Merchant Banking and Financial Services

While walking in the streets of any town or city you might have seen some signboards on buildings with names-Canara Bank, Punjab National Bank, State Bank of India, United Commercial Bank, etc. What do these names stand for? Did you ever try to know about them? If you enter any such building you will find some kind of a business office. You will see some employees sitting behind counters dealing with visitors standing in front of them. You will find that some are depositing money at one counter while some are receiving money at another counter. Behind the counters in the office you will see tables and chairs occupied by officers. On one side of the office you will also see a chamber (small partitioned room) where the manager is sitting with papers on his table. This is the office of a Bank.

Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reason of India's growth process.

Banking is one form or the other, was in existence in ancient times. The writing of Manu and Kautilya contain references to banking. How ever, modern banking is of recent origin. It came into existence only after the industrial revolution. The industrial revolution led to the growth of industry and commerce. In order to meet the rapid growth of financial requirement of industry and commerce, joint stock banks came into existence. So, joint stock banks or modern banks are of recent development.

The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money have become the order of the day. The first bank in India, though conservative, was established in 1786.

Meaning and Definitions

Bank is a lawful organisation, which accepts deposits that can be withdrawn on demand. It also lends money to individuals and business houses that need it. A bank is an institution, which deals in money. It accepts deposits from the public and creates credit with a view to lend or invest. Dr. H.L. Hart defines a banker one who ordinary course of his business honours cheques drawn upon him. By persons from and for whom he receives money on current accounts. The Indian Banking Regulation Act, 1949 defines the term banking company as any company which transacts the business of banking in India and the term banking as accepting, for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque draft, order or otherwise.

Need and importance of banking or banks

1.Mobilization of savings Banks mobilize the small and scattered savings of the people and make them available for the socially desirable sectors. Thus, they contribute capital formation. 2. Financing Industry Banks provide finance to the industrial sector. They provide short term, medium term amd long term loans to industry.

3.Finance Trade The commercial banks provide finance both for internal and external trade. They provide loans to retailers, wholesalers, importers and exporters for meeting their various financial requirements. 4. Development of capital market Commercial banks underwrite the shares and debentures of public limited companies. They have also gone in for mutual funds. This has further strengthened the capital market.

5. Financing agriculture Commercial banks provide finance to agriculture. They provide loans to traders to trade in agriculture commodities. 6. Financing consumer activities Commercial banks provide finance to consumers for the purchase of houses, vehicles, consumer durables such as refrigetators, television etc

The law governing Banking Activities in India is called "Negotiable Instruments Act 1881". The banking activities can be classified as : Accepting Deposits from public/others (Deposits) Lending money to public (Loans) Transferring money from one place to another (Remittances) Acting as trustees Acting as intermediaries Keeping valuables in safe custody Collection Business Government business

Bank Account A Bank Account is the record of financial relationship a customer has with the Bank. It contains details of all the moneys deposited with the Bank and withdrawn from it. There are many Bank accounts, but basically there are two types:

DEPOSITS LOANS

Types of Banks
There are various types of banks which operate in our country to meet the financial requirements of different categories of people engaged in agriculture, business, profession, etc. On the basis of functions, the banking institutions in India may be divided into the following types:

Central Bank (RBI)

A bank which is entrusted with the functions of guiding and regulating the banking system of a country is known as its Central bank. Such a bank does not deal with the general public. It acts essentially as Governments banker, maintain deposit accounts of all other banks and advances money to other banks, when needed. The Central Bank provides guidance to other banks whenever they face any problem. It is therefore known as the bankers bank. The Reserve Bank of India is the central bank of our country.

 The Central Bank maintains record of Government revenue and expenditure under various heads. It also advises the Government on monetary and credit policies and decides on the interest rates for bank deposits and bank loans. In addition, foreign exchange rates are also determined by the central bank. Another important function of the Central Bank is the issuance of currency notes, regulating their circulation in the country by different methods. No other bank than the Central Bank can issue currency.

Commercial Banks
Commercial Banks are banking institutions that accept deposits and grant short-term loans and advances to their customers. In addition to giving short-term loans, commercial banks also give medium-term and long-term loan to business enterprises. Now-a-days some of the commercial banks are also providing housing loan on a long-term basis to individuals. There are also many other functions of commercial banks, which are discussed later in this lesson.

Types of Commercial banks:

Commercial banks are of three types i.e., Public sector banks, Private sector banks and Foreign banks.
Public Sector Banks: These are banks where majority stake is held by the Government of India or Reserve Bank of India. Examples of public sector banks are: State Bank of India, Corporation Bank, Bank of Boroda and Dena Bank, etc. Public Sector Banks comprise 19 nationalized banks and State Bank of India and its 7 associate banks. Private Sectors Banks: In case of private sector banks majority of share capital of the bank is held by private individuals. These banks are registered as companies with limited liability. For example: Axis Bank, Bank of Rajasthan, Catholic Syrian Bank, Federal Bank, HDFC Bank, ICICI Bank, ING Vysya Bank, Kotak Mahindra Bank and SBI Commercial and International Bank

Foreign Banks: These banks are registered and have their headquarters in a foreign country but operate their branches in our country. Some of the foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, Grindlays Bank, etc. The number of foreign banks operating in our country has increased since the financial sector reforms of 1991.

