FACULTY: Mr.P.

PRASATH KUMAR CLASS: III BCOM SUBJECT: BANKING THEORY LAW & PRACTICE SEMESTER: V

ORIGIN OF BANKING The word, Bank is said to have derived from the French word Banco or Bancus or Bank or Banque which means, a bench. In fact the early Jews in Lombardy transacted their Banking business by sitting on benches. When their business failed, the benches were broken and hence the word bankrupt came into vogue. Another common held view is that the word bank might be originated from the German word Bank which means a joint stock fund of course bank essentially deals with funds. In due course, it was Italianized into banco, Franchised into bank and finally Anglicised into bank. This view is most prevalent even to day. DEFINITIONS 1.BANKING: The Banking Regulation Act which gives a statutory definition to the term banking According to section 5(b) of the act 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. BANKER: Dr. Herbert L.Hart defines a banker as one who in the ordinary course of business honours cheques drawn upon him by persons from and for whom he receives money on current account. According to Sir John Paget, no person or body corporate or otherwise, can be a banker who does no (1) take deposits accounts, (2) take current accounts, (3) issue and pay cheques, and (4) collect cheques crossed and uncrossed, for his customers. CUSTOMER:

The term customer of a bank is not defined by law. Ordinarily a person who has an a/c in a bank is considered its customers thus, to constitute a customer the following essential requisites must be fulfilled. i) ii) A bank a/c savings, current or fixed deposit must be opened in his name by making necessary deposit of money and The dealing between the banker and the customer must be of the nature of banking business. A customer of a banker need not necessarily be a person. A firm, joint stock company a society or any separate legal entity may be a customer.

CHARACTERISTICS OF BANKING BUSINESS: 1. There should be acceptance of deposits: There is difference between the terms loans and deposits. Generally, when amounts are borrowed on condition that they should be repaid on the expiry of a term, they are regarded as loans rather than deposits. In case of deposits, the liability to repay arises only when a demand for repayment has been made. 2. Deposits should be from the public: The acceptance of deposits by an institution from its own members does not constitute banking. This means that nithis or mutual benefit societies which collects deposits only from their members are not banks. However, the words, deposits from public have given rise to practical difficulties for example in the case of many cooperative credit institutions a substantial portion of their deposit business may be from their members. 3. Repayable on demand or otherwise: The definition covers acceptance of all deposits whether repayable on demand or on the expiry of a term or after a specified period of notice. 4. Withdrawable by cheque, draft, order, or otherwise: This means that withdrawal of deposits need not be try means of a negotiable instrument like cheque. Withdrawal may be permitted in any other firm eg. A request may be made to transfer funds from are a/c to some other a/c. 5. Purpose of acceptance of deposits:

The purpose of accepting deposits should be lending or investment. Thus, companies which accept deposits for financing their trading or manufacturing business will not come within the definition of banking companies not banking companies can combine manufacturing or trading activities along with the banking business. to purchase durable goods such as VCRs, refrigerators, TVs, etc. These are clean loans and banks keep a lien on the goods and reserve the right to seize them if the borrower fails his part of the contract.
Loan Participation:

Some of the larger borrowers are financed by more

than one institution on a participation basis. This is done either because the amount involved is very large and beyond the resources of a single institution, or because the amount is beyond what an institution would like to risk on a single borrower. Schemes for Financing Agriculture working capital finance. CLASSIFICATION OF BANKS: Today is the age of specialization and w can find specialization in all fields including banking. The banks have specialized in a particular line of finance. Various types of banks have developed to suit the economic development and requirements of the country. The principal banking institutions of a country may be classified into the following types. I. Central Banks III. Industrial or Development Banks V. Co-operative Banks. VII. Indigenous Banks IX Supranational Bank i. Central Bank: Central Bank is the bank of a country a nation. Its main function is to issue currency known as Bank Notes. This bank acts as the leader of the banking system and money market of the country by regulating money and credit. These banks are the bankers to the government, they are bankers banks and the ultimate custodian of a nations foreign exchange reserves. The aim of the Central Bank is not to earn profit, maintain price II. Commercial Banks IV. Exchange Banks (Authorized dealers in foreign exchange) VI. Land Mortgage Bank. VIII. Savings Banks X. International Bank Banks grant term-loans to small-scale industrial units for expansion, modernization, and renovation and also provide them with

stability and to strive for economic development with alround growth of the country. There is now hardly any country, which does not have a Central Bank of its own. It acts as a great engine of growth of a State. In India, the RBI was established in 1935 and this Bank has since been functioning as the Central Bank of the country (this is not to be confused with Central Bank of India, which is only a commercial bank). The Central Bank of different countries is known by different names like Reserve Bank in India, Bank of England in U.K Federal Reserve System in U.S.A., etc. ii) Commercial Banks: A bank, which undertakes all kinds of ordinary banking business is called a commercial bank. It is so called because it so called because it provides money and credit for public and grand short-term loans, and advances. They supply working capital to industries and enable them to carryon production and manufacturing activities. They grant loans and advances on the stocks of agricultural commodities, industrial goods, etc., they discount internal and foreign bills and thereby finance the International trade. They also perform certain agency services such as collection of cheques, dividends, interest on investments, issue of drafts, letter of credit, Travelers Cheques, Investment Advisory Services, etc., iii) Industrial Bank or Financial Institutions An industrial Bank is one which specializes by providing loans and fixed capital to industrial concerns by subscribing to share and debenture issued by public companies. They play an important role in the establishment and growth of industries. The block capital required for the acquisition of fixed assets, etc., is supplied by investment banks. They provide long-term loans and credits for period varying between 5 and 15 years for industries to acquire fixed assets. They may serve as catalytic agents in mobilization of capital in other forms of assistance such as, underwriting, guarantee, etc., these banks are nowadays grouped as Development Financial Institutions. These banks are very popular in Germany and Japan. In India, we have several Industrial Finance Corporation in addition to the Industrial Development Bank of India. Both, Development Financial Institution and Commercial banks, nowadays, finance infrastructure development activities, which include construction of transport facilities, building of power-supply stations, etc., iv) Exchange Banks (Authorised Dealers in Foreign exchange):

These types of banks are primarily engaged in transactions involving foreign exchange. They deal in foreign bills of exchange import and export of bullion and otherwise participate in the financing of foreign trade. They do a number of incidental services such as opening of letters of credit, issue of Foreign Currency Drafts and Travellers Cheques and supply of information about foreign customers. They provide credit and loans in foreign currency and also accept deposits in Foreign Currency. They require huge capital and trained staff as it is a risky business. Thy maintain branches in foreign countries at important trade centers. In the past foreign bank operating in India would deal in foreign exchange and were known as exchange banks. Reserve Bank of India and known as Authorised Dealers in Foreign Exchange. As per foreign Exchange Regulation Act banks dealing in Foreign Exchange related activities requires the permission of Reserve Bank of India. This is applicable to both Indian and Foreign Banks. v) Co-operative Banks: They are origanised on co-operative principles of mutual help and assistance. Thy grant short-term loans to the agriculturists for purchase of seeds, harvesting and for other cultivation expenses. They accept money on deposit from and make loans to their members at a low rate of interest vi) Land-mortgage Banks (Presently known as Agriculture and Rural Development Banks): They are agriculture development banks. The Land-mortgage banks supply loanterm loans for a period up to 15 years for development of land to improve agricultural yields. They grant loan for permanent improvements in agricultural lands. They create negotiable bonds out of real estate like land, buildings, etc. they raise funds by floating debentures and by borrowing from the government. The agriculture Finance Corporation was the first Indian Institution to set up finance for development of Agriculture. The National Bank for Agriculture and Rural Development (NABARD) was constituted by the Government to promote rural development. vii) Indigenous Banks: The Central Banking Enquiry Commission defined an indigenous banker as a individual or firm accepting deposits and dealing in indigenous lending or money to the needy. They form unorganized part of the banking structure, i.e these are unrecognized operators in receiving deposits and lending money. In India the Marwaris, the Multanis, the Jains, the Sowcars, the Nattukottai chettiars are some of the leading indigenous

