project on banker and customers

RELATIONSHIP BETWEEN BANKER AND CUSTOMER

Before we take up the relationship that exists between a banker and his customer, let us understand the definitions of the terms banker and customer. The definition of the business of banking and the large number of activities permissible for banks are given in the Banking Regulation Act. 1949. The relationship between a banker and his customer depends upon the nature of service provided by a banker.

DEFINITION OF BANKING

A banking company is defined as a company which transacts the business of banking in India. The banking Regulation Act defines the business of banking by stating the essential functions of a banker. It also states the various other businesses a banking company may be engaged in and prohibits certain businesses to be performed by it.

The term ‘Banking is defined as “accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand of otherwise, and withdraw able by cheque, draft, order of otherwise” [Section 5(b) ].

The salient features of this definition are as follows:-

(i) A banking company must perform both of the essential function. Viz..,

(a) accepting of deposits, and(b) lending or investing the same. If the purpose of accepting of

deposits is not to lend of invest, the business will not be called banking business. The explanation to Section 5(c) makes it clear that any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as

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such, the manufacturer or trader shall not be deemed to transact the business of banking.

(ii)The phrase ‘deposits of money from public’ is significant. The banker accepts deposits of money and not of anything else. The word ‘public implies that a banker accepts deposits from anyone who offers his/her money for such purpose. The banker, however, can refuse to open an account in the name of the person who is considered as an undesirable person. E.g. a thief, robber, etc.

(iii) Acceptance of deposits should be the known business of a

banker. The money lenders and indigenous bankers depend on their own resources and do not accept deposits from the public. If they ask for money from their friends or relatives incase of need. Such money is not deemed as deposit accepted from the public.

Sir John Paget’s Definition. According to Sir John Paget, “ No person or body, corporate or otherwise, can be a banker who does not.

(i) take deposit accounts,(ii) take current accounts,(iii) issue and pay cheques, and (iv) collect cheques, crossed and uncrossed, for his customers.”

This definition points out the four essential functions of the banking business.

John Paget also lays emphasis on the performance of the above functions in a regular and recognized manner. According to him. “One claiming to be a banker must profess himself to be one and the public must accept him as such: his main business must be that of banking from which, generally, he should be able to earn his living.” The above mentioned functions are considered as the essential functions which are now being performed by modern bankers.

Name must include the word. ‘Bank’ , ‘Banker’ or ‘Banking’, Secction7 makes it essential for every company carting on the business of banking in India to use as part of its name at last one of the words bank, banker, banking company. Besides, it prohibits May other company or firm. Individual or group of individuals, from using any of these words as parts of its/her name. Section 7 was amended in 1983 with the effect

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that any of these words cannot be used by any such company even “In connection with its business.”

Other Business permitted for a Banking company.

The Banking Regulation Act specifies other forms of businesses a banking company may be engaged in. According to section6 the following businesses may be undertakes by a banking company:

(a) The following functions form the bulk of a bank’s activities and are called its main functions:

the borrowing, raising or taking of money the lending or advancing of money either upon security or without

security the drawing, making accepting, discounting, buying, selling,

collecting and dealing in bills of exchange, humid, promissory notes, coupons, drafts, bills of landing, railway receipts warrants, debentures, certificates, scripts and other instruments and securities whether transferable or negotiable or not

the granting and issuing of letters of credit, travelers’ cheques and circular notes

the buying selling and dealing in billion and specie the buying and selling of foreign exchange including foreign bank

notes the acquiring holding, issuing on commission, underwriting and

dealing in stock, funds, shares debentures, debenture stock, bonds, obligation, securities and investments of all kinds

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the purchasing and selling of bonds, scrip’s and other forms of securities on behalf of constituents or other

the negotiations of loans and advances the receiving of al kinds of bonds, scrip’s or valuable on deposit or

for safe custody or otherwise the providing of safe deposit vaults, and the collection and transmitting of money and securities

(b) It may act as an agent of the Government, local authority or person and can carry on agency business but it cannot act as secretary and treasurer of a company.(c) It may contract for public and private loans and negotiate and issue the same.(d) It may effect, insure, guarantee, underwrite, participate in managing and carrying out of any issue of state, municipal or other loans or of shares, stack, debenture stock of companies and may lend money for the purpose of nay such issue(e) It may carry on and transact every kind of guarantee and indemnity business.(f) It may manage, sell and realize any property which may come into its possession in satisfaction of its clams.(g) It may acquire and hold and deal with any property or any right. Title or interest in any such property which may form the security for any loan or advance.(h) It nay undertakes and executes trusts.(i) It may undertaken the administration if estates as executor trustee of otherwise.(j) It may establish, support and aid, associations, institutions, funds, trusts, etc., for the benefit of its present or past employees and may grant money for charitable purposes.(k) It may acquire construct and maintain any building for its own purpose.(l) It may acquire and undertake the whole or any part of the business of any person or company, when such business is of a nature described in Sec. 6 (1).(m) It may do all such things which are incidental or conducive the promotion or advancement of the business which the central Government may specify as form of business in which it is lawful fir a banking company to engage.

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Banks and Insurance Business

Recently the Government of India has issued a notification specifying insurance as a permissible form of business that could be undertake by banks under clause ’O’ of section 6. Subsequently, the Reserve Bank of India issued guidelines for the banks’ entry into insurance business. Banks which fulfill certain conditions, can enter into joint venture with foreign entities for this purpose, while other banks can participate in providing infrastructure and services support or can undertake insurance business as agent of insurance companies.

Business prohibited for a banking company Section 8 progibits a banking company from engaging directly or

indirectly in trading activities and undertaking trading risks. No banking company shall directly or indirectly deal in buying or selling or bartering of goods or engage in any trade or buy, sell or barter goods for others.

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       Regular S.B/C.A. holders Rs. 1.50 lacs.

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Entire range of General Insurance    Products i.e. Medical Insurance,      Motor Insurance, House Property    Insurance, Personal Accident    Insurance and many more.

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Restriction on Nature of Business of subsidiary companies

Section19 of the banking Regulation Act, 1949 lays down the purposes for which a banking company is permitted to form a subsidiary company. A banking company may form a subsidiary company for one or more of the following purposes:

For understanding of any business permitted for a banking company is permitted for a banking company under clause (a) to (o) of sub-section (1) of section 6. For carrying on of the business of banking exclusively outside India (with the previous permission of the Reserve Bank of India) For undertaking of such other business which in the opinion of the

Reserve Bank. Would be conducive to the spread of banking in India, or to be otherwise useful or necessary in the public interest.

The business carried on by such subsidiary company shall not be deemed to be the business of the banking company for the purpose of Section 8.

Reserve bank of India as stipulated that banks can set up subsidiaries to transact equipment leasing business and/or invest in shares of equipment leasing companies within specified limits after obtaining

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the prior approval of the Reserve Bank of India. Banks are precluded from undertaking directly, i.e., departmentally, the business of equipment leasing.

While a number of banks have been permitted by the Reserve Bank to make portfolio investment in equipment leasing companies the State bank of India has entered into this business in a significant way by establishing a subsidiary company, named SBI Capital Markets Ltd., on 1st August, 1986. SBICAP, as it is called, has taked over the business of Merchant banking Division of the State bank of India. It provides a range of new services including project advisory services and equipment leasing.

Services rendered by BanksThe range of services offered differs from bank to bank, depending

mainly on the size and type of bank, but the acceptance of deposits from the public and provision of credit form the mainstay of the banking business. The services offered by commercial banks may be classified into

(i)services to depositors and borrowers for providing credit to them and(ii) ancillary services.

(i) Services rendered to Depositors and Borrowers:-

Banks open various types of deposit accounts and render the following services to the depositors and borrowers:

(1)collection of cheques, demand drafts, bills of exchange, promissory notes, hands and foreign documentary and clean bills.

(2)Purchase of local and foreign currency documentary/clean advising of inland and foreign letters of credit established by branches and correspondents.

(3)Carrying out the standing instructions for the payment of insurance premier, subscriptions, certain taxed and gift remittances.

(ii) Ancillary Services:-

(1) Performance Guarantees and Financial Guarantees.(2) Safe Custody of Deeds, Securities.

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(3) Safe Deposit vault(4) Purchase and safe securities(5) Collection of Interest on Securities/Debentures and Dividend

on shares, collection of Pension Bills.(6) Remittance of funds-Bank Drafts, Mail Transfers,

Telegraphic Transfers.(7) Executor and Trustees(8) Personal Tax Assistance, preparing Income Tax sales Tax

wealth Tax Returns.(9) Credit transfers(10) Travelers Cheques and Gift Cheques.(11) Emergency Vouchers.(12) Sale of Units of Unit Trust of India.

Following are the services rendered by the jankalyn sahakari bank limited.

(iii) Services rendered to Depositors and Borrowers:- (1) collection of cheques, demand drafts, bills of exchange,

promissory notes, hands and foreign documentary and clean bills.(2) Purchase of local and foreign currency documentary/clean

advising of inland and foreign letters of credit established by branches and correspondents.

(iv) Ancillary Services:- (1) Performance Guarantees and Financial Guarantees.(2) Safe Custody of Deeds, Securities.(3) Safe Deposit value(4) Remittance of funds-Bank Drafts, Mail Transfers,

Telegraphic Transfers.

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DEFINITION OF A CUSTOMER

The term ‘customer’ of a bank is not defined by law. Ordinarily, a person who has an accounting a bank is considered its customer. Banking experts and the legal judgments in the past, however used to qualify this statement by laying emphasis on the period for which such account had actually been maintained with the bank. In 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.” This definition of customer of a bank lays emphasis on the duration of the dealings between the banker and the customer is, therefore called the ‘duration theory’. Accordaing to this viewpoint a person does not become a customer of the banker on the opening of a account, he must have been accustomed to deal with the banker before he is designated as a customer.

“Broadly speaking, a customer is a person who has the habit of resorting to the same place or person to do business. So far as banking transactions are concerned he is a person whose money has been accepted on the footing that the banker will honor up to the amount standing to his credit, irrespective of his connection being of short or long standing”

Thus a person who has a bank account in his name and for whom the banker undertakes to provide the facilities as a banker, is considered to be a customer. It is not essential that the account must have been operated upon for some time, even a single deposit in the account will be sufficient to designate a person as customer of the banker. Though emphasis is not being laid on the habit of dealing with the banker in the past but such habit may be expected to be developed and continued in future. In other words, a customer is expected to have regular dealings with his banker in future.

An important consideration which determines a person’s status as a customer is the nature of his dealings with the banker. It is evident from the above that his dealings with the banker must be relating to the business of banking, A banker performs a number of agency functions and tenders various public utility services besides performing essential functions as a banker. A person who does not deal with the banker in regard to the essential functions of the banker, i.e., accepting of deposits

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and lending of money, but avails of any of the services rendered by the banker, is not called a customer of the banker. For example, any person without a bank account in his name may remit money through a bank draft, encase a cheque received by him from others of deposit his valuables in the Safe Deposit Vaults in the bank or deposit cash in the bank to be credited to the account of the Life Insurance Corporation or any joint stock company issuing new shares. But he will not be called a customer of the banker as his dealings with the banker are not in regard to the essential functions of the banker. Such dealings are considered as casual dealings and are not in the nature of banking business.

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GENERAL RELATIONSHIP BETWEEN BANKER AND CUSTOMER

In addition to his primary functions, a banker renders a number of services to his customer. The relationship between them primarily is that of a creditor and debtor. A banker also acts as an agent or trustee of his customer if the latter entrusts the former with agency or trust work. In such cases, the banker acts as a debtor, an agent and a trustee simultaneously but in relation to the specified business.

(1) Relationship as Debtor and Creditor:-

On the opening of an account the banker assumes the position of a debtor. He is not a depositor or trustee of the customer’s money because the money handed over to the banker becomes a debt due from him to the customer. A depository accepts something for safe custody on the condition that it will not be opened or replaced by similar commodity. A banker does not accept the depositors’ money on such condition. The money deposited by the customer with the banker is, in legal tersm lent by the customer to the banker, who makes use of the same according to his discretion. The creditor has the right to demand back his money from the banker, and the banker is under an obligation to repay the debt as and when he is required to do so. But it is not necessary that the repayment is made in terms of the same currency notes and coins. The payment, of course, must be made in terms of legal tender currency of the country.

A depositor remains a creditor of his banker so long as his account carries a credit balance. But he does not get any charge over the assets of his debtor/banker and remains an unsecured creditor of the banker. Since the introduction of deposit Insurance in India in 1962, the element of risk to the depositor is minimized as the Deposit Insurance and Credit Guarantee Corporation undertakes to insure the deposits up to a specified amount.

Banker’s relationship with the customer is reversed as soon as the customer’s account is overdrawn. Banker becomes creditor of the customer who has taken a loan from the banker and continues in that

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capacity till the loan is repaid. As the loans and advances granted by a banker are usually severed by the tangible assets of the borrower, the banker become a secured creditor of his customer.

Though the relationship between a banker and his customer is mainly that of a debtor and creditor, this relationship differs from similar relationship arising out of ordinary commercial debts in following respects:-

(i) The creditor must demand payment. In case of ordinary commercial debt, the debtor pays the amount on the specified date or earlier or whenever demanded by the creditor as per the terms of the contract. But in case of a deposit in the bank, the debtor/banker is not required to repay the amount on his own accord. It is essential that the depositor (creditor) must make a demand for the payment of the deposit in the proper manner. This deference is due to the fact that a banker is not an ordinary debtor, he accepts the deposits with an additional obligation to honor his customer’s cheques. If he returns the deposited amount on his own accord by closing the account, some of the cheques issued by the depositor might be dishonored and his reputation might be adversely affected. Moreover, according to the statutory definition of banking, the deposits are repayable on demand or otherwise. The depositor makes the deposit for his convenience, apart from his motive to earn an income (except current account0. Demand by the creditor is, therefore, essential for the deposited money. Thus the deposit made by a customer with his banker differs substantially from an ordinary debt.

(ii) Proper place and time of demand. The demand by the creditor must be made at the proper place and in proper time. A commercial bank, having a number of branches, is considered to be one entity, but the depositor enters in to the relationship with only that branch where an account is opened in his name. His demand for the repayment of the deposit must be made at the same branch of the bank concerned otherwise the banker is not bound to honor his commitment. However the customer may make special arrangement with the banker for the repayment o the deposited money at some other branch. For example, in case of bank drafts, traveler’s cheque, etc., the branch receiving there money undertakes to repay it at a specified branch or at any branch of the bank.

It also essential that the demand must be made during banking hours only on a working day of the bank. If the banker makes payment after of before the banking hours, he might be held liable or the same.

