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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 bank’s 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 customer’s consent

- Express consent (customer can instruct)
- Implied consent (guarantor)
2. Disclosure for banker’s 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/c’s.
- Different branches of bank will constitute
one entity.
- Banker has the option (customer can’t
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 ¾ 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:
 Naturalguardian
 Testamentary guardian
 Appointed by the court
2. Married woman:
 Can enter into a valid
contract
 Husband can’t 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:

 Can’t enter – valid contract

 Can’t 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
 Can’t 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. Can’t 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:

 Itis 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. Firm’s 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 investor’s 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
country’s 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 %
Profitability Total 100 %
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. Banker’s 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 purchaser’s
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 Can’t 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. Don’t 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
Must pay some
Need not pay 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

doesn’t 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: According  Unsecured:
to Se 5 (n) of the BR
Act 1949; Opposite
“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”
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
Demerits
Merits
1. Impossibility of
1. Effective 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