tqm implementation

Banking & Insurance BANK

The word ‘Bank’ originated from the French word “Banque” or Italian word, ‘Banca’ which mean an office for monetary transaction over

the counter.In those days banks were used as centers for

monetary transactions.

Banking and InsuranceModule.I: COMMERCIAL BANKING

Evolution of Banking Services and it’s history in India.

The modern banking and it’s networking are the products of modern western civilization.

British brought with them this modern concept of banking in India.

……Evolution of Banking Services and it’s history in India.

The BANK OF ENGLAND was started in 1694. In 1708, the monopoly and the right to issue

notes was given to Bank of England through an Act.

Several Joint Stock Banking Companies started operating early in the nineteenth century.These banks primarily carried on commercial functions like receiving money on deposits, lending money, transferring money from place to place and bill discounting.

History of Banking in India

Early History: The Vedic period has literature which

records giving of loans to others. The Manuscript speaks of deposits,

pledges, loans and interest rate. Interest could legally be charged at

between two to five percent per month. The maximum amount of interest collectable on the principal was laid down by the State.

…Early History of Banking The main instrument through which

banking and transfer of funds was carried out through the inland bills of exchange or the Hundi.

Business developed so well that certain castes and communities traditionally came to regard banking as their family business.

History of Banking in India Modern History:

Modern banking in India began with the rise to power of the British.

The British consolidated their power and became the most powerful force in India after vanquishing Tipu Sultan in the battle of Srirangapattan in 1799.

Modern History of Banking: The quest for power by Lord Morning ton. Governor General of

Fort William in Bengal at that time led to a serious depletion of the resources of the East India Company. This led to the Company promoting the Bank of Calcutta in 1806 to raise resources.

The native money lender lent to the farmers at 40, 50, and 60 per cent.

Indian business men were very often acted as lender to the European business men with rate of interest lower than the market rate.

The Swadeshi Movement which prompted the Indians to start many new institutions also provided an impetus for starting new banks.

History of Banking in India In 1921, the Three Presidency Banks at

Calcutta, Bombay and Madras were merged in to Imperial Bank by passing Imperial Bank of India Act, 1920.

The Imperial Bank did not have power of issuing notes, but was permitted to manage the clearing house and hold government balances.

…….History of Banking in India

With the passing of RBI Act of 1934, the Reserve Bank of India came in to being to act as the Central Bank. It acquired the right to issue notes and acted as the banker to the Government in place Imperial Bank.

By passing of SBI Act, the Imperial Bank was taken over and the assets vested in a new bank, the State Bank of India.

Bank Nationalization The RBI was a originally shareholder’s bank . It

was nationalized by the RBI (Amendment) Act,1948, consequent to the nationalization of Bank of England in 1946.

The major historical event in the history of banking India after in after independence is undoubtedly the nationalization of 14 major banks on 19 th July, 1969. In 1980 six more private sector banks were nationalized.

Nationalization was recognition of the potential of the banking system to promote broader economic objectives.

…..Bank Nationalization The branch network which was 8262 in

June 1969 expanded to over 60,000 by 1992 with major expansion (80%) in rural areas.

The average number of people served by branch came down from 60,000 to 11,000.

Bank Nationalization The deployment of credit is more widely

spread all over the country as against only in

advanced states. In 1969 deposits amounted to 13 % of GDP

and advances to 10 %.By 1990 deposits grew to 30 % and advances 25 % of GDP.

….Bank Nationalization Rural deposits as percentage of deposits

grew from 3% to 15 % making for increased mobilization of resources from rural areas.

Deposits grew from a figure of Rs. 4669 crores in July1969 to Rs.2,75,000 crores on 31.3.1993.

….Bank Nationalization 40% of the total credit was directed to priority

sector. 45% of the total deposits was used by the

government to fund it’s five year plans.

...Nationalization However the growth did not come without it’s costs .

The banking system has grown too large and unmanageable.

Customer service has suffered due to increasing costs and lower productivity.

The directed credit program has led to large over-dues affecting the very viability of the banking system.

Definition of Banking The Banking Regulation Act,1949 defines the

term ‘Banking’ as, “ accepting, for the purpose of lending

or investment, of deposits of money from the public, repayable on demand or otherwise,and wihtdrawable by cheque, draft, order or otherwise.” [Sec.5 (b)].

Banking terms

Section 5(c) of Banking Regulation Act,1949 defines banking company as ,

“Any company which transacts the business of banking in India.”

…Banking terms

Section 5(c)a. of Banking Regulation Act,1949 defines banking policy as, “ Any policy which is specified from time to time by the Reserve Bank in the interest of the banking system or in the interest of monetary stability or sound economic growth , having due regards to the interests of depositors, the volume of deposits and other resources of the bank and the need for equitable allocation and the efficient use of these deposits and resources. ”

Definitions of Banking terms Section 5 (f) of Banking Regulation Act ,1949 defines

demand liabilities as, “liabilities which must be met on demand”. And Times Liabilities as “liabilities which are not demand liabilities.”

“Development Bank” means Industrial Development Bank of India established under Section 3 of IDBI Act of 1964.

“Gold” Includes gold in the form of coin, whether legal tender or not, or in the form of bullion or ingot, whether refined or not.

“National Bank” means National Bank for Agriculture and Rural Development” established u/s 3 of NABARD Act, 1911.

Definitions of Banking terms “Exim Bank” means Export Import Bank of India

established under Section 3 of Export Import Bank of India of 1981.

“Reconstruction Bank” means the Industrial Reconstruction Bank of India established under section 3 of the Industrial Reconstruction Bank of India ,1984.

“Secured loan or advance” means a loan or advance made on security of assets the market value of which is not any time less than the amount of such loan or advance ; and “unsecured loan or advance” means a loan or advance not so secured.

Definitions of ‘Banker/Bank’

Dr. H. C. Hart,

A banker or bank is a person or company carrying on the business of receiving of money and collecting of drafts, for customers subject to the obligation of honoring checks drawn upon them from time to time by the customers to the extent of amount available in their accounts.

Definition of ‘Banking’ H. P. Sheldon defines, “The function of receiving money from his

customers and repaying it by honoring their cheques as and when required is the function above all other functions, which distinguishes a banking business from any other kind of business.”

BUSINESS OF BANKING COMPANIES Forms of business in which banking companies may

engage in any one or more of the following forms of business namely;

The borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security;the drawing, making accepting and discounting , buying, selling collecting and dealing in bills of exchange, hundis, promissory notes, coupons, drafts, bills of lading, railway receipts,warrants, debentures, certificates, scripts and other instruments,and securities whether transferable or negotiable or not;

….BUSINESS OF BANKING COMPANIESthe granting and issuing of letters of credit,

traveler’s checks and circular notes; the buying,selling and dealing in bullion ; 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, obligations, securities and investments of all kinds ;

….BUSINESS OF BANKING COMPANIES

the purchasing and selling of bonds, scrip or other forms of securities on behalf of the constituents or others, negotiating of loans and advances; the receiving of all kinds of bonds , scrip or valuables on deposits or for safe custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities;

Various types of Banking Services The flow chart given below shows the following types of

banking services;

1.Central Banking services:The Central Bank of any country(i)Issues currency

and bank notes; (ii) Discharges the treasury functions of the

Government, (iii)Manages the money affairs of the nation & regulates the internal and external value of money (iv)acts as the bank of the Government and last but not the least, acts as bankers’ bank.

Various types of Banking Services

2.Commercial Banking Services:Commercial banking services include, (i)receiving various types of deposits;(ii) giving various types of loans (iii) Extending some non-banking customer services like facilities of locker, rendering services in paying directly house rent, electricity bill, share calls, insurance premium and the like.Commercial bank also advices on investment, re-investment,allotment or transfer of funds.

Cont’d… 3.Specialized Banking Services: Special banking institutions are established for

definite specialized banking services like industrial banks to supply industrial long term credit and working capital;land mortgage bank for granting loans on equitable mortgage; Rural credit banks for generating funds for extending rural credit; development banks to support any developmental activities.These types of banks accept all types of deposits but mobilizes the amount in it’s specially focused area.

,………Cont’d 4.Non-banking financial services: Many institutions are established for carrying on non-

banking financial services.Mutual funds are institutions accepting finances from it’s members and investing in long term capital of companies both directly and indirectly in primary market as well as indirectly in the capital market.

Financial institutions acting as portfolio managers receive funds from the public and manage the funds for or on behalf of it’s depositors.The portfolio managers undertake the responsibility of managing the funds of the principal so as to generate maximum return.

The Narasimhan Committee Report The 1980’s were the decade of private

enterprises all over the world. The collapse of the USSR at the end of the 1980’s is the end of one experiment of socialism.

In India the country went through traumatic moments in 1990, after the heady economic growth in the 1980’s, due to a foreign exchange crises on account of large scale external borrowings in the 1980’s that had weakened the country’s ability to service it’s debts.

…The Narasimhan Committee Report

The government felt that there was a need to initiate reform in the financial system and banks, as the system had developed weaknesses.Banks were burdened by a large percentage of non-performing loans (NPAs). Customer service had suffered, and out-dated practices were in vogue.

Narasimhan committee was set up to recommend changes in the financial system.

NARASIMHAN COMMITTEE MADE REVOLUTIONARY RECOMMENDATIONS ON EMPHASIZING THE NEED FOR DE-REGULATION AND LIBERALIZATION.

Banks were to be allowed to raise capital from the public. Also no further nationalization of banks were to be made. New private sector banks were to be allowed and no

distinction was to be made between private banks and public sector banks.

Foreign banks were to be allowed freedom to open branches.

The pattern of banking structure should be broadened with 3-4 large banks on a international level 8-9 large banks on a national level and the other as local banks.

Narasimhan Committee Report Recommendations………. [cont’d]

Control over the banking system should be centralized with the RBI and not split between the RBI and department of banking of government .

SLR and CRR should be reduced . Concession-al lending should be phased out. Deposit interest rates to be raised along with reduction of

SLR. The appointment of CEO should be de-politicized banks

should be free to make their own recruitments.

The Role and Functions of Commercial Banks in India

Utility of Banking Institutions: Banks are extremely useful and indispensable institutions for

a modern community .They are the custodians and distributors of liquid capital the essential ingredient for commercial and industrial activities.

a] The banks create purchasing power,in the form of purchasing power, in the form of bank notes, checks, bill,drafts,etc.

