COMMERCIAL BANKING IN INDIA,

INTRODUCTION TO TRANSNATIONAL BANKING

TRADE FINANCE
UNIT 3
2012
UNIT 3: COMMERCIAL BANKING IN INDIA,
INTRODUCTION TO TRANSNATIONAL BANKING
3.1 Form and Business in which banking company may engage
3.2 Chairman/ Managing Director, Board and Management of Banks
3.3 Regulation of Capital and voting rights
3.4 The Banking Ombudsman Scheme, 2006
3.5 Bank-Customer relationship
3.6 Recovery of Debts Due to Banks: SARFAESI Act, 2002, Need for
reform
3.7 Trade Finance and Transnational Banking
3.8 Letter of Credit, Uniform Customs & Practice for Documentary
Credits
Cases:
1) UCO Bank v. Hema Chandra Sarkar, AIR 1990 SC 1329.
2) SBI v. Shyama Devi, AIR 1978 SC 1263
3) Mardia Chemicals v Union of India, AIR 2004 SC 2371
4) ICICI Bank Vs Shanti Devi Sharma 2008 7SCC 532
5) Manager ICICI Bank Ltd Vs Prakash Kaur AIR 2007 SC 1349
6) Federal Bank Ltd v VM Jog Engineering Ltd AIR 2000 SC 3166

Articles:
Whither the distinction between equitable and legal
mortgages: Indian Supreme Court allows lenders to
enforce security interests without court recourse-
Aparna Viswanathan; J.I.B.L.R. 2004, 19( 8), 307-
310 Journal of International Banking Law and
Regulation 2004
UN Convention on Independent Guarantees and
Stand-by Letters of Credit (1995). In The law and
practice of documentary letters of credit. Ellinger,
E.P. and D. Neo, eds. Oxford; Portland, Hart
Publishing, 2010. Ch. 13, vi, D, p. 349-351.
UNCITRAL Model Law on International Credit
Transfer 1992

Bank, Banking, Commercial Activities
of a Banking Institution
R.C. Cooper v UoI AIR 1970 SC 564
Mahalaxmi Bank Ltd. V RoC W.B.,A.I.R. 1961 Cal.666
S. 5(b): "banking" means the accepting, for the purpose of lending
or investment, of deposits of money from the public, repayable on
demand or otherwise, and withdrawal by cheque, draft, or
otherwise;
S. 5(c): "banking company" means any company which transacts
the business of banking in India.
Explanation.Any company which is engaged in the manufacture
of goods or carries on any trade and which accepts deposits of
money from the public merely for the purpose of financing its
business as such manufacturer or trader shall not be deemed to
transact the business of banking within the meaning of this clause;
(ca) "banking policy" means any policy which is specified from
time to time by the Reserve Bank in the interest of the banking
system or in the interest of monetary stability or sound economic
growth, having due regard to the interests of the depositors, the
volume of deposits and other resources of the bank and the need
for equitable allocation and the efficient use of these deposits and
resources;


BANKING REGULATION ACT 1949 Overview
Banking means accepting for the purpose of lending or investment of
deposits of money from public repayable on demand or otherwise and
withdrawable by cheque, drafts order or otherwise (5 (i) (b)).
Banking company means any company which transacts the business of
banking (5(i)(c)
Transact banking business in India (5 (i) (e).
Demand liabilities are the liabilities which must be met on demand and
time liabilities means liabilities which are not demand liabilities (5(i)(f)
Secured loan or advances means a loan or advance made on the
security of asset the market value of which is not at any time less than
the amount of such loan or advances and unsecured loan or advances
means a loan or advance not secured (5(i)(h).
Defines business a banking company may be engaged in like borrowing,
lockers, letter of credit, traveller cheques, mortgages etc (6(1).
States that no company shall engage in any form of business other than
those referred in Section 6(1) (6(2).
For banking companies carrying on banking business in India to use at
least one word bank, banking, banking company in its name (7).
Restrictions on business of certain kinds such as trading of goods etc.
(8)

.
Prohibits banks from holding any immovable property howsoever acquired
except as acquired for its own use for a period exceeding 7 years from
acquisition of the property. RBI may extend this period by five years (9)
Prohibitions on employments like Chairman, Directors etc (10)
Paid up capital, reserves and rules relating to these (11 & 12)
Banks not to pay any commission, brokerage, discount etc. more than 2.5% of
paid up value of one share (13)
Prohibits a banking company from creating a charge upon any unpaid capital of
the company. (14) Section 14(A) prohibits a banking company from creating a
floating charge on the undertaking or any property of the company without the
RBI permission.
Prohibits payment of dividend by any bank until all of its capitalised expenses
have been completely written off (15)
To create reserve fund and 20% of the profits should be transferred to this fund
before any dividend is declared (17 (1))
Cash reserve - Non-scheduled banks to maintain 3% of the demand and time
liabilities by way of cash reserves with itself or by way of balance in a current
account with RBI (18)
Permits banks to form subsidiary company for certain purposes (19)
No banking company shall hold shares in any company, whether as pledgee,
mortgagee or absolute owners of any amount exceeding 30% of its own paid up
share capital + reserves or 30% of the paid up share capital of that company
whichever is less. (19(2).
Restrictions on banks to grant loan to person interested in management of the
bank (20)
Power to Reserve Bank to issue directive to banks to determine policy for
advances (21)

