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2. Disclosure in the interest of the public-the following grounds generally fall under this
category
(a) disclosure of the account where money is kept for extreme political purposes in
contravening the provisions of any law
3. Disclosure in the interest of the bank- the banker may disclose the state of his
customers account in order to legally protect his own interest. For example- if the
baker has to recover the dues from the customer or the guarantor, disclosure of
necessary facts to the guarantor or the solicitor becomes necessary and is justified.
4. Disclosure under the express or implied consent of a customer- the customer may
instruct his banker to give some or all other particulars of his account to say, his auditor,
in such case banker can disclose. Banker can also disclose to a referee whose name is
suggested by the customer. It is implied that the banker can disclose information to the
guarantor.
Banks solicit deposit of money from the members of the public. Any person who is
legally capable of entering into a valid contract may apply in the proper way to deposit his
money with the bank.
A banks special customers are generally minors, married women, illiterate persons,
lunatics, blind people, drunkards, insolvents etc who are not competent to open such accounts.
There are also impersonal customers like schools, clubs, partnership firm, joint stock companies
etc. certain precautions are to be taken by banks while opening accounts in the name of the
following customers.
Minor
A minor is a person who has not attained the age of 18 and in case a guardian is
appointed, it is 21. Minors are regarded pet children of law.
In Mohori Bibi v. Dharmodas Ghose, a minor executed a mortgage for Rs 20000 and
received Rs 8000 from the money lender. Subsequently, the minor sued for setting aside the
mortgage. The money lender wanted refund of money which he had actually paid. The PC held
that an agreement by a minor was absolutely void and therefore, money lender was not entitled
repayment of money.
Some of the precautions to be taken by the banker on opening and operating account
of a minor are1)
The banker may open a SB account but not a current account as it incurs no liability to
the minor.
2)
At the time of opening of account of minor, the bank should record the genuine date of
birth of the minor. Banker should insist on to give some schooling record or date of birth
as entered in Births and Deaths Register.
3)
Minors are allowed to open such accounts when they have completed a particular age
say twelve years in some banks and ten years in some others.
4)
Banks should prudent to issue cheque books only to minors of, say sixteen or
seventeen years of age.
5) Accounts for illiterate minors are not opened in their single name.
6) As a measure of precaution, banks adopt a general rule not to accept deposit exceeding
a particular sum.
7) Since a contract with a minor is void and cannot be enforced against him in Court of law,
a minors account should never be allowed to be overdrawn.
8)
Lunatics
Lunatics are persons of unsound mind. Lunatics are disqualified from contracting but
the disqualification does not apply to contract entered by lunatics during their period of sanity.
Following are bankers duty n case of lunatics1)
Since a lunatic has no capacity to contract, acc to sec 11 of the ICA, no banker
knowingly opens an account in the name of a lunatic.
2)
If an existing customer becomes insane, the banker must immediately stop the
operation of the account. It is so because, the banker has no right to debit his account
for payment made out of his account from the moment, the banker knows the fact of
lunacy of customer, the contract between them is void.
3)
A banker must not be carried away by hearsay information or rumours. He must get
definite information about the lunacy of the customer.
4) If a banker dishonours a cheque in a hurry, without having any proof of lunacy, he will be
liable for wrongful dishonour of cheque.
5)
It should return all cheques of customers account with the word refer to drawer
and not customer insane. It should make careful note of lunacy order.
6)
If a third party is authorised to draw on customers account, that authority will cease
when the customer becomes insane since when a principal cannot act for himself his
agent can no longer act for him.
7)
Illiterates
An illiterate person is competent to contract and bank may open an account in his
name, but special care should be taken by the banker before opening an account.
1)
The account of an illiterate person may be opened provided he/she calls the bank
personally along with a witness who is known both to the banker and the depositor.
2)
A passport size photograph of the illiterate person is identified before the banker in
presence of the account holder. The photographs have to be attested by the bank officer/
witness.
3)
The left hand thumb impression in case of male illiterate and right hand thumb
impression in case of female illiterate are duly attested by some responsible person on
the account opening form.
4) One or two identification marks of the depositor should be noted on the account opening
form.
5)
The illiterate person should be provided with a passbook which should also contain an
attested photograph of the illiterate person.
6)
7)
8) The thumb impression of illiterate person on the withdrawal form or cheque (if provided),
and on the back of the withdrawal form or cheque should be duly compared with the
specimen impression kept by the bank.
Married women
The Hindu married women are governed by the Hindu Succession Act and other
married women by Indian Succession Act. A banker may open an account in the name of a
married woman like any other customer. However, a banker should exercise caution while
opening account for the wife of an undischarged insolvent.
1)
While opening an account of a married woman, the bank should enquire about her
means and circumstances, and if she is living with her husband, something about him
and his occupation and position in life, and if he is an employee, the name of the
employer.
2)
In case she applies for an overdraft, the banker should see that she owns separate
property in her own name and precaution should be kept in mind regarding her status
and capacity to pay and the purpose for which the borrowings are made. Also he should
seek suitable securities preferably on her, which can be attached by the Courts.
3) The banker should always observe that there is credit balance in her account.
