Professional Documents
Culture Documents
Banking Theory
Law & Practice
Dr. A. Balu, Senior Lecturer
KCC – Kodaikanal – 624 104.
Unit – 1
Introduction
Banker Customer Relationship
Types of Deposits
Types of Customers
Bank – Meaning:
French word “Bancus” or “Banque” – “A
bench” – on which early bankers
transacted their banking business
German word “Back” (termed as
“Banco” in Italy) – “A Joint Stock Fund”.
Banker – Definition:
“The banker at present has three
ancestors viz., merchants,
goldsmiths and money lenders”
- Geoffery Crowther
Banking – Definition:
Relationship
General Special
Relationship Relationship
General Relationship
General
Relationship
Primary Secondary
Primary Relationship
Debtors & creditors relationship:
- Demand for payment
- Demand at proper time
- Demand in proper manner
Secondary Relationship
1. Trustee & Beneficiary relationship (at the
time of keeping valuables):
- Bankers does not get ownership
- It does not compensate the creditors at
the time of bank’s liquidation
- Deposits carry any standing instruction –
(trustee & beneficiary) and vice versa
- cheque deposits for collection (trustee &
beneficiary) and vice versa.
2. Agent & Principal relationship:
- Collection of bills of exchange on
customer behalf.
- Purchase or sale of securities on
customers behalf.
- Payments of customers dues like
insurance premium, telephone &
electricity bills etc. on customers behalf.
Special Relationship
Special
Relationship
Obligation Rights
Obligation of the banker
- Fixed Deposit
- Saving Bank Deposit
- Current Deposit
- Recurring Deposit
Fixed Deposit:
Features:
- Deposit accepted for fixed period
- Period mentioned
- cash reserve not required
- Can be used by bank in more
profitable manner
- Rate of interest is comparatively
high
Opening of Fixed deposit A/c
- Filling of an Application
- Name, Age, Sex, Address, Period,
Nominee if any etc.,
- If it is joint a/c (who is the payee)
- Specimen signature of the depositors
- Verification of application
- Collecting of money
- Issuing FD Receipt
Contents of FDR:
On its face On its back
Name of the Columns for marking
bank payment of interest,
Holder of deposit principal and renewals if
any
Amount and
period of deposit
Rate of interest Column for customer
signature
Date of maturity “Not transferable” &
“Not negotiable”
Legal position of a banker as
regards to FDR
- Premature withdrawals [interest 1% less]
- Advance against FDR
- Interest 3% more than FD interest
- 75% value of FD
- Payment of interest
- Monthly or Quarterly or Half yearly or Annually
- Repayment of FD [on surrender of FDR]
- Repayment of third person [authorised person]
- Donatio mortis causa [Gift – death of donor – donee]
- Loss of FDR [Duplicate FDR]
- Change in the name of the depositors
- Fixed deposits in joint names
2. Savings bank Account
Features:
- Restriction of Deposits
- Minimum balance
- Cheques payable to others can not be deposited
- Restriction on withdrawals
- Through cheques /withdrawal forms
- Total withdrawals < 500 in half year
- Interest
- Interest 3 – 4.5% p.a.