Development Banks
Business often requires medium and long-termcapital for purchase of machinery and equipment, for using latest technology, or for expansion and modernization. Such financial assistance is provided by Development Banks. They also undertake other development measures like subscribing to the shares and debentures issued by companies, in case of under subscription of the issue by the public. Industrial Finance Corporation of India (IFCI) and State Financial Corporations (SFCs) are examples of development banks in India.

Co-operative Banks
People who come together to jointly serve their common interest often form a co-operative society under the Cooperative Societies Act. When a co-operative society engages itself in banking business it is called a Cooperative Bank. The society has to obtain a licence from the Reserve Bank of India before starting banking business. Any co-operative bank as a society is to function under the overall supervision of the Registrar, Co-operative Societies of the State.As regards banking business, the society must follow the guidelines set and issued by the Reserve Bank of India. `

Types of Co-operative Banks There are three types of co-operative banks operating in our country. They are primary credit societies, central co-operative banks and state co-operative banks. These banks are organized at three levels, village or town level, district level and state level. (i) Primary Credit Societies: These are formed at the village or town level with borrower and nonborrower members residing in one locality. The operations of each society are restricted to a small area so that the members know each other and are able to watch over the activities of all members to prevent frauds.

(ii) Central Co-operative Banks: These banks operate at the district level having some of the primary credit societies belonging to the same district as their members. These banks provide loans to their members (i.e., primary credit societies) and function as a link between the primary credit societies and state co-operative banks. (iii) State Co-operative Banks: These are the apex (highest level) co-operative banks in all the states of the country. They mobilize funds and help in its proper channelisation among various sectors. The money reaches the individual borrowers from the state co-operative banks through the central cooperative banks and the primary credit societies.

Banker-Customer Relationship
The relationship between a banker and a customer depends on the activities; products or services provided by bank to its customers or availed by the customer. Thus the relationship between a banker and customer is the transactional relationship. Banks business depends much on the strong bondage with the customer. Trust plays an important role in building healthy relationship between a banker and customer.

The Banking Regulations Act (B R Act) 1949 does not define the term banker but defines what banking is? As per Sec.5 (b) of the B R Act Banking' means 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."

As per Sec. 3 of the Indian Negotiable Instruments Act 1881, the word banker includes any person acting as banker and any post office savings bank.
According to Sec. 2 of the Bill of Exchange Act, 1882, banker includes a body of persons, whether incorporated or not who carry on the business of banking.

Accepting deposits from the public means that a bank accepts deposits from anyone who offers money for the purpose. Unless a person has an account with the bank, it does not accept deposit. For depositing or borrowing money there has to be an account relationship with the bank. A bank can refuse to open an account for undesirable persons. It is banks right to open an account. Reserve Bank of India has stipulated certain norms Know Your Customer (KYC) guidelines for opening account and banks have to strictly follow them.

Who is a Customer? It is generally believed that any individual or an organisation, which conducts banking transactions with a bank, is the customer of bank. However, there are many persons who do utilize services of banks, but do not maintain any account with the bank.

Thus bank customer`s can be categorized in to four broad categories as under: (a) Those who maintain account relationship with banks i.e. Existing customers. (b) Those who had account relationship with bank i.e. Former Customers (c) Those who do not maintain any account relationship with the bank but frequently visit branch of a bank for availing banking facilities such as for purchasing a draft, encashing a cheque, etc. Technically they are not customers, as they do not maintain any account with the bank branch. (d) Prospective/ Potential customers: Those who intend to have account relationship account relationship with the bank. A person will be deemed to be a 'customer' even if he had only handed over the account opening form duly filled in and signed by him to the bank and the bank has accepted the it for opening the account, even though no account has actually been opened by the bank in its books or record.

The term 'customer' is used only with respect to the branch, where the account is maintained. He cannot be treated as a customer' for other branches of the same bank. However with the implementation of Core Banking Solution the customer is the customer of the bank and not of a particular branch as he can operate his account from any branch of the bank and from anywhere. In the event of arising any cause of action, the customer is required to approach the branch with which it had opened account and not with any other branch.

Know Your Customer Guidelines and Customer:

As per Know Your Customer guidelines issued by Reserve Bank of India, customer has been defined as:

(i) A person or entity that maintains an account and/or has a business relationship with the bank; (ii) One on whose behalf the account is maintained (i.e. the beneficial owner); (iii) Beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants,Solicitors etc. as permitted under the law, and (iv) Any person or entity connected with a financial transaction, which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction.

