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Banking Theory Law

& Practice
Dr. A. Balu, Senior Lecturer
KCC Kodaikanal 624 104.

Unit 1
Introduction
Banker Customer Relationship
Types of Deposits
Types of Customers

Bank Meaning:
French word Bancus or Banque A
bench on which early bankers transacted
their banking business

German word Back (termed as Banco in

Italy) A Joint Stock Fund.

Banker Definition:
The banker at present has three
ancestors viz., merchants, goldsmiths
and money lenders
- Geoffery Crowther

Banking Definition:
Section 5 (b) of Banking Regulation Act 1949

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

Features of the Definition:

Performance of essential functions
The phrase deposit of money from the public
Time and mode of withdrawal
Resource mobilisation

Customer Definition:
To constitute a customer there
must be some recognizable
course or habit of dealing in
the nature of regular banking
business
- Sir John Paget
It is known as Duration theory

Features of Customer:
- Have an account in a bank
- Dealing with a bank
- Dealing must be in the nature of
banking business
- Dealing may be of short or long
duration

Relationship between a banker

and customer

Relationship
General
Special
Relationship Relationship

General Relationship

General
Relationship

Primary

Secondary

Primary Relationship
Debtors & creditors relationship:
- Demand for payment
- Demand at proper time
- Demand in proper manner

Secondary Relationship
1. Trustee & Beneficiary relationship (at the time
of keeping valuables):
-

Bankers does not get ownership

It does not compensate the creditors at

the time of banks liquidation

Deposits carry any standing instruction

(trustee & beneficiary) and vice versa

cheque deposits for collection (trustee &

beneficiary) and vice versa.

2. Agent & Principal relationship:

- Collection of bills of exchange on customer
behalf.
- Purchase or sale of securities on customers
behalf.
- Payments of customers dues like insurance
premium, telephone & electricity bills etc. on
customers behalf.

Special Relationship

Special
Relationship

Obligation

Rights

Obligation of the banker

1. Obligation to honour the Cheques:
- Sufficiency of funds
- Applicability of funds
- Proper requirements for payment
- No garnishee or attachment order

2. Obligation to maintain secrecy of

accounts:
a. Legal necessity it will disclose if it is
required by;
-

Income tax act

Companies act
RBI act
Banking regulation act
Gift tax act
Order to court
Foreign regulation act

b. Banking Practice:
1. Disclosure with customers consent
- Express consent (customer can instruct)
- Implied consent (guarantor)
2. Disclosure for bankers own interest
- To bankers lawyer (recovery of dues)
3. Disclosure of request by other banks
- Can furnish data except the actual figures
4. Disclosure for public interest
- When it helps to find a criminal
- Person involves in Illegal activities

Consequences of wrong disclosure:

Liability to the customer:
Banker should compensate the loss due
to the wrong disclosure

Liability to the third party:

Banker should compensate the loss for
the wrong disclosure

Rights of a banker
1. Right of lien:
- Lien is a right of the person who can retain
the goods of another in his position until a
debt due to him is paid.
- Particular lien on particular property.
- General lien
retained.

Any

property

can

be

Conditions to be satisfied in lien:

- Banker
must
property/security.

possess

the

- Property/security must be in the name

of the customer alone.
- The possession obtained by banker
legally.

Exception to the right of lien:

- Valuable accepted for safe custody.
- Bill of exchange/other documents deposited for other
purposes.
- Money deposited for special purposes like purchase of
securities
- Documents/valuables left with the banker by mistake
- Trust a/c operated by the customer against his
personal a/c.
- Securities lodged with a banker for getting a loan
before sanctioning such loan

2. Right of Set Off:

- Banker can exercise the right
by setting off a debit balance in
one a/c with the credit balance
in another a/c maintained by
the same customer.

Right of set off subject to the following

conditions:
- No agreement contrary to this right.
- Formal notice to the customer.
- Capacity of the customer must be same in
all the a/cs.
- Different branches of bank will constitute
one entity.
- Banker has the option (customer cant
compel the banker).
- Banker can do this even after the receipt
of garnishee order.

3. Right of Appropriation:
- Appropriation of amount will arise
when a customer;
- Owes several debts to a banker and

- His payment is not

discharge all his debts.

sufficient

to

4. Right of charge interest, incidental

charges etc:
- Banker has the right to charge interest
on due from customers
- It has the right to charge incidental
charges on customers a/c

Types of Deposits or Account:

-

Fixed Deposit

Saving Bank Deposit

Current Deposit

Recurring Deposit

Fixed Deposit:
Features:
-

Deposit accepted for fixed period

Period mentioned

cash reserve not required

Can be used by bank in more

profitable manner

Rate of interest is comparatively

high

Opening of Fixed deposit A/c

-

Filling of an Application

Name, Age, Sex,

Nominee if any etc.,

If it is joint a/c (who is the payee)

Specimen signature of the depositors

Verification of application

Collecting of money

Issuing FD Receipt

Address,

Period,

Contents of FDR:
On its face

On its back

Name
of
the Columns for marking
bank
payment
of
interest,
Holder of deposit principal and renewals if
any
Amount
and
period of deposit
Rate of interest
Column for customer
signature
Date of maturity Not transferable &
Not negotiable

Legal position of a banker as

regards to FDR
-

Premature withdrawals [interest 1% less]

Advance against FDR

- Interest 3% more than FD interest
- 75% value of FD
Payment of interest

Monthly or Quarterly or Half yearly or Annually

Repayment of FD [on surrender of FDR]

Repayment of third person

Donatio mortis causa

Loss of FDR [Duplicate FDR]

Change in the name of the depositors

Fixed deposits in joint names

[authorised person]

[Gift death of donor donee]

2. Savings bank Account

Features:
- Restriction of Deposits
- Minimum balance
- Cheques payable to others can not be deposited

- Restriction on withdrawals
- Through cheques /withdrawal forms
- Total withdrawals < 500 in half year
- Interest
- Interest 3 4.5% p.a.
- Calculated once in 46 days (varies)
- It is transferable form one branch to another

