II semester B.Com Banking law and operations Banker and Customer Relationship … · Banker and Customer Relationship II semester B.Com Banking law and operations Complied by Sri.Balaji.A.,

Banker and Customer Relationship II semester B.Com Banking law and operations

Complied by

Sri.Balaji.A., Assistant Professor,

Dept. of Commerce. GFGC Vemagal

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Banker and Customer Relationship

Since the banking activities were started in different periods in different countries, there is no

unanimous view regarding the origin of the word ‘Bank’. The word ‘Bank’ is said to have derived

from the French word ‘Banco’ or ‘Bancus’ or ‘Bank’ or ‘Banque’ which means a ‘Bench’. In fact the

early Jews in Lombardy transacted their banking business by sitting on benches. When their business

failed the benches were broken and hence the word ‘Bankrupt’ come into vogue.

Another common-held view is that the word ‘Bank’ might be originated from the German word

‘Bank’ which means a joint stock fund.

Definition of Banker A person who is doing the banking business is called a banker. But it is not easy to define the term

‘Banker’ because a banker performs multifarious functions.

First: a banker must be a man of wisdom, he deals with others money but, with his own mental

faculties.

Second: a banker is not only acting as a depositor, agent but also as a financial advice.

The bill of exchange Act of 1882 defines the banker “Banker includes a body of persons whether

incorporated or not who carry on the business of banking”.

According to section-3 of the Negotiable instruments act state that “The term banker includes a

person or a corporation or a company acting as a banker”.

Definition of Bank According section-5(B) of Banking Regulation Act banking has been defined as “Accepting for the

purpose of lending and investment of deposits of money from the public, repayable on demand order

or otherwise and with drawable by cheque, draft order or otherwise”.

Definition of Customer According to Sir John Paget’s view “To constitute a customer there must be some recognizable

course or habit of dealing in the nature of regular banking business”.

According to him a person a customer of a bank have to satisfy the two conditions.

First condition: (Duration theory)

“There must be some recognizable course or habit of dealing between the person and the banker”

means that there must be some duration of dealings between the person and the banker. In other

words, a single banking transaction will not make a person a customer of a bank. He must maintain


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his account with the bank for a reasonable duration or period. This condition is commonly known as

the duration of dealing or duration theory”.

Second condition:

“The transaction or dealing between the person and the bank must be in the nature of regular banking

business” mean that the dealings or transaction must be regular banking business and not casual

transaction.

The same view was expressed in the case of Mathew’s v/s Williams Brown & co. his

view regarding the dealing of banking nature has been universally accepted. But, his view about

duration is subjects to several criticisms. It is very difficult to say how many transactions will make a

person, a customer or how much time should elapse between two successive transactions to qualify a

person as a customer. Therefore, the duration theory exploded, discarded.

Functions of Commercial Banks The functions of the commercial banks are now wide and diverse. They have assumed great

significance in the role of an agent for social transformation because of their vital role in

mobilization of resources as well as deployment for meeting the said objectives.

The functions can be classified into:

1. Primary functions

2. Secondary functions

1) Primary Functions

a) Accepting of Deposits

Deposits are an important source of banks funds. They are classified in to three categories:

i. Savings Deposits: these deposits are of small amounts and are accepted by the banks to

encourage person of small means to make savings. Deposits can be made at any time but

frequent withdrawals are not allowed. The deposits earn interest

ii. Fixed Deposits: These are deposits made with the bank for fixed period of time and are

repayable on the date of maturity. A customer can use a fixed deposit as security for a loan

in same bank or another bank.

iii. Current Deposits: These deposits are repayable on demand. The banks undertake an

obligation of paying all cheques drawn against these deposits by the customers till they have

adequate funds of the customer. The banks usually do not pay interest in respect of such

deposits. Usually, banks issue monthly statements showing the transactions in the accounts.

Deposits are repayable on demand without prior notice. The customer may issue cheques to

third parties or may withdraw from counter or via ATM.


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b) Lending of Money

The major portion of the deposits received by the bank is lent out. Interest earned from lending is the

main income of the bank, however, lending money is not without risk, and therefore, a banker must

take precautions in this process. The lending may be in the form of:

i. Loans

ii. Cash Credit

iii. Overdraft

iv. Discounting and Purchasing of the bills.

Thus commercial banks fender unique service by tapping savings from a wide spectrum of people

and lending to those who really need and use them for various productive purposes.

2) Secondary Functions

Agency service such as:

a) Collection of drafts, bills, cheques, dividend, etc. on behalf of customers

b) Execution of standing orders of customers

c) Conducting of stock exchange transactions

d) Functioning as an executor, trustee or administrator of an estate of a customer

3) Ancillary or miscellaneous functions

General utility services such as:

a) Issuing of letters of credit

b) Issuing of travelers cheques

c) Accepting valuables for safe keeping

d) Acting as referee as to the respectability and financial standing of the for customers

e) Providing specialized advisory services to customers

f) Issue of credit cards

g) Providing of information through regular bulletins about general trade and

economic conditions

h) Merchant banking e.g. counseling, sponsor of share issue, investment management,

etc.

Relationship between a banker and a customer Relationship between a banker and a customer may be divided into two types, they are:

I. General relationship.

II. Special relationship.

I. General relationship:

The general relationship between a banker and a customer may be sub-divided into:

1. Primary general relationship.


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2. Subsidiary general relationship.

1) Primary general relationship:

The primary general relationship arises from a contract between the two i.e. banker and a customer.

So it is a contractual relationship. It is governed by the various terms of agreement between the two

parties.

Nature of primary general relationship:

When a banker receives deposits of money from a customer, he is neither a bailee nor a

trustee nor an agent, but only a debtor. According to Sir John Paget,” the relation of banker and

customer is primarily that of debtor and creditor, the respective positions being determined by the

existing state of the account”.

a) Banker is only a debtor in respect of customer’s money:

The banker is just a debtor, and the customer is creditor, when he accepts and has the

deposits of the customer. Of course, in case the customer’s account is overdraw or the customer has

taken loan or any other form of financial accommodation from the banker, the customer becomes the

debtor and the banker becomes the creditor.

The debtor and creditor relationship of banker and customer has certain features:

A banker is a debtor, when he holds his customer’s deposit. But he is a privileged,

Honored or dignified debtor. He is a privileged debtor for the following reasons:

i. Banker’s borrowing from a customer is nothing but a debt; it is given a dignified name

‘deposit’.

ii. Generally, for borrowing money, a debtor goes to the creditor. But in case of bank deposit,

the creditor goes to the debtor for giving the amount.

iii. Normally, a debtor is required to repay the debt of his own but a banker need not repay the

deposit to the depositor of his own. He has to repay the deposit only when there is an express

demand in writing by the customer.

iv. A banker cannot be asked by the customer to repay the deposit at a place other than the one

where the deposit is kept.

v. A banker can be asked to repay the deposit only on a working day and only during working

hours.

vi. A banker is not required to give any security to the customer for the deposit accepted.

b) Customer is only general creditor of the banker:

The customer is the creditor of the banker when he has some deposit in the bank. But he

cannot be a secured creditor of the banker because he does not get any charge on any asset of the

banker.


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A banker can be a secured creditor of the customer, when an advance is granted by him to the

customer against some tangible securities. That means even when he becomes a creditor, he becomes

a privileged creditor.

c) Demand for repayment of deposits is necessary:

For the repayment of the deposit due from the banker to the customer an express demand for

repayment is required to be made by the customer.

d) Customer can demand repayment of deposits whenever he wants.

e) Customer’s demand for repayment of deposits should be made at proper place.

f) Customer’s demand for repayment of deposits should be made on a working day and during

business hours.

g) Customer’s demand for repayment of deposits should be made in proper form.

2) Subsidiary general relationship between a banker and customer:

When a deposit of money is received and an account is opened by a banker in the name

of customer, the primary relationship between the banker and the customer is created, and that

relationship is that of a debtor and a creditor but this does not mean that there cannot be any other

relationship between the banker and the customer. The banker and the customer can also enter into

subsidiary relationships like that of bailee & bailor, trustee & beneficiary, and agent & principal by

special agreement or arrangements.

a) Bailee and Bailor:

When a banker accepts valuable and documents from a customer for safe custody, he

becomes a bailee and the customer become a bailor.

As a bailee, the banker owes some duties and liabilities to the customer. They are:

i. He is required to safeguard the safe-custody deposits of the customer in his hands with

reasonable care.

ii. If he fails to take reasonable care in the preservation of the safe-custody deposits, and the

customer suffers a losses a consequence, so banker will be liable to compensate the customer.

iii. He is required to hand over the safe-custody deposit to the depositor whenever he demands

them back.

b) Trustee and Beneficiary:

A banker becomes the trustee of his customer, when he is entrusted with some trust for

instance, when a customer deposits a certain sum of money with banker with specific instructions to

use the same for a specific purpose, the banker becomes the trustee of the customer in respect of that

money until that purpose is fulfilled.

When a cheque or a bill of exchange is deposited with a bank for collection, the bank

becomes a trustee for the cheque or bill till it is collected. Of course once the cheque is collected and

the proceeds are credited to the customer’s account the banker becomes the debtor.


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When banker is appointed as trustee for the customer’s property he becomes a trustee of

the customer and he owes some duties.

i. He is required to deal with the trust money or property in accordance with the terms of the

trust deed.

ii. He is required to give a detailed account of the trust property to the beneficiary.

iii. He should be banded to hand over the profits earned from the use of the trust property to the

beneficiary who is entitled to the benefits of the trust property.

c) Agent and Principal:

When a banker undertakes agency service such as collection of cheque, drafts and bills,

collection of interests and dividends on securities payment of premium and subscriptions, purchase

and sale of securities, etc., for a customer, he becomes the agent and the customer becomes the

principal.

As an agent, the banker owes some duties to the customer. They are:

i. He is required to act in accordance with the instructions of the principal i.e. the customer.

ii. He is bound to return to the customer all the incomes which he earns as an agent of the

customer.

d) Mortgagee and Morgagor relationship:

The relationship between banker and customer may be mortgagee (pledgee) and mortgagor

(pledger) when customer pledge any valuable assets as security to take loan.

e) Guarantor and Guarantee relationship:

At the time of international trade importer needs guarantee to receive goods from the exporter.

Here bank gives guaranteeto its customer i.e. bank issue “letter of credit” to exporter by

stating strength of importer financial position.

II. Special relationship

Special relationship between a banker and a customer refers to the special obligations and

rights of the banker against the customer and vice-versa. The rights and obligations are reciprocal i.e.

customers rights are bankers duties and bankers rights are customer duties.

The various special features of relationship between the banker and the customer are:

1) Obligations

a) Banker’s obligation to honour his customer’s cheques:

When a current account is opened by a banker in the name of a customer there is an obligation

on the banker to honour the customer’s cheque as long as there are sufficient funds available in the

customer’s account for meeting the cheques.

The debts are repayable by the banker to the customer on demand as per contract entered into

between them. So, whenever the customer demands the repayment of his deposits by issuing


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cheques, there is a contractual obligation on the banker to honour his customer’s cheques and repay

his deposits.

According section-31 of the Indian negotiable instrument act of 1881 provide, “The drawee of

a cheque having sufficient funds of the drawer in his hands, properly applicable to the payment of

such cheque, must pay the cheque when duly required to do so, and in default of such payment, must

compensate the drawer for any loss or damage caused by such default.”

Banker’s obligation to honour cheques is subject to certain conditions:

i. Sufficient funds must be available:

The banker must have sufficient funds of the customer to pay his cheques. If the banker

does not have sufficient funds of the customer, he can dishonour the cheque issued by the customer.

It should be noted that when the funds of the customer lying in the hands of the banker are not

sufficient to pay the cheque in full, the banker need not make a part payment for that cheque to the

extent of the balance available. He can just dishonour that cheque.

ii. Funds must be properly applicable to the payment of the cheque:

The customer’s funds in hands of the banker must be properly applicable to the payment

of the payment of the cheque presented.

iii. Banker must be duly required to pay the cheque:

The banker must be duly required to pay the customer’s cheque. That means the bank

should pay the cheque only if it is complete and is in order and is presented within a reasonable time

after its date of issue.

iv. There must be no legal bar presenting the payment of the cheque:

If there is a garnishee order issued by a court attaching the funds of the customer in a

particular account, a cheque drawn against that garnished account should not be paid by the banker.

DISHONOUR OF CUSTOMER’S CHEQUE:

A banker is obliged to honour his customer’s cheques, he can dishonour the

cheque issued by a customer under certain circumstances, such as insufficiency of funds in the

customer’s account, irregularity in the cheque, presentation of a post-dated cheque before its due

date, attachment of the funds in the customer’s account by a garnishee order etc.,.

Wrongful dishonour of a cheque and its consequences:

A banker can dishonour a customer’s cheques under certain circumstances,

wrongful or unjustified dishonour of the customer’s cheque lands the banker in trouble. If a banker,

without any justifiable reason, dishonours his customer’s cheque, he becomes liable to compensate

the customer for any damage or loss caused to the customer. The customer can claim damages from

the banker for wrongful dishonour of his cheque on the ground of breach of contract by the bank.


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Damages or compensation for wrongful dishonour of cheques:

The damages payable by a banker to his customer for the wrongful dishonour of

his cheque may be divided into four kinds:

i. General damages for breach of contract.

ii. Special damages for pecuniary loss or financial loss.

iii. General damages for libelous or defamatory statement.

iv. Vindictive damages.

i. General damages for breach of contract:

The damages payable by a banker to a customer for causing damage to the credit (i.e.

reputation) of the customer as a result of the wrongful dishonour of his cheque.

The rules which govern the general damages are:

The amount of general damages payable by a banker to his customer for breach of contract

(i.e. for the wrongful dishonour of his cheque).

The amount of general damages which the banker is required to pay to his customer for

breach of contract does not depend even upon the actual loss.

The amount of damages by the banker to his customer for the injury caused to the reputation

of the customer.

The amount of general damages awarded by the court may be ordinary or nominal depending

upon the circumstance of each case.

ii. Special damages for financial loss:

Special damages refer to damages payable by a banker to his customer for the actual

financial loss suffered by the customer as a direct result of the wrongful dishonour of his cheque by

the banker.

iii. General damages for libelous or defamatory statement:

When a cheque is dishonoured by a banker, he usually, gives the reason for the dishonour on

a slip of paper attached to the dishonoured cheque. If the answer given by the banker is humiliating

to the customer, the customer can claim from the banker substantial general damages.

iv. Vindictive damages:

If the dishonour of a customer’s cheque is willful, the banker becomes liable to pay

vindictive damages.

b) Banker’s obligation to maintain the secrecy of the customer’s account:

The banker should not disclose to any outsider the details concerning the customer’s account

such as the amounts deposited, cheque, the cheques issued. The overdraft, loan or any advance

granted, the securities deposited by the customer against the advance etc.

The relationship between a banker and a customer is confidential or private in character. If the

private character of the relationship is revealed to any outsider, it may affect the reputation and the


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business of the customer adversely. So an obligation is imposed on the banker to observe the secrecy

of his customer’s account.

Exception to banker’s obligation to observe secrecy:

i. When there is an express consent of the customer:

A banker is justified in disclosing the state of his customer’s account to a third party. For

instance, when a customer instructs his banker in writing to give some or all the details of his

account to an authorized person, say his lawyer, auditor, manager or secretary, there is an express

consent of the customer for disclosure.

ii. When there is an implied consent of the customer:

A banker is justified in disclosing the state of his customer’s account to an outsider even when

there is an implied consent of the customer for such disclosure.

This point was supported in case of Sunderland vs. Barclays bank.

iii. When he is compelled by the laws of the country:

A banker can disclose the state of his customer’s account to public authorities when he is

compelled by the laws of the country like, companies’ act 1956, R.B.I act 1934, etc.

iv. When he is under a public duty to disclose:

A banker can disclose the state of his customer’s account when he is under a public duty to

disclose. For instant, is a banker comes to know from his customer’s bank account that his customer

is engaged in trading with an enemy country during war or is engaged in anti-notional activity,

banker can disclose the state of the customer’s account to the government in the interest of the state.

v. when his own interest requires disclosure:

A banker can disclose the state of his customer’s account when his own interest requires

disclosure. For instance when a banker takes legal action against the customer for the realization of

the amount due, he is permitted to disclose the exact state of his customer’s account to his banker’s

lawyer, the court etc.

Consequences of unjustified disclosure:

Disclosure of the state of a customer’s account by a banker to an outsider, except on

reasonable and proper grounds as stated, is regarded as unjustified disclosure.

When there is an unjustified disclosure by a banker, the banker makes him self liable to

compensate the customer on the ground of breach of contact. The amount of compensation payable

by the banker to his customer may be nominal or substantial, depending upon the circumstances of

each case. If no serious damage is caused to the customer, only nominal damage is awarded. On the

other hand, if any serious damage is caused to the customer, substantial damage is awarded.


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2) Rights

a) Right of General Lien:

Meaning of Lien:

Lien is the right of one person to retain the property, in his possession, belonging to another,

until the debt due from the owner of the property is repaid.

Types of Lien:

i. Particular Lien:

A particular lien is the right of a creditor to retain a particular property until the particular debt is

repaid.

For e.g.: A watchmaker has a lien over the watch till the repair charges due from the owner of the

watch are paid to him.

ii. General Lien:

A general lien is the right of a creditor to return any property until the general balance is repaid.

Banker’s general lien:

Banker’s general lien is the right of a banker to retain the goods and securities entrusted to him as

a banker by a customer in respect of the general balance due from the customer.

However, a banker’s general lien empowers the banker not only to retain the securities, but also to

sell them without getting any order from the court as in the case of pledge. So a banker’s general lien

is considered as an implied pledge.