bankers who charge high rates of interest on their lending. In rural areas, they still provide substantial financial to agriculturists and small traders viii) Savings Banks: These are institutions which collect the periodicals savings of the general public. Their main objects is to promote thrift and saving habits among the middle and lower income sections of the society. They have certain restrictions on number of withdrawals in a year to discourage spending. In almost all countries, postal authorities also run savings bank account and their working is regulated by the government. The first savings bank was startedin Hamburg in 1765. In India, we have postal savings accounts. These days separate savings banks as such are very rare. In India, all commercial banks have savings accounts. The minimum balance which is required to be kept in the account differ from banks to banks. The rate of interest payable on the accounts by banks is determined by RBI. Presently it is 4.5 per cent per annum. Co-operative banks are normally allowed to pay an additional 0.5 per cent interest per annum. Interest rate on savings accounts with post offices is determined by Government of India. ix) Supranational Banks: Special Banks have been created to deal with certain international financial matters. World Bank is otherwise known as International Bank for Reconstruction of Development (IBRD) which gives long-term loans to developing countries for their economic and agricultural development. Asian Development Bank (ADB) is another Supranational Bank which provides finance for the economic development of poor Asian countries. They generally provides finance for the economic development of poor Asian countries. They generally provide finance at concessional interest rates and for loan-term needs. These institution are the creations of World bodies promoted by various countries or central banks of different countries. The European Central Bank established in June 1998 by countries in the European Union is another example of Supranational Bank x) International Banks: International Banks are those which are operating in different countries. While, the registered office/head office is situated in one country, they operate through their branches in other countries. They specialize in Banking business pertaining to foreign trade like opening of letters of credit, providing short-term finance in foreign currency, issue of performance guarantee, arranging foreign currency credits, etc., they are the main traders in International Currencies like US dollars, Japanese Yen, the new-born European Currency Euro, etc. they also perform Currency Risk Management functions for clients.

These banks are also known as Multinational Banks since, they operate from many countries. These banks make possible the follow of money /credit from one country to another country. They help grow international trade. Relationship between a Banker and Customer: The nature of relationship between a banker and customer depends upon the type of service rendered by the banker. The services rendered by commercial banks in our country can be classified into two categories. 1. 2. Traditional Services, and New Services. TRADITIONAL SERVICES These services mainly relate to: Maintenance of different types of deposit accounts e.g. savings, fixed and current deposit accounts; Grant of advances through cash credit, overdraft and loan accounts and through purchasing/discounting demand and usance bills; Collection of cheques, bill of exchange and other instrument (inland and foreign); Issue of performance and financial guarantees; Provision of remittance facilities by issue of drafts, mail transfers, and telegraphic transfers; Provision of facilities of safe deposit and safe custody; and Purchase and sale of securities. NEW SERVICES The banks have introduced a number of new services with the accent on deposit mobilization and grant of credit to weaker sections of society during recent years. Some of the important new services are as follows:
Schemes for Deposit Mobilisation:

A large number of new schemes have

been introduced for deposit mobilization. Some of these schemes are as follows:
Certificate of deposit (CD):

The Certificate of Deposit (CD) is a

document of title similar to a time receipt issued by a bank. However, there is no prescribed interest rate on such funds and the banks have the freedom to

issue it at a discount or face value. It is a bearer document, hence, readily negotiable.

Daily savings scheme:

Under this scheme small depositors are

expected to deposit their money with the bank every day. It is specially meant for daily wage earners. Syndicate Bank was a pioneer in this field with its Pigmy Deposit Scheme.
Minor savings scheme: This scheme has been introduced as an attempt to

encourage children to form the saving habit. Withdrawal facility is also available under the scheme.
Ladies Department:

In order to attract women as depositors some banks

have Ladies Departments. They also conduct special courses to acquaint the women with banking habit.
Monthly interest income schemes:

They are fixed deposit accounts on

which instead of annually or half yearly, monthly interest is either paid by way of cash or is credited to the current or savings deposit account of the depositor. It may also be credited to a recurring deposit or festival deposit account. Banks usually allow loan and refund facilities before maturity on appropriate terms. Annuity or retirement scheme: Under this scheme monthly installment of deposits are collected for a period of years. The amount inclusive of interest or double the amount received, in monthly installment, is repaid after certain specified period.
Farmers deposit schemes:

This scheme is intended for the benefit of

those farmers, who can save once or twice a year, when their income is received after harvest. Under the scheme farmers can deposit their money once or twice a year as and when they receive the proceeds of the sale of their crop and they can withdraw up to 1/10 of deposit every month.
Insurance linked savings bank accounts: The

scheme

provides

life

insurance protection on the life of an account holder covered under a special Insurance Linked Savings Bank Account. Persons, not below 18 years of age and not above 49 years of age, and who agree to maintain specified minimum balance and who have an independent regular income by way of salary, professional income, rent, dividend on shares are eligible for opening an account under this scheme. Joint accounts can be opened by two persons

closely related to each other but only one of the joint account holders will be insured. Insurance cover is provided by the Life Insurance Corporation of India under a special arrangement with the bank. Besides the insurance benefits, the depositor has the advantage of getting repayment of the balance with interest calculated by bank on minimum balance.
Innovative deposit schemes:

In order to attract deposits from the

public many banks (particularly foreign banks) have started innovative deposit schemes. 1. Multi deposit scheme: In case of a traditional fixed deposit scheme, if the depositor needs to withdraw even a small sum, he has to break the entire deposit. Alternatively he can take a loan or overdraft facility on his deposit. However, he will pay a higher interest on such loan or overdraft as compared to the interest that he gets on his fixed deposit. In case of a multi-deposit scheme, a depositor gets free access to his money. It is so structured that the depositor can use his money whenever he needs it without losing returns or breaking the entire deposit or paying interest to use his own money. The depositor is required to open a deposit account with minimum amount say Ra. 1000. His money is treated as multiple of deposits of fixed sum say Rs. 1000. He is entitled to withdraw as many blocks of Rs.1000 as he wants. There is no compulsion to put back the money withdrawn. For example if one opens a 3 years multi-deposit account of Rs. 100000 and decides to withdraw Rs. 10000 after 9 months, the balance of Rs. 90000 will earn interest at an attractive rate for these 9 months. As per RBI regulations, premature withdrawals earns interest at 1% less than the rate applicable for the period for which the deposit was actually paid. The cheque facility is also available for withdrawing the amount. Some banks permit use of their bank cards for this purpose. The banks usually do not issue a Deposit Certificate to the depositor for this purposes. They give a Credit Advice instead. In the event of its being lost, its duplicate copy can be obtained without much difficult. The City Bank is the first bank in the country to introduce multi-deposit scheme. 2. as follows: Time-wise savings scheme: This scheme gives such facilities to a depositor that he saves more time than just money. The salient features of the scheme are

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The depositor has to open a deposit account with a minimum amount, say Rs. 10,000. The depositors account is credited with interest regularly at the rate applicable to savings deposit. The interest is credited on the minimum balance in the depositors account between the 10th and the last day of the month.