.
Every bank to maintain a percentage of its demand and time
liabilities by way of cash, gold, unencumbered securities 25%-
40% as on last Friday of 2nd preceding fortnight (24).
Return of unclaimed deposits (10 years and above) (26)
Every bank has to publish its balance sheet as on March 31st
(29).
Balance sheet is to be got audited from qualified auditors (30 (i))
Publish balance sheet and auditors report within 3 months from
the end of period to which they refer. RBI may extend the period
by further three month (31)
Prevents banks from producing any confidential information to
any authority under Indl Disputes Act. (34A)
RBI authorised to undertake inspection of banks (35).
Amendment carried in the Act during 1983 empowers Central
Govt to frame rules specifying the period for which a bank shall
preserve its books (45-y), nomination facilities (45ZA to ZF) and
return a paid instrument to a customer by keeping a true copy
(45Z).
Certain returns are also required to be sent to RBI by banks such
as monthly return of liquid assets and liabilities (24-3), quarterly
return of assets and liabilities in India (25), return of unclaimed
deposits i.e. 10 years and above (26) and monthly return of
assets and liabilities (27-1).

S.3.Act to apply to Co-operative Societies
in certain cases.
Nothing in this Act shall apply to
(a) a primary agricultural credit society;
(b) a co-operative land mortgage bank; and
(c) any other co-operative society, except in the manner and to
the extent specified in Part V.]
PART V APPLICATION OF THE ACT TO CO-OPERATIVE
BANKS
56. Act to apply to co-operative societies subject to
modifications.The provisions of this Act, as in force for the
time being, shall apply to, or in relation to, co-operative societies
as they apply to, or in relation to, banking companies to the
following modifications, namely
(a) Throughout this Act, unless the context otherwise requires,
(i) references to a "banking company" or "the company" or "such
company" shall be construed as reference to a Co-operative
Bank,
(ii) references to "commencement of this Act" shall be construed
as references to commencement of the Banking Laws
(Application to Co-operative Societies) Act, 1965 (23 of 1965);


.
G. Gopinathan Nair v. State of Kerala, AIR. 1977 Ker. 36
Applicability to Co-operative Societies.Amongst the
provisions in the Banking Regulation Act which have been
made applicable to Co-operative Societies under Part V of
the said Act there is no section which deals with any of the
following matters, namely (a) the classification of such
institutions on the basis of their financial position, (b) the
staff-pattern by the said institution or (c) conditions of service
of the employees in such institutions. Such being the
position, the contention that co-operative societies carrying
on the business of banking are governed in respect of such
matters, only by the provisions contained in the Banking
Regulation Act, 1949, is devoid of any substance.
Application to societies.Part V makes substantial
departure from the Banking Regulation Act as far as
Co-operative Banks are concerned. Sec. 35-B under which
amendments of provision relating to appointments of
managing directors, etc. are subject to the previous approval
of the Reserve Bank, do not apply to a Co-operative Bank

.
Apex Coop Bank v Maharshtra St Coop Bank 2003
11SCC66 (2-Judge Bnch)
Coop regd u MultiState Act be granted licence by RBI
Greater Bombay Coop Bank v United Yarn 2007
6SCC236 (3-Judge Bnch)
Coop Banks not under BR Act

Disqualification for continuing in
service.
10. Prohibition of employment of managing agents and
restrictions on certain forms of employment.(1) No
banking company
(a) shall employ or be managed by a managing agent; or
(b) shall employ or continue the employment of any person
(i) who is, or at any time has been, adjudicated insolvent, or has
suspended payment or has compounded with his creditors, or
who is, or has been, convicted by Criminal Court of an offence
involving moral turpitude; or
It is relevant to notice that under Sec. 10 (1) (b) of the Banking
Regulation Act, any and every conviction by a Criminal Court
does not operate as a disqualification for continuing in service,
only the conviction by a Criminal Court of an offence involving
moral turpitude operates as such disqualification. Once it is
found that an employee has been convicted of an offence
involving moral turpitude, the employer has no option but to
terminate his service. That is the command of Sec. 10 (1) (b).

Moral turpitudeTest.
The test which can be applied for judging whether an offence
does or does not involve `moral turpitude can be
summarised as follows:
(1) Whether the act leading to a conviction was such as
could shock the moral conscience of society in general;
(2) Whether the motive which led to the act was a base one,
and
(3) Whether on account of the act having been committed
the perpetrator could be considered to be of a depraved
character or a person who was to be looked down upon by
the society."
Bank of Maharashtra v. Om Prakash Malviya, 1997
Lab.1.C. 1932 (Delhi).
K. Ganapathy Sastry v. Deputy General Manager, (Staff)
Andhra Bank, 1996 (2) Bank. L.J . 311 314, 315 (A. P.).
10-A. Board of Directors to include persons with
professional or other experience
(2) Not less than fifty-one per cent of the total number of
members of the Board of Directors of a banking company
shall consist of persons, who
shall have special knowledge or practical experience in
respect of one or more of the following matters, namely:
(5) Where the Reserve Bank is of opinion that the
composition of the Board of Directors of a banking company
is such that it does not fulfil the requirements of sub-section
(2), it may, after giving to such banking company reasonable
opportunity of being heard, by an order in writing, direct the
banking company to so reconstitute its Board of Directors as
to ensure that the said requirements are fulfilled
(6) Every appointment, removal or reconstitution duly made
and every election duly held, under this section shall be final
and shall not be called into question in any Court.


