Banking Law Modules

MASTER OF BUSINESS LAWS (MBL)–PART I

COURSE NO. II MODULE NOS. I-IX

BANKING LAW MODULE ASSIGNMENT

SUBMITTED BY:

RAJ RAJESHWARI SHUKLA I.D. NO.8987 YEAR OF ADMISSION 2007-2008 DISTANCE EDUCATION DEPARTMENT NATIONAL LAW SCHOOL OF INDIA UNIVERSITY BANGALORE-560 072

MODULE – I STRUCTURE AND FUNCTIONS OF COMMERCIAL BANKS AND FINANCIAL INSTITUTIONS. Ans.1. Regional Rural Banks (RRB’s): The RRB’s have been set up under the Regional Rural Banks Act of 1976.

The main objective of

RRB’s is to provide credit and other facilities particularly to small and marginal farmers, agricultural laborers, artisans and small entrepreneurs and develop agriculture, trade, commerce, industry and other productive activities in rural areas. The first RRB was set up on October 2, 1975 in Moradabad in Uttar Pradesh (U.P.). The authorised capital of each Regional Rural Bank is Rs. 5 crores, out of which 50% shall be subscribed by the Central Government, 15% by the concerned State Government and the remaining 35% by the Sponsor Bank. Since the inception of these Banks till June 2003, 196 RRB’s have been operating through 14,522 branches. The advances granted to small and marginal farmers, landless labourers and rural artisans constitutes little more than 90 percent of the total deposits granted. National Bank for Agriculture and Rural Development (NABARD). The NABARD was set up on July 12,1982 as the leader of the entire Rural Credit system. It has taken over the functions of the agricultural credit department of RBI and the Agricultural Refinance and Development Corporation (ARDC). NABARD is responsible for the development, policy planning operational matters, coordination, monitoring, research, training etc. relating to rural credit. It provides refinance to Cooperatives, RRB’s for short, medium and long term requirements. Relationship between NABARD and RRB – As NABARD provides medium term loans from one and a half years to seven years to Regional Rural Bank’s for agricultural and rural development. In this regard it is a Bank to RRB’s who can always approach NABARD when in need.

NABARD has the authority to ask for information and statements from RRB’s with regard to there operations etc. under the Banking Regulation Act, 1944 RRB’s are required to furnish to NABARD copies of returns submitted to the Reserve Bank of India. NABARD also has the power to inspect the RRB’s whenever it feels it is required. Another interesting part of their relationship is that NABARD undertakes training to its own staff as well as the staff of Regional Rural Banks in order to upgrade the technical skills and competence of the staff. To remedify the various problems concerning RRB’s the Narsimhan Committee (1991) on RRB’s recommended that the rural subsidiaries of Commercial Banks should be treated at par with Regard to cash reserves and statutory liquidity requirements and refinance facilities from NABARD. All concessions in lending to agriculture and to small industry should be phased out, and there would be saving in costs of administration brought through the process of rationalization. The Narsimhan Committee also recommended that NABARD should help RRB’s to earn higher level of interest income for their surplus cash balances and for their funds presently invested in Government Securities or in Government guaranteed securities for SLR Compliance. This would also help to increase the earning capacity of RRB’s. The Reserve Bank of India appointed M C Bhandari Committee to suggest measures for destructing RRB’s. The committee recommended that in view of the unsatisfactory recovery position of RRB’s , NABARD monitors the working of RRB’s, on a quarterly basis, as regards productivity, cash management, advances portfolio and recovery performance. NABARD has devised a package of short term measures for RRB’s: (a)

RRB’s are freed from their service area obligations;

(b)

They are allowed to increase there non target group financing from 40 percent to 60 percent;

(c)

They are permitted to relocate same of their loss making branches at agricultural produce centres, market yards mandis etc.;

(d)

They are given freedom to open extension counters;

(e)

They are allowed to provide for non – priority sector purposes like loans for consumer durables and loans for various purposes to both target groups and non target groups; and

(f)

Upgrading and deepening the range of there activities to cover non fund business such as remittance and discount facilities.

Ans.2. State Bank of India (SBI): The first half of the 19th century, three Presidency Banks were started with the financial participation of the Government. In the year 1921, the three presidency banks at Calcutta, Bombay and Madras were merged into the Imperial Bank vide Imperial Bank of India Act, 1920. The Reserve Bank of India appointed a Rural Credit Survey Committee which recommended the setting up of a State Bank of India. Accordingly, the State Bank of India was set up in July 1955 which took over the assets, liabilities and establishment of the Imperial Bank of India. The State Bank of India is a Shareholder’s Bank, in which majority of the shares are held by the RBI, and the private shareholders are the minority shareholders. The State Bank is managed by the Central Board of Directors consisting of 20 members. The Central Board (CB) shall be guided by the Central Government.

All such directions of the Central Government shall be

given through the Reserve Bank of India. The Central Board shall consist of the Chairman to the appointed by the Central Government in consultation with the Reserve Bank of India, two Managing Directors appointed by the Central Government in consultation with Reserve Bank of India, presidents of thirteen local boards and four elected members elected by shareholders other than by the Reserve Bank of India provided shareholders hold more than 25% of the share capital. One director taken from the workmen to be appointed by the Central Government, one director to be appointed by the Central Government from employees, not less than two and not more than six directors to be appointed by the Central Government in Consultation with Reserve Bank of India from persons having the special knowledge of the working of Cooperative institutions and of rural economy on experience in commerce, industry,

banking on finance. One nominated Director by the Central Government and one nominated Director by Reserve Bank of India. The local boards of all local head offices comprise of the chairman of officio and Directors of the Central Government coming from that are exofficio, six members nominated by the Central Government in Consultation with Reserve Bank of India, one elected member from the shareholders other than Reserve Bank of India Manager of the Area.

and Chief General

The Governor of the RBI in consultation with

chairman of SBI shall nominate members of the local board. The local boards shall exercise all powers and perform all functions and duties of the SBI as may be approved by the Central Board. All questions are decided by the majority. Similarly local boards are also to meet at such place and time and observe such rules and procedures as may be prescribed. It is quite evident from the above discussion that the Composition of Board of Directors both at the Central and local level is responsible for maintaining the operation of efficiency of the State Bank of India. Apart from performing all the functions, which a commercial bank performs, it also acts as on agent of Reserve Bank of India at all places in India where it has a branch and where the Reserve Bank of India has no Branch. It also plays a special role in rural credit, namely, promoting Banking Habit in the rural areas and catering to their credit needs. Ans. 3. Role of State Bank of India: The State Bank of India is the single largest commercial bank in the country with total deposits of Rs.96,400/- in 1995 – 96. The SBI Associate banks had total deposits of Rs.31,200 crores. SBI has the largest amount of deposits, extend the highest percentage of advances and performs the role of the Reserve Bank of India wherever the latter has no office. The State Bank of India Act has been amended recently under which: (a) RBI shareholding of SBI has been reduced from 99% to 67%; and (b) 10% of voting rights have been given to shareholders.

The State Bank of India and other nationalized Banks have been permitted to raise equity and debentures in the market. SBI has raised Rs. 3200 crores through public issue of shares and bonds. The development activities of the State Bank of India and its subsidiaries have included, besides opening new branches in non banking areas, the financing of the co-operation movement and of small scale industries. By March 2005 the State Bank and its associates assisted over 13,800 small scale business units and other small operations. The most spectacular progress has been achieved in the filed of rural credit, where the loans outstanding rose to over Rs. 7450 crores to farmers. General Assistance of State Bank: (1)

Remittance Facilities – The order to provide extended remittance facilities, the State Bank has liberalized remittance facilities to State and Central Co-operative banks and now permits free transfer facilities.

(2)

Loans to Co-operative Banks – The State Bank has also been granting short term credit facilities to the state and Central Cooperative Banks against Government securities at a concessional rate of interest, viz, one half or one percent below its usual advance rate. The Co-operative Banks and Societies in turn make these finds available to the farmers.

(3)

Financial Accommodation to Marketing and Processing Societies – The State Bank has undertaken an important aspect of direct finance to co-operative marketing and processing societies in areas where they are not able to secure prompt and adequate finance from Central Co-operative Banks.

Ans. 4.Capital Formation by Commercial Banks – Commercial Banks accelerate the process of economic development in an economy by capital formation. It has been seen throughout the years that inadequacy of capital is the single most influential reason for economic development’s slow rate. Commercial Banks by stimulating the savings and investment brings in capital in to the economy.

A sound banking system mobilizes the small and scattered savings of the people and makes them available for investment in productive enterprises. In this connection, the Banks perform two important functions – (a) Attracting Deposits - Banks attract deposits by offering high rate of interest, thus converting savings which would have remanded idle into active capital; and (b) They distribute these savings through loans among enterprises, which are connected with economic development. During this process of reconing and granting loans and advances to people, banks also earn rate of interest on the amount advances. Commercial Banks indirectly also makes capital through the process of Capital Formation by credit creation. Credit creation means the multiplication of loans and advances. As every bank loan creates an equivalent deposit, credit creation by banks implies also multiplication of loans and advances. As every bank loan creates an equivalent deposit, credit creation by banks implies also multiplication of Bank deposits. The word “creation” implies that banks are unique institutions and they can create Bank deposits or create bank money by giving loans and purchasing bills and bonds but of nothing. Thus banks indirectly creates capital by creating credit more liberally and thereby make finds available for the development of various projects. This tool of capital formation by credit creation is the exclusive tool in the hand of commercial banks.

Thus we can conclude that Commercial

Banks helps directly as well as indirectly in capital formation. Ans. 5. Government’s Interference and inefficiency – The Industrial Finance Corporation of India (IFCI) is the best example for this. For a long time, IFCI was used by the Finance Ministry of the Government of India and its politicians to finance many doubtful and financially week enterprises. In fact, in the initial years the IFCI under the chairmanship of Sir Shri Ram (of Delhi Cloth Mills) lent extensively to the textile mill sector which soon became sick. Heavy accumulation of non

paying assists badly affects and burdens IFCI. After making it financially weak, the Finance Ministry took a series of steps to help IFCI. First, IFCI was converted into a public limited company under the Indian Companies Act, 1950 and was given the freedom to function as a public limited company from July 1993.

The Finance Ministry hoped that as an

independent financial company, IFCI would be able to improve its working and rehabilitate itself. It was increasingly felt that the IFCI could not be rehabilitated simply by pumping in additional funds. The Government of India has now agreed to merge IFCI with Punjab National Bank. Ans. 6. Industrial Development Bank of India – The Industrial Development Bank of India was set up in July 1964 as a wholly owned subsidiary of Reserve Bank of India.

Under the Public Financial

Institutions Laws (Amendment Act 1976 ownership of the IDBI was transferred from the Reserve Bank of India to the Government of India. Also various other responsibilities of the Reserve Bank of India vis – a – vis the financial institutions was vested in the IDBI. Today IDBI is an apex institution in the area of development banking. Management of IDBI – The management of the affairs and business of the development bank is vested in a Board of Directors. The Board consists of(a) A Chairman and a Managing Director appointed by the Central Government. (b) A Deputy Governor of the Reserve Bank nominated by that bank. (c) Not more than 20 Directors nominated by the Central Government. Industrial Credit and Investment Corporation of India (ICICI) – The Industrial Credit and Investment Corporation of India (ICICI) was set up in 1955 and its issued capital has been taken up by Indian Banks, insurance companies and others. The aim of ICICI was to stimulate the promotion if new industries, to assist expansion and modernization of existing ones and to furnish

technical and managerial aid so as to increase production and afford employment opportunities. ICICI has merged with ICICI Bank in May 2002 and has now ceased to exist as an all India Development Financial Institution. Management of ICICI – ICICI is efficiently managed by a Board of Directors comprising personalities drawn from such diverse fields as finance and banking, industry and Government service. The day to day affairs are handled by the Managing Director supported by the Senior Executive of ICICI. The main objective is encouraging and promoting the private ownership of industrial investments and the expansion of investment. Industrial Finance Corporation of India (IFCI) – IFCI was the first development bank to be established for providing medium and long term credits to industrial concerns.

