I.

Short Q&A

1). Banking

As per section 5(b) of Banking Regulation Act, 1949, the term banking
is characterized as the acceptance of deposits of money from the public,
repayable on demand or otherwise, for the purpose of lending or investment,
and withdrawals by cheque, draft, order or otherwise.

Section 5(c) of the Banking Regulation Act, 1949 defines “Banking

Company” as any company that carries out the banking business in India.

As per Section 5(d) of the Banking Regulation Act, 1949 Company

means any company as defined in Section 3 of the Companies Act, 1956 and
includes a foreign company within the meaning of Section 591 of that Act.

The RBI defines a modern bank as “An establishment for the custody of
money received from, or on behalf of, its customer. It is essential duty is to
pay their drafts on it, its profit arises from the use of the money left
unemployment by them. Banks organize the borrowing and lending work
(credit) of the community, they lend their funds (capital) and borrowed funds
and their own credit to person engaged in trade, agriculture, manufacturing
and other industries. They supply a part of the medium of exchange in the
form of bank notes, cheques.”

2). Fiduciary Relationship (*)

3).Rights of banker against Surety

4).Travelers Cheque(*)

5).Holder in due Course

In banking law, a holder in due course (HDC) is a person who receives a

negotiable instrument, such as a check or promissory note, in good faith and
for consideration. The HDC must meet the following criteria to be considered
such:
 The instrument must be payable to bearer or order
 The HDC must receive the instrument before it becomes overdue
 The HDC must not have been notified that the title of the person they
received the instrument from was defective
 The HDC must receive the instrument without any notice or suspicion
that it is overdue or was previously dishonoured

6). Paying Banker

 While modern banking has many aspects and the range of activities of
clearing banks today is very broad, the payment and processing of cheques
are still a central and fundamental feature.

Paying banker refers to the banker who holds the cheques of the
drawer and is obliged to make payment if the funds of the customer are
sufficient to cover the amount of his cheque drawn.

The paying banker is the banker who cancels the signature of the
drawer on payment of the cheque either by the usual means of authorizing a
drawer’s signature or by any method that the bank takes, which also reflects
the point of payment. In some cases, cheques are paid by stamping the
cheques “Paid”, usually with the date being included in the stamped crossing,
or by perforating the payment date onto the cheque.

As paying banker, the banker is obligated to accept the customer’s

check if it is valid and if it is issued by the holder in its original form within a
reasonable period of time and before the banker has provided orders to stop
paying or receiving notice of the death of the customer, etc., and if sufficient
funds are available to the customer’s account and that balance is available to
the banker.

7). Set-off

It is the agreement between the creditor and a debtor wherein the

bank/creditor has the legal right to seize the debtor’s deposit in case of the
loan has defaulted. The set off clause is written in the legal agreement.

In simple words, set off in banking is a mutual agreement wherein the

customer's current deposit or bank account can be seized in case the loan
amount is not returned. This clause is used by businesses and manufacturers
as well. This protects the sellers to protect them from a default by a buyer.

Take a look at the example below to further understand what is right to

set off in banking.

Let's assume, you have a credit account in the bank with rs.500 deposited.

You have taken a loan of 100 rupees from the bank in your debit account.

You have willfully defaulted on your loan payment.

Under the set off clause, the bank can seize your credit account and seize a
percentage of the sum (% of rs.500) or the entire sum (Rs.500).

8).Letters of Credit
 Letter of Credit (LC) is a document that guarantees the buyer’s
payment to the sellers. It is issued by a bank and ensures timely and full
payment to the seller. If the buyer is unable to make such a payment, the
bank covers the full or the remaining amount on behalf of the buyer.

A letter of credit is issued against a pledge of securities or cash. Banks

typically collect a fee, ie, a percentage of the size/amount of the letter of
credit.

Importance of Letters of Credit

Since the nature of international trade includes factors such as

distance, different laws in each country and the lack of personal contact
during international trade, letters of credit make a reliable payment
mechanism. The ‘International Chamber of Commerce Uniform Customs and
Practice for Documentary Credits’ oversees letters of credit used in
international transactions.

Parties to a Letter of Credit

 Applicant (importer) requests the bank to issue the LC.

 Issuing bank (importer’s bank which issues the LC [also known as the
Opening banker of LC]).
 Beneficiary (exporter).

Types of a Letter of Credit

The letters of credit can be divided into the following categories:

Sight Credit

Under this LC, documents are payable at the sight/ upon presentation
of the correct documentation. For example, a businessman can present a bill
of exchange to a lender along with a sight letter of credit and take the
necessary funds right away. A sight letter of credit is more immediate than
other forms of letters of credit.

Acceptance Credit/ Time Credit

The Bills of Exchange which are drawn and payable after a period, are
called usance bills. Under acceptance credit, these usance bills are accepted
upon presentation and eventually honoured on their respective due dates.
For example, a company purchases materials from a supplier and receives
the goods on the same day. The bill will be delivered with the shipment of
goods, but the company may have up to 30 days to pay it. This 30 day period
marks the usance for the sale.
Revocable and Irrevocable Credit

A revocable LC is a credit, the terms and conditions of which can be

amended/ cancelled by the Issuing Bank. This cancellation can be done
without prior notice to the beneficiaries. An irrevocable credit is a credit, the
terms and conditions of which can neither be amended nor cancelled. Hence,
the opening bank is bound by the commitments given in the LC.

Confirmed Credit

Only irrevocable LC can be confirmed. A confirmed LC is one when a

banker other than the Issuing bank, adds its own confirmation to the credit. In
case of confirmed LCs, the beneficiary’s bank would submit the documents to
the confirming banker.

Back-to-Back credit: In a back to back credit, the exporter (the

beneficiary) requests his banker to issue an LC in favour of his supplier to
procure raw materials, goods on the basis of the export LC received by him.
This type of LC is known as Back-to-Back credit.

Example: An Indian exporter receives an export LC from his overseas

client in the Netherlands. The Indian exporter approaches his banker with a
request to issue an LC in favour of his local supplier of raw materials. The
bank issues an LC backed by the export LC.

Transferable Credit: While an LC is not a negotiable instrument, the

Bills of Exchange drawn under it are negotiable. A Transferable Credit is one
in which a beneficiary can transfer his rights to third parties. Such LC should
clearly indicate that it is a ‘Transferable’ LC.

9).Private Sector banks

Private sector banks in India are banks where private individuals or

organizations own more than 50% of the shares. They are registered under the
Companies Act of 2013 and their main goal is to maximize profits. Private sector
banks entered the Indian market after public sector banks due to reforms in
1991, but have gained popularity due to their customer service and
technological advancements. Some examples of private sector banks in India
include HDFC Bank (1994) and Kotak Mahindra Bank (2003).

Key Difference Between Public Sector and Private Sector Banks

Parameters Public Sector Banks Private Sector Banks

Objective Prioritises social objectives Aims to maximise profits.

 and public welfare.

Controlling Authority Governed by the government. Controlled by private companies

or individuals.

Governing Act/Law Formed by legislation in Registered under the Indian

parliament. Companies Act.

Customer Base Generally has a larger Usually has a smaller customer

customer base. base.

Share in Industry It holds almost 59% of the It holds only 34% of the total
total market share in India,in market share in India, in terms of
terms of deposit. deposit.

Foreign Direct It allows up to 20% FDI. It allows up to 74% FDI with

Investment (FDI) restrictions on control and
ownership.

Number of Banks There are 12 public sector There are 21 private sector banks
banks in India. in India.

Pension They provide pensions to No pension scheme for

employees. employees.

10).Social banking

Social banking in India is a concept that challenges the traditional role of

banks and financial institutions by promoting activities that meet the needs of
the masses and provide funds for social programs. It's a shift from "class
banking" to "mass banking" and is connected to the social responsibilities of all
organizations.

Social banking can also involve developing strategies to reach the rural
poor and unbanked, and building long-term relationships with clients to
understand their economic activities and risks.

Difference between CRR & SLR

Both CRR and SLR are the essential components of the monetary
policy. However, there are a few differences between them. The following
table gives a glimpse into the dissimilarities:

Statutory Liquidity Ratio (SLR) Cash Reserve Ratio (CRR)

In the case of SLR, banks are The CRR requires banks to have
asked to have reserves of liquid only cash reserves with the RBI
assets, which include cash,
 government securities and gold.

Banks earn returns on money Banks don’t earn returns on money

parked as SLR parked as CRR

SLR is used to control the bank’s The Central Bank controls the
leverage for credit expansion. It liquidity in the Banking system
ensures the solvency of banks through CRR

In the case of SLR, the securities

are kept with the banks In CRR, the cash reserve is
themselves, which they need to maintained by the banks with the
maintain in the form of liquid Reserve Bank of India
assets.