. Issue of direction to fill up vacancy of Director by workman
bad:
In so far as the Scheduled Banks are concerned, there is no
such provision enabling the employees to represent in the Board
of Directors of the Banking Company.

Company law is a self-contained Code.The Company Law
is a self-contained Code in so far as the appointment of the
Director is concerned, the provisions of the Act shall prevail. Sec.
256 (3) of the Companies Act provides that at the annual general
meeting at which a Director retires the Company may fill up the
vacancy by appointing the retiring director or some other person
thereto. However, in view of the fact that the provisions of the
Banking Regulation Act are also applicable, such appointment of
directors shall be consistent with the provision contained under
Sec. 10-A of the Act. Section 10-A of the Act further provides that
where the Reserve Bank of India is of opinion that the
composition of the Board of Directors of a banking company is
such that it does not fulfil the requirements of sub-section (2) it
may direct the banking company to so reconstitute the Board of
Directors as to ensure that the said requirements are fulfilled
T.S. Arumugain v. V. Laxmi Vitas Bank Ltd., 1992 (2) L.L.J .
270 at p. 218 (Mad.): 1993 Bank J . 435 at p. 445 (Mad.).

. 10-B. Banking company to be managed by whole-time Chairman
(4) Every Chairman who is appointed on a whole-time basis and every
Managing Director of a banking company appointed under sub-section
(1-A) shall be a person who has special knowledge and practical
experience of
(a) the working of a banking company, or of the State Bank of India or any
subsidiary bank or financial institution; or
(b) financial, economic or business administration:
Provided that a person shall be disqualified for being Chairman who is
appointed on a whole-time basis as a Managing Director, if he
(a) is a director of any company other, than a company referred to in the
proviso to sub-section (2); or
(b) is a partner of any firm which carries on any trade, business or
industry; or
(c) has substantial interest in any other company or firm; or
(d) is a director, manager, managing agent, partner or proprietor of any
trading, commercial or industrial concern; or
(e) is engaged in any other business or vocation.
10-BB. Power of Reserve Bank to appoint Chairman of a banking
company.
10-C. Chairman and certain directors not to be required to hold
qualification shares.
10-D. Provisions of Secs.10-A and 10-B to override all other lazes,
contracts, etc

RBI Master Circular- Loans and Advances
Statutory and Other Restrictions- 02-July-2012
.

UCO BANK V HEM CHANDRA SARKAR 1990
3SCC389 Bank and Customer Relationship
Indian Contract Act, 1872:
Bailment-Agency--Distinguishing features
What is Duty of Banker-bailee- Bank entrusted with
charge of goods/documents by customer-
Whether an agent or bailee--Whether any fiduciary
relationship exists between parties.
Banking Law--Bank and Customer--Existence of
fiduciary relationship--Whether could be inferred from
entries in current account.

.
The Resp, Hem Chandra, who was indenting and
lifting goods from textile mills situated in different
places, and was maintaining a current account with
the appellant-UCO Bank for this purpose, filed a suit
against the Bank for accounts, damages,
compensation and delivery of goods or their
equivalent in money, for non-delivery of goods despite
receiving payment thereof, contending that there was
an oral agreement with the Bank, regarding receipt
and payment of bills, etc. and receipt and storage of
goods on his behalf, and delivery of goods to him as
and when required.
That under the said terms and conditions. the Banker
constituted himself and acted as an express trustee
and/or agent of the respondent in relation to the said
goods and documents and thus stood in fiduciary
relationship with the respondent.

.
The trial court decreed the suit holding that from the
evidence and entries in the current account, it could be
inferred that there was agreement or arrangement
between the parties, and the Bank acted as
agent/trustee of Hem Chandra and that there was
fiduciary relationship between the parties.
The High Court, affirming the decree of the trial court
held that if the respondent had paid the value of the
goods and the appellant Bank neither delivered the
goods nor rendered accounts, a fiduciary relationship
could exist between Hem Chandra and the Bank in
respect of the goods for which value was paid by the
respondent.


.
In the appeal, by special leave, on behalf of the
appellant Bank it was contended that the Bank was
only a collecting agent for the supply of goods, and not
an agent or trustee for the respondent.
Adjustment of bills by debiting to the current account
without cheques from the respondent would not
change the ordinary relationship of bank and customer.
No special relationship was created either by opening
the current account or storing the goods meant for
delivery to the respondent and there was nothing to
take the parties outside the usual course of banking
business; and the bank received and took charge of
the goods only as bailee and any inference of fiduciary
relationship between parties was unwarranted and
unjustified.