4)
Banks usually require that a married woman be independently advised by her own
solicitor when depositing security for the account of other persons.
5)
A married woman may enter into a contract of guarantee and it is enforceable only
against her separate estate.
6) In case of an illiterate married woman, her thumb impression should be obtained on the
account opening form and on the identification card.
Pardhanishin women
In case of a pardhanishin woman who remains completely secluded the following
presumption exists1) Any contract entered into by her may be subject to undue influence
2)
The same might not have been done with free will and with full understanding of what
the contract actually means.
He banker should therefore due precaution while opening an account in the name of a
pardhanishin woman. As the identity of such woman cannot be ascertained the banker generally
refuses to open an account in her name.
A JHF or a HUF consists of all persons lineally descended from a common ancestor
and included their wives. Following are the precautions to be taken by the banker in opening
and operating accounts in the name of HJF.
1) The account may be opened in the name of karta or in the name of family business and
should be duly introduced.
2)
The account opening form should be signed by all adult coparceners, even though the
karta would operate the account.
3) The declaration signed by all the members as to who is the karta and who are the other
coparceners including minor coparceners should be obtained.
4)
If there are minor coparceners, the other adult coparceners should sign for self and as
guardians of minors.
5)
Authority should be given to the karta to operate the account of all concerned under
their joint signature.
6)
On attaining majority, the minor coparceners should be asked to join with other
coparceners in signing the existing account opening form in ratification of previous
transactions.
7) Any member of the HUF can stop payment of a cheque drawn by karta. When the bank
receives a notice about any dispute amongst the family members of the HUF, the
operations in the account should be stopped till further instructions from a competent
court.
8)
The burden of proof that loan was taken by karta for purposes beneficial to the family
lies on the banker. Thus before granting loans necessary enquiries should be made to
ensure it. Otherwise, the bank may not be able to succeed in a suit for recovery of debt.
Agent
A person employed to do any act for another, or to represent another in dealings with
third persons, is known as an agent for another. The precautions to be taken by a banker in
opening and operating account of a customer by an agent are
1)
A banker should at once suspend all operations on that account upon hearing or being
notified of the principals death, insanity or bankruptcy.
2)
The agent must assign the cheque for and on behalf of the principal, so that the third
parties would know that he is dealing in a representative capacity.
3)
4)
In case the agent is authorised to open an account on behalf of the principal, the
application should be made to sign by the principal himself, delegating authority to agent
to operate the account.
The banker should on no account allow the agent, or in fact any person to pay into his
own private account, cheques which he has endorsed on behalf another, without
satisfying himself that the agent has the authority of the principal to do so.
7)
A banker should not allow an agent to overdraw his principals account express with
his express authority.
Partnership firm
A partnership is the relation between the persons who have agreed to share the profits
of a business carried on by all or anyone of them acting for all. The banker should take the
following precautions while dealing with a partnership firm.
1) The banker should first know the provisions of the Part Act before he opens an account
for PF.
2)
The banker shall open an account in the name of a partnership firm only when an
application is submitted in writing by any one or more partners under sec 19(2)(b) of the
Act. Authority to open an account in the name of an individual partner is positively
denied.
3) To be on safer side, a banker should get a written request from all the partners jointly for
opening an account.
4)
The banker should go through the partnership deed and carefully study the objects,
capital, borrowing powers etc. he should get a copy of the duly stamped partnership
deed. He should enquire about the details of the firm, partners and their powers. If the
firm is registered the banker should get a copy of the registration certificate. Dealings
with unregistered firms will involve risks.
5)
There should be a clear mandate from all the partners. Mandate must be signed by all
the parties.
6) The banker should not mix the personal and private accounts of the partners. He has no
right to set off and lien over the accounts.
7) No partner has an implied power to sell or mortgage the property of his firm. So in case
of mortgage of property, the deed of mortgage should be signed by all the partners.
8)
While advancing loans and advances to partnership firm the banks in practice get the
loan documents executed by the partners on behalf of the firm as also in their personal
capacity.
Trust
A trust is an obligation annexed to the ownership of the property, and arising out of a
confidence reposed in and accepted by the owner, or declared and accepted by him, for the
benefit of another, or of another and the owner.
While opening accounts in the names of persons in their capacity as trustees, the
banker should take the following precautions.
1)
The banker should examine the trust deed concerning instructions regarding opening
and operating the account contained in the trust deed. In the absence of such
instructions, all the trustees may join in opening such account.
2)
3)
The banker should note the objects for which the trust has been created so as to
facilitate the passing of cheques.
4) A trustee has no individual powers. They must all act together. All must join in signing of
cheques. Unless expressly provided otherwise in the trust deed, no trustee can delegate
his power to another.
5)
If one of the trustees dies or retires, the bank on receiving notice should suspend all
operations in the account. However, if the trust deed is silent the bank can let the
operations to continue.
6)
In case of breach of trust the bank must see that it does not become a party to the
breach. The banker is justified in dishonouring the cheque drawn by a trustee, if
intended for breach of trust.
7)
If the trustees are authorised to borrow to discharge the functions of the trust, the
banker must get specific assets of the trust as security.
11.
