B.

Com

BANKING THEORY LAW & PRACTICE

COGNITIVE
UNIT CONTENT HOURS CO’s
LEVEL
Banking – Meaning – Definition –
Classification of Bank – Commercial CO1,
banking – Functions of Commercial CO2, K1, K2,
I Banking – Central Banking – Need – 18 CO3, K3, K4
Principles – Distinguish between CO4,
Commercial Banking and Central CO5
banking.
Banker – Customer – Definition –
General Relationship – Special CO1,
relationship - Rights and Obligations CO2, K1, K2,
II of a banker –Who can be a customer – 18 CO3, K3, K4
Various types of account – Types of CO4,
Deposits – General precautions for CO5
opening Accounts – KYC Norms.
Negotiable Instruments Act –
Definition - Types of Negotiable CO1,
Instruments - Promissory Note – Bill CO2, K1, K2,
III of Exchange - Cheques – Crossing of 18 CO3, K3, K4
Cheques – Types -Endorsement – CO4,
Meaning -Definition - Kinds – CO5
Truncated cheques and e- cheques.
Loans and Advances – Principles of
sound lending – Types of loans & CO1,
Advances – Lien – Types – Exception CO2, K1, K2,
IV to right of Lien – Mortgage – Forms of 18 CO3, K3, K4
mortgage - Pledge – Essential – Rights CO4,
of bank - Hypothecation – CO5
Characteristics.
V E – Banking – Electronic Delivery 18 CO1, K1, K2,
channels – Credit Cards – Debit Cards CO2, K3, K4
– ATM –Internet Banking – E- CO3,
Banking transactions – Mobile CO4,
banking – Inter Bank Mobile Payment CO5
(IMPs) – Virtual Currency – Model of
E-banking – Advantages – Constraints

1
 – Security measures – Electronic
Payment System (EPS) – NEFT, RTGS,
SWIFT, WIRE.
Text Book
1. Sundaram&Varshney, 2014, Banking Theory Law & Practice, Sultan Chand & Sons.
2. Dr. S. Gurusamy, 2016, Banking Theory Law & Practice, Vijay Nicole Imprints(p). Ltd
Reference Books
1. E. Gorden and K. Natarajan, 2017, Banking Theory Law & Practice, Himalaya
Publishing House.
2. Kandasami. K.P, 2010, Banking Theory Law & Practice, Sultan Chand & Company
Web References
1. https://byjus.com/commerce/functions-of-commercial-banks/
2. https://www.forbes.com/advisor/in/banking/what-kind-of-bank-accounts-exist/
3. https://www.elearnmarkets.com/blog/various-types-of-bank-deposits/
4. https://keydifferences.com/difference-between-loans-and-advances.html
5. https://www.toppr.com/guides/business-laws-cs/negotiable-instruments-act/
definition-of-negotiable-instruments/
6. https://www.toppr.com/guides/business-economics-cs/money-and-banking/e-
banking/

Unit-I

Origin and Development of banks – Banking Regulations Act 1949 – Definition of

Banking – Licensing – Opening of Branches – Importance and Functions of Banks –
Inspection, Relationship between Banker and Customer –Special types of Banker’s
Customers.

Unit-II

Commercial Banks – Universal Banking – Management of Deposits and

Advances – Classification and nature of Deposit accounts- Advances – Types of
Advances – Lending practice – Principles of soundbank lending.

Unit-III

Central Bank – Reserve Bank of India – Objectives – Organisation – Functions –

Monetary Policy – Credit Control measures and their effectiveness.

2
 Unit-IV

Negotiable Instruments – Definition – Features – Promissory Note – Bills of

Exchange and Cheque – Holderand Holderinduecourse –CrossingofaCheque–
TypesofCrossing–Endorsement–Negotiation& Dishonour and discharge of Negotiable
Instrument – Protection of Collecting Banker and Paying Banker.

Unit-V

E- Banking – Meaning – Benefits – Electronic Transfer – NEFT – ECS –ATM –

Debit Card and Credit Card – RTGs _ Mobile Banking – WAP – Tele Banking – Internet
Banking – Bank assurance – Banking Ombudsman Scheme – Demat Account.

TEXT BOOK:

1. BankingTheroyandPractice-E.Gordonand Dr.K.Natarajan,HimalayaPublishingHouse.

REFERENCEBOOKS

1. Banking Techonology- Dr.A.Rama, A.Arundadevi, New century book house(P)Ltd,

Chennai

2. Banking Theory, Law&Practice, Sundaram & Varshney, Sultan Chand & Sons,
NewDelhi.

3. Banking Theory, Law&Practice, Rajesh.R, Sivagannasithi.T, Tata McGraw –Hill

publishing Co L

4. Banking Theory&Practice– Dr.P.Srivastava, Himalaya Publishing House, Mumbai

5. Banking Theory& Practice– Shekar.K.C.LakshmiShekar, Vikas Publishing House Pvt,

Ltd.

3
 UNIT-I

BANKING REGULATIONS ACT1949 MEANING

A bank is an institution which deals with money and credit. It accepts deposits
from the public, makes the funds available to those who need them and helps in the
remittance of money from one place to another. In other words; a bank is a factory of
credit.

DEFINITION OF THE TERM BANKING

1. According to section5(1) (b) of the Banking Companies Act1949, ”Banking means

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”.
As per Section 5(b) of the Banking Regulation Act 1949: “Banking” means the
accepting, for the purpose of lending or investment, of deposits of money from the
public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or
otherwise.”
All banks which are included in the Second Schedule to the Reserve Bank of India
Act, 1934 are scheduled banks. These banks comprise Scheduled Commercial Banks and
Scheduled Cooperative Banks.
Scheduled Commercial Banks in India are category into five different groups
according to their ownership and / or nature of operation. These bank groups are:
(i) State Bank of India and its Associates,
(ii) Nationalised Banks,
(iii) Regional Rural Banks,
(iv) Foreign Banks and
(v) Other Indian Scheduled Commercial Banks (in the private sector).
Besides the Nationalized banks (majority equity holding is with the Government),
the State Bank of India (SBI) (majority equity holding being with the Reserve Bank of
India) and the associate banks of SBI (majority holding being with State Bank of India),
the commercial banks comprise foreign and Indian private banks. While the State bank
of India and its associates, nationalized banks and Regional Rural Banks are constituted
under respective enactments of the Parliament, the private sector banks are banking
companies as defined in the Banking Regulation Act.

4
 Bank Nationalization, the Government of India issued an ordinance and
nationalized the 14 largest commercial banks with effect from the midnight of July 19,
1969. Within two weeks of the issue of the ordinance, the Parliament passed the
Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the
presidential approval on 9 August 1969.
List of Nationalized Banks in India in 2012:
1. Allahabad Bank
2. Andhra Bank
3. Bank of Baroda
4. Bank of India
5. Bank of Maharashtra
6. Canara Bank
7. central Bank of India
8. Corporation Bank
9. Dena Bank
10. Indian Bank
11. Indian Overseas Bank
12. Oriental Bank of Commerce
13. Punjab and Sind Bank
14. Punjab National Bank
15. State Bank of Bikaner & Jaipur
16. State Bank of Hyderabad
17. State Bank of India (SBI)
18. State Bank of Indore
19. State Bank of Mysore
20.State Bank of Patiala
21. State Bank of Travancore
22. Syndicate Bank
23. UCO Bank
24. Union Bank of India

5
 25. United Bank of India
26. Vijaya Bank

Reserve Bank of India The Reserve Bank of India is the central bank of the
country. Central banks are a relatively recent innovation and most central banks, as we
know them today, were established around the early twentieth century. The Reserve
Bank of India was set up on the basis of the recommendations of the Hilton Young
Commission.

IMPORTANCEOF BANKS

Banks play a very useful and crucial role in the economic life of every nation.
They have control over a large part of the supply of money in circulation, and they can
influence the nature and character of production in any country. In order to study the
economic significance of banks, we have to review the general and important functions
of banks. Removing the deficiency of capital formation
In any economy, economic development is not possible unless there is an
adequate degree of capital accumulation (or) formation. Deficiency of capital formation
is the result of low saving made by the community. The serious capital deficiency in
developing economies is reflected in small amount of capital equipment per worker and
the limited knowledge, training and scientific advance. At this juncture, banks play a
useful role. Banks stimulate saving and investment to remove this deficiency. A sound
banking system mobilizes small savings of the community and makes them available for
investment in productive enterprises. The important implications of this activity include
Banks mobilise deposits by offering attractive rates of interest and thus convert savings
into active capital. Otherwise that amount would have remained idle.
1)Provision off increase and credit

Banks are very important sources off increase and credit for industry and trade. It
is observed that credit is the lubricant of all commerce and trade. Hence, banks become
nerve centers of all trade activities and therefore commerce and trade could function in
the presence of sound banking system.
The banks cover foreign trade transactions also. Big banks also undertake foreign
exchange business. They help in concluding deferred payments, arrangements between
the domestic industrial undertakings and foreign firms to enable the former import
machinery and other essential equipment.

6
2)Extension of the size of the market

Commercial bankers help commerce and industry in yet another way. With the
sound banking system, it is possible for commerce and industry for extending their field
of operation. Commercial banks act as an intermediary between buyers and the sellers.
Goods are supplied on bank guarantees, making it viable for industry and commerce to
cultivate and locate markets for their products. The risks are undertaken by the bank.
When the risks have been set free by the banks, the industry can look forward to derive
economies of the large size of the market.

3)Act as an engine of balanced regional development

Commercial banks help in proper allocation of funds among different regions of
the economy. The banks operate primarily for profits. When the banks lend their funds
for more productive uses, their profits will be maximized. Introduction of branch
banking makes it possible to choose between different regions. A region with growth
potential attracts more bank funds. But in recent years, the approach of banks towards
regional growth has been undergoing a change. Banks help create infrastructure
essential for economic development. Thus banks are engines of balanced regional
development in the country.

4)Financing agriculture and allied activities

The commercial bank helps the farmers in extending credit for agricultural
development. Farmers require credit for various purposes like making their produce, for
the modernization and mechanization of their agriculture, for providing irrigation
facilities and for developing land.
The banks also extend their financial assistance in the areas of animal
husbanding, dairy farming, sheep breeding, poultry farming and horticulture.
5)For improving the standard of living of the people
The standard of living of the people is estimated on the basis of the consumption
pattern. The banks advance loans to consumers for the purchase of consumer durables
and other immovable property, which will raise the standard of living of the people.
Stimulating human capital formation, facilitating monetary policy formulation
and developing entrepreneurs are some of the other roles played by commercial banks
in the economic life of every nation.
Generally, banks have come to play a significant role in the development of
countries. Here we shall deal with the important services provided by commercial banks
and show how banks play a significant role in the economic development of a nation.

7
6)Banks are necessary for trade and industry: All economic progress in the last
200 years or so has been based on extensive trade and industrialization, which could not
have taken place without the use of money. In all large transactions, payments are not
made in terms of money but in terms of cheques and drafts. Between countries, trade is
financed through bills of exchange which are discounted (i.e., bought) by bank
7)Banks help in distribution of funds between regions: Another way by which
commercial banks encourage production and enhance national income is by the
transference of surplus capital from regions where it is not wanted so much to those
regions where it can be more usefully and efficiently employed.
8)Banks create credit and help in business expansion: Fluctuations in bank
credit have an important bearing on the level of economic activity. Expansion of bank
credit will provide more funds to entrepreneurs and, hence, will lead to more
investment.
9)Banks monetize debt: A very important service that banks render to the
community is the creations of demand deposits in exchange of debts of other which
(viz., short and long- term securities). Commercial banks buy debts of others which are
not generally acceptable as money, either because the debtors are not sufficiently known
or because their debt is payable only after a period of time.
10)Bank promotes capital formation: Commercial banks afford facilities for
saving and thus encourage habits of thrift and industry among people. They mobilize the
idle and dormant capital of the community and market available for productive
purposes. Economic developments depend upon the diversion of economic resources
from consumption to capital formation.
11)Banks influence interest rates: Bank can influence economic activity in another
way also. They can influence the rate of interest in the money market through its supply
of funds. By offering more or less funds, it can exert a powerful influence upon interest
rates. In a developing country like India, banking facilities are highly inadequate. The
vast number of people living in villages and towns do not have any banking facilities and
consequently all their savings are wasted.
Thus, banks have come to occupy an important place in the industrial and
commercial life of nation.
A developed banking organization necessary condition for the industrial
development of country.

FUNCTIONSANDSERVICESOFBANKS

Meaning of a Commercial Bank

A commercial bank can be defined as the financial institution that offers banking
services to the general public and to companies with the main aim of making profit.
Commercial Banks functions there are two types such as,

8
 Primary and Secondary Functions
(I)Primary Functions
1. Accepting Deposits:
It is the most important function of commercial banks.They accept deposits in
several forms according to requirements of different sections of the society.
(i) Current Account Deposits or Demand Deposits
(ii) Fixed Deposits or Time Deposits
(iii) Saving Deposits
2. Advancing of Loans:
The deposits received by banks are not allowed to remain idle. So, after keeping
certain cash reserves, the balance is given to needy borrowers and interest is charged
from them, which is the main source of income for these banks.