.
HELD: The courts below were not justified in holding
that a fiduciary relationship could exist between the
parties in respect of goods for which the suit claim was
based.
This inference was drawn primarily from the debit
entries in the respondent's current account. Collection
of bills, remittances to mills, meeting expenses of
storing the goods and debiting the same to the current
account even without cheques from the respondent
could not lead to an inference that the Bank acted as
agent of the respondent and that there was fiduciary
relationship between parties. There is nothing in this
method of operation to take the parties outside the
ordinary relationship of banker and customer.
This is the normal method of banking operation and
the maintenance of the current account in the instant
case is not outside this principle. Law of Banking by
Lord Chorley 10th ed. at 167- 168 and Paget's Law of
Banking, 9th ed. at8.2-83. referred to.

.
2.1 Banks take charge of goods, articles, securities as
bailee and not as trustee or agent. Bailment is the delivery
or transfer of possession of a chattel or other item of
personal property with a specific mandate which required
the identical res either to be returned to the bailor or to be
dealt with in a particular way by the bailee as per directions
of the bailor.
One important' distinguishing feature between agency and
bailment is that the bailee does not represent the bailor. He
merely exercises. with the leave of the bailor under contract
or otherwise, certain powers of the bailor in respect of his
property. Fridman's Law of Agency 5th ed. p. 23, referred to.
It cannot be held that the Bank acted as agent of Hem.
Having regard to the finding of fact recorded by the courts
below, it is immaterial whether the Bank acted as bailee or
in any other capacity. On the evidence adduced by the
parties it has been established that the respondent did pay
the price of the goods in respect of which he based his
claim in the suit. The Bank having received the price of the
goods from the respondent has failed to deliver the same.

Some cases
1). UCO Bank v. Hema Chandra Sarkar, AIR 1990
SC 1329.
2). Foley v. Hill (1848) 9 ER 1002.
3). SBI v. Shyama Devi, AIR 1978 SC 1263
4). Hyderabad Commercials v. Indian Bank, AIR
1991 SC 247

Foley v. Hill (1848) 9 ER 1002
BankBanker and customerRelationshipDebtor
and creditorNo fiduciary relation.
The relation between a banker and his customer who
pays money into the bank is that of debtor and creditor,
the banker being liable to repay to the customer the
money which he holds for him when required to do so
by the customer.
When a customer pays money into his account at a
bank It ceases to be his money; it becomes the
banker's money and he can deal it as his own. He is
not vis--vis the customer in the fiduciary position of a
trustee or quasi-trustee holding the money for the
customer as for a cestui que trust.
.
In January, 1838, the appellant filed his bill against the
respondents, praying that an account might be taken of the sum of
6,117 10s. and all other sums received by the respondents for
the appellant on his private account since April, 1829, with interest
on the same at the rate of 3 per cent. per annum; and also an
account of all sums properly paid by them for or to the use of the
appellant on his account since that day, and that they might be
decreed to pay the appellant what, upon taking such accounts,
should be found due to him.
A schedule annexed to the defendants' answer set forth the
separate account of the appellant from the bank book, containing
the items and entries before mentioned. The chancellor, on the
hearing of the cause, decreed for an account as prayed, being of
opinion that the respondents were bound in duty to keep the
account clear; that they were to be charged accordingly to their
duty, the neglect of which could be no excuse, and that the
agreement to allow the interest was in effect the same, in answer
to the Statute of Limitations, as if the interest had been regularly
entered or paid.
LORD LYNDHURST, taking a different view of the case, upon
appeal, held, first., that the Statute of Limitations was a sufficient
defence; and, secondly, that the account consisting of only a few
simple items, was not a proper subject for a bill fin equity, but a
case for. an action at law for money had and received, and his
Lordship reversed the decree, and dismissed the bill.
.
Trusts and ordinary bank accounts
It is not always that case that when one person receives
another persons property that there will be a trust. It is an
established principle of banking law that when a bank
receives money from a customer and pays it into that
customers account, the bank receives an outright transfer
of that money and so does not hold the deposited money on
trust for the customer.
In Foley v Hill (1848) 2 HL Cas 28 Lord Cottenham LC
described the inter-action of banker and customer in the
following terms:
[M]oney placed in the custody of a banker is, to all intents
and purposes, the money of the banker, to do with it as he
pleases; he is guilty of no breach of trust in employing it; he
is not answerable to the principal if he puts it into jeopardy, if
he engages in a hazardous speculation; he is not bound to
keep it or deal with it as the property of his principal; but he
is, of course, answerable for the amount, because he has
contracted, having received that money, to repay to the
principal, when demanded, a sum equivalent to that paid
into his hands.
.
A banker therefore owes only personal obligations to its customers
(that is, its depositors) when it receives their deposits. In that
sense, money transferred to a bank is an outright transfer of
money to the bank. This conclusion was based on the courts
analysis of the ordinary intentions of the parties to a banking
contract. It would require an express agreement between the bank
and the customer for the bank to be understood as acting as a
trustee: banks often do act as trustees, but only through special
subsidiaries and only in limited circumstances, but not in relation
to ordinary bank accounts. Thus, the court will look at the
circumstances and infer the existence or non-existence of an
express trust from those circumstances.
The customers remedy against the banker is a remedy based on
ordinary contract law but not based on trusts law.
Hirschhorn v Evans (Barclays Bank garnishees) [1938] 2 KB 801,
815, per Mackinnon LJ.
So a bank operating an account on behalf of a Lloyds insurance
syndicate would not hold those moneys on trust (without
something more in the arrangement to require that analysis):
Mann v Coutts & Co [2003] EWHC 2138, [2004] 1 CLC 301.
Azam v Iqbal [2007] EWHC 2025, [2008] Bus LR 168.