11).Circular Notes

12).Conversion

13).Postal Orders

14).Material Alteration

15).General Lien

16).Imperial Bank of India

17).Promissory Note

18).Clayton’s Rule

Appropriation means ‘application’ of payments. In case of a creditor and

a debtor, Section 59 to 61 of the Indian Contract Act, 1872, lay down certain
rules regarding the Appropriation of payments. When a debtor pays an
amount to the creditor, the creditor is to take note of these sections before
applying the payment to a particular debt, because the creditor would be
inclined to appropriate payments to the debt which is not likely to be realized
easily. In case both parties do not specify the appropriation then the law
would take the responsibility and appropriate accordingly.

Appropriation of Payments by Debtor:

Under Sec. 59 of the Indian Contract Act, 1872, it is stated that if the
debtor owes several debts to the creditor, and makes a payment to any of
them and later requests the creditor to apply the payment to the discharge of
a particular debt. If the creditor agrees to this request, he is bound by such
appropriation. This section applies to several distinct debts and not to a
single debt, or to various heads of one debt. This is not applicable where the
debt has merged into a decree. The appropriation may be implied or
expressed by the creditor. The basic idea is that “When money is paid, it is to
be applied according to express the will of the payer and not the receiver. If
the party to whom the money is offered does not agree to apply it according
to the will of the party offering it, he must refuse it and stand upon the rights
which the law has given him”.

Clayton’s Rule of Appropriation of Payments:

In England, it has been considered a basic rule since the case

of Devaynes vs Noble, also known as Clayton’s case. In this, it was held that
the debtor can request the creditor to appropriate the amount to any of the
debt in case he owes to the creditor several and distinct debts, if the creditor
agrees to it, then he is bound by it.

In the Devaynes vs Noble[1] case, a partner in a banking firm died. The

surviving partners continued to trade without making any changes. They later
fell into bankruptcy. Creditors of the bank at the date of the death still traded
with the bank with varying changes in their banking accounts. So, it was held
that: The fact that they continued to trade with the continuing partners did not
discharge the estate of the deceased partner. The Judge Grant MR said: ‘I
apprehend by the general mercantile law, a partnership contract is several as
well as joint. That may probably be the reason why courts of equity have
considered joint contracts of this sort, that is joint in form, as standing on a
different footing from others.’

19).CRR

20).Crossed Cheque

21).Advances against Shares

22).SLR

23).Internet and Mobile banking

24).Concepts of NEFT and RTGS

25).Over Draft
An overdraft is a type of loan that occurs when a bank account holder
withdraws more money than is in their account, and the bank allows the
transaction to go through. This can happen for a number of reasons,
including: Checks, In-person withdrawals, Debit card purchases, ATM
withdrawals, and Other electronic means.
For example, if Mary buys cosmetics for Rs.2,000 with a check, and the check is
deposited when Mary's account only has Rs.1,500, Mary is overdrawn by
Rs.500.
Overdrafts usually come with a charge, and the interest rate is typically no more
than 2% above the base rate. The interest must be paid back within a certain
time frame, usually 12 months or less, so an overdraft is considered a short-
term loan. It's important to repay overdrafts on time, as late payments can
negatively impact your credit score.

26).Implied Pledge

In banking, an implied pledge is a banker's lien, which is a legal right that

allows a bank to keep a customer's property or assets until the customer pays
off their debts. A banker's lien can be used to secure any type of debt, including
loans, credit card bills, and overdrafts.

A banker's lien differs from a pledge in that a lien only gives the creditor
the right to keep the goods until the loan is repaid, while a pledge gives the
creditor the right to sell the property. However, a banker can sell property after
giving reasonable notice if it comes into their possession in the ordinary course
of business. This allows the bank to fully adjust the liability.

27).Termination of Relationship

28).Crossing Cheques

29).Dishonour of Cheques

30).pecuniary and Territorial jurisdiction

31).Paying banker

A paying banker is a banker who holds a customer's checks and is

responsible for paying them if the customer's account has enough funds. The
banker has an obligation to honor the checks if they are valid, issued by the
holder within a given period, and presented for payment. The banker's
responsibilities include: Honoring checks, Taking precautions when honoring
checks, Refusing payment on checks for certain reasons, Exercising care during
collection, and Notifying customers of dishonored checks

32).Collecting Banker

34).SARFAESI Act 2002

This Act empowers the bank and other financial institutions to recover
their dues in Non Performing Assets, without the intervention of the court. It
also empowers the bank to issue a notice to the defaulting borrowers or
guarantors to discharge their dues within 60 days.

Important aspects of the Act

Securitization

Securitization is the process in which the financial asset is bought by

the securitization or reconstruction company from the lender (bank or
financial institution). The Securitization or reconstruction company raises the
fund by the qualified and institutional buyers by issuing security receipt to
them. The security receipt represents an undivided interest in the financial
asset.

Asset Reconstruction

Asset reconstruction role is to take over the loans or advances from the
bank of the financial assets for the purpose of the recovery. On acquisition of
the financial asset, the asset reconstruction company becomes the owner of
the property. The asset reconstruction company steps in the shoes of the
bank. The securitization company is governed by the Companies Act, 1956.
The regulatory authority for all the securitization company is the Reserve
Bank of India.

Enforcement of Security Interest

The enforcement of security interest is important for the recovery of the

bank’s loan. The enforcement of the security feature is accomplished without
any interference from the court. The bank has to serve the notice to the
borrower before 60 days with a request to discharge the liability of the loan. If
the borrower fails to pay the amount within the stipulated time then the
secured creditor can take the possession of the secured asset.

Security Interest

Any right, title or interest of any kind of property created in favour of the
secured creditor is called the security interest. Whenever any lender takes
any property from any borrower then a lender gets security in that property.
When the bank or any lender is taking possession of the property then
precaution must be taken and also, if required, the help of the metropolitan
magistrate or chief judicial magistrate can be taken.

35).bank Guarantee

36).negotiable Instrument

37).Difference between Guarantee and Indemnity

 38).Pledge

39).Letters of Credit

40). Customer

“A customer is someone who has an account with a banker or who is

regularly committed to behaving as such with the banker.

One may conclude that a “Customer” is one who has either a current or
a saving account or, in the absence of it, some relation with the bank in the
ordinary course of business, that can be seen as banking business.

41).Bankers Lien

A banker’s lien is a legal right that allows banks to hold on to a

customer’s property that is in the bank’s custody as security for the
customer’s indebtedness to the bank. This right arises in many common law
jurisdictions and is designed to ensure that banks can recover their dues from
customers who owe them money. Essentially, a banker’s lien acts as a form
of security for the bank, allowing it to retain possession of the customer’s
goods or securities until the debt is paid.

 Banker’s Right to Lien

The banker’s right to lien is predicated on the idea that a bank should be able
to recover the amount owed to it by selling the debtor’s goods that are in its
possession. This recovery can only occur after a reasonable time and notice
have been provided to the debtor. In other words, a bank has the right to
retain the goods and securities of a customer until the customer settles their
dues with the bank. If the customer fails to repay the debt, the bank can sell
these goods after giving due notice to the customer, as per the law.

The goods and securities subject to a banker’s lien are those that the banker
has acquired during the ordinary course of business. This lien is an implicit
agreement between the bank and the customer, granting the bank the right to
hold the customer’s property until the debt is cleared.

 Types of Assets Subject to a Banker’s Lien

The scope of assets that can be held under a banker’s lien is broad. These
typically include:

 Deposits: Fixed deposits or other similar deposits that can be retained until
the maturity of a loan.
 Securities: Stocks, bonds and other marketable securities that may be in the
bank’s custody.
 Documents: Important documents like title deeds, held for safekeeping but
which can be used as security.

Clients must understand that not all assets can be subjected to a banker’s
lien. Specifically, assets that are held for a specific purpose or those that are
explicitly exempted by law may not be included.

 Exceptions to Banker’s Lien

There are specific scenarios where a banker’s lien is not permissible:

 Express Contract: When there is an express contract, such as a counter

guarantee, the banker’s lien does not apply.

 No Mutual Demand: If there is no mutual demand between the banker and

the customer, the lien cannot be exercised.

 Safe Custody: When valuables are placed with the bank under safe custody,
such as in lockers, the banker’s lien does not apply.

 Special Purpose Documents: The banker has no lien on bills of

exchange or other documents entrusted to them for a specific purpose.

Additionally, the right of lien provided to the banker is not barred by

the law of limitation. The effect of limitation is limited to barring the legal
remedies available, but it does not discharge the debts.

 Key Case Laws on Banker’s Lien

Chettinad Mercantile Bank Ltd. v. PL.A. Pichammai Achi (AIR

1945)
In this case, it was held that a banker has the right to keep possession of
items delivered to them if and as long as, the customer to whom the items
belonged or who had the power to dispose of them when delivered, is
indebted to the banker. This right persists provided the banker has obtained
possession under circumstances that do not imply an agreement to waive this
right.

