When the banker is to advance loans on the security of shares he should take the following precautions for the

safety of the capital. The banker can safely advance loans against securities issued by the government, semigovernment bodies, public utility companies, banks and well-reputed companies as they are normally safe, easily marketable, and stable in price and yield a fair income. The stocks and shares which are partially paid up are to be examined with utmost care before any commitment is made to the customer. The bank shall have to meet the liability of the unpaid amount in case the bank has taken a legal mortgage and is registered as holder of shares. There is a mushroom growth of joint stock companies after the industrial revolution. The banker while selecting the shares as a cover for advances must have with him an up-to-date list of approved securities. The selection of securities to be brought on the approved list should be made after a through scrutiny of the companies, past standings, their reputation in the market, examination of their balance sheets, the management and direction of the companies by their directors, the dividends paid on the shares, marketability of shares of the company.

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. 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. 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.

2. 3.

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 affect 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 coguarantor 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 3. 4. 5. 6.
mean transfer of ownership. if there is more than one owner of an immovable property, each co-owner can mortgage his share 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. the mortgage need not always be given the actual possession of the property 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 8.
Kinds property trough the intervention of the Court. an agreement in writing between the mortgagor and the mortgagee is essential for creating a mortgage. The mortgage deed should contain all safety clauses.

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. Mortgage by conditional sale-in this mortgage the borrower sells the mortgaged property on the condition that:

2.

(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. 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. Mortgage by deposit of title deeds or equitable mortgage-where 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.

4.

5.

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 the differences between lien & hypothecation?

Lien Hypothecation 1.Possession of securities is transferred to Neither ownership nor possession is the banker transferred to the creditor. Only an equitable charge is created in favour of the creditor. 2. No such agreement 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 3. The borrower holds possession of goods The borrower holds possession of the as owner and not as an agent of the bank goods not in his own right as the owner of the goods but as an agent of the bank 4. There is no such constructive The banker has constructive possession possession even of the banker over the hypothecated goods 5. To take possession of the property It is essential for the bank to take under lien by way of security directly the possession of the hypothecated goods by baker has to move the Court itself directly. 6. Lien also creates a charge but it is not It is convenient device to create a charge so convenient to proceed as in case of over the movable property when transfer of hypothecation its possession is inconvenient or impracticable

25. What are the differences between hypothecation & pledge?

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

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 follows1) 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 offered 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 Categories2. 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 arefixed 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 offers 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 offer 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 suffer 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) Overdraft facilities are given in case of current accounts only. 3) 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 areRestriction 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) Trading or business concern, proprietary or partnership. 2) A company or an association.

3) Government departments. 4) 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.