1.

Explain the origin & development of banking in India.

Banking was in existence in India during the Vedic

times (2000 BC to 1400 BC). Money lending was regarded as an old
art and was practiced in the early Aryan days.
Rina (debt) is often mentioned in the Rig Veda reflecting a
normal condition prevalent in the Vedic Society.
The transition from money-lending to banking must have
occurred before Manu-he states that a sensible man should deposit his
money with a person of good family, good conduct, well-acquainted
with law, wealth and honorable.
There are references to lending and banking in the two epics
namely Ramayana & Mahabharata. During that period banking had
become a full fledged business
More details pertaining to money lending in the Sutra
period (7th century
to
2nd century)
are
available
from
the Jatakas (Buddhist writings). Jatakas establish the existence of
seths (money lenders) and contain several stories of Kings receiving
financial help from the guilds. From these accounts it is evident that
money lending, banking and trading were interlinked. In the Buddhist
period even the Brahmins & Kshatriyas started taking banking as a
business. Bills of exchange came into use in this period.
The banking business was being carried out even in
the Smriti period and the Smritis explained the methods of regulation
of interest.
The tradition from money-lending to banking appears to have
taken place in the 2nd or 3rd century AD. During This period, people
were enjoined upon to make deposits with respectable bankers. This
period is characterized as one in which the activities of the
bankers/money lenders were well controlled and regulated. Rules for
safeguarding the interest of borrowers were introduced.
Kautilya in his Arthashastra which was written in the Maurya
period in the 4th century mentioned the maximum rate of interest
which could be charged by the lenders. The bankers during this period
was known as Shakuras and Mahajans
There is no live account of indigenous banking from the 6 th to
16th century but some stray evidence is found.
During the Moghul period indigenous banking was in its
prime. There was hardly any village without its money-lender or Sharof
who financed trade and commerce. The system of currency and
coinage rendered money lending a highly profitable business.

The British came to India in the 17th century. The East India
company established its Agency houses in Bombay, Calcutta & Madras.
These agency houses were the combination of trade & banking in
India.
Bank of Hindustan- Appendage of Alexander & Co.1 st bank under
European direction
Established in 1771 at Cal. Collapsed due to failure of parent company
Bengal bank was established in 1784
General Bank of India was established in 1786. It was the 1 st joint
stock company with limited liability
Presidency banks were established in Calcutta, Bombay & Madras. It
amalgamated into the Imperial bank in 1921.
In 1865 Allahabad Bank was set up under European management
In 1875 Alliance Bank of Shimla was started
Oudh Commercial bank was the 1st purely Indian management joint
bank.
Swadeshi movement stated in 1905 and the period from 1906 to 1913
was a period of boom for Indian Banking. The Bank of Burma was
established in 1904.
Bank of India, Bank of Rangoon & Indian Specie Bank was established
in 1906
Some of the important banks which were established later were Bank
of India, Central Bank of India, Bank of Baroda, etc.
2.

What are the objectives

nationalization in India?
Objectives-

&

achievements

of

bank

According to the Banking Companies Act, 1970, the aim of

nationalization of banks in India is to control the heights of the
economy and to meet progressively and serve better the needs of
development of the economy in conformity with national policy and
objectives.
1. The elimination of concentration of economic power in the hands
of a few
2. diversification of the flow of bank economic credit towards
priority sectors such as agriculture, small industry and exports,
weaker sections and backward areas
3. fostering of new classes of entrepreneurs, so as to create, sustain
and accelerate economic growth
4. professionalisation of bank management

5. providing adequate training as well as reasonable terms of

service to bank staf
6. extending banking facilities to unbanked rural areas and semi
rural areas to mobilize savings of people to the largest possible
extent and to utilize for productive purposes
7. to curb the use of bank credit for speculative and other
unproductive purposes
8. to bring banks under the control of RBI
Achievements

1. Accelerated branch expansion in rural and backward

regions- in 1969 bank branches in rural areas accounted to only
22.5% of the total number of branches. Today branches in rural
areas account to 52%
2. Deposit mobilization-after nationalization banks attract
deposits from diferent sections by means of attractive deposit
schemes
3. Finance to priority sectors- In 1969 the total credit given to
priority sectors like agriculture, small industries and rural
development was only 2% of total bank credit. By 2006-2007 in
increased to around 40% of total credit
4. Increase in total transactions-the total deposits which was
4,664 crores in 1969 increased to 38.30 trillion
5. Differential rate of interest-to provide credit to weaker
sections of the society at very low rate of interest, banks came
out with Diferential Rate of Interest scheme in 1972
6. Profit making-after nationalization, banks are making profits in
addition to achieving economic and social objectives.
7. Safety-the government has given importance to safety of the
banks. The RBI exercises tight control over banks and safeguards
depositors interest
8. Developmental functions- after nationalization, banks provide
assistance for the progress of agriculture, rural development,
industry, trade and other developmental plans of the government
9. Advances under self-employment scheme-public sector
banks play a significant role in promoting self employment
through advances to unemployed through various schemes of the
government like IRDP,JGSY, etc
3.

State the argument for & against nationalization

For
1. It would enable the government to obtain all the large profits of
the banks as its revenue
2. Nationalization would safeguard interests of public and increase
their confidence thereby bringing about a rapid increase in
deposits. Thus preventing bank failures
3. It would remove the concentration of economic power in the
hands of a few industrialists
4. It would help in stabilizing the price levels by eliminating artificial
scarcity of essential goods
5. It would enable the baking sector to diversify its resources for the
benefit of the priority sector.
6. Eliminates wasteful competition and raises the efficiency of the
working of banks
7. enables rapid increase in the number of banking offices in rural &
semi-urban areas & helped considerably in deposit mobilization
to a great extent
8. necessary for the furtherance of socialism and in the interest of
community
9. Enables the Reserve Bank to implement its monetary policy more
efectively
10.
It would replace the profit motive with service motive
11.
It would secure standardization of banking services in the
country
12.
Would check the incidence of tax evasion and black money
13.
Through pubic ownership and control, banks function like
other public utility services by catering to the financial need of
the common man.
14.
Like other countries, India should also get profit by
nationalizing her banking industry.
15.
Essential for successful planning and all-round progress of
the national economy, community development and for the
welfare of the people.
Against

1. Nationalization involves huge amounts to be paid as

compensation to the shareholders adding to the financial burden
of the government.

2. Extending loans to agriculture and small scale industries is risky

and less remunerative and may weaken the economic viability of
these institutions
3. It may not lead to socialism as State capitalism is not socialism
4. It may reduce the efficiency of these banks as political
interference will impair the smooth working of these institutions
5. It is not the remedy for growth of monopoly and the
concentration of wealth and power as the root cause for them lies
in the existing economic system
6. Other countries like Sweden, Finland, Denmark etc have privately
run banks and are running smoothly
7. Control of RBI and government authorities make the bank officials
scared to take decisions and it adversely afects the bank
services
8. The rapid extension of banking into the rural ad semi-urban areas
has often been cited as a major factor afecting the earning
capacity of banks
9. Inter-state rivalries and policies would raise their ugly heads,
damaging the present sound banking system.
10.
Banks were not at all responsible for the evasion of taxes or
for creation of black money. It was the product of an irrational
tax-structure, high deficit financing and corrupt public
administration.
11.
Bank
nationalization
should
follow
and
precede
nationalization of all major trades and industries of the country
12.
Inflation is caused by unsound monetary and fiscal policies
and nationalization of banks cannot solve this problem
13.
Rapid expansion of branches has increased establishment
costs and reduced the quality of supervisory and managerial staf
14.
Malpractices in privately owned banks can be checked by
adopting appropriate monetary and fiscal policies and through
efficient supervision, nationalization is not necessary
15.
Public control leaves the doors of banks open for corruption
and favoritism. Delays and lethargy in work are common in public
sector undertakings.
4.

What are the main functions of banks?

There are four types of banking services. They are as follows1)

Central banking services.
2)
Commercial banking services.
3)
Specialized banking services.

4)
Non-banking financial services.
The various functions of each of the following banks areCentral banking services
The central bank of any country1)
Issues currency and bank notes.
2)
Discharges the treasury functions of the Government.
3)
Manages the money afairs of the nation and regulates the
internal and external value of money.
4)
Acts as banker to the govt.
5)
Acts as bankers bank.

Commercial banking services

Commercial banking services include1)
Receiving various types of deposits.
2)
Lending various types of loans.
3)
Extending some non-banking customer services like facilities
of locker, rendering services in paying directly house rent,
electricity bills, share calls, insurance premium etc
Specialized banking services
They are estd for definite specialized banking services like
1)
Industrial banks to lend long term loans and working capital
for industrial purposes.
2)
Land mortgage banks for granting loans on equitable
mortgage.
3)
Rural credit banks for generating funds for extending rural
credit.
4)
Developmental banks to support any developmental activities.
These types of banks accept all types of deposits but mobilize
the amount in its specially focused area.
Non-banking financial services
Many banks are established for carrying out non banking
financial services. Mutual funds are institutions accepting finances from
its members and investing it in long term capital of companies both
directly in primary market as well as indirectly in the capital market.
Financial institutions acting as portfolio managers receive funds from
the public and manage the funds for or on behalf of its depositors.
They undertake to manage the funds of the principal so as to generate
maximum return.

Explain the role of banks in promoting economic development.

Banks play a very significant role in the economic
development of the country. Banking system as a whole has an imp
influence on the tempo of economic activity. The economic importance
of banks are1)
Banks mobilize the small, scattered and idle savings of the
people and make them available for productive purposes. They
help the process of capital formation.
2)
By ofering attractive interests on the savings of the people
deposited with them banks promote the habit of saving in them.
3)
By accepting the savings of the people banks provide safety
and security to the surplus money of the customers.
4)
Banks provide a convenient and economical mean of transfer
of funds from one place to another. Even cheques are used for
the movement of funds from one place to another.
5)
Banks help the movement of funds from one region where
they are not very useful to regions where they can be more
usefully employed. By moving funds from one place to another
banks contribute to the economic development of backward
regions.
6)
Banks influence the rate of interest in the money market,
through the supply of money. They exercise a powerful influence
on the interest rate in money market.
7)
Banks help trade, commerce, industry and agriculture by
meeting their financial requirements. Without the financial
assistance the growth of trade and commerce industry would
have been very slow.
8)
Banks direct the flow of funds into collective channels while
lending money. They discriminate in favour of essential activities
as against non-essential activities. Thus they encourage the
development of right type of activities which the society desires.
9)
Banks help the industrious, the prudent, the punctual, the
honest and discourage the dishonest by not giving finance for
wrongful purpose. Thus banks act as public conservator of
commercial activities.
10) Banks serve as the best financial intermediaries between the
borrowers and the lenders.
11) Through the process of creation of money, banks acquire
control over the supply of money in the country. Through their
control over supply of money they influence economic activities,
employment, income and general price level in the economy.