City Union Bank Ltd. v. Thangarajan (2003)

This case established that a bank has the right of a general lien concerning
all securities of a customer, including negotiable instruments and fixed
deposits, but only to the extent of the customer’s liability. If the bank fails to
return the balance amount to the customer and the customer suffers a loss,
 the bank is liable to pay damages. The court emphasised that invoking a lien
by a bank requires interdependency between the bank and the customer.
Detaining the customer’s properties beyond the total liability is unauthorised
and can attract damages against the bank.

 Difference Between Banker’s Lien and Set-off

A banker’s lien and the right to set-off, though similar, are distinct concepts:

Banker’s Lien: A banker’s lien is confined to the securities and property

upon which the bank has custody. It allows the bank to retain and, if
necessary, sell the property to recover the debt owed by the customer.

Set-off: Set-off relates to money and involves the adjustment of mutual debts
between the bank and the customer. It can arise from a contract, mercantile
usage or by law. Set-off allows the bank to combine different accounts of a
customer to offset a debt.

42). Lenders Liability Act

After the recommendation by the committee constituted by the

government of India for limited liability laws, the Lender Liability Act came into
force. It has devised certain fair practice code for the lenders which was
adopted by all the banks.

The act explicitly laid down the criteria by which the lenders have to
comply for granting loans. The lenders should dispose of any loan application
within a reasonable time period. It must consider the welfare of the borrower.
If the application is from any borrower who belongs to the pivotal sector of the
economy, then he must be dealt on a priority basis. The creditworthiness
should be checked according to rules and regulation provided by the Reserve
Bank of India. The margin and security stipulation should not be used as the
due diligence along with other terms and conditions for granting the loan.

43).Banking Ombudsman

Banking Ombudsman Scheme is a grievance redressal system. If a

customer is dissatisfied with the service of the bank then he can approach
the banking ombudsman for further action. It is introduced under Section 35A
of the Banking Regulations Act, 1949.

Important features of the Banking Ombudsman Scheme

 Deficiency in service, non-acceptance of note of notes of small

denominations without sufficient cause.
  Delayed or non-payment of inward remittance or delayed issuance
of the draft.

 Non-adherence to prescribed working hours.

 Refusal to open a banking account without any valid reason.

 Levying of charges without any prior notice to the customer.

 Forced closure of deposit account without notice or sufficient reason.

 Refusal to close or delay closing accounts.

 Non-adherence to the fair procedure adopted by the bank or non-

adherence to the fair procedure and function for customers laid
down by the Banking Codes and Standard Board of India.

 Non-observance of Reserve Bank guidelines on engagement of

recovery agents by banks.

 Non-observance of the Reserve Bank guidelines on interest rates.

II. Long Q&A

1). History of the Banking from Vedic to till now.

Banking refers to the system of financial institutions, such as banks and

credit unions, that provide various financial services to individuals,
businesses, and governments.

The world's first bank is often credited to the Bank of Venice, which was
founded in Venice, Italy in 1157. This bank specialized in exchanging
different currencies and soon began making loans to merchants and even
governments.

The first bank of India was the “Bank of Hindustan”, established in 1770
and located in the then Indian capital, Calcutta. However, this bank failed to
work and ceased operations in 1832. During the Pre-Independence period
over 600 banks had been registered in the country, but only a few managed
to survive.

The Reserve Bank of India was set up on the basis of the

recommendations of the Hilton Young Commission.
 India’s banking system in three phases

 Phase 1 (1786-1969)

This is the pre-independence phase, which lasted nearly 200 years.

During this period, there were close to 600 banks. At the same time, some
significant developments in the banking industry also took place.

Presidency Banks

The East India Company founded three key presidency banks. These
include the Bank of Bombay (1840), Bank of Madras (1843) and Bank of
Calcutta (1806).

These three banks merged and became the Imperial Bank of India. In
1955, it was renamed the State Bank of India. Besides these, more banks,
including Punjab National Bank and Allahabad Bank, came into existence.

Between 1913 and 1948, there was stagnation in India’s banking space
as growth was slow. Multiple banks encountered periodic failures. The lack of
confidence in the country’s banking system played a part in the slow
mobilisation of funds and the growth of this sector. There were around 1100
banks during this period.

To streamline these banks' operations, the Indian Government

introduced the Banking Regulation Act 1949.

Phase 2 (1969-1991)

Post-independence, Indians were doubtful about the private ownership

of banks. Instead, they preferred to rely on moneylenders for necessary
 financial assistance. To combat this issue, the Indian Government
nationalised 14 commercial banks in 1969.

The main objective of this move was to reduce the concentration of

power and wealth of certain families that owned and controlled these financial
institutions.

There were other reasons too for nationalisation:

 To support India’s agricultural sector

 Mobilise savings among individuals
 Facilitate the expansion of India’s banking network by opening more
branches
 Boost the priority sectors through banking services
Some of the banks that were nationalised in 1961 include:
 Central Bank of India
 United Bank
 Canara Bank
 Indian Overseas Bank
 Dena Bank
 Union Bank of India
 Bank of Baroda
 Bank of India
 Allahabad Bank

The evolution of India’s banking system continued in this trajectory.

In 1980, the Government nationalised six more banks, including:

 Corporation Bank
 Punjab & Sind Bank
 New Bank of India
 Vijaya Bank
 Andhra Bank
 Oriental Bank of Commerce

o Financial Institutions

Besides nationalising private banks, the Indian Government established a

few financial institutions (between 1982 and 1990) to fulfil specific objectives.

 EXIM Bank – for promoting import as well as export

 National Housing Board- for funding housing projects
 National Bank for Agriculture and Rural Development (NABARD) –
for supporting agricultural activities
 Small Industries Development Bank of India (SIDBI) – for providing
financial assistance to small-scale Indian industries
Benefits of Nationalisation

 Increased efficiency in the industry

 Empowered small-scale industries
 Provided a massive boost to India’s agricultural sector
 Increased public deposits
 Ensured better outreach
 Provided employment opportunities

Phase 3 (1991- Present)

Since 1991, the Indian banking system has been evolving. The Indian
Government encouraged foreign investment, which opened the economy to
foreign and private investors, which has led to the introduction of mobile
banking, internet banking, ATMs, and more.

Some foreign banks in India include:

 HSBC
 Citibank
 Bank of America
 Standard Chartered Bank
 DBS Bank
 Royal Bank of Scotland

To stabilise the nationalised public sector banks, the Indian Government

formed the Narasimham Committee in 1991 to manage reforms in the
banking sector. During this time, the Government approved various private
banks. These include Axis Bank, IndusInd Bank, and ICICI Bank.

Other noteworthy developments or changes

 Small finance banks became eligible to open new branches

anywhere in India
 The Government and RBI began to treat both private and public
sector banks equally
 Banks started digitising transactions along with other banking
operations
 Payments banks were established

Different Types of Banks in India

Currently, there are four types of banks in India:

 Commercial Banks
 These banks adhere to the provisions of the Banking
Regulations Act 1949. Commercial banks accept deposits from the public
and give out loans to generate profits. They are segregated into four
types: Private sector banks, public sector banks, regional rural banks and
foreign banks.

 Small Finance Banks

Small finance banks provide financial assistance to those segments

of society that other banks do not serve. The customer base of such banks
includes small business units, micro industries, and more.

 Cooperative Banks

A managing committee controls the operations of these banks.

Cooperative banks are not designed to make a profit, and the customers
of these banks are their owners. These banks are categorised into state
cooperative banks and urban cooperative banks.

 Payments Banks

This new type of bank in India can accept limited deposits. These
banks are allowed to provide savings and current account services. They
can also issue debit cards. But as per RBI norms, they are not eligible to
offer credit cards or loans.

HISTORY OF BANKING SECTOR ON INDIA

 1770 - First Bank of India is “The Bank of Hindustan” was formed in

1770 and in the year 1786 - General Bank of India is formed and failed
(1791).

 (1806-1843) – During this period, the Presidency Banks were formed.

In the year 1806, the Bank of Calcutta (1806 -1809 Bengal), Bank of
Bombay
(1840) & Bank of Madras (1843)

 1921- The Presidency Banks were merged and formed the Imperial
Bank of India (Private bank).

