TQM Implementation

Banking & Insurance
BANK
The word Bank originated from the French

word Banque or Italian word, Banca which
mean an office for monetary transaction over
the counter.
In those days banks were used as centers for
monetary transactions.
Banking and Insurance

Module.I: COMMERCIAL BANKING
Evolution of Banking Services and its

history in India.
The modern banking and its networking are
the products of modern western civilization.
British brought with them this modern
concept of banking in India.
Evolution of Banking Services and its history in India.
The BANK OF ENGLAND was started in 1694.

In 1708, the monopoly and the right to issue notes
was given to Bank of England through an Act.
Several Joint Stock Banking Companies started
operating early in the nineteenth century.These
banks primarily carried on commercial functions like
receiving money on deposits, lending money,
transferring money from place to place and bill
discounting.
History of Banking in India

Early History
The Vedic period has literature which records giving

of loans to others.
The Manuscript speaks of deposits, pledges, loans
and interest rate.
Interest could legally be charged at between two to
five percent per month. The maximum amount of
interest collectable on the principal was laid down by
the State.
Early History of Banking
The main instrument through which banking and

transfer of funds was carried out through the
inland bills of exchange or the Hundi.
Business developed so well that certain castes
and communities traditionally came to regard
banking as their family business.

Modern History:
Modern banking in India began with the rise

to power of the British.
The British consolidated their power and
became the most powerful force in India after
vanquishing Tipu Sultan in the battle of
Srirangapattan in 1799.
Modern History of Banking:
The quest for power by Lord Morning ton. Governor General of

Fort William in Bengal at that time led to a serious depletion of
the resources of the East India Company. This led to the
Company promoting the Bank of Calcutta in 1806 to raise
resources.
The native money lender lent to the farmers at 40, 50, and 60
per cent.
Indian business men were very often acted as lender to the
European business men with rate of interest lower than the
market rate.
The Swadeshi Movement which prompted the Indians to start
many new institutions also provided an impetus for starting
new banks.
In 1921, the Three Presidency Banks at Calcutta,

Bombay and Madras were merged in to Imperial
Bank by passing Imperial Bank of India Act, 1920.
The Imperial Bank did not have power of issuing
notes, but was permitted to manage the clearing
house and hold government balances.
.History of Banking in India
With the passing of RBI Act of 1934, the Reserve Bank

of India came in to being to act as the Central Bank. It
acquired the right to issue notes and acted as the
banker to the Government in place Imperial Bank.
By passing of SBI Act, the Imperial Bank was taken
over and the assets vested in a new bank, the State
Bank of India.
Bank Nationalization
The RBI was a originally shareholders bank . It

was nationalized by the RBI (Amendment)
Act,1948, consequent to the nationalization of
Bank of England in 1946.
The major historical event in the history of
banking India after in after independence is
undoubtedly the nationalization of 14 major
banks on 19 th July, 1969. In 1980 six more
private sector banks were nationalized.
Nationalization was recognition of the potential
of the banking system to promote broader
economic objectives.
..Bank Nationalization
The branch network which was 8262 in June 1969

expanded to over 60,000 by 1992 with major
expansion (80%) in rural areas.
The average number of people served by branch
came down from 60,000 to 11,000.
Bank Nationalization
The deployment of credit is more widely
spread
all over the country as against only in
advanced states.
In 1969 deposits amounted to 13 % of GDP
and advances to 10 %.By 1990 deposits grew
to 30 % and advances 25 % of GDP.
.Bank Nationalization
Rural deposits as percentage of deposits

grew from 3% to 15 % making for increased
mobilization of resources from rural areas.
Deposits grew from a figure of Rs. 4669
crores in July1969 to Rs.2,75,000 crores on
31.3.1993.
.Bank Nationalization
40% of the total credit was directed to priority

sector.
45% of the total deposits was used by the
government to fund its five year plans.
...Nationalization
However the growth did not come without its costs .
The banking system has grown too large and

unmanageable.
Customer service has suffered due to increasing costs and

lower productivity.
The directed credit program has led to large over-dues

affecting the very viability of the banking system.
Definition of Banking
The Banking Regulation Act,1949 defines 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 wihtdrawable by cheque,
draft, order or otherwise. [Sec.5 (b)].
Banking terms
Section 5(c) of Banking Regulation Act,1949
defines banking company as ,
Any company which transacts the business
of banking in India.
Banking terms
Section 5(c)a. of Banking Regulation Act,1949
defines banking policy as, 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 regards to the
interests of 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.
Definitions of Banking terms
Section 5 (f) of Banking Regulation Act ,1949 defines

demand liabilities as, liabilities which must be met on
demand. And Times Liabilities as liabilities which are
not demand liabilities.
Development Bank means Industrial Development Bank
of India established under Section 3 of IDBI Act of 1964.
Gold Includes gold in the form of coin, whether legal
tender or not, or in the form of bullion or ingot, whether
refined or not.
National Bank means National Bank for Agriculture and
Rural Development established u/s 3 of NABARD Act,
1911.
Definitions of Banking
terms
Exim Bank means Export Import Bank of India

established under Section 3 of Export Import Bank of India
of 1981.
Reconstruction Bank means the Industrial

Reconstruction Bank of India established under section 3
of the Industrial Reconstruction Bank of India ,1984.
Secured loan or advance means a loan or advance

made on security of assets the market value of which is
not any time less than the amount of such loan or advance
; and unsecured loan or advance means a loan or
advance not so secured.
Definitions of Banker/Bank
Dr. H. C. Hart,
A banker or bank is a person or company

carrying on the business of receiving of money
and collecting of drafts, for customers subject to
the obligation of honoring checks drawn upon
them from time to time by the customers to the
extent of amount available in their accounts.
Definition of Banking
H. P. Sheldon defines,
The function of receiving money from his
customers and repaying it by honoring
their cheques as and when required is the
function above all other functions, which
distinguishes a banking business from
any other kind of business.
BUSINESS OF BANKING COMPANIES

Forms of business in which banking companies may
engage in any one or more of the following forms of
business namely;
The borrowing, raising, or taking up of money; the lending
or advancing of money either upon or without security;the
drawing, making accepting and discounting , buying,
selling collecting and dealing in bills of exchange, hundis,
promissory notes, coupons, drafts, bills of lading, railway
receipts,warrants, debentures, certificates, scripts and
other instruments,and securities whether transferable or
negotiable or not;
.BUSINESS OF BANKING COMPANIES

the granting and issuing of letters of credit,
travelers checks and circular notes; the
buying,selling and dealing in bullion ; the buying
and selling of foreign exchange including foreign
bank notes; the acquiring ,holding ,issuing on
commission, underwriting and dealing in stock,
funds, shares, debentures, debenture stock,
bonds, obligations, securities and investments of
all kinds ;
.BUSINESS OF BANKING COMPANIES
the purchasing and selling of bonds, scrip or other

forms of securities on behalf of the constituents
or others, negotiating of loans and advances; the
receiving of all kinds of bonds , scrip or valuables
on deposits or for safe custody or otherwise; the
providing of safe deposit vaults; the collecting
and transmitting of money and securities;
Various types of Banking Services
The flow chart given below shows the following types of

banking services;
1.Central Banking services:

The Central Bank of any country(i)Issues currency
and bank notes;
(ii) Discharges the treasury functions of the
Government, (iii)Manages the money affairs of
the nation & regulates the internal and external
value of money (iv)acts as the bank of the
Government and last but not the least, acts as
bankers bank.
Various types of Banking Services

2.Commercial Banking Services:Commercial
banking services include, (i)receiving various
types of deposits;(ii) giving various types of
loans (iii) Extending some non-banking customer
services like facilities of locker, rendering
services in paying directly house rent, electricity
bill, share calls, insurance premium and the
like.Commercial bank also advices on
investment, re-investment,allotment or transfer
of funds.
Contd
3.Specialized Banking Services:
Special banking institutions are established for

definite specialized banking services like industrial
banks to supply industrial long term credit and
working capital;land mortgage bank for granting
loans on equitable mortgage; Rural credit banks for
generating funds for extending rural credit;
development banks to support any developmental
activities.These types of banks accept all types of
deposits but mobilizes the amount in its specially
focused area.
,Contd
4.Non-banking financial services:
Many institutions are established for carrying on nonbanking financial services.Mutual funds are
institutions accepting finances from its members
and investing in long term capital of companies both
directly and indirectly in primary market as well as
indirectly in the capital market.
Financial institutions acting as portfolio managers
receive funds from the public and manage the funds
for or on behalf of its depositors.The portfolio
managers undertake the responsibility of managing
the funds of the principal so as to generate
maximum return.
The Narasimhan Committee Report
The 1980s were the decade of private

enterprises all over the world. The collapse of the
USSR at the end of the 1980s is the end of one
experiment of socialism.
In India the country went through traumatic
moments in 1990, after the heady economic
growth in the 1980s, due to a foreign exchange
crises on account of large scale external
borrowings in the 1980s that had weakened the
countrys ability to service its debts.
The Narasimhan Committee Report
The government felt that there was a need to

initiate reform in the financial system and
banks, as the system had developed
weaknesses.
Banks were burdened by a large percentage of
non-performing loans (NPAs). Customer service
had suffered, and out-dated practices were in
vogue.
Narasimhan committee was set up to
recommend changes in the financial system.
NARASIMHAN COMMITTEE MADE REVOLUTIONARY RECOMMENDATIONS

ON EMPHASIZING THE NEED FOR DE-REGULATION AND LIBERALIZATION.
Banks were to be allowed to raise capital from the public.

Also no further nationalization of banks were to be made.
New private sector banks were to be allowed and no
distinction was to be made between private banks and
public sector banks.
Foreign banks were to be allowed freedom to open
branches.
The pattern of banking structure should be broadened with 3-4
large banks on a international level 8-9 large banks on a national

level and the other as local banks.
Narasimhan Committee Report Recommendations.

