BANKING LAW

1. Professor Introduction
2. Course Description:
Bank and the banking system evolved into a vital socio-economical institution in the
modern age and backbone of any country. This has been largely influenced by the socio-
political and economic changes that have been witnessed at large. As a developing State,
India has been influenced by these developments leading to the evolutionary effect on
banking structure, policies, patterns and practices. A study of these developments
reveals the development from banking as a generic entity to specialized one. One could
quote Commercial banks, Cooperative Banks, Development Banks and Specialized
Banks as a paradigm. The evolutionary process still continues with global phenomenon
of liberalization. This has witnessed the entry of Foreign Banking Companies in the
Indian market leading to deviation in the banking policy. Moreover new means such as
E- Banking and E-Commerce has made it essential that the Indian legal system adopt
new modus operandi to cope with the modern scenario.1
3. Course Objective:
 The conceptual and legal parameters including the judicial interpretation of banking
law.
 New emerging dimensions in banking system including e-commerce and e-banking.
 An abridged comparative analysis of International Banking System with that of
Banking system in India
 A vitally important economic institution the banking system is deeply influenced by
socio-political and economic changes2.
 The emerging changes in India, particularly after the initiation of the planning process
as an instrument of rapid economic development had moulded and affected the
banking structure, policies, patterns and practices.
 A significant development in the banking system is diversification in banks financing.
The commercial banks entered 'into the field of wide ranging financial assistance to
industry, both large and small scale, requiring the need for social control of the
banking system eventually leading to the nationalization of banks.
 This course is designed to acquaint the students with the conceptual and operational
parameters of banking law, the judicial interpretation and the new and emerging
dimensions of the banking system.
4. Suggested Readings

 Gordon and Natarajan – Banking Theory Law and Practice

 Tandon M.L- Banking Law and Practice in India

1
https://www.hnlu.ac.in/upload2015/exam/Syllabus-Spl_Repeat_Exam,May-2015/Sem-
IX_Banking_Law_(Optional).pdf
2
https://saurashtrauniversity.edu/uni-files/academic/syllabus-2019-20/LAW/PGDBL-Course-%20[Revised%20-
2019].pdf

[1]
 Maheshwari. S.N.:- Banking Law and Practice
 Shekar. K.C- Banking Theory Law and Practice
 D Muraleedharan – Modern Banking
 Varshney – Banking

COURSE OUTLINE

1. Lecture 1(5-8 minutes)

[2]
 Introduction of Banking Law
 Nature and development of banking
 Evolution of Banking and its history in India
 Bank, Banking and bank Regulation
 Structure and Function of Banking Institutions
 Commercial Banks
 System of Banking

ASSESSMENT EVALUATION-A

2. Lecture 2(5-8 minutes)

Relation between Banker and Customer
 Legal Character of banker- Customer Relationship
 Contract between banker and customer
 Rights and Obligation of Banker
 Bankers ‘s Lien
 Nature and Types of account
 Principles of good lending
 Special classes of customers
 Consumer protection: banking as service

ASSESSMENT EVALUATION –B

3. Lecture 3 (5-8 minutes)

Negotiable Instrument
 Meaning and Kinds
 Transfer and Negotiations
 Holder and Holder in due course
 Presentment and Payment
 Liabilities of Parties
 Crossing of Cheques

ASSESSMENT EVALUATION-C

4. Lecture 4(5-8 minutes)

Reserve Bank of India: Structure and Functions
 Evolution of Central Bank
 Central Banking – organizational Structure of RBI
 Characteristics and Functions of RBI
 Economic and Social Objective
 The RBI as the Central Bank
 Controlling function of RBI over Banking and Non- Banking
Companies
 Regulation of Monitory Mechanism of the economy
 Financial and Non- Financial Company

[3]
 ASSESSMENT EVALUATION-D

5. Lecture 5(5-8 minutes)

Law Relating to Banking Companies in India
 Control over Management
 Prohibition of certain activities in relation to Banking companies
 Acquisition of the undertaking of Banking Companies
 Suspension of Business and winding up proceedings.
 Powers of the central Government towards Banking Companies
 Contract between Banker and Customer: the rights and Duties.

