Banking Law Anusha M Virupannavar Assistant Professor KLE

Banking Law. Anusha M Virupannavar Assistant Professor KLE Society’s Law, Bengaluru

Evolution of banking institutions • “bancus” or “banque” which means bench. • Early bankers, the Jews transacted their business on benches in the market place.

�When banker was unable to meet his obligation, his bench was broken up by people; it is called “bankrupt. ” �The word “bank” is originally derived from the German word “back” meaning joint stock fund.

Early history of banking � 2000 B. C. , the Babiloninas had developed a banking system. � Temples of Babylon were used as banks. � Great temples Ephesus & of Delphi were the most powerful of the Greek banking institution.

� Spread of irreligion destroyed the public sense of security in depositing valuables in temple & priest were no where acting as financial agents. � Aristotle’s dictum-charging of interest was unnatural and consequently immoral. Even now Mohammedans in obedience to the commands contained in their religious books, refuse to accept interest on money loans.

Evolution of Banking law � The India banking law is based to a very large extent upon the English Banking Law. � Beside Banking Law, the Law of Contract, the Law of Torts and other branches of commercial and civil laws are applicable to banks as to others.

merchant or Lex mercatoria � customs of merchants � ratified by courts and become part of general law. � Law � Lord Mansfield’s ruling � Post industrial revolution period, banking law largely judge made law. � Took into consideration customs of merchants of the advanced European Countries.

Development of British Banking � Royal exchanger � In England, Edward III-Royal Exchanger for the benefit of the Crown. � Goldsmiths � Land ceased to be the only form of wealth, merchants began to hold part of their “capital” in cash. � Merchants entrusted their cashiers with large sums, later misappropriated.

� City merchants decided to keep their cash with goldsmiths, who had strong rooms and doors and employed watchmen. � Early beginning of “Issue” and “Deposit” banking � Large sums of money were left with the goldsmiths for safe custody, against signed receipts- “goldsmiths’ notes”. � Notes- embodying an undertaking to return money to depositor or to bearer on demand.

� Transformed from receipt to a bank noteconsiderable circulation. � Large money were left with them. � Following Dutch bankers-thought it is profitable to lend which is to be repaid within a fixed time. � In order to attract more depositors they began to offer interest on deposits. � Current banking � In 1672, English banking received a rude setback.

� Charles II borrowed heavily and repudiated his debts. � Crisis ensued, leading to general suspension of payments. Confidence, however, was restored. � Receive deposits on “current account” i. e. , money withdrawal without notice. � Bank of England (1694) � The Tonnage Act � Financial difficulties of William III, was carrying war with France. � The public distrust of goldsmiths.

� Mr. Patterson-raise $1, 200, 000, a loan to the Govt, certain concession the right to issue notes were given to proposed institution. � Certain important provisions of the Act are as follows 1. Authorized the raising of $1, 200, 00 by subscription, the subscribers forming a corporation called “The Governor and company of the Bank of England”

2. The Corporation was to lend the whole of its capital to the Govt , interest @ 8% & $4000 for expenses of management. 3. Corp. have a privilege of bank for 12 years, Govt preserved the right of annulling the charter after giving 1 yr notice to. Corp. 4. Corp. was forbidden to trade in any merchandise, but allowed to deal in bill of exchange, gold or silver bullion & to sell wares or merchandise upon which it has advanced money.

� The new bank is a big competitor to the comparatively small private banks. � Monopoly of note issue: prohibited any other bank, with more than 6 partners, issuing promissory notes i. e. , bank notes � Limited supply of Bank of England notes � The Act gave monopoly of note issue to the Bank of England, so far joint stock companies were concerned, but left private banks having not more than six partners free to issue notes.

� Notes of pvt banks did not circulate to any appreciable extent � unprofitable and gave it up; began to develop deposit banking. � They received deposits which were at first withdrawable by letter, and later by cheques. � Printed cheque forms were first issued between 1749 & 1759. � Bank of England notes were not popular beyond the metropolis, as it did not have any outside branch. � Pvt banks in provincial cities began to play an important role after the middle of 18 th century.

� Restriction on monopoly � It was realized that joint stock banks with right of issue should be started outside London. � In 1826 an Act was passed which allowed banks to be started with unlimited liability, consisting more than 6 partners , with the right to issue notes, provided they have no office within a radius of 65 miles from London, it was removed –Mr. Joplin-no such monopoly was intended.

� Peel’s � No Act, 1844 limit to the amount of notes, which pvt bankers and after 1826 the country jointstock banks were allowed to issue. � resulted in numerous banking crisis and bank failures. � Extinction of the right of issue of bank notes and deposit banking came into place.

� Growth of deposit banking and cheque currency � Currency and Bank Notes Act, 1928 - Bank of England was given exclusive right to issue notes. � In 1947 it was nationalized. � History of Banking in India � India was not a stranger to the concept of Banking.

� Provisions of banking were found in Kautilya’s Arthashastra- Sahukars and Mahajans Manusmriti etc � Hundi � “hund”, means to collect. � The bills of exchange are generally used for the collection of debts. �

� For instance, when a merchant in Bombay sells goods to a merchant in Delhi, the former draws a bills of exchange on the latter, so to collect the price of those goods. llly when a merchant in Calcutta desires to collect a debt, due to merchants in Madras, the former may draw a Hundi for the amount upon the latter.

of “Hundis”-3 types � “Darshani hundi” payable at sight � “Muddati hundi” payable after specified period of time. � “Shah Jog Hundi” payable by drawee only to a respectable person. � Nature of document a promissory note or a hundi � unconditional undertaking that the defendants has promised to pay an amount to petitioner. � Types

inscription of word “Hundi” above the stamp is not sufficient to hold the document as “Shah Jog Hundi” � Usury- The Usurious Loans Act, 1918 � Usury, or high rate of interest, was widely prevalent in India. � In Bengal, money was frequently lent to farmers at 40% or 60% per annum, while the standing crop was mortgaged for repayment of the loan. � Mere

� Most writers attribute usury to the state of insecurity in India risk-low financial status of the borrowers. � Money lender rather than a banker. � State Money-Lenders Acts � The money lenders in India are regulated under the respective State Money-Lenders Acts e. g. , the Kerala Money Lenders Act, 1958, the Karnataka Money Lenders Act, 1961 etc

� Money- Lending legislations of various states have similar salient provisions � Requirement of Registration/license � Duty of money lenders with respect to maintaining and providing statement of accounts to the debtors. � Penalty for carrying on business without license � Intimidating the debtors or interfering with their day to day activities � Maximum rate of interests

� The Constitution of India has conferred power to legislate on matters relating to money lending to the states. � RBI working group/Radhakrishna Expert Group on Agricultural indebtedness (2008) recommended there should be stricter and more transparent regulation of Money. Lenders.

Indigenous banking � Pvt. firms or individuals � Business was hereditary and confined to few castes & communities like vaishyas, Jains, Marwaries and Chettis. � Financial intermediaries � Indigenous bankers v. money lenders � Deal in short term credit instrument like hundis and commercial bill. � They provided credit to traders, agriculturist, small producers and Govt also. � Lending on basis of promissory note.

� Simple method of accounting. � Easily accessible. � Do not have fix banking hours. � No much formalities and procedures. � Defects in Indigenous banking � Hindrance in the development of an organized money market. � High rate of interest � Involved other business. � Manipulating accounts � Secrecy of accounts, neither audited nor published. � Commission agents

� Deducting interest in advance-undeseriable practice. � Give loans for any purpose. � Suggestions: � Indian Central Banking Enquiry Committee, 1931 � The Banking Commission, 1971 � Only banking business and not any other activity. � Maintain account books in a prescribed and recognized form and get them audited. � Linked with commercial banks.