Circumstances under which a banker can exercise his right of general lien:

A banker can exercise his right of general lien under the following circumstances:

i. Lien on customer’s funds or deposits or credit balance lying with the banker in his capacity as

a banker:

A banker could exercise his right of general lien on the funds deposited by the customer with him

(i.e. the banker) in his capacity as a banker. Today, a bank no lien on the money deposited by the

customer. He has only the right of set off in respect of that money.

ii. Lien on goods coming into the hands of the banker in his capacity as a banker:

Banker has a general lien on goods that come into his hands as a banker.

iii. Lien on documents of title to goods:

A banker has a general lien on documents of tile to goods, such as a bill of lading, railway receipt,

dock warrant, etc, that come into his hands as a banker.


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iv. Lien on fixed deposit receipt:

A banker has a general lien on duly discharged fixed deposit receipt that comes into his hands as a

banker.

v. Lien on life insurance policy:

A banker has a general lien on a life insurance policy that comes into his hands as a banker.

vi. Lien on cheques, bills, etc. deposited for collection:

A banker has a general lien on cheques, bills of exchange and promissory notes deposited with him

for collection.

vii. Lien on negotiable instruments deposited for safe custody till maturity and collection:

A banker has a general lien on negotiable instruments deposited with him for safe custody till

maturity and collection.

viii. Lien on dividend and interest warrants deposited for collection:

A banker has a lien on dividend and interest warrants sent to him for collection, as they come into his

hands in the capacity of a banker.

ix. Lien on interest and dividend coupons deposited for collection:

A banker can exercise his general lien on interest and dividend coupons deposited with him for

collection, because they are received by him in his capacity as a banker.

x. Lien on both coupons and bonds when they come to him in his capacity as a banker:

A banker can exercise his general lien not only on the coupons but also on the bonds, if he is

authorized to cut off the coupons from the bonds left with him and collect the coupons, because in

this case, both the coupons and the bonds come into his hands as a collecting banker.

xi. Lien on specific securities left with him after the repayment of the specific loan:

A banker has a general lien on securities deposited with him to secure or cover a specific loan, but

left in his hand after the loan has been repaid. This is because in leaving the securities with the

banker after the repayment of the specific debt, the customer is supposed to have redeposited them as

securities for other outstanding debts.

xii. Lien on the surplus sale proceeds of security:

When securities deposited with a banker for a specific loans are sold by the banker and there is a

surplus after the settlement of the specific loan, the banker can exercise his general lien on that

surplus.

xiii. Lien on negotiable securities despite the defective title of the customer:


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In the case of negotiable securities, a banker can exercise his general lien even if the customer does

not have any valid title to them, provided the banker acts in good faith and without negligence.

xiv. Lien in respect of time-barred debts:

A banker’s right of general lien is not barred by the law of limitation only bars the remedy but not

the debt. Therefore, a banker can exercise his general lien even in respect of debts which have

become time-barred.

A circumstance under which a banker cannot exercise his right of general lien, or exceptions to

banker’s right of general lien:

A banker cannot exercise his right of general lien in the following cases:

i. No lien on deposits of money:

A banker has no lien on the money deposited by the customer. This is because the money deposited

into a bank by a customer ceases to be the money of the customer.

ii. No lien on safe-custody deposits:

A banker cannot exercise his right of general lien on securities deposited with him only for safe

custody. He has no lien in this case, because in receiving the securities for safe custody, he is

supposed to be acting as a bailee and in the capacity of a bailee, and he has no lien.

iii. No lien on money deposited for a specific purpose:

A banker cannot exercise his general lien on money deposited with him for a specific purpose. Here,

the money is deposited for a specific purpose. So, a banker cannot exercise lien in this case.

iv. No lien on bills, promissory notes, etc. deposited for a specific purpose:

A banker has no general lien on bills of exchange, promissory notes, cheques and other documents

entrusted to him for a specific purpose. If a bill of exchange is sent to the banker for collection with

specific instructions to apply the proceeds of the bill for a particular purpose, the banker has no lien

on the proceeds of that bill.

v. No lien on securities left with him inadvertently:

A banker has no general lien on securities left with him by a customer inadvertently i.e. by mistake,

because in this case, the possession of the securities has not been obtained by the banker lawfully.

vi. No lien on securities obtained by force:

A banker cannot exercise his general lien on securities obtained from the customer through the use of

force.

vii. No lien on securities left to cover a loan which is not granted:

A banker has no general lien on securities left with him to cover an advance which is not granted.


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viii. No lien on securities received for sale:

A banker has no general lien on securities received for sale, because the securities are received for a

specific purpose.

ix. No lien on securities furnished to cover a specific debt:

A banker cannot exercise his general lien on securities furnished by a customer to cover a specific or

particular debt, because the special contract excludes the banker’s general lien.

x. No lien on non-negotiable securities to which the customer has no title or defective title:

A banker has no general lien on non-negotiable securities to which the customer has no valid title.

xi. No lien on a fixed deposit receipt which has not been endorsed and discharged on maturity:

A bank has no general lien on the security of a fixed deposit receipt which has been endorsed and

discharged on maturity.

xii. No lien on bonds when the customer separates the coupons from the bonds:

A banker has no general lien on bonds, if the bonds are deposited with him for safe custody and the

customer periodically calls on the banker, cuts off the coupons from the bonds and hands over the

coupons to the banker for collection.

xiii. No lien in respect of contingent debts:

A banker cannot retain the securities of his customer for a loan granted for a specific period until the

expiry of the specific period, because, in this case, the loan becomes due only after the expiry of the

specific period.

b) Right of set-off or banker’s right to combine account:

A banker’s right to set-off refers to the right of a banker to adjust the amount due to him from a

customer on one account against the amount due from him to the customer on another account. In

short, it is the right of a banker to combine or adjust the debit and credit balances of two or more

similar account held by a customer in the same capacity.

c) Banker’s right to charge compound interest:

When a banker grants an advance to a customer, he becomes the creditor of the customer. When he is

the creditor of the customer, the banker has an implied right to charge interest on the customer by

virtue of banking customs.

d) Banker’s right to charge incidental charges:

Incidental charges may take the form of services charges, ledger folio charges, processing charges,

appraisal charges, handling charges, penalty charges, stop payment charges etc.


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e) Banker’s obligation and rights when a customer’s account is attached by a garnishee order:

When a debtor fails to pay the amount due from him to his creditors and when the creditor knows

that some money is due to his debtor from another party, he may apply to the court for the issue of a

garnishee order on the debtor of his debtor attaching the amount due from him to his debtor and

directing him to pay the same to the judgment creditor.

The garnishee order issued in two stages:

Firstly, a preliminary order called the order nisi is issued, the term nisi means unless. So the order

nisi warns the garnishee not to pay the funs of the judgment debtor lying in his hands to the judgment

debtor unless otherwise directed by the court.

If the garnishee fails to appear before the court on the appointed date and time or appears before the

court, but does not raise any objection, Secondly the court will issue the final order called the order

absolute. The order absolute directs the garnishee to pay the amount garnished to the judgment

creditor in discharge of the judgment debtor.

f) Bankers Right of Appropriation (Clayton’s case)

When a customer owes several distinct debts to a banker and makes a payment which is insufficient

to discharge his entire indebtedness, there is a problem of appropriating payment. In such a case

when money is paid, it is to be applied according to the expressed will of the customer, not the

banker. If the party to whom the money is offered does not agree to apply it according to the

expressed will of the party offering it, he must refuse it and stand upon the rights which the law gives

him. In case there is a current account, and neither the banker nor the customer makes any specific

appropriation, then any successive payments will be appropriated in accordance with the rule in

Clayton’s case. The following provisions guide the appropriation of payments:

i. Appropriation by the Debtor

Where money is paid by a debtor to his creditor with the express or implied intimation that money is

to be applied to a particular debts, creditor, of accepts the payment, must apply the money received

according to the direction of the debtor. If the debtor owes other debts which are also due and

payable and the debtor insists upon applying the money to the debt of his choice, the creditor’s

remedy is to refuse to accept the money if he is not prepared to agree with the wishes of the debtor.

Appropriation is a right primarily of the debtor and for his benefit.

ii. Appropriations by the Creditor

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 applying it to the payment of any lawful debt

at his choice including even the time- barred debts. creditors will exercise such a right of

appropriation only after the debtor had the opportunity to exercise his right but has omitted to do so.

The creditor needs to declare his intentions in express terms.

iii. Where neither Party Appropriates


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Where neither party makes any appropriation, the payment shall be applied in discharge of debts in

order of time, whether they are or not barred by the law in force for the time being. If debts are of

equal standing payment shall be applied in discharge of each debt proportionately.

RULE IN CLAYTON’S CASE:

The ruling given in Clayton’s case, while dealing with accounts a banker should

always keep in mind the Clayton’s principles. This case purely deals with appropriation of payments.

The question of appropriation arises only when a customer has borrowed different loans on different

dates. When he makes payments the question arises as to which debt should be cancelled first.

In fact, as a general rule, the customer is given the first option to decide the account to

which the amount should be credited.

If the customer fails to indicate his choice, then the banker has every legal right to

credit the amount in any one of the account of that customer.

Incase, both of them do not exercise their option, then the rule given in the Clayton’s

case will apply for the appropriation of payment.

RULES:

The principle laid down in Clayton’s case is of great practical significance to bankers,

particularly in the case of running account like current account and cash credit account.

The rule is...

• Where the account goes into debit, the first item on the debit side is cancelled by the first

items on the credit side i.e. appropriation takes place in the order of time.

• Where the account goes into credit the first item on the credit side is extinguished by the first

item on the debit side i.e. appropriation takes place in a chronological order.

Negotiable Instruments II semester B.Com Banking law and operations

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Negotiable Instruments

Definition of Negotiable Instrument

According to section 13 of the Negotiable Instruments Act, 1881, a negotiable

instrument means “promissory note, bill of exchange, or cheque, payable either to

order or to bearer”.

Types of Negotiable Instruments According to the Negotiable Instruments Act, 1881 there are just three types of negotiable

instruments i.e., promissory note, bill of exchange and cheque. However many other documents are

also recognized as negotiable instruments on the basis of custom and usage, like hundis, treasury

bills, share warrants, etc., provided they possess the features of negotiability. In the following

sections, we shall study about Promissory Notes (popularly called pronotes), Bills ofExchange

(popularly called bills), Cheques and Hundis (a popular indigenous document prevalentin India), in

detail.

1) Promissory Note

Section 4 of the Negotiable Instruments 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 to or to the order of a certain person or to the

bearer of the instrument’.

Specimen of a Promissory Note

Parties to a Promissory Note

Rs. 10,000/- New Delhi

September 25, 2002

On demand, I promise to pay Ramesh, s/o RamLal of Meerut or order a sum of

Rs 10,000/- (Rupees Ten Thousand only), for value received.

To ,

Ramesh Sd/

Sanjeev

Address…….. Stamp


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There are primarily two parties involved in a promissory note. They are-

a) The Maker or Drawer – the person who makes the note and promises to pay the amount stated

therein. In the above specimen, Sanjeev is the maker or drawer.

b) The Payee – the person to whom the amount is payable. In the above specimen it is

Ramesh.

In course of transfer of a promissory note by payee and others, the parties involved may be -

a) The Endorser – the person who endorses the note in favour of another person. In the above

specimen if Ramesh endorses it in favour of Ranjan and Ranjan also endorses it in favour of

Puneet, then Ramesh and Ranjan both are endorsers.

b) The Endorsee – the person in whose favour the note is negotiated by endorsement. In the

above, it is Ranjan and then Puneet.

Features of a promissory note

a. A promissory note must be in writing, duly signed by its maker and properly stamped as per

Indian Stamp Act.

b. It must contain an undertaking or promise to pay. Mere acknowledgement of indebtedness is not

enough. For example, if some one writes ‘I owe Rs. 5000/- to Satya Prakash’, it is not a

promissory note.

c. The promise to pay must not be conditional. For example, if it is written ‘I promise to pay Suresh

Rs 5,000/- after my sister’s marriage’, is not a promissory note.

d. It must contain a promise to pay money only. For example, if some one writes ‘I promise to give

Suresh a Maruti car’ it is not a promissory note.

e. The parties to a promissory note, i.e. the maker and the payee must be certain.

f. A promissory note may be payable on demand or after a certain date. For example, if it is written

‘three months after date I promise to pay Satinder or order a sum of rupees Five Thousand only’

it is a promissory note.

g. The sum payable mentioned must be certain or capable of being made certain. It means that the

sum payable may be in figures or may be such that it can be calculated.

2) Bill of Exchange

Section 5 of the Negotiable Instruments Act, 1881 defines a bill of exchange as ‘an instrument

inwriting containing an unconditional order, signed by the maker, directing a certain person to paya

certain sum of money only to or to the order of a certain person, or to the bearer of the instrument’.


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Specimen of a Bill of Exchange

Rs. 10,000/- New Delhi

May 2, 2001

Five months after date pay Tarun or (to his) order the sum of Rupees Ten Thousand

only for value received.

To Accepted Stamp

Sameer Sameer S/d

Address Rajiv

Parties to a Bill of Exchange

There are three parties involved in a bill of exchange. They are-

a) The Drawer – The person who makes the order for making payment. In the above

specimen,Rajiv is the drawer.

b) The Drawee – The person to whom the order to pay is made.He is generally a debtor of the

drawer. It is Sameer in this case.

c) The Payee – The person to whom the payment is to be made. In this case it is Tarun. The

drawer can also draw a bill in his own name thereby he himself becomes the payee. Here the

words in the bill would be Pay to us or order. In a bill where a time period is mentioned, just

like the above specimen, is called a Time Bill. But a bill may be made payable on demand

also. Thisis called a Demand Bill.

Features of a bill of exchange

a. A bill must be in writing, duly signed by its drawer, accepted by its drawee and properly

b) stamped as per Indian Stamp Act.

c) It must contain an order to pay. Words like ‘please pay Rs 5,000/- on demand and oblige’

d) are not used.

e) The order must be unconditional.

f) The order must be to pay money and money alone.

g) The sum payable mentioned must be certain or capable of being made certain.

h) The parties to a bill must be certain.

3) Cheques

Cheque is a very common form of negotiable instrument. If you have a savings bank account or

current account in a bank, you can issue a cheque in your own name or in favour of others,thereby

directing the bank to pay the specified amount to the person named in the cheque. Therefore, a

cheque may be regarded as a bill of exchange; the only difference is that the bank isalways the

drawee in case of a cheque.


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The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a specified

banker and not expressed to be payable otherwise than on demand. Actually, a cheque is an order by

the account holder of the bank directing his banker to pay on demand, the specified amount, to or to

the order of the person named therein or to the bearer.

Features of a cheque

a. A cheque must be in writing and duly signed by the drawer.

b) It contains an unconditional order.

c) It is issued on a specified banker only.

d) The amount specified is always certain and must be clearly mentioned both in figures and

words.

e) The payee is always certain.

f) It is always payable on demand.

g) The cheque must bear a date otherwise it is invalid and shall not be honoured by the bank.

Specimen of a Cheque

………......20.......

Pay……..............................................................................................................

……....................................................................................................... or Bearer

Rupees……………………………………………… Rs.Rs.___________________

……………………………………………………

STATE BANK OF INDIA

Jawaharlal Nehru University, New Delhi – 110067

MSBL/97

6 5 3 0 0 3 1 1 0 0 0 2 0 5 6 1 0

Types of Cheque

a) Open cheque: A cheque is called ‘Open’ when it is possible to get cash over the counter at the

bank. The holder of an open cheque can do the following:

Receive its payment over the counter at the bank,

Deposit the cheque in his own account

Pass it to some one else by signing on the back of a cheque.

b) Crossed cheque: Since open cheque is subject to risk of theft, it is dangerous to issue such

cheques. This risk can be avoided by issuing another types of cheque called ‘Crossedcheque’.

The payment of such cheque is not made over the counter at the bank. It is onlycredited to the


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bank account of the payee. A cheque can be crossed by drawing two transverse parallel lines

across the cheque, with or without the writing ‘Account payee’ or ‘Not Negotiable’.

c) Bearer cheque: A cheque which is payable to any person who presents it for payment at the

bank counter is called ‘Bearer cheque’. A bearer cheque can be transferred by mere delivery and

requires no endorsement.

d) Order cheque: An order cheque is one which is payable to a particular person. In such a cheque

the word ‘bearer’ may be cut out or cancelled and the word ‘order’ may bewritten. The payee

can transfer an order cheque to someone else by signing his or her name on the back of it.

e) Ante-dated cheques: Cheque in which the drawer mentions the date earlier to the date of

presenting if for payment. For example, a cheque issued on 20th May 2003 may bear a date 5th

May 2003.

f) Stale Cheque: A cheque which is issued today must be presented before at bank for payment

within a stipulated period. After expiry of that period, no payment will be made and it is then

called stale cheque’

g) Mutilated Cheque: In case a cheque is torn into two or more pieces and presented for payment ,

such a cheque is called a mutilated cheque. The bank will not make payment against such a

chequewithout getting confirmation of the drawer. But if a cheque is torn at the corners and no

materialfact is erased or cancelled, the bank may make payment against such a cheque.

h) Post-dated Cheque: Cheque on which drawer mentions a date which is subsequent to the date

on which it is presented, is called post-dated cheque. For example, if a cheque presented on 8th

May 2003 bears a date of 25th May 2003, it is a post-dated cheque. The bank will make payment

only on or after 25th May 2003.

