1

2. What are the objectives & achievements of bank

nationalization in India?
Objectives-

According to the Banking Companies Act, 1970, the aim of nationalization of banks in India
is “to control the heights of the economy and to meet progressively and serve better the
needs of development of the economy in conformity with national policy and objectives.”

1. The elimination of concentration of economic power in the hands of a few

2. diversification of the flow of bank economic credit towards priority sectors such as
agriculture, small industry and exports, weaker sections and backward areas
3. fostering of new classes of entrepreneurs, so as to create, sustain and accelerate
economic growth
4. professionalisation of bank management
5. providing adequate training as well as reasonable terms of service to bank staff
6. extending banking facilities to unbanked rural areas and semi rural areas to mobilize
savings of people to the largest possible extent and to utilize for productive purposes
7. to curb the use of bank credit for speculative and other unproductive purposes
8. to bring banks under the control of RBI

Achievements

1. Accelerated branch expansion in rural and backward regions- in 1969 bank

branches in rural areas accounted to only 22.5% of the total number of branches.
Today branches in rural areas account to 52%
2. Deposit mobilization-after nationalization banks attract deposits from different
sections by means of attractive deposit schemes
3. Finance to priority sectors- In 1969 the total credit given to priority sectors like
agriculture, small industries and rural development was only 2% of total bank credit.
By 2006-2007 in increased to around 40% of total credit
4. Increase in total transactions-the total deposits which was 4,664 crores in 1969
increased to 38.30 trillion
5. Differential rate of interest-to provide credit to weaker sections of the society at
very low rate of interest, banks came out with Differential Rate of Interest scheme in
1972
6. Profit making-after nationalization, banks are making profits in addition to achieving
economic and social objectives.
7. Safety-the government has given importance to safety of the banks. The RBI
exercises tight control over banks and safeguards depositors interest
8. Developmental functions- after nationalization, banks provide assistance for the
progress of agriculture, rural development, industry, trade and other developmental
plans of the government
9. Advances under self-employment scheme-public sector banks play a significant
role in promoting self employment through advances to unemployed through various
schemes of the government like IRDP,JGSY, etc

4. What are the main functions of banks?

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There are four types of banking services. They are as follows-

1) Central banking services.

2) Commercial banking services.

3) Specialized banking services.

4) Non-banking financial services.

The various functions of each of the following banks are-

Central banking services

The central bank of any country-

1) Issues currency and bank notes.

2) Discharges the treasury functions of the Government.

3) Manages the money affairs of the nation and regulates the internal and external
value of money.

4) Acts as banker to the govt.

5) Acts as banker’s bank.

Commercial banking services

Commercial banking services include-

1) Receiving various types of deposits.

2) Lending various types of loans.

3) Extending some non-banking customer services like facilities of locker, rendering

services in paying directly house rent, electricity bills, share calls, insurance premium
etc

Specialized banking services

They are estd for definite specialized banking services like

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1) Industrial banks to lend long term loans and working capital for industrial purposes.

2) Land mortgage banks for granting loans on equitable mortgage.

3) Rural credit banks for generating funds for extending rural credit.

4) Developmental banks to support any developmental activities.

These types of banks accept all types of deposits but mobilize the amount in its specially
focused area.

Non-banking financial services

Many banks are established for carrying out non banking financial services. Mutual funds
are institutions accepting finances from its members and investing it 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 the public and manage
the funds for or on behalf of its depositors. They undertake to manage the funds of the
principal so as to generate maximum return.

Explain the role of banks in promoting economic development.

Banks play a very significant role in the economic development of the country. Banking
system as a whole has an imp influence on the tempo of economic activity. The economic
importance of banks are-

1) Banks mobilize the small, scattered and idle savings of the people and make them
available for productive purposes. They help the process of capital formation.

2) By offering attractive interests on the savings of the people deposited with them
banks promote the habit of saving in them.

3) By accepting the savings of the people banks provide safety and security to the
surplus money of the customers.

4) Banks provide a convenient and economical mean of transfer of funds from one
place to another. Even cheques are used for the movement of funds from one place
to another.

5) Banks help the movement of funds from one region where they are not very useful to
regions where they can be more usefully employed. By moving funds from one place
to another banks contribute to the economic development of backward regions.

6) Banks influence the rate of interest in the money market, through the supply of
money. They exercise a powerful influence on the interest rate in money market.
 4

7) Banks help trade, commerce, industry and agriculture by meeting their financial
requirements. Without the financial assistance the growth of trade and commerce
industry would have been very slow.

8) Banks direct the flow of funds into collective channels while lending money. They
discriminate in favour of essential activities as against non-essential activities. Thus
they encourage the development of right type of activities which the society desires.

9) Banks help the industrious, the prudent, the punctual, the honest and discourage the
dishonest by not giving finance for wrongful purpose. Thus banks act as public
conservator of commercial activities.

10) Banks serve as the best financial intermediaries between the borrowers and the
lenders.

11) Through the process of creation of money, banks acquire control over the supply of
money in the country. Through their control over supply of money they influence
economic activities, employment, income and general price level in the economy.

12) Banks monetize the debts of others that is cover t the debts of others into money by
exchanging bank deposits in return for securities.

Thus a strong and a sound banking system is indispensable for the economic
development of any country.

5. Who is a banker and customer? Explain the general

relationship between banker & customer. OR The
 5

relation between a banker and a customer is that of a

debtor and a creditor. Explain.

The relationship between a banker and a customer is of great significance. It depends

upon the services rendered by the banker to the customer.

Definition of banker

According to section 3 of the NI Act, 1881, banker includes any person acting as a banker
and any post office savings bank.

According to section 5(b) of the Banking Regulation Act, 1949, banking means the
accepting, for the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.

To sum up a banker is who

1) Take deposit account

2) Take current accounts

3) Issue and pay cheques

4) Collect cheques crossed and uncrossed for his customers.

Money lender is not considered as a banker as mere lending does not constitute banking
business. Banker is an institution which borrows money by accepting deposits from the
public for the purpose of lending to those who are in need of money.

Definition of customer

The term customer is not defined by law. Ordinarily, a person who has an account in a
bank is called a customer.