� Benefit of Bankers’ Book Evidence Act shpuld be extended to them. � Their banking practices need to be upgraded. � These banks are encouraged to become corporate bodies rather than continuing as family based enterprises.

Functions of Commercial bank � profit-based financial institution. � Primary functions Fixed or time deposit Saving Deposit Accepting deposits Current Deposit Recurring Deposit

Loans and advances Cash Credit Overdraft Purchasing and discounting of bills

Secondary Functions � Agency Functions Utility Functions � Transfer of funds/ Locker facility remittance � Payment of bills Foreign exchange � Underwriter Provide market info � Collection of cheque Advice to exporters � Collecting money on Behalf of customers � Income tax returns � Trustee, administrator

Functions of Industrial Development Bank of India (IDBI) � Set up in July 1964, as a wholly-owned subsidiary of RBI. Autonomy in 1976. � Apex institution in the arena of development banking. � Major role is to coordinate the activities of other development banks. � Provides medium & long term finance to business units.

� Functions: � Planning, promoting & developing industriesfill gaps in the industrial structure by conceiving, preparing & floating new projects. � Technical & administrative assistance for promotion, management & expansion of industry. � Providing refinance to the IFCI and other financial institutions. � Purchasing or underwriting shares and debentures of industrial concerns.

� Guaranteeing deferred payments due from industrial concerns. � Undertaking market and investment research, surveys and techno-economic studies. � Entrepreneurship development programme.

Leader Coordinator Innovator, promotional

� The scope of business of the IDBI extendeddirect industrial assistance by way of project loans, equipment finance scheme. � Assistance to service sector industries like health care, informatics. � Small Industries Development Bank of India (SIDBI)-1990 -subsidary to IDBI delinked in 1997 - apex bank in financing small scale industries.

Cooperative Banks � Germany � First cooperative credit society was Act (1904) � Registered under respective state Cooperative Societies Act. (1959). � Small financial entities. � Voluntary association of members of locality or professional community. � Operate in rural (finance farming, cattle) and urban areas (self employment, small scale units, personal finance). � They are governed by RBI (licensing, rate of interest, area of operation), State Govt (management, merging, liquidation) � Higher rate of interest on deposits. Credit oriented movement.

Cooperative Banking Structure State Cooperative Bank District/Central Cooperative Bank Primary Credit Societies/Urban Cooperative Bank

• • The Maclagan committee (1915) on cooperative, recommended some important policies regarding the three-tier system of co -operative societies. The first urban co-operative society was established in India, “Annyona Shakari Mandli Co-operative Bank‟ located in Baroda (Gujarat state) on 5 Feb 1889. Economic sustainable development. Banking to doorsteps of common people.

� The Objectives and Functions of the Urban Co. Operative Banks: � 1. Primarily, to rise funds for lending money to its members � 2. To attract deposits from members as well as nonmembers � 3. To encourage thrift, self-help ad mutual aid among members. � 4. To draw, make, accept, discount, by sell, collect and deal in bills of exchange, draft, certificates and other securities � 5. To provide safe deposits vaults. � 6. To issue letters of credit and traveler‟s cheques � 7. To arrange for the safe custody of valuables � 8. It acts as an agent of its customers � 9. To borrow funds and utilize them for giving loans to needy persons

o • • • Problems Many regulatory bodies. No expertise & skills. Recruitments are Politicized. Unduly dependent on refinance. No active participation of members. � Reforms � RBI suggested: Single regulatory body.

Reserve Bank of India (RBI) � Established on 1 st April, 1935 under the RBI Act, 1934. � Was established on recommendations of Hilton Young Commission. � RBI nationalized in 1949 � Originally a shareholders’ bank. � Paid up capital was Rs. 5 crores. � Took over the function of currency issue from GOI & power of credit control from SBI.

� In 1949 Banking Companies Act was enacted and now renamed as Banking Regulation Act, 1949. � Functions of RBI � RBI was constituted to: 1. Regulate the issue of banknotes 2. Maintain reserves with a view to securing monetary stability. 3. Operate the credit & currency system of the country to its advantage.

1. Issuer of currency in India ü Sole authority to issue, control & regulate currency in India. ü It issues & exchanges or destroys currency & coins not fit for circulation. ü Objective is to give adequate quantity of supplies of currency notes & coins in good quantity. 2. Banker to the Govt ü Performs merchant banking functions of State & Central Govts. ü Also acts as banker to GOI and State Govts.

� Accept money on account of the Govt, to make payment on behalf of the Govt. � Carries out exchange remittance& other banking operations including Govt securities and management of public debt of the govt. 3. Baker of Commercial Banks ü RBI act as Banker of Banks. ü Maintains banking accounts of all scheduled Banks. ü All banks keep and maintain their accounts with RBI

4. Organizer of Commercial Banking System Concerned with the organization of a sound & healthy commercial banking system. ü Ensuring effective co-ordination & control over credit through appropriate monetary & credit policies followed from time to time. ü 5. Regulator & supervisor of Financial Sysem Prescribes broad parameters of banking operations. ü Objective is to i. maintain public confidence in the system ii. protect depositors interest. iii. provide cost effective banking service to the public. ü

6. Financial Supervision ü Guidance of the Board for Financial Supervision (BFS), constituted in Nov 1994 as a committee of the Central Board of Directors of the RBI. ü Objective of BFS: undertake consolidated supervision of financial sector comprsing commercial banks, financial institutions & non banking financial institutions. ü BFS through the Audit Sub-Committee aims at upgrading the quality of the statutory audit & internal audit functions in banks & FI.

� BFS oversees the functioning of Department of Banking Supervision(DBS), Department of Non-Banking Supervision(DNBS) & Financial Institution Division (FID). � Gives direction on the regulatory & supervisory issues. 7. Monetary Authority � RBI formulates, implements & monitors the monetary policy. � Objective is maintaining price stability & ensuring adequate flow of credit to productive sectors.

8. Control the volume of credit ü Exercise it control over volume of credit created by the commercial banks in order to ensure price stability. ü Quantitative Credit Control 1. Bank Rate 2. Repo Rate 3. Reverse Repo Rate 4. Open Market Operations 5. Variable Reserve Requirements 6. Selective Credit Control

9. RBI has been designated under the Payment & Settlement System Act, 2007 as the authority to regulate & supervise payment system in the country, including those operated by non- banks such as CCIL & other payment system providers. 10. Manager of Foreign Exchange Facilitate external trade & payment & promote orderly development & maintenance of foreign exchange market in India

11. Maintains the value of currency Maintain not the internal value of currency, i. e. , the Indian rupee, but it has also maintain the external value of the currency. 12. It is also concerned with the development of rural banking. 13. It plays an important role in the promotion of FI. RBI has taken steps to enable the Commercial Banks to open up branches in foreign centres.

14. Issue license to commercial banks/branches No commercial bank can commence the business of banking without obtaining license from RBI. § BR Act, 1949, Sec. 22 § License may be issued subject to following Conditions: i. Company is or will be in a position to pay to its present or future depositors in full as their claims accrue. §

� Affairs of the company are not conducted or not likely to be conducted in a manner detrimental to the interest of present or future depositors. � The general character of the proposed management of the company will not prejudicial to public interest or the interest of the depositors � Company has adequate capital structure & earning prospects. � Public interest will be served by grant of a license to a co.

15. Power to inspect the commercial banks § § § S. 35 of BR Act, 1949 RBI itself or on direction of Central Govt may at any time cause an inspection, carried out by one or more officers of any bank & its books & accounts. RBI shall supply to the banking company a copy of its report on such inspection. If there are defects, the banks concerned are required to rectify them. RBI has power to appoint Additional Directors on the Board of Directors.

� RBI may also cause scrutiny to be made by one or more of its officers, of the affairs of any banking company and its books and accounts. � It is duty of every employee of bank to produce such books, accounts and other documents in his custody. � Submit a report to Central Govt, if it is of opinion that the affairs of the banking company-detriment of the interests of its depositors.