4) Hundis

A Hundi is a negotiable instrument by usage. It is often in the form of a bill of exchange drawn in

any local language in accordance with the custom of the place. Some times it can also be in the form

of a promissory note. A hundi is the oldest known instrument used for the purpose of transfer of

money without its actual physical movement. The provisions of the Negotiable Instruments Act shall

apply to hundis only when there is no customary rule known to the people.

Types of Hundis

Shah-jog Hundi: This is drawn by one merchant on another, asking the latter to pay the

amount to a Shah. Shah is a respectable and responsible person, a man of worth and known in

the bazaar. A shah-jog hundi passes from one hand to another till it reaches a Shah, who, after

reasonable enquiries, presents it to the drawee for acceptance of the payment.

Darshani Hundi: This is a hundi payable at sight. It must be presented for payment within a

reasonable time after its receipt by the holder. Thus, it is similar to a demand bill.

Muddati Hundi: A muddati or miadi hundi is payable after a specified period of time. This

is similar to a time bill.

There are few other varieties like Nam-jog hundi, Dhani-jog hundi, Jawabee hundi, Jokhami

hundi, Firman-jog hundi, etc.


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Features of Negotiable Instruments

a) A negotiable instrument is freely transferable. Usually, when we transfer any property

tosomebody, we are required to make a transfer deed, get it registered, pay stamp duty, etc.

But, such formalities are not required while transferring a negotiable instrument. The

ownership is changed by mere delivery (when payable to the bearer) or by valid endorsement

and delivery (when payable to order). Further, while transferring it is also not required to give

a notice to the previous holder.

b) Negotiability confers absolute and good title on the transferee. It means that a person who

receives a negotiable instrument has a clear and undisputable title to the instrument.

However, the title of the receiver will be absolute, only if he has got the instrument in good

faith and for a consideration. Also the receiver should have no knowledge of the previous

holder having any defect in his title. Such a person is known as holder in due course

c) A negotiable instrument must be in writing. This includes handwriting, typing, computer

print out and engraving, etc.

d) In every negotiable instrument there must be an unconditional order or promise for payment.

e) The instrument must involve payment of a certain sum of money only and nothing else. The

time of payment must be certain. It means that the instrument must be payable at a time

which is certain to arrive. If the time is mentioned as ‘when convenient’ it is not a negotiable

instrument. However, if the time of payment is linked to the death of a person, it is

nevertheless a negotiable instrument as death is certain, though the time thereof is not.

f) The payee must be a certain person. It means that the person in whose favour the instrument

is made must be named or described with reasonable certainty. The term ‘person’ includes

individual, body corporate, trade unions, even secretary, director or chairman of an

institution. The payee can also be more than one person.

g) A negotiable instrument must bear the signature of its maker. Without the signature of the

drawer or the maker, the instrument shall not be a valid one.

h) Delivery of the instrument is essential. Any negotiable instrument like a cheque or a

promissory note is not complete till it is delivered to its payee. For example, you may issue a

cheque in your brother’s name but it is not a negotiable instrument till it is given to your

brother.

i) Stamping of Bills of Exchange and Promissory Notes is mandatory. This is required as per

the Indian Stamp Act, 1899. The value of stamp depends upon the value of the pronote or bill

and the time of their payment.

Distinction between a Promissory Note and a Bill of Exchange

BASIS FOR COMPARISON BILL OF EXCHANGE PROMISSORY NOTE


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Meaning Bill of Exchange is an instrument

in writing showing the

indebtedness of a buyer towards

the seller of goods.

A promissory note is a written promise

made by the debtor to pay a certain sum

of money to the creditor at a future

specified date.

Defined in Section 5 of Negotiable

Instrument Act, 1881.

Section 4 of Negotiable Instrument Act,

1881.

Parties Three parties, i.e. drawer, drawee

and payee.

Two parties, i.e. drawer and payee.

Drawn by Creditor Debtor

Liability of Maker Secondary and conditional Secondary and conditional

Can maker and payee be the

same person?

Yes No

Copies Bill can be drawn in copies. Promissory Note cannot be drawn in

copies.

Dishonor Notice is necessary to be given to

all the parties involved.

Notice is not necessary to be given to

the maker.

Distinction between a Cheque and a Bill of Exchange

BASIS FOR

COMPARISON

CHEQUE BILL OF EXCHANGE

Meaning A document used to make easy payments on

demand and can be transferred through hand

delivery is known as cheque.

A written document that shows the

indebtedness of the debtor towards

the creditor.

Defined in Section 6 of The Negotiable Instrument Act,

1881

Section 5 of The Negotiable

Instrument Act, 1881

Validity Period 3 months Not Applicable


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Payable to bearer on

demand

Always Cannot be made payable on demand

as per RBI Act, 1934

Grace Days Not Applicable, as it is always payable at the

time of presentment.

3 days of grace are allowed.

Acceptance A cheque does not require acceptance. Bill of exchange needs to be

accepted.

Stamping No such requirement. Must be stamped.

Crossing Yes No

Drawee Bank Person or Bank

Noting or Protesting If the cheque is dishonoured it cannot be noted or

protested

If a bill of exchange is dishonoured it

can be noted or protested.

Definition of Endorsement:

Sec 15 of Indian Negotiable Instruments Act of 1881 “When the maker or holder of

negotiable instruments signs the same on the back or face there of or on a slip of a paper annexed

there to he is said to endorse the same, and is called the endorser”.

Kinds of Endorsement: 1. Black Endorsement: According to sec 16(1) of Indian Negotiable Instrument Act “if the

endorser signs his name only, the endorsement is said to be blank” An endorsement in blank as

it is generally called general endorsement specified no endorsee, and as such the instruments

becomes payable to the bearer. Hence cheques endorsed in blank can be negotiated by mere

delivery.

2. Special Endorsement: It is otherwise called a full endorsement Sec 16(1) of the N.I. Act lays

down that “If adds a direction to pay the amount mentioned to or to the order of a specified

person the endorsee is said to be in full and the person so specified is called the endorsee of the

instrument.” An instrument with a blank endorsement is converted into a special endorsement

by a holder by specifying the name of an endorsee and putting his signature.

3. Restrictive Endorsement: A restrictive endorsement is one which limits the further

negotiation of an instrument. The endorsee in such cases cannot further end it.


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4. Conditional Endorsement: This is not a common from of endorsee. It may either limit the

liability of the endorsement create some liability to the endorsement to receive the payment of

the instrument. That is, an endorsement may be preceded by a certain condition which should

have been fulfilled be the endorsement obtaining payment. The endorsee’s right to receive

money is subject to fulfillment of a particular.

5. Sans Recourse Endorsement: It is an endorsement which limits the liability of the endorser.

The effect of this endorsement is, to make the endorser free from all liability to any subsequent

holder.E.g.: A cheque payable to D. David is endorsed as follows “pay to rabindran or order

without recourse to me”

6. Facultative Endorsement: It is an endorsement whereby, the endorser waives some of his

rights on the instrument.E.g.: The facultative endorsement might read as follows “Pay to raja or

order notice of dishonor waived”- D.David.

7. Per Pro Endorsement: It is an endorsement made by authorized agent prior information about

the delegation of authority to the agent must have been given to the banker otherwise a banker

is not legally bound to accept this type of endorsement.

Crossing of cheques

Meaning of crossing of cheques:

Crossing of a cheque means drawing across the face of the cheque two parallel transverse

lines with or without the words “And company” or “Not Negotiable” or Account Payee” between the

parallel transverse lines.

Types of crossing:

1) General crossing:

Sec 123 of the Indian Negotiable Instruments Act 1881 defines a general crossing as

“where a cheque bears across its face an addition of the words and any bank company or any

abbreviation there of between two parallel transverse lines either with or without the worlds” not

negotiable “that addition shall be deemed a crossing and the cheque shall be deemed to be

crossed generally.”

General crossing means drawing across the face of a cheque two parallel

Transverse lines with or without the words “And company” or “not negotiable” or “account

payee” between the parallel transverse lines.

Examples:


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Essential features of general crossing:

1. There must be two parall transverse lines.

2. The lines must be drawn on the left hand top corner of the cheque.

3. Words, such as “Not Negotiable” or Account Payee also do not from an essential part of

general crossing so they may or may not be written.

4. The paying banker is required to pay the amount of a generally crossed cheque to another

banker but not to the holder at the counter.

5. General crossing makes a cheque safe by making it difficult for wrong person to obtain its

payment.

2) Special Crossing:

Section-124 of the Indian Negotiable Instruments Act 1881 “ where a cheque bears across

its face an addition of the name of a banker with or without the words “not negotiable” that addition

shall be deemed a crossing and the cheque shall be deemed to be crossed specially and to be crossed

to that banker.”

Special crossing means writing across the face of a cheque the name of some banker with

or without lines or words such as “not negotiable or account payee”.

Examples:

Essential features of special crossing:

1. A special crossing requires the name of the collecting banker.

2. The two parallel transverse lines are not essential.

3. Words such as “not negotiable or account payee” do not form a necessary part of a special

crossing.

4. The paying banker is required to

5. Pay the amount of a specially crossed cheque only to the banker named in the crossing.

6. Special crossing makes a cheque safer than general crossing.

Difference between a general crossing and special crossing


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1. Two parallel transverse lines are essential for a general crossing but such lines are not

essential for a special crossing.

2. The words “And company” may or may not be written a general crossing But these words

are not written in a special crossing.

3. In the case of a general crossing the name of the collecting banker is not written on the face

of the cheque But in the case of a special crossing, the name of the collecting banker must

be written on the face of the cheque

4. The amount of a generally crossed cheque can be paid by the paying banker to any banker

but the amount of a specially crossed cheque should be paid by the paying banker only to

the banker named in thee crossing or his agent for collection.

5. Special crossing makes a cheque safer than general crossing.

6. Conversion of a generally crossed cheque into a special crossing cheque does not amount

to material alteration. So it does not require the drawer’s confirmation for payment. On the

other hand, conversion of a specially crossed cheque into a generally crossed cheque

amounts to material alteration. So it should not be paid without the drawer’s confirmation.

3) Restrictive crossing / account payee crossing - In this, crossing of cheques is done by writing

Account Payee or Account Payee only in between the crossing lines.

4) Double crossing - When a cheque bears two special crossing, is called Double Crossing. In this

second bank act as agent of the first collecting banker. It is made when the banker in whose

favour the cheque is crossed does not have branch where the cheque is paid.

SBI

To

ICICI bank

as agent of collection

Banking Operations II semester B.Com Banking law and operations

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Banking Operations

Collecting Bankers

Meaning of a collecting bankers:

The collecting banker is the banker who collects cheques drawn upon other banker for and on

customers. He is called the collecting banker as he behalf of his undertakes the work of collection of

cheques.

Procedure followed in collection of cheques:

The following procedure is adopted by a collecting banker for the collection of cheques drawn

upon another banker.

First, he receives from his customers the cheques which are required to be collected. Then, he

presents that cheque to the drawer or paying banker either though clearing or through post for

payment. If the cheques presented to the paying banker is honoured or realized, he credit the amount

realized to his customers account and informs the customer about the realization of the cheques

within a reasonable time. In case the cheques presented for payment is dishonoured he gives a

notices to his customer about the dishonour of the cheque within a reasonable time so as to enable

the customer to take necessary steps to receive the amount of the cheque from the parties liable

thereto. The collecting banker charges his customers account with a small amount of commission for

his service whether the cheque is realized or dishonoured.

Capacities in which Banker collects cheques:

While collecting his customer’s cheques a banker may act either

1. As a holder for value.

2. As an agent of his customer for collection.

1) Collecting Banker as a holder for value:

A collecting banker becomes a holder for value is he has paid the value of the cheque to the

customer before the cheque to the customer before the cheque is actually collected. In other words a

collecting banker becomes a holder for value when he collects his customer’s cheque for himself and

not for the customer.

In the following circumstances a collecting banker becomes a holder for value.

a) When he acquires from the customers the cheque meant for collection in exchange for cash.

b) When he pays to the customers the amount of the cheque deposited for collection before it is

collected.

c) When he expressly or impliedly allows the customer to draw against the cheque deposited

for collection before it is collected.

d) When he receives from the customer the cheque meant for collection in settlement of an

existing debt\advance.


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e) When he leads to the customers on the strength of the cheque deposited for collection

f) When he exercises his lien on the cheque deposited for collection for any amount due from

the customer.

Rights of the collecting Banker as a holder for value: a) As he has already paid the value of the cheque to the customer he

can receive the amount of the cheque in his own name and retain the

amount for himself.

b) In case the cheque accepted for collection is dishonor he can recover the amount from all

or any of the endorsers of the cheque.

c) If any of the endorsements on the cheque accepted for collection is forzed, he can recover

the amount from all or any of the endorsers subsequent to the forgery.

d) If his customer has no title or has a defective title to the cheque accepted for collection, he

can recover the amount from all the previous endorsers of the cheque as holder in due

course.

Liabilities of the collecting banker as a holder for value:

a) If he collects for himself an uncrossed cheque bearing any forged

endorsement, he becomes liable to the true owner of the cheque.

b) If he collects for himself an uncrossed or a crossed cheque to which his customer has a

title or has a defective title, he becomes liable to the true owner of the cheque.

2) Collecting Banker as an agent of his customer:

A collecting banker becomes an agent of his customer as he collects a cheque for and a behalf of

his customer. In other words, he becomes an agent of his customer, if he credits his customers

account with the amount of the cheque after it is actually realized from the drawee banker (i.e. the

paying banker)

Rights of collecting banker as an agent of his customer:

When a collecting banker collects a cheque as an agent of his customer he has no rights of his

own. His rights or title to the cheque will be the same as that of the customer of his customer has a

good title to the cheque he too will have a good title to the cheque on the other hand if his customer

has no title or has a defective title to the cheque he too will have either no title or defective title to the

cheque.

Liabilities of collecting banker as an agent of his customer:

a) While acting as an agent of his customer, if he fails to do his dustiest to his customer properly

and if his customer suffers losses as a direct result of his negligence, he becomes liable to

make good the losses suffered by his customer.

b) If he, as an agent of his customer collects a cheque bearing any forged endorsement or a

cheque to which his customer has no title or has a defective title, he becomes liable to

compensate the third party i.e. the true owner of the cheque. Under the doctrine of conversion.

Duties of a collecting Banker:

a) Exercise reasonable care and diligence in his collection work:


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When a banker collects a cheque for his customer, he acts only as an agent of the

customer. As an agent he should observe atmost care when presenting a cheque or a bill for

payment. Reasonable care and diligence depends upon the circumstances of each case.

b) Present the cheque for collection without any delay:

The banker must present the cheque for payment without any delay. If there is delay in

presentment, the customer may suffer losses due to the insolvency of the draw or insufficiency

of funds in the account. In such cases, the banker should bear the loss.

c) Notice to customer in the case of dishonor of a cheque:

If the cheque, he collects has been dishonored, he should inform his customer without

any delay. The negotiable instruments act has prescribed a reasonable time for giving the notice

of dishonor. If he fails to do so, and consequently, any loss arises to the customer, the banker has

to bear the loss.

d) Present the bill for payment:

The banker should present bills for payment in proper time and at proper place. If he

fails to do so, and if any loss occurs to the customer, then the banker will be liable. According to

section 66 of the negotiable instrument act a bill must be presented for payment on maturity

section 22 lays down that the maturity of the bill is the date on which it is due for payment, to

which 3 days of grace are added. Thus the rules for calculating the maturity dates are given in sec

23, 24 and 26 of the negotiable instruments act.

e) Protest and note a foreign bill for non-acceptance:

In case of dishonor of a bill by non-acceptance or non-payment, it is the duty of the

collecting banker to inform the customer immediately generally he returns the bill to the

customer. If the bill in should have it protested and noted by a notary public and then forwarded

it to the customer.

Conversion by collecting banker:

Conversion refers to the unlawful taking, using, disposing\destroying of goods or property

which is inconsistent with the owner’s right of possession. In other words it means depriving the true

owner or the possession and ownership of the goods\property to which he is entitled.

The following are the common circumstance under which a collecting banker may be held liable

for conversion:

1. If he collects for a customer a bill exchange or a promissory note bearing a forged

endorsement or defective title.

2. If he takes as a holder for value a bill of exchange, a promissory note or a cheque bearing a

forged endorsement or defective title.

3. If he collects a cheque crossed with the words “Account payee” for a person other than thee

payee.


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4. If he delivers a property entrusted to him for safety custody to a wrong person (i.e. person

other then the depositor.)

Protection to collecting Banker:

The protection to the collecting banker is laid down in sec 131&131a of the Indian Negotiable

Instruments Act of 1881.

Sec 131 gives protection to the collecting banker in respect of a cheque bearing a forged

endorsement or in respect of a cheque to which the customer has no title or has a defective title. The

protection given under sec 131 can be claimed by the collecting banker only of the following

conditions are satisfied.

a) This protection is available only for a crossed cheque. Which has no protection is granted

for an open or uncrossed cheque, as it need not be collected through a banker.

b) This protection can be claimed only for that cheque which has been crossed before it

reaches the collection banker.

c) This protection can be claimed only when the collecting banker has collecting banker has

collected the cheque as an agent for his customer. If he collects the cheque for himself as

holder for value or for anon customer, he will not get protection.

d) This protection can be claimed only if the collecting banker has collected the cheque in

good faith and without negligence.

Protection In Respect Of Bank Drafts:

Section 131A of the Negotiable Instruments Act of 1881 gives protection to the collecting

banker in respect of a draft, bearing a forged endorsement or in respect of a draft to which the

customer has no title or defective title. The protection given under Sec 131A can be claimed by the

banker only if all the conditions laid down in Sec 131A are satisfied.

Paying Banker

Meaning:

The banker on whom a cheque is drawn or the banker who is required to pay the cheque drawn on

him by a customer is called the paying or drawee bank.