Functions of commercial banks- the functions of CB are numerous. They can be broadly
divided into two categories. They are-
e) Creation of money- the various ways of creation of money are(i) By advancing loans
(ii) By allowing over draft
(iii) By providing cash credit
(iv) By discounting BOE
2)
Secondary or subsidiary functions- apart from performing the main function the comm.
banks also perform a num of secondary functions which may be divided into the following
two headsa) Agency services- the services rendered by a bank as the agent of his customer are
called agency services. The imp agency services are(i) Collection of money on behalf of customers.
(ii) Making payments on behalf of customers.
(iii) Purchase and sale of securities on behalf of customers.
(iv) Advising customers regarding investments.
(v) Acting as trustee, executor, and administrator of customers.
(vi) Rendering of merchant banking services.
b)
12.
The Central Bank is the Apex Bank of the country. It is called by different names in
different countries. It is the Reserve Bank of India in India.
The Reserve Bank of India has been defined in terms of its function. According to Vera
Smith, The primary definition of central banking is a banking system in which a single bank
has either complete control or a residuary monopoly of note issue.
According to A.C.L. Day, a central bank is to help control and stabilise the monetary
banking system.
Functions Of RBI:
1) Regulator Of Currency:
The Reserve Bank of India is the bank of issue. It has the monopoly of note issue.
Notes issued by it circulate as legal money. It has its issued department which issued notes and
coins to commercial banks.
Reserve Bank of India has been following different methods of note issue in different
countries. The monopoly of issuing notes vested in the Reserve Bank of India ensures
uniformity in the notes issued which helps in facilitating exchange and trade within the country. It
brings stability in the monetary system and creates confidence among the public.
RBI can restrict or expand the supply of cash according to the requirements of the
economy. Thus, it provides elasticity to the monetary system.
RBI also advices the government on such economic and money matters as controlling
inflation or deflation, devaluation or revaluation of the currency, deficit financing, balance of
payments etc. Thus it is the custodian of government money and wealth.
7) Controller Of Credit:
The most important function of RBI is to control the credit creation power of
commercial bank in order to control inflation and deflation pressures within this economy. For
this purpose, it adopts quantitative and qualitative methods. These involve selective credit
control and direct action.
Besides the above noted functions, the RBI in a number of developing countries have
been entrusted with the responsibility of developing a strong banking system to meet the
expanding requirements of agriculture, industry, trade and commerce.
Constitution:
The bank was established as a shareholder`s bank with an authorized and paid-up
capital of Rs. 5 crores divided into shares of Rs. 100 each. After independence, under the
Reserve Bank Act, 1948, the bank was nationalized, after paying compensation to the
shareholders at the market price of the share.
Management:
The affairs if the RBI are managed by the Central Board of Directors consisting of:
Governor and not more than 4 Deputy Governors appointed for a period not more than 5
years.
All the Directors and the officials are nominated for 4 years each by the Central
Government. To look after the affairs there are 4 local Boards, one at each of the cities of
Bombay, Calcutta, Delhi and Madras, each Board consisting of 5 members appointed for 4
years by the Central Government.
Functions:
Mention the above functions in brief.
Powers:
RBI has the authority to appoint Chairman of Banking Company where the office of
the Chairman of the Board of Directors appointed on a whole-time basis.
Every banking company should deposit the prescribed minimum paid-up capital and
reserves with the RBI either in cash or in form.
Cash Reserve:
Every banking company, not being a Scheduled Bank, shall maintain in India by way
of cash reserves or by way of balance in a current account with the RBI.
The RBI may, by order, require any banking company to call a general meeting of the
shareholders of the company within such time, not less than two months from the date of order.
The RBI may determine the policy in relation to advances to be followed by banking
companies generally or by any banking company in particular.
No company shall carry on banking business in India unless it holds a licence issued
in that behalf by the RBI and any such licence may be issued subject to such conditions as the
RBI may think fit to impose.
Monthly Returns:
Every bank should submit monthly returns to the RBI in the prescribed form and
manner showing its assets and liabilities in India. The RBI has the power to call for other returns
and information if required.
At the expirations of each calendar year, every banking company incorporated in India
shall prepare, a balance-sheet, profit and loss accounts as on the last working day of the year.
Submission Of Returns:
The accounts and balance-sheet together shall be published in the prescribed manner
and three copies thereof shall be furnished as returns to the RBI within three months form the
end of the period to which they refer.
Inspection:
The RBI had got the power to inspect the books and accounts of a banking company.
After the inspections it sends a copy of it to the concerned bank. The inspection by the RBI may
be on its own or under the direction of the Central Government.
Directions:
The RBI may from time to time, issue directions as it deems fit, to a banking company
in particular or to the banking companies in general and the banking company or companies
shall be bound to comply with such directions
RBI has to powers to remove managerial and other persons from office of the banking
companies, whose conduct is to the interest of the deposits and to secure proper management.
RBI also appoints additional directors.
The RBI has a wide range of powers of supervision and control over commercial and
cooperative banks. The RBI control frauds in entire banking industry in India.
2. Providing development finance- the RBI has helped a great deal in setting up of
specialized institutions so that the financial facilities are made available.
