when it is satisfied that the loan is necessary for
the purpose of regulating credit in the interest of trade, commerce and industry.
that the company is or will be in a position to pay its present or future depositors in full as
their claims accrue
that the affairs of the company are not being or not liked to be, conducted in a manner
detrimental to the interests of its present or future depositors; and
in case of a foreign bank, the carrying on of banking business by such company in India will
be in the public interest and that the Government or law of the country in which it is
incorporated does not discriminate in any way against banking companies registered in India
and that the company complies with all the provisions of the Act applicable to foreign banks.
It is clear from the above that the grant of a license depends upon the maintenance of
satisfactory financial position. The provision is intended to ensure the continuance and
growth only of banks which are established or are operating on sound lines and to discourage
indiscriminate floating of banking companies. To ascertain the position, the inspecting officer
of the RBI has to make an estimate of the liquid and other readily realizable assets and also to
judge whether the assets are enough to meet the claims of the depositors as and when they
arise. The assessment about the whole gamut of operations of the banking company and its
organizational set-up is necessary to judge the conditions before the license is granted.
According to Section 23 of the Act, no banking-company shall open a new place of business
in India or change otherwise than within the same city, town or village, the location of an
existing place of business situated in India without obtaining the prior permission of the RBI.
The RRBs are relatively new banking institutions which were added to the Indian banking
scene since October 1975 to strengthen the institutional rural credit structure. Prior to that, the
then existing credit agencies lacked in meeting the needs of rural masses. A committee under
the chairmanship of N.Narasimhan suggested the institutions of RRBs as low cost banking
for rural areas should be set up to meet their credit needs.
Objectives
Functions
1) To provide financial facility to small and marginal farmers, agricultural labourers, co-
operative societies for agricultural purposes or other purposes related to agriculture.
2) To grant loans and advances to artisans, small entrepreneurs, persons of small means
engaged in trade, commerce etc.
6) To take the banks to the doorsteps of the poorest people in remote rural areas.
Sponsorship
Each RRB is sponsored by a nationalized bank known as a sponsoring bank which provides
all sorts of helps to these RRBs. The sponsoring bank will assist the RRB in its establishment,
recruitment and training of personnel. They may also provide managerial and financial
assistance with mutual agreement.
Capital resources
Each RRB may have an authorized capital of Rs. five crore divided into one lakh shares of
Rs. 100 each and issued capital of Rs. 1 crore to improve their viability.
Management
The management of each RRB is vested in nine members Board of Directors, headed by a
Chairman. The chairman is appointed by the Central Govt. The chairman is a paid servant of
the sponsoring bank while the members are honorary.
Conclusion
RRBs are playing an important role as an alternative agency to provide institutional credit.
According to RBI the RRBs have fared well in achieving the objective of providing access to
weaker sections of society.
The funds of a central co-operative bank consist of share capital, reserve fund, deposits from
members and non-members and loans from state co-operative banks. Sometimes, loans are
taken even from the commercial banks.
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19. What are the advantages & disadvantages of unit & branch banking?
Unit Banking
In the unit banking system, the banks operations are generally confined to a single office
only. It is a corporation that operates from one office and that is not related to other banks
through either ownership or control. USA is the birth place of unit banking.
Advantages
1. The funds of the locality are utilized for the local development
4. They are in a better position to solve problems as they know the local problems better.
6. There will be no inefficient banks as weak and inefficient banks are automatically
eliminated
7. Unit banking is free from the diseconomics and problems of large scale operations.
Disadvantages
Under the branch banking system, a bank operates as a single institution under single
ownership with branches spread all over the country. Branch banking developed in Great
Britain.
Advantages
20. What are the differences between schedule & non-schedule banks?
Private sector Indian Commercial Banks are classified into two types. They are:
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Scheduled Banks.
Non-scheduled Banks.
Scheduled Bank:
Scheduled Banks are those private sector Indian commercial Banks which are included in the
second scheduled to the RBI Act, 1934. Foreign banks also are included in the second
schedule to the RBI Act.
Non-scheduled Bank:
Non-scheduled banks are those banks which are not included in the second schedule of the
RBI Act. The non-scheduled banks do not enjoy from the RB all the facilities enjoyed by the
Scheduled Banks.
Scheduled banks are included in the second schedule of the RBI Act of 1934. On the other
hand, non-scheduled banks are not included in the second schedule of the RBI Act.
