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BANKING LAW NOTES

MODULE 1

Overview of Banking System

Banks are the important segment in Indian Financial System. An efficient banking system helps the
nation’s economic development. Various categories of stakeholders of the Society use the banks for
their different requirements. Banks are financial intermediaries between the depositors and the
borrowers or it can be understood as a connection between customers that have capital deficits and
customers with capital surpluses. A bank is a financial institution that provides banking and other
financial services to their customers which includes fundamental services such as accepting deposits
and providing loans. Apart from these, banks in today’s changed global business environment offer
many more value-added services to their clients. The Reserve Bank of India as the Central Bank of
the country plays different roles like the regulator, supervisor and facilitator of the Indian Banking
System.

Banks represent main pillar of financial stability play an important role as national financial
institutions in everyday life. The Banking sector offers several facilities and opportunities to their
customers. All the banks safeguard the money and valuables and provide loans, credit, and payment
services. Section 5(b) of the Banking Regulations Act, 1949 defines banking as "the accepting, for
the purpose of lending or investment, of deposits of money from the public, repayable on demand
or otherwise, and withdrawal by cheque, draft, order or otherwise."

Banks also act as payment agents through checking or current accounts for customers, paying
cheques drawn by customers on the bank, and collecting cheques deposited to customers’ current
accounts. The banks also offer investment and insurance products. As a variety of models for
cooperation and integration among finance industries have emerged, some of the traditional
distinctions between banks, insurance companies, and securities firms have diminished. The banking
sector in India has transformed significantly over the years, with the addition of various new services
to the core of banking to meet the evolving needs of customers. These services include internet
banking, mobile banking, digital wallets, credit and debit cards, ATMs, online investment services,
and insurance products. The introduction of these services has made banking more convenient,
accessible, and efficient for customers in India, and has helped banks to expand their reach and
increase their customer base.
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History of Banking

An indigenous banking system was being carried out by the businessmen called Seths, Sahukars,
Mahajans, Chettis, etc. since ancient time. They performed the usual functions of lending moneys to
traders and craftsmen and sometimes placed funds at the disposal of kings for financing wars. The
indigenous bankers could not, however, develop to any considerable extent the system of obtaining
deposits from the public, which today is an important function of a bank.

Modern banking in India originated in the last decades of the 18th century. The first banks were The
General Bank of India which started in 1786, and the Bank of Hindustan. Thereafter, three
presidency banks namely the Bank of Bengal in 1809 (Originally Bank of Calcutta in 1806), the
Bank of Bombay and the Bank of Madras, were set up. For many years the Presidency banks acted as
quasi-central banks. The three banks merged in 1925 to form the Imperial Bank of India.

Many other banks were established by Indian merchants as well during that time but most of them
failed such as Union Bank or Oudh Commercial Bank. However, banks like Allahabad Bank in 1865
(now merged with Indian Bank) and Punjab National Bank in 1895 are still surviving and working as
major banks. A number of banks which were established for Indians then have survived to the
present such as Bank of India, Indian Bank, Bank of Baroda, and Central Bank of India.

Reserve Bank of India

A major landmark in Indian banking history took place in 1934 when a decision was taken to
establish ‘Reserve Bank of India’ which started functioning in 1935. Since then, RBI, as a central
bank of the country, has been regulating banking system. RBI covered all over the undivided India
and replaced the Imperial Bank of India by started issuing the currency notes and acting as the
banker to the government. In order to have close integration between policies of the Reserve Bank
and those of the Government, it was decided to nationalize the Reserve Bank immediately after the
independence of the country. From 1st January 1949, the Reserve Bank began functioning as a State-
owned and State-controlled Central Bank. RBI acts as a regulator of banks, banker to the
Government and banker’s bank. It controls financial system in the country through various measures.
It was given wide powers in the area of bank supervision through the Banking Companies Act (later
renamed Banking Regulations Act, 1949).

The nationalization of the Imperial bank through the formation of the State Bank of India and the
subsequent acquisition of the state-owned banks in eight princely states by the State Bank of India in
1959 made the government the dominant player in the banking industry. In 1969, fourteen major
Indian commercial banks were nationalized such as Bank of Baroda, Bank of India, Central Bank of
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India, Punjab National Bank, etc. Later in 1980 six more banks were nationalized. These banks
constitute the public sector banks while the other scheduled banks and non-scheduled banks are in
the private sector.

 A bank is a financial institution that provides banking services to customers. A bank is a single
physical entity that operates under a license.
 The banking system is a network of financial institutions, regulators, and organizations that
facilitate the flow of money. It includes banks, credit unions, payment systems, regulatory
bodies, and other organizations
 The banking services refer to the various financial products and services offered by banks and
other financial institutions such as deposit accounts, loans, credit cards, investment products,
insurance, and various other financial product.

Functions of a Bank
Primary Functions

1. Accepting deposits: One of the primary functions of all the commercial banks is mobilising
public funds, providing safe custody of savings as well as interest on the savings to depositors. It
can be in the form of savings accounts, current accounts, fixed deposits, and recurring deposits.
 In a saving deposit, the amount and the rate of interest are low. Withdrawals are also allowed
but only in a limited number.
 The fixed deposit is a fixed sum that one gives to the bank for a certain agreed time. The
withdrawals are not allowed before the completion of the time of the fixed deposit.
 The current account or deposit, there is no interest paid by the bank and the customer can
withdraw or deposit any number of times.
 In Recurring Deposits, a certain sum of money is deposited in the bank at regular intervals.
Money can be withdrawn only after the expiry of a certain period, but a higher interest is
paid.

2. Lending: The deposits accepted from the public are utilised by the banks to advance loans to the
businesses and individuals to meet their uncertainties. Bank charges a higher rate of interest on
loans and advances than what it pays on deposits. The difference between the lending interest
rate and interest rate for deposits is bank profit. The lending of funds may take different forms
such as cash credit, advances, discounting bills, overdraft, etc.
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 Overdraft is for current account holders and allows withdrawing money over the balance
limit.
 Cash credits are a short-term loan against a mortgage of property, and interest is charged on
the amount withdrawn above the limit.
 Loans are for short or medium terms, with repayment in lump-sum or instalments, and with
lower interest rates than overdrafts and cash credits.
 Discounting the bill of exchange is a short-term loan where the seller discounts the bill from
the bank for a fee, and the bank pays the bill amount to the seller on behalf of the buyer.

Secondary Functions
3. General Utility Functions: Banks provide general utility services too. For instance, traveller
cheques are issued, locker facilities provide for safe custody, and facilities of credit and debit
card services.
4. Agency Functions: Commercial banks may also serve the role of agents to their customers by
way of various services. Services may include a collection of cheques, drafts, and bills, insurance
premium payment, trustee or executor of customers’ estate, etc.

