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Banking Theory Law

& Practice
Dr. A. Balu, Senior Lecturer
KCC Kodaikanal 624 104.
 Unit 1
Introduction

Banker Customer Relationship

Types of Deposits

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

German word Back (termed as Banco in

Italy) A Joint Stock Fund.
 Banker Definition:
The banker at present has three
ancestors viz., merchants, goldsmiths
and money lenders
- Geoffery Crowther
Banking Definition:

Section 5 (b) of Banking Regulation Act 1949

Accepting for the purpose of lending or

investment, of deposits of money from the
public repayable on demand or otherwise,
and withdrawable by cheque, draft, order
or otherwise
 Features of the Definition:

Performance of essential functions

The phrase deposit of money from the public

Time and mode of withdrawal

Resource mobilisation
 Customer Definition:
To constitute a customer there
must be some recognizable
course or habit of dealing in
the nature of regular banking
business
- Sir John Paget

It is known as Duration theory

Features of Customer:

- Have an account in a bank

- Dealing with a bank
- Dealing must be in the nature of
banking business
- Dealing may be of short or long
duration
Relationship between a banker
and customer

Relationship
General Special
Relationship Relationship
 General Relationship

General
Relationship

Primary Secondary
 Primary Relationship
Debtors & creditors relationship:
- Demand for payment
- Demand at proper time
- Demand in proper manner
 Secondary Relationship
1. Trustee & Beneficiary relationship (at the time
of keeping valuables):
- Bankers does not get ownership
- It does not compensate the creditors at
the time of banks liquidation
- Deposits carry any standing instruction
(trustee & beneficiary) and vice versa
- cheque deposits for collection (trustee &
beneficiary) and vice versa.
 2. Agent & Principal relationship:
- Collection of bills of exchange on customer
behalf.
- Purchase or sale of securities on customers
behalf.
- Payments of customers dues like insurance
premium, telephone & electricity bills etc. on
customers behalf.
Special Relationship

Special
Relationship

Obligation Rights
 Obligation of the banker

1. Obligation to honour the Cheques:

- Sufficiency of funds
- Applicability of funds
- Proper requirements for payment
- No garnishee or attachment order
 2. Obligation to maintain secrecy of
accounts:

a. Legal necessity it will disclose if it is

required by;
- Income tax act
- Companies act
- RBI act
- Banking regulation act
- Gift tax act
- Order to court
- Foreign regulation act
 b. Banking Practice:
1. Disclosure with customers consent
- Express consent (customer can instruct)
- Implied consent (guarantor)
2. Disclosure for bankers own interest
- To bankers lawyer (recovery of dues)
3. Disclosure of request by other banks
- Can furnish data except the actual figures
4. Disclosure for public interest
- When it helps to find a criminal
- Person involves in Illegal activities
 Consequences of wrong disclosure:

Liability to the customer:

Banker should compensate the loss due
to the wrong disclosure

Liability to the third party:

Banker should compensate the loss for
the wrong disclosure
 Rights of a banker

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

- Banker must possess the

property/security.
- Property/security must be in the name
of the customer alone.
- The possession obtained by banker
legally.
Exception to the right of lien:
- Valuable accepted for safe custody.
- Bill of exchange/other documents deposited for other
purposes.
- Money deposited for special purposes like purchase of
securities
- Documents/valuables left with the banker by mistake
- Trust a/c operated by the customer against his
personal a/c.
- Securities lodged with a banker for getting a loan
before sanctioning such loan
 2. Right of Set Off:
- Banker can exercise the right
by setting off a debit balance in
one a/c with the credit balance
in another a/c maintained by
the same customer.
Right of set off subject to the following
conditions:

- No agreement contrary to this right.

- Formal notice to the customer.
- Capacity of the customer must be same in
all the a/cs.
- Different branches of bank will constitute
one entity.
- Banker has the option (customer cant
compel the banker).
- Banker can do this even after the receipt
of garnishee order.
 3. Right of Appropriation:

- Appropriation of amount will arise

when a customer;
- Owes several debts to a banker and

- His payment is not sufficient to

discharge all his debts.
4. Right of charge interest, incidental
charges etc:
- Banker has the right to charge interest
on due from customers
- It has the right to charge incidental
charges on customers a/c
Types of Deposits or Account:

- Fixed Deposit
- Saving Bank Deposit
- Current Deposit
- Recurring Deposit
 Fixed Deposit:

Features:
- Deposit accepted for fixed period
- Period mentioned
- cash reserve not required
- Can be used by bank in more
profitable manner
- Rate of interest is comparatively
high
Opening of Fixed deposit A/c

- Filling of an Application
- Name, Age, Sex, Address, Period,
Nominee if any etc.,
- If it is joint a/c (who is the payee)
- Specimen signature of the depositors
- Verification of application
- Collecting of money
- Issuing FD Receipt
 Contents of FDR:

On its face On its back

Name of the Columns for marking
bank payment of interest,
Holder of deposit principal and renewals if
any
Amount and
period of deposit
Rate of interest Column for customer
signature
Date of maturity Not transferable &
Not negotiable
Legal position of a banker as
regards to FDR

- Premature withdrawals [interest 1% less]

- Advance against FDR
- Interest 3% more than FD interest
- 75% value of FD
- Payment of interest
- Monthly or Quarterly or Half yearly or Annually
- Repayment of FD [on surrender of FDR]
- Repayment of third person [authorised person]

- Donatio mortis causa [Gift death of donor donee]

- Loss of FDR [Duplicate FDR]