3. Current Account
Features:

- Suitable
for
organisations

business

and

big

- No interest
- Incidental charges
maintained]

[Min

Bal.

not

- Privileges
- OD facility
- Third party cheques can be deposited
- Granted loans are credited in the a/c

Opening of Current Account:

- Application
- Letter of introduction if not
- Bankers loose their statutory protection
- OD will be irrecoverable
- Fraud or misrepresentation occur

- Specimen signature
- Mandate for operation by agent

- Verification of documents
- Opening of an account
- Issue of pay in slip, cheque book & passbook

4. Recurring /Cumulative Deposit:

Features:

- Features of saving/fixed deposits are applicable

- It can also transferable

Special features:
- Depositors can select the amount period
- Amount in multiples of 100
- Period 1 to 10 years

- Any person including minor can open

- Passbook will be given
- At the end interest and principal

Differences between FD & SB a/c

FD A/c

SB A/c

Repayment on certain date

On demand

No need of cash reserve

CR is needed

Introduction not necessary

It is necessary

High rate of interest

Low rate of interest

Suitable for investors

Suitable for small savers

Loans available on FDR

No loan facility

Practically
customer

he

is

not

Only deposit receipt is given

a He is a customer
Cheque book, passbook &
pay in slip will be given if
necessary

Differences between FD & Current a/c:

FD A/c

Current A/c

Time deposit

Demand deposit

No need of cash reserve

CR is needed

Introduction not necessary

It is necessary

High rate of interest

No interest

Suitable for investors

Suitable
people

Loans available on FDR

OD facility available

Practically
customer

he

is

not

Only deposit receipt is given

for

business

a He is a customer
Cheque book, passbook &
pay in slip will be given if
necessary

Differences between SB & Current a/c:

SB A/c

Current A/c

Object to promote the habit Provide convenience

of savings
customers

Third party
deposited

can

not

be Can be

OD not available

Available

Reasonable rate of interest

No interest

Withdrawals are restricted

No restriction

Comparatively
reserve

lesser

cash More CR required

to

New schemes of deposits

1. Super savings packages:
1. Monthly deposit
2. 15 40 years
3. Lump sum at the end

2. Cash certificate
1. Higher face value (IVP/KVP) (8 years)
2. Period should be mentioned

3. Maturity time will be mentioned

Annuity deposits:
- Provide regular monthly income
- Period 36, 60, 84 or 120 months

- Only one Initial investment

- Monthly payment of interest

4. Cash certificate
1.Development of FD schemes
2.Interest calculated periodically
3.Interest is reinvested

Perennial premium plan:

- Regular monthly payment for fixed period
- After that regular monthly pension scheme for some
years or will be given

6. Cash certificate:
1.Development of FD schemes
2.Interest calculated periodically
3.Interest is reinvested

7. Educational Plans:
1.Helps to meet children education expenses
2.It encourages the parents
3.Monthly deposit specified period
4.Sum assured on maturity

Types of Customers:

Minor
Married woman
Lunatic
Drunkard
Illiterate person
Trustees
Executors &
Administrators

Attorney
Joint Hindu Family
Partnership firm
Joint Stock Company
Society & other nontrading concern
Local authority

1. Minor:
Less than 18
Less than 21 Guardian
He/She can not enter into a
contract
Banker can open

Precautions to be taken by bank:

1.
2.
3.
4.
5.
6.
7.
8.

Type of Account
Date of Birth
Death of minor or guardian
Loans to minor
Loan to minor on the guarantee of
3rd person
Liability
regarding
negotiable
instrument
Minor as a partner
Minor as an agent

Guardian:
Natural guardian
Testamentary guardian
Appointed by the court

2. Married woman:
Can enter into a valid
contract
Husband cant liable except
she act as agent for her
husband
purchase of necessaries not
provided by her husband

Precautions to be taken by bank:

1.Any type of A/C
2.Enquire about her personal
estate
3.Husband assets can be taken as
collateral

3. Lunatic Unsound Mind:

Cant enter valid contract
Cant open A/c
If an A/c holder become lunatic

Precautions to be taken by bank:

1. Suspend the operation of A/c
2. Confirm with proper evidence
3. Acceptance of any bill etc he
will not be liable
4. Operation after court order

4. Drunkard:
Legal position of a person
disturbed by liquor or drugs
Contract void
Cant open an A/c

Precautions to be taken by bank:

1. Dishonour the presented cheque
2. Dishonour the 3rd party cheques

5. Illiterate Person:
Allowed to open account
Thump impression - Signature

Precautions to be taken by bank:

1.
2.
3.
4.

Left hand thump impression

Identification marks 2
Photographs 2
Explain
the
operational
Conditions
5. Withdrawal In person with
passbook

6. Trustee:
Trust for the properties of a
deceased person
Manager Trustee
Beneficiary for whom the trust
is formed.

Precautions to be taken by bank:

1.
2.
3.
4.
5.

Careful study of trust deed

Authorized person to operate a/c
Death or retirement of trustee
Insolvency of trustee
Loan to trustee
1. Not allowed
2. Cant sell the property
3. Special provision in the deed.

7. Executor & Administrator:

Executor Appointed by the will of a
deceased person to settle his accounts.

Court permission is required

Official confirmation of the will
probate.
Administrator Appointed by court when
executor is appointed or he is not willing to act.

Duties are same

Realize the assets & pay off the
liabilities.

no

Precautions to be taken by bank:

1. Examination of documents
2. Style of account
3. Operation of the account
4. Misappropriation of funds
5. Borrowing powers of executor/
administrator

8. Attorney:
Attorney a person appointed by a
document called Power of attorney to
act on behalf of another person.
In writing, stamped and registered
Attorney
general
(All Transactions)

Special
(Particular
Transaction)

Precautions to be taken by bank:

1. Examination
attorney

of

power

of

2. Time period of power

3. No loan/OD unless special
power

9. Joint Hindu Family:

It is governed Hindu law

Precautions to be taken by bank:

1.
2.
3.
4.