� After giving such opportunity to the bank to make a representation, by order in writingi. prohibit the banking Co. from receiving fresh deposits. ii. Direct the RB for the winding up of the banking company. iii. Publish the report. § Any person making an inspection may examine on oath any director or employee of a banking company.

� Overall control over Management of Banks � Directions & circular letters issued by RBI are binding on the banking companies. � S. 35 B of BR Act, 1949 the approval of RBI is necessary for the appointment or reappointment or termination of appointment of chairman, managing & whole time director.

� Power to supersede the Board of Directors of Banking Company � RBI in consultation with Central Govt can supersede the Board of Directors for a period not more then 6 months which could be extended from time to time, totally not exceeding 12 months in case it is in public interst.

� Selective credit control � S. 21 Power of RB to control advances by banking companies � RBI may give directions to banking companies generally or to any banking companies or group of banking companies in particular to� The purpose for which advance may or may not be granted. � The margins to be maintained in respect of secured advances.

Control of RBI over NBFC & FI � 45 JA. Power of Bank to determine policy and issue directions. � To all or any of the NBFC’s � Relating to: • income recognition • accounting standards • making of proper provision for bad and doubtful debts • capital adequacy based on risk weights for assets and credit conversion factors for off-balance sheet items and • relating to deployment of funds

� nonbanking financial companies shall be bound to follow the policy so determined and the directions so issued. � If any directions are not complied, the Bank may prohibit the NBFC from accepting any deposit. May also order not to sell, transfer, create charge or mortgage or deal in any manner with its property and assets without prior written permission of the Bank for such period not exceeding six months from the date of the order. � Directions: • a) the purpose for which advances or other fund based or non-fund based accommodation may not be made; and

� b) the maximum amount of advances or other financial accommodation or investment in shares and other securities which, having regard to the paid-up capital, reserves and deposits of the non-banking financial company and other relevant considerations, may be made by that nonbanking financial company to any person or a company or to a group of companies.

� S. 45 K. Power of Bank to collect information from non-banking institutions as to deposits and to give directions. � Information: • the amount of the deposits, • the purposes and periods for which, and the rates of interest and other terms and conditions on which, they are received. • Directions: • the rates of interest payable on such deposits, and the periods for which deposits may be received.

� If any NBFC fails to comply with any direction given by the Bank, the Bank may prohibit the acceptance of deposits by that non-banking institution. � If so required by bank, NBFC shall send on its on cost a copy of its annual balance sheet and P&L A/C or other annual accounts to every person from whom the non-banking institution holds, as on the last day of the year to which the accounts relate, deposits higher than such sum as may be specified by the Bank.

� � � S. 45 L. Power of Bank to call for information from financial institutions and to give directions. the paid-up capital, reserves or other liabilities, the investments whether in Government securities or otherwise, the persons to whom, and the purposes and periods for which, finance is provided and the terms and conditions, including the rates of interest, on which it is provided. In issuing directions to any financial institution the Bank shall have due regard to the conditions in which, and the objects for which, the institution has been established, its statutory responsibilities, if any, and the effect the business of such financial institution is likely to have on trends in the money and capital markets.

� S. 45 M. Duty of non-banking institutions to furnish statements, information or particulars etc. , required by Bank. � S. 45 MC. Power of Bank to file winding up petition. � A non-banking financial company shall be deemed to be unable to pay its debt if it has refused or has failed to meet within five working days any lawful demand made at any of its offices or branches

� 45 N. Inspection. � purpose of verifying the correctness or completeness of any statement, information or particulars furnished to the Bank or for the purpose of obtaining any information or particulars which the non-banking institution has failed to furnish on being called upon to do so; or � Duty to furnish that authority with any statements and information

� CHAPTER IIIC � PROHIBITION OF ACCEPTANCE OF DEPOSITS BY UNINCORPORATED BODIES � 45 S. Deposits not to be accepted in certain cases. � (1) No person, being an individual or a firm or an unincorporated association of individuals shall, accept any deposit � Except, receipt of money by an individual by way of loan from any of his relatives

� 45 T. � on Power to issue search warrants. an application by an officer of the Bank or of the State Government authorised in this behalf stating his belief that certain documents relating to acceptance of deposits in contravention of the provisions of section 45 S are secreted in any place within the local limits of the jurisdiction of such court, issue a warrant to search for such documents.

Deposit Insurance & Credit Guarantee Corporation � Deposit Insurance Scheme was introduced under the Deposit Insurance & Credit Guarantee Corporation Act, 1961 in the wake of certain bank failures. � India is second major country to provide insurance cover to bank depositors. � Under the above Act Deposit Insurance Corporation was established with effect from 1 st January 1962. � DIC looks over the undertaking of the Credit Guarantee Corporation of India Ltd. , a public Ltd. , Company promoted by RBI w. e. f 15 th July 1978.

� With integration of two organization the Corporation was renamed as the Deposit Insurance Credit Guarantee Corp (DICGCs). v The functions & claims of DICGC are governed by the provisions of the Deposit Insurance & Credit Guarantee Corporation Act, 1961& Insurance & Credit Guarantee Corporation General Regulations, 1961 framed by RBI in exercise of the powers conferred by the said Act.

� DICGC has twin objectives: � 1. giving insurance protection to small depositors in bank. � 2. providing guarantee support to credit extended by banks & approved financial institutions to certain categories of small borrowers, particularly those belonging to the weaker & neglected sections of the society as well as to small-scale industrial units.

� Deposit insurance functions of DICGC � Under DICGC Act, all commercial banks including RRB’s (1968) are registered as insured banks, there by affording uniform protection to all bank depositors. � DICGC is extending insurance cover to small depositors with the object of maintaining the confidence of small investors in the banking system of the country & also promoting financial stability. Indian depositors enjoy high degree of protection.

� Role of Insurance Premium & limit of Cover � Each depositor of insured bank which goes into liquidation is entitled to receive from Corp. , through liquidator, repayment of his amount up to Rs. 1, 0000. � Where a depositor has would have several accounts, either in one branch or different branches of a bank, the aggregate of all credits in such accounts would fall within this limit, such that the eligible repayment shall not exceed Rs. 1, 000.

� Amount which is excess of Rs. 1, 000 may not be given to depositors unless bank in liquidation is having sufficient funds which can be given all on pro-rata basis after providing for expenditure in liquidation proceedings. � Banks are required to pay the premium @ 10 paise per annum for every RS. 100 of total amount of assessable deposits. � The insurance cover is thus available to the depositors free of cost.

� Deposits of the Central & State Govts, foreign Govts. & the banking companies are not covered under the scheme. � The amount of deposit covered for the purpose of insurance is the net sum owned by the bank after adjustment of any deductions due from the depositor. � The Corp. is empowered to request the RBI to inspect an insured bank & obtain the Reserve Bank’s Inspection report. � The Act also empowers the Corp. to require the Insured bank to furnish any information relating to their deposits & to have free access to records of Insured bank.

Provisions of BR Act, 1949 � 7. Use of words "bank", "banker", "banking" or "banking company" � (1) No company other than a banking company shall use as part of its name [or in connection with its business] any of the words "bank", "banker" or "banking" and no company shall carry on the business of banking in India unless it uses as part of its name at least one of such words. � (2) No firm, individual or group of individuals shall, for the purpose of carrying on any business, use as part of its or his name any of the words "bank", "banking" or "banking company".

� � � 8 - Prohibition of trading Notwithstanding anything contained in section 6 or in any contract, no banking company shall directly or indirectly deal in the buying or selling or bartering of goods, except in connection with the realisation of security given to or held by it, or engage in any trade, or buy, sell or barter goods for others otherwise than in connection with bills of exchange received for collection or negotiation or with such of its business as is referred to in section 6(1) (i) [PROVIDED that this section shall not apply to any such business as is specified in pursuance of clause (o) of sub-section (1) of section 6. ] Explanation. --For the purposes of this section, "goods" means every kind of movable property, other than actionable claims, stocks, shares, money, bullion and specie, and all instruments referred to in clause (a) of sub-section (1) of section 6.