Acc to Dr. Hart, “a customer is one who has an account with a banker or for whom a
banker habitually undertakes to act as such.

Thus to constitute a customer, the following essential requisites must be fulfilled:

1) He must have some sort of an account.

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2) Even a single transaction constitutes a customer.

3) The dealing must be of a banking nature.

A customer need not be a person. A firm, joint stock company, a society or any separate
legal entity may be a customer. Explanation to section 45-Z of the BR Act clarifies that a
customer includes a Government department and a corporation incorporated by or under
any law.

Relationship between a banker and customer

Relation of a debtor and a creditor

The general relationship between banker and a customer is that of a debtor and a
creditor i.e. borrower and lender. In Foley v. Hill, Sir John Paget remarks, “the relation of a
banker and a customer is primarily that of debtor and creditor, the respective positions being
determined by the existing state of account. Instead of the money being set apart in a safe
room, it is replaced by the debt due from the banker. The money deposited with him
becomes his property, and is absolutely, at his disposal, and, save as regards the following
of the trust funds into his hands, the receipt of money by a banker from or on account of his
customer constitutes him merely the debtor of the customer with ‘super added’ obligation to
honour his customer’s cheques drawn upon his balance, in so far the same is sufficient and
available”.

In Shanthi Prasad Jain v. Director of Enforcement, Foreign Exchange Regulation, the SC

held that the banker and customer relationship in respect of the money deposited in the
account of a customer with the bank is that of a debtor and a creditor.

On the opening of an account a banker assumes the position of a debtor. The money
deposited by the customer with the bank is in legal terms lent by the customer to the banker
who males use of the same according to his discretion. The creditor has the right to demand
back his money from the banker, and the banker is under an obligation to repay the debt as
and when he is required to do so.

A depositor remains a creditor of his banker so long as his account carries a credit
balance. But he does not get any charge over the assets of his debtor/banker and remains
an unsecured creditor of the banker. Since the introduction of deposit insurance in India in
1962 the element of risk of the depositor is minimized as Deposit Insurance and Credit
Guarantee Corporation undertakes to insure the deposits upto a specified amount.

Banker’s relation with the customer is reversed as soon as the customer’s account is
overdrawn. Banker becomes creditor of the customer who has taken a loan from the banker
and continues in that capacity till the loan is repaid. As the loans and advances granted by a
banker are usually secured by the tangible assets of the borrower, the baker becomes a
secured creditor of his customer.

Various legal relationships of banker and customer

 7

2) Agent and Principal- Sec.182 of ‘The Indian Contract Act, 1872’ defines “an agent” as a
person employed to do any act for another or to represent another in dealings with third
persons. The person for whom such act is done or who is so represented is called “the
Principal”.One of the important relationships between a banker and customer is that of an
agent and principal. The banker performs various services of the customer, where he acts
as the agent.

Buying and selling securities of customer

Collection of cheques, bills of exchange, promissory notes on behalf of customer

Acting a trustee, executor or representative of a customer

Payment of insurance premium, telephone bills etc.

1) Trustee and beneficiary- section 3 of the Trusts Act defines a trustee as one to
whom property is entrusted to be administered for the benefit of another called the
beneficiary. A banker becomes a trustee under special circumstances. When a customer
deposits securities or other valuables with the banker for safe custody, the banker acts as
trustee of customer.

2) Bailee and bailor- during certain circumstances banker becomes bailee. When he
receives gold ornaments and important documents for safe custody he takes charge of it as
bailee and not trustee or agent. He cannot make use of them as he is bound to return the
identical articles on demand.

3) Pawnee and pawner- pawn is a sort of bailment in which the goods are delivered to
another as a pawn, to be a security for money borrowed. Thus a banker acts as a pawnee
where a customer delivers he goods to him to be kept as security till the debt is discharged.
The banker can retain the goods pledged till the debt is paid.

4) Mortgagee and mortgagor- the relation between a banker as mortgagee and his
customer as mortgagor arises when the latter executes a mortgage deed in respect of his
immovable property in favour of the bank or deposits the title deeds of his property with the
bank to create an equitable mortgage as security for an advance.

5) Lessee and lessor- when a customer hires a locker in the bank’s safe deposit vault,
the bank undertakes to take necessary precaution for the safety of the articles in the locker.
The relation between the parties is that of a lessor and lessee.

6) Guarantor and guarantee- a bank as guarantor gives guarantee to its customer by

issuing a ‘letter of credit’. It is a kind of credit facility to its customer to facilitate international
trade. A bank guarantee contains an undertaking to pay the amount without any demur on
mere demand of the principal amount on the ground for non-performance or breach of
contract.

7) Fiduciary relationship- every relation of trust and confidence is a fiduciary relation. A

banker who receives a customer’s money is under a duty not to part with it which is
inconsistent with the customer’s fiduciary character and duty. In Official Assignee v. Rajaram
Aiyar, it was held that where banks old money for a specific purpose of sending it somebody
the money is impressed with trust.
 8

6. Explain the special relationship between banker &

customer. OR What is the special relationship arising out
of general relationship between a banker and a customer.
OR What are the rights and obligations of a banker
towards a customer?

By opening an account with the banker, there will be some rights conferred and
obligations imposed to the banker as well as the customer. These rights and duties are
reciprocal i.e. the banker’s duties are the customer’s rights and the banker’s rights are the
customer’s duties. These rights and obligations are called the special features of relationship
between banker and the customer.

The special relationship between banker and customer can be presented as under:

General obligations of banker towards customer

Obligation to honour cheques- banker accepts the deposits from the customer with an
obligation to repay it to him on demand or otherwise. The banker is therefore under a
statutory obligation to honour his customer’s cheques because, it is recognized under
section 31 of the NI Act, 1881-

The drawee of a cheque having sufficient funds of the drawer in his hands properly
applicable to the payment of such cheque must pay the cheque when duly required so to do,
and, in default of such payment, must compensate the drawer for any loss or damage
caused by such default.