The depositor is sent statement of his account every quarter by post and that also free of charge. Chequebook facility is also made available. In case a depositor is going out of town, he can have a confidence operating his account in his absence. The depositor is given access to all branches of the bank irrespective of the branch where he has opened the account. The account holder can deposit or withdraw upto a fixed amount (say Rs. 3000) at any of the branches of the bank. Similarly he is also entitled to free transfer of funds from his account in one branch to the same titled account in any other branch. The bank also agrees to pay the routine bills of the depositor if given instructions. In case the depositor does not want to receive any bank related correspondence, at his registered address, the banks at his request can hold his mail to be collected personally by him. The Time-wise Scheme was first introduced in India by ANZ Grindlays Bank.

3.

Smart-money scheme: This gives the depositor a smart alternative to his savings

account. The depositor can withdraw upto 75% of his deposit whenever he wants it by just issuing a cheque. On the balance, he continues to enjoy the rate applicable to fixed deposits as per the directives of the Reserve Bank. The Smart-money Account scheme has been launched in India by the Hong Kong Bank. 4. Any time money (ATM) scheme: The Scheme enables the depositor though ATM card, to withdraw, deposit, check balances, transfer money and order for cheque book or statements, at his convenience, day or night, seven days a week. City Bank and Hong Kong Bank are pioneers in this field.
Housing Deposit Scheme:

These Schemes are suitable for those wishing

to acquire or construct their own houses. Account holders have to deposit money in installments for a fixed period at earning an attractive rate of interest.

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With the setting up of the National Housing Bank on July 9th 1988, a spurt is expected in the building activity. The National Housing Bank has introduced with effect from July 1st 1989, this scheme is called Home Loan Account Scheme (HLAS) with the co-operation of scheduled banks.
Automatic extension Deposit Scheme:

Depositors make a lump sum payment

and deposits can be automatically renewed for any term as desired after the specified period.
Personal Loan Scheme: The Scheme has been introduced during the last one

decade. Under the scheme individuals, either employed or engaged in business and having a steady income, are granted loans grant loans to technocrats, technologists, technicians and entrepreneurs to set up small-scale industrial units.
Schemes for Agriculturists:

A large number of schemes have been They provide short-term loans for

introduced by banks to help agriculturists.

financing seasonal agricultural operations including purchase of inputs. Mediumterm loans are provided for purchase of equipment such as tractors, agricultural machinery and pump sets, sinking wells, etc. Long-term loans are provided for purchase of land and other assets of long-term durability. Some of the banks have adopted certain villages for providing credit facilities for all productive purposes in the villages adopted. Many of the banks have launched schemes for financing farmbased activities such as poultry, dairy farming, etc. They have also started providing loans to fishermen for purchase, construction and mechanisation of boats.
Financing of Road Transport Operations and other small Borrowers:

Loans are granted for purchase of vehicles i.e. taxis, scooters, trucks, rickshaws to road transport operators, on hypothecation of the vehicle concerned. Self-employed persons like doctors, lawyers, architects, etc., are also granted loans to start or expand trade or vocation. Some banks have also introduced schemes for granting of educational loans to deserving students for graduate and post-graduate courses in India and for higher studies abroad.
Credit Transfer System:

As a result of increased customer expectations many

banks have introduced schemes for free remittance of funds by their customers subject to certain conditions. One of such schemes of charge amounts up to a specified limit at a time from one branch of the bank for credit to any personal account with any of its branches. Similarly, under another scheme known as Special Cheque Transfer Scheme, cheques up to a certain amount drawn on any

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personal account can be collected, negotiated at par for the payee of the last endorsee.
Credit Cards:

The Credit Cards System in India is rather a new concept.

Of course, in the West, credit cards are slowly replacing the real money as a medium of economic transactions in day to day living. The Indian banks which have ventured into the credit cards scheme are Andhra Bank, Central Bank of India, Bank of Baroda, Bank of India, Canara Bank, Indian Overseas Bank, Punjab National Bank and State Bank of India etc. A credit card is a unique scheme in which one uses a little card and special cheques in place of money. Hence, instead of paying for things in cash, one can pay for them with credit card. Credit cards are issued to valued constituents as identification cards. On presentation of the cards, the constituent can encash his cheques drawn on his account at any of the officers of the bank issuing the credit card upto a specified amount for a specified period. The cheques issued by him are also accepted for payments by several institutions viz. Airlines, hotels, departmental stores, etc. There is no restriction on the number of withdrawals or on the amount which one can withdraw at one time.
Rural / Green Cards:

Dena Bank and a number of other banks are now offering

Green Cards to farmers to provide them production credit to buy agriculture inputs without repeated visits to them. Under this scheme of green card of rural card, and agriculturist with a good track record is issued a card to avail credit facility within indicated limits for three years. He can present special cheques issued along with a card at anyone of the designated branches convenient to him. The Branch Manager after comparing his signatures on the card makes cash payments or issues a bank draft at par in the name of dealer of fertilizer, seeds, pesticides etc. Of courses, there is a risk of misusing this facility, hence, it is necessary that the banks should issue such cards only to farmers with good past records. Corporation Bank issues two types of rural cards, one for crop loans and the other for consumption loans.
Travellers Cheques:

Travellers cheques are issued by banks to avoid the

risk of loss or inconvenience in having to carry large amount of cash while traveling. These cheques are issued in suitable denominations and are encashable at any office of the bank.
Travel Agency Work:

A few banks have started travel agency work for their

clients such as securing of passage, accommodation in hotels, providing general

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travel information, etc. Some banks arrange reservation of tickets for a small charge for their customers only.
Gift Cheques:

These cheques are artistically designed in attractive folders

and covers. The purchaser of the gift cheque need not be an account holder with that bank or any other bank to avail of that service. The cheque is collectable at par at all the offices of the issuing banks in India.
Lock-box and Night Safe Service:

In case of lock-box service a box is

kept at the branch of the bank in which the customers lodge the cheques and other remittances after the banks office hours. The bank collects them the next day and passes the necessary entries. It obviates the need for the customers to go to the bank during the customers own office hours and thus saves time for them. At some banks efforts have also been made to offer night safe facilities whereby the customers, particularly the traders, can lodge their cash overnight.
Services after Banking Hours:

In order to provide service to the customers

after banking hours some banks have introduced Emergency Vouchers Scheme. These vouchers, which are sold free of any extra charge, are encashable at the banks branches during office hours and selected Petrol Stations after office hours. A number of banks have started morning and / or evening banking facilities in residential areas.
Other Services:

These services include such as tax assistance, executor and

trustee, merchant banking services, etc. Since these services are of a high specified nature, only a few banks provide them. I. General Relationship between a Banker and Customer: 1. Primary Relationship (Debtor and Creditor Relationship): The relationship between a banker and customer is primarily that of debtor and creditor. On the basis of the existing state of account, respective position of the banker and customer will be determined. In otherwords, if the customers account show a credit balance, the banker becomes a debtor and the customer becomes the creditor. On the otherhand, if it shows a debit balance, the banker be comes a debtor and the customer becomes the creditor. On the otherhand, if it shows a debit balance i.e. overdrawn, the banker becomes a debtor the money deposited by the customer with a bank is a debt due from the bank to its customer and it becomes the property of the bank. Therefore, the banker may make use of it