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(iii) Demand must be made in proper manner. According to the statutory definition of banking deposits are withdraw able by cheque draft, order or otherwise. It means that the demand for the refund of money deposited must be made through a cheque or an order as per the common usage amongst the bankers. In other words, the demand should not be made verbally or through a telephonic message or in any such manner.

(2) Banker as Trustee:-

Ordinarily, a banker is a debtor of his customer in respect of the deposits made by the latter, but in certain circumstances he acts as a trustee also. A trustee holds money or assets and performs certain functions for the benefit of some other person called the beneficiary. For example, if the customer deposits securities or other valuables with the banker for same custody, the latter acts as a trustee of his customer. The customer continues to be the owner of the valuables deposited with the banker. The legal position pf the banker as a trustee, therefore, differs from that of a debtor of his customer. In the former case the money or documents held by him are not treated as his own and are not available for distribution amongst his general creditors in case of liquidation.

The position of a banker as a trustee or as a debtor is determined according to the circumstances of each case if he does something in the ordinary course of his business, without any specific direction from the customer; he acts as a debtor (or creditor). In case of money of bills, etc., deposited with the bank for specific purpose, the banker’s position will be determined by ascertaining whether the among was actually debated or credited to the customer’s account or not. For example, in case of a cheque sent for collection from another banker, the banker acts as a trustee till the cheque is realized and credited to his customers account and thereafter he will be the debtor for the same account. If the collecting bank falls before the payment of the cheque is actually received by it from the paying bank, the money so realized after the failure of the bank will belong to the customer and will not be available for distribution amongst the general creditors of the bank.

On the other hand, if a customer instructs his bank to purchase certain securities out of his deposit with the latter, but the bank fails before making such purchase, the bank will continue to be a debtor of his customer (and not a trustee) in respect of the amount which was not

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withdrawn from or debited to is account to carry out his specific instruction.

The relationship between the banker and his customer as a trustee and beneficiary depends upon the specific instructions given by the latter to the former regarding the purpose of use of the money or documents entrusted to the banker. In New Bank of India Ltd, vs. Pearey Lal(A.I.R.1962, Supreme Court 1003), the Supreme court observed in the absence of other evidence a person paying into a bank, whether he is a constituent of the bank or not, may be presumed to have paid the money to be held as banker ordinarily held the money of their constituents. If no specific instruction are given at the time of payment or thereafter and even if the money is held in a suspense Account the bank does not thereby become a trustee for the amount paid. In other words, when a person dealing with a bank delivers money to a bank the intention to create a relationship of creditor and debtor between him and the bank is presumed, unless this presumption is rebutted. For example :-when the money is paid to a bank with special instruction to retain the same pending further instructing, or ,to pay the same to another person who has no account with the bank and the bank accepts the instruction and holds the money pending instructions from that other persons, or where instructions are given by the customer to his banker that a part of the amount lying in his account be forwarded to another bank to meet a bill to become due and payable by him and the amount is sent by the banker as directed, a trust results and the presumption which ordinarily arises by reason of payment of money to the bank is rebutted.

In the above case a customer deposited tow sums of money at the Lahore branch of a bank for transmission to its Calcutta branch with instructions to await his directions regarding the opening of account of keeping the same in fixed deposit or otherwise at Calcutta breach. The customer did not give any direction but the bank opened a fixed deposit account without his consent and was subsequently placed under Scheme of arrangement. The Supreme court held that after the purpose for which the money entrusted was carried, in the absence pf further instructions, the bank did not cease to be a trustee and continued to hold the same for and on behalf of the customer.

In case the borrower transfers to the banker certain shares in a company as a collateral security and the transfer is duly registered in the books of the issuing company, no trust is created in respect of such shares and the bank’s position remains that of a pledge rather than as trustee. Pronouncing the above verdict, in New Bank of India (1981) 51 company

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case p. 378, the Delhi High court observed that a trustee is generally not entitled to dispose of or appropriate trust property for his benefit. “In the present case the banker was entitled to dispose of the shares and utilize the amount thereof for adjustment to the loan amount if the debtor defaults. The banker’s obligation to transfer back the shares canaries only when the debtor clears dues of the bank. Hence bank as not considered as trustee.

(3) Banker as Agent:-

A Banker acts as an agent of his customer and performs a number of agency functions for the convenience of his customers. For example, he buys or sells securities on behalf of his customer, collects cheques on his behalf and makes payment of various dues of his customers, e.g., insurance premium etc. The range of such agency functions has become much wider and the banks are now rendering large number of agency services of diverse nature. For example, some banks have established Tax Service departments to take up the tax problems of their customers.

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OBLIGATIONS OF A BANKER

Through the primary relationship between a banker and his customer is that of a debtor and creditor or vice versa, the special features of this relationship, as noted above impose the following additional obligations on the banker:

1. Obligation to honour the cheques

The depositors accepted by a banker are his liabilities repayable on demand or otherwise. The banker is, therefore, under a statutory obligation to honour his customer’s cheques in the usual course. Section31 of the Negotiable instruments Act, 1881, lays down that:“The drawee of a cheque having suddicient 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 loses or damage caused by such default.”

Thus, the banker is bound to honours his customer’s cheques provided the following conditions are fulfilled:-

(i) There must be sufficient funds of the drawer in the hands of the drawee. 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, the cheques sent for collection by the customer are not treated as cash in the hands of the banker until the same are realized. The Banker credit the amount of such cheques to the account of the customer on their realization. A banker should, therefore, be given sufficient time to realise the amount of the cheques sent for collection before the said amount is drawn upon by the customer. If the customer draws a cheque on such unrealized amounts, the banker will be justified in dishonoring the cheque with the remark ‘Effects not cleared’.

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(ii) The fund must be properly applicable to the payment of the cheque. A customer might be having several bank accounts in his various capacities. But 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 purposes, the said funds are not available for honoring his cheques. Similarly, a depositor having a debit balance in his current account cannot draw a cheque on the basis of his fixed deposit with the banker as the latter is a deposit under a separate agreement for a specific period and can be withdrawn in the prescribed manner and not through a cheque.

The banker’s obligation to honour the cheques is further extended if an agreement is reached between the banker and the customer, either expressly or impliedly, whereby he banker agrees to sanction an overdraft to the customer. In such cases the banker’s obligation to honour the customer’s cheques is extended up to the amount of overdraft sanctioned by him. If the banker subsequently reduces the limit of overdraft or withdraws it altogether, he must honours cheques issued by the customer before the notice of such reduction or withdrawal is served upon him. Sometimes an obligation also emerges out of the past practice followed by the banker. For example, if the banker has honored the cheques of a customer on several occasions in the past without sufficient funds and later on requested the customer to make good the deficiency in his account, an implied arrangement to overdraw the account is presumed to exist. The banker should not discontinue such practice without giving prior notice to the customer.

Some times banks grant overdraft facilities to the customers who are not required to execute any document for this temporary overdraft facility. The question whether such conduct f the parties constitutes a contract or not was considered by Gujrat high /court in Indian Overseas Bank vs. M/s Naran Prasad Govindlal Patel, (1980) vol. XXI Gujarat Law Reporter, 132. In this case the Bank permitted a customer to enjoy overdraft facility to the extent Rs. 5,000 for a period pf four years without requiring him to execute any document for this facility. Subsequently, the bank contended that Rs. 3,916 because of insufficiency of funds. The bank contended that the transaction clearly showed that it was only a facility and not a contract. It amounted to a personal arrangement with the agent of the bank and did not constitute a contract

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(iii)The banker must be duly required to pay. The banker is bound to honour the cheques only when the cheques only when he is duly required to pay. This means that the cheque, complete and in order, must be presented before the banker at the proper time. Ordinarily a period of six months is considered sufficient within which a cheque must be presented for payment. On the expiry of this period the cheque is treated as stale and the banker dishonored by the banker because the order of the drawer becomes effective only on the date given in the cheque.

Banker’s Liability:-

As already noted above the words loss or damage in section 31 mean and include-

(i) the monetary loss suffered by the customer, and (ii) the loss of credit or reputation in the market

It is therefore, to be noted that the banker is liable to compensate the drawer not only for the actual monetary loss suffered by him, but also for the injury to or losses of his reputation as a result of dishonour of a cheque. The latter is more significant in case of a trader Therefore the question of banker’s liability is discussed below separately for traders and non traders.In case of /traders and businessmen reputation or credit is the foundation on which their business depends. There is a natural presumption in law that a trader suffers loss of reputation in case his cheque is wrongfully dishonoured by his banker. He is, therefore entitled to claim not only the general damages, but substantial damages for such loss of credit or reputation and even without proving the special loss or damaged suffered by him because, in his case, loss or damage is presumed. Of course, it there is proof of special loss or damage that would be taken into consideration for arriving at the exact quantum of damages. In New central Hall vs. United commercial Bank ltd. (A.I.R. 1959. Madras 153) the madras court held:

“In case where a cheque issued by a trader customer is wrong fully dishonoured even special damage could be awarded without proof of special loss or damage. The fact that such dishonour took place due to a mistake of the bank is no excuse nor can the offer of the bank to write and

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apologize to the payees of such dishonoured cheques affect the liability of the bank t pay damages for their wrongful act”

In the above case, the clerk of the bank forgot to credit the customer’s account with the money deposited by him and as a result a number of cheques issued by him were dishonoured by the bank.Obligation to maintain secrecy of Account:-

The account of the customer in the books of the banker records all of his financial dealings with the latter and depicts the true state of his financial position. If any of these facts is made known to others the customer’s reputation may suffer and he may incur losses also. The banker is, therefore, under an obligation to take utmost care in keeping secrecy about the accounts of his customers. By keeping secrecy is meant that the account books of the bank will not be thrown open to the public or Government officials and the banker will take all necessary precautions to ensure that the state of affairs of a customer’s account is not made known to others by any means. The banker is thus under an obligation not to disclose deliberately or intentionally any information regarding his customer’s accounts to the third party and also to take all necessary precaution and care to ensure that no such information leaks out of the account books.

The nationalized banks in India are also required to fulfill this obligation. Section 13 lf the banking companies Act. 1970. Specifically requires them to observe except as otherwise required by law the practices and usages customary amongst bankers and in particular not to divulging information relating to the affairs of the constituents except in circumstances in which they are in accordance with law or practices and usages customary among bankers, necessary or appropriate for them to divulge such information.”

Thus the general rule about the secrecy of customer’s accounts may be dispensed with in the following circumstances:

I. When the law requires such disclosure to be made; and II. When the practices and usages amongst the bankers permit

such disclosure.

The banker will be justified in disclosing information about his customer’s account on reasonable and proper occasions only as started below:-

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Risks of unwarranted and Unjustifiable Disclosure:

The obligation of the banker to keep secrecy of his customer’s accounts except in circumstances noted above continue even after the account is close. If a banker discloses information unjustifiably, he shall be liable to his customer and the third party as follows:

(a) Liability to the customer. The customer may sue the banker for the damages suffered by him as a result of such disclosure. Substantial amount may be claimed if the customer has suffered material damages. Such damages may be suffered as a result of unjustifiable disclosure of any information or extremely unfavorable opinion about the customer being expressed by the banker

(b) Liability to third parties. The banker is responsible to the third parties also to whom such information is given if :-

(i) the banker furnishes such information with the knowledge that is false and (ii) Such party relies on the information and suffers losses

Such third party may require the banker to compensate him for the losses suffered by him for relying on such information. But the banker shall be liable only if it is proved that he furnished the wrong or exaggerated information deliberately and intentionally. Thus he will be liable to the third party on the charge of fraud but not for innocent misrepresentation. Mere negligence on his part will not make him liable to a third party.

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BANKER’S RIGHTS

1. Right of General Lien:-

One of the important right enjoyed by a banker is the right of general lien. Lien means the right of the creditor to retain the goods and securities owned by the debtor until the debt due from him is repaid. It confers upon the creditor the right to retain the security of the debtor and not the right to sell it. Such right can be exercised by the creditor in respect of goods and securities entrusted to him by the debtor with the intention to be retained by him as security for a debt due by him (debtor). Line may be either

(i) General lien or,(ii) a particular lien.

A particular lien can be exercised by a craftsman or a person who has spent his time, labor and money on the goods retained. In such cases goods are retained for a particular debt only. For example a tailor has the right to retain the clothes made by him for his customer until his tailoring charges are paid by the customer. So is the case with public carriers and the repair shops.

A general lien, on the other hand, is applicable in respect of all amounts due from the debtor to the creditor. Section 171 of the Indian Contract act 1872 confers the right of lien the bankers as follows: “Banker may, in the absence of a contract to the contrary, retain as a security for a general balance of account, any goods bailed to them.”

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2. Right of set-off:

The right of set off is a statutory right which enables a debtor to take into account a debt owed to him by a creditor, before the latter could recover the debt due to him from the debtor. In other words, the mutual claims of debtor and creditor are adjusted together and only the remainder amount is payable by the debtor. A banker, like other debtors, possesses this right of set-off which enables him to combine two accounts in the name of the same customer and to adjust the debit balance in one account with the credit balance in the other. For example, a has taken an overdraft from his banker to the extent of re. 5,000 and he has a credit balance of Rs. 2,000 in his savings bank account, the banker can combine both of these accounts and claim the remainder amount of rs. 3,000 only. This right of set-off can be exercised by the banker if there is no agreement express or implied contrary to this right and after a notice is served on the customer intimating the latter about the formers intention to exercise the right of set-off. To be on the safer side, the banker takes a letter of set off from the customer authorizing the banker to exercise the right of set-off without giving him any notice. The right of set off can be exercised subject to the fulfillment of the following conditions:

(i) The accounts must be in the same name and in the same right The first and the most important condition for the application of the right of set-off is that the accounts with the banker must not only be in the same name but also in the same right. By the words ‘the same right’ is meant that the capacity of the account holder in both or all the accounts must be the same, i.e., the funds available in one account are held by him in the same right or capacity in which a debit balance stands in another account. The underlying principle involved in this rule is that funds belonging to someone else, but standing in the name of the account-holder, should not be made available to satisfy his personal debts.

(ii) The right can be exercised in respect of debts due and not in respect of future debts or contingent debts. For example, a banker can set off a credit balancer in the account of a customer towards the payment of a bill which is already due but not in respect of a bill which will mature in future. If a loan given to a customer is repayable on demand or at a future date, the debt becomes due only when the banker makes a demand or on the specified date and not earlier.

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(iii) The amount of debts must be certain. It is essential that the amount of debts due from both the parties to each other must be certain. If liability of any one of their is not determined exactly, the right of set-off cannot be exercised. For example, if A stands as guarantor for a loan of Rs. 50,000 given by a Bank to B, his liability as guarantor will arise only after B defaults in making payment. The banker cannot set6 off the credit balance in his account till his liability as a guarantor is determined. For this purpose it is essential that the banker must first demand payment from his debtor. If the latter defaults in making payment of his debt, only then the liability of the guarantor arises and the banker can exercise his right of set-off against the credit balance in the account of the guarantor. The banker cannot exercise this right as and when he realizes that the amount of debt has becomes sticky, i.e., irrecoverable.