Different types of loans and advances made by Commercial banks are:

(i) Cash Credit:
(ii) Demand Loans
(iii) Short-term Loans
(II) Secondary Functions:
1. Overdraft Facility:
It refers to a facility in which a customer is allowed to overdraw his current
account up to an agreed limit. This facility is generally given to respectable and reliable
customers for a short period. Customers have to pay interest to the bank on the amount
overdrawn by them.

2. Discounting Bills of Exchange:

It refers to a facility in which holder of a bill of exchange can get the bill
discounted with bank before the maturity. After deducting the commission, bank pays
the balance to the holder. On maturity, bank gets its payment from the party which had
accepted the bill.

3. Agency Functions:
Commercial banks also perform certain agency functions for their customers. For
these services ,banks charge some commission from their clients.

9
Some of the agency functions are:
(i)Transfer of Funds:
Banks provide the facility of economical and easy remittance of funds from
place-to-place with the help of instruments like demand drafts, mail transfers, etc.

(ii)Collection and Payment of Various Items:

Commercial banks collect cheques, bills,’ interest, dividends, subscriptions, rents
and other periodical receipts on behalf of their customers and also make payments of
taxes, insurance premium, etc. on standing instructions of their clients.

(iii)Purchase and Sale of Foreign Exchange:

Some commercial banks are authorized by the central bank to deal in foreign
exchange. They buy and sell foreign exchange on behalf of their customers and help in
promoting international trade.

(iv)Purchase and Sale of Securities:

Commercial banks buy and sell stocks and shares of private companies as well as
government securities on behalf of their customers.

(v)Income Tax Consultancy:

They also give advice to their customers on matters relating to income tax and
even prepare their income tax returns.

(vi)Trustee and Executor:

Commercial banks preserve the wills of their customers as trustees and execute
them after their death as executors.

(vii)Letters of Reference:
They give information about the economic position of their customers to traders
and provide the similar information about other traders to their customers.

3.General Utility Functions:

Commercial banks render some general utility services like

10
(i)Locker Facility:
Commercial banks provide facility of safety vaults or lockers to keep valuable
articles of customers in safe custody.

(ii)Traveller Cheques:
Commercial banks issue traveler’s cheques to their customers to avoid risk of
taking cash during their journey.

(iii)Letter of Credit:
They also issue letters of credit to their customers to certify their creditworthiness.

(iv)Underwriting Securities:
Commercial banks also undertake the task of underwriting securities. As public
has full faith in the creditworthiness of banks, public do not hesitate in buying the
securities underwritten by banks.

(V)Collection of Statistics:
Banks collect and publish statistics relating to trade, commerce and industry.
Hence, they advice customers on financial matters. Commercial banks receive deposits
from the public and use these deposits to give loans. However, loans offer dare many
times more than the deposits received by banks. This function of banks is known as
‘Money Creation’.
INSPECTIONBYRESERVEBANKOFINDIA(Section35)
Under the Banking Regulation Act, Reserve Bank of India can undertake
inspection of banks under certain conditions. Banks will send periodical reports to RBI
based on which RBI may undertake inspection.

RELATIONSHIP BETWEEN BANKER AND CUSTOMER

Meaning of Banker
Generally a bank performs a multitude of functions and services which cannot
be comprehended into a single definition. For a common man, a bank means a
storehouse of money, for a businessman it is an institution of finance and for a worker it
may be a depository for his savings.

11
 In India, the Banking Regulation Act 1949, under which banks a reregulated by
the Reserve Bank of India, defines ' ‘banking as an activity of accepting of deposit, which
shall be repayable on demand from the depositor’.

Definition of Banker
Dr. Herbert L. Hart, the author of the well known treatise on Law of Banking says, “
“A Banker is one who in the ordinary course of his business honors cheques drawn upon
him by persons from and for whom he receives money on current accounts”.
According to Sir John Paget, Banker is that no person or body, Corporate or
otherwise, canbea banker who does not (1) take deposit accounts, (2) take Current
deposits, (3) issue and pay cheques and (4) collect cheques crossed or uncrossed, for his
customers”.

Meaning of a Customer
A customer is a person with whom the banker has some regular and formalised
banking business. The dealings with the banker should be of a banking nature and
regular in order to make a person a customer ofthe banker.

Definition of a Customer
The term “customer” of a bank has not been defined by any law. As per the views
of Sir John Paget, “to constitute a customer there must some recognizable course or
habit of dealings in the nature of regular banking business”. According to this definition,
to constitute a customer of a bank a person has to satisfy the following conditions.
 There should be a habit of dealings between him and the bank.
 The transactions should be in the nature of regular banking business i.e., frequency of
transactions should be there.
 As such, a person does not become a customer of a bank immediately on opening an
account. A single and isolated act or transaction cannot constitute a customer.
 There must be some continuity of transactions.
 Since the emphasis is placed on the continuity of transactions .i.e., duration of the bank
account, this view is called as “Duration Theory”

RELATIONSHIPBETWEENBANKERAND CUSTOMER
Banker and customer relationship can be divided into two categories as follows;

12
 1.GeneralRelationship
 Debtor and Creditor
2. Special Relationship
 Bailor and Bailee
 Principal and Agent
 Trustee sand Beneficiary
 Banker as Adviser
 Other Relations.

GENERAL RELATIONSHIP
The general relationships includes the following:
1. DEBTORSANDCREDITOR RELATIONSHIP:
The relationship between a banker and customer is mainly that of debtor and
creditor. The respective positions depend on the state of account. Normally the banker is
debtor and the customer generally keeps some amount in his account with the bank. In
other words, customer’s accounts generally shows a credit balance. But in three case of
an overdraft the banker is a creditor. In the case of a loan account, banker is a creditor
and the customer is a debtor.
On the opening of an account the banker assumes the position of a debtor. He is
not a depository or trustee pf the customer’s money because the money deposited with
the banker becomes a debt due from him to the customer. Normally the banker is in the
position pf a debtor and the customer is that of a creditor. But when the account is
overdrawn, the roles are changed, the banker becoming a creditor and the customer the
debtor.
However, this debtor-creditor relationship is subject to the following peculiarities
which are not there in similar commercial relationships.
Not time barred: The deposit with a bank does not become time barred on the expiry
of three years. On the other hand, an ordinary debt becomes a time barred debt after the
expiry pf three years. The statute of limitations begins to run only when the amount
becomes due.
Creditor must demand payment: The debt due by a banker to his customer
different for ordinary commercial debt, demand for payment by the creditor is not
necessary. In other words, the debtor (borrower) himself has to pay money to the
creditor. But in the case of debt due from a banker, demand for payment is necessary.

13
Proper place and time of demand: When the bank accepts money on a current
account, it promises to honour its customer’s cheques in so far as the amount is
sufficient and available. The obligation to repay the amount is limited to the branch
where the account is kept.
Demand to be made in proper manner: Deposits are withdrawal by cheques,
drafts, and order or otherwise. Demand for refund must be made by means of cheques
or order as permitted by the banker. The amount should never be returned on oral
instructions.

SPECIAL RELATIONSHIPS
Bailor and Bailee Relationship:
The Bank becomes a bailee in case of the valuable or securities deposited with
him for safe custody. It is his duty to preserve them properly and hand them over to the
customer. The banker does not get the ownership of these articles. The ownership
remains with the customer .In these case banks are acting as bailee. It is the duty of the
bailee to redeliver the same goods to the bailor any profit or surplus that might have
occurred from the goods so bailed.

Principal and Agent:

When a banker acts as an agent of his customer and performs a number of a
agency functions for the convenience of his customer. When banks undertake to
purchase or sell securities, collect cheques, bills, interest, dividends etc., and pay
insurance premium on behalf of their customers, banks act as agents. Some banks have
established Tax Service departments to take up the tax problems of the customers.

Trustee and Beneficiary:

In certain circumstances, banker acts as a trustees with regard to securities and
valuables deposited deposited for safe custody, the banker’s position is different. The
funds or assets coming into his hands in the capacity of a trustee must be applied only
for the specific purpose. But ordinary, a banker is not a trustee or a bailee of the moneys
deposited with him. He is a debtor and possesses complete freedom to use the funds.

Banker as agent and advisor:

When a banker buys or sells securities on behalf of his customer and renders
others service, he is acting as an agent of his customer. Similarly, when he collects
cheques, dividends, bills or promissory notes on behalf of his customer the banker is
acting as agent of the customer concerned.

14
 Other Relations:
The banker is lesser when he lets out safe deposit lockers. When the bank
undertakes to render advice to corporate customers on financial matters and to manage
their new capital issues, he acts as a manager to the issue. The banker may undertake to
make deferred payments or underwrite share capital or loans, or establish letters of
credit or even act as an executor or administrators on behalf of his customer. In that
case, he assumes the role of a guarantor. The nature of relationship between the banker
and the customer can be explained as follows:

Type of deposits and functions

Nature of relationship

Banker customer

1.Depositaccount Debtor Creditor

2.Loanaccount Creditor Debtor
3.SafeDepositLockers Bailee Bailor
4.CollectionofCheques/Instruments Agents Principal

SPECIALTYPESOFBANKER’SCUSTOMERS

OPENING OF AN ACCOUNT IN THE NAME OF INDIVIDUAL OR OPENING

OF CURRENT AND SAVINGS ACCOUNT

By opening an account with the banker, a customer enters into relationship with
a banker. The special features of this relationship impose several obligations on the
banker. He should, therefore, be very careful in opening an account in the name of a
customer. Though any person may apply for opening an account in his name but the
banker reserves the right to do so on being Satisfied about the identity of the
customer .The following precautions should be taken in this regard:
1. Application on the Prescribed Form:
The request for opening a savings or current account is made on the prescribed
form of the bank concerned. Banks provide separate application forms for opening
savings and current accounts for individuals, partnership firms and companies. The
applicant is required to mention his name, occupation, full address, specimen signature
and the name and signature of a referee. He also undertakes to comply with the bank’s
rules in force from time to time for the conduct of the account.

15
2. Introduction of the Applicant:
Before opening a savings or current account in the name of an intending
customer, the banker must get true identity of the former in order to ensure that he is a
respectable person. The banker, thus, reserves the right not to open an account in the
name of a person whose true identity has not been established or who is considered to
be an undesirable person, example, a thief, robber, etc.
3. Specimen Signature:
The applicant is required to give his specimen signature on a prescribed form,
generally a card for the purpose of bank’s record. The signature cards are preserved by
the banker and the signature of the account- holder on the cheques is compared with his
specimen signature. If the former differs from the latter, the banker can refuse to
honour the cheque. The specimen signature thus protects the banker against forgery. He
should be very careful in comparing the signature on the customer given on a cheque
with his specimen signature.
4. Opening the account:
After the above formalities are over, the banker opens an account in the name of
the applicant. It is essential that the applicant deposits some amount at the time of
opening an account. The minimum amount to be initially deposited is Rs.500 in case of
a savings bank account with cheque book facility and Rs.250 without cheque book
facility.
5. Operating the bank account:
The word ‘operate’ in relation to a bank account means that the customer
deposits further sums of money and cheques, etc., into the bank and with draws money
according to his need or convenience. A special feature of banking business is that each
and every transaction of money with the customer is supported by a separate slip or
document. A customer is, therefore, required to make use of (i) Pay-in-slips for
depositing money, and (ii) Cheques for withdrawing money from the bank.

OPENING OF AN ACCOUNT IN THE NAME OF PARTNERSHIP FIRMS:

A partnership is notes garded as anentity separate from the partners .The
IndianPartnershipAct,1932, defines partnership as the ‘relation between persons who
have agreed to share the profits of the business, carried on by all or any of them acting
for all.’ A Partnership firm is thus established by an agreement amongst the partners.
This agreement may be oral or written. The object of constituting a partnership firm
must be-
i. To carry on business which may be conducted by all the partners or by any of them on
behalf of the rest ,and

16
ii. To share the profit of such business amongst themselves.

17
 The partnership deed contains the details of the agreement reached between the
partners. The Indian Partnership Act, 1932, lays down the general provisions which
govern a partnership business. A banker should take the following precautions while
opening an account in the name of a partnership firm:
1. Number of Partners:
The banker should very carefully examine the Partnership Deed, which is the
charter of the firm, to acquaint himself with the constitution and business of the firm.
The banker should see that the number of partners does not exceed the statutory limit.
According to Section 11 of the Companies Act, 1956, a partnership firm consisting of
more than 10 persons for the purpose of carrying on banking business and or more than
20 persons for the purpose of carrying on any other business for the acquisition of gain
or profit.
2. Title of the Firm’s Account:
A firm’s account should always be opened in the name of the firm and not in the
name or names of the individual partner/partners.
3. Opening of an Account:
An account in the name of a firm may be opened by a banker on receipt of an
application from one or more of the partners. Banks, however, insist that all the
partners should join to open the firm’s account. If any partner has gone out of the
country, the rest of the partners can open a bank account in the name of the firm.
Specimen signatures of all the partners should also be taken for the purpose of record.
But if any of the partners is deprived of the right to open an account in the firm’s name
and this fact is within the knowledge of the banker, he should not open the firm’s
account at the request of such partner.
4. The Partnership Letter or Mandate:
The banker should take a letter signed by all the partners stating:
i. The names and addresses of the partners;
ii. The nature of the business under taken by the firm; and
iii. The name/names of the partner/partners who will operate the account on
behalf of the firm and will have the authority to draw and accept bills etc., and to sell
and mortgage the property of the firm.
iv. The banker should honor he cheques signed by all the partners or by those partners who are
authorized to operate the account.
5. Revocation of Authority to Operate the Account:
The authority given in favour of particular partner/partners to operate the firm’s
account may be with drawn by any of them by giving a notice to the banker. In such a
circumstance, the bankers should stop

18
 payment of cheques signed by such partner and pay the cheques which are signed by all
the partners. A partner can also stop the payment of a cheque issued by any other
partner on the firm’s account.
6.A partner authorized to operate the firm’s account cannot delegate his authority to
another person without the consent in writing of all other partners. If such consent is
given by all of them, the authorized partner may execute a Power of Attorney in favour
of such other person.
7.If a cheque payable to the firm is endorsed by a partner in his own favour and is
deposited by him to be credited to his personal account, the banker should do so after
making an enquiry about it from other partners and after being satisfied about it.