- Change in the name of the depositors
- Fixed deposits in joint names
2. Savings bank Account
Features:
- Restriction of Deposits
- Minimum balance
- Cheques payable to others can not be deposited
- Restriction on withdrawals
- Through cheques /withdrawal forms
- Total withdrawals < 500 in half year
- Interest
- Interest 3 4.5% p.a.
- Calculated once in 46 days (varies)
- It is transferable form one branch to another
 3. Current Account
Features:
- Suitable for business and big
organisations
- No interest
- Incidental charges [Min Bal. not
maintained]
- Privileges
- OD facility
- Third party cheques can be deposited
- Granted loans are credited in the a/c
Opening of Current Account:
- Application
- Letter of introduction if not
- Bankers loose their statutory protection
- OD will be irrecoverable
- Fraud or misrepresentation occur
- Specimen signature
- Mandate for operation by agent
- Verification of documents
- Opening of an account
- Issue of pay in slip, cheque book & passbook
4. Recurring /Cumulative Deposit:
Features:
- Features of saving/fixed deposits are applicable
- It can also transferable
Special features:
- Depositors can select the amount period
- Amount in multiples of 100
- Period 1 to 10 years
- Any person including minor can open
- Passbook will be given
- At the end interest and principal
 Differences between FD & SB a/c

FD A/c SB A/c
Repayment on certain date On demand
No need of cash reserve CR is needed
Introduction not necessary It is necessary
High rate of interest Low rate of interest
Suitable for investors Suitable for small savers
Loans available on FDR No loan facility
Practically he is not a He is a customer
customer
Only deposit receipt is given Cheque book, passbook &
pay in slip will be given if
necessary
Differences between FD & Current a/c:

FD A/c Current A/c

Time deposit Demand deposit
No need of cash reserve CR is needed
Introduction not necessary It is necessary
High rate of interest No interest
Suitable for investors Suitable for business
people
Loans available on FDR OD facility available
Practically he is not a He is a customer
customer
Only deposit receipt is given Cheque book, passbook &
pay in slip will be given if
necessary
 Differences between SB & Current a/c:

SB A/c Current A/c

Object to promote the habit Provide convenience to
of savings customers
Third party can not be Can be
deposited
OD not available Available
Reasonable rate of interest No interest

Withdrawals are restricted No restriction

Comparatively lesser cash More CR required

reserve
 New schemes of deposits
1. Super savings packages:
1. Monthly deposit
2. 15 40 years
3. Lump sum at the end
2. Cash certificate
1. Higher face value (IVP/KVP) (8 years)
2. Period should be mentioned
3. Maturity time will be mentioned
Annuity deposits:
- Provide regular monthly income
- Period 36, 60, 84 or 120 months
- Only one Initial investment
- Monthly payment of interest
4. Cash certificate
1.Development of FD schemes
2.Interest calculated periodically
3.Interest is reinvested
Perennial premium plan:
- Regular monthly payment for fixed period
- After that regular monthly pension scheme for some
years or will be given
6. Cash certificate:
1.Development of FD schemes
2.Interest calculated periodically
3.Interest is reinvested
7. Educational Plans:
1.Helps to meet children education expenses
2.It encourages the parents
3.Monthly deposit specified period
4.Sum assured on maturity
 Types of Customers:
Minor Attorney
Married woman Joint Hindu Family
Lunatic Partnership firm
Drunkard Joint Stock Company
Illiterate person Society & other non-
Trustees trading concern
Executors & Local authority
Administrators
 1. Minor:

Less than 18
Less than 21 Guardian
He/She can not enter into a
contract
Banker can open
Precautions to be taken by bank:

1. Type of Account
2. Date of Birth
3. Death of minor or guardian
4. Loans to minor
5. Loan to minor on the guarantee of
3rd person
6. Liability regarding negotiable
instrument
7. Minor as a partner
8. Minor as an agent
 Guardian:

Natural guardian
Testamentary guardian
Appointed by the court
 2. Married woman:
Can enter into a valid
contract
Husband cant liable except
she act as agent for her
husband
purchase of necessaries not
provided by her husband
Precautions to be taken by bank:

1.Any type of A/C

2.Enquire about her personal
estate
3.Husband assets can be taken as
collateral
 3. Lunatic Unsound Mind:

Cant enter valid contract

Cant open A/c
If an A/c holder become lunatic
Precautions to be taken by bank:

1. Suspend the operation of A/c

2. Confirm with proper evidence
3. Acceptance of any bill etc he
will not be liable
4. Operation after court order
 4. Drunkard:

Legal position of a person

disturbed by liquor or drugs
Contract void
Cant open an A/c
 Precautions to be taken by bank:

1. Dishonour the presented cheque

2. Dishonour the 3rd party cheques

 5. Illiterate Person:

Allowed to open account

Thump impression - Signature

 Precautions to be taken by bank:

1. Left hand thump impression

2. Identification marks 2
3. Photographs 2
4. Explain the operational
Conditions
5. Withdrawal In person with
passbook
 6. Trustee:

Trust for the properties of a

deceased person
Manager Trustee
Beneficiary for whom the trust
is formed.
 Precautions to be taken by bank:

1. Careful study of trust deed

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

Executor Appointed by the will of a

deceased person to settle his accounts.
Court permission is required
Official confirmation of the will
probate.
Administrator Appointed by court when no
executor is appointed or he is not willing to act.
Duties are same
Realize the assets & pay off the
liabilities.
Precautions to be taken by bank:

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

Attorney a person appointed by a

document called Power of attorney to
act on behalf of another person.
In writing, stamped and registered
Attorney

general Special
(All Transactions) (Particular
Transaction)
Precautions to be taken by bank:

1. Examination of power of
attorney
2. Time period of power
3. No loan/OD unless special
power
 9. Joint Hindu Family:

It is governed Hindu law

 Precautions to be taken by bank:

1. Knowledge of law & customs

2. Dealing with karta
3. Karta personally liable
4. Members liable to the extend of
their share
5. Purpose of loan
6. Incase of trading JHF manager
karta pledge & borrow.
 10. Partnership Firm:

It is governed Partnership act

1932
 Precautions to be taken by bank:

1. Study - partnership deed

2. Opening of account
3. Letter or mandate from partners
4. Revocation of authority and stop
payment of cheque
5. Firms cheque endorsed in favour of a
partner
6. Implied authority of a partner
7. Power to borrow
8. Order of payment of firms debt and
personal debts
9. Reconstruction of a firm
 11. Joint Stock Company:

Artificial person by companies

Act 1956
Separate existence
It can sue & be sued by others
 Precautions to be taken by bank:

1. Verify the certificate of incorporation

2. Verify the certificate of the
commencement of the business.
3. Verify the MOA
4. Verify the AOA
5. Obtain a copy of MOA & AOA
6. Obtain a copy of financial statements
7. Obtain a copy of board of resolution
8. Borrowing powers of the company
9. Registration of charges
12. Societies & Other Non-Trading
Association:

Artificial person by societies

registration act or the
cooperative societies act Act
1956
Educational institutions,
hospitals clubs etc.,
 Precautions to be taken by bank:

1. Verify the registration of

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

Artificial person by
government provisions.
Municipality, corporation etc.,
Precautions to be taken by bank:

1. Study the special act

2. Can have different a/c for each
section
3. Copy of resolution
4. Borrowing power for OD
Different forms used in day to day
banking:

- Withdrawal slips/forms

- DD forms

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

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

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

- Multiple purpose forms

- A/c opening forms

 Assignment topics:

Banker Customer Relationship

Types of Deposits
Types of Customers

The students are advised to take any one of

the above mentioned assignments and
submitted with in a week from the
completion of the unit.
 Further Reading:

Banking Theory - Sundaram Varshney

Banking theory law
and practice - S.M. Sundaram
Banking Theory - E. Gorden & Natarajan
Practical Banking - M. Radhaswamy
Unit II
 Unit II
Commercial Banks
State Bank of India
Regional Rural Banks
Reserve Bank of India
recent development in banking sector
 Commercial Bank Origin and Growth
1.Before British period Indigenous
bankers
2. Britishers Difficult to deal with
them

3. Britishers Encouraged agency

houses to start banking

4. Britishers Setup bank of

Hindustan in 1770
Functional of Commercial Banks

Functions

Secondary/
Primary
Subsidiary
 PRIMARY FUNCTIONS

Receiving deposits from the Public

Granting Loans and Advances

Receiving Deposits

All kinds of deposits savings

term recurring current
Making Loans and Advances

Cash Credit

Overdraft

Loans System

Purchase & Discounting of Bills

SUBSIDIARY & SECONDARY
FUNCTIONS

Functions
Miscellaneous &
Agency service
General utility
 AGENCY SERVICES
Payment of subscription, premium,
rent etc
Collection of promissory note,
dividends, salaries, pension etc
Purchase and sale of stocks and
shares
Acting as Trustee, Executor,
Administrator or Attorney
Miscellaneous or General Utility Service

Safe custody of customers

valuables
Letter of Credit
Travellers cheque
Remittance of funds
Merchant banking
 Dealing in foreign exchange business
Import & Export Finance
Housing Finance
Under writing of securities
Tax Consultancy
Credit cards
Gift Cheques
Teller System
 Role of Commercial Banks in the
Economic Development of the Country

1.Collection of savings
2.Productive Investment A mere
injection of money and credit cannot
star a process of growth
- Rockfeller David
3.Agricultural & Rural development
4.Industrial development
5. Development of Trade and Commerce
6. Development of foreign trade
7. Balanced regional development
8. Optimum utilization of natural
resources
9. Finance to government
10. Creation of employment opportunities
11. Government sponsored programme
 Modern Services Rendered by
Commercial Banks

1. Financing Lease: Lessor

Lessee No provision in act
1949 amendment act 1983
with the permission of Lessor.
 2. Merchant Banking
Service to entrepreneurs
Commencement of business
Project Counselling
Feasibility Reports Economic Technical
Financial Market survey.
Raising of loans new issues of shares &
debentures
Financial planning modification &
restructuring of capital
Organisational restructuring
Amalgamation, Absorption, conversion of
partnership into Pvt. ltd Co, Pvt. Ltd. Co
into Public ltd Co.
 3. Factoring
Continuing arrangement between
banker and trader
Purchase of traders books
Administration of traders sales
ledger
Making prepayments for the debts
purchased
Collection of debts purchased
Meeting the credit risk involved
 4. Tele-banking Facility
Ordering for DD
Faxing of annual statements
Payment of bills
Booking tickets
 5. Stock Invest
Customers can pay subscription to
capital issues
Banks will issues
Money will be in the investors A/c
Interest will be paid till allotment
 6. ATM
Draw cash
Deposit cash
Get mini statement
View the balance
Request for cheque book
Transfer of funds (one a/c to another
in the same branch)
Deposit of cheque for collection
 7. Credit cards
For reputed customers
Purchase of goods & services
Credit limit fixed by banks
Sales voucher given after purchase
Customer signature is must
Signature verification
Charges will be applicable
 8. Debit Cards
Similar to credit cards
Purchase all over the world
Purchase by Debiting bank account
ATM cum Debit card
Charges is applicable
 9. Internet banking
Using E-mail ID

