Table of Contents

History of Banking in India.............................................................................................1

Pre Independence Period (1786-1947)........................................................................1
Post Independence Period (1947-1991).......................................................................2
Impact of Nationalisation........................................................................................4
Liberalisation Period (1991-Till Date)........................................................................4
Banks in India - List of Different Types of Banks in India..............................................5
Functions of Banks......................................................................................................6
Central Bank...........................................................................................................6
Cooperative Banks..................................................................................................7
Commercial Banks..................................................................................................7
Regional Rural Banks (RRB)..................................................................................9
Local Area Banks (LAB)........................................................................................9
Specialized Banks...................................................................................................9
Small Finance Banks...............................................................................................9
Payments Banks....................................................................................................10
Banking Financial Institutions..........................................................................10
The Difference Between a Bank and a Financial Institution..................12
Functions Of Bank........................................................................................................14
What Is a Bank?....................................................................................................14
Important Functions of Bank.....................................................................................15
Primary Functions of Bank....................................................................................15
Secondary Functions of Bank................................................................................16
E-banking is a broad term that includes everything from internet and mobile
banking to NEFT and IMPS transfers..................................................................24
What is E-banking?................................................................................................24
Types of E-banking................................................................................................25
Mobile and Internet banking..............................................................................25
Credit and debit cards........................................................................................25
ATMs....................................................................................................................26
Electronic Data Interchange (EDI)....................................................................26
Electronic Fund Transfer (EFT)........................................................................26
Why should you prefer E-banking?......................................................................26
Introduction..................................................................................................................27
Different kind of relationship.....................................................................................27
  Relationship of debtor and creditor..............................................................27
 Relationship of pledger and pledgee...........................................................27
 Relationship of bailor and a bailee...............................................................28
 Relationship of lesser and lesse...................................................................28
 Relationship of trustee and beneficiary........................................................29
Relevant laws..............................................................................................................30
Consumer Protection Act, 2019............................................................................30
Limitation Act, 1963................................................................................................30
Revival of the document....................................................................................30
Recovery of debts due to banks and financial Institutions Act, 1993 (DRT Act)
..................................................................................................................................31
Important things in the legislation.....................................................................31
Lok Adalat Act.........................................................................................................31
SARFAESI Act, 2002.............................................................................................32
Case laws....................................................................................................................32
Conclusion...................................................................................................................32
Rights and Duties of Banker and Customer........................................................33
Rights of a Banker..............................................................................................33
1. Right to charge interest.................................................................................33
2. Right to levy commission and service charges..........................................33
3. Right of Lien....................................................................................................33
4. The Right of Set-off........................................................................................33
5. Right of Appropriation....................................................................................34
6. Right to Close the Account...........................................................................34
Rights of a Customer.........................................................................................34
1. Right to fair treatment....................................................................................34
2. Right of transparent, fair and honest dealing..............................................34
3. Right to suitability...........................................................................................34
4. Right to privacy...............................................................................................34
5. Right to grievance redressal and compensation........................................35
Duties of customers to banks............................................................................35
Obligations of Bankers.......................................................................................35
Special Types of Banker’s Customers.....................................................................36
Minor........................................................................................................................37
Illiterate....................................................................................................................38
Lunatic......................................................................................................................39
 Married Woman......................................................................................................39
Purdanashin Woman..............................................................................................40
Joint Account...........................................................................................................40
Partnership Firm.....................................................................................................40
Joint Stock Companies..........................................................................................41
Introduction..................................................................................................................42
What is Lien.................................................................................................................42
Types of Lien...............................................................................................................43
Particular/Specific Lien:.........................................................................................44
General Lien:...........................................................................................................44