Thus the banker is bound to honour his customer’s cheques provided the following
conditions are fulfilled-

(a) Sufficient balance in customer’s account

(b) Presentation of cheques within working hours of business

(c) Presentation of cheques within reasonable time after ostensible date of its issue

(d) Cheques should be presented at the branch where account is kept

(e) Fulfilment of requirements of law

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Obligation to maintain secrecy and disclosure of information required by law- the banker
is under an obligation to take utmost care in keeping secrecy about the accounts of the
customers since it may affect his reputation, credit-worthiness and business. It was firmly
laid down in Tournier v. National Provincial and Union Bank of England Ltd. in India it was
made compulsory after 1970. The duty to maintain secrecy will be continuing even after the
account is closed or the death of the customer.

This obligation is subject to certain exceptions.

Obligation to keep a proper record of transactions- the banker must keep a proper record
of transactions of the customer. If he wrongly credits the account of the customer and
intimates him with the same and the customer acts upon the intimation bonafide and
withdraws cash the banker cannot contend that the entries were wrongly made. He shall not
succeed in recovery of money from the customer.

Obligation to abide by the instructions of the customer- the banker must abide by any
express instructions of the customer provided it is within the scope of their banker-customer
relationship. In the absence of any express instructions, the banker must according to
prevailing usages at the place where the banker conducts his business.

Rights of a banker

Banker’s right of general lien- one of the important rights enjoyed by a banker is the right
of general lien. Lien means the right of the creditor to retain goods and securities owned by
the debtor until the debt due from him is paid. It may either be general or particular.

In Brando v. Barnet, it was held that bankers most undoubtedly have a general lien on all
securities deposited with them as bankers unless there is an express or implied contract
inconsistent with lien.

In India sec 171 of the Indian Contract Act confers general lien upon bankers as follows-
bankers…..may in absence of a contract to the contrary, retain as a security for a general
balance of account, any goods bailed to them.

Banker’s right of set-off- the right to set off is a statutory right which enables debtor to
take into account a debt owing to him by a creditor, before the latter could recover the debt
due to him from the debtor. Thus when a customer keeps two or more accounts at the same
bank, some of which are overdrawn and some in credit, the bank has a right to combine
such accounts and pay the resultant balance. In Halesowen Presscook and Assemblies Ltd
v. Westminister Bank Ltd, it was held that a banker has the right to combine two accounts
and to set off unless he has made some agreement express or implied to the contrary.
 10

Banker’s right for appropriation of payment- when a debtor owes two or more debts to a
creditor and he pays some amount which is not sufficient to meet any debt to the creditor
appropriation is done. It applies to a banker if the customer has more than one deposit or
more than one loan account.

In Devaynes v. Noble, famously known as Clayton’s case, a principle was laid down as to
when the customer has current account and deposits and withdraws money frequently the
first item on debit side will be discharged by the first item on credit side. The credit entries in
the account adjust or set off the debit entries in chronological order.

Banker’s right to claim incidental charges- the banker may claim incidental charges on
unremunerative accounts such as service charges, processing charges, ledger folio
charges, appraisal charges, penal charges and so on.

Banker’s right to charge compound charges- a banker has a special privilege to charge
compound interest. In Syndicate Bank v. West Bengal Cement Ltd, the adding of unpaid
interest due to the principal amount is recognized. However, the SC abolished this in case of
agricultural loans in the Bank of India case.
 11

7. What are the obligations of a banker?

1. Obligation to honour cheques- the banker is under a statutory obligation to honour

his customer’s cheques in the ordinary course of business. If he wrongfully dishonors the
cheque, then he is liable to the customer for damages.

Thus the banker is bound to honour the customers cheque provided the following
conditions are fulfilled-

(a) Sufficient funds- there must be sufficient funds of the drawer in the hands of the
drawee. A banker should be given sufficient time to release the amount of the
cheque sent for collection before the said amount can be drawn upon by the
customer. The banker can dishonor the cheques if there are insufficient funds.

(b) Funds must be properly applicable- a customer might be having several bank
accounts in his various capacities. But is essential that the account on which a
cheque is drawn must have sufficient funds. If some funds are earmarked by the
customer for some specific purpose, they are not available for honouring the
cheques. But where the customer has overdraft facility the banker has the obligation
to honour the cheque upto the amount of overdraft sanctioned.

(c) The banker must be duly required to pay- the banker is bound to honour the cheque
only when hi is duly required to pay. The cheque, complete and in order, must be
presented before the banker at the proper time.

2. Obligation to maintain secrecy of accounts-The customer’s account details are

recorded in the books of the banker and the true state of his financial dealings are
available with the banker. If any of these facts are made known to others, the customer’s
reputation might suffer and he might incur losses also. The banker is therefore under an
obligation to take utmost care in keeping secrecy of the details of the customer.

However, this rule has exceptions(mention briefly)

3. Obligation to keep a proper record of transaction- the banker must keep a proper
and accurate record of all the transactions of the customer. Sometimes, he may commit
some wrong.
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8. Explain the banker’s right of general lien.

Lien means a legal claim to hold property as security. According to Halsbury, lien may be
defined as “a right in man to retain that which is in his possession belonging to another, until
certain demands of the person in possession is satisfied”.

Lien is of two kinds- 1) specific or particular lien and 2) general lien

A particular lien is one which confers a right to retain the goods in connection with a
particular debt only while a general lien is a right to retain all the goods or any property of
another until all the claims of the holder are satisfied. It extends to all transactions and thus
more extensive.

Banker’s right of general lien

One of the important rights enjoyed by a banker is the right of general lien. In Brando v.
Barnet, it was held that bankers most undoubtedly have a general lien on all securities
deposited with them as bankers unless there is an express or implied contract inconsistent
with lien.

In India sec 171 of the Indian Contract Act confers general lien upon bankers as follows-
bankers…..may in absence of a contract to the contrary, retain as a security for a general
balance of account, any goods bailed to them.

Circumstances for exercising general lien

1) No agreement inconsistent with the right of lien.

2) Property must be possessed in his capacity as a banker.

3) Possession should be lawfully obtained.

4) Property should not be entrusted to the banker for a specific purpose.

