THEORY & PRACTICE OF BANKING

1. THEORY & PRACTICE OF BANKING C. P. Mansoor S. Ahmed. M. Com, PGDBA

2. Origin • Derived from French words Bancus, Banco, Banc, Banque

3. DEFINITION According to Sec 5(b) of Banking Regulation Act. • “Accepting for the purpose of lending and investment, of deposits of money from the public, repayable on demand, order or otherwise and withdraw able by cheque, draft, order or otherwise.” Banker Person doing Banking Business Earlier View: “Banker includes a body of persons whether incorporated or not who carry on the banking business.” Expert’s View: The essential business of a banker is to buy money and debts by creating other debt. He is essentially a dealer in debts or credit.

4. Requirements to become a CUSTOMER: • He must have some sort of an account • Even single transaction may constitute him a customer. • Frequency of transaction is anticipated but not insisted upon. • The dealing must be of banking nature. Customer Earlier Views: There must be some sort of an account – either deposit or current account or similar relation – to make a man customer of a bank. Second View: To constitute a customer there must be some recognizable course or habit of dealing in the nature of regular banking business Modern View: Even a single transaction can constitute a person a customer.

5. Questions to be asked? • Is there a depositary relationship? • A banker as a bailee! • Is there a trustee relationship? • Is there an agent relationship? Relationship between a BANKER & A CUSTOMER General Relationship Special Relationship

6. Banker-Customer Relationship General Relationship Special Relationship • Debtor-Creditor Relationship • Express Demand by the creditor • Particular branch • Banking Hours • Un-secured • Law of Limitation • Combine accounts • Obligation to honour cheques • Banker’s Lien • Duty to maintain secrecy • Right to claim incidental charges • Right to charges compound interest • Exceptions from the law of limitation.

7. Overriding the OBLIGATION • Liability to the customer • Assessment of damages Obligation to honour Cheques Availability of money Correctness of the cheque Proper drawing of he cheque Proper application of funds Proper presentation Reasonable time for collection

8. Grounds of Confrontation • Breach of Contract • Negligence • Libel Damages “the smaller the amount of cheque the greater the damage” – principle Ordinary Damage Special Damage Implication of law: • Damage for breach of contract to pay cheques • Damage to general drawer’s business • Damage to general reputation and credit • Damage for the negligence of the banker.

9. Obligation to PAY the BILLS! • Prior arrangements • Indemnity Bonds. • Precautions: • Particulars • Stamp • Due for payment • Signature

10. Lien cannot go beyond the agreement. • Banker’s lien as an implied pledge. • Lien on quasi & negotiable securities. • No general lien on Safe custody deposits. • No lien on documents entrusted for specific purpose. • No lien on articles left by mistake. • Lien on securities taken back after repayment of the loan. • Lien on Bonds & Coupons • No lien until the due date of a loan. • No lien on deposits. Banker’s Lien Right to retain the goods Kinds of Lien: General Lien Particular Lien Circumstances of Exercising a lien: Any agreement in consistent of lien Acquired in the capacity of a banker Not for specific purpose.

11. General Acceptance • Disclosure under the compulsion of law • Disclosure in the interest of public. • Disclosure in the interest of bank. • Disclosure under the express or implied consent of customer DISCLOSURES The disclosure of the financial position of the customer may affect his reputation and bring considerable loss. If a customer suffers any loss on account of the unwanted disclosure of his account the banker will be compelled to compensate for the loss suffered by his customer.

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

13. Disclosure in the Interest of the Public • Political Purpose • Unlawful association • Revolutionary body • Enemy at times of war.

14. Disclosure in the Interest of Bank • Disclosure of the account of the customer who failed to repay the loan to the guarantor. • Disclosure to a fellow banker • Defend the past action

15. Disclosure under the Express or Implied Consent of Customer • Trade Reference • To the guarantor

16. Negligent – Information • Express Consent • Bare Facts • Strict Confidence • Fellow banker • Exact balance General Precaution Damage – unreasonable disclosure Loss – untrue & misleading information.

17. LF Chg Rs. 500/-pa Computerized Branch & Rs. 200/- others • Collection Charges Right to claim incidental Charges Service Charges Processing Charges Ledger Folio Charges Appraisal Charges Penal Charges Handling Charges Collection Charges

18. Right to charge compound interest • Compounding is prohibited • Quarterly/Half Yearly/Yearly

19. Exemptions from the Law of Limitation • 3 years Vs 10 years • 1 year – Dormant Account • 2 year – Inoperative Account • 5 year – Tfr to Central Office