According to section-31 of the negotiable instrument act 1881 a banker is bound to honour his

customer’s cheques, to the extent of the funds available and the existence of no legal bar to payment

further, the cheque must be in order and it must be duly presented for payment at the branch, where

the account is kept. The paying banker should use reasonable care and diligence in paying a cheque,

if the paying banker wrongfully dishonours cheque, he will be asked to pay heavy damages.

Precautions before honouring a cheque:

The following precautions should be observed by the paying banker:

1) Presentation of cheque:


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A paying banker should note whether the presentation of the cheque is correct. If can be found

out by paying attention to the following factors:

a) Type of the cheque: Before honouring a cheque, he must find out the type to which it

belongs, cheques may generally be of two types-open or crossed. If it is an open, the

payment may be made at the counter. If it is crossed, the payment must be made only to a

fellow banker. If it is specially crossed the payment must be specifically made to that

banker, in whose favour it has been crossed.

b) Branch: The paying banker should see whether the cheque is drawn on the branch where

the account is kept. If it is drawn on another branch, without any prior arrangement, the

banker can safely return the cheque.

c) Account: Even in the same branch, a customer might have opened two or more account.

For each account, a separate cheque book would have been issued. Hence the paying

banker should see that the cheque of one account is not used for withdrawing money from

another account. For withdrawal of money from an account, only the cheque relating to that

account must be used for withdraws of money.

d) Banking hours: The paying banker should also note whether the cheque is presented during

the banking hours on a business day. Payment outside the banking hours does not amount

to payment in due course. However, a banker is justified in extending the time during

peak days, for those who are still waiting for encashing a cheque.

The hours of banking business are statutority laid down even public holidays are notified

under the negotiable instrument act.

e) Mutilation: If the cheque is torn into pieces or cancelled or mutilated, then, the paying

banker should not honour it. He should return the cheque for the drawer’s confirmation. In

case a cheque is torn accidentally, the drawee must confirm it by writing such words as

“accidentally torn by me” and affixing his full signature. A cheque torn into two or more

pieces is generally returned with a remark “mutilated”.

2) Form of the cheque:

Before honouring a cheque, banker should see the form of the cheque and find out whether it is

regular or not.

a) Printed form: The cheque must be in the proper form. It must satisfy all the requirements of

law. The customer should draw cheques only on the printed leaves, supplies by the banker

are, failing which, the banker may refuse to honour it.

b) Unconditional order: The cheque should not contain any condition. If it is a conditional

one, the paying banker’s position will become critical and he may not honour it.

c) Date: Before honouring a cheque, the bank must see whether there is a date on the

instrument. If it is undated, it cannot be regarded as a valid instrument. The cheque can be

paid if it has not become stale by that time. A cheque which is presented after six months,

from the date of its issue, is a stale one. If a cheque is post-dated he should honour it only

on its due date.

d) Amount: The next important precaution is that the banker should see whether the amount

stated in the cheque both in words and figures, agree with each other. If the amount is

stated only in figures, the banker should return it with a remark “amount required to be

stated in words”. However, if the amount is stated only in words, the banker may honour it.

Supposing, there is a different in the amount stated in words and figures, then the banker

can take any one of the following courses available to him.

1. He can dishonour the cheque.


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2. He can honour the amount stated in words or.

3. He can honour the smaller amount.

e) Material alteration: A paying banker should be very cautious in finding out the alterations

that may appear on a cheque. If there is any material alteration, the banker should return it

with a memorandum “Alteration required drawer’s confirmation”. If the alteration is

confirmed by the drawer by means of his full signature, then the banker can have no

objection to honour it.

3) Sufficient balance:

There must be sufficient balance to meet the cheque. If the funds available are not sufficient to

honour a cheque, the paying banker is justified in returning it. Before honouring a cheque, he

must check up the present state of his customer’s account. For this purpose, he must compute the

balance in the account of his customer. He should not disclose the state of affairs of his

customer’s account to anybody. He must not offer a part of the amount of the cheque, if the

balance is insufficient to meet the full amount of the cheque. Under certain circumstances, a

banker, in order to protect the customer, may combine the accounts and pay a cheque. Provided if

the customer’s have more than two accounts in the bank. Hence the paying banker should pay a

special attention to the computation of balance.

4) Signature of the drawer:

The duty of paying banker is to compare the signature of his customer found on cheque with that

of his specimen signature. If he fails to do so and he pays a cheque which contains a forged

signature of the drawer, then the payment will not amount to payment in due course. If the

signature has been two skillfully forged to find it out by the banker even then the banker is liable.

However if the customer facilitates the forgery of his signature by his conduct, then the banker

will be relieved from his liability.

5) Endorsement:

Before honouring a cheque, the banker must verify the regularity of endorsement, if any that

appears on the instrument. It is more so in case of order cheque, which requires an endorsement

before its delivery.

6) Legal bar:

The existence of legal bar like garnishee order limits the duty of the banker to pay a cheque.

7) Minor precautions:

A paying banker should look into the following minor details also before honoring a cheque.

a. He must see whether there is any order of the customer not to pay a cheque.

b. He must see whether there is any evidence of misappropriation of money.

c. He must see whether he has got any information about the death or insolvency or insanity

of his customer.

Circumstances under which a cheque can be dishonoured:

Meaning of dishonour of a cheque:

A cheque is said to be dishonoured when it is not paid by the paying banker on presentation.


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There are certain circumstances under which the cheques are dishonoured. They are:

a) When the cheque is a conditional one (i.e. when a condition is attached by the drawer of the

cheque to his order), the paying banker can dishonour that cheque.

b) When the customer stops the payment of any cheque, the banker must refuse to make the

payment for that cheque. If the banker fails to stop the payment, he becomes liable to compensate

the customer.

It is true that the paying banker is bound to carry out the stop payment, only if the following

conditions are satisfied:

The instruction is in writing.

It is signed by the drawer.

It mentions clearly the details, i.e. slumber date, amount and payee of the cheque

whose payment should be stopped.

c) When the banker receives a notice from the holder about the loss of the cheque, he cannot ignore

that notice and make the payment. However, in such a case banker should direct the holder to

obtain a stop payment order from the drawer.

d) On receipt of a notice of the drawer’s death, the banker must stop the payment of cheques issued

by the drawer.

The banker should not act on mere rumors about the drawer’s death.

To the banker, it is the time of receipt of notice of the drawer’s death that is important, and not

the actual time of the drawer’s death.

e) When the banker receives a notice of the drawer’s insolvency, he must dishonour the cheque

issued by the customer.

f) When a garnishee order is served on the banker by a court attaching the customer’s funds, the

banker is bound to comply with the garnishee order.

g) When the banker receives a prohibitive order from any government authority like, income-tax

authority, sales tax authority, etc, freezing the customer’s funds, the banker is required to comply

with that prohibitive order.

h) If the bank account is trust account and if the banker comes to know that the customer, who is

operating the trust account intends to use the funds in the trust account in breach of trust for his

personal use, the banker must stop payment for the cheques issued by the trustee.

i) If a cheque is presented or payment after the customer’s account is closed, the banker must refuse

payment for a cheque.

j) The banker must not make payment for a cheque bearing the forged signature of the drawer; the

banker must not make the payment for such account.

k) When a crossed cheque is presented at the count for payment.

l) If the drawer is a foreigner, and if there is an outbreak of war with the drawer’s country, the

banker must refuse payment for the cheque issued by that customer during the time of war.

m) When the drawer’s signature on the cheque differs from his specimen signature, the banker may

refuse payment.

n) If a cheque is post-dated and is presented for payment before its due-date, the banker may refuse

payment for the same.

o) When a cheque is undated, the banker may refuse the payment.

p) When a cheque bears an incomplete date, the banker may refuse payment.

q) If a cheque has become state, payment may be refused.

r) If a cheque is presented for payment outside banking hours, payment may be refused.


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s) If the amount of the cheque stated in words differs from the amount stated in figures, the banker

may refuse payment.

t) If a cheque is mutilated and is not confirmed by the drawer payment may be refused by the

banker.

u) If the cheque is not clearly written, payment may be refused.

v) If a cheque bears any material alteration, the banker may refuse payment.

w) When the cheque is presented for payment at a branch other than the one where the drawer has

the account.

x) If a joint account is to be operated by all jointly and the cheque issued on that account is not

signed by all the joint account holders, the banker may refuse payment.

Answer to a dishonoured cheque:

Even though it is not obligatory on the part of paying banker to give reasons while dishonouring a

cheque, in practice, he gives such reasons to satisfy the rules of clearing hours. In giving the reasons,

he must be very cautious and must see that his answer neither damages the customer’s credit nor

misleads the party presenting the cheque. Most of the banks have slip containing the reasons printed

on it and they put tick mark against the appropriate reasons.

Generally, the answer given by the banker or slip is very brief. The following are some of the

answers commonly given for dishonoured cheque.

a. R.D (refer to drawer).

b. N.S (not sufficient).

c. N.F (no funds).

d. N.E (no effects).

e. E.I (endorsement irregular).

f. E.N.C (effects

g. N.A.F (not arrangement

h. E.A (exceeds arrangement).

i. W.& F.D (words & figures

PROTECTION TO PAYING BANKER:

The paying banker is given some statutory protection in respect of risk or difficulties by him.

The protection to the paying banker is laid down in section-85(1), (2), 85A, 89 and 128 of the

Negotiable Instruments Act of 1881.

a) Protection in respect of an order cheque bears forged endorsement of the payee:

Section-85(1) of Indian negotiable instrument act 1881 give protection to the paying banker respect

of payment mode on an order cheque which the payee’s endorsement (i.e. payee’s sign) is forged.

This protection is given to the paying banker only on the fulfillment of two conditions.

The endorsement of the payee must be correct.

The payment must be a payment in due course.

This protection is granted to the paying banker on the ground that is difficult for him to verify the

genuineness of the signature of the payee as he does not have the payee’s specimen signature.


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b) Protection to a case of forgery of any subsequent endorsement

According to section-16(2) extends this protection to a case of forgery of any subsequent

endorsement (i.e. the forgery of any endorsee’s signature) this protection is given to the paying

banker only on the fulfillment of two conditions:

The endorsement of the endorsee must be regular or correct.


c) Protection in respect of a bearer cheque:

Section-85(2) gives protection to the paying banker in respect of a bearer cheque. “Where a cheque

is originally expressed to be payable to bearer, the drawee is discharge by payment in due course to

the bearer thereof not withstanding any endorsement whether in full or in blank appearing there on,

and such endorsement exclude further negotiation”.

As such, the paying banker is protected is following conditions are satisfied:

There is matting to arouse suspicious about the bearer of the cheque.

The payment is made to the bearer in due course.

d) Protection in respect of an order draft bearing forged endorsement:

Section-85A gives protection to the paying banker in respect of payment made on an order draft

bearing forged endorsement. “Where any draft, that is, an order to pay money, drawn by one office

of a bank upon another office of the same bank for a sum of money paying to order on demand,

purports to be endorsed by on behalf of the payee, the bank is discharged by payment in due course”.

This protection is given to the paying bank only on the fulfillment of the two conditions:

The endorsement on the draft must be regular.


e) Protection in respect of a materially altered cheque:

Section-89 protects the paying banker in respect of paying made on a materially altered cheque.

Normally, a paying banker cannot claim any statutory protection for a materially altered cheque.

Negotiable Instrument act gives protection in case materially, altered cheque provided:

The banker is liable to pay.

An alteration is not apparent.

The banker has made payment in due course.

f) Protection in respect of crossed cheque:

Section-128 gives protection to paying banker in respect of payment made on a crossed

cheque to a party other than the true owner of the cheque. According to this section, if a

banker pays a crossed cheque in due course, he is discharged from liability, even though the

amount of the cheque is not received by the true owner. Payment of crossed cheque in due

course means payment to any banker, when it is crossed generally, when it is crossed

specially.


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PAYMENT IN DUE COURSE:

To claim protection under section-85, the cheque should have been paid in due course. Section-10 of

the Indian Negotiable Instrument act defines payment in due course as follows:

“payment in due course means payment in accordance with the apparent tenor of the instrument, in

good faith and without negligence, to any person in possession there of, under circumstances which

do not afford a reasonable ground for belied that, he is not entitled to receive payment of the amount

therein mentioned”.

Thus concept of payment in due course has three essential features:

a) Apparent tenor: The payment should be made in accordance with the apparent tenor of the

instrument i.e. the payment should be made in accordance with the intention of the parties as it

appears on the face of the cheque.

b) Payment in good faith and without negligence: The payment should be made honestly and

with reasonable skill and care. A payment made negligently will not be a payment in due course.

c) The payment must be made to a person who is in possession of the cheque: The payment

must be made to the lawful holder. If the payment is not made to the lawful holder, the paying

banker cannot get the statutory protection.

Holder

Holder is the person who is entitled in his own name to the possession of a negotiable instrument.

Normally a payee or endorsee is a holder. Please note that holder may be or may not be with

possession of the Instrument. If the payee or endorsee dies, then the legal heir is the holder . If there

is a forged endorsement then , last endorsee is the holder. If it is a bearer cheque, the person in whose

name it is made is a holder. If it is damaged the payee or last endorsee is the holder. If it is stolen,

then also payee or last endorsee is holder because a thief cannot become holder. The holder has the

right to obtain a duplicate of instrument is lost. A holder can cross a cheque if it is not already

crossed.

Holder in Due Course

Holder in due course means a person who must have the possession of the instrument. This is the

basic difference between the Holder and Holder in Due course. Holder in Due course must obtain the

instrument in Good Faith. If the instrument bears not-negotiable crossing , then the NO person can be

a holder in due course. If the instrument bears A/C payee crossing and restricted endorsement then

NO person can be a holder in due course. Forgery / theft / deceit do not convey any title.

Bank Lending Lending of funds constitute the main business of bank. The major portion of a banks fund is

employed by way of advances which enable trade, commerce and industry to meet their financial

requirements.


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Principles of sound lending:

While lending a banker is required to observe certain principles. These principles are called as

principles of sound lending or good banking lending policy. The traditional principles of sound bank

lending are:

1. Saftey:

The banker should ensure that his funds will come back to him in the normal process without taking

any legal action on without realizing the security along with interest. He should give loans and

advances to those persons who have unquestionable records of honesty and good faith. They should

have good credit standing; depending upon his assets it is better to take collateral securities in

addition to personal security.

2. Liquidity:

It is the capacity of the banker to repay the deposits on demand. He should see that the funds which

are given as loans will come back to him as quickly as possible. He should give loans for short

period and if he gives for long-term he should take into consideration the position of the borrower.

3. Purpose:

Before giving loans and advances banker should see for what purpose the borrower needs loans and

advances. The purpose of borrowing has direct affect on capacity of borrower to repay the loan. If

the purpose is productive it is easy for the banker to get back the amount. If the purpose is non-

productive it becomes a burden on the borrower to return it back. Therefore, banker should give

loans and advances only to productive purpose and he should not give loans for anti-social illegal

activities like smuggling, holding large stock, etc.

4. Profitability:

A traditional commercial bank is essentially a profit making institution so it has to employ its funds

profitability to meet its expenses and to pay dividends to its share holders.

5. Security:

Banker should take some assets as collateral security and he should take only those assets which are

having fixed value, price, ready market and which can be efficiently managed.

6. Diversification:

By spreading on diversification of advances a banker will be able to spread the risk involved in

lending. He should spread his advances over a large number of borrowers over a good number of

industries, over a wide geographic area and over different types of securities.

7. Margin:

While giving the secured loan banker gives loan for an amount which is less than the realizable value

of the security taken. The difference between the realizable value of security and the loan sanctioned

is called margin. Banker should maintain a good amount of margin because there may be fluctuations

in the price of security.

8. National interest:


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He should give more interest to key sections. Key sections means which will have direct effect on

public economy like agriculture etc. he should give more advances for productive purpose which will

increase employment opportunities and standard of living.

TYPES OF ADVANCES:

Banker provides financial advances by:

Overdraft.

Loan.

Cash credit.

Discount of bills.

On the basis of security loan can be classified into:

1. Against guarantee:

Guarantee is a contract where by the guarantor agrees to pay the debt of another person called

as principal debtor in case the principal debtor fails to repay his debts.

Types of guarantee:

a. Specific guarantee: It is guarantee for a particular debt on for a certain amount. The

liability of the guarantor revokes (cancels) as an when the amount is repaid.

b. Continuing guarantee: It is for a series of transactions the guarantor can revoke his

guarantee by giving a notice for the future transactions. It is also called as running

guarantee and the guarantor will be liable for all transactions entered into before the

notice is given.

The difference between specific and continuing guarantor:

A specific guarantee is for a particular debt where as continuing guarantee is for a series of

transactions.

A specific guarantee cannot be revoked by the guarantor until the debt is repaid. A continuous

guarantee can be revoked in respect of future transactions by giving a notice to the creditor.

From the point of the banker continuing guarantee is safer than specific guarantee.

2. Through collateral securities:

When the banker takes some tangible assets as security in addition to the personal security it

is called collateral security.

Methods of creating charge:

Lien: It is right of the creditor to retain any property of the debtor until the debtor

clears the debt.

Features of lien:

a. Lien is related only to movable property.


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b. It has no agreement.

c. There is no transfer of ownership.

d. Lien is only the right to retain and not to sell but in case of banker he is having the right to

sell the property also.

Pledge: it is a bailment of goods as security for payment of a debt on performance of a promise. In

other words, a pledge is a contract where by a borrower offers his movable property to his lender as a

security for the amount borrowed on the understanding that the property will be returned to the

borrower when the debt is repaid.