OPENING OF AN ACCOUNT IN THE NAME OF TRUST/TRUSTEES

According to the Indian Trusts Act, 1882, a ‘trust’ is an obligation annexed to the
ownership of property, and arising out of a confidence reposed in and accepted by the
owner, or declared and accepted by him, for the benefit of another, or of another and the
owner (Section 3). The person who reposes the confidence is called the author of the
trust. Trustee is the person in
whom the confidence is reposed. The person for whose benefit the trust is formed is
called beneficiary. A trust is usually formed by means of a document called the ‘Trust
Deed’. While Opening an account in the names of persons in their capacity as trustees
the banker should take the following precautions:
1. The banker should thoroughly examine the Trust Deed appointing the applicants as the
Trustees. The Trust Deed contains the names of the trustees, power vested in them for
administering the Trust property and other competent to delegate their powers unless
the Trust Deed authorizes them to do so. The banker should thoroughly examine the
Trust Deed to ascertain the powers and functions of the Trustees.
2. In case of two or more trustees, the banker should ask for clear instruction regarding the
person or persons who shall operate the account. In the absence of such instruction, all
the trustees must sign the cheques, etc., because the estate is placed under their joint
charge.
3. If one or more of the trustees dies or retires, the authority vested in the remaining
trustees depends upon the provisions of the Trust Deed. When all the trustees are deed,
new trustees may be appointed by the court.
4. The Insolvency of a trustee does not affect the Trust property and the creditor of the
trustee cannot recover their claims from such property.
5. The banker should take all possible precautions to safe guard the interest of the
beneficiarie sofa Trust, failing which he shall be liable to compensate the latter for any
fraud on the part of the trustee.
6. The Trustees may borrow money from the banker and pledge or mortgage the Trust
property only if the Trust Deed specially confers such power on them. The banker

19
 should, therefore, grant loans to the trustee after. Through examination of the borrowing
powers as given in the Trust Deed. To be on the safer side ,the banker should grant an advance
for a Trust only when the trustees are respectable persons and give personal guarantee also,
apart from creating a charge on the assets of the Trust.

OPENINGOF ANACCOUNT INTHENAME OFJOINT STOCK COMPANIES

Modernbusinessesaregenerallyorganizedasjointstockcompaniesincorporatedund
erthe Companies Act, 1956. A joint stock company is an artificial person with per Actual
succession brought into existence under the provisions of the Companies Act. Legally, a
company is considered as an entity separate from its members and hence it possesses all
power to enter into valid contract. It can own property in its own name ,carryon lawful
business and incur liabilities in its name. While opening an account in the name of
accompany, the banker must satisfy himself about the following:
1. Examination of Documents:
As a company is an artificial person, its constitution, powers and objectives, rules
and regulation, etc., are contained in the following important documents. The banker
should thoroughly and carefully examine these documents:
 CertificateofincorporationandCertificateofCommencementofBusiness
 Memorandum of Association
 Articles of association
2. Copy of the Board’s Resolution:
Along with the application to open an account in the company’s name, the banker
should obtain a certified copy of the resolution passed by the Board of Directors of the
company containing the following in regard to the opening of a bank account:
 Appointing the bank concerned as the banker of the company;
 Naming the person or persons who are authorized to operate the bank account on
behalf of the company;
 Stating the names of the persons who are authorized to execute the documents on
behalf of the company , or in whose presence the seal of the company will be affixed on
the documents;
 Authorizing the advance and stating all details of such advance ,eg. ,limit, security ,rate
of interest, etc., and
 Stating the names of the persons who are authorized to deposit the titled needs in case
of equitable mortgage.

20
 3. The Borrowing Power of the Company:
All joint stock companies engaged in trade or industry have the implied power to
borrow money for the purpose of carrying on their businesses. The borrowing power of
the company may be restricted by its Memorandum of Association.
4. Registration of Charges under the Companies Act:
Section 125 of the Companies Act, 1956, requires that every charge created by a
joint stock company, falling within the following categories, must be registered with the
Register of Joint Stock Companies within 30 days of its creation, otherwise it shall be
void against the liquidator or any creditor of the company:
 A charge for the purpose of a securing any issue of debentures;
 A charge un called share capital of the company;
 A charge on any immovable property or any interest there in;
 A charge on any book debts of the company;
 A charge, not being ap ledge, on any movable property of the company;
 A floating charge on the undertaking or any property of the company including stock-in-
trade;
 A charge on calls made but not paid;
 A charge on a ship or any share in a ship; and
 A charge on goodwill ,apatentora licence vundatent, a trademark ,or a
copyright ,oralicence undera copyright.

5. Directors’ Personal Account:

The banker of a company having personal accounts of the directors of the
company must handle the latter with care. If a director, who is authorized to operate the
company’s account and to endorse cheques on its behalf, deposits cheques drawn in
favour of the company to be credited to his personal account, the banker should first
enquire the purpose for which such cheques are intended to be credited to his personal
account and on being satisfied about the genuine reason, credit them to his account.

21
 UNIT-II

COMMERCIAL BANKS

ROLE OF COMMERCIAL BANKS

Commercial banks have come to playa significant role in the development of
countries. Here we shall deal with the important services provided by commercial banks
and show how banks playa significant role in the economic development of a nation.
(1) Banks are necessary for trade and industry: All economic progress in the
last 200 years or so has been based on extensive trade and industrialization,
which could not have taken place without the use of money. In all large
transactions, payments are not made in terms of money but in terms of cheques
and drafts. Between countries, trade is financed through bills of exchange which
are discounted (i.e., bought)by banks.
(2)Banks help in distribution of funds between regions: Another way by
which commercial banks encourage production and enhance national income is by
the transference of surplus capital from regions where it is not wanted so much to
those regions where it can be more usefully and efficiently employed.

(i)Banks create credit and help in business expansion: Fluctuations in bank

credit have an important bearing on the level of economic activity. Expansion of bank
credit will provide more funds to entrepreneurs and, hence, will lead to more
investment.
(ii)Banks monetize debt: A very important service that banks render to the
community is the creations of demand deposits in exchange of debts of other which
(viz., short and long- term securities). Commercial banks buy debts of others which are
not generally acceptable as money, either because the debtors are not sufficiently known
or because their debt is payable only after a period of time.
(iii)Bank promotes capital formation: Commercial banks afford facilities for
saving and thus encourage habits of thrift and industry among people. They mobilize the
idle and dormant capital of the community and make it available for productive
purposes. Economic developments depend upon the diversion of economic resources
from consumption to capital formation.
(iv)Banks influence interest rates: Bank can influence economic activity in another
way also. They can influence the rate of interest in the money market through its supply
of funds. By offering more or less funds ,it can exert a powerful influence upon inter
states. In a developing country like India ,banking

22
 Facilities are highly in adequalty. The as number of people living in villages and towns
another on other any banking facilities and consequently all their savings are wasted.
Thus, banks have come to occupy an important place in the industrial and commercial
life of a nation.
A developed banking organization is a necessary condition for the industrial
development of country.

Meaning of a Commercial Bank

A commercial bank can be defined as the financial institution that offers banking
services to the general public and to companies with the main aim of making profit.

UNIVERSAL BANKING IN INDIA:-

Various types of banks have developed to suit the economic development and
requirements of the country. The principal banking institutions of a country may be
classified into the following types.
1) Central Bank
2) Commercial Banks
3) Industrial or Development Banks
4) Exchange Banks
5) Co-operative Banks
6) Land Mortgage Banks
7) Indigenous Banks
8) Savings Banks
9) Suprenational Banks
10) International Banks.
1)Central Bank
Central bank is the bank of a country or a nation. Its main function is to issue
currency known as "Bank Notes", Central Bank of India act as a leader of the banking
system and money of the country by regulating money &credit. These banks are the
bankers of the bank and the ultimate custodian of a nations foreign exchange reserves.
The main aim of the central bank is not to earn profit, but to maintain price stability. It
acts as a great engine of growth of a state in India, die RBI was established in 1935 and
this bank has since been functioning as the central bank of the country.

23
2)Commercial bank
A bank, which undertakes all kinds of ordinary banking business, is called a Th2y
receive short and medium term deposits from the public is grant short-term loans and
advances. They supply working capital to industries and enable them to carry on
production and manufacturing activities. They grant loans & advances on the stocks of
agricultural commodities, industrial goods etc. they discount internal & foreign bills and
thereby finance the international trade.
They also perform certain agency services such as collection of cheque, dividends,
interest on investments, issue of drafts, letter of credit, traveller' s cheque, investment
advisory services etc.
3)Industrial Banks or Financial Institutions: -
The industrial banks provide long-term loans and supply credit to industrial
concerns by subscribing to the shares and debentures floated by the companies. They
play an important role for the growth of industries. They provide long-term loans &
credits for periods varying between 5 and 15 years for industries to acquire fixed assets.
In India, we have several industrial finance corporations in addition to the industrial
development bank of India.
4)Exchange banks:-
Exchange banks are also commercial banks engaged in the foreign exchange
transactions. They also receive deposits and lend money. They deal in foreign bills of
exchange, import and export of bullion and participate in the financing of foreign trade.
Now a day, many Indian banks deal in foreign exchange with special authorization from
RBI and known as Authorized Dealers In Foreign Exchange.
5)Co-operative banks:-
They are organised on co-operative principles of mutual help and assistance.
They grant short-term loans to the agriculturists for purchase of seeds, harvesting and
for other cultivation expenses. They accept money on harvesting deposit from and make
loans to their members at a low rate of interest.
6)Land-Mortgage banks:-
They are agriculture development banks. The land-mortgage banks supply long-
term loans for a period to 15 years for development of land to improve agricultural
yields. 1-hey grant loans for permanent improvement in lands. The agriculture finance
corporation was the first Indian institution to set up finance for development
agriculture. The TABARD was established by the Government to promote rural
development.
7)Indigenous bank:-
The Central Banking Enquiry Commission defined an indigenous banker as an
for individual on firm accept in deposits acid dealing in indigenous lending of money to
the needy. Indigenous bankers are unorganized operators in receiving deposits and

24
 lending money .The Mar-vans, the Jams, etc., are the leading
indigenous bankers 4 charge high rates of interest. In the rural areas, they skill provide
substantial finance. to agriculturists and small traders
8)Savings banks.
Savings banks are institutions, which collect the periodical savings of the general
public. The maintain bank is to promote saving -habits among the middle & lower
income sections of the society. In India, commercial banks have savings account. The
RBI determines the rate of interest. Interest rate on saving account with post offices is
determined by Government of India.
9)Supranational Banks:
Special banks have been created to deal with certain international matters. World
bank and Asia Development Banks are example. They generally provide finance at
concession interest rates and for long-to needs.
10)International banks: -
International banks are those, which are operating in different countries. The
registered office is situates one country; they operate through their branches in oldies
countries.

MANAGEMENTOFDEPOSITSANDADVANCES

CommercialBanks functionstherearetwo typessuch as,

Primary and Secondary Functions
Primary Function:
1. Accepting Deposits:
Itisthemostimportantfunctionofcommercialbanks.Theyacceptdepositsinseveral
forms according to requirements of different sections of the society.
(i) Current Account Deposits or Demand Deposits
(ii) Fixed Deposits or Time Deposits
(iii) Saving Deposits
2. Advancing of Loans:
The deposits received by banks are not allowed to remain idle. So, after keeping
certain cash reserves, the balance is given to needy borrowers and interest is charged
from them, which is the main source ofincome for these banks.