(iv) The right may be exercised in the absence of an agreement to the contrary. If there is an agreement express or implied inconsistent with the right of set-off, the banker cannot exercise such right.

(v) The banker may exercise this right at his discretion. For the purpose of exercising this right of all the branches of a bank constitute one entity one entity and the bank can combine two or more accounts in the name of the same customer, however, cannot compel or pursue the banker to exercise the right and to pay the credit balance at any other branch.

(vi) The banker has right to exercise this right before the garnishee order in respect of the funds belonging to his customer, he has the right first to exercise his right of set-off and thereafter to surrender only the remainder amount to the judgment-creditor.

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3. Banker’s Right of Appropriation (Rule in Clayton’s Case).

In the case of his usual business, a banker receives payments from his customer. If the latter has more than one account or has taken more than one loan from the banker, the question of appropriation of the money subsequently deposited by him naturally arises. Sections 59 to 61 of the Indian contract Act, 1872 contain provisions regarding the right of appropriation of payments in such cases. According to section 59 such right of appropriation is vested in the debtor, who makes a payment to his creditor to whom he owes several debts. He can appropriate the payment by (i) an express intimation or (ii) under circumstances implying that the payment is to be applied to the discharge of some particular debt. If the creditor accepts such payment, it must be applied accordingly. For example, A owes B several debts, including Rs. 1,000 upon a promissory note which falls due on 1st December , 1986. He owners B no other debt of that amount on 1/12/1986 A pays b Rs. 1,000. The payment is to be applied to the discharge of the promissory note.

If the debtor does not intimate or there is no other circumstance indicating to which debt the payment is to be applied, the right of appropriation is vested in the creditor. He may apply it at his discretion to any lawful debt actually due and payable to him from the debtor (Section60)

Further, where neither party makes any appropriation, the payment shall be applied in discharge of the debts in order of time. If the debts are of equal standing, the payment shall be applied in discharge of each proportionately (Section 61).

In m/s. Kharavelsa Industries Pvt. Ltd. V. Orissa State Financial Corporation and Other [AIR 1985 Orissa 153 (A)], the question arose whether the payment made by the debtor was to be adjusted first towards the principal or interest in the absence of any stipulation regarding appropriation of payments in the loan agreement. The Court held that in the case of a debt due with interest, any payment made by the debtor is in the first instance to be applied towards satisfaction of interest and thereafter towards the principal unless there is an agreement to the contrary.

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In case a customer has a single account and he deposits and withdraws money from it frequently, the order in which the credit entry will set off the debit entry is the chronological order, as decided in the famous Clayton’s Case, discussed below.

4. Right to charge Interest, Incidental Charges, etc.

As a creditor, a banker has the implied right to charge interest on the advances granted to the customer. Banker usually follows the practice of debiting the customer’s account periodically with the amount of interest due from the customer. The agreement between the bankers due from the customer. The agreement between the banker and customer may, on the other hand, stipulate that interest may be charged at compound rate also. In konalalla Venkata Satyanarayana and others v. State Bank of India (AIR, 1975 A.P. 113) the agreement provided that “ interest shall be calculated on the daily balance of such amount shall be charged to such account on the last working day of each month.” For several year the customer availed the overdraft facilities and periodical statements of accounts were being sent to the customer showing that interest was being charged and debited at compounded rate and no objection was raised at any time. The high court, therefore, held that there was no doubt that the customer had agreed to the compound rate interest being charged and debited to his account. The customer need not pay the amount of interest in cash, after making a debit entry in the account of the customer, the amount of interest is also deemed as the debt due from the customer to the banker and interest accrues on the same in the next period. The same practice is following in allowing interest on the savings accounts. Banks also charge incidental charges on the current accounts to meet the incidental expenses on such accounts.

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5. Period of Limitation

Deposits are repayable on demand made by the customer. Under Article 22 of Part II of the schedule to the Limitation Act, 1963, the period of limitation for the refund of bank deposits is three years with effect from the refund of bank deposits is three years with effect from the date a customer makes a demand for his money.

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PART-IICUSTOMERS ACCOUNTS WITH

THE BANKER

The relationship between a banker and his customer begins with the opening of an account by the former in the name of the latter. Initially all the accounts are opened with a deposit of money by the customer and hence these accounts are called deposit accounts are called deposit accounts. The bulk of the resource of a bank are mobilised by accepting deposits from the public. Accepting of deposits of money from the public, as already noted, in one of the essential functions of a banker, according to the definition of banking given in the Banking Regulation Act, 1949. The banker solicits deposits from the members of the public belonging to different walks of life, engaged in numerous economic activities and having different financial status. The nature of banking facilities sought by them, there fore varies widely. The banks have , therefore introduced different types of accounts with various facilities and privileges. Customarily, the bank accounts are classified into three categories: (i) the savings deposits accounts (ii) the fixed deposit accounts, and (iii) the current accounts, In recent years a few new types of accounts have also been introduced by banks, e.g. Recurring deposits accounts, students deposits accounts, multi purpose deposit scheme, super savings scheme, Janta Deposit Scheme, reinvestment Plan, pigmy deposits scheme, etc. Some bankers also issue cash certificates to solicit deposits for a fixed period . The present chapter discusses banker’s practice in relation to the opening and operation of different types of customers’ accounts. Before we do so let us discuss the measures adopted to regulate competition among the banks in India in the field of deposit mobilizing

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REGULATION OF COMPETITION IN BANKING

Completion in the business of accepting deposits takes two forms: (i) improvement in the customer services; and (ii) offer of higher rates of interest to the depositors. Such competition, though essential for the growth of industry , is undesirable if it becomes unhealthy. Bankers realised the urgency of regulating competition amongst themselves in the field of deposit mobilisation as early as 1958 when the leading banks in the country entered into a voluntary agreement. The inter banks agreement on Deposit Rates prescribed the maximum rates of interest [payable by member banks. Modifications in such rates were made as and when felt necessary. After the nationalisation of 14 major commercial banks in July 1969, the reserve Bank of India exercised its right to issue directives to the banks in regard to the deposit rates. The Inter Bank Agreement was therefore, withdrawn with effect from 1st

April, 1970. The rates of interest on various types of deposit accounts and other terms, etc., were thereafter prescribed by the

Reserve Bank through its directives issued from time to time. Actable feature of the Reserfge bank directifes was that the freedom to compete in the banking business was controlled and regulated rather than completely abolished. The smaller banks with comparatively less deposits were unable to compete with the bigger banks by offering the same rates of interest. In the directives of the Reserve Bank, therefore, smaller banks were permitted to compete with the bigger ones by offering reasonable higher rates of interest. Thus both the maximum and minimum rates of interest payable on deposits were prescribed for smaller banks. These banks were at liberty to determine their own rates within the limits prescribed by the Reserve bank according to their own judgment and discretion. During recent years the Reserve years the Reserve Bank has de-regulated the interest rates on deposits except the savings accounts.

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TYPES OF DEPOSITS ACCOUNTS

1. FIXED DEPOSIT ACCOUNTS

In this category are included the deposits with the bank for a fixed period which is specified at the time of making the deposit. Such deposits are, therefore called fixed Deposits or Term Deposits. A fixed deposit is repayable on the expiry of a specified period, chosen by the depositor to suit his purpose and to enable him to get back the money as and when he needs it. For example, if a person intends to utilise his money for any purpose after a few years. He may deposit it for 3, 5 or 6 years, whereas if purpose is to meet some urgent need in the near future, the fixed deposit may be made for 3, 6 or 9 months. As the date of repayment of a fixed deposit is determined in advance, the banker need not keep more cash reserves against it and can utilise such amount more profitably. The banker, therefore, offers higher rate of interest on such deposits because the depositor parts with liquidity for a definite period. Fixed deposits have grown in importance and popularity in India during recent years.

Rates of Interest on fixed deposits:-

The rates of interest and other terms and conditions on which the banks accepted fixed deposits were regulated buy the Reserve bank of India in exercise of the powers conferred upon it by sections 21 and 35A of the banking Regulation Act, 1949. Till April 21, 1992 fixed deposits were classified into four categories with varying periods of maturity starting from 46 days. The creation of various categories of fixed deposit with higher rates of i9nterst for each successive categories of fixed deposit with h8gher rates of interest for each successive category was

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intended to induce the depositors to take advantage of higher rates on interest. By parting with liquidly for longer periods. The Reserve Bank of India revised the rates of interest on fixed deposits several times. During 1991 reserve bank made upward revision in the interest rates on deposits twice, along with rise in the Bank rate. The main object of the step was to make bank deposits more attractive as compared to other savings instruments, these steps were undertaken as anti-inflationary measures when the inflationary pressure was mounting up. Since 1992 Reserve Bank of India commenced the policy of gradual de-regulation over deposit interest rates. Reserve Bank of India permitted the banks to prescribe their own rates of interest on fixed deposits of different maturities, but the maximum rate of interest was fixed by it. This ceiling rate was revised several times. In October 1997, the ceiling rate itself was also withdrawn and thus the deposits of different maturities. Further, on April 29, 1998, the minimum period of maturity of term deposits was reduced from 30 days to 15 days. Hitherto a restriction was imposed on the banks that they nest offer the same rate on deposits of the same maturity irrespective of the size of such deposits. This restriction has also been removed since April 29, 1998. Banks are now free to allow different rates of interest varying with the size of the amount of the deposits for the same maturity. According to Reserve Bank’s instructions permission to offer varying rates of interest for deposits of the same maturity will apply to domestic deposits of Rs. 15 lakh &above. Banks are required to disclose in advance the schedule of interest rates payable n deposits. Interest shoud be paid as per the schedule and shoud not be negotiated between the banker and the depositor. Consequently, banks have prescribed their own rates of interest have also permitted higher rates on deposits above the specified amount viz. Rs. 15 lakh. On April 19, 2001, Reserve Bank of India permitted the banks to reduce the minimum maturity period for term deposits to 7 days (instead of 15 days) at the discretion of individual banks. This applied to wholesale deposits of Rs. 15 lakh and above, on which banks. This applied to wholesale deposits of Rs. 15 lakh and above, on which banks may offer higher rates of interest.

Fixed deposits schemes for senior citizens

Reserve Bank of India has also permitted the banks to formulate fixed deposits schemes specially meant for senior citizens on which they may offer higher and fixed rates of interest as compared with normal deposits

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These schemes will also incorporate simple procedure for auto0matic transfer of deposits to nominees of such depositors in the event of death.

Floating Rate of Interest

In April 2002,Reserve bank of India suggested to the banks to introduced flexible interest rates for all deposits which are to be re-set at six monthly intervals. The reserve bank also asked the banks to encourage the depositors to converts their existing long term fixed rate deposits into variable rate deposits. In such cases, contracted rate of interest may be paid till the time of conversi9on and no penalty is to be imposed for per-mature withdrawal. In pursuance to the above, Canara Bank has launched a floating rate deposit scheme for higher net worthy depositors. Under the scheme, Rs. 10 lakh or more in multiples of Rs. 1 lakh may be deposited for six months or more up to 24 months. The floating rate is linked to the 91 days Treasury bill yield, with a mark up rate to e fixed by the bank from time to time. The rate of interest on these deposits will change every month, based on the average monthly 91 days’ treasury bills rate during the preceding month with a mark up.

Renewal Before Maturity: The reserve bank has permitted the banks to renew an existing term deposit before maturity without invoking the penalty provides:(i) It is renewed before the date of maturity, and (ii) The period of renewal is longer than the remaining period of the

original deposit.In such cases interest will be payable as follows:

(i) on the original deposit at the rate applicable to the period for which the deposit has actually run (i.e., from the date of deposit to the date of renewal), prevailing at the time of original deposit 9without levying any penalty;

(ii) interest for the period from the date of renewal will be allowed at the rate prevailing on the date of renewal.

Opening and operation of a fixed deposit account:

For opening a fixed deposit account a depositor is required to fill in an application form wherein he mentions the amount of the deposit and

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the period for which deposit is to be made. Hw also gives his specimen signature. A Fixed Deposit Receipt is thereafter issued to the depositor, acknowledging the receipt of the sum of money specified therein, to be repaid at the expiry of the period mentioned therein along with interest at the specified rate. Reserve bank of India has made it absolutely necessary to indicate on the fixed Deposit Receipt the date of receipt,. The period for which the deposit has been accepted and due date, as also the applicable rate of interest. The specimen of a fixed Deposit receipt is given

Payment of Interest:

Though interest is p[payable at the stipulated rate at the maturity of the foxed deposit Receipt, banks usually pay interest quarterly or half-yearly also at the request of the depositor. The interest earned during the Sid quarter half year is paid to the depositor in cash or is credited to his saving A/c. This system of payment is based on ‘quarterly rests’ or ‘half yearly rests’ and so on. The depositor is required to present the receipt for the purpose of necessary entry regarding payment of interest on the back thereof. Withdrawal of interest or the principle thought cheques is not permitted. Neither is the depositor given a cheque book for this purpose, nor is he permitted current or a saving account. At the request of the customer, the banker may credit the amount of interest or the principal to his saving o current account from which he may withdraw the same through cheques. The reserve bank has directed the banks that interest on all types of deposits is payable at quarterly or longer rests. Consequently, interest on fixed and recurring deposits for 12 months and above is paid on quarterly basis. Similarly, under the Reinvested Plan, interest is compounded quarterly. Though the payment of interest under the Re-invested Plan and Recurring deposit scheme is made at the expiry of the period deposit, the Income Tax Department has permitted interest earned on them to be taxed annually and not on maturity. A fixed/term deposit becomes due for payment on the working day following the expiry of the specified period of deposit. If such due date of payment falls on a holiday or Sunday or non-business working day, banks are permitted by reserve Bank to pay interest at the originally contracted rate on the deposit amount for such holiday/non-business working days which fall between the date of maturity and the date of payment on the succeeding working day.

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Interest on overdue Deposits :

Legally, interest ceases to accrue on the overdue fixed deposits after the expiry of the fixed period, but the banks may, at their discretion, allow interest thereafter if the fixed Deposit or a part thereof is renewed from the date of its maturity till some future date. On such renewed deposit, the rate if interest operative on the date of maturity shall be payable. Demand by the customer is essential for the repayment of the fixed deposit. On the date of maturity the depositor should present the Receipt, duly discharged on its back for payment or renewal. In the latter case, the bank issues a fresh receipt as per the direction of the customer. According to the directive of the direction of the customer. According to the directive of the Reserve Bank, banjs may at heir discretion allow interest on such deposits for the overdue period provided that:

(1) the deposit is renewed with effect from the date on wh8ich it matured for payment and,

(2) the rate of interest allowed do3es not exceed the appropriate rate applicable to the period for which the deposit is proposed to be renewed as ruling on the date of maturity of the deposit.