[contd]
Control over the banking system should be centralized with

the RBI and not split between the RBI and department of
banking of government .
SLR and CRR should be reduced .
Concession-al lending should be phased out.
Deposit interest rates to be raised along with reduction of
SLR.
The appointment of CEO should be de-politicized banks
should be free to make their own recruitments.
The Role and Functions of Commercial Banks in

India
Utility of Banking Institutions:
Banks are extremely useful and indispensable institutions
for a modern community .They are the custodians and
distributors of liquid capital the essential ingredient for
commercial and industrial activities.
a] The banks create purchasing power,in the

form of purchasing power, in the form of bank
notes, checks, bill,drafts,etc.
.The Role and Functions of Commercial Banks

in India
b] Banks transfer funds, by bringing
borrowers and lenders together, and by
helping funds move from person to person
and place to place in convenient manner.
c] Banks encourage the habit of saving among the
people and enable small savings, which
otherwise would have been scattered
ineffectively, to be accumulated in to large funds
and thus made available for investments of
various kinds.They promote economic
development through capital formation.
Contd..
By encouraging savings and investment, the

banks increase the productivity of the resources
of the country and thus contribute to general
prosperity and welfare by promoting economic
development.
Banks agency functions are very useful to customers of

the bank.They undertake to make payments of various
kinds on behalf of their customers and also make several
types of collections on their behalf.
Thus, banks are useful to both the community in general and
the individual customer in particular.
Role of Commercial Banks in Economic Development
Banks promote capital formation:

a) they attract deposits by offering attractive
rates of interest,thus converting savings which
would have remained idle, in to active capital
b) they distribute these savings through loans
among enterprises which are connected with
economic development
Optimum utilization of resources:

The banks exercise a degree of
discrimination which not only ensures
their own safety but also makes for
optimum utilization of the financial
resources
Financing the priority sectors:

For successful implementation of the
development programs it becomes necessary to
make credit facilities available to high priority
sectors.The banks and financial institutions
operate in such a manner as to conform to the
priorities of development and not in terms of
return on their capital.
Contd..
Banks promote balanced regional

development:
By opening branches in backward

areas the banks make credit facilities
available there.
Also the funds collected in developed regions
through deposits may be channelised for
investment in the underdeveloped regions of the
country.
Contd..
Expansion of credit:
To maintain a high level of economic activity, it
is imperative that credit must expand. Banks
make valuable contribution to the speed and
level of economic development in the country.
Banks promote growth with stability:
Banks regulate the rates of investment by
influencing the rates of interest.
Contd.
In recent years , commercial banks in India have been

adopting the strategy of innovative banking in their
business operations
To attract more deposits, banks have introduced many
attractive saving schemes such as education deposit
plan,perennial pension plan retirement schemes, loan
linked recurring deposit schemes, housing finance, credit
cards, packing credit and post shipment credit for
exporters ,consumer credit, 24 hr banking, working on
Sundays, etc. Mobile bank branches have also been
opened by number of banks.
Contd.
In addition to various activities like
innovative banking , promoting
entrepreneurship, retail banking and
rural development, the commercial banks
have promoted various schemes like
advance to priority sectors and credit
guarantee schemes.Thus banks come to
p[lay an t role in economic development.
MERCHANT BANKING
Merchants bankers are governed by the Securities and

Exchange Board of India(Merchant Bankers)Rules,1992.
Merchant Banker is defined as, any person

who is engaged in the business of issue
management either by making arrangement
regarding selling, buying or subscribing to
securities as Manager, Consultant, Adviser or
rendering corporate advisory service in relation
to such issue management .
Role of Merchant Bankers:

Merchant bankers are designated as managers to the issue.
They are specialized agencies whose main business is to attract
public money to Capital issues. They render the following
services.
1. Drafting of prospectus and getting it approved from the

stock exchanges
2. Appointing and assisting in appointing bankers
,underwriters, brokers, advertisers etc.
3.Obtaining the consent of all the agencies involved in public
issue.
4. Holding brokers conference / investors conference
5.Deciding the pattern of advertising
6.Deciding the branches where applications money should be
collected.
merchant bankers
7.Deciding the dates of opening and closing of the
issue.
8.Obtaining the daily report of the application money
collected at various branches
9. After the closing of issue , obtaining the consent of stock
exchange for deciding basis of allotment etc.
Merchant Bankers charge a heavy fee for rendering the

above mentioned services.The fees are so lucrative that
many nationalized banks which had separate merchant
banking divisions have now opened separate subsidiary
companies for rendering merchant banking services.
Merchant Bankers
A). All merchant bankers must obtain the
authorization from SEBI
B) SEBI may collect from the merchant bankers
an initial authorization fee an annual fee and a
renewal fee.
C) The Merchant bankers must have a minimum
net worth which is based on the category in to
which they are classified.
CATEGORY:- Rs 1 crore.
CATEGORY:- Rs 50 Lakhs
CATEGORY:- Rs 20 lakhs.
CATEGORY:- NIL.
Merchant Bankers
D) Lead manager / Merchant bankers would be
responsible for ensuring timely refunds and
allotment of securities to the investor.
E) The merchant banker shall make available to
SEBI such information documents returns and
reports as may be prescribed and called for.
F) SEBI has already prescribed code of conduct for
merchant bankers, which they should adhere
to.
merchant bankers.
The above terms of authorization have been
framed to make merchant bankers more
responsible and liable and any negligence on the
part of the merchant bankers can be proceeded
against legally.
This will ensure that fake companies whose only
intention is to defraud the public do not have any
access to the stock market and the investing
public at large.
Four categories of Merchant Bankers

CATEGORY-I :
Those categorized to act in the capacity of
issue manager /co-advisor/consultant and
portfolio manager to an issue and under
writer to an issue as mandatory required

CATEGORY-II:
Those categorized to act in the capacity of
co-manager, advisor or consultant to an
issue or portfolio manager, and

CATEGORY-III:
Those authorized to act only in the capacity
of advisor or consultant to an issue.
CATEGORY-IV:
Advisors and consultants who provide
consultancy and guidance to certain
terms of authorization have also been
specified for merchant bankers.
DIVERSIFICATION IN BANKING
The Government of India issued guidelines to he
banks under section 6 of the Banking Regulation
Act,1949 permitting and encouraging them to
diversify their functions.
MERCHANT BANKING AND UNDERWRITING:
Commercial banks have now se up merchant banking
divisions and are underwriting new issues,especially
preference shares and debentures.
MUTUAL FUNDS: Mutual Fund offers investors a
proportionate claim on portfolio of assets that fluctuates in
value with the value of the assets that make up the
intermediaries port folio.Some banks have now been
permitted to float subsidiaries as mutual funds.
RETAIL BANKING:
Commercial banks in India are increasingly taking up retail

banking as an attractive market segment with opportunities
for growth and for profit. Retail banking refers to housing
loans,consumer loans for purchase of consumer
goods.The loan values can average between Rs.20,000 to
Rs 1 crore.The repayment period can be up to 7 years with
housing loans granted even up to 15 years.Retail banking
has been facilitated by growth in banking technology and
automation of banking processes.
,,,,,,,,
ATMs: ATMs (Automated Teller
Machines ,or any time money as one
bank has been wittily advertising) have
emerged as an alternative banking
channel which facilitate low cost banking
transaction.Bank customers need not go
to the bank branches but can withdraw
money and deposit checks in ATMs
.
These are the normal purposes for which persons go to
bank.This is now avoided by he neighborhood ATM.The use
of ATMs by foreign banks and private sector banks has
helped these banks to expand their reach and compete
effectively with public sector banks(PSB s).PSB s also in
turn rapidly introducing ATMs.
ANY WHERE BANKING: Any where Banking is the new
system of banking adopted and made popular by a few
foreign banks and is now being increasingly adopted by
PSB s. This facility is a technology based customer friendly
service for the convenience of customers.
Contd
Under Any Where Banking,a customer having an

account with any select branch can operate it
from other designated branches of the bank
through out the country.The facility includes cash
withdrawal , cash deposit, transfer of funds,
collection of local checks, intra city, and inter city
transactions, etc.Now distance is no hindrance
and banking is made more convenient ,
wherever the consumer may reside.
Branch Banking and Unit Banking
In the branch banking system, every

bank, as a single legal entity operate
through a network of branches through
out the country.
Under the unit banking system, however,
the banking operations are carried
through a single banking office rather
than through a network of branches.
Contd
INTERNET BANKING
Growth of internet and wireless
communication technologies, advances in
telecommunications, etc. have
dramatically changed the structure and
nature of banking and financial services.
Contd.
RBI has issued guidelines to the banks on
internet banking covering :
(a) the risks associated with internet
banking;
(b)the technology and security standards for
internet banking;
(c) legal issues relating to this new type of
activity;
(d) the regulatory and supervisory concerns
of RBI.
Contd.
VENTURE CAPITAL FUNDS:
The purpose of VCF s is to provide equity capital

for pilot plants attempting commercial
application of indigenous technology and
adaptation of previously imported technology to
domestic conditions.
The Government of India has issued detailed
guidelines and procedures for establishment of
VCF, management structure, size and investment
of the fund,etc.
Corporate Advisory Services & Consultancy

Services offered by the Merchant Bankers
Corporate Advisory Services are needed to ensure that

a corporate enterprises runs efficiently at its maximum
potential through effective management of financial and
other services.
It also rejuvenates old- line companies and
ailing units and guides existing units in locating
areas/activities of growth and
diversification.Corporate Advisory Services
represent an important component of the
portfolio of the activities of merchant bankers.
Corporate Advisory Services:

Corporate Advisory Services:
a)
Providing guidance in areas of diversification
based on the Governments economic and
licensing policies.
b)
Appraising product lines and analyzing growth
and profitability and fore casting future trends.
Main Corporate Advisory Services
1.Making of Public Issue and Issue Management

2.Project Counseling and Pre-Investment
Studies.
3.Corporate Restructuring
4.Capital structuring and Restructuring
5.Loan Syndication
6.Liaison with foreign collaborators and making
preparation for joint-ventures
Contd.[Corporate Advisory Services]
7.Raising Foreign Currency Loans Euro

issues,FCCB s etc.
8.Mergers and Acquisitions.
9.Making Valuation and Re-valuation of Assets.
10.Consultancy for Rehabilitation of Sick
Industrial Units
11.Other Corporate Advisory Services
Fee based Services

Issue Management
Corporate Advisory Services
Credit Rating
Mutual Funds
Asset Securitization
Fund Based Services
Leasing and Hire Purchase

Housing Finance
Credit Cards
Venture Capital
Factoring, Forfaiting and Bill Discounting.
Module II.
RELATIONSHIP BETWEEN BANKER AND CUSTOMER
Definition of Banker and Customer:
BANKER:
There is no statutory definition of the term customer.According to
Hart , Banker is one , who in the ordinary course of his
business , honors checks drawn upon by him by persons
( customers) from and for whom he receives money on current
accounts.
According to the Banking Regulation Act,1949 Banking
Company is a company which transacts the business of banking
in India. [Sec.5(c)]
According to the Banking Regulation Act,1949 the term Banking means

accepting for the purpose of lending or investment of deposits of money
from the public repayable on demand ,order or otherwise or withdraw
able by check, order or draft or otherwise.
CONTD.
Who is the customer of the bank ?
The term customer is not defined under any statutes.
A person becomes a customer of the bank when the
latter agrees to open an account of the former. Thus
customer is one who has some sort of account with
the banker.The duration of relationship is
immaterial.
In Ladbroke v.Todd (1914) it was observed that : The
relation between banker and customer begins as soon as
the first check is paid in and accepted for collection and
not merely when it is paid.
CONTD.
But mere casual acts of service do not create
the relationship of banker and customer.
[Commissioner of Taxation v.English,
Scottish Australian Bank Ltd.,(1920)].Thus a
person who goes to the bank to remit his life
insurance premium to the Life Insurance
Corporation, or to buy a draft or cash a check
issued to him by someone else, is not a
customer. To become a customer, a person
must have some sort of account with the
banker.
Module II.
RELATIONSHIP BETWEEN
BANKER AND CUSTOMER