25
 Different types of loans and advances made by Commercial banks are:
(i) Cash Credit:
(ii) Demand Loans
(iii) Short-term Loans
Secondary Functions:

1. Overdraft Facility:
It refers to a facility in which a customer is allowed to overdraw his current
account up to an agreed limit. This facility is generally given to respectable and reliable
customers for a short period. Customers have to pay interest to the bank on the amount
overdrawn by them.

a.Discounting Bills of Exchange:

It refers to a facility in which holder of a bill of exchange can get the bill
discounted with bank before the maturity. After deducting the commission, bank pays
the balance to the holder. On maturity, bank gets its payment from the party which had
accepted the bill.

b.Agency Functions:
Commercial banks also perform certain agency functions for their customers. For
these services, banks charge some commission from their clients.
CLASSIFICATIONAND NATURE OF DEPOSIT ACCOUNTS

One of the major functions of a bank is to make advances to needy people. This
can be done by accepting money from the people in different forms of deposits.
Basically deposits are divided into two types: Viz., “Time deposits” and “Demand
deposits “ Time deposits are also called “Fixed Deposits” which will be paid back to the
deposit holders after the lapse of the stipulated time period. Demand Deposits are
repayable on the Demand by the account holder. Demand Deposits consists of two
accounts Viz., Current Deposits or Accounts and Savings Bank Accounts.
Besides these types of accounts several innovative types of accounts are opened
by bankers to mobilize resources.

26
 TYPES OF DEMAND DEPOSIT

a) CURRENT DEPOSITS
A current account is a running account between a banker and his customer. A
customercanoperate on his current account any number of times during a working day.
Thus it has unrestricted operation. Current account represent a banker’s demand
liability, since they are tobe repaid on demand. Current accounts are generally opened
by large scale businessman, joint stock companies, institutions etc.,

Special Features of current account:

 The basic objective of current account is to facilitate the handling of cash dealings and
reducing the risks involved in it.
 Currentaccountsdonotcarryanyinterestsonthe amountsofdeposits
 Mostbankschargeincidentalcharges onsuch accountswhich dependupon thebalancekept.
 Cheque book facility can be availed of by all current account holders but only a few
savings bank deposit account holders can avail this facility.
 Third party cheque scan be collected only through current account.
 Overdraftfacilitiesareavailableonlytocurrentaccountholders.
 Otherformsloanssuchascashcreditcan be availedonlyif currentaccountsaremaintained.

Advantages:
 As cash, cheques and draft sare deposited in the bank’s account, they will be perfectly
safe.
 The customer can make this payment more conviently.
 Payment to creditors situated at distant places is facilitated.
 Collection of cheques drawn on banks situated outside the place of business becomes
easier.
 The paid cheque forms at the bank, serves as a receipt. It can be referred to in caused
dispute.
 Nomination facility is a vailable for current holders opened either individual or joint
names of depositors.
 Current account can be transferred from one branch from another at the nearest of the
account holder..

27
 SAVINGSDEPOSITS
This deposit is intended primarily for small-scale savers. The main object of this
account is promotion of thrift. Hence there is restriction on withdrawals in a month.
This accountbecame very popular and the Government of India could collect crores of
rupees through this account. Commercial banks who were watching the progress of
these accounts entered the area and to-day the “savings Bank Account” has become one
of the major sources of mobilizing the funds by commercial banks. Even the people are
happy with this account as there are no disadvantage as in the case of current account.

Features:
Theseaccounts areopenedby people whowish to saveanddeposit a littleportion of
theirearnings.
 Salaried class, low and middle income group, farmers, small traders, mainly run this
account.
 This account can be opened with a minimum of Rs. 5.
 Any amount of money can be deposited any number if times to this account by the
accountholder. Normally minimum of Rs.1 is accepted for deposit.
 Minimum balance to be maintained is a Rs.5, if the cheque book facility is not required
and is not required and Rs.250 if the cheque book facility is required.
 As in the case of current accounts, the commercial banks provide pay-in-slip to deposit
he amount and provide separate withdrawal forms for withdrawal.

TYPESOFTIME DEPOSITS

FIXEDDEPOSIT ACCOUNT
Another very vital account opened by the commercial bank is “fixed Deposit
Account”. It is also called “Time Deposit” as the period of payment is determined at the
time of collecting the deposit. This account is popular with both bankers and customers.
For customers it gives a better return on money deposited and for the banker it acts as a
greater cushion in marinating liquidity.
Features
 Thisis atime bounddeposit and has tobedeposited for aspecificperiod ranging from15
days to 10years.

28
 The rate of interest payable to the deposit holders range from 8% p.a., to 12% p.a., Thus
it attracts a higher rate of interest.
 This is not a demand deposit. This means it is not payable on demand by the customers,
but payable only after the lapse of the stipulated time period.
 This account needs no introduction, as there payment is made by simpled is charge by
the

RECURRING DEPOSIT
This account promotes savings and is more suitable to those who have regular
monthly income. In this account a specified amount is credited every month for a
stipulated period. After the lapse of the period, the amount accumulated in the account
along with the interest accrued thereon will be paid back to account holder. The amount
is credited every month in multiples of Rs.5 or Rs.10. The period will be from of the year
to ten year. Pass book is issued to record the payments made every month. The normal
limit of deposit is up to Rs. 50,000.
For the banker it strengthens his liquidity as there will be regular inflow
of cash without frequent withdrawal. The recurring deposit money can be profitably
employed . The rate of interest payable on this account varies from 8% to 12%. Bank
allows a loan on this account. Cheques are not drawn against this account and the bank
does not run the risk relating to the payments made by check. Operating cost of this
account will be low. Large number ofdepositors can be brought into banking orbit
through this account.

DIFFERENCE BETWEEN FIXED DEPOSIT AND SAVINGS BANK ACCOUNT

FIXEDDEPOSIT ACCOUNT SAVINGSBANKACCOUNT

1.It is a time deposit since it is repayable It is repayable on demand made by the

Only after the expiry of a fixed period. customer.
2.The banker need not maintain cash The banker must maintain Sufficient cash
reserves For the repayment of the se reserves to meet there payment on demand.
deposits.
3.Introduction or reference is not Introduction is necessary for opening this
necessary for opening this account,
account.
4.The rates of interest are higher. Ther ate of interest is lesser.
5.it is suitable for investors since it yields It is suitable for small savers since promotes
More return than savings bank account. The habit of savings.

29
 6.Loan facility is a vailable against the
No loan facility is available.
Security of fixed deposit receipt.
7. In this case, the depositor is a customer
the oretically but not practically, since In this case the depositor is a customer the
there is no frequency of transaction oretically and practically.
between him and banker.
A pass book, cheque book and pay-in-slips
8.Only a deposit receipt is given on Are provided on opening this account for its
opening this account. operation.

DIFFERENCE BETWEEN FIXED-DEPOSIT AND CURRENT ACCOUNT

FIXEDDEPOSIT ACCOUNT CURRENT ACCOUNT

1.It is a time deposit since it is repayable It is a demand is a deposit since repayable
only after the expiry of a fixed period. on demand made by the customer.

2. The banker need not maintain cash The banker must maintain adequate cash
reserves for the repayment of these reserves to Meet heavy repayments on
deposits. demand.

3.Introduction or reference is not

necessary for opening this account. It is necessary.

A pass book, cheque book and pay-in-slips

4.Only a deposit receipt is given on are provided on opening this account for its
opening this account. operation.

5.The rates of interest are high. No interest is payable.

It is suitable for big business people since its

6.It is suitable for investors since it yields Object is to provide convenience to the
more return. customers.

7.Loan facility is available. Overdraft facility is available.

30
 8. In this case, the depositor is a customer
the oretically but not practically, since
In this case, the depositor is P.customer in
there is no frequency of transaction
all respects.
between him and banker.

DIFFERENT BETWEEN SAVINGS BANK ACCOUNT AND CURRENT

ACCOUNT

SAVINGS BANK ACCOUNT CURRENT ACCOUNT

1.Its object is promote the habit of savings Its object is to proved convenience to the
among the people. customers.
2.Third party cheques with endorsement Third party cheques with endorsement can be
deposited for collection and credit.
cannot. Be deposited for collection and
credit.
3.Overdraft is payable at a reasonable rate. Overdraft facility is available.
4.Interest is payable reasonable rate. No interest is payable.
5.With drawals are restricted. There is no such restriction.
6.Comparatively lesser cash reserve is Comparatively more cash reserve is required
required since the withdrawals are since the withdrawals are not restricted.
restricted.

31
 UNIT–III

CENTRALBANK
MEANINGOFCENTRALBANK
In every country there is one bank which acts as the leader of the money
market, supervising, controlling and regulating the activities of commercial
banks and the financial institution.It acts as a bank of note issue and is in
close touch with the Government as a banker, agent, advisor to the latter.
Such a bank is known as Central Bank.

REGULATIONOFBANKSBYRBI

The Reserve Bank of India has been empowered under the Banking Regulation
Act, 1949 to regulate and supervise banks' activities in India and their branches abroad.
While the regulatory provisions of this Act prescribe the policy framework to be followed
by banks, the supervisory framework provides the mechanism to ensure banks'
compliance with the policy prescription.

THERESERVEBANK OFINDIAAND FUNCTIONS

The Reserve Bank of India was inaugurated in April 1935 with a share capital of
Rs. 5 crores, divided into shares of RS.100 each fully paid-up. The Bank was
nationalized in 1949. The functions of Reserve Bank performs are of three types- central
banking functions, supervisory functions, and promotional functions.

Majorfunctionsof the RBI areas follows:

1.Issue of Bank Notes:
The Reserve Bank of India has the sole right to issue currency notes except one
rupee notes which are issued by the Ministry of Finance. Currency notes issued by the
Reserve Bank are declared unlimited legal tender throughout the country.
This concentration of notes issue function with the Reserve Bank has a number of
advantages: (i) it brings uniformity in notes issue; (ii) it makes possible effective state
supervision; (iii) it is easier to control and regulate credit in accordance with the
requirements in the economy; and (iv)it keeps faith of the public in the paper currency

32
2.Banker to Government:
As banker to the government the Reserve Bank manages the banking needs of the
government. It has to-maintain and operate the government’s deposit accounts. It
collects receipts of funds and makes payments on behalf of the government. It
represents the Government of India as the member of the IMF and the World Bank.

3.Custodian of Cash Reserves of Commercial Banks:

The commercial banks hold deposits in the Reserve Bank and the latter has the
custody of the cash reserves of the commercial banks.

4.Custodian of Country’s Foreign Currency Reserves:

TheReserveBank has thecustody ofthe country’s reserves ofinternational
currency, and this enables the Reserve Bank to deal with crisis connected with adverse
balance of payments position. Lender of Last Resort:
The commercial banks approach the Reserve Bank in times of emergency to tide
over financial difficulties, and the Reserve bank comes to their rescue though it might
charge a higher rate of interest.

5.Central Clear an and Accounts Settlement:

Since commercial banks have their surplus cash reserves deposited in the Reserve
Bank, it is easier to deal with each other and settletheclaim of each on
theotherthroughbook keeping entries in the books of the Reserve Bank. The clearing of
accounts has now become an essential function of the Reserve Bank.

6.Controller of Credit:
Since credit money forms the most important part of supply of money, and since
the supply of money has important implications for economic stability, the importance
of control of credit becomes obvious. Credit is controlled by the Reserve Bank in
accordance with the economic priorities of the government.

MONETARY POLICY

Monetary policy refers to the use of official instruments under the control of the
central bank to regulate the availability, cost and use of monetary and credit.It
influences the economic trends. The central bank exercise sits influences on the
availability and cost of credit primarily by affecting the reserve position of commercial
banks and though its official discount rate or bank rate policies.The efficiency of
monetary policy depends on the prevailing economic situation and structural factors.

33
CREDITCONTROLMETHODS/MEASURES
The RBI has been entrusted with the task of controlling the inflationary pressure
in the economy by using appropriate measures.
(1) Bank Rate Policy: The Reserve Bank of India is the lender of the last resort to the
banking system and, therefore the rate at which it gives accommodation to the latter
assumes great importance. The RBI influences the cost and availability of credit to the
commercial banks through the bank rate- the standard rate at which the RBI is prepared
to buy or rediscount bills of exchange or other eligible paper: but for all practical
purposes, the Bank rate is the rate charged by the RBI on its advances to the commercial
banks.
(2) Net Liquidity Ratio System and the Penal Rate of Interest: Since
September1964, the RBI’s advance to the commercial banks is regulated not so much by
the bank rate as by the net liquidity ratio system. Under this system, a commercial bank
is entitled to borrow from the RBI at the Bank rate only whenit maintains a minimum
net liquidity ratio to its total demand and time deposit liabilities; and it will have to pay
a penal rate of interest to the RBI, if the net liquidity ratio falls be low the minimum
fixed by the RBI from time to time. Now,the net liquidity ratio is the ratio between net
liquid assets of a borrowing bank and its total demand and time liabilities. Then liquid assets of
a borrowing bank comprise:(a).cash in hand and balances with the RBI,
(b) balances with the banks in the current account and (c) investment in Government
and other approved securities, minus its borrowings from the RBI, SBI and the IDBI.
The objective of minimum net liquidity ratio system and the penal rate of interest
are quite simple: itis to discharge the commercial banks from relying heavily on the RBI
financefor extending loans and advances.
(3) Cash Reserve Ratio (CRR). Another weapon available to the RBI for credit
control is the use of variable reserve requirement. Under the RBI Act, 1935, every
commercial bank has to keep certain minimum cash reserves with the RBI- initially; it
was 5% against demand deposits and 2% against time deposits- these are known as the
statutory cash reserves.
(4) Statutory Liquidity Requirements. (SLR): Apart from statutory cash reserve
requirements which commercial banks have to keep with the RBI (under the RBI Act,
1935(, all commercial banks have to maintain (under sec.24 of the banking Regulation
Act, 1949) liquid assets in the form of cash, gold and un encumbered approved securities
equal to not less than 25% of their total demand and time deposit liabilities. This is known
as the statutory liquidity requirements; this is in addition to the statutory cashreserve ratio. It
may be mentioned here that the effect pf stepping up statutory reserve requirements and the
minimum liquidity ratio is the same, viz.,
They reduce the capacity of commercial banks to expand credit to business and
industry and thus are anti-inflationary.

