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Banking is defined as 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[Sec. 5 (b) of BR Act] The essential characteristics of a banking business are: a) collecting cheques for customers; b) paying cheques drawn by customers; c) keeping different accounts for customers.
A person becomes a customer and a contract is created when an account is opened Contractual relationship
Definition of Customer: A customer is not defined by law, but is defined by practice evolved by bankers and decided cases. To constitute a customer, following essential requisite may be fulfilled: (i) A bank account- Savings/Current/Fixed Deposit must be opened in his name by making necessary deposit of money (ii) Dealing between banker and customer must be of nature of banking business Above functions of Bank are called essential functions
Bankers also perform number of agency functions and provide various Public utility services, apart from essential services e.g. Remitting money through bank drafts/Electronic Transfer Encash cheque of payee to him issued by one of the customer Deposit valuables in the Safe Deposit vault Deposit cash to the account of LIC for premia Accept applications for New issue of joint stock companies etc. In such type of above dealings, if person/ organisation does not have any banking account, he does not constitute to be customer of bank
Though relationship between banker and customer is that of Debtor and Creditor, yet it differs from ordinary commercial contracts in following respects: (i) Creditor must demand payment unlike other commercial contracts where debtor is required to extend payment as per contract on its own. This is true both for Demand or Fixed Deposits (ii)Proper Place and Time of Demand : Branch/ATM within banking hours etc. All branches of bank constitute one entity (iii) Demand in proper prescribed manner: As per statutory definition withdrawals must be made by cheque/Withdrawal/Draft/ATM Card /Any other mode defined by usage.
Banker as Trustee Trustee holds money or assets and performs certain functions for the benefit of some other person called beneficiary. Customer Deposits Securities/Valuables/Wills etc. with Bank for Safe custody Accounts opened UNG for benefit of minor/ Any other Trust Account for benefit of third person Legal position of banker as a Trustee differs from that of Debtor position, as in case Trust accounts, in case of insolvency of customer, banker holds account and distributes proceeds to beneficiaries and not general creditors of customer.
e) Under Companies Act, 1956 : When the Central Govt. appoints an Inspector to investigate the affairs of a Joint Stock Company, it shall be duty of all officers and other employees and agents (including bankers) of the Company to (a) produce all books and papers of, or relating to, the Company, which are there in their custody or power, and (b) otherwise to give to the inspector all assistance in connection with the investigation which they are reasonably able to give. Thus the banker is under an obligation to disclose all information regarding the Company but not of any other customer, under the act.
f) Under RBI Act, 1934 : RBI under the act collects credit information from the Banking Companies and prepares consolidated Credit Report but the information is kept confidential. After the enactment of RBI (Amendment Act, 1974), the banks are granted statutory protection to exchange freely credit information mutually among themselves. g) Under Banking Regulation Act 1949: Under Section 26, every banking Company is required to submit annually a return to RBI of all such accounts which have not been operated upon
By the customer for the last 10 years. MOF has also assess to the information. h) Under Gift Tax Act: Powers to obtain relevant information from Banks is conferred on Gift Tax officials. i) Disclosure to the Police: Under Sec 94(3) of Criminal Procedure Code, Bank is liable to produce books for inspection to authorised police officer for investigation, under Bankers Books evidence act. j) Under Foreign Exchange Management Act (FEMA): Banking Companies dealing in Foreign Exchange
Business are designated as Authorised Dealers in Foreign Exchange. The Act empowers the Directorate of Enforcement and RBI to inspect the books and accounts relating to all foreign exchange transactions. 2. Duty to the Public to Disclose Disclosure can be made if public interest warrants so. The circumstances can be: (a) Sufficient evidence that customer has commissioned some crime (b) Sufficient evidence that the customer is involved in activities prejudicial to the interests of the Country
LIABILITY OF BANKER IN CASE OF WRONGFUL DISHONOUR OF CHEQUE SEC. 31 of NI Act: Banker is liable to compensate the drawer for any loss or damage caused by default on his part for dishonouring any cheque without any valid reason either intentionally or by mistake. Loss or damage will include (i) Any monetary loss suffered by the customer (ii) Loss of credit or reputation in the market. As per decided cases, it is observed that damages awarded for loss of reputation in case of traders/companies/other business is higher than that in case of individuals. However, the same
may differ from case to case. Mistake may occur in balance of account and credit balance of customer in the account may get reduced (a) If some credit of particular customer gets posted in the account of some other customer (b) Debit/cheque of some other customer gets posted in his account. Shakuntala Devi vs PNB BM of bank caused fraudulent transfer of Rs.2 lacs from the account of a customer, resulting in dishonour of a cheque drawn by the customer because of insufficiency of balance. Bank was held liable for authorised act of employee.