9 - Disposal of non-banking assets � Notwithstanding anything contained in section 6, no banking company shall hold any immovable property howsoever acquired, except such as is required for its own use, for any period exceeding seven years from the acquisition thereof or from the commencement of this Act, whichever is later or any extension of such period as in this section provided, and such property shall be disposed of within such period or extended period, as the case may be: � PROVIDED that the banking company may, within the period of seven years as aforesaid deal or trade in any such property for the purpose of facilitating the disposal thereof: � PROVIDED FURTHER that the Reserve Bank may in any particular case extend the aforesaid period of seven years by such period not exceeding five years where it is satisfied that such extension would be in the interests of the depositors of the banking company. �

PART IIC Acquisition of the undertakings of banking companies in certain cases � 36 AE. Power of Central Government to acquire undertakings of banking companies in certain cases � (a) has, on more than one occasion, failed to comply with the directions given to it in writing under section 21 or section 35 A, in so far as such directions relate to banking policy, or � (b) is being managed in a manner detrimental to the interests of its depositors, and that— � (i) in the interests of the depositors of such banking company, or � (ii) in the interest of banking policy, or

� (ii) � (iii) in the interest of banking policy, or for the better provision of credit generally or of credit to any particular section of the community or in any particular area, � it is necessary to acquire the undertaking of such banking company, the Central Government may, after such consultation with the Reserve Bank as it thinks fit, by notified order, acquire the undertaking of such company � PROVIDED that no undertaking of any banking company shall be so acquired unless such banking company has been given a reasonable opportunity of showing cause against the proposed action.

� (2) on the appointed day, the undertaking of the acquired bank and all the assets and liabilities of the acquired bank shall stand transferred to, and vest in, the Central Government.

� (3) The undertaking of the acquired bank and its assets and liabilities shall be deemed to include all rights, powers, authorities and privileges and all property, whether movable or immovable, including, in particular, cash balances, reserve funds, investments, deposits and all other interests and rights in, or arising out of, such property as may be in the possession of or held by, the acquired bank immediately before the appointed day and all books, accounts and documents relating thereto, and shall also be deemed to include all debts, liabilities and obligations, of whatever kind, then existing of the acquired bank.

� all contracts, deeds, bonds, agreements, powers of attorney, grants of legal representation and other instruments of whatever nature subsisting or having effect immediately before the appointed day and to which the acquired bank is a party or which are in favour of the acquired bank shall be of as full force and effect against or in favour of the Central Government, or as the case may be, of the transferee bank, and may be enforced or acted upon as fully and effectually as if in the place of the acquired bank the Central Government or the transferee bank had been a party thereto or as if they had been issued in favour of the Central Government or the transferee bank, as the case may be.

� If, on the appointed day, any suit, appeal or other proceeding of whatever nature is pending by or against the acquired bank, the same shall not abate, be discontinued or be, in any way, prejudicially affected by reason of the transfer of the undertaking of the acquired bank or of anything contained in this Part, but the suit, appeal or other proceeding may be continued, prosecuted and enforced by or against the Central Government or the transferee bank as the case may be.

� 36 AF. Power of the Central Government to make scheme � (1) The Central Government may, after consultation with the Reserve Bank, make a scheme for carrying out the purposes of this Part in relation to any acquired ban

� the continuance of the right of any person who, on the appointed day, is entitled to or is in receipt of, a pension or other superannuation or compassionate allowance or benefit, from the acquired bank or any provident, pension or other fund or any authority administering such fund, to be paid by, and to receive from, the Central Government or the transferee bank, as the case may be, or any provident, pension or other fund or any authority administering such fund, the same pension, allowance or benefit so long as he observes the conditions on which the pension, allowance or benefit was granted, and if any question arises whether he has so observed such conditions, the question shall be determined by the Central Government and the decision of the Central Government thereon shall be final;

� 36 AG. Compensation to be given to shareholders of the acquired bank � (1) Every person who, immediately before the appointed day, is registered as a holder of shares in the acquired bank or, when the acquired bank is a banking company incorporated outside India, the acquired bank, shall be given by the Central Government, or the transferee bank, as the case may be, such compensation in respect of the transfer of the undertaking of the acquired bank as it determined in accordance with the principles contained in the Fifth Schedule.

� 36 AG. Compensation to be given to shareholders of the acquired bank (1) Every person who, immediately before the appointed day, is registered as a holder of shares in the acquired bank or, when the acquired bank is a banking company incorporated outside India, the acquired bank, shall be given by the Central Government, or the transferee bank, as the case may be, such compensation in respect of the transfer of the undertaking of the acquired bank as it determined in accordance with the principles contained in the Fifth Schedule.

� (4) If the amount of compensation offered in terms of sub-section (3) is not acceptable to any person to whom the compensation is payable, such person may, before such date as may be notified by the Central Government in the Official Gazette, request the Central Government in writing, to have the matter referred to the Tribunal constituted under section 36 AH.

� 36 AH. Constitution of the Tribunal � (1) The Central Government may, for the purpose of this Part, constitute a Tribunal which shall consist of a Chairman and two other members. � (2) The Chairman shall be a person who is, or has been, a Judge of a High Court or of the Supreme Court, and, of the two other members, one shall be a person, who, in the opinion of the Central Government, has had experience of commercial banking and the other shall be a person who is a chartered accountant within the meaning of the Chartered Accountants' Act, 1949

� The Tribunal may, for the purpose of determining any compensation payable under this part, choose one or more persons having special knowledge or experience of any relevant matter to assist it in the determination of such compensation.

� 36 AI. Tribunal to have powers of a civil court � (1) The Tribunal shall have the powers of a civil court, while trying a suit, � (a) summoning and enforcing the attendance of any person and examining him on oath; � (b) requiring the discovery and production of documents; � (c) receiving evidence on affidavits; � (d) issuing commissions for the examination of witnesses or documents.

� 37. Suspension of business � (1) The High Court may on the application of a banking company which is temporarily unable to meet its obligations make an order (a copy of which it shall cause to be forwarded to the Reserve Bank) staying the commencement or continuance of all actions and proceedings against the company for a fixed period of time on such terms and conditions as it shall think fit and proper, and may from time to time extend the period so however that the total period of moratorium shall not exceed six months.

� (2) No such application shall be maintainable unless it is accompanied by a report of the Reserve Bank indicating that in the opinion of the Reserve Bank the banking company will be able to pay its debts if the application is granted.

� (3) When an application is made under subsection (1), the High Court may appoint a special officer who shall forthwith take into his custody or under his control all the assets, books, documents, effects and actionable claims to which the banking company is or appears to be entitled and shall also exercise such other powers as the High Court may deem fit to confer on him, having regard to the interests of the depositors of the banking company. ]

� (4) Where the Reserve Bank is satisfied that the affairs of a banking company in respect of which an order under sub-section (1) has been made, are being conducted in a manner detrimental to the interests of the depositors, it may make an application to the High Court for the winding up of the company, and where any such application is made, the High Court shall not make any order extending the period for which the commencement or continuance of all actions and proceedings against the company were stayed under that sub-section.

� Dr. Unit III Banker & Customer Hart: “a customer is one who has account with a banker or for whom a banker habitually undertakes to act as such. ” � For the purpose of KYC policy, customer is defined as: � i. a person or entity that maintain account with &/or has business relation with the bank. � ii. One on whose behalf the account is maintained.