…….The Role and Functions of Commercial Banks in India

b] Banks transfer funds, by bringing borrowers and lenders together, and by helping funds move from person to person and place to place in convenient manner.

c] Banks encourage the habit of saving among the people and enable small savings, which otherwise would have been scattered ineffectively, to be accumulated in to large funds and thus made available for investments of various kinds.They promote economic development through capital formation.

Cont’d…….. By encouraging savings and investment, the

banks increase the productivity of the resources of the country and thus contribute to general prosperity and welfare by promoting economic development.

Bank’s agency functions are very useful to customers of the bank.They undertake to make payments of various kinds on behalf of their customers and also make several types of collections on their behalf.

Thus, banks are useful to both the community in general and the individual customer in particular.

Role of Commercial Banks in Economic Development Banks promote capital formation: a) they attract deposits by offering attractive

rates of interest,thus converting savings which would have remained idle, in to active capital

b) they distribute these savings through loans among enterprises which are connected with economic development

Role of Commercial Banks in Economic Development

Optimum utilization of resources: The banks exercise a degree of

discrimination which not only ensures their own safety but also makes for optimum utilization of the financial resources

…Role of Commercial Banks in Economic Development

Financing the priority sectors: For successful implementation of the

development programs it becomes necessary to make credit facilities available to high priority sectors.The banks and financial institutions operate in such a manner as to conform to the priorities of development and not in terms of return on their capital.

Cont’d….. Banks promote balanced regional

development: By opening branches in backward areas

the banks make credit facilities available there.

Also the funds collected in developed regions through deposits may be channelised for investment in the underdeveloped regions of the country.

Cont’d…..

Expansion of credit: To maintain a high level of economic activity, it

is imperative that credit must expand. Banks make valuable contribution to the speed and level of economic development in the country.

Banks promote growth with stability: Banks regulate the rates of investment by

influencing the rates of interest.

Cont’d……. In recent years , commercial banks in India have been

adopting the strategy of innovative banking in their business operations

To attract more deposits, banks have introduced many attractive saving schemes such as education deposit plan,perennial pension plan retirement schemes, loan linked recurring deposit schemes, housing finance, credit cards, packing credit and post shipment credit for exporters ,consumer credit, 24 hr banking, working on Sundays, etc. Mobile bank branches have also been opened by number of banks.

Cont’d…….In addition to various activities like

innovative banking , promoting entrepreneurship, retail banking and rural development, the commercial banks have promoted various schemes like advance to priority sectors and credit guarantee schemes.Thus banks come to p[lay an t role in economic development.

MERCHANT BANKING Merchants bankers are governed by the Securities and

Exchange Board of India(Merchant Bankers)Rules,1992. “Merchant Banker” is defined as, ‘any person

who is engaged in the business of issue management either by making arrangement regarding selling, buying or subscribing to securities as Manager, Consultant, Adviser or rendering corporate advisory service in relation to such issue management .’

Role of Merchant Bankers:Merchant bankers are designated as managers to the issue. They are specialized agencies whose main business is to attract

public money to Capital issues. They render the following services.

1. Drafting of prospectus and getting it approved from the stock exchanges

2. Appointing and assisting in appointing bankers ,underwriters, brokers, advertisers etc.

3.Obtaining the consent of all the agencies involved in public issue.

4. Holding brokers conference / investors conference 5.Deciding the pattern of advertising 6.Deciding the branches where applications money should be

collected.

…………merchant bankers7.Deciding the dates of opening and closing of the

issue.8.Obtaining the daily report of the application money

collected at various branches9. After the closing of issue , obtaining the consent of stock

exchange for deciding basis of allotment etc.Merchant Bankers charge a heavy fee for rendering the

above mentioned services.The fees are so lucrative that many nationalized banks which had separate merchant banking divisions have now opened separate subsidiary companies for rendering merchant banking services.

Merchant BankersA). All merchant bankers must obtain the

authorization from SEBI B) SEBI may collect from the merchant bankers an

initial authorization fee an annual fee and a renewal fee.

C) The Merchant bankers must have a minimum net worth which is based on the category in to which they are classified.

CATEGORY:- Rs 1 crore. CATEGORY:- Rs 50 Lakhs CATEGORY:- Rs 20 lakhs. CATEGORY:- NIL.

……Merchant BankersD) Lead manager / Merchant bankers would be

responsible for ensuring timely refunds and allotment of securities to the investor.

E) The merchant banker shall make available to SEBI such information documents returns and reports as may be prescribed and called for.

F) SEBI has already prescribed code of conduct for merchant bankers, which they should adhere to.

merchant bankers………. The above terms of authorization have been

framed to make merchant bankers more responsible and liable and any negligence on the part of the merchant bankers can be proceeded against legally.

This will ensure that fake companies whose only intention is to defraud the public do not have any access to the stock market and the investing public at large.

Four categories of Merchant Bankers CATEGORY-I :Those categorized to act in the capacity of

issue manager /co-advisor/consultant and portfolio manager to an issue and under writer to an issue as mandatory required

…Four categories of Merchant Bankers CATEGORY-II:Those categorized to act in the capacity of

co-manager, advisor or consultant to an issue or portfolio manager, and

…Four categories of Merchant Bankers

CATEGORY-III:Those authorized to act only in the capacity

of advisor or consultant to an issue.

…Four categories of Merchant Bankers

CATEGORY-IV: Advisors and consultants who provide

consultancy and guidance to certain terms of authorization have also been specified for merchant bankers.

DIVERSIFICATION IN BANKING

The Government of India issued guidelines to he banks under section 6 of the Banking Regulation Act,1949 permitting and encouraging them to diversify their functions.

MERCHANT BANKING AND UNDERWRITING: Commercial banks have now se up merchant banking divisions and are underwriting new issues,especially preference shares and debentures.

MUTUAL FUNDS: Mutual Fund offers investors a proportionate claim on portfolio of assets that fluctuates in value with the value of the assets that make up the intermediaries port folio.Some banks have now been permitted to float subsidiaries as mutual funds.

RETAIL BANKING:

Commercial banks in India are increasingly taking up retail banking as an attractive market segment with opportunities for growth and for profit. Retail banking refers to housing loans,consumer loans for purchase of consumer goods.The loan values can average between Rs.20,000 to Rs 1 crore.The repayment period can be up to 7 years with housing loans granted even up to 15 years.Retail banking has been facilitated by growth in banking technology and automation of banking processes.

,,,,,,,,

ATMs: ATMs (Automated Teller Machines ,or “any time money” as one bank has been wittily advertising) have emerged as an alternative banking channel which facilitate low cost banking transaction.Bank customers need not go to the bank branches but can withdraw money and deposit checks in ATMs…

…….These are the normal purposes for which persons go to

bank.This is now avoided by he neighborhood ATM.The use of ATMs by foreign banks and private sector banks has helped these banks to expand their reach and compete effectively with public sector banks(PSB s).PSB s also in turn rapidly introducing ATMs.

ANY WHERE BANKING: Any where Banking is the new system of banking adopted and made popular by a few foreign banks and is now being increasingly adopted by PSB s. This facility is a technology based customer friendly service for the convenience of customers.

Cont’d…… Under Any Where Banking,a customer having an

account with any select branch can operate it from other designated branches of the bank through out the country.The facility includes cash withdrawal , cash deposit, transfer of funds, collection of local checks, intra city, and inter city transactions, etc.Now distance is no hindrance and banking is made more convenient , wherever the consumer may reside.

Branch Banking and Unit Banking In the branch banking system, every

bank, as a single legal entity operate through a network of branches through out the country.

Under the unit banking system, however, the banking operations are carried through a single banking office rather than through a network of branches.

Cont’d……

INTERNET BANKING Growth of internet and wireless

communication technologies, advances in telecommunications, etc. have dramatically changed the structure and nature of banking and financial services.

Cont’d….

RBI has issued guidelines to the banks on internet banking covering :

(a) the risks associated with internet banking;

(b)the technology and security standards for internet banking;

(c) legal issues relating to this new type of activity;

(d) the regulatory and supervisory concerns of RBI.

Cont’d….VENTURE CAPITAL FUNDS:

The purpose of VCF s is to provide equity capital for pilot plants attempting commercial application of indigenous technology and adaptation of previously imported technology to domestic conditions.

The Government of India has issued detailed guidelines and procedures for establishment of VCF, management structure, size and investment of the fund,etc.

Corporate Advisory Services & Consultancy Services offered by the Merchant Bankers

Corporate Advisory Services are needed to ensure that a corporate enterprises runs efficiently at it’s maximum potential through effective management of financial and other services.

It also rejuvenates old- line companies and ailing units and guides existing units in locating areas/activities of growth and diversification.Corporate Advisory Services represent an important component of the portfolio of the activities of merchant bankers.

…Corporate Advisory Services:

Corporate Advisory Services:a) Providing guidance in areas of diversification

based on the Government’s economic and licensing policies.

b) Appraising product lines and analyzing growth and profitability and fore casting future trends.

Main Corporate Advisory Services 1.Making of Public Issue and Issue Management 2.Project Counseling and Pre-Investment

Studies. 3.Corporate Restructuring 4.Capital structuring and Restructuring 5.Loan Syndication 6.Liaison with foreign collaborators and making

preparation for joint-ventures

Cont’d………….[Corporate Advisory Services]

7.Raising Foreign Currency Loans Euro issues,FCCB s etc.

8.Mergers and Acquisitions. 9.Making Valuation and Re-valuation of Assets. 10.Consultancy for Rehabilitation of Sick

Industrial Units 11.Other Corporate Advisory Services

Fee based Services Issue Management Corporate Advisory Services Credit Rating Mutual Funds Asset Securitization

Fund Based Services Leasing and Hire Purchase Housing Finance Credit Cards Venture Capital Factoring, Forfaiting and Bill Discounting.

Module II.RELATIONSHIP BETWEEN BANKER AND CUSTOMER

Definition of Banker and Customer:BANKER:

There is no statutory definition of the term customer.According to Hart , “Banker is one , who in the ordinary course of his business , honors checks drawn upon by him by persons ( customers) from and for whom he receives money on current accounts.”