.
Fram 1829 to the end of the year 1834, when the joint account
was closed, the appellants share of the profits of the collieries
was from time to time paid by cheques, drawn by the colliery
agents against the joint account.
These cheques were, as the respondents alleged, paid in cash
or by bills drawn by them an their London bankers in favor of the
appellant, and none of them was entered in his separate acount.
The only items found in that account mere the 26117 10s. on the
credit side, and two sums of &1?00 and &2000 on the debit side,
both being payments made to or on behalf of the appeliant in
1830. There were also entries, in a separate column, of interest
calculated on the sum or balance in the Bank, up to the 1831,
and not afterwards.
The appellant filed h i s bill in January 1838, against the
respondents, praying that account might be taken of the said
sum of 6117 , and all other sums received by the respondents
for the plaintiff on his private account since April l829 with
interest on the same at, the rate of $3 per cent. per annum; md
also an account of all sums properly paid by them for or to the
use of the appeIlant not n his said account since that day, and
that they might be decreed
.
The relation between a Banker and customer who pays
money into the Bank, is the ordinary relation of debtor
and creditor, with a superadded obtigation arising out of
the custom of bankers to honour the customer's drafts ;
and that relation is not altered by an agreement by the
banker to allow the interest on the balances in the
Bank.
App. Edward Foley, owner of collieries;
Resp., Thomas Hill, Banker
Foley and Scott Joint owners of a colliery had a Joint
account with Hill, Bank. Foley opened a separate a/c
and cheq was paid from their joint a/c. Hill promised 3%
interest on the amount in the new a/c of Foley.


Banker Customer Relationship
The Contract
When a customer pays money into his account
the bank = a debtor
customer = creditor. Foley v Hill (1848) 2 HL Cas
28
The money becomes the property of the bank; the
bank has borrowed the money from the customer
Balmoral Super market Ltd v Bank of New Zealand
[1974] 2 NZLR 155 money stolen at the counter
still the property of the customer;
Chambers v Miller (1862) 13 CBNS 125
money drawn by a customer from overdrawn
account belongs to the customer

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

.
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

Liability of Bank in Advisory Role
Mis-Selling
Quistclose Trust
Barclays Bank Ltd v Quistclose Investments Ltd [1970]
AC 567, [1968] 3 All ER 651
Azam v Iqbal [2007] EWHC 2025, [2008] Bus LR 168.
Adrian Rubenstein v HSBC [2011] EWHC 2304 (QB)
Rubenstein v HSBC [2012] EWCA Civ 1184


Bankers Lien and Right to Set-off
Bankers Right of General Lien
It is more than ordinary possessory lien. It is an
implied (unwritten) pledge. It does not transfer the
property or right of legal ownership. It is a statutory
and defensive right and does not require any separate
agreement. In case of pledge, a Banker can avail of
the right to sell on default.
A Banker has a general lien over all forms of securities
or negotiable instruments deposited by or on behalf of
the customer in the ordinary course of banking
business and that the right of general lien of the
Banker is judiciously recognised.
Sec. 171, Indian Contract Act 1872
.
Lien Subject to contract to contrary
KK Kar v UCO Bank, AIR 1982 Cal 62

A Right to Combine or set-off accounts
On security of third party
Specific purpose
Pledged goods

Right to Set-off
In the form of cross claim
Mutual demands between same parties
When set-off not available
Joint account


SBI v Shyama Devi AIR 1978 SC 1263
Banker and customer - Customer entrusting money or cheque by
endorsement on its back to bank employee for crediting the same to his
account - Employee misappropriating sums entrusted - Vicarious liability of
bank - Onus of proof.
On September 17, 1945, the Resp. opened a Saving Bank Account, with
App. Bank. Was introduced to the Bank by one Kapil Deo Shukla, who
was an employee of the Bank, and admittedly a close neighbour of the
resp. and a friend of her husband.
On November 30, 1948, the respondent made a petition for the recovery
of Rs. 15,547/10/-, from the Imperial Bank.
The plaintiff had, apart from Rs. 1,932/2/- admitted by the def. Bank, the
under-noted amounts which were deposited by her from time to time with
the Bank:
Rs. 105 __ deposited on September 17, 1945.
Rs. 4,000 __ deposited on September 17, 1945.
Rs. 8,000 __ deposited on December 7, 1945.
Rs. 100 __ deposited on June 20, 1946.
Rs. 12,205
These amounts were entered in the respondent's Pass Book by the
employees of the Bank, which had been confirming and ratifying those
entries from time of time.

.
The parties went to trial on these issues:
(1) Did the plaintiff deposit with the defendant the
various sums of money mentioned in the plaint?
(2) Are these amounts mentioned in the plaintiff's Pass
Book? If so, is the defendant bound by the entries
therein?
(3) Did the plaintiff make any deposit in contravention of
any rule of the Bank? If so, to what effect?
The Bank averred that the plaintiff was introduced to the
Bank by the said Kapil Deo Shukla, who was her close
neighbour and a fast friend of her husband, Bhagwati
Prasad, and that if the plaintiff-respondent selected him
as her agent or instrument for depositing money in the
Bank and he had defrauded her, or if Kapil Deo Shukla
acting in collusion with her husband, showed wrong
amounts in her Pass Book, the Bank was not liable for
any loss that might have accrued to her.