IFCI was established under such

circumstances where normal banking accommodation was inappropriate and recourse to capital issue methods was impracticable.

The IFCI

provides assistance in all forms – sanction of rupee loans and foreign currency loans, underwriting of and subscribing to share and debenture issues, guaranteeing of deferred payments etc. All the three IDBI, ICICI and IFCI are all India Financial Institutions. They all are All India Development Banks.

The management and the

organization structure of ICICI have produced spectacular success since its inception in 1955. In tune with, the changing environment, the Development Financial Institutions have been diversifying their operations and reorienting their business strategies. For example IDBI has expanded the scope of its venture capital scheme to include a wide spectrum of projects – both new and technology and new products and process with a high element of risk and high potential returns. ICICI promoted a new company to provide registry and transfer services to investors, it started a commercial bank – ICICI Bank and floated a mutual fund by the name of Prudential – ICICI.

Following Narsimhan Committee (1991) recommendation and in tune with the growing environment of competition, the system of consortium finance by DFI’s is being gradually replaced by informal loan syndication. The Reserve Bank of India has also issued guidelines on prudential norms to be followed by the five all India DFI’s. The norms are broadly similar to those prescribed for scheduled commercial banks. The DFI’s have recognised the importance of prudential norms as a means to maintain financial health and have also been following norms for credit concentration, asset classification, income reorganization. Ans. 7. Branch Banking – In the branch banking system, every bank, as a single legal entity having one Board of Directors and one group of shareholders, operations through a network of branches through out the country. In England, the tendency has been for banking services to be concentrated in the hands of a very small number of banks – the “Big five” as they are called each having a large number of branches all over Britain. India have also adopted the Branch Banking system. Advantages of Branch Banking – Following are the advantages of branch banking. (1)

Proper distribution of Capital – Branch banking results in

transfer of capital from regions which have surplus to those which require capital. This means that capital is put to the most productive use and thus it promotes increased output and national income of the country. (1) Diversification of Deposits and Assets – Since the branch banking

system covers a wide geographical area, there are greater possibilities of diversification affecting both deposits and assets. (2) Loans and advances made on merit – Under branch banking, loans

and advances are made purely on merit and not on other considerations. The branch manger is not influenced by personal on local considerations in the granting of loans. (3) Large Financial Resources – The branch banking system offers

large financial resources. The requirements of large customers can be easily met by this system.

(4) Efficiency in management – The branch banking system makes for

greater efficiency in management. (5) Economy in working – Besides efficiency in management, the

branch banking system ensures greater economy in its working. Disadvantages of Branch Banking – Following are the disadvantages of branch banking – (1) Delays and Red Tapism: There may be delays in granting special loans and advances. This is because of the lack of sufficient authority to branch members. (2) The branch managers may not be familiar with local conditions and with the special problems and difficulties of local borrowers (3) The funds of a particular locality may not be available for the development of that area but may be used elsewhere. To sum up, the branch banking system has far more substantial merits and has greater power of survival than the unit Banking system. Even in America, traditionally considered as the home of unit Banking, trend since 1930’s has been towards branch banking, or to get the advantages of branch banking by what are known as group banking and chain banking system. Ans. 8. State Bank of India – The State Bank of India was set up in July 1955, which took over the assets, liabilities and establishment of the Imperial Bank OF India. The shares of State Bank of India were held by the Reserve Bank of India, insurance companies and the general public who were formerly shareholders of the Imperial Bank of India. The SBI Act has been amended recently under which – (1)

Reserve Bank of India shareholding of SBI has been reduced from 99 percent to 67 percent; and

(2)

10 percent voting rights have been given to shareholders.

The State Bank of India performs all the commercial banking functions which the Imperial Bank of India performed before viz, receiving deposits, advancing and lending, making investment and so on. Besides, it also acts as the agent of the Reserve Bank of India at all places in India where it has a branch and where the Reserve Bank of India has no branch. Apart from these normal functions which the State Bank of India has “inherited” from the Imperial Bank of India, it has been required to play a special role in rural credit, namely, promoting banking habit in the rural areas and catering to there credit needs. The establishment of the State Bank has marked a significant step in the filed of integrated rural credit. It performs the following:(1)

Remittance facilities to state and central co-operative banks.

(2)

Loans to Cooperative Banks. (3)

Assistance to Land Development Banks.

(4)

Financial accommodation to marketing and processing societies.

Ans. 9. Mutual Funds – Mutual funds are institutions accepting finances from its members and investing in long term capital of companies both directly in primary market as well as indirectly in the capital market. Financial institutions acting as portfolio managers receive funds from public and manage the funds for and on behalf of the depositors. This portfolio managers undertake the responsibility of managing the funds of the principal so as to generate maximum return. Mutual Funds in India (1)

UII – Unit Trust of India

(2)

LIC – Life Insurance Corporation of India

(3)

GIC – General Insurance Corporation of India

UII was established by an act of parliament in 1964, and it plays an important role in tapping the savings of the small investors through sale of units and channelising them into corporate investments. The trust has built up a portfolio of investments, which is balanced between the fixed income bearing securities and variable income bearing securities. The main objective of the trust investment policy is to secure maximum income consistent with safety of capital.

The bulk of the

investible funds has been invested in companies which are on regular dividend payment paying basis. Barring investments in bonds of public corporations, the Trusts funds have been invested in financial, public utility and manufacturing enterprises. The trust has now floated its own Bank, UII Bank Ltd. Securities and Exchange Board of India (SEBI) has the authority to issue guidelines and to supervise and regulate the working of mutual funds. The guidelines issued by the SEBI relate to advertisements and disclosures and reporting requirements. The investors have to be informed about the status of their investments in equity, debentures and government securities. SEBI has introduced a uniform set of regulations governing the mutual funds in the country. Under these regulations, known as SEBI (Mutual Fund) Regulations, 1993 – (a)

Mutual Funds have to be formed as trusts and managed by a separate Asset Management Company (AMC) and supervised by a board of trusts.

(b)

AMC must have a minimum net worth of Rs. 6 crores of which the sponsors must contribute at least 40 percent.

(c)

SEBI should approve the offer documents of schemes of Mutual Funds.

(d)

SEBI prescribes the minimum amount to be raised by each scheme – a close ended scheme should raise a minimum of Rs. 20 crores, and open – ended scheme should raise a minimum of Rs. 50 crores. In case the amount collected falls short by the prescribed minimum, the subscription amount must be reduced within a period of 6 weeks.

(e)

The advertisement code prescribes norms for fair and truthful disclosure by the mutual funds in advertisements and publicity materials. The SEBI (Mutual Funds) Regulation, 1993 were later revised on the basis of the recommendations of the Mutual Funds, 2000 report prepared by SEBI. The revision includes, increase in net worth of AMC’s from Rs. 5 crores to Rs. 10 crores, permission to have cross trusteeship and cross directorships between AMC’s.

Ans. 10.

Non Banking Functions of Commercial Banks - In recent

times many of the commercial banks indulge more in non banking functions then the conventional banking operations. With the world economy and getting more and more influenced with globalization, commercial banks have today also acquired a new role. Modern Banks performs services. Such as – (1) The issue of various forms of credits, eg. Letters of credit, traveller’s cheque, credit cards and circular notes; (2) Underwriting of capital issues; (3) The acceptance of bills of exchange, whereby the banker lends his name to his customers in return for a commission; (4) The safe custody of valuables; (5) Acting as executors and trustees for customers; (6) Preparing income tax returns for their customers; (7) Furnishing guarantees on behalf of customers etc. From a mere depository of surplus cash, it has gradually developed into an institution, which provides for practically every financed requirement of commerce and business as well as of the general public. The modern bank has made itself indispensable not only the custodian of deposits of surplus balances of the community, but also as a repository of financial advice and commercial information. It gives advise to investors, buys and sells securities on there behalf, helps government and corporations in raising loans etc.

Ans. 11.

Nationalized Banks - Nationalized Banks are managed by

the board of directors having 15 nominated members including two fulltime directors of whom one is the managing director. The Board has to meet al least 6 times in a year and once in each quarter and the head office of the Bank of at such other place as the board may decide. All questions are to be decided by majority votes. The scheme also provide for appointment of regional competitive committees for six regions. The functions of these committees shall review banking developments and recommend on such matters. It is a fact that nationalization of commercial banks have to some extent brought inefficiency and corrupt practice in banking operations. According to Narasimhan Committee (1991), direct investment and direct credit programmes are the two major causes for this state of affairs. (a) Government Investment - The Government of India used the

provisions of the Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934 to force the commercial banks to invest a high proportion of their deposit funds in government and public sector securities under statutory liquidity requirements and cash Reserve Requirements banks had to keep as much as 53.5 percent

in

government securities and the securities of public sector financial institutes. (b) Directed

credit programmes – A major objective of Indian’s

development credit policy, at the time of Bank nationalization in 1969, was to extend the reach of bank credit both geographically to unbanked regions and functionally to other neglected sectors. This system of government – directed credit programme has been achieved at the cost of security oriented credit. (c) Political and Administrative interference

- The most serious damage

to the banking system was the political and administrative interference in credit decision making.

The Centre and the States directed public sector banks to continue to extend credit to sick industrial units often against their better commercial judgment. (d) Mounting Expenditure of Banks – There was mounting expenditure

of Banks over the two decades since nationalization due to the following reasons. (a) Phenomenal increase in branch banking, without any relation to demonstrated need and potential viability. (b) Rapid growth of staff in numbers and in acceleration promotions - this has led to deterioration in the quality of manpower, over manning at all levels. (c) Extension of the coverage of bank credit to agriculture and small industry where the unit cost of administering the loans tended to be high.

Module No. II Reserve Bank of India: Structure and Functions Ans. 1. Regulation of Foreign Exchange – The regulation and conservation of foreign exchange is a major function of the Reserve Bank under the Foreign Exchange Regulation Act (FERA), 1973. The Supreme Court in Life Insurance Corporation of India V. Escorts Limited held the Reserve Bank to be the ‘custodian general’ of foreign exchange. The Central Government is vested with several powers under the act including, the power to give general on special direction to the Reserve Bank under Section 73. The Bank is obliged to comply with such direction in the discharge of its functions under the act. The Act imposes certain restrictions on dealings in foreign exchange, import and export of currency and payment of exported goods. The Indian Banks were not doing this business on a large scale and there operations were confined to India. This was so because the overseas trade of India was handled by foreign banks, generally known as ‘Exchange Banks’ with the attainment of independence and growth and diversification of India’s foreign trade the Indian Banks entered into the foreign exchange business. During the last two decades the position has changed substantially and the Indian Banks now handle 75 percent of country’s foreign trade. The Indian Banks now extend assistance to importers and exporters by their expertise and they finance exports by way of – (1)

packing credits

(2)

loans against duty

(3)

advance against bill for collection

(4)

purchase of export bills.

(5)

post shipment term finance

(6)

guidance in exchange control formalities.