� Customer is one who has either a current account or a deposit account or, in absence of it, some relation with the bank in the ordinary course of business, that can be seen as banking business. � Paget: to constitute a “customer”, there must be some recognizable course or habit on the part of a person of dealing with bank in the nature of regular banking business. An isolated transaction or a series of transaction not Sufficient. He does not seems to favour the school, which thinks that duration of relationship is not of the essence.

� Single transaction may constitute a customer: Savory & Co. v. Lloyds Bank Ltd � Frequency anticipated � Frequency of transaction is not essential to constitute a person as a customer but it is true to say that his position is must be such that transaction are likely to become frequent. � Dealing to be of a banking nature � If a person occasionally goes to a cashier of bank & gets cheques cashed or deposits, valuables or securities for safe custody or buy some stamps, he does not thereby become a customer of the bank, it is a casual service not a transaction of banking business.

� H. L Hart: “ a customer is one who has an account with a banker or for whom a banker habitually undertake to act as such. ” � HC of Kerala in Central Bank of India Ltd. v. Gopinath Nair, AIR 1970 Ker. 74. � A customer is a person who has the habit of resorting to the same place, to do the business. � A customer is a person whose money has been accepted on the footing, that the banker will honour up to the amount standing to his credit, irrespective of his connection being of short or long standing. � Deposit doesn’t constitute bailment.

Debtor/ Creditor Agent/ Principal Lessor/ Lessee Creditor/ Debtor Bailor/ Bailee

� Customer (creditor) to make demand on banker (debtor) � Joachimson v. Swiss Bank Corporation � Debt due from bank to customer & debt due from ordinary borrower have two distinctions. So far banker is concerned the rule that debtor should find , doesn’t apply. Here the creditor (customer) has to make a demand to the debtor (bank). The demand can be made only at that branch of the bank where customer has an account.

Debtor & Creditor � Velji Lakhamsey & Co. v. Dr. Bannaji (1955) 25 Comp. Cas 395. � Any amount due from banker to customer cannot be claimed as preferential creditor if the bank is wound up. But customer may give certain specific directions to the bank & constitute bank as his agent. Agency brings about fiduciary relationship which lasts until the agency is terminated.

� Indian Bank Aluminium v. Industries Ltd (1990)69 Comp Cas 427 (Ker) (DB) � The company got license to import ignots. � By letter dated 4 th February 996 the company requested to bank to execute an undertaking to the foreign supplier to effect import. Accordingly, the bank gave undertaking to make remittance to the foreign supplier. � By the letter dated 10 th May 1996 company informed the bank that it had deposited requisite money & requested it to remit money to Govt.

� In the same letter it also informed bank that it would be depositing the money for Calcutta consignment soon & actually deposited money on 23 rd May 1996. � Bank made remittance on 10 th July 1996. � In the mean time, the rupee was devalued, as a result of which the Co. had to pay additional amount of Rs. 8. 78 lacs which it claimed from bank for its negligence in not remitting the money in time, which it could do.

� Holding the bank liable for loss, the Court observed : “. . the bank which was required to possess expertise, instead of exercising expertise or care, acted carelessness…it is not an unforeseeable event like devaluation which was directly responsible for loss. ” � In determining the negligence, the test is the standard of the ordinary competent banker. � The requisite standard is that which ordinary competent bankers ought to exercise & not what the bankers do in fact exercise.

� Hedely Byrne & Co. Ltd. v. Heller & Partners Ltd. [1963]2 All ER 577. � If the banker upon receiving a request for information or advice in circumstances that show that his skill or judgment in being relied upon gives the information or advice without clear disclaimer of responsibility, he accepts a legal duty to exercise proper care in doing so. , even though he is not under any contractual or fiduciary obligation to the inquirer, if he is negligent an action for damages will lie.

� Tournier v. National Provincial & Union Bank of England [1924]1 KB 461. � Duty of secrecy is not absolute but qualified. � i. where disclosure is under compulsion of law. � ii. Where there is a duty to the public to disclose. � iii. Where the interest of the bank require disclosure. � iv. Where the disclosure is made by the express or implied consent of the customer.

� Sec. 5 of Bankers’ Book Evidence Act, 1891: no officer of the bank shall in any legal proceeding to which bank is not party be compellable to produce any bankers’ book… � Nobody can seek through a writ petition an inquiry into commercial transactions between the banker and the customer. �

� Duties of Banker � a. banker has contractual duty of care to his customer in the conduct of customer business. � b. duty to honour cheque up to the credit balance or agreed overdraft. � c. Duty not to pay without authority: � when the banker pays a cheque which is void of material alteration, or on which the drawer signature has been forged, the general rule is that the customer’s account cannot be debited with the amount so paid.

� d. duty of secrecy � e. If in a particular case the giving of advice forms part of banker’s business, it is under a duty to take reasonable care in giving it. � f. Safe custody arrangements. � g. Bank Statement: a banker is under a duty to keep accurate record of operations of its customer’s account. � h. a bank may seek exclusion of liability in matters specifically provided in the contract between the bank & his customer.

Banker as a agent of Customer � When a banker buys or sells securities on behalf of his customer, he performs agency function. � Payment of tax, insurance premiums, telephone or electricity bills, prepare income tax returns of customers. � Similarly when banker collects cheques, dividends, bills or promissory note on his customer behalf, he acts as his agent. � Banker may also act in various other agency capacities for example, as a trustee, attorney, executor, auctioneer, correspondence with income tax authorities etc.

� Eg. A entrusts Rs. 50, 000/- to his banker B for buying securities of stated particulars. B’s position is an agent to A (customer) � No bank provides service without authority of the customer � In a case, ICICI issued General Insurance Medical Policy for his customer without his consent & withdrew Rs. 9000/- from his account. Consumer forum has ordered to refund whole amount and compensation of 10, 000.

� Condition for payment of deposit amount. � i. creditor must demand payment. � Banker accepts money with additional obligation to honour cheque. � If the banker returns the deposited amount on his own accord by closing the account, cheque issued by depositor is dishonored, his reputation might be effected. � ii. Proper place and time � Demand for the payment of the deposit must be made at the same branch of the bank concerned. � Now Central Banking Solution (CBS) system has made payment possible at any branch of the same bank & under Automatic Teller Machine (ATM) customer can take payment anywhere at any bank.

� Demand must be made during banking hours only on a working day of the bank. � iii. Demand must made in proper manner � Through a cheques, drafts, order or otherwise. � Demand should not be made verbally through a telephonic message or in any such manner. � The above aspects also explains that bank is not an ordinary debtor but a favored debtor or privileged debtor. Some more points are as follows: � No security for deposits.

� Ordinary loans are subject to limitation period. In case FD there is automatic renewal. � The bank can claim right to combine the accounts of the customer whereas such right cannot be claimed in case of ordinary debt.

� Refusal to providing services by bank to its customer not proper � In Purewal & Associates v. Punjab National Bank AIR 1993 SC 954. � It was held that the appellants who manufacture watches & clocks were denied banking services on the ground that the appellants, who allegedly owe large sum of money to the bank, have failed and neglected to repay the same.

� Appellants alleged that the monopolist nationalized banking sector has virtually made it impossible for the appellants to avail themselves of normal banking services & operation such as furnishing of Letter of Credit for import purposes, payment of wages, taxes, salaries and payment of raw – material suppliers etc. � SC held that the respondent shall allow the operations of one current account, which will be free from the incidents of banker’s lien , so as to enable the appellants to carry on its normal day-to-day business transaction.

� Respondent bank is at liberty to institute a suit or other appropriate proceedings against the appellants for the recovery of alleged dues.

Special features of relationship between Banker & Customer � It may be studied under following headings: � 1. general obligation of banker towards customer. � 2. rights of bankers. � 3. the obligations & rights of the customers. � Banker’s obligations : statutory duties of banks � 1. Obligation (duty) to honour cheques. � 2. Obligation to maintain secrecy of accounts.