According to the Banking Regulation Act,1949 “Banking Company is a company which transacts the business of banking in India.” [Sec.5(c)]

According to the Banking Regulation Act,1949 the term Banking means “accepting for the purpose of lending or investment of deposits of money from the public repayable on demand ,order or otherwise or withdraw able by check, order or draft or otherwise.”

CONT’D…………….

Who is the customer of the bank ? The term ‘customer’ is not defined under any statutes.A person becomes a customer of the bank when the

latter agrees to open an account of the former. Thus customer is one who has some sort of account with the banker.The duration of relationship is immaterial.

In Ladbroke v.Todd (1914) it was observed that : “The relation between banker and customer begins as soon as the first check is paid in and accepted for collection and not merely when it is paid”.

CONT’D…………….

But mere casual acts of service do not create the relationship of banker and customer. [Commissioner of Taxation v.English, Scottish Australian Bank Ltd.,(1920)].Thus a person who goes to the bank to remit his life insurance premium to the Life Insurance Corporation, or to buy a draft or cash a check issued to him by someone else, is not a customer. To become a customer, a person must have some sort of account with the banker.

Module II.

RELATIONSHIP BETWEEN BANKER AND CUSTOMER

Between the banker and customer exists a contractual relationship.The services rendered by commercial banks are classified in to two types;

1. TRADITIONAL & 2. NEW SERVICES. I. Traditional services mainly relate to; (a) Maintenance of different types of deposit accounts e.g.,

savings, fixed and current accounts; (b) Granting loans and advances; (c) Collection of checks ,bill of exchange and other

instruments ( inland and foreign) (d) Providing financial guarantees; (e) Remittance facilities by issue of drafts, mail transfers, and telegraphic transfers; (f ) Providing safe deposit and safe custody(locker) facilities; (g) Purchase and sale of securities.

Cont’d …… Banker Customer Relationship II.New Services:1.Schemes for deposit mobilization a. Certificate of Deposit (CD) b. Savings Schemes c. Minor Savings Scheme d. Monthly Interest Income

Schemes e. Annuity or Retirement

Schemes f. Farmers Deposit Schemes g. Insurance linked savings

bank accounts h. Innovative Deposit Schemes

2.Housing Finance3.Automatic Extension Deposit Scheme4.Personal Loan Scheme5.Loan Participation or Consortium

Banking6.Multiple Banking Arrangement7.Schemes for Financing SSI s8.Schemes for Financing Agriculture9.Credit Cards and Debit Cards10.Electronic Banking: ANY TIME BANKING ANYWHERE BANKING TELE BANKING INTERNET BANKING MOBILE BANKING

New Services …………Cont’d

11.Rural or Green Cards 12.Traveler's Checks 13.Travel Agency work 14.Gift Checks 15. Lock Box and Night Safe Services 16. Services After Banking Services 17.Other Services.

Banker-Customer Relationship

The banker customer relationship has been broadly classified in to ; I.General Relationship, and II.Special Relationship

I. General Relationship Between Banker and Customer.

1. Banker as a Debtor :Uses the money deposited with him for his business.

2.Banker as a Creditor: Lends loan as a credit to his customers. a) Demand for repayment necessary.

b) Demand Should be made at proper time & at proper place.

c) Demand must be made in proper manner.

3.Banker as a Trustee:A trustee holds money or assets and performs certain functions for the benefit of some

other person called the ‘beneficiary’.

Cont’d……

4. Bank as an Agent: Performs agency functions.Buys and sells securities on behalf of his customer , of insurance premium collects checks on his behalf and makes payments of various dues,like payment .

5. Banker as a Bailee: If valuables are left with the bank for safe keeping e.g., when a provides a safe deposit services such as electricity and telephone bills.

6. Banker as a Consultant: Providing consultancy in matters such as taxes and making investments.

7. Banker as a Lessor:Provides safe deposit lockers to it’s customers on lease for depositing their valuable articles, documents, etc.

Banks held liable for deficiency in service.The Chartered Accountant ,Feb,2005 / Subhash Agarwal “Applicability of Consumer Protection Act to Banking Sector”

a) Wrongful Dishonor of checks b) Non-credit of check collected c) Non-issuance of proper receipt d) Payment of lower rate of interest e) Default by bank’s agent f) Interest not paid on excess amount deposited

Special Relationship Between Banker-Customer:Rights and Obligations towards Customer

Rights of Banker:1. Banker has the right of lien in respect of the

amount due to him by the customer. Lien gives to a person only right to retain the possession

of the goods and not the power to sell.Banker’s lien entitles the banker to retain in his

possession securities etc., in respect of the general balance due by the owner to the banker.The right extends to all securities placed in his hands as a banker by his customer which are not specifically appropriated.

Special Relationship Between Banker-Customer:Rights and Obligations towards Customer

OBLIGATIONS OF BANKER 1. OBLIGATION TO HONOR CHECKS [cheques] :

Banker has a statutory obligation to honor checks A banker must honor the customer’s check drawn on him

provided:a) He has sufficient funds of customerb) The funds are properly applicable to the repayment of

such checkc) Banker has been duly required to payd) The check has been presented within a reasonable time

after the apparent date of it’s issuee) No prohibitory order of the court or any other competent

authority e.g., tax authority etc., is standing against the accounts of the customer

Cont’d…..f) Check should be properly drawn g) Banker to have reasonable time for

crediting fundsh) Check should be presented in a bank where

the account is kepti) No lien or claim on the balancej) No stop payment instructions

EXTENSION OF OBLIGATION:

Obligation of the banker to honor the checks of the customer, when sufficient balance is available in his account, is extended by an agreement, express or implied, to the amount of overdraft agreed upon.

Cont’d…..

2.Obligation to keep a proper record of transactions

3.Obligation to abide by the instructions given by the customer

4. OBLIGATION TO MAINTAIN SECRECY OF CUSTOMER’S ACCOUNT

Special Features of Banker Customer Relationship……….Cont’d

RULE IN CLAYTON’S CASE(1816)

The rule is applicable where the parties have a current account , i.e., unbroken account between them.If, for example, a check for Rs.500/- is presented for payment and the customer has only Rs 490/- to his credit , the banker may dishonor the check . Again if two checks of Rs 250 each are presented at one time, the banker may dishonor the checks

Special Features of Banker Customer Relationship……….Cont’d.

1.In Indian Overseas Bank, Madras V. Naranprasad Govindlal Patel, Ahmedabad (AIR1980 Guj.)

Gujarat High Court held that, the overdraft arrangement between the bank and it’s customer is a contract and it cannot be terminated by the bank unilaterally, even if it is a temporary one.


2.In New Central Hall v/s United Commercial Bank Ltd.(AIR 1959 Madras), it was held that, damages for loss of reputation due to the dishonoring of a check can be nominal or substantial or exemplary.

A trader is entitled to substantial damages even without proof of any special damage; but a non-trader can be awarded only nominal damages. Exemplary dam,ages can be awarded only in highly exceptional circumstances.


4. OBLIGATION TO MAINTAIN SECRECY OF CUSTOMER’S ACCOUNT

1] Under Law: The various statutes make it compulsory for the banker to disclose information about

the customer’s account.The following acts contain such provisions. (a) The Income Tax Act, 1961 (b) The Companies Act, 1956 (c) Bankers Books Evidence Act,1891 (d) RBI Act, 1934 (e) Banking Regulation Act, 1949 (f) FERA, 1973 (g) The Gift Tax Act, 1958

Obligation to Maintain Secrecy of Customer’s Account.[cont’d]

2] Under Express or Implied Consent of the Customer

It is an implied term of contract between a banker and his customer that the banker will not divulge the state of the customer’s account to third parties,without the express or implied consent of the customer. For instance, where a customer has given his banker as a reference, the banker will be justified in disclosing legitimate information to a third party.

Obligation to Maintain Secrecy of Customer’s Account. [cont’d…]

…..2] Under Express or Implied Consent of the Customer

In case of loan accounts, when a customer introduces a proposed guarantor to his banker, the latter has to disclose the financial affairs of the customer to the proposed guarantor to the extent it would be necessary for the guarantor to be aware of his responsibility as guarantor.

Obligation to Maintain Secrecy of Customer’s Account. [cont’d…]

3] Under common courtesy among bankers There is a well recognized practice among banks themselves

generally described as a ‘a common courtesy’ where bankers enquire among themselves about information as to the financial status of a customer.Information given in response to such enquiries is given confidentially and is worded with scrupulous care, so as to disclose no more than the general position of the customer.And it is considered to be permissible in view of the implied consent of the customer, derived from a well known practice among banks.

Cont’d…….. 4] Disclosure in Bank’s interest:A banker will require to disclose information about

his customer to protect his own interest, such as in case of dispute with the customer.When banker has to realize his dues on account of loans and advances from the customer, he will be justified in revealing information to guarantors about such advances or to an advocate for initiating legal proceedings in a court of law.

Obligation to Maintain Secrecy of Customer’s Account [cont’d……]

5] Disclosure in Public Interest: Suppose our nation is at war with a neighboring

country.In such a situation, continuation of trade with that country would not be desirable.When a banker comes to know that one of his customers is having secret trade transactions with the enemy country, he will be justified in disclosing the facts to proper authorities.Similarly, when a banker comes to know of some criminal intents of a customer, It is his duty to disclose the facts to the appropriate authorities.

Obligation to Maintain Secrecy of Customer’s Account. [ cont’d……]

4. BANKER TO BE CAUTIOUS WHILE DISCLOSING INFORMATION :

It is the duty of the banker to take due care while disclosing information about a customer.Undue or irrelevant information should not be given;only facts should be communicated and information given in general terms. Only in general terms like good, fair, satisfactory, unsatisfactory,etc., should be used while disclosing information. Whenever information is given to another banker , one of the conditions of disclosure should be that secrecy is maintained by the recipient of the information also.

Information should not be given to persons not connected with the collection of information.The obligation to maintain secrecy continues even when the customer’s account is closed.

Obligation to Maintain Secrecy of Customer’s Account. [ cont’d……]

5. OBLIGATION FOR IMMEDIATE CREDIT OF OUTSTATION CHECKS.

Under the guidelines of RBI, a banker has to give immediate credit to the customer for outstation checks up to a specified amount and also allow the customer to withdraw against such checks.

When may a banker dishonor a customer’s check [cheque] ? 1.Where the banker does not have the sufficient

funds to the credit of the customer. 2.Where the funds to the credit of the customer

are not applicable to the payment of the check E.g.,.When money is held in trust.