34
 (5) Selective credit controls: Before the Banking Regulation Act, 1949, was passed
the RBI used mostly traditional or conventional instruments (or quantitative controls)
such as the Bank rate and the open market operations. The RBI is authorized to issue
directives to any bank or the banking system as a whole in regard to:
a. The purposes for which advances may or may not be made;
b. The margins to be maintained on secured loans;
c. The maximum amount of advances to any individual, firm or company: and
d. The rate of interest to be charged.

CREDIT CONTROL MEASURES

The various measures employed by the RBI t0 control credit creation power of
the commercial banks can be classified in two groups, viz., quantitative controls and
qualitative controls.
I. Quantitative Method:
(i) Bank Rate:
The bank rate, also known as the discount rate, is the rate payable by commercial
banks on the loans from or rediscounts of the Central Bank. A change in bank rate
affects other market rates of interest. An increase in bank rate leads to an increase in
other rates of interest and conversely, a decrease in bank rate results in a fall in other
rates of interest.
An increase in bank rate results in an increase in the cost of credit; this is
expected to lead to a contraction in demand for credit. In as much as bank credit is an
important component of aggregate money supply in the economy, a contraction in
demand for credit consequent on an increase in the cost of credit restricts the total
availability of money in the economy, and hence may prove an anti-inflationary measure
of control.
A fall in bank rate may, thus, prove an anti-deflationary instrument of control.
The effectiveness of bank rate as an instrument of control is, however, restricted
primarily by the fact that both in inflationary and recessionary conditions, the cost of
credit may not be a very significant factor influencing the investment decisions of the
firms.

35
(ii) Open Market Operations:
Open market operations refer to the sale and purchase of securities by the Central
bank to the commercial banks. A sale of securities by the Central Bank, i.e., the purchase
of securities by the commercial banks, results in a fall in the total cash reserves of the
latter.
A fall in the total cash reserves is leads to a cut in the credit creation power of the
commercial banks. With reduced cash reserves at their command the commercial banks
can only create lower volume of credit. Thus, a sale of securities by the Central Bank
serves as an anti- inflationary measure of control.
(iii) Variable Reserve Ratios:
Variable reserverations refer to that proportion of bank deposits that the
commercial banks are required to keep in the form of cash to ensure liquidity for the
credit created by them.
A rise in the value of deposit multiplier, on the other hand, amounts to the fact
that the commercial banks can create more credit, and make available more finance for
consumption and investment expenditure. A fall in the reserve ratios may, thus, work as
anti-deflationary method of monetary control.
II. Qualitative Method:
The qualitative or selective methods of credit control are adopted by the Central
Bank in its pursuit of economic stabilisation and as part of credit management.

(i) Margin Requirements:

Changes in margin requirements are designed to influence the flow of credit
against specific commodities. The commercial banks generally advance loans to their
customers against some security or securities offered by the borrower and acceptable to
banks.

(ii) Credit Rationing:

Rationing of credit is a method by which the Central Bank seeks to limit the
maximum amount of loans and advances and, also in certain cases, fix ceiling for
specific categories of loans and advances.

(iii) Regulation of Consumer Credit:

Regulation of consumer credit is designed to check the flow of credit for
consumer durable goods. This can be done by regulating the total volume of credit that
may be extended for purchasing specificdurable goods and regulating the number of
installments through which such loan can be spread. CentralBank uses this method to
restrict or liberalise loan conditions accordingly to stabilise the economy.

36
(iv) Moral Suasion:
Moral suasion and credit monitoring arrangement are other methods of credit
control.The policy of moral suasion will succeed only if the Central Bank is strong
enough to influence the commercial banks.
In India, from 1949 onwards, the Reserve Bank has been successful in using the
method of moral suasion to bring the commercial banks to fall in line with its policies
regarding credit. Publicity is another method, whereby the Reserve Bank marks direct
appeal to the public and publishes data which will have sobering effect on other banks
and the commercial circles.

37
 UNIT-IV

NEGOTIABLE INSTRUMENTS

Negotiable Instruments Act, 1981

Negotiable instruments have great significance in the modern business world.
These instruments have gained prominence as the principal instruments making
payments and discharging business obligations. A negotiable instrument is a
transferable document which satisfies certain conditions. These instruments passon
freely from hand to hand and thus form an integral part of the modern business
mechanism.

MEANING:
According to sec 13 of the negotiable instruments Act 1881,”Negotiable
instruments means promissory note, bills of exchange or cheque payable either to order
or to bearer”.

DEFINITION
The Negotiable Instruments Act does not define a negotiable instrument and
merely states that negotiable instrument means a promissory note, bill of exchange or
cheque payable either to order or bearer" section 13). This does not indicate the
characteristics of a negotiable instrument but only states that three instruments—
cheque, bill of exchange and promissory note are negotiable instrument. These
threeinstruments are, therefore, noble instruments by statute.

Justice K.C. Willisdefines a negotiable instrument as "one the property inis

acquired by any one who takes it bona fide, and for value" now withstanding any defect
of title in the person from whom he took it.

The law of banking is comprised of many branches of law. The statutory content
of the subject is also to be found in many Acts, the Banking Regulation Act and
Negotiable Instruments Act being primary among them. The Contract Act also applies
because every relationship is founded upon contract.

The Chapter of the Contract Act on pledge is of particular application because

pledge is a method of securing repayment of loans. The Transfer of Property Act also
applies because the provisions as to mortgages are to be found in this Act.The seared but
some examples. Apart from this, banking services fall Under the Consumer Protection

38
also. No study of this subject can be complete without taking into account consumer
cases on banks. A special chapter has been provided in the book on such cases.

The Negotiable Instruments Act was amended in the year 2002. Some new
sections were inserted in relation to the liability for dishonour of cheques. A few other
amendments became necessary because of the developments in the electronic field,

For example, new provisions deal with truncated cheques, electronic image of a
cheque, asymmetric crypto system, print out of electronic image, etc. The highlight of
the changes has been provided in the Appendix.

On the judicial front, some of the developments have been as follows: the
difference between accepting an instrument as an absolute or conditional payment has
been noted.

The decisions on criminal liability for dishonour of cheques have made a good
contribution to the frontier soft he subject; like the effect of a guarantor’s cheque,
renewal of cheque, when corporate officer scan be held liable, when complaints can be
quashed, what sentence and fine would be appropriate.

A Kerala decision recognizes the courtside he creditor's splace as proper

jurisdiction.

An indispensable publication for banks, commercial establishments, Bench and

art and the students of law, banking and commerce.

Meaningof Negotiation

The chief characteristic of a negotiable instrument is its negotiability; it can be

negotiated from one person to another. According to Section 1 "when a promissory note,
bill of exchange or cheque is transferred to any per so as to constitute that person the
holder thereof, the instrument is said to negotiated." The essence of negotiation thus lies
not in mere transfer of instrument from one person another but also in the fact that the
transfer gets the right as the holder of the instrument. If the transferee of an cannot be
called its holder, as defined in Section 8, the instrument is not said 'wm been
negotiated.".,
IMPORTANCEOFNEGOTIABLE INSTRUMENTS

Though the negotiable instruments possess the above-mentioned features, fall

under two categories as follows:

39
(i)Negotiable Instruments by Statute. As already stated the Negotiable Moments Act
states three instruments—cheque, bill of exchange and Knissory notes—as negotiable
instruments. They are, therefore called P1.1able instruments by statute.

('ii) Negotiable Instruments by Custom or Usage. Some other instruments acquired the
character of negotiability by the custom or usage of trade. an 137 of the Transfer of
Property Act, 1882 also recognised that an instrument may be negotiable by law or
custom. Thus in India Government promissory notes, ShahJog hundis, delivery orders
and railway receipts have On held to be negotiable by usage or custom of the trade.

Exceptional Cases of Negotiable Instruments. Generally the negotiable

instruments possess all the essential features discussed above. But times the drawer or
the holder may take away the essential characteristic of Liability and thus the
instrument ceases to be a transferable or negotiable instrument Examples: (i) If a
cheque is payable to a specified person only and his order or the bearer, it cannot be
transferred to any other person and it loses its negotiability, (ii) if a cheques crossed
'Not Negotiable', it can transferred but without conferring on the transferee absolute
and good title in all cases. The transferee of such a cheque will stand at par with the
transferee of any other commodity acrid shall not possess title better than that of his
transferor.

ACCORDING TO SEC.13 OF THE NEGOTIABLE INSTRUMENTS ACT,1881:

“A Negotiable instrument means a promissory note, bills of exchange or cheque

payable either toorder or to bearer”. ‘Negotiable’ means transferable whereas
‘instrument’ means a document, therefore negotiable instruments means a transferable
document. A negotiable instrument is one which entitles the holder to the receipt of
money. It gives him the right to transfer the same by mere delivery or endorsement
thereon. The negotiability of the instrument continues till its maturity. A negotiable
instrument may be made payable to two or more payees jointly, or it may be made
payable in the alternative to one or two, or one or some of several
payees.

40
CHARACTERISTICS OF A NEGOTIABLE INSTRUMENTS

A negotiable instrument has the following characteristics:

1} PROPERTY: The possessor of the instrument is the holder and owner thereof. A
negotiable instrument does not merely give possession of the instrument, but right to
property. Whosever gets possession of the instrument becomes its owner and is entitled
to the sum mentioned therein as the holder. It passes by mere delivery where
instrument is payable to ‘bearer.’
2} DEFECTS IN TITLE: The holder in good faith and for value called the ‘holder in
due course’ gets the instrument free from all defects of any previous holder.
3}REMEDY: The holder can sue upon the negotiable instrument in his own name. All
prior parties are liable to him. A holder in due course can recover the full amount of the
instrument.
4} RIGHT: The holder in due course is not affected by certain defenses which might be
available against previous holder, for example, fraud, to which he is not a party.
5} PAYABLE TO ORDER: All three negotiable instruments are payable to order
which is expressed to a particular person. An instrument which does not restrict its
transferability expressly is negotiable whether the word ‘order’ is mentioned or not. The
word ‘order’ or ‘bearer’ is no longer necessary to render an instrument negotiable. It
must benotedthat all thethreenegotiableinstrument is endorsed and is expressedto
bepayable to the order of a specified person, it is nevertheless payable to him or his
order.
6} PAYABLE TO BEARER: the three negotiable instrument is expressed to be
payable or on which theonly or last endorsement is an endorsement in blank. It specifies
that the person in possession of the bill is a bearer of the instrument which is so
expressed payable to bearer.
7} PAYMENT: A negotiable instrument may be made payable to two or more payees,
or it may be payablein alternative to one or two payees.
8}CONSIDERATION: Consideration in the case of a negotiable instrument is
presumed.
9}PRESUMPTIONS: Certain presumptions apply to all negotiable instruments.

41
 TYPES OF NEGOTIABLE INSTRUMENTS
A negotiable instrument regulates only three types, viz

PROMISSORY NOTES
BILLS OF EXCHANGE
CHEQUES.

LAWRE LATING TO NEGOTIABLE INSTRUMENTS CHEQUE

The Indian Negotiable Instruments Act defines a cheque as “a bill of exchange

drawn on a specified banker and not expressed to be payable otherwise than on demand.

ESSENTIAL FEATURES OF A CHEQUE:

(1) Instrument in writing:

A Negotiable instrument has to be in writing though the form of writing is not

stipulated, it may be typed, handwritten or printed. Neither does it stipulate any
particular languages to be used in drawing them.
(2) Draw non a specified bank:

The cheque can be drawn only on the banker of the customer and on none else.
Also the cheque should be drawn only on the branch of the bank at which the account of
the drawer is maintained and the amount in the account should be sufficient to pay the
cheque.
(3) Payable on demand:

The cheque should not be expressed to be payable otherwise than on demand. It

is not necessary that the words “on demand” should appear on the cheque. A cheque is
presumed to be payable on demand unless an express provision is made in the cheque
disturbing this feature.
(4) Unconditional Order or Promise:

A Negotiable instrument is always unconditional. It is not contingent upon the

happening of an event or the fulfillment of a specified pre-requisite. Therefore phrases
such as “on arrival” or “after clearance” or “on arrival of S.S” cannot be inserted in them,
because that will preclude their negotiation till the specified condition has been fulfilled.