Between the banker and customer exists a contractual relationship.The
services rendered by commercial banks are classified in to two types;
1. TRADITIONAL & 2. NEW SERVICES.
I. Traditional services mainly relate to;
(a) Maintenance of different types of deposit accounts e.g.,
savings, fixed and current accounts;
(b) Granting loans and advances;
(c) Collection of checks ,bill of exchange and other
instruments ( inland and foreign)
(d) Providing financial guarantees;
(e) Remittance facilities by issue of drafts, mail transfers, and
telegraphic transfers;
(f ) Providing safe deposit and safe custody(locker) facilities;
(g) Purchase and sale of securities.
Contd Banker Customer Relationship

II.New Services:
1.Schemes for deposit mobilization
a. Certificate of Deposit (CD)
b. Savings Schemes
c. Minor Savings Scheme
d. Monthly Interest Income
Schemes
e. Annuity or Retirement
Schemes
f. Farmers Deposit Schemes
g. Insurance linked savings
bank accounts
h. Innovative Deposit Schemes
2.Housing Finance
3.Automatic Extension Deposit Scheme
4.Personal Loan Scheme
5.Loan Participation or Consortium
Banking
6.Multiple Banking Arrangement
7.Schemes for Financing SSI s
8.Schemes for Financing Agriculture
9.Credit Cards and Debit Cards
10.Electronic Banking:
ANY TIME BANKING
ANYWHERE BANKING
TELE BANKING
INTERNET BANKING
MOBILE BANKING
New Services Contd
11.Rural or Green Cards

12.Traveler's Checks
13.Travel Agency work
14.Gift Checks
15. Lock Box and Night Safe Services
16. Services After Banking Services
17.Other Services.
Banker-Customer Relationship
The banker customer relationship has been broadly classified
in to ; I.General Relationship, and II.Special Relationship
I. General Relationship Between Banker and

Customer.
1. Banker as a Debtor :Uses the money deposited with him
for his business.
2.Banker as a Creditor: Lends loan as a credit to his customers.
a) Demand for repayment necessary.
b) Demand Should be made at proper time & at
proper place.
c) Demand must be made in proper manner.
3.Banker as a Trustee:A trustee holds money or assets and
performs certain functions for the benefit of some
other
person called the beneficiary.
Contd
4. Bank as an Agent:
Performs agency functions.Buys and

sells securities on behalf of his customer , of insurance premium
collects checks on his behalf and makes payments of various
dues,like payment .
5. Banker as a Bailee:
If valuables are left with the bank for

safe keeping e.g., when a provides a safe deposit services such
as electricity and telephone bills.
6. Banker as a Consultant:
Providing consultancy in
matters such as taxes and making investments.
7. Banker as a Lessor:Provides safe deposit lockers to its

customers on lease for depositing their valuable articles,
documents, etc.
Banks held liable for deficiency in service.

The Chartered Accountant ,Feb,2005 / Subhash Agarwal
Applicability of Consumer Protection Act to Banking Sector
a) Wrongful Dishonor of checks

b) Non-credit of check collected
c) Non-issuance of proper receipt
d) Payment of lower rate of interest
e) Default by banks agent
f) Interest not paid on excess amount deposited
Special Relationship Between Banker-Customer:

Rights and Obligations towards Customer
Rights of Banker:
1. Banker has the right of lien in respect of the
amount due to him by the customer.
Lien gives to a person only right to retain the possession

of the goods and not the power to sell.
Bankers lien entitles the banker to retain in his

possession securities etc., in respect of the
general balance due by the owner to the
banker.The right extends to all securities
placed in his hands as a banker by his customer
which are not specifically appropriated.
Special Relationship Between Banker-Customer:

Rights and Obligations towards Customer
OBLIGATIONS OF BANKER
1. OBLIGATION TO HONOR CHECKS
[cheques] :
Banker has a statutory obligation to honor checks
A banker must honor the customers check drawn on him

provided:
a) He has sufficient funds of customer
b) The funds are properly applicable to the repayment of
such check
c) Banker has been duly required to pay
d) The check has been presented within a reasonable time
after the apparent date of its issue
e) No prohibitory order of the court or any other competent
authority e.g., tax authority etc., is standing against the
accounts of the customer
Contd..
f) Check should be properly drawn
g) Banker to have reasonable time for
crediting funds
h) Check should be presented in a bank where
the account is kept
i) No lien or claim on the balance
j) No stop payment instructions
EXTENSION OF OBLIGATION:
Obligation of the banker to honor the

checks of the customer, when sufficient
balance is available in his account, is
extended by an agreement, express or
implied, to the amount of overdraft
agreed upon.
Contd..
2.Obligation to keep a proper record of

transactions
3.Obligation to abide by the instructions

given by the customer
4. OBLIGATION TO MAINTAIN SECRECY OF

CUSTOMERS ACCOUNT
Special Features of Banker Customer

Relationship.Contd
RULE IN CLAYTONS CASE(1816)
The rule is applicable where the parties have a

current account , i.e., unbroken account between
them.If, for example, a check for Rs.500/- is
presented for payment and the customer has
only Rs 490/- to his credit , the banker may
dishonor the check . Again if two checks of Rs
250 each are presented at one time, the
banker may dishonor the checks

Relationship.Contd.
1.In Indian Overseas Bank, Madras V. Naranprasad

Govindlal Patel, Ahmedabad (AIR1980 Guj.)
Gujarat High Court held that, the

overdraft arrangement between the bank
and its customer is a contract and it
cannot be terminated by the bank
unilaterally, even if it is a temporary one.

Relationship.Contd.
2.In New Central Hall v/s United Commercial Bank Ltd.

(AIR 1959 Madras), it was held that, damages for loss
of reputation due to the dishonoring of a check can be
nominal or substantial or exemplary.
A trader is entitled to substantial damages even without

proof of any special damage; but a non-trader can be
awarded only nominal damages. Exemplary dam,ages
can be awarded only in highly exceptional
circumstances.

Relationship.Contd.
4. OBLIGATION TO MAINTAIN SECRECY OF CUSTOMERS
ACCOUNT
1] Under Law:
The various statutes make it compulsory for the banker to disclose information about
the customers account.The following acts contain such provisions.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
The Income Tax Act, 1961

The Companies Act, 1956
Bankers Books Evidence Act,1891
RBI Act, 1934
Banking Regulation Act, 1949
FERA, 1973
The Gift Tax Act, 1958
Obligation to Maintain Secrecy of Customers Account.[contd]
2] Under Express or Implied Consent of

the Customer
It is an implied term of contract between a
banker and his customer that the banker will
not divulge the state of the customers account
to third parties,without the express or implied
consent of the customer. For instance, where a
customer has given his banker as a reference,
the banker will be justified in disclosing
legitimate information to a third party.
Obligation to Maintain Secrecy of Customers Account.

[contd]
..2] Under Express or Implied Consent of the Customer
In case of loan accounts, when a customer

introduces a proposed guarantor to his
banker, the latter has to disclose the
financial affairs of the customer to the
proposed guarantor to the extent it would
be necessary for the guarantor to be
aware of his responsibility as guarantor.

[contd]
3] Under common courtesy among bankers

There is a well recognized practice among banks themselves
generally described as a a common courtesy where
bankers enquire among themselves about information as
to the financial status of a customer.Information given in
response to such enquiries is given confidentially and is
worded with scrupulous care, so as to disclose no more
than the general position of the customer.And it is
considered to be permissible in view of the implied consent
of the customer, derived from a well known practice
among banks.
Contd..
4] Disclosure in Banks interest:
A banker will require to disclose information about
his customer to protect his own interest, such as
in case of dispute with the customer.When
banker has to realize his dues on account of
loans and advances from the customer, he will
be justified in revealing information to
guarantors about such advances or to an
advocate for initiating legal proceedings in a
court of law.
Obligation to Maintain Secrecy of Customers Account

[contd]
5] Disclosure in Public Interest:

Suppose our nation is at war with a neighboring
country.In such a situation, continuation of trade
with that country would not be desirable.When a
banker comes to know that one of his customers
is having secret trade transactions with the
enemy country, he will be justified in disclosing
the facts to proper authorities.Similarly, when a
banker comes to know of some criminal intents
of a customer, It is his duty to disclose the facts
to the appropriate authorities.

[ contd]
4. BANKER TO BE CAUTIOUS WHILE DISCLOSING
INFORMATION :
It is the duty of the banker to take due care while disclosing
information about a customer.Undue or irrelevant information
should not be given;only facts should be communicated and
information given in general terms. Only in general terms like
good, fair, satisfactory, unsatisfactory,etc., should be
used while disclosing information. Whenever information is
given to another banker , one of the conditions of disclosure
should be that secrecy is maintained by the recipient of the
information also.
Information should not be given to persons not connected with
the collection of information.The obligation to maintain
secrecy continues even when the customers account is
closed.

[ contd]
5. OBLIGATION FOR IMMEDIATE CREDIT OF

OUTSTATION CHECKS.
Under the guidelines of RBI, a banker has to give

immediate credit to the customer for outstation
checks up to a specified amount and also
allow the customer to withdraw against such
checks.
may a banker dishonor a customers

check [cheque] ?
When
1.Where the banker does not have the sufficient

funds to the credit of the customer.
2.Where the funds to the credit of the customer
are not applicable to the payment of the check
E.g.,.When money is held in trust.
3.Where the check is ambiguous or doubtful
legality.
4.Where the check is mutilated (torn so as to
make it imperfect)
Contd
5.Where the check is irregular and

materially altered
6.Where the check is not duly presented .
7.Where the customers signature does
not tally with his specimen signature.
8.Where the check is post-dated.
9.Where the check has become stale (outdated).
Contd.
10. Where the check is presented at a branch other than

the one where the customer has the account.
11.Where an account is in joint names of few ,but they all
have not signed the check.
12.Where the banker has a claim for a set-off on the funds
of the customer and the check is for an amount in excess
of the balance above the claim.
13.When the customer has informed the bank about the
loss of the check.
14.When the bank receives the notice of an assignment by
a customer of his credit balance.
When a banker must dishonor the check ?