But in April 2001, Reserve Bank of India instructed the banks to renew the overdue deposits at the rate of interest prevailing on the date of maturity only if the overdue period is up to 14 days. If the overdue period exceeds 14 days, the deposit should be treated like term deposit and banks may prescribe their own interest rate for the overdue period. Banks are required to inform the depositors their policy in this regard at the time of accepting the fixed deposits.

In case a portion of an overdue deposit is to be renewed, the bank may allow interest for the overdue period on such portion of the deposited which is proposed to be renewed .

The question whether bank was liable to pay interest on the amount of fixed deposits after the expiry of the period of the deposited was considered in the Hindustan commercial bank limited v. jagtar singh (AIR 1974, Punjab abd Haryana 208). In this case A deposited with there bank a sum of money, in fixed deposit for 12 months in the name of K, minor son of J. K. died before the maturity of the deposit. His father J obtained a succession certificate from the Court empowering him to receive the amount of deposit with interest. A filed a suit against J and

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the bank, claiming to be the owner of the amount of deposit with interest. A filed a suit against J and the bank claming to be the owner of the amount. The Court issued temporary injunction restraining the bank from making payment to J.

During the tendency of the suit the Court had, on the application of J. ordered the bank either to agree to pay interest or deposit the amount in Court for being invested in securities. The Bank paid the principal and interest for 1 year to J. Thereafter J filed a suit for the recovery of interest for the subsequent period during which the amount remained with the Bank.

The Bank contested the case on the plea that after the expiry of the period of deposit, the fixed deposit became a demand deposit and ceased to carry any interest and that the clains oif J by way of damages was totally incorrect as there was no implied agreement between the parties to pay the overdue interest or to pay any amount as damages.

The High Court held that the question whether a fixed deposit remains as deposit or becomes a loan after the expiry of the period of deposit, depends upon the intention of the parties and the implied agreement. The Court held that deposits in banks are normally treated by the banks as payable on demand after the expiry of the period of the deposit. Thus it remains a deposit and not a loan .

The Court further held that J suffered a loss of interest because the Bank did not deposit the money in the court for investment in securities. The Bank having retained the amount was liable to pay interest.

PAYMENT BEFORE DUE DATE:Though a fixed deposit is re-payable at the expiry of the specified

period, banks also permit encashment of such deposits even before the due date, if the depositor so desires/ Till April,1998. According to the directive of the Reserve bank, if any deposit was r4epaid, before the expiry of the period of deposit agreed upon at the time of deposit, the interest on such deposit was payable as follows:

(1)First, the rate of interest applicable to the deposit on the basis of the period for which it remained with the bank was determined.

(2)Then the said rate was reduced by one per cent point.Example. A deposits Rs. 5,000 for a period of 48 months at 10 per cent. After one year he desires premature encashment of the F. D. R. Interest for deposit for one year is 9 per dent-1 per cent.

According to the Reserve bank directive banks should not charge the penalty of 1 % in case of premature withdrawal of deposit for

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immediate reinvestment with it in another term deposit of a longer maturity than the remaining period of the original contract.

In April, 1998, Reserve bank has permitted the banks to determine their own penal interest rates for premature withdrawal of domestic term deposits. Banks are required to inform the panel rate to the depositors at the time of accepting deposits.

The Reserve bank has permitted that if a term deposit is repaid prematurely on the death of a depositor to the heirs or legal pre representatives, this penalty is not to be imposed by banks. In such cases the interest payable will be at the same rate as is applicable for the period for which the deposit has actually remained with the bank, i.e. from the date of deposit to the date of payment.

Realizing that pre-mature withdrawals of large sums may have impact on the Asset-Liability Management function in the Banks, Reserve bank of India decided in April 2001 to grant freedom to the banks to exercise their discretion to disallow pre-mature withdrawals of large deposits held by entities other than individuals and Hindu Undivided families. But banks shall have to inform such depositors their policy of disallowing pre-mature withdrawals at the time of accepting deposits.

ADVANCES AGAINST FIXED DEPOSITThe banker may also grant a lone to the depositor on the security of

the Fixed Deposit receipt.As regards interest rate on advances against fixed deposit receipts,

Reserve Bank of India stipulated on April 29, that banks charge interest rate equal to Prime Lending Rate or less. In view of the decline in the Prime Lending Rate subsequently, the reserve Bank decided on April 1999 that in case of deposit rate being in excess of the Prime Lending Rate, advances to depositors against Fixed Deposit receipts can be made by banks without reference to the ceiling of PLR. Banks are permitted to charge suitable interest rates in such cases.

The reserve bank has advised the banks that they cab give loans to depositors against F.D.R. maintained with them, up to 75 per cent of the total of (i) actual deposits and (ii) the interest accrued thereon up to the time the loans are advanced.

The fixed deposit receipts are marked ‘Not Transferable’ and cannot be transferred by endorsement, But the amount can be paid to a third party authorised by the depositor through a letter which should accompany the receipt duly discharged. Thus the ownership of the Receipt cannot be transferred to a third party but the latter may be

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deputed by the owner to collect the money on its due date. The debt r5epresented by the receipt may be assigned like any anther debt, but a notice of assignment is to be served on the banker for this purpose.

Change in NamesA fixed deposit receipt is issued in the name/names of the

depositor/depositors who apply for the opening of a Fixed Deposit A/C. Sometimes the banker receives a request for changing the name in the receipt or making an addition thereto or deleting a name therein. Such requests should be complied with very carefully after examining the legal position in each case.

If a receipt is issued in the name of an unmarried lady, who requests after her marriage, to change her surname in the receipt, the banker should comply with such request.

Similarly, if a receipt is issued in the name of a person and he wants to add the name of any other person as a joint account-holder, the banker should have no objection to the compliance of the mandate of the customer. But if the receipt is payable to two or more persons and only one of them wants to add a new name thereto, such request should not be accepted unless the consent of the other depositors is also secured. Banks may allow addition or deletion of name or names of joint account-holders at the request of all the joint account-holders. According to the Reserve Bank directive. In allowing this facility, there should not be any change in the amount or duration of the original term deposit.

If the depositor dies, allows the name or names of one or more legal heirs or legal representatives to be added jointly or individually. Such deposit can be split equally person’s name.

Mode of Repayment of Fixed DepositsSection 269 T of Income Tax Act, 1961 require that a banking

company or a cooperative bank shall re-pay any deposit by an account payee cheque or an account payee draft if—

1. the deposit together with interest, if any payable, or 2. the aggregate of the deposits held by a person together with

interest, if any, payable on such deposits is Rs. 20,000 or more. The bank can alternatively repay such deposits by crediting the amount to the savings/current account of the same depositor. Penalty amounting to the sum equal to the amount of the deposit shall be imposed. If the above requirement is not complied with.

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Deduction of Tax at SourceSection 194A of the Income Tax Act provide for deduction of tax

at source from interest on time deposits, payable by a bank or co-operative society. Where it exceeds Rs. 5,000 in a financial year. This limit applies to interest paid/credited by each branch of a bank. For this purpose, time deposit means a deposit repayable after the expiry of a fixed period and excludes recurring deposits. Moreover, interest on time deposits with a primary agricultural credit society, primary credit society, a cooperative land development bank will not be subject to tax deduction at source. Deduction of tax will not be made in case of depositors who furnish an affidavit or statement that their income is below taxable limit or that the tax on their estimated income would be nil.

Tax is to be deducted at sources at the prescribed rates. At present these rates are :10%for a resident other than a company and 20% for a domestic company.

New Schemes of Liquidity for Term DepositsSome leading banks, specially foreign banks, new private sector

banks and state bank of India have recently started new schemes to attract the depositors by providing additional liquidity to their Term Deposits. State bank of India has launched a Multi Purpose Depositors Scheme where in the Term Deposit/ Special Term Deposit Account holder is permitted to withdraw from Term Deposit through saving Bank a/c in units of Rs. 1000 without attracting any penal rate of interest. For this facility the term Deposit should be for a minimum amount of Rs. 10,000 and thereafter in multiples of Rs. 1000.

Term Deposit   We have schemes for auto renewal of term deposits placed with us upto 90 days. Fixed deposit have added feature of interest      up to Ten Times. Payment on monthly, quarterly or half yearly basis. Under Kalyan Thev Yojana, the interest is calculated on       quarterly  compounded basis and paid on maturity along with the principal amount of deposit.   Competitive Rates of interest.   Monthly / Quarterly modes of interest payments. Cumulative deposit

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option also available.   Additional Rate of interest to Senior Citizens’ / High Net Worth deposits.

Feature   All deposits up to Rs. 1.00 lac covered under DICGS insurance.   Auto Renewal up to 10 Times.   Monthly Interest   Quarterly Interest   Cumulative – Kalyan Thev Yojana    High Net Worth Deposits

Eligibility     Nationality Indian

Open an Account      Local Residential proof   PAN Card    Ration Card    Secondary School Leaving Certificate indicating date of Birth    Voters Identity Card    Birth Certificate issued by the competent authority

Interest Ratenormally 8.25%(its depends upon the depositors amount and time)

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II. SAVING BANK ACCOUNTS

A saving bank account is meant for the people of the lower and middle classes who wish to save a part of their current incomes to meet their future needs and also intend to earn an income form their savings. The banks, therefore, impose certain restrictions on the saving bank account and also offer a reasonable rate of interest. The need of keeping cash reserves against such deposits is comparatively larger vis-à-vis the fixed deposits but smaller as against the current deposits, because of the restrictions on the number of withdrawals. With the extension of banking facilities during the last decade and the growth of banking habit amongst the people, the savings deposits of all scheduled commercial banks have gone up substantially.

Restrictions on Withdrawals: In pursuance of the objective of the savings bank accounts, banks impose restrictions on the right of the depositor to withdraw money within a given period. At present the saving bank deposits are subject to the restrictions regarding the number and amount of withdrawals within a specified period. The number of withdrawals over a period of six months is limited to 50. a bank may at its discretion allow additional withdrawals also if its is satisfied about the merits of the case. A depositor cannot withdraw by withdrawal form a sum smaller then Re. 1 or any sum which is not a multiple of Re. 1 unless it is to close his account. The minimum amount of a cheque is Re. 5.

Restrictions of Deposits: The customer may deposit any amount in the savings bank account subject to a minimum of Rs. 5.The banks do not accept cheques or other instruments payable to a third party for the purpose of deposit in the saving account.

Minimum Balance: Banks prescribe the minimum balance that is to be maintained in the Saving Banks Accounts. For this purpose they take into consideration the cost involved in maintaining and servicing such accounts. They also levy specific charges. If the minimum balance is not maintained.

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Payment of Interest: The rate of interest payable by the banks on deposits maintained in savings accounts is prescribed by the Reserve Bank. Effective April 1, 2003 the rate of interest on savings deposits has been reduced from 4.0% to 3.5% per annum. The above rate of interest is payable irrespective of whether cheque facility is extended or not.

Interest is calculated at quarterly or longer a rests on the minimum balance to the credit of the account during the period from the tenth day to the last day of each calendar month on every complete sum of Rs. 10 and is credited to the account. Banks credit interest twice in a year.

The Reserve Bank of India has prohibited the banks to open a saving account in the name of any trading or business concern company or an association. The banks should also not open a savings account in the name of:

1. government departments.2. bodies depending upon budgetary allocations for

performance of their functions (i.e. which receive grants, loans, subsides, or subscription to its share capital from Government).

3. Municipal Corporation/Committees.4. Panchayat Samitis.5. State housing boards.6. Water and sewerage boards/drainage boards.7. State text book publishing corporation/societies.8. Metropolitan development authority.9. State/district level housing co-operative societies.

Saving Account

Features   Free Any Branch Banking facility at all the 26 branches.   Free Utility Bills Payment.   Free ATM facility.   Quarterly interest for Saving Bank Accounts.   Standing Instruction.   Nomination Facility.   Passbook

Eligibility

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   Nationality Indian

Open an Account    Local Residential proof   Affidavit-cum-indemnity    PAN Card    Ration Card    Secondary School Leaving Certificate indicating date       of Birth    Voters Identity Card    Birth Certificate issued by the competent authority    Passport

Interest Rate   Earn Interest @3.5% p.a. every quarter.

III. RECURRING DEPOSIT OR CUMULATIVE DEPOSIT ACCOUNTS

A variant of the savings bank account is the recurring deposit on cumulative deposit account introduced by banks in recent years. This account is intended to inculcate the habit of saving on a regular basis as an inducement is offered in the form of comparatively higher rate of interest. A depositor opening a recurring deposit account is required to deposit an amount chosen by him, generally a multiple of Rs. 5 or 10. In his account every month for a period selected by him. The period of recurring deposit varies from bank to bank. Banks open such accounts for periods ranging from 1 to 10 years.

The rate of interest on the recurring deposit account stands favourably as compared to the rate of interest on the saving bank account because the former partly resembles the fixed deposit account. According to the directive of the Reserve Bank, banks are required to ensure that the rates of interest offered by them on recurring deposits are generally in accord with the rates prescribed for various term deposits. The rate of interest is, therefore, almost equal to that of the fixed deposit account.

In case a depositor is compelled to close the account before its maturity, the bank pays no interest if the deposits are made for less than 3

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months, interest at 1.1/2% is payable for deposits made up to 6 months, up to 4% for deposits made up 12 months and 1% below the rate applicable to a recurring deposit of the period for which the deposit has actually run in case of deposits are held for over year. The accounts are transferable from one branch to another without charge.

The recurring deposit account can be opened by any person, more than one person jointly or severally, by a guardian in the name of a minor and even by a minor. While opening the account, the depositor is given a Pass Book which is to be presented to the bank at the time of monthly deposits and repayment of amount. Instalments for each month should be paid before the last working day of that month. Accumulated amount with interest will be payable after a month of the payment of the last instalment.

Recurring Deposit

  Feature    All deposits up to Rs. 1.00 lac covered under DICGS insurance.    Additional 1% Benefits*    LAKHPATI Recurring Deposit    Conventional RD Scheme Available    No TDS on RD Schemes.

  Eligibility    Nationality Indian

Open an Account      Local Residential proof    PAN Card     Ration Card     Secondary School Leaving Certificate indicating date of Birth     Voters Identity Card     Birth Certificate issued by the competent authority

  Interest Ratenormally 8.25%(its depends upon the depositors amount and time)

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IV.CURRENT ACCOUNTS.