The problems arising out of the devaluation of the rupee and sterling and more recently the revaluation of the Deutsche Marks have proved the capacity of Indian Banks in dealing with them intelligently. Now, studies have begun on the feasibility of having one central banking organization for conducting foreign exchange business of Indian Banks thereby releasing larger resources and personnel which are necessary for this type of business. Ans. 2(a)

Bank of Issue – The Reserve Bank of India issues and

regulates the issue of currency in India. In fact the Reserve Bank of India is sole authority for issue of currency in the country. This power enables the Reserve Bank of India to regulate and control money supply in the country. The assets of the issue department against which bank notes are issued consist of the following:(i)

gold coins and bullion

(ii)

foreign securities

(iii)

rupee coins

(iv)

government of India rupee securities

(v)

the bills of exchange and promissory notes payable in India, which are eligible for purchase by the bank.

The aggregate value of gold coins and bullion shall not at any time be less than Rs. 115 crores and together with foreign securities not less than Rs. 200 crores. Reserve Bank of India is also empowered to reduce its holding of foreign exchange in the issue department to any lesser amount with the previous sanction of the Central Government. Refund of Notes – under Section 27 of the Act, Reserve Bank has a duty not to reissue bank notes which are torn, defaced on excessively failed. This is to ensure the quality of notes in circulation. Section 28 stipulates that no person shall have a right to recover from the central government or the Reserve Bank the value of any lost, stolen,

mutilates on imperfect currency note on bank note. However, as matter of grace, the value of such currency notes on bank notes may be refunded in certain conditions and circumstances. The conditions for refund are prescribed in the Reserve Bank of India (Note Refund) Rules framed under the proviso to section 28. Refund is available from the Reserve Bank and also from authorized branches of commercial banks. Ans. 2(b)

Bank Notes – The Notes issued by the Reserve Bank are

referred to as bank notes under section 26 of Reserve Bank of India Act, 1934, every bank note shall be legal tender at any place in India in payment or on account for the amount expressed therein. Section 4 of the Negotiable Instruments Act defines a promissory note as “An instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain some of money only to, or to the order of a certain person or to the bearer of the instrument.” The definition under Section 4 specifically excludes the following notes – (a)

Bank notes – A bank note may be defined as any bill, draft or note issued by a banker, promising to pay a certain sum to the bearer on demand. In its nature it is like cash and differs from bonds and other securities which are only evidence of money being due and are not money itself.

(b)

Currency notes – A currency note issued by the government incorporates an undertaking by the government to pay the bearer of the note on demand the specified sum.

Though Bank notes and currency notes satisfy all requirements of promissory notes, they are themselves money and legal tender for the amount represented by them, and hence excluded form the purview of the Act. Reserve Bank is exempted under Section 29 of the Act from payment of stamp duty in respect of bank notes issued by it.

Ans. 2(c)

Cash Reserve – Section 42 of the Reserve Bank of India Act

and Section 18 of the Banking Regulation Act deal with cash reserves to be kept with the Reserve Bank by schedule banks and non-scheduled banks respectively. A ‘Scheduled bank’, as defined in Section 2(c) of the Reserve Bank of India Act means a bank included in the second scheduled of the Act. Every schedule bank is under an obligation to keep a cash reserve with Reserve Bank of India called statutory Reserve. Every scheduled bank is required to maintain with Reserve Bank of India an average daily balance equal to at least 3% of its demand and time liabilities. Average daily balance means the average of balances held at the close of business on each day of the fortnight.

Reserve Bank of India is empowered to

increase the rate of statutory cash reserve from 3% to 20% of the total deposit liabilities. Additional Cash Reserve – RBI is authorized to direct every scheduled bank to maintain with it, in addition to the above, on additional average daily balance at a rate specified by it. This additional cash reserve is not to be maintained on the entire amount of demand and time liabilities but on the excess of such liabilities. The Reserve Bank of India may pay interest to the scheduled banks on – (i)

the cash reserve maintained by the latter in excess of the statutory minimum of 3% of their total liabilities,

(ii)

the additional cash reserves.

But they shall be entitled to such interest if they maintain the above cash reserves to the full extent as required by RBI.

If a scheduled bank

maintains a balance in excess of the enhanced reserve requirements or additional reserve requirement, no interest shall be payable on that excess amount. Yes, there are provisions for commercial banks to get loans from Reserve Bank. When difficulties arise, Reserve Bank is a lender of last Resort for Banks.

The availability of credit from the Bank is dependent on the

prevailing credit policy. Sector 17 authorizes the Reserve Bank to give

financial accommodation to scheduled Banks. Rediscount facilities are available under various provisions of Section 17 (2) of the Act for financing commercial or trade transactions, agricultural operations, production or marketing activities of cottage and small scale industries. Ans. 3. Bank of the Central Government - The Reserve Bank is the banker to the Central and State Governments. Under Section 20 of the Act, it is obligatory for the Reserve Bank to undertake the banking business of the Central Government. The Bank has also to manage the public debt of the Central Government. In turn the Central Government has a duty to entrust the Reserve Bank with all its money, remittance and deposit free of interest all its cash balance with the bank. The management of public debt concerns with the raising of finance by the Government. Under the provisions of the Public Debt Act, 1944, the management of public debt is with the Reserve Bank. For raising public loans Government issues securities in various forms, namely – i)

Stocks transferable by registration in the books of the Reserve

Bank. ii)

promissory notes payable to order and

iii)

bearer bonds payable to bearer.

The public debt functions are carried out through the Public Debt Office operating at the local brand offices of the Reserve Bank. The long term objectives of public debt management is to ensure adequate finance for the government and avoid recourse to short term borrowings from the Reserve Bank as far as possible. As an agent of the Government, the Reserve Bank issues treasury bills at a discount, which can be rediscounted with the bank at any time before maturity. Apart from this, the Reserve Bank also advises the central and state Governments regarding the time, quantum and the other aspects of issue of new plans.

Ans. 4. Acceptance of Deposits by unincorporated Bodies - The fast growth of non banking institutions in the country and there accepting deposits from the public at a very high rates of interest raised the question of regulating their activities. Hence control over the acceptance of deposits by non-banking institutions was conceived as an adjunct to monetary and credit policy and also with a view to protecting the interest of the depositors. Chapter III C of the Reserve Bank of India Act prohibits acceptance of deposits by individuals, firms or unincorporated bodies from more than the number of depositors specified therein. Accordingly an individual may not accept deposits from more than if persons excluding relatives of the individual. In the case of firms the ceiling is twenty five depositors per partner and two hundred and fifty depositors in all excluding relatives of partners. In the case of unincorporated associations also the limit is twenty five depositors per individual and two hundred and fifty depositors in total excluding relatives of the individuals forming the association. Relatives for this purpose are defined in the explanation to Section 45 S(2). However, any period not exceeding 6 months in any accounted relating to mutual dealings in the ordinary course of trade or business shall not be deemed to be a depositor on account of such balance. The acceptance of deposits from more depositors than specified being in contravention of the provisions of the Act, the Reserve Bank can initiate prosecution under Section 58 B read with 58 E of the Act. Ans. 4 (b) Regulation of Non-Banking institutions – Chapter III – B of the Reserve Bank of India Act was introduced in 1964 by an amendment of the act conferring powers on the Reserve Bank to regulate the acceptance of deposits by non-banking institutions. Sections 45 I, 45 K and 45 L of the Act empower the Reserve Bank to regulate acceptance of deposits by non-banking institutions. The term ‘Deposit’ is defined in Section 45 I (bb) includes any receipt of money by

way of deposit or loan or any other except those specifically excluded. The excluded categories are (i)

Amounts raised by way of share capital.

(ii)

Share capital brought in by partners.

(iii)

Amounts received from banks and financial institutions

Non-banking institution as defined in Section 45 I (e) means a company, corporation or cooperative society. Financial institutions as defined in clause (c) of Section 45 –I means any non-banking institution, which carries on the types of business specified therein. Section 45 J, provides for the Reserve Bank to regulate or prohibit in public interest issue of prospects or advertisement soliciting deposits from the public. Section 45 K provides for collection of information from nonbanking institution regarding deposits and also for issuing directions on matters relating to receipt of deposits, including rates of interest and period of the deposit.

On failure to comply with such directions,

acceptance of deposits may be prohibited. Ans. 4 (c)

Government’s control over acceptance of deposits by

companies chapter III – B of the Reserve Bank of India Act was introduced in 1964 an amendment of the Act conferring powers on the Reserve Bank to regulate the acceptance of deposits by non – banking institutions. The term ‘Non-banking institution’ is defined in Section 45 I (e) as a company, corporation or co-operative society. Section 45J, provides for the Reserve Bank to regulate or prohibit in public interest issue of prospects or advertisement soliciting deposits from the public. Under 45 L, Reserve Bank may call for information from financial institutions and give directions relating to the conduct of the business of financial institutions.

Non-banking institutions have a duty to furnish

statements, information and particulars as called for by the Reserve Bank. There is also provision under Section 45, for inspection of non-

banking institutions by Reserve Bank. Further soliciting of deposits on behalf of a non – banking institutions persons is prohibited. With an amendment to Companies Act, 1956 introducing Section 58A the Central Government is empowered to exercise control over acceptance of deposits

by

non-banking

non

–

financial

companies

and

over

advertisements for acceptance of deposits by all clauses of companies. Directions: Under the authority of Section 45 J, 45 K and 45 L, the Reserve Bank has issued the Non Banking Financial Companies (Reserve Bank Directions 1977, the Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977 and the Residuary Non Banking Companies (Reserve Bank) Directions, 1987. These directions are applicable to financial companies or other non-banking companies impose several restrictions on rate of interest, period of deposit, maintenance of assets etc., which are modified from time to time.

Module No. III Law of Banking Regulations

Ans. 1.

General Provisions about licensing - Section 22 of the

Banking Regulation Act deals with the licensing provisions of Banking Companies. No banking company can commence or carry on banking business in India until it holds a licence granted to it by the Reserve Bank for the purpose in the case of banking companies to be started, before granting a licence to them the Reserve Bank may require to be satisfied whether the conditions given in Sub – Section (3) of Section 22 are fulfilled. By the Banking Laws (Amendment) Act, 1983 clauses (C) w.e.f. 15.2.1984 so as to widen the scope of the matters, which the Reserve Bank may consider before granting a licence. Before granting any license under this section, the Reserve Bank may required to be satisfied by an inspection of the books of the company or otherwise that the following are fulfilled, namely – (a)

That the company is on will be in a position to pay its present or future depositors in full as their claims accrue.

(b)

That the affairs of the company are not being, or are not likely to be conducted in a manner detrimental to the interests of its present on future depositors;

(c)

That the general character of the proposed management of the company will not be prejudicial to the public interest on the interest of its depositors;

(d)

That the company has adequate capital structure and earning prospects;

(e)

That the public interest will be served by the grant of a licence to the company to carry on banking business in India;

(f)

Its working would not be prejudicial to the operational and consolidation of the banking system consistent with monetary stability and economic growth

3A - Before granting any licence under this section to a company incorporated outside India, the Reserve Bank may require to be satisfied by an inspection of the books of company or otherwise that the conditions specified in Sub – Section (3) are fulfilled and that the carrying on of banking business by such company in India will be in the public interest and that the government on low of the country in which it is incorporated does not discriminate in any way against Banking companies registered in India and that the company companies with all the provisions of this act applicable to banking companies outside India. This section originated with the demand for licensing of foreign banks doing business in India and was also recommended by the Indian Central Banking Enquiry Committee, mainly with the object of prohibiting the entry of banks started in countries, which discriminated against banks started in India. Laws of certain foreign countries such as Switzerland, U.S.A. and Sweden have almost similar provisions. Paid up capital and reserves – The aggregate value of paid up capital and reserves of a foreign bank shall not be less than Rs. 15 lakhs and if it has a place of business in the city of Mumbai or Calcutta, or both Rs. 20 lakhs.

