BANKING

THEORY & PRACTICE OF BANKING C. P. MANSOOR S. AHMED. M. COM, PGDBA 

Origin 

Derived from French words Bancus, Banco, Banc, Banque

DEFINITION

Banker Person doing Banking Business

Earlier View: “Banker includes a body of  persons whether incorporated or not who carry on the banking  business.”

Expert’s View: The essential business of a  banker is to buy money and debts by creating other debt. He is essentially a dealer in debts or credit.

 According to Sec 5(b) of Banking Regulation Act. “Accepting for the purpose of lending and investment, of deposits of money from the public, repayable on demand, order or otherwise and withdraw able by cheque, draft, order or otherwise.” 

Customer Earlier Views: There must be some sort of an account – either deposit or current account or similar relation – to make a man customer of a bank.

Second View: To constitute a customer there must be some recognizable course or habit of dealing in the nature of regular banking  business

Modern View: Even a single transaction can constitute a person a customer.

Requirements to become a CUSTOMER: He must have some sort of an account Even single transaction may  constitute him a customer. Frequency of transaction is anticipated but not insisted upon. The dealing must be of banking nature. 

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Relationship  between a BANKER & A  CUSTOMER  1.

General   Relationship

2.  Special 

 Relationship

Questions to be asked?    

Is there a depositary relationship?  A banker as a bailee! Is there a trustee relationship? Is there an agent relationship?

Banker-Customer Relationship General Relationship 

Debtor-Creditor Relationship 

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Express Demand by the creditor Particular branch Banking Hours Un-secured Law of Limitation Combine accounts

Special Relationship 

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Obligation to honour cheques Banker’s Lien Duty to maintain secrecy  Right to claim incidental charges Right to charges compound interest Exceptions from the law  of limitation.

Obligation to honour Cheques 1.

 Availability of  money 

2.

Correctness of the cheque

3.

Proper drawing of  he cheque

4.

Proper application of funds

5.

Proper presentation

6.

Reasonable time for collection

Overriding the OBLIGATION Liability to the customer  Assessment of damages  

Damages “the smaller the amount of cheque the greater the damage” – principle

Ordinary Special

Grounds of Confrontation Breach of Contract Negligence Libel 

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Damage

Damage

Implication of law: Damage for breach of contract to pay cheques Damage to general drawer’s business Damage to general reputation and credit Damage for the negligence of the banker. •

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Obligation to PAY the BILLS!  

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1. 2. 3. 4.

Prior arrangements Indemnity Bonds. Precautions: Particulars Stamp Due for payment Signature

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Banker’s Lien Right to retain the goods

Kinds of Lien: 1.

General Lien

2.

Particular Lien

Circumstances of  Exercising a lien: 1.

 Any agreement in consistent of lien

2.

 Acquired in the capacity of a banker

3.

Not for specific purpose.

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Lien cannot go beyond the agreement. Banker’s lien as an implied pledge. Lien on quasi & negotiable securities. No general lien on Safe custody  deposits. No lien on documents entrusted for specific purpose. No lien on articles left by mistake. Lien on securities taken back after repayment of the loan. Lien on Bonds & Coupons No lien until the due date of a loan. No lien on deposits.

DISCLOSURES The disclosure of the financial position of the customer may affect his reputation and bring considerable loss. If a customer suffers any  loss on account of the unwanted disclosure of  his account the banker  will be compelled to compensate for the loss suffered by his customer.

General Acceptance 1. Disclosure under the compulsion of law  2. Disclosure in the interest of  public. 3. Disclosure in the interest of   bank. 4. Disclosure under the express or implied consent of customer

Disclosure under the Compulsion of LAW! 

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Sec 4 – Bankers Book Evidence Act – certified copy of  customer’s account in his ledger. Sec 285 – Income Tax Act – interest earned beyond Rs. 10000/-pa Sec 45B – Reserve Bank of India Act – Collect Credit Information Sec 26 – Banking Regulation Act – Annual return of  deposits (unclaimed for 10 years) Sec 36 – Gift Tax Act – Books of Account Exchange Control Act Garnishee Order Nisi

Disclosure in the Interest of the Public 

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Political Purpose Unlawful association Revolutionary body  Enemy at times of war.

Disclosure in the Interest of Bank  

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Disclosure of the account of the customer who failed to repay the loan to the guarantor. Disclosure to a fellow banker Defend the past action

Disclosure under the Express or Implied Consent of Customer 

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Trade Reference To the guarantor

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General

Precaution 1.

2.

Damage – unreasonable disclosure Loss – untrue & misleading information.

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Negligent – Information Express Consent Bare Facts Strict Confidence Fellow banker Exact balance

Right to claim incidental Charges Service Charges Processing Charges Ledger Folio Charges  Appraisal Charges Penal Charges Handling Charges Collection Charges

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LF Chg Rs. 500/-pa Computerized Branch & Rs. 200/- others Collection Charges

Right to charge compound interest 

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Compounding is prohibited Quarterly/Half Yearly/Yearly 

Exemptions from the Law of Limitation 

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3 years Vs 10 years 1 year – Dormant Account 2 year – Inoperative Account 5 year – Tfr to Central Office