� 3. Obligation to honour guarantee. � 4. Obligation to honour letter of credit. � 5. Obligation of recovery of debts by legal means. � 6. Dropping box for collection of cheques & banks liability. � 7. To maintain correct account of the customer. � 8. Obligation of banker not to convert excess credit as overdraft.

� 1. Obligation (duty) to honour cheques � Sec 31 of NI Act, 1881: Liability of drawee of cheque. — � 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 so to do, and , in default of such payment, must compensate the drawer for any loss or damage caused by such default.

� The banker is bound to honour his customer cheques provided following conditions are fullfilled: � i. there must be sufficient funds � By sufficient funds is meant funds at least equal to the amount of the cheque presented. � The funds must be sufficient in the hands of the banker. � Generally cheques sent for collection by the customer are not treated as cash in the hands of the banker until the same is realised.

�A banker should, therefore, be given sufficient time to realize the amount of cheques sent for collection before the said amount is drawn by the customer. If the customer draws a cheque on such unrealized amounts, the banker will be justified in dishonoring the cheques with the remark “effect not cleared” � No obligation to make part payment of the cheque. � If the payee of the cheque makes a deposit in the account of the drawer to make up such defciency…

� ii. Funds must be properly applicable to the payment of the cheque � Customer might be having several bank accounts in his various capacities. � It is essential that the account on which a cheque is drawn must have sufficient funds. � If some funds are earmarked by the customer for some specific purpose, the said funds are not available for honoring his cheque. � Customer cannot draw a cheque on the basis of the FD with the banker as it is deposited under a separate agreement for a specific period & can be withdrawn in the prescribed manner and not through a cheque.

� iii. Banker must be duly required to pay � Within 3 months from the date of cheque must be presented for payment. On the expiry of this period the cheque is treated as stale & banker dishonors the cheque. � A post dated cheque is also dishonored, because the order of the drawer becomes effective only on the date given in the cheque.

� iv. Justified dishonor � The bank has valid conditions for dishonor of cheques e. g. , undated, post dated cheques, mutilated cheques, cheques with material alteration, where amount differs in words and figures, death and insolvency of drawer etc. � Garnishee Order � No obligation on banker to honour cheque on the receipt of garnishee order, issued under Order XXI Rule 46 of CPC, 1908.

� If the debtor fails to pay debt owned by him to his creditor, he may apply to the court for the issue of garnishee order on the banker of his debtor. � The account of the customer with the banker thus, becomes suspended & banker is under an obligation not to make any payment from the account concerned after receipt of garnishee order. � The creditor, on whose request the order is issued, is called judgment creditor; the debtor whose money is frozen is called judgment debtor & the banker who is the debtor of the judgment debtor is called the Garnishee.

� Garnishee order is issued in two parts � 1. Court directs the banker to stop payments out of the account of the judgment debtor. Such order, is called Order Nisi. � Seeks explanation from banker as to why the funds in the said account should not be utilized for meeting judgment creditor’s claim. � The banker is prohibited from paying the amount due to his customer on the date of receipt of the Order Nisi. � Banker should immediately inform the customer so that dishonor of cheque issued by him may be avoided.

� After banker files his explanation, if any, the court may issue final order, called order Absolute. � The entire balance or specified amount is attached to be handed over to the judgment creditor. � On receipt of such order the banker is bound to pay garnished funds to the judgment creditor & his liability towards his customer is discharged to that extent. � The suspended account may be revived after payment has been made to judgment creditor as per directions of the court.

� If the entire amount in the account is garnished or attached & if the banker pays any amount out of the same which is in excess of the amount of debt of the creditor, he will render himself liable for such payment. � Overdraft � The right to set off any debt owed by the customer before the amount to which the Garnishee order applies is determined. But debt has to be actual debt not a contingent one.

� G. O attaches the balance standing to the credit of the principal debtor at the time the order is served on the banker. � Garnishee order does not applies to: � 1. amounts of cheques, draft, bills etc. , sent for collection by the customer, which remains uncleared at the time of the receipt of the order. � 2. sale proceeds of the customer securities, which have not been received by the banker. � G. O cannot attach the amounts deposited into the customer account, after G. O has been served on the banker.

� G. O is not effective on the payments already made by the banker before order is served upon him. • Cheque presented for payment and its actual payment is not yet been made… ü G. O is not applicabe to: 1. Money held abroad by the judgement debtor. 2. Securities held in the safe custody of the banker. q G. O may be served on the head office of the bank concerned & it will be treated as sufficient notice to all of its branches. H. O is given reasonable time to intimate all the concerned branches.

Joint accounts: joint account is opened in the names of two or more persons � if only one of them is a judgement debtor the joint account cannot be attached. � partnership accounts: if a partner is a judgement debtor only his Individual account may be attached and not that of the firm or other partners. � When the garnishee deposits the attached amount in the court, creditor becomes a secured creditor. � Rikhabchand Mohanlal Surana v. Sholapur Spinning and � weaving Co. Ltd. When the attachment is only by a prohibitory order then the attaching creditor has no right in the property attached but once the property or money comes into the position of the court then it would follow that they are constructively held by the court for attaching creditor. � Credit balance in the account of a customer of a banker may be attached by Income Tax authorities. �

� Loss or damage in section 31 of Negotiable Instrument Act means and includes � 1. monitory loss suffered by the customer and � 2. loss of credit or reputation in the market � in case of traders and Businessman reputation of credit is a Foundation on which their business depend. � there is natural presumption in law that a trader suffer loss of reputation in case his cheque is wrongfully dishonored by his banker. � He is entitled to claims not only general damages but also substantial damages for such loss of credit or reputation and even without proving the special loss suffered by him because in his case loss is presumed.

� Special loss could be taken into consideration for arriving at the exact quantum of damages. � In New Central Hall v. United commercial bank Limited AIR 1959 Mad 153 � The clerk of the bank forgot to credit the customer account with the money deposited by the customer and as a result number of cheques issued by him were dishonored by bank. � The amount of damages claimed by the customer for loss of his reputation need not depend on amount of cheque. If the smaller amount of cheque is wrongfully dishonored, the greater is the damage caused to the reputation of the trader and larger would be the damages he would be entitled to.

� The banker disobeyed the customer order to stop payment of a cheque, subsequently another cheque was dishonored as a result of insufficiency of funds. � Court will determine actual amount of substantial damages my taking into account all relevant facts namely: � The financial position of the customer the reputation he enjoys in market and customs and practices of his business. � The court may also grant special damages if the customer is able to prove that he has a suffered loss, as a result of losing a profitable contract due to wrongful dishonor of his cheque.

� The Liability of the drawee bank for the wrongful dishonour of cheque is towards the drawer and not the payee. � Non-traders are entitled only to nominal damages. If they prove that they have sustained special damages. . . � 2. Obligation to maintain secrecy of accounts � Financial dealings with the customer depicts the true state of his financial position. � If it is disclosed to others the customer's repetition may suffer and he may incur losses also. It may effect his credit worthiness and business.

� banker has an obligation to take utmost care in keeping secrecy about the accounts of his customers. � Take all necessary precautions and care to ensure that no such information leaks out of the account books. � Tournier V. National Provincial and Union Bank of England (1924) 1 K. B. 461. � Tournierwas a temporary employee in M/s. Kenyan Co. and he was to be made a permanent employee. � He overdrew from the said bank Rs. 9, 856 and agreed to pay by weekly instalments. � one day he did not attend duty. the director of the company telephoned the bank manager know his address. In their conversation the bank manager revealed that he had taken overdraft and made payment to bookmaker.

� The director misconceived the information and came to conclusion that Tournier has turned to be or gambler and was in practice of betting and also insolvent. . . � Secrecy of customers account maybe dispensed within the following circumstances: � When the law requires such disclosure to be made � When the practices and usages amongst the bankers permit such disclosure.