The Act also requires a foreign banking company t0 deposit with

the Reserve Bank at the end of each calander year an amount equal to 20% of the profit of that year. Ans. 2. Submission of Returns etc, to Reserve Bank

- Under the

provisions of Section 27 – (1)

Every banking Company shall, before the close the month

succeeding that to which it relates, submit to the Reserve Bank a return in the prescribed form and manner showing its assets and liabilities in India as at the close of business on the last Friday or every Friday or if that Friday is a public holiday under the Negotiable Instruments Act, 1881 at the close of business on the preceding working day. (2)

The Reserve Bank may at any time direct a banking company to

furnish it within such time as may be specified by the Reserve Bank, with such statements and information relating to business or affairs of the banking company as the reserve Bank may consider necessary, and

without prejudice to the generality of the foregoing power may call for information every half year regarding the investments of a banking company and the classification of its advances in respect of industry, commerce and agriculture. The monthly return in the prescribed form and the manner showing its assets and liabilities as at the close of business on the last Friday of every month is required to be submitted not later than the close of the succeeding month. Sub Section (2) authorizes the Reserve Bank at any time to require a banking company to furnish it with any statements and information relating to the business of the banking company. The right to call for information and statements from commercial Banks is now recognized in most countries. In England, the Bank of England has been authorized under the Bank of England Act, 1945 to call for any information and statements, provided it does not affect the privacy of an account. Ans. 3. Evaluation of Banking Regulation Act, 1949 (1)

Regulation of Management organs – RBI has general

regulatory power on the management of the banking companies in general and nationalized Banks in particular. The Central Government has also some controlling function. It has been found over the years that the Central Government having two powers, namely, power in the role of ownership and power in the role of a controller and the Reserve Bank having its own powers and control, often may have conflicting interests. The ownership interest of the government and the controlling interest of the RBI may conflict.

In most of these conflict interest

situations RBI fails to have its say. This has weakened the management of nationalized Banks. Thus an amendment is required in this regard, (2)

The basic purpose of the Banking Registration Act, 1949 was to

protect the depositors and for this purpose it planned to control, direct and monitor the banking system. Government of India

The practice, however, the

used the Finance Ministry to abuse the

provisions of the Act and command the resources of the banking system to finance its borrowing programs. For instant, the Government raised

the statutory liquidity Ratio (SLR) from 25 percent to 38.5 percent and compelled the banking sector to invest in government securities and bonds of the public sector institutions, these securities and bonds carried rates of interest much below the market rate of interest and after much below the market rate of interest which the banks themselves had to offer to their depositors. The Government of India was also responsible for adversely affecting the working of the Indian Banking system through some of its poverty elevation programmes, priority sector banking etc. Apart from these amendments, what ultimately is needed for a sound and efficient banking system is not fine banking legislation, but sound bankers and a non-interfering Government. Ans. 4. Cash Reserve Ratio – Section 42(1) of the Reserve Bank of India Act requires every bank included in the second schedule annexed thereto, to maintain an average daily balance with the Reserve Bank of India, the amount of which shall not be less than three percent of the total of the demand and time liabilities in India, as shown in the return referred to in the next sub section of the said sub section. Under the provision of the above section, before it was amended in 1962, the average daily balance to be maintained was five percent of the demand liability and two percent of the time liabilities in India. The powers relating to additional reserve requirements were first exercised by the Reserve Bank when, by a notification by it on March 11, 1960 all scheduled banks were required to maintain with it in the form of additional deposits, 25 percent of any additions to there demand and time liabilities after March 11, 1960, over and above the minimum requirements Viz, 5 percent on demand and 2 percent on time liabilities. The CRR at the time of nationalization was 3%. The percentage of CRR goes on changing every six months, when the credit policy for six months is announced by the Reserve Bank.

Sub section (3) of Section 42 provides for payment of penal interest by a scheduled bank on the amount of any shortfall in the cash balance required to be maintained by it with the Reserve Bank in terms of Sub Section (1) or Sub Section (IA) of Section 42. Such penal interest will initially be at the rate of 3 percent above the Bank rate for the first fortnight of default, and if the default is not made good, at the rate of 5% above the bank rate. Statutory Liquidity Ratio (SLR) – According to Section 24 (2A) of the Banking Regulation Act, 1949 as amended by the banking laws (Amendment) Act, 1983, a scheduled bank in addition to the cash reserve required to be maintained under Section 42 of the Reserve Bank of India Act, and every other banking company, in addition to the cash reserve which it is required to maintain under section 18 of the Banking Regulation Act, shall maintain under Section 18 of the Banking Regulation Act, shall maintain in India – (a) cash (b) in gold valued at a price not exceeding the current market price on in unencumbered approved securities valued at a price determined in accordance with such one or more of, on combination of, the methods proved in the section, an amount which shall not, at the close of business on any day, be less than 255 on such other percentage not exceeding 40% as the Reserve Bank may, from time to time, by notification in the official Gazette specify, of the total of its demand and time liabilities in India, as on the last Friday of the second preceding fortnight. Ans. 5.

Securitisation

According to Kenneth Cox securitisation is

a process in which pools of individual loans or receivables or actionable claims are packaged, under written and distributed to investors in the form of securities. It is a process of liquidizing assets appearing in the Balance Sheet of a bank or financial institution which represent long term receivables by issuing marketable securities there against. It involves conversion into cash flow from a portfolio of assets in negotiable instruments on assignable debts, which are sold to investors. Obstacles on Securitisation in India – The present legal environment about securitisation is inadequate, in appropriate and unfriendly.

Immediate steps are required to remove the legal hurdles and save this promising instrument. A two dimensional Government action is necessary, Viz. (i)

removal of all legal barriers; and

(ii)

providing appropriate incentives and adequate infrastructural facilities.

Some of the requirements are as follows: (a) Stamp Duty remission – The law relating to stamp duties are both Centre and State subjects. It is necessary to give complete remission on securitisation so that the growth of the market instruments bring more liquidity which will offset the loss on account of remission of stamp duty and wide confusion arising out of present law relating to stamp duty. (b)

Income Tax incentives – It is suggested by many market friendly

economists that securitisation require tax incentives in the line of Section 88A of the Income Tax Act. (c)

Development of infrastructual facilities – SEBI may prepare

guidelines for listing of such securities and for other marketing practices. It is necessary for Reserve Bank of India to make regulations for the management of ‘portfolios’ with suitable rules of set off and protection. Various tax incentives can be given to institutions for popularizing the process of securitisation among them. Ans. 6 Mutual Funds - In the recent years, mutual funds are the most important among the newer capital institutions.

Several public sector

banks and financial institutions have set up mutual funds on a tax-exempt basis virtually on the same footing as the unit Trust of India (UTI). Their main function is to mobilise the savings of the general public and invest them in stock market securities. Accordingly, mutual funds have attracted strong investor support and have shown significant progress.

The

Government has thrown the filed open to the private sector and joint sector mutual funds.

SEBI has the authority to issue guidelines and to supervise and regulate the working of mutual funds. The guidelines issued by SEBI relate to advertisements and disclosures and reporting requirements.

The

investors have to be informed about the status of their investments in equity, debentures and Government securities. SEBI has introduced a uniform set of regulations governing the mutual funds in the country. Under these regulations, known as SEBI (Mutual Fund) Regulations, 1993 (a)

Mutual funds have to be formed as trusts and managed by a separate Asset Management Company (AMC) and supervised by a board of trustees.

(b)

AMC must have a minimum net worth of Rs. 6 Crores of which the sponsors must contribute 40 percent.

(c)

SEBI should approve the offer documents of schemes of mutual funds.

(d)

SEBI prescribes the minimum amount to be raised by each scheme - a close ended scheme should raise a minimum of Rs. 20 Crores and open ended scheme should raise a minimum of 50 Crores. In case the amount collected falls short by the prescribed minimum, the subscription amount must be refunded within a period of six weeks.

(e)

The advertisement code prescribes norms for fair and truthful disclosure by the mutual funds in advertisements and publicity materials.

As of January 2004 there were 31 mutual funds (excluding the Unit Trust of India), of which is belonging to public sector and 21 were in the private sector. They manage 393 schemes and have total assets of Rs. 1,40,000 Crores. Ans. 7. Opening of Branches – Under the provisions of Section 23, the Reserve Bank of India has been empowered to control the opening of new and transfer of existing places of business of banking companies as follows:

(1)

Without the prior permission of the Reserve Bank -

(a)

No banking company shall open a new place of business in India

or change otherwise than within the same city, town or village, the location of an existing place of business situated in India, and (b)

No banking company incorporated in India shall open a new place

of business outside India or change otherwise than with the same city, town or village in any country or area outside India, the location of an existing of business situated in that country or area. Provided that nothing in this sub section shall apply to the opening for a period not exceeding one month of a temporary place of business within a city, town or village within which the banking company already has a place of business, for the purpose of affording banking facilities to the public on the occasion of an exhibition, a conference on a mela or any other like occasion. The Reserve Bank of India takes into account the following factors in deciding the application of the bank for opening branches. (i)

The financial condition and history of the company,

(ii)

The general character of its management.

(iii)

The adequacy o fits capital structure and earning prospects.

(iv)

Whether public interest will be served by the opening change of location of the place of business.

If RBI is satisfied by an application or otherwise about the above mentioned factors, permission is granted by RBI. Ans. 8.

The powers of the Reserve Bank of India over the

management of the banks is very wide. The Reserve Bank of India is armed with Draconian powers under the Banking Regulation Act, 1949 as amended from time to time. These powers are spread over a number of sections of the Act. Section 10 A - This section was introduced the sub serve the purpose of social control.

The section prescribes the nature and composition of

Board of Directors who are responsible for the management of the banking company. Sub Section (6)

Every appointment, removal or reconstitution duly

made, and every election duly held, under this section shall be final and shall not be called into question into any court. Sub Section (7)

Every direction elected, or, as the case may be

appointed under this section shall hold the office until the date upto which his predecessor would have held office, if the election had not been held, or, as the case may be, the appointment had not been made. Ans. 9. Entry of Private Banks - For well over decades, after the nationalization of 14 larger banks in 1969, no bank has been allowed to be set up on the private sector. Over this period, the public sector banks have expanded their branch network considerably and catered to the socio – economic needs of large masses of population, especially the weaker section and those in the rural area. It is necessary that while permitting the entry of new private sector banks the following considerations have to be kept in view – (a)

They sub serve the underlying goals of financial sector reform

which are to provide competitive, efficient and low cost financial intermediation services for the society at large. (b)

They are financially viable.

(c)

They should result in the up-gradation of technology in the banking

sector. (d)

They should avoid the shortcomings such as unfair preemption and

concentration of credit, monopolization of economic power, cross holdings with industrial groups. (f)

Freedom of entry in the banking sector may have to be managed carefully and judiciously.

The Reserve Bank of India has also laid certain guidelines in this regard.

(a) Such a bank shall be registered as a public limited company under the companies Act, 1956; (b) The RBI may, on merit grant licence under the Banking Regulation Act, 1949 for such a bank. The bank may also be included in the Second Schedule of the Reserve Bank of India Act, 1934 at an appropriate time. The decision of the Reserve Bank of India shall be final in this regard.

Module No. IV and V Negotiable Instruments: Ans.1.

Law and Procedure

The issue consideration in the present case is the law

relating to ‘non negotiable’ crossing and stopping of payment of a cheque. Not Negotiable Cross – Section 130 of the Negotiable Instrument Act, 1881 deals with not negotiable crossing. “A person taking a cheque crossed generally or specially bearing in either case the words, ‘not negotiable’ shall not have, and shall not be capable of giving, a letter title to the cheque than that which the person from whom he took it had” Thus the transferee of such a crossed cheque would not be able to get a title letter than that of the transferor. So, no one can become the holder in due course of such a cheque.