12) Banks monetize the debts of others that is cover t the debts of
others into money by exchanging bank deposits in return for
securities.
Thus a strong and a sound banking system is indispensable
for the economic development of any country.
5.

Who is a banker and customer? Explain the general

relationship between banker & customer. OR The relation
between a banker and a customer is that of a debtor and a
creditor. Explain.

The relationship between a banker and a customer is of great

significance. It depends upon the services rendered by the banker to
the customer.
Definition of banker
According to section 3 of the NI Act, 1881, banker includes any
person acting as a banker and any post office savings bank.
According to section 5(b) of the Banking Regulation Act, 1949,
banking means the accepting, for the purpose of lending or
investment, of deposits of money from the public, repayable on
demand or otherwise, and withdrawable by cheque, draft, order or
otherwise.
To sum up a banker is who
1)
Take deposit account
2)
Take current accounts
3)
Issue and pay cheques
4)
Collect cheques crossed and uncrossed for his customers.
Money lender is not considered as a banker as mere lending
does not constitute banking business. Banker is an institution which
borrows money by accepting deposits from the public for the purpose
of lending to those who are in need of money.
Definition of customer
The term customer is not defined by law. Ordinarily, a person
who has an account in a bank is called a customer.
Acc to Dr. Hart, a customer is one who has an account with
a banker or for whom a banker habitually undertakes to act as such.
Thus to constitute a customer, the following essential
requisites must be fulfilled:

1)
He must have some sort of an account.
2)
Even a single transaction constitutes a customer.
3)
The dealing must be of a banking nature.
A customer need not be a person. A firm, joint stock company,
a society or any separate legal entity may be a customer. Explanation
to section 45-Z of the BR Act clarifies that a customer includes a
Government department and a corporation incorporated by or under
any law.
Relationship between a banker and customer
Relation of a debtor and a creditor
The general relationship between banker and a customer is
that of a debtor and a creditor i.e. borrower and lender. In Foley v. Hill,
Sir John Paget remarks, the relation of a banker and a customer is
primarily that of debtor and creditor, the respective positions being
determined by the existing state of account. Instead of the money
being set apart in a safe room, it is replaced by the debt due from the
banker. The money deposited with him becomes his property, and is
absolutely, at his disposal, and, save as regards the following of the
trust funds into his hands, the receipt of money by a banker from or on
account of his customer constitutes him merely the debtor of the
customer with super added obligation to honour his customers
cheques drawn upon his balance, in so far the same is sufficient and
available.
In Shanthi Prasad Jain v. Director of Enforcement, Foreign
Exchange Regulation, the SC held that the banker and customer
relationship in respect of the money deposited in the account of a
customer with the bank is that of a debtor and a creditor.
On the opening of an account a banker assumes the position
of a debtor. The money deposited by the customer with the bank is in
legal terms lent by the customer to the banker who males use of the
same according to his discretion. The creditor has the right to demand
back his money from the banker, and the banker is under an obligation
to repay the debt as and when he is required to do so.
A depositor remains a creditor of his banker so long as his
account carries a credit balance. But he does not get any charge over
the assets of his debtor/banker and remains an unsecured creditor of
the banker. Since the introduction of deposit insurance in India in 1962
the element of risk of the depositor is minimized as Deposit Insurance
and Credit Guarantee Corporation undertakes to insure the deposits
upto a specified amount.

 Bankers relation with the customer is reversed as soon as

the customers account is overdrawn. Banker becomes creditor of the
customer who has taken a loan from the banker and continues in that
capacity till the loan is repaid. As the loans and advances granted by a
banker are usually secured by the tangible assets of the borrower, the
baker becomes a secured creditor of his customer.
Various legal relationships of banker and customer
2) Agent and Principal- Sec.182 of The Indian Contract Act,
1872 defines an agent as a person employed to do any act for
another or to represent another in dealings with third persons. The
person for whom such act is done or who is so represented is called
the Principal.
One of the important relationships between a banker and
customer is that of an agent and principal. The banker performs
various services of the customer, where he acts as the agent.
Buying and selling securities of customer
Collection of cheques, bills of exchange, promissory notes on behalf
of customer
Acting a trustee, executor or representative of a customer
Payment of insurance premium, telephone bills etc.
1)
Trustee and beneficiary- section 3 of the Trusts Act defines a
trustee as one to whom property is entrusted to be administered for
the benefit of another called the beneficiary. A banker becomes a
trustee under special circumstances. When a customer deposits
securities or other valuables with the banker for safe custody, the
banker acts as trustee of customer.
2)
Bailee and bailor- during certain circumstances banker
becomes bailee. When he receives gold ornaments and important
documents for safe custody he takes charge of it as bailee and not
trustee or agent. He cannot make use of them as he is bound to return
the identical articles on demand.
3)
Pawnee and pawner- pawn is a sort of bailment in which the
goods are delivered to another as a pawn, to be a security for money
borrowed. Thus a banker acts as a pawnee where a customer delivers
he goods to him to be kept as security till the debt is discharged. The
banker can retain the goods pledged till the debt is paid.
4)
Mortgagee and mortgagor- the relation between a banker as
mortgagee and his customer as mortgagor arises when the latter
executes a mortgage deed in respect of his immovable property in

favour of the bank or deposits the title deeds of his property with the
bank to create an equitable mortgage as security for an advance.
5)
Lessee and lessor- when a customer hires a locker in the
banks safe deposit vault, the bank undertakes to take necessary
precaution for the safety of the articles in the locker. The relation
between the parties is that of a lessor and lessee.
6)
Guarantor and guarantee- a bank as guarantor gives
guarantee to its customer by issuing a letter of credit. It is a kind of
credit facility to its customer to facilitate international trade. A bank
guarantee contains an undertaking to pay the amount without any
demur on mere demand of the principal amount on the ground for nonperformance or breach of contract.
7)
Fiduciary relationship- every relation of trust and confidence is
a fiduciary relation. A banker who receives a customers money is
under a duty not to part with it which is inconsistent with the
customers fiduciary character and duty. In Official Assignee v.
Rajaram Aiyar, it was held that where banks old money for a specific
purpose of sending it somebody the money is impressed with trust.
6.

Explain the special relationship between banker &

customer. OR What is the special relationship arising out of
general relationship between a banker and a customer. OR
What are the rights and obligations of a banker towards a
customer?

By opening an account with the banker, there will be some

rights conferred and obligations imposed to the banker as well as the
customer. These rights and duties are reciprocal i.e. the bankers
duties are the customers rights and the bankers rights are the
customers duties. These rights and obligations are called the special
features of relationship between banker and the customer.
The special relationship between banker and customer can be
presented as under:
General obligations of banker towards customer

Obligation to honour cheques- banker accepts the deposits

from the customer with an obligation to repay it to him on demand or
otherwise. The banker is therefore under a statutory obligation to
honour his customers cheques because, it is recognized under
section 31 of the NI Act, 1881-

 The drawee of a cheque having sufficient funds of the drawer

in his hands properly applicable to the payment of such cheque must
pay the cheque when duly required so to do, and, in default of such
payment, must compensate the drawer for any loss or damage caused
by such default.
Thus the banker is bound to honour his customers cheques
provided the following conditions are fulfilled(a) Sufficient balance in customers account
(b) Presentation of cheques within working hours of business
(c) Presentation of cheques within reasonable time after
ostensible date of its issue
(d) Cheques should be presented at the branch where account is
kept
(e) Fulfilment of requirements of law
Obligation to maintain secrecy and disclosure of information
required by law- the banker is under an obligation to take utmost care
in keeping secrecy about the accounts of the customers since it may
afect his reputation, credit-worthiness and business. It was firmly laid
down in Tournier v. National Provincial and Union Bank of England Ltd.
in India it was made compulsory after 1970. The duty to maintain
secrecy will be continuing even after the account is closed or the death
of the customer.
This obligation is subject to certain exceptions.
Obligation to keep a proper record of transactions- the banker
must keep a proper record of transactions of the customer. If he
wrongly credits the account of the customer and intimates him with
the same and the customer acts upon the intimation bonafide and
withdraws cash the banker cannot contend that the entries were
wrongly made. He shall not succeed in recovery of money from the
customer.
Obligation to abide by the instructions of the customer- the
banker must abide by any express instructions of the customer
provided it is within the scope of their banker-customer relationship. In
the absence of any express instructions, the banker must according to
prevailing usages at the place where the banker conducts his business.
Rights of a banker

 Bankers right of general lien- one of the important rights

enjoyed by a banker is the right of general lien. Lien means the right of
the creditor to retain goods and securities owned by the debtor until
the debt due from him is paid. It may either be general or particular.
In Brando v. Barnet, it was held that bankers most
undoubtedly have a general lien on all securities deposited with them
as bankers unless there is an express or implied contract inconsistent
with lien.
In India sec 171 of the Indian Contract Act confers general lien
upon bankers as follows- bankers..may in absence of a contract to
the contrary, retain as a security for a general balance of account, any
goods bailed to them.
Bankers right of set-of- the right to set of is a statutory
right which enables debtor to take into account a debt owing to him by
a creditor, before the latter could recover the debt due to him from the
debtor. Thus when a customer keeps two or more accounts at the
same bank, some of which are overdrawn and some in credit, the bank
has a right to combine such accounts and pay the resultant balance.
In Halesowen Presscook and Assemblies Ltd v. Westminister Bank Ltd,
it was held that a banker has the right to combine two accounts and to
set of unless he has made some agreement express or implied to the
contrary.
Bankers right for appropriation of payment- when a debtor
owes two or more debts to a creditor and he pays some amount which
is not sufficient to meet any debt to the creditor appropriation is done.
It applies to a banker if the customer has more than one deposit or
more than one loan account.
In Devaynes v. Noble, famously known as Claytons case, a
principle was laid down as to when the customer has current account
and deposits and withdraws money frequently the first item on debit
side will be discharged by the first item on credit side. The credit
entries in the account adjust or set of the debit entries in chronological
order.
Bankers right to claim incidental charges- the banker may
claim incidental charges on unremunerative accounts such as service
charges, processing charges, ledger folio charges, appraisal charges,
penal charges and so on.