Features of pledge:

a. There is an agreement.

b. It is related to movable property.

c. There is transfer of actual position of goods.

d. The lender is not only having the right to retain the property but he can sell the property when he

falls to repay the amount.

Difference between pledge and lien:

o A lien is a right of a creditor to retain the property of his debtor for the amount due. A pledge

is a bailment of property by the borrower as a security for an advance.

o In case of lien the property of the debtor can be retained either for a specific debt on for a

general debt but in case of pledge the property of the borrower can be retained only for

specific debt.

o The holder of a lien had a right only to retain the property but a pledge has not only the right

to retain the property but also to sell the property.

o To a creditor a pledge is better than a lien from the point of security.

Hypothecation: it is a method of creating equitable charge on movable property in favour of creditor

without transferring the possession on ownership of the property. There will be transfer of possession

and ownership only in case of default in repayment of loan by the borrower.

Features of Hypothecian:

a. It is a mode of creating charge on movable property.

b. It is only a method of creating equitable charge.

c. There is no transfer of possession or ownership.

d. Rights of the lender over the property depend upon the conditions stated in the letter of

Hypothecian.

e. It is not safe like pledge.

Mortgage: It is made by creation of charge on immovable properties and there is transfer of

interest in a specific immovable property by one person to another for securing the money. The

charge is created through a document called “mortgage deed”.


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Features of Mortgage:

a. It is a method of creating charge on specific immovable property.

b. There is no transfer of possession of property.

c. There is only a transfer of interest in specific immovable property.

Assignment: it is an agreement by which the right, interest on title in a property is transferred by

one person to another. The person who transfers the title is called as assigner and the person who

receives the legal title is called assignee. Assignment is done by endorsement and it is a popular

type of creation of change on life insurance policy and fixed deposit receipt etc.

LOANS AGAINST VARIOUS ITEMS:

a. Advancing against goods: Banker gives loans against the goods on the basis of Hypothecian.

Advantages:

o Bankers are having some tangible assets as security.

o If the goods are necessaries of life they will not have wide fluctuation.

o When compared to immovable property it is relatively very easy to realize and sell the goods.

o It is very easy to find out the market value of goods are branded and standardized.

o Advancing against goods is for very short term period it is easy for the banker to maintain

liquidity in his funds.

o Expenses involved are relatively very easy.

o In case if the borrower makes any default endorsement is easy because it does not include any

legal requirements for recovering or taking charge on security.

o Banker through providing loans and advances against the goods help the people to conduct

trade in goods and to get the necessary commodities easily and cheaply.

Disadvantages:

o There may be determination in the quality of goods.

o There is loss of weight in quality because of storage and value of security reduces.

o There is possibility of fraud by borrower both in respect of quality and quantity of goods.

o If the goods are not standardized it is very difficult to find out the market value.

o If the banker has taken away any fashionable goods as security there is possibility of fall in

demand and price because of sudden change in fashion.

o There is a problem of storage of goods because of each of storage facility.

o Look of organized markets for goods in many countries may cause problem to the banker in

realizing the goods.

o Giving loans against goods involves a lot of derical work because banker has to give regular

visit and inspect property the goods stored.

Precautions:


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o Banker should give loans and advances only to those who are honest and trustworthy. There is

possibility of practicing fraud in the quality and quantity of goods given as security therefore a

banker should give loans only to those who are honest customers.

o Before giving loans banker should see that whether the customer has got amount of practical

experience in the business.

o Banker has to confirm himself that the borrower is having license to deal in goods from the

concerned authorities.

o Banker should give loans and advances only for marketing and transportation and not for

speculation.

o Before giving loans and advances banker should ascertain marketable value of the goods.

o He has to maintain a minimum 30% of margin.

o He should make proper selection of goods as security. He should accept only such goods which

are having ready such goods which are having ready market and which is not having fluctuation

in price.

o Banker should ascertain the title of the customer over the goods given as security by verifying

the related documents.

o Banker should inspect the goods personally and as to satisfy himself regarding the quality,

quantity and price of the goods given as security.

o Banker should insist the customer to take insurance against the goods.

o Banker should insist the customer to put a sign board stating that the goods are hypothecated to

the banker.

o Banker should follow the directions of reserve bank while advancing against certain type of

commodity.

b. Lending against life insurance policy: a life insurance is a contract between the insurance

company and the person who purchases the life policy the insurance company is called insurer

and the person who purchases the policy is called insured. The insurer agrees to pay the insured a

specified sum of money on the event of death of insured to his legal heirs or to the insured himself

after the lapse of certain period of a consideration. The consideration is called premium.

Advantages:

o Life insurance policy is a liquid security that it can be easily converted into cash.

o In case of life insurance policy it is easy to ascertain the value of security or policy.

o There is no risk of fall in the value of policy.

o Supervision and control is very easy.

o The legal formalities to take the policy as security are very less.

o In case of default by the borrower to repay the loan, it is easy to get back the money from

LIC by surrendering the policy.

Disadvantages:

o The policy will become cancelled in the absence of almost good faith.

o The policy will be cancelled in the absence of insurable interest.

o Every policy contains a clause called suicide or capital punishment clause. According to this

clause if the insurer commits suicide or faces death sentence because of criminal offence,

the insurance company will not make any payment against the policy.


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o These policies may be cancelled because of non-payment of premium.

o In case the policy is taken on the life of wife and children the policy has to be assigned by

wife and children also.

o The law relating to priority of assignment of life insurance policy is unsatisfactory.

Precautions:

o Banker should give loans and advances against LIC only to the respectable persons because

there is problem of cancellation of the policy because of absence of almost good faith and

insurable interest.

o Banker should prefer endowment policy rather than whole life policy.

o Banker should confirm that the policy is alive for which he should ask the policy holder to

give the receipts of latest premium.

o Banker has to ascertain the surrender value of the policy and should maintain sufficient

amount of margin.

o Banker should take proper assignment of policy. There are two types of assignment that is:

I.LEGAL ASSIGNMENTS: In this case the banker can file a case in his own name.

II.EQUITABLE ASSIGNMNETS: In this case banker cannot file a case in his own

name of customer.

o In case if the policy is taken in the name of wife and children banker should see that the

policy is assigned by all the parties involved in the policy.

o Once the loan is repaid by the customer banker should return the policy by canceling the

endorsement or by reassignment.

o In case of default by the customer in repaying the loan banker has to give a reasonable

notice to the customer before surrendering the policy.

c. Advancing against stock exchange securities: Those securities which are bought and sold

regularly stock exchange are called stock exchange securities. It includes certificates, bonds

issued by the government, semi-government and other companies.

Advantages:

o Banker will get some tangible asset or securities.

o If the securities are first class security or government security it can be easily realizable in

the market.

o If the securities are good type of securities is good type of security they will not face wide

fluctuation in price.

o It is easy to ascertain the title of the person possessing the security.

o It is very convenient type of security because the banker can keep the security in his custody

and can have a better supervision.

o Most of the securities are freely transferable.

o Banker can verify easily and find out the market value of securities.

o Legal formalities to be followed in stock exchange security are very simple.

o In case of financial difficulties banker can get the financial accommodation from the central

bank by pledging the stock exchange securities.


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Disadvantages:

o Some securities are having wide fluctuation in prices.

o Stock exchange securities are not negotiable instrument.

o The documents can be transferred through forged signature.

o In case of partly paid shares there is a risk of forfeiture of shares because of non-payment of

call money.

o In case of partly paid shares company may not register the transfer of shares.

Precautions:

o While giving the loan against stock exchange securities bank should have diversification of

securities.

o He should avoid advancing against third partly securities.

o He should make proper selection of securities that is government or semi-government

securities.

o Banker should maintain sufficient margin by taking into consideration possible fluctuation

in prices.

o He should get stock exchange securities properly endorsed in his favour.

o It is advisable for the banker to take legal charge of the securities in addition to possession

of securities.

o Banker should not return the securities until the loan is fully repaid.

d. Advancing against real estate (land and building):

Advantages:

o Banker need not bother about the fluctuation in prices generally because the value of land

increases by the passage of time.

o It serves as an additional security along with other weaker security.

Disadvantages:

o Granting loan against real estate is generally for long term which affects the liquidity of

assets of the company.

o There is difficulty in ascertaining the title of a person over the real estate because the law

relating to title is very complicative therefore banker has to take a lot of risk in ascertaining

the title with registrar.

o Land tenure period raises from state to state, from place to place in some state to the value

of land also varies according to the tenure to which it belongs so it is risky to accept land as

security without taking expert advice.

o The rule of succession and transfer of property under different law so difference in law

forces the banker to take expert advice before accepting the real estate as security.

o There is no market quotation for land and buildings and banker has to depend upon the

valuer and engineer.


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o Expenses and legal formalities involve in legal mortgage of real estate is more as compared

to other securities.

o Real estate has limited marketability because of that there is difficulty in realizing of land

and building.

o If mortgage requires the administration of land and building like carrying out repairs,

collecting rent etc maintaining these records in very difficult.

Precautions:

o Banker has to ascertain the financial soundness and profitability of business.

o Banker has to ensure that the customer is having valid title over the real estate and should

ask the customer to present the original documents.

o Banker should satisfy himself that the real estate has got prior charge for this he should

examine the records with the registar.

o Banker has to verify whether the land is freehold or leasehold.

o If the real estate includes building which is within municipal limit the banker should ensure

that the tax has been paid.

o If it is agricultural land banker has to certify the revenue records ensure that he land revenue

has to be paid by customer.

o Banker has to estimate the value of the property with the help of valuer and engineers.

o Banker should keep sufficient margin which is nearly 30%-50%.

o Banker should conduct periodical inspection and ensure that the buildings are kept in proper

condition.

e. Giving loans against document of title to goods: Document of title of goods are the document

which represent the actual goods which is used in the ordinary course of business as proof of

possession and control of goods which authorities the possession to receive the goods represented

by the document.

Types of title of goods are:

1. Bill of lading.

2. Warehouse receipt.

3. Railway receipt.

4. Motor transport.

Advantages:

o Document of title of goods represent the actual goods only so banker get some tangible

assets as security.

o It is very commitment type of security to the banker.

o Loans against documents of title to goods are for very short period.

Disadvantages:

o Documents may be forged.

o There may be fraudulent increase in number of packages.


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o Documents of title of goods will not give guarantee regarding the contents of the packages.

o Documents of title of goods are not negotiable instruments.

o In certain type of documents like motor transport receipt and unpaid seller company

exercise the right of stock age of goods in transit. Because which may cause serious

problem to the holder of the documents.

Precautions:

o Banker should take loan advances only to these customers who are honest and trustworthy.

o Before giving loans and advances banker should confirm himself that the document is not

forged one.

o Banker has to certify himself regarding the reliability or financial soundness of the

document.

o Banker should try to give loans and advances against the document which are of recent date.

o Banker should accept those documents which has study demand and good ability.

o He should confirm himself that the goods are properly insured against the risk of fire, theft

etc.

o Banker should get the documents properly endorsed to his name or to his favour.

o Banker has to serve a notice to the insurer of the document asking them not to deliver the

goods without the presentation of the original documents dully discharged by him.

o Banker has to take an undertaking from the customer authorizing him to sell the goods and

adjust the proceeds in settlement of advances.

o Banker should not handover the document until he receives the loan in full.

f. Loans against the discounting of bills: Discounting of bills of exchange is a process

through which the right, title and interest in the bill will be transferred by holder or

drawer to the banker to receive the value of the bill in advance. The banker charges

some percent as discount for having parted his money to the person who transfers the

bill in his favour.

Advantages:

o There is certainly of payment as the bill will be honored in the due date.

o There is security regarding repayment of the bill.

o Discounting of bills is for short term period so banker can maintain liquidity in his funds.

o A bill of exchange is negotiable instrument.

o There is no risk of loss because of fluctuations in the prices.

o It is more convenient type of security.

Disadvantages:

o There is danger of dishonoring the bill.

o Discounting all types of bills is not secured investment.

Precautions:


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o Banker should discount only genuine trade bills and he should ask them to attach the

invoice and other relevant documents relating to trade bills.

o Even in trade bills the banker should prepare documentary trade bills where some goods are

given as security.

o He should take documentary trade bills which has good demand in the market and which

can be easily realizable.

o Before discounting the bill, banker should ensure himself that the bill is drawn properly and

satisfies all the required conditions as per negotiable instrument act.

o Banker should ensure that the bill contains required amount of revenue stamps.

o Banker should discount the bill only for customer and not to non-customer.

o Before discounting the bill he should ensure that the bill is properly endorsed to his name.

o Banker should make proper enquiry and should satisfy himself regarding the credit

worthiness of all parties involved in the bill.

o Banker has to maintain a separate register in which he has to write the name of the customer

who has discounted the bill, name and address of the customer who has to honor the bill of

the due date.

o If the bill is dishonored banker has to serve a notice of dishonour to all the parties who are

involved in the bill.

Non Performing Assets

Meaning:

An asset, including a leased asset, becomes non performing when it ceases to generate income

for the bank.

Features:

A non performing asset (NPA) is a loan or an advance where;

a) interest and/ or instalment of principal remain overdue for a period of more than 90

days in respect of a Term loan,

b) ii. the account remains ‘out of order’ as indicated at paragraph 5.3 below, in respect of an

Overdraft/Cash Credit (OD/CC),

c) iii. the bill remains overdue for a period of more than 90 days in the case of bills purchased

and discounted,

d) iv. the instalment of principal or interest thereon remains overdue for two crop seasons for

short duration crops,(Agricultural loans)

e) v. the instalment of principal or interest thereon remains overdue for one crop season for long

duration crops,

f) vi. the amount of liquidity facility remains outstanding for more than 90 days, in respect of a

securitisation transaction undertaken in terms of guidelines on securitisation dated February

1, 2006.

Types of NPA:

There are three major types of NPA:

a) Sub-standard : The account holder belonging to this category don’t pay three instalment

continuously after 90 days and up to 1year. Bank has made 10% provision of funds for this

category to meet the losses generated from NPA from their profit.

b) Doubtful NPA : Doubtful NPA are classified into three sub categories :


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20% provision is made by the banks for D1 i.e. up to 1 year

30% provision is made by the bank for D2 i.e. up to 2 year

100% provision is made by the bank for D3 i.e. up to 3 year.

c) Loss Assets : When account holder belongs to this category 100% provision is made bythe banks

to write off their accounts. After this the assets are delivered to recovery agentsfor the purpose of

sale.

Reasons behind NPA:

Default of a loan intentionally

Frequent shuffle of govt. policies leads to NPA.

Customer has taken the loan for non performance of business

Most of the loan sanctioned for agricultural purposes

Negligent pre-enquiry by the bank for sanctioning the loan to a customer.

Effects of NPA on banks & FI:

Continuous draining of profit.

Negative impact on goodwill.

Adverse growth of equity value.

Restricted cash flow by bank due to provision of fund created against NPA.

NPA Management

a) Banks should find out the original reasons/purposes of the loan required by the borrower.

b) Proper identification of the guarantor should be checked by the bank including

scrutiny of his/her wealth.

c) Framing reasonably well documented loan policy and rules.

d) Sound credit appraisal on well-settled banking norms with emphasis on reduction in

Gross NPAs rather than Net NPAs

e) Position of overdue accounts is reviewed on a weekly basis to arrest slippage of fresh account

to NPA.

f) Half yearly balance confirmation certificates should be obtained from the borrowers.

g) A committee is constituted at Head Office, to review irregular accounts.

h) Based on the recent trends, banks should emphasize more on priority sector for reducing the

quantum of NPAs.

i) Banks should ensure credibility of the borrower.

j) Appropriate SWOT analysis should be done before disbursement of the advance.

k) Banks should ensure that there is no diversion of funds disbursed to the borrower.

l) Bank officials should frequently visit the unit and should assess the physical conditions of the

assets, receivables and stocks therein.

m) While advancing loans, the three principles of bank lending viz., Principle of Safety,

Principle of Liquidity and principle of Profitability must be adhered to.

n) Banks should get the Non Encumbrance and Valuation of the primary and collateral

securities done.


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o) Banks should critically examine and analyze the reasons behind time overrun.

p) The banks should ensure that latest technology is being used by the borrower, to avoid

obsolescence.

q) The banks should ensure that the assets are fully insured.

r) Recovery competition system should be extended among the staff members. The recovering

highest amount should be felicitated.

s) Adopting market intelligence for deciding the credibility of the borrowers

t) Creation of a separate “Recovery Department” with Special Recovery Officer

u) There surely is a need to distinguish between willful and non willful defaulters. In case of the

latter category of defaulters, the law should not be as harsh as in case of former category.

v) The recovery process is very slow; as such the Government needs to update the process

which is fast and effective.

w) Bank officers shouldn‟t forget the ethics of doing job.

x) Last but not the least, the act(s) should be judiciously and selectively applied so that

NPAs should be converted into performing assets.

Customers and Account Holders II semester B.Com Banking law and operations

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Customers and Account Holders

Types of Bank accounts: 1. Bank accounts in India

a. Demand deposits

Savings bank account

Current account

b. Time deposits

Fixed/ Term deposits

Recurring deposits

2. Non-Resident accounts

a. Rupee accounts

Non-resident Rupee Ordinary accounts (NRO Accounts)

Non-resident (External) accounts

Non-resident (Non-Repatriable) Rupee deposits accounts (NRNR Accounts)

Non-resident (Special) Rupee account (NRSR Accounts)

b. Foreign currency accounts

Foreign Currency Non-residents Accounts (FCNR Accounts)

1) Bank accounts in India

a) Demand deposits

Demand deposits are deposits repayable on demand they include deposits received on current

account and savings bank account.

i. Current Account:

Current account forms the most important type of bank account. In practice, there cannot be any

commercial bank without current account.