Instruction to bank officials

 Anywhere Banking
Withdrawal of cash
Deposits of cash
Transfer of funds
Collection of local Cheques
Issue mini statement
Balance enquiry
 SBI - Origin
Established in 1st July 1955
By an separate Act
By taken over Imperial bank of
India
1959 8 state owned banks were
constituted as subsidiaries.
Among 8 two of them merged in
1963
 All together called State Bank
group.
First bank under public sector
Largest commercial bank in;
Branch network
Resources
Man power
It holds major portion of banking
of public & private sector
undertakings
 SBI Share Capital
Started with an authorised capital
of Rs. 20 Crores. (20,00,000x100)
It has grownup to 200 crores
A major portion of shares with RBI
The Capital of its subsidiary was
114 crores.
 SBI Management
Managed by central board of directors;
A Chairman & Vice-Chairman Central
Government
2 Managing directors Central Government
6 directors Elected by share holders other than
RBI
8 directors Nominated by central Government
with the consultation RBI
1 director nominated by Central Government
1 director nominated by RBI
2 directors Appointed to represent the officers
& Staff of the bank
 Apart from this there are local boards at:
Kolkota
Mumbai
Chennai
New Delhi
Kanpur
Hyderabad
Ahmedabad
Bhopal
Patna
SBI Functions &
Workings
Peculiar features of its functions

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

Clearing operation are managed by

SBI where there is no branch for
RBI
For this purpose it maintains all
other commercial banks accounts
 3. Finance to industry
Finance to large scale industries
Finance to SSI schemes
Finance towards
Working capital
Expansion
Modernisation
4. Advance to priority sector
5. Finance to small business
 6. Merchant Banking
Financial advise to new projects
Helps in technical feasibility
studies
Organises different types of
financial assistance
Helps the small, medium and new
entrepreneurs
 7. Finance to foreign trade
Finance to Export & Import projects
Finance to Indian companies doing
construction abroad
Obtaining status report of overseas
buyers
Providing information about overseas
development
Attracting NRI funds
 8. International banking
Started off-shore banking units
First Indian organisation to enter
into the international Euro Yen
bond market
Built branches & offices in many
countries
 9. Innovative Banking
Community service banking
SBI cards Debit & Credit
Customer councils
SBI capital market Ltd
SBI mutual funds
 Regional Rural Bank (RRB)
Started to strengthen the banking
system in rural areas
Combination of the following:-
Rural atmosphere
Local feeling
Knowledge of cooperative institutions
Modern banking practices
 First RRB October 1975

RRB Act 1976

 Features
Formation of Regional Rural Banks
Separate Body Corporate established by
the government of India
As per the provision of act
Commercial banks request the
Government to start
The bank request called Sponsored bank
Sponsored banks provide finance and
technical assistance
 Area of operation
Government specifies the area limit
Can have branch with in the limit
Initial authorized capital was Rs. 1
Crore
It increased to Rs. 5 Crores
Issued capital Rs. 1 Crore
 Future of RRBs

RBI conducted a survey on RRBs in 1981

Survey
Khusro Narasimham MC Bhandari
Committee Committee Committee
 Khusro Committee

The weakness of RRBs were endemic.

Non-viability was built in their structure
They had huge accumulated losses
Some case losses erode the deposits
RRBs were not able to serve the larger
group
There was no place for RRBs in the
countrys rural system
 Narasimham Committee
Due to many restriction on RRBs,
earning capacity was low
Wages & salary is almost close to
commercial banks no growth like.
Sponsored banks have rural branches
near by RRB
No restriction on targeted group
Interest rate structure of RRBs in the
same line like commercial banks
 M.C Bhandari Committee
Suggested measured for restructuring
RRBs.
Most of them were implemented
They are;
 The issue of share capital has been
enhanced
NABARD should help on;
Productivity
Cash management
Advances portfolio
Recovery performance
No restriction on area of operation
Relocate the loss making branches
Extension counters can be opened in
suitable cases
Allow them to provide finance to Non
priority sector
 Investment Policy of Banks
FEATURES:
Deals with Technicalities of
Investment
Investment of bank funds is a difficult
task
Maintain proper balance to honour
the customers demand
Make profit and pay dividend
 Earn more to meet administration
cost
Get more FDs
Reinvest the FDs
IN TOTAL WE CAN SAY:
It should bring more profits for share
holders
Provide maximum security to depositors
 Guiding Principles of a
Good Investment Policy

Safety &
Liquidity Profitability
Security

Banker can not ignore any one of

this. Because they are inter related
 Safety & Security
Deal with customers money
Invest in secured & safety assets
Prefer to grant advances to
businessmen by discounting short-
term bills
Invest in short term government
securities
Safety can not be sacrificed for more
profits
No lending for unworthy borrowers
 Liquidity
Ability to produce cash on demand

Definition:
If an asset is converted in to cash quickly,
then they are said to be liquid
 Ratio of Liquid Asset to Total
Current Assets
Cash reserve 10 %

Call money & bill of exchange 20 %

Total liquidity 30 %

Investments 20 25 %

Advances 45 50 % 70 %
Total 100 %

Profitability
 RBI - Meaning
Introduction:
Amalgamation of 3 presidency banks
& function as central bank upto 1935
1925 Hilton young recommended a
separate central bank.
1927 RBI bill introduced in
assembly
1934 Act was passed
1935 April RBI formally inaugurated
 Initially functioned as private bank
with share capital of 5 crores.
Nationalised in 1948 by RBI
(transferred to public ownership) Act.
Private share holders were paid @
118.10 per share.
Operation (Bombay, Calcutta,
Madras, Delhi and Rangoon) (Myanmar)
1947 Rangoon office was closed.
 RBI - Management