 Bankers right to charge compound charges- a banker has a

special privilege to charge compound interest. In Syndicate Bank v.
West Bengal Cement Ltd, the adding of unpaid interest due to the
principal amount is recognized. However, the SC abolished this in case
of agricultural loans in the Bank of India case.
7.

What are the obligations of a banker?

1. Obligation to honour cheques- the banker is under a statutory
obligation to honour his customers cheques in the ordinary course
of business. If he wrongfully dishonors the cheque, then he is liable
to the customer for damages.
Thus the banker is bound to honour the customers cheque provided
the following conditions are fulfilled(a) Sufficient funds- there must be sufficient funds of the drawer in
the hands of the drawee. A banker should be given sufficient time
to release the amount of the cheque sent for collection before the
said amount can be drawn upon by the customer. The banker can
dishonor the cheques if there are insufficient funds.
(b) Funds must be properly applicable- a customer might be having
several bank accounts in his various capacities. But is essential
that the account on which a cheque is drawn must have sufficient
funds. If some funds are earmarked by the customer for some
specific purpose, they are not available for honouring the
cheques. But where the customer has overdraft facility the
banker has the obligation to honour the cheque upto the amount
of overdraft sanctioned.
(c) The banker must be duly required to pay- the banker is bound
to honour the cheque only when hi is duly required to pay. The
cheque, complete and in order, must be presented before the
banker at the proper time.
2. Obligation to maintain secrecy of accounts-The customers
account details are recorded in the books of the banker and the true
state of his financial dealings are available with the banker. If any of
these facts are made known to others, the customers reputation
might sufer and he might incur losses also. The banker is therefore
under an obligation to take utmost care in keeping secrecy of the
details of the customer.
However, this rule has exceptions(mention briefly)
3. Obligation to keep a proper record of transaction- the
banker must keep a proper and accurate record of all the

transactions of the customer. Sometimes, he may commit some

wrong.

8.

Explain the bankers right of general lien.

Lien means a legal claim to hold property as security.

According to Halsbury, lien may be defined as a right in man to
retain that which is in his possession belonging to another, until certain
demands of the person in possession is satisfied.
Lien is of two kinds- 1) specific or particular lien and 2)
general lien
A particular lien is one which confers a right to retain the
goods in connection with a particular debt only while a general lien is a
right to retain all the goods or any property of another until all the
claims of the holder are satisfied. It extends to all transactions and
thus more extensive.
Bankers right of general lien
One of the important rights enjoyed by a banker is the right of
general lien. In Brando v. Barnet, it was held that bankers most
undoubtedly have a general lien on all securities deposited with them
as bankers unless there is an express or implied contract inconsistent
with lien.
In India sec 171 of the Indian Contract Act confers general lien
upon bankers as follows- bankers..may in absence of a contract to
the contrary, retain as a security for a general balance of account, any
goods bailed to them.
Circumstances for exercising general lien
1)
No agreement inconsistent with the right of lien.
2)
Property must be possessed in his capacity as a banker.
3)
Possession should be lawfully obtained.
4)
Property should not be entrusted to the banker for a specific
purpose.
Incidents of lien- lien attaches to
1)
Bills of exchange or cheques deposited for collection or
pending discount.
2)
Dividend warrants and interest warrants paid to the banker
under mandates issued by the customer.

3)

Securities deposited to secure specific loan but left in

bankers hand after loan is repaid.
4)
Securities, negotiable or not, which the banker has purchased
or taken up, at the request of customer, for the amount paid.
Exceptions- banker has no general lien
1)
On safe custody deposits.
2)
On securities or bills of exchange entrusted for specific
purpose.
3)
On articles lefty by mistake or negligence.
4)
On deposit account.
5)
On stolen bond.
6)
Until due date of the loan.
7)
On trust account.
8)
On title deeds of immovable properties.
9.

What are the circumstances under which a disclosure by

banker is justified? OR Bankers duty of secrecy is not
absolute. Explain.

The duty of the banker to maintain the secrecy is not an

absolute one. It is also subject to certain exceptions. The exceptions
were stated in the landmark judgment Tournier v National
Provincial Bank Limited. Section 13 of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970 also allows certain
exceptions.
1. Disclosure under the compulsion of Law- Bankers
obligation to his customer is subject to his duty to the law of the
country. The baker would, therefore, be justified in disclosing
information to meet the following statutory requirements.
(a) Under the Income Tax Act, 1961- Vide Section 131 & 133,
Income Tax authorities have powers to call for the attendance of
any person or for necessary information from banker for the
purpose of assessment of the banks customers.
(b) Under the Bankers Books Evidence Act, 1891- a banker
may be asked for the Court to produce a certified copy of his
customers account in his ledger.
(c) Under the Reserve Bank of India,1934- the RBI is
empowered to collect credit information from Banking Companies
relating to their customers

(d) Under the Banking Regulation Act, 1949- every bank is

compelled to submit an annual return of deposits which remain
unclaimed for 10 years.
(e) Under the garnishee order- when a garnishee order nisi is
received, the banker must disclose the nature of the account of a
customer to the Court.
(f)
Under the Companies Act, 1956- when the Central
Government appoints an inspector to investigate the afairs of
any joint-stock company under section 135 or section 137 of the
Companies Act, the banker must produce all books and papers
relating of the Company.
(g) Under CrPC- the police officers conducting an investigation
may also inspect the bankers books for the purpose of such
investigation.
2. Disclosure in the interest of the public-the following grounds
generally fall under this category
(a) disclosure of the account where money is kept for extreme
political purposes in contravening the provisions of any law
(b) disclosure of the account of an unlawful association
(c) disclosure of the account of a revolutionary or terrorist body to
avert danger to the State
(d) disclosure of the account of an enemy in time of war
(e) disclosure of the account where sizable funds are received from
foreign countries by a constituent.
3. Disclosure in the interest of the bank- the banker may
disclose the state of his customers account in order to legally
protect his own interest. For example- if the baker has to recover
the dues from the customer or the guarantor, disclosure of
necessary facts to the guarantor or the solicitor becomes
necessary and is justified.
4. Disclosure under the express or implied consent of a
customer- the customer may instruct his banker to give some or
all other particulars of his account to say, his auditor, in such
case banker can disclose. Banker can also disclose to a referee
whose name is suggested by the customer. It is implied that the
banker can disclose information to the guarantor.

5. Disclosure under Bankers enquiry- it is an established

banking practice to provide credit information about their
customers by one bank to another. The customer gives implied
consent to this practice at the time of opening the account.

10.
Who are the bankers special customers? Explain
the precautions to be taken by the banker in opening and
operating their accounts.

Banks solicit deposit of money from the members of the

public. Any person who is legally capable of entering into a valid
contract may apply in the proper way to deposit his money with the
bank.
A banks special customers are generally minors, married
women, illiterate persons, lunatics, blind people, drunkards, insolvents
etc who are not competent to open such accounts. There are also
impersonal customers like schools, clubs, partnership firm, joint stock
companies etc. certain precautions are to be taken by banks while
opening accounts in the name of the following customers.
Minor
A minor is a person who has not attained the age of 18 and in
case a guardian is appointed, it is 21. Minors are regarded pet
children of law.
In Mohori Bibi v. Dharmodas Ghose, a minor executed a
mortgage for Rs 20000 and received Rs 8000 from the money lender.
Subsequently, the minor sued for setting aside the mortgage. The
money lender wanted refund of money which he had actually paid. The
PC held that an agreement by a minor was absolutely void and
therefore, money lender was not entitled repayment of money.
Some of the precautions to be taken by the banker on opening
and operating account of a minor are1)
The banker may open a SB account but not a current account
as it incurs no liability to the minor.
2)
At the time of opening of account of minor, the bank should
record the genuine date of birth of the minor. Banker should insist
on to give some schooling record or date of birth as entered in
Births and Deaths Register.

3)
4)
5)
6)
7)
8)

Minors are allowed to open such accounts when they have

completed a particular age say twelve years in some banks and
ten years in some others.
Banks should prudent to issue cheque books only to minors of,
say sixteen or seventeen years of age.
Accounts for illiterate minors are not opened in their single
name.
As a measure of precaution, banks adopt a general rule not to
accept deposit exceeding a particular sum.
Since a contract with a minor is void and cannot be enforced
against him in Court of law, a minors account should never be
allowed to be overdrawn.
A guarantee obtained to secure the money borrowed by a
minor is also of no avail. However, if the guarantor undertakes to
indemnify he will be held liable though borrower is minor.

Lunatics
Lunatics are persons of unsound mind. Lunatics are
disqualified from contracting but the disqualification does not apply to
contract entered by lunatics during their period of sanity. Following are
bankers duty n case of lunatics1)
Since a lunatic has no capacity to contract, acc to sec 11 of
the ICA, no banker knowingly opens an account in the name of a
lunatic.
2)
If an existing customer becomes insane, the banker must
immediately stop the operation of the account. It is so because,
the banker has no right to debit his account for payment made
out of his account from the moment, the banker knows the fact of
lunacy of customer, the contract between them is void.
3)
A banker must not be carried away by hearsay information or
rumours. He must get definite information about the lunacy of the
customer.
4)
If a banker dishonours a cheque in a hurry, without having any
proof of lunacy, he will be liable for wrongful dishonour of cheque.
5)
It should return all cheques of customers account with the
word refer to drawer and not customer insane. It should
make careful note of lunacy order.
6)
If a third party is authorised to draw on customers account,
that authority will cease when the customer becomes insane
since when a principal cannot act for himself his agent can no
longer act for him.

7)

If one party to an account opened in joint names becomes

mentally incapable of managing his or her afairs, the banker
should not allow either party to operate the account.