Other Functions
5. Remitting Funds: Fund remittance, or money transfer in general language, is also done by these
commercial banks. Funds can be transferred in various modes such as IMPS, NEFT, RTGS, draft
pay orders, etc., for specified commissions.
6. Cheque Facilities: Cheque facilities provided by commercial banks also help in drawing funds.
Money can be withdrawn both by the owner and the payee. The bearer cheques can be cashed
immediately, but the crossed cheques can only be deposited in the account of the payee.
7. E-banking: It engages electronic mediums enabling customers to access their funds. It does
away with the need of the customer to visit the bank premises for a transaction. With greater
penetration of the internet, it has become easier for customers to avail the facilities of e-banking.

Kinds of Banks

(a) Central Bank: The Reserve Bank of India is the central bank of India constituted under RBI Act,
1934 and given wide powers under Banking Regulations Act, 1949. Each country has a central bank
that regulates all the other banks in that particular country. The main function of the central bank is
to act as the Government’s Bank and guide and regulate the other banking institutions in the country.
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It is also known as the banker’s bank as it provides assistance to the other banks of the country and
manages the financial system of the country, under the supervision of the Government.

(b) Commercial Banks: A commercial bank is a kind of financial institution that carries all the
operations related to deposit and withdrawal of money for the general public, providing loans for
investment, and other such activities. These banks are profit-making institutions and do business
only to make a profit. They are regulated under the Banking Regulation Act, 1949. The two primary
characteristics of a commercial bank are lending and borrowing. They can be divided into:

 Public sector Banks – A bank where the majority stakes are owned by the Government of India.
Apart from the nationalized banks, SBI, IDBI Bank and Regional Rural Banks are also included
in the category of Public Sector banks.
 Private sector Banks – A bank where the majority stakes are owned by a private organization or
an individual or a group of people. Four of the Local Area Banks are also categorized as private
banks.
 Foreign Banks – Foreign banks have their registered offices outside India, and through their
branches they operate in India. Foreign banks are allowed on reciprocal basis.

(c) Cooperative Banks: A cooperative bank is a cooperative society registered or deemed to have
been registered under any State or Central Act. These cooperative banks cater to the needs of
agriculture, retail trade, small and medium industry and self-employed businessmen usually in urban,
semi urban and rural areas. The shareholders should be members of the co-operative banks which is
a distinctive feature. They operate at village, district, and state levels. They can also be divided into:
Short term agricultural institutions, Long term agricultural credit institutions, Urban
Cooperative Banks.

(d) Regional Rural Banks: They were established in India in 1975 to provide banking services to
the rural population. With joint shareholding by the Central government (50%), State government
(15%), and a Commercial Bank (35%), RRBs were designed to integrate commercial banking with
the social banking policy. They were expected to mobilize savings of small farmers, artisans,
agricultural labourers, and small entrepreneurs and promote banking habits among rural people. They
provide concessional credit to agriculture and the rural sector. One RRB cannot open its branches in
more than 3 geographically connected districts.

(e) Local Area Bank: LABs were introduced in 1996 with the aim of increasing credit availability
and the institutional credit framework in rural and semi-urban areas. They can operate in two or three
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contiguous districts, with permission to perform all scheduled commercial bank functions. Their
main objective is to earn a profit and were envisioned by the Raghuram Rajan Committee as private,
well-governed, deposit-taking small finance banks with higher capital adequacy norms and lower
concentration norms. However, at present, there are only 4 Local Area Banks.

(f) Development/Specialised Banks:

 Small Industries Development Bank of India (SIDBI) – Loan for a small-scale industry or
business can be taken from SIDBI. Financing small industries with modern technology and
equipment’s is done with the help of this bank.
 EXIM Bank – EXIM Bank stands for Export and Import Bank. To get loans or other financial
assistance with exporting or importing goods by foreign countries can be done through this type
of bank.
 National Bank for Agricultural & Rural Development (NABARD) – To get any kind of
financial assistance for rural, handicraft, village, and agricultural development, people can turn to
NABARD. It is the apex institution concerned with the policy, planning and operations in the
field of agriculture and other rural economic activities.
 National Housing Bank (NHB): Its functions are to increase the flow of institutional credit for
the housing sector and regulate Housing Finance Companies. NHB mobilizes resources and
channelizes them to various schemes of housing infrastructure development.

(g) Small Finance Banks: They look after the micro industries, small farmers, and the unorganized
sector of the society by providing them loans and financial assistance. The main objective of the
small finance bank is to strengthen the financial inclusion by extending basic banking services like
deposits and the supply of credit across the country. They are registered under the Companies Act,
2013 as public companies.

(h) Payments Bank: It has been recently conceptualized by the RBI. People with an account in the
payments bank can only deposit an amount of up to ₹1 lakh and cannot apply for loans or credit
cards under this account. Options for online banking, mobile banking, the issue of debit card can be
done through payments banks.
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Reserve Bank of India Act, 1934

The Reserve Bank of India Act, 1934 is the legislation that establishes the RBI and provides the legal
framework for the central banking system in India. The RBI Act was enacted on March 6, 1934, and
has been amended several times since then to reflect the changing needs of the Indian economy.

Salient Features of the RBI Act, 1934:

1. Establishment of the Reserve Bank of India: The RBI Act established the Reserve Bank of
India as the central bank of India with the primary objective of regulating the issue of bank notes
and the keeping of reserves with a view to securing monetary stability in India and to operate
effectively the nation’s currency and credit system.
2. Management and Administration: The RBI Act provides for the constitution of a Central
Board of Directors, consisting of a Governor, Deputy Governors, and other Directors appointed
by the central government. The Governor of the RBI is appointed by the central government for a
period of four years and is responsible for the management and administration of the RBI.
3. Functions and Powers: The RBI Act sets out the functions and powers of the RBI, which
include the regulation of the monetary and credit system in India, the management of foreign
exchange reserves, and the development of the financial system in India.
4. Issue of Banknotes: The RBI Act gives the RBI the sole right to issue banknotes in India. The
RBI is also responsible for the design, printing, and distribution of banknotes in India.
5. Regulation of Banks: The RBI Act empowers the RBI to regulate and supervise banks and other
financial institutions in India. The RBI is responsible for licensing and regulating banks, setting
the minimum reserve requirements for banks, and prescribing norms for the functioning of banks.
6. Government Securities: The RBI Act empowers the RBI to manage the public debt of the
central government and to issue and manage government securities.
7. Issuing Directives and Imposing Penalties for violation of the provisions of the Act