 1935 - Formed Reserve Bank of India on the based on Reserve Bank

of India Act 1934
  1955 - In this year the Imperial Bank was renamed as “State Bank of
India” on Recommendations by A D Gorewala Committee

-It's a Public Sector bank and not a Nationalized Bank

 1959 - 8 Banks were attached to SBI Called as Associate Banks of

India.
They are

1). State Bank of Bikaner

2). State Bank of Hyderabad
3). State Bank of Indore
4). State Bank of Jaipur
5). State Bank of Mysore
6). State Bank of Patiala
7). State Bank of Saurashtra
8). State Bank of Travancore

 1969 & 1980 - Nationalization of Banks

- 19th July 1969 - 14 Banks got nationalized (Minimum Capital –
50
Crores)

- 15th April 1980-6 more Banks got nationalized (Minimum Capital

–
200 Crores)

Note - New Bank of India Punjab National Bank 1993

MERGER OF BANKS BY SBI

 First internal merger happened as below
o State Bank of Bikaner & Jaipur- 1963
o As of now (2020) there is not Associate Bank to State Bank of India
as all the earlier Banks were got merged with State Bank of India
as below
o State Bank of Saurashtra - 2008
o State Bank of Indore - 2010
o 5 Banks got merged during April, 2017
o State of Bikaner & Jaipur
o State Bank of Hyderabad
o State Bank of Mysore
 o State Bank of Patiala
o State Bank of Travancore

NATIONALIZATION OF BANKS

1969 - Minimum Capital 50 Crores

o Allahabad Bank (Now Indian Bank)
o Bank of Baroda
o Bank of India
o Bank of Maharashtra
o Central Bank of India
o Canara Bank
o Dena Bank (Now Bank of Baroda)
o Indian Bank
o Indian Overseas Bank
o Punjab National Bank
o Syndicate Bank (Now Canara Bank)
o UCO Bank
o Union Bank of India
o United Bank of India (Now Punjab National Bank)

1980 - Minimum Capital 200 Crores

o Andhra Bank.
o Corporation Bank.
o Oriental Bank of Commerce.
o New Bank of India.
o Vijaya Bank.
o Punjab and Sind Bank.

2). Salient features of the Banking Regulation Act 1949

The Banking Regulation Act was passed by the Indian Parliament in

1949. The Banking Regulation Act, 1949 is like a rulebook for banks in
India. It sets out the important rules they have to follow to keep things
running smoothly. This article explores its key features, objectives, and
provisions for a comprehensive understanding.
What is Banking Regulation Act, 1949

The Banking Regulation Act, 1949 supervises the banks that have
been established in India. This acts as in charge of regulating and
managing the operations of all banking corporations in India.

The RBI is the governing body that regulates the banks. The
introduction of Section 56, gave the Reserve Bank of India the authority to
regulate its operations in the same way other banks in the country are
functioning. This Act also gives RBI, the authority to license banks, regulate
shareholder voting and shareholding, oversee board and management
appointments, and set auditing instructions. RBI is also involved in mergers
and liquidations of the banks.

Features of Banking Regulation Act, 1949

The Act has been divided into five parts and comprises 56 sections.
The main features of the act are mentioned below:

 It prevents non-banking enterprises from taking demand-repayable

deposits.

 It restricts trading related to non-banking entities to remove

potential risks.

 It also establishes minimum capital requirements for the bank.

 It limits dividend payouts of the bank.

 This act provides the legal framework for banks registered outside
of India’s provinces.

 It helps in implementing an extensive licensing program for banks

and their branches.

 It determines a unique format for the balance sheet and gives the
Reserve Bank authority to call for periodic reports.

 This act gives the Reserve Bank the right to examine a bank’s
books of accounts.

 Enabling the central government, the authority to take action

against banks that conduct in a way that harms depositors’
interests.
  A clause that calls for the Reserve Bank of India to communicate
with banking institutions regularly.

 This act also establishes a quick liquidation procedure for the bank.

 It increases the capability of the Reserve Bank of India to assist

banking institutions when emergencies arise.

Objectives of the Banking Regulation Act, 1949

 To prevent banking companies from engaging in fierce competition,

this act regulated the opening of new branches and the relocating
of existing ones.

 To ensure the balanced growth of banks through a licensing system

and to stop the indiscriminate openings of additional branches.

 To assign RBI the authority to appoint, remove, and reappoint the

chairman, directors, and bank officers. This might help in the
effective and smooth functioning of Indian banks.

 To safeguard the interests of depositors and the general public by

implementing certain measures which include maintaining ratios for
cash reserve and liquidity reserve. This enables the bank to meet
the demand of depositors.

 To strengthen India’s financial system by mandating the merging of

weaker banks with senior banks.

 To include certain clauses that can limit the ability of foreign banks
to invest funds from Indian depositors outside of India.

 To assist banks in quick and easy liquidation when they are unable
to continue or merge with other banks.

Offences and Punishments under the Banking Regulation Act, 1949

The Act contains several provisions which describe the consequences

of violation of the act, including fines and imprisonment of the same. The
following is mentioned in Section 46:

 In case a person purposefully presents false information or promotes

fraudulent acts, they risk imprisonment of up to three years and a fine
of up to one crore rupees.

 In case a person does not share the records or documents or refuses

to answer the inquiries of the inspection officer, then a fine of up
 to twenty lakh rupees, and another fine of fifty thousand rupees in
case of continuing offence.

 In case the banking company has received any deposits illegally, all of
the directors will be held accountable and charged twice the value of
the deposits made with the banking company.

 In case there is a default and it is caused by the banking company, or

by directors’ negligence, then the directors or the secretary will be held
responsible for the same.

3). RBI FUNCTIONS

1). MONETARY FUNCTIONS

1. Issue of Bank Notes

2. Banker to Government
3. Bankers Bank
4. Custodian of Cash Reserves of Commercial Banks
5. Custodian of Country’s Foreign Currency Reserves
6. Lender of Last Resort
7. Central Clearance and Accounts Settlement
8. Currency Chest
9. Banker, Agent & Adviser to the Government
10. Controller of Credit

2). NON-MONETARY FUNCTIONS

1. Supervisory Functions
2. Promotional Functions

3). MONETARY FUNCTIONS

1). Issue of Bank Notes - Except for the One-rupee coins and notes,
which is issued by Ministry of Finance, everything else is printed by the RBI

What is the base?

I. It’s based on the assets of issue departments
II. Gold Coins & Bullion
III. Foreign Securities
IV. Rupee Coins
V. Government of India Rupee Securities &
VI. The bill of exchange and promissory notes payable in India, which are
eligible for purchase by the bank
Why only RBI?
I. To keep uniformity in notes issue
II. To makes effective state supervision possible
III. It is easier to control and regulate credit in
IV. accordance with the requirements in the economy
V. It keeps faith of the public in the paper currency

 There are currently 4 printing presses in India where currency notes

are printed — Mysore, Dewas, Salboni & Nasik
 There are 4 mints where coins are minted - Kolkata,Hyderabad,
Mumbai & Noida Security Paper Mill was established in 1968 at
Hoshangabad, Madhya Pradesh to make papers for bank notes

2. Banker to the Government

i). RBI Maintains, operates, receives of funds, makes payment etc. of

the
Indian Government
ii). It represents Government of India in IMF as well as World Bank

3. Bankers Bank- Second Schedule of RBI Act, 1934 makes RBI, a Bankers
Bank such as

i. Commercial Banks - Indian and Foreign

ii. Regional Rural Banks
iii. State Co-operative Banks

4. Custodian of Cash Reserves of Commercial Banks - This is convention

as well As compulsion. They withdraw during busy season and deposit during
slack seasons

5. Custodian of countries Foreign Currency Reserves - Foreign

Currencies as are Maintained by the RBI along with gold to meet any adverse
balance of payments with any other country

6. Lender of last resort - RBI helps Commercial Banks during their

emergency time. This is done by re-discounting the bills, loans, advance etc.
Though such help is coming in higher rate of interest, such help is the last
opportunity for the other banks

7. Central clearance and accounts settlement - One of the essential

functions of RBI These days is to play the role of central clearance and
account settlement for all other banks as it will have the fund of them. By
having the fund, it becomes easy for RBI to manage the same

8. Currency Chest - Currency chest is the place where the RBI kept all the
excess money of banks under custody. Whenever, RBI prints new currency
notes, first it delivers to currency chests and then currency chests deliver
these new currency notes to banks. A currency chest is a depositary of RBI
- The RBI has set up over 4,075 currency chests all over the
country. Besides these, there are around 3,746 bank branches
that act as small coin depots to stock small coins
- The currency chests should have Chest Balance Limit (CBL) of
Rs 1,000 crore, subject to ground realities and reasonable
restrictions, at the discretion of the Reserve Bank.

9. Banker, Agent & Adviser to the Government - Funding during financial

difficulties via short-term loans, advising etc.