Illiterates
An illiterate person is competent to contract and bank may
open an account in his name, but special care should be taken by the
banker before opening an account.
1)
The account of an illiterate person may be opened provided
he/she calls the bank personally along with a witness who is
known both to the banker and the depositor.
2)
A passport size photograph of the illiterate person is identified
before the banker in presence of the account holder. The
photographs have to be attested by the bank officer/ witness.
3)
The left hand thumb impression in case of male illiterate and
right hand thumb impression in case of female illiterate are duly
attested by some responsible person on the account opening
form.
4)
One or two identification marks of the depositor should be
noted on the account opening form.
5)
The illiterate person should be provided with a passbook which
should also contain an attested photograph of the illiterate
person.
6)
Normally, no cheque book facility is provided on accounts in
the name of illiterate persons.
7)
At the time of withdrawal/repayment of deposit account the
account holder should attend personally with passbook and attest
his/her thumb impression or mark in the presence of an
authorised person.
8)
The thumb impression of illiterate person on the withdrawal
form or cheque (if provided), and on the back of the withdrawal
form or cheque should be duly compared with the specimen
impression kept by the bank.
Married women
The Hindu married women are governed by the Hindu
Succession Act and other married women by Indian Succession Act. A
banker may open an account in the name of a married woman like any
other customer. However, a banker should exercise caution while
opening account for the wife of an undischarged insolvent.

1)

While opening an account of a married woman, the bank

should enquire about her means and circumstances, and if she is
living with her husband, something about him and his occupation
and position in life, and if he is an employee, the name of the
employer.
2)
In case she applies for an overdraft, the banker should see
that she owns separate property in her own name and precaution
should be kept in mind regarding her status and capacity to pay
and the purpose for which the borrowings are made. Also he
should seek suitable securities preferably on her, which can be
attached by the Courts.
3)
The banker should always observe that there is credit balance
in her account.
4)
Banks usually require that a married woman be independently
advised by her own solicitor when depositing security for the
account of other persons.
5)
A married woman may enter into a contract of guarantee and
it is enforceable only against her separate estate.
6)
In case of an illiterate married woman, her thumb impression
should be obtained on the account opening form and on the
identification card.
Pardhanishin women
In case of a pardhanishin woman who remains completely
secluded the following presumption exists1)
Any contract entered into by her may be subject to undue
influence
2)
The same might not have been done with free will and with
full understanding of what the contract actually means.
He banker should therefore due precaution while opening an
account in the name of a pardhanishin woman. As the identity of such
woman cannot be ascertained the banker generally refuses to open an
account in her name.
Joint Hindu families
A JHF or a HUF consists of all persons lineally descended from
a common ancestor and included their wives. Following are the
precautions to be taken by the banker in opening and operating
accounts in the name of HJF.
1)
The account may be opened in the name of karta or in the
name of family business and should be duly introduced.

2)
3)
4)
5)
6)
7)

8)

The account opening form should be signed by all adult

coparceners, even though the karta would operate the account.
The declaration signed by all the members as to who is the
karta and who are the other coparceners including minor
coparceners should be obtained.
If there are minor coparceners, the other adult coparceners
should sign for self and as guardians of minors.
Authority should be given to the karta to operate the account
of all concerned under their joint signature.
On attaining majority, the minor coparceners should be asked
to join with other coparceners in signing the existing account
opening form in ratification of previous transactions.
Any member of the HUF can stop payment of a cheque drawn
by karta. When the bank receives a notice about any dispute
amongst the family members of the HUF, the operations in the
account should be stopped till further instructions from a
competent court.
The burden of proof that loan was taken by karta for purposes
beneficial to the family lies on the banker. Thus before granting
loans necessary enquiries should be made to ensure it.
Otherwise, the bank may not be able to succeed in a suit for
recovery of debt.

Agent
A person employed to do any act for another, or to represent
another in dealings with third persons, is known as an agent for
another. The precautions to be taken by a banker in opening and
operating account of a customer by an agent are
1)
A banker should at once suspend all operations on that
account upon hearing or being notified of the principals death,
insanity or bankruptcy.
2)
The agent must assign the cheque for and on behalf of the
principal, so that the third parties would know that he is dealing
in a representative capacity.
3)
Whenever a bank receives a mandate, it should be recorded in
a register, serially numbered, indexed alphabetically, and
instructions should be noted in the customers ledger account.
4)
In case the agent is authorised to open an account on behalf
of the principal, the application should be made to sign by the
principal himself, delegating authority to agent to operate the
account.

5)

The agent should sign in a manner to indicate that he is

signing as an agent.
6)
The banker should on no account allow the agent, or in fact
any person to pay into his own private account, cheques which he
has endorsed on behalf another, without satisfying himself that
the agent has the authority of the principal to do so.
7)
A banker should not allow an agent to overdraw his
principals account express with his express authority.
Partnership firm
A partnership is the relation between the persons who have
agreed to share the profits of a business carried on by all or anyone of
them acting for all. The banker should take the following precautions
while dealing with a partnership firm.
1)
The banker should first know the provisions of the Part Act
before he opens an account for PF.
2)
The banker shall open an account in the name of a partnership
firm only when an application is submitted in writing by any one
or more partners under sec 19(2)(b) of the Act. Authority to open
an account in the name of an individual partner is positively
denied.
3)
To be on safer side, a banker should get a written request from
all the partners jointly for opening an account.
4)
The banker should go through the partnership deed and
carefully study the objects, capital, borrowing powers etc. he
should get a copy of the duly stamped partnership deed. He
should enquire about the details of the firm, partners and their
powers. If the firm is registered the banker should get a copy of
the registration certificate. Dealings with unregistered firms will
involve risks.
5)
There should be a clear mandate from all the partners.
Mandate must be signed by all the parties.
6)
The banker should not mix the personal and private accounts
of the partners. He has no right to set of and lien over the
accounts.
7)
No partner has an implied power to sell or mortgage the
property of his firm. So in case of mortgage of property, the deed
of mortgage should be signed by all the partners.
8)
While advancing loans and advances to partnership firm the
banks in practice get the loan documents executed by the
partners on behalf of the firm as also in their personal capacity.

9)

Since a firm stands dissolved on insolvency or insanity of a

partner, a cheque signed by an insolvent partner before the date
of adjudication should not be paid b the banker without
conformation from other partners.

Trust
A trust is an obligation annexed to the ownership of the
property, and arising out of a confidence reposed in and accepted by
the owner, or declared and accepted by him, for the benefit of another,
or of another and the owner.
While opening accounts in the names of persons in their
capacity as trustees, the banker should take the following precautions.
1)
The banker should examine the trust deed concerning
instructions regarding opening and operating the account
contained in the trust deed. In the absence of such instructions,
all the trustees may join in opening such account.
2)
Instructions regarding limitation on withdrawal in the trust
deed, if any, be prominently noted at the ledger head and
specimen signature card and withdrawals should be restricted.
3)
The banker should note the objects for which the trust has
been created so as to facilitate the passing of cheques.
4)
A trustee has no individual powers. They must all act together.
All must join in signing of cheques. Unless expressly provided
otherwise in the trust deed, no trustee can delegate his power to
another.
5)
If one of the trustees dies or retires, the bank on receiving
notice should suspend all operations in the account. However, if
the trust deed is silent the bank can let the operations to
continue.
6)
In case of breach of trust the bank must see that it does not
become a party to the breach. The banker is justified in
dishonouring the cheque drawn by a trustee, if intended for
breach of trust.
7)
If the trustees are authorised to borrow to discharge the
functions of the trust, the banker must get specific assets of the
trust as security.
11.

What are the functions of commercial banks?

The functions of commercial banks are very vast.

Meaning of CB- commercial banking refers to that banking which is

concerned with the acceptance of deposits from the public repayable
on demand or after the expiry of a short period and the granting of
mainly short term credit to trade, commerce and industry through wide
networking of branches throughout the country.
Functions of commercial banks- the functions of CB are numerous.
They can be broadly divided into two categories. They are1)

(i)

(ii)

(iii)

(iv)

Primary or basic functions

a)
Receiving of deposits- deposits constitute the main
source of funds for commercial banks. CBs receive deposits
from the public on various accounts. The main types of
accounts are- fixed, current, savings, recurring (explain lil).
b)
Issuing notes/cheques- this function once considered to
be the most paying part of bankers business is in modern
times performed generally by the central bank. Its importance
has dwindles to a large extent in some developed countries
where cheque currency has replaced bank notes to a large
extent.
c)
Lending of funds- it is the main business of CB. Advances
form the chief source of profit for CB. Banks lend funds by way
of loans, over-drafts, cash credit, discounting of bills.
Loan- it is a financial arrangement under which an advance is
granted by a bank to a borrower on a separate account
called the loan account. A loan may short, medium or
long term. It is granted either against collateral securities
or against personal security of the borrower.
Over-draft- it is a financial arrangement where a current
account holder is permitted by a bank to overdraw his
account that is to draw more than the amount standing
to his credit upon an agreed limit.
Cash credit- it is a financial arrangement under which a
borrower is allowed an advance under a separate
account called cash credit limit. Here the borrower can
withdraw the amount in installments as and when he
needs.
Discounting of bills of exchange- here the bank takes a BOE
maturing from an approved customer and pays him and
credits his account immediately with the present value of
the bill.

d)

Investment of funds on security- it is one of the imp

functions of comm. Banks. They invest a considerable amount
of their funds in govt and industrial securities. In India it is
required by statute for CB to invest a considerable amount of
their funds in securities.
e)
Creation of money- the various ways of creation of money
are(i)
By advancing loans
(ii)
By allowing over draft
(iii)
By providing cash credit
(iv)
By discounting BOE
(v)
By purchasing securities
(vi)
By purchasing fixed assets
The commercial banks are prominent in todays world
because they manufacture or create money. The bank deposits are
regarded as money coz they perform the same function as money that
is they increase the purchasing power of the community and serve as
medium f exchange in purchase of goods and services and settlement
of debts.
2)

Secondary or subsidiary functions- apart from performing

the main function the comm. banks also perform a num of
secondary functions which may be divided into the following two
headsa)
Agency services- the services rendered by a bank as the
agent of his customer are called agency services. The imp
agency services are(i)
Collection of money on behalf of customers.
(ii)
Making payments on behalf of customers.
(iii)
Purchase and sale of securities on behalf of customers.
(iv)
Advising customers regarding investments.
(v)
Acting as trustee, executor, and administrator of customers.
(vi)
Rendering of merchant banking services.
b)
Miscellaneous or general utility services- services
rendered by banker is not confined only to his customers but
also to general public called such as(i)
Safe custody of valuables
(ii)
Dealing in foreign exchange business
(iii)
Issuing of travellers cheque, travellers letter of credit and
circular notes.
(iv)
Collecting information bout other businessmen for customers.
(v)
Collection of statistics and data.

(vi)
12.

Lease financing.
What are the functions of the Reserve Bank of India?