3.Where the check is ambiguous or doubtful legality.

4.Where the check is mutilated (torn so as to make it imperfect)

Cont’d…… 5.Where the check is irregular and

materially altered 6.Where the check is not duly presented . 7.Where the customer’s signature does

not tally with his specimen signature. 8.Where the check is post-dated. 9.Where the check has become stale (out-dated).

Cont’d……. 10. Where the check is presented at a branch other than

the one where the customer has the account. 11.Where an account is in joint names of few ,but they all

have not signed the check. 12.Where the banker has a claim for a set-off on the funds

of the customer and the check is for an amount in excess of the balance above the claim.

13.When the customer has informed the bank about the loss of the check.

14.When the bank receives the notice of an assignment by a customer of his credit balance.

When a banker must dishonor the check ?1.When the customer becomes insolvent. [The reason is obvious.All the assets of the insolvent(the

customer) vest in official receiver or assignee]2. When the customer countermands payment [i.e., orders banker not to make payment]3.When the banker receives notice of the customer’s death.4.When the banker receives the notice of the customer’s

insanity.5.When a garnishee or other legal order attaching or

otherwise dealing with the money in banker’s hands is received by the banker.

Cont’d……….6.When the customer gives notice to the banker to

close the account.7.When the customer gives notice of assignment of

the credit balance of his account.8.When the banker suspects, or has reason to

believe, that the title of the person presenting the check is defective.

9.When the holder gives a notice of loss of check to the banker.

[The banker may however, may insist that the holder should obtain a countermand from the drawer].

Garnishee Order In case a debtor fails to make payment due to

his creditor , the latter may apply to the court to issue a garnishee order on the debtor’s banker.As a result of this order the debtor’s account with the bank is frozen and the bank cannot make any payment out of the account.The creditor, on whose request , such an order is issued is called the judgement creditor; the debtor, whose account is frozen is called the judgement debtor, and the banker who has the customer’s account is called the Garnishee.

Garnishee Order is not applicable in the following cases: (a) If the account is overdrawn, the banker owes no money

to the customer and, hence, the court order ceases to be effective.

(b) It does not apply to amounts of checks , drafts,bills,etc. sent for collection for the customer,which remain un-cleared at the time receipt of the order.

(c) Sale proceeds of customer’s securities,e.g., stocks and shares in the process of sales, which have not been received by the banker are not attachable.

(d) It is not effective on the payments already made by the banker, before the order is served upon him.This rule will also ………………………………….

Cont’d…….

apply inward clearing checks paid by the banker in the normal clearing time and the order is received after the time of returning check is over.

(e) The order is not applicable to money held abroad by the judgement debtor.

(f) Securities held in safe custody with the banker are not attachable by the order.

(g) Future credits in the account are not covered.The Garnishee Order may be served on the head office of the bank concerned and it will be treated as a sufficient notice to all of it’s branches, provided the head office is given reasonable time to intimate all concerned branches.

ANSWERS IN CASE OF DISHONOURED CHECKS

In case a check is dishonored, the bank should return it with a slip disclosing the reason for dishonor.Most banks have such slips called as ‘Return Memos’ printed and they tick off the most appropriate answer.Some of the reasons for dishonor and the abbreviations used by the bankers are explained below:

Cont’d…… 1.Refer to Drawer(R.D.)This means that the holder should

refer it to the drawer for payment.The bank puts such a note in those cases where the drawer does not have sufficient funds with the banker there is reasonable ground for suspecting that a check has been tampered.It will be more appropriate for the bankers o use these words in the latter case.

2. ‘Not Sufficient’, ‘No funds’, ‘No effects’ (N.S,N.F., N.E)These abbreviations are used in those cases where the drawer does not have sufficient funds with the bank.Generally , in such a case in actual practice the words ‘R.D’ are used.

Cont’d…… 3.Not Arranged For(N.A)This phrase is used in a case where the payment of a check

will result in an overdraft which has not approved by the bank.

4.Endorsement Irregular(E&I) This phrase is used where the endorsement is not in order,e.g., the spelling of the payee’s name as given on the face of the check differs from that in the endorsement.

5.Effects not cleared(E.N.C) This phrase is used in those cases where the drawer has given certain checks,drafts, etc., for collection and the same have not been collected yet and, therefore the banker is not in a position to meet the check drawn on account of insufficiency of the funds in the drawer’s account at the moment.

Cont’d…… 6.Drawer diseased(D.D)Where the banker receives

intimation that the drawer has expired and, therefore, it has stopped payment of checks.

7.Words and figures differ(W.& F.D). This phrase is used in cases where the reason for dishonor is differing of amount of check in words and figures.

Banker’s Liability in case reply is not appropriateA banker should take utmost precaution while sending it’s

reply in respect of a dishonored check.In case the banker states an inappropriate reason which injures the reputation of the drawer unnecessarily, the drawer can make the banker liable for damages.

Rights of the Banker. 1.Right of lien [A banker’s Lien] 2.Right of Set-Off 3.Right of Appropriation1. Right of Lien: Sec 171 of the Indian Contract Act, 1872

confers the right of general lien on the banker as follows: “Banker may, in the absence of a contract to the contrary, retain a security for a general balance of account, any goods bailed to him.”

Banker’s Lien A banker can have a right of general

lien on the goods and securities which come in to possession in his capacity as a banker, provided there is no other contract inconsistent with his right of general lien.

In the following cases, a banker cannot exercise his right of lien.

Banker’s Lien (a) If he has received the securities/ property as a trustee

or as an agent of the customer, but not as a creditor.Example: If customer has given to his banker some shares for

sale as his agent, he cannot appropriate the sale proceeds towards his due owed by the customer.

(b) In case of safe custody articles, lien cannot be exercised.

(c) If the securities are left with banker by mistake by the customer, the banker’s right of general lien cannot be exercised.

(d) The right of lien cannot be exercised when the debtor has joint account

Banker’s Lien………. (e) A banker cannot exercise his right when the debt has

not matured [ i.e.,before the due date of the repayment of loan]

(f) A banker has no right of lien over goods stolen by the customer and deposited with him as a security

(g) On money deposited by the customer, the banker cannot exercise the right of lien as this right cannot be over own goods. As money deposited with banker becomes his money, the banker cannot exercise the right of lien.The banker can exercise only right of set-off or adjustment over money deposited with him by his customer.

Applicability of Banker’s Lien Banker’s right of general lien is a right of

implied pledge. It applies to all goods and services received

by the banker during the course of business. He can sell goods and securities received by

him after giving due notice to the customer to realize his dues.

No separate agreement is required in favor of a banker to enable to exercise his right.

The right of lien can also be exercised against the guarantors.

……………..Rights of the Banker. 2. Right of Set-off:A banker like other creditors, possesses the right of

set-off, which enables him to combine two accounts in the name of the same customer and adjust the debit balance in one account with the credit balance in the other.This right to combine two accounts is known as the right of set- off.

Example of Right of Set-off:

If a customer has taken a loan of Rs 50,000/- from his banker and also has a credit balance of Rs.15,000/-in his savings bank account, the banker has a right to set-off the credit balance against the debit balance of Rs. 50,000/- in his customer’s loan account, thus reducing the debit balance in the latter to Rs. 35,000/-.

………Rights of the Banker. This right can be exercised only if there is no

agreement to the contrary, expressed or implied, between the banker and customer.

In the normal course, a banker also has to serve a notice to the customer for exercising the right of set-off, unless the customer has waived his right to receive such notices by executing a combined document of lien and set off.

……………Rights of the Banker The bank may exercise this right even when

a Garnishee order has been made.It may hand over to the Judgment Creditor only the balance of money left after satisfying his own claim.

The amount due must be certain. The banker has the option to exercise this

right.The customer cannot compel him to do so.

……………………Rights of the Banker. Banker’s Right of Appropriation:As per Section 59 of the Indian Contract Act,

1872, while making the payment to a creditor, a debtor has the right to appropriate such amount against discharge of any particular debt.If the debtor does not do so , the banker can appropriate the payment to any debt of his customer.

The Indian Contract Act has the following provisions with regard to the appropriation of payments

1.APPROPRIATION BY THE DEBTOR[Sec.59]:Where money paid by debtor to his creditor with the express or implied intimation that money is to be applied to a particular debt, creditor, if accepts the payment, must apply money received according to the direction of the debtor.

….The Indian Contract Act has the following provisions with regard to the appropriation of payments

2.APPROPRIATION BY THE CREDITOR[Sec.68]: If the debtor fails to intimate to the creditor at the

time of payment as to the debt towards the payment of which the money is to be applied and where several debts are due , the right of application may be exercised by the creditor, who may apply it to the payment of any lawful debt at his choice including even time barred debts.

The Indian Contract Act has the following provisions with regard to the appropriation of payments……………………..

3.WHERE NEITHER PARTY APPROPRIATES[Sec.61] Where neither party makes any appropriation, the payment shall be applied in discharge of the debts in order of time, whether they are or are not barred by the law in force for the time being as to the limitation of suits. If debts are of equal standing payment shall be applied in discharge of each debt proportionately.

4.PAYMENT OF INTEREST FIRST:In case of debt carrying interest and the debtor has not given specific direction as to the appropriation of money paid, the rule is, to apply the money in ordinary cases, first towards payment of interest and then to apply the surplus in payment of the principal amount.


5.RIGHT TO CHARGE INCIDENTAL CHARGES:A banker has the right to charge interest for the advances

it might have granted to it’s customers.The interest may be simple or compound depending upon the

terms of the contract.Usually the interest is charged after every six months and the

amount of interest is debited to the customers account which subsequently becomes part of the debt due by the customer.

In case of current accounts the banks charge their customers for incidental charges to meet the incidental expenses they have to incur for such accounts.


6.PERIOD OF LIMITATION: Since the deposits with the banks are repayable

on demand and, therefore, the period of limitation begins only from the date on which demand for repayment has been made by the customer.

The same principle applies in case of fixed deposits too.

In case of an overdraft granted by a banker to it’s customer, the period will generally run from the time the overdraft is made use of.

Exemption from the law of Limitation Act. The banker is exempted from the law of limitation act.As per the provisions of this law, a debt will become

a bad one after the expiry of three years from the date of the debt.