A current account is a running and active account which may be operated upon any number of times during a working day. The no restriction on the number and the amount of withdrawals from the current account. As the banker is under an obligation to repay these deposits on demand, they are called demand liabilities of a banker. To meet such liability the banker keeps sufficient cash reserves against such deposits vis-à-vis the savings and the fixed deposits. Current accounts suit the requirement of big businessmen, joint stock companies, institutions, public authorities and public corporation, etc. whose banking transactions happen to be numerous on every working day. Special characteristics of the current account are as follows:

1. A current account is meant for the convenience of his customers, who are relieved of the task of handling cash themselves and account differs from the object of other deposit accounts which are meant to solicit the savings of the people.

2. As the banker undertakes to make payments and to collect the bills, drafts, cheque, etc. any number of times daily, the operating cost, i.e, the cost of bank personnel, involved in current account is considerable. It is, therefore, customary for the banks not to pay any interest on the credit balance in the current account. The Reserve Bank directive prohibits the payment of interest on current account. No countervailing interest is payable on any current account maintained by a borrower with any bank. Banks may pay interest on current account of Regional Rural Banks at half per cent below the borrowing rate fixed for the RRB by the sponsor bank. Since May 1983, banks have been permitted to pay interest on balances lying in current accounts in the name of a deceased depositor from the date of death of the depositor till payment to the legal heirs. Interest on such amount shall be payable at savings bank deposit rate.

3. The state bank makes no charge for keeping an account provided the balance maintained is sufficient to compensate the bank for the work involved. In case of unremunerative accounts involving lot of work but without the maintenance of sufficient balance, the banker charges incidental expense from the customer. The public sector banks now impose a uniform Ledger folio charge of Rs. 20 per folio (I.e. one side of the ledger page) on accounts having average balance below Rs. 25000.

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4. A current account carries certain privileges which are not given to a saving banks account-holder. E.g.(i)Third party cheque and cheque with endorsements may be

deposited in the current account for collection and credit.(ii) Overdraft facilities are given in case of current accounts

only.(iii) The loans and advances granted by the banks to their

customers are not given in the form of cash but through the current accounts. Current accounts thus earn interest on all types of advances granted by the banker.

1. Current Account

Features   Free Any Branch Banking facility at all the       26 branches.   Free Utility Bills Payment.   Free ATM facility.   Standing Instruction.   Statement on Demand

Eligibility   Nationality Indian

Open an Account    Local Residential proof   PAN Card    Ration Card    Secondary School Leaving Certificate indicating       date of Birth    Voters Identity Card    Birth Certificate issued by the competent authority    Passport

Interest Rate :- NIL

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2. Special Current Account

Features   Free Any Branch Banking facility at all the 26 branches.   Free Insurance Cover of Rs. 1.00 lac.   Free Personalized Cheque Books.   Commission free Demand Drafts / Pay Orders.   Free Utility Bills Payment.   Free ATM facility.   Quarterly interest for Saving Bank Accounts.   Standing Instruction.   Statement on demand

Eligibility   Nationality Indian

Open an Account    Local Residential proof   Affidavit-cum-indemnity    PAN Card    Ration Card    Secondary School Leaving Certificate indicating date of Birth    Voters Identity Card    Birth Certificate issued by the competent authority    Passport

Interest Rate

3. Zero Balance Current Account

Free Utility Bills Payment Facility.   Free payment of all utility bills covered under the Banks Jan-Bill Pay Scheme.       Bills of all the major billers like MTNL, Reliance Energy, BEST, BPL Mobile,       Reliance Mobile & Landline, TATA Indicom, Airtel, Mahanager Gas Ltd, LIC and       many more, can be paid through this account absolutely free.

Free ATM Facility

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   ATM facility available, as per applicable rules. At present ATMs are available at       select branches.

Free ABB    Any Branch Banking facility is available absolutely free, across our 26 branches.

RTGS facility    Remit/ Receive funds through RTGS, instantly at a nominal fee.   You may Open Current Account (after adhering to KYC norms) with / without       depositing cash / Cheque.   You are entitled to all facilities available to our regular current account holders.

Interest Rate

Opening of Current and Savings Accounts

By opening an account with the banker, a customer enters into relationship with a banker. As already noted in the previous chapter, the special features of this relationship impose several obligations on the banker. He should, therefore, be very careful in opening an account in the name of a customer. Though any person may apply for opening an account in his name but the banker reserves the right to do so on being satisfied about the identity of the customer. The following precautions should be taken in this regard:

(1)Application on the Prescribed Form: The request for opening a savings or current account is made on the prescribed form of the bank concerned. Banks provide separate application forms for opening savings and current accounts for individuals, partnership firms and companies. The application is required to mention his name, occupation, full address, specimen signature and the name and signature of a referee. He also undertakes to comply with the bank’s rules in force from time to time for the conduct of the account. It means that the rules prevalent at the time of opening of an account may be changed or modified by the banker and such modified rules shall be acceptable to the

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customer. The application is also required to submit three copies of his Pass Port Size Photograph.

(2)Introduction of the Applicant: Before opening a savings or current account in the name of an intending customer, the banker must get true identity of the former in order to ensure that he is a respectable person. The banker, thus, reserves the right not to open an account in the name of a person whose true identity has not been established or who is considered to be an undesirable person, e.g., a thief, robber, etc. the application may be introduced to the banker in any of the three ways:

(i) A respectable person – either a customer of the same branch of the bank or who is known to the staff of the branch – introduces him by singing on the application form itself along with his full address.

(ii) The applicant may give the name of any respectable person or that of another bank as referee. The banker enquires from the said referee amount the integrity,, honesty, respectability and financial standing or the applicant and his past experience in dealing with the applicant. If the referee sends no reply, the banker should not open the account unless satisfactory introduction is given otherwise.

(iii) The reserve bank has advised the banks that pay books or postal identification cards or identity cards of armed forces/police/government departments or passports may be considered sufficient for establishing the identity of persons desiring to open deposit accounts without cheque facility.

3. Specimen Signature: The applicant is required to give his

specimen signature on a prescribed form. Generally a card for the purpose of bank’s record. The signature cards are preserved by the banker and the signature of the account-holder on the cheques is compared with his specimen signature. If the reformer differs from the latter, the banker can refuse to honor the cheque. The specimen signature thus protects the banker against forgery. He should be very careful in comparing the signature of the customer given on the cheque with his specimen signature.4. Opening the Account: After the above formalities are over the banker

opens and account in the name of the applicant. It is essential that the applicant deposits some amount at the time or opening an account. The

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minimum amount to be initially deposited is Rs. 500 in case of a savings bank account with cheque book facility . and Rs. 250 without cheque book facility. According to a decision of the Indian banks association, the minimum initial deposits for opening a current account would be Rs 600 for urban metropolitan branches and Rs 300 for semi urban and rural branches. This amount will also be the minimum balances to be maintained by the account holders. The banker, thereafter, provides the customer with (i) a pay-in-sleep Book (ii) a cheque Book and (iii) a Pass Book and he is thus authorized to operate the account.

Operating the bank account

The word ‘operate’ in relation to a bank account means that the customer deposits further sums of money and cheques, etc into the bank and withdraws money according to his need or convenience. A special feature of banking business is that each and every transaction of money with the customer is supported by a separate slip or document. A customer is, therefore, required to make use of (i) pay-in-slips for depositing money, and (ii) cheques, draft bills etc, to the credit of his account. Usually every bank supplies free of cost to the customer separate pay-in-slips for depositing (i) cash, and (ii) cheques, etc. Thought the size and design of such slips vary from bank to bank but the contents include information relating to the date of deposit name and account number of the customer. Amount to be deposited the denomination of currency notes, etc. (in case of cash only), the cheque number and the name of the drawer (in case cheques, etc.)

After filling in the all such details on the foil and the counterfoil, the customer hands over the same together with cashier (in case of cash) or cheques, etc., to any other responsible officer (in case of cheques) who acknowledges receipt of the same by signing the counterfoil along with the stamp of the bank and returns it to the customer. The slip retained by the bank is passed on to the clerk concerned for making necessary credit entries in the account of the customer.

(ii) The cheque Book; contains blank forms of cheques which are uses as an instrument to withdraw money forms the bank. In case of savings bank account a cheque book is provided to only those customers

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who undertake to maintain a minimum balance to their credit. Other customer may withdraw from their saving bank account through a withdrawal form available from the bank but in the latter case it is essential that the Pass Book must accompany the withdrawal form every time. The blank forms of cheques and their counterfoils are serially numbered. The cheque book also contains a requisition Slip which, dully filled in, is presented by the customer for obtaining another cheque book from the bank.

(iii) The pass Book: It is a small handy book issued by a banker to his customer to record all dealings between them. In fact, it is an authenticated copy of the customer’s account in the accounts books of the banker. The purpose of issuing a pass book to a customer is to acquaint him periodically with the bank for the purpose of recording entries therein. As it passes from the hands of the customer to the banker and vice versa it is called a ‘Pass Book’

A Pass book is very important to a customer because it enables him to know some of the en tries made by the banker in his ledger account, charges made by the banker. In business where such entries are many, businessmen prepare bank reconciliation statements with the help of the pass book to tally the balance shown in the cash book with that given in the pass book.

The following points are important in this connection:(i) Entries in the pass book are to be recorded by the clerk of the

bank and must bear the initial of the accountant. The customer should not write any entry himself even for the purpose of reconciling the bank balance

(ii) Whenever the banker sends a pass book to the customer, it must show up to date entries

(iii) If the pass book is lost by the customer a duplicate pass book may be issued by the banker and marked as ‘Duplicate’

(iv) In case of savings bank account, the pass book must accompany the withdrawal form every time when money is withdrawn through a withdrawal through a withdrawal form.

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Same banks send to the customers a statement of account periodically, i.e. fortnightly or monthly, in place of providing the customer with the pass book. Such statement shows the relevant entries in the customer’s account during the given period and is filled by the customer.

LEGAL ASPECTS OF ENTRIES IN THE PASS BOOK

Though the pass book contains true and authenticated record of the customer’s account with the banker, no unanimous view prevails regarding the validity of the entries in the pass book. The banker may err in recording the entries in the Pass Book. The question, therefore arises whether the Pass Book constitutes a conclusive proof of the accuracy of the entries made therein.

Divergent View point. The implied obligation on the customer to esamine the Pass Book has not been supported in may other judicial decisions in England and India. In the absence of such obligation on the customer, the entries in the pass book cannot be treated as a conlusive proof of their accuracy and as settled account. The customer is competent to point out the mistakes or omissions in the Pass Book at any time he happens to know about them. Thus the entries in the Pass Book do not form the conlusive evidence of their correctness or accuracy. The entries erroneously made or wrongly omitted may be ither advantageous to the customer or the banker. Both the parties may, therefore indicate the mistakes or omissions therein and get them rectified. The legal position in this regard is as follows:Effect of Entries to the Advantage of the customer: The account of a customer may sometimes wrongly show a credit balance. Which is larger than he correct balance be ause of duplication of credit entries or incorrectly entering higher amounts for such entries or due to omission of any debit entry. The legal position of the banker and his customer shall be as follows :

(i)The Pass Book is written by the banker and hence the entries therein may form an evidence against the banker. The customer is rightly entitled to believe them as correct and to act on the basis of such

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entries. If the Pass Book shows a higher balance and the customer withdraws such balance treating it as his own and sub sequent spends it away, the banker shall not be entitled to recover such amount wrongly paid to the customer. But the customer shall have to prove the (a) he acted in such manner relying on the correctness of the balance shown in the Pass Book and had no knowledge of the mistakes there, and (b) he altered his position by sending the same. This benefit has been given to the customer in various judgments because of the presumption that normally a person spends what he presumes to belong to him and if the banker permits him to withdraw excess money on the above presumption, it would be a great prejudice to him, if he is called to pay them back.

(ii) There are sine exceptions to the above mentioned principle of estoppels. If the customer regularly maintains his account books and the bank regularly send him the pass book (or statement in lieu of the pass book ) the customer cannot act on the basis of the above presumption. Though it is not obligatory for him to check the pass book (or the statements) but in such circumstances, it is difficult to establish that he maintained the account books. In such Pass Book, because he regularly maintained the account books. In such circumstances, a constructive notice of the mistake is supposed to have been given to him.

Case study: In S. Kotrabasappa Vs. Indian Bank(1990) 69 company case 683 the Karnataka high court held that the customer who has take unfair advantage of a mistaken credit made by the bank is bound to return or repay the amount according to Section 72 of the Indian contract Act which states that “A person to whom money has been paid or anything delivered by mistake or under coercion, must repay or return it”,

Effect of False entries in the pass book The liability of a banker to his customer in case his employee commits an act of embezzlement and makes false entries in the Pass Book was considered by the supreme court in State Bank of India vs. Shyama

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Devi (A. I. R. 1978 S. C. 1263). The brief facts of the case were as follows:A lady opened a savings bank account in state bank of India with the introduction by an employee of the bank, who was a close neighbor and fast friend of her husband. The customer entrusted to the said employee moneys and cheques, duty endorsed, for being credited to her account. The employee misappropriated the same and to cover up his fraud made false entries in the pass book. It was argued on behalf of the customer in the savings bank account t had admittedly been made by the employee of the bank. It was further pointed out that this employee had manipulated the accounts of three other depositors also and the bank had reimbursed those customers for the loss. It was urged that the entries in the Pass Book were prima facie sufficient to establish of the customers claim.

The bank argued that the customer had entrusted the employee situation the employee could not be said to have been acting in due course of his employment or as an agent of the bank. He was only agent of the customer. If he did not deposit those amounts as directed by the customer and misappropriated the same and to cover up his fraud made false entries in the pass book, the bank could not be held liable for the loss.

The supreme court, therefore, considered the question whether the amount were handed over by the customer to the said employee in the course of the bank’s business, i.e., whether the employee acted as an agent of the customer or of the bank in the course of employment.

It was established that the said employee was not, at the relevant times, in charge of the savings bank counter at which the savings account of the customer was dealt with. In such a situation he acted as an agent of the customer or of the bank in the course of employment.

It was established that the said employee was not at the relevant times, in charge of the savings bank counter at which the savings accoun6t of the customer was dealt with. In such a situation he acted as an agent of the customer. His act of misappropriation could not be said to have been committed in the course of his employment with the bank, Similar, it cannot be said that false and fictitious entries made by the employee to cover up his fraud made the embezzlement an act committed by the employee in the course of his employment with the

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bank. The bank was, therefore, not held liable to make good the loss caused to the customer.

Precautions to be taken by the banker and the customer:1. The pass book must be sent by the customer to the bank periodically

and regularly for recording the necessary entries, so that mistakes, if any, may be detected by the customer soon thereafter. Reserve bank has advised the banks to issue a simple receipt to the tendered of saving bank pass book if it is retained by the bank for updating.