.
The trial court, on July 8, 1952, decreed the respondent's
suit (in respect of two items) for Rupees 10,040/10/-.
The High Court dismissed the Bank's appeal and allowed
the plaintiff-respondent's cross-objections, decreeing the
suit for Rs. 14,145/10/-.
In Appeal to the Supreme Court;
Appellant, contends that the respondent's case was that the
plaintiff had entrusted K. D Shukla, who was their friend,
with moneys from time to time for depositing in her Savings
Bank account.
In such a situation, K. D. Shukla could not be said to have
been acting in due course of his employment or as an agent
of the Bank but but only as an agent of the respondent, and
if K. D. Shukla did not deposit those amounts as directed by
the plaintiff, but misappropriated the same and to cover up
his fraud made false entries in the Pass Book, the Bank was
not liable. Stress has been laid on the fact that the disputed
amounts were never delivered by cheque or otherwise at
the Bank's counter.
.
As against the above, Resp. submits that the entries in
the Pass Book showing the deposit of these amounts in
the Savings Bank account of the plaintiff, had admittedly
been made by K. D. Shukla, when he was an employee
of the Bank.
It is pointed out that there is evidence on the record to
show that this K. D. Shukla had manipulated the
accounts of three other depositors, also, and the Bank
had reimbursed those constituents for the loss, and
there is no reason why a discriminatory treatment
should have been meted out to the plaintiff.
With regard to all the disputed items, it is urged that the
entries in the Pass Book showing these deposits in the
plaintiff's accounts were, prima facie, sufficient to
establish the plaintiff's claim and case liability on the
appellant.
.
Principle is that the employer is not liable for the act of
the servant if the cause of the loss or damages arose
without his actual fault or privity and without the fault or
neglect of his agents or servants in the course of their
employment. This principle has been illustrated by the
decision of the House of Lords in Leesh River Tea Co.
Ltd. v. British India Steam Navigation Co. Ltd., (1966) 3
All ER 593.
In view of all that has been said above, we allow the
defendant's appeal and dismiss the plaintiff's claim with
regard to Rs. 11,000/- (consisting of the items of Rs.
4000/- plus Rs. 7000/-) and interest thereon.
BANKING LAWS (AMENDMENT) BILL, 2011
STATEMENT OF OBJECTS AND REASONS
A BILL further to amend the Banking Regulation Act, 1949, the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970 and the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1980 and to make consequential
amendments in certain other enactments.
The Banking Regulation Act, 1949 being the law relating to banking has been in force for
more than six decades. It, inter alia, empowers the Reserve Bank to regulate and
supervise the banking sector. The banking companies are now operating in a liberalised
environment. In this scenario, it has become necessary that the banking companies in
India are enabled to raise capital in accordance with the international best practices.
Therefore, it is proposed to
1. (a) enable the nationalised banks to increase or decrease the authorised capital with
approval from the Central Government and the Reserve Bank without being limited by the
ceiling of a maximum of three thousand crores of rupees;
(b) provide the nationalised banks to issue two additional instruments (bonus shares and
rights issue) for accessing the capital market to raise capital required for expansion of
banking business;
(c) raise the ceiling on voting rights of shareholders of nationalised banks from one per
cent. to ten per cent.;
(d) make provisions to ensure that control of banking companies is in the hands of fit and
proper persons, it should be mandatory for the persons to obtain prior approval from the
Reserve Bank who propose to acquire five per cent. or more of the share capital of a
banking company;
(e) confer power upon the Reserve Bank to impose such conditions as it deems necessary
while granting such approval for acquisitions of five per cent. or more share capital of a
banking company (including specifying acquisition of a minimum percentage of shares in a
banking company) if it considers necessary; and
(f) remove the existing restriction on voting rights limited to ten per cent. of the total voting
rights of all the shareholders of the banking company.


.
2. Taking advantage of the liberalised environment, banking
companies are engaging in multifarious activities through the
medium of associate enterprises. It has, therefore, become
necessary for the Reserve Bank, as the regulator of the banking
companies, to be aware of the financial impact of the business of
such enterprises on the financial position of the banking
companies. It is, therefore, proposed to confer power upon the
Reserve Bank to call for information and returns from the
associate enterprises of banking companies also and to inspect
the same, if necessary.

3. Under the existing provision contained in section 36AA of the
Banking Regulation Act, 1949, the Reserve Bank has, inter alia,
power to remove any director or other officers of a banking
company, but such power is not adequate if the entire Board of
directors of a banking company is functioning in a manner
detrimental to the interest of the depositors or the banking
company itself. It is, therefore, proposed to confer power upon the
Reserve Bank to supersede the Board of directors of a banking
company for a total period not exceeding twelve months and
appoint an administrator to manage the banking company during
the said period.