- Calculated once in 46 days (varies)
- It is transferable form one branch to another
3. Current Account
Features:
- Suitable for business and big
organisations
- No interest
- Incidental charges – [Min Bal. not
maintained]
- Privileges
- OD facility
- Third party cheques can be deposited
- Granted loans are credited in the a/c
Opening of Current Account:
- Application
- Letter of introduction – if not
- Bankers loose their statutory protection
- OD will be irrecoverable
- Fraud or misrepresentation occur
- Specimen signature
- Mandate for operation by agent
- Verification of documents
- Opening of an account
- Issue of pay in slip, cheque book & passbook
4. Recurring /Cumulative
Deposit:
Features:
- Features of saving/fixed deposits are applicable
- It can also transferable
Special features:
- Depositors can select the amount period
- Amount in multiples of 100
- Period – 1 to 10 years
- Any person including minor can open
- Passbook will be given
- At the end interest and principal
Differences between FD & SB a/c
FD A/c SB A/c
Repayment on certain date On demand
No need of cash reserve CR is needed
Introduction not necessary It is necessary
High rate of interest Low rate of interest
Suitable for investors Suitable for small savers
Loans available on FDR No loan facility
Practically he is not a He is a customer
customer
Only deposit receipt is given Cheque book, passbook &
pay in slip will be given if
necessary
Differences between FD & Current a/c:
1. Type of Account
2. Date of Birth
3. Death of minor or guardian
4. Loans to minor
5. Loan to minor on the guarantee of
3rd person
6. Liability regarding negotiable
instrument
7. Minor as a partner
8. Minor as an agent
Guardian:
Naturalguardian
Testamentary guardian
Appointed by the court
2. Married woman:
Can enter into a valid
contract
Husband can’t liable except
she act as agent for her
husband
purchase of necessaries not
provided by her husband
Precautions to be taken by bank:
1. Examination of documents
2. Style of account
3. Operation of the account
4. Misappropriation of funds
5. Borrowing powers of executor/
administrator
8. Attorney:
general Special
(All Transactions) (Particular
Transaction)
Precautions to be taken by bank:
1. Examination of power of
attorney
2. Time period of power
3. No loan/OD unless – special
power
9. Joint Hindu Family:
Artificial person – by
government provisions.
Municipality, corporation etc.,
Precautions to be taken by bank:
- DD forms
• Types of Deposits
• Types of Customers
Functions
Secondary/
Primary
Subsidiary
PRIMARY FUNCTIONS
All
kinds of deposits – savings –
term – recurring – current
Making Loans and Advances
Cash Credit
Overdraft
Loans System
Functions
Miscellaneous &
Agency service
General utility
AGENCY SERVICES
Payment of subscription, premium,
rent etc
Collection of promissory note,
dividends, salaries, pension etc
Purchase and sale of stocks and
shares
Acting as Trustee, Executor,
Administrator or Attorney
Miscellaneous or General Utility Service
1.Collection of savings
2.Productive Investment – “A mere
injection of money and credit cannot
star a process of growth”
- Rockfeller David
3.Agricultural & Rural development
4.Industrial development
5. Development of Trade and Commerce
6. Development of foreign trade
7. Balanced regional development
8. Optimum utilization of natural
resources
9. Finance to government
10. Creation of employment opportunities
11. Government sponsored programme
Modern Services Rendered by
Commercial Banks
1. Agent of RBI
Act as an agent where there is no
branch for RBI
Helps in implementing the monetary
& credit policy
2. Clearing operations
Survey
Khusro Narasimham MC Bhandari
Committee Committee Committee
Khusro Committee
Safety &
Liquidity Profitability
Security
Definition:
If an asset is converted in to cash quickly,
then they are said to be liquid
Ratio of Liquid Asset to Total
Current Assets
Cash reserve 10 %
Call money & bill of exchange 20 %
Total liquidity
30 %
Investments 20 – 25 %
Advances 45 – 50 %
70 %
Profitability Total 100 %
RBI - Meaning
Introduction:
Amalgamation of 3 presidency banks
& function as central bank upto 1935
1925 – Hilton young recommended a
separate central bank.
1927 – RBI bill introduced in
assembly
1934 – Act was passed
1935 – April RBI formally inaugurated
Initially functioned as private bank
with share capital of 5 crores.
Nationalised in 1948 by RBI
(transferred to public ownership) Act.
Private share holders were paid @
118.10 per share.
Operation – (Bombay, Calcutta,
Madras, Delhi and Rangoon) – (Myanmar)
1947 – Rangoon office was closed.