Knowledge of law & customs

Dealing with karta
Karta personally liable
Members liable to the extend of
their share
5. Purpose of loan
6. Incase of trading JHF manager
karta pledge & borrow.

10. Partnership Firm:

It is governed Partnership act
1932

Precautions to be taken by bank:

1.
2.
3.
4.
5.
6.
7.
8.
9.

Study - partnership deed

Opening of account
Letter or mandate from partners
Revocation
of
authority
and
stop
payment of cheque
Firms cheque endorsed in favour of a
partner
Implied authority of a partner
Power to borrow
Order of payment of firms debt and
personal debts
Reconstruction of a firm

11. Joint Stock Company:

Artificial person by companies
Act 1956
Separate existence
It can sue & be sued by others

Precautions to be taken by bank:

1. Verify the certificate of incorporation
2. Verify
the
certificate
of
commencement of the business.
3. Verify the MOA

4. Verify the AOA

5. Obtain a copy of MOA & AOA
6. Obtain a copy of financial statements

7. Obtain a copy of board of resolution

8. Borrowing powers of the company
9. Registration of charges

the

12. Societies & Other Non-Trading

Association:
Artificial person by societies
registration
act
or
the
cooperative societies act Act
1956
Educational
institutions,
hospitals clubs etc.,

Precautions to be taken by bank:

1. Verify
the
registration
of
association
2. Obtain the copies of memorandum
& Articles.
3. Check the objectives
4. Check the rules & by-laws
5. Copy of resolution
6. Person to operate the a/c
7. Borrowing powers

13. Local Authorities:

Artificial
person

government provisions.

by

Municipality, corporation etc.,

Precautions to be taken by bank:

1. Study the special act
2. Can have different a/c for each
section
3. Copy of resolution
4. Borrowing power for OD

Different forms used in day to day

banking:
- Withdrawal slips/forms
- DD forms
- SB A/c deposit forms (pay in slips)

- Current A/c deposit forms (pay in slips)

- Recurring A/c deposit forms (pay in slips)
- Multiple purpose forms
- A/c opening forms

Assignment topics:
Banker Customer Relationship

Types of Deposits
Types of Customers
The students are advised to take any one of
the above mentioned assignments and
submitted with in a week from the
completion of the unit.

Further Reading:

Banking Theory
- Sundaram Varshney
Banking theory law
and practice
- S.M. Sundaram
Banking Theory
Practical Banking

- E. Gorden & Natarajan

- M. Radhaswamy

Unit II

Unit II
Commercial Banks
State Bank of India
Regional Rural Banks
Reserve Bank of India
recent development in banking sector

Commercial Bank Origin and Growth

1.Before British period Indigenous

bankers

2. Britishers Difficult to deal with

them
3. Britishers Encouraged agency
houses to start banking
4. Britishers

Setup
Hindustan in 1770

bank

of

Functional of Commercial Banks

Functions

Primary

Secondary/
Subsidiary

PRIMARY FUNCTIONS

Receiving deposits from the Public

Granting Loans and Advances

Receiving Deposits

All kinds of deposits savings

term recurring current

Making Loans and Advances

Cash Credit
Overdraft
Loans System
Purchase & Discounting of Bills

SUBSIDIARY & SECONDARY

FUNCTIONS

Functions
Agency service

Miscellaneous &
General utility

AGENCY SERVICES
Payment of subscription, premium,
rent etc
Collection of promissory note,
dividends, salaries, pension etc

Purchase and sale of stocks and

shares
Acting
as
Trustee,
Executor,
Administrator or Attorney

Miscellaneous or General Utility Service

Safe custody of customers

valuables
Letter of Credit

Travellers cheque
Remittance of funds

Merchant banking

 Dealing in foreign exchange business

Import & Export Finance
Housing Finance
Under writing of securities
Tax Consultancy
Credit cards
Gift Cheques
Teller System

Role of Commercial Banks in the

Economic Development of the Country
1.Collection of savings
2.Productive Investment A mere
injection of money and credit cannot
star a process of growth
- Rockfeller David
3.Agricultural & Rural development
4.Industrial development

5. Development of Trade and Commerce

6. Development of foreign trade
7. Balanced regional development
8. Optimum utilization of natural
resources
9. Finance to government
10. Creation of employment opportunities
11. Government sponsored programme

Modern Services Rendered by

Commercial Banks

1. Financing Lease: Lessor

Lessee No provision in act
1949 amendment act 1983
with the permission of Lessor.

2. Merchant Banking
Service to entrepreneurs

Commencement of business
Project Counselling
Feasibility Reports Economic Technical
Financial Market survey.
Raising of loans new issues of shares &
debentures
Financial planning
restructuring of capital

modification

&

Organisational
restructuring

Amalgamation, Absorption, conversion of

partnership into Pvt. ltd Co, Pvt. Ltd. Co
into Public ltd Co.

3. Factoring
Continuing arrangement between
banker and trader
Purchase of traders books
Administration of traders sales
ledger
Making prepayments for the debts
purchased
Collection of debts purchased
Meeting the credit risk involved

4. Tele-banking Facility
Ordering for DD

Faxing of annual statements

Payment of bills
Booking tickets

5. Stock Invest
Customers can pay subscription to
capital issues
Banks will issues

Money will be in the investors A/c

Interest will be paid till allotment

6. ATM
Draw cash
Deposit cash
Get mini statement
View the balance
Request for cheque book
Transfer of funds (one a/c to another
in the same branch)
Deposit of cheque for collection

7. Credit cards
For reputed customers
Purchase of goods & services
Credit limit fixed by banks
Sales voucher given after purchase
Customer signature is must
Signature verification
Charges will be applicable

8. Debit Cards
Similar to credit cards

Purchase all over the world

Purchase by Debiting bank account

ATM cum Debit card

Charges is applicable

9. Internet banking
Using E-mail ID
Instruction to bank officials

Anywhere Banking
Withdrawal of cash
Deposits of cash
Transfer of funds
Collection of local Cheques
Issue mini statement

Balance enquiry

SBI - Origin
Established in 1st July 1955

By an separate Act
By taken over Imperial bank of
India
1959 8 state owned banks were
constituted as subsidiaries.
Among 8 two of them merged in
1963

 All together called State Bank

group.
First bank under public sector
Largest commercial bank in;
Branch network

Resources
Man power

It holds major portion of banking

of
public
&
private
sector
undertakings

SBI Share Capital

Started with an authorised capital
of Rs. 20 Crores. (20,00,000x100)
It has grownup to 200 crores

A major portion of shares with RBI

The Capital of its subsidiary was
114 crores.