What is Set-off............................................................................................................45
Difference between Banker’s Lien & Set-off...........................................................45
Banker’s Right to Lien............................................................................................46
Conditions when Banker can choose the Right of Set-off.................................46
Case laws....................................................................................................................47
Right of Lien............................................................................................................47
Chettinad Mercantile Bank Ltd. v/s PL.A. Pichammai Achi AIR 1945.........47
City Union Bank Ltd v/s Thangarajan (2003)..................................................47
Right of Set-off........................................................................................................47
Radha Raman Choudhary & Others v. Chota Nagpur Banking Association
Ltd. (1945)...........................................................................................................47
I.S. Machado v. Official Liquidator of Travancore National and Quilon Bank
Ltd., 1941.............................................................................................................48
Conclusion...................................................................................................................48
Introduction..................................................................................................................49
Appropriation by debtor.............................................................................................49
Clayton’s Case....................................................................................................50
Several and Distinct Debts................................................................................50
Intimation by the Debtor.....................................................................................50
Proof of Intention................................................................................................50
Contract of Guarantee.......................................................................................51
Appropriation by creditor...........................................................................................51
Lawful Debts........................................................................................................51
Time-Barred Debts.............................................................................................51
Principal and Interest on Single Debt...............................................................51
Appropriation by law...................................................................................................52
Assignment of contracts............................................................................................52
Assignment of liabilities.........................................................................................52
By the act of the party........................................................................................53
By operation of law.............................................................................................53
Assignment of rights...............................................................................................53
Personal Nature of the Contract.......................................................................55
Unilateral cancellation of the sale deed...........................................................55
Effect and formalities of assignment....................................................................55
Consideration......................................................................................................55
Subject to equities..............................................................................................55
Notice of assignment..........................................................................................56
What is Clayton Rule?...............................................................................................56
Clayton rule in the Indian context.........................................................................57
Exception.............................................................................................................58
Bank Pass Book.........................................................................................................58
Legal description[edit]............................................................................................66
Examples[edit].........................................................................................................66
Introduction..................................................................................................................66
Definition of Banking..................................................................................................68
Who is a customer?...................................................................................................68
Paying Banker.............................................................................................................69
Safety measures and obligatory roles of Paying Banker......................................69
Dishonour of cheque..................................................................................................71
Reasons for dishonour of cheque............................................................................71
Insufficiency of funds..............................................................................................71
Notice of the Customer’s Death............................................................................71
 Notice of the Customer’s Insolvency....................................................................72
Receipt of the Garnishee Order............................................................................72
Presentation of a post-dated cheque...................................................................72
Types of dishonour.....................................................................................................73
Rightful Dishonour..................................................................................................73
Wrongful Dishonour................................................................................................73
Leading case laws on payment of cheques by a bank..........................................73
Collecting banker........................................................................................................74
Banker as a holder for value.................................................................................74
Collecting Banker as an Agent.............................................................................74
Conversion by the Collecting Banker...................................................................75
Statutory Protection to Collecting Bank...................................................................75
Section 131: Non-liability of a banker receiving payment of cheque...............75
Duties of the collecting bank.....................................................................................75
Leading case laws on duties of collecting banks...................................................77
Conclusion...................................................................................................................77
Negotiable Instruments Explained....................................................................80
Features...............................................................................................................81
Types of Negotiable Instruments......................................................................82
Examples.............................................................................................................85
Negotiable Instruments – Current Trends.......................................................86
Frequently Asked Questions (FAQs)...............................................................87
Crossing a Cheque.................................................................................................89
Types of Cheque Crossing (Sections 123-131 A):...............................................89
 General Cheque Crossing.................................................................................90
Special Cheque Crossing..................................................................................91
Restrictive Cheque Crossing or Account Payee’s Crossing.........................92
Who is a Holder?....................................................................................................93