Although the instrument remains

transferable, its essential negotiability stands diluted by this type of crossing. The object of ‘not negotiable’ crossing is clearly to afford extra protection to holder on drawer of a cheque. Even if such a cheque goes into wrong hands and from there it is transferred to a holder in due course, the true owner will not loose his rights against such an endorsee. Thus, such a crossed cheque must be accepted with extra caution about the antecedents of the endorser. In the current case X had issued a ‘Not Negotiable’ crossed cheque to Y. Y endorsed the cheque to Z. Later Z lost the cheque and it was found by F, who transferred it to E. E got the payment through his account with the State Bank of India. Now at the time when Z had lost the cheque, he must had intimated the drawer of the cheque to stop the payment from the bank. But it seems from the fact of the case that I had made no such efforts to stop the payment from X’s account. Thus neither X nor his banker is at fault while they made the payment from his account. It is to be noted that there is no privity of contract between the holder of the cheque and the banker to

who it is drawn. It is for this reason that, when it is desired to stop the payment of a lost cheque, the holder has to ask the drawer to instruct the banker to do so, as otherwise, the paying banker may refuse to act according to the instructions of the holder of the cheque. Thus it is quite clear that Z cannot claim the money X.

But had he

intimated X about the stopping of payment from the farmer’s account Z would had got the right to claim money. Ans. 2.The issue under consideration in the present case is the law relating to inchoate instruments. The term inchoate instrument’s means an instrument incomplete in some respects e.g. an instrument, which does not mention the amount payable on the name of the payee. When a person signs and delivers to another a blank or incomplete stamped instrument, it implies that he authorizes the other person to make or complete the instrument for any amount not exceeding the amount covered by the stamp. When the instrument is so filed up, the person signing the instrument becomes liable to any holder in due course for such amount in the capacity in which he signed it. The liability of the person signing is restricted to the amount specified in the instrument. A Bill of exchange must be properly stamped as required under the Indian Stamp Act, 1899, and each stamp must be duly cancelled also. In the current case, M drew a bill on C, and later endorsed the bill to B of Bangalore. B later sent a notice to C for the payment of the Bill. The notice came returned with a remark ‘office kept’ closed. Now the fact is that M, the drawer had wrongly affixed the stamp worth Rs. four hundred as per the Indian Law. But later M endorsed this bill to B and thus both the parties to the bill belong to India now. Now if the jurisdiction of the Indian courts is valid, then B shall be allowed to recover the money from S, because –B in this case is a holder in due

course, and the holder in due course has a right to because such amount. B is the recipient from M and this makes him holder in due course. Ans. 3.

The issue under consideration in the present case is the

implication of the phrase “After Sight” on a bill of exchange. The phrase ‘after sight’ on a bill of exchange should always be accompanied but the period after which the bill would become payable, as for example 6 months after sight etc. sight must appear in a legal way i.e. after acceptance if the bill has been accepted or after nothing for non acceptance or protest for non acceptance. [Homes V. Kerrison] Detailed Rules for calculating maturity – To overcome some practical problems that crop up while determining the date of maturity of an instrument, sections 23 to 25 have laid down some rules which are given below: 1)

If the instrument is made payable a stated numbers of months after

sight, it would mature on the third day after the corresponding date of the month after the stated number of months. 2)

If the month in which the stated period would terminate has no

corresponding date, the period shall be held to terminate on the last date of such a month. 3)

If an instrument is made payable a certain number of days after

sight, the maturity to the calculated by excluding the day on which the instrument is drawn on presented for acceptance or sight or on which the event happens. 4)

If the date on which a bill or note is at maturity happens to be a

public holiday, the instrument shall be deemed to be due on the next preceding business day, i.e. a day earlier. 5)

If an instrument is payable by installments, three days of grace are

to be allowed on each installment (Section 67).

Ans. 4. Arguments on behalf of the defendant – (1)

Forgery by the Plaintiff – Section 470 of Indian Penal code states

that ‘a false document made wholly or in part by forgery is designated’ a forged document’. Section 471 further observes that the use as genuine of a forged document has to be with an intent dishonest has to be with an intent dishonest or fraudulent. A mere erroneous belief and persistence in a wrong on perverse opinion cannot be said to be offence tainted with a dishonest or fraudulent intention [Bank of India Vs. State of Maharashtra] Section 464 – Making a false document. A person is said to make a false document. Firstly – When dishonestly or fraudulently makes, signs, seals or executes a document on part of a document, or makes any mark denoting the execution of a document, with the intention of causing it to be believed that such document or part of the document was made, signed, sealed or executed by or by the authority of a person by whom or by whose authority he knows it was not made, signed, sealed or executed on at a time at which he knows it was not made, signed, sealed or executed. Secondly – Who, without lawful authority, dishonestly or fraudulently, by cancellation or otherwise, alters a document in any material part there of, after it has been made or executed either by himself or by any other person, whether such person be living or dead at the time of such alteration. (2)

As per the principle of Natural equity and justice, one who seeks

justice must also do justice. In this case, the plaintiff had himself not done justice and thus he cannot ask for justice in the court of law. Ans.6. Section 76 provides for situations in which the presentment for payment is unnecessary, and the instrument in such a case is dishonored at the due date for presentment. These situations are as follows:

(1)

When Prevented - Whenever the marker, drawer or acceptor

intentionally prevents the presentment, then the holder need not present the requirement. (2)

When business place closed – if the place of business of such

maker etc. is closed on a working day during business hours the presentment is not necessary, because in such a case the presumption is that it has been deliberately kept closed to avoid payment. (3)

When no person at place of payment – The same rule applies, if

the instruments is payable at a specified place, and when the holder goes there for presentment there is no person present who can either authorize payment or refuse it. (4)

When the waiver etc. cannot be found - The holder is required to

search diligently for the maker etc. If the instrument does not specify a place of payment. If after due search the maker etc. can not be found, the parties to the instrument are liable on it without the presentment. Ans. 7. Privileges of a Holder in Due Course – The holder in due couse enjoys a privileged position under the Negotiable Instruments Act in comparison to a mere ‘holder’. He has the rights superior to those of holder. Following are the privileges. (1)

Better title than that of the transferor - A person who is only a holder

gets a title over the instrument, which is at par with the transferor.

If

there is a defect in transferors title, the holder would suffer from the same defect. But the holder in due course would acquire a better title than that of the transferor. (2)

Privilege in case of inchoate instrument

- In the case of inc

stamped instrument, if its original payee or holder fills an amount more than what was authorized, he cannot enforce the instrument for the entire amount. (3)

Rights against prior parties – All prior parties to negotiable

instrument i.e. its maker or drawer, acceptor and intervening indorses,

continue o remain liable to a holder in due course both jointly and severally i.e. he can hold any or all prior parties liable, until the instrument is duly satisfied (Sec.36). Whereas, only preceding party is liable to a holder (4)

Privilege in case of fictitious bills – When a bill of exchange is

drawn in a fictitious name and is made payable to another fictitious person i.e. where both drawer and payee of a bill are fictitious persons, the bill is said to be a fictitious bill. But, if such a bill, during its negotiation of such a bill would be liable to him. (5)

Rights under an instrument delivered conditionally – When a

negotiable instrument is endorsed or delivered conditionally or for a special purpose only, such as, to make it a collateral security or for safe custody, and not with the idea of transferring the rights therein, the property in the instrument does not pass to an indorsee, and he becomes merely a bailee with limited title and power of negotiating it. (6)

Estoppel against denying capacity of payee to indorsee - No maker

of a note and no acceptor of a bill payable to order shall, in a suit thereon by a holder in due course, be permitted to deny the payees capacity, at the date of the note, or the bill, to indorse the same. But the condition is that payee must be competent to indorse the instrument. Ans. 8. Payment in due course - the payment made under a negotiable instrument by the person liable must be made in such a way which could be called “payment in due course”. Only such a payment will endorse as a valid discharge of the instrument against the holder. Section 10 lays down that a payment under a negotiable instrument shall amount to a ‘payment in due course’ if the following conditions are satisfied – (1)

The payment must be in accordance with the apparent tenor of the

instrument. It should be made at or after its maturity. A payment before maturity cannot be a, payment in due course so as to discharge the instrument.. The instrument, even if paid before the last day of grace, can be indorsed further. Similarly, the bankers should not make payment of a post-dated cheque before the date mentioned therein.

(2)

The payment must be made in good faith and without any

carelessness. It must be made under a honest belief that the person demanding the payment is a bonafide person and is legally entitled to it. The payee must not act carelessly while making the payment. If there are circumstances to arouse suspicion, the payment will not be a payment in due course. (3)

The payment must be made in return of the instrument. A payment

will not be a payment in due course if it is made without presentment of the instrument. (4)

The payment must be made in money only unless the holder

agrees to accept payment in any other form or by cheque or draft or in kind, as a discharge of the debtor. (i)

“Pay Ramesh an amount of Rs.5000/-, sixty days after arrival fo the

ship ‘victory’ at Bombay. Such a document is not a valid as Bill of Exchange i.e. a negotiable instrument.

The order to pay on the Bill of Exchange must be

unconditional i.e. payment must be made under all circumstances and it should not be on a contingency.

A Bill of Exchange payable on a

contingency is void ab initio, but such contingency or defect be apparent on the face of it. In such cases, even the happening of the contingency cannot make the bill of exchange valid. A Bill of Exchange is not based on contingency merely because there is an uncertainty regarding the person having the right to enforce it under particular circumstances. (ii) I promise to pay on demand a sum of Rs. 10,000/- at my convenience. This document is not a valid Promissory note i.e. a negotiable instrument, Section 4 of the Negotiable Instruments Act which defines a Promissory Note lays down a condition that a promissory note must contain an unconditional and definite promise to pay a certain sum. In this case the promise to pay is at the convenience of the drawer, and thus this makes the document conditional.

(iii)

“Rs. 1000 balance, due to you and I am indebted to pay on

demand”. This is a valid Promissory note. A promissory note is a promise in writing by a person to pay a certain sum of money to a specified person. The above document is unconditional and definite promise to pay a certain sum of money. (iv)

“I promise to pay a Rs.1000 and all fines accordingly to rules”.

The above document is not a valid Promissory note, as they do not satisfy the requirements laid down in the definition. Ans. 10.

The issue under consideration in the present case is the law

relating to instruments. The term ‘inchoate instrument’ means an instrument incomplete in some respects e.g. an instrument, which does not mention the amount payable or the name of the payee. When a person signs and delivers to another a blank or incomplete stamped instrument, it implies that he authorizes the other person to make or complete the instrument for any amount not exceeding the amount covered by the stamp. When the instrument is so filled up, the person signing the instrument becomes liable to any holder in due course for such amount in the capacity in which he signed it. The liability of the person signing is restricted to the amount specified in the instrument. It may noted here that no person other than a holder in due course can recover from the person delivering the instrument anything in excess of the amount intended to be paid by him. The following points are important in connection with an inchoate instrument – (1)

The liability of the person who signs and delivers an incomplete

stamped instrument, arises when the blanks are filled in and the instrument is completed.