General features of current account:

1. Current accounts are intended for commercial industrial undertakings, public bodies, etc.,

which have numerous and frequent banking transaction.

2. A current account is opened by a customer for the convenience of making payments by

cheque.

3. A current account is generally, opened with a minimum deposit of Rs. 3000/- or 10000/-,

but in rural a minimum deposit of Rs. 1000/- and sub-urban Rs. 2000/-.

4. A current account is an active or a running account which is in operation continuously.

As such a customer can deposit into a current account any amount of money, and any

number of times. Similarly, he can withdraw from the current account any amount and as

many times as he likes as, long as there are sufficient funds to his credit.

5. Deposit into the current account is made by filling in the pay-in-slips and withdrawals

from this account are made by cheques.


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6. As per the recent directives of the reserve bank, the granted required to submit two copies

of his photograph to bank, one to place on the application form and other to be placed on

the signature card.

7. As current deposits are repayable on demand a bank has to keep a major portion of the

current deposits in liquid form to meet the withdrawals of the depositors.

8. No interest is allowed on current deposits, but incidental charges are levied (i.e.

collected) by a bank to maintain account for work and expenses involved in it.

ii. Savings Bank Account:

The post offices in the country were asked to accept savings deposits from the people and promote

the habit of thrift among the low income group. The post office saving account becomes very

popular and these encouraged the commercial banks also to have savings bank account and shorted

accepting savings deposits.

Today savings bank accounts have become very popular with the commercial banks.

General features of savings bank account:

1. Savings bank accounts are meant for middle and low income groups who can deposit

only small sums.

2. A savings bank can be opened with a very small deposit of just Rs.500/- or is the savings

bank account is to be operated by cheques, the minimum balance will be rs.1000/-. If

minimum balance is not maintained incidental charges will be charged.

3. A savings bank account is opened by a customer for the purpose of saving a part of his

current income for his future needs and for earning a fail interest on his deposits.

4. In a savings bank account a customer can deposit any amount of money and any number

of times.

5. As a savings bank account is intended to promote the habit of saving among the

depositors, there are restrictions on the number and the amount of withdrawals from this

account.

6. Deposits into this account are made by filling in the pay-in-slips and withdrawals are

made either by cheques or by special withdrawal forms accompanied by the pass book.

7. As a savings bank account is opened by a customer with a view to earning interest on his

deposits and as the banker can utilize a good portion of the savings bank account of

restrictions on withdrawals, a four interest is allowed by the banker on the savings bank

account.

8. Generally, no incidental charges are levied by a bank on a savings bank account but in

the case of savings bank account operated by cheques, incidental charges are charged by

banks today.

b) Time Deposit:

Time deposits are deposits repayable on the expiry of a fixed period of time, and deposits repayable

after the expiry of a certain period of notice of withdrawal given to the banker.

i. Fixed Deposit Account:

It is one of most important types of bank account. They are popular not only with the banks, but

also with the depositors. They are called time deposits or time liabilities in England, as their


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withdrawals are subject to the service of a period of notice. In India, they are known as term

deposits.

General features of fixed deposit account:

1. Fixed deposit accounts are intended for small investors who prefer to invest their money

on safe bank deposits rather on risky industrial securities.

2. Fixed deposit accounts are opened by the depositors mainly with a view to earning high

and steady interest on their deposits.

3. No instruction is necessary for opening a fixed deposit account as it is not operated by

cheque.

4. In Fixed deposit accounts, a fixed amount of money is deposited by a customer for a fixed

period of time at a fixed rate of interest.

5. A Fixed deposit account can be opened with a minimum deposit of Rs.1000/-. There is no

limit on the maximum amount that can be deposited in this account.

6. The period of deposits generally varies from 3 months to 10 years: the minimum period

can be even less than 3 months, but not less than 45 days.

7. A Fixed deposit accounts is left with the banker for a fixed period ordinarily, it cannot be

withdrawn on demand. It can be withdrawn only after the expiry of the specified period.

8. Fixed deposit can be withdrawn not by issuing cheques but by returning the fixed deposit

receipt given by the bank at the time of depositing money.

9. As the entire fixed deposit can be employed by a banker profitably without any fear of

withdrawal by the depositor during the course of the fixed period, he offers higher rate of

interest on fixed deposits than on other types of deposits.

10. A Fixed deposit receipt issued by a bank is exempt from stamp duty, provided the person

who deposited the money and the person to whom repayment is made are the some.

ii. Recurring Deposit Account:

Recurring deposit account are variants of and innovations over the savings bank account. In short,

they are a form of savings deposits. They have become very popular in recent years.

General features of Recurring deposit account:

1. Recurring deposit accounts are meant for people who have regular monthly incomes.

2. They are intended to encourage the habit of saving among the depositor on a regular basis.

3. In the case of a recurring deposit account, the depositor deposits a fixed sum of money

every month for an agreed period, and at the end of the period (specified), he gets back the

amount deposited together with the interest accrued thereon.

4. The monthly installment has to be made before the last working day of month. If there is

delay, interest is charged on the arrears of installment.

5. The period for which a recurring deposit account is opened varies from one year to ten

years.

6. As there is a regular deposit of money into a recurring deposit account and as there is no

withdrawal from the account before the expiry of the fixed period, there is an opportunity

for the banker to employ the deposits profitably. So he is able to offer high interest on the

recurring deposit account.

7. A recurring deposit account can be transferred from one branch to another branch of the

bank without payment of any charge for the transfer.


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2) Non-resident Accounts

Only non-resident Indians will be eligible for non-resident account schemes. A person can become a

non-resident Indian by fulfilling any one of the condition as given in the Foreign Exchange

Regulation act.

The following persons are eligible for non-resident account schemes:

1. All the people of Indian nationally or origin residing or working outside India.

2. Indian government employees posted abroad on duty with Indian mission and similarly

agencies of the government of India.

3. Indian government employees deputed abroad on assignments with foreign governments

or international organization like UNO, IMF, and IBRD etc.

4. Officials of state governments and public sector undertaking deputed abroad on any

temporary assignment.

5. Overseas companies, partnership firms, societies and other corporate bodies which are

owned to the extent of at least 60% by non-residents of Indian nationality or origin.

Where can the non-resident account are maintained:

Non-resident account can be maintained with banks in India which are authorized

dealers in foreign exchange or which are specifically authorized in this behalf by the RBI.

In the case of non-resident account permission from the RBI is not necessary for the

following purposes.

1. For opening the non-resident account.

2. For crediting these account with funds transferred from abroad through banking channels.

3. For crediting these account with interest earned there on.

4. For repatriation of funds abroad from these account.

Types of non-resident account:

a) Rupee accounts

i. Non-resident Rupee Ordinary accounts (NRO Accounts)

The account may be in the form of current, savings or fixed account. The funds earned in India, in

Rupees, can only be credited into the account. These funds cannot be remitted outside India. Banks

are free to decide the rate of interest payable on these deposits. Loans in rupees may be sanctioned

on these deposits by the banker.

ii. Non-resident (External) accounts

The deposit account may be current, savings or fixed deposit account. Deposit amount is held in

Indian Rupee. Funds from the account can be remitted outside India at the current exchange rate, and

the exchange risk is to be borne by the depositor. The rate of interest payable can be freely

determined by the banker. The banker is permitted to sanction both rupee loans as also foreign

currency loans on these deposits. Interest earned on these deposits is interest free.

iii. Non-resident (Non-Repatriable) Rupee deposits accounts (NRNR Accounts)

This scheme was introduced in the year 1992. This account has to be in the form of a fixed deposit,

the period of deposit ranging between 1 to 3 years. Deposit amount would be in Indian Rupee.

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the principal amount. T he exchange risk is to be borne by the depositor. The rate of interest payable

can be freely determined by the banker. The banker is permitted to sanction only rupee loans on

these deposits. These deposits may be renewed from time to time.

iv. Non-resident (Special) Rupee account (NRSR Accounts)

The RBI introduced this variety of account in the year 1999. This account may be in the form of

current, savings or fixed account. Deposit amount would be accepted in Indian Rupee only. Both the

principal amount and the interest accrued thereon may be repatriated; therefore, the depositor is not

exposed to fluctuations in foreign exchange rate. The rate of interest payable can be freely

determined by the banker. The account holders are permitted to transfer funds from

NRO/NRE/FCNR accounts to NRSR account and not vice versa.

b) Foreign currency accounts

i. Foreign Currency Non-residents Accounts (FCNR Accounts)

An FCNR account is a term deposit account that can be maintained by NRIs and PIOs in foreign

currency. Thus, FCNRs are not savings accounts but fixed deposit accounts.FCNR deposits are

allowed to be maintained in six currencies: US dollar, Pound Sterling (GBP), Euro, Japanese Yen,

Australian dollar and Canadian dollar. The funds in an FCNR account must necessarily come from

your overseas funds.

There are several ways in which a persson can open an FCNR account.

Transfer funds from your overseas bank account directly to open an FCNR account. You can

do this either as a wire transfer or a cheque transaction

Transfer funds from an existing NRE account

Open an FCNR account using foreign currency notes or travelers cheques when you visit

India

You can open an FCNR account for a minimum term of 1 year and maximum term of 5 years.

The interest rates vary between terms and from currency to currency. Rates may also vary between

banks. For instance, the rate for a 1 year FCNR deposit in US dollar would be in the range of 2.5-3%

while the same for a deposit in Australian dollar would be 5-6%.

It is important to note that this interest is tax free in India. However, you may be subject to tax in the

country of your residence for such interest. Balances in FCNR can be freely repatriated outside India.

Rupee loans and foreign currency loans can be taken in India against the security of the deposit.

Banks may also give loans to resident individuals, firms or companies against collateral security of

FCNR deposits.


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SPECIAL TYPES OF CUSTOMERS:

1) Minor or Infant:

A minor is a person who has not attained the age of 18 years. According to section-3 of the

Indian minority act 1875, a minor is a person who has not attained the age of 18 and in case a

guardian is appointed till he is 21. But, in England until a person completes his age of 21, he is

regarded as a minor or an infant.

The privileges of a minor guaranteed by low:

1. As per section-11 of the Indian contract act a contract entered into by a minor is void.

Hence a minor’s contract is not at all enforceable.

2. Even if he borrows money by falsely representing himself as an adult, he cannot be

compelled to repay the loan since the contract is void one.

3. A minor has the right to get back the securities pledged even without repaying the loan.

4. A minor can never be appointed as a trustee.

5. A guarantee given by a minor is not valid.

6. A minor cannot be adjudged as an insolvent either on his own petition or of others.

MINOR AND BANKER:

As a banker runs risks in dealing with a minor under certain circumstances, he should be very

careful in opening and maintaining an account with minor.

1. Though a current account can be opened in the name of a minor, it is advisable for the banker

to open only a saving bank account not current account in the name of a minor.

2. It is advisable for the banker to open a minor’s account in the name of his natural or legal

guardian, whether savings bank account or current account, of course for the benefit of the

minor.

3. when a minor’s account is opened in the name of his guardian, the banker should observe the

following formalities:

a. The account should be opened in the following style “V. Krishna natural guardian of

minor ‘x’”.

b. He should obtain the specimen signatures of the guardian.

c. He need not ask for the specimen signatures of the minor. Because the account will be

operated only by guardian.

d. Banker should note down the date of birth of the minor in the account opening form.

This information helps the banker to know as to when the minor attains majority.

e. As soon as the minor attains the age of majority the banker should close the minor’s

account opened in the name of his guardian and open a new account in the name of the

erstwhile minor himself.

f. When the new account is opened in the name of the erstwhile minor, the banker should

obtain the specimen signature of the erstwhile minor duly verified by the guardian.

4. In case a minor’s account is opened in the name of the minor himself, or in the joint names of

the minor and his guardian, the banker should take the following precautions:

a. He should make sure that the minor his attained the age of discretion (generally, a minor

attains the age of discretion when he is 12 years of age or more).

b. He should satisfy himself that the minor is able to reads and write English, Hindi or the

regional language. If he is not able to read and write no account should be opened in his

name.

c. Entries in the minor’s account should be made with great care.

d. He should allow the minor to operate his account only when the account is in credit.


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e. The banker should not allow loan or any other advances to the minor, as the minor

cannot be sued for the some.

f. Incase an advance is granted to a minor for the purchase of necessaries of life him or his

dependants, it is in the interest of the banker to satisfy himself that he has got sufficient

property.

5. Minor as an agent:

A minor can act as an agent, sometimes, he may be appointed as an agent by another person to

operate his bank account. As an agent, the minor can not only draw and endorse cheques on behalf of

the principal.

When a minor is appointed as an agent to operate the bank account of another person, the

banker should take certain precautions. First, he should obtain a written authorization from the

principal appointing the minor as his agent and specifying the various powers given to minor to

agent.

6. Minor as a partner:

A minor is not competent to enter into contract so he cannot become a fault pledged partner of a

firm. He can be admitted only to the benefits of the partnership firm with the consent of all the

partners.

When a minor is admitted to the benefits of a partnership firm, he will not be personally liable for

the debts incurred by the firm during his minority. Only his share in the profits and assets of the firm

will be liable for such debts.

7. Minor as a joint account holder:

An account can be opened in the joint names of a minor and an adult. Such account can be

operated in the casual manner. However, the minor cannot be made liable for any loan given

on that joint account.

8. Minor as guarantor:

A minor cannot be made liable as a guarantor on a contract of a guarantee. So banker should

not accept the guarantee of a minor for a debt due from a principal debtor.

9. Minor as an executor:

A minor may be appointed as an executor but he cannot act as such until he attains majority.

2) Joint accounts:

A joint account is an account opened in the names of two or more persons, who are not partners,

trustees, executors or administrators. These persons may be husband and wife, father and sons,

friends, etc.

JOINT ACCOUNT AND BANKER:

In opening and dealing with a joint account, a banker should take the following precautions:

a. The banker to ensue that the joint account is opened in the names of only adult members

competent to enter into contracts.

b. He should open the joint account only when the application for opening the joint account

is signed by all the persons interested in the joint account.

c. He should ascertain title under which the joint account is to be opened.

d. The joint stock account holders can delegate the authority to operate the joint account to

any of them or even to an outsider.

e. The authority to operate the joint account can be delegated by the joint account holders

to any of them, the banker should get clear instructions, in writing, signed by all joint

account holders, regarding the person or persons who are authorized to operate the joint

account.


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f. The banker should also get clear instructions as to how the credit balance in the joint

account is to be disposed off in the event of death of any of the joint account holder.

g. The authority given to the authorized persons or persons to operate the joint account can

be revoked (i.e. cancelled) by any joint account holder. Banker act accordingly and stop

the operations on the joint.

h. The authorized person or persons to operate the joint account does not empower them to

take any other advance on the joint account.

i. The authorized person or persons are given the specific authority to overdraw or to take

any advance on the joint account. It is advisable for the banker to insist that the loan

documents are signed by all the joint account holders.

j. On receipt of the notice of the insolvency of any one of the joint account holder, the

banker should stop the operation on the joint account.

k. On receipt of the notice of the death of any one of the joint account holders, it is

advisable for the banker to stop the operations on the joint account; he can proceed

against the surviving joint account holders and legal representatives of the deceased joint

account holder.

If there is credit balance in the joint account the banker should dispose it as per the

instruction received from the joint account holder at the time of opening the joint

account.

3) Partnership firm:

A partnership firm is an association of two or more persons called partners who

undertake a venture for a mutual benefit.

According to section-4 of the Indian partnership act 1932, “A relationship between

the persons who have agreed to share the profits of a business carried on by all or any one of them

acting for all of them.”

BANKERS DUTY:

A banker can very deal with there types of customers, only when, he has a thorough

knowledge of the firm and the relevant act governing the functioning of the firm.

a. Opening of account:

Generally banker will open an account for a partnership firm only when an

application in writing is submitted by any one or more partners. Under section-19(2) (b) of the Indian

partnership act of 1932, authority to open a bank account in the name of an individual partner is

positively denied.

b. Consent of all partners:

A banker should get a written request from the entire partner’s jointly for opening an

account.

c. Partnership deed:

The banker should go through the partnership deed and carefully study its objects,

capital, borrowing powers, etc. the banker should enquire about the details of the organization,

description of the business the business, the names and address of all the partners and their powers.

The banker should get a copy of the duly stamped partnership deed. He should further see whether it

is a registered firm or not.

d. Mandate:

In the absence of a mandate, the partnership account cannot be operated effectively

and easily so, the banker should ask for a mandate duly signed by all the partners.

The mandate must contain information’s regarding.


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The name of the person who is authorized to operate the account.

The extent of authority given to such persons.

e. Personal account and a firm’s account:

Usually a banker has the personal account of a partner side with the partnership

account. These two accounts are different in nature.

Banker should not mix one account with another and right of set-off the lies will

not be available against each other.

A cheque payable to the firm not be accepted for collection to the private account

of the partner without proper enquiry and without the consent of all other partners.

With the consent of the partner concerned, the banker can have no objection in

transferring the funds from the private account of a partner to the partnership

account.

f. Creation of mortgage:

According to section-19 of the partnership act no partner has an implied power to sell

or mortgage the property of his firm. Secton-19 & section-8 is that, in the case of mortgage of a

partnership property, the deed of mortgage be signed by all the partners only then, all the partners

will be made liable.

g. The retirement of a partner:

When a partner returns from business, notices of retirement should be given to the

banker. If no notice is served, he will continue to be liable even for advance made after his

retirement. At the time of retirement, if the partnership account shows a debit balance and if the

banker should immediately close the account and open a new account to avoid the operation of the

rule laid down in Clayton’s case.

h. The death of a partner:

The death of a partner may or may not dissolved the firm, and is the account shows a

credit balance, the banker can have no objection to allow the other partner to continue the operation

of the account. But he must have obtained a fresh mandate from the remaining partners. A cheque

drawn in the case of a deceased partner can be honored after the confirmation of the other partners

whether the firm is dissolved or not, if the account shows a credit balance, surviving partners alone

are accountable to the legal representative of the deceased partners for his share in the assets of the

firm.

i. The insolvency of a partner:

At the time of insolvency of a partner, is the partnership account shows a debit

balance, the banker must immediately close the account and open a new account to make the

insolvent liable for his share.