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according to his discretion. However, the banker is under an obligation to repay the debt as and when demanded by the customer. But such repayment need not be made in terms of the same currency notes and coins deposited by the customer. Such payment may be in any kind of legal tender money. However, this relationship of debtor and a creditor between a banker and its customer differs from similar relationship arising out of ordinary commercial debts, in the following respects: (a) Demand for repayment necessary: The general rule that demand for repayment by creditor is unnecessary and applicable in case of ordinary commercial debts, dones not apply in case of banks. The customer must make and express demand for repayment to make the debt actually due for payment by the bank. This is because if the would amount to summarily closing the customers account without notice. This may damage its customer credit on account of possible dishonour of cheques already issued by him. (b) Demand should be made at proper time and place: day. In case a banker makes. (c) payment during any other time, it shall not be taken to be a payment in due course and it may be held liable to the customer for loss. More over, the demand should be made at the branch of the bank where the customer has his account unless otherwise agreed. Though branch forms part of one legal entity, yet the banker obligation to repay is confined to the place where the accounts is kept. (d) Demand must be made in the proper manner: The demand for repayment of money should be made through a cheque or any other written order as per the common usage among the bankers. A verbal or telephonic demand will not be taken as a proper demand. In case the customer has two more accounts with the same branch of the bank, the banker cannot generally combine these accounts unless it obtains prior approval of the customer or has given prior notice to the customer. Similarly the customer cannot also treat two different accounts at the same branch as one. He cannot draw a cheque on one with insufficient balance presuming that the banker will pay it since the balance in the other account is sufficient.
3.

The

demand

for

repayment should be made during normal working hours of the bank on a working

Trustee and Beneficiary:

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The banker acts as a trustee for its customers in those case where it accepts securities and other valuable for safe custody. In such cases the customer continues to be the owner of the valuable or securities deposited with the bank and they are not available for distribution among the banks creditors in the event of bank going into liquidation. The position of a banker as a trustee or debtor depends upon the practical art circumstances of each case. This has to be viewed in the light of specific instructions given by the customer regarding the purpose or use of the documents or money entrusted to the banker. If specific instruments are given at the time to deposit of money the banker is taken as a trustee for the money and not as debtor. For example, when the money is paid to a bank with special instructions to retain it till further instructions, the banker will be considered as a trustee for the funds and not as a mere debtor. Similarly when a cheque or bill is deposited with the bank for collection, the banker acts as a trustee of the cheque or bill till it is collected. But once the cheque or bill is collected and the proceeds are credited to the customers account, the bank goes into liquidation, such instrument will not be available for distribution among the creditors of the bank. 3. Principal and Agent: Banker acts as the agents of the customer in those cases where it performs agency functions such as collection of cheques, bills of exchange, purchasing and selling securities, payment of insurance premium etc., on behalf of his customer.
Recent Trends In Indian Banking. Commercial Banks extend financial assistance or the credit facilities in many ways depending upon their period of finance, purpose of finance, quantum of finance. The Indian Banking system has developed enormously after independence particularly after Nationalization of banks I. Types of Financing: 1.Take out Financing. 2. Revolving Credit Facilities. 3.Evergreening of loan. 4.Syndicated loan. 5.Bridge loan. 6.Consortium Finance. 7.Preferred Financing. 8.Non-Fund Based Business.

16 II. Types of Repayment System: 1.Bullet Payment System 2.Balloon Payment System III. Venture Capital. IV. Factoring services V. Bank net VI. Automated teller machine (A.T.M.) VII. Phone Banking VIII. Net Banking or Internet Banking IX. Deposit Insurance Scheme X. Gold Deposit Scheme XI. Multi Dimensional Development a) Number of commercial banks b) Expansion of branches in India c) Concentration in rural areas d) Deposit Mobilisation e) Changes in composition of Deposits f) Population per office g) Expansion of credit facilities h) Advance to priority sector RECENT TRENDS IN BANKING Types of Financing: Take Out Financing: infrastructure facilities. Revolving Credit Facility: Ever greening of Loan: A bank fixes up a credit limit to a borrower for certain A bank provides a second finance facility to a borrower to help period. Automatic renewal facility is available. him to pay back the original loan. Syndicated Loan: It is a loan facility provided to a single borrower by a group of banks. Syndicated loans are arranged to finance projects needing large sums of money where the credit risk is also high. requirements. Bridge loan: It is a short-term temporary loan extended by financial institutions to These loans are for financing medium to long-term It is long term finance provided for the projects like

help the borrower to meet the immediate expenditure pending disposal of requests for long-term funds or regular loans.

17 Consortium Finance: It is a large credit facility may be jointly arranged by a The word consortium refers to a combination of many combination of several banks. Preferred Financing:

banks who have agreed to extend the credit facility. In the highly competitive world of banking today, banks are reaching out to customers, particularly high net worth or wealthy customers. One area of lucrative finance for bankers is consumer finance, more particularly car finance. Guarantee Services / Non-fund Based Business: Guarantee Service refers to a legal undertaking by the bank to pay a certain sum of money to a third-party or a creditor in the event of the banks client / customer fails to fulfill his part of obligation.

CHEQUE
Meaning: on demand. Definition: Section 5 defines a bill of exchange as 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. Thus, a cheque is a specie of bill of exchange with two qualifications fulfilled: First, the sheque should always be drawn upon a banker, and Secondly, it is always payable on demand. The person who writes the cheque is the drawer, the person to whom it is expressed to be payable is the payee and the bank on which the cheque is drawn is the drawee. Requisites of a valid cheque: 1. The instrument to be in writing: The instruments to pay the maount should be in writing. The writing may be done by pen or typewriter or even by a lead pencil as it is not prohibited under law. But writing of cheques by lead pencil is to be discouraged as alterations can be easily effected on such cheques. 2. Drawn on a speicified bank: The cheque can be drawn only on the banker of the customer and on none else. Also the cheque should be drawn only on the branch of the bank at which the account of the drawer is maintained and the amount in the account should sufficient to pay the cheque. 3. Payable on demand: The cheque should not be expressed to be payable It is not necessary that the words on demand should otherwise than on demand. A Cheque, under Section 6 of the Negotiable Instruments Act, is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than

appear on the cheque. A cheque is presumed to be payable on demand unless an express provision is made in the cheque disturbing this feature.

18 4. Unconditional order: The cheque should contain an order to the bank to pay and this order should be unconditional. The words I order you to pay, need not be on the cheque; the words pay or please pay sufficiently convey the order. Further, the order should not attach any condition to the payment of the cheque. 5. Certain sum of money: The direction should be to pay a sum of money which is certain and it should be payable in monetary units. Instructions to pay about Rs. 500, is not certain. Likewise, direction to pay two kilograms of rice is not a cheque. A cheque drawn in foreign currency is valid and is payable at the exchange rate current at he time of payment. 6. Payee to be certain: The person to whom the cheque is drawn payable should be certain. He need not be an individual as is understood generally, but can be any legal person recognized under law like corporations, etc. The cheque can be drawn payable to a certain person or his order or it may be drawn payable to a certain person or the bearer of the instrument. Order cheque should contain the name of the payee. It may be omitted in the case of bearer cheques.