The Central Bank is the Apex Bank of the country. It is called

by diferent names in diferent countries. It is the Reserve Bank of India
in India.
The Reserve Bank of India has been defined in terms of its function.
According to Vera Smith, The primary definition of central banking is
a banking system in which a single bank has either complete control or
a residuary monopoly of note issue.
According to A.C.L. Day, a central bank is to help control and
stabilise the monetary banking system.
Functions Of RBI:
1) Regulator Of Currency:
The Reserve Bank of India is the bank of issue. It has the
monopoly of note issue. Notes issued by it circulate as legal money. It
has its issued department which issued notes and coins to commercial
banks.
Reserve Bank of India has been following diferent methods of
note issue in diferent countries. The monopoly of issuing notes vested
in the Reserve Bank of India ensures uniformity in the notes issued
which helps in facilitating exchange and trade within the country. It
brings stability in the monetary system and creates confidence among
the public.
RBI can restrict or expand the supply of cash according to the
requirements of the economy. Thus, it provides elasticity to the
monetary system.
2) Banker, Fiscal Agent and Advisor To The Government:
RBI everywhere acts as bankers, fiscal agent and advisor to
their respective governments. As banker to the government, the
central bank keeps the deposits of the central and state governments
and makes payments on behalf of the governments. But it does not
pay interest on government deposits.
It buys and sells foreign currencies on behalf of the
government. It floats loans, pays interest on them, and finally repays
them on behalf of the government. Thus it manages the entire public
debts.

 RBI also advices the government on such economic and

money matters as controlling inflation or deflation, devaluation or
revaluation of the currency, deficit financing, balance of payments etc.
Thus it is the custodian of government money and wealth.
3) Custodian Of Cash Reserves Of Commercial Banks:
Commercial banks are required by law to keep reserves equal
to a certain percentage of both time and demand deposits liabilities
with the RBI. It is on the basis of these reserves that the RBI transfers
funds from one bank to another to facilitate the clearing of cheques.
Thus the RBI acts as the custodian of the cash reserves of commercial
banks and helps in facilitating their transactions.
4) Custody And Management Of Foreign Exchange Reserves:
The RBI keeps and manages the foreign exchange reserves of
the country. It sells gold at fixed prices to the authorities of other
countries. It also buys and sells foreign currencies at international
prices.
Further, it fixes the exchange rates of the domestic currency
in terms of foreign currencies. It holds these rates within narrow limits
in keeping with its obligations as a member if IMF and tries to bring
stability in foreign exchange rates.
5) Lender Of The Last Resort:
By granting accommodation in the form of re-discounts and
collateral advances to commercial banks, bill brokers and dealers, or
other financial institutions, the RBI acts as the lender of the last resort.
It acts as lender of the last resort through discount house on
the basis of treasury bills, government securities etc. Thus RBI as
lender of the resort is a big source of cash and also influences prices
and market rates.
6) Clearing House For Transfer And Settlement:
As bankers` bank, the RBI acts as a clearing house for transfer
and settlement of mutual claims of commercial banks. Since the RBI
holds reserves of commercial banks, it transfers funds from one bank
to other banks to facilitate clearing of cheques.
To transfer and settle claims of one bank upon others, the RBI operates
a separate department in big cities and trade centres. This department
is known as clearing house and it renders free service to commercial
banks.

7) Controller Of Credit:
The most important function of RBI is to control the credit
creation power of commercial bank in order to control inflation and
deflation pressures within this economy. For this purpose, it adopts
quantitative and qualitative methods. These involve selective credit
control and direct action.
Besides the above noted functions, the RBI in a number of
developing countries have been entrusted with the responsibility of
developing a strong banking system to meet the expanding
requirements of agriculture, industry, trade and commerce.

13.
Explain the management, powers and constitution of
the Reserve Bank of India.
The Reserve Bank of India was established on 1st April, 1935
under the Reserve Bank of India Act, 1943 as the Central Bank of the
country to regulate the issue of bank notes and the keeping of reserves
for the stability in India and generally to operate the currency and
credit system of the country.
Constitution:
The bank was established as a shareholder`s bank with an
authorized and paid-up capital of Rs. 5 crores divided into shares of Rs.
100 each. After independence, under the Reserve Bank Act, 1948, the
bank was nationalized, after paying compensation to the shareholders
at the market price of the share.
Management:
The afairs if the RBI are managed by the Central Board of
Directors consisting of:
Governor and not more than 4 Deputy Governors appointed for a
period not more than 5 years.
Four Directors, one from each of the four local boards.
The other Directors.
One Government Official.
All the Directors and the officials are nominated for 4 years
each by the Central Government. To look after the afairs there are 4
local Boards, one at each of the cities of Bombay, Calcutta, Delhi and

Madras, each Board consisting of 5 members appointed for 4 years by

the Central Government.
Functions:
Mention the above functions in brief.
Powers:
Power Of RBI To Appoint Chairman Of A Banking Company:
RBI has the authority to appoint Chairman of Banking
Company where the office of the Chairman of the Board of Directors
appointed on a whole-time basis.
Minimum Paid-up Capital And Reserves:
Every banking company should deposit the prescribed
minimum paid-up capital and reserves with the RBI either in cash or in
form.
Cash Reserve:
Every banking company, not being a Scheduled Bank, shall
maintain in India by way of cash reserves or by way of balance in a
current account with the RBI.
RBI Control Over Banking Companies:
The RBI may, by order, require any banking company to call a
general meeting of the shareholders of the company within such time,
not less than two months from the date of order.
Power Of RBI To Control Advances By Banking Companies:
The RBI may determine the policy in relation to advances to
be followed by banking companies generally or by any banking
company in particular.
Licensing Of Banking Companies:
No company shall carry on banking business in India unless it
holds a licence issued in that behalf by the RBI and any such licence
may be issued subject to such conditions as the RBI may think fit to
impose.
Monthly Returns:
Every bank should submit monthly returns to the RBI in the
prescribed form and manner showing its assets and liabilities in India.
The RBI has the power to call for other returns and information if
required.
Accounts And Balance-Sheet:
At the expirations of each calendar year, every banking
company incorporated in India shall prepare, a balance-sheet, profit
and loss accounts as on the last working day of the year.

 Submission Of Returns:
The accounts and balance-sheet together shall be published in
the prescribed manner and three copies thereof shall be furnished as
returns to the RBI within three months form the end of the period to
which they refer.
Inspection:
The RBI had got the power to inspect the books and accounts
of a banking company. After the inspections it sends a copy of it to the
concerned bank. The inspection by the RBI may be on its own or under
the direction of the Central Government.
Directions:
The RBI may from time to time, issue directions as it deems
fit, to a banking company in particular or to the banking companies in
general and the banking company or companies shall be bound to
comply with such directions
Power To Remove Managerial And other Persons From
office:
RBI has to powers to remove managerial and other persons
from office of the banking companies, whose conduct is to the interest
of the deposits and to secure proper management. RBI also appoints
additional directors.
Power Of RBI To Impose Penalty:
The RBI has a wide range of powers of supervision and control
over commercial and cooperative banks. The RBI control frauds in
entire banking industry in India.
14.
Explain
development.

the

role

of

Reserve

Bank

in

economic

In developed countries, the role of Central Bank is regulatory.

But in a developing economy like that of India, the role of Central Bank
is developmental or promotional. The Central Bank is to help in the
mobilization of required productive resources and in their efficient
allocation. It has to bring about economic development with stability.
The RBI has been quite active in the maintenance of a proper
atmosphere of economic development and mobilization of financial
resources for economic development. The RBI has assisted economic
development in the following ways1. Checking inflation- the government budgetary operations,
owing to increasing size of government expenditure, generate
strong inflationary pressures. It is the responsibility of the

monetary authority to restrain these pressures by freezing a part

of liquidity thus generated. This, the RBI has been able to do
through its pivotal tool-rate of interest. It has made use of other
methods of credit control as well. Unless inflation is kept in check,
all the development plans are in danger of being upset.
2. Providing development finance- the RBI has helped a great
deal in setting up of specialized institutions so that the financial
facilities are made available.
3. Agricultural credit-The RBI has made available short term,
medium term and long term finance to agriculture through the
hierarchical network of co-operative banks and societies. In this
connection, the RBI set up two funds
(a) National Agricultural Credit(long term operations) Fund
(b) National Agricultural Credit(stabilization) Fund
These fund loans were given to SCBs & RRBs for agricultural
credit and during floods and famines.
It has also been instrumental in setting up Agricultural Refiance &
Developmental Corporation and more recently Export-Import Bank
and the NABARD.
4. Industrial finance-The RBI has also organized industrial finance
for both big and small industries to secure all types of loans-short
term, medium term and long term. It has helped in the creation of
(a) Industrial Finance Corporation of India
(b) National Small Industries Corporation
(c) State Financial Corporations
(d) Industrial Development Bank of India.
It has also introduced a scheme of guarantee of bank loans to small
industry and till the establishment of Export-Import Bank, also
provided refiance to banks for export credit
5. Regulatory credit-When there is an expansion of bank credit, it
adds to the active demand for goods and services. This tends to
start inflationary spiral. Thus it becomes essential for the
monetary authority to stem in and restrain the expansion of bank
credit in the interest of sound and healthy economic growth.
During the last 5 decades, the RBI has tried to regulate(a) cost of credit
(b) quantity of credit
(c) purpose or use of credit
Conclusion-Thus the RBI has helped to broaden and deepen the
structure of institutional finance for accelerating development of the
country with itself as the central arch of banking and monetary
framework of the country.

