Module 1 Bank The word bank is derived

Module 1 Bank: The word bank is derived from the words bancus or banquet that means BENCH. Jews in England transacted their business on benches. When they failed people had broken benches which represented bankruptcy. Greek word Pack means joint stock fund(collection of funds) Evolution of modern banking: Beginning – Money business by Goldsmiths in England Received money for safe custody against signed receipts called bank notes Found out that depositors are not withdrawing money as often as possible Started lending to others to make profit Due to industrialisation Goldsmith were not able to lend huge amount of loans and advances PRESIDENCY COLLEGE

FUNCTIONS OF BANKS Functions can be classified in to primary and secondary. 1. Primary functions The main primary functions are accepting deposits and lending money. A) Accepting deposits: main function is to accept deposits from public – banks are accepting deposits through fixed deposits, current account, savings account and recurring account. B) lending money: Overdraft, Cash credit, Discounting of bills, Term loans, Credit to government 2. Secondary functions: can be classified into agency functions and general utility functions. PRESIDENCY COLLEGE

A) Agency functions: a) Collection and payment of credit and other instruments b) Sale and purchase of stock exchange securities c) Administration of wills and trusteeship d) Remit funds on behalf of customers from one place to another place through cheques, drafts, mail transfers e) Act as representatives and/or correspondents of the clients especially in handling various applications. B) General utility functions a) Receiving of valuables for safe custody b) Issuing letters of credit c) Acting as underwriters d) Issuing traveller's cheques and credit cards to the customers. e) Issuing gift cheques. f) Dealing in foreign exchange. g) Render merchant banking services to the customers PRESIDENCY COLLEGE

Banker: According to Sec. 5[c] of the Banking Regulation Act 1949, a banker is a person who undertakes business banking. Banking means accepting deposits from public, for the purpose of lending, repayable on demand or otherwise withdrawable by cheque, draft, order or otherwise. Customer: A customer means a person who seeks to open account which banker accepts with proper introduction. Relationship is not based on frequency of transactions. Any person can be a customer, if he opens an any type of account Such account may be frequently operated or not the transaction should be of a banking nature (accepting deposits and lending loans and advances) PRESIDENCY COLLEGE

Banker customer relationship: Features Relationship is of a contractual nature. Relationships are of two types: - General and special relationship. general relationship are of primary and secondary primary relationship is debtor creditor relationship Secondary relationship: All other comes under secondary PRESIDENCY COLLEGE

• Banker customer relationship: • General Special • Primary Secondary Rights Responsibilities • Primary: Debtor creditor relationship • Secondary: As a trustee, bailee, an agent • Rights: Right of lien, Right to charge interest commission incidental and commitment charges, Right to set off, Right of appropriation, Produce books of accounts, Garnishee order Responsibilities: Honour the cheque and maintain secrecy of accounts PRESIDENCY COLLEGE

BANKER CUSTOMER RELATIONSHIP: A. Primary relationship 1. Debtor Creditor Relationship. The relationship of the banker and customer is primarily that of debtor and creditor. When deposits are accepted from the customers , the banker is a debtor and the customer is a creditor. When the bank lends loans to customers, then bank is a creditor and customer is a debtor. Banker is a dignified debtor Customer is not a secured creditor Customer’s balance at bank is not repayable until a demand for repayment as made by the customer Banker should pay the deposit money on demand The demand should be made on working days PRESIDENCY COLLEGE

2. Secondary relationship: a. Banker as a trustee: The banker acts as a trustee for managing the assets of customers. b. Banker as an agent: Banker acts as an agent of customers. He collects cheques, drafts, collect dividends, pays fees duties on behalf of customers. c. Banker as a bailee: The customer can keep his valuables or any secret documents in the bank for safe custody. When the banker accepts the same, he will be a Bailee. PRESIDENCY COLLEGE

B) Special relationship 1. Rights a. LIEN: Right of a debtor to retain the property belonging to a debtor till the debt is paid. Two types of lien – particular and general lien Particular lien: This lien refers to a particular property which is retained by the creditor against a particular loan. Banker has general lien. General lien is a right a banker(creditor) to retain all the properties of debtors(customers) till all the sums due to the bank are recovered. How to exercise lien? PRESIDENCY COLLEGE