CROSSING:

A cheque may be either an open cheque or a crossed cheque. Crossing is an indication appearing on the face of the cheque that it should be paid only through a banker; it is usually done by drawing two parallel lines on the face of the cheque. Crossing has been evolved to prevent wrongful persons from obtaining payment on a cheque. An open cheque is payable to any person who presents it and it would be very difficult to locate the payee at a later date. Any person who comes into possession of a lost or stolen cheque may obtain payment and decamp without leaving a trace. A crossed cheque is payable only through a banker. The payee should have an account with any bank through whom the cheque is collected. Or he should endorse it to a person having a bank account and collect the cheque through his banker. In either case, the identity of the payee or the person who has obtained payment can easily be established. Crossing may be done generally or specially. whom it is crossed. General Crossing: It is defined under Section 123 of the Negotiable Instruments Act as follows: Where a cheque bears across it face an addition of the words and company or any abbreviation thereof, between tow parallel transverse lines, or two parallel transverse lines simply, either with or without the words not negotiable that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally. A generally crossed cheque is payable to any bank while a specially crossed cheque is payable only to the banker to

19 Special Crossing: It is defined in Section 124 of the Negotiable Instruments Act as follows: Where a cheque bears across its face an addition of the name of a banker, either with or without the words Not Negotiable that addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially, and to be crossed to that banker. Restrictive Crossing: Besides the above two types of statutory crossing, in recent years the practice of crossing cheques with the words account payee or account payee only has sprung up. Such a crossing is termed as restrictive crossing. Restrictive crossing is only a direction to the collecting banker that the proceeds are to be credited only to the account of payee named in the cheque. In case the collecting banker allows the proceeds to be credited to some other account, it may be held liable for wrongful conversion of funds. It does not in any way affect the paying banker, who has simply to see that the cheque has been presented it for payment by any bank in case of general crossing and by the particular bank (named in crossing) in case of special crossing. It is under no duty to ascertain that the cheque is in fact collected for the account of the person named as payee. DOUBLE CROSSING: When a cheque bears two separte special crossings, it is said to have been doubly crossed. According to Section 127 where a cheque is crossed specially to more than one banker, except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereon. Example: BANK OF INDIA TO PUNJAB NATIONAL BANK AS AGENT FOR COLLECTION

Opening of crossing:

Cancellation of crossing of a cheque is called opening of

crossing. The cancellation can be done only by the drawer of the cheque. The drawer after cancellation of crossing will put his signature and write Pay Cash on the cheque. Who can cross a cheque: 1. 2. (ii) (iii) 3. The drawer: The holder: The drawer can make general, special or restrictive crossing (i) Where a cheque is uncrossed, the holder may cross it on a cheque before issuing it. generally or specially. Where a cheque is crossed generally the holder may cross it specially. Where a cheque is crossed generally or specially the holder may add the words The banker: Where a cheque is crossed specially, the banker to whom it is

not negotiable. crossed may again cross it specially to another banker to work as its agent for collection.

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PAYING BANKER: A banker on whom a cheque is drawn should pay the cheque when it is presented for payment. Precautions before Honouring a Cheque: In order to safeguard his position, the paying banker has to observe the following precautions before honouring a cheque. I.Presentation of the cheque:First of all, a paying banker should note whether the presentation of the cheque is correct. It can be found out by paying attention to the following factors: a) Type of the cheque:Before honouring a cheque, he must find out the type to which it belongs. Cheques may generally be of two types open or crossed. If it is an open one, the payment may be made at the counter. If it is crossed, the payment must be made only to a fellow banker. If it is specially crossed, the payment must be specifically made to that banker, in whose favour it has been crossed. If there are A/c Payee and Not Negotiable crossings, the paying banker need not worry, as they are the directions only to the collecting banker. b) Branch:Then the paying banker should see whether the cheque is drawn on the branch where the account is kept. If it is drawn on another branch, without any prior arrangement, the banker can safely return the cheque.
c) Account:-

21 Even in the same branch, a customer might have opened two or more accounts. For each account, a separate cheque book would have been issued. Hence, the paying banker should see that the cheque of one account is not used for withdrawing money from another account. d) Banking hours:The paying banker should also note whether the cheque is presented during the banking hours on a business day. Payment outside the banking hours does not amount to payment in due courses. e) Mutilation:If the cheque is torn into pieces or cancelled or mutilated, then, the paying banker should not honour it. He should return the cheque for the drawers confirmation. II. Form of the Cheque:Before honoring a cheque, a banker should see the form of the cheque and find out whether it is regular or not. a) Printed form:The cheque must be in the proper form. It must satisfy all the requirements of law. The customer should draw cheques only on the printed leaves supplied by the bakers, failing which, the banker may refuse to honour it. b) Unconditional order:The cheque should not contain any condition. If it is a conditional one, the paying bankers position will become critical and he may not honour it. c) Date:Before honouring a cheque, the bank must see whether there is a date on the instrument. If it is undated, it cannot be regarded as a valid instrument. If a cheque is ante dated, it may be paid if it has not become stale by that time. A cheque which is presented after six months, from the date of its issue is a state one. If a cheque is post-dated, he should honour it only on its due date. d) Amount:The next important precaution is that the banker should see whether the amount stated in the cheque, both in words and figures, agree with each other. Supposing, there is a difference in the amount stated in words and figures, then, the banker can take any one of the following courses available to him:-

22 i) ii) iii) he can dishonour the cheque with a memorandum words and figures differ, or he can honour the amount stated in words, or he can honour the smaller amount.

e) Material alteration:A paying banker should be very cautions in finding out the alterations that may appear on a cheque. If there is any material alteration, the banker should return it with a memorandum Alteration requires drawers confirmation. III. Sufficient Balance:There must be sufficient balance to meet the cheque. If the funds available are not sufficient to honour a cheque, the paying banker is justified in returning it. So, before honoring a cheque, he muse check up the present state of his customers account. Any change in an instrument which causes to speak a different language in legal effect from that which it originally spoke or which changed the legal identity or character of the instrument either in its terms or in the relation of parties thereto is a material alteration. Examples of material alterations are as follows: Alteration of the date of the cheque. By altering the date a fraudulent holder can secure payment of a post-dated cheque or a stale cheque, which a banker is not authorized to make. Alteration of the place of payment. Alteration of amount of the cheque. Alteration in the names of the parties or the relationship between them or affecting their legal status. The substitution of the word bearer in place of order in the cheque. An alteration of the crossing on a cheque. IV. Signature of the Drawer:The next important duty of a paying banker is to compare the signature of his customer found on the cheque with that of his specimen signature. If he fails to do so and if he pays a cheque, which contains a forged signature of the drawer, then, the payment will not amount to payment in due course. Hence, he cannot claim protection. Endorsement:Before honouring a cheque, the banker must verify the regularity of endorsement, if any, that appears on the instrument. It is more so in the case of an order cheque, which requires an endorsement before its delivery. For instance, if there is per pro endorsement, the banker must

23 find out the existence of authority. Failure to do so constitutes negligence on the part of the paying banker. Legal Bar:The existence of legal bar like Garnishee Order limits the duty of the banker to pay cheque.

Minor Precautions:A paying banker should look into the following minor details also, before honouring a cheque;

a) He must see whether there is any order of the customer not to pay a cheque. b) He must see whether there is any evidence of misapporiation of money. If so, the cheque should be returned eg., breach of trust. c) He must see whether he has got any information about the death or insolvency or insanity of his customer. Failure to note those instructions will land him in trouble.