2. The pass book must be initialed by the accountant or other responsible officer of the bank, who must ascertain the accuracy of the balance ion the date of recording the entries, otherwise the customer will be entitled to act upon the same. If it is wrongly stated.

3. The customer must tally the entries, otherwise the either the account books or the counterfoils of pay-in-slips and cheques, etc. If any inaccuracy is found, the customer must inform the bank immediately rectified.

4. While sending the pass book to the customer, the banker should take steps to ensure the secrecy of its contents. The Pass Book must be sent in a closed cover.

ATTRACTIVE SAVINGS SCHEMES After The de-regulation of interest rates on deposits banks have introduced various attractive savings schemes. Some of the deposit schemes are as follows:-

(1)Re-investment plan: This is just like fixed deposits with the difference that deposits are accepted for a fixed period ranging between 12 and 120 months and interest, though calculated periodically, is payable at the time of maturity. This plan provides for the re-investment of interest also. In case of premature withdrawal or renewal under such plan, compound interest with quarterly rests at prescribed rate is to be allowed. If an advance is

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granted against a deposit under re-investment scheme, accrued interest is also to be taken into account for determining the margin.

(2)Cash Certificates: These certificates are issued with different face values payable after specified maturity period. The issue prices for different maturity period are specified in advanced; fir example one can get a cash certificate with face value of Rs. 100 after 12 months by paying its discounted value. Thus interest is payable on maturity.

(3)Multi Option Deposit scheme. State bank of India has introduced this scheme to provide liquidity to term deposits are accepted in conjunction with savings bank/current a/c or both. The facility withdrawal is permissible in units o rs 1000 through savings bank a/c without attracting any penal rate of interest. Remaining amount continues to earn interest at contracted rate

(4)Savings accounts linked with fixed deposits. Under this scheme the depositor specifies the maximum amount in his savings bank account. Beyond which the balanced is to be automatically transferred to a fixed deposit account the maturity of which is decide by him.

(5)Super savings account. Bank of Baroda has launched this scheme wherein range of benefits are given to depositors.

Special Saving Account

Feature   Free Any Branch Banking facility at all the 26 branches.   Free Insurance Cover of Rs. 1.00 lac.   Free Personalized Cheque Books.   Commission free Demand Drafts / Pay Orders.   Free Utility Bills Payment.   Free ATM facility.   Quarterly interest for Saving Bank Accounts.   Standing Instruction.

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   Nomination Facility.   Passbook

Eligibility   Nationality Indian

Open an Account    Local Residential proof   Affidavit-cum-indemnity    PAN Card    Ration Card    Secondary School Leaving Certificate indicating date of Birth    Voters Identity Card    Birth Certificate issued by the competent authority    Passport

Interest Rate    Earn Interest @3.5% p.a. every quarter.

Group Salary Saving Account

Feature   Free Any Branch Banking facility at all the 26 branches.   Relaxation in Minimum balance requirement.   Overdraft facility up to 4 times of Net Monthly Salary.   Free ATM facility.   Quarterly interest for Saving Bank Accounts.   Standing Instruction.   Nomination Facility.   Passbook

Eligibility   Nationality Indian

Open an Account    Local Residential proof

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   PAN Card    Ration Card    Secondary School Leaving Certificate indicating date of Birth    Voters Identity Card    Birth Certificate issued by the competent authority    Passport

CLASSIFICATION OF DEPOSITS :DEMAND AND TIME DEPSITS

The reserve bank of India publishes the classification of deposits with the commercial banks under two broad heads, namely (i) Time deposits, (ii) demand deposits. The various types of deposits included in these heads are as follows:

The deposits include (i) current deposits, (ii0 dement liabilities portion of savings bank deposits, (iii) margins held against letter of credit/guarantees 9if payable on demand). (iv) balances in overdue fixed deposits, cash certificates and recurring deposits, (v) outstanding telegraphic and mail transfers, demand drafts, (vi) unclaimed deposits, (vii0 credit balances in cash credit accounts and (viii) deposits held as security for advances which are repayable on demand.

Time deposits include (i) fixed deposits, (ii) cash certificates recurring deposits, (iii) time liabilities portion of savings bank deposits, (iv) staff security deposits (v) margins held against letter of credit if not payable on demand and (vi) fixed deposits held as security for advances.

It is to be noted that the savings deposits are apportioned in both of the above categories. The portion which can be withdrawn without notice is treated as demand deposits and the rest as time deposits.

FACILITY OF NOMINATIONThe banking laws (Amendment) Act, 1983 inserted a new section 45 ZA in the banking regulation Act, 1949 to provide for the facility of nomination by depositors in banks.. The above section and the rules framed there under provide as follows:

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(1)A single depositor may nominate, in the prescribed manner, a person to whom, in the event of the death of the depositor, the amount to his credit may be paid by the banking company

(2) In case of a joint account, all the depositors together may nominate a person to whom, in the event of death of all the joint depositors, the amount to their credit may be paid by the banking company. Thus the nominees’ right to receive deposit money arises only after the death of all the depositors. There cannot be more than one nominee in respect of a joint account.

(3)A nomination cab be made in favour of individual only and not associations, societies, trusts’ or any organization or their office bearers.

(4)Nomination facility is available to all types of deposit accounts, including the accounts opened for credit of pension.

(5)Such nomination confers upon the nominee the right to receive the amount of deposit from the banking company. On the death of the depositor/all the joint depositor, the nominee shall become entitled to all the right of the letter to such deposit, to the exclusion of all other person.

In case of a fixed deposit receipt, can a nominee request the bank to permit him to withdraw the fixed deposit amount before the date of maturity, was the issue which was decided by Allahabad High Court in a recent case (smt. Parvati v. Central Bank of India (1989)(2) Bank CLR 194. The High Court allowed such premature encashment by the nominee on the ground that Section 45Z-A(2) confers all rights of the depositor in relation to the deposit on the nominee. Hence the right to get premature encashment of FDR can also be exercised by the nominee.

(6) If the nominee is a minor, the depositor/depositors may also appoint any person to receive the amount of deposit in the even of his death during the minority of the nominee.

(7)The nomination may be varied or cancelled by the depositor in the prescribed manner. In case of a joint account variation or cancellation of a subsisting, nomination can be made by all the surviving depositors acting together.

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(8)On making payment under the provisions of this section, the banking company shall be fully discharged from its liability in respect of the deposit.

(9)The right or claim of any other person against the nominee, to whom any payment is made under this section, shall not be affected by such payment.

(10) No other person shall be able to get notice of his claim to such deposits to the banking company. Nor shall the banking company be bound by such notice even through expressly given to it.

The above provision in the act have been made to facilities expeditious settlement of claims in the accounts of decreased depositors and to minimize the hardship caused to the family members on the death of the depositors.

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SPECIAL TYPES OF BANKER’S CUSTOMERS

A banking institution solicits deposits of money from the members of the public. An account in a bank for this purposes may be opened by any person who (i) it is legally capable of entering into a valid contract, (ii) applies t the banker in the proper manner, i. e., he follows the procedure laid down by the banker, and (iii) accepts the terms and conditions stipulated by the latter. The banker however possesses the right to reject an application for opening an account, if h is not satisfied with the identity of the applicants, i.e., if the latter is deemed to be an undesirable person. Some persons like the minor’s lunatics and drunkards are not competent to enter into valid contracts. Some persons who act on behalf of others have limited powers t contract e.g., the agents trustees, executors etc, Institutions like schools, colleges, clubs, societies, and corporate bodies are the impersonal customers of a banker. The authority, powers and functions of the persons managing these institutions are embodied in their respective constitution. The banker should therefore take special care and precautions to ensure that the accounts of these institutions are being conducted in accordance with the provisions of their respective charters. The present chapter discusses the legal position f the special cases of a bank’s customers and the necessary precautions that a prudent banker should take while dealing with them.

MINOR

Person who has not completed 18 years of age is a minor. If a guardian of his person or property is appointed by the court before he completes 18th year, he remains minor till he completes his 21st year. According to the Indian contract act 1872, a minor is not capable of entering into a valid contact and a contract entered into by a minor is void A contract fir the supply of necessaries of lire to a minor is however, a minor is however a valid contract. In case of all other contracts In case of all other contracts, a minor ism repudiate his promise or consent. A banker should, therefore be very careful in dealing with a minor and take the following precaution

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1. The banker may open a saving bank account (and not a current account) in the name of a minor, in any of the following ways:(i) In the name of the minor, t be operated upon by the

national guardian of the minor or the guardian appointed by the court. Such account can also be opened in the joint names of two or more minor, to be operate upon by the guardian.

(ii) In the name of the minor, to be operated upon by himself if he has attained the age of 12 years. Two such minors can jointly open such an account, to be operated upon by them jointly.

2. The bank records the date of birth of the minor as given by the minor or his her guardian. On the attainment of majority, the account of the moor in the name of the guardian should be closed and the balance paid to the minor (then major) or be transferred to a new account in his/her own name. In case of joint account the minor is also permitted to operate the account and his signature is taken on the account opening form.

3. The legal provisions regarding guardianship are discussed later. If the father of a Hindu minor dies his mother becomes his natural guardian. After the death of the mother, during the minority of the boy there is either the testamentary guardian or the guardian appointed by the court. The banker may return the money to such guardian.

4. In case the minor dies, the balance in the account is permitted to be withdrawn by the guardian and in case of joint account the balance will be held at the absolute disposal of the guardian.

5. No risk is involved if an account is opened in the name of a minor so long as the account is not overdrawn by the member, But if an overdraft or advance is granted to a minor, even by mistake or unintentionally, the banker has no legal remedy to recover the amount from the minor, the assets of a minor pledged with the banker as security for the advance taken by the minor are note legally available to the banker because such pledge itself is invalid. The banker shall have to return these securities to the minor and he cannot exercise his right of sale in case of default by the minor.

6. If an advance is granted to a minor on the guarantee of a third party, such advance cannot be recovered from the guarantor also because the contract of guarantee is invalid on the ground that the contract between the creditor and the principal debtor (minor) itself is a void contract. According to section 128 lf the Indian contract act, 1872 the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. The surety, therefore, cannot be held liable on a guarantee given for default by a minor. According to the law a minor cannot enter into a valid contract and he cannot undertake a liability upon himself. Thus he

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cannot default. Surety’s liability is a secondary one and does not arise, if the liability of the primary debtor does not arise. In Edavan Nambiar vs. Moolakai Raman (A.I.R. 1956 Madras 164) the Madras High Court also upheld the above viewpoint. The liability of a surety is ancillary. It materializes if there is a valid obligation on the part of the debtor whose debt or obligation is guaranteed. However, if the contract of guarantee specially provides contrary to the above, the guarantor may be held liable for the debts of a minor.

But if a minor enters into an agreement by representing himself as major and later on claims such a contract as void on account of his minority at the time of entering into contract, the minor must restore the benefit derived by him under the agreement. In M/S Thiry Ariiram Sugars Ltd. Vs State bank of India, the high court observed as above on the bases of section 65 of the Indian contract act which states the “when an agreement or contract is bounded to restore it or to make compensation for it to the person from whom he recovered it”.

7. A minor ay draw, endorse or negotiate a cheque or a bill but he cannot be held liable on such cheque of bill. He cannot be sued in respect of a bill accepted by him during his minority. Such bill or cheque, nevertheless will be a valid instrument and all other arties will be liable in their respective capacities (Section 26 of the Negotiable instruments Act, 1881). The banker should, therefore, be very cautious in dealing with negotiable instrument, to which a minor is a party.

8. A minor can be admitted to the benefit of partnership with the consent of all the partners but he will be liable for the loses or debts of the firm. Within six months after he attains majority he should repudiate his liability as partner otherwise be will be held liable as a partner of the firm from the date he was admitted to the benefit of the partnership [Section 30 (7) (a) of the Indian Partnership Act, 1932].

9. A minor may be appointed as an agent to act on behalf of his principal. According to section 184 of the Indian Contract Act, 1872, “as between the principal and third person, any person may become an agent; but no person who is not of the age of majority and of sound mind can be appointed as an agent, so as to be responsible to his principal.” Thus a minor agent cannot be held responsible to his principal. The principal may be held responsible to the third parties in respect of the acts of his minor agent. Therefore, all of his dealings with the banker will be valid and binding on his principal. The banker should obtain written authority of the principal specifying the power and the extent of authority entrusted

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to the agent in this regard and should see that the minor agent does not deal beyond such delegated powers.

ILLITERATE PERESONS

Illiterate persons cannot sign their names and hence the bankers take their thumb impressions as a substitute for signature, and also a copy of their recent photograph. The application form and the photograph should be attested by an approved witness. For withdrawing money, he must attend personally and affix his thumb impression in the presence of an official of the bank, for the purpose of identification.

LUNATICS

According to the Indian contract act. 1872, a person of unsound mind is not competent to enter into a valid contract. A person is said to be of sound mind for the purpose of making a contract if he is capable of understanding it and of forming a rational judgment as to its effect upon his interests (Section 12). It is important that he should be of sound mind at the time he enters into a contract. If a person is usually of sound mind but occasionally of unsound mind, he cannot enter into a valid contract when he is of unsound mind. A contract entered into by a person of unsound mind is a void contract according to the Indian Contract Act, 1872.

The banker should, therefore, not open an account in the name of a person who is of unsound mind. But if a banker has discounted a bill duly written, accepted or endorsed by a lunatic he can realise the money due on the same from such person except in the circumstances where it is proved that the banker was aware of the lunacy of the person concerned at the time he discounted the bill. The banker should suspend all operations on the account of a customer as soon as he receives the news

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of his lunacy till he gets the proof of his sanity or is served with an order of the court.

TRUSTEES

According to the Indian Trusts Act, 1882, a ‘trust’ is an obligation annexed to the ownership of property, and arising out of a confidenc3e reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner (section 3). The person who reposes the confidence is called the author of the trust. Trustee is the person in whom the confidence is reposed. The person for whose benefit the trust is formed is called the beneficiary. A trust is usually formed by means of a document called the ‘Trust Deed’. While opening an account in the names of persons in their capacity as trustees the banker should take the following precautions:

1. The banker should thoroughly examine the Trust Deed appointing the applicants as the trustees. The trust deed contains the names of the trustees; power vested in them for administering the authorized to act jointly and is not competent to delegate their powers unless the Trust Deed authorizes them to do so. The banker should thoroughly examine the Trust Deed to ascertain the powers and functions of the trustees.

2. In case of two or more trustees, the banker should ask for clear instruction regarding the person or persons who shall operate the account. In the absence of such instruction, all the trustees must sign the cheques etc., because the estate is placed under their joint charge.