� Disclosure of information required by law � Income Tax Act, 1961: � S. 131 income tax authorities possess the same powers as are vested in a court under CPC. � S. 133 empowers income tax authorities required banking companies to furnish statement of account and affairs which is relevant to any proceedings under the Act. � II. Disclosure to Police � S. 94 Cr. P. C: the banker is not exempted from producing account books before the police. � The police officer conducting investigation may also inspect the bankers books for the purpose of such investigations. (sec. 5 Bankers Book Evidence Act)

� Duty to the public to disclose � Crime has been committed and information in the bank’s possession may lead to apprehension of the culprits. � Where the bank considers that the customer is involved in activities prejudicial to the interest of the country. � Where the bank’s book reveal that the customer is contravening the provisions of any law. � where sizable funds are received from the foreign countries.

� S. 26 of BR Act, 1949 every banking Co. is required to submit a return annually of all such accounts which have not been operated upon 10 yrs. � S. 45 -B of RBI Act, 1934 every banking Co. should provide credit information to the RBI. � II. Disclosure permitted by banker’s practices & usages. � 1. with express or implied consent of the customer. � Direct banker in writing to intimate the balance or in his A/C or other details to his agent or consultant.

� Oral enquiry at the counter. � Pass book if has to be sent through messenger, in closed cover. � Should recognize the voice of customer. � Implied consent � Info to Guarantor. � Trade reference. � Implied consent cannot be taken for granted. Even when customer and enquirer are closely related. � Banker may disclose state of customer A/C in order to legally protect his own interest. � Banker has to recover dues from customer, disclosure to guarantor or solicitor becomes necessary.

� Banker’s references- info from other bankers. � Precautions to be taken by the banker 1. Banker should disclose his opinion based on the exact position of the customer as is evident from his account. 2. General statement of the customer’s account without disclosing the actual figures. he should not speak too low or too high.

� Risk of unwarranted and unjustified disclosure � Liability to the customer � duty to maintain secrecy continue even after account is closed. � Substantial amount man be claimed if customer sustained material damage. � Answer honestly. � Liability to the third parties � Banker furnishes information with the knowledge that it is false. � Such party relies on the information and suffers losses.

in Hedley Byrne v. Heler & partners Ltd. (1964) A. C. 465 v Banker of a Co. in a reply to an enquiry from a firm gave his opinion: the Co. is respectfully constituted, considered good for its normal business engagements. v Opinion was given without responsibility. v Co. went into liquidation. � Disclaimer made by banker. � HOL

� 3. obligation to honour guarantee � Plays significant role in credit transaction. � No specific statutory provision but according to uniform customs and practices for Documentary credits…except in following two conditions: � i. in case of fraud and � ii. Where irreparable loss or damage may arise. � Bank guarantee amounts to service to customer and therefore, failure to honour it amounts deficiency in service.

� Bank is liable to honour guarantee given by it even though the purpose for which it was given has been failed. � Obligation to maintain correct account of the customer & not to convert excess credit as overdraft. � Bank is not justified to claim interest on such excess amount treating it as overdraft. � It is not for the account holder to discover the mistake committed by the bank.

� Dropping collection of cheques in drop boxes for Cheque Open Crossed

� Crossed cheques are not allowed to paid in cash. Such cheques have to be deposited to bank for collection; known as collecting bank. � Who will be collecting bank? � Depends on type of crossing. � In case of ordinary crossing any bank in India may act as collecting bank. � In case of specific crossing only that bank in whose name it is specifically crossed can act as collecting banker.

� In ordinary crossing, payee should have a account in bank but in case of specific crossing his account must be in that bank against whose name it has been specifically crossed. � Depositing of cheques � Cheques for collection are deposited through ‘pay in slip’ form by payee himself or any other person. � Bank employee has to return counterfoil of the ‘pay in slip’ with his signature & seal of the bank which remains as proof for deposit. � If collection is not made within reasonable time he may remind with the counterfoil.

� During 2005 there was drop box without any receipt from bank. � It created hue and cry all over the country. � Complaints of wrong debit of account, loss of cheque, wrongful dishonor, altered etc. � It came to the knowledge of RBI it issued a circular to ensure both drop box facility and acknowledgment of cheques are made available at collection counters. � No bank can refuse acknowledgment of cheques if they are tendered at bank counters. Bank cannot compel customer to drop cheque in cheque box. While check box facility is also made available.

� Display on drop box itself that customer can also tender cheques at the counter. � Depositing cheques by phone � Photo cheque- smart phone � Download application. � Facility is started in USA, Canada and Spain since 2009. In India it is yet to come.

Banker’s Right � The rights of the banker may be grouped as follows: 1. Banker’s right of general lien 2. Banker’s right of set-off 3. Banker’s right of appropriation of payment. 4. Banker’s right to claim incidental charges. 5. Banker’s right to compound interest.

Lien Particular General

� Right of general lien � Lien means right of the creditor to retain the goods and securities owned by debtor until the debt due from him is paid. � Right to retain the security and not the right to sell it. � A bankers lien tantamount to an implied pledge- implied pledge. May sell the securities after giving proper to the customer � Particular lien can be exercised by a craftsman. � Goods are retained for a particular debt only. E. g. tailor, repair shop.

� General lien is applicable in respect of all amounts due from the debtor to creditor. � S. 171 of Indian Contract Act provides general lien on the following persons: � 1. Bankers � 2. Factors � 3. Wharfingers � 4. Attorney of HC � 5. Policy brokers

� Banker cannot exercise general lien if: � The goods and commodities ve been entrusted to the banker as a trustee or as agent of the customer E. g. safe custody deposits � Contract- express or implied exists, between the customer and the banker which is inconsistent with the bankers right of general lien. � If goods or securities are deposited for some special purpose. . .

� If customer sends bills of exchange with specific instructions to utilize its proceeds for specific purpose , a contract inconsistent with right to lien exist. � Customer hands over shares with the instruction to sell them at or above price & the same are lying unsold with the banker, right of lien cannot be exercised. � Money deposited for specific purpose e. g. , purchase of securities. � No lien on securities left with the banker negligently.

� Securities lodged with banker for securing loan, before such loan is actually granted. � No lien over the securities deposited by the customer as a trustee in respect of his personal loan. but if the banker is unaware of the fact that the negotiable securities do not belong to the customer, right of general is not effected. � Banker has right to set-off not lien on money deposited. Lien can be exercised only over the property of someone else not own property.

� 2. Banker’s right of set-off � Mutual claims of debtor and creditor are adjusted and only the remainder amount is payable by debtor. � When customer has taken overdraft… � No set-off when there is agreement to the contrary. � A notice need to be sent. � Banker takes a letter of set-off, in which he can exercise the right of set-off without giving him notice.

� Banker has right to combine two accounts so that he can set-off the debit against the credit. � Right to set-off can be exercised subject to following conditions: 1. Accounts must be in the same name and in the same right. ‘the same right’ means that the capacity of account holder in both the accounts must be same. � the underlying principle involved in this rule is that funds belonging to someone else, but standing in the name of account holder, should not be made available to satisfy his debts.

� Sole trader- account in personal name & account in firm name are deemed to be in same capacity. � In capacity of guardian & personal account are not in same capacity. � Partnership account firm & personal A/C. � 2. The right of set-off can be exercised in respect of debts due not in respect of future or contingent debts. � 3. The amount of debts must be certain. � 4. The banker has the right to exercise set-off before Garnishee order is made effective.

� Banker’s right to combine accounts � Garnett v. Mc Kervan � the plaintiff had a dormant overdraft with one branch of a bank & few years after he stopped business with the branch. � He opened a new A/C with another branch of the same bank. � Where his credit balance just exceeded the amount of the dormant debit balance. � The amount required for clearing of the overdraft with the first branch was transferred from his A/C in the second branch.