Boards
Central Board Local Boards
Mumbai Chennai

New Delhi Kolkota

 Central Board
Governor C.G US 8 (1) (a) RBI Act
1934 (5 years)
Not more than 4 deputy directors
C.B US 8 (1) (a) RBI Act 1934 (5 years)
4 directors nominated by C.G (1/local
board) US 8 (1) (b) (4 years)
10 Directors nominated by C.G US 8
(1) (c) (4 years)
1 Government official nominated by
the C.G US 8 (1) (d)
 Local Boards
Each board 5 members
Appointed by central Government
Appointment 4 years & eligible for
re-appointment.
Duties
Advising on central board
Performing other duties delegated by
the central board from time to time
 RBI - Functions
1. Issue of Bank Notes:
Sole right to issue currency notes
(except coins and subsidiary coins)
It has separate department known as
issue department.
Makes adequate arrangements for
distribution of notes & coins.
Issue department has offices in
important cities.
2. Banker to Government:
Accepting & maintaining money on account
of central & state Governments.
Making payments on their behalf.
Carrying out their exchange, remittance &
their banking operations.
Managing the public debt including new
loans & Treasury bills of central
government.
Advances to central & state governments
Advising the government in all financial
matters.
3. Bankers Bank:
Act as banker to scheduled banks in
India.
Maintain cash reserves of scheduled
banks. (% on their liabilities)
Servers as lender of last resort.
(rediscounting the bill of exchange etc)
4. Custodian of Foreign Exchange
Reserve:
Responsible for maintaining the
external stability of rupee value.
Controlling & regulating the foreign
exchange.
5. Controller of Credit:
As per the Acts (1934 & 1949) have
powers to control & regulate the
credit.

Controlling of credit
6. Collection & Publication of
Information:
Collects & publishes information on:
General economic.
Financial & banking developments.
 1. Issue Department:
Issue & management of bank notes
14 branches in the country
Each branch has:
Cash department Currency
transactions
General department Managing
supply
2. Exchange control department:
Control foreign exchange & maintain
stable exchange rate
3. Department of Banking operation
and development:
Control & supervise the working of
banks in India.
Visits banks periodically
 4. Department of Financial
Companies:
Control & supervise the non banking
financial companies.
Central office in Kolkota
Four regional offices in Bangalore,
Mumbai, Kolkota and New Delhi.
 Method of Credit Control
1.Bank Rate
Rate at which RBI grants loans to
commercial banks
Changes in this rate reflect on the
lending rate of Commercial Banks
 2. Open Market Operation
Purchase & sale of securities in the
market.
Sells the securities reduces the money
supply.
Buys the securities increases the
money supply (credit).
 3. Variable Reserve Ratio

Increase the ratio reduce the credit.

Decrease the ratio increase the credit.

 4. Statutory liquidity
Requirement

As per Se. 24 of B.R.Act banks have to

maintain the liquid assets like cash,
gold and approved securities.

Any change in the ratio will have a

reflection in the credit.
5. Credit Authorization Scheme

Banks get permission from RBI before

releasing loans exceeding certain limit.
 6. Moral Suasion

Advising the banks to follow the

guidelines of RBI
Maintaining good relation by having
meetings etc.
 7. Fixing of Lending Rate

RBI has the right to fix the lending rate

Increase or decrease in the rate and

interest
Currency Chest
Quantitative Vs Qualitative
Credit Control
 Quantitative Qualitative
It is in indirect control It is a direct control
Objective is to control Objective is to control
the amount of credit & the purpose & flow of
expenses on credit credit

Doest not control the Controls the flow of

flow of credit credit to various purposes
(unproductive purpose) like socially relevant and
economically useful

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

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

Dealing in short-term bills generally

of 3 months duration
Dealt with bill of exchange, trade
bills, finance bills or promissory notes
and treasury bills
Ideal source of investment
Easily realisable
 Bill Market Scheme 1952

First time introduced by RBI

To increase the liquidity position of
commercial banks
Features are:
 RBI release advance to commercial
banks against the trade bills &
promissory notes (maturity 90 days)
It was introduced initially for 4 years
Initially, offered to banks who had:
Deposits > 10 crores
Advances - > 25 lakhs
1953 Extended to all scheduled commercial
banks.
RBI will consider;
Financial soundness of the banks.
Mannerism in conducting business.
1958 Extended to export bills
New Bill Market Scheme 1970
Introduced in 1st November 1970
Features are:
 All scheduled banks are eligible for
rediscounting the bills with RBI
Rediscounts Trade bills and not
accommodation bills
Drawn on and accepted by purchasers
bank.
Maturity period is < 120 days.
Maturity period for rediscounting is < 90
days
Bill should bear two or more good
signatures; one must be scheduled banks
 Bill value for rediscount is > 5000/bill
Total bill value for rediscount is > 50,000
at a time
CHANGES MADE AFTER INTRODUCTION
The scheme extended to Government
departments and quasi-Government
bodies, statutory corporations and
government companies.
Procedure for rediscounting was
liberalised
Exempted bills value was < 2 lakhs from
actual lodgement
 1973 This lodgement value increased
to 10 lakhs.
Minimum amount of bill for rediscount
was reduced to Rs. 1000
Bills drawn and accepted by ICICI Ltd
was covered under this scheme.
 Powers under Banking
Regulation Act 1949
1. Licensing of Banks:
Every commercial bank must obtain
the license from RBI
Cancellation of license:
If the company ceases to carry on
banking business in India
If the company fails to comply with
any of the conditions imposed by
the RBI.
3. Inspection of Banks:
Inspect the banks in the best
interest of the depositors
4. Power to issue directions:
RBI can issue directions at any
time when it requires.
5. Control over Management:
If Private sector banks RBI has to
approve for appointment,
reappointment and remuneration
of director or CEO.
If Public sector banks RBI has to
consult with the government for
the same.
6. Control over investment &
advances:
The purposes for which the
advance granted.
The margins for secured advances
Maximum limit of the advances for
company, firms or individuals.
Limit for guarantee of advances
Interest rate & other terms and
conditions.
7. Collection of information:
Can collect any information
relating to commercial banks.
8. Power incase of amalgamation &
& Liquidation:
RBI has the power to examine or
sanction the amalgamation
It can recommend or supervise the
liquidation
9. Power to advise banks