Incidents of lien- lien attaches to

1) Bills of exchange or cheques deposited for collection or pending discount.

2) Dividend warrants and interest warrants paid to the banker under mandates issued
by the customer.

3) Securities deposited to secure specific loan but left in banker’s hand after loan is
repaid.

4) Securities, negotiable or not, which the banker has purchased or taken up, at the
request of customer, for the amount paid.
 13

Exceptions- banker has no general lien

1) On safe custody deposits.

2) On securities or bills of exchange entrusted for specific purpose.

3) On articles lefty by mistake or negligence.

4) On deposit account.

5) On stolen bond.

6) Until due date of the loan.

7) On trust account.

8) On title deeds of immovable properties.

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10. Who are the banker’s special customers? Explain

the precautions to be taken by the banker in opening
and operating their accounts.

Banks solicit deposit of money from the members of the public. Any person who is legally
capable of entering into a valid contract may apply in the proper way to deposit his money
with the bank.

A bank’s special customers are generally minors, married women, illiterate persons,
lunatics, blind people, drunkards, insolvents etc who are not competent to open such
accounts. There are also impersonal customers like schools, clubs, partnership firm, joint
stock companies etc. certain precautions are to be taken by banks while opening accounts
in the name of the following customers.

Minor

A minor is a person who has not attained the age of 18 and in case a guardian is
appointed, it is 21. Minors are regarded “pet children of law”.

In Mohori Bibi v. Dharmodas Ghose, a minor executed a mortgage for Rs 20000 and
received Rs 8000 from the money lender. Subsequently, the minor sued for setting aside the
mortgage. The money lender wanted refund of money which he had actually paid. The PC
held that an agreement by a minor was absolutely void and therefore, money lender was not
entitled repayment of money.

Some of the precautions to be taken by the banker on opening and operating account of
a minor are-

1) The banker may open a SB account but not a current account as it incurs no liability
to the minor.

2) At the time of opening of account of minor, the bank should record the genuine date
of birth of the minor. Banker should insist on to give some schooling record or date of
birth as entered in Births and Deaths Register.

3) Minors are allowed to open such accounts when they have completed a particular
age say twelve years in some banks and ten years in some others.

4) Banks should prudent to issue cheque books only to minors of, say sixteen or
seventeen years of age.

5) Accounts for illiterate minors are not opened in their single name.

6) As a measure of precaution, banks adopt a general rule not to accept deposit

exceeding a particular sum.
 15

7) Since a contract with a minor is void and cannot be enforced against him in Court of
law, a minor’s account should never be allowed to be overdrawn.

8) A guarantee obtained to secure the money borrowed by a minor is also of no avail.

However, if the guarantor undertakes to indemnify he will be held liable though
borrower is minor.

Lunatics

Lunatics are persons of unsound mind. Lunatics are disqualified from contracting but the
disqualification does not apply to contract entered by lunatics during their period of sanity.
Following are banker’s duty n case of lunatics-

1) Since a lunatic has no capacity to contract, acc to sec 11 of the ICA, no banker
knowingly opens an account in the name of a lunatic.

2) If an existing customer becomes insane, the banker must immediately stop the
operation of the account. It is so because, the banker has no right to debit his
account for payment made out of his account from the moment, the banker knows
the fact of lunacy of customer, the contract between them is void.

3) A banker must not be carried away by hearsay information or rumours. He must get
definite information about the lunacy of the customer.

4) If a banker dishonours a cheque in a hurry, without having any proof of lunacy, he

will be liable for wrongful dishonour of cheque.

5) It should return all cheques of customer’s account with the word ‘refer to drawer’ and
not ‘customer insane’. It should make careful note of lunacy order.

6) If a third party is authorised to draw on customer’s account, that authority will cease
when the customer becomes insane since when a principal cannot act for himself his
agent can no longer act for him.

7) If one party to an account opened in joint names becomes mentally incapable of

managing his or her affairs, the banker should not allow either party to operate the
account.

Illiterates

An illiterate person is competent to contract and bank may open an account in his name,
but special care should be taken by the banker before opening an account.

1) The account of an illiterate person may be opened provided he/she calls the bank
personally along with a witness who is known both to the banker and the depositor.
 16

2) A passport size photograph of the illiterate person is identified before the banker in
presence of the account holder. The photographs have to be attested by the bank
officer/ witness.

3) The left hand thumb impression in case of male illiterate and right hand thumb
impression in case of female illiterate are duly attested by some responsible person
on the account opening form.

4) One or two identification marks of the depositor should be noted on the account
opening form.

5) The illiterate person should be provided with a passbook which should also contain
an attested photograph of the illiterate person.

6) Normally, no cheque book facility is provided on accounts in the name of illiterate

persons.

7) At the time of withdrawal/repayment of deposit account the account holder should

attend personally with passbook and attest his/her thumb impression or mark in the
presence of an authorised person.

8) The thumb impression of illiterate person on the withdrawal form or cheque (if
provided), and on the back of the withdrawal form or cheque should be duly
compared with the specimen impression kept by the bank.

Married women

The Hindu married women are governed by the Hindu Succession Act and other married
women by Indian Succession Act. A banker may open an account in the name of a married
woman like any other customer. However, a banker should exercise caution while opening
account for the wife of an undischarged insolvent.

1) While opening an account of a married woman, the bank should enquire about her
means and circumstances, and if she is living with her husband, something about
him and his occupation and position in life, and if he is an employee, the name of the
employer.

2) In case she applies for an overdraft, the banker should see that she owns separate
property in her own name and precaution should be kept in mind regarding her status
and capacity to pay and the purpose for which the borrowings are made. Also he
should seek suitable securities preferably on her, which can be attached by the
Courts.

3) The banker should always observe that there is credit balance in her account.

4) Banks usually require that a married woman be independently advised by her own
solicitor when depositing security for the account of other persons.

5) A married woman may enter into a contract of guarantee and it is enforceable only
against her separate estate.
 17

6) In case of an illiterate married woman, her thumb impression should be obtained on

the account opening form and on the identification card.