ASSESSMENT EVALUATION- E

6. Lecture 6 (5-8 minutes)

Control of Banks in India
 Social control of Banks
 Nationalisation of Banks
 Protection od Depositors
 Priority Lending
 Promotion of underprivileged classes
 Development work and participation in national economy(Narshimam
Committee Recommendations )

ASSESSMENT EVALUATION-F

7. Lecture 7 (5-8 minutes)

Deposit Insurance
 The Deposit Insurance Corporation Act, 1961
 Establishment of Capital of DIC
 Registration of Banking Companies insured Banks
 Liability of DIC to depositors
 Relation between insured banks, DIC and RBI

ASSESSMENT EVALUATION-G

8. Lecture 8 (5-8 minutes)

Lending by Banks
 Good Lending principles
 Lending to poor masses
 Securities for advance
 Repayment of loans
 Default and Recovery
 Debt Recovery Tribunal

ASSESSMENT EVALUATIOPN- H

9. Lecture 9 (5-8 minutes)

[4]
 Recent trends of Banking System in India
 New Technology
 Information Technology
 Automation and Legal aspects
 Automatic Teller Machine and Use of Internet
 Use of Expert system
 Smart cards
 Credit cards
 E- commerce and E- banking

ASSESSMENT EVALUATION-I

LECTURE 1(5-8 MINUTES)

[5]
 Introduction of Banking Law
 Nature and development of banking
 Evolution of Banking and its history in India
 Bank, Banking and bank Regulation
 Structure and Function of Banking Institutions
 Commercial Banks
 System of Banking

ASSESSMENT EVALUATION-A

1. FATCA stands for

a. Foreign Account Tax Compliance Act
b. Foreign Account Trade Company Act
c. Financial Account Tax Compliance Act
d. Fiscal Account Tax Compliance Act

Ans. (a)

2. The primary relationship between banker and customer from the time
a. when customer visits that bank
b. when customer opens account
c. when customer visits that bank to made queries
d. All of the above

Ans. (b)

3. Which bank have given the instructions to the commercial banks regarding the
immediate credit of outstation cheques?
a. Reserve Bank of India
b. Central Bank
c. World Bank
d. All of the above

Ans. (a)

4. MICR technology used for clearance of cheques by banks refers to

a. Magnetic Ink Character Recognition
b. Magnetic Ink Company Recognition
c. Magnetic Ink Cross Recognition
d. Magnetic Ink Community Recognition

Ans. (a)

5. Which one of the following is the most important relationship between banker and
customer
a. Debtor and Creditor

[6]
 b. Bailee and Bailor
c. Agency and Principal
d. Trustee and Beneficiary

Ans. (a)

LECTURE 2(5-8 MINUTES)

Relation between Banker and Customer

[7]
  Legal Character of banker- Customer Relationship
 Contract between banker and customer
 Rights and Obligation of Banker
 Bankers ‘s Lien
 Nature and Types of account
 Principles of good lending
 Special classes of customers
 Consumer protection: banking as service

ASSESSMENT EVALUATION –B

1. The relationship between a banker and customer is............

a) That of a debtor and creditor
b) That of a creditor and debtor
c) Primarily that of a debtor and a creditor
d) (a) and (b) together

Ans. (c)

2. The banker has a lien on........

a) Bonds given for collection
b) Bonds given for safe custody
c) Bonds left by mistake
d) (a) and (b) together

Ans. (a)

3. In executing the standing instructions, there exists a relationship of........

a) debtor and creditor
b) Trustee and Beneficiary
c) Bailee and Bailor
d) Agent and Principal

Ans. (d)

4. The banker has a statutory obligation to.........

a) Honour customers' cheque
b) Exercise lien
c) Maintain secrecy of his customers' accounts
d) Honour customers' bill

Ans. (a)

5. The best procedure for opening an account in the name of a minor X and the guardian
Y would be under the style.............
a) 'X' Account
b) 'b'-Account- Minor

[8]
 c) 'y' in trust for X
d) 'y' account

Ans. (c)

LECTURE 3 (5-8 MINUTES)

Negotiable Instrument
 Meaning and Kinds

[9]
  Transfer and Negotiations
 Holder and Holder in due course
 Presentment and Payment
 Liabilities of Parties
 Crossing of Cheques

ASSESSMENT EVALUATION-C

1. Which of the followings are not the Negotiable Instruments as defined by the
Statute…

a. Banker’s Note
b. Promissory Note
c. Bill of Exchange
d. Cheques
e. All of the Instruments are Negotiable Instruments

Ans. (a)

2. The Negotiable Instruments (Amendment) Bill, 2017 inserted a provision allowing a

court trying an offence related to cheque bouncing, to direct the drawer (person who
writes the cheque) to pay interim compensation to the complainant. The interim
compensation will not exceed ___% of the cheque amount?

a. 15%
b. 25%
c. 30%
d. 33%
e. 20%

Ans. (e)

3. If the holder of a bill of exchange allows the drawee more than ___ hours, exclusive
of public holidays, to consider whether he will accept the same, all previous parties
not consenting to such allowance are thereby discharged from liability to such holder.

a. 24

[10]
 b. 12
c. 36
d. 48
e. 60

Ans. ()