RBI Act, 1934 is a comprehensive legislation that provides the legal framework for the functioning
of the Reserve Bank of India as the central bank of India. The Act provides for the constitution,
functions, and powers of the RBI. The act does not directly deal with the regulation of the banking
system except for few sections. However, it outlines the functions of the RBI such as issue of bank
notes, monetary control, banker to the Central and State Governments and banks, lender of last resort
and other functions.
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Banking Regulation Act, 1949

The Banking Regulation Act, 1949 is one of the important legal frameworks. Initially the Act was
passed as Banking Companies Act, 1949 and it was changed to Banking Regulation Act 1949. The
Act is a comprehensive piece of legislation aimed at the development of sound and balanced growth
of banking business in the country. Along with the Reserve Bank of India Act 1934, Banking
Regulation Act 1949 provides a lot of guidelines to banks covering wide range of areas. The
preamble of the act states that it is to consolidate the banking laws as far as possible. The objective of
Banking Regulation Act, 1949 is to:

 Provide specific legislation containing comprehensive provisions, particularly to the business

of banking in India
 Prevent such bank failures by prescribing minimum capital requirements
 Ensure the balanced development of banking companies
 Give powers to RBI to approve the appointment, reappointment, and removal of the
chairman, directors, and officers of the banks
 Safeguard the Interests of Depositors
 Facilitate strengthening the banking system of the country.

Powers of RBI

1. Section 10BB – Power of Reserve Bank to appoint Chairman of the Board of Directors
appointed on a whole-time basis or a Managing Director of a banking company.
2. Section 21 – Power of Reserve Bank to control advances by banking companies. Reserve Bank
has the powers to determine policies and direct banking companies to follow the same.
3. Section 22 – Licensing of banking companies: All banking companies need to get a license from
RBI and it issues a license only after ‘tests of entry’ are fulfilled.
4. Section 24A- The RBI by notification in the Official Gazette can declare that the whole or any
part of the provisions of section 18 or section 24 shall not apply to any co-operative bank.
5. Section 27 – At any time, the RBI may direct a banking company calling for statements and
information relating to the business or affairs of the banking company apart from calling for
information every half-year regarding the investments of a banking company and the
classification of its advances in respect of industry, commerce and agriculture.
6. Section 29A empowers the RBI to require a banking company to provide information on its
associate enterprises and conduct inspections of their books and accounts jointly with the
relevant regulatory authority.
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7. Section 30 – In the public interest or in the interest of the banking company or its depositors, the
RBI may at any time by order direct that a special audit of the banking company’s accounts.
8. Section 35 – Reserve Bank on its own or being directed so to do by the Central Government,
inspect any banking company and its books and accounts and supply to the banking company a
copy of its report on such inspection.
9. Section 35(3) – RBI can examine on oath any director or other officer of the bank and cause a
scrutiny to be made of the affairs of the bank.
10. Section 35A – Power of the Reserve Bank to give directions: In the public interest or in the
interest of Banking policy, RBI has powers to issue, modify or cancel as it deems fit, and the
banking companies are bound to comply with such directions.
11. Section 36 – RBI may caution or prohibit banking companies against entering into any particular
transaction or class of transactions.
12. On a request by the companies concerned and subject to the provision of section 44A, assist, in
the amalgamation of such banking companies.
13. Give assistance to any banking company by means of a loan or advance in terms of under section
18 of the RBI Act.
14. Section 47A provides the RBI with the power to impose penalties for contraventions mentioned,
which is to be payable within 14 days.

Banking Company
As per section 5 (c) of the B.R. Act, 1949 Banking company means “any company which transacts
the business of banking in India.” Thus, any company whether foreign or Indian, which transacts the
business of banking in India is called a banking company. The explanation to the section makes it
clear that any company which accepts deposits merely for the purpose of financing its business will
not be treated as a banking company.

It has to be executing the features of a bank as per Section 5 (b) i.e.,

 Accepting deposits from the general public,

 Lending or further investing the money received from such deposits,
 The money is repayable on demand, and
 The money deposited can be withdrawn by cheque, draft, order or otherwise.

The first and the foremost requirement for the formation of a banking company in India is that the
applicant needs to be a ‘Company’ formed under the provisions of the Companies Act.
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Section 7 prohibits every company other than a banking company to use the words bank, banking, or
the banking company, whereas for a banking company it is mandatory to use one of these words.
Section 6 also provides an exhaustive list of form of businesses banking companies can do other than
banking functions. It is mandatory for banking companies to get a license from RBI.

A banking company can perform banking functions such as accepting deposits and making loans, but
it is not the same as a bank. A banking company must also meet the requirements set by the RBI to
obtain a license to operate. One key difference between a bank and a banking company is the scope
of their operations. Banks tend to have a broader range of services and are often involved in a wider
range of financial activities.

The Banking Ombudsman Scheme

It was introduced by the RBI under the Banking Regulation Act of 1949, with effect from 1995. The
scheme was legally refined and modified through the introduction of regulations under Banking
Ombudsman Scheme 2006, with the latest revision made in 2017. Its main aim is to provide a cost-
free and expeditious forum to bank customers for the resolution of their complaints against the
deficiencies in banking services rendered by the banks. The scheme extends to the whole country and
covers the business of the banking industry in the country, meaning all scheduled commercial banks,
rural banks, and cooperative banks come under the purview of the scheme.

The Banking Ombudsman Scheme creates an onus through Section 35A of the Banking Regulation
Act, 1949, to appoint a banking ombudsman, who is a senior official not below the rank of Chief
General Manager or General Manager appointed by the Reserve Bank of India.

Under the scheme, customers can raise complaints in around 25 areas listed in Clause 8, including:

 Non-payment or inordinate delay in payment or collection of cheques, drafts, bills, etc.;

 Non-payment or delay in payment of inward remittances;
 Failure or delay to issue drafts, pay orders, or bankers' cheques;
 Non-adherence to prescribed working hours;
 Refusal to open deposit accounts without any valid reason for refusal;
 Levying of charges without adequate prior notice to the customer;
 Refusal or delay in closing accounts; and
 Non-observance of Reserve Bank guidelines on engagement of recovery agents by banks.
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To make a complaint with the Banking Ombudsman, a bank customer can file it simply by writing
on a plain paper or through online modes. The customer can file a complaint with the Banking
Ombudsman if the bank fails to provide a reply to the customer's complaint in one month, the bank
rejects the complaint, or the complainant is not satisfied with the reply given by the bank.
Any person who has a grievance against the bank on any one or more of the grounds mentioned in
Clause 8 of the Scheme, may himself or through his authorised representative, make a complaint,
along with copies of documents, to the Banking Ombudsman within whose jurisdiction the branch or
office of the bank complained against is located. According to the regulations, the ombudsman
redressal is allowed for complaints where the compensation amount for any loss suffered by the
complainant is limited to Rs 20 lakh. Similarly, the Banking Ombudsman may award compensation
not exceeding Rs 1 lakh to the complainant for mental agony and harassment. The Banking
Ombudsman will consider the loss of the complainant's time, expenses incurred by the complainant,
harassment, and mental anguish suffered by the complainant while passing the compensation.