(2)

The signatory becomes liable only when the instrument is delivered

to the transferee. Thus, where a person sings his name on a stamped promissory note, and keeps it in his drawer, and some person steals it and completes the instrument, then he cannot recover the amount from the signatory. It may be noted that in such a case, even a holder in due course cannot recover the amount from the signatory because he did not get it through negotiation. (3)

The instrument must be stamped, and the stamp affixed must be

sufficient to cover the amount filled in the instruments. (4)

The person who completes an inchoate instrument cannot himself

become a holder in due course. Only the recipient from him can become a holder in due course if he receives it in good faith, and for value. (Kadarkarni V. Arumugam 1992 AIR Mad 346)

Module No. VI Banker – Customer Relation

Ans.1. Pledge

Pledge along with hypothecation form a major chunk of bank

especially for trade or commercial purposes. Section 172 of the Indian Contract Act defines pledge as: The bailment of goods as security for payment of a debt or performance of a promise is called pledge. Pledge has the following essential characteristics – a)

The pledge article must be delivered to the pawnee.

b)

The delivery must be either for payment of a debt or the

performance of a promise. c)

On the pawner’s repaying the debt or performing his promise the

goods must be returned to him. Pledge of Shares -

In case shares of an incorporated company are

pledged it is not necessary for the pledge to be duly filed in the transfer form.

In re Bengal Silk Mills case it was held that a transferee in the

case of a transfer to shares in blank has the right to fill in the necessary particulars including his own name as a transferee and the date of the transfer, even after the death of the original transferor. The transfer so made will be a valid one and transferee will be entitled to have his name registered in the company register as the holder of shares. In Kunhunni Elaya Nayar V. P.N. Krishna Pattar and others, the court while considering the question whether a pledge of shares can be created by the mere deposit of the share certificate, held that the shares are “goods” and therefore pledge able. They can only be pledged by the deposit of the share certificate. The court observed that it appears that it appears that by including shares in the definition of goods in the sale of goods Act, the legislature must have associated shares with the share certificate, which is marketable.

Otherwise, it is difficult to see how

shares can be goods and the subject of pledge, the essence of which is delivery. The word “goods” in the Indian contract Act should receive the

same meaning, which it has in the sale of goods Act. The court also observed that to say that there can only be a pledge of shares when the share certificate is accompanied by a deed of transfer is making the transaction something more than a pledge. Therefore, when a person delivers a share certificate to another to be held by him as security, there is under the law a pledge, which can be enforced. But unless the pledge at the time of the deposit securities a deed of transfer which he can use in the case of necessity or obtains one from his debtor at a later stage, he must have recourse to the court when he wishes to enforce his security. Ans. 2. The issue under consideration in the present case is the law relating to the rights of the pawner. In M.R. Dhawan Vs. Madan Mohan & others, AIR 1969 Del. 313, the Delhi High Court held that “it will be seen that the pawnee acquires a right, after notice, to dispose of the goods pledged. This amounts to his acquiring only a “special property” in the goods pledged.

The general

property therein remains in the and wholly reverts to him on payment of the debt or performance of the promise. Any accretion in the case of dividends, bonus or right shares, issued in respect of the pledged shares will, therefore, be in the absence of any contract to the contrary, the property of the pawner” The general property of the shares pledged thus remains in the pawner and he remains entitled to all the dividends that may be declared on shares and to the bonus and right shares that may be issued in respect of the shares pledged that there is no contract to the contrary. The Delhi High Court in this case also made the distinction between pledge and mortgage. It observed that pledge is a kind of bailment and security. Its primary purpose is to put the goods pledged in the power of the pawnee to reimburse himself for the money advanced, when on becoming due it remains unpaid by selling the goods after serving the pawner with a due notice. The _at no time becomes the owner of the

goods pledged. He has only a right to retain the goods until his claim for the money advanced thereon has been satisfied, with a power to sell the goods pledged, after due notice in case of default by the pawner. It is only a special property in the goods pledged, which is acquired by the pawnee, leaving the general property intact with the pawner. Ans. 3. Mortgage - A mortgage is defined by Section 58 of the Transfer of Property Act, 1882, as “the transfer of an interest in specific immovable property for the purpose of receiving the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability”. The essential future of a mortgage is the transfer of an interest in specific immovable property for the purpose of securing a debt or an obligation. If the transfer is made for any other purpose such as the discharge of a debt, it cannot be called a mortgage.

Moreover, the

immovable property to be mortgaged must be specific, that is, it should be such as can be clearly described. It may be noted here that immovable property referred above, does not include grass, crop or standing timber. Equitable Mortgage – When a loan of money is secured by the deposit of title deeds it is taken as an equitable mortgage, because in such a case not legal transfer of property takes place. In Foster v. Barnard, Lord Haldone said – “The deposit of title deeds – with bankers makes the bankers mortgages in the eye of equity.

Under English law, such a

mortgage gives the mortgage no rights against the property, but only a personal right against its owners. Ans. 4. The issue under consideration in the present case is the law relating to of the Indian Contract Act, 1872. “Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such another person enjoys the benefit thereof, the latter is bound to make

compensation to the former in respect of or to restore, the thing so done or delivered. Example – A fire breaks out in M/s factory. The fire brigade reaches the spot and extinguishes the fire; M is not bound to pay because the act of the fireman was not done with the intention to be paid. The requirements for this rule are that one person should have lawfully done something or delivered something for the benefit of another but with an intention to be paid for it, and the other person should have enjoyed the benefit of it, understanding dearly that the service is being rendered non gratuitously. Doing an illegal act for another will not be covered by this section. Also the section intends that the service should have been rendered without an express request. If a person renders a non-gratuitous service at the request of the beneficiary, this becomes a case of clear contract between the two persons. Further, the beneficiary of the service should not be an incompetent person. Thus the fact that L was the beneficiary does not include him within the ambit of Section 70. The Bank had not done anything on its own for L, and L got the benefit from C and H. Ans. 5. The issue under consideration in the present case is the law relating to set off of certain deposits. A set – off must be in the form ofa cross claim for a liquidated amount and it can be pledged only in respect of a liquidated claim. Both the claims and the set off must be mutual details, due from and to the same parties, under the same right. A claim by a person in representative capacity cannot be set off against a personal claim. Thus if a claims Rs.500 as the balance due to him from his banker, while as trustee of B, A owes to the banker Rs. 300, no set off can be claimed be claimed by the banker. Even a claim against the estate of deceased cannot be set off against a debit, which was due to the customer from his banker, during the farmer

life time, whether the accounts are with one or more offices of the banker, it does not materially affect the position in any way. In case of Joint Account (repayable to either or survivor) the bank cannot set off A debt due from alone against joint debt nor can A set off such a debt against a separate debt due from him to the bank (Nath Bank Limited v. Sisir Kumar Sarkar). The Patna High Court in Radha Raman Choudhary v. Chota Nagpur Banking Association Limited, has also held that the bankers have a right to combine one or more accounts of the same customer. But a Banker cannot combine a customer’s personal account with a joint account of the customer and another person. It is to be noted that – A Banker’s right of set off cannot be exercised after the money in his hands has been validly assigned or in any case after he has been notified of the fact of an assignment. (Official Liquidator K.P.T. Nodar and others). Ans. 6. The banker’s power to combine different accounts is called the right to set off. Between the ordinary debtor and creditor, there is an undoubted right to set off amounts due to and from each other in the ordinary course of business. For ex – A buys cement from B, a trader for Rs. 10,000. Later, A sells to B steel worth Rs.5000/-. B is now perfectly entitled to set off the cost of steal against his liability for cement and need to pay only Rs.5000/- in settlement of the net debt. In the current case there were two partnerships firms functioning under different names but comprising the very same parties. The Bank has now credited the amount of one of the firms into the account of another. In Firm Jaikishan Dass Ram v. Central Bank of India two partnerships firms with same set of partners had two separate accounts with the bank was entitled to appropriate the monies who belong to a firm for payment of an overdraft of another firm. Because although two separate firms are involved they are not two separate legal entitles and cannot be distinguished from the members who compose them. Mutual demands existed between the banks on the one hand and the persons constituting

the firm on the other. Nor it could be said that these demands did not exist between the parties in the same right. In veerapa Chettiar Vs. J.V.Pirrie and others, the claim for setting off an amount due by the bank to the plaintiff and his mother, payable to either or survivor, in respect of an fixed deposit against an account due to the bank by the plaintiff on overdraft account was allowed, on the ground that the fixed deposit amount absolutely belonged to the plaintiffs. Ans. 7. Liquidators – Bankers should always be careful while dealing with persons appointed to wind up the affairs of the companies. A liquidator’s business is to realise the company’s assets and to collect such amounts as may be due to the company from its shareholders and debtors. He has to apply the funds thus collected in payment of the company’s debts and distributes the balance if any, among its shareholders. He has the power to borrow money against the security of the Company’s assets and to draw, accept, make and endorse bills and notes, in the name and on behalf of the company. In the exercise of any such powers, he is free from any personal liability. In Madras Provincial Cooperative Bank Limited Vs. Official Liquidator, South Indian Match Factory Limited the official liquidator of the company did not open an account with the bank as required under the Companies Act and the rules formed by the Madras High Court. A cheque drawn in favour of the official liquidator the bank was put on enquiry and was negligent in paying him personally. The payment was not made in due course within the meaning of Section 85 of the Negotiable Instruments Act and the bank was therefore liable for the amount. Ans. 8. In the current case, Bank had granted an overdraft to R on the security of a fixed deposit in his sons’s name with a firm of bankers. The son had given the fixed deposit receipt to Bank alongwith a letter authorizing it to collect the amount on maturity and appropriate towards the over draft. He gave the bank another letter addressed to the firm asking it to pay to the bank the amount of the deposit and the interest thereon. On the due

date, when the bank asked for payment, the firm refused to pay saying that the amount, the firm refused to pay saying that the amount had been adjusted against a debt to it from the depositor. In official liquidator, Hanuman Bank Ltd. Vs. K.P.T. Nadar and others that a bankers right of set off cannot be exercised after the money n his hands has been validly assigned or in any case after he has been notified of the fact if an assignment. Rule of set off in bankruptcy does not rest on the same principle as the right to set off between solvent parties. (I.S. and C. Machado V. Official Liquidator). Ans. 9. Bailor

- Bailee Relation – one of the many services offered by a

commercial bank is called safe custody facility. Bank accepts from its customers sealed boxes and packets for safe custody. In most of the cases the banker can open such safe custody articles, boxes or packets only as per the instructions of the person who deposits the same for safe custody. A customer can chose to keep with his bank his last will and tesament. In such a case he may also instruct his bank to open the packet on receipt of the notice or knowledge of his death. And if in the will the bank is appointed by the deceased as his executor or trustee the bank will have to take care of the assets of the deceased and execute the wil in toto. The Supreme Court of India in united commercial Bank V. Hem Chandra Sarkar decided the question of law, whether in the circumstances of the case the appellant bank was an agent of the respondent or bailee in respect of goods entrusted for delivery to the respondent against payment. The law of bailment is explained in the Indian Contract Act, Section 148. A bailment is the delivery of goods by one person to another for some purpose, upon a contract, that they shall, when the purpose is

accomplished, be returned or otherwise disposed of according to the directions of the person delivering them.

Module No. VII & VIII Advances, Loans and Securities

Ans.1. Hypothecation – Hypothecation is another method of creating a charge over the movable assets, neither ownership nor possession of goods is transferred to the creditor but an equitable charge is created in favour of the latter. The goods remain in the possession of the borrower, who binds himself, under an agreement, to give the possession for the goods to the banker, whenever the latter requires him to do so. The charge of hypothecation is thus converted into that of a pledge and the banker or the hypothecatee enjoys the powers and rights of a pledgee. In Gopal Singh Hira Singh Vs. Punjab National Bank, the Delhi High Court observed that in case of hypothecation, the borrower is in actual physical possession but the constructive possession is still of the bank because, according to the deed of hypothecation, the borrower holds the actual physical possession not in his own right as the owner of the goods but as the agent of the bank. Hypothecation is convenient device to create a charge over the movable assets in circumstances in which transfer of possession is either inconvenient or impractical. According to a recent judgment of the Andhra Pradesh High Court it is open to the bank to take possession of the hypothecated property on its own or through the court as per Hypothecation Agreement. Where there is any specific clause in the Hypothecation Agreement empowering the hypothecatee to take possession of the goods and sell the same in the event of default in payment, the hypothecatee can process ahead. Without the intervention of the Court. (State Bank of India vs. S.B.Shah Ali) In State Bank of India Vs. Quality Bread Factory, cash credit facility was given by the bank on open credit system. Hypothecated goods were lost

by the negligence of the bank. The Court held that it has not been laid down in the contract Act that this principle applies only to the pledges and not to the hypothecations.