Pardhanishin women

In case of a pardhanishin woman who remains completely secluded the following

presumption exists-

1) Any contract entered into by her may be subject to undue influence

2) The same might not have been done with free will and with full understanding of
what the contract actually means.

He banker should therefore due precaution while opening an account in the name of a
pardhanishin woman. As the identity of such woman cannot be ascertained the banker
generally refuses to open an account in her name.

Joint Hindu families

A JHF or a HUF consists of all persons lineally descended from a common ancestor and
included their wives. Following are the precautions to be taken by the banker in opening and
operating accounts in the name of HJF.

1) The account may be opened in the name of karta or in the name of family business
and should be duly introduced.

2) The account opening form should be signed by all adult coparceners, even though
the karta would operate the account.

3) The declaration signed by all the members as to who is the karta and who are the
other coparceners including minor coparceners should be obtained.

4) If there are minor coparceners, the other adult coparceners should sign for self and
as guardians of minors.

5) Authority should be given to the karta to operate the account of all concerned under
their joint signature.

6) On attaining majority, the minor coparceners should be asked to join with other
coparceners in signing the existing account opening form in ratification of previous
transactions.

7) Any member of the HUF can stop payment of a cheque drawn by karta. When the
bank receives a notice about any dispute amongst the family members of the HUF,
the operations in the account should be stopped till further instructions from a
competent court.

8) The burden of proof that loan was taken by karta for purposes beneficial to the family
lies on the banker. Thus before granting loans necessary enquiries should be made
 18

to ensure it. Otherwise, the bank may not be able to succeed in a suit for recovery of
debt.

Agent

A person employed to do any act for another, or to represent another in dealings with
third persons, is known as an agent for another. The precautions to be taken by a banker in
opening and operating account of a customer by an agent are

1) A banker should at once suspend all operations on that account upon hearing or
being notified of the principal’s death, insanity or bankruptcy.

2) The agent must assign the cheque for and on behalf of the principal, so that the third
parties would know that he is dealing in a representative capacity.

3) Whenever a bank receives a mandate, it should be recorded in a register, serially

numbered, indexed alphabetically, and instructions should be noted in the customer’s
ledger account.

4) In case the agent is authorised to open an account on behalf of the principal, the
application should be made to sign by the principal himself, delegating authority to
agent to operate the account.

5) The agent should sign in a manner to indicate that he is signing as an agent.

6) The banker should on no account allow the agent, or in fact any person to pay into
his own private account, cheques which he has endorsed on behalf another, without
satisfying himself that the agent has the authority of the principal to do so.

7) A banker should not allow an agent to overdraw his principal’s account express with
his express authority.

Partnership firm

A partnership is the relation between the persons who have agreed to share the profits of
a business carried on by all or anyone of them acting for all. The banker should take the
following precautions while dealing with a partnership firm.

1) The banker should first know the provisions of the Part Act before he opens an
account for PF.

2) The banker shall open an account in the name of a partnership firm only when an
application is submitted in writing by any one or more partners under sec 19(2)(b) of
the Act. Authority to open an account in the name of an individual partner is positively
denied.
 19

3) To be on safer side, a banker should get a written request from all the partners
jointly for opening an account.

4) The banker should go through the partnership deed and carefully study the objects,
capital, borrowing powers etc. he should get a copy of the duly stamped partnership
deed. He should enquire about the details of the firm, partners and their powers. If
the firm is registered the banker should get a copy of the registration certificate.
Dealings with unregistered firms will involve risks.

5) There should be a clear mandate from all the partners. Mandate must be signed by
all the parties.

6) The banker should not mix the personal and private accounts of the partners. He has
no right to set off and lien over the accounts.

7) No partner has an implied power to sell or mortgage the property of his firm. So in
case of mortgage of property, the deed of mortgage should be signed by all the
partners.

8) While advancing loans and advances to partnership firm the banks in practice get
the loan documents executed by the partners on behalf of the firm as also in their
personal capacity.

9) Since a firm stands dissolved on insolvency or insanity of a partner, a cheque signed

by an insolvent partner before the date of adjudication should not be paid b the
banker without conformation from other partners.

Trust

A trust is an obligation annexed to the ownership of the property, and arising out of a
confidence reposed in and accepted by the owner, or declared and accepted by him, for the
benefit of another, or of another and the owner.

While opening accounts in the names of persons in their capacity as trustees, the banker
should take the following precautions.

1) The banker should examine the trust deed concerning instructions regarding
opening and operating the account contained in the trust deed. In the absence of
such instructions, all the trustees may join in opening such account.

2) Instructions regarding limitation on withdrawal in the trust deed, if any, be

prominently noted at the ledger head and specimen signature card and withdrawals
should be restricted.

3) The banker should note the objects for which the trust has been created so as to
facilitate the passing of cheques.
 20

4) A trustee has no individual powers. They must all act together. All must join in
signing of cheques. Unless expressly provided otherwise in the trust deed, no trustee
can delegate his power to another.

5) If one of the trustees dies or retires, the bank on receiving notice should suspend all
operations in the account. However, if the trust deed is silent the bank can let the
operations to continue.

6) In case of breach of trust the bank must see that it does not become a party to the
breach. The banker is justified in dishonouring the cheque drawn by a trustee, if
intended for breach of trust.

7) If the trustees are authorised to borrow to discharge the functions of the trust, the
banker must get specific assets of the trust as security.
 21

11. What are the functions of commercial banks?

The functions of commercial banks are very vast.

Meaning of CB- commercial banking refers to that banking which is concerned with the
acceptance of deposits from the public repayable on demand or after the expiry of a short
period and the granting of mainly short term credit to trade, commerce and industry through
wide networking of branches throughout the country.

Functions of commercial banks- the functions of CB are numerous. They can be broadly
divided into two categories. They are-

1) Primary or basic functions

a) Receiving of deposits- deposits constitute the main source of funds for

commercial banks. CBs receive deposits from the public on various accounts.
The main types of accounts are- fixed, current, savings, recurring (explain lil).

b) Issuing notes/cheques- this function once considered to be the most paying

part of banker’s business is in modern times performed generally by the central
bank. Its importance has dwindles to a large extent in some developed countries
where cheque currency has replaced bank notes to a large extent.

c) Lending of funds- it is the main business of CB. Advances form the chief source
of profit for CB. Banks lend funds by way of loans, over-drafts, cash credit,
discounting of bills.