The Banking Ombudsman conducts an investigation and attempts to mediate and resolve the
complaint within a period of 30 days. If the complaint is not resolved, the Banking Ombudsman can
pass an award, which is binding on the bank, subject to the right of the customer to approach the
appellate authority under clause 14 if dissatisfied with the award. The "appellate authority" means
the Deputy Governor in charge of the Department of the Reserve Bank implementing the Scheme.

Grounds for Rejection:

 The complainant didn't first make a written representation to the bank before filing the complaint.
 The bank has already responded to the complaint within one month and the complainant is
satisfied with the response.
 The complaint is made more than one year after the complainant received the bank's response (if
any) to their representation.
 The complaint is about the same issue that has already been settled by the Banking Ombudsman
or is being dealt with by a court, tribunal, arbitrator, or forum.
 The complaint is frivolous or vexatious.
 The complaint is filed after the expiry of the period of limitation provided under the Limitation
Act, 1963.

Although now this has been repealed because the Reserve Bank – Integrated Ombudsman Scheme,
2021 integrates the existing three Ombudsman schemes of RBI namely, (i) the Banking Ombudsman
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Scheme, 2006; (ii) the Ombudsman Scheme for Non-Banking Financial Companies, 2018; and (iii)
the Ombudsman Scheme for Digital Transactions, 2019.

Banker-Customer Relationship
Banker-customer relationship refers to the legal and contractual relationship between a bank and its
customers. When a person opens an account with a bank, it creates a contractual relationship
between the two parties, where the bank is responsible for keeping the deposited money safe and
providing various banking services to the customer.

1. Creditor-Debtor

On the opening of an account the banker assumes the position of a debtor as the money over to the
banker becomes a debt due from him to the customer. The money deposited by the customer with the
banker is, in legal terms, lent by the customer to the banker, who makes use of the same according to
his discretion. They aren’t bound to inform the creditor about the utilization and aren’t bound to give
any security to the depositor. The creditor has the right to demand back his money from the banker,
and the banker is under and obligation to repay the debt as and when he is required to do so.

They also provide loans by charging a particular amount of interest by utilizing the resources
mobilized by them. Banker becomes creditor of the customer who has taken a loan from the banker
and continues in that capacity till the loan is repaid. But here, the bank requires security and
documents for providing loans.

2. Trustee-Beneficiary

A trustee holds money or assets and performs certain functions for the benefit of some other person
called the beneficiary. For example, if the customer deposits securities or other valuables with the
banker for safe custody, the latter acts as a trustee of his customer. The customer continues to be the
owner of the valuables deposited with the banker. He may have simply kept the valuables for the
safe-keeping or he may have taken a loan out of it.

The relationship between the banker and his customer as a trustee and beneficiary depends upon the
specific instructions given by the latter to the former regarding the purpose of use of the money or
documents entrusted to the banker. This relationship is based on trust, hence, the document deposited
in the bank is a secured document and the bank never share these documents with any other person.
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3. Bailor-Bailee

Section 148 of Indian Contract Act,1872, defines bailment, bailor, and bailee. A bailment is the
delivery of goods by one person to another for some purpose upon a contract. As per the contract, the
goods should when the purpose is accomplished, be returned or disposed off as per the directions of
the person delivering the goods. The person delivering the goods is called the bailer and the person to
whom the goods are delivered is called the bailee.

Banks obtain tangible securities to secure their loans and advances. In some cases, banks hold
physical possession of secured goods such as gold jewels (gold loans) or bonds and shares (loans
against shares and financial instruments). In such cases, the collateral securities are held by the banks
and the relationship between banks and customers is that of bank as bailee and borrowing customer
as bailor. The banks take certain charges for such bailment.

4. Principal-Agent

An agent is a person who acts as the one who is employed to do any act for another or to represent
another in dealings with the third person. The person for whom the work is done or to whom it is
represented is called the principal. A banker acts as an agent of his customer and performs a number
of agency functions for the convenience of his customers. For example, banker collects cheques on
his behalf and makes payment of various dues of his customers, e.g., insurance premium, etc. The
range of such agency functions has become much wider and the banks are now rendering large
number of agency services of diverse nature. Here bank acts according to the guidelines of the
customer as an agent.

5. Lesser-Lessee

Section 105 of ‘Transfer & Property Act’ deals with lease, lesser, lessee. Lease is a transfer of a right
to enjoy an immovable property in consideration of a price. In case of safe deposit locker accounts,
the banker becomes the lesser and the customer becomes the lessee. Banks lease the safe deposit
lockers (bank’s immovable property) to the clients on hire basis. Banks allow their locker account
holders the right to enjoy (make use of) the property for a specific period against payment of rent.

6. Advisor-Client

The advisor and client relationship between a bank and its customer involves the bank serving as an
advisor and providing guidance and recommendations on financial matters, while the customer
ultimately makes the decisions regarding the use of financial products and services. The relationship
is based on trust, transparency, and the bank acting in the best interests of the customer.
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Rights and Duties of Bankers

Duties of Bankers
1. It is the responsibility of the banker not to disclose the personal information given by the
customer.

2. A banker should follow the guidelines of the customer. If the banker isn’t provided with any
guidelines, they can follow the rules and regulations.

3. A banker is obliged to maintain all the details of transactions made by the customer.

4. The banker is obliged to honour the cheques of its customers up to the amount standing to the
credit of the customer’s account. If the banker is wrongly refusing to honour the cheque, it is liable to
pay the compensation to the customer.

5. A banker is responsible to withdraw and deposit funds with attention and accuracy.

6. A banker should gather financial information from new and existing clients to prepare their
accounts, loans and determine their creditworthiness.

7. The banker is obliged to advise, assist, and guide the client to meet their financial goals.

Rights of Bankers
1. Right of Lien- This is one of the rights that are enjoyed by the banker. Under this right, a banker
can keep the goods or properties which are under the possession of the debtor until the loan is repaid
by the same. The right of general lien is referred to under Section 171 of the Indian Contracts Act,
1872. A banker is only supposed to maintain the collateral but not allowed to sell it. But the banker
can sell the collateral after issuing a reasonable notice to the debtor who has defaulted.