Circumstances Under Which A Cheque Can Be Dishonoured: a) Countermanding: Countermanding is the instruction given by the customer of a bank requesting the bank not to honour a particular cheque issued by him. received, the banker must refuse to pay the cheque. Countermanding, in order to be really effective, must be in writing. name of the payee and the amount. If a customer informs by telephone or telegram regarding the stopping payment of a cheque, the banker should diplomatically delay the payment, till written instructions are received. The drawer alone has the right to countermand the payment of a cheque. In case a cheque is lost by a holder, he should stop payment of that cheque only through its drawer. It is so because, a banker is always answerable only to the drawer, in the case of dishonour of a cheque. In the case of a draft, its purchaser has no right to countermand its payment. Any countermanding instruction given to one branch is not effective, as a notice given to another branch. The written mandate should contain all the details of the cheque, viz, date number of the cheque, When such an order is

If a banker, by mistake, honours a countermanded cheque:

24 a) the payment does not amount to payment in due courses. b) He will have to answer for having disobeyed his customers mandate. c) He has no right to debit his customers account with the amount of the countermanded cheque. d) He may have to dishonour the customers subsequent cheques for want of funds in the account. Therefore, countermanding instructions, once received, must be kept as a constant record. A stopped payment register may be maintained for ready reference.

b) Upon the receipt of notice of death of a customer:Death puts an automatic end to the contractual relationship between a banker and his customer. When a banker receives written information form an authoritative source, (preferably from the nearest relatives) regarding the death of a particular customer, he should not honour any cheque drawn by that deceased customer.

c) Upon the receipt of notice of insolvency:Once a banker has knowledge of the insolvency of a customer, he must refuse to pay cheques drawn by him. Usually, the banker will be served with a notice of the presentation of petition upon which he can take necessary action.

d) Upon the receipt of notice of insanity:Where a banker receives notice of a customers insanity, he is justified in refusing payment of the cheque drawn by him. The banker should make a careful note, when the lunacy order is received.

e) Upon the receipt of notice of Garnishee Order:Garnishee Order refers to the order issued by a court attaching the funds of the judgement debtor (ie, the customer) in the hands of a third party (ie the banker).

f) Upon the receipt of notice of assignment:The bank balance of a customer constitutes an asset and it can be assigned to any person by giving a letter of assignment to the banker. Once an assignment has been made, the assignor has no legal rights over the bank balance and therefore, if any cheque is drawn by him, the banker should refuse to honour it.

25

g) When a breach of trust is intended:In the case of a trust account, mere knowledge of the customers intention to use the trust funds for his personal use, is a sufficient reason to dishonour his cheque.

h) Defective title:If the person who brings a cheque for payment has no title is defective, the banker should refuse to honour the cheque presented by him.

i) Other grounds:A banker is justified in dishonouring a cheque under the following circumstances also: If a cheque is : 1) a conditional one, 2) drawn on an ordinary piece of paper 3) a stale one 4) a post dated one 5) mutilated 6) drawn on another branch where the account is not kept. 7) Presented during non-banking hours. 8) If the words and figures differ. 9) If there is no sufficient funds, 10)If the signature of the customer is forged, 11)If the endorsement is irregular, and 12)If a crossed cheque is presented at the counter.

STATUTORY PROTECTION TO A PAYING BANKER Supposing, a paying banker pays a cheque which bears a forged signature of the payee or endorsee, he is liable to the true owner of the cheque. But, it is quite unjustifiable to make the banker responsible for such errors. It is so because, he is not expected to know the signature of the payee or endorsee.

Statutory Protection Under Indian Law:To claim protection under Sec.85, the banker should have fulfilled the following conditions:1) he should have paid an order cheque.

26 2) Such a cheque should have been endorsed by the payee or his order 3) It should have been paid in due courses.

Order Cheque:The statutory protection has been extended to an order cheque. Example of an order cheque is pay to X or order. When such a cheque is paid by the banker, he is entitled to get protection. Endorsement is a must for an order cheque and so protection is mainly extended to an order cheque.

Endorsement by payee or his order:Protection cannot be claimed if such a cheque is not endorsed by a payee or any third party.

PAYMENT IN DUE COURSE Payment in due course means payment in accordance with the apparent tenor of the instrument, in good faith and without negligence, to any person in possession thereof under circumstances which do not afford a reasonable ground for believing, that , he is not entitled to receive payment of the amount therein mentioned.

This concept of payment in due course has three essential features: a) Apparent tenor of the instrument:To avoid of the statutory protection, the payment should have been made according to the apparent tenor of the instrument. The apparent tenor refers to the intention of the parties as it is evident from the face of the instrument. b) Payment in good faith and without negligence:Good faith forms the basis for all banking transactions, and so, it is taken for granted. As regards negligence, the banker may sometimes be careless in his duties which constitutes as act of negligence. If negligence is proved, the banker will lose the statutory protection given under sec.85 Example: a) payment of a crossed cheque over the counter b) payment of a post-dated cheque before maturity c) failure of verify the regularity of an endorsement.

c) Payment to a person who is entitled to receive payment:-

27 The banker should have made the payment to the holder of the instrument. In other words, the banker must see that the person, who presents the cheque, is in possession of the instrument and he is entitled to receive the amount of the cheque. Sec 8 of the N.I. Act defines a holder as the holder of a promissory note, bill of exchange or cheque, means any person entitled, in his own name, to the possession thereof and to receive or recover amount due thereon from the parties thereto.

PROTECTION OF A BEARER CHEQUE Protection to a crossed cheque:Originally, this protection was extended only to open cheques. Now, this has been

extended to crossed cheques also. Sec. 128 of the N.I. Act gives protection in respect of crossed cheque to the drawer as well, provided, it comes into the possession of the payee. Sec 128 of the Act runs as follows where a banker on whom a crossed cheque, is drawn has paid the same in due course, the banker paying the cheque and (in case such cheque has come to the hands of the payee) the drawer thereof, shall respectively be entitled to the same rights and be placed in the same position in all respects, as they would respectively be entitled to and placed in, if the amount of the cheque had been paid to and received by the true owner thereof. Protection to a Materially Altered Cheque:Protection to a Draft: Protection has been extended to drafts drawn by one office of a bank of the same bank. This was made possible by the amendment of Sec 84 in 1930. When a Banker acts both as paying and Collecting banker:When a banker acts both as a collecting banker and a paying banker, it would be as a collecting banker that a decision would be taken. In worshipful carpenters company vs. British Mutual Banking company Ltd., it was held that the statutory protection is available only when a bank acts for a paying banker and not as both paying and collecting banker. Holder in Due Course:Sec 9 of the N.I. Acts lays down that holder 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 endorsee thereof. Thus a holder in due course is the person i) who receives an instrument innocently 9ie., in good faith and without negligence), and ii0 who has paid value for the same, iii) who has

28 received the instrument before its maturity iv) who is in possession of the instrument as a bearer or payee or endorsee.