But according to Article 22 of the Law of Limitation Act,1963, for a banking debt, the period of 3 years will be calculated from the date on which an express demand is made for the repayment of the debt.It follows that a banker’s debt cannot be made time barred. However, in practice, a reasonable period has been fixed for the banker’s debt also.

………………………………Exemption from the law of Limitation Act.

Sec. 26 of the Banking Regulation Act prescribes a period of 10 years to consider a banking debt as a bad one.

In case of a safe custody deposit, this period begins from the date of demand.

In case of of an overdraft, the period of these years will be counted from the date on which it is made use of.

………………………………Exemption from the law of Limitation Act.

In the actual banking practice, no banker would wait for the expiry of 10 years. If there is is no operation in an account for one year, it will be marked as a ‘dormant account’.

After two years of marking, it will be transferred to an account called ‘inoperative account’ and it will be , thereafter, transferred to the Central Office of the Bank after 5 years.

Special Relationship Involved in Mandates and Power of Attorney MANDATES: Some times an account holder

appoints a third person to act on his behalf or to do certain acts, like drawing checks or instructing the bank to debit his account for various purposes like issuance of drafts, mail transfers or for carrying outstanding instructions.When such authority is given to the banker in the form of an unstamped letter, signed by the customer (account holder) and addressed and submitted to the bank, it is called mandate letter.The mandate comes to an end on death, inanity, insolvency or bankruptcy of the account holder.

Special Relationship Involved in Mandates and Power of Attorney POWER OF ATTORNEY: It is a document

executed by one person- ‘donor’ or ‘principal’-in favor of another person – ‘donee’ or agent – to act on behalf of the former, strictly as per authority given in the document.

Two types of Power of Attorney: Special and General can be granted.

…POWER OF ATTORNEY

Special Power of attorney is issued for specific purposes.Often, it is for single transaction.Against this, the general power of attorney, empowers an agent to act in respect of more than one transaction and confers very extensive powers on him.

Special Relationship Involved in Mandates and Power of Attorney A banker while scrutinizing and

registering a power of attorney, must verify whether specific mention is made in it to sign checks on behalf of his principal.The attorney can also stop payment of checks.

The principal can withdraw or cancel the power of attorney given to the agent at any time.He however will be responsible to the bank for all acts of he agent, till the bank receives the notice of cancellation.

Special Category of [Bank] Customers 1.Limited Companies 2.Partnership Firms 3.Joint Hindu Families 4.Minors 5.Illiterate Persons 6.Trust 7.Executors and Administrators 8.Unincorporated Bodies 9.Joint Accounts 10.Liquidators 11.Mercantile Agents 12.NRI s 13.Foreigners

1.Accounts of Limited Companies The accounts of limited companies form a

large and major portion of the business of the banks When limited companies approach a bank to

open an account, whether as a depositor or as a borrower the following formalities are to be complied with…

1.An account opening form [with names of persons authorized to operate an account singly or jointly]

……..1.Accounts of Limited Companies2.A certified copy of the Memorandum and Articles3.A Certificate of Incorporation issued the Registrar

of Cos.4.Certificate of Commencement of Business[In case

of Public Co. only]5.A certificate copy of the resolution to open the

bank account at the bank branch certified by the chairman, or secretary or the principal officer of he company.

1.Accounts of Limited Companies……………………….

The banks must ascertain from Articles that the directors have necessary powers to borrow.

In cases where the bank deals with a company in accordance with the MA and AA and has complied with other requirements, then the bank is not concerned with the internal management

of the company.There may be irregularities in the appointment of directors and passing of various resolutions.It is not the liability of the banker to verify the correctness of these matters.

2.Accounts of Partnership Firms The bank records in the account opening form in

one column the signature of all the partners and in another column the signatures of those who are authorized to operate the bank account.

There are instances where the partnership is registered and is considered advisable to obtain the original of the deed by the banks and are returned to partners after recording the same in the books of the banks.

….2.Accounts of Partnership Firms The important points the bank has to note are:1.In a firm’s account, one partner has prima facie

right to draw checks in the firm’s name.One partner has the implied authority o bind the firm by checks so drawn.

2.The implied authority of a bank does not empower him to open a banking account on behalf of the firm in his own name.

2.Accounts of Partnership Firms…………………

3.Banks do not accept for the credit of the personal account of a partner, checks payable to his firm.The banks otherwise will be liable to what is known as “conversion”.

4.One partner has the authority to stop payment of a check drawn in the name of the firm by another partner.

….2.Accounts of Partnership Firms…………………

5.The death or insolvency of a partner automatically dissolves the firm.Bu the partnership deed may provide that as a result of the death of a partner or on account of the insolvency of a partner , the firm may not be dissolved if there is an agreement to that effect between partners.

It is the duty of the surviving partners to give notice to the bank about the death of a partner.

3.Accounts of Joint Hindu Families The concept of Joint Hindu Family is

peculiar in India only.The concept has almost vanished after the passage of Hindu Succession Act,1956.However there still exist some Joint Hindu families.

…..3.Accounts of Joint Hindu Families The banks generally follow the following

precautions while opening such accounts;1.A Joint Hindu Family letter is obtained2.Proper Introduction3.Account opening form signed by Karta4.Karta is being given authority to operate the

account by all coparceners5If there are minors the other coparceners should

sign for self and as a guardian of the minor/minors.

4.Accounts of Minors As per the Indian Contract Act, a minor is under

legal disability to enter in to contract in his own name.There are various laws for the protection of he minor.However, an account can be opened on behalf of minor by a natural guardian or a guardian appointed by the court.

….4.Accounts of Minors A person is a minor till he attains age of 18

years.A person whose person or properties are in the superintendence of a person appointed as a guardian by the Court,then the person is deemed to have attained majority only when he completes 21 years.

In India banks open accounts for minors.In the present day many bank branches operate in colleges or have heir Extension Counters in he campus.

4.Accounts of Minors……………

The following points are note worthy:a) A minor can open and operate accountb) The banker should exercise sufficient

care while the minor operates the account

c) The bank should not permit the minor to overdraw his account

4.Accounts of Minors……………d)The banker should exercise caution while credit

for large sums and debits for large sums are transacted in the minors account

e) A minor can validly draw a check and if there is a wrongful dishonor or wrongful payment for example payment of a forged check, the minor can sue the bank forwrongful dishonor and for damages.

f) The practice relating to secrecy of customers account equally apply to minor’s accounts also.

5.Accounts of Illiterate Persons The large number of people in India are

illiterates.Illiteracy is no considered as an incapacity to open bank accounts. The banks in India after nationalization of the major banks have embarked upon various loan schemes for the up-liftment of the illiterates.

6.Trust Accounts Banks permit the opening of trust

accounts . A certified copy of the trust deed is

obtained and kept along with the other formalities file relating to the account.Bank enters in to it’s books he salient features of the trust deed.

…….6.Trust AccountsBanks permit the operation of the trust account by

some or all trustees; if the trust deed provides specifically for such operations or confers general authority on the trustees to delegate their powers to some or one of them.

In the absence of such a provision all trustees have to operate the account jointly.

The authority of the trustees to borrow is limited.In case the borrowings by the trustees ultra vires the deed, the bank loses the right of recovery.

7.Accounts of Executors and Administrators In case of testamentary succession, a

person executes a will and prescribes the will how his properties after his/her death will have to be partitioned or dealt with. In many cases the will provides that certain

person or persons should execute the terms of the will.Where no executor is mentioned in the will, the court will appoint one of the beneficiaries of the will as administrators.

7.Accounts of Executors and Administrators……………………

The executor and administrator of the will as the case may be, may have to open a bank account after the death of the testator, either in the name of the rust or in their personal capacities. They have to make clear that the accounts are opened and operated on behalf of the deceased. The executors and administrators have no

power to delegate their authority.


Banks follow the under-mentioned precautions.1.Proper Introduction To open an account2.The will should be properly examined to ensure the terms

and powers of the executors and administrators.3.All the executors must sign the account opening form and

give a clear mandate for the operation of the account.4.The checks and instruments tendered should “………”.5.The particulars of the will should be recorded in the banks’

books.6.The trust accounts should not be opened in the personal

names of the executors or administrators.


7.The banks should ensure that they do not become parties to a breach of trust.

8.The checks drawn by one of the trustees can be stopped by another.

9.The banks have no right to set off the credit balance in the trust accounts against any dues from the administrators or executors.

10.The executors account is for a limited period that is still the terms are executed.

Accounts of Unincorporated Bodies,Clubs,Societies,Committees,etc. These bodies are not legal entities as

limited companies are.Nevertheless, banks open accounts for them.These bodies have their on bye laws and have their executive committees or boards elected by the members.

……..Accounts of Unincorporated Bodies,Clubs,Societies,Committees,etc. For opening accounts for co-operative society,

the permission of the Registrar of Co-operative Societies is essential.The following formalities are observed by banks while opening accounts.

1.An introduction before opening account2.Account opening form for the account duly filled

up3.Copy of the resolutions of the committee or

governing body,signed by the Chairman, for opening the account.

Accounts of Liquidators Liquidators are appointed by the courts to

liquidate the assets and liabilities of the insolvent or bankrupt customer.

Companies Act deals in detail with the the appointment of a liquidator or court receiver.

……Accounts of Liquidators The liquidator or Official Receiver is an officer of

the court and the bank opens the account in their names.The mode of operations in the account are advised by the Liquidator/Official Receiver by production of court orders and have the sanctity as if it is given by the court order and should not aid or abet Liquidator or Receiver to commit a breach of trust.

Mercantile Agents A mercantile agent may be defined as an

agent having n the customary course of business as such agent, authority either to sell goods or to consign goods for the purpose of sale or to buy goods, or to raise money on security of goods.The authority that the mercantile agent derives from his principal is limited.

…Mercantile Agents A mercantile is personally liable for a

breach of warranty for any loss or damage sustained by a third party if such agent makes representation to the third party that he has the requisite powers to make such representation.

….Mercantile Agents The bank who is so authorized by a

principal to operate his account by an agent should suspend operations in the account immediately on receipt of the information about he death or insolvency of the principal.An agent should make it clear that he signs for and on behalf of his principal.

…..Mercantile Agents Banks should not allow the agent to

overdraw the account without the express authority of the principal.

Banker also should not be a party to conversion if the agent credits his personal account by debit to his principal’s account through the bank.