2. Right of Set-off- Under this right, the banker has the right to merge two or more accounts of the
customer under the same name in a bank and set off the debt balance in one account and the credit
balance in other, provided the funds belong to the customer.

3. Right of Appropriation- This right is used when a customer who has taken many loans from the
bank, deposits some money without any instructions. In such cases, the banker can use his right to
appropriate the deposited amount to any loan, even to a time-barred- debit after informing the
customer about the appropriation.
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4. Right to charge interest and commission- Every bank in India has the right to charge interest on
the loans they provided to their customers. The interests are charged monthly, quarterly, semi-
annually or annually. Along with interests, the banks also have the right to levy commissions for the
services they are rendering for their customers like SMS notification service, multi-city cheque
service, retail banking etc.

5. Right to close the Account- After sending a written intimation to the customer, the banker has the
right to close an account if it is found to be not operated properly.

Customer

A customer is a person or a company who has an account in the bank and the activities by the
customer should be valid and lawful. The term “customer” is not defined under any law.

1. A person or entity that maintains an account and/or has a business relationship with the bank.
2. One on whose behalf the account is maintained.
3. Beneficiaries of transactions conducted by professional intermediaries, such as stockbrokers,
chartered accountants, solicitors, etc. as permitted under the law.

As the banker- customer relationship is a contractual relationship, all the essential features of a valid
contract must be present when a banker opens an account. Even though the actual formalities will
differ depending on the type of the customer, certain formalities are common to all. The common
formalities are: The banker must ensure that the customer is competent to contract. For entering into
a valid contract, a person needs to fulfil the basic requirements of being a Major (18 years of age or
above) and possessing sound mental health (i.e., not being a lunatic). A person who fulfils these
basic requirements, as also other requirements of the banks as mentioned below can open an account.
However, minors (below 18 years of age) can also open SB accounts with certain limitations.

A customer of a bank need not to be necessarily a person, it may be a firm, joint venture, a society or
any separate legal entity. Special Types of customers include:
a) Minors b) Married women c) Lunatics d) Illiterate persons e) Partnerships f) Trust etc
 16

MODULE 2

Types of Accounts

1. Current account- A current account is a deposit account for traders, business owners, and
entrepreneurs, who need to make and receive payments more often than others. These accounts hold
more liquid deposits with no limit on the number of transactions per day. Current accounts allow
overdraft facility, that is withdrawing more than what is currently available in the account. Also,
unlike savings accounts, where you earn some interest, these are zero-interest bearing accounts. You
need to maintain a minimum balance to be able to operate current accounts.

2. Savings account - A savings bank account is a regular deposit account, where you earn a
minimum rate of interest. Here, the number of transactions you can make each month is
capped. Banks offer a variety of Savings Accounts based on the type of depositor, features of the
product, age or purpose of holding the account, and so on. There are regular savings accounts,
savings accounts for children, senior citizens or women, institutional savings accounts, family
savings accounts, and so many more. The customer has the option to pick from a range of savings
products. There are zero-balance savings accounts and also advanced ones with features like auto
sweep, debit cards, bill payments and cross-product benefits. A cross-product benefit is when you
have a savings account with a bank and get to avail special offers on opening a second account such
as a demat account.

3. Fixed deposit account- To park your funds and earn a decent rate of interest on it, there
are different types of accounts like fixed deposits and recurring deposits. A fixed deposit (FD)
account allows you to earn a fixed rate of interest for keeping a certain sum of money locked in for a
given time, that is until the FD matures. FDs range between a maturity period of seven days to 10
years. The rate of interest you earn on FDs will vary depending on the tenure of the FD. Generally,
you cannot withdraw money from an FD before it matures. Some banks offer a premature
withdrawal facility. But in that case, the interest rate you earn is lower.

4. Recurring deposit account- A recurring deposit (RD) has a fixed tenure. You need to invest a
 17

fixed sum of money in it regularly -- every month or once a quarter -- to earn interest. Unlike FDs,
where you need to make a lump sum deposit, the sum you need to invest here is smaller and more
frequent. You cannot change the tenure of the RD and the amount to be invested each month or
quarter. Even in the case of RDs, you face a penalty in the form of a lower interest rate for premature
withdrawal. The maturity period of an RD could range between six months to 10 years.

5. NRI accounts- There are different types of bank accounts for Indians or Indian-origin people
living overseas. These accounts are called overseas accounts. They include two types of savings
accounts and fixed deposits -- NRO or non-resident ordinary and NRE or non-resident external
accounts. Banks also offer foreign currency non-resident fixed deposit accounts.

KYC Norms
Know Your Customer (KYC) establishes the identity and residential address of the customers by
specified documentary evidences. In India, the eKYC or Electronic Know Your Customer is a
process wherein the customers’ identity and address are digitally verified by way of their Aadhaar
identity cards. One of the main objectives of KYC procedure is to prevent misuse of the banking
system for money laundering and financing of terrorist activities. Banks are entitled to refuse to open
an account or discontinue an existing relationship if there is failure to meet the minimum KYC
requirements.

The ‘KYC’ guidelines also reinforce the existing practices of some banks and make them
compulsory, to be adhered to by all the banks with regard to all their customers who maintain
domestic or non-resident rupee or foreign currency accounts with them. All religious trust accounts
and non-religious trust accounts are also subjected to KYC procedure. RBI had advised banks that:

a. No account is opened in anonymous or fictitious/benami name (s)

b. Bank will not open an account or close an existing account if the bank is unable to verify the
identity or obtain documents required by it due to non-cooperation of the customer.

Customer Identification Procedure

Customer identification means identifying the customer and verifying his/her identity by using
reliable, independent source documents, data or information. Banks need to obtain sufficient
information necessary to establish, to their satisfaction, the identity of each new customer, whether
regular or occasional, and the purpose of the intended nature of banking relationship. Being satisfied
means that the bank must be able to satisfy the competent authorities that due diligence was observed
 18

based on the risk profile of the customer in compliance with the extant guidelines in place. Such risk-
based approach is considered necessary to avoid disproportionate cost to banks and a burdensome
regime for the customers. Besides risk perception, the nature of information/documents required
would also depend on the type of customer (individual, corporate etc.). For customers that are natural
persons, the banks should obtain sufficient identification data to verify the identity of the customer,
his address/ location, and also his recent photograph. Similar information will also have to be
provided for joint holders and mandate holders. For customers that are legal persons or entities, the
bank should

(i) verify the legal status of the legal person/entity and operating address through proper and
relevant documents;
(ii) verify that any person purporting to act on behalf of the legal person/entity is so
authorized and identify and verify the identity of that person;
(iii) understand the ownership and control structure of the customer and determine who are
the natural persons who ultimately control the legal person.