(i) Loan- it is a financial arrangement under which an advance is granted

by a bank to a borrower on a separate account called the loan account. A
loan may short, medium or long term. It is granted either against collateral
securities or against personal security of the borrower.

(ii) Over-draft- it is a financial arrangement where a current account

holder is permitted by a bank to overdraw his account that is to draw more
than the amount standing to his credit upon an agreed limit.

(iii) Cash credit- it is a financial arrangement under which a borrower is

allowed an advance under a separate account called cash credit limit.
Here the borrower can withdraw the amount in installments as and when
he needs.

(iv) Discounting of bills of exchange- here the bank takes a BOE

maturing from an approved customer and pays him and credits his
account immediately with the present value of the bill.
 22

d) Investment of funds on security- it is one of the imp functions of comm. Banks.

They invest a considerable amount of their funds in govt and industrial securities.
In India it is required by statute for CB to invest a considerable amount of their
funds in securities.

e) Creation of money- the various ways of creation of money are-

(i) By advancing loans

(ii) By allowing over draft

(iii) By providing cash credit

(iv) By discounting BOE

(v) By purchasing securities

(vi) By purchasing fixed assets

The commercial banks are prominent in today’s world because they manufacture or
create money. The bank deposits are regarded as money coz they perform the same
function as money that is they increase the purchasing power of the community and serve
as medium f exchange in purchase of goods and services and settlement of debts.

2) Secondary or subsidiary functions- apart from performing the main function the
comm. banks also perform a num of secondary functions which may be divided into the
following two heads-

a) Agency services- the services rendered by a bank as the agent of his customer
are called agency services. The imp agency services are-

(i) Collection of money on behalf of customers.

(ii) Making payments on behalf of customers.

(iii) Purchase and sale of securities on behalf of customers.

(iv) Advising customers regarding investments.

(v) Acting as trustee, executor, and administrator of customers.

(vi) Rendering of merchant banking services.

b) Miscellaneous or general utility services- services rendered by banker is not

confined only to his customers but also to general public called such as-

(i) Safe custody of valuables

(ii) Dealing in foreign exchange business

 23

(iii) Issuing of traveller’s cheque, traveller’s letter of credit and circular notes.

(iv) Collecting information bout other businessmen for customers.

(v) Collection of statistics and data.

(vi) Lease financing.

12. What are the functions of the Reserve Bank

of India?
The Central Bank is the Apex Bank of the country. It is called by different names in different
countries. It is the Reserve Bank of India in India.

The Reserve Bank of India has been defined in terms of its function. According to Vera
Smith, “The primary definition of central banking is a banking system in which a single bank
has either complete control or a residuary monopoly of note issue.”

According to A.C.L. Day, “a central bank is to help control and stabilise the monetary
banking system”.

Functions Of RBI:

1) Regulator Of Currency:

The Reserve Bank of India is the bank of issue. It has the monopoly of note issue. Notes
issued by it circulate as legal money. It has its issued department which issued notes and
coins to commercial banks.

Reserve Bank of India has been following different methods of note issue in different
countries. The monopoly of issuing notes vested in the Reserve Bank of India ensures
uniformity in the notes issued which helps in facilitating exchange and trade within the
country. It brings stability in the monetary system and creates confidence among the public.

RBI can restrict or expand the supply of cash according to the requirements of the
economy. Thus, it provides elasticity to the monetary system.

2) Banker, Fiscal Agent and Advisor To The Government:

RBI everywhere acts as bankers, fiscal agent and advisor to their respective
governments. As banker to the government, the central bank keeps the deposits of the
central and state governments and makes payments on behalf of the governments. But it
does not pay interest on government deposits.

It buys and sells foreign currencies on behalf of the government. It floats loans, pays
interest on them, and finally repays them on behalf of the government. Thus it manages the
entire public debts.

RBI also advices the government on such economic and money matters as controlling
inflation or deflation, devaluation or revaluation of the currency, deficit financing, balance of
payments etc. Thus it is the custodian of government money and wealth.
 24

3) Custodian Of Cash Reserves Of Commercial Banks:

Commercial banks are required by law to keep reserves equal to a certain percentage of
both time and demand deposits liabilities with the RBI. It is on the basis of these reserves
that the RBI transfers funds from one bank to another to facilitate the clearing of cheques.
Thus the RBI acts as the custodian of the cash reserves of commercial banks and helps in
facilitating their transactions.

4) Custody And Management Of Foreign Exchange Reserves:

The RBI keeps and manages the foreign exchange reserves of the country. It sells gold
at fixed prices to the authorities of other countries. It also buys and sells foreign currencies
at international prices.

Further, it fixes the exchange rates of the domestic currency in terms of foreign
currencies. It holds these rates within narrow limits in keeping with its obligations as a
member if IMF and tries to bring stability in foreign exchange rates.

5) Lender Of The Last Resort:

By granting accommodation in the form of re-discounts and collateral advances to

commercial banks, bill brokers and dealers, or other financial institutions, the RBI acts as the
lender of the last resort.

It acts as lender of the last resort through discount house on the basis of treasury bills,
government securities etc. Thus RBI as lender of the resort is a big source of cash and also
influences prices and market rates.

6) Clearing House For Transfer And Settlement:

As bankers` bank, the RBI acts as a clearing house for transfer and settlement of mutual
claims of commercial banks. Since the RBI holds reserves of commercial banks, it transfers
funds from one bank to other banks to facilitate clearing of cheques.

To transfer and settle claims of one bank upon others, the RBI operates a separate
department in big cities and trade centres. This department is known as clearing house and
it renders free service to commercial banks.

7) Controller Of Credit:

The most important function of RBI is to control the credit creation power of commercial
bank in order to control inflation and deflation pressures within this economy. For this
purpose, it adopts quantitative and qualitative methods. These involve selective credit
control and direct action.