10. Power to advise to the Central

Government
9. Other Powers:
It may call for a meeting of a
commercial banks at any time.
It may require any officer of a
commercial bank to meet with an
officer of RBI.
It may depute one or more officers
to monitor either the board
meeting or the proceedings of any
commercial banks at times.
 Recent development in
banking sector
1. Diversified Activities:
Merchant banking
Venture capital
Mutual funds
Housing finance
Equipment leasing
Other financial services.
2. Innovative Banking:
Phone banking
Internet banking
ATM, etc.,
3. Adoption of capital:
RBI introduced capital
adequacy accounting norms
since 1992 93 in respect of;
income recognition
Asset classification and
Provisioning for bad debts
etc.,
4. Privatisation of banks:
Licensing for new private
banks disinvestment policy
clearly shows the Privatisation
of commercial banks in the
near future.
5. Reduction in SLR & CRR:
Pave the way for more
investment in various
sector.
6. Decontrol and reduction of
interest rate:
Encourage the healthy
competition among the
banks.
7. Recovery of debts:
Recovery of debts due to
banks and financial
institutions Act 1993 helps
them in speedy recovery.
 Assignment topics:
Commercial Banks

State Bank of India

Regional Rural Banks
Reserve Bank of India
Recent development in banking sector

The students are advised to take any one of

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

Banking Theory - Sundaram Varshney

Banking theory law
and practice - S.M. Sundaram
Banking Theory - E. Gorden & Natarajan
Practical Banking - M. Radhaswamy
 Unit III
Cheques
Crossing
Endorsement
 Cheques
Crossing
Endorsement
 Cheque

Meaning:
- Negotiable instrument
- Transferable from one to another
 Definition

- Se 6 of NI Act A bill of exchange

drawn on specified banker and not
expressed to be payable otherwise
than demand
 Requisites of an valid cheque
1. It must be an instrument in writing.
2. It must be an order.
3. The order must be unconditional
4. It must be drawn on specific banker
5. Payee must be a certain person
6. Amount must be certain
7. It must be dated
8. It must be signed by the drawer
9. Payable on demand
 Drawing of Cheque

1. Drawer writer

2. Drawee banker

3. Payee to whom the payment

 Dishonour of a cheque
According to Se. 138 of NI Act
punishable under criminal offence.

but the following conditions to be

satisfied.
 Conditions to be satisfied
1. Issued to settle debt / consideration.
2. Presented with in the valid time
3. Dishonoured due to insufficiency of
funds.
4. Payee demand payment < 15 days
5. No payment by drawer < 15 days.
 Differences between

Cheque Draft

Drawn by customer on a Banker on other

bank banker

Facility only to customer To all

Payable to bearer or order Payable only on order

May be dishonoured Always be honoured

 Differences between
Cheque Bills of exchange
Drawn on bank Drawn on any person

No acceptance Requires acceptance

Payable on demand Expiry on a fixed period
No grace days 3 days Grace days
Stamp may be required Compulsory
Can be crossed Cant be crossed
Intended for immediate Not intended for
payment immediate payment
Easy discount not Possible
possible
 Types of cheque
1. Antedated cheque

2. Postdated cheque

3. Stale cheque

4. Order cheque

5. Bearer cheque
 Crossing of cheque
Cheques which has 2 parallel transverse
lines across its face with or with out any
words.

Payment done only through bank

account and not at counter.

Crossing does not affect its negotiability

It can be hand written, stamped, printed

or perforated on its face.
 Types of Crossing
Crossing

General Special
Se. 123 NIA Se. 124 NAI
 Essential of G.C.
1. Two parallel lines

2. Crosswise direction

3. Words are & co and company

not negotiable Account payee.

4. Effects Not at counter If so banker

will loose their statutory protection.
 Essential of S.C.
1. Specify the banker name.

2. General words may be required.

3. Words may be Indian bank not

negotiable Indian bank.

In addition other types of crossing

 1. Not Negotiable Crossing
1. Word not negotiable

2. Can be transferred.

3. Transferee will not get better title.

4. To get a better title

 Conditions to be satisfied
1. Received the cheque for
consideration.

2. There should not be any prior bad

title.
 2. Account Payee Crossing

1. General crossing with the words

Account payee only.

2. Banker have to accept for the person

only.

3. Law does not restrict the

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

1. Erasing the crossing.

1. If the obliteration is not apparent &

Payment made in due course

2. Banker will not be liable.

 Opening of Crossing

1. Cancellation of the crossing.

1. Only the drawer can

2. Striking off the crossing, Writing

pay cash & his full signature
 Alteration of Cheques

1. Making some correction.

 Types of Alteration

Alteration

Material Immaterial
 Material Alteration

an alteration which affects the

fundamental characters of cheques
Examples of Material Alteration

1. Altering the date.

2. ,, ,, place of payment

3. ,, ,, name of the payee

4. ,, ,, amount

5. ,, ,, word order as bearer

6. ,, ,, crossing
Effects of Material Alteration
1. Generally it is void.

2. Do not pay.

3. Required drawers signature.

4. If the alteration not apparent &

payment made in due course
banker will not be liable.
 Immaterial Alteration

an alteration is immaterial and will

not make a cheque as void if;
1. It does not affect the fundamental
character of the cheque
2. It is allowed by law
3. It is made before the issue of the
cheque
4. It is made for the purpose of correcting
the mistake
5. It is made to carry out the common
intention of the original party
6. It is made with the consent the parties
of the cheque.
Example of immaterial Alteration

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

Meaning:
- Transferring the instrument
- Bearer instrument - delivery
- Order instrument - Endorsement delivery
- Endorser Who transfers
- Endorsee To whom the transfer
made
- Endorsement On its back
 Allonge

- If there is no space on its face.