3. Agricultural credit-The RBI has made available short term, medium term and long term
finance to agriculture through the hierarchical network of co-operative banks and
societies. In this connection, the RBI set up two funds
(a) National Agricultural Credit(long term operations) Fund
(b) National Agricultural Credit(stabilization) Fund
These fund loans were given to SCBs & RRBs for agricultural credit and during floods
and famines.
It has also been instrumental in setting up Agricultural Refiance & Developmental
Corporation and more recently Export-Import Bank and the NABARD.
4. Industrial finance-The RBI has also organized industrial finance for both big and small
industries to secure all types of loans-short term, medium term and long term. It has
helped in the creation of
(a) Industrial Finance Corporation of India
(b) National Small Industries Corporation
of
1. By changing the statutory liquidity rate- Section 24 of the Banking Regulation Act, 1949
requires that every banking company has to maintain cash, gold or approved securities of an
amount not less than 25% of its net demand and liabilities at the close of business everyday.
This is called statutory liquidity rate and the RBI is empowered to step up the rate upto 40%
2. The RBI controls credit by changing the statutory reserve maintained by the scheduled
banks-section 42 of the RBI Act.
3. Controls credit by changing the bank rate and its policy of granting accommodation to
commercial banks
4. It controls credit through its credit monitoring arrangement
5. It controls credit by exercising moral influence on the banks.
(c) as banker to the baker
As banker to the banks, the RBI acts as the lender of last resort and grant accommodation to
the scheduled banks in the following forms1. re-discounting or re-purchasing eligible bills
2. grant loans and advances against securities
Emergency advances-the RBI advances loans when it is satisfied that the loan is necessary for
the purpose of regulating credit in the interest of trade, commerce and industry.
16.
1. that the company is or will be in a position to pay its present or future depositors in full as
their claims accrue
2. that the affairs of the company are not being or not liked to be, conducted in a manner
detrimental to the interests of its present or future depositors; and
3. in case of a foreign bank, the carrying on of banking business by such company in India
will be in the public interest and that the Government or law of the country in which it is
incorporated does not discriminate in any way against banking companies registered in
India and that the company complies with all the provisions of the Act applicable to
foreign banks.
It is clear from the above that the grant of a license depends upon the maintenance of
satisfactory financial position. The provision is intended to ensure the continuance and growth
only of banks which are established or are operating on sound lines and to discourage
indiscriminate floating of banking companies. To ascertain the position, the inspecting officer of
the RBI has to make an estimate of the liquid and other readily realizable assets and also to
judge whether the assets are enough to meet the claims of the depositors as and when they
arise. The assessment about the whole gamut of operations of the banking company and its
organizational set-up is necessary to judge the conditions before the license is granted.
According to Section 23 of the Act, no banking-company shall open a new place of business in
India or change otherwise than within the same city, town or village, the location of an existing
place of business situated in India without obtaining the prior permission of the RBI.
17.
The RRBs are relatively new banking institutions which were added to the Indian
banking scene since October 1975 to strengthen the institutional rural credit structure. Prior to
that, the then existing credit agencies lacked in meeting the needs of rural masses. A committee
under the chairmanship of N.Narasimhan suggested the institutions of RRBs as low cost
banking for rural areas should be set up to meet their credit needs.
Objectives
1) To identify a specific and functional gap in the present institutional structure.
2) To supplement the other institutional structure.
3) To fill the gap within a reasonable period of time.
Functions
1)
To provide financial facility to small and marginal farmers, agricultural labourers, cooperative societies for agricultural purposes or other purposes related to agriculture.
2) To grant loans and advances to artisans, small entrepreneurs, persons of small means
engaged in trade, commerce etc.
3) To relieve the rural masses from the clutches of money lenders.
4) To provide easy credit facility to weaker sections of society.
5) To establish branches in unbanked rural areas.
6) To take the banks to the doorsteps of the poorest people in remote rural areas.
Sponsorship
Each RRB is sponsored by a nationalized bank known as a sponsoring bank which
provides all sorts of helps to these RRBs. The sponsoring bank will assist the RRB in its
establishment, recruitment and training of personnel. They may also provide managerial and
financial assistance with mutual agreement.
Capital resources
Each RRB may have an authorized capital of Rs. five crore divided into one lakh
shares of Rs. 100 each and issued capital of Rs. 1 crore to improve their viability.
Management
The management of each RRB is vested in nine members Board of Directors, headed
by a Chairman. The chairman is appointed by the Central Govt. The chairman is a paid servant
of the sponsoring bank while the members are honorary.
Conclusion
RRBs are playing an important role as an alternative agency to provide institutional
credit. According to RBI the RRBs have fared well in achieving the objective of providing access
to weaker sections of society.
18.
It accepts the surplus funds of one primary credit society and makes it available to
another primary credit society, and thus acts as a balancing centre between the primary
credit societies.
It raises loans from the state co-operative banks and lends the same to the primary
credit societies, and thus acts as a link between the state co-operative bank and primary
credit societies.
It raises deposits from members as well as non-members for the purpose of meeting the
credit requirements of the primary credit societies.
It exercises general supervision and control over the activities of primary credit societies.