10. Controller of the Credit -To ensure stable economic and supply of
money, RBI ensures that there is control over the credits and the same is
done based on the priorities of the Government of India

2. NON-MONETARY FUNCTIONS

1. Supervisory Functions

i. Such powers are given under RBI Act, 1934 & Banking Regulation
Act, 1949
ii. Supervision, Control over Branch Expansion
iii. Liquidity of their assets
iv. Amalgamation and reconstruction etc
v. New responsibilities were also given to RBI via Nationalization of
Banks

2. Promotional Functions - RBI was asked to promote Banking habit via

extending banking to facilities to rural and semi-urban areas & to establish
and promote new and specialized agencies and below are impacts of the
same

i. Deposit Insurance Corporation, 1962

ii. Unit Trust of India, 1964
iii. Industrial Re-constructions Corporations of India, 1972
iv. National Bank for Agriculture & Rural Development (NABARD), 1982
4). DISHONOUR OF CHEQUE FOR INSUFFICIENCY, ETC., OF FUNDS IN

THE ACCOUNT - S138

Provided that nothing contained in this section shall apply unless

(a) The cheque has been presented to the bank within a period of three
months from the date on which it is drawn or within the period of its validity,
whichever is earlier;

(b) The payee or the holder in due course of the cheque, as the case may be,
makes a demand for the payment of the said amount of money by giving a
notice in writing, to the drawer of the cheque, within thirty days of the receipt
of information by him from the bank regarding the return of the cheque as
unpaid; and

(c) The drawer of such cheque fails to make the payment of the said amount
of money to the payee or, as the case may be, to the holder in due course of
the cheque, within fifteen days of the receipt of the said notice.

Explanation - For the purposes of this section, "debt or other liability"

means a legally enforceable debt or other liability

IMPORTANT CASE LAW

M/s. Electronics Trade & Technology Development Corpn. Ltd.,

Secunderabad Vs. M/s. Indian Technologists & Engineers (Electronics) Pvt.
Ltd. and another - It would thus be clear that when a cheque is drawn by a
person on an account maintained by him with the banker for payment of any
amount of money to another person out of the account for the discharge of
the debt in whole or in part or other liability is returned by the bank with the
endorsement like in this case,

(1) "l refer to the drawer"

(2) "Instructions for stoppage of payment" and
(3) "Stamp exceeds arrangement", it amounts to dishonour within the
meaning of Section 138 of the Act. On issuance of the notice by the payee or
the holder in due course after dishonour, to the drawer demanding payment
within 15 days from the date of the receipt of such a notice, if he does not pay
the same, the statutory presumption of dishonest intention, subject to any
other liability, stands satisfied.

Jurisdiction - Dashrath Rupsingh Rathod Vs. State Of Maharashtra & Anr on

1 August, 2014 - The SC held that there is a discernibly defined difference
between the commission of an offence and cognizance of offence.
Cognizance leads to cause of action. For section 138 complaints, the cause
of action arises only when the drawer fails to pay the defaulted payment. The
complaints can be filed only in the courts within whose jurisdiction cheque IS
presented for encashment.

SECTION 139-142

Section 139 - Presumption in favour of holder

It shall be presumed, unless the contrary is proved, that the holder of a

cheque received the cheque of the nature referred to in section 138 for the
discharge, in whole or in part, of any debt or other liability

Section 140 - Defence which may not be allowed in any prosecution

under section 138

It shall not be a defence in a prosecution for an offence under section 138

that the drawer had no reason to believe when he issued the cheque that the
cheque may be dishonoured on presentment for the reasons stated in that
section

Section 141 - Offences by companies

(1). If the person committing an offence under section 138 is a company,

every person who, at the time the offence was committed, was in charge of,
and was responsible to the company for the conduct of the business of the
company, as well as the company, shall be deemed to be guilty of the
offence and shall be liable to be proceeded against and punished accordingly

- Provided that nothing contained in this sub-section shall render

any person liable to punishment if he proves that the offence was
committed without his knowledge, or that he had exercised all due
diligence to prevent the commission of such offence:
- Provided further that where a person is nominated as a Director
of a company by virtue of his holding any office or employment in
the Central Government or State Government or a financial
corporation owned or controlled by the Central Government or the
State Government, as the case may be, he shall not be liable for
prosecution under this Chapter.

(2). Notwithstanding anything contained in sub-section (I), where any offence

under this Act has been committed by a company and it is proved that the
offence has been committed with the consent or connivance of, or is
attributable to,any neglect on the part of, any director, manager, secretary or
other officer of the company, such director, manager,secretary or other officer
shall also be deemed to be guilty of that offence and shall be liable to be
proceeded against and punished accordingly.
Explanation - For the purposes of this section,

(a) "Company" means anybody corporate and includes a firm or other

association of
individuals; and

(b) "Director", in relation to a firm, means a partner in the firm.

COGNIZANCE OF OFFENCES - SECTION 142

Notwithstanding anything contained in the Code of Criminal Procedure, 1973

-

(a) No court shall take cognizance of any offence punishable under section
138 except upon a complaint, in writing, made by the payee or, as the case
may be, the holder in due course of the cheque;

(b) Such complaint is made within one month of the date on which the cause
of action arises under clause (c) of the proviso to section 138: Provided that
the cognizance of a complaint may be taken by the Court after the prescribed
period, if the complainant satisfies the Court that he had sufficient cause for
not making a complaint within such
period

(c) No court inferior to that of a Metropolitan Magistrate or a Judicial

Magistrate of the first class shall try any offence punishable under section
138

CASE LAWS AND COMMENTS

(i) Sadanandan Bhadran Vs. Madhavan Sunil Kumar, AIR 1998 SC 3043 -
Consequent upon the failure of the drawer to pay the money within the period
of 15 days as envisaged under clause (c) of the proviso to section 138, the
liability of the drawer for being prosecuted for the offence he has committed,
arises, and the period of one month for filing the complaint under section 142
is to be reckoned accordingly

(ii) Salar Solvent Extractions Ltd. Vs. South India Viscose Ltd., (1994) 3
Crimes 295 (Mad) - A manager or any other person authorised by the
company can represent it during the course of legal proceedings before the
court and file a complaint

(iii) M/s. Pearey Lal Rajendra Kumar Pvt. Ltd. Vs. State of Rajasthan, (1994)
3 Crimes 308 (Raj) - The Magistrate while taking cognizance has to look into
the question whether the ingredients of an offence have been made out or
not;
(iv) V.N. Samant Vs. M/s. K.G.N. Traders, (1994) 3 Crimes 725 (Karn) - The
cause of action for filing complaint would arise after the completion of 15 days
from the date the drawer receives the notice and fails to pay the amount
within that period

(v) V.N. Samant Vs. M/s. K.G.N. Traders, (1994) 3 Crimes 725 (Karn) - The
payee cannot lodge a complaint after the completion of one month from the
date on which the cause of action arose as there is a bar under clause (b) of
S142

(vi) T.K. Khungar Vs. Sanjay Ghai, (1994) 3 Crimes 802 (P & H) - So long as
the period of notice does not expire there can be no cause of action with the
payee to make the drawer liable criminally;

(vii) R. Rajendra Reddy Vs. M/s. Sujaya Feeds, (1994) 3 Crimes 692 (Karn) -
It is well settled that it is not necessary for the Magistrate to specifically state
that he is taking cognizance of the offence. If he takes steps as provided
under section 200, of the Code of Criminal Procedure then it necessarily
means that he has taken cognizance of the offence;

POINTS TO BE NOTED

Liability

Civil Liability: Payee may initiate recovery procedure under Order 37 of the
Code of Civil Procedure,1908 (Money Recovery Suit)

 The civil liability is a fine twice the amount of dishonoured cheque

as per Section 138 of NIA
 If suit by Payee under Order 37 of Code of Civil Procedure, 1908
- If the judgement is in favour to Payee, then there can be
additional impact of costs, interests etc.

Criminal liability: Presence of 'Mens rea' is not required. That's why it

stands out of IPC provisions

 It can be prosecuted under Section 417 (Punishment for Cheating) and

420 (Cheating and dishonestly inducing delivery of property) of IPC
 Punishment under Sec 138 of NIA is 2 years of imprisonment or fine
double the value of cheque or both
 Compoundable (Magestrate 2F,3rd Hearing 10% | HC - 15% | SC -
20%), Bailable, Non-cognizable offence

Who can take cognizance - Judicial Magistrate of First Class / Metropolitan

 Magistrate

5). Under what circumstances discloser of account details of customer

is
permitted by Bank?

Banks have a legal duty to protect the confidentiality of existing and former
customers. Banks also have obligations under the Privacy Act 2020, which
contains 13 privacy principles about personal information. In the banking
sector, these principles govern:

 banks’ collection and storage of customer information

 customers’ rights to access and correct information about themselves
 the disclosure of personal information.

We can consider complaints about breaches of privacy and duty of

confidence. Sometimes we refer a privacy complaint to the Office of the
Privacy Commissioner if we consider it would be better dealt with by that
office. An example would be if a customer sought compensation that
exceeded our limit.