42
 • A certain Amount: In both a sight and usage instrument the amount to be paid by the
drawee must be an amount certain, a definite amount. The Drawee: Every instrument
has a drawee who is its addressee. While a cheque the drawee is always a banker. Any
person partnership, companyor association could be a drawee in
bills of exchange and promissory notes. The identity of the drawee is however to be
made certain by indicating his name, address etc.,.
• Payee a certain person: The person 6to whom the cheque is drawn payable should be
certain. He need not to be an individual as is understood generally but can be any legal
person recognized under law like corporation.
• Payee a certain person: A Negotiable instrument must be payable to a definite person
named or to anyone to whom he in turn directs, payments to be made.
• Time of Payment: An instrument may be payable on demand or at a fixed or
determinable future time. Without a definite time element such instruments could not
be negotiated because the payee would not know when they are to receive payment.
• Signature of the Maker: Every instrument has a maker who in a promissory note is
called the “promisor” and in a bill or a cheque the “drawer”. Maker is the person who
addresses the instrument to someone.

BILLS OF EXCHANGE
A bill of exchange is “an instrument in writing containing an unconditional
order signed by the maker directing a certain person to pay certain sum of money only
to orto the order of a certain person or the bearer of the instrument”.
Essential features of a Bill:

• The instrument must be writing.

• It must contain an unconditional and express order to pay.
• There are three parties in the bill. Drawer, Drawee and Payee.
• It must be signed by the drawer.
• A bill may be payable on demand in which case it is called a demand billor It may be
payable after a specified period and such bills are called time bills.
• The amount of money tom be paid must be certain and the payment must being legal
tender.
• The bill may be payable to payee or his order. Such a bill is called order bill.
• When it is payable to bearer, it is called a bearer bill.

43
 PROMISSORY NOTE
According to section 4 of the Negotiable Instrument Act of 1881, “Promissory
note is an instrument in writing containing anun conditional undertaking by the makert
opaya certain personor to the bearer of the instrument”.
Essentials of a promissory note:

• The instrument must be in writing.

• Mere acknowledgement of debt is not sufficient. There must be an undertaking of
promise to pay.
• The promise to pay must be unconditional, because a conditional promise destroys the
negotiable character of an otherwise negotiable instrument.
• The instrument must be signed by the maker.

• The signature may be Indicated by a face simile or by stamping the name.

• The promise to pay must be acertain sum of money in legal tender.
• The payee must be certain.
Usually promissory notes beard attend place buttheyare not require under the law.
But a stamp is necessary as is required under the Indian Stamp Act.
DIFFERENCES BETWEEN PROMISSORY NOTE AND BILLS OF
EXCHANGE

PROMISSORYNOTE BILLSOF EXCHANGE

But bill of exchange Contains an order to

1.A promissory note contains I promise to
Pay.
pay.

2.In a note, there are only two parties. In a bill there are three parties.

3.A promissory note is payable only to the

payee named there in or to his order. Buta bill can be made payable to Bearer.

4.Notes are not prepared in sets Foreign bills are drawn in sets.

44
 DIFFERENCES BETWEEN A CHEQUE AND A BILL OF EXCHANGE

CHEQUE BILLSOF EXCHANGE

1.A Cheque is always drawn on a banker. Whereas a bill may be Drawn on any person
including a banker.

2.In the case of cheque no grace period is Whereas three days of Grace are allowed.
allowed.

3.Cheque scan be crossed generally or There is no crossing in the Case of bills.

specially.

4.Cheques are exempted from stamping. It requires stamping.

5.They are not noting and Protesting. Protesting is compulsory.

CROSSING

Crossing of cheque means drawing two parallel transverse lines on the left hand
top corner of a cheque. Crossing on a cheque is a direction to the paying banker by the
drawer that payment should not be made a cross the counter. The payment on a crossed
cheque can be collected only through a banker. Therefore, crossing protects the holder
of the cheque and reduces the possibilities of fraud.
TYPES OF CROSSING
• General Crossing
According to section 123 of the negotiable instruments Act, 1881. “Where a
cheque bears across its face an addition of the words “and company” or any
abbreviation thereof, between two parrel transfer lines or of two parallel traverse lines
simply either with or without the words “not negotiable”, that addition shall be deemed
a crossing and the cheque shall be deemed to be crossed generally”.
The following are examples of general crossing:

45
 (2)&CO (3) and Company
(4)NotNegotiable (5)Account Payee (6)NotNegotiable
AccountPayee
Significance of General crossing:

• A crossed cheque should not be paid across the counter . Even if the payee of a crossed
cheque is well know, thepaying bankeris directedto makepayment onlythrough
anotherbanker. Ifthe payeedoes not haveabank account he can collect it only through
someone who is having a bank account.
• A generally crossed cheque protects the drawer and also the payee or holder thereof.
Whenever a drawer desired to make payment to an outstation party, he can cross the
cheque some that even if the cheque is lost, only a piece of paper is lost and nothing
beyond that.

B)SPECIAL CROSSING

Section 124 defines special crossing as follows: “When a cheque bears across its
face an addition of the name of a banker with or without the words “Not Negotiable”
that addition shall be deemed a crossingand the cheque shall be deemed to be crossed
specially and to thatbanker”.
Here the parallel tranverse lines are not essential. But the name of banker to
whom payment shouldbe made is to be necessarily written on the face of the cheque.
Thus it must be noted that while drawing of two parallel tranverse lines is must for
general crossing, the addition of the name of a banker continues the essential part of a
special crossing.

46
(C) NOT NEGOTIABLE CROSSING

Section 130 of the Indian Negotiable Instruments Act lays down that “ a person
taking a cheque crossed generally or specially bearing in either case the words ‘Not
Negotiable’ shall not have and shall notbe capable of giving a better title to the cheque
than that which the person from whom he took it in the first instance had”.
(D) CHEQUE WITH ACCOUNT PAYEE CROSSING:
The inclusion of the words ‘Account Payee’ or Payee’s Account’ ensures greater
safety to the cheque. According to law such a crossing is a direction is direction to the
collecting bank, and the paying banker has no obligation in this regard provided the
endorsement is in order.

ENDORSEMENT
Meaning and Definition:

Section15 of the Negotiable instruments Act defines endorsements as follows:

“When the maker or holder of a negotiable instrument signs the same, otherwise
than as such maker forthe purpose of negotiation on the back or face thereof or on a slip
of paper annexed thereto, or so signs for the same purpose a stamped paper intended to
be completed as a negotiable instrument he is said to have endorsed the same and is
called the endorser”.
The person who signs the instrument for the purpose of negotiation is called the
“endorser” and the person in whose favour instrument is transferred is called the
“endorsee”.

47
 ESSENTIALS OF VALID ENDORSEMENT

The rules regarding valid endorsement are given below:

• The endorsement must by the holder of the instrument itself or on a slip of paper
annexed thereto.
• It must be signed by the endorser. The endorser must sign his name in the same
spellings as appearing on the face of the cheque.
• It must be made by the holder of the instrument and not by a stranger.
• An endorsement written on an along is deemed to be written on the instrument itself.
• The endorser should the instrument in full and not in part.
• If an instrument is payable to the order of two or more payees or endorsees who are not
partners , all must endorse unless the one endorsing has authority to endorse for all
others.
• Endorsement is complete only when the instrument is delivered. The delivery must be
made by the endorser himself. If the delivery is conditional, endorsement is not
complete until the condition is fulfilled.
• Endorsement can be made by the endorser merely by signing his name on the
instrument or by adding the name of a specified person to whom the endorser likes to
endorse.

KINDS OF ENDORSEMENT

According to the Negotiable Instrument Act 1881endorsement may take any of the
following terms:

1) Generalor BlankEndorsement

If the endorser just puts his signature without specifying the name of the
endorsee, the endorsement is said to be blank.
For Example: A cheque payable to Mr. B. Senthilnathan may be endorsed
as:“B.Senthilnathan”, i.e., merely signs on its back.
2) Special or Full Endorsement

If the name of the endorsee is specified in whose favour it is being endorsed,

along with the signature of the endorser, the endorsement is called endorsement in full.

48
 For Example, the words “pay to “ A. Kumaran” or “Pay to A. Kumaran or order”.
Are made such endorsement is called endorsement in full.
3) Conditional Endorsement

It is an endorsement under which the endorser lays down some condition to be

fulfilled by the payee before making the payment. A cheque cannot be made payable on
the happening of certain conditions and therefore it ceases to be a cheque. For Example,
endorsement, Pay to X after he signs the enclosed receipt.
4) Sans Recourse Endorsement

In this case the endorser makes it clear to the endorsee that the endorser would
not be liable in case the instrument

Is dishonored. This means that further recourse cannot be taken against the
endorser. For Example: Pay to X without recourse to me.
5) Restrictive Endorsement

Restrictive endorsement by written words restricts the right of further

negotiation. In this case, an endorser specifies that the banker should pay the amount to
a particular endorsement only. Example: Pay to X only.
6) Facultative Endorsement

The endorser waiving the right of notice of dishonour of the instrument while
making the endorsement is called Facultative endorsement. It means that further
endorsers need not serve a notice of dishonour to the endorser who has made such
facultative endorsement.
7) Partial Endorsement

If an endorsement is made for the part of the amount of the instrument it is

called “Partial Endorsement”. But such an endorsement is not valid.

49
 COLLECTING BANKER

Meaning

Collecting banker means the banker who collects the cheques and bills on behalf
of the customer. Every bank today discharges one important function. That is “
Collectingchequesand bills on behalf of customer”.
The collecting banker regarding collection of cheques holds two positions (1)
holder for value (2) customer’s agent for collection.
• Holder for Value
Sometimes as a matter of gesture and goodwill the banker pays the value of
cheque to the customer even before it is collected. This is another service rendered to
the customer. In case of open cheques, he acts as though he is a customer himself and
collects the value of cheque from the paying banker. Thus he will be collecting the
cheque for himself, as he will have alreadypaid the value the customer. This position is
called “Holder for Value”
There are circumstances in which the banker becomes holder for value. They are:

• When he pays the value of cheque presented for collection even before it is collected.
• Where a customer pays in a cheque and the bank expressly impliedly permit shim to
draw against it before it is collected.
• When the cheque meant for collection is obtained in exchange for cash.
• When the cheque to be collected is received from the customers to appropriate the
proceeds towards the loan of the customer.
• When he advances money against the cheque meant for collection.

Rights as a holder for value:

• The proceeds of collection will be retained by the banker a she has already paid the value
to the customer.
• He has the right recover the value of cheques end for collection, when is dishonoured
from the drawer as well as the endorsers, if any.

50
• If any cheque collected bears a forged endorsement, the collecting banker has the right
to recover the amount from all concerning the cheque or any of the endorsers,
subsequent to the forgery.
• The person who has presented the cheque for collection had obtained the cheque in
good faith without knowing the defective title in it, and in turn the collecting banker
finds that the cheque ha s a defective title can recover the amount from the endorsers or
from the drawer as holder in due course.
(2) Banker as Agent

. In this case the collecting banker does not pay the value of the
cheque to the holder of cheque on presentation to collect the value. He neither discounts
nor purchase the cheque. He simply acts as an agent by obtaining the cheque and sends
it for collection to the concerned branch. He credits the account of the customer, only
when the value is collected or sends anotice of dishonour, if it is dishonoured.
Rights: While collecting a cheque for customer banker cannot assert any right of a
holder for value. How will not have any better title than that of his customer.
Liabilities:

• He should execute the collection work honestly and without any negligence.
• When the collecting banker collects a cheque for his customer having defective title than
forged endorsement, he is liable to the true owner of the cheques as per the “doctrine of
conversion”.

STATUTORY PROTECTION
The Negotiable Instruments Act, 1881 provides some protection. Section 131 and
131A of the Actdeal with the protection given to the collecting banker.
 Section 131 lays down that “ A banker who has in good faith and without negligence
received payment for a customer of a cheque crossed generally or specially to himself
shall not in case the title to the previous cheque proves defective incur any liability to
the owner of the cheque by reason only of having received such payment”.

51
 The analysis of section131 also states “A banker receives payment of a crossed cheque for
a customer within the meaning of the this section notwithstanding that he credits his
customer’s account with the amount of the cheque before receiving the payment
thereof.”
 The collecting banker gets protection in case of crossed cheques under certain
conditions:
 The cheques must be crossed before it presented for payment by the customer who
presents it of collection.
 An open cheque cannot be collected or when sent for collection after crossing by the
collecting banker he will not get statutory protection.
 The collecting banker can get shelter under section 131 only when hecollects thecheque
as a collecting agent and not as a holder for value or for a non-account holder.
 Section131 also states that the amount should be collecting good faith and without
negligence. Thus he should exercise greater care at the time of collecting a cheque.

DUTIES AND RESPONSIBILITIES OF A COLLECTING BANKER

• Due care and diligence in collection of cheques: As an agent of the customer the
collecting banker is bound to show due care and deligence in the collection of cheques
given to him. If the banker fails in this regard and as consequences the customer suffers
a loss, the collecting banker shall be required to compensate that loss.
• Reasonable Time: The collecting banker should present the cheques deposited by his
customer for collection within a reasonable time. If the banker and the drawee bank
arein the same place, the collecting banker should present the cheque the next day after
he receives it.
• Advising the customer about collection: It is the duty of the collecting banker
toinform his customer immediately about the collecting if the cheque is collected. As
soon as theproceeds are collected he can debit his customer account in respect of his
commission and credit the gross proceeds to the customer’s account.

52
• To Serve Notice of Dishonour: If the cheque deposited for collection stands
dishonoured and the collecting banker gets the information in writing from the paying
banker the collecting banker should immediately intimate his customer in writing giving
reasons thereof.