They are in a better position to solve problems as they know the local problems
better.
Unit banking is free from the diseconomics and problems of large scale
operations.
Disadvantages
6. The interest rates tend to vary at different places as there is no movement of funds from
place to place.
7. The transfer of funds is very expensive as there are no branches at other places.
8. There will be high local pressure and interference which disrupt their normal functioning.
Branch Banking
Under the branch banking system, a bank operates as a single institution under single
ownership with branches spread all over the country. Branch banking developed in Great
Britain.
Examples- SBI, Barclays.
Advantages
7. Offers a wide scope for the selection of diverse securities and varied investments, so
that a higher degree of safety and liquidity can be maintained.
9. Mobility of funds from one place to another which in turn brings equality in interest rates.
10. Banking can be extended to under developed areas and this helps in the development of
backward regions.
11. It is more convenient for Central Bank or the Government to regulate and supervise.
Disadvantages
5. Creates monopoly and leads to the concentration of resources into a few banks.
6. Losses and weakness of some branches affect the other branches too due to adverse
linkage effect.
20. What are the differences between schedule & nonschedule banks?
Private sector
Indian Commercial Banks are classified into two types. They are:
Scheduled Banks.
Non-scheduled Banks.
Scheduled Bank:
Scheduled Banks are those private sector Indian commercial Banks which are
included in the second scheduled to the RBI Act, 1934. Foreign banks also are included in the
second schedule to the RBI Act.
Non-scheduled Bank:
Non-scheduled banks are those banks which are not included in the second schedule
of the RBI Act. The non-scheduled banks do not enjoy from the RB all the facilities enjoyed by
the Scheduled Banks.
Scheduled banks are included in the second schedule of the RBI Act of 1934. On the
other hand, non-scheduled banks are not included in the second schedule of the RBI
Act.
Scheduled banks satisfy tow important conditions, viz., (i) they have paid-up capital and
reserves of Rs. 5 lakh or more and (ii) they satisfy the RBI that their affairs are not being
conducted to the interests of the depositors. But non-scheduled banks do not satisfy
these conditions.
Scheduled banks enjoy certain benefits from the RBI, whereas non-scheduled banks do
not enjoy those benefits.
Scheduled banks are subject to greater degree of control and more obligations than the
non-scheduled banks in their day-to-day operations.
Scheduled banks are, generally, big, whereas non-scheduled banks are, ordinarily,
small.
Scheduled banks are spread over a large area of the country, whereas non-scheduled
banks are confined to a small area.
The share capital and reserves of scheduled banks are more than those of nonscheduled banks.
The advances of scheduled banks are also more than those of non-scheduled banks.
1. Right of lien-the banker can exercise his right of lien on the balance of the account of
the guarantor in his possession notwithstanding the fact that his claim under the
guarantee is time-barred. Right to exercise a general lien does not arise until a default
has been ade by the principal debtor, in which case the banker should immediately
inform the guarantor that the former has exercised his lien on the latters money or
securities deposited with him.
3. Bankers claim against a bankrupt suretys estate-in the event of the bankruptcy
of the surety, the banker is entitled to prove his claim against the estate of the surety.
When the banker hears of the death or bankruptcy of the surety he should close the
account guaranteed by the surety and if the principal debtor makes a default in the
payment of the amount, the banker should at once claim the amount from the legal
representative of the deceased or from the Official Receiver of the bankrupt surety.
Precautions
22.
Guarantee
A guarantee is the most common form of security taken by the bankers to ensure
safety of the funds lent. Section 126 of the ICA defines a contract of guarantee as a contract to
perform the promises or discharge the liability of a third person in case of his default.
Ex: A wanting a loan of Rs.500 induces B to promise C to repay the loan in case of
As default. This is a contract of guarantee.
It will be seen that there are 3 parties to this contract- A the principal debtor, B the
surety and C the creditor. A contract of guarantee is thus a secondary contract the principal
contract being between the principal debtor and the creditor himself. The liability of the surety
therefore arises only if the principal contract is not fulfilled.
Kinds of guarantee
1) Specific guarantee- guarantee given for a single debt is called a specific guarantee and
is discharged on repayment of the particular debt it was given to secure.
2)
3)
Joint and several guarantee- where two or more persons join in executing a guarantee,
their liability may be joint or several or joint and several. In a J and S guarantee each coguarantor is jointly and severally liable for the debt.
4) Limited guarantee- in limited guarantee, the guarantees have some clauses which either
restrict the liability of the guarantor or limit the scope.
Indemnity
Contracts of indemnity appear to be analogous to contracts of guarantee. Section 124
defines a contract of indemnity as a contract by which one party promises to save the other
from loss caused to him by the conduct of the promisor himself, or by the conduct of any other
person.
Ex: A contracts to indemnify B against all the consequences of any proceedings which
C may initiate against B. this is a contract of indemnity.
The baker must periodically inspect the hypothecated goods and the account
books of the borrower should be checked to ascertain the position of stocks
under hypothecation
An undertaking should be obtained from the borrower that he shall not charge
the same goods to other bank or person.
5.
The banker should also ensure that the borrower is not enjoying similar
hypothecation facilities on the same stocks from some other bank.