Besides the above noted functions, the RBI in a number of developing countries have
been entrusted with the responsibility of developing a strong banking system to meet the
expanding requirements of agriculture, industry, trade and commerce.
 25

13. Explain the management, powers and constitution of

the Reserve Bank of India.

The Reserve Bank of India was established on 1st April, 1935 under the Reserve Bank of
India Act, 1943 as the Central Bank of the country to regulate the issue of bank notes and
the keeping of reserves for the stability in India and generally to operate the currency and
credit system of the country.

⤚ Constitution:

The bank was established as a shareholder`s bank with an authorized and paid-up
capital of Rs. 5 crores divided into shares of Rs. 100 each. After independence, under the
Reserve Bank Act, 1948, the bank was nationalized, after paying compensation to the
shareholders at the market price of the share.

⤚ Management:

The affairs if the RBI are managed by the Central Board of Directors consisting of:

• Governor and not more than 4 Deputy Governors appointed for a period not more
than 5 years.
• Four Directors, one from each of the four local boards.
• The other Directors.
• One Government Official.

All the Directors and the officials are nominated for 4 years each by the Central
Government. To look after the affairs there are 4 local Boards, one at each of the cities of
Bombay, Calcutta, Delhi and Madras, each Board consisting of 5 members appointed for 4
years by the Central Government.

⤚ Functions:

Mention the above functions in brief.

 26

Powers:

• Power Of RBI To Appoint Chairman Of A Banking Company:

RBI has the authority to appoint Chairman of Banking Company where the office of the
Chairman of the Board of Directors appointed on a whole-time basis.

• Minimum Paid-up Capital And Reserves:

Every banking company should deposit the prescribed minimum paid-up capital and
reserves with the RBI either in cash or in form.

• Cash Reserve:

Every banking company, not being a Scheduled Bank, shall maintain in India by way of
cash reserves or by way of balance in a current account with the RBI.

• RBI Control Over Banking Companies:

The RBI may, by order, require any banking company to call a general meeting of the
shareholders of the company within such time, not less than two months from the date of
order.

• Power Of RBI To Control Advances By Banking Companies:

The RBI may determine the policy in relation to advances to be followed by banking
companies generally or by any banking company in particular.

• Licensing Of Banking Companies:

No company shall carry on banking business in India unless it holds a licence issued in
that behalf by the RBI and any such licence may be issued subject to such conditions as the
RBI may think fit to impose.

• Monthly Returns:

Every bank should submit monthly returns to the RBI in the prescribed form and manner
showing its assets and liabilities in India. The RBI has the power to call for other returns and
information if required.

• Accounts And Balance-Sheet:

At the expirations of each calendar year, every banking company incorporated in India
shall prepare, a balance-sheet, profit and loss accounts as on the last working day of the
year.

• Submission Of Returns:

The accounts and balance-sheet together shall be published in the prescribed manner
and three copies thereof shall be furnished as returns to the RBI within three months form
the end of the period to which they refer
 27

• Inspection:

The RBI had got the power to inspect the books and accounts of a banking company.
After the inspections it sends a copy of it to the concerned bank. The inspection by the RBI
may be on its own or under the direction of the Central Government.

• Directions:

The RBI may from time to time, issue directions as it deems fit, to a banking company in
particular or to the banking companies in general and the banking company or companies
shall be bound to comply with such directions

• Power To Remove Managerial And other Persons From office:

RBI has to powers to remove managerial and other persons from office of the banking
companies, whose conduct is to the interest of the deposits and to secure proper
management. RBI also appoints additional directors.

• Power Of RBI To Impose Penalty:

The RBI has a wide range of powers of supervision and control over commercial and
cooperative banks. The RBI control frauds in entire banking industry in India.

14. Explain the role of Reserve Bank in economic

development.

In developed countries, the role of Central Bank is regulatory. But in a developing

economy like that of India, the role of Central Bank is developmental or promotional. The
Central Bank is to help in the mobilization of required productive resources and in their
efficient allocation. It has to bring about economic development with stability.

The RBI has been quite active in the maintenance of a proper atmosphere of economic
development and mobilization of financial resources for economic development. The RBI
has assisted economic development in the following ways-

1. Checking inflation- the government budgetary operations, owing to increasing size

of government expenditure, generate strong inflationary pressures. It is the
responsibility of the monetary authority to restrain these pressures by freezing a part
of liquidity thus generated. This, the RBI has been able to do through its pivotal tool-
rate of interest. It has made use of other methods of credit control as well. Unless
inflation is kept in check, all the development plans are in danger of being upset.
2. Providing development finance- the RBI has helped a great deal in setting up of
specialized institutions so that the financial facilities are made available.
 28

3. Agricultural credit-The RBI has made available short term, medium term and long
term finance to agriculture through the hierarchical network of co-operative banks
and societies. In this connection, the RBI set up two funds

(a) National Agricultural Credit(long term operations) Fund

(b) National Agricultural Credit(stabilization) Fund

These fund loans were given to SCB’s & RRB’s for agricultural credit and during floods
and famines.

It has also been instrumental in setting up Agricultural Refiance & Developmental

Corporation and more recently Export-Import Bank and the NABARD.

4. Industrial finance-The RBI has also organized industrial finance for both big and
small industries to secure all types of loans-short term, medium term and long term. It
has helped in the creation of

(a) Industrial Finance Corporation of India

(b) National Small Industries Corporation

(c) State Financial Corporations

(d) Industrial Development Bank of India.

It has also introduced a scheme of guarantee of bank loans to small industry and till the
establishment of Export-Import Bank, also provided refiance to banks for export credit

5. Regulatory credit-When there is an expansion of bank credit, it adds to the active

demand for goods and services. This tends to start inflationary spiral. Thus it
becomes essential for the monetary authority to stem in and restrain the expansion of
bank credit in the interest of sound and healthy economic growth. During the last 5
decades, the RBI has tried to regulate-

(a) cost of credit

(b) quantity of credit

(c) purpose or use of credit

Conclusion-Thus the RBI has helped to broaden and deepen the structure of
institutional finance for accelerating development of the country with itself as the central
arch of banking and monetary framework of the country.
 29

15. In what way does the Reserve bank exercise control

over the commercial banks?