Accounts of Non-Resident Indians During the early eighties, the remittances from

persons of Indian origin and employed abroad started pouring in and even acted as an aid to the Government to meet a portion of the balance of payments deficit.The Government and RBI issued instructions to commercial banks to open accounts for the Non Resident Indians.These are two types, rupee accounts and foreign currency accounts.

Accounts of Foreigners Commercial banks are designated by RBI as

Authorized Dealers of Foreign Exchange.The banks have to obtain permission from the RBI to open accounts for foreigners.

The bank branch obtains a Form: QA-22 from the foreigner and submits to the RBI.The operation of the account is controlled by RBI.

Module III. PAYING BANKERBanking Law and Practice Maheshwari and Maheshwari/,N.D

Kapoor

The paying banker is responsible to his customer and is under duty to make payments to the right persons in accordance with the instructions of the drawer.If he honors the checks carelessly and negligently in a manner inconsistent with the instructions of the drawer, he subjects himself to heavy liability.

Not only he shall lose the money so paid, but he shall be liable to pay damages or compensation to his customer and also to the true owner of the check as provided for in the Negotiable Instruments Act.

Precautions to be taken by the paying banker. 1.Precaution regarding the proper ‘form’of the

check [cheque]:The Negotiable Instruments Act defines a cheque but does not prescribe it’s form, nor does it require that a check should be drawn on the printed form issued by the bank.But almost every bank in India requires that ‘checks must be drawn on the bank’s printed forms’.This makes it essential that the check forms it essential that the check forms issued by the banker must be used by the customers.

PRECAUTIONS TO BE TAKEN BY THE PAYING BANKER The banker should ensure that a check is regular in all respects

and should take the following precautions while making payment of his customer’s checks.

ADVANTAGES OF USING PRINTED CHECKS[cheques]:1.It is convenient for the drawer a to draw a check.2.The counterfoil of the check serve the purpose of record for future

reference.3.If the drawer wishes to countermand payment of any check

payment of any check , he can issue instructions to the banker more conveniently and with certainty as every check form is serially numbered and can be easily identified by the banker.

4.If the customer keeps the checkbook safely and carefully, chances of forgery can be reduced.

PRECAUTIONS TO BE TAKEN BY THE PAYING BANKER 2.Precaution regarding ‘date’ of the check

[cheque]:A check must bear a date because the mandate of the customer to

the banker given in the check becomes legally effective on the date mentioned therein.

The banker should refuse to honor an undated check which has been presented to it for payment.The date need not be filled by the drawer, it can be filled by the subsequent holder too.

STALE CHECK:This is also termed as ‘out-dated check’. In India, a cheque is treated as stale cheque after the expiry

of six months from the date of the check.It is the custom of the bankers not to pay checks which are presented

after a certain period has elapsed since the apparent date of their issue.When such a cheque is presented the bankers return it with the answer ‘out of date’.

PRECAUTIONS TO BE TAKEN BY THE PAYING BANKER POST-DATED CHECKS[CHEQUES]:If the drawer (or any other holder) mentions a date on the

cheque, which is subsequent to the date on which it is drawn, it is called a post dated cheque.

For example,If a check is drawn on 15 th September and bears the date of 15th December, the check is post-dated.Such a check though not invalid, becomes effective only on the date mentioned there in[i.e.,15 th December].The banker should honor the check(if presented for payment) not earlier than 15 th December.

The banker should , therefore, not make payment of the post dated cheque before the date mentioned therein.

PRECAUTIONS TO BE TAKEN BY THE PAYING BANKERIn case a banker honors a outdated check , it runs the following

risks:1.The drawer(customer) may countermand the payment before the

date mentioned on the check and then the banker will not be entitled to debit the customer’s account with the amount of the check.

2. The drawer may make the banker liable for dishonoring of other checks on account of insufficiency of funds resulting because of the payment of post dated checks.

3. In case of insolvency or death of the drawer before the dater mentioned on check, the banker shall not be entitled to debit the customer’s account, if it has already made payment of the check.

4.The payment of post dated check shall not be considered to be a payment in due course and, therefore, the banker shall not be entitled to any statutory protection if the payment is made to a wrong person.

PRECAUTIONS TO BE TAKEN BY THE PAYING BANKER 3. Precaution regarding ‘amount’:The banker should see that the amount mentioned

both in figures and words in the check are the same.

If they differ, then the banker usually return she check for “reference to the drawer” [R.D].

In case the amount has been stated in words only and not in figures the banker should pay the check. But where the amount has been mentioned in figures, only and not in words , the banker should return the check.

PRECAUTIONS TO BE TAKEN BY THE PAYING BANKER 4.Precaution regarding the ‘funds’ of the customer:The

banker is under an obligation to pay his customer’s check if the latter’s account shows sufficient credit balance. But if the funds in the customer’s account are insufficient to pay the check, the banker is not bound to honor the check or even to pay the balance in the account to the presenter of the check.Checks are to be paid in full and not in part.

For example: If a check for Rs.1,000 is presented for, payment to a banker, while the drawer’s account has the credit balance of Rs.900 only, the banker is not bound to honor the check or to make payment to the extent of Rs.900 because the check contains the order of the drawer to pay a specified sum of money.

PRECAUTIONS TO BE TAKEN BY THE PAYING BANKER While considering sufficient funds in the account

of the drawer, the following points should be borne in mind by the banker:

1.If the banker has already agreed to grant a loan or overdraft to the customer up to a certain amount , checks in excess of the credit balance in the account but within the limit of the loan of the overdraft must be honored by the banker in the usual course.

2.The minimum balance required to be maintained in a current account or savings account is deemed as available for honoring the checks.

PRECAUTIONS TO BE TAKEN BY THE PAYING BANKER 5.Precaution regarding ‘drawer’s signature’:A banker is expected to know the signature of

his customers and , there fore, if the drawer’s signature has been forged and the loss will borne by banker.When there is a joint account, both or the signatures on the check should be genuine.In case any one of the signatures is forged, the bank should not make payment.It is also expected from the customers to remain reasonably vigilant and render all possible assistance to the bank when asked by it.

PRECAUTIONS TO BE TAKEN BY THE PAYING BANKER

6.Precaution regarding ‘banking hours’:The banker should make payment of only

such checks which have been presented to it for payment during it’s banking hours.

Any payment of check which was presented after banking hours will not be taken as a payment in due course and the banker will not be entitled to debit then customer’s account if in the meanwhile the customer has countermanded the payment or some similar event happened.


7. Precaution regarding ‘mutilated checks’:A check is said to be mutilated when it is torn in

to two or more pieces.Such a check should not be paid unless the banker is satisfied that mutilation was unintentional and it also contains the confirmation of the drawer.

8.Precaution regarding ‘crossing’ of check:If the check is a crossed one, it should not be paid on the counter but through a collecting banker.


9.Precaution regarding “material alteration”:A cheque contains a mandate of the drawer to his banker to

pay a specified sum of money to he bearer or the person mentioned therein or his order.

Any alteration or correction therein, to be valid must be made by , or with the consent of the drawer and confirmed by his full signature.

In case a check is materially altered and the banker makes the payment, he shall be discharged from liability only when he proves the following:

1.The alteration could not be detected with reasonable care, prudence and scrutiny, and

2.The payment had been made in due course.


Examples of Material Alteration:1.Alteration of the date of the cheque.By altering the date a fraudulent holder can secure payment

of a post dated check or a stale check.2.Alteration of the place of payment.3.Alteration of the amount of the check.4. Alteration in the names of the parties or the relationship

between them or affecting their legal status.5.Substitution of the word bearer in place of order in he

check.6.An alteration of the crossing of the check.


The following changes are not treated as material alterations:

1.Conversion of an endorsement in blank in to endorsement in full.

2.Crossing of an open check by the holder.

3.Conversion of general crossing in to special crossing.

4.Conversion of bearer in to order.


LEGAL EFFECT OF MATERIAL ALTERATION:According to Section 87, any material alteration of

a negotiable instrument renders the same as void against any one who is a party at the time of making such alteration and does not consent hereto, unless it was made in to carry out the common intention of the original parties.

Any such alteration, if made by the endorsee, discharges his endorser from all liability to him in respect of the consideration thereof.

Mode of presentment for payment Ordinarily, presentment means

presenting the cheque personally at the counter of the banker.

But Section 64 of NI Act, 1881 provides, “where authorized by agreement or usage, a presentment through the post office by means of a registered post is sufficient”.

When payment is deemed as made? At what stage of time he payment is deemed as

made is examined by Bombay High Court in Union Bank of India vs.Sales Tax officer and others(1979).

The bank’s contention was that, “Payment of the check is deemed as made the moment money is physically handed over by the cashier to the presenter of the check”.Held, the token signifies a kind of identity between the bank and the person who gives the check for encashment.It also signifies that, the token holder has a right to receive payment and the bank creates a kind of obligation to honor it.

Statutory Protection to the Paying Banker.

The payment of the check involves risk to the paying banker because the latter’s duty is to pay the amount of the check to the right person according to the instructions of his customer.If he(banker) makes payment to a wrong person,he himself will bear the loss.The banker has to honor his customer’s checks on demand and hence he cannot make detailed enquiries about the title of the person who presents the check for payment. To minimize losses likely to be suffered by the paying banker,the Negotiable Instruments Act provides him protection, provided he fulfills his obligations as laid down in the Act.

Statutory Protection to the Paying Banker. Protection in case of Order Check:

In case of an order check, Section85(1) provides statutory protection to the paying banker as follows:

“Where a check payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course”.

Forgery of Drawer’s Signature

The paying banker should carefully ascertain that the check bears the genuine signature of the drawer after comparing the same with his specimen signature.

The check must be signed by the drawer on it’s face and not on it’s back.

The account-holder may change his specimen signature any time and supply to the banker his fresh specimen signature.Banker is bound to accept the new specimen signature with effect from a specified date.

Forgery of Drawer’s Signature[cont’d……….] If the signature on the check differs from the

specimen signature of the drawer or the former is a forged one, the banker must refuse payment of the check because a check with forged signature of the drawer is a nullity and gives no mandate to the banker to make any payment.

Payment of a check with the forged signature of the drawer is deemed as payment without the authority of the customer and hence breach of implied contract between a banker and his customer.