6.
During inspection, if the banker finds that the financial position is weak, it is
advisable to get the personal guarantees of directors/officers to strengthen the
charge.
7.
While granting loans against hypothecation, the banker should obtain a letter of
hypothecation containing several clauses to protect his interest.
8. Character, capacity and capital must be thoroughly verified before granting loans
on the basis of hypothecation. This facility should be given to genuine and
financially sound parties.
9.
A name plate of the bank, mentioning that the stocks are hypothecated to it,
must be displaced at a prominent place of the hypothecated goods for public
notice to avoid the risk of a second charge being created on the same stock.
10. The banker should get the charge registered under Section 125 of the
Companies Act, if borrower happens to be a joint stock company.
3. if there is more than one owner of an immovable property, each co-owner can mortgage
his share
4. the object of mortgaging the property is to give security for the loan to be taken or
already taken for performance of an engagement giving rise to pecuniary liability.
5. the mortgage need not always be given the actual possession of the property
6. on repayment of the loan together with interest, the interest in specific immovable
property is recovered to the mortgagor
7. in the evnt of non-payment of the loan, the mortgagee has a right to sell the mortgaged
property trough the intervention of the Court.
8. an agreement in writing between the mortgagor and the mortgagee is essential for
creating a mortgage. The mortgage deed should contain all safety clauses.
Kinds
1. Simple mortgage- in simple mortgage the borrower binds himself personally to pay the
mortgage money without giving possession of property. He agrees to pay according to
his contract and also gives the banker the right ot sell and adjust the sale proceeds to
the mortgage money. But court intervention is necessary for selling the mortgage
property.
2. Mortgage by conditional sale-in this mortgage the borrower sells the mortgaged
property on the condition that:
(a) on default of payment of the mortgage on a certain date the sale shall become absolute
(b) on such payment being made the sale shall become void
(c) on such payment being made the buyer shall transfer the property to the seller
3. Usufructuary mortgage-in this mortgage the mortgagee gets the possession of the
property (physical possession not necessary) and is entitled to recover the rents and
profits relating to the property till the loans are repaid. He can also appropriate such
rents or profits to interest or payment of mortgage money and partly interest and partly in
payment of the mortgage money.
Lien
Hypothecation
2. No such agreement
Hypothecation
Pledge
1. the possession of the movable property There is delivery of goods from one person
is retained by the owner and certain right in to another as security for payment of debt
that property are transferred to the person or performance of a promise.
in whose favour the property is
hypothecated
26.
Definition
According to section 5(a) of the Banking Regulation Act, 1949, 'a secured loan or
advance' means a loan or advance' made on the security of assets, the Market value of which is
not at any time less than the amount of such loan or advance; and 'unsecured loan or advance'
means a loan or advance' not so secured.
Secured advances
The distinguishing features of a secured loan or advance are as follows 1) The loan must be made on the security of tangible assets like goods and
commodities, lands and buildings, hold and silver, corporate and government securities etc. A
charge on any such assets offered as security must be created in favour of the banker.
2) The Market value of such security must not be less than the amount of the loan at
anytime till the loan is repaid. If the former falls below the latter, the loan is considered as partly
secured.
Unsecured advances
They are also called clean loans or advances.
The characteristics of unsecured advances are
1) UAs are made on the goodwill and reputation of the customer.
2) They are generally made by way of overdraft facilities.
3) Unsecured advances are made at the discretion of the concerned bank manager
himself.
4) Grant of loans depend on the credit worthiness of the borrowers. Such
creditworthiness depends on- 1) character 2) capacity 3) capital
What is overdaraft?
Overdraft means allowing the customer to overdraw his account. It is allowed only to
current account holders. But some banks allow casual overdraft in savings accounts of
Government servants, etc. An overdraft is a running account wherein thy balance goes on
fluctuating from debit to credit or vice versa.
Under an overdraft arrangement, a customer is allowed to draw cheques upto an agreed limit
over and above the credit balance in the account.
Benefits-The bank provides overdraft facility to its customers to earn interest, and its customers
enjoy the overdraft facility in order to develop their business. The overdraft facility is ideal to
cover short term requirements. The interest on overdraft is calculated on the amount actually
utilized by the debtor-customer at regular intervals and hence it is cheaper than the other loans.
There is no restriction on operations in the account and withdrawals and deposits may be upto
any number of times.
Bankers obligation.-If a bank has agreed to give an overdraft, it cannot refuse to honour
cheques or draft within the limit of that overdraft which have been drawn and put in circulation. If
the banker refuses any cheque it becomes wrongful dishonor and he will be liable for
damages.
Customers obligation-where a customer even without any express grant of an overdraft
facility, overdraws on his account and the cheques issued by him are honoured, without there
being sufficient balance in the account, the transaction amounts to a loan and the customer is
bound pay reasonable interest-Bank of Maharashtra v United Construction Co & Ors.
Procedure-It is safe course for the banks that they should obtain a letter and a promissory note
from the customer in which terms and conditions of the facility including the rate of interest
chargeable on the overdraft is given. But written transactions are not necessary all the time.