� It led to the dishonor of cheque. � The Court decision was in favor of bank. � It was held that there was no special contract or usage proved to keep the accounts separate. � There was no legal obligation on a bank to give notice to a customer of intention to combine accounts, either from the express contract or course of dealing. � No right of the customer to combine the account � Banker issue different cheque books with different code no. for different accounts.

� SBI v. Vathi Samba Murthy AIR 1988 Ori 50. � Customer had two current accounts with the bank. � One A/C was in the name of the customer & other in the of partnership firm, of which he was partner. � The customer issued cheque on his personal account. � Funds in that A/C were insufficient. � The bank honored the cheque resulting in overdrawl of personal A/C. � When demanded, the customer refused to pay the overdraft & interest thereon.

� Defense: the amount of cheque was really intended to be drawn from the partnership A/C in which there was sufficient balance. � Held : cheque of one account cannot be used in respect of another account, even though the same person may be having two accounts. � Regarding the overdraft the Court held that the customer is liable to pay back the amount with reasonable interest. �

� Automatic right of set-off of all accounts arises immediately in the following instances: 1. On the death, mental incapacity or insolvency of a customer. 2. Winding-up of a Co. 3. On the receipt of a Garnisghee Order. Right to publish defaulting borrowers. Right of Appropriation (Rule of Clayton’s Case) � In the course of his usual business, a banker receives payments from his customer. � If the customer has taken more then one loan, the question of appropriation of the money deposited subsequently arises

� In such cases customer has the right to direct the banker to appropriate the amount to either of the two accounts. � In the absence of any direction from the customer, the banker shall have the right to appropriate the payment to any debt or account according to his discretion. � He should inform the customer accordingly.

� Clayton’s Case � Devayns v. Noble � A firm of bankers known as Devayanes, Noble & Co. had 5 partners. � Devayanes, the senior partner, died & the surviving partners carried on the business of banking in the same name. � The executors of the deceased partner objected to the continuance of the name Devayanes in the firm’s name. � After a year the firm become bankrupt & various classes of creditors of the firm placed their claims against the estate of Devayanes.

�N Clayton was one such creditor who continued to deal with the surviving partners. � At the time of death of Deveynes, Claytons balance was $1, 713. He withdrew several times thus balance reduced to $453. � Later he deposited with the firm, credit balance at the time of bankruptcy

Obligation of customer � Not to draw cheques without sufficient funds. � Drawing cheques with reasonable care. 1. Keep the cheque book under lock & key. 2. Fill in the body of cheques before delivery. 3. Fill in the amount in words as near as possible to the words “Rupees” and amount in figures as near as possible to “Rs”. � Cheques must be drawn in such a way as to prevent any alteration after issue.

� Young v. Goorte � The customer left the gap while writing the amount in figures and in words & the Court held that the customer provided the occasion for his own loss. � He could not rely on the normal rule that the alteration of cheque in a material particular invalidated it, so the banker had no mandate to pay it at all. � 3. To repay overdrawings. � 4. To pay charges of the bank ◦ Banker provides diversified services like issue of DD, locker facility, travel cheques, MICR cheques, credit cards, ATM facility etc.

� To communicate or inform facts § Forgery of signature on cheque, loss of cheque book, ATM cards etc. q To make demand for repayment of deposists.

Classification of Deposits Demand Time/Term

� Demand deposists � Payable on demand. � Banker has to keep sufficient cash reserves to meet such liability. � Withdrawable without notice. � Deposits are liability on part of the bankers, so it may be termed as demand liability/ time liability.

Demand Deposits Current Deposit s Saving Deposit s

Current Accounts � No restriction on the number & the amount of withdrawals. � Formerly it did not contribute to the capital of banks in India as compared to FD. � In recent years it constitute 15 to 20% of aggregate deposits. Portion varies with bank to bank and from time to time. � Current Account suit the requirement of big businessmen, joint stock companies, institutions, public authorities and public corporations.

� Reserve Bank directive prohibits payment of interest on current accounts. � Maintain minimum balance, failing which customer has to pay bank charges either in the form of commission on the half yearly turnover of the A/C certain sum of money every half year. � This practice enables the banker to earn something on the minimum balance agreed to kept. � Overdraft facility is available only in case of Current A/C.

Savings bank deposits � Helps customers to save part of their current income to meet their future needs & earn income from their savings. � Restrictions on number and amount of withdrawals. � Whether bank can accept interest free deposits? � Banks can pay interest quarterly or longer rests. � computation of interest on savings bank deposits done on a daily product basis.

� No limit is prescribed for the maximum amount that may be held in SB A/C, banks allow interest on a maximum balance of Rs. 1 lakh in one A/C.

Fixed deposit account � Fixed deposits are payable on the expiry of specified period. � Term deposits are withdrawable subject to notice and not on demand. � It varies from 3 months to 5 years. � Period is fixed during at the time deposit is made. It enables banker to invest money. � Ensured or guaranteed return compared to investment in share market. � These deposits constitute more than half of the total bank deposit.

� Higher rate of interest. � Double or treble scheme were there. � Fixed Deposit Receipts (FDR) are not negotiable/transferable. � FDR can be transferred by way of assignment to a third party. Notice of assignment is to served on the banker. � By mere handing over of FDR is not enough, ‘letter of authority’ need to be signed. � Even after the expiry of the fixed period the depositor is not entitled to draw cheques on FD. � Withdrawal of interest or the principal through cheques is not permitted.

� Whether banks can prematurely repay term deposits on their own? � a term deposit can be paid prematurely at the request of the customer subject to the terms of the contract, including penalty, if any. � Demand by the payment is essential for the repayment of FD. � Whether banks are permitted to offer differential rate of interest on other deposits? � Banks can formulate special fixed deposit schemes specifically for resident Indian senior citizens offering higher and fixed rates of interest as compared to normal deposits of any size.

� Fixed deposit in joint names � Payable to either or survivor. � Premature repayment request by one of the joint depositor. � Loan is sought against FDR by one of joint depositor… • loan application shall be signed by other depositor or • no objection to loan granted to one of them may be taken other depositor/s. • Request for duplicate receipt- should be signed by all the depositors.

� Loss of FDR � A letter signed by depositor/s informing the loss of FDR. � A note to this effect should be made in FD ledger. � Anumati v. PNB AIR 2005 SC 29. � Appellant ‘A’ & her husband ‘M’ made a FD of Rs. 20, 000/- with respondent bank ‘P’ for a period of 7 years. � The maturity amount of the deposit was Rs. 39, 930/ on 31. 5. 1995.

� Husband without the consent of wife pledged FDR for loan which was accepted by the bank. � Bank prayed for a decree against FDR which was resisted by wife. � Since she failed to get remedy in civil court, she filed a complaint in District Consumer Forum. � Dist Forum concluded that bank is entitled to recover half of the amount of FDR. � Because she has never pledged her share of FD. Bank appealed to State Forum & got order in his favour.

� She appealed to National Commission which reaffirmed State Forums Commission. � So she appealed to SC & it upheld Dist. Forum order.

Special type of customer � Partnership firm � Partnership is agreement to share profits of business carried by all or any of them acting for all. � A firm A/C should always be opened in the name of the firm not in the name of individual partner. � Banker should confirm the right of the applicant/s to open an account in the name of firm.

� Mutual agency. � Promissory note is executed on behalf of firm by managing partner, money is utilized for the purpose of firm. Every partner is liable for the debt incurred. � Partner does something which is not related to the kind of business carried on by the firm other partners and firm will not be liable. � Power given to particular partner to operate firm account may be withdrawn by any of them by giving notice to the banker. �In such circumstances the banker should pay cheques which is signed by all the partners.

� Borrowing power of a partner: a partner may justifiably do all that he is expressed to do for carrying on the business of the firm unless expressly barred or power is limited…