HOLDERIN DUE COURSE

Section 9 defines a holder in due course as ‘any person who, for consideration
became the possessorof the promissory note, bill of exchange or cheque if payable to
bearer or the payee or endorsee if payable to order before the amount mentioned in it
became payable and without having sufficient cause to believe that any defect existed in
the title of the person from whom he derived his title.
Thus a holder of a negotiable instrument will be a holder in due course, if he
fulfills the following conditions:
 He must be a holder as defined in section 8 of the Act. That is he must be in possession
of the instrument, he must have the right to sue on the instrument in his own name, and
he must have paid consideration for it.
 The instruments must be complete and regular in all respects.
 He must have acquire the instrument before it became due for payment.
 He should not have sufficient cause to believe that any defect existed in the title of the
person from whom he acquired it.
 The instrument must have been obtained for valuable consideration, i.e., paying its full
value.
RIGHS AND PRIVILEGES OF THE HOLDER IN DUE COURSE

The holder in due course enjoy she following privileges under various sections of the
Negotiable Instruments Acts.
 Better Title: A holder in due course possesses better title free from all defects. That is he
always obtain a better title than that of his transfer or any of the previous parties.
 Purging of prior defects: The defective title of the previous endorsers will not affect
adversely the rights of the holder in due course.

53
 Transfer of better title: Once an instrument passes through the hands of a holder in due
course, it is purged of all defects and he can give to the subsequent parties the good title
that he possesses.
 Liability of prior parties to holder in due course: According to section 36, every party to
a negotiable instrument. i.e., its maker or drawer, acceptor or endorser, is liable there on
to a holder in due course until the instrument is duly paid.
 Right of the holder in due course in case of inchoate instrument: The drawer of an
instrument cannot claim invalidity of the instrument against the holder in due course on
the ground that the instrument was originally aninchoate.

 Right in case pf fictitious bills: Ifa bill of exchange is drawn on behalf of a fictitious
person and is payable to his holder in due course because pf such fictitious name.
 Estoppel against Denying capacity of payee to endorse:
 The claim of the holder in due course cannot be denied on the plea that the payee had no
capacity to endorse.
 Estoppel against Denying signature: No endorser of an instrument is permitted to deny
the signature or capacity of any prior party to the instrument in the case of a suit by a
holder in due course.
PAYING BANKER MEANING
The banker who is liable to pay the value of a cheque of a customer as per the
contract, when the amount is due from him to the customer is called “paying banker “.

DUTIES AND RESPONSIBILITIES OF A PAYING BANKER

1.PROPER FORM
The cheque presented for payment should be in proper form .The banker should see
that the cheque presented for payment satisfies all the requirements of valid cheque.the
cheque must be in printed form supplied by the banker in specific format and it should
be an unconditional order.

2.PHYSICAL CONDITION
The cheque should be in good condition. The instrument should not be torn,
mutilated or cancelled. if torn intentionally to cancel the crossing etc.,

54
3.CROSSING
The paying banker when receives a cheque for payment should examine whether
a cheque is open cheque or a crossed one. If a cheque is a crossed one the payment can
not be made across the counter. It hasto pass through the account holder. The account
holder has to issue another cheque for receiving the payment.

4.Office of drawing
When a cheque is presented for payment. banker should also observe the
account, against which the cheque is drawn, is kept in the same branch or any other
branch of the same bank.

5.Date of the cheque

The cheque should possess the date for payment. On that date or with in six
months from that date, the payment should made. A cheque, which is not dated or post
dated, should be honored on the date when it is presented for payment.

6.Time of presentation
The cheque presented during the banking hours should be honoured. The point
to be noted is that cheque should be presented for payment during the bank hours.

7.Amount
The amount of the cheque presented for payment has to be recorded in both
words figures and they should tally with each other. If the amount written in words is
correct, there is no legal restriction to pay such cheque.

8.Material alteration
The banker should also note whether the cheque is materially altered before
payment. if the material alteration is apparent, the banker should confirmation from
drawer by obtaining full signature at the place of material alteration.

9.Signature of the Drawer

The Banker has to examine the signature if the drawer on the cheque before he
makes payment with the specimen he has. Drawer files his signature in the cheque to
give a mandate to the banker to pay the amount of cheque.

55
 10.Endorsement

Before the cheque is honoured, the bankers should also see whether the
endorsement if any on the cheque are regular. If any endorsement is irregular the
banker cannot honour such cheques.

11.Legal Restrictions
When cheque is presented for payment, it might have lost its legal characters by
that time and will have become invalid. Such invalid cheques should not be honoured by
the banker.
Invalidity will take place in two forms

(i) by counter manding by the customer himself

(ii)caused by the death, insolvency, lunacy and by serving the Garnishee order.

RIGHTS OF PAYING BANKER (STATUTORY PROTECTION)

The Negotiable Instruments Act, 1881 has given certain protection to the paying
banker under the section 85 (1), 16(2), 85(2), 85A, 89 and 128.
1) Order Cheque having Forged Endorsement of the payee and Endorsees:

Section 16(2) extends the protection to the paying banker even when the
signature of endorsee are forged, as the paying banking banker cannot verify the
signature. The conditions here also are (1) endorsement of the endorsee should be
regular (2) The payment must be a payment in due course.
2) Bearer Cheques

Section 85 (2) of N.I Act states that, “where a cheque is originally expressed to be
payable to bearer. The drawee is discharged by payment in due course to the bearer
thereof not withstanding any endorsement whether in full or in blank operating thereof,
and not withstanding that any such endorsement purports to restricts or exclude further
negotiation”.
3) Order Draft with forged Endorsement

Section of 85 A of N.I Act gives protection to the paying banker regarding the
draft having a forged endorsement. Again the conditions to be satisfied are

56
4) Crossed Cheques

The payment should be payment in due course.

The protection to the paying banker regarding the payment of crossed cheque to
a person other than the true owner is given under section 128 of the N.I. Act 18881. The
provision states that when the paying banker makes payment in due course regarding a
crossed cheque, he is discharged of the liability as he is deemed to have paid the value to
the true owner.
5) Materially Altered Cheques

The paying banker also gets protection under section 89 of N.I. Act regarding the
payment of materially altered cheques. The paying banker is protected of any payment
made regarding materially altered cheques provided (i) the material alteration is not
noticeable even by careful examination.

PAYMENT IN DUE COURSE

Section 10 of N.I Act,1881 states that “Payment in due course means payment in
accordance with the apparent tenor of the instrument in good faith and without
negligence to any person in possession thereof under circumstances which don’t afford a
reasonable ground for believing that he is not entitled to receive payment of the amount
mentioned there in”. Payment in due course is:
• Payment in accordance with the apparent ten or of the instrument:
• This means the banker should make the payment as per the instruction given by the
drawer in the instrument. Thus the banker cannot make partial payment of the amount
exhibited on the face of the cheque or the crossed cheque cannot be paid across the
counter or the payment should be made on the date, or within a reasonable time for the
date mentioned in the cheque.
• In good faith and without negligence: The banker should not be negligent while making
the payment and he should be sincere and honest in making payment to the payee. If the
payment is made verifying the comments of the cheque, it tantamount to negligence and
such payment cannot be called “Payment in due course”.
• Person in possession thereof: This tells that the payment should be made to the
legitimate person. If payment is made to a person to a person other than the legal holder
of the cheque, it amounts to wrong payment and it cannot be “Payment in due course”.

57
• Under circumstances which don’t afford a reasonable ground for believing that he is not
entitledto receive payment of the amount mentioned therein: According to this part
ofthe provision, if any doubt arises to the paying banker, he should enquire and then
make payment. If the situation is ignored by the banker, it is not “Payment in due
course”.
• Payment in money only: Money here means legal tender or it may be a bill of exchange
or promissory note if the payee agrees to accept in that form.

REFUSAL OF PAYMENT OF CHEQUE

A banker can refuse to honour the customer’s cheque in the following cases:

• When the customer does not have sufficient funds belonging to him, the banker can
refuse to honour his cheque. It must be noted that the term ‘funds belong to the
customer includes the sum covered by the overdraft granted to the customer.
• When the cheque is not drawn in proper form.
• When the cheque is post-dated and is presented before the ostensible date of issue.
• When the cheque is stale, i.e., it presented six months after the ostensible date of issue.
• When the cheque is not presented during banking hours.
• When there are material alterations in the cheque.
• When one or more endorsements are irregular.
• When the banker has a notice of the customer’s death
• When the banker receives a Garnishee or der from the court.
• When the banker receives notice of the customer’s insolvency.
• When the customer has counter manded the cheque. When the signature on the cheques
does not correspond with the specimen signature.
• When the cheque is presented at a branch of the bank different from the one where he
has the account.
• The banker cab refuse payment of cheques without incurring any liability under certain
circumstances.

58
 CONSEQUENCES OF WRONGFUL DISHONOUR

• A banker has the statutory obligation to honour his customer’s cheques unless there are
valid reasons for refusing payment of the same. In case the banker dishonors the cheque
intentionally or by mistake, he is liable to compensate the customer for the loss suffered
by him. According to section31 of the Negotiable instruments Act,1881, the words “Loss or
Damage” do not mean only pecuniary loss, but also a loss of credit or injury to reputation.
• Without appropriate reasons if a customer’s cheque is dishonoured by a banker, he
incurs the liability of paying damages for affecting adversely the customer’s credit and
goodwill. A customer has every right to claim substantial; damages from a banker where
he can prove in a court of law that his reputation has been spoiled even where he had
not incurred monetary loss.
• In the case of non-trader customers, the loss of creditor reputation is not to be taken for
Granted a saresult of wrongful dishonour of their cheques. Therefore they are entitled to only
nomial damages.

59
 UNIT- V

E-BANKING

Meaning
Online banking also known as internet banking, e-banking, or virtual banking, is
an electronicpayment system that enables customers of a bank or other financial
institution to conduct a range of financial transactions through the financial institution's
website.

Benefits of E-banking

1.Convenience: Banks that offer internet banking are open for business transactions
anywhere a client might be as long as there is internet connection. Apart from periods of
website maintenance, services are available 24 hours a day and 365 days round the year.
In a scenario where internet connection is unavailable, customer services are provided
round the clock via telephone.
2.Low cost banking service: E-banking helps in reducing the operational costs of
banking services. Better quality services can be ensured at low cost.
3.Higher interestrate: Lower operating cost results in higher interestrates on savings
and lower rates on mortgages and loans offers from the banks. Some banks offer high
yield certificate of deposits and don’t penalize withdrawals on certificate of deposits,
opening of accounts without minimum deposits and no minimum balance.
4.Transfer services: Online banking allows automatic funding of accounts from long
established bank accounts via electronic funds transfers.
5.Ease of monitoring: A client can monitor his/her spending via a virtual wallet
through certain banks and applications and enable payments.
6.Ease of transaction: The speed of transaction is faster relative touse of ATM’s or
customary banking.
7.Discounts: The credit cards and debit cards enables the Customers to obtain
discounts from retail outlets.

60
 8.Quality service: E-Banking helps the bank to provide efficient, economic and
quality service to the customers. It helps the bank to create new customer and retaining
the old ones successfully.
9.Any time cash facility: The customer can obtain funds at any time from ATM
machines.

DisadvantagesofE-banking

1.High start-up cost: E-banking requires high initial start up cost. It includes internet
installation cost, cost of advanced hardware and software, modem, computers and cost
of maintenance of all computers.
2.Security Concerns: One of the biggest disadvantages of doing e-banking is the
question of security. People worry that their bank accounts can be hacked and accessed
without their knowledge or that the funds they transfer may not reach the intended
recipients.
3.TrainingandMaintenance: E-banking requires 24hourssupportive environment,
support of qualified staff. Bank has to spend a lot on training to its employees. Shortage
of trained and qualified staff is a major obstacle in e-banking activities.
4.Transaction problems: Face to face meeting is better in handling complex
transactions and problems. Banks may call for meetings and seek expert advice to solve
issues.

ELECTRONICFUNDTRANSFER
An electronicfundstransfer (EFT)isatransaction that takesplaceover
acomputerized network, either among accounts at the same bank or to different
accounts at separate financial institutions.

Common Uses for Electronic Funds Transfer

• Let's look at several ways that you may currently use electronic funds transfer:

• Using a credit or debit card - Using this method, money is transferred electronically
from your account to the seller's account. This is one of the most widely used forms of
payment. In 2010, Visa and MasterCard processed over $5 trillion in transaction
volume!

• Online bill payment -Often referred by many as online banking, this has become very
popular as a quick and easy way to pay monthly bills. More than two out of every three

61
 bills are now paid in an electronic form. This has recently further evolved into the ability
to pay bills directly from your mobile device or phone.

• Direct debit - This is often referred to as electronic checks or monthly auto draft.
Individuals can set up a recurring schedule and payment instructions for companies to
automatically pull money from their bank account to pay for bills or services. Many
people pay their house or car payments this way. The method simply requires sending
the institution a voided check with your routing and account number.

• Direct deposit -This form of employee payment is now the preferred way to get paidfrom
your employer and is often the only way for some jobs. your pay check enters your bank
account quicker, and the employer saves hundreds or thousands of dollars in not
printing and delivering checks.