RIGHTS AND PRIVILEGES OF A HOLDER IN DUE COURSES:The following are some of the important rights and privileges of a holder in due course:1. He obtains a better title to the instrument than that of a true owner. 2. The defective title of the previous endorsers (if any) will not adversely affect his rights. 3. He can pass on a better title to others, since, once the instrument passes through his hands, it is purged of all defects. 4. Until the instrument is finally discharged, every part to that instrument is liable to him. 5. Even the drawer of a negotiable instrument cannot claim invalidity of the instrument against him. 6. His claim cannot be denied on the ground that the payee has no capacity to endorsee. 7. The principle of estoppels is applicable against the endorser to deny the capacity of previous parties. Recovery of Money paid by Mistake: Since, in a bank thousands of transactions take place every day, it is quite natural that mistakes do occur. By mistake, a banker may pay money to a wrong person. Can a banker recover money paid by mistake? The law on this subject is not yet clear. As a general rule, a person who has committed a mistake, has every right to rectify the same. But, in rectifying the mistake, he should not bring any disadvantages to a party. In the same way, a banker can recover the money paid by mistake without adversely affecting the other party. Money can be recovered:Under the following circumstances, money wrongly paid can be recovered. 1. Money received in badfaith is recoverable:When a person receives money by mistake in bad faith, knowing that he is not entitled to receive that money, then, the banker is entitled to recover the same. 2. Money paid under a mistake of fact is recoverable:If the mistake is a mistake, of fact, then, the money wrongly paid is recoverable. 3. Mistake between the party paying and the party receiving:If the mistake is between the party paying and the party receiving, then, the money is recoverable.

Money cannot be Recovered:1. Money paid under a mistake of law is not recoverable:-

29 Ignorance of law is no excuse. recover it. 2. Money paid on a negotiable instrument to an innocent holder is not recoverable:When money is paid by mistake on a negotiable instrument to a holder in due course, it cannot be reclaimed after a lapse of time. 3. when a person, who receives money in good faith by mistake, alters his position relying upon it, need not return the same. COLLECTING BANKER A collecting banker is one who undertakes to collect the amount of a cheque for his customer from the paying banker. Banker as a holder for value:In collecting a cheque, the banker can act in two capacities namely 1) as a holder for value, and 2) 2) as an agent for collection. The banker would be regarded as a holder for value: 1. If he allows his customers to withdraw money before cheques paid in for collection are actually collected and credited. 2. If any open cheque is accepted and the value is paid before collection, and /or 3. If there is a reduction in the overdraft account of the customer before the cheque is collected and credited in the respective account. In all these cases, the banker acquires a personal interest. If the banker acts as holder for value, his rights will be the same as those of a holder in due courses. Thus, according to Sir. John Paget apart from the question of forged endorsement, if the customer has either no title to the cheque or his title is defective, the banker is the holder in due course with a good independent title against all the prior parties on the cheque. The title of the holder in due course is superior to that of the true owner. When a banker pays money mistaking law, he cannot

A banker as an Agent:In practice, no banker credits a customers account even before a cheque is collected. He collects a cheque on behalf of a customer. So, he can not acquire any of the rights of a holder for value. He ahs to act only as an agent of the customer. This is so because, he can not have a title better than that of the customer himself. So, a collecting banker can not choose the capacity in which he wants to act as his discretion. He will be regarded only as an agent. So, during collection, if a banker, in his capacity as an agent, collects a cheque which belongs to some other person, to the account of his customer, he will beheld liable for conversion of money received.

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CONVERSION: Conversion is a wrongful interference or meddling with the goods of another. Conversion may be committed innocently. Conversion is a wrong that renders the person committing it personally liable. This liability exists even when a person acts merely as an agent. A bankers liability:Hence, if a collecting banker, however innocent he may be, has converted the goods of another, he will be held personally liable. This liability exists because the banker is acting as an agent and not as a holder of value. Statutory Protection:According to sec. 131 of the N.I. Act, A banker who has in good faith and without negligence, received payment for a customer of a cheque, crossed generally or specially to himself, shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque, by reason only of having received such payment. The above statutory protection is available to the collecting banker only if he fulfills the following conditions:1. The cheque he collect must be crossed cheque. 2. He must collect such crossed cheques only for his customer as an agent and not as a holder for value. 3. He must collect such crossed cheque in good faith and without negligence. 1. Crossed cheques only:Statutory protection can be claimed by a collecting banker only for crossed cheques. It is so because, in the case of an open cheque, it is to absolutely necessary for a person to seek the service of a bank. So, a banker when collecting an open cheque, in which his customer has no title, becomes liable for conversion. 2. Collections on behalf of customers as an agent:The above protection can be claimed by a banker only for those cheques collected by him as agent of his customers. If he acts as a holder for value, he will sequire a personal interest in them, and so, he cannot claim protection under sec.131. so also, if he collects a cheque for a person other than a customer, he will not be protected. will be liable for conversion. 3. In good faith and without negligence:In order to get the protection under this Section, a collecting banker must act in good faith and without negligence. This applies to the whole transaction form the receipt of the cheque from the customer to the receipt of the proceeds from the paying banker. The question of That is, if the stranger(other than the customer) for whom he collects a cheque has no title then the banker

31 good faith is not very material because, joint stock banks do not act otherwise than in good faith. DUTIES OF A COLLECTING BANKER 1. Exercise reasonable care and diligence in his collection work:When a banker collects a cheque for his customer, he acts only as an agent of the customer. As an agent he should exercise reasonable care, diligence and skill in collection work. He should observe atmost care when presenting a cheque or a bill for payment. 2. Present the cheque for collection without any delays:The banker must present the cheque for payment without any delay. If there is delay in presentment, the customer may suffer losses due to the insolvency of the drawer or insufficiency of funds in the account of the drawer or insolvency of the banker himself. In all such cases, the banker should bear the loss. 3. Notice to customer in the case of dishonour of a cheque:If the cheque, he collects, has been dishonoured, he should inform his customer without any delay. The N.I. Act has prescribed a reasonable time for giving the notice is dishonour. If he fails to do so, and consequently, any loss arises to the customer, the banker has to bear the loss. 4. Present the bill for acceptance at an early date:Sec 61 of the N.I. Act a bill of exchange must be accepted. acceptance. If a banker undertakes to collect bills, it is his duty to present them for acceptance at any early date. Sooner a bill is presented and got accepted, earlier is its maturity. However presentment for acceptance is excused in the following cases: a) where a bill is payable on demand. b) where the drawee is either a fictitious person, dead, insane or bankrupt having no capacity to enter into a contract, c) where, inspite of a reasonable diligence on the part of the banker, the presentment cannot be effected. d) where, although the presentment is not quite regular, the drawee has refused to accept it on some other ground. 5. Present the bill for payment:The banker should present the bills for payment in proper time and at proper place, if he fails to do so and if any loss occurs to the customer, then, the banker will be liable. According to sec. 66 of the N.I. Act a bill must be presented for payment on maturity. As per or a person Acceptance gives an additional currency to the bill because, the drawee becomes liable thereon form the date of