SBI Management
Managed by central board of directors;
A
Chairman
Government

&

Vice-Chairman

Central

2 Managing directors Central Government

6 directors Elected by share holders other than
RBI
8 directors Nominated by central Government
with the consultation RBI
1 director nominated by Central Government
1 director nominated by RBI
2 directors Appointed to represent the officers
& Staff of the bank

 Apart from this there are local boards at:

Kolkota
Mumbai
Chennai
New Delhi

Kanpur
Hyderabad
Ahmedabad

Bhopal
Patna

SBI Functions &

Workings

Peculiar features of its functions

1. Agent of RBI
Act as an agent where there is no
branch for RBI
Helps in implementing the monetary
& credit policy

2. Clearing operations
Clearing operation are managed by
SBI where there is no branch for
RBI
For this purpose it maintains all
other commercial banks accounts

3. Finance to industry
Finance to large scale industries
Finance to SSI schemes
Finance towards
Working capital
Expansion

Modernisation

4. Advance to priority sector

5. Finance to small business

6. Merchant Banking
Financial advise to new projects

Helps in
studies

technical

Organises
different
financial assistance

feasibility
types

of

Helps the small, medium and new

entrepreneurs

7. Finance to foreign trade

Finance to Export & Import projects

Finance to Indian companies doing

construction abroad
Obtaining status report of overseas
buyers
Providing information about overseas
development
Attracting NRI funds

8. International banking
Started off-shore banking units

First Indian organisation to enter

into the international Euro Yen
bond market
Built branches & offices in many
countries

9. Innovative Banking
Community service banking

SBI cards Debit & Credit

Customer councils

SBI capital market Ltd

SBI mutual funds

Regional Rural Bank (RRB)

Started to strengthen the banking
system in rural areas
Combination of the following: Rural atmosphere

Local feeling
Knowledge of cooperative institutions

Modern banking practices

 First RRB October 1975

RRB Act 1976

Features
Formation of Regional Rural Banks
Separate Body Corporate established by
the government of India
As per the provision of act

Commercial
banks
Government to start

request

the

The bank request called Sponsored bank

Sponsored banks provide finance and

technical assistance

 Area of operation

Government specifies the area limit

Can have branch with in the limit
Initial authorized capital was Rs. 1
Crore
It increased to Rs. 5 Crores
Issued capital Rs. 1 Crore

Future of RRBs
RBI conducted a survey on RRBs in 1981

Survey
Khusro
Committee

Narasimham
Committee

MC Bhandari
Committee

Khusro Committee
The weakness of RRBs were endemic.
Non-viability was built in their structure
They had huge accumulated losses

Some case losses erode the deposits

RRBs were not able to serve the larger
group
There was no place for RRBs in the
countrys rural system

Narasimham Committee
Due to many restriction
earning capacity was low

on

RRBs,

Wages & salary is almost close

commercial banks no growth like.

to

Sponsored banks have rural branches

near by RRB
No restriction on targeted group
Interest rate structure of RRBs in the
same line like commercial banks

M.C Bhandari Committee

Suggested measured for restructuring
RRBs.
Most of them were implemented
They are;

 The issue of share capital has been

enhanced
NABARD should help on;
Productivity
Cash management
Advances portfolio
Recovery performance
No restriction on area of operation
Relocate the loss making branches
Extension counters can be opened in
suitable cases
Allow them to provide finance to Non
priority sector

Investment Policy of Banks

FEATURES:
Deals
with
Technicalities
of
Investment
Investment of bank funds is a difficult
task
Maintain proper balance to honour
the customers demand
Make profit and pay dividend

 Earn more to meet administration

cost
Get more FDs
Reinvest the FDs
IN TOTAL WE CAN SAY:
It should bring more profits for share
holders
Provide maximum security to depositors

Guiding Principles of a
Good Investment Policy
Safety &
Security

Liquidity

Banker can not ignore any one of

this. Because they are inter related

Profitability

Safety & Security

Deal with customers money
Invest in secured & safety assets
Prefer
to
grant
advances
to
businessmen by discounting shortterm bills
Invest in short term government
securities
Safety can not be sacrificed for more
profits
No lending for unworthy borrowers

Liquidity
Ability to produce cash on demand

Definition:
If an asset is converted in to cash quickly,
then they are said to be liquid

Ratio of Liquid Asset to Total

Current Assets
Cash reserve

10 %

Call money & bill of exchange 20 %

Total liquidity

30 %

Investments

20 25 %

Advances

45 50 %
Total

Profitability

70 %
100 %

RBI - Meaning
Introduction:
Amalgamation of 3 presidency banks
& function as central bank upto 1935
1925 Hilton young recommended a
separate central bank.
1927
assembly

RBI

bill

introduced

in

1934 Act was passed

1935 April RBI formally inaugurated

 Initially functioned as private bank

with share capital of 5 crores.
Nationalised
in
1948
by
RBI
(transferred to public ownership) Act.
Private share holders were paid @
118.10 per share.

Operation

(Bombay,
Calcutta,
Madras, Delhi and Rangoon) (Myanmar)
1947 Rangoon office was closed.

RBI - Management

Boards
Central Board

Local Boards

Mumbai

Chennai

New Delhi

Kolkota

Central Board
Governor C.G US 8 (1) (a) RBI Act
1934 (5 years)

Not more than 4 deputy directors

C.B US 8 (1) (a) RBI Act 1934 (5 years)
4 directors nominated by C.G (1/local
board) US 8 (1) (b) (4 years)
10 Directors nominated by C.G US 8
(1) (c) (4 years)

1 Government official nominated by

the C.G US 8 (1) (d)

Local Boards
Each board 5 members
Appointed by central Government
Appointment 4 years & eligible for
re-appointment.