Concepts similar, but not the same

A duty of confidence and the legal obligation to protect privacy are

similar, but not the same. The former applies to information about individuals
and businesses, the latter to information about individuals only (and that
includes bank staff). If a complaint requires us to look into the behaviour of a
staff member, we can ask the bank to tell us what systems or process
changes it has put in place to correct a problem, but we cannot seek
information about any disciplinary or other action the bank may have taken
against that individual.

Disclosing confidential information

There are four broad situations in which a bank can lawfully disclose
confidential information:

 When the law compels it to: Banks sometimes have to give evidence
about a customer’s affairs in court. Banks can also be required to give
information to the Inland Revenue Department (under the Tax
Administration Act 1994), to the Ministry of Social Development (under
the Social Security Act 1964) and to a company liquidator (under the
Companies Act 1993). Banks are also required to report suspicious
transactions to Police (under the Financial Transactions Reporting Act
1996 and Anti-Money Laundering and Countering Financing of
Terrorism Act 2009).
  When it has a public duty to: This applies when there is a danger to the
state or when the wider public needs protection against crime. A bank
needs to balance the public interest with respecting a customer’s right
to privacy when it considers providing information about that person to
a third party.

 When a bank must disclose information to protect its interests: This

applies when a bank takes legal action against a customer (such as to
recover a debt), or defends an action from a customer and needs to
provide information about the customer’s affairs.

 When a customer agrees: A bank can disclose customer information if

the customer agrees. A bank must ensure the information is correct and
within the scope of the customer’s consent. A customer may, for
example, agree to the bank’s disclosure of information about one
account only. If the bank releases information about other accounts, it
has breached its duty of confidence.

When a bank breaches confidentiality or privacy

If we consider a complaint about breach of confidence or privacy to be

valid (whether accidental or deliberate), we assess whether this has resulted
in a direct financial loss to the customer and, if so, award compensation. If
the breach is continuing, we can also require the bank to cease its conduct.

We will look at whether the customer has suffered distress,

embarrassment or inconvenience. We must be satisfied any distress,
embarrassment or inconvenience warrants a compensation payment.
Sometimes customers submit substantial claims for minor frustration or
inconvenience. We are unlikely to award compensation for minor mistakes
that have little or no harmful effects. Banks are also required to report
suspicious transactions to Police (under the Financial Transactions Reporting
Act 1996 and Anti-Money Laundering and Countering Financing of Terrorism
Act 2009).

6). Provisions contained in the Negotiable Instruments Act, 1881

relating to the dishonour of Cheques.

The Negotiable Instruments Act of 1881 was enacted to protect the

legitimacy of commercial transactions involving cheques. It also includes
precautions to protect drawers of such instruments from potential dishonor.
There have been several significant changes in the way cheques are issued,
bounced, and dealt with throughout the years.
 With the fast growth of business and trade, the use of cheques grew as
well, as did the number of cheques bouncing disputes. The purpose of
Sections 138-142 of the Negotiable Instruments Act of 1881 is to improve the
efficiency of banking operations and maintain the legitimacy of commercial
transactions involving cheques. A person who issues a cheque to satisfy a
debt or liability in whole or in part and the cheque is dishonored by the bank
on presentation is guilty of a criminal offence punishable by imprisonment,
fine, or both. Section 138 was established to penalize dishonest check draws
who, although claiming to be releasing their responsibility by issuing a check,
have no intention of really doing so.
However, in order to avoid unnecessarily prosecuting an honest cheque
drawer and to allow him a chance to make corrections, the prosecution under
Section 138 of the Act has been made subject to specific circumstances.

The proviso to Section 138 specifies these criteria. The conduct of an

offence is one thing, but prosecution is quite another under criminal law.
Section 138 of the Act governs the commission of an offence. Section
142 of the Act governs prosecution.
Section 138. Dishonour of cheque for insufficiency, etc., of funds in the
account.—Where any cheque drawn by a person on an account maintained
by him with a banker for payment of any amount of money to another person
from out of that account for the discharge, in whole or in part, of any debt or
other liability, is returned by the bank unpaid, either because of the amount of
money standing to the credit of that account is insufficient to honour the
cheque or that it exceeds the amount arranged to be paid from that account
by an agreement made with that bank, such person shall be deemed to have
committed an offence and shall, without prejudice to any other provision of
this Act, be punished with imprisonment for a term which may extend to two
years, or with fine which may extend to twice the amount of the cheque, or
with both:
Provided that nothing contained in this section shall apply unless —
(a) the cheque has been presented to the bank within a period of six months*
from the date on which it is drawn or within the period of its validity,
whichever is earlier;
(b) the payee or the holder in due course of the cheque, as the case may be,
makes a demand for the payment of the said amount of money by giving a
notice in writing, to the drawer of the cheque, within thirty days of the receipt
of information by him from the bank regarding the return of the cheque as
unpaid; and
(c) the drawer of such cheque fails to make the payment of the said amount
of money to the payee or as the case may be, to the holder in due course of
the cheque within fifteen days of the receipt of the said notice.
Explanation. – For the purposes of this section, “debt or other liability” means
a legally enforceable debt or other liability.
Classification of Offence
 The violation under Section 138 is a non-cognizable offence (a case in
which a police officer cannot arrest the accused without an arrest warrant). It
is also a bailable offence.

Although it was held in Dashrath Rupsingh Rathod v. State of

Maharashtra, that an offence under Section 138 is complete with the
dishonor of a cheque, taking cognizance of the same by any court is
prohibited so long as the complainant does not have a cause of action under
clause (c) of the proviso read with Section 142.
If cheque is dishonoured
When a cheque is returned unpaid, the drawee bank sends a ‘Cheque
Return Memo’ to the payee’s banker, detailing the cause for non-payment.
The dishonored cheque and the memo are then given to the payee by the
payee’s banker. If the holder or payee feels the cheque will be honored a
second time, he or she can resubmit it within three months after the date on
it. If the cheque issuer fails to make a payment, the payee has the right to
take legal action against the drawer.

Only if the amount indicated in the cheque is for the repayment of a

debt or any other duty of the defaulter owed towards the payee may the
payee legally sue the defaulter/drawer for dishonour of cheque.

The drawer cannot be charged if the cheque was given as a gift, used
to lend money, or was used for illegal purposes.

Legal action
For instances of cheque dishonour, the Negotiable Instruments Act of
1881 applies. Since 1881, this Act has been revised several times.

Dishonoring a cheque, according to Section 138 of the Act, is a criminal

offence punishable by up to two years in prison, a monetary penalty, or both.

If the payee chooses to proceed legally, the drawer should be offered the
option of promptly returning the cheque amount. An opportunity like this can
only be offered in the form of a written notice.

The payee has 30 days from the date of receiving the “Cheque Return
Memo” from the bank to send the notice to the drawer. The notification should
state that the amount of the check must be paid to the payee within 15 days
of the drawer receiving the notice. The payee has the right to file a criminal
complaint under Section 138 of the Negotiable Instruments Act if the cheque
issuer fails to make a new payment within 30 days of receiving the
notification.

However, within a month of the notice period expiring, the complaint

must be filed in a magistrate’s court. In this scenario, it is critical to seek the
advice of an attorney who is well-versed and skilled in this field of law to
proceed further in the matter.
Notice under S. 138
The necessary condition of issue of notice in terms of clause (b) of
proviso to Section 138 of the Act is met when the notification is issued by
registered mail to the proper addressee of the cheque. It goes without saying
that the complaint must include basic information on the method and manner
in which the notice to the cheque drawer was sent.
Punishment & Penalty
The court will issue summons and hear the case after receiving the
complaint, as well as an affidavit and related document trail. If proven guilty,
the defaulter may be penalised with a monetary penalty of double the amount
of the cheque, or imprisonment for a time of up to two years, or both. For
repeated bounced cheque offences, the bank has the power to suspend the
cheque book facility and cancel the account.

If the drawer pays the amount of the check within 15 days after
receiving the notice, the drawer is not guilty of any offence. Otherwise, the
payee has one month from the notice’s expiration date to submit a complaint
in the jurisdictional magistrate’s court.

Section 138 provides for a penalty of up to two years in prison, a fine of

up to double the amount, or both. It is important to remember that the power
under Section 357(3) CrPC to order the payment of compensation is in
addition to the specified punishment if no fine is imposed. The compensation
order can be enforced by a default sentence under Section 64 IPC and a
recovery procedure under Section 431 CrPC.
Fine points: Conditions for prosecution
There are three separate criteria antecedent that must be met before a check
dishonor may be considered an offence and punished.