1.When the customer becomes insolvent.
[The reason is obvious.All the assets of the insolvent(the
customer) vest in official receiver or assignee]
2. When the customer countermands payment
[i.e., orders banker not to make payment]
3.When the banker receives notice of the customers death.
4.When the banker receives the notice of the customers
insanity.
5.When a garnishee or other legal order attaching or
otherwise dealing with the money in bankers hands is
received by the banker.
Contd.
6.When the customer gives notice to the banker to
close the account.
7.When the customer gives notice of assignment of
the credit balance of his account.
8.When the banker suspects, or has reason to
believe, that the title of the person presenting the
check is defective.
9.When the holder gives a notice of loss of check to
the banker.
[The banker may however, may insist that the holder
should obtain a countermand from the drawer].
Garnishee Order
In case a debtor fails to make payment due to

his creditor , the latter may apply to the court to
issue a garnishee order on the debtors
banker.As a result of this order the debtors
account with the bank is frozen and the bank
cannot make any payment out of the
account.The creditor, on whose request , such an
order is issued is called the judgement creditor;
the debtor, whose account is frozen is called the
judgement debtor, and the banker who has the
customers account is called the Garnishee.
Garnishee Order is not applicable in the following

cases:
(a) If the account is overdrawn, the banker owes no

money to the customer and, hence, the court order ceases
to be effective.
(b) It does not apply to amounts of checks ,
drafts,bills,etc. sent for collection for the customer,which
remain un-cleared at the time receipt of the order.
(c) Sale proceeds of customers securities,e.g., stocks and
shares in the process of sales, which have not been
received by the banker are not attachable.
(d) It is not effective on the payments already made by
the banker, before the order is served upon him.This rule
will also .
Contd.
apply inward clearing checks paid by the banker in the

normal clearing time and the order is received after the
time of returning check is over.
(e) The order is not applicable to money held abroad by the
judgement debtor.
(f) Securities held in safe custody with the banker are not
attachable by the order.
(g) Future credits in the account are not covered.The
Garnishee Order may be served on the head office of the
bank concerned and it will be treated as a sufficient notice
to all of its branches, provided the head office is given
reasonable time to intimate all concerned branches.
ANSWERS IN CASE OF DISHONOURED CHECKS
In case a check is dishonored, the bank

should return it with a slip disclosing the
reason for dishonor.Most banks have
such slips called as Return Memos
printed and they tick off the most
appropriate answer.Some of the reasons
for dishonor and the abbreviations used
by the bankers are explained below:
Contd
1.Refer to Drawer(R.D.)This means that the holder should

refer it to the drawer for payment.The bank puts such a
note in those cases where the drawer does not have
sufficient funds with the banker there is reasonable ground
for suspecting that a check has been tampered.It will be
more appropriate for the bankers o use these words in the
latter case.
2 Not Sufficient, No funds, No effects (N.S,N.F.,

N.E)These abbreviations are used in those cases where
the drawer does not have sufficient funds with the
bank.Generally , in such a case in actual practice the
words R.D are used.
Contd
3.Not Arranged For(N.A)
This phrase is used in a case where the payment of a check
will result in an overdraft which has not approved by the
bank.
4.Endorsement Irregular(E&I) This phrase is used where
the endorsement is not in order,e.g., the spelling of the
payees name as given on the face of the check differs
from that in the endorsement.
5.Effects not cleared(E.N.C) This phrase is used in those
cases where the drawer has given certain checks,drafts,
etc., for collection and the same have not been collected
yet and, therefore the banker is not in a position to meet
the check drawn on account of insufficiency of the funds in
the drawers account at the moment.
Contd
6.Drawer diseased(D.D)Where the banker receives
intimation that the drawer has expired and, therefore, it
has stopped payment of checks.
7.Words and figures differ(W.& F.D). This phrase is used in
cases where the reason for dishonor is differing of amount
of check in words and figures.
Bankers Liability in case reply is not appropriate
A banker should take utmost precaution while sending its
reply in respect of a dishonored check.In case the banker
states an inappropriate reason which injures the
reputation of the drawer unnecessarily, the drawer can
make the banker liable for damages.
Rights of the Banker.
1.
1.Right of lien [A bankers Lien]

2.Right of Set-Off
3.Right of Appropriation
Right of Lien:
Sec 171 of the Indian Contract Act, 1872
confers the right of general lien on the banker
as follows: Banker may, in the absence of a
contract to the contrary, retain a security for a
general balance of account, any goods bailed
to him.
Bankers Lien
A banker can have a right of general
lien on the goods and securities
which come in to possession in his
capacity as a banker, provided there
is no other contract inconsistent with
his right of general lien.
In the following cases, a banker
cannot exercise his right of lien.
Bankers Lien
(a) If he has received the securities/ property as a trustee
or as an agent of the customer, but not as a creditor.
Example: If customer has given to his banker some shares
for sale as his agent, he cannot appropriate the sale
proceeds towards his due owed by the customer.
(b) In case of safe custody articles, lien cannot be
exercised.
(c) If the securities are left with banker by mistake by the
customer, the bankers right of general lien cannot be
exercised.
(d) The right of lien cannot be exercised when the debtor
has joint account
Bankers Lien.
(e) A banker cannot exercise his right when the debt has
not matured [ i.e.,before the due date of the repayment of
loan]
(f) A banker has no right of lien over goods stolen by the
customer and deposited with him as a security
(g) On money deposited by the customer, the banker
cannot exercise the right of lien as this right cannot be
over own goods. As money deposited with banker
becomes his money, the banker cannot exercise the right
of lien.The banker can exercise only right of set-off or
adjustment over money deposited with him by his
customer.
Applicability of Bankers Lien
Bankers right of general lien is a right of

implied pledge.
It applies to all goods and services received
by the banker during the course of business.
He can sell goods and securities received by
him after giving due notice to the customer to
realize his dues.
No separate agreement is required in favor
of a banker to enable to exercise his right.
The right of lien can also be exercised against
the guarantors.
..Rights of the Banker.
2. Right of Set-off:
A banker like other creditors, possesses the right

of set-off, which enables him to combine two
accounts in the name of the same customer
and adjust the debit balance in one account
with the credit balance in the other.This
right to combine two accounts is known as the
right of set- off.
Example of Right of Set-off:

If a customer has taken a loan of Rs 50,000/- from
his banker and also has a credit balance of
Rs.15,000/-in his savings bank account, the
banker has a right to set-off the credit balance
against the debit balance of Rs. 50,000/- in his
customers loan account, thus reducing the
debit balance in the latter to Rs. 35,000/-.
This right can be exercised only if there is no

agreement to the contrary, expressed or
implied, between the banker and customer.
In the normal course, a banker also has to serve
a notice to the customer for exercising the
right of set-off, unless the customer has waived
his right to receive such notices by executing a
combined document of lien and set off.
Rights of the Banker
The bank may exercise this right even when

a Garnishee order has been made.It may hand
over to the Judgment Creditor only the balance
of money left after satisfying his own claim.
The amount due must be certain.
The banker has the option to exercise this
right.The customer cannot compel him to do
so.
Bankers Right of Appropriation:
As per Section 59 of the Indian Contract

Act, 1872, while making the payment to a
creditor, a debtor has the right to
appropriate such amount against
discharge of any particular debt.If the
debtor does not do so , the banker
can appropriate the payment to any
debt of his customer.
The Indian Contract Act has the following provisions

with regard to the appropriation of payments
1.APPROPRIATION BY THE
DEBTOR[Sec.59]:Where money paid by debtor
to his creditor with the express or implied
intimation that money is to be applied to a
particular debt, creditor, if accepts the
payment, must apply money received
according to the direction of the debtor.
.The Indian Contract Act has the following

provisions with regard to the appropriation of
payments
2.APPROPRIATION BY THE CREDITOR[Sec.68]:
If the debtor fails to intimate to the creditor at the
time of payment as to the debt towards the
payment of which the money is to be applied
and where several debts are due , the right of
application may be exercised by the
creditor, who may apply it to the payment
of any lawful debt at his choice including
even time barred debts.
The Indian Contract Act has the following provisions with regard to the
appropriation of payments..
3.WHERE NEITHER PARTY APPROPRIATES[Sec.61] Where

neither party makes any appropriation, the payment
shall be applied in discharge of the debts in order of
time, whether they are or are not barred by the law in
force for the time being as to the limitation of suits. If
debts are of equal standing payment shall be
applied in discharge of each debt proportionately.
4.PAYMENT OF INTEREST FIRST:In case of debt carrying
interest and the debtor has not given specific direction as
to the appropriation of money paid, the rule is, to apply
the money in ordinary cases, first towards payment
of interest and then to apply the surplus in payment
of the principal amount.
5.RIGHT TO CHARGE INCIDENTAL CHARGES:

A banker has the right to charge interest for the advances
it might have granted to its customers.
The interest may be simple or compound depending upon the
terms of the contract.
Usually the interest is charged after every six months and
the amount of interest is debited to the customers
account which subsequently becomes part of the
debt due by the customer.
In case of current accounts the banks charge their customers
for incidental charges to meet the incidental expenses
they have to incur for such accounts.
6.PERIOD OF LIMITATION:
Since the deposits with the banks are repayable
on demand and, therefore, the period of
limitation begins only from the date on which
demand for repayment has been made by the
customer.
The same principle applies in case of fixed deposits
too.
In case of an overdraft granted by a banker to its
customer, the period will generally run from the
time the overdraft is made use of.
Exemption from the law of Limitation Act.
The banker is exempted from the law of limitation act .
As per the provisions of this law, a debt will become

a bad one after the expiry of three years from the
date of the debt.
But according to Article 22 of the Law of Limitation
Act,1963, for a banking debt, the period of 3
years will be calculated from the date on
which an express demand is made for the
repayment of the debt.It follows that a
bankers debt cannot be made time barred.
However, in practice, a reasonable period has
been fixed for the bankers debt also.
Sec. 26 of the Banking Regulation Act

prescribes a period of 10 years to
consider a banking debt as a bad one.
In case of a safe custody deposit, this
period begins from the date of demand.
In case of of an overdraft, the period of
these years will be counted from the
date on which it is made use of.
In the actual banking practice, no banker

would wait for the expiry of 10 years. If
there is is no operation in an account for
one year, it will be marked as a dormant
account.
After two years of marking, it will be
transferred to an account called
inoperative account and it will be ,
thereafter, transferred to the Central
Office of the Bank after 5 years.
Special Relationship Involved in Mandates

and Power of Attorney
Some times an account holder

appoints a third person to act on his behalf or to
do certain acts, like drawing checks or instructing
the bank to debit his account for various purposes
like issuance of drafts, mail transfers or for
carrying outstanding instructions.When such
authority is given to the banker in the form of an
unstamped letter, signed by the customer
(account holder) and addressed and submitted to
the bank, it is called mandate letter.
MANDATES:
The mandate comes to an end on death, inanity, insolvency

or bankruptcy of the account holder.