Duties
Advising on central board
Performing other duties delegated by
the central board from time to time

RBI - Functions
1. Issue of Bank Notes:
Sole right to issue currency notes
(except coins and subsidiary coins)
It has separate department known as
issue department.
Makes adequate arrangements
distribution of notes & coins.

Issue department
important cities.

has

offices

for

in

2. Banker to Government:
Accepting & maintaining money on account
of central & state Governments.

Making payments on their behalf.

Carrying out their exchange, remittance &
their banking operations.

Managing the public debt including new

loans
&
Treasury
bills
of
central
government.
Advances to central & state governments
Advising the government in all financial
matters.

3. Bankers Bank:
Act as banker to scheduled banks in
India.

Maintain cash reserves of scheduled

banks. (% on their liabilities)
Servers

as

lender

of

last

resort.

(rediscounting the bill of exchange etc)

4. Custodian of Foreign Exchange

Reserve:
Responsible for maintaining
external stability of rupee value.

the

Controlling & regulating the foreign

exchange.

5. Controller of Credit:
As per the Acts (1934 & 1949) have
powers to control & regulate the
credit.
Controlling of credit

6. Collection & Publication of

Information:
Collects & publishes information on:
General economic.
Financial & banking developments.

1. Issue Department:

Issue & management of bank notes

14 branches in the country

Each branch has:

Cash
department
transactions
General
supply

department

Currency
Managing

2. Exchange control department:

Control foreign exchange & maintain

stable exchange rate

3. Department of Banking operation

and development:

Control & supervise the working of

banks in India.

Visits banks periodically

4. Department of Financial
Companies:

Control & supervise the non banking

financial companies.

Central office in Kolkota

Four regional offices in Bangalore,

Mumbai, Kolkota and New Delhi.

Method of Credit Control

1.Bank Rate
Rate at which RBI grants loans to
commercial banks
Changes in this rate reflect on the
lending rate of Commercial Banks

2. Open Market Operation

Purchase & sale of securities in the
market.
Sells the securities reduces the money
supply.
Buys the securities increases the
money supply (credit).

3. Variable Reserve Ratio

Increase the ratio reduce the credit.
Decrease the ratio increase the credit.

4. Statutory liquidity
Requirement
As per Se. 24 of B.R.Act banks have to
maintain the liquid assets like cash,
gold and approved securities.
Any change in the ratio will have a
reflection in the credit.

5. Credit Authorization Scheme

Banks get permission from RBI before
releasing loans exceeding certain limit.

6. Moral Suasion
Advising the banks to follow the
guidelines of RBI
Maintaining good relation by having
meetings etc.

7. Fixing of Lending Rate

RBI has the right to fix the lending rate
Increase or decrease in the rate and
interest

Currency Chest

Quantitative Vs Qualitative
Credit Control

Quantitative

Qualitative

It is in indirect control It is a direct control

Objective is to control Objective is to control
the amount of credit & the purpose & flow of
expenses on credit
credit
Doest not control the Controls the flow of
flow
of
credit credit to various purposes
(unproductive purpose) like socially relevant and
economically useful

Eg. Bank rate, open Eg. Rationing of credit,

market
operation, direct action, regulation
variable reserve ratio.
of consumer credit, moral
suasion and publicity.

RBI Bill Market Scheme

Dealing in short-term bills generally
of 3 months duration
Dealt with bill of exchange, trade
bills, finance bills or promissory notes
and treasury bills
Ideal source of investment
Easily realisable

Bill Market Scheme 1952

First time introduced by RBI
To increase the liquidity position of
commercial banks
Features are:

 RBI release advance to commercial

banks against
the trade
bills &
promissory notes (maturity 90 days)
It was introduced initially for 4 years
Initially, offered to banks who had:
Deposits > 10 crores
Advances - > 25 lakhs
1953 Extended to all scheduled commercial
banks.

RBI will consider;

Financial soundness of the banks.
Mannerism in conducting business.

1958 Extended to export bills

New Bill Market Scheme 1970

Introduced in 1st November 1970

Features are:

 All scheduled banks are eligible for

rediscounting the bills with RBI
Rediscounts
Trade
bills
and
not
accommodation bills
Drawn on and accepted by purchasers
bank.
Maturity period is < 120 days.
Maturity period for rediscounting is < 90
days
Bill should bear two or more good
signatures; one must be scheduled banks

 Bill value for rediscount is > 5000/bill

Total bill value for rediscount is > 50,000
at a time
CHANGES MADE AFTER INTRODUCTION
The scheme extended to Government
departments
and
quasi-Government
bodies,
statutory
corporations
and
government companies.
Procedure
for
rediscounting
was
liberalised
Exempted bills value was < 2 lakhs from
actual lodgement

 1973 This lodgement value increased

to 10 lakhs.
Minimum amount of bill for rediscount
was reduced to Rs. 1000
Bills drawn and accepted by ICICI Ltd
was covered under this scheme.

Powers under Banking

Regulation Act 1949
1. Licensing of Banks:

Every commercial bank must obtain

the license from RBI

Cancellation of license:

If the company ceases to carry on

banking business in India

If the company fails to comply with

any of the conditions imposed by
the RBI.

3. Inspection of Banks:
Inspect the banks in the best
interest of the depositors

4. Power to issue directions:

RBI can issue directions at any

time when it requires.

5. Control over Management:

If Private sector banks RBI has to

approve
for
appointment,
reappointment and remuneration
of director or CEO.

If Public sector banks RBI has to

consult with the government for
the same.

6.

Control over
advances:

investment
which

&

The purposes for

advance granted.

the

The margins for secured advances

Maximum limit of the advances for

company, firms or individuals.

Limit for guarantee of advances

Interest rate & other terms and

conditions.

7. Collection of information:

Can
collect
any
information
relating to commercial banks.