Classification of Relationship
The relationship between a bank and its customers can be broadly categorized in to General relationship and Special Relationship. If we look at Sec 5(b) of Banking Regulation Act, we would notice that banks business covers around accepting of deposits for the purposes of lending. Thus the relationship arising out of these two main activities are known as General Relationship. In addition to these two activities banks also undertake other activities mentioned in Sec.6 of Banking Regulation Act. Relationship arising out of the activities mentioned in Sec.6 of the act is termed as special relationship.

General Relationship
Debtor-Creditor : When a 'customer' opens an account
with a bank, he fills in and signs the account opening form. By signing the form he enters into an agreement/contract with the bank. When customer deposits money in his account the bank becomes a debtor of the customer and customer a creditor. The money so deposited by customer becomes banks property and bank has a right to use the money as it likes. The bank is not bound to inform the depositor the manner of utilization of funds deposited by him. Bank does not give any security to the depositor i.e. debtor. The bank has borrowed money and it is only when the depositor demands, banker pays.

CreditorDebtor: Lending money is the most important activities of a bank. The resources mobilized by banks are utilized for lending operations. Customer who borrows money from bank owns money to the bank. In the case of any loan/advances account, the banker is the creditor and the customer is the debtor. The relationship in the first case when a person deposits money with the bank reverses when he borrows money from the bank. Borrower executes documents and offer security to the bank before utilizing the credit facility.

Special Relationship:
Bank as a Trustee: : As per Sec. 3 of Indian Trust Act, 1882 A "trust" is an obligation annexed to the ownership of 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. Thus trustee is the holder of property on behalf of a beneficiary.

Bailee Bailor: Sec.148 of Indian Contract Act, 1872, defines "Bailment" "bailor" and "bailee". A "bailment" is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the "bailor". The person to whom they are delivered is called, the "bailee".

Lessor and Lessee:

Sec.105 of Transfer of property Act 1882 defines lease, Lessor, lessee, premium and rent. As per the section

A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.
Definition of Lessor, lessee, premium and rent : (1)The transferor is called the lessor, (2)The transferee is called the lessee, (3)The price is called the premium, and (4)The money, share, service or other thing to be so rendered is called the rent.

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.

Thus an agent is a person, who acts for and on behalf of the principal and under the latters express or implied authority and the acts done within such authority are binding on his principal and, the principal is liable to the party for the acts of the agent. Banks collect cheques, bills, and makes payment to various authorities viz., rent, telephone bills, insurance premium etc., on behalf of customers. .

5. As a Custodian: A custodian is a person who acts as a caretaker of some thing. Banks take legal responsibility for a customers securities. While opening a demat account bank becomes a custodian. 6. As a Guarantor: Banks give guarantee on behalf of their customers and enter in to their shoes. Guarantee is a contingent contract. As per sec 31,of Indian contract Act guarantee is a " contingent contract ". Contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.

It would thus be observed that banker customer relationship is transactional relationship.

Banker Customer Relationship

Implied Terms
The bank will receive the customers deposits and collect cheques The bank will comply with written orders (i.e. cheques) issued by its customers assuming there is sufficient credit tin the account; The bank will repay the entire balance on the customers demand at the account holding branch during banking hours - Libyan Arab Foreign Bank v Bankers Trust [1989] AC 80 PC The bank will give reasonable notice before closing a customers account if it is in credit (Joachimson v Swiss Bank Corporation [1921] 3 KB 110 CA) The bank must only act on its customers valid instructions and not on any forgery of those instructions Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank [1986] AC 80 PC

Implied Terms A customer only has duties to: To exercise reasonable care when drawing cheques to prevent forgery and alteration; and To notify the bank if he actually knows of forgeries on his account, a customer who wilfully ignores the obvious is not considered to have actual knowledge London Joint Stock Bank v Macmillan and Arthur [1918] AC 777 HL and in Greenwoods v Martins Bank [1933] AC 51 HL

Implied Terms Liability cannot be excluded for certain matters under the Unfair Contract Terms Act 1977 Unfair Terms in onsumer Contracts Regulations 1999

Express Terms Must be made clear to the customer e.g. Electronic Banking and Charges

Termination of the Contract Termination by the Customer Termination by the Bank Prosperity Ltd v Lloyds Bank (1923) 39 TLR 372. Termination by Law a) Death of the customer; b) Mental incapacity of the customer c) Bankruptcy or insolvency of bank or customer.

Duties of the Bank Duty to collect cheques Duty to honour cheques Duty not to pay a cheque without authority Duty to obey customer's countermands of cheques Duty to tell customer of forgeries Duty to inform customers of the state of the account Duty to act on notice of death