Who is a Holder in Due Course?..........................................................................93
What are the Differences between Holder and Holder in due course?...........94
Liability of Parties – Cheque...................................................................................96
Browse more Topics under Negotiable Instruments Act...............................96
1. Liability of Drawer (Section 30)....................................................................96
2. Liability of the Drawee of Cheque (Section 31)..........................................97
3. Liability of Acceptor of Bill and Maker of Note  (Section 32)....................98
4. Liability of Endorser (Section 35).................................................................98
5. Liability of Prior Parties (Section 36)..........................................................100
6. Liability Inter-se............................................................................................100
7. Liability of Acceptor when Endorsement is Forged (Section 41)...........100
8. Acceptor’s Liability when Bill is drawn in a Fictitious Name...................101
ACCOMMODATION BILL.......................................................................................101
Definition:...............................................................................................................101
Meaning:.................................................................................................................101
Parties in a formation of a bill:................................................................................102
How does an accommodation bill work?.................................................................102
Section 82 – Discharge from liability.......................................................................102
Section 83 – Discharge by allowing drawee more than forty-eight hours to
accept......................................................................................................................103
Section 84 – When cheque not duly presented and drawer damaged thereby......103
Illustrations.........................................................................................................103
3. Section 85 – Cheque payable to order..........................................................103
Section 85A – Drafts drawn by one branch of a bank on another payable to order104
Section 86 – Parties not consenting discharged by qualified or limited acceptance
................................................................................................................................104
Explanations........................................................................................................104
Section 87 – Effect of material alteration................................................................104
PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENT.............................107
Sections 118 and 119 of the Negotiable Instrument Act lay down certain
presumptions which the court presumes in regard to negotiable instruments. In other
words, these presumptions need not be proved as they are presumed to exist in every
negotiable instrument. Until the contrary is proved the following presumptions shall
be made in case of all negotiable instruments:........................................................107
1. Consideration: It shall be presumed that every negotiable instrument was made
drawn, accepted or endorsed for consideration. It is presumed that; consideration is
present in every negotiable instrument until the contrary is presumed. The
presumption of consideration, however may be rebutted by proof that the instrument
had been obtained from, its lawful owner by means of fraud or undue influence....107
2. Date: Where a negotiable instrument is dated, the presumption is that it has been
made or drawn on such date, unless the contrary is proved.....................................108
3. Time of acceptance: Unless the contrary is proved, every accepted bill of
exchange is presumed to have been accepted within a reasonable time after its issue
and before its maturity. This presumption only applies when the acceptance is not
dated; if the acceptance bears a date, it will prima facie be taken as evidence of the
date on which it was made......................................................................................108
4. Time of transfer: Unless the contrary is presumed it shall be presumed that every
transfer of a negotiable instrument was made before its maturity............................108
5. Order of endorsement: Until the contrary is proved it shall be presumed that the
endorsements appearing upon a negotiable instrument were made in the order in
which they appear thereon.......................................................................................108
6. Stamp: Unless the contrary is proved, it shall be presumed that a lost promissory
note, bill of exchange or cheque was duly stamped.................................................108
7. Holder in due course: Until the contrary is proved, it shall be presumed that the
holder of a negotiable instrument is the holder in due course. Every holder of a
negotiable instrument is presumed to have paid consideration for it and to have taken
it in good faith. But if the instrument was obtained from its lawful owner by means of
an offence or fraud, the holder has to prove that he is a holder in due course.........109
8. Proof of protest: Section 119 lays down that in a suit upon an instrument which
has been dishonoured, the court shall on proof of the protest, presume the fact of
dishonour, unless and until such fact is disproved...................................................109
TYPES OF NEGOTIABLE INSTRUMENTS......................................................109
A dishonoured cheque – what is it?...................................................................111
Why do cheques get dishonoured?....................................................................111
1. Insufficient funds..........................................................................................111
2. Mismatched signature..................................................................................112
3. The date on the cheque..............................................................................112
4. Damaged cheque.........................................................................................112
5. Overwriting....................................................................................................112
What is a Bank Guarantee?..................................................................................113
Summary............................................................................................................113
Types of Bank Guarantees................................................................................113
Real-World Example.........................................................................................114
 Advantages of Bank Guarantees.....................................................................115
Disadvantages of Bank Guarantees................................................................115
Bank Guarantees vs. Letters of Credit.............................................................115
Banker Rights and Obligations....................................................................................116
Rights of Banker....................................................................................................116
1. Rights of General Lien..................................................................................119
2. The Right of the Set-off................................................................................119
3. Banker’s Right of Appropriation..................................................................120
4. Right to Charge Interest and Commission.................................................120
5. Right to Close the Account..........................................................................121
Obligations of Banker...........................................................................................121
1. Obligation of Banker to Honor Checks......................................................123
2. Obligation of banker to Maintain Secrecy.................................................123
3. Obligation of Banker to Maintain Proper Records....................................123
4. Obligation of Banker to Follow Customer’s Instructions..........................123
5. Obligation of Banker to give Notice before Closing the Account...........123
What Is a Letter of Credit?..................................................................................124
KEY TAKEAWAYS...........................................................................................124
How a Letter of Credit Works.............................................................................124