POWER OF ATTORNEY: It is a
document executed by one persondonor or principal-in favor of another
person donee or agent to act on
behalf of the former, strictly as per
authority given in the document.
Two types of Power of Attorney: Special and

General can be granted.
POWER OF ATTORNEY
Special Power of attorney is issued for

specific purposes.Often, it is for single
transaction.Against this, the general
power of attorney, empowers an agent to
act in respect of more than one
transaction and confers very extensive
powers on him.

A banker while scrutinizing and
registering a power of attorney, must
verify whether specific mention is made
in it to sign checks on behalf of his
principal.The attorney can also stop
payment of checks.
The principal can withdraw or cancel the power of
attorney given to the agent at any time.He
however will be responsible to the bank for all
acts of he agent, till the bank receives the notice
of cancellation.
Special Category of [Bank] Customers
1.Limited Companies
2.Partnership Firms
3.Joint Hindu Families
4.Minors
5.Illiterate Persons
6.Trust
7.Executors and Administrators
8.Unincorporated Bodies
9.Joint Accounts
10.Liquidators
11.Mercantile Agents
12.NRI s
13.Foreigners
1.Accounts of Limited Companies
The accounts of limited companies form a

large and major portion of the business of
the banks
When limited companies approach a bank to

open an account, whether as a depositor or
as a borrower the following formalities are to be
complied with
1.An account opening form [with names of

persons authorized to operate an account singly
or jointly]
..1.Accounts of Limited Companies

2.A certified copy of the Memorandum and Articles
3.A Certificate of Incorporation issued the Registrar
of Cos.
4.Certificate of Commencement of Business[In
case of Public Co. only]
5.A certificate copy of the resolution to open the
bank account at the bank branch certified by the
chairman, or secretary or the principal officer of
he company.
1.Accounts of
Limited Companies.
The banks must ascertain from Articles that the

directors have necessary powers to borrow.
In cases where the bank deals with a company in
accordance with the MA and AA and has
complied with other requirements, then the bank
is not concerned with the internal management
of the company.There may be irregularities in the
appointment of directors and passing of various
resolutions.It is not the liability of the banker to
verify the correctness of these matters.
2.Accounts of Partnership Firms
The bank records in the account opening form in

one column the signature of all the partners and
in another column the signatures of those who
are authorized to operate the bank account.
There are instances where the

partnership is registered and is
considered advisable to obtain the original
of the deed by the banks and are
returned to partners after recording the
same in the books of the banks.
.2.Accounts of Partnership Firms

The important points the bank has to note are:
1.In a firms account, one partner has prima facie
right to draw checks in the firms name.One
partner has the implied authority o bind the firm
by checks so drawn.
2.The implied authority of a bank does not
empower him to open a banking account on
behalf of the firm in his own name.
2.Accounts of Partnership Firms
3.Banks do not accept for the credit of the personal
account of a partner, checks payable to

his firm.The banks otherwise will be liable
to what is known as conversion.
4.One partner has the authority to stop
payment of a check drawn in the name of
the firm by another partner.
.2.Accounts of
Partnership Firms
5.The death or insolvency of a partner

automatically dissolves the firm.Bu the
partnership deed may provide that as a result of
the death of a partner or on account of the
insolvency of a partner , the firm may not be
dissolved if there is an agreement to that effect
between partners.
It is the duty of the surviving partners to give
notice to the bank about the death of a partner.
3.Accounts of Joint Hindu Families
The concept of Joint Hindu Family

is peculiar in India only.The concept
has almost vanished after the
passage of Hindu Succession
Act,1956.However there still exist
some Joint Hindu families.
..3.Accounts of Joint Hindu Families

The banks generally follow the following
precautions while opening such accounts;
1.A Joint Hindu Family letter is obtained
2.Proper Introduction
3.Account opening form signed by Karta
4.Karta is being given authority to operate the
account by all coparceners
5If there are minors the other coparceners should
sign for self and as a guardian of the
minor/minors.
4.Accounts of Minors
As per the Indian Contract Act, a minor is under

legal disability to enter in to contract in his own
name.There are various laws for the protection
of he minor.However, an account can be opened
on behalf of minor by a natural guardian or a
guardian appointed by the court.
.4.Accounts of Minors
A person is a minor till he attains age of 18

years.A person whose person or properties are in
the superintendence of a person appointed as a
guardian by the Court,then the person is
deemed to have attained majority only when he
completes 21 years.
In India banks open accounts for minors.In the
present day many bank branches operate in
colleges or have heir Extension Counters in he
campus.
The following points are note worthy:
a) A minor can open and operate account
b) The banker should exercise sufficient
care while the minor operates the
account
c) The bank should not permit the minor to
overdraw his account
d)The banker should exercise caution while credit
for large sums and debits for large sums are
transacted in the minors account
e) A minor can validly draw a check and if there is
a wrongful dishonor or wrongful payment for
example payment of a forged check, the minor
can sue the bank for
wrongful dishonor and for damages.
f) The practice relating to secrecy of customers
account equally apply to minors accounts also.
5.Accounts of Illiterate Persons
The large number of people in India are

illiterates.Illiteracy is no considered as
an incapacity to open bank accounts.
The banks in India after nationalization
of the major banks have embarked upon
various loan schemes for the up-liftment
of the illiterates.
6.Trust Accounts
Banks permit the opening of trust

accounts .
A certified copy of the trust deed is
obtained and kept along with the other
formalities file relating to the account.
Bank enters in to its books he salient
features of the trust deed.
.6.Trust Accounts
Banks permit the operation of the trust account by
some or all trustees; if the trust deed provides
specifically for such operations or confers
general authority on the trustees to delegate
their powers to some or one of them.
In the absence of such a provision all trustees have
to operate the account jointly.
The authority of the trustees to borrow is
limited.In case the borrowings by the
trustees ultra vires the deed, the bank loses
the right of recovery.
7.Accounts of Executors and Administrators
In case of testamentary succession, a

person executes a will and prescribes the
will how his properties after his/her death
will have to be partitioned or dealt with.
In many cases the will provides that certain

person or persons should execute the terms of
the will.Where no executor is mentioned in the
will, the court will appoint one of the
beneficiaries of the will as administrators.
The executor and administrator of the will

as the case may be, may have to open a
bank account after the death of the
testator, either in the name of the rust or
in their personal capacities. They have to
make clear that the accounts are opened
and operated on behalf of the deceased.
The executors and administrators have no

power to delegate their authority.
Banks follow the under-mentioned precautions.

1.Proper Introduction To open an account
2.The will should be properly examined to ensure the terms
and powers of the executors and administrators.
3.All the executors must sign the account opening form and
give a clear mandate for the operation of the account.
4.The checks and instruments tendered should .
5.The particulars of the will should be recorded in the banks
books.
6.The trust accounts should not be opened in the personal
names of the executors or administrators.
7.The banks should ensure that they do not

become parties to a breach of trust.
8.The checks drawn by one of the trustees can
be stopped by another.
9.The banks have no right to set off the credit
balance in the trust accounts against any dues
from the administrators or executors.
10.The executors account is for a limited period
that is still the terms are executed.
Accounts of Unincorporated
Bodies,Clubs,Societies,Committees,etc.
These bodies are not legal entities as

limited companies are.Nevertheless,
banks open accounts for them.These
bodies have their on bye laws and have
their executive committees or boards
elected by the members.
..Accounts of Unincorporated
Bodies,Clubs,Societies,Committees,etc.
For opening accounts for co-operative society,
the permission of the Registrar of Co-operative
Societies is essential.The following formalities
are observed by banks while opening accounts.
1.An introduction before opening account
2.Account opening form for the account duly filled
up
3.Copy of the resolutions of the committee or
governing body,signed by the Chairman, for
opening the account.
Accounts of Liquidators
Liquidators are appointed by the courts to

liquidate the assets and liabilities of the
insolvent or bankrupt customer.
Companies Act deals in detail with the the
appointment of a liquidator or court
receiver.
Accounts of Liquidators
The liquidator or Official Receiver is an officer of

the court and the bank opens the account in
their names.The mode of operations in the
account are advised by the Liquidator/Official
Receiver by production of court orders and have
the sanctity as if it is given by the court order
and should not aid or abet Liquidator or Receiver
to commit a breach of trust.
Mercantile Agents
A mercantile agent may be defined as an

agent having n the customary course of
business as such agent, authority either
to sell goods or to consign goods for the
purpose of sale or to buy goods, or to
raise money on security of goods.The
authority that the mercantile agent
derives from his principal is limited.
Mercantile Agents
A mercantile is personally liable for a

breach of warranty for any loss or
damage sustained by a third party if such
agent makes representation to the third
party that he has the requisite powers to
make such representation.
.Mercantile Agents
The bank who is so authorized by a

principal to operate his account by an
agent should suspend operations in the
account immediately on receipt of the
information about he death or insolvency
of the principal.An agent should make it
clear that he signs for and on behalf of his
principal.
..Mercantile Agents
Banks should not allow the agent to

overdraw the account without the express
authority of the principal.
Banker also should not be a party to
conversion if the agent credits his
personal account by debit to his
principals account through the bank.
Accounts of Non-Resident Indians
During the early eighties, the remittances from

persons of Indian origin and employed abroad
started pouring in and even acted as an aid to
the Government to meet a portion of the balance
of payments deficit.The Government and RBI
issued instructions to commercial banks to open
accounts for the Non Resident Indians.These are
two types, rupee accounts and foreign currency
accounts.
Accounts of Foreigners
Commercial banks are designated by RBI as

Authorized Dealers of Foreign Exchange.The
banks have to obtain permission from the RBI to
open accounts for foreigners.
The bank branch obtains a Form: QA-22 from

the foreigner and submits to the RBI.The
operation of the account is controlled by RBI.
Module III. PAYING BANKER

Banking Law and Practice Maheshwari and Maheshwari/,N.D Kapoor
The paying banker is responsible to his

customer and is under duty to make payments
to the right persons in accordance with the
instructions of the drawer.If he honors the
checks carelessly and negligently in a manner
inconsistent with the instructions of the drawer,
he subjects himself to heavy liability.
Not only he shall lose the money so paid, but he
shall be liable to pay damages or compensation
to his customer and also to the true owner of the
check as provided for in the Negotiable
Instruments Act.
Precautions to be taken
by the paying banker.
1.Precaution regarding the proper formof the

check [cheque]:
The Negotiable Instruments Act defines a
cheque but does not prescribe its form, nor
does it require that a check should be drawn on
the printed form issued by the bank.
But almost every bank in India requires that
checks must be drawn on the banks printed
forms.This makes it essential that the check
forms it essential that the check forms issued by
the banker must be used by the customers.
PRECAUTIONS TO BE TAKEN BY THE PAYING

BANKER
The banker should ensure that a check is regular in all respects
and should take the following precautions while making payment
of his customers checks.
ADVANTAGES OF USING PRINTED CHECKS[cheques]:
1.It is convenient for the drawer a to draw a check.
2.The counterfoil of the check serve the purpose of record for
future reference.
3.If the drawer wishes to countermand payment of any check
payment of any check , he can issue instructions to the banker
more conveniently and with certainty as every check form is
serially numbered and can be easily identified by the banker.
4.If the customer keeps the checkbook safely and carefully,
chances of forgery can be reduced.