8. Power incase of amalgamation &

& Liquidation:

RBI has the power to examine or

sanction the amalgamation

It can recommend or supervise the

liquidation

9. Power to advise banks

10. Power to advise to the Central
Government

9. Other Powers:

It may call for a meeting of a

commercial banks at any time.

It may require any officer of a

commercial bank to meet with an
officer of RBI.

It may depute one or more officers

to monitor either the board
meeting or the proceedings of any
commercial banks at times.

Recent development in
banking sector
1. Diversified Activities:

Merchant banking

Venture capital

Mutual funds

Housing finance

Equipment leasing

Other financial services.

2. Innovative Banking:
Phone banking

Internet banking
ATM, etc.,

3. Adoption of capital:
RBI
introduced
capital
adequacy accounting norms
since 1992 93 in respect of;
income recognition

Asset classification and

Provisioning
etc.,

for

bad

debts

4. Privatisation of banks:
Licensing for new private
banks disinvestment policy
clearly shows the Privatisation
of commercial banks in the
near future.

5. Reduction in SLR & CRR:

Pave the way for more
investment
in
various
sector.

6. Decontrol and reduction of

interest rate:
Encourage
competition
banks.

the
healthy
among
the

7. Recovery of debts:
Recovery of debts due to
banks
and
financial
institutions Act 1993 helps
them in speedy recovery.

Assignment topics:
Commercial Banks

State Bank of India

Regional Rural Banks
Reserve Bank of India
Recent development in banking sector
The students are advised to take any one of
the above mentioned assignments topics and
submitted with in a week from the
completion of the unit.

Further Reading:

Banking Theory
- Sundaram Varshney
Banking theory law
and practice
- S.M. Sundaram
Banking Theory
Practical Banking

- E. Gorden & Natarajan

- M. Radhaswamy

Unit III
Cheques
Crossing
Endorsement

Cheques
Crossing
Endorsement

Cheque
Meaning:

- Negotiable instrument
- Transferable from one to another

Definition
-

Se 6 of NI Act A bill of exchange

drawn on specified banker and not

expressed to be payable otherwise

than demand

Requisites of an valid cheque

1. It must be an instrument in writing.
2. It must be an order.
3. The order must be unconditional
4. It must be drawn on specific banker

5. Payee must be a certain person

6. Amount must be certain
7. It must be dated
8. It must be signed by the drawer
9. Payable on demand

Drawing of Cheque
1. Drawer writer

2. Drawee banker
3. Payee to whom the payment

Dishonour of a cheque
According to Se. 138 of NI Act
punishable under criminal offence.
but the following conditions to be
satisfied.

Conditions to be satisfied
1. Issued to settle debt / consideration.
2. Presented with in the valid time
3. Dishonoured due to insufficiency of
funds.

4. Payee demand payment < 15 days

5. No payment by drawer < 15 days.

Differences between
Cheque

Draft

Drawn by customer on a Banker

bank
banker
Facility only to customer

on

other

To all

Payable to bearer or order Payable only on order

May be dishonoured

Always be honoured

Differences between
Cheque

Bills of exchange

Drawn on bank

Drawn on any person

No acceptance

Requires acceptance

Payable on demand

Expiry on a fixed period

No grace days

3 days Grace days

Stamp may be required

Compulsory

Can be crossed

Cant be crossed

Intended for immediate Not

intended
for
payment
immediate payment
Easy
discount
not Possible
possible

Types of cheque
1. Antedated cheque
2. Postdated cheque
3. Stale cheque
4. Order cheque
5. Bearer cheque

Crossing of cheque

Cheques which has 2 parallel transverse

lines across its face with or with out any
words.

Payment

done

only

through

bank

account and not at counter.

Crossing does not affect its negotiability

It can be hand written, stamped, printed

or perforated on its face.

Types of Crossing

Crossing
General
Se. 123 NIA

Special
Se. 124 NAI

Essential of G.C.
1. Two parallel lines
2. Crosswise direction
3. Words are & co and company
not negotiable Account payee.
4. Effects Not at counter If so banker
will loose their statutory protection.

Essential of S.C.
1. Specify the banker name.
2. General words may be required.
3. Words may be Indian bank not
negotiable Indian bank.

In addition other types of crossing

1. Not Negotiable Crossing

1. Word not negotiable
2. Can be transferred.
3. Transferee will not get better title.
4. To get a better title

Conditions to be satisfied
1. Received

the

cheque

for

consideration.
2. There should not be any prior bad
title.

2. Account Payee Crossing

1. General crossing with

Account payee only.

the

words

2. Banker have to accept for the person

only.
3. Law
does
endorsement.

not

restrict

the

3. Double Crossing
1. Banker in whose favour a cheque is
drawn may cross it again in favour of
another banker being his agent for
collection.
2. Allowed When there is no branch
otherwise double crossing is invalid
according se 127 of NAI.
union bank
To
SBI
as agent for
collection

Obliterating a Crossing

1. Erasing the crossing.

1. If the obliteration is not apparent &
Payment made in due course
2. Banker will not be liable.

Opening of Crossing

1. Cancellation of the crossing.

1. Only the drawer can
2. Striking off the crossing, Writing
pay cash & his full signature

Alteration of Cheques

1. Making some correction.

Types of Alteration

Alteration
Material

Immaterial

Material Alteration

an

alteration

which

affects

the

fundamental characters of cheques

Examples of Material Alteration

1. Altering the date.
2.

,,

,, place of payment

3.

,,

,, name of the payee

4.

,,

,, amount

5.

,,

,, word order as bearer

6.

,,

,, crossing

Effects of Material Alteration

1. Generally it is void.
2. Do not pay.
3. Required drawers signature.
4. If the alteration not apparent &
payment

made

in due

banker will not be liable.

course

Immaterial Alteration

an alteration is immaterial and will

not make a cheque as void if;

1. It does not affect the fundamental

character of the cheque
2. It is allowed by law
3. It is made before the issue of the
cheque
4. It is made for the purpose of correcting
the mistake
5. It is made to carry out the common
intention of the original party

6. It is made with the consent the parties

of the cheque.