Information is also required on the nature of employment/business that the customer does or expects
to undertake and the purpose of opening of the account with the bank.

Garnishee Orders
A Garnishee Order is an order issued by court under provisions of Order 21, Rule 46 of the Code of
Civil Procedure, 1908. It is an order passed by an executing court directing or ordering a garnishee,
i.e., the bank upon whom the order is served, not to pay money to judgment debtor since the latter is
indebted to the garnisher (decree holder). It is an Order of the court to attach money or Goods
belonging to the judgment debtor in the hands of a third person. The court may direct that such
amount may be paid to the decree holder towards the satisfaction of the decree and costs of the
execution. In simple words the garnishee is the bank in this who is liable to pay a debt to judgment
debtor or to deliver any movable property to him.

It is passed if a debtor fails to pay the debt owed by him to his creditor, the latter may apply to the
Court for the issue of a Garnishee Order on the banker of his debtor. The obligation of a banker to
honour his customer’s cheques is extinguished on receipt of the Garnishee order. The account of the
customer with the banker, thus, becomes suspended and the banker is under an obligation not to
make any payment from the account concerned after the receipt of the Garnishee Order. First, the
Court directs the banker to stop payment out of the account of the judgement- debtor. Thereafter, the
Court may issue the financial order where the entire balance in the account or a specified amount is
 19

attached to be handed over to the decree holder. On receipt of such an order to the banker is bound to
pay the garnished funds to the decree holder. Thereafter, the banker liabilities towards his customer
are discharged to that extent.

Garnishee Order applies to existing debts as also debts accruing due. It does not apply to money
deposited subsequent to receipt of Garnishee Order. Bank can exercise right of set off before
applying Garnishee Order. If amount is not specified in the order, then it will be applicable on the
entire balance in the account. However, if it is for specific amount, the cheques can be paid from the
balance available after setting aside the amount as mentioned in the Garnishee Order.

The Garnishee Order is not applicable to:

(i) Money held abroad by the judgement-debtor; and

(ii) Securities held in the safe custody of the banker.

Also, in case of Joint Account, if only one of them is a judgement –debtor, the joint account cannot
be attached. But, if both or all the joint account- holders are joint judgement- debtors in any legal
proceedings, the joint account can be attached. Similarly, when Garnishee Order is in the name of a
partner it will not apply to partnership account but when Garnishee Order is in the name of firm,
accounts of individual partners are covered.

Where neither the garnishee makes the payment into the court, as ordered, nor appears and shows
any cause in answer to the notice, the court may order the garnishee to comply with such notice as if
such order were a decree against him. The costs of the garnishee proceedings are at the discretion of
the court. Orders passed in garnishee proceedings are appealable as Decrees.

Set-Off
The right of set-off is a statutory right which enables a bank to combine two accounts in the name of
the same customer and to adjust the debit balance in one account with the credit balance in the other.
The general rule is that the banker has a right of set-off which means that unless expressly or
impliedly excluded, the banker may combine accounts kept by the customer in his own right, even
though at different branches of the same bank, and to treat the balance as the only amount standing to
his credit. It has been held that when a bank combines a customer's accounts, it is not making a claim
over the money in them, but is merely carrying out an accounting exercise to determine the
customer's indebtedness to it or vice versa.

The right of set-off can be exercised subject to the fulfilment of the following conditions:
 20

(i) This right of set-off can be exercised by the banker if there is no agreement—express or
implied—contrary to this right and after a notice is served on the customer intimating the
latter about the former’s intention to exercise the right of set-off. To be on the safer side, the
banker takes a letter of set-off from the customer authorizing the banker to exercise the right
of set-off without giving him any notice.
(ii) The accounts must be in the same name and in the same right- It means that not only the
name but the capacity of the accountholder in both or call the accounts must be the same. The
underlying principle involved in this rule is that funds belonging to someone else, but
standing in the same name of the account – holder, should not be made available to satisfy his
personal debts. For e.g., An account in the name of a person in his capacity as a guardian for
a minor is not be treated in the same right as his own account with the banker.
(iii) The right can be exercised in respect of debts due and not in respect of future debts or
contingent debts. A banker can set-off a credit balance in the account of customer towards the
payment of a bill which is already due but not in respect of a bill which will mature in future.
(iv) The amount of debts must be certain. It is essential that the amount of debts due from both
the parties to each other must be certain. If liability of any one of them is not determined
exactly, the right of setoff cannot be exercised.
(v) The Banker may exercise this right at his discretion. The customer cannot compel or pursue
the banker to exercise the right and to pay the credit balance at any other branch.
(vi) The banker has right to exercise this right before the garnishee order is made effective. In
case a banker receives a garnishee order in respect of the funds belonging to his customer, he
has the right first to exercise his right of set-off and thereafter to surrender only the remainder
amount to the judgement creditor.

Bank Guarantee
A Bank Guarantee is a commitment given by a banker to a third party, assuring him to honour the
claim against the guarantee in the event of the non- performance by the bank’s customer. A Bank
Guarantee is a legal contract which can be imposed by law. The banker as guarantor assures the third
party to pay him a certain sum of money on behalf of his customer, in case the customer fails to fulfil
his commitment to the beneficiary. There is always a risk that a party might default and the other
party would have to suffer huge losses. The concept of “Bank Guarantee” is used for this security
purpose.
 21

A bank guarantee, similar to guarantee in Section 126 of the Indian Contract Act, 1872, involves a
tripartite agreement between the debtor, creditor and the surety in which the bank promises the surety
to repay the amount of the debtor defaults. The bank issuing the guarantee is known as the issuing
bank, the party on whose behalf the guarantee is issued is called the applicant, and the party in whose
favour the guarantee is issued is called the beneficiary.

Any person who has a good financial record is eligible to apply for BG. BG can be applied by a
business in his bank or any other bank offering such services. Before approving the BG, the bank
will analyse the previous banking history, creditworthiness, liquidity, CIBIL, etc. The bank would
also examine the BG period, value, beneficiary details, and currency as required for the approval. In
certain cases, banks will require security to be provided by the applicant to cover the BG value. The
issuing bank will charge a fee for issuing the guarantee, which is usually a percentage of the amount
guaranteed.

The bank guarantee is an independent contract between the bank and the beneficiary, and the bank is
liable to pay the amount mentioned in the guarantee on demand by the beneficiary. The bank
guarantee is also irrevocable, meaning that the issuing bank cannot cancel the guarantee without the
consent of the beneficiary. There are different types of Bank Guarantees, the most common of
which are Performance Guarantees and Financial Guarantees.