Time period-The period of overdraft is 7 years at maximum. But in practice, the banker grants
an overdraft for one year, and renews it every year.
Overdraft agreement is a contract-Overdraft arrangement between bank and its customer is a
contract and it cannot be terminated by the bank unilaterally even if it is a temporary one.Indian Overseas Bank, Madras v Narayanprasad Patel
Categories
2. Secured overdraft- when a party is allowed regular limits against some tangible
security, it is known as secured overdraft.
3.
27.
Clean overdraft-Overdrafts which are not backed up by any security are called
clean or temporary overdrafts. Clean overdrafts are allowed purely on the
personal credit of the party. They are allowed for small amounts to meet the
partys sudden requirements.
The relation between a banker and his customer begins with the opening of an
account by the former in the name of the latter. Initially the accounts are opened with a deposit
of money by the customer and hence these accounts are called deposit accounts. Deposits are
broadly divided into two kinds- 1) payable on demand (demand deposit) and 2) payable after
certain time (time deposit). Demand deposits are- savings and current account. Time
deposits are- fixed deposit and recurring deposit.
Fixed account
The term fixed deposits means deposits repayable after the expiry of a certain period,
which ordinarily varies from three months to five years. The fixing of the period enables the
banker to invest money or employ it in business without having to keep a reserve and hence are
very popular with the bankers.
Rate of interest- the banker offers higher rates of interest on fixed deposits as the
depositor parts with liquidity for a definite period. The longer the period, the higher will be the
rate of interest.
FD for senior citizens- RBI has permitted the banks to formulate FD schemes
specially meant for senior citizens on which they offer higher and fixed rates of interest.
Opening and operation- to open an account the depositor is required to fill in an
application form wherin he mentions the amount of the deposit and the period for which the
deposit is to be made. He also gives his specimen signature. A fixed deposit receipt is thereafter
issued to the depositor acknowledging the same.
FD in joint names- FDs can be opened in joint names of two or more persons payable
to either or survivor in accordance with the terms of the receipt. The problems faced by the
banker before date of maturity are
1) Request for premature repayment by one of the depositor
2) Loan against FDR by one of the depositor
3) Request for duplicate receipt by one of the depositor
In all these cases the banker should obtain consent of other depositor/s.
Payment before due date- though a FD is payable after expiry of fixed period, banks
permit encashment even before due date. In such a case certain interest will be charged for the
same. According to the RBI directive banks should not charge the penalty in case of premature
withdrawal for immediate reinvestment in another FD for a longer term than the remaining
period of the original contract.
Overdue deposits- if the receipt is not encashed on the date of maturity, the interest
ceases to run from that date. The banks allow interest as per RBI directives, if it is renewed.
28.
A current account is a running and active account which may be operated any
number of times during a working day. There is no restriction on the number and amount of
withdrawals from a current account. As the banker is under an obligation to repay these
deposits on demand, they are called deemed liabilities or deemed deposits.
To meet the requirement of the current account the banker keeps sufficient reserves
against such deposits vis--vis the savings and the fixed deposits. Current accounts suit the
requirements of big businessman, joint stock companies, institutions, public authorities,
corporations etc. whose banking transactions happen to be numerous per day. Cheque facility is
available for the depositors.
Bankers obligation- by taking RDs the banker undertakes to honour his
customers cheques as long as his account is in credit. The banker may have to suffer loss if
he pays a forged cheque, or a cheque contrary to the instructions of his customer (s 129, NI
Act).
Privileges- a current account carries certain privileges which are not given to other
account holders
1)
Third party cheques and cheques with endorsements may be deposited in the current
account for collection and credit.
The loans and advances granted by banks to their customers are not given in the form
of cash but through the current accounts. Current accounts thus earn interest on all
types of advances granted by the banker.
Interest- normally no interest is paid on current accounts. Rather, the depositors have
to pay certain incidental charges to the bank for services rendered by it. Sometimes customers
are required to maintain a minimum balance failing which bank charges some commission half
yearly thus helping them to earn something on minimum balance kept.
29.
cannot withdraw by withdrawal form a sum smaller than Re 1. The minimum amount of a
cheque is Re 5.
Restriction on deposits- the customer may deposit any amount in the savings bank
account subject to a minimum of Re 5. The banks do not accept cheques or other instruments
payable to a third party for the purpose of deposit in the savings account.
Minimum balance- banks prescribe the minimum balance that is to be maintained in
the SB accounts. For this purpose they take into consideration the cost involved in maintaining
and servicing such accounts. Levy specific charges if the minimum balance is not maintained.
Payment of interest- the rate of interest payable by the banks on deposits maintained
in savings accounts is prescribed by the RBI. Interest is calculated at quarterly or longer rests of
period.
Cheques- cheque facility is provided to the depositors subject to the condition that he
will keep a minimum balance with the bank according to the rules of the bank. Only cheques
payable to the customers having SB accounts are collected.
Prohibition on savings account- the RBI has prohibited the banks to open a savings
account in the name of
1) Trading or business concern, proprietary or partnership.
2) A company or an association.
3) Government departments.
4) Bodies depending upon budgetary allocations for performance of their functions.
5) Municipal corporations/committees.