. 7. In addition to the changes proposed in paras 1 to 5, it is also proposed
to,
(a) enable the banking companies to issue preference shares subject to
regulatory guidelines of the Reserve Bank;
(b) align the restriction on commission, etc., on sale of shares to issue
price rather than to the paid-up value of shares;
(c) establish a Depositor Education and Awareness Fund to take over
inoperative deposit accounts which have not been claimed or operated
for a period of ten years or more;
(d) substantially increase the penalties and fine for some violations of the
Banking Regulation Act, 1949;
(e) confer power upon the Reserve Bank to levy penal interest in case of
non maintenance of required cash reserve ratio;
(f) confer power upon the Reserve Bank to order a special audit of co-
operative banks in public interest for a more effective supervision.
8. The Banking Laws (Amendment) Bill, 2011 seeks to amend the
Banking Regulation Act, 1949, the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970 and the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1980 to make the
regulatory powers of Reserve Bank more effective and to increase the
access of the nationalised banks to capital market to raise capital
required for expansion of banking business and also to make certain
other consequential amendments in certain other enactments.


THE BANKING COMPANIES (ACQUISITION AND
TRANSFER OF UNDERTAKINGS) AND FINANCIAL
INSTITUTIONS LAWS (AMENDMENT) ACT, 2006
S. 2A: Subject to the provisions of this Act, the authorised
capital of every corresponding new bank shall be one
thousand five hundred crores of rupees divided into one
hundred and fifty crores fully paid- up shares of ten rupees
each: Provided that the Central Government may, after
consultation with the Reserve Bank and by notification in the
Official Gazette, increase or reduce the authorised capital
as it thinks fit, so however that after such increase or
reduction, the authorised capital shall not exceed three
thousand crores or be less than one thousand five hundred
crores, of rupees.
S. 2E: No shareholder of the corresponding new bank, other
than the Central Government, shall be entitled to exercise
voting rights in respect of any shares held by him in excess
of one per cent. of the total voting rights of all the
shareholders of the corresponding new bank.

THE BANKING OMBUDSMAN SCHEME,
2006
The Scheme is introduced with the object of enabling
resolution of complaints relating to certain services
rendered by banks and to facilitate the satisfaction or
settlement of such complaints. (w.e.f. 1995)
In exercise of the powers conferred by Section 35A of
the Banking Regulation Act, 1949 Reserve Bank of
India amended the Banking Ombudsman Scheme 2006
w.e.f. February 3, 2009
The Reserve Bank hereby directs that all commercial
banks, regional rural banks and scheduled primary co-
operative banks shall comply with the Banking
Ombudsman Scheme, 2006.

ESTABLISHMENT OF OFFICE OF
BANKING OMBUDSMAN
JURISDICTION, POWERS AND DUTIES OF
BANKING OMBUDSMAN
PROCEDURE FOR REDRESSAL OF GRIEVANCE
Grounds of Complaint
Procedure for Filing Complaint
Power to Call for Information
Settlement of Complaint by Agreement
Award by the Banking Ombudsman
Rejection of the Complaint
Appeal Before the Appellate Authority
Banks to Display Salient Features of the Scheme for
Common Knowledge of Public
.
The Banking Ombudsman is a senior official appointed by
the Reserve Bank of India to redress customer complaints
against deficiency in certain banking services.
3. Definition; (4) Banking Ombudsman means any person
appointed under Clause 4 of the Scheme.
4. APPOINTMENT & TENURE
(1) The Reserve Bank may appoint one or more of its
officers in the rank of Chief General Manager or General
Manager to be known as Banking Ombudsmen to carry out
the functions entrusted to them by or under the Scheme.
(2) The appointment may be made for a period not
exceeding three years at a time.
Location of Banking Ombudsmen
As on date, fifteen Banking Ombudsmen have been
appointed with their offices located mostly in state capitals.
The addresses and contact details of the Banking
Ombudsman offices have been provided in Annex I.

.
The Grounds of Complaints?
The Banking Ombudsman can receive and consider any complaint relating to the
following deficiency in banking services (including internet banking):
non-payment or inordinate delay in the payment or collection of cheques, drafts, bills
etc.; non-adherence to prescribed working hours ;
refusal to open deposit accounts without any valid reason for refusal; levying of
charges without adequate prior notice to the customer; non-adherence by the bank or
its subsidiaries to the instructions of Reserve Bank on ATM/Debit card operations or
credit card operations;
non-disbursement or delay in disbursement of pension
refusal to accept or delay in accepting payment towards taxes, as required by
Reserve Bank/Government; servicing or redemption of Government securities;
Refusal or forced closure of deposit accounts without due notice or without sufficient
reason;
non-adherence to the fair practices code as adopted by the bank
non-observance of Reserve Bank guidelines on engagement of recovery agents by
banks; and
delays in sanction, disbursement or non-observance of prescribed time schedule for
disposal of loan applications;
non-adherence to the provisions of the fair practices code for lenders as adopted by
the bank or Code of Banks Commitment to Customers, as the case may be;
non-observance of any other direction or instruction of the Reserve Bank as may be
specified by the Reserve Bank for this purpose from time to time.
The Banking Ombudsman may also deal with such other matter as may be specified
by the Reserve Bank from time to time.