Forgery of Drawer’s Signature The paying banker is , therefore, is not given any

protection under law, if he pays a check with with forged signature of the drawer. The banker cannot debit his customer’s account with the amount of the check bearing the forged signature of the drawer and will suffer the loss himself.

The banker cannot debit his customer’s account with the amount of the check bearing the forged signature of the drawer and will suffer the loss himself.

Forgery of Drawer’s Signature Lala Pirbhu Dayal vs. Jwala Bank Ltd.(1938) The

Allhabad High Court held, that “it is the duty of the employees of the bank to be able to identify the signature of the customers and if they fail to discharge their duty and thereby suffer loss, there is no reason why the customer should make good that loss”.

In this case, the customer was negligent, as he did not keep his check book under lock and key. Still the Court held that, the neglect on the part of the customer did not absolve the paying banker.

Forgery of Drawer’s Signature Obligation on the customer:The customer is however is under an obligation to

the banker in this regard.The customer should not be negligent in observing the necessary precautions to save the banker from the losses which may arise because of his own acts.

Examples:A banker is in doubt about the signature of the drawer

and seeks confirmation of the drawer.The customer expressly represents that the signature is his own.Later on, the customer will be estopped from denying the validity of his signature on the check.

Forgery of Drawer’s Signature Payment of Check by Mistake: In United Bank of India vs.M/s A.T.Ali Hussain & Co.(1978) Calcutta

High Court.The Court found that the forgery of the signature on the check had

been done so skillfully that it could not be detected by a trained eye.Even the authorized signatory found it difficult to deny his signature on the forged cheque.The High Court found it difficult to deny his signature on the forged cheque.The High Court, therefore, held that the paying banker was neither negligent nor careless in paying the check.The payment was made under a mistaken belief that the instrument was genuine.

According to Section 72 of Indian Contract Act,1872 “a person to who money has been paid or anything delivered by mistake or under coercion , must repay it.But this rule is qualified by the Doctrine of Equity.Doctrine says “no one is allowed to enrich himself at the expense of the other”.

Negotiable Instruments Negotiable Instrument: Definition by Justice WillisA negotiable instruments is one, the property in which is

acquired by anyone who takes it bona fide and for value, not withstanding any defect of title in the person from whom he took it.

The term “Negotiable” means “transferable” and “Instrument” means a “written document by which a right is created in favor of some person”.

Thus a negotiable instrument is a method of transferring a debt from one person to another.

The term negotiable instrument is not defined under the NI Act,1881.The law relating to negotiable instruments is contained in the Negotiable Instruments Act,1881.

Negotiable Instruments The law relating to the

Negotiable Instruments is contained in NI Act,1881 which deals with promissory note, bill of exchange and cheque, as also hundis( bills of exchange in vernacular language).

Negotiable Instruments CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS:1.The property in negotiable instrument passes from one

person by a simple process,i.e., by mere delivery, if it is payable to to bearer, and by endorsement an) d delivery if it is payable to order.

2.The holder in due course( one who acquires the instrument in good faith and for consideration) gets it free from all defects.

3. He can sue upon the instrument in his own name.4.The transferee of the instrument need not give notice of

transfer to the party liable to pay.5.Consideration is presumed to have been given for the

instrument.

PROMISSORY NOTE Sec.4 of the NI Act(1881) defines a

promissory note as “an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only or to the order of, certain person, or to the bearer of the instrument.”

Parties to a Promissory NoteThe person who makes the

promissory note and promises to pay is called the maker.

The person to whom the payment is to be made is called the payee.

Essential Characteristics of a Promissory Note: 1.It is an instrument in writing 2.It is a promise to pay.

[The word promise to pay is not necessary]The following cannot be taken as promissory notes

because there is no express promise to pay.If A writes-(a) “Mr.B, I.O.U, Rs.500/-”(b) “Mr. B, I have taken from you rupees five

hundred ; whenever you ask for it I have to pay it together with interest”.

Essential Characteristics of a Promissory Note:[Cont’d…………….] 2.It is a promise to pay.

(c) “Mr. B, I am liable to pay you Rs.100” The following will be taken as promissory note

because here is an express promise to pay: If A writes –(a) “I promise to pay B or order Rs.500”.(b) “I acknowledge myself to be indebted to B in

Rs.1,000, to be paid on demand, for value received.

Essentials of a promissory note were pointed by the PUNJAB AND HARYANA HIGH COURT in Balmukund vs. Munnalal Ramjilal and others, as follows:

“ Before a document can be treated as a Promissory Note, it should be Promissory Note both in form and intent.If indebtedness is acknowledged in a document in a defined sum of money payable on demand that is enough to make a document a promissory note and the document need not necessarily say that the debtor promises to repay the amount.Merely because a document says that the payment to be made when demanded the undertaking to repay the amount does not become conditional.The absence of the words ‘I promise to pay’ makes no difference in the tenure of the instrument provided it fulfills other conditions of a promissory note”.

In another case Surjit Singh and others V. Ram Ratan Sharma(1978) the Assam High Court Held that,

An acknowledgement of a receipt of the amount does not take away the character of the document as a promissory note if other conditions are satisfied.The document in the following case read as follows:“ We have received the sum of Rs.9,240 from Sri Ram Sharma.The above amount will be repaid on demand.We have received Rs.9,240 in cash today.”

Essential Characteristics of a Promissory Note: 3.The undertaking to pay is conditional.The payment should not depend upon contingencies

which may or may not happen, because uncertainty badly affects the business and commerce .Thus, the following documents cannot be termed as promissory notes:

(i) “I promise to pay B Rs.1,000 after marriage with C.” Marriage with C may or may not take place.

(ii) “Rs.500 is required.Send it per bearer.The amount will be returned with 12 % Interest without delay.” Here the promise is conditional on the amount being sent as requested.

Essential Characteristics of a Promissory Note: 4.It should be signed by the maker.The person who promises to pay must sign the instrument

even though it might have been written by the promissor himself.

5.The maker must be certain.The note itself must show clearly who is the person agreeing

to undertake the liability to pay the amount.Maker is taken as certain if from the description of the maker, sufficient indication follows about his identity.He may be described by name or his designation.

6.The payee must be certain.The instrument must point out with certainty the person to

whom the promise has been made.

Essential Characteristics of a Promissory Note: 7.The promise should be to pay money and

money only.Money means legal tender money and not old or rare coins. 8.Amount should be certain.The following is not the

promissory note.I promise to pay B Rs.500 and all other sums which become

due. 9. Other formalities.The formalities regarding number,

place, date, consideration etc., though usually found given in the promissory notes but are not essential.

10.It may be payable on demand or after a definite period of time.

Bill of Exchange [Sec.5 of NI Act,1881].“Bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money, only to, or to the order of, a certain person or to the bearer of the instrument”

Parties to a Bill. There are three parties to a Bill of Exchange:The person who gives order to pay is called the

drawer.The person who is directed to pay is called the

drawee. -When the drawee accepts the bill, he is called

the acceptor.The person to whom the payment is to be made is

called the payee.

……….Parties to a Bill. Where the payee named in a bill is fictitious or

non existing person, the bill is treated as payable to bearer.

The drawer or the payee who is in possession of the bill is called the holder.The holder must present the bill to the drawee for his acceptance.

When the holder i/endorses the bill, note or cheque, he is called the i/endorser.

The person to whom the bill, note or cheque is called the i/endorsee.

Holder In Due Course[Sec.9] Holder in due course means any person

who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorsee thereof, if payable to order, before the amount mentioned in it became payable and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.

Essential Characteristics of Bill of Exchange 1.It must be in writing 2.Order to pay 3.Unconditional 4.Money and money only 5.Three parties: Drawer, Drawee & Payee 6.Parties must be certain 7.It must be signed by the drawer. 8.The sum payable must be certain. 9.Signature.

Distinction between, Bill of Exchange and a Promissory Note 1.Three parties-

Drawer, drawee and Payee.

2.Bill contains unconditional order to pay

3. The drawer of the bill is the creditor who directs the drawee (his debtor) to pay.

1.Two parties-Maker and Payee.

2.Note contains an unconditional promise to pay.A bill contains an unconditional

3.The maker of a note is the debtor and he himself undertakes to pay.

Distinction between, Bill of Exchange and a Promissory Note 4.The liability of

the maker of a note is primary and absolute.

5. In a bill the drawer and the payee may be one and the same person.

4.The liability of the drawer of a bill is secondary and conditional.

5.A note cannot be made payable to the maker himself.

Distinction between, Bill of Exchange and a Promissory Note

6.A bill can be so drawn.

But in no case, can a note or bill be drawn “payable to bearer on demand”.

6.A note cannot be made payable to the bearer.

Cheque [Check] Section 6 of NI Act,1881 defines,

cheque as,“Cheque is a bill of exchange drawn on a specified banker and payable on demand”.

Distinction Between Bill of Exchange and Cheque 1.May be drawn on

any one including, a banker.

2.A bill which is not expressed to be payable on demand is entitled to three days of grace.

3.No crossing is done. 4.Payment of a bill

cannot be countermanded.

1.Always drawn on a banker.

2.A cheque is not entitled to any days of grace.

3.A cheque may be crossed.

4.Payment of cheque may be countermanded.

Crossing of Cheque There are two types of cheques, open cheques

and crossed cheques. A cheque which is payable in cash across the

counter of a bank is called an pen cheque. When such a cheque is in circulation,great risk

attends it.If it’s holder loses it, its finder may go to the bank and get payment unless it’s payment has already been stopped.

It was to prevent the losses incurred by open cheques getting in to the hands of wrong persons that the custom of crossing was introduced.

………..Crossing of Cheque A crossed cheque is one on which two parallel lines with

or without the words “& Co.” are drawn.I.General Crossing: A cheque is said to be crossed

generally where it bears across it’s an addition of- (i) the words ‘and company’ a or any abbreviation

there of between two parallel transverse lines with or without the words ‘not negotiable’; or

(ii) Two parallel transverse lines simply ,either with or without the words ‘not negotiable’.(Sec.123)

Where a cheque is crossed generally, the drawee banker shall not pay it unless it is presented by a banker.(Sec126 .Para1)

II.Special Crossing: Where a cheque bears across it’s face an addition of

the name of a banker, either with or without the words ‘not negotiable’, the cheque is deemed to be crossed specially(Sec.124).

The transverse lines are not necessary in case of a specially crossed cheque can be obtained only through the particular banker whose name appears across the face of the cheque or between the transverse lines, if any.