6) Panchayat samitis.
7) State housing boards.
30.
The banks have in recent years started various daily, weekly, or monthly deposit
schemes in order to inculcate the habit of savings on a regular or recurring basis. Generally
money in these accounts is deposited in monthly installments for a fixed period and repaid to
the depositors along with interest on maturity. These are called as recurring deposits.
A depositor opening a RD account is required to deposit an amount chosen by him,
generally a multiple of Re 5 or 10, in his account every month for a period selected by him. The
period of recurring deposit varies from bank to bank. Generally banks open such accounts
ranging from one to ten years.
Opening and functioning of account- the RD account can be opened by any person,
more than one person jointly or severally, by a guardian in the name of a minor and even by a
minor.
While opening the account, the depositor is given a pass book which is to be
presented to the bank at the time of monthly deposits and repayment of amount. Installments for
each month should be paid before the last working day of that month. Accumulated amount with
interest will be payable after a month of the payment of the last installment.
Rate of interest- the rate of interest on RD stands favourably as compared to the rate
of interest on savings bank accounts. According to the directive of the RBI, the interest provided
by banks on RD must be in accord with the rates prescribed for various term deposits. The rate
of interest is
Banks help the industrious, the prudent, the punctual, the honest and discourage the
dishonest by not giving finance for wrongful purpose. Thus banks act as public
conservator of commercial activities.
10) Banks serve as the best financial intermediaries between the borrowers and the lenders.
11) Through the process of creation of money, banks acquire control over the supply of
money in the country. Through their control over supply of money they influence
economic activities, employment, income and general price level in the economy.
12) Banks monetize the debts of others that is cover t the debts of others into money by
exchanging bank deposits in return for securities.
Thus a strong and a sound banking system is indispensable for the economic
development of any country.
Definition of banker
According to section 3 of the NI Act, 1881, banker includes any person acting as a
banker and any post office savings bank.
According to section 5(b) of the Banking Regulation Act, 1949, banking means the
accepting, for the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.
To sum up a banker is who
1) Take deposit account
2) Take current accounts
3) Issue and pay cheques
4) Collect cheques crossed and uncrossed for his customers.
Money lender is not considered as a banker as mere lending does not constitute
banking business. Banker is an institution which borrows money by accepting deposits from the
public for the purpose of lending to those who are in need of money.
Definition of customer
The term customer is not defined by law. Ordinarily, a person who has an account in a
bank is called a customer.
Acc to Dr. Hart, a customer is one who has an account with a banker or for whom a
banker habitually undertakes to act as such.
Thus to constitute a customer, the following essential requisites must be fulfilled:
1) He must have some sort of an account.
2) Even a single transaction constitutes a customer.
2) Agent and Principal- Sec.182 of The Indian Contract Act, 1872 defines an
agent as a person employed to do any act for another or to represent another in dealings with
third persons. The person for whom such act is done or who is so represented is called the
Principal.
One of the important relationships between a banker and customer is that of an agent
and principal. The banker performs various services of the customer, where he acts as the
agent.
Buying and selling securities of customer
Collection of cheques, bills of exchange, promissory notes on behalf of customer
Acting a trustee, executor or representative of a customer
Payment of insurance premium, telephone bills etc.
1) Trustee and beneficiary- section 3 of the Trusts Act defines a trustee as one to whom
property is entrusted to be administered for the benefit of another called the beneficiary. A
banker becomes a trustee under special circumstances. When a customer deposits securities or
other valuables with the banker for safe custody, the banker acts as trustee of customer.
2) Bailee and bailor- during certain circumstances banker becomes bailee. When he
receives gold ornaments and important documents for safe custody he takes charge of it as
bailee and not trustee or agent. He cannot make use of them as he is bound to return the
identical articles on demand.
3) Pawnee and pawner- pawn is a sort of bailment in which the goods are delivered to
another as a pawn, to be a security for money borrowed. Thus a banker acts as a pawnee
where a customer delivers he goods to him to be kept as security till the debt is discharged. The
banker can retain the goods pledged till the debt is paid.
4) Mortgagee and mortgagor- the relation between a banker as mortgagee and his
customer as mortgagor arises when the latter executes a mortgage deed in respect of his
immovable property in favour of the bank or deposits the title deeds of his property with the
bank to create an equitable mortgage as security for an advance.
5) Lessee and lessor- when a customer hires a locker in the banks safe deposit vault,
the bank undertakes to take necessary precaution for the safety of the articles in the locker. The
relation between the parties is that of a lessor and lessee.
6) Guarantor and guarantee- a bank as guarantor gives guarantee to its customer by
issuing a letter of credit. It is a kind of credit facility to its customer to facilitate international
trade. A bank guarantee contains an undertaking to pay the amount without any demur on mere
demand of the principal amount on the ground for non-performance or breach of contract.
7) Fiduciary relationship- every relation of trust and confidence is a fiduciary relation. A
banker who receives a customers money is under a duty not to part with it which is
inconsistent with the customers fiduciary character and duty. In Official Assignee v. Rajaram
Aiyar, it was held that where banks old money for a specific purpose of sending it somebody the
money is impressed with trust.