Example of immaterial Alteration

Conversion of a endorsement in
blank into an endorsement in full.
Crossing of an opening cheque.
Conversion of GC into SC
Conversion of bearer into order
Fill up the blank in an instrument.

Endorsement
Meaning:

Transferring the instrument

Bearer instrument - delivery

Order instrument - Endorsement delivery

Endorser Who transfers

Endorsee To whom the transfer

made

Endorsement On its back

Allonge

- If there is no space on its face.

- A piece of paper attached to it.

Definition
-

According to Se. 15 of NIA when the

maker or holder of a negotiable
instrument
signs
the
same,
otherwise than such maker, for the
purpose of negotiation, on its back
or face thereof, or on a slip of paper
annexed thereto .. he is said
to have endorsed the same and is
called the endorser.

Significance of
Endorsement
1. Ownership transferred to endorsee.
2. Endorsee will get the right to sue.

3. Endorsee will get the right to recover

the money.
4. Endorsee will get the right of further
negotiation.

Rules Regarding
Endorsement
1. Done by
signature.

endorser

or

an

agent

with

2. Payee or endorsee must sign on its face.

3. Endorsement should be in ink.
4. Incase of married women Husband name

5. Illiterate person Thump impression.

6. Joint stock company Authorised person
7. Partnership Authorised person

8. Deceased person Legal representative

9. Endorsement completed by delivery of the
instrument.

Types of Endorsement

1. Blank or General Endorsement:

Endorser simply sign on the back with
mentioned anything.

2. Full or Special Endorsement:

Endorser mention the name of the

person to whom to pay;

Pay to Alagu Sundaran

Endorser

3. Partial Endorsement:
endorsed only for the part of the

amount
cheque

Not possible

bill

Possible

4. Restrictive Endorsement:
Restrict

the

endorsee

from

further

negotiation
Pay Grocery Rashith only
Endorser
Pay Gundu Dinesh for my use
Endorser

5. Conditional or Qualified Endorsement:

It limits the liability of the endorser

It imposes certain condition.

Pay to Rabit Binil or order on his
marriage with Mouse Vanitha
Endorser

This may done two forms;

Conditional or Qualified Endorsement

C/Q Endorsement
Sans Recourse

Sans Frais

Sans Recourse Endorsement:

Endorser free from liability.

Pay to Trouser Benson
without recourse to me
Endorser

Sans Frais Endorsement:

Endorsee free from liability.
Pay to Fraud Price
Without expenses to me
Endorser

6. Per Pro Endorsement:

Endorsement done by an agent
inform the banker regard the delegation
of authority
Pay to Regular Rajasekar or order
Povendraraja
Per Pro M. Som

Assignment topics:
Cheques

Crossing
Endorsement

The students are advised to take any one of

the above mentioned assignments topics and
submitted with in a week from the
completion of the unit.

Further Reading:

Banking Theory
- Sundaram Varshney
Banking theory law
and practice
- S.M. Sundaram
Banking Theory
Practical Banking

- E. Gorden & Natarajan

- M. Radhaswamy

Unit IV
Paying and Collecting Banker

Collecting banker
Paying banker

Paying Banker
Meaning:

Banker to whom the cheque is

drawn & presented for payment

Precautions to be taken by
Paying Banker
1. Form of cheque:
2. Date of cheque

3. Amount of cheque
4. Sufficiency of funds
5. Material alteration
6. Drawers signature

7. Mutilation
8. Payment during the banking hours
9. Open or crossed cheque
10.Endorsement if any
11.Legal restriction if any
12.Countermanding order
13.Notice of death or insanity or
insolvency of customer.

Dishonouring of cheques
1. Countermanding of payment

2. Death of the drawer

3. Insolvency of the drawer

4. Insanity of the drawer

5. Receipt of garnishee order

6. Receipt of notice of assignment

7. Breach of trust

8. Post dated or stale cheque.

9. Insufficiency of funds.
10.In proper format.
11.Materially altered cheque.
12.Forged signature.

Statutory protection to the paying banker:

1. Protection incase of order cheque Se.
85 (1):
1. Verify the endorsement
2. Payment made in due course

2. Protection incase of bearer cheque Se.

85 (2):
1. Payment at the counter
2. No need to verify the endorsement.

3. Protection incase of crossed cheque [Se.

128]:
1. Payment through A/c
2. Payment made in due course

Payment made by mistake:

Recoverable

Irrecoverable

Received malafide

Mistake of law

Mistake of fact

Paid on a negotiable
instrument

Mistake between banker Paid by mistake to an

& receiver
agent

Forgery of drawers signature:

1. Dont pay for the cheque.
2. Even

the

payment

made

in

due

course banker will be liable.

3. Lewes

sanitary

Laundry

Co

Vs

Barclays Bevan & Co., (secretary)

4. Green wood Vs Martins Banks Ltd.,
(Husband & Wife)

Holder:
1. He must be acquired legally.
2. A thief or finder of an instruments
can not be considered as a holder.
3. Entitled to receive the money

Rights of a Holder:
1. Convert the blank endorsement into
full
2. Cross a open cheque
3. Claim & sue
4. Can obtain the duplicate copy of a
lost cheque.

Holder in due course:

1. Se. 9 of NIA Any person who become
the

possessor

instrument
endorsee

of

negotiable

payable

to

bearer

or

consideration.

payee

thereof

or
for

Conditions to be satisfied:
1. He must obtain the possession
2. Obtain by payment of consideration
not by way of a gift
3. Must be a holder before the maturity
period.
4. Must become the holder in good
faith.

Rights of a Holder in due course:

1. He can get better title
2. He can recover the amount form
previous parties
3. He can sue

Differences between holder and holder in due course

Holder

Holder in due
course

Need not pay

consideration

Must pay some

consideration

Need not take care about

the transferors titles

Must care

He takes the instrument

subject to all defects

Takes free from all

defects

Obtain the possession at

any time

Can obtain only before

the due date

Collecting Banker
Meaning:
-

Banker
who
undertake
responsibility of collection.

He can do this in the capacity;

-

Holder for value

Agent for collection

the

CB as holder for value

- Banker will allow the customer to

make use of the amount before the

execution of the collection.