32 Sec 21 sight bills are payable on demand. Sec 22 lays down that the maturity of the bill is the date on which it is due for payment, to which, 3 days of grace are added. 6. Protest and note a foreign bill for non-acceptance:In case of dishonour of a bill by non-acceptance or non-payment, it is the duty of the collecting banker to inform the customer immediately. Generally he returns the bill to the customer. In the absence of specific instructions, collecting bankers do not get the inland bills noted and protested for dishonour. If the bill in question happens to be a foreign bill, the banker should have it protested and noted by a notary public and then forwarded it to the customer. RIGHTS OF A BANKER The following important rights are available to banker's in general: (1) Right to exercise lien. (2) Right to charge compound interest. (3) Right to charge incidental charges. (4) Right to set-off. (5) Right to close an account. (6) Right to appropriate payments. Of these rights, the first three have been already discussed under the chapter 'Banker and Customer,' Hence, the remaining rights have been discussed at length in this chapter. RIGHT TO SET-OFF The right to set -off is nothing but a right to combine two or more accounts of a customer. A banker can exercise his right to set-off, subject to the fulfillment of the following conditions: (a) The two or more accounts must be in the name of the same customer. (b) They must be in the same capacity. (c) They must be in the same bank though at different branches. (d) One or more accounts must show a debit balance and the other or others must show a credit balance. (e) The debt must be mutual. (f) The amount and the debt should be a certain one. For instance, a contingent is not a certain debt. Notice of Set-off Essential: Exercising this right without prior notice would involve the dishonor of this customer's cheques and bring damage to his credit for which the banker is liable. So, it is essential that the banker should get the consent of his customer before exercising his right to set-off. Moreover mere opening of two accounts implies that the customer wants to operate them separately. Hence it is prudent to combine these accounts after informing the customer and getting his consent. Notice of Set-off Not Essential:

33 However, a banker can exercise his right to set-off without giving any prior notice3 under the following circumstances: (a) If the credit balance is claimed in any way other than by the presentment of a cheque. (b) On the death or insolvency or insanity of a customer. (c) On the receipt of a garnishee order. (d) On the strength of a letter of set off given by the customer while opening two or more accounts. (e) On receiving a notice of the creation of a second mortgage on any security over which the banker has a prior charge. (f) Where the accounts are 'stopped'. For 'running accounts, after giving due notice to the customer the right of set-off can be exercised. Set-off Not Available: The bankers right of set off is subjected to certain limitations. He can not exercise the right to set -off the credit balance of a customer against: (a) A debt that is not due. (b) A contingent liability that is not certain. (c) A debt due from a partner to a firm or vice versa. ( First National Bank of Denton Vs, Vestal and naugle).In insolvency, the credit balance of a partner is first used in payment of his personnel debt. (d) A debt due by him in the capacity of a trustee or agent or officer of any institution. (e) If the liability of the party is not arise unless the customer fails to pay. (f) The account of a deceased customer cannot be combined with that of the excerpts account (g) Where there is an express provision, that, a banker should not exercise the right of set-off, then he cannot do so. Safest course: The safety method, which most of the bankers follow in practice is that, they obtain a letter of set off duly signed by the customer at the time of opening two or more accounts. This prevents the occurrence of any unpleasant happenings in future. RIGHT TO CLOSE AN ACCOUNT: One should not confuse the term 'closing of an account' with that of the 'stopping operation of an account'. The contractual relationship between a banker and a customer is terminated by closing an account . So it is a permanent affair and once for all, the account will be closed. There is no opportunity for the customer to operate the account once again. On the other hand. 'stopping operation of an account' refers to the suspension of the operation of an account for the time being at the advent of certain events. It is purely a temporary suspension of the relationship between a banker and a customer and the customer can operate the account after such events come to a close.

34 Circumstances for Exercising Either the Right to close an Account or Stop the operation of an Account: (a) Customer's intention to close the account: A customer has a right to close his account at any time. Generally, a customer may close his account for any one of the following reasons: i) ii) iii) if he does not agree to the terms of a banker such as the rate of interest, bank charges etc., if he cannot enjoy such facilities as are offered by some other banking. when his confidence in the bank is shaken. Just as a customer has a right to discontinue his dealings with the banker, the banker also has a right to do so. The banker may close the account of a customer for anyone of the following reasons: i) ii) when the account is not a remunerative one. When the customer is not a desirable customer, who used to draw cheques in the absence of sufficient balance or who is convicted of forging cheques. c) Customers death:As soon as the banker receives a notice of the death of a customer, he should immediately stop the operation of the account. It is so because, death puts an end to a contract. d) Customers insanity:The notice of insanity of a customer results in the immediate stopping of the operation of his account. The banker should apply for an official copy of the lunacy order. An insane customer may be permitted to operate his account, if he is certified to be sane, by a competent authority, namely a doctor. However, if the sanity is a permanent one, the banker should close his account and give the balance to the duly appointed representatives of the insane customer, as per the Lunacy order. e) Customers insolvency:Even though Sec.55 of the Provincial Insolvency Act and Sec 57 of the Presidency Towns Insolvency Act provide for an exception of the application of the Doctrine of Relation Back to the banker, it is subjected to certain conditions. If a banker has knowledge of the presentation of the petition or the commitment of an act of insolvency by a customer, he must immediately stop the operation of his account. f) Upon the receipt of Garnishee Order:As soon as the banker receives a Garnishee Order Nisi, he should stop the operation of the account concerned. Upon the receipt of a Garnishee order absolute, he must study the terms of the order. If the order attaches the whole amount, the banker should close the account in order to comply with the order of the court. If it attaches only a part of the amount, the banker must allow the customer to operate his account, to the extent of the amount that is not garnished. If the order does not specify the amount, then, it attaches the whole amount.

b) Bankers intention to close the account:-

35 g) Upon the receipt of notice of assignment:As per Sec 130 of the Transfer of Property Act, a person has a right to transfer his interest in the asset. Since, the bank balance constitutes an asset, it can be transferred in favor of third parties. Once a notice of assignment is given, it cannot be revoked.

Right to Appropriate Payments:

Yet another right of a banker is to appropriate the money deposited by a customer to any one of the loan accounts due by him. The question of appropriation arises only when a customer has more than one account one or more showing a credit balance and others showing a debit balance. In fact, as general rule, the customer is given the first option to decide the account to which the amount should be credited. He should exercise his option at the time of depositing money and he can even ask his banker to credit this amount to an account, which is already showing a credit balance, instead of an account, which is showing a debit balance. If the customer fails to indicate his choice, then, the banker has every legal right to credit the amount in any one of the accounts of that customer. He can even cancel a time -barred debt or reduce an unsecured loan by exercising this right and inform the same to the customer. Thus, the appropriation is deemed to be completed as soon as the information regarding such appropriation is given to the customer. In case, both of them do not exercise their option, then, the rule given in the Claytons case will apply for the appropriation of payment. Rule in Claytons Case: The rule in Claytons case deals with appropriation of payments. This rule was laid down in the important case Devaynes Vs. Noble. The principle laid down in Claytons case is of great practical significance to bankers, particularly in the case of running accounts like current account and cash credit account. The rule is : 1. Where the account goes into debit, the first item on the debit side is cancelled by the first item on the credit side i.e., appropriation takes place in the order of time. 2. Where account goes into credit, the first item on the credit side is extinguished by the first item on the debit side and so on. In other words, appropriation takes place in a chronological order. Significance of the rule: A banker should always bear in mind the rule laid down in Claytons case. For instance, at the time of retirement of partner X, the partnership account of X, Y and Z shows a debit balance of Rs.5000/-, Supposing, the banker does not close the old amount, any subsequent payment

36 made by the other partners will be entered only in this account. For instance, if the remaining partners make a deposit of Rs.5000/-, it will cancel the debit balance of Rs.5000/- due to the operation of the rule in Claytons case and thereby, the retiring partners liability is automatically discharged. The banker stands to bear the loss of extend of the retiring partners share since the deposit of Rs.5000/- belongs to the remaining partners Y and Z only.