Scheduled banks satisfy tow important conditions, viz., (i) they have paid-up capital and
reserves of Rs. 5 lakh or more and (ii) they satisfy the RBI that their affairs are not being
conducted to the interests of the depositors. But non-scheduled banks do not satisfy these
conditions.
Scheduled banks enjoy certain benefits from the RBI, whereas non-scheduled banks do not
enjoy those benefits.
Scheduled banks are subject to greater degree of control and more obligations than the non-
scheduled banks in their day-to-day operations.
The number of scheduled banks is more than that of non-scheduled banks.
Scheduled banks are, generally, big, whereas non-scheduled banks are, ordinarily, small.
Scheduled banks are spread over a large area of the country, whereas non-scheduled banks
are confined to a small area.
The share capital and reserves of scheduled banks are more than those of non-scheduled
banks.
Deposits of scheduled banks are more than those of non-scheduled banks.
The advances of scheduled banks are also more than those of non-scheduled banks.
Scheduled banks are more important that non-scheduled banks
21. What are the rights of a banker against surety?What are the precautions to be
taken by the banker?
Right of lien-the banker can exercise his right of lien on the balance of the account of the
guarantor in his possession notwithstanding the fact that his claim under the guarantee is
time-barred. Right to exercise a general lien does not arise until a default has been ade by the
principal debtor, in which case the banker should immediately inform the guarantor that the
former has exercised his lien on the latters money or securities deposited with him.
Suretys liability is co-extensive with that of the principle debtor-according to Section 128 of
the Indian Contract Act, the liability of the surety is co-extensive with that of the principal
debtor, unless it is otherwise provided for by the contract of guarantee.
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Bankers claim against a bankrupt suretys estate-in the event of the bankruptcy of the surety,
the banker is entitled to prove his claim against the estate of the surety. When the banker
hears of the death or bankruptcy of the surety he should close the account guaranteed by the
surety and if the principal debtor makes a default in the payment of the amount, the banker
should at once claim the amount from the legal representative of the deceased or from the
Official Receiver of the bankrupt surety.
Precautions
1. Advisability of getting the contract of guarantee signed in the bank managers presence-
usually bankers require the guarantors to execute the guarantee in the bank managers
presence. It is not advisable to allow the customer to take the guarantee form away and
himself obtain the signature of the guarantor thereto. This si because, firstly, the guarantors
signature may turn out to be a forgery or he may later on allege that he signed in ignorance of
the nature of the document and secondly, the guarantor when called upon to discharge his
obligation, may put forth the plea that he signed under a misrepresentation.
2.Notice of principal debtors death- the notice of the death of a customer puts an end to his
account and consequently te guarantee automatically terminates. The banker should make a
formal demand upon the guarantor for repayment of the amount unless it is paid by those in
charge of the estate of the deceased.
3.Notice of debtors bankruptcy-a banker should stop the operation on a guaranteed account
as soon as he receives notice, actual or constructive, f his debtors bankruptcy. In such a case,
the banker should also demand the repayment of the amount due by the surety. The banker
need not first resort to the sale of the securities held by him in the account.
4.Notice of lunacy of the debtor or surety-a banker on receipt of reliable notice of the lunacy
of the principal debtor or surety should close the account. The lunacy of a surety is to be
taken as terminating the guarantee so far as future advances are concerned. Consequently, any
advance made by the banker after receipt of the notice of lunacy of his customer is not
recoverable from the estate of the lunatic despite the fact that the contract of guarantee may
provide for a months notice from the surety for the termination of the guarantee.
5.Change in the condition of the bank-unless it is provided in the contract of guarantee that
changes in the constitution of a bank will not affect the guarantee, it will terminate in case the
bank having the guarantee in amalgamated with or absorbed by another bank. The guarantee
should provide for such contingencies.
Guarantee
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A guarantee is the most common form of security taken by the bankers to ensure safety of the
funds lent. Section 126 of the ICA defines a contract of guarantee as a contract to perform the
promises or discharge the liability of a third person in case of his default.
Ex: A wanting a loan of Rs.500 induces B to promise C to repay the loan in case of As
default. This is a contract of guarantee.
It will be seen that there are 3 parties to this contract- A the principal debtor, B the surety and
C the creditor. A contract of guarantee is thus a secondary contract the principal contract
being between the principal debtor and the creditor himself. The liability of the surety
therefore arises only if the principal contract is not fulfilled.
Kinds of guarantee
1) Specific guarantee- guarantee given for a single debt is called a specific guarantee and
is discharged on repayment of the particular debt it was given to secure.