Therefore, the law regarding discharge of

surety as laid down in Section 141 applies equally to open credit system. The bank as a pledgee therefore should keep requisite vigilance on the debtor both in the “lock and key” system and “open credit system” in order to protect himself and the surety against the illegal actions of the debtor. Ans. 2. The issue under consideration in the present case is the low relating to contract of guarantee. Section 126 of the Indian contract Act, 1872 defines a contract of guarantee as” “a contract to perform the promise, in discharge the liability, of a third person in case of his default”. The person giving the loan is known as the creditor, the principle taking the loan is known as the Creditor, and the person giving the guarantee is known as the surety. In Punjab National Bank Vs. Mehra Brothers (in liquidation), the debtor company went into liquidation. The bank filed a suit against the company in liquidation and three guarantors. The banks claim was admitted by the official liquidator.

The bank later decided to proceed against the

guarantors and not the company.

It was contended on behalf of the

guarantors that since the claim of the bank had been admitted by the Official Liquidator, the bank could not proceed against the guarantors. The Calcutta High Court held that the Bank could proceed against the guarantors as the bank filed a suit not only against the principal debtor but also against the guarantors and by preferring the claim before the official liquidator the bank had not foregone its right to proceed against the guarantors. On behalf of the Bank it was contended that Section 137 of the Contract Act provides that more forbearance on the part of the creditor to sue the principal debtor or to enforce any remedy against him does not, in the absence of any provision in the guarantee to the contrary

discharge the surety. Reliance was placed on Supreme Court decision in Bank of Bihar Limited Vs. Damodar Parsad and another. The Calcutta High Court observed that in view of Section 137 of the Contract Act and also in view of various judgments on the point, the surety’s liability towards the creditor remains unaffected, even when the creditor was chosen not to sue the principal debtor. Ans. 3. The issue under consideration in the present case is the law relating to Garnishee order. The obligation of a banker to honour his customer’s cheques is extinguished on receipt of an order of the court, known as the Garnishee order, issued under order 21, Rule 46 of the Code of Civil Procedure, 1908. If a debtor fails to pay the debt owed by him to his creditors, the latter may apply to court for the issue of a Garnishee order on the banker of his debtor. Such order attaches the debts not secured by a negotiable instrument, by prohibiting the creditor from recovering the debt and the debtor from making payment thereof. The account of the customer with the banker, thus becomes suspended and the banker is under an obligation not to make any payment thereof. The account of the customer with the banker, thus cannot be debited. The creditor at whose request the order is issued is called the judgment – creditor, the debtor whose money is frozen is called judgment debtor and the banker who is the debtor of the judgment debtor is called the Ganrishee. The Herschorn Vs. Evans, where there was a joint account in the name of husband and wife it was held that the joint account could not be garnished in execution of a decree obtained against the husbands alone. It is not for the banker, however, to question the propriety of the court’s order nor can he, as a garnishee, be compelled to adjudicate upon conflicting equities.

Thus, Garnishee order is a useful tool in the hand of the creditor, who cannot realise his money from the debtor. Ans. 4. The issue under consideration in the present case is the law relating to pledge. Section 172 If the Indian Contract Act defines pledge as follows: “The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. The bailor is in this case called “pawnor”. The bailee is called “ pawnee”.

So, a borrower of money after furnishing a security is a bailor or pawnor or pledger. The lender of money would be the bailee, pawnee or pledgee. The lender takes the goods as security to ensure the return of his money in time or else he would be able to sell them to recover a part or whole of his money. Thus, the pledgee acquires a special interest in the goods whereas the general interest remains with the pledger. It may also be noted that pledge involves only movable goods, which may include any physical item, or document which pledger considers as valuable documents of title, like railway receipt etc can also be pledged. It is necessary for creation of pledge that the goods are delivered, through actual or constructive delivery, to the pledgee. Pledgee’s Liability – where the bank is the pledgee of the goods or is in possession of the goods and assets of the borrower, it has the obligation to retrun the same on demand against payment of debt and if it fails to do so it will be liable in damages. (Lallan Parsad Vs. Rahmat Ali) A person borrowed moneys from bank, executed a promissory note and endorsed a railway receipt in favour of the bank as security.

The

combined effect of these transactions was that the Bank would remain in control of the goods till the debt was discharged (Morvi Mercantile Bank Vs. Union of India).

A person borrowed money from the bank and pledged certain goods. The government seized the goods, sold it and sought to distribute the money to the creditor. It was held that the bank being a pledgee has priority over other claimants on the sale proceeds for payment of its claim against the borrower. (Bank of Bihar Vs. State of Bihar). A banker is bound to take the same core of the property pledged or entrusted to it as a reasonable prudent and careful man may fairly be expected to take in respect of his own property of the like description (UCO Bank Vs. Hem Chandra Sarkar). Ans. 5. Hire Purchase Finance – A banker is very often approached to finance what is known as a hire purchase agreement, in which the owner of the article / movable property hires it to another known as the hirer on an understanding that on the hirer paying the owner a specified number of fixed installments, the property would be transferred by the owner to the hirer who then becomes the owner of the property. The essential feature of this form of a contract is that although the trader undertakes to hire the goods to the customer for a fixed term and to transfer the property to him when all installments of hire rental have been paid, the customer on his part does not bind himself to continue the hiring for longer then he wishes and therefore undertakes no obligation to buy the goods under the English Law the benefit of a hire purchase agreement can be assigned but the assignee gets the same title as the hirer i.e. he stands on the same footing as the hirer. Even the Indian Law has sought to confer the right of assign mention the hirer.

The Hire – Purchase Act, 1972 governs the hire purchase

transactions in India. Ans. 6. Book Debts - A banker sometimes gives an advance to a customer on the basis of assignment of debts either due or accruing due to the latter. For example the assignor – customer may be expecting to receive money

either for goods sold or services rendered, or he may be due to receive money under a will. These debts, which are due to him, the customer may assign to the banker against the loan advanced to him.

Generally,

bankers do not like to advance money against book debts, because these transactions are brought with risk. Form of Assignment - A assignment must be in writing and signed by the assignor.

There is no particular format to be followed, only an

intention on part of the assignor to pass on his interest to the assignee, should clearly be manifested whatever the words used i.e. be it may in the form of an order or in the form of a request it is immaterial. Consideration not essential – An assignment may be by way of gift or otherwise and no separate consideration is necessary to support the assignment.

Once the debtor pays off his debt to a third party on a

direction from his creditor, he is entitled to a valid discharge irrespective of whether there was any consideration as between the creditor and third party or not. Ans. 7. Assignment of pronote in favour of the bank – In chandrashekara Goude Vs.

Canara Bank and others the loan was

advanced by the firm under the hire purchase agreement for purchase of vehicle. The borrower executed a pronote in favour of the firm advancing the money. The firm assigned the promissory note to bank but not the loan covered by the hire purchase agreement. The court held that it is an elementary principle of law that unless the actionable claim covered by the hire purchase agreement was transferred in favour of the bank, the bank had no locus standi to bring a suit against the borrower only on the basis of the collateral security executed by them by way of pronote,unless the loan was transferred as contemplated under section 130 of the Transfer of Property Act. Assignment of Fund - In Bharat Nidhi Limited Vs. Takhatmat the bank advanced money to the borrower against the bills of military and other authorities. The borrower gave an irrevocable power of attorney in favour

of the bank to present and obtain the payment of bills. The borrower endorsed one bill in favour of the bank as: “Please pay to the Bharat Bank Limited, Jabalpur” and handed over the bill to the bank for collection. The bank forwarded the bill to military authorities. But before the bank received the payment on T attached the amount due under the bill in execution of a money decree against the borrower. The Supreme Court held that under the power of attorney there was an agreement between the lender and the borrowers that the debt due the lender would be paid out of the specific fund. The power of attorney coupled with endorsement as amounted to assignment of the fund and it is not revocable. Ans. 8. The issue under consideration in the present case is the law relating to mortgage. Section 58 of the Transfer of Property Act, 1882 defines mortgage as under: (a)

A mortgage is the transfer of an interest in specific immovable

property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement, which may give rise to pecuniary liabilities. The transferor is called a mortgagor, the transferee a mortgagee, the principal monies and interest of which payment is secured for the time being are called the mortgage money, and the instrument by which the transfer is effected is called a mortgage debt. (b)

Simple mortgage - Where, without delivering possession of the

mortgaged property, the mortgager binds himself personally to pay the mortgage money, and agrees expressly or impliedly, that in the event of his failing to pay according to his contract, the mortgagee shall have a right to cause the mortgage property to be sold and all the proceeds of sale to be applied, so far as may be necessary, in payment of the

mortgage money, the transaction is called a simple mortgage and the mortgagee a simple mortgagee. (c)

Mortgage by conditional sale - Where the mortgagor ostensibly

sells the mortgaged property – on condition that on default of payment of the mortgage money on a certain date the sale shall become absolute, or on condition that on such payment being made the sale shall become void. (d)

Usfructory mortgage when the mortgagor delivers possession on

expressly or by implication binds himself to deliver possession of the mortgaged property to the mortgagee, and authorizes him to retain such possession until payment of the mortgage money, and to received the rends and profits accruing from the property or any part of such rents and profits and to appropriate the same in lieu of interest, or in payment of the mortgage money, or partly in lieu of interest and partly in lieu of interest money, the transaction is called a Usfructory mortgage and the mortgagee a Usfructory mortgagee. (e)

English mortgage - Where the mortgagor binds himself to repay

the mortgage money on a certain date, and transfers the mortgaged property absolutely to the mortgage, but subject to the proviso that he will retransfer it to the mortgagor upon payment of the mortgage –money as agreed the transaction is called an English mortgage. (f)

Anomalous Mortgage – A mortgage which is not a simple

mortgage, a mortgage by conditional sale, an English mortgage or a mortgage by deposit of title deed within the meaning of this section is called anomalous mortgage.

Module No. IX Procedural Aspects of Banking Law

Ans. 1. Garnishee order – If a debtor fails to pay the debt owed by him to his creditor, the latter may apply to the court for the issue of a Garnishee order on the banker by his debtor. Such order attaches the debts not secured by a negotiable instrument, by prohibiting the creditor from recovering the debt and the debtor from making payment thereof. A Garnishee order is issued under order 21, Rule 46 of the code of Civil Procedure, 1908. The account of the customer with the banker, thus becomes suspended and the banker is under an obligation not to make any payment from the account concerned after the

receipt of the

Garnishee order. The creditor at whose request the order is issued is called the judgment creditor, the debtor whose money is frozen is called judgment debtor and the banker who is the banker of the judgment debtor is called the Garnishee. The suspended account may be revived after payment has been made to the judgment creditor as per the directions of the court. The following points are to be noted in this connection – (1)

The Amount Attached by the order - A garnishee order may attach

either the entire amount of the judgment debtor with the banker irrespective of the amount which the judgment – debtor owes to the creditor or a specified amount only which is sufficient to meet the creditor’s claim from the judgment debtor. (2)

The order of the court restrains the banker from paying the debts

due or accruing due. The words “accruing due’ mean the debts which are not payable but for the payment of which an obligation exists.