4. If a Minor draw, indorse, deliver and negotiate Negotiable Instruments, it binds __

a. All the parties except minor

b. All the parties including minor
c. Minor Only
d. Minor and Only Drawer
e. Minor and the Drawee

Ans. (e)

5. Section 6 of the Negotiable Instruments Act defines ___

a. Cheque
b. Bill of Exchange
c. Promissory Notes
d. Dishonour by non-payment
e. Dishonour by non-acceptance

Ans. (a)

LECTURE 4(5-8 MINUTES)

Reserve Bank of India: Structure and Functions

 Evolution of Central Bank
 Central Banking – organizational Structure of RBI
 Characteristics and Functions of RBI

[11]
  Economic and Social Objective
 The RBI as the Central Bank
 Controlling function of RBI over Banking and Non- Banking
Companies
 Regulation of Monitory Mechanism of the economy
 Financial and Non- Financial Company

ASSESSMENT EVALUATION-D

1. The Reserve Bank of India was established on _______.

a) April 1, 1935
b) July 12, 1982
c) May 26, 2006
d) September 30, 2005

Ans. (a)

2. Who works as RBI's agent at places where it has no office of its own?

a) State Bank of India

b) Ministry of Finance
c) Government of India
d) International Monetary Fund

Ans. (a)

3. Which of the following is true about the functions performed by RBI -

(i) It is the Bank of Issue

(ii) It acts as banker to the Government
(iii) It is the banker of other banks
(iv) It regulates the flow of credit

(a) Both (i) and (ii)

(b) Both (iii) and (iv)
(c) All the Above
(d) None of the above

Ans. (c)

4. Which among the following is incorrect?

a) RBI is the Bank of Issue

b) RBI acts as Banker to the Government
c) RBI is Banker's Bank
d) RBI does not regulate the flow of credit

[12]
Ans. (d)

5. According to which guidelines did the Government pick up the entire SBI
shares held by the RBI?

a) National Stock Exchange of India

b) Securities Commission
c) Financial Regulations
d) Securities and Exchange Board of India (SEBI)

Ans. (d)

LECTURE 5(5-8 MINUTES)

Law Relating to Banking Companies in India

 Control over Management
 Prohibition of certain activities in relation to Banking companies
 Acquisition of the undertaking of Banking Companies
 Suspension of Business and winding up proceedings.

[13]
  Powers of the central Government towards Banking Companies
 Contract between Banker and Customer: the rights and Duties.

ASSESSMENT EVALUATION- E

1. Which of the following entities are not covered under the Banking Regulation Act
1949?
a. Public Sector Bank
b. Cooperative Bank
c. Primary Agricultural Credit Society
d. All of the above

Ans. (c)

2. Who regulates the District Central Cooperative Banks in India?

a. RBI
b. State Government
c. Central Government
d. SEBI

Ans. (a)

3. Who has been given the power under the Banking Regulation Act 1949 to grant
license to banks?
a. RBI
b. State Government
c. Central Government
d. All of the above

Ans. (a)

4. Which entity regulates and supervises NBFCs?

a. SEBI
b. RBI
c. Ministry of Finance
d. NABARD

Ans. (a)

5. Who is entrusted with the power to lay down instructions to the banks in India for
audits?
a. RBI
b. Finance Ministry
c. State Government
d. None

[14]
Ans. (a)

LECTURE 6 (5-8 MINUTES)

Control of Banks in India

 Social control of Banks
 Nationalisation of Banks
 Protection od Depositors

[15]
  Priority Lending
 Promotion of underprivileged classes
 Development work and participation in national economy(Narshimam
Committee Recommendations )

ASSESSMENT EVALUATION-F

1. In order to control credit and investment, the Central Bank of a country should
a. Sell securities in the open market and hike the cash reserve ratio.
b. Buy securities in the open market and lower the cash reserve ratio.
c. Buy securities from the open market and hike the cash reserve ratio.
d. Sell securities in the open market and lower the cash reserve ratio
Ans. (a)
2. Which one of the following is not an instrument of credit control in the banking
system?
a. Open market operations

b. Cash Reserve Ratio

c. Tax rates

d. All of the above

Ans. (a)
 
3. Which of the following is a measure of selective credit control
a. Bank rate policy

b. Statutory cash reserve ratio

c. Open market operation

d. None of the above

Ans. (d)

4. Which of the following sentence is false

a. Nationalisation of commercial banks has achieved its objectives.

b. Prior to nationalisalion, commercial bank in India were generally concerned
with profit maximisation only.