3) Joint and several guarantee- where two or more persons join in executing a guarantee,
their liability may be joint or several or joint and several. In a J and S guarantee each co-
guarantor is jointly and severally liable for the debt.
4) Limited guarantee- in limited guarantee, the guarantees have some clauses which either
restrict the liability of the guarantor or limit the scope.
Indemnity
Ex: A contracts to indemnify B against all the consequences of any proceedings which C
may initiate against B. this is a contract of indemnity.
23. What are the precautions to be taken by the banker in the case of
hypothecation?
Precautions-
1. Stocks should be fully insured against fire, theft and other risks
2. The baker must periodically inspect the hypothecated goods and the account books of
the borrower should be checked to ascertain the position of stocks under hypothecation
4. An undertaking should be obtained from the borrower that he shall not charge the same
goods to other bank or person.
5. The banker should also ensure that the borrower is not enjoying similar hypothecation
facilities on the same stocks from some other bank.
6. During inspection, if the banker finds that the financial position is weak, it is advisable
to get the personal guarantees of directors/officers to strengthen the charge.
7. While granting loans against hypothecation, the banker should obtain a letter of
hypothecation containing several clauses to protect his interest.
8. Character, capacity and capital must be thoroughly verified before granting loans on the
basis of hypothecation. This facility should be given to genuine and financially sound parties.
9. A name plate of the bank, mentioning that the stocks are hypothecated to it, must be
displaced at a prominent place of the hypothecated goods for public notice to avoid the risk of
a second charge being created on the same stock.
10. The banker should get the charge registered under Section 125 of the Companies Act, if
borrower happens to be a joint stock company.
Transferor- mortgagor
Transferee-mortgagee
Instrument-mortgage deed
Characteristics-
the interest to be transferred is always with respect to a specific property
a mortgage implies transfer of interest in a specific immovable property. It does not mean
transfer of ownership.
if there is more than one owner of an immovable property, each co-owner can mortgage his
share
the object of mortgaging the property is to give security for the loan to be taken or already
taken for performance of an engagement giving rise to pecuniary liability.
the mortgage need not always be given the actual possession of the property
on repayment of the loan together with interest, the interest in specific immovable property is
recovered to the mortgagor
in the evnt of non-payment of the loan, the mortgagee has a right to sell the mortgaged
property trough the intervention of the Court.
an agreement in writing between the mortgagor and the mortgagee is essential for creating a
mortgage. The mortgage deed should contain all safety clauses.
Kinds
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Simple mortgage- in simple mortgage the borrower binds himself personally to pay the
mortgage money without giving possession of property. He agrees to pay according to his
contract and also gives the banker the right ot sell and adjust the sale proceeds to the
mortgage money. But court intervention is necessary for selling the mortgage property.
Mortgage by conditional sale-in this mortgage the borrower sells the mortgaged property on
the condition that:
(a) on default of payment of the mortgage on a certain date the sale shall become absolute
(b) on such payment being made the sale shall become void
(c) on such payment being made the buyer shall transfer the property to the seller
Usufructuary mortgage-in this mortgage the mortgagee gets the possession of the property
(physical possession not necessary) and is entitled to recover the rents and profits relating to
the property till the loans are repaid. He can also appropriate such rents or profits to interest
or payment of mortgage money and partly interest and partly in payment of the mortgage
money.
English mortgage-the mortgagor makes a personal promise to repay money on a certain due
date. Mortgagee is entitled to immediate possession and to retain possession until the money
is repaid. The transfer is absolute with all interests and seeking the permission of the Court.
Mortgage by deposit of title deeds or equitable mortgage-where a person delivers to a creditor
or his agent documents of title to immovable property with the intention to create a security
thereon, the transaction is called a mortgage by deposit of title deed. This mortgage does not
require registration.
Anamolous mortgage-a mortgage other than any of the mortgages explained above is a
anamolous mortgage. Such a mortgage includes a mortgage formed by combination of two or
more types of mortgage. It takes various forms based on custom, local usage or contract.
Hypothecation
Neither ownership nor possession is transferred to the creditor. Only an equitable charge is
created in favour of the creditor.
2. No such agreement
The borrower binds himself under an agreement to give possession of the goods hypothecated
to the banker whenever the banker requires the borrower to do so
3. The borrower holds possession of goods as owner and not as an agent of the bank
The borrower holds possession of the goods not in his own right as the owner of the goods
but as an agent of the bank
5. To take possession of the property under lien by way of security directly the baker has to
move the Court
It is essential for the bank to take possession of the hypothecated goods by itself directly.