BANKER
2.Precaution regarding date of the check

[cheque]:
A check must bear a date because the mandate of the customer to

the banker given in the check becomes legally effective on the date
mentioned therein.
The banker should refuse to honor an undated check which has been
presented to it for payment.The date need not be filled by the
drawer, it can be filled by the subsequent holder too.
STALE CHECK:This is also termed as out-dated check.
In India, a cheque is treated as stale cheque after the expiry
of six months from the date of the check.
It is the custom of the bankers not to pay checks which are presented
after a certain period has elapsed since the apparent date of their
issue.When such a cheque is presented the bankers return it with
the answer out of date.

BANKER
POST-DATED CHECKS[CHEQUES]:
If the drawer (or any other holder) mentions a date on the
cheque, which is subsequent to the date on which it is
drawn, it is called a post dated cheque.
For example,If a check is drawn on 15 th September and
bears the date of 15th December, the check is postdated.Such a check though not invalid, becomes effective
only on the date mentioned there in[i.e.,15 th
December].The banker should honor the check(if
presented for payment) not earlier than 15 th December.
The banker should , therefore, not make payment of the post
dated cheque before the date mentioned therein.

BANKER
In case a banker honors a outdated check , it runs the following
risks:
1.The drawer(customer) may countermand the payment before the
date mentioned on the check and then the banker will not be
entitled to debit the customers account with the amount of the
check.
2. The drawer may make the banker liable for dishonoring of other
checks on account of insufficiency of funds resulting because of the
payment of post dated checks.
3. In case of insolvency or death of the drawer before the dater
mentioned on check, the banker shall not be entitled to debit the
customers account, if it has already made payment of the check.
4.The payment of post dated check shall not be considered to be a
payment in due course and, therefore, the banker shall not be
entitled to any statutory protection if the payment is made to a
wrong person.

BANKER
3. Precaution regarding amount:
The banker should see that the amount mentioned
both in figures and words in the check are the
same.
If they differ, then the banker usually return she
check for reference to the drawer [R.D].
In case the amount has been stated in words only
and not in figures the banker should pay the
check. But where the amount has been
mentioned in figures, only and not in words , the
banker should return the check.

BANKER
4.Precaution regarding the funds of the customer:The

banker is under an obligation to pay his customers check
if the latters account shows sufficient credit balance. But
if the funds in the customers account are insufficient to
pay the check, the banker is not bound to honor the check
or even to pay the balance in the account to the presenter
of the check.Checks are to be paid in full and not in part.
For example: If a check for Rs.1,000 is presented for,
payment to a banker, while the drawers account has the
credit balance of Rs.900 only, the banker is not bound to
honor the check or to make payment to the extent of
Rs.900 because the check contains the order of the drawer
to pay a specified sum of money.

BANKER
While considering sufficient funds in the account
of the drawer, the following points should be
borne in mind by the banker:
1.If the banker has already agreed to grant a
loan or overdraft to the customer up to a
certain amount , checks in excess of the
credit balance in the account but within the
limit of the loan of the overdraft must be
honored by the banker in the usual course.
2.The minimum balance required to be maintained
in a current account or savings account is
deemed as available for honoring the checks.

BANKER
5.Precaution regarding drawers signature:
A banker is expected to know the signature of
his customers and , there fore, if the drawers
signature has been forged and the loss will borne
by banker.When there is a joint account, both or
the signatures on the check should be genuine.In
case any one of the signatures is forged, the
bank should not make payment.
It is also expected from the customers to remain
reasonably vigilant and render all possible
assistance to the bank when asked by it.

BANKER
6.Precaution regarding banking hours:
The banker should make payment of only
such checks which have been presented to
it for payment during its banking hours.
Any payment of check which was presented after
banking hours will not be taken as a payment in
due course and the banker will not be entitled to
debit then customers account if in the
meanwhile the customer has countermanded the
payment or some similar event happened.

BANKER
7. Precaution regarding mutilated checks:
A check is said to be mutilated when it is torn in

to two or more pieces.Such a check should
not be paid unless the banker is satisfied that
mutilation was unintentional and it also contains
the confirmation of the drawer.
8.Precaution regarding crossing of check:
If the check is a crossed one, it should not be
paid on the counter but through a collecting
banker.

BANKER
9.Precaution regarding material alteration:
A cheque contains a mandate of the drawer to his banker to
pay a specified sum of money to he bearer or the person
mentioned therein or his order.
Any alteration or correction therein, to be valid must
be made by , or with the consent of the drawer and
confirmed by his full signature.
In case a check is materially altered and the banker makes
the payment, he shall be discharged from liability only
when he proves the following:
1.The alteration could not be detected with reasonable
care, prudence and scrutiny, and
2.The payment had been made in due course.

BANKER
Examples of
Material Alteration:
1.Alteration of the date of the cheque.

By altering the date a fraudulent holder can secure payment
of a post dated check or a stale check.
2.Alteration of the place of payment.
3.Alteration of the amount of the check.
4. Alteration in the names of the parties or the relationship
between them or affecting their legal status.
5.Substitution of the word bearer in place of order in he
check.
6.An alteration of the crossing of the check.

BANKER
The following changes are not treated

as material alterations:
1.Conversion of an endorsement in
blank in to endorsement in full.
2.Crossing of an open check by the
holder.
3.Conversion of general crossing in to
special crossing.
4.Conversion of bearer in to order.

BANKER
LEGAL EFFECT OF MATERIAL ALTERATION:
According to Section 87, any material alteration of

a negotiable instrument renders the same as
void against any one who is a party at the time
of making such alteration and does not consent
hereto, unless it was made in to carry out the
common intention of the original parties.
Any such alteration, if made by the endorsee,
discharges his endorser from all liability to him in
respect of the consideration thereof.
Mode of presentment for payment

Ordinarily, presentment means
presenting the cheque personally at
the counter of the banker.
But Section 64 of NI Act, 1881
provides, where authorized by
agreement or usage, a presentment
through the post office by means of
a registered post is sufficient.
When payment is deemed as made?
At what stage of time he payment is deemed as

made is examined by Bombay High Court in Union
Bank of India vs.Sales Tax officer and
others(1979).
The banks contention was that, Payment of the
check is deemed as made the moment money is
physically handed over by the cashier to the
presenter of the check.Held, the token signifies a
kind of identity between the bank and the person
who gives the check for encashment.It also signifies
that, the token holder has a right to receive
payment and the bank creates a kind of
obligation to honor it.
Statutory Protection to the

Paying Banker.
The payment of the check involves risk to the

paying banker because the latters duty is to pay
the amount of the check to the right person
according to the instructions of his customer.If
he(banker) makes payment to a wrong
person,he himself will bear the loss.The banker
has to honor his customers checks on demand and hence

he cannot make detailed enquiries about the title of the
person who presents the check for payment . To minimize
losses likely to be suffered by the paying

banker,the Negotiable Instruments Act provides
him protection, provided he fulfills his obligations
as laid down in the Act.
Statutory Protection to the

Paying Banker.
Protection in case of Order Check:
In case of an order check,
Section85(1) provides statutory
protection to the paying banker as
follows:
Where a check payable to order
purports to be endorsed by or on
behalf of the payee, the drawee is
discharged by payment in due
course.
Forgery of Drawers Signature
The paying banker should carefully ascertain that the

check bears the genuine signature of the drawer after
comparing the same with his specimen signature.
The check must be signed by the drawer on its face and
not on its back.
The account-holder may change his specimen signature
any time and supply to the banker his fresh specimen
signature.Banker is bound to accept the new specimen
signature with effect from a specified date.

[contd.]
If the signature on the check differs from the

specimen signature of the drawer or the former is
a forged one, the banker must refuse payment of
the check because a check with forged signature
of the drawer is a nullity and gives no mandate to
the banker to make any payment.
Payment of a check with the forged signature of
the drawer is deemed as payment without the
authority of the customer and hence breach of
implied contract between a banker and his
customer.
The paying banker is , therefore, is not given any

protection under law, if he pays a check with
with forged signature of the drawer. The banker
cannot debit his customers account with the
amount of the check bearing the forged
signature of the drawer and will suffer the loss
himself.
The banker cannot debit his customers account
with the amount of the check bearing the forged
signature of the drawer and will suffer the loss
himself.
Lala Pirbhu Dayal vs. Jwala Bank Ltd.(1938) The

Allhabad High Court held, that it is the duty
of the employees of the bank to be able to
identify the signature of the customers and
if they fail to discharge their duty and
thereby suffer loss, there is no reason why
the customer should make good that loss.
In this case, the customer was negligent, as he
did not keep his check book under lock and key.
Still the Court held that, the neglect on the part
of the customer did not absolve the paying
banker.

Obligation on the customer:
The customer is however is under an obligation to
the banker in this regard.The customer should
not be negligent in observing the necessary
precautions to save the banker from the losses
which may arise because of his own acts.
Examples:
A banker is in doubt about the signature of the drawer

and seeks confirmation of the drawer.The customer
expressly represents that the signature is his
own.Later on, the customer will be estopped from
denying the validity of his signature on the check.