4) Joint stock company:

A joint stock company is an artificial person created by low. It has a separate

existence different from that of the members, who constitute it. It has a common seal, it is an

artificial creation, it cannot act by itself and it has to act only through human agent Because of the

above features, it requires a special treatment in the hands of the banker.

Banker’s duty:

1. Preliminary steps:

Before opening an account, the banker should find out whether the company has a legal

existence or not. It can be ascertained by referring to the certificate of incorporation

which is a proof for birth of the company.


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The banker should obtain the latest copies of the memorandum of association and

articles of association. These documents will reveal the objects of the company its

capital, its name, the operation of its registered office, its directors, their addresses, its

borrowing power, duties & liabilities of officers and so on.

The banker must get a copy of the prospectus of the company. A public limited

company will have to obtain another certificate, namely, certificate of commencement

of business. The banker should verify the document. In case he has any doubt about the

document he can refer the matter to the registered of joint stock companies and get

clarified.

If the company is a new one, the banker should carefully note whether the name of first

directors have been mentioned in the document or not.

If the company happens to be an existing one, the banker should demand copies of the

recent balance sheet and profit and loss account, which will reflect the growth of the

company and its financial soundness.

After have satisfied himself with these preliminary steps, the banker can safely open on

account.

2. The board resolution:

The opening of a bank account is taken by the board of directors. They pass a

resolution authorizing the secretary to supply the necessary documents to the proposed banker and

open an account. The banker will ask the secretary to fill up the prescribed application form and hand

it over to banker along with the copy of resolution. The resolution will state the name/names of the

person authorized to open and operate the account. It will also contain the specimen signature of the

authorized person.

3. Mandate:

Along with the resolution, the banker must call for a mandate from the company. The

mandate must contain the following matters.

The names of persons who are authorized to operate the account and their specimen

signature must be specifically given.

The nature and the extent of the powers delegated to the authorized persons must be

clearly laid down in the mandate.

It contains a provision that it will be in force until it is replaced by another resolution.

So, whenever the company wants to introduce any change in the operation of the

account, it must be done by passing a fresh resolution and giving a fresh mandate to the

banker.

The mandate provides that whenever there is a change in the board of directors or in the

post of the secretary the banker would be duly informed. If he is not informed, he cannot

be made liable for any consequence arising out of such changes.

4. Borrowing powers:

The banker will look into the borrowing powers of a company before lending money.

Every trading company has an implied power to borrow and mortgage its property. This power is

exercised by the board of directors. Generally, the article of association of the company puts a limit

on the borrowing powers of the directors as well as the company. If the directors borrow money over

and above their borrowing powers it is ‘ultra-virus’.

The articles contained a stipulation that the borrowing should not exceed the amount

of the preference share capital. It was held that there is no restriction on the borrowing powers until

the preference shares are issued.

As per the companies act, 1956 the borrowings of the company should not exceed the

aggregate paid-up capital of the company.

5. The purpose of loan:


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If the money borrowed for the purpose of the companies business is misappropriated

for a different purpose and it is unknown to the bank, the bank is not liable for it. But, is the banker

has knowledge of it, he mist immediately, stop the operation of the account. It is so because, such a

borrowing is ultra- virus.

6. Directors personal account and the company account:

If a banker has the personal account of the authorized director, side by side with the

companies account then the banker must handle the personal account very carefully. He should not

combine both the account and the right of set off and right of lien will not be available against each

other. A cheque payable to the company must not be collected to the private account of the director

without proper enquiry. If a banker does so, it will constitute negligence on the part of the banker and

he will be liable to the company.

7. Old company:

If a company that has applied to open an account is an old one, then the banker must

ask for the certified copies of the annual account and reports of the previous years. These documents

contain the financial position and the progress of the company and thus the banker can know its

earning capacity.

8. Winding up of the company:

Once the winding up procedure commences the power of the directors and all the

officers of the company cease. A company may be wound up voluntarily by the members or the

creditors or compulsorily by the court. In all these cases, the liquidator will have the power to

operate the account for the purpose of winding up of the company.

Hence, when the banker has knowledge of the passing of the resolution authorizing

the winding up of the company, he must stop the operation of the account.

In case of compulsory winding up, the liquidator’s power to take the assets of the

company relates back to the presentation of the petition. So, it is advisable on the part of the banker

to stop the operation of the account on the other hand, is the banker has no knowledge of the

presentation of the petition, he can go on honoring the cheque drawn by the directors and the banker

will not be liable.

5. Clubs, Societies and Non-Trading Associations:

1. Opening of account:

Clubs like ‘sports club’, ‘friends club’ etc, and associations and societies may

approach a banker for the purpose of opening an account.

The banker should first see whether they are registered bodies or not. If they are not

incorporated, it will be difficult to make all the members liable for the banking transactions. In the

case of registered clubs, the banker can open the account in the name of the club.

2. Mandate and resolution:

The banker then gets a mandate from the customer along with an authenticated copy

of a resolution appointing the banker to open banker to the association or club and requesting banker

to open an account. It also contains the names of the different officials who are authorized to operate

the account, their powers and their specimen signatures.

3. rules of the club:

A copy of the rules of a club or the constitution of an association is available; the

banker should get a copy of it and file it for his reference.

4. Change in the officials:

If there is any change in the officials of the club or society, and in particular, in the

one, who is authorized to operate the banker must be immediately notified to the change through on


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authenticated copy of the resolution making the change. It must contain the specimen signatures of

the new officials.

5. Borrowings:

The associations do not have an implied power to borrow. However the rules may

permit them to borrow after fulfilling the necessary formalities for instance, the rules may provide

that the club may borrow after getting the necessary sanction from the general body. In that case, the

banker will demand a certified copy of the resolution passed in the general body.

6. Security:

The banker should grant loans only against either the guarantee of a financially sound

person or the property of a club. Usually the property of clubs will be vested in the names of trustees.

Hence the banker must note the powers of the trustees to charge the property for the borrowings of

the club.

7. Club account and personal account:

If the club account and the personal account of the authorized person exit side by side

the banker should consider the following:

He cannot combine both the account.

The right of lien will not be available against each other.

Cheque payable to the club must not be collected to the private account of the

individual operating account.

6. Executors, Administrators and Trustees:

An executor is a person to whom the execution of a will is entrusted by the testator

(maker of the will). Any alteration or addition in the original will might have been made in a separate

instrument called codicil which also forms a part of the will. If the person named in the will refuses

to act or if a person dies insensate (without any will) then the court will appoint a person called

administration.

The certified copy of the final will is called probate. Probate is granted only to an

executor appointed by a will.

A trustee is a person in whose care the control of an estate is placed under an

instrument of trust or trust deed. Sometimes two or more persons may be appointed as executors or

trustees. They may approach a banker for the purpose of opening an account. A banker’s position

will be safe if the account is opened in their personal capacity.

If they may like to open the account in their official capacity. The banker should be

very cautious and he will generally take the following precautions.

Banker’s duty:

1. Familiarity with the terms and conditions of appointment:

The banker must go through the probate or the letter of administration or the trust

deed as the case may be banker must thoroughly conversant with the terms mentioned in the

document appointing the executors or trustees. The document will reveal the genuineness of their

appointment.

2. Joint executors and trustees:

If there are two or more executors or trustees, the banker should get clear instructions

about the nature of the powers delegated to each of them. If there are no instructions, one executor

can deal with the funds of the estate on behalf of others. But in the case of joint trustees, in the

absence of any instructions, all of them should deal with the funds and all must sign the document, in

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modify the business. The account can be operated as usual. But in case of joint trustees, it would not

be safe for the banker to assume that the continuing trustee possess full powers to deal with the

property.

3. Breach of trust:

A banker should be very careful whenever as account of this type is opened. It is so

because whenever something goes wrong the banker will be held liable for not protecting the interest

of the beneficiaries. If a banker comes to know that the funds are misapplied, he cannot escape from

his liability.

4. Powers to borrow:

Trustees and executors have no implied power to borrow. Hence, they can Borrow

only in their personal capacity. If they are authorized to borrow to discharge the debts of a deceased,

as security and he must note that the creditors of the deceased will have prior rights over the assets of

the deceased. To safeguard his position he must get the personal assets of the executor also as

security.

5. Trust account and personal account of a trustee:

If a banker maintains the personal account of the trustee or executor side by side with

the trust account.

The banker cannot combine both the account.

The right of set off and the right of lien will not be available against each other.

A cheque payable to the trust should be collected to the private account of the trustee.

If banker does so, he will lose the statutory protection under section-131 of the INI

act.

6. Delegation of power:

The trustees and executors cannot delegate their powers to an outsider. Executors can

delegate their powers to one of themselves. But trustees cannot do so. All of them should act

together.

7. Government Departments and Government Business:

Government department’s accounts may be opened in banks for transacting the

government business. The main function of a bank in conducting government business is to receive,

pay, collect and remit money on behalf of the various government departments. Generally, the

central government transactions are governed by the compilation of treasury rules and the account

codes volume I & II. On the other hand, the state government transactions are governed by the state

financial handbook.

Precautions in the case of government account:

1. Conversant with the rules:

The banker should be thoroughly conversant with the compilation of treasury rules

and the account codes volume I & II governing the operation of government account. Besides these,

he should be aware of the various rules and regulations given in the state government transactions.

2. Head of account:

While receiving all government dues like receipt of income tax, sales tax, excise duty

road tax etc, he should pay attention to the head of the account to which the amount is to be credited.

3. Misuse of duplicate challons:

Generally, all government dues are paid into banks through challons made in

duplicate or triplicate as required. In orders to avoid the misuse of duplicate challons as duplicate


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receipts, the banker should sign the challons returned to the depositors and he should only initial the

other copies.

4. Lost challons:

In the case of lost challons, the banker should never issue any duplicate copies. In

case the depositors want any evidence for payment made, only a certificate should be given by the

banker.

5. Treasury approval:

For the payment of any amount by the government like payment of salary to

employees, the department concerned will prepare a bill or voucher as the case may be in the

prescribed format which should be duly passed by the treasury and sent to the bank for payment. The

banker should see whether it has been duly passed by the treasury and in prescribed format.

6. Cheque drawing facility:

The cheque drawing facility has been extended to the officers of the government

departments on the basis of the drawing power. In such a case, the banker should pay a special

attention to the drawing power of the officer concerned and his specimen signature.

7. Direct account:

Certain departments like the forest department have been given power to open direct

account with banks for which necessary sanction must be given by the account general. In the case

the banker should see whether the department has been authorized to open a direct account by the

accountant general.

8. Joint Hindu Families or Hindu Undivided Families:

A Joint Hindu Family or Hindu undivided Family is a family which is composed of

all the male members lineally descended from a common ancestor for three successive generations.

In other words, a Joint Hindu Family is a family which consists of more than one

male member, possesses ancestral property and carries on family business. It arises by law and not

by an agreement.

Generally, the Joint Hindu Family is managed only by the eldest male member of the

family called the KARATA or the manager. The other coparceners do not take part in the

management of the joint family. If the joint family has business at different places the KARTA may

appoint the other coparceners as managers of the branches. The female members cannot act as the

managers of the joint family, as they are not coparceners, however, a mother can manage the family,

if there is no major male coparceners.

JOINT HINDU FAMILY AND BANKER:

1. Before opening an account in the name of Joint Hindu Family the banker should ask for the

names of all the coparceners both major and minor.

2. The banker should see that the declaration the coparceners and the other particulars of the

Joint Hindu Family are made by the KARTA as well as the other major coparceners of the

joint family.

3. It is advisable for the banker to get the signatures of all the major coparceners on the

account opening form.

4. The account of the joint family can be opened either in the name of the KARTA or in the

name of the family itself.


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5. The banker should get clear instructions about the persons authorized to operate the account

of the family. In the absence of specific instruction, only the KARATA should be allowed to

operate the account.

6. The banker should get a mandate signed by all the major or adult coparceners authorizing

the KARTA to operate the joint family account.

7. If there are minor coparceners in Joint Hindu Family, the bank should observe certain

formalities. The banker should obtain the signatures of the guardians of the minor

coparceners on all the documents on behalf of the minor coparceners and also they should

take down the dates of birth of the minor coparceners, when the minor coparceners attain

majority the banker should obtain their signatures on all the bank documents and there by

get their assent to all the transactions which have taken place during their minority.

8. When the KARTA of the Joint Hindu Family approaches the bank for an advance, it is

necessary for the banker to enquire about the purpose of the advance and satisfy himself that

the advance is necessary for and beneficial to the joint family. This obligation has been

imposed on the banker also by law.

9. When the KARTA of Joint Hindu Family contracts debts for the benefit of the joint family,

no doubt he is personally liable for the debts of the joint family to an unlimited extent. But

the other coparceners of the joint family will be liable only to the extent of their shares in

joint family property.

9. Lunatics

Lunatics are persons of unsound mind. Lunatics are disqualified from contracting but the

disqualification does not apply to contract entered by lunatics during their period of sanity.

Following are bankers duty n case of lunatics-

1. Since a lunatic has no capacity to contract, acc to sec 11 of the ICA, no banker

knowingly opens an account in the name of a lunatic.

2. If an existing customer becomes insane, the banker must immediately stop the operation

of the account. It is so because, the banker has no right to debit his account for payment

made out of his account from the moment, the banker knows the fact of lunacy of

customer, the contract between them is void.

3. A banker must not be carried away by hearsay information or rumours. He must get

definite information about the lunacy of the customer.

4. If a banker dishonours a cheque in a hurry, without having any proof of lunacy, he will

be liable for wrongful dishonour of cheque.

5. It should return all cheques of customers account with the word refer to drawer and not

customer insane. It should make careful note of lunacy order.

6. If a third party is authorised to draw on customers account, that authority will cease

when the customer becomes insane since when a principal cannot act for himself his

agent can no longer act for him.

7. If one party to an account opened in joint names becomes mentally incapable of

managing his or her affairs, the banker should not allow either party to operate the

account.

10. Illiterates

An illiterate person is competent to contract and bank may open an account in his name, but special

care should be taken by the banker before opening an account.


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1. The account of an illiterate person may be opened provided he/she calls the bank

personally along with a witness who is known both to the banker and the depositor.

2. A passport size photograph of the illiterate person is identified before the banker in

presence of the account holder. The photographs have to be attested by the bank officer/

witness.

3. The left hand thumb impression in case of male illiterate and right hand thumb

impression in case of female illiterate are duly attested by some responsible person on

the account opening form.

4. One or two identification marks of the depositor should be noted on the account opening

form.

5. The illiterate person should be provided with a passbook which should also contain an

attested photograph of the illiterate person.

6. Normally, no cheque book facility is provided on accounts in the name of illiterate

persons.

7. At the time of withdrawal/repayment of deposit account the account holder should

attend personally with passbook and attest his/her thumb impression or mark in the

presence of an authorised person.

8. The thumb impression of illiterate person on the withdrawal form or cheque (if

provided), and on the back of the withdrawal form or cheque should be duly compared

with the specimen impression kept by the bank.

11. Married women

The Hindu married women are governed by the Hindu Succession Act and other married women by

Indian Succession Act. A banker may open an account in the name of a married woman like any

other customer. However, a banker should exercise caution while opening account for the wife of an

undischarged insolvent.

1. While opening an account of a married woman, the bank should enquire about her means and

circumstances, and if she is living with her husband, something about him and his occupation

and position in life, and if he is an employee, the name of the employer.

2. In case she applies for an overdraft, the banker should see that she owns separate property in

her own name and precaution should be kept in mind regarding her status and capacity to pay

and the purpose for which the borrowings are made. Also he should seek suitable securities

preferably on her, which can be attached by the Courts.

3. The banker should always observe that there is credit balance in her account.

4. Banks usually require that a married woman be independently advised by her own solicitor

when depositing security for the account of other persons.

5. A married woman may enter into a contract of guarantee and it is enforceable only against

her separate estate.

6. In case of an illiterate married woman, her thumb impression should be obtained on the

account opening form and on the identification card.


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Pardhanishin women

In case of a pardhanishin woman who remains completely secluded the following presumption

exists-

1. Any contract entered into by her may be subject to undue influence

2. The same might not have been done with free will and with full understanding of what the

contract actually means.

12. Insolvents

When an insolvency petition is filed in the court, in respect of the customer of the bank, the bank

shall immediately stop paying the cheques irrespective of the cheque dated before or after the date of

petition. Once the customer has been adjudicated as insolvent by the court, the relationship of the

banker and customer stands terminated. All the assets of the insolvent person vests with court

receiver/ official assignee appointed by the court, who would distribute the assets of the insolvent to

the creditors.

Banking Innovations II semester B.Com Banking law and operations

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Banking Innovations

Electronic banking services are a range of banking and other services or facilities that use electronic

equipment and include:

1. Internet banking

2. Mobile banking

3. Phone banking

4. SMS banking

5. Automated Teller Machine (ATM) services

6. Debit card and credit card services

7. Magnetic Ink Character Reader (MICR) services

8. RTGS and NEFT

9. De-Materialized account (DEMAT) services

Internet Banking Online banking also known as internet banking, e-banking, or virtual banking, is an electronic

payment system that enables customers of a bank or other financial institution to conduct a range of

financial transactions through the financial institution's website.