(i) The cheque must have been given to the bank within 6 months [3 months]
[1] after the date on which it was drawn, or within the validity period,
whichever comes first.
(ii) Within 30 days after receiving information from the bank about the return
of the cheque as unpaid, the payee or holder in due course of the cheque, as
the case may be, should make a demand for payment of the specified
amount of money by providing a notice in writing to the drawer of the cheque.

(iii) The drawer of such a cheque should have failed to pay the said sum of
money to the payee or, as the case may be, to the holder of the cheque in
the proper course of the cheque within 15 days of receiving the said notice.

The Court in MSR Leathers v. S. Palaniappan[ix] held that an offence under

Section 138 may only be considered to have been committed by the person
issuing the cheque if all three requirements stated under the proviso to
Section 138 as clauses (a), (b), and (c) are met.
Dishonour of Cheque issued as a Security can also attract Offences
U/Sec 138 NI Act
The Supreme Court recently observed in the judgment of Sripati Singh (D)
vs. State of Jharkhand[x] that the dishonour of a security cheque can also
be considered a criminal offence under Section 138 of the Negotiable
Instruments Act.
There can’t be a clear and fast rule that a cheque issued as security can
never be given by the cheque’s drawee. The court went on to say that such a
claim would only emerge if the debt had not become collectable and the
security cheque had not matured to be submitted for payment of the
obligation if the agreed-upon due date had not arrived.

[1] The period of “six months” mentioned in S. 138 proviso (a) remains
unchanged as there has been no amendment in this regard. However, RBI
vide Circular RBI/2011-12/251 DBOD AML BC No. 47/14.01.001/2011-12,
dated 4-11-2011, has changed the default period within which a cheque may
be presented for payment, from a period of six months from the date of the
instrument, to a period of only three months from such date, w.e.f. 01-04-
2012.

[i] Law Commission of India, 213th Report, Fast Track Magisterial Courts for
Dishonoured Cheque Cases, November 2008.
[ii] Modi Cements Ltd. v. Kuchil Kumar Nandi, (1998) 3 SCC 249.
[iii] SMS Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89.
[iv] C.C. Alavi Haji v. Palapetty Muhammed, (2007) 6 SCC 555.
[v] William Rosario Fernandes v. Cabral & Co., 2006 SCC OnLine Bom 918.
[vi] Dashrath Rupsingh Rathod v. State of Maharashtra, (2014) 9 SCC 129.
[vii] C.C. Alavi Haji v. Palapetty Muhammed, (2007) 6 SCC 555.
[viii] Meters and Instruments (P) Ltd. v. Kanchan Mehta, (2018) 1 SCC 560.
[ix] MSR Leathers v. S. Palaniappan, (2013) 1 SCC 177.
[x] Sripati Singh (D) vs. State of Jharkhand, LL 2021 SC 606.

PAYING BANKER AND COLLECTING BANKER

Paying Banker: Meaning

The banker on whom a cheque is drawn or the banker who is required to

pay the cheque drawn on him by a customer is called the paying banker.
 Precaution of a Paying banker or mandatory Functions of Banker

1. Cheque should be in proper form: the cheque presented for payment should
be
in proper form. The banker should see that the cheque satisfies all the requir
ements of a valid cheque. The cheque must be in printed form supplied by th
e banker
2. Physical conditions of the cheque: the cheque should be in good physical con
dition. The instrument should not be torn, cancelled.
3. Crossing of cheque: if the cheque is a crossed one, the payment cannot be m
ade across the counter. It as to pass through the account holder.
4. Office of drawing: the cheque should be presented for payment same bank w
here he as account. If the customer presents a cheque in a bank where he do
esn’t hold an account, the manager cannot make payment.
5. Date of the cheque: the cheque should possess a date for payment and only
on that date or within three months from that date, the payment should be ma
de.
6. Time of presentation: the cheque should be presented for payment during the
banking hours.
7. Amount: the amount of the cheque presented for payment has to be recorded
in both words and figures and they should tally with each other.
8. Material alteration: if material alteration is apparent the banker should get con
firmation from the drawer by obtaining full signature at the place of material al
teration.
9. Signature of the drawer: the banker has to examine the signature of the draw
er on the cheque before he makes payment with the specimen he has.

[Link]

11. Legal Restrictions: in case of death, insolvency lunacy

STATUTORY PROTECTION TO PAYING BANKER

1. Bearer Cheques: the drawee is discharged by payment in due course to t

he bearer thereof, not with standing any endorsement whether in full or blank
appearing there on.

The banker shall be free from any liability if the payment in respect of a beare
r cheque is payment is due course.

2. Order Draft with Forged Endorsement: this Provision gives protection to

the paying banker regarding the draft having a forged endorsement. Again, th
e conditions to be satisfied are:
 The endorsement should be regular
 The payment should be made in due course.
 3. Protection in respect of a crossed cheque:

The paying banker has to make payment of the crossed cheque as per the in
struction of the drawer refuted through the crossing

4. Materially Altered Cheques if material alteration is apparent the banker s

hould get confirmation from the drawer by obtaining full signature at the place
of material alteration.

COLLECTING BANKER

The collecting banker is a banker who collects cheques drawn upon oth
er bankers for and on behalf of his customer. He is called the collecting bank
er as he undertakes the work of collection of cheques.

Holder for value

A collecting banker becomes a holder for value if he has paid the value of the
cheque tothe customer before the cheque is already collected.

As an agent

A collecting banker acts as an agent of the customer on crediting the acco

unt of the customer only after realising the payment from the paying banker
(drawee bank)

DUTIES AND RESPONSIBILITIES OF A COLLECTING BANKER

 Banker must take at most care while presenting the cheque for collection
 Collecting banker must present the cheque within reasonable time.
 Notice to customer in case of dishonour of cheque.
 The banker has to credit the proceeds of the cheque to the account of the cu
stomer
 Should undertake the collection of cheque only for customer and not for stran
ger.
 Must receive the payment as an agent of the customer.
 Cheque must be crossed

 Duties and Responsibilities of Paying and Collecting Banker

/2 Paying Bankers duties & responsibilities

A banker on whom the cheque is drawn should pay the cheque, when it
is presented for payment. It is his obligation by section 31 of the NI Act. A
 banker is bound to honour his customers cheque to the extent of the fund
available & the existence of no legal bar for payment. The paying banker
should use reasonable care and diligence in paying a cheque so as to
abstain from any action likely to damage his customer’s credit.

At the time of making payment of he should observe the following very

carefully:

 Verification of signature of the drawer.

 Verification of the genuineness of the instrument.
 Payment not stopped by the A/c holder.
 Holders title on the cheque is valid.
 A/c is not dormant one.
 A/c holder is not bankrupt, deceased and insanse.
 A/c is not under subject of liquidation process.
 ‘Guernsey Order’ is issued by count.
 Properly endorsed.
 Cheque is not drawn beyond limit fixed by the drawer is respect of
amount.
 Instrument being presented is crossed.
 Instrument is not state or post-dated.
 No material alteration is made.
 Sufficient balance in the A/c

Duties & Responsibilities of Collecting Bankers

 Acting as agent: While collecting an instrument, whether for credit to

customer’s account or for himself, the Bankers works as agent of his
customer. As an agent he has generally to take such steps & precautions to
protect the interest or his customer as a man of ordinary prudence would take
to safe-guard his own interest.

 Scrutinizing the instruments: Name of the holder, Branch name, date, amount
in world and figure, any cutting without signature, material alteration of any to
be checked carefully.

 Checking the endorsement: Bankers has to check the instrument whether it

has been endorsed properly.

 Presenting the instrument in due time: It is the responsibility of the collecting

bank to present the instrument in due time to the paying bank.

 Collecting the proceeds in the payee’s account: It is the duty of collecting

banks to collect and credit the proceed of the instruments to the
proper/correct account.
 Notice of dishonor and returning the instruments: If any instrument is
dishonoured by the paying bank it should be informed to the customer on the
business day following the receipt of the unpaid instruments.

Collecting Banker’s Protection

Under section 131 of negotiable instrument Act the collecting banker is

not liable to the true owner of a cheque or a banker’s draft if his title to the
instrument proves defective provided the cheque or draft was one crossed
generally or specially to himself and collected for a customer is good faith and
without negligence.

Relationship between a banker and customer

Introduction

The relationship between a Banker and a Customer is based on trust.

In today’s world, banks are considered a pivotal element for the economy of
the country. It is an effective banking system that paves the way for the
proper growth of the economy. Customers avail different kinds of services
from the bank. This article critically analyses different types of relationship
between customer and banker. It also discusses different legislations that
protect the interest of the banker and customer and also provide proper
remedies to them.

Different kind of relationship

 Relationship of debtor and creditor

When a customer opens a bank account with the bank, he fills the form
and other requisites compulsory for the same. When he deposits money in
his bank account, he becomes a creditor to the bank. The bank becomes the
debtor. The obligations of the bank to carry further business from the deposits
of the consumer are solely dependent on their own choice. The bank can
invest that money according to their own convenience. If the consumer wants
to take back that money, then he needs to follow a procedure of withdrawal.