Payment of Check by Mistake:
In United Bank of India vs.M/s A.T.Ali Hussain & Co.(1978) Calcutta
High Court.
The Court found that the forgery of the signature on the check had
been done so skillfully that it could not be detected by a trained
eye.Even the authorized signatory found it difficult to deny his
signature on the forged cheque.The High Court found it difficult
to deny his signature on the forged cheque.The High Court,
therefore, held that the paying banker was neither negligent nor
careless in paying the check.The payment was made under a
mistaken belief that the instrument was genuine.
According to Section 72 of Indian Contract Act,1872 a person to who
money has been paid or anything delivered by mistake or under
coercion , must repay it.But this rule is qualified by the Doctrine
of Equity.Doctrine says no one is allowed to enrich himself at the
expense of the other.
Negotiable Instruments
Negotiable Instrument: Definition by Justice Willis
A negotiable instruments is one, the property in which is
acquired by anyone who takes it bona fide and for value,
not withstanding any defect of title in the person from
whom he took it.
The term Negotiable means transferable and
Instrument means a written document by which a
right is created in favor of some person.
Thus a negotiable instrument is a method of transferring a

debt from one person to another.
The term negotiable instrument is not defined under the NI
Act,1881.The law relating to negotiable instruments is
contained in the Negotiable Instruments Act,1881.
The
law relating to the

Negotiable Instruments is
contained in NI Act,1881 which
deals with promissory note,
bill of exchange and cheque,
as also hundis( bills of
exchange in vernacular
language).
CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS:
1.The property in negotiable instrument passes from one
person by a simple process,i.e., by mere delivery, if it is
payable to to bearer, and by endorsement an) d delivery if
it is payable to order.
2.The holder in due course( one who acquires the instrument
in good faith and for consideration) gets it free from all
defects.
3. He can sue upon the instrument in his own name.
4.The transferee of the instrument need not give notice of
transfer to the party liable to pay.
5.Consideration is presumed to have been given for the
instrument.
PROMISSORY NOTE
Sec.4 of the NI Act(1881) defines a

promissory note as an instrument in
writing (not being a bank note or a currency
note) containing an unconditional
undertaking, signed by the maker, to pay a
certain sum of money only or to the order of,
certain person, or to the bearer of the
instrument.
Parties to a Promissory Note

The
person who makes the

promissory note and
promises to pay is called the
maker.
The person to whom the
payment is to be made is
called the payee.
Essential Characteristics of a
Promissory Note:
1.It is an instrument in writing

2.It is a promise to pay.
[The word promise to pay is not necessary]

The following cannot be taken as promissory notes
because there is no express promise to pay.
If A writes(a)
Mr.B, I.O.U, Rs.500/-
(b) Mr. B, I have taken from you rupees five
hundred ; whenever you ask for it I have to
pay it together with interest.
Promissory Note:
[Contd.]
2.It is a promise to pay.

(c) Mr. B, I am liable to pay you Rs.100
The following will be taken as promissory note
because here is an express promise to pay:
If A writes
(a)
I promise to pay B or order Rs.500.
(b) I acknowledge myself to be indebted to B in
Rs.1,000, to be paid on demand, for value
received.
Essentials of a promissory note were pointed by the

PUNJAB AND HARYANA HIGH COURT in Balmukund vs.
Munnalal Ramjilal and others, as follows:
Before a document can be treated as a Promissory Note, it

should be Promissory Note both in form and intent.If
indebtedness is acknowledged in a document in a
defined sum of money payable on demand that is
enough to make a document a promissory note and
the document need not necessarily say that the debtor
promises to repay the amount.Merely because a document
says that the payment to be made when demanded the
undertaking to repay the amount does not become
conditional.The absence of the words I promise to pay
makes no difference in the tenure of the instrument
provided it fulfills other conditions of a promissory
note.
In another case Surjit Singh and others V. Ram

Ratan Sharma(1978) the Assam High Court Held
that,
An acknowledgement of a receipt of the amount

does not take away the character of the
document as a promissory note if other
conditions are satisfied.The document in the
following case read as follows:
We have received the sum of Rs.9,240

from Sri Ram Sharma.The above amount
will be repaid on demand.We have
received Rs.9,240 in cash today.
Promissory Note:
3.The undertaking to pay is conditional.
The payment should not depend upon contingencies

which may or may not happen, because
uncertainty badly affects the business and
commerce .Thus, the following documents
cannot be termed as promissory notes:
(i)
I promise to pay B Rs.1,000 after marriage with
C. Marriage with C may or may not take place.
(ii)
Rs.500 is required.Send it per bearer.The
amount will be returned with 12 % Interest
without delay. Here the promise is conditional
on the amount being sent as requested.
Promissory Note:
4.It should be signed by the maker.
The person who promises to pay must sign the instrument
even though it might have been written by the promissor
himself.
5.The maker must be certain.
The note itself must show clearly who is the person agreeing
to undertake the liability to pay the amount.Maker is taken
as certain if from the description of the maker, sufficient
indication follows about his identity.He may be described
by name or his designation.
6.The payee must be certain.
The instrument must point out with certainty the person to
whom the promise has been made.
Promissory Note:
7.The promise should be to pay money and money
only.
Money means legal tender money and not old or rare coins.
8.Amount should be certain.The following is not the

promissory note.
I promise to pay B Rs.500 and all other sums which become
due.
9. Other formalities.The formalities regarding number,

place, date, consideration etc., though usually found
given in the promissory notes but are not essential.
10.It may be payable on demand or after a

definite period of time.
Bill of Exchange
[Sec.5 of NI Act,1881].
Bill of exchange is an instrument in

writing containing an unconditional
order, signed by the maker, directing
a certain person to pay a certain
sum of money, only to, or to the
order of, a certain person or to the
bearer of the instrument
Parties to a Bill.
There are three parties to a Bill of Exchange:
The person who gives order to pay is called the
drawer.
The person who is directed to pay is called the

drawee.
-When the drawee accepts the bill, he is called

the acceptor.
The person to whom the payment is to be made is
called the payee.
.Parties to a Bill.
Where the payee named in a bill is fictitious or

non existing person, the bill is treated as payable
to bearer.
The drawer or the payee who is in possession of
the bill is called the holder.The holder must
present the bill to the drawee for his acceptance.
When the holder i/endorses the bill, note or
cheque, he is called the i/endorser.
The person to whom the bill, note or cheque is
called the i/endorsee.
Holder In Due Course[Sec.9]
Holder in due course means any person

who for consideration became the
possessor of a promissory note, bill of
exchange or cheque if payable to bearer,
or the payee or indorsee thereof, if
payable to order, before the amount
mentioned in it became payable and
without having sufficient cause to believe
that any defect existed in the title of the
person from whom he derived his title.
Essential Characteristics of
Bill of Exchange
1.It must be in writing

2.Order to pay
3.Unconditional
4.Money and money only
5.Three parties: Drawer, Drawee & Payee
6.Parties must be certain
7.It must be signed by the drawer.
8.The sum payable must be certain.
9.Signature.
Distinction between,
Bill of Exchange and a Promissory Note
1.Three partiesDrawer, drawee and

Payee.
2.Bill contains
unconditional order to
pay
3. The drawer of the
bill is the creditor who
directs the drawee
(his debtor) to pay.
1.Two parties-Maker
and Payee.
2.Note contains an
unconditional promise
to pay.A bill contains
an unconditional
3.The maker of a note
is the debtor and he
himself undertakes to
pay.
4.The liability of
the maker of a
note is primary
and absolute.
5. In a bill the
drawer and the
payee may be one
and the same
person.
4.The liability of
the drawer of a bill
is secondary and
conditional.
5.A note cannot be
made payable to
the maker himself.
6.A bill can be so

drawn.
But in no case, can a

note or bill be
drawn payable to
bearer on
demand.
6.A note cannot be

made payable to
the bearer.
Cheque [Check]
Section 6 of NI Act,1881 defines,

cheque as,
Cheque is a bill of
exchange drawn on a
specified banker and
payable on demand.
Distinction Between
Bill of Exchange and Cheque
1.May be drawn on any

one including, a
banker.
2.A bill which is not
expressed to be
payable on demand is
entitled to three days
of grace.
3.No crossing is done.
4.Payment of a bill
cannot be
countermanded.
1.Always drawn on
a banker.
2.A cheque is not
entitled to any
days of grace.
3.A cheque may be
crossed.
4.Payment of
cheque may be
countermanded.
Crossing of Cheque
There are two types of cheques, open cheques

and crossed cheques.
A cheque which is payable in cash across the
counter of a bank is called an pen cheque.
When such a cheque is in circulation,great risk
attends it.If its holder loses it, its finder may go
to the bank and get payment unless its payment
has already been stopped.
It was to prevent the losses incurred by open
cheques getting in to the hands of wrong persons
that the custom of crossing was introduced.
..Crossing of Cheque
A crossed cheque is one on which two parallel lines with
or without the words & Co. are drawn.
I.General Crossing: A cheque is said to be crossed generally
where it bears across its an addition of
(i) the words and company a or any abbreviation

there of between two parallel transverse lines
with or without the words not negotiable; or
(ii) Two parallel transverse lines simply ,either with
or without the words not negotiable.(Sec.123)
Where a cheque is crossed generally, the drawee banker shall
not pay it unless it is presented by a banker.(Sec126
.Para1)
II.Special Crossing:
Where a cheque bears across its face an addition of

the name of a banker, either with or without the
words not negotiable, the cheque is deemed to be
crossed specially(Sec.124).
The transverse lines are not necessary in case of a
specially crossed cheque can be obtained only
through the particular banker whose name appears
across the face of the cheque or between the
transverse lines, if any.
Where a cheque is crossed specially the banker on
whom it is drawn shall pay it only to the sbanker on
whom it is drawn, or his agent for collection.
(Sec.126.Para:2)
III.Restrictive Crossing
In addition to the two statutory types of

crossing, there is another type which has
been adopted by commercial banks and
banking usage.In this type the words A/C
Payee are added to the general or special
crossing.
The words A/C Payee on a cheque are a
direction to the collecting banker that the
amount collected on the cheque is to be
credited to the account of the payee.
Who may cross a cheque?

1.The
drawer:He may cross a cheque
2.The
holder:
3.The
banker:
generally or specially.
Where the cheque is

uncrossed,the holder may cross it generally or
specially.Where it is crossed generally, he may
cross specially.
Where a cheque is crossed
specially, the banker to whom it is crossed may
again cross it specially to another banker
(his agent) for collection.
ENDORSEMENT: Definition
When the maker or holder of a

negotiable instrument signs the same,
otherwise than such maker,for the
purpose of negotiation,on the back or
face thereof or on a slip of paper annexed
thereto or so signs for the same purpose
a stamped paper intended to be
completed as a negotiable instrument, he
is said to have endorsed the same and is
called endorser [Section.15 of NI Act,1881].
Endorsement..
Negotiation by endorsement: [Sec.48]
An instrument payable to order is negotiated
by endorsement and delivery. Thus,
endorsement requires two formalities.
First, the holder should endorse it and then
deliver it to his endorsee.
Endorsement is made by signing the name
of the endorser, usually on the back of the
instrument.
.Endorsement
But when the back is already full of

endorsements, further endorsements
may be signed on a slip of paper
(i.e.,allonge) annexed to the instrument.
Endorsement means an endorsement
completed by delivery.
Endorsement must be genuine and not
forged.
Who may endorse [Sec.51]