RBI -
Management
Boards
Central Board Local Boards
Mumbai Chennai
Duties
Advising on central board
Performing other duties delegated by
the central board from time to time
RBI - Functions
1. Issue of Bank Notes:
Sole right to issue currency notes
(except coins and subsidiary coins)
It has separate department known as
issue department.
Makes adequate arrangements for
distribution of notes & coins.
Issue department has offices in
important cities.
2. Banker to Government:
Accepting & maintaining money on account
of central & state Governments.
Making payments on their behalf.
Carrying out their exchange, remittance &
their banking operations.
Managing the public debt including new
loans & Treasury bills of central
government.
Advances to central & state governments
Advising the government in all financial
matters.
3. Banker’s Bank:
Act as banker to scheduled banks in
India.
Maintain cash reserves of scheduled
banks. (% on their liabilities)
Servers as lender of last resort.
(rediscounting the bill of exchange etc)
4. Custodian of Foreign Exchange
Reserve:
Responsible for maintaining the
external stability of rupee value.
Controlling & regulating the foreign
exchange.
5. Controller of Credit:
As per the Acts (1934 & 1949) have
powers to control & regulate the
credit.
Controlling of credit
6. Collection & Publication of
Information:
Collects & publishes information on:
General economic.
Financial & banking developments.
1. Issue Department:
Issue & management of bank notes
14 branches in the country
Each branch has:
Cash department – Currency
transactions
General department – Managing
supply
2. Exchange control department:
Control foreign exchange & maintain
stable exchange rate
3. Department of Banking operation
and development:
Control & supervise the working of
banks in India.
Visits banks periodically
4. Department of Financial
Companies:
Control & supervise the non banking
financial companies.
Central office in Kolkota
Four regional offices in Bangalore,
Mumbai, Kolkota and New Delhi.
Method of Credit Control
1.Bank Rate
Rate at which RBI grants loans to
commercial banks
Changes in this rate – reflect on the
lending rate of Commercial Banks
2. Open Market Operation
Purchase & sale of securities in the
market.
Sells the securities – reduces the money
supply.
Buys the securities – increases the
money supply (credit).
3. Variable Reserve Ratio
Meaning:
- Negotiable instrument
- Transferable from one to another
Definition
2. Drawee – banker
2. Postdated cheque
3. Stale cheque
4. Order cheque
5. Bearer cheque
Crossing of cheque
• Cheques which has 2 parallel transverse
lines across its face with or with out any
words.
• Payment done only through bank
account and not at counter.
• Crossing does not affect its negotiability
• It can be hand written, stamped, printed
or perforated on its face.
Types of Crossing
Crossing
General Special
Se. 123 NIA Se. 124 NAI
Essential of G.C.
1. Two parallel lines
2. Crosswise direction
2. Can be transferred.
Alteration
Material Immaterial
Material Alteration
2. ,, ,, place of payment
4. ,, ,, amount
6. ,, ,, crossing
Effects of Material Alteration
1. Generally it is void.
2. Do not pay.
• Conversion of a endorsement in
blank into an endorsement in full.
• Crossing of an opening cheque.
• Conversion of GC into SC
• Conversion of ‘bearer’ into ‘order’
• Fill up the blank in an instrument.
Endorsement
Meaning:
- Transferring the instrument
- Bearer instrument - delivery
- Order instrument - Endorsement delivery
- Endorser – Who transfers
- Endorsee – To whom the transfer
made
- Endorsement – On its back
Allonge
‘Endorser’
3. Partial Endorsement:
bill – Possible
4. Restrictive Endorsement:
“Endorser”
“Endorser”
5. Conditional or Qualified Endorsement:
It limits the liability of the endorser
It imposes certain condition.
Pay to Rabit Binil or order on his
marriage with Mouse Vanitha
“Endorser”
This may done two forms;
Conditional or Qualified
Endorsement
C/Q Endorsement
“Endorser”
Sans Frais Endorsement:
Endorsee free from liability.