.
When can a complaint be filed?
One can file a complaint before the Banking Ombudsman if the reply is not
received from the bank within a period of one month after the bank concerned
has received ones representation, or the bank rejects the complaint, or if the
complainant is not satisfied with the reply given by the bank.

A Complaint will not be considered if:
a. One has not approached his bank for redressal of his grievance first.
b. One has not made the complaint within one year from the date one has
received the reply of the bank or if no reply is received if it is more than one year
and one month from the date of representation to the bank.
c. The subject matter of the complaint is pending for disposal / has already been
dealt with at any other forum like court of law, consumer court etc.
d. Frivolous or vexatious.
e. The institution complained against is not covered under the scheme.
f. The subject matter of the complaint is not within the ambit of the Banking
Ombudsman.
g. If the complaint is for the same subject matter that was settled through the
office of the Banking Ombudsman in any previous proceedings.

The procedure for filing the complaint before the Banking Ombudsman
Simply by (1) writing on a plain paper, (2) Online or (3) sending an email to the
Banking Ombudsman. There is a form along with details of the scheme in the
website. However, it is not necessary to use this format.
.
Place of Complaint; Compensation; Conciliation; Award
One may lodge his/ her complaint at the office of the Banking
Ombudsman under whose jurisdiction, the bank branch complained
against is situated. For complaints relating to credit cards and other types
of services with centralized operations, complaints may be filed before the
Banking Ombudsman within whose territorial jurisdiction the billing
address of the customer is located.
The complainant can be filed by the authorized representative (other than
an advocate).
The Banking Ombudsman does not charge any fee for filing and resolving
customers complaints.
The amount, if any, to be paid by the bank to the complainant by way of
compensation for any loss suffered by the complainant is limited to the
amount arising directly out of the act or omission of the bank or Rs 10
lakhs, whichever is lower.
The Banking Ombudsman may award compensation not exceeding Rs 1
lakh to the complainant only in the case of complaints relating to credit
card operations for mental agony and harassment.
The Banking Ombudsman endeavours to promote, through conciliation or
mediation, a settlement of the complaint by agreement between the
complaint and the bank named in the complaint.
If the terms of settlement (offered by the bank) are acceptable to one in
full and final settlement of complaint, the Banking Ombudsman will pass
an order as per the terms of settlement which becomes binding on the
parties.


.
Rejection of complaint; Appeals
The Banking Ombudsman may reject a complaint at any stage if it appears to
him that a complaint made to him is:
(1) not on the grounds of complaint referred to above , (2) compensation sought
from the Banking Ombudsman is beyond Rs 10 lakh; (3) requires consideration
of elaborate documentary and oral evidence and the proceedings before the
Banking Ombudsman are not appropriate for adjudication of such complaint
without any sufficient cause (4) not pursued by the complainant with reasonable
diligence; (5) in the opinion of the Banking Ombudsman there is no loss or
damage or inconvenience caused to the complainant.
If a complaint is not settled by an agreement within a period of one month, the
Banking Ombudsman proceeds further to pass an award. Before passing an
award, the Banking Ombudsman provides reasonable opportunity to the
complainant and the bank, to present their case.

Approach the appellate authority against the Banking Ombudsmens decision -
Deputy Governor of the RBI. Other remedies available as per the law.

Appeal within 30 days of the date of receipt of the award, also allow a further
period not exceeding 30 days. The appellate authority may
(i). dismiss the appeal; or ; (ii). allow the appeal and set aside the award; or ; (iii).
send the matter to the Banking Ombudsman for fresh disposal in accordance
with such directions as the appellate authority may consider necessary or proper;
or ; (iv). modify the award and pass such directions as may be necessary to give
effect to the modified award; or ; (v.) pass any other order as it may deem fit.

Nomination Facility Legal Provisions in
the Banking Regulation Act, 1949
The Banking Regulation Act, 1949 was amended by Banking
Laws (Amendment) Act, 1983 by introducing new Sections
45ZA to 45ZF, which provide, inter alia, for the following
matters:
a. To enable a banking company to make payment to the
nominee of a deceased depositor, the amount standing to the
credit of the depositor.
b. To enable a banking company to return the articles left by
a deceased person in its safe custody to his nominee, after
making an inventory of the articles in the manner directed by
the Reserve Bank.
c. To enable a banking company to release the contents of a
safety locker to the nominee of the hirer of such locker, in the
event of the death of the hirer, after making an inventory of
the contents of the safety locker in the manner directed by
the Reserve Bank.


Customer
No legal definition
A customer means a person who opens account which
bank accepts with proper introduction.
RBI KYC Policy 2004: customer may be defined as-
Person/entity that maintains account with bank and/or has
business relationship with bank
One on whose behalf the account is maintained
Any person or entity connected with a financial transaction
which may pose risk to the bank; wire transfer, demand
drafts
Bankers obligations
To honour cheques of custom
Maintain secrecy of accounts
Know Your Customer (KYC)
KYC principles issued by RBI u/s 35(A) of Banking
Regulation Act
Identification of customers
To prevent banks from being used for money laundering
activities
Financial Intelligence Unit (FIU)
Financial Action Task Force (FATF)
Anti Money Laundering (AML) standards
Combating Financing of Terrorism (CFT)