15.
In what way does the Reserve bank exercise control
over the commercial banks?
The RBI acts as supervisor and controller of banks in India. By
virtue of the powers conferred on the RBI by the RBI Act, 1934 and the
Banking Regulation Act, 1949, the relationship between the RBI and
the commercial banks are very close. The RBI has a 3 fold control over
the commercial banks
(a) as supervisory & controlling authority over banks
1. Each bank in India is required to obtain license from the RBI before
conducting banking business-section 22. The RBI is required to
conduct an inspection of the books of the banking company and issue
a license, if it is satisfied that all or any of the conditions are fulfilled.
The provision is intended to ensure the continuance and growth only of
banks which are established or are operating on sound lines and to
discourage indiscriminate floating of banking companies
2. According to Section 23 of the Act, no banking-company shall open
a new place of business in India or change otherwise than within the
same city, town or village, the location of an existing place of business
situated in India without obtaining the prior permission of the RBI.
3. It has powers to inspect books and accounts of commercial banksSection 35
The RBI may on its own initiative or at the instance of the Central
government, inspect any banking company and its books and
accounts. The Central Governemnt may on the basis of this report
direct the company to wind up.
4. RBI may remove managerial an other persons from office-Section
36AA-where the RBI is convinced that a banking company is not
conducting its afairs in the public interest, or is conducting them in a
manner detrimental to the interests of the depositors, or where the RBI
is satisfied that for securing the proper management of the banking
company it would be necessary to do so, the RBI may after recording
the reasons and by order, remove from office, with efect from a
specified date, any chairman, director, chief executive director or other
such officer or employee.
5. RBI may appoint additional directors of the banking companySection 36 AB- in the interest of banking policy or in the public
interest or in the interests of the banking company or its depositors,
the Bank may, from time to time by order in writing, appoint with efect

, one or more persons to hold office as directors of the banking

company.
6. It may issue directions to commercial banks and may prohibit banks
to enter into particular transactions- Section 36
(b) as
controller
of
credit
1. By changing the statutory liquidity rate- Section 24 of the Banking
Regulation Act, 1949 requires that every banking company has to
maintain cash, gold or approved securities of an amount not less than
25% of its net demand and liabilities at the close of business everyday.
This is called statutory liquidity rate and the RBI is empowered to step
up the rate upto 40%
2. The RBI controls credit by changing the statutory reserve maintained
by the scheduled banks-section 42 of the RBI Act.
3. Controls credit by changing the bank rate and its policy of granting
accommodation to commercial banks
4. It controls credit through its credit monitoring arrangement
5. It controls credit by exercising moral influence on the banks.
(c) as banker to the baker
As banker to the banks, the RBI acts as the lender of last resort and
grant accommodation to the scheduled banks in the following forms1.
re-discounting or re-purchasing eligible bills
2.
grant loans and advances against securities
Emergency advances-the RBI advances loans when it is satisfied that
the loan is necessary for the purpose of regulating credit in the interest
of trade, commerce and industry.

16.

Explain the Reserve banks licensing function.

Section 22 of the Banking Regulation Act,

1949 contains a comprehensive system of licensing of banks by RBI.
This section makes it essential for every banking company to hold a
license issued by the RBI. The RBI is required to conduct an inspection
of the books of the banking company and issue a license, if it is
satisfied that all or any of the following conditions are fulfilled1. that the company is or will be in a position to pay its present or
future depositors in full as their claims accrue
2. that the afairs of the company are not being or not liked to be,
conducted in a manner detrimental to the interests of its present
or future depositors; and

3. in case of a foreign bank, the carrying on of banking business by

such company in India will be in the public interest and that the
Government or law of the country in which it is incorporated does
not discriminate in any way against banking companies
registered in India and that the company complies with all the
provisions of the Act applicable to foreign banks.
It is clear from the above that the grant of a license depends
upon the maintenance of satisfactory financial position. The provision
is intended to ensure the continuance and growth only of banks which
are established or are operating on sound lines and to discourage
indiscriminate floating of banking companies. To ascertain the position,
the inspecting officer of the RBI has to make an estimate of the liquid
and other readily realizable assets and also to judge whether the
assets are enough to meet the claims of the depositors as and when
they arise. The assessment about the whole gamut of operations of the
banking company and its organizational set-up is necessary to judge
the conditions before the license is granted.
According to Section 23 of the Act, no banking-company shall open a
new place of business in India or change otherwise than within the
same city, town or village, the location of an existing place of business
situated in India without obtaining the prior permission of the RBI.
17.
Write a short of Regional Rural Banks

The RRBs are relatively new banking institutions which were

added to the Indian banking scene since October 1975 to strengthen
the institutional rural credit structure. Prior to that, the then existing
credit agencies lacked in meeting the needs of rural masses. A
committee under the chairmanship of N.Narasimhan suggested the
institutions of RRBs as low cost banking for rural areas should be set
up to meet their credit needs.
Objectives
1)
To identify a specific and functional gap in the present
institutional structure.
2)
To supplement the other institutional structure.
3)
To fill the gap within a reasonable period of time.
Functions
1)
To provide financial facility to small and marginal farmers,
agricultural labourers, co-operative societies for agricultural
purposes or other purposes related to agriculture.

2)

To
grant loans
and
advances to
artisans,
small
entrepreneurs, persons of small means engaged in trade,
commerce etc.
3)
To relieve the rural masses from the clutches of money
lenders.
4)
To provide easy credit facility to weaker sections of society.
5)
To establish branches in unbanked rural areas.
6)
To take the banks to the doorsteps of the poorest people in
remote rural areas.
Sponsorship
Each RRB is sponsored by a nationalized bank known as a
sponsoring bank which provides all sorts of helps to these RRBs. The
sponsoring bank will assist the RRB in its establishment, recruitment
and training of personnel. They may also provide managerial and
financial assistance with mutual agreement.
Capital resources
Each RRB may have an authorized capital of Rs. five crore
divided into one lakh shares of Rs. 100 each and issued capital of Rs. 1
crore to improve their viability.
Management
The management of each RRB is vested in nine members
Board of Directors, headed by a Chairman. The chairman is appointed
by the Central Govt. The chairman is a paid servant of the sponsoring
bank while the members are honorary.
Conclusion
RRBs are playing an important role as an alternative agency
to provide institutional credit. According to RBI the RRBs have fared
well in achieving the objective of providing access to weaker sections
of society.

18.
Write a note on Central Co-operative banks.
A central co-operative bank is a federation of primary credit
societies operating in a specified area, usually a district. All types of
primary credit societies, rural and urban are affiliated to it. Some cooperative banks have even individual members, besides the affiliated
primary credit societies. A central co-operative bank is located at
district head-quarters or in some prominent town in the district.
The funds of a central co-operative bank consist of share
capital, reserve fund, deposits from members and non-members and

loans from state co-operative banks. Sometimes, loans are taken even
from the commercial banks.
A central co-operative bank is managed by a board of
directors constituted by the representatives of the constituent primary
credit societies and individuals of business capacity and influence.
Functions Of Central Co-operative Banks:
Its main function is to lend primary credit societies
It accepts the surplus funds of one primary credit society and
makes it available to another primary credit society, and thus
acts as a balancing centre between the primary credit societies.
It raises loans from the state co-operative banks and lends the
same to the primary credit societies, and thus acts as a link
between the state co-operative bank and primary credit societies.
It raises deposits from members as well as non-members for the
purpose of meeting the credit requirements of the primary credit
societies.
It exercises general supervision and control over the activities of
primary credit societies.
Besides the above functions, it also carries on ordinary
commercial banking operations, such as the acceptance of deposits,
granting of loans, collection of cheques and bills on behalf of the
customer, etc.
19.
What are the advantages & disadvantages of unit &
branch banking?
Unit Banking
In the unit banking system, the banks operations are generally
confined to a single office only. It is a corporation that operates from
one office and that is not related to other banks through either
ownership or control. USA is the birth place of unit banking.
Advantages
3.
The funds of the locality are utilized for the local
development
4.
The management and supervision is much easier and
efective
5.
There are less chances of fraud and irregularities in the
management
6.
They are in a better position to solve problems as they
know the local problems better.
7.
There is no possibility of generating monopolistic
tendencies

8.

There will be no inefficient banks as weak and inefficient

banks are automatically eliminated
9.
Unit banking is free from the diseconomics and problems
of large scale operations.
Disadvantages
1. Cut throat competition.
2. Lack the benefits of specialization and division of labour
3. No banking development in backward areas as banking activity is
uneconomical and no bank is opened there
4. Limited resources restrict its ability to face financial crises.
5. There is little possibility of distribution and diversification of risks
under the localized unit banking system.
6. The interest rates tend to vary at diferent places as there is no
movement of funds from place to place.
7. The transfer of funds is very expensive as there are no branches
at other places.
8. There will be high local pressure and interference which disrupt
their normal functioning.
Branch Banking
Under the branch banking system, a bank operates as a single
institution under single ownership with branches spread all over the
country. Branch banking developed in Great Britain.
Examples- SBI, Barclays.
Advantages
1. Results in the economy of cash reserves
2. Less risk and greater capacity to meet risks
3. There is proper use of capital.
4. Customers get better and greater facilities.
5. Large scale operation with greater applicability of the division of
labour.
6. It is easier and cheaper to transfer funds because branches are
spread all over the country.
7. Ofers a wide scope for the selection of diverse securities and
varied investments, so that a higher degree of safety and liquidity
can be maintained.
8. Greater diversification of both deposits and assets because of
wider geographical coverage.
9. Mobility of funds from one place to another which in turn brings
equality in interest rates.
10.
Banking can be extended to under developed areas and this
helps in the development of backward regions.

11.
It is more convenient for Central Bank or the Government to
regulate and supervise.
Disadvantages
1. Proper supervision and scrutiny become more difficult
2. Sufers from red-tapism and delays on account of inadequate
authority of branch managers and the necessity to take
permission from head office
3. Dealings become more impersonal
4. Very expensive. Opening of many branches, establishing and
maintenance of the branches result in high expenses and may
reduce profits.
5. Creates monopoly and leads to the concentration of resources
into a few banks.
6. Losses and weakness of some branches afect the other branches
too due to adverse linkage efect.
7. Unhealthy competition among the branches of diferent banks in
big cities.
8. Preferential treatment is given to the branches near the head
office.
20.
What are the differences between schedule & nonschedule banks?
Private sector
Indian Commercial Banks are classified into
two types. They are:
Scheduled Banks.
Non-scheduled Banks.
Scheduled Bank:
Scheduled Banks are those private sector Indian commercial
Banks which are included in the second scheduled to the RBI Act, 1934.
Foreign banks also are included in the second schedule to the RBI Act.
Non-scheduled Bank:
Non-scheduled banks are those banks which are not included
in the second schedule of the RBI Act. The non-scheduled banks do not
enjoy from the RB all the facilities enjoyed by the Scheduled Banks.
Difference Between Scheduled Banks And Non-scheduled
Banks:
Scheduled banks are included in the second schedule of the RBI
Act of 1934. On the other hand, non-scheduled banks are not
included in the second schedule of the RBI Act.
Scheduled banks satisfy tow important conditions, viz., (i) they
have paid-up capital and reserves of Rs. 5 lakh or more and (ii)