 Relationship of pledger and pledgee

When a customer pledges an article (goods and documents) with the

banker as a security for the payment of debt or performance of the promise,
the customer becomes a pledger and the banker becomes the pledgee.

 Relationship of bailor and a bailee

 Section 148 of the Indian Contract Act, 1872 defines Bailment, bailor and
bailee. A “Bailment” is the transfer of goods from one person to another for
some purpose, upon a contract that they shall return the goods after
completion of the purpose or will dispose of the goods according to the
direction agreed as per the terms and conditions of the contract. The person
delivering the good is called the bailor and the person to whom the good is
delivered is called the bailee. Banks secure their advances by taking some
tangible assets as securities. Sometimes they keep valuable items, or land
and other things as security. By doing so, the bank becomes the baillie and
the consumer becomes the bailor.

 Relationship of lesser and lesse

Section 105 of Transfer of Property Act, 1882 defines lease, lessor, lesse,
premium and rent.
A lease of immovable property is transferred to the right to enjoy the property
for a certain period of time. The transferor is the lessor. The transferee is
called the lessee.

 Relationship of trustee and beneficiary

When a bank receives money or other valuable securities, then the banker’s
position is of a trustee. On the other hand, when a bank receives money and
uses it in various sectors, the bank becomes the beneficiary.

 What is Lien

As per Merriam- Webster Dictionary, “Lien” is defined as “a charge/

penalty upon real or personal property towards the satisfaction of some debt
or duty derived by the use of law”. In legal terms, lien means rights of bailee
to retain the goods & securities (held by bailee) owned by the bailor until the
total debt due to him is paid off. It allows the bailee/ creditor the right to retain
the security and not the right to sell it. In simple terms, a lien means the right
to keep somebody’s property until a debt is paid and not the right to sell it to
someone else. A Bailee always has the right to lien against Bailor. This article
will provide a quick understanding of Lien and their types, various aspects of
Banker’s Right to Lien and the procedure adopted by Banks while set-off of a
particular lien.

Types of Lien
A lien may be categorised into Particular/ Specific Lien and General
Lien.

Particular/Specific Lien
 This is a lien wherein a person, who has made expenses either by
rendering any services in the form of labour or skills on a particular item, has
a right to retain such goods until the due remuneration is paid to him against
the rendered services. This is mentioned under Section 170 of the Indian
Contract Act, 1872.

For example, A gives his car to a mechanic for servicing against

consideration of Rs. 4500. The mechanic after rendering the due scope of
service will be right to keep A’s car in his custody until he is remunerated for
his services.

A bailee can exercise his right to a particular lien in scenarios, wherein:

1. There is an involvement of any labour or skills

2. There is a performance of services as per the agreed scope of services.
3. The payment is due to be made by the bailor.

General Lien

This is a lien wherein any goods bailed can be retained as security (in
the absence of a contract) if any amount is due to Bailee. Such rights are
assigned and limited to the following category of people.

1. Bankers
2. Factors,
3. Wharfingers (owner of dockyards used for parking ships).
4. Attorneys of High Court
5. Policy Brokers.

The general lien is discussed under SECTION 171 of the Indian

Contract Act, 1872.

It is important to note that persons other than those mentioned above

can have the right to a general lien only in case any contract is explicitly
made to the effect.

The goods excluded are the documents related to litigation, Contracts,

and legal documents. This also includes lockers as the lockers are taken for
the safe custody of ornaments and important documents.

Difference between General Lien and Particular Lien

Sl Particular Lien General Lien

No

1 Section 170 of the Indian Section 171 of the Indian Contract

Contract Act, 1872 which confers Act,1872 confer on Bailee the right
on the Bailee, the right of of General Lien.
particular lien.

2
A particular lien gives the right to General Lien is one which gives
retain possession only of goods right to possession until the whole
in respect of which the changes balance of the amount is paid.
or dues have arisen.

3 Example: Example:

A delivers a rough diamond to The banker’s Lien is a general

B, a jeweller, to be cut and lien and he can retain the goods
polished, which is accordingly for the satisfaction of a debt other
done. B is entitled to retain the than the one for which the goods
stone till he is paid for the are pledged.
services he has rendered.

4 The right of particular lien can be It is not necessary in case of

successfully claimed if by the general Lien.
exercise of labour or skill, there
has been some improvement of
the goods.

5 The Right of Particular Lien can The right of General lien, can be
be claimed only in respect of claimed in respect of any goods for
goods upon which labour or skill any change due in respect of other
has been exercised by the goods.
Bailee.
  The Negotiable Instruments Act and its special provisions

Introduction

The Negotiable Instrument Act was promulgated in the year 1881 which
was introduced to ease the growth of banking and commercial transactions.
The basic purpose was to legalize the system of negotiable instruments. The
Act was enforced during British rule and to date, most of the provisions still
remain unchanged. The Ministry of Finance is the nodal organization that
regulates the system related to negotiable instruments. The process of
transfers from one person to another in dealings of monetary value in terms
of legal documents is the negotiable instrument. The legal definition of
negotiable is that something can be transferable from one party to another
party by delivery so that the title shall pass with or without the endorsement to
the transferee. After getting a better clarity of the concept, the other important
aspects and the Act have been discussed in the content.

Objective of the Act

Before delving deeper into the “Negotiable Instrument Act”, let us see
some of the basic concepts that would be required for a better understanding
of the statute. Negotiable Instruments play an important role in financial
transactions. A negotiable instrument is a signed written document. The
purpose of this document is to transfer the specific amount of money to the
assigned person.

The instrument bears the promise to pay the sum of money at an

assigned future date or on-demand as the case may be. One of the common
examples that we can see in our day-to-day life is a draft that is the specific
amount of money payable by the payer or the personal check. There are no
certain set of fixed conditions to consider a document as the negotiable
instrument; however, for an instrument to be negotiable, it must be signed
with a mark or signature, by the maker of the instrument that is the one who
issues drafts. The person who promises the amount of money is known as
the drawer of funds and the person receiving it is known as the drawee of
funds.

Characteristics

Some of the essential characteristics provide a distinctive identity. These are:

 Movable- The negotiable instrument is a convenient method of transferring

money that is easily and portable. There are no hectic and lengthy
procedures as simple steps are needed for transferring the ownership of the
instrument by simple delivery or by a valid endorsement.
 Written- The negotiable instrument transactions should be in the written form.
The documentation works can be handwritten notes, printed, or typed.
 Definite time- The period for the order of payment must be certain. If the date
is not specified then also it must be within a reasonable time. If the payment
order depends upon convenience and choice then it cannot be considered as
a negotiable instrument.

 Specified persons- Like the time,the payee must also be certain or

determined. There can be more than one drawee in the negotiable
instruments and the person may include artificial persons like company, any
separate legal entity, or the authorized persons.

Types

Most of the negotiable instruments’ transactions can be categorized into

three parts. However, there are no explicit statements that it is limited or it
must be specified into only three parts. The railway receipts or the delivery
orders are also common examples of negotiable instruments.

 Promissory notes-This transaction generally takes place between the

debtor and the creditor. The debtor creates the instrument promising
the amount of money on a specified date.

 Bills of Exchange- This is just the opposite of the promissory notes as

this is an order from the creditor to the debtor. Here, the creditor makes
the instrument that instructs the debtor to pay the payee a certain
amount of money. The bill is created by the creditor.

 Cheque- This is just one of the forms of bill of exchange. In this case,
the drawee is a bank and such cheques are payable on demand. The
bank is instructed by the debtor to pay a certain amount of money to
the assigned payee.

Let us have a look at the purpose of the Negotiable Instrument Act.

 The Act aims to create the legal provisions for the negotiable
instruments system that is currently in operation throughout the country.
The regulatory laws would systematically organize the system and the
Act would define a decisive authority to decide any issues relating to
negotiable instruments.

 The Act defines every subject related to the negotiable instruments for
better clarity and understanding. For example, who is the drawer,
drawee, acceptor, etc are mentioned in the various sections.
 The Act provides the penal provisions for effective implementation of
the negotiable instruments process among the parties. If any party
breaches its obligation or there is nonfulfillment of the said duty then
they may be charged with offenses leading to imprisonment.

 The Act protects the right of the parties when they discharge their
obligations diligently.

 The Act mentions different conditions about the transaction systems

and laid down its specific provisions.

 The Act eliminates all kinds of discrepancies or hurdles that may arise
between the parties. In case of any dispute, the parties would have to
undergo the established provisions, and such would legally resolve the
matter.

 The Act regulates the different negotiable instruments like promissory

notes, Bills of Exchanges, and cheques.