Where a cheque is crossed specially the banker on whom it is drawn shall pay it only to the sbanker on whom it is drawn, or his agent for collection.(Sec.126.Para:2)

III.Restrictive Crossing In addition to the two statutory types of

crossing, there is another type which has been adopted by commercial banks and banking usage.In this type the words A/C Payee are added to the general or special crossing.

The words A/C Payee on a cheque are a direction to the collecting banker that the amount collected on the cheque is to be credited to the account of the payee.

Who may cross a cheque? 1.The drawer:He may cross a cheque

generally or specially. 2.The holder: Where the cheque is

uncrossed,the holder may cross it generally or specially.Where it is crossed generally, he may cross specially.

3.The banker: Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker(his agent) for collection.

ENDORSEMENT: Definition “When the maker or holder of a

negotiable instrument signs the same, otherwise than such maker,for the purpose of negotiation,on the back or face thereof or on a slip of paper annexed thereto or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to have endorsed the same and is called endorser” [Section.15 of NI Act,1881].

Endorsement…….. Negotiation by endorsement: [Sec.48]An instrument payable to order is

negotiated by endorsement and delivery. Thus, endorsement requires two formalities.

First, the holder should endorse it and then deliver it to his endorsee.

Endorsement is made by signing the name of the endorser, usually on the back of the instrument.

……………….Endorsement But when the back is already full of

endorsements, further endorsements may be signed on a slip of paper (i.e.,allonge) annexed to the instrument.

Endorsement means an endorsement completed by delivery.

Endorsement must be genuine and not forged.

Who may endorse [Sec.51] The payee of an instrument is

rightful person to make the first endorsement .

Thereafter the instrument may be endorsed by any party who has become the holder of the instrument.

KINDS OF ENDORSEMENTS (i) Endorsement in blank:In case of

endorsement in blank, the endorser puts his signature on the back of the instrument without mentioning the name of any specified person in whose favor the endorse is made.

KINDS OF ENDORSEMENTS […Endorsement in blank]…In this type of endorsement ,the

instrument is payable to bearer, and consequently, it can be negotiated by mere delivery.

E.g., A bill is payable to the order of Ram.Ram signs on the back of the bill.This is an endorsement in blank by Ram.In this case, the property in the bill may pass by mere delivery as if the bill is payable to bearer.

KINDS OF ENDORSEMENTS (ii) Endorsement in full:In case of

endorsement, the endorser mentions the name of a specified person or to the order of that person, e.g., Pay to Rajeev or order

Sd/-Rajesh Kumar

KINDS OF ENDORSEMENTS (iii) Restrictive Endorsement: In

case of Restrictive Endorsement, the endorser restricts the further negotiation of the instrument.

E.g., To pay Arjun Prasad only. Sd/- Ram Saran Sinha

KINDS OF ENDORSEMENTS (iv) Partial Endorsement: When an

endorsement purports to transfer to the endorsee a part only of the amount of the instrument, the endorsement is said to be partial.A partial endorsement does not operate as a negotiation of the instrument.E.g., A is the holder of the bill for Rs.1,000/-.He endorses it thus: “Pay B or order Rs.500.”This is a partial endorsement and is invalid for the purpose of negotiation.

KINDS OF ENDORSEMENTS (v) Conditional Endorsement:In the

case of conditional endorsement, the transfer of property in the instrument is made to depend on the fulfillment of a specified condition.E.g.,

Pay to PremaNandlal on arrival of ship “Godavari”

Sd/- Nirmal Kumar.

KINDS OF ENDORSEMENTS (vi) Sans Recourse Endorsement:In the case of a sans recourse endorsement, the endorser

removes (relieves) himself from his liability to the endorsee by making it clear that the endorsee, or any subsequent holder, should not look to him for payment in case the bill is dishonored.E.g.,Pay to H.P.. Verma without recourse to meSd/- S.Prasad

Mr Verma should not look to him [S.Prasad] for repayment in case the bill is dishonoured, e.g., Mr Verma cannot sue S Prasad on the instrument in case he (Verma) fails to recover money from the acceptor.

KINDS OF ENDORSEMENTS (vii)Facultative Endorsement:

In the case of a facultative endorsement, the endorser waives some of his rights.E.g.,Pay to Kamta Prasad, Notice of dishonor waived

Sd/-Ram Saran Sinha

KINDS OF ENDORSEMENTS (viii) Sans Frais Endorsement:In case of sans frais endorsement,

the endorser does not want any expense to be incurred on his account on the bill.

Module:IV.BankingPrinciples of sound (Bank) Lending

Lending is a risky business. Lending money to different kinds of borrowers is one of the most important functions of a bank.

The borrowers of a bank range from individuals to partnership firms, companies, institutions, societies and even governments etc.

Criteria for Bank(credit)Lending:The nature of economic

activity, the location of business unit, the market potential,purpose of loan, the turnover/income, repayment capacity and the kind of security for advances are all important determinants to decide on lending by banks.

BANK LENDING: PRINCIPLES Safety Purpose of advance Character,Capacity & Creditworthiness of

borrower Nature of business Security for advances Location of business Liquidity Safety Margin National Policy Objective

PRINCIPLES OF BANK LENDING 1.SAFETY:The first and foremost principle of lending is safety of funds The borrower should be in a position to repay

the loans with interest on time. 2.PURPOSE OF LOAN:

The banker should be convinced fully about the productiveness of the purpose of loan.

3.CHARACTER,CAPACITY & CREDITWORTHINESS OF BORROWER: The chances of loan being repaid largely depend upon these 3 Cs.

..PRINCIPLES OF BANK LENDING 4.Nature of business:

The type of business the borrower is in also can influence the decision of loan.The profitability of business [Rate of return on investment] is very important.

5.Security for advances:The securities offered against loan may vary from gold, silver to stock market securities, goods, documents of title to goods, insurance policies and immovable properties .The securities must be such that , they must possess high liquidity, good market value and must have clear title.

...PRINCIPLES OF BANK LENDING 6.Location of business: The location must be safe in terms of man made

and natural disasters. 7. Liquidity:Banks are essentially intermediaries for

short term funds.Therefore they lend funds for short periods.The loans are therefore are largely repayable on demand.The banker must ensure that, the liquidity being taken in to consideration.

8.Safety Margin:The margin of safety is maintained in the form of a much higher percentage.

….PRINCIPLES OF BANK LENDING 9.National Policy & Objectives:The priority sectors should be taken in to

consideration, as per government instructions.

The bankers have to be more cautious in lending ,in these cases.

The Deposit Insurance and Credit Guarantee Corporation guarantees to the banks for the risk of lending to weaker and under privileged sections.

Reserve Bank’s Guidelines…… While lending to big enterprises for amounts

exceeding Rs 6 crores, the commercial banks required to seek the sanction of R B I.For this reason banks are required to furnish the financial data of borrowing concern to R B I for credit appraisal.

The various tools of financial analysis such as financial statement analysis, ratio analysis etc are to be used to determine the financial strength.

A d v a n c e s : Security continues to be one of the important

factors which determines to a significant extent the banker’s willingness to lend money.

The reason is that banker cannot afford to take the risk of non recovery of the money lent.

In case of the borrower’s inability to pay, the banker must have some tangible assets to fall back upon.

The banker, therefore, tries to get some charge created on the assets of the borrower in his favor.

The important modes by which such charge can be created are:Lien,Pledge,Hypothecation and Mortgage.

LIEN Lien is the right of a person to retain that which is in his

possession and which belongs to another, until the demands of the person in possession are satisfied.

Two types:Particular Lien & General Lien Particular Lien:It is attached to some specific goods.It is

restricted to those goods which are the subject matter of the contract and are liable for certain demands of the person in possession of these goods.

General Lien:General lien entitles a person to retain possession of goods belonging to another for a general balance of account.It will entitle a person to retain them until all claims or accounts of the person in possession against the owner of the goods are satisfied.

PLEDGE Section 172 of Indian Contract Act,defines

pledge as, the “bailment of goods as security for payment of a debt or performance of a promise”.From the above definition, we find that,

1. pledge occurs when goods are delivered for getting advance,

2. The goods pledged will be returned to the owner on repayment of the debt,

3. The goods serve as security for the debt.

PLEDGE A pledge may be in respect of

goods, stocks, shares, document of title to goods and any other immovable property.The person who transfers the goods is called pledger and to whom it is transferred is called the pledgee.

ESEENTIALS OF PLEDGE 1.Delivery of goods:Delivery may be physical or

symbolic.Physical transfer of goods from pledger to pledgee.

2.Transfer of ownership:The ownership of goods remains with the pledger.

3.Right in case of failure to repay:If the pledger fails to pay within the stipulated time, pledgee may,

a)Sell the goods pledged after giving a reasonable notice b)File a civil suit against the pledger for the amount due, c)File a suit for the sale of the goods pledged and the realization of money due to him.When the pledgee decides to exercise the right of sale, he must issue a clear,

specific and reasonable notice.

Mortgage Mortgage is a method of creating charge on

immovable properties like land and building.Section 58 of the Transfer of Property Act 1882, defines, mortgage as, “A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability.”

Characteristics of MORTGAGE 1.A mortgage can be effected only on immovable property. 2.A mortgage is the transfer of an interest in the specific

immovable property. 3.The object of transfer of of interest in the property must be to

secure a loan or performance of contract which which results in monetary obligation.

4.The property to be mortgaged must be specific one. 5.The actual possession of the mortgaged property is generally

with the mortgager and will be free on repayment of the loan with interest due on it.

6.The interest in the mortgaged property is transferred to the mortgager on the repayment of loan with interest due.

7.In case the mortgager fails to repay the loan, the mortgagee gets the right to recover the debt out of the the sale proceeds of the mortgaged property.

Hypothecation The mortgage of movable property for

securing of loan is called hypothecation.In other words, in case of hypothecation, a charge over movable properties like goods, raw materials, goods in progress is created.

…..Hypothecation Hart defines, hypothecation as “a charge

against property for an amount where neither ownership nor possession is passed to the creditor”.

The goods remain with the borrower and under a hypothecation agreement he undertakes to transfer the possession whenever required to do so.Thus hypothecation is only an extended idea of pledge, the creditor permitting the debtor to retain the possession either on behalf of or in a trust for himself.The creditor possesses the rights of a pledgee.

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