If the

account is overdrawn, the banker owes no money to the customer and hence the court order ceases to be effective.

(3)

The Garnishee order may be served on the Head Office of the bank

concerned and it will be treated as sufficient notice to all of its branches. However, the head office is given reasonable time to intimate all concerned branches.

If the branch office makes payment out of the

customer’s account before the receipt of such intimation, the banker will not be held responsible for such payment. (4)

In case of cheques presented to the paying banker through the

clearing house, the effectiveness of the Garnishee order depends upon the fact whether the time for returning the dishonoured cheques to the collecting banker has expired or not.

Every drawee bank is given

specified time within which it has to return the unpaid cheques, if any, to the collecting bank. If such time has not expired and in the meanwhile the bank receives a garnishee order, it may return the cheque dishonoured. But if the order is received after such time is over, the payment is deemed to have been made by the paying banker and the order shall not be applicable to such amount. (5)

The Garnishee order can attach the amounts deposited into the

customer’s account after the Garnishee order has been served on the banker. A Garnishee order applies to the current balance at the time the order is served, it has no prospective operation. Bankers usually open a new account in the name of the customer for such purpose. Rights of Attaching Creditor - When the garnishee deposits the attached amount in the court, the attaching creditor becomes a secured creditor. In Rikhabchand Mohanlal Surana

Vs.

The Sholapur Spinning and

Weaving Co. Ltd., the High Court held that – “when the attachment is only by a prohibitory order then the attaching creditor has no right in the property attached, but once the property or moneys come into the possession of the court, then it would follow that they are constructively held by the court for the attaching creditor. The court does not hold the money for the debtor more so when the garnishee obtains complete discharges by making payment in court.

Ans. 2. The issue under consideration in the present case is the law relating to Banker’s duty of secrecy. As the disclosure of matters relative to the customer’s financial position may do considerable harm to his credit and business, the banker should take scrupulous care not to disclose the state of his customer’s account. It is a recognised fact that the banker must not disclose the condition of his customer’s account except on reasonable and proper occasions and the obligation to observe secrecy does not end even with closing of the customer’s account. When disclosure is justified – It is an implied term of the contract between a banker and his customer that the former will not divulge to third persons, without the express or implied consent of the latter, the state of his accounts. For instance, in cases where the customer has given his banker as a reference, the latter will be fully justified in answering all the trade references invited by the customer. The banking companies are required to make certain disclosures under these enactments – (1)

Banker’s Book Evidence Act, 1891, Section 4.

The Act allows

certified copies of the entries to be produced in legal proceedings in which the bank is not a party. (2)

The Reserve Bank of India Act, 1934, Section 45B empowers the

Reserve Bank to collect credit information from banking companies. The Reserve Bank may furnish such information to any other banking company in accordance with Section 45D. (3)

The Banking Regulation Act, 1949, Section 26 requires every

banking company to submit a return of unclaimed deposits to the Reserve Bank within 30 days of the close of each calander year.

(4)

The Companies Act, 1956 Sections 235 and 237 empower the

Central Government to appoint inspectors to investigate the affairs of any company.

Under Section 240, it should be the duty of all officers,

employees and agents of the company to produce all books and papers of or relating to the company and give to the inspectors all assistance in connection with the investigation which they are reasonably able to give. Ans.3. Overdraft - Sometimes it may happen that a customer might need a temporary accommodation i.e. he may need to withdraw more money then what his account actually holds. In such cases the bank may allow him to overdraw from his current account, usually against collateral securities. This arrangement like the one above is advantageous from the customer’s viewpoint because he is required to pay interest only on the amount actually drawn by him. The basic difference between on overdraft and a cash credit is that the former is deemed to be a kind of a bank credit to be used only occasionally whereas the latter is generally used for long-term loans by commercial and industrial concerns doing regular business. In Indian Overseas Bank, Madras

Vs. Naranprasad Govindlal Patel,

Ahmedabad, it was observed by the Gujarat High Court that, “an arrangement of overdraft between a bank and its customers is a contract and it cannot be terminated unilaterally by bank. Merely because the client was not required to execute any document or to furnish any security would not made such an arrangement an act of grace on behalf of the bank. Such an arrangement even though temporary is not one which can be terminated unilaterally and at the sweet will of the bank without giving notice to its customers. Ans. 4. Garnishee order of the court restrains the banker from paying the debts due or accruing due. The words ‘accruing due’ mean the debts which are not payable but for the payment of which an obligation exists.

If the

account is overdrawn, the banker owes no money to the customer and

hence the court order cases to be effective. A bank is not a garnishee with respect to the unutilized portion of the overdraft of cash credit facility sanctioned to its customer and such unutilized portion of cash credit or overdraft facility cannot be said to be an amount due from the bank to its customers. The above decision was given by the Karnataka High Court in Canara Bank Vs. Regional Provident Fund Commissioner. In this case the Regional Provident Fund Commissioner wanted to recover the arrears of provident fund contributions from the defaulters bankers out of the unutilized portion of cash credit facility. Rejecting this claim, the High Court held that the bank cannot be termed as a garnishee of such unutilized portion of cash credit, as the banker’s position is that of creditor. In the current case, the garnishee appeared in court, in response to the letter and filed a counter – affidavit. It was held that the same could be treated as “objections” contemplated by order 21, rule 46C of CPC, 1908, even though a formal notice under order 21, rule 46 A had not been issued. Hence the court has a duty under order 21, rule 46C to direct that the disputed question be tried as an issue and to decide the issue. (Executive Engineer, R.S.E. Board Vs. I.H. Sharma AIR 1988 Ker. 285). Ans. 5. Fixed Deposits and Banker’s Lien – The bank is a debtor, in respect of the money in fixed deposit. It has no right to press into service of the doctrine of “banker’s lien” and to retain the money in fixed deposit. There is no question of the bank exercising the ‘lien’ for the purpose of retaining the money in fixed deposit, according to the fixed deposit. [Union Bank of India Vs. R.V. Venugopalan] According to the view of Kerala High Court, money lodged with banks as fixed deposits is a loan to the bank. The banker in connection with the ‘fixed deposit’ is a debtor. Accordingly, the depositor would cease to be the owner of the money in fixed deposit. The said money becomes the money of the bank, enabling the bank to do as it likes, subject however, to banker’s obligations to repay the debt on maturity.

Money in fixed deposit, therefore, constitutes a debt against the banker and a debt cannot be a suitable subject for lien because a lien is a right recognised in a creditor to retain another man’s property until the debt is paid. Set off by the Banker – Banker has the right to set off the account against another. [United Bank of India Vs. Venugopalan AIR 1990 Ker.223) Ans. 6. Contingent and Future Debts – If the money is payable to the judgment debtor only on a certain contingency, then the decree holder would be subject to the some disability as his judgment debtor, and has to wait tillt he happening of that contingency. (K.J. Jung Vs. Mohd. Ali, AIR 1972 A.P 70) The principle is that there must be money due to the judgment debtor. Thus, if a builder is paid only on the certificate if the architect, the amount does not become due to the builder until the certificate is obtained (Dunlop & Ranken Ltd. Hendall Steel Structures Ltd. (1957) 1 All ER 347. A mere cause of action which has not ripened into a debt cannot be attached. It follows that if a deed has been already assigned by the judgment debtor, it cannot be attached. There is, however, a distinction between (1) he case where there is an existing debt, though its payment is deferred, and (ii) the case where both the debt and its payment rest in the future. In the former case, the debt is attached. In the latter it is not. The fact that the amount of the debt due all accruing is not ascertained does not prevent a garnishee order nisi from being made. Ans. 7. If the money is payable to the judgment debtor only on a certain contingency, then the decree holder would be subject to the same disability as his judgment debtor, and has to wait till the happening of that contingency. (K.L. Jung Vs. Mohd. Ali AIR 1972 AP 70). The principle is that there must be money due to the judgment debtor.

A Bankers garnishee order may not be operative in respect of deposits in the bank made subsequent to the service of the order. Such deposits do not constitute “debts” due from bank at the time of the order. The income – tax authorities cannot freeze an overdraft of account by order or order the bank to pat them the difference between the limit of overdraft allowed and the amount overdrawn. An unjustified overdraft account does not render the banker a debtor in any sense. Floating charge - When proceeds of goods are under a bank’s floating charge, garnishee proceedings are not possible for the recovery of the assessee’s does from the purchased.

(Jay Engg. Works Ltd.

V.

Syndicate Bank Ltd. (1981) Tax L.R. (Notice of contravention) 173 (Col.)). Ans.8. The Garnishee order does not apply to: (1)

The amounts of cheques, drafts, bills, etc. sent for collection by the

customer which remain uncleared at the time of the receipt of the order. (2)

The sale proceeds of the customer’s securities eg. Stocks and

shares in the process of sale, which have not been received by the banker. In such cases, the banker acts, as the agent for the cases, the banker acts as the agent for the customer for the collection of the cheques or for the sale of the securities and the amounts in respect of the same are not debts due by the banker to the customer, until they are actually received by the banker and credited to the customer’s account. But if the amount of such uncleared cheque etc. is credited to the customer’s account, the position if the banker changes and the garnishee debtor are applicable to the amount of such uncleared cheques. The Garnishee order cannot attach the amounts deposited into the customers account after the garnishee order has been served on the banker. A Garnishee order applies to the current balance at the time the order is served, it has no prospective operation. Banker’s usually open a new account in the name of the customer for such purpose.

Set off by the Banker - Banker has the right to set off one account against another. Set off cannot be claimed in respect of an amount becoming due to the bank after the attachment. Ans. 9. Provision in the code of Criminal Procedure, 1973 - In criminal proceedings, the power of the court to issue summons to produce a document or other thing is governed by section 91 of the code of Criminal Procedure,1973 Sub Section (1) of that section gives power to the court or an officer in charge if a police station for the specified purpose. When the court or the officer mentioned above considers that the production if any document or other thing is necessary or desirable for the purposes of any investigation, inquiry, trial or other proceedings under this code by or before such court or officer, such court may issue summons, or such officer a written order, to the person in whose possession or power such document or thing is believed to be, requiring him to attend and produce it, or to produced it, at the time and place stated in the summons or order. Section 91(3) of the code provides that nothing in the section shall be deemed to effect the Banker’s Books Evidence Act, 1891. The main object if the Act of 1891 is to avoid disturbance of the business of banking and inconvenience to the large number of customers who have to transact business with banks. Ans. 10. The issue under, consideration in the present case is the law relating to future debts.

The cheque, in this case was payable only after the

retirement from service. If the money is payable to the judgment debtor only on a certain contingency, then the decree holder would be subject to the same disability as his judgment debtor, and has to wait till the happenning of

that contingency.

(Shanti Prasad V. Director of Enforcement).

The

principle is that there must be money due to the judgment debtor. Thus, if a builder is paid only on the certificate of the architect, then the amount does not become due to the builder until the certificate is obtained. (Dunlop and Ranken Ltd. V. Hendall Steel Structures Limited. It follows that if a debt has already been assigned by the judgment debtor, it cannot be attached. There is, however, a distinction between (i) the case where there is an existing debt, though its payment is deferred, and (ii) the case where both the payment and the debt rest in the future. In the former case, the debt is attached, in the latter case, it is not. Insurance Committee).

(O, Driscoll V. Manchester

The fact that the amount of the debt due or

accruing, is not ascertained, does not prevent a garnishee order nisi from being made. (Demurrage Pass V. Capital and Industrial Corporation). Joint Judgment – If there is a joint judgment against two or more persons, the decree holder can attach a debt owing to any of those judgment debtors. (Miller Vs. Myhn, (1859) 28 L.J. O.B. 324).