 Financial Guarantee: A Financial Guarantee is issued to ensure that the applicant makes the
payment on time. This type of guarantee is often used in international trade transactions, where
the buyer (applicant) is required to make payment to the seller (beneficiary) within a specified
period of time. If the buyer fails to make the payment as per the agreement, the beneficiary can
claim the amount mentioned in the guarantee from the issuing bank. Financial Guarantees can
also be used in other types of transactions, such as loans and leases.
 Performance Guarantee: A Performance Guarantee is issued to ensure that the applicant
performs his obligations under a contract. This type of guarantee is often used in construction
contracts, where the contractor is required to complete the work within a specified period of time.
If the contractor fails to complete the work on time, the beneficiary can claim the amount
mentioned in the guarantee from the issuing bank. Performance Guarantees can also be used in
other types of contracts, such as supply contracts and service contracts.

Letter of Credit (Not part of BG)

A Letter of Credit is issued by a bank at the request of its customer (importer) in favour of the
beneficiary (exporter). It is a commitment by the bank, advising/informing the beneficiary that the
 22

documents under a LC would be honoured, if the beneficiary (exporter) submits all the required
documents as per the terms and conditions of the LC. It is a written undertaking by the buyer's bank
to the seller that payment will be made upon the satisfaction of certain conditions, typically the
presentation of specified documents that demonstrate the shipment of the goods in accordance with
the terms of the LC.

The trade can be classified into Inland and International. Due to the geographical proximities of the
importers and the exporters, banks are involved in LC transactions to avoid default in payment
(credit risks). To facilitate trade and also to enable the exporter and importer to receive and pay for
the goods sold and bought, letter of credit is used as a tool. Letter of credit mechanism that the
payment and receipts (across the globe) are carried out in an effective manner.

Deceased Accounts
Deceased accounts are bank accounts that are owned by a person who is no more alive. Banks will
freeze the account(s) when they get notified that the account has been deceased. The money and
belongings (if stored in a bank locker) will be handed over to the legal heirs as per the court's
directions.

In a deceased account where there is neither Survivorship clause nor Nomination, the Banks deliver
the assets only to the legal heirs. When the account holder is no more, the nominee or the legal heirs
are to inform the banks at the earliest about the same. They must notify the bank about the death by
furnishing death certificate, ID proof, and account details. If the deceased accounts are pay-on-death
accounts, then the bank will hand over the proceeds to the nominee or beneficiary when the account
holder gets deceased. Further, if there is nothing that the deceased person owes to creditors, then the
proceeds from the deceased accounts will be handed over to the nominee if there was a clause,
otherwise to the legal heirs after proper proof identification. The bank may release the balance in the
account to the legal heirs after obtaining indemnity bonds and sureties from them.

The bank may also require the legal heirs to publish a notice in a newspaper to inform other
claimants. If there is a dispute among legal heirs, the bank may require them to obtain a court order
or settlement agreement before releasing the funds. The bank may also transfer the balance in the
account to a court-appointed administrator if there is no agreement among legal heirs.

Although, if there is any unpaid debt, then the account balance would be recovered by the creditors.
The remaining amount, if any, will be handed over to the heirs. Creditors are given the preference
 23

over legal heirs when an account becomes deceased. Hence, deceased accounts become extremely
important for the lenders if the deceased has any unpaid debt.

However, the proceeds in the case of joint accounts held with a deceased person will result in the
surviving owner gaining full ownership over the account. The surviving owner may continue to
operate on the account or close the same. Joint accounts held with a deceased person are not
considered deceased accounts.

Bill of Exchange and Promissory Note

A “bill of exchange”, given under Section 5 of the Negotiable Instruments Act, 1881, is an
instrument in writing containing an unconditional order, signed by the maker, directing a certain
person to pay on demand or in future a certain sum of money to a certain person. A bill of exchange
is a legal document that is used in commercial transactions and serves as a written order by one party
to another to pay a specific sum of money at a certain time. It contains the details of the parties
involved in the transaction, the amount to be paid, the date of payment, and other relevant terms and
conditions. It is a negotiable instrument, which means that it can be transferred or endorsed by the
holder to another party, who then becomes the holder in due course with all the rights and obligations
associated with the bill. The holder of the bill has the right to demand payment from the drawee, who
is the party ordered to make the payment. A creditor issues Bill of Exchange to a debtor for payment
of money owed by the debtor for the goods and services availed. A prominent feature of Bill of
Exchange is, it needs to be accepted by a debtor to in order to be valid. It is used in business to settle
the outstanding debt between the parties involved in the transaction. As per Section 30, the drawer of
a bill of exchange or cheque is bound, in case of dishonour by the drawee or acceptor thereof, to
compensate the holder, provided due notice of dishonour has been given to, or received by, the
drawer as hereinafter provided.

A promissory note, given under Section 4 of the Negotiable Instruments Act, 1881, is a negotiable
instrument containing written promise to pay a certain amount of money to its holder by an
individual or an entity either on demand by the holder or at a pre-specified date. The most important
feature of Promissory Note is, once it is drawn by the debtor, it need not be accepted by the creditor.
A “promissory note” is an instrument in writing (not being a bank-note or a currency-note)
containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to
a certain person, or to the bearer of the instrument. A promissory note is a negotiable instrument,
which means that it can be transferred from one person to another by mere delivery or by
endorsement and delivery. The NI Act also provides certain requirements for a valid promissory
 24

note, such as the amount must be certain, the instrument must be properly stamped, and the parties
must be legally capable of entering into a contract. Two parties are involved in the promissory note.
They are:

 Drawer/Maker: Drawer is the debtor who promises to pay the amount to lender or creditor.
 Payee: Payee is the creditor who is been promised by the borrower or debtor about the
pending payment.

MODULE 4

Banking Frauds
In the present-day economic system, banks play a very important role in the economic development
of the country. Nowadays, banks have diversified their activities and are getting into new schemes
and services that create opportunities for financial inclusion. As the banking sector is flourishing, it
is getting plagued by some operational problems such as frauds etc

Fraud can be understood as “A deliberate act of omission or commission by any person, carried
out in the course of a banking transaction or in the books of accounts maintained manually or
under computer system in banks, resulting into wrongful gain to any person for A temporary
period or otherwise, with or without any monetary loss to the bank”.