Conditions To Exercise Lien: The property should come to the possession of the banker. Security should belong to the customer. The security or property should not be lodged with a specific purpose. There should be lawful possession of the goods or securities by the banker and they must come to the banker in his capacity as a banker. The loan must be due for payment when the lien has to be exercised. When Can A General Lien Be Exercised? On the bills and cheques lodged for collection, on documents of title to goods such as railway receipt, bill of lading etc. On the funds deposited with the banker Securities held for a specific advance Personal accounts of the partner against the advances made to the firm, in the case of accounts of partnership firms. On negotiable securities Time barred debts are subjected to the general lien PRESIDENCY COLLEGE

When the banker cannot exercise lien? • Valuable deposited in safe custody • Money deposited for specific purpose(ex: traveller’s cheque) • Securities left with him inadvertently(by mistake) • Money deposited to execute a particular contract • If a banker act as a trustee under an agreement, he cannot exercise lien on trust property • Bonds which are separated from the coupons and kept with the banker for safe custody PRESIDENCY COLLEGE

b. Right to charge interest, commission, incidental charges and commitment charges • Interest: The banker has a right to charge interest on loans and advances. It is the normal practice of every banker to calculate interest at every quarter or half year and debit the same to the loan account. The customer has to pay the interest as and when it is due. If the customer fails to do so the interest of the first quarter becomes the principal and interest on interest (compound interest) is charged. • Commission: The banker has an implied right to charge commission for the services renders to the customers. • Incidental charges: It is a levy imposed by the banker on unremunerative accounts. (not maintaining minimum balances) PRESIDENCY COLLEGE

Commitment charges: This is a charge made by the banker on overheads and cash credit accounts. It is charged on the unitized portion of the sanctioned limit which does not earn any profit to the banker. RBI allowed Indian commercial banks to charge commitment charges from the year 1970. According to the Act the borrower should utilize 95% of the sanctioned limit for a determined period. If not the banker has the right to charge 1% per annum on the unutilized portion. But the limits up to Rs. 25 lakh are exempted for levying the commitment charges. PRESIDENCY COLLEGE

Right of set off It is a right to adjust the accounts of one against the other between the debtor and the creditor to determine the net balance due to either debtor or creditor. Ex: X has to pay Y Rs. 1000 and Y has to pay X Rs. 600. After adjusting X has to pay a net balance of Rs. 400. The banker, as a debtor has the right of set off. Conditions: • The debt must be certain and due on the date (not applicable for a future debt) • The debts are due as between the same parties and in the same right (not applicable as a trustee, agent, bailee, etc. ) • Automatic set off incase of death and insolvency of a customer, closing of a company, legal restriction (garnishee order) • The right of set off can be exercised in case of inter branch accounts PRESIDENCY COLLEGE

Right to appropriate payments It is applicable when the customer has more than one loan account and the payment made by him may not be sufficient to clear all debts due by the customer. Conditions – (a) at the request of the customer (b) banker if customer is not specifying and © date. Ex: A has taken a loan from B. A is a debtor and B is a creditor. A fails to pay the money to B. B knows that the money is due to A from C (third party). B files a suit in the court of law and requested the court to issue an order directing C (third party) not to make any payment to A. The order issued by the court is called garnishee order. Here a is a judgment debtor, B is a judgment creditor and C (third party) is garnishee. Conditions: Not applicable in the following cases • as a trustee, agent and bailee • joint accounts of customers • Deposits held as a security for advances d. PRESIDENCY COLLEGE

Applicable for the following: • There should be balance in customers account • The amount should be belong to the customer in his own right and capacity • Fixed deposits, savings deposits, etc. Banker role: • Send a notice to the customer regarding garnishee order • Advice the customer to open a new account for the operations • Ask the customer to raise any objection against the order PRESIDENCY COLLEGE

PRESIDENCY COLLEGE