Circumstances:
1. Lends on the strength of the cheque
2. He pays the amount or part of it before
it is collected.
3. Permit to draw before it is collected.
4. Receive the cheque to reduce the OD.

Rights of banker as
holder for value
1. Rights are same as holder in due
course, in addition,

2. If the endorsement is forged, he can

recover
3. If the cheque gets dishonoured, he
can sue all the previous parties.

CB as an agent for collection

- When he undertake the collection he

will be act as an agent.

Duties of a collecting
banker
1. Exercise of reasonable care.
2. Presentation of cheque for Payment
within a reasonable time. (local &
outstation).

3. Remittance of proceeds.
4. Notice of dishonour.

Statutory protection of a
collecting banker
1. US 131 of NIA banker can claim
against the collection of crossed
cheque if the following conditions are
satisfied

Conditions
1. Collection for customer

2. Collection in good faith with out any

negligence

Collection against
demand draft

1. Se. 131A of NIA give protection

2. If he collect crossed DD in good faith
without negligence

Negligence on the part of

a collecting banker

1. Baker act carelessly in the collection

of cheques, he will be liable for gross

negligence.

Instances of gross
negligence
1. Fail to present the cheque with in
the reasonable time.

2. Fail to give notice of dishonour

3. Fail to verify the endorsement

4. Fail to enquire the authority

incase of perpro endorsement.

5. Partnership cheque deposited in the

partner personal account

6. Cheque payable to a Co. deposited into

secretary personal account.
7 Collecting a stale cheque
8. Collecting cheque for a person who
doesnt have an account.

Assignment topics:
Collecting

banker

Paying banker

The students are advised to take any one of

the above mentioned assignment topics and
submitted with in a week from the
completion of the unit.

Further Reading:
Banking Theory
- Sundaram Varshney
Banking theory law
and practice
- S.M. Sundaram
Banking Theory
Practical Banking

- E. Gorden & Natarajan

- M. Radhaswamy

Unit V

Lending & Advances

 Lending
Principles of sound lending
Types of advances
Advances Against various securities

Principles of sound lending

Safety
Diversification

Purpose

Liquidity

Profitability

1. Safety
- Repayment

Capacity

borrower

- Value of the asset owned

- Character & Integrity

of

the

2. Liquidity
1. Short term loan advisable
2. Recovery frequency

3. Profitability
1. Interest on Loans.
2. Income to meet all recurring expenses.
1. Interest on deposits
2. Salary for staff
3. Establishment expenses

4. Purpose of loan
- Production purpose.
-

Not for speculative & unproductive

purposes.

5. Diversification of risks

Not for similar business and same

area.

Grant for diff. business in diff. area.

Types of Loans and Advances

L&A
Secured
Security
Security > loans

Unsecured
No security/
personal security
Character
Repaying capacity

Loan or Advances
Secured:
According to Se 5
(n) of the BR Act
1949;

loan
or
advance made on
the security of
assets the market
value of which is
not at any time

Unsecured:
Opposite

Types of L & A
(Forms/style)

1. Loans
1. Lump sum

2. Regular due with interest

3. Purpose Purchase of any asset

2. Cash credit
1. Allow to borrow against F. Assets
2. Interest for utilisation only

3. Overdraft
1. For current A/c holders

2. Allow to withdraw over & above the

credit balance.

3. Interest for utilisation only.

4. Purchase & discounting of bills

1. Purchase of bills.
2. Discounting the bills.
3. Commission is charged.

Other Forms
of
Secured Advances

1. Advances against life policies

Merits
1. Effective
2. Assignment
3. Easy valuation
4. Quick realization

Demerits
1. Impossibility of
realization (utmost
good faith)
2. Risky security

3. Worthless security
(sentenced to death)

Precautions to be taken by banker

1. Terms & conditions
2. Type of policy
3. Insurable interest
4. Admission of age

5. Payment of premium
6. Surrender value

7. Free from encumbrances

8. Assignment of policy

2. Advances against document of title of

goods

Document in proof of the possession or

control of goods.

It authorizes the holder to receive or

transfer of goods.

Examples Bill of lading, dock warrant,

warehouse certificate, railway receipt,

wharfinger certificate etc.

Risk involved
1. Chances for fraud

2. Forged documents
3. Defective title over the documents

4. Delivery on execution of indemnity bond

Precaution to be taken by banker

1. Character of the borrower

2. Documents

free

from

remarks

3. Insurance cover
4. Memorandum of charge

prejudicial

3. Advances Against bill of Exchange

Purchase & discounting of bills.

Purchase bills payable on demand

Discount bills payable on a due date

Merits

Safe lending.

Definite payment.

Profitable investment of funds.

Rediscounting of bills.

Fixed value.

Higher earning.

Precautions to be taken by banker

Preference for trade bills.

Credit worthiness of parties.

Completeness of bills.

Bills should be alive.

4. Advances against land & buildings

Housing loans

Plot loans

On the value of land & building

Precautions to be taken by banker

Clear title

Free from encumbrances

Value by experts

Insurance

Legal formalities Creation of charge.

5. Advances against security of goods

Advances against

Food articles

Industrial raw materials

Plantation products

Manufactured products

Merits

Easy realisable security

Safety of funds

Circulation of funds

Demerits

Decrease in the value of goods.

Difficulty in verification.

Price fluctuation.

Expensive for the banker.

Precaution to be taken by the banker

1. Examination

of

character

&

financial

position.
2. Loan against only easy marketable goods.
3. Watch the commodity market to check the
price movement.
4. Proper valuation of goods.
5. Godown key.
6. Name plate in the godown.
7. Insurance.

Assignment topics:
Lending

Principles of sound lending

Types of advances
Advances Against various securities
The students are advised to take any one of
the above mentioned assignment topics and
submitted with in a week from the
completion of the unit.

Further Reading:

Banking Theory
- Sundaram Varshney
Banking theory law
and practice
- S.M. Sundaram
Banking Theory
Practical Banking

- E. Gorden & Natarajan

- M. Radhaswamy