ELECTRONIC CLEARING SYSTEM

ECS is an electronic mode of funds transfer from one bank account to another. It
can be used by institutions for making payments such as distribution of dividend
interest, salary, pension, among others.It can also be used to pay bills and other charges
such as telephone, electricity, water or for making equated monthly installments
payments on loans as well as SIP investments. ECS can be used for both credit and debit
purposes.
Standard Chartered introduces the Electronic Clearing System (ECS), an
innovative facility for busy people. With this facility, your credit card bill is
automatically debited from your savings account, so you don't need to worry about
missing a payment.
And since this entire process happens through the Reserve Bank of India's
electronic clearing mechanism, you can enjoy the advantages of ECS, no matter which
bank holds your savings account.

Special Features of electronic clearing system

• No need to write and send acheque every month

• No worries about payments being lost or delayed in transit

• No more late payment charges

62
• You can pre-decide what you want to pay every month, with an option of increasing the
sum if you have surplus funds
• Unlike other cards, your Standard Chartered card offers you the flexibility of choosing
the amount you wish to pay with ECS. Just call our credit card helpline before payment
is due and let them how much you want to pay for the month.

AUTOMATED TELLER MACHINE(ATM)

Meaning
An automated teller machine (ATM) is an electronic banking outlet, which allows
customers to complete basic transactions without the aid of a branch representative or
teller such as to withdraw cash,make deposits, pay bills and obtain bank statements.
Anyone with a credit card or debit card can access most ATMs.

Explanation
The evolutionary trend from cash economy to cheques economy and onwards to
plastic card economy is witnessed in the introduction of ATMs.These days, ATMs are
securelyplaced inside the walls of bank’s premises. While a weighing machine measures
the weight of a person in kilograms, the ATM measures the bank balances of a person in
rupee. In the weighing machine you insert a coin and you get a card telling your weight
andfortune The ATM also tells you yourbank balance, ifyou ask forit. TheATM facility is
available round the clock. The main protection in ATM card against wrong use is the
secret code number. Like someone knowing your STD secret code can misuse your
telephone, similarly someone knowing your ATM secret code can also misuse and draw
money from your account.
HSBC bank is the first bank in India to offer ATM facility in 1987. Presently, a
number of Indian and Foreign banks are offering ATM facility but mostly in cities. There
is ease and privacy of operation through self service.

ATM has many advantages, some of which are given below:

 It provides the facility to the customer to with draw or deposit cash and avail other
services as quickly as possible.
 It is available to a customer round the clock ,i.e., 24 hour sin a day and365 days in a
year.
 It enables the bank to advertise their product son the ATM screen like a media.

63
 It saves time of the customers to travel to a bank branch for operating of their account.
 Most of all, ATMss provide privacy in banking transactions of the customer.

DEBIT CARD
Debit cards are one of the most common forms of payment used in the world
today. These are cards that look identical to credit cards, which are linked directly to
your bank account. Whenever you make a purchase, the funds are taken directly from
your account, resulting is a simple and quick transaction. Debit cards are also known as
“E-Checks” and didn’t come around until the late 1970’s, but they have changed the way
that we purchase things globally. There are some spectacular benefits from using a debit
card as your form of payment, but some negative things to consider as well.

The Advantages of Debit Cards

1. Extremely Convenient
The biggest draw For debit cards is how simple they are touse. Since the payment
is taken directly out of your bank account, where the money already exists, it can be
done instantly.
This is much faster than having to wait for a credit transaction to go through, or having
to worry about having enough cash to cover your expenses. It is especially faster than
writing out a check, which many people no longer take.
2. It’s A Cash Card Too
Sure, debit cardsarenice, but sometimescash isanecessity. Ifyou aregoing
garagesale-ing orto the flea market, you may have to have cash to make the purchases
that you want to. Debit cards still have the abilitytogiveyou cash, youcan takethemto an
ATMand usethem theretowithdrawthecash. In additionto ATM use, the majority of
stores offer cash back options at checkout.
3. Your Pin Protects You
Debit cards are protected by a four digit pin number that you set yourself. This
pin is needed to make almost any purchase with your debit card. This gives you a great
deal of protection against theft. These cards can also be canceled very easily and quickly,
so if you lose it, you can prevent anyone from being able to do any damage.
4. Anyone Can Have One
The only thing that you must have to have a debit card is have a bank account.
Anyone can open a bank account with a small minimum deposit. This makes debit cards
much different than credit cards, because

64
 approval for a credit card largely depends ony our credit score and payment hi stories.
None of these things are taken into account when getting a debit card.
5. Strong Budgeting Tool
One of the best things about a debit card is that you cannot spend more money
than you have, which means you cannot go into debt. This helps you to only spend the
money that you have to spend because you cannot accumulate new debt, like with credit
cards.

The Disadvantages of Debit Cards

1. Your Credit Score Isn’t Helped

A person’s credit score impacts them for their entire life, whether it be negative or
positive. With a debit card, you do not impact your credit score at all, which means that
you cannot build it up. Having a higher credit score gives you lower interest rates and
increased lines of credit.Fees Galore, When you have a debit card, fees are likely a part
of your life as well. Banks inflict a wide variety of different fees to debit card holders,
which can add up very fast. Some of these include monthly use charges, major overage
fees, and transaction fees or limits.

2. Instant Money Means Instant Risk

If someone got a hold of your debit card, they would be able to take money
directly from your bank account. With a credit card, the charges are much easier to
dispute, and they do not interfere with your direct lines of income the way that debit
cards do.

3. Merchant Blocks
Depending on where you are using your debit card, or what you are buying, the
merchant can put a “hold” on your money. For example, if you are filling your tank up
with gas, the gas station will likely put a hold up to 100 dollars on your card, this is
because they want to ensure that you have the funds to pay for the gas before you pump
it. The bank can take up to 48 hours to free this money up again.

65
CREDIT CARD
Meaning
A credit card can be defined as a card (usually plastic) that financial institution
issue to their customers so that they can access credit facilities. The card holder can
make payment on credit at some point of sale.
Credit cards in cur some interest which starts a month after the payment was
made. Most banking institutions issue these cards to facilitate an increase in revenue
and customer loyalty.
Advantages
1.Enables the holder to pay on credit. This card enables the cardholder to make
payment at the point of sale even when they don’t have money in their bank account.
2.Helps in handling transaction disputes. Most institutions that give credit cards
will come to your rescue when there is disputed transaction.
3.The card is convenient to use for large amount of money. Unlike the use of
cash, which limits the amount you can pay; the credit card can be used to pay large sums
of money with no limitation.
4.Helps in accessing instant loans. When you run out of cash and you don’t know
where to get some money, a credit card will help to get a short-term loan.
5.It’s light to carry around. The weight of the card is negligible hence you will
conveniently when travelling.
6.Helps in tracking your credit transactions. You can get the transactions you
have made by requesting for a statement, hence clarifying where you have doubts.
7.Increases customer loyalty. The customer tends to love a place they can get credit
facilities. This means that they will remain loyal to the financial institution.
8.Helps the customer to get Discounts. Many credit card institutions offer
discounts to attract people to use their cards. The discount is based on the amount you
are purchasing.
9.Provides security from theft. Credit cards cannot be used by any other person
without the holders’ permission making it difficult for your money to be stolen.
10.They help in time saving. You don’t have to waste time going to the ATM to with
draw money to make a payment.

66
Disadvantages
1.They are pro net of raud. Many people have had their cards hacked and large
amounts of money added to their accounts.
2.Promote sim pulse buying. As long as you have the card, you are pro net o buying
what you had not planned for.
3.Convenient for the literate in the society. The card is given to the rich and the
literate living out the poor and the illiterate.
4.Can only be used in selected points of sale. The cards are not accepted in all
points of sale meaning you will be inconvenienced is some shops or supermarkets.
5.They charge some interest on the card. This means that you will have to pay
more than the amount you used.
6.There are increased chances of financial institutions losing money. If the
customer is unable to pay the debt, the financial institution can incur losses.
7.Promotes bad credit. Since one can access loans instantly, many peoplemay take
too much moneythat they can’t be able to pay in/on time.

MOBILE BANKING
The Reserve Bank of India recently informed banks to encourage mobile banking.
Incoming days we will see more number of people getting addicted to the ease of mobile
banking. In the internet era, mobile banking can be considered as boon as well as bane.
However, many people still are not able to relay on mobile banking due to its exposure
to risk. Here are few safety tips which you can consider.

Advantages of Mobile Banking

In Mobile banking, the user can transfer funds from your bank account to
another bank account with a smart phone just with the help of the internet, from
anywhere to everywhere. It is available for 24hours and easy and convenient mode for
many Mobile users in the rural areas. Mobile Banking is said to be more secure and risk-
free than online Internet Banking. With the help of Mobile, Banking user can transfer
funds, and pay bills, checking account balance, study your recent transaction, block your
ATM card, etc. Mobile Banking is cost- effective, and Banks offer this service at less cost
to the customers.

Disadvantage soft Mobile Banking

 Mobile Banking is not available on all mobile phone. Sometimes, it requires you
to install lappson your phone to use the Mobile Banking feature which is available
on the high-end smartphone.

67
  If the customer does not have a smart phone than the use of Mobile Banking
becomes limited. A transaction like transfer of funds is only available on high-end
phones.
 Regular use of Mobile Banking may lead to extra charges levied by the bank for
providing the service. Mobile banking users are at risk of getting fake SMS
messages and scams.
 The loss of a mobile customer device of ten means that criminal scan gain access
to your mobile banking PIN and other sensitive information

INTERNET BANKING
Meaning
Online banking also known as internet banking, e-banking, or virtual banking, is
an electronicpayment system that enables customers of a bank or other financial
institution to conduct a range of financial transactions through the financial institution's
website.

Advantages of Internet banking

1.Convenience: Banks that offer internet banking are open for business transactions
anywhere a client might be as long as there is internet connection. Apart from periods of
website maintenance, services are available 24 hours a day and 365 days round the year.
In a scenario where internet connection is unavailable, customer services are provided
round the clock via telephone.
2.Low cost banking service: E-banking helps in reducing the operational costs of
banking services. Better quality services can be ensured at low cost.
3.Higher interest rate: Lower operating cost results in higher interest rates on
savings and lower rates on mortgages and loans offers from the banks. Some banks offer
high yield certificate of deposits and don’t penalize withdrawals on certificate of
deposits, opening of accounts without minimum deposits and no minimum balance.
4.Transfer services: Online banking allows automatic funding of accounts from long
established bank accounts via electronic funds transfers.
5.Ease of monitoring: A client can monitor his/her spending via a virtual wallet
through certain banks and applications and enable payments.
6.Ease of transaction: The speed of transaction is faster relative touse of ATM’s or
customary banking.
7.Discounts:The credit cards and debit cards enables the Customers to obtain
discounts from retail outlets.

68
8.Quality service: E-Banking helps the bank to provide efficient, economic and
quality service to the customers. It helps the bank to create new customer and retaining
the old ones successfully.
9.Any time cash facility: The customer can obtain funds at any time from ATM
machines.

DisadvantagesofInternet banking

1.High start-up cost: E-banking requires high initial startup cost. It includes internet
installation cost, cost of advanced hardware and software, modem, computers and cost
of maintenance of all computers.
2.Security Concerns: One of the biggest disadvantages of doing e-banking is the
question ofsecurity. People worry that their bank accounts can be hacked and accessed
without their knowledge or that the funds they transfer may not reach the intended
recipients.
3.Training and Maintenance: E-banking requires 24 hours supportive
environment, support ofqualified staff. Bank has to spend a lot on training to its
employees. Shortage of trained and qualified staff is a major obstacle in e-banking
activities.
4.Transaction problems: Face to face meeting is better in handling complex
transactions and problems. Banks may call for meetings and seek expert advice to solve
issues.

BANK ASSURANCE
Bank assurance is a relationship between a bank and an insurance company that is
aimed at offering insurance products or insurance benefits to the bank’s customers.In
this partnership, bank staff and telllers become the point of sale and point of contact for
the customer.
Bank assurance is an arrangement between a bank and an insurance
company.Bank assurance is controversial with opponents believing that it gives banks
too much control.

BANKING OMBUDSMAN SCHEME

Banks have come forward not only to address the problems of their customers
but have also taken measures to solve them by the setting up of a permanent grievance
redressal machinery.In 1995, by giving a legal recognition to this set up.Reserve Bank of

69
India, in exercise of the powers conferred by Section 35 Aof the Banking Regulation Act,
has come out with a new scheme called Banking Ombudsman Scheme.
DEMAT ACCOUNT
A Demat account is an account to hold financial securities in electronic form.In
India, Demat accounts are maintained by two depository organizations, National
Securities Depository Limited and Central Depository Services Limited.
A depository participant, such as a bank acts as an intermediary between the
investor and the depository. The Demat account number is quoted for all transactions to
enable electronic settlements of trades to take place.Access to the Dematerialized
account requires an internet password and a transaction password. Transfer or purchase
of securities can then be initiated.Purchases and sales of securities on the
Dematerialized account are automatically made once transactions are confirmed and
completed.

******

70