[16]
 c. Nationalisation has enhanced the efficiency of commercial banks.
d. Bank nationalisation in India was promoted by the necessity of credit facilities
reaching the rural sector and weaker section of the society.
Ans. (a)
 
5. The Securities and Exchange Board of India was not entrusted with the function of
a. Investor protection

b. Ensuring fair practices by companies

c. Promotion of efficient services by brokers

d. Improving the earning of equity holders

Ans. (d)

LECTURE 7 (5-8 MINUTES)

Deposit Insurance

[17]
  The Deposit Insurance Corporation Act, 1961
 Establishment of Capital of DIC
 Registration of Banking Companies insured Banks
 Liability of DIC to depositors
 Relation between insured banks, DIC and RBI

ASSESSMENT EVALUATION-G

1. DIGC refers to …………..

a .Deposit Industrial Guarantee Corporation
b . Development Insurance Guarantee Corporation
c. Development Industrial Guarantee Corporation
d. Deposit Insurance Guarantee Corporation

Ans. ()

2. SLR refers to …………..

a. A .Statutory Liquidity Ratio
b. B. Stability Liquidity Ratio
c. C. Safety Liquidity Ratio
d. d.None of these

Ans. ()

3. CDM refers to ………….

a. Cash Deposit Machine
b. Credit Development Method
c. Cash Development Method
d. Cash Development Machine

Ans. ()

4. Delivery of financial services at affordable costs to the disadvantaged Low income

segments of the society known as………..
a. Credit creation
b. financial exclusion
c. Financial Inclusion
d.consumer credit

Ans. ()

5. MICR refers to………………..

A .Magnetic Ink Character Recognition
b. Magnetic Information Character Recognition

[18]
 c. Magnetic Ink Code Recognition
d .Magnetic Icon Character recognition

Ans. ()

LECTURE 8 (5-8 MINUTES)

Lending by Banks
 Good Lending principles

[19]
  Lending to poor masses
 Securities for advance
 Repayment of loans
 Default and Recovery
 Debt Recovery Tribunal

ASSESSMENT EVALUATIOPN- H

1. Presiding Officer of DRT is-

(a)Appointed by the Committee of Bankers
(b)Appointed by the RBI
(c)Appointed by the RBI in consultation with Central Government
(d)Appointed by the GOI

Ans. (d)

2. Appeal before the Appellate Tribunal to be disposed off finally from the date of
receipt of appeal within
(a)3 months
(b)4 months
(c)180 days
(d)1 year

Ans. ()c

3. The Recovery officer while carrying out his job, a third party is affected. Then he can
file an appeal-
(a)Within 30 days
(b)To the Tribunal
(c)Both A & B are correct
(d)Both A & B are wrong

Ans. (a)

4. The DRT issues Recovery Certificate to the applicant. Recovery Officer has to
proceed to recover the amount specified in the Recovery Certificate, by adopting
(a)Attachment and sale of movable and immovable property of the defendants
(b)Arrest of the defendant and his detention in prison
(c)Appointment of a receiver for the management of the movable and immovable
properties of the defendant.
(d)Any one of the above

Ans. (d)

5.  Bank V has moved the DRT for justice. Before the final order is passed Bank C who
have also advanced to the same borrower has approached the DRT for inclusion in the
same proceedings.

[20]
 (a)Permissible
(b)Not permissible
(c)Not permissible since both the contracts are different
(d)DRT would not entertain and advise the bank to file a separate case

Ans. (a)

LECTURE 9 (5-8 MINUTES)

Recent trends of Banking System in India

[21]
  New Technology
 Information Technology
 Automation and Legal aspects
 Automatic Teller Machine and Use of Internet
 Use of Expert system
 Smart cards
 Credit cards
 E- commerce and E- banking

ASSESSMENT EVALUATION-I

1.  Which of the following is the largest community in classification of e-commerce?

A) Business to Business (B to B)
B) Business to Consumer (B to C)
C) Business to Government (B to G)
D) Government to Government (G to G)

Ans. (a)

2. The types of Business to Business e-commerce are …………….

A) Direct selling and support to Business
B) Industry portals
C) Information sites about a industry
D) All of the above

Ans. (d)

3.  ……………… is simply the use of electronic means to transfer funds directly from one
account to another, rather than by cheque or cash.
A) M-Banking
B) O-Banking
C) E-Banking
D) D-Banking

Ans. (c)

4. Which of the following are the forms of E-banking?

i) Internet Banking                      ii) Telephone Banking
iii) Electronic Check conversion   iv) Electronic Bill Payment
v) Direct Deposit
A) i, ii, iii and iv only
B) ii, iii, iv and v only
C) i, iii, iv and v only
D) All i, ii, iii, iv and v

Ans. (b)

5. What is the full form of SWIFT?

A) Society for Worldwide Internet Financial Telecommunications.

[22]
 B) Secret Wide Interbank Financial Telecommunications
C) Society for Worldwide Interbank Financial Telecommunications
D) None of the Above

Ans. (c)

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