The
payee of an instrument is
rightful person to make the first
endorsement .
Thereafter the instrument may
be endorsed by any party who
has become the holder of the
instrument.
KINDS OF ENDORSEMENTS
(i) Endorsement in blank:In
case of
endorsement in blank, the
endorser puts his signature on
the back of the instrument
without mentioning the name of
any specified person in whose
favor the endorse is made.
[Endorsement in blank]
In this type of endorsement ,the
instrument is payable to bearer, and
consequently, it can be negotiated by
mere delivery.
E.g., A bill is payable to the order of
Ram.Ram signs on the back of the
bill.This is an endorsement in blank by
Ram.In this case, the property in the bill
may pass by mere delivery as if the bill is
payable to bearer.
(ii) Endorsement in full:In case of
endorsement, the endorser

mentions the name of a specified
person or to the order of that
person, e.g.,
Pay to Rajeev or order
Sd/-Rajesh Kumar
(iii) Restrictive Endorsement:
In
case of Restrictive Endorsement,
the endorser restricts the
further negotiation of the
instrument.
E.g., To pay Arjun Prasad only.
Sd/- Ram Saran Sinha
(iv) Partial Endorsement: When an

endorsement purports to transfer to the
endorsee a part only of the amount of the
instrument, the endorsement is said to be
partial.A partial endorsement does not operate
as a negotiation of the instrument.
E.g., A is the holder of the bill for Rs.1,000/-.He
endorses it thus: Pay B or order Rs.500.This
is a partial endorsement and is invalid for the
purpose of negotiation.
(v) Conditional Endorsement:In the
case of conditional endorsement, the

transfer of property in the
instrument is made to depend on
the fulfillment of a specified
condition.E.g.,
Pay to PremaNandlal on arrival
of ship Godavari
Sd/- Nirmal Kumar.
(vi) Sans Recourse Endorsement:
In the case of a sans recourse endorsement, the endorser

removes (relieves) himself from his liability to the endorsee
by making it clear that the endorsee, or any subsequent
holder, should not look to him for payment in case the bill
is dishonored.E.g.,
Pay to H.P.. Verma without recourse to me
Sd/- S.Prasad
Mr Verma should not look to him [S.Prasad] for repayment in
case the bill is dishonoured, e.g.,
Mr Verma cannot sue S Prasad on the instrument in case
he (Verma) fails to recover money from the acceptor.
(vii)Facultative Endorsement:
In the case of a facultative

endorsement, the endorser waives
some of his rights.E.g.,
Pay to Kamta Prasad, Notice of
dishonor waived
Sd/-Ram Saran Sinha
(viii) Sans Frais Endorsement:
In case of sans frais

endorsement, the endorser does
not want any expense to be
incurred on his account on the
bill.
Module:IV.Banking
Principles of sound (Bank) Lending

Lending
is a risky business.
Lending money to different kinds of
borrowers is one of the most
important functions of a bank.
The borrowers of a bank range from
individuals to partnership firms,
companies, institutions, societies
and even governments etc.
Criteria
for
Bank(credit)Lending:
nature of economic
activity, the location of business
unit, the market potential,purpose
of loan, the turnover/income,
repayment capacity and the
kind of security for advances are
all important determinants to
decide on lending by banks.
The
BANK LENDING: PRINCIPLES
Safety
Purpose of advance
Character,Capacity & Creditworthiness of
borrower
Nature of business
Security for advances
Location of business
Liquidity
Safety Margin
National Policy Objective
PRINCIPLES OF BANK LENDING
1.SAFETY:
The first and foremost principle of lending is safety of funds
The borrower should be in a position to repay

the loans with interest on time.
2.PURPOSE OF LOAN:
The banker should be convinced fully about the
productiveness of the purpose of loan.
3.CHARACTER,CAPACITY & CREDITWORTHINESS
OF BORROWER: The chances of loan being
repaid largely depend upon these 3 Cs.
..PRINCIPLES OF BANK LENDING
4.Nature of business:
The type of business the borrower is in also can
influence the decision of loan.The profitability of
business [Rate of return on investment] is very
important.
5.Security for advances:The securities offered
against loan may vary from gold, silver to stock
market securities, goods, documents of title to
goods, insurance policies and immovable
properties .The securities must be such that ,
they must possess high liquidity, good market
value and must have clear title.
...PRINCIPLES OF BANK LENDING
6.Location of business:
The location must be safe in terms of man made
and natural disasters.
7. Liquidity:Banks are essentially intermediaries for
short term funds.Therefore they lend funds for
short periods.The loans are therefore are largely
repayable on demand.The banker must ensure
that, the liquidity being taken in to consideration.
8.Safety Margin:The margin of safety is maintained
in the form of a much higher percentage.
.PRINCIPLES OF BANK LENDING

9.National Policy & Objectives:
The priority sectors should be taken in to
consideration, as per government
instructions.
The bankers have to be more cautious in
lending ,in these cases.
The Deposit Insurance and Credit Guarantee
Corporation guarantees to the banks for
the risk of lending to weaker and under
privileged sections.
Reserve Banks Guidelines
While lending to big enterprises for amounts

exceeding Rs 6 crores, the commercial banks
required to seek the sanction of R B I.
For this reason banks are required to furnish the
financial data of borrowing concern to R B I for
credit appraisal.
The various tools of financial analysis such as
financial statement analysis, ratio analysis etc
are to be used to determine the financial
strength.
Advances:
Security continues to be one of the important

factors which determines to a significant extent
the bankers willingness to lend money.
The reason is that banker cannot afford to take the risk of

non recovery of the money lent.
In case of the borrowers inability to pay, the banker

must have some tangible assets to fall back upon .
The banker, therefore, tries to get some charge
created on the assets of the borrower in his favor.
The important modes by which such charge can be created
are:Lien,Pledge,Hypothecation and Mortgage.
LIEN
Lien is the right of a person to retain that which is in his

possession and which belongs to another, until the
demands of the person in possession are satisfied

Two types:Particular Lien & General Lien
Particular Lien:It is attached to some specific goods.It is
restricted to those goods which are the subject matter of
the contract and are liable for certain demands of the
person in possession of these goods.
General Lien:General lien entitles a person to retain
possession of goods belonging to another for a general
balance of account.It will entitle a person to retain them
until all claims or accounts of the person in possession
against the owner of the goods are satisfied.
PLEDGE
1.
2.
3.
Section 172 of Indian Contract Act,defines

pledge as, the bailment of goods as security
for payment of a debt or performance of a
promise.
From the above definition, we find that,
pledge occurs when goods are delivered for
getting advance,
The goods pledged will be returned to the
owner on repayment of the debt,
The goods serve as security for the debt.
PLEDGE
A pledge may be in respect of

goods, stocks, shares, document of
title to goods and any other
immovable property.The person who
transfers the goods is called pledger
and to whom it is transferred is
called the pledgee.
ESEENTIALS OF PLEDGE
1.Delivery of goods:Delivery may be physical or

symbolic.Physical transfer of goods from pledger to
pledgee.
2.Transfer of ownership:The ownership of goods remains
with the pledger.
3.Right in case of failure to repay:
If the pledger fails to pay within the stipulated time,
pledgee may,
a)Sell the goods pledged after giving a reasonable notice

b)File a civil suit against the pledger for the amount due,
c)File a suit for the sale of the goods pledged and the realization
of money due to him.
When the pledgee decides to exercise the right of sale, he must issue a clear,
specific and reasonable notice.
Mortgage
Mortgage is a method of creating charge on

immovable properties like land and
building.Section 58 of the Transfer of Property
Act 1882, defines, mortgage as, A mortgage is
the transfer of an interest in specific immovable
property for the purpose of securing the
payment of money advanced or to be advanced
by way of loan, an existing or future debt, or the
performance of an engagement which may give
rise to a pecuniary liability.
Characteristics of MORTGAGE
1.A mortgage can be effected only on immovable property.

2.A mortgage is the transfer of an interest in the specific
immovable property.
3.The object of transfer of of interest in the property must be to
secure a loan or performance of contract which which results in
monetary obligation.
4.The property to be mortgaged must be specific one.
5.The actual possession of the mortgaged property is generally
with the mortgager and will be free on repayment of the loan
with interest due on it.
6.The interest in the mortgaged property is transferred to the
mortgager on the repayment of loan with interest due.
7.In case the mortgager fails to repay the loan, the mortgagee
gets the right to recover the debt out of the the sale proceeds of
the mortgaged property.
Hypothecation
The mortgage of movable property for

securing of loan is called hypothecation.In
other words, in case of hypothecation, a
charge over movable properties like
goods, raw materials, goods in progress is
created.
..Hypothecation
Hart defines, hypothecation as a charge

against property for an amount where
neither ownership nor possession is passed
to the creditor.
The goods remain with the borrower and under a
hypothecation agreement he undertakes to
transfer the possession whenever required to do
so.Thus hypothecation is only an extended idea
of pledge, the creditor permitting the debtor to
retain the possession either on behalf of or in a
trust for himself.The creditor possesses the
rights of a pledgee.

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Banking & Insurance

The word Bank originated from the French

Banking and Insurance

Evolution of Banking Services and its

Evolution of Banking Services and its history in India.

The BANK OF ENGLAND was started in 1694.

History of Banking in India

The Vedic period has literature which records giving

Early History of Banking

The main instrument through which banking and

History of Banking in India

Modern banking in India began with the rise

Modern History of Banking:

The quest for power by Lord Morning ton. Governor General of

History of Banking in India

In 1921, the Three Presidency Banks at Calcutta,

.History of Banking in India

With the passing of RBI Act of 1934, the Reserve Bank

The RBI was a originally shareholders bank . It

The branch network which was 8262 in June 1969

Rural deposits as percentage of deposits

40% of the total credit was directed to priority

However the growth did not come without its costs .

The banking system has grown too large and

Customer service has suffered due to increasing costs and

The directed credit program has led to large over-dues

The Banking Regulation Act,1949 defines the term

accepting, for the purpose of lending or

Definitions of Banking terms

Section 5 (f) of Banking Regulation Act ,1949 defines

Exim Bank means Export Import Bank of India

Reconstruction Bank means the Industrial

Secured loan or advance means a loan or advance

A banker or bank is a person or company

BUSINESS OF BANKING COMPANIES

.BUSINESS OF BANKING COMPANIES

.BUSINESS OF BANKING COMPANIES

the purchasing and selling of bonds, scrip or other

Various types of Banking Services

The flow chart given below shows the following types of

1.Central Banking services:

Various types of Banking Services

3.Specialized Banking Services:

Special banking institutions are established for

4.Non-banking financial services:

The Narasimhan Committee Report

The 1980s were the decade of private

The Narasimhan Committee Report

The government felt that there was a need to

NARASIMHAN COMMITTEE MADE REVOLUTIONARY RECOMMENDATIONS

Banks were to be allowed to raise capital from the public.

The pattern of banking structure should be broadened with 3-4

large banks on a international level 8-9 large banks on a national

Narasimhan Committee Report Recommendations.

Control over the banking system should be centralized with

The Role and Functions of Commercial Banks in

a] The banks create purchasing power,in the

.The Role and Functions of Commercial Banks

By encouraging savings and investment, the

Banks agency functions are very useful to customers of

Role of Commercial Banks in Economic Development

Banks promote capital formation:

Role of Commercial Banks in Economic Development