6. Lien also creates a charge but it is not so convenient to proceed as in case of hypothecation
It is convenient device to create a charge over the movable property when transfer of its
possession is inconvenient or impracticable
Hypothecation
Pledge
1. the possession of the movable property is retained by the owner and certain right in that
property are transferred to the person in whose favour the property is hypothecated
There is delivery of goods from one person to another as security for payment of debt or
performance of a promise.
2. since the possession of the goods remains with the owner, the hypothecate cannot have the
right of lien. He may sell the property in default
Since the pledge has got the possession of the goods, in the event of default by the pawnor,
apart from other rights, the pledge has a right of lien over the goods
1. if an agreement empowers the hypothecate to take possession of the goods and then sell
the same in case of default of payment, he can proceed in accordance with the agreement to
sell the goods, without intervention of the Court.
The loans and advances granted by banks are broadly classified into
Definition
According to section 5(a) of the Banking Regulation Act, 1949, 'a secured loan or advance'
means a loan or advance' made on the security of assets, the Market value of which is not at
P a g e | 39
any time less than the amount of such loan or advance; and 'unsecured loan or advance'
means a loan or advance' not so secured.
Secured advances
1) The loan must be made on the security of tangible assets like goods and commodities,
lands and buildings, hold and silver, corporate and government securities etc. A charge on any
such assets offered as security must be created in favour of the banker.
2) The Market value of such security must not be less than the amount of the loan at anytime
till the loan is repaid. If the former falls below the latter, the loan is considered as partly
secured.
Unsecured advances
3) Unsecured advances are made at the discretion of the concerned bank manager himself.
4) Grant of loans depend on the credit worthiness of the borrowers. Such creditworthiness
depends on- 1) character 2) capacity 3) capital
Q. What is overdaraft?
Overdraft means allowing the customer to overdraw his account. It is allowed only to current
account holders. But some banks allow casual overdraft in savings accounts of Government
servants, etc. An overdraft is a running account wherein thy balance goes on fluctuating from
debit to credit or vice versa.
Under an overdraft arrangement, a customer is allowed to draw cheques upto an agreed limit
over and above the credit balance in the account.
Benefits-The bank provides overdraft facility to its customers to earn interest, and its
customers enjoy the overdraft facility in order to develop their business. The overdraft facility
is ideal to cover short term requirements. The interest on overdraft is calculated on the
amount actually utilized by the debtor-customer at regular intervals and hence it is cheaper
than the other loans.
There is no restriction on operations in the account and withdrawals and deposits may be upto
any number of times.
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Bankers obligation.-If a bank has agreed to give an overdraft, it cannot refuse to honour
cheques or draft within the limit of that overdraft which have been drawn and put in
circulation. If the banker refuses any cheque it becomes wrongful dishono and he will be
liable for damages.
Procedure-It is safe course for the banks that they should obtain a letter and a promissory note
from the customer in which terms and conditions of the facility including the rate of interest
chargeable on the overdraft is given. But written transactions are not necessary all the time.
Time period-The period of overdraft is 7 years at maximum. But in practice, the banker
grants an overdraft for one year, and renews it every year.
Categories-
2. Secured overdraft- when a party is allowed regular limits against some tangible security,
it is known as secured overdraft.
3. Clean overdraft-Overdrafts which are not backed up by any security are called clean or
temporary overdrafts. Clean overdrafts are allowed purely on the personal credit of the party.
They are allowed for small amounts to meet the partys sudden requirements.
The relation between a banker and his customer begins with the opening of an account by the
former in the name of the latter. Initially the accounts are opened with a deposit of money by
the customer and hence these accounts are called deposit accounts. Deposits are broadly
divided into two kinds- 1) payable on demand (demand deposit) and 2) payable after certain
time (time deposit). Demand deposits are- savings and current account. Time deposits are-
fixed deposit and recurring deposit.
Fixed account
The term fixed deposits means deposits repayable after the expiry of a certain period, which
ordinarily varies from three months to five years. The fixing of the period enables the banker
to invest money or employ it in business without having to keep a reserve and hence are very
popular with the bankers.
Rate of interest- the banker offers higher rates of interest on fixed deposits as the depositor
parts with liquidity for a definite period. The longer the period, the higher will be the rate of
interest.
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FD for senior citizens- RBI has permitted the banks to formulate FD schemes specially meant
for senior citizens on which they offer higher and fixed rates of interest.