Similarly, If a post dated cheque is honoured by bank, thereby reducing balance in customers a/c, resulting in dishonour of current cheque, bank is held liable.
The a/cs must be in the same name and in the same right. In case of a joint account, a debt due from one of the joint a/c holders in his individual capacity can not be set-off against an amount due to him by the bank in the joint account except, if the joint account is payable to former or survivor/Latter or survivor and debt is due from the former/Latter. In case of a sole properitor the account in his personal name and that of in the name of the firm are deemed to be in the same right and hence right of set-off can be exercised. In case of a partnership firm the debt balance can not be set off against the individual partners a/cs
except partners have undertaken to be jointly and severally liable for the firms debt due to the banker. An account in the name of a person in his capacity as a guardian for a minor is not to be treated in the same right as his own account with the banker. The funds held in the trust account are deemed to be in different right as that of trustees. The right can be exercised in respect of debts due and not in respect of future debts or contingent debt. The amount of debts must be certain. All branches of the bank constitute one entity for exercising right of set-off.
PROBLEMS: (1) ABC Udyog is a partnership concern having 3 partners A, B and C. It has availed of a Term Loan for P & M amounting to Rs.2 lacs and Working Capital in the form of Cash-Credit with outstanding balance of Rs. 3 lacs from Elite Bank Ltd. The firm has not been doing well. All the efforts by the bank to revive have failed. Partners are in the process of winding up the firm. Firm has also a deposit with the Bank for Rs.50,000/-. Partners A, B, and C have also Fixed deposit A/c with the Bank in another Branch for Rs.50,000/-, Rs.80,000/- and Rs.40,000/- resp. Partner A also has a joint A/c Fixed Deposit with his wife M for
Rs.30,000/- with the Bank. Can Elite Bank exercise right of set-off for the outstandings of Partnership firm ABC Udyog. How much amount Elite Bank Ltd. will be able to recover if it is entitled to do so. Will it make any difference if Elite Bank Ltd. has also obtained Joint and Several liability letter from the partners. (2) Hemant Udyog is a properitorship concern and has availed of working capital facility from KCIC Bank Ltd. with outstanding balance of R.1.50 lac. The firm has not been doing well. All the efforts by the bank to revive have failed. Bank has called
Up the loan but even after repeated demands Mr. Hemant has not deposited any amount in the loan account. Mr. Hemant has also following deposit accounts with the Bank: (i) in the name of Mr. Hemant for Rs.20,000/- (ii) Joint A/c with his wife Mr.Hemant & Mrs.Shiela Hemant (E or S) for R.30,000/- (iii) Joint A/c Mr. Hemant & Mrs. Shiela Hemant (F or S) for Rs.20,000/- (iv) Master Dhiraj under Natural Guardianship (UNG) of Mr.Hemant. Can the Bank exercise right of set-off for the outstandings of Hemant Udyog. If entitled, how much amount Bank will be able to recover by exercising the right of set-off.
(3) Mr. Puneet has an overdraft A/c with Elite Bank Ltd. with outstanding balance of Rs.80,000/. He has defaulted repayment even after repeated demands from the Bank. Mr. Puneet has also a Fixed Deposit A/c with the Bank for Rs.40,000/jointly with his wife Sushma (E or S). Can the Bank exercise right of set-off. Will it make any difference if operation mandate for the Fixed Deposit A/c with his wife is (F or S). (4) MR. Sushil and Mrs.Rita are Directors in Himanshu Udyog Private Ltd. which has defaulted loan account with outstanding balance of Rs.3 lac. Mr. Sushil and Mrs. Rita both have deposit a/cs with the Bank for Rs. 1 lac and Rs.2 lac resp. Can
The Bank exercise right of set-off for the outstanding balance of Himanshu Udyog Ltd. If entitled how much amount Bank will be able to recover. Will it make any difference if Mr. Sushil and Mrs. Rita have furnished personal guarantees for sanctioning loan to Himanshu Udyog Ltd.
6. The banker can not exercise his right of lien over the securities lodged with him for securing a loan, before such loan is actually granted to him. 7. In case of money deposited in the account, banker exercises right of set-off and not banker lien.