- A piece of paper attached to it.

 Definition

- According to Se. 15 of NIA when the

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

1. Ownership transferred to endorsee.

2. Endorsee will get the right to sue.

3. Endorsee will get the right to recover

the money.

4. Endorsee will get the right of further

negotiation.
 Rules Regarding
Endorsement
1. Done by endorser or an agent with
signature.
2. Payee or endorsee must sign on its face.
3. Endorsement should be in ink.
4. Incase of married women Husband name
5. Illiterate person Thump impression.
6. Joint stock company Authorised person
7. Partnership Authorised person
8. Deceased person Legal representative
9. Endorsement completed by delivery of the
instrument.
Types of Endorsement

1. Blank or General Endorsement:

Endorser simply sign on the back with

mentioned anything.
2. Full or Special Endorsement:

Endorser mention the name of the

person to whom to pay;

Pay to Alagu Sundaran

Endorser
3. Partial Endorsement:

endorsed only for the part of the

amount

cheque Not possible

bill Possible
4. Restrictive Endorsement:

Restrict the endorsee from further

negotiation

Pay Grocery Rashith only

Endorser

Pay Gundu Dinesh for my use

Endorser
5. Conditional or Qualified Endorsement:
It limits the liability of the endorser
It imposes certain condition.
Pay to Rabit Binil or order on his
marriage with Mouse Vanitha
Endorser
This may done two forms;
Conditional or Qualified Endorsement

C/Q Endorsement

Sans Recourse Sans Frais

Sans Recourse Endorsement:
Endorser free from liability.

Pay to Trouser Benson

without recourse to me

Endorser
Sans Frais Endorsement:
Endorsee free from liability.

Pay to Fraud Price

Without expenses to me

Endorser
6. Per Pro Endorsement:
Endorsement done by an agent
inform the banker regard the delegation
of authority

Pay to Regular Rajasekar or order

Povendraraja
Per Pro M. Som
 Assignment topics:

Cheques

Crossing
Endorsement

The students are advised to take any one of

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

Banking Theory - Sundaram Varshney

Banking theory law
and practice - S.M. Sundaram
Banking Theory - E. Gorden & Natarajan
Practical Banking - M. Radhaswamy
 Unit IV
Paying and Collecting Banker
Collecting banker
Paying banker
 Paying Banker

Meaning:

- Banker to whom the cheque is

drawn & presented for payment
 Precautions to be taken by
Paying Banker

1. Form of cheque:
2. Date of cheque
3. Amount of cheque
4. Sufficiency of funds
5. Material alteration
6. Drawers signature
7. Mutilation
8. Payment during the banking hours
9. Open or crossed cheque
10.Endorsement if any
11.Legal restriction if any
12.Countermanding order
13.Notice of death or insanity or
insolvency of customer.
 Dishonouring of cheques

1. Countermanding of payment
2. Death of the drawer
3. Insolvency of the drawer
4. Insanity of the drawer
5. Receipt of garnishee order
6. Receipt of notice of assignment
7. Breach of trust
8. Post dated or stale cheque.
9. Insufficiency of funds.
10.In proper format.
11.Materially altered cheque.
12.Forged signature.
Statutory protection to the paying banker:

1. Protection incase of order cheque Se.

85 (1):
1. Verify the endorsement

2. Payment made in due course

2. Protection incase of bearer cheque Se.

85 (2):
1. Payment at the counter

2. No need to verify the endorsement.

3. Protection incase of crossed cheque [Se.
128]:
1. Payment through A/c

2. Payment made in due course

Payment made by mistake:

Recoverable Irrecoverable

Received malafide Mistake of law

Paid on a negotiable
Mistake of fact
instrument

Mistake between banker Paid by mistake to an

& receiver agent
Forgery of drawers signature:
1. Dont pay for the cheque.

2. Even the payment made in due

course banker will be liable.

3. Lewes sanitary Laundry Co Vs

Barclays Bevan & Co., (secretary)

4. Green wood Vs Martins Banks Ltd.,

(Husband & Wife)
Holder:
1. He must be acquired legally.

2. A thief or finder of an instruments

can not be considered as a holder.

3. Entitled to receive the money

Rights of a Holder:
1. Convert the blank endorsement into
full

2. Cross a open cheque

3. Claim & sue

4. Can obtain the duplicate copy of a

lost cheque.
Holder in due course:
1. Se. 9 of NIA Any person who become
the possessor of a negotiable
instrument payable to bearer or
endorsee or payee thereof for
consideration.
Conditions to be satisfied:
1. He must obtain the possession

2. Obtain by payment of consideration

not by way of a gift

3. Must be a holder before the maturity

period.

4. Must become the holder in good

faith.
Rights of a Holder in due course:
1. He can get better title

2. He can recover the amount form

previous parties

3. He can sue
Differences between holder and holder in due course

Holder in due
Holder
course
Need not pay Must pay some
consideration consideration
Need not take care about
Must care
the transferors titles
He takes the instrument Takes free from all
subject to all defects defects
Obtain the possession at Can obtain only before
any time the due date
 Collecting Banker

Meaning:
- Banker who undertake the
responsibility of collection.
- He can do this in the capacity;
- Holder for value
- Agent for collection
CB as holder for value

- Banker will allow the customer to

make use of the amount before the
execution of the collection.
 Circumstances:

1. Lends on the strength of the cheque

2. He pays the amount or part of it before

it is collected.