Opening and operation- to open an account the depositor is required to fill in an application
form wherin he mentions the amount of the deposit and the period for which the deposit is to
be made. He also gives his specimen signature. A fixed deposit receipt is thereafter issued to
the depositor acknowledging the same.
FD in joint names- FDs can be opened in joint names of two or more persons payable to
either or survivor in accordance with the terms of the receipt. The problems faced by the
banker before date of maturity are
In all these cases the banker should obtain consent of other depositor/s.
Payment before due date- though a FD is payable after expiry of fixed period, banks permit
encashment even before due date. In such a case certain interest will be charged for the same.
According to the RBI directive banks should not charge the penalty in case of premature
withdrawal for immediate reinvestment in another FD for a longer term than the remaining
period of the original contract.
Overdue deposits- if the receipt is not encashed on the date of maturity, the interest ceases to
run from that date. The banks allow interest as per RBI directives, if it is renewed.
A current account is a running and active account which may be operated any number of
times during a working day. There is no restriction on the number and amount of withdrawals
from a current account. As the banker is under an obligation to repay these deposits on
demand, they are called deemed liabilities or deemed deposits.
To meet the requirement of the current account the banker keeps sufficient reserves against
such deposits vis--vis the savings and the fixed deposits. Current accounts suit the
requirements of big businessman, joint stock companies, institutions, public authorities,
corporations etc. whose banking transactions happen to be numerous per day. Cheque facility
is available for the depositors.
Bankers obligation- by taking RDs the banker undertakes to honour his customers cheques
as long as his account is in credit. The banker may have to suffer loss if he pays a forged
cheque, or a cheque contrary to the instructions of his customer (s 129, NI Act).
Privileges- a current account carries certain privileges which are not given to other account
holders
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1) Third party cheques and cheques with endorsements may be deposited in the current
account for collection and credit.
3) The loans and advances granted by banks to their customers are not given in the form of
cash but through the current accounts. Current accounts thus earn interest on all types of
advances granted by the banker.
Interest- normally no interest is paid on current accounts. Rather, the depositors have to pay
certain incidental charges to the bank for services rendered by it. Sometimes customers are
required to maintain a minimum balance failing which bank charges some commission half
yearly thus helping them to earn something on minimum balance kept.
Savings accounts are maintained for encouraging savings of households. It is useful to save a
part of the current income to meet future needs and also to earn higher incomes from savings.
The main characteristics of savings account are-
Restriction on withdrawals- in pursuance of the objective of savings bank accounts, the banks
impose certain restriction on the right of depositor to withdraw money within a given period.
The number of withdrawals over a period of six months is limited to 50. A depositor cannot
withdraw by withdrawal form a sum smaller than Re 1. The minimum amount of a cheque is
Re 5.
Restriction on deposits- the customer may deposit any amount in the savings bank account
subject to a minimum of Re 5. The banks do not accept cheques or other instruments payable
to a third party for the purpose of deposit in the savings account.
Minimum balance- banks prescribe the minimum balance that is to be maintained in the SB
accounts. For this purpose they take into consideration the cost involved in maintaining and
servicing such accounts. Levy specific charges if the minimum balance is not maintained.
Payment of interest- the rate of interest payable by the banks on deposits maintained in
savings accounts is prescribed by the RBI. Interest is calculated at quarterly or longer rests of
period.
Cheques- cheque facility is provided to the depositors subject to the condition that he will
keep a minimum balance with the bank according to the rules of the bank. Only cheques
payable to the customers having SB accounts are collected.
Prohibition on savings account- the RBI has prohibited the banks to open a savings account
in the name of
2) A company or an association.
3) Government departments.
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5) Municipal corporations/committees.
6) Panchayat samitis.
The banks have in recent years started various daily, weekly, or monthly deposit schemes in
order to inculcate the habit of savings on a regular or recurring basis. Generally money in
these accounts is deposited in monthly installments for a fixed period and repaid to the
depositors along with interest on maturity. These are called as recurring deposits.
Opening and functioning of account- the RD account can be opened by any person, more than
one person jointly or severally, by a guardian in the name of a minor and even by a minor.
While opening the account, the depositor is given a pass book which is to be presented to the
bank at the time of monthly deposits and repayment of amount. Installments for each month
should be paid before the last working day of that month. Accumulated amount with interest
will be payable after a month of the payment of the last installment.
Rate of interest- the rate of interest on RD stands favourably as compared to the rate of
interest on savings bank accounts. According to the directive of the RBI, the interest provided
by banks on RD must be in accord with the rates prescribed for various term deposits. The
rate of interest is therefore almost equal to that of fixed deposits.