“Endorser”
6. Per Pro Endorsement:
Endorsement done by an agent
inform the banker regard the delegation
of authority
“Povendraraja”
Per Pro M. Som
Assignment topics:
• Cheques
• Crossing
• Endorsement
Meaning:
1. Form of cheque:
2. Date of cheque
3. Amount of cheque
4. Sufficiency of funds
5. Material alteration
6. Drawers signature
7. Mutilation
8. Payment during the banking hours
9. Open or crossed cheque
10. Endorsement if any
11. Legal restriction if any
12. Countermanding order
13. Notice of death or insanity or
insolvency of customer.
Dishonouring of cheques
1. Countermanding of payment
2. Death of the drawer
3. Insolvency of the drawer
4. Insanity of the drawer
5. Receipt of garnishee order
6. Receipt of notice of assignment
7. Breach of trust
8. Post dated or stale cheque.
9. Insufficiency of funds.
10. In proper format.
11. Materially altered cheque.
12. Forged signature.
Statutory protection to the paying banker:
Recoverable Irrecoverable
Paid on a negotiable
Mistake of fact
instrument
3. He can sue
Differences between holder and holder in due course
Holder in due
Holder
course
Must pay some
Need not pay consideration
consideration
Need not take care about
Must care
the transferors titles
He takes the instrument Takes free from all
subject to all defects defects
Obtain the possession at Can obtain only before
any time the due date
Collecting Banker
Meaning:
- Banker who undertake the
responsibility of collection.
- He can do this in the capacity;
- Holder for value
- Agent for collection
CB as holder for value
• Collecting banker
• Paying banker
Diversification Liquidity
Purpose Profitability
1. Safety
2. Recovery frequency
3. Profitability
1. Interest on Loans.
2. Income to meet all recurring
expenses.
1. Interest on deposits
2. Salary for staff
3. Establishment expenses
4. Purpose of loan
- Production purpose.
L&A
Secured Unsecured
Security No security/
personal security
Security > loans
Character
Repaying capacity
Loan or Advances
Secured: According Unsecured:
to Se 5 (n) of the BR
Act 1949; Opposite
“a loan or advance
made on the
security of assets
the market value of
which is not at any
time less than the
amount of such loan
or advance”
Types of L & A
(Forms/style)
1. Loans
1. Lump sum
1. Purchase of bills.
3. Commission is charged.
Other Forms
of
Secured Advances
1. Advances against life policies
Demerits
Merits
1. Impossibility of
1. Effective realization (utmost
2. Assignment good faith)
3. Easy valuation 2. Risky security
4. Quick realization 3. Worthless security
(sentenced to death)
Precautions to be taken by banker
1. Terms & conditions
2. Type of policy
3. Insurable interest
4. Admission of age
5. Payment of premium
6. Surrender value
7. Free from encumbrances
8. Assignment of policy
2. Advances against document of title of
goods
Document in proof of the possession or
control of goods.
It authorizes the holder to receive or
transfer of goods.
Examples – Bill of lading, dock warrant,
warehouse certificate, railway receipt,
wharfinger certificate etc.
Risk involved
1. Chances for fraud
2. Forged documents
3. Defective title over the documents
4. Delivery on execution of indemnity
bond
Precaution to be taken by banker
1. Character of the borrower
2. Documents free from prejudicial
remarks
3. Insurance cover
4. Memorandum of charge
3. Advances Against bill of Exchange
Housing loans
Plot loans
On the value of land & building
Precautions to be taken by banker
Clear title
Free from encumbrances
Value by experts
Insurance
Legal formalities – Creation of charge.
5. Advances against security of goods
Advances against
Food articles
Industrial raw materials
Plantation products
Manufactured products
Merits
Safety of funds
Circulation of funds
Demerits
Difficulty in verification.
Price fluctuation.
• Lending
• Principles of sound lending
• Types of advances
• Advances Against various securities