The RBI acts as supervisor and controller of banks in India. By virtue of the powers
conferred on the RBI by the RBI Act, 1934 and the Banking Regulation Act, 1949, the
relationship between the RBI and the commercial banks are very close. The RBI has a 3 fold
control over the commercial banks—

(a) as supervisory & controlling authority over banks

1. Each bank in India is required to obtain license from the RBI before conducting banking
business-section 22. The RBI is required to conduct an inspection of the books of the
banking company and issue a license, if it is satisfied that all or any of the conditions are
fulfilled. The provision is intended to ensure the continuance and growth only of banks which
are established or are operating on sound lines and to discourage indiscriminate floating of
banking companies

2. According to Section 23 of the Act, 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 without obtaining the prior permission of the
RBI.

3. It has powers to inspect books and accounts of commercial banks-Section 35

The RBI may on its own initiative or at the instance of the Central government, inspect any
banking company and its books and accounts. The Central Governemnt may on the basis of
this report direct the company to wind up.

4. RBI may remove managerial an other persons from office-Section 36AA-where the RBI is
convinced that a banking company is not conducting its affairs in the public interest, or is
conducting them in a manner detrimental to the interests of the depositors, or where the RBI
is satisfied that for securing the proper management of the banking company it would be
necessary to do so, the RBI may after recording the reasons and by order, remove from
office, with effect from a specified date, any chairman, director, chief executive director or
other such officer or employee.

5. RBI may appoint additional directors of the banking company-Section 36 AB- in the
interest of banking policy or in the public interest or in the interests of the banking company
or its depositors, the Bank may, from time to time by order in writing, appoint with effect ,
one or more persons to hold office as directors of the banking company.

6. It may issue directions to commercial banks and may prohibit banks to enter into particular
transactions- Section 36

(b) as controller of credit

1. By changing the statutory liquidity rate- Section 24 of the Banking Regulation Act, 1949
requires that every banking company has to maintain cash, gold or approved securities of an
amount not less than 25% of its net demand and liabilities at the close of business everyday.
This is called statutory liquidity rate and the RBI is empowered to step up the rate upto 40%
 30

2. The RBI controls credit by changing the statutory reserve maintained by the scheduled
banks-section 42 of the RBI Act.

3. Controls credit by changing the bank rate and its policy of granting accommodation to
commercial banks

4. It controls credit through its credit monitoring arrangement

5. It controls credit by exercising moral influence on the banks.

(c) as banker to the baker

As banker to the banks, the RBI acts as the lender of last resort and grant accommodation
to the scheduled banks in the following forms-

1. re-discounting or re-purchasing eligible bills

2. grant loans and advances against securities

Emergency advances-the RBI advances loans when it is satisfied that the loan is necessary
for the purpose of regulating credit in the interest of trade, commerce and industry.

16. Explain the Reserve bank’s licensing function.

Section 22 of the Banking Regulation Act, 1949 contains a comprehensive system of

licensing of banks by RBI. This section makes it essential for every banking company to hold
a license issued by the RBI. The RBI is required to conduct an inspection of the books of the
banking company and issue a license, if it is satisfied that all or any of the following
conditions are fulfilled-

1. that the company is or will be in a position to pay its present or future depositors in
full as their claims accrue
2. that the affairs of the company are not being or not liked to be, conducted in a
manner detrimental to the interests of its present or future depositors; and
3. in case of a foreign bank, the carrying on of banking business by such company in
India will be in the public interest and that the Government or law of the country in
which it is incorporated does not discriminate in any way against banking companies
registered in India and that the company complies with all the provisions of the Act
applicable to foreign banks.

It is clear from the above that the grant of a license depends upon the maintenance of
satisfactory financial position. The provision is intended to ensure the continuance and
growth only of banks which are established or are operating on sound lines and to
discourage indiscriminate floating of banking companies. To ascertain the position, the
inspecting officer of the RBI has to make an estimate of the liquid and other readily
realizable assets and also to judge whether the assets are enough to meet the claims of the
depositors as and when they arise. The assessment about the whole gamut of operations of
 31

the banking company and its organizational set-up is necessary to judge the conditions
before the license is granted.

According to Section 23 of the Act, 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 without obtaining the prior permission of the RBI.

17. Write a short of Regional Rural Banks

The RRBs are relatively new banking institutions which were added to the Indian banking
scene since October 1975 to strengthen the institutional rural credit structure. Prior to that,
the then existing credit agencies lacked in meeting the needs of rural masses. A committee
under the chairmanship of N.Narasimhan suggested the institutions of RRBs as low cost
banking for rural areas should be set up to meet their credit needs.

Objectives

1) To identify a specific and functional gap in the present institutional structure.

2) To supplement the other institutional structure.

3) To fill the gap within a reasonable period of time.

Functions

1) To provide financial facility to small and marginal farmers, agricultural labourers,

co-operative societies for agricultural purposes or other purposes related to
agriculture.

2) To grant loans and advances to artisans, small entrepreneurs, persons of small

means engaged in trade, commerce etc.

3) To relieve the rural masses from the clutches of money lenders.

4) To provide easy credit facility to weaker sections of society.

5) To establish branches in unbanked rural areas.

6) To take the banks to the doorsteps of the poorest people in remote rural areas.

Sponsorship

Each RRB is sponsored by a nationalized bank known as a sponsoring bank which

provides all sorts of helps to these RRBs. The sponsoring bank will assist the RRB in its
establishment, recruitment and training of personnel. They may also provide managerial and
financial assistance with mutual agreement.
 32

Capital resources

Each RRB may have an authorized capital of Rs. five crore divided into one lakh shares
of Rs. 100 each and issued capital of Rs. 1 crore to improve their viability.

Management

The management of each RRB is vested in nine members Board of Directors, headed by
a Chairman. The chairman is appointed by the Central Govt. The chairman is a paid servant
of the sponsoring bank while the members are honorary.

Conclusion

RRBs are playing an important role as an alternative agency to provide institutional credit.
According to RBI the RRBs have fared well in achieving the objective of providing access to
weaker sections of society.