they satisfy the RBI that their afairs are not being conducted to
the interests of the depositors. But non-scheduled banks do not
satisfy these conditions.
Scheduled banks enjoy certain benefits from the RBI, whereas
non-scheduled banks do not enjoy those benefits.
Scheduled banks are subject to greater degree of control and
more obligations than the non-scheduled banks in their day-today operations.
The number of scheduled banks is more than that of nonscheduled banks.
Scheduled banks are, generally, big, whereas non-scheduled
banks are, ordinarily, small.
Scheduled banks are spread over a large area of the country,
whereas non-scheduled banks are confined to a small area.
The share capital and reserves of scheduled banks are more than
those of non-scheduled banks.
Deposits of scheduled banks are more than those of nonscheduled banks.
The advances of scheduled banks are also more than those of
non-scheduled banks.
Scheduled banks are more important that non-scheduled banks
21.
What are the rights of a banker against surety?What
are the precautions to be taken by the banker?
Rights of banker against surety
1. Right of lien-the banker can exercise his right of lien on the
balance of the account of the guarantor in his possession
notwithstanding the fact that his claim under the guarantee is
time-barred. Right to exercise a general lien does not arise until a
default has been ade by the principal debtor, in which case the
banker should immediately inform the guarantor that the former
has exercised his lien on the latters money or securities
deposited with him.
2. Suretys liability is co-extensive with that of the
principle debtor-according to Section 128 of the Indian Contract
Act, the liability of the surety is co-extensive with that of the
principal debtor, unless it is otherwise provided for by the
contract of guarantee.
3. Bankers claim against a bankrupt suretys estate-in the
event of the bankruptcy of the surety, the banker is entitled to

prove his claim against the estate of the surety. When the banker
hears of the death or bankruptcy of the surety he should close
the account guaranteed by the surety and if the principal debtor
makes a default in the payment of the amount, the banker should
at once claim the amount from the legal representative of the
deceased or from the Official Receiver of the bankrupt surety.
Precautions

1. Advisability of getting the contract of guarantee signed in

the bank managers presence-usually bankers require the
guarantors to execute the guarantee in the bank managers
presence. It is not advisable to allow the customer to take the
guarantee form away and himself obtain the signature of the
guarantor thereto. This si because, firstly, the guarantors
signature may turn out to be a forgery or he may later on allege that
he signed in ignorance of the nature of the document and secondly,
the guarantor when called upon to discharge his obligation, may put
forth the plea that he signed under a misrepresentation.
2.Notice of principal debtors death- the notice of the death of
a customer puts an end to his account and consequently te
guarantee automatically terminates. The banker should make a
formal demand upon the guarantor for repayment of the amount
unless it is paid by those in charge of the estate of the deceased.
3.Notice of debtors bankruptcy-a banker should stop the
operation on a guaranteed account as soon as he receives notice,
actual or constructive, f his debtors bankruptcy. In such a case,
the banker should also demand the repayment of the amount due
by the surety. The banker need not first resort to the sale of the
securities held by him in the account.
4.Notice of lunacy of the debtor or surety-a banker on receipt
of reliable notice of the lunacy of the principal debtor or surety
should close the account. The lunacy of a surety is to be taken as
terminating the guarantee so far as future advances are concerned.
Consequently, any advance made by the banker after receipt of the
notice of lunacy of his customer is not recoverable from the estate
of the lunatic despite the fact that the contract of guarantee may
provide for a months notice from the surety for the termination of
the guarantee.
5.Change in the condition of the bank-unless it is provided in
the contract of guarantee that changes in the constitution of a bank
will not afect the guarantee, it will terminate in case the bank

having the guarantee in amalgamated with or absorbed by another

bank. The guarantee should provide for such contingencies.

22.

Explain the concepts of guarantee & indemnity

Guarantee
A guarantee is the most common form of security taken by
the bankers to ensure safety of the funds lent. Section 126 of the ICA
defines a contract of guarantee as a contract to perform the promises
or discharge the liability of a third person in case of his default.
Ex: A wanting a loan of Rs.500 induces B to promise C to
repay the loan in case of As default. This is a contract of guarantee.
It will be seen that there are 3 parties to this contract- A the
principal debtor, B the surety and C the creditor. A contract of
guarantee is thus a secondary contract the principal contract being
between the principal debtor and the creditor himself. The liability of
the surety therefore arises only if the principal contract is not fulfilled.
Kinds of guarantee
1)
Specific guarantee- guarantee given for a single debt is called
a specific guarantee and is discharged on repayment of the
particular debt it was given to secure.
2)
Continuing guarantee- a guarantee extending to series of
distinct and separable transactions is said to be continuing
guarantee. It can be revoked by the surety at any time.
3)
Joint and several guarantee- where two or more persons join in
executing a guarantee, their liability may be joint or several or
joint and several. In a J and S guarantee each co-guarantor is
jointly and severally liable for the debt.
4)
Limited guarantee- in limited guarantee, the guarantees have
some clauses which either restrict the liability of the guarantor or
limit the scope.
Indemnity
Contracts of indemnity appear to be analogous to contracts of
guarantee. Section 124 defines a contract of indemnity as a contract
by which one party promises to save the other from loss caused to him
by the conduct of the promisor himself, or by the conduct of any other
person.

 Ex: A contracts to indemnify B against all the consequences of

any proceedings which C may initiate against B. this is a contract of
indemnity.
23.
What are the precautions to be taken by the banker
in the case of hypothecation?
Precautions1.
Stocks should be fully insured against fire, theft and
other risks
2.
The baker must periodically inspect the hypothecated
goods and the account books of the borrower should be
checked to ascertain the position of stocks under
hypothecation
3.
The borrower should be asked to submit a statement of
stocks periodically giving current position about the stocks
and its valuation and declaration that the borrower
possesses clear title or person.
4.
An undertaking should be obtained from the borrower
that he shall not charge the same goods to other bank or
person.
5.
The banker should also ensure that the borrower is not
enjoying similar hypothecation facilities on the same stocks
from some other bank.
6.
During inspection, if the banker finds that the financial
position is weak, it is advisable to get the personal
guarantees of directors/officers to strengthen the charge.
7.
While granting loans against hypothecation, the banker
should obtain a letter of hypothecation containing several
clauses to protect his interest.
8.
Character, capacity and capital must be thoroughly
verified before granting loans on the basis of hypothecation.
This facility should be given to genuine and financially
sound parties.
9.
A name plate of the bank, mentioning that the stocks are
hypothecated to it, must be displaced at a prominent place
of the hypothecated goods for public notice to avoid the risk
of a second charge being created on the same stock.
10. The banker should get the charge registered under
Section 125 of the Companies Act, if borrower happens to
be a joint stock company.

Section 58(a) of Transfer of Property Act,1882-The transfer of an

interest in specific immovable property for the purpose of securing the
payment of money advanced or to be advanced by way of loan, an
existing or future debt or the performances of an engagement which
may give rise to pecuniary liability.
Transferor- mortgagor
Transferee-mortgagee
Instrument-mortgage deed
Characteristics-
1. the interest to be transferred is always with respect to a
specific property
2. a mortgage implies transfer of interest in a specific immovable
property. It does not mean transfer of ownership.
3. if there is more than one owner of an immovable property, each
co-owner can mortgage his share
4. the object of mortgaging the property is to give security for the
loan to be taken or already taken for performance of an
engagement giving rise to pecuniary liability.
5. the mortgage need not always be given the actual possession of
the property
6. on repayment of the loan together with interest, the interest in
specific immovable property is recovered to the mortgagor
7. in the evnt of non-payment of the loan, the mortgagee has a right
to sell the mortgaged property trough the intervention of the
Court.
8. an agreement in writing between the mortgagor and the
mortgagee is essential for creating a mortgage. The mortgage
deed should contain all safety clauses.
Kinds

1. Simple mortgage- in simple mortgage the borrower binds

himself personally to pay the mortgage money without giving
possession of property. He agrees to pay according to his contract
and also gives the banker the right ot sell and adjust the sale
proceeds to the mortgage money. But court intervention is
necessary for selling the mortgage property.
2. Mortgage by conditional sale-in this mortgage the borrower
sells the mortgaged property on the condition that:
(a) on default of payment of the mortgage on a certain date the
sale shall become absolute
(b) on such payment being made the sale shall become void

(c) on such payment being made the buyer shall transfer the
property to the seller
3. Usufructuary mortgage-in this mortgage the mortgagee gets
the possession of the property (physical possession not
necessary) and is entitled to recover the rents and profits relating
to the property till the loans are repaid. He can also appropriate
such rents or profits to interest or payment of mortgage money
and partly interest and partly in payment of the mortgage money.
4. English mortgage-the mortgagor makes a personal promise to
repay money on a certain due date. Mortgagee is entitled to
immediate possession and to retain possession until the money is
repaid. The transfer is absolute with all interests and seeking the
permission of the Court.
5. Mortgage by deposit of title deeds or equitable mortgagewhere a person delivers to a creditor or his agent documents of
title to immovable property with the intention to create a security
thereon, the transaction is called a mortgage by deposit of title
deeds. This mortgage does not require registration.
Anamolous mortgage-a mortgage other than any of the mortgages
explained above is a anamolous mortgage. Such a mortgage includes a
mortgage formed by combination of two or more types of mortgage. It
takes various forms based on custom, local usage or contract.

24.
What
are
hypothecation?

the

Lien
1.Possession of securities
transferred to the banker

differences

is

2. No such agreement

3.
The
borrower
holds
possession of goods as owner
and not as an agent of the bank

between

lien

Hypothecation
Neither
ownership
nor
possession is transferred to the
creditor. Only an equitable
charge is created in favour of
the creditor.
The borrower binds himself
under an agreement to give
possession
of
the
goods
hypothecated to the banker
whenever the banker requires
the borrower to do so
The borrower holds possession
of the goods not in his own
right as the owner of the goods

&

4. There is no such constructive

possession even of the banker
5. To take possession of the
property under lien by way of
security directly the baker has
to move the Court
6. Lien also creates a charge
but it is not so convenient to
proceed
as
in
case
of
hypothecation

but as an agent of the bank

The banker has constructive
possession
over
the
hypothecated goods
It is essential for the bank to
take
possession
of
the
hypothecated goods by itself
directly.
It is convenient device to create
a charge over the movable
property when transfer of its
possession is inconvenient or
impracticable

25. What are

pledge?

the

differences

Hypothecation

1. the possession of the

movable property is retained by
the owner and certain right in
that property are transferred to
the person in whose favour the
property is hypothecated
2. since the possession of the
goods remains with the owner,
the hypothecate cannot have
the right of lien. He may sell the
property in default

between

hypothecation

&

Pledge
There is delivery of goods from
one person to another as
security for payment of debt or
performance of a promise.