The RBI has been advising banks from time to time about the major fraud prone areas and the
safeguards necessary for prevention of frauds. As per RBI’s master directions of fraud, it can be
classified into:

1. Misappropriation and criminal breach of trust: Misappropriation refers to an act of

dishonestly appropriating or using the funds of a bank for one’s personal use or for the use of
a third party. Criminal breach of trust, on the other hand, involves a violation of the trust
reposed in an individual by entrusting them with the property or money of another. Such
frauds often involve insiders, i.e., employees of the bank, who misuse their position to siphon
off funds or other assets.
2. Fraudulent encashment through forged instruments, manipulation of books of account
or through fictitious accounts and conversion of property: This type of fraud involves the
use of fake or forged documents, such as cheques or demand drafts, to withdraw money from
 25

a bank account. The fraudsters may also manipulate the bank’s books of account or create
fictitious accounts to facilitate the fraud. In some cases, they may also convert the property of
the bank for their own benefit.
3. Unauthorised credit facilities extended for reward or for illegal gratification: This type
of fraud involves the granting of credit facilities to a borrower without proper due diligence
or collateral security, in exchange for a reward or illegal gratification. This can be done by
bank officials or third-party intermediaries who have connections with the bank.
4. Cash shortages: Cash shortages occur when there is a discrepancy between the actual cash
balance and the recorded cash balance in the bank’s books of account. Such frauds can be
caused by employees stealing cash or not properly accounting for cash transactions.
5. Cheating and forgery: Cheating and forgery are similar to fraudulent encashment but
involve the use of false or fake documents to deceive the bank. This can include the use of
counterfeit cheques, fake IDs, or other documents to obtain loans or other financial facilities.
6. Fraudulent transactions involving foreign exchange: This type of fraud involves the use of
foreign exchange transactions to illegally transfer funds across borders. This can be done
through the use of fake import/export invoices or through the manipulation of exchange rates.
7. Any other type of fraud not coming under the specific heads as above: This refers to any
other type of fraud that is not covered under the above categories. This could include loan
fraud, credit card fraud, ATM fraud, etc.

8. Cyber fraud: Although not mentioned in RBI Circular, but with the growing use of
technology in banking, cyber fraud has become a significant concern for banks in India.
Cyber fraud involves hacking into the bank's computer system to gain unauthorized access to
customer accounts. The fraudsters can then steal sensitive information such as login
credentials, account details, and personal information. It can result in significant financial
losses to both the bank and its customers. Internet banking frauds can involve phishing
scams, hacking, identity theft, and other forms of cybercrime.
9. Money laundering: Money laundering involves making illegal funds appear legitimate by
channelling them through legitimate channels. Banks can be used to facilitate money
laundering by accepting deposits of illegal funds, or by allowing illicit transactions to take
place. This can be done through a variety of methods, such as using shell companies, offshore
accounts, or complex financial transactions.
 26

To prevent and detect such frauds, the RBI has issued various guidelines and circulars to banks on
the maintenance of proper internal control systems, risk management, and reporting of frauds. Banks
are also required to conduct regular audits and inspections to identify any potential risks and take
appropriate measures to mitigate them. Additionally, the RBI has set up a fraud monitoring cell to
oversee the reporting and investigation of banking frauds.

Legal Framework

Banking fraud in India is not recognized as a separate offence, under the Indian
Penal Code, 1860. Rather, different provisions of the Indian Penal Code, 1860
are interpreted depending upon the facts of each case, which includes Section
403 which deals with the dishonest misappropriation of property, Section 415
that deals with cheating, Section 405 that deals with criminal breach of trust,
Section 463 that deals with forgery and Section 477A that deals with the
falsification of accounts. Other statutes that contain provisions relating to
Banking Fraud in India are:

 The SARFAESI Act, 2002

 The Negotiable Instruments Act, 1881
 Banking Regulation Act, 1949
 Insolvency and Bankruptcy Code, 2016
 Fugitive Economic Offenders Act, 2018

In addition, each bank has a Chief Vigilance Officer to investigate a fraud

committed by the staff up to 25 lakhs, after informing the police and the RBI.
Any Banking fraud in India going beyond 25 lakhs is referred to CBI.

Additionally, banks are required to report frauds of 1 crore and above to the RBI
records the event on a database and issues a circular on all cases of fraud
reported. In June 2016, RBI also set up a fraud monitoring cell and stated bank
entities that fraud risk management, fraud monitoring and fraud investigation
function, at least in respect of large value frauds, must be owned by the bank's
CEO, Audit Committee of the Board, and the Special Committee of the Board.
 27

RBI has also introduced the concept of the Red Flags Account (RFA) based on
Early Warning Signals (EWS) for the detection and prevention of banking fraud
in India.

ROLE OF RBI

RBI is the central bank of India and is responsible for regulating and supervising the banking system
in the country. Regulatory Framework: The RBI has put in place a robust regulatory framework to
prevent and detect frauds in banks. It regularly reviews and updates the framework to keep pace with
changing fraud trends.

 Risk Management: The RBI has mandated banks to have a comprehensive risk management
framework in place, which includes measures for identifying, assessing, monitoring, and
mitigating various types of risks, including fraud risks.
 Reporting Requirements: The RBI has set up a centralized fraud monitoring system to track
and monitor frauds across banks. Banks are required to report all instances of frauds to the
RBI, and the central fraud monitoring system enables the RBI to analyse and take action on
these reports.
 Capacity Building: The RBI conducts training programs and workshops for bank officials
and auditors to enhance their skills in fraud detection and prevention.
 Collaboration with Other Agencies: The RBI works closely with other agencies such as law
enforcement agencies, investigative agencies, and other regulatory bodies to detect and
investigate cases of banking frauds.
 Technology Upgradation: The RBI encourages banks to adopt new technologies such as
artificial intelligence, machine learning, and big data analytics to detect and prevent frauds.

RBI has advised banks to introduce certain minimum checks and balances like introduction of two
factor authentication in case of ‘card not present’ transactions, converting all strip based cards to chip
based cards for better security, issuing debit and credit cards only for domestic usage unless sought
specifically by the customer, putting threshold limit on international usage of debit/ credit cards,
constant review of the pattern of card transactions in coordination with customers, sending SMS
alerts in respect of card transactions etc., to minimize the impact of such attacks on banks as well as
customers.

RBI has advised banks to introduce preventive measures such as:

 putting a cap on the value/ number of beneficiaries,

 28

 introducing system of issuing alert on inclusion of additional beneficiary, and

 velocity checks on number of transactions effected per day/per beneficiary.

RBI has further recommended Banks to consider introduction of digital signature for large value
payments, and capturing internet protocol check as an additional validation check for any
transaction, etc. Indian banks need significant improvements in operation and governance standards
to work in an effective manner, by constantly working on the loopholes so that the banking sector
can contribute more to the growth of the economy.