3. If one or more of the trustees dies or retires, the authority vested in the remaining trustee dies or retires the authority Trust deed. When all the trustees depends upon the provisions of the Trust deed. When all the trustees are dead, new trustees may be appointed by the court.

4. The insolvency of a trustee does not affect the Trust property and the creditor of the trustee cannot recover their claims from such property.

5. The banker should take all possible precautions to safeguard the interest of the beneficiaries of a Trust failing which he shall be liable to compensate the latter for any fraud on the part of the trustee. For example if the banker permits the transfer of Trust money to the personal account of the trustee, already overdrawn,

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with clear knowledge and understanding, the banker shall be liable to refund the money to the trust account. The banker is, thus, placed in the same position in which the trustee is so far as the use of Trust money is concerned. He shall be held liable for the misuse of the Trust money if it is within his knowledge.

6. The trustees may borrow money from the banker and pledge or mortgage the trust property only if the trust deed specifically confers such power on them. The banker should, therefore, grant loans to the trustee after thorough examination of the borrowing powers as given in the trust deed. To be on the safer side, the banker should grant an advance for a Trust only when the trustees are respectable persons and given personal guarantee also, apart from creating a charge on the assets of the trust.

EXECUTORS AND ADMINISTRATORS

Executors and administrators are personas who are appointed to conduct the affairs of a person after his death. When a person known as testator appoints another person for this purpose through a will, he is known as an executor. If the will of the testator does not mention the name of the executor, or if the person appointed as executor dies or refuses to act, the Court appoints a person for the purpose that is known as administrator. Both the executor and the administrator perform the same duties, i.e., to realise the assets of the deceased and to pay off his debts, the executor is appointed by the will. His powers and authority are vested therein. He has to act according to the directions given in the will, but he is required to obtain a probate (official confirmation of the will) from the court the administrator is appointed by the court through a latter of administration and is directed, in the absence of the will, to settle the affairs according to the provision of the law. The banker should take the following precautions while dealing with executors and administrators:

1. On the death of customer, the banker must stop payments from his account. The executor should be permitted to operate the account of the deceased after he has obtained the probate from the court. The administrator is authorized to do so after securing the latter of Administration. The banker should examine these documents before the appointed person is permitted to operate the account.

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An account in the name of an executor/administrator is opened in the following style and the balance in the account of the deceased is transferred to such account:“ABC executor (or administrators) to the estate of XYZ deceased”

2. In case two or more persons are appointed as executors or administrators, they shall have joint interest in the estate of the deceased. This interest is not capable so division. One or more executors may draw cheques on the account but a latter of authority signed by all of them, stating the name/names of the persons who will operate the account, is taken by the banker. If this authority is revoked, either all of them should operate the account jointly or a fresh latter of authority is given to the banker. Any of the executor/administrators is competent to countermand and payment of the cheque issued by any other executors/administrators.

3. the banker should be very cautions in conducting the account of executors/administrators so as to prevent them from misappropriating the funds of the deceased. The banker should not permit transfer of funds from the estate account to the personal account of the executor to repay an overdraft taken by the executor. Similarly, the banker should not have recourse to the securities belonging to the deceased for granting personal loan to the executors.

4. In case of death of one of the executor or administrators, a cheque issued on such account should not be dishonoured even if he is one of the two or more joint signatories, because on the death of one of the executors (unless otherwise provided in the will) or of an administrator his powers are vested in the surviving executor/administrators. Of course, in such cases a new latter of administration is to be secured from the court.

5. The banker cannot exercises his right of set-off against the creditor balance in the executor’s personal account of the deceased.

6. If the executor requires an overdraft or a loan before he obtains the probate in order to make necessary payment, the banker usually advances such loans on the personal security of the executor, so that he can recover the same in case the probate is not granted. The executors are made jointly and individually liable for such loans.

7. After the court grants probate or issues a latter of administration, the executor or the administrator may pledge specific assets of the testator to obtain an overdraft from the banker. But if the will specifically forbids such power, the executor cannot do so. The banker should therefore very thoroughly examine the will to ascertain the borrowing power of the executors. In case a loan is

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granted, all the executors must sign the documents. The executors may also make themselves personally liable for such loans.

JOINT PERSONS ACCOUNT

When two or more persons open an account jointly, it is called a joint account. Such an account may be opened by any two persons for the sake of convenience of operation of account and also for withdrawal of money after the death of any one of them. The banker should take the following precautions in opening and dealing with a joint account

1. The application for opening a joint account must be signed by all the persons intending to open a joint account.

2. The banker should obtain clear instruction in writing, signed by all the joint account may be operated in any of the following ways:

(i) By all the depositors jointly(ii) By either or survivor of them(iii) By former or survivor of them.

The mandate must include the name or names of the persons who are authorized to operate the joint account and must specify the extent to which they are authorized to take advance or to pledge the securities, etc. In the absence of such instructions, the banker should honour only those cheques which bear the signature of all the persons in whose names the account stands.

3. The joint account holder who is authorized to operate the joint account, himself alone cannot on appoint an agent of attorney to operate the account on his beheld. Such attorney or agent may be appointed with the consent of all the joint account holders

Example: A , B and C open joint account with SBI and authorize C to operate the account After some time C wants to do abroad and ants to

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appoint D as his agent to operate the joint a/c. C himself alone cannot do so. He shall have to seek the written consent of both A and B for this purpose.

4. Any joint account holder (including the one who is not authorized to operate the account) can stop payment of a cheque issued on a joint account. Banker must honour such order even if an agent or attorney has been appointed to operate the account-holder.

5. The banker should also take a mandate to ascertain whether the persons operating the joint account are also authorized to overdrawn the account. If so, it is desirable to establish separate joint liability. This is secured by asking the customers to sign a joint and several promissory notes and also by declaring such separate and joint liability in all the documents executed by them. In case the several liability is also established, the banker can recover the amount from all the joint account-holder individually or from one or more of them. He can file duties against all of them individually. Further, the banker can exercise his right of set-off against the credit balances in the account of the joint account-holders, if they have established their several liabilities also. But in case of joint liability. Only, a suit may be filled against all of them jointly and if any of them dies, his legal heir will not be liable for the same.

6. The authority to operate the account can be revoked by any of the person giving such authority. It is automatically revoked if any of the joint account-holders dies, becomes bankrupt or of unsound mind. the banker must stop payment in such cases

7. The banker should be given clear instruction regarding the withdrawal of securities in the joint account and the power conferred upon the person operating the account to pledge the securities. In case the shares are in the joint names, all such persons must sign the transfer form.

8. A joint account may be operated by either of the joint account-holders. But if a cheque is drawn and signed by one of them, any alterations therein should also be done by the same person and not the other one. The alteration should bear the signature of the drawer.

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9. The persons opening a joint account are also required to give a mandate, in the application form itself, specifying the person to whom the balance in the account shall be payable. The balance in a joint account may be a payable to:-

(i) both or all of them or the survivor or survivors of them; or(ii)either or any one or more of them or the survivor or survivors

of the

The balance in the joint account shall be payable to all the joint account-holders together, if the instruction is given in form (i) above and to any one of them if it is in form (ii) in both the cases, if one of the joint account holders dies, the balance is payable to the survivors. The above instruction is given by all the joint account-holders. Hence any one of them is competent to revoke it in writing, Thereafter the banker will treat the account as one without such instruction and the amount from the account will be payable on the discharge of all the joint account holders.

Death of a Joint Account holder

In case of a joint account the bank happens to be a debtor to two of more creditors jointly and promises to repay the same to them. The Indian contract Act 1872 provides for the devolution of joint rights in such cases as follows:

“When a person has made a promise to two or more persons jointly then unless a contrary intention appears from the contract, the right to claim performance rests, as between him and them, with them during their joint lives and after the death of any of them during their joint lives and after the death of any of them, with the representative of such deceased person jointly with the survivor or survivors, and after the death of the last survivor, with the representatives of all jointly” (Sec. 45).

Something banks to encounter difficulties in given effect to the terms of contract with the customer when there are conflicting claims on balance held in joint account. In Nagarajmma vs. State bank of Hyderabad (AIR 1962 A.P. 260), the bank issued a fixed deposit receipt in the joint names of one D and a lady N who claimed to be his real wife, claimed the amount from the bank. The bank, instead of paying the amount to N as per the contract, filed an interpleaded suit thought it could have got good discharge by paying the money to N. On the basis of the

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facts of the case the court held that N. the survivor, was not entitled to the amount and the other lady, being his real wife, was his heir to receive the amount. Thus in case of conflicting claims, the banks may ask for the production of legal representation.

In Jrushanadas Nagindas Bhate vs. Bhagwandas Ranchhoddas and others (A>I>R> 1976 Bom. 153). The Bombay high court uploading the above, observed that-

“ In respect of a joint account opened in the bank, the lw seems to be well settled that on the death of one, there is a resulting trust in favour of his heirs and legal representatives, unless there are special facts and circumstances to show contrary intention.” The High Court further held that “if from the facts and circumstances of the case could be held that the intention was to make the survivor the owner of the amount lying in the account, them he and not the heirs would be entitled to recover the amount. If the facts and circumstances of thecase do not establish any such intention, although the holder of the joint account may be authorized to withdraw the amount, he would be bound to restore that amount to the heirs and legal representatives of the deceased joint holder. The bank may be discharged by payment to the survivor. But the survivor may in the absence of an intention to make him the owner, be accountable to the heirs of the deceased joint holder”. The High Court also rejected the rule of joint account of the state bank of India making the survivor the absolute owner of the amount lying in credit of the account.

In padmanabhan Bhawani and other vs Govindan Bhargava and another (A.I.R. 1975 Kerala 83) the High court held that on the death of the depositor the amounts deposited in the joint names, payable to either or survivor, could not be treated as a gift to the survivor because the depositor continues to be the owner of the amounts in question till his death. In such cases without any declaration of tryst, there is a resulting trust in favors of the depositor in the absence of any country intention or unless it can be proved that an actual gift of the amount was intended. The burden of proving a contrary intention of gift is on the person who seeks to rebut the resulting trust in favour of the person who makes the deposits.

Above the rule the rule of the banks that on the death of one, the account would be converted into a single account to be operated by the survivor, the high court observed that such provisions were designed only to regulate easy operation of accounts and payment of money to the survivor. The provisions did not touch the right inter se among the depositors or the rights of inheritance.

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JOINT HINDU FAMILY

A joint Hindu family possesses ancestral properties and carries on ancestral business. The ownership of such property passes on to joint Hindu family governed by the atakshara School of Hindu Law, every male member of a family acquires an interest in the joint property by birth. After the enforcement of the Hindu succession /act, 1956, the share of deceased coparcener, who was member of the joint Hindu family, is also dividable amongst his wife, daughters and other female relatives as given in the act. While dealing with the account of a joint Hindu family and granting it loan, the banker is naturally faced with a difficult task of ascertaining the right of the coparceners in the joint family.

PARTNERSHIP FIRM

A partner ship is not regarded as an entity separate from the partners. The Indian partnership act 1932, defines partnership as the relation between persons who have agreed to share the profits of the business, carried on by all or any of them acting for all. A partnership firm is thus established by an agreement among the partners. This agreement may be oral or written. The object of constitutions a partnership firm must be oral or written. The object of constitutions a partnership firm must be to –

(i) carry on a business which may be conducted by all the partners or any of them on behalf of the rest, and

(ii) to share the profit of such business amongst themselves. The partnership deed contains the details of the agreement reached between the partners. The Indian partnership act 1932 lays down the general provisions which govern a partnership business. A banker should take the following precautions while opening an account in the name of a partnership firm.

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1. Number of partners:- The banker should very care fully examine the partnership deed, which is the charted of the firm, to acquaint himself with the constitution and business so the firm. The banker should see that the number of partners does not exceed the statutory limit. According to section 11 of the companies ace 1956 a partnership firm consisting of more than 10 persons for the purpose of carrying on banking business and of more than 20 persons for the purpose of carrying on any other business for the acquisition of gain or profit, shall be an illegal association unless it is registered under the companies act 1956, or is formed in pursuance of some other Indian law or is a joint Hindu family carrying on such business. If the number of partners exceeds these limit, the partnership becomes an illegal association of persons, which cannot enter into any contract, and cannot sue or be sued. The banker must refuse to open an account in the name of a firm in such cases. The minimum number of partners in a firm must be two excluding a minor partner who is not competent to enter into a contract. A minor may be admitted into the partnership with the consent of all other partners but he shall not be liable for the losses or debts of the firm. The banker should note the date when the minor partner will attain majority so that a fresh partnership letter signed by him and other partners is obtained by the banker.

2. title of the firm’s account: A firm account should always be opened in the name of the firm and not in the name or names of the individual partner/partners.

3. Opening of an account: An account in the name of a firm may be opened by a banker on receipt of an application from one or more of the partners. Bankers, however, insist that all the partners should join to open the firm’s account. If any partner has gone out of the country, the rest of the partners can open a bank account in the mane of the firm. Specimen signatures of all the partners should also be taken for the purpose of record. But if any of the partners is deprived of the right to open an account in the firm’s name and this fact is within the knowledge of the banker, he should not open the firm’s account at the request of such partner.

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The banker should, therefore, conform the right of the applicant/s to open an account6 in the name of the firm the partnership deed or from any other available evidence

4. The partnership latter or mandate : the banker should take a latter signed by all the partners starting

(i) the manes and addresses of the partners;(ii) the nature of the business undertaken by the firm;(iii) the name/s of the partner/s who will operate the account

on behalf of the firm and will have the authority to draw and accept bills etc., and to sell and mortgage the property of the firm.

The banker should honour the cheques signed by all the partners or by those partners who are authorized to operate the account.

5. Revocation of authority to operate the account: The authority given in favour of a particular partner/s to operate the firm’s account may be withdrawn by any of them by giving a notice to the banker. In such circumstance, the banker should stop payment of cheques signed by such partner and pays the cheques which are signed by all the partners. A partner can also stop payment of cheques signed by such partner and pay the cheques which are signed by all the partners. A partner can also stop the payment of a cheque issued by any other partner on the firm’s account.

6. a partner authorized to operate the firms account cannot delegate his authority to another person without the consent in writing of all other partners. If such consent is given by all of them, the authorized partner may execute a power of attorney in favour of such other person.

7. If a cheque payable to the firm is endorsed by a partner in his own favour and is deposited by him to be credited to his personal account, the banker should do so after making an enquiry about it from other partners and after being satisfied about it. Otherwise he will bear the risk of losing there statutory protection granted to the collecting banker under the negotiable instruments act, 1881. The banker should be particularly careful in this regard if the partner sends such a cheque in response to a request from the bank to repay overdraft taken by him from the bank.