3. Permit to draw before it is collected.

4. Receive the cheque to reduce the OD.

 Rights of banker as
holder for value

1. Rights are same as holder in due

course, in addition,
2. If the endorsement is forged, he can
recover
3. If the cheque gets dishonoured, he
can sue all the previous parties.
CB as an agent for collection

- When he undertake the collection he

will be act as an agent.
Duties of a collecting
banker

1. Exercise of reasonable care.

2. Presentation of cheque for Payment
within a reasonable time. (local &
outstation).
3. Remittance of proceeds.
4. Notice of dishonour.
Statutory protection of a
collecting banker

1. US 131 of NIA banker can claim

against the collection of crossed
cheque if the following conditions are
satisfied
 Conditions
1. Collection for customer

2. Collection in good faith with out any

negligence
 Collection against
demand draft

1. Se. 131A of NIA give protection

2. If he collect crossed DD in good faith

without negligence
Negligence on the part of
a collecting banker

1. Baker act carelessly in the collection

of cheques, he will be liable for gross
negligence.
 Instances of gross
negligence

1. Fail to present the cheque with in

the reasonable time.
2. Fail to give notice of dishonour
3. Fail to verify the endorsement
4. Fail to enquire the authority
incase of perpro endorsement.
5. Partnership cheque deposited in the
partner personal account

6. Cheque payable to a Co. deposited into

secretary personal account.

7 Collecting a stale cheque

8. Collecting cheque for a person who

doesnt have an account.
 Assignment topics:

Collecting banker
Paying banker

The students are advised to take any one of

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

Banking Theory - Sundaram Varshney

Banking theory law
and practice - S.M. Sundaram
Banking Theory - E. Gorden & Natarajan
Practical Banking - M. Radhaswamy
 Unit V
Lending & Advances
 Lending
Principles of sound lending
Types of advances
Advances Against various securities
Principles of sound lending
Safety

Diversification Liquidity

Purpose Profitability
 1. Safety

- Repayment Capacity of the

borrower

- Value of the asset owned

- Character & Integrity

 2. Liquidity

1. Short term loan advisable

2. Recovery frequency
 3. Profitability

1. Interest on Loans.
2. Income to meet all recurring expenses.
1. Interest on deposits
2. Salary for staff
3. Establishment expenses
 4. Purpose of loan

- Production purpose.

- Not for speculative & unproductive

purposes.
 5. Diversification of risks
Not for similar business and same
area.

Grant for diff. business in diff. area.

Types of Loans and Advances

L&A
Secured Unsecured

Security No security/
personal security
Security > loans
Character
Repaying capacity
 Loan or Advances
Secured: Unsecured:
According to Se 5
Opposite
(n) of the BR Act
1949;
a loan or
advance made on
the security of
assets the market
value of which is
not at any time
Types of L & A
(Forms/style)
 1. Loans
1. Lump sum

2. Regular due with interest

3. Purpose Purchase of any asset

 2. Cash credit

1. Allow to borrow against F. Assets

2. Interest for utilisation only

 3. Overdraft
1. For current A/c holders

2. Allow to withdraw over & above the

credit balance.

3. Interest for utilisation only.

 4. Purchase & discounting of bills

1. Purchase of bills.

2. Discounting the bills.

3. Commission is charged.
 Other Forms
of
Secured Advances
 1. Advances against life policies

Merits Demerits
1. Effective 1. Impossibility of
realization (utmost
2. Assignment
good faith)
3. Easy valuation
2. Risky security
4. Quick realization
3. Worthless security
(sentenced to death)
 Precautions to be taken by banker
1. Terms & conditions
2. Type of policy
3. Insurable interest
4. Admission of age
5. Payment of premium
6. Surrender value
7. Free from encumbrances
8. Assignment of policy
2. Advances against document of title of
goods
Document in proof of the possession or
control of goods.
It authorizes the holder to receive or
transfer of goods.
Examples Bill of lading, dock warrant,
warehouse certificate, railway receipt,
wharfinger certificate etc.
 Risk involved
1. Chances for fraud
2. Forged documents
3. Defective title over the documents
4. Delivery on execution of indemnity bond
 Precaution to be taken by banker
1. Character of the borrower
2. Documents free from prejudicial
remarks
3. Insurance cover
4. Memorandum of charge
 3. Advances Against bill of Exchange

Purchase & discounting of bills.

Purchase bills payable on demand

Discount bills payable on a due date

 Merits
Safe lending.
Definite payment.
Profitable investment of funds.
Rediscounting of bills.
Fixed value.
Higher earning.
 Precautions to be taken by banker

Preference for trade bills.

Credit worthiness of parties.

Completeness of bills.

Bills should be alive.

 4. Advances against land & buildings
Housing loans
Plot loans
On the value of land & building
 Precautions to be taken by banker
Clear title
Free from encumbrances
Value by experts
Insurance
Legal formalities Creation of charge.
 5. Advances against security of goods

Advances against
Food articles
Industrial raw materials
Plantation products
Manufactured products
 Merits

Easy realisable security

Safety of funds

Circulation of funds
 Demerits

Decrease in the value of goods.

Difficulty in verification.

Price fluctuation.

Expensive for the banker.

 Precaution to be taken by the banker
1. Examination of character & financial
position.
2. Loan against only easy marketable goods.
3. Watch the commodity market to check the
price movement.
4. Proper valuation of goods.
5. Godown key.
6. Name plate in the godown.
7. Insurance.
 Assignment topics:

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

The students are advised to take any one of

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

Banking Theory - Sundaram Varshney

Banking theory law
and practice - S.M. Sundaram
Banking Theory - E. Gorden & Natarajan
Practical Banking - M. Radhaswamy