Description of LC ...........................................................................................125

Advantages of LC ..........................................................................................125

Main types of LC...................................................................................................125

What Is Collateral?...............................................................................................126
KEY TAKEAWAYS...........................................................................................126
How Collateral Works..........................................................................................126
Types of Collateral...............................................................................................127
Collateralized Personal Loans........................................................................127
Examples of Collateral Loans.............................................................................128
Residential Mortgages.....................................................................................128
Home Equity Loans..........................................................................................128
Margin Trading..................................................................................................128
Loan against Documents of Title of Goods........................................................129
An Overview: Banking Regulation Act, 1949....................................................134
 Highlights of Banking Regulation Act 1949.......................................................134
Importance of Banking Regulation Act 1949....................................................135
Conclusion.............................................................................................................136
SARFAESI ACT........................................................................................................136
SARFAESI ACT, 2002.........................................................................................137
Objectives of Securitization and Reconstruction of Financial Assets and
Enforcement of Securities Interest Act, 2002...................................................138
Applicability of SARFAESI Act............................................................................138
Features of SARFAESI ACT...............................................................................140
Background...........................................................................................................140
Procedure..............................................................................................................141
Right of borrowers:...............................................................................................141
Preconditions........................................................................................................141
Recovery methods...............................................................................................142
Securitization:........................................................................................................142
Asset Reconstruction:..........................................................................................142
Power of Debt Recovery Tribunal......................................................................142
Role of High Court................................................................................................143
Proposed Amendments to the act......................................................................143
Conclusion.............................................................................................................143

History of Banking in India

Banking in India forms the base for the economic development of the country.
Major changes in the banking system and management have been seen over the
years with the advancement in technology, considering the needs of people.
The History of Banking in India dates back to before India got independence in
1947 and is a key topic in terms of questions asked in various Government
exams. In this article, we shall discuss in detail the evolution of the banking
sector in India.
The banking sector development can be divided into three phases:
Phase I: The Early Phase which lasted from 1770 to 1969
Phase II: The Nationalisation Phase which lasted from 1969 to 1991
Phase III: The Liberalisation or the Banking Sector Reforms Phase which
began in 1991 and continues to flourish till date

Given below is a pictorial representation of the evolution of the Indian banking

system over the years:
Candidates can get details about the functions of Banks at the linked article.
Further below in this article, we shall discuss the different phases of Bank
industry evolution.

Pre Independence Period (1786-1947)

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.
Following the path of Bank of Hindustan, various other banks were established
in India. They were:

 The General Bank of India (1786-1791)

 Oudh Commercial Bank (1881-1958)
 Bank of Bengal (1809)      
 Bank of Bombay (1840)    
 Bank of Madras (1843)   
During the British rule in India, The East India Company had established three
banks: Bank of Bengal, Bank of Bombay and Bank of Madras and called them
the Presidential Banks. These three banks were later merged into one single
bank in 1921, which was called the “Imperial Bank of India.”
The Imperial Bank of India was later nationalised in 1955 and was named The
State Bank of India, which is currently the largest Public sector Bank. 
Given below is a list of other banks which were established during the Pre-
Independence period:

Pre-Indepence Banks in India

Bank Name Year of Establishment

Allahabad Bank 1865

Punjab National Bank 1894

Bank of India 1906

 Central Bank of India 1911

Canara Bank 1906

Bank of Baroda 1908

If we talk of the reasons as to why many major banks failed to survive during
the pre-independence period, the following conclusions can be drawn:

 Indian account holders had become fraud-prone

 Lack of machines and technology
 Human errors & time-consuming
 Fewer facilities
 Lack of proper management skills
Following the Pre-Independence period was the post-independence period,
which observed some significant changes in the banking industry scenario and
has till date developed a lot.
Related Links:

Post Independence Period (1947-1991)

At the time when India got independence, all the major banks of the country
were led privately which was a cause of concern as the people belonging to rural
areas were still dependent on money lenders for financial assistance.
With an aim to solve this problem, the then Government decided to nationalise
the Banks. These banks were nationalised under the Banking Regulation Act,
1949. Whereas, the Reserve Bank of India was nationalised in 1949.
Candidates can check the list of Banking sector reforms and Acts at the linked
article.
Following it was the formation of State Bank of India in 1955 and the other 14
banks were nationalised between the time duration of 1969 to 1991. These were
the banks whose national deposits were more than 50 crores.
Given below is the list of these 14 Banks nationalised in 1969:

1. Allahabad Bank               
2. Bank of India                          
3. Bank of Baroda
4. Bank of Maharashtra         
5. Central Bank of India
6. Canara Bank         
7. Dena Bank
8. Indian Overseas Bank
9. Indian Bank
10. Punjab National Bank                         
11. Syndicate Bank             
12. Union Bank of India
 13. United Bank 
14. UCO Bank

In the year 1980, another 6 banks were nationalised, taking the number to 20
banks. These