Death of a partner:

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If a partner dies, the firm stands dissolved automatically, if an agreement to the contrary does not exist. It means that the firm is not dissolved on the death of a partner if the partnership deed specifically provides for this. The deceased partner’s heirs cannot succeed him as partners. They can demand the share of the deceased in the firm from the surviving partners, or they may be admitted as new partners by the existing partners. If the firm stands dissolved on the death of a partner, the banker must close the firm’s account immediately on receipt of the intimation about the partner’s death. This is important if the firm’s account shows a debit balance at the time of a partners death because the latter’s estate would be liable to pay the debts incurred by the firm before his death. Hence to determine the liability of the deceased partner, the banker should close the account of the firm soon after the death of a partner, if he defaults in doing so, the rule in Clayton’s case will apply. If the firm does not stand dissolved. It is reconstituted by the surviving partners with or without the admission of a new partner. The banker should open a new account in the name of the reconstituted firm and obtain a fresh mandate and unde5rtaking from the partners in any case the cheques drawn by the deceased partner should not be honoured b the namely without confirmation from the surviving partners.

Retirement of a partner: When a partner retires his liability towards the banker or any

other third party ceases in respect of all transitions undertaken subsequent to the date of his retirement, the retiring partner continues to be liable for the transactions of the firm even after the date of his retirement. The retiring partner should give a public notice for this purpose to terminate his liability to the third parties. If the bank account of the firm at the time of retirement of a partner shows a debit balance. The banker must close the account of the firm, in order to retain his right to claim money from the retiring partner. If this is not done, the rule in Clayton’s case will apply, If an account shows a credit balance, the banker need not close it but the cheques drawn by the retiring partner should be honoured after securing confirmation from other partners,. On the opening of a new account or on the continuance of the existing account after the retirement of a partner, a fresh mandate should be taken from the partners of the new firm.

Insolvency of a partner:

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In case of insolvency of a partner the partnership comes t an end, if an agreement to the contrary does not exist. The insolvent partner ceases to be a partner with effect from the date he is declared as insolvent and he shall not be liable to the firm for any of its transactions thereafter. The insolvent partner does not remain competent to operate the firm’s account. The solvent partner can operate the account for winding up the affairs of the firm. The banker should honour the cheques drawn by the insolvent partner before his adjudication only after getting confirmation from the solvent partners. Bankers usually close the account of the firm and open a new account in the name of the reconstituted firm to determine the liability of the insolvent partner. Otherwise the rule in Clayton’s case will apply.

JOINT STOCK COMPANIES

Modern businesses are generally organized as joint stock companies incorporated under the companies act,1956. A joint stack company is an artificial person with perpetual succession brought into existence under the provisions of the companies act. Legally, a company is considered as an entity separate from its members and hence it possesses all power to enter into valid contract. It can own property in its own name, carry on lawful business and incur liabilities in its name. While opening an account in the name f a company the banker must satisfy himself about the following :

1. Examination of documents: As company is an artificial person, its constitution, powers and

objectives, rules and regulations, etc, are contained in the following important documents. The banker should thoroughly and carefully examine these documents. The banker should thoroughly and carefully examine these documents:

(i) Certificate of Incorporation certificate and Commencement of Business: These certificates, issued by the registrar of the companies, provide conclusive proof that the company is a duly incorporated body and the necessary formalities regarding its formation have been fulfilled by the promoters. A private limited company is not required to obtain the certificate of commencement of business. On its registration under the companies act a company is given recognition as an entry separate from its members and acquires

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all powers to enter into contracts and to commence its business. The baker should ensure from these certificates that the company applying for opening an account is a duly registered and incorporated body.(ii) Memorandum of Association: The memorandum of association is the main documents of a company, which embodies its constitution and is called the charter of the company. It contains the name of the company. It’s authorized capital the name of the state in which the registered office of the company is to be situated, the objects of the company and the liability of its members. This is generally limited to the extent of their shareholdings. The banker should examine the memorandum specially to note objective for which the company is incorporated because any contract entered into by a company which serves an object other than the objects mentioned in the memorandum is unenforceable at law and ultra virus, such a contract cannot be ratified by the members of the company at their meeting even by a unanimous vote.(iii) Articles of association: The articles of association contain the rules and regulations of a company regarding its internal management. It contains in detail all matters which are concerned with the conduct of day-to-day business of the company.

2. Copy of Board’s resolution:

Along with the application to open an account in the company’s name, the banker should obtain a certified copy of the resolution passed by the Board of Directors of the company containing the following in regard to the opening of a bank account;

(a) appointing the bank concerted as the banker of the company

(b) naming the person or persons who are authorized to operate the bank account on behalf of the company

(c) Stating the names of the persons who are authorized to execute the documents on behalf of the company, or in whose presence the seal of the company will be affixed on the documents

(d) Authorizing the advance and stating al details of such advance, e.g., limit, security, rate of interest, etc., and

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(e) Stating the names of the persons who are authorized to deposit the title deeds in case of equitable mortgage

3. The Borrowing Power of the Company:

All joint stock companies engaged in trade or industry have the implied power to borrow money for the purpose of carrying on their businesses. The borrowing power of the company may be restricted by its memorandum of association. Section 293 (1) (d) of the companies act 1956, provides that the board of directors of a public company or of a private company which is a subsidiary of a public company shall not, except with the consent of such public company or subsidiary in general meeting, borrow money in excess of the aggregate of the paid-up capital of the company and its free reserves, i.e., reserves not set apart for any specific purpose, The temporary loans obtained from the company’s bankers in the ordinary course of business are excluded in computing total borrowing of the company for this purpose. The term temporary loan’ means loans repayable on demand or within six months from the date of the loan ; such as, short term cash credit arrangement, the discounting of bills and other short term loans of seasonal character, but des not include loans raised for the purpose of financing expenditure of capital nature. Thus the limit imposed by section 293 (10 (d) does not apply to the short term and seasonal loans. Fir borrowings in excess of this limit, a resolution shall specify the total amount up to which money may be borrowed by the board of directors.

Borrowing by directors without authorization: The question whether the amount borrowed by the directors without authority and used for the benefit of the company can be recovered from the company or not was considered by the Patna High Court in Kumar Krishan Rohatgi and Others vs. State bank of India and Others. (1980)50 suit filed by the state bank of India on the ground that the managing director of the company had no authority to execute the promote in the absence of a resolution duly adopted by the board of directors and hence it was not binging on the company. It is to be noted that any borrowing by the company may be ultra virus the directors but not ultra virus the company. In such cases money can be recovered from the company.

Precautions to be taken by the banker

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(i) The banker should ascertain that the company borrows only or the purpose mentioned in its memorandum of association and within the limits, if any specified therein.

(ii) A certified copy of the resolution of the board of directors passed under section 292 should be obtained by the banker for his own record.

(iii) The board of directors should also pass a resolution certifying that the company’s borrowing including the proposed borrowing, are within the limit specified by the companies act, or the limit sanctioned by the shareholders at the general meeting.

4. Registration of charges under the companies act: section 125 of the companies act 1956. Requires that every charge created by a joint stock company, falling within the following categories. Must be registered with the registrar of Joint stock companies with in 30days days of its creation, otherwise it shall be void against the liquidator or any creditor of the company;

(a) a charge for the purpose of securing any issue of debentures

(b) a charge on uncalled share capital of the company(c) a charge on any immovable property of any interest

therein (d) a charge on any book debts of the company(e) a charge not being a pledge, on any movable property of

the company(f) a floating charge on the undertaking or any property of

the company (g) A charge on call made but not paid (h) A charge on good will, a patent or a licence under a

copyright.(trade mark or a copyright or a licence under a patent)

Precautions regarding prior charge over the assets: Generally banker grants secured loan guarantee is a fixed charge on the fixed asset of the company and a floating charge over its stock-in-trade, book debts

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and other movable assets. Sometimes in addition to the above, personal guarantees is also secured from the directors of the company as a collateral security. While granting a loan on the basis of a fixed of floating charge over the assets of a company the banker should be careful about any prior charge fixed or floating over the same assets cases debentures are succored by floating charge over the assets of the company with a stipulation that the company cannot create any other charge over the assets ranking above or at par with the charge in favour of the debenture holders. A charge by the company subsequently will, therefore, not have priority over the earlies charge. The banker should therefore. Be very careful in finding out the existence of any prior charge over the assets of the company by inspecting the register of charges. Which every company is enquired to maintain at its registered office.

CLUBS SOCIETIES AND CHARITABLE INSTITUTIONS

Clubs, societies, charitable and religious institutions, libraries, schools, colleges, etc., not engaged in trading activities, maintain their account with the banks. The banks should observe the following precautions in dealing with them:

(i) The society must be incorporated: The society registration act, 1860, provides for the registration of societies for the promotion institutions may also be incorporated under the companies act 1956, or the co-operative society acts. A society gets the legal recognition as an entity separate from its members only after is incorporation under any of these acts. Thereafter, it is empowered to enter into valid contracts and to sue or be sued. The banker should, therefore, ensure that the applicant society is properly incorporated body. The unregistered society cannot be sued in law

(ii)Rule and by-laws of the society: A registered society is governed by the provisions of the act under which it has been registered. It may have its own constitution, charter or memorandum of association and rules and by-laws, etc., to carry on its activities. A copy of the same should be furnished by the society to the baker to acquaint the latter it’s the powers and functions of the persons managing its affairs. The banker should ensure that these

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rules are observed by the persons responsible for managing the society.

(iv) Resolution of the managing committee. Fr opening bank account, the managing committee of the society must pass a resolution-

(a) appointing the bank concerned as a banker of the society(b)Mentioning the name/s of the person or persons. Who are

authorized to operate the account; and (c) giving any other directions for the operation of the said

accountA copy of the resolution must be obtained by the bank for its own record.

(v) Borrowing power of the society: In case a registered society intends to borrow the bankers must ascertain the borrowing power of the society from its characters or memorandum. The purpose for which such borrowing is permissible must also be noted and the powers of the managing committee or its office bearers to create a charge over the assets of the society for the purpose of borrowing should be enquired into. A resolution must be passed by the managing committee for this purpose and a copy thereof must be sent to the banker.

(vi) Death or resignation : In case the person authorize to operate the account on beheld of a society dies or resigns, the banker should stop the operation of the society’s account till the society nominates another person to operate it account.

(vii) Caser to be exercises in case of personal accounts. If the person authorized to operate the society’s account is also having his personal account with the same branch of the bank, the banker is under an obligation to ensure that the funds of the society are not being credited to the personal account of the said person or office bearer. For example the principal of a college is authority to operate the account of the college with bank X. he also has his personal account with the same bank. He sends to the bank for collection and credit to his personal account a cheque drawn by a donor in favour of the college. The banker is under an obligation to ensure that he receives payment on behalf of the true owner of the said cheque, i.e., on behalf of the college. If he fails to do so he will be held guilty of negligence and shall not be able to avail of the statutory protection under section 131 of the negotiable instruments act. In this circumstance, the banker should not collect such cheque for crediting the same to the account of the principal.

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CONCLUSION

The empirical evidence on various aspects of relationship banking is rather mixed in most cases, a fact which may be attributable partly to the difficulty of defining relationship banking in practice.

Relationship banking can reduce information asymmetry between a business firm and its creditors, making the relationship bank (and other creditors) willing to give easier access to credit, allowing the firm to mitigate liquidity constraints in its investment activities. Based on this information, relationship banks are often willing to provide insurance functions to their client firms. This can take the form of adjusting the terms of loans according to the cyclical business situation, or giving more intensive care to the client firms in times of financial distress.

The empirical evidence also seems to demonstrate the risks of relationship banking. Creditor banks tend to discourage risk-taking by client firms, and this may constrain the full realization of corporate growth potential. Also, a firm may be informational captured by its relationship bank, making it difficult to turn to other financial sources and forcing the firm to pay monopoly rents to the bank. When a relationship bank is also a shareholder of a financially distressed firm, it may influence corporate decisions in its interest, making other creditors less willing to provide additional credit due to potential conflicts of interest.

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Deregulation and increased competition in the financial markets is often considered a threat to relationship banking. However, once relationship banking has become firmly established between a bank and its corporate clients, the relationship is likely to be maintained, since the bank’s informational advantages can be kept with modest additional effort. In situations where competition is mainly in the capital market, relationship banking might be even more valued, particularly for small and medium sized firms and young firms without adequate access to venture capital. More importantly, with the transition to a universal banking system, relationship banks can continue to make use of the informational advantages about their clients in the securities business, even though they may no longer rely on bank loans. A universal banking system requires strengthened prudential regulation to deal with the increasing scope for banks’ abuse of conflicts of interest. The challenge is substantially larger if the banks are controlled by family-based conglomerates.

Relationship banking comes under stress when the client firms or banks are in financial distress. In order to better help a client firm in financial difficulty, the relationship bank may need to intervene in corporate management by dispatching a banker to the corporate board of directors. The banker faces a conflict of interest, having a fiduciary duty to both the owners of the firm as well as the bank. This conflict and the possibility of consequent liability for losses by other stakeholders may constrain the bank’s much-needed corporate governance role. To deal with this problem, an efficient mechanism for coordination among creditors is needed. Relationship banking may be a curse when the bank cannot fulfill its implicit obligations due to its own financial problems. Firms are likely to have difficulty turning to other banks or investors because of the informational monopoly by the bank. Moreover, if the bank goes bankrupt, its information capital accumulated through relation-specific investment is mostly lost. Since this represents a loss to the economy beyond the bank’s book value, care needs to be given to the restructuring of banks so that this information capital can be saved to the extent possible.

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ANNEXURE

1. WHICH SERVICES RENDED BY YOUR BANK?

2. WHICH ACCOUNT PROVIDED BY YOU’R BANKS?

3. WHAT FACILITIES PROVIDED FOR THIS ACCOUNT?

4. WHAT INTEREST RATES PROVIDED FOR THIS ACCOUNT?

5. WHICH ATTRACTIVE SAVING PROVIDES YOUR BANK TO YOUR CUSTOMERS & WHAT ARE THE FEATURES FOR THIS ACCOUNT?

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6. WHICH TYPES OF ACCOUNTS PROVIDED BY YOUR BANK FOR THE FOLLOWING

MINOR MARRIED WOMEN TRUSTEES EXECUTORS AND ADMINISTRATORS JIONT PERSONS

BIBLOGRAPHY

BOOKS:-

INDIAN BANKING (IN NEW MILLENNIUMS) M. P. SHRIVASTAVA. S. R. SINGH

MODERN BANKING AND INSURANCE (PRINCIPALES AND SAVINGS)

J. N. JAIN. R. K. JAIN.

BASICS OF BANKING (TAXMANN)

BANKING LAW AND PRACTICE

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P. N. VARSHNEY.

WEBSIDES

www.ask.com www.jksbl.com www.indianfoline.net www.tcs.com

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