Since the pledge has got the

possession of the goods, in the
event of default by the pawnor,
apart from other rights, the
pledge has a right of lien over
the goods
1.
if an agreement empowers the hypothecate to take
possession of the goods and then sell the same in case of
default of payment, he can proceed in accordance with the
agreement to sell the goods, without intervention of the
Court.

26.

Write a note of secured & unsecured loans

Loan is a contract by which property or money is transferred

by a lender to a borrower on the promise of the borrower to return the
property, or its exact equivalent, at a stated time or on demand.
The loans and advances granted by banks are broadly
classified into
1) Secured advances
2) Unsecured advances
Definition
According to section 5(a) of the Banking Regulation Act, 1949,
'a secured loan or advance' means a loan or advance' made on the
security of assets, the Market value of which is not at any time less
than the amount of such loan or advance; and 'unsecured loan or
advance' means a loan or advance' not so secured.
Secured advances
The distinguishing features of a secured loan or advance are
as follows 1) The loan must be made on the security of tangible assets
like goods and commodities, lands and buildings, hold and silver,
corporate and government securities etc. A charge on any such assets
ofered as security must be created in favour of the banker.
2) The Market value of such security must not be less than the
amount of the loan at anytime till the loan is repaid. If the former falls
below the latter, the loan is considered as partly secured.
Unsecured advances
They are also called clean loans or advances.
The characteristics of unsecured advances are
1) UAs are made on the goodwill and reputation of the
customer.
2) They are generally made by way of overdraft facilities.
3) Unsecured advances are made at the discretion of the
concerned bank manager himself.
4) Grant of loans depend on the credit worthiness of the
borrowers. Such creditworthiness depends on- 1) character 2) capacity
3) capital

What is overdaraft?
Overdraft means allowing the customer to overdraw his account. It
is allowed only to current account holders. But some banks allow
casual overdraft in savings accounts of Government servants, etc. An
overdraft is a running account wherein thy balance goes on fluctuating
from debit to credit or vice versa.
Under an overdraft arrangement, a customer is allowed to draw
cheques upto an agreed limit over and above the credit balance in the
account.
Benefits-The bank provides overdraft facility to its customers to earn
interest, and its customers enjoy the overdraft facility in order to
develop their business. The overdraft facility is ideal to cover short
term requirements. The interest on overdraft is calculated on the
amount actually utilized by the debtor-customer at regular intervals
and hence it is cheaper than the other loans.
There is no restriction on operations in the account and withdrawals
and deposits may be upto any number of times.
Bankers obligation.-If a bank has agreed to give an overdraft, it
cannot refuse to honour cheques or draft within the limit of that
overdraft which have been drawn and put in circulation. If the banker
refuses any cheque it becomes wrongful dishonor and he will be
liable for damages.
Customers obligation-where a customer even without any express
grant of an overdraft facility, overdraws on his account and the
cheques issued by him are honoured, without there being sufficient
balance in the account, the transaction amounts to a loan and the
customer is bound pay reasonable interest-Bank of Maharashtra v
United Construction Co & Ors.
Procedure-It is safe course for the banks that they should obtain a
letter and a promissory note from the customer in which terms and
conditions of the facility including the rate of interest chargeable on
the overdraft is given. But written transactions are not necessary all
the time.
Time period-The period of overdraft is 7 years at maximum. But in
practice, the banker grants an overdraft for one year, and renews it
every year.
Overdraft agreement is a contract-Overdraft arrangement between
bank and its customer is a contract and it cannot be terminated by the

bank unilaterally even if it is a temporary one.-Indian Overseas

Bank, Madras v Narayanprasad Patel
Categories

2.
Secured overdraft- when a party is allowed regular
limits against some tangible security, it is known as secured
overdraft.
3.
Clean overdraft-Overdrafts which are not backed up by
any security are called clean or temporary overdrafts. Clean
overdrafts are allowed purely on the personal credit of the
party. They are allowed for small amounts to meet the
partys sudden requirements.
27.

Write a note on fixed deposits

The relation between a banker and his customer begins with

the opening of an account by the former in the name of the latter.
Initially the accounts are opened with a deposit of money by the
customer and hence these accounts are called deposit accounts.
Deposits are broadly divided into two kinds- 1) payable on demand
(demand deposit) and 2) payable after certain time (time
deposit). Demand deposits are- savings and current account. Time
deposits are- fixed deposit and recurring deposit.
Fixed account
The term fixed deposits means deposits repayable after the
expiry of a certain period, which ordinarily varies from three months to
five years. The fixing of the period enables the banker to invest money
or employ it in business without having to keep a reserve and hence
are very popular with the bankers.
Rate of interest- the banker ofers higher rates of interest on
fixed deposits as the depositor parts with liquidity for a definite period.
The longer the period, the higher will be the rate of interest.
FD for senior citizens- RBI has permitted the banks to
formulate FD schemes specially meant for senior citizens on which
they ofer higher and fixed rates of interest.
Opening and operation- to open an account the depositor is
required to fill in an application form wherin he mentions the amount of
the deposit and the period for which the deposit is to be made. He also

gives his specimen signature. A fixed deposit receipt is thereafter

issued to the depositor acknowledging the same.
FD in joint names- FDs can be opened in joint names of two or
more persons payable to either or survivor in accordance with the
terms of the receipt. The problems faced by the banker before date of
maturity are
1)
Request for premature repayment by one of the depositor
2)
Loan against FDR by one of the depositor
3)
Request for duplicate receipt by one of the depositor
In all these cases the banker should obtain consent of other
depositor/s.
Payment before due date- though a FD is payable after expiry
of fixed period, banks permit encashment even before due date. In
such a case certain interest will be charged for the same. According to
the RBI directive banks should not charge the penalty in case of
premature withdrawal for immediate reinvestment in another FD for a
longer term than the remaining period of the original contract.
Overdue deposits- if the receipt is not encashed on the date of
maturity, the interest ceases to run from that date. The banks allow
interest as per RBI directives, if it is renewed.
28.
Write a note on current account
A current account is a running and active account which
may be operated any number of times during a working day. There is
no restriction on the number and amount of withdrawals from a current
account. As the banker is under an obligation to repay these deposits
on demand, they are called deemed liabilities or deemed deposits.
To meet the requirement of the current account the banker
keeps sufficient reserves against such deposits vis--vis the savings
and the fixed deposits. Current accounts suit the requirements of big
businessman, joint stock companies, institutions, public authorities,
corporations etc. whose banking transactions happen to be numerous
per day. Cheque facility is available for the depositors.
Bankers obligation- by taking RDs the banker undertakes to
honour his customers cheques as long as his account is in credit. The
banker may have to sufer loss if he pays a forged cheque, or a cheque
contrary to the instructions of his customer (s 129, NI Act).
Privileges- a current account carries certain privileges which
are not given to other account holders
1)
Third party cheques and cheques with endorsements may be
deposited in the current account for collection and credit.

2)
3)

Overdraft facilities are given in case of current accounts only.

The loans and advances granted by banks to their customers
are not given in the form of cash but through the current
accounts. Current accounts thus earn interest on all types of
advances granted by the banker.
Interest- normally no interest is paid on current accounts.
Rather, the depositors have to pay certain incidental charges to the
bank for services rendered by it. Sometimes customers are required to
maintain a minimum balance failing which bank charges some
commission half yearly thus helping them to earn something on
minimum balance kept.
29.
Write a note on savings bank account
Savings accounts are maintained for encouraging savings of
households. It is useful to save a part of the current income to meet
future needs and also to earn higher incomes from savings. The main
characteristics of savings account are Restriction on withdrawals- in pursuance of the objective of
savings bank accounts, the banks impose certain restriction on the
right of depositor to withdraw money within a given period. The
number of withdrawals over a period of six months is limited to 50. A
depositor cannot withdraw by withdrawal form a sum smaller than Re
1. The minimum amount of a cheque is Re 5.
Restriction on deposits- the customer may deposit any
amount in the savings bank account subject to a minimum of Re 5. The
banks do not accept cheques or other instruments payable to a third
party for the purpose of deposit in the savings account.
Minimum balance- banks prescribe the minimum balance that
is to be maintained in the SB accounts. For this purpose they take into
consideration the cost involved in maintaining and servicing such
accounts. Levy specific charges if the minimum balance is not
maintained.
Payment of interest- the rate of interest payable by the banks
on deposits maintained in savings accounts is prescribed by the RBI.
Interest is calculated at quarterly or longer rests of period.
Cheques- cheque facility is provided to the depositors subject
to the condition that he will keep a minimum balance with the bank
according to the rules of the bank. Only cheques payable to the
customers having SB accounts are collected.
Prohibition on savings account- the RBI has prohibited the
banks to open a savings account in the name of

1)
2)
3)
4)

Trading or business concern, proprietary or partnership.

A company or an association.
Government departments.
Bodies depending upon budgetary allocations for performance
of their functions.
5)
Municipal corporations/committees.
6)
Panchayat samitis.
7)
State housing boards.

30.

Write a note on recurring account.

The banks have in recent years started various daily, weekly,

or monthly deposit schemes in order to inculcate the habit of savings
on a regular or recurring basis. Generally money in these accounts is
deposited in monthly installments for a fixed period and repaid to the
depositors along with interest on maturity. These are called as
recurring deposits.
A depositor opening a RD account is required to deposit an
amount chosen by him, generally a multiple of Re 5 or 10, in his
account every month for a period selected by him. The period of
recurring deposit varies from bank to bank. Generally banks open such
accounts ranging from one to ten years.
Opening and functioning of account- the RD account can be
opened by any person, more than one person jointly or severally, by a
guardian in the name of a minor and even by a minor.
While opening the account, the depositor is given a pass book
which is to be presented to the bank at the time of monthly deposits
and repayment of amount. Installments for each month should be paid
before the last working day of that month. Accumulated amount with
interest will be payable after a month of the payment of the last
installment.
Rate of interest- the rate of interest on RD stands favourably
as compared to the rate of interest on savings bank accounts.
According to the directive of the RBI, the interest provided by banks on
RD must be in accord with the rates prescribed for various term
deposits. The rate of interest is therefore almost equal to that of fixed
deposits.