The common features fall broadly into several categories:

A bank customer can perform non-transactional tasks through online banking, including -

Viewing account balances

Viewing recent transactions

Downloading bank statements, for example in PDF format

Viewing images of paid cheques

Ordering cheque books

Download periodic account statements

Downloading applications for M-banking, E-banking etc.

Bank customers can transact banking tasks through online banking, including -

Funds transfers between the customer's linked accounts

Paying third parties, including bill payments (see, e.g., BPAY) and third party fund transfers

(see, e.g., FAST)

Investment purchase or sale

Loan applications and transactions, such as repayments of enrollments

Credit card applications

Register utility billers and make bill payments

Financial institution administration

Management of multiple users having varying levels of authority


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Transaction approval process

Personal financial management support

Advantages of Internet Banking

Online account is simple to open and easy to operate.

It is available all the time, i.e. 24x7.

It is fast and efficient. Funds get transferred from one account to the other very fast.

It keeps your account safe by keeping an eye on your transactions and account balance all

the time.

It also acts as a great medium for the banks to endorse their products and services. The

services include loans, investment options, and many others.

Disadvantages of Internet Banking

Understanding the usage of internet banking might be difficult for a beginner at the first go.

You cannot have access to online banking if you don’t have an internet connection; thus

without the availability of internet access, it may not be useful.

Security of transactions is a big issue. Your account information might get hacked by

unauthorized people over the internet.

Password security is a must. After receiving your password, do change it and memorize it

otherwise your account may be misused by someone who gets to know your password

inadvertently.

You cannot use it, in case, the bank’s server is down.

Loss of net connectivity

Mobile Banking Mobile banking is a service provided by a bank or other financial institution that allows its customers

to conduct a range of financial transactions remotely using a mobile device such as a mobile phone

or tablet, and using software, usually called an app, provided by the financial institution for the

purpose.

Mobile banking services

1. Account information

Mini-statements and checking of account history

Alerts on account activity or passing of set thresholds

Monitoring of term deposits

Access to loan statements

Access to card statements

Mutual funds / equity statements

Insurance policy management

2. Transaction

Funds transfers between the customer's linked accounts


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Paying third parties, including bill payments and third party fund transfers(see, e.g., FAST)

Check Remote Deposit

3. Investments

Portfolio management services

Real-time stock quotes

Personalized alerts and notifications on security prices

4. Support

Status of requests for credit, including mortgage approval, and insurance coverage

Cheque book and card requests

Exchange of data messages and email, including complaint submission and tracking

ATM Location

Advantage of Mobile Banking

Mobile Banking uses the network of service provider and it doesn't need internet

connection.In a developing countries like India where their is no internet connection in the

interiors their is the presence of mobile connectivity.

Mobile Banking is available round the clock 24/7/365 and is easy and Convenient mode for

many Mobile users in the rural areas.

Mobile Banking is said to be more secured and risk free than online/internet Banking.

With the help of Mobile Banking you can pay you bills,transfer funds,check account

balance,review your recent transaction,block your ATM card etc.

Mobile Banking is cost effective and Banks offer this service at very low cost to the

customers.

Disadvantage of Mobile Banking.

Though the security threat is less than Internet Banking, Mobile Banking has to security

issues.One of the great threat to Mobile Banking is "Smishing" which is similar to

"phishing"..In "Smishing" users receives fake message asking for their Bank details.Many

users have fallen to this trap.

Mobile Banking is not available on all mobile phone.Some time it requires you to install apps

on your phone to use the Mobile Banking feature which is available on high end

smartphone.If you don't have a smartphone than the use of Mobile Banking becomes limited.

Transaction like transfer of funds are only available on high end phones.

Regular use of Mobile Banking may lead to extra charges levied by the bank for providing

the services.

Mobile phones are limited in processing speeds,screen size and battery life.This act as a

barrier in Mobile Banking.

Phone Banking Telephone banking is a service provided by a bank or other financial institution, that enables

customers to perform a range of financial transactions over the telephone, without the need to visit a

bank branch or automated teller machine.


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Types of financial transactions which a customer may transact through telephone banking include:

Obtaining account balances and list of latest transactions, electronic bill payments, and funds

transfers between a customer's or another's accounts.

Operation

To use a financial institution's telephone banking facility, a customer must first register with

the institution for the service.

They would be assigned a customer number and they may be given or set up their own

password (under various names) for customer verification.

To access telephone banking, the customer would call a special phone number set up by the

financial institution.

The service can be provided using an automated system, using speech recognition and

DTMF technology or by live customer service representatives.

After calling the number, they would enter on the keypad the customer number and

password. Some financial institutions have set up additional security steps for access, but

there is no consistency to the approach adopted.

Most telephone banking services use an automated phone answering system with phone

keypad response or voice recognition capability.

To ensure security, the customer must first authenticate through a numeric or verbal

password or through security questions asked by a live representative.

SMS Banking SMS banking is a form of mobile banking. It is a facility used by some banks or other financial

institutions to send messages (also called notifications or alerts) to customers mobile phones using

SMS messaging, or a service provided by them which enables its customers to perform some

financial transactions using SMS.

Push and pull messages

SMS banking services may use either push and pull messages.

Push messages are those that a bank sends out to a customer's mobile phone, without the customer

initiating a request for the information.

Typical push services would include:

Periodic account balance reporting (say at the end of month);

Reporting of salary and other credits to the bank account;

Successful or un-successful execution of a standing order;

Successful payment of a cheque issued on the account;

Insufficient funds;

Large value withdrawals on an account;

Large value withdrawals on the ATM or EFTPOS on a debit card;


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Large value payment on a credit card or out of country activity on a credit card.

One-time password and authentication

Pull messages are initiated by the customer, using a mobile phone, for obtaining information or

performing a transaction in the bank account.

Typical pull services would include:

Account balance enquiry;

Mini statement request;

Electronic bill payment;

Transfers between customer's own accounts, like moving money from a savings account to a

current account to fund a cheque;

Stop payment instruction on a cheque;

Requesting for an ATM card or credit card to be suspended;

De-activating a credit or debit card when it is lost or the PIN is known to be compromised;

Foreign currency exchange rates enquiry;

Fixed deposit interest rates enquiry.

Automated Teller Machine (ATM) services The Automated Teller Machine (ATM) is a machine which facilitates basic banking activities viz,

withdrawal of money, depositing money and checking of ones own balances etc. ATM does most of

the functions of cashier in the bank. ATM is operated by plastic card issued by the bank which is

called as ATM Card, with it special features.

Advantages of ATM :

Round the Clock Service : ATM provides banking services to its customers round the clock,

24 hours a day, 7 days a week and 365 days a year.

Access to bank from any part of the world: Essential banking services like deposits,

withdrawals transfer of funds, etc can be accessed by customers from any part of the world.

Expansion of Services to any corner of the world: Of the Banks can expand their services

to any corner of the world by providing electronic access to its customers.

Reduction in cost of operation: This reduces human intervention and thereby reduces the

cost of operations and increases profitability of banks.

For shopping Purpos : Now a days almost every shopping mall, restaurant and other

organizations are accepting credit card payments.

Disadvantages :

Cannot be provided in rural areas: In a country like India, where banks are having large

number of rural and non-computerized branches, ATM services cannot be provided.

Presence various constraint: Even if banks make some efforts to introduce ATM services

country side, various constraints like illiteracy, security concern, etc., may not permit that.


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Limitation of cash withdrawals: Again there is a limitation of cash withdrawals from ATM.

For example, many banks do not permit withdrawal of more than 25,000 at a time.

Cash deposit facility is not safe: Similarly cash deposit facility is restricted and not safe as

dropping of envelope with can in ATM is not advisable.

Possibility of misusing ATM card: ATM card, if misplaced, lost or stolen, may be misused.

There are number of such reported incidences now a days.

Loss of personnel touch with the Banks: Last but not the least, customers lose personal

touch with their bankers.

Debit card and credit card services

Debit card

A debit card is a plastic payment card that provides cardholders electronic access to their bank

account at a financial institution.

Advantages of a Debit Card

Easy to obtain. Once you open an account most institutions will issue you a debit card upon

request.

Convenience. Purchases can be made using a chip-enabled terminal or by swiping the card

rather than filling out a paper check.

Safety. You don't have to carry cash or a cheque book.

Readily accepted. When out of town (or out of the country), debit cards are usually widely

accepted (make sure to tell your financial institution you’re leaving your city; to not have an

interruption in service).

Disadvantages of a Debit Card

No grace period. Unlike a credit card, a debit card uses funds directly from your checking

account. A credit card allows you to borrow funds on credit, leaving disposable cash in your

account.

Check book balancing. Balancing your account may be difficult unless you record every

debit card transaction.

Less protection. Most financial institutions will try and protect their customer from debit

card fraud. However, a customer could potentially be liable for up to $500 on fraudulent debit

card transactions compared with only $0 on credit cards. Be sure to check with your financial

institution to learn the details.

Fees. Using your debit card for ATM transactions may be costly if the ATM is not affiliated

with your institution.

Credit card

A credit card is a payment card issued to users (cardholders) as a method of payment. It allows the

cardholder to pay for goods and services based on the holder's promise to pay for them. The issuer of

the card (usually a bank) creates a revolving account and grants a line of credit to the cardholder,

from which the cardholder can borrow money for payment to a merchant or as a cash advance.


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Advantages

Purchase Power and Ease of Purchase - Credit cards can make it easier to buy things. If

you don't like to carry large amounts of cash with you or if a company doesn't accept cash

purchases (for example most airlines, hotels, and car rental agencies), putting purchases on a

credit card can make buying things easier.

Protection of Purchases - Credit cards may also offer you additional protection if something

you have bought is lost, damaged, or stolen. Both your credit card statement (and the credit

card company) can vouch for the fact that you have made a purchase if the original receipt is

lost or stolen. In addition, some credit card companies offer insurance on large purchases.

Building a Credit Line - Having a good credit history is often important, not only when

applying for credit cards, but also when applying for things such as loans, rental applications,

or even some jobs. Having a credit card and using it wisely (making payments on time and in

full each month) will help you build a good credit history.

Emergencies - Credit cards can also be useful in times of emergency. While you should

avoid spending outside your budget (or money you don't have!), sometimes emergencies

(such as your car breaking down or flood or fire) may lead to a large purchase (like the need

for a rental car or a motel room for several nights.)

Credit Card Benefits - In addition to the benefits listed above, some credit cards offer

additional benefits, such as discounts from particular stores or companies, bonuses such as

free airline miles or travel discounts, and special insurances (like travel or life insurance.)

While most of these benefits are meant to encourage you to charge more money on your

credit card (remember, credit card companies start making their money when you can't afford

to pay off your charges!) the benefits are real and can be helpful as long as you remember

your spending limits.

Disadvantages

Blowing Your Budget -- The biggest disadvantage of credit cards is that they encourage

people to spend money that they don't have. Most credit cards do not require you to pay off

your balance each month, so even if you only have $100, you may be able to spend up to

$500 or $1,000 on your credit card.

High Interest Rates and Increased Debt -- Credit card companies charge you an

enormous amount of interest on each balance that you don't pay off at the end of each

month. This is how they make their money and this is how most people in the United States

get into debt (and even bankruptcy.)

Credit Card Fraud - Like cash, sometimes credit cards can be stolen. They may be

physically stolen (if you lose your wallet) or someone may steal your credit card number

(from a receipt, over the phone, or from a Web site) and use your card to rack up debts.

Basis Credit Card Debit Card

About Credit cards are lines of credit. When you use

a credit card, the issuer puts money toward the

transaction. This is a loan you are expected to

Any time you use a debit card to

buy something, money is deducted

from your account. With a debit


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pay back in full (usually within 30 days),

unless you want to be charged interest.

card, you can really only spend the

money you have available to you.

Connected

To

Not required to be connected to a checking

account.

Checking or Savings Account

Monthly

Bills

Yes No

Application

Process

Somewhat difficult, depending on one's credit

score and other details.

Easy, with basically no barrier to

receiving a debit card.

Spending

Limit

The credit limit set by the credit issuer. Limits

increase or stay the same over time as a

borrower's creditworthiness changes.

However much is in the bank

account connected to the card.

Interest

Charged

If a credit card bill is not paid in full, interest is

charged on outstanding balance. The interest

rate is usually very high.

No interest is charged because no

money is borrowed.

Security Credit cards are not very secure in and of

themselves because many still use dated card

security technology. However, consumers are

not held liable for this poor security.

A PIN makes them secure so long

as no one steals the card number

and PIN, and as long as you don't

lose the card itself. If the card/info

is stolen, debit cards are very

insecure.

Fraud

Liability

Low. High.

Credit

History

Responsible credit card usage and payment

can improve one's credit rating. Credit cards

typically report account activity to at least one

of the three major credit bureaus on a monthly

basis.

Does not affect credit history.

Overdraw

Fees

Low. Some credit card companies allow to

overdraw amount over the maximum credit

line with a fee.

High "overdraft" fees. Possible to

overdraw amount over the account

limit.

Magnetic Ink Character Reader (MICR) services Magnetic Ink Character Recognition Code (MICR Code) is a character-recognition technology used

mainly by the banking industry to ease the processing and clearance of cheques and other documents.

The MICR encoding, called the MICR line, is at the bottom of cheques and other vouchers and

typically includes the document-type indicator, bank code, bank account number, cheque number,

cheque amount, and a control indicator. The technology allows MICR readers to scan and read the

information directly into a data-collection device. Unlike barcodes and similar technologies, MICR

characters can be read easily by humans.

Electronic fund transfer (EFT): RTGS and NEFT Electronic funds transfer (EFT) is the electronic transfer of money from one bank account to another,

either within a single financial institution or across multiple institutions, through computer-based

systems and without the direct intervention of bank staff.

Real Time Gross Settlement (RTGS)

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RTGS stands for real time gross settlement, which means that it enables money to move from one

bank to another on a real time and gross basis. Simply put, real time means the beneficiary bank

receives the instructions for fund transfer immediately and gross means that it is not bunched with

any other transaction and settlements of funds transfer instructions happen individually. Since the

funds settlement takes place in the books of the Reserve Bank of India (RBI), keep in mind that the

payments are final and irrevocable.

National Electronic Funds Transfer (Neft)

NEFT stands for National Electronic Funds Transfer and is a payment system which facilitates one-

to-one funds transfer. Like RTGS, Neft also transfers funds from one bank, but unlike RTGS the

settlement takes place in batches (that may include transfers from various individuals) rather than

individually. The batches are settled in hourly time slots.

Criteria NEFT RTGS (Retail)

Settlement Done in batches (Slower) Real time (Faster)

Full Form National Electronic Fund

Transfer

Real Time Gross Settlement

Timings on Mon – Fri 8:00 am – 6:30 pm 9:00 am – 4:30 pm

Timings on Saturday 8:00 am – 12:30 pm 9:00 am – 1:30 pm

Minimum amount of money

transfer limit

No Minimum 2 lacs

Maximum amount of money

transfer limit

No Limit No Limit

When does the Credit

Happen in beneficiary

account

Happens in the hourly batch

Between Banks

Real time between Banks

Maximum Charges as per

RBI

Upto 10,000 – Rs. 2.5

from 10,001 – 1 lac – Rs. 5

from 1 – 2 lacs – Rs. 15

Above 2 lacs – Rs. 25

Rs. 25-30 (Upto 2 – 5 lacs)

Rs. 50-55 (Above 5 lacs)

(Lower charges for first half of

day)

Suitable for Small Money Transfer Large Money Transfer

De-Materialized account (DEMAT) services In India, shares and securities are held in electronically in a dematerialized account, instead of the

investor taking physical possession of certificates. A Dematerialized account is opened by the

investor while registering with an investment broker (or sub-broker). The Dematerialized account

number is quoted for all transactions to enable electronic settlements of trades to take place. Every

shareholder will have a Dematerialized account for the purpose of transacting shares.


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Access to the Dematerialized account requires an internet password and a transaction password.

Transfers or purchases of securities can then be initiated. Purchases and sales of securities on the

Dematerialized account are automatically made once transactions are confirmed and completed.

Demat benefits

Easy and convenient way to hold securities

Immediate transfer of securities

No stamp duty on transfer of securities

Safer than paper-shares (earlier risks associated with physical certificates such as bad

delivery, fake securities, delays, thefts etc. are mostly eliminated)

Reduced paperwork for transfer of securities

Reduced transaction cost

No "odd lot" problem: even one share can be sold

Change in address recorded with a DP gets registered with all companies in which investor

holds securities eliminating the need to correspond with each of them separately.

Transmission of securities is done by DP, eliminating the need for notifying companies.

Automatic credit into demat account for shares arising out of bonus/split,

consolidation/merger, etc.

A single demat account can hold investments in both equity and debt instruments.

Traders can work from anywhere (e.g. even from home).

Disadvantages of Demat

Trading in securities may become uncontrolled in case of dematerialized securities.

It is incumbent upon the capital market regulator to keep a close watch on the trading in

dematerialized securities and see to it that trading does not act as a detriment to investors.

For dematerialized securities, the role of key market players such as stock-brokers needs to

be supervised as they have the capability of manipulating the market.

Multiple regulatory frameworks have to be conformed to, including the Depositories Act,

Regulations and the various Bye-Laws of various depositories.

Agreements are entered at various levels in the process of dematerialization. These may cause

worries to the investor desirous of simplicity.

There is no provision to close a demat account, which is having illiquid shares. The investor

cannot close the account and he and his successors have to go on paying the charges to the

participant, like annual folio charges etc..

After liquidating the holdings, many Indian investors don't close their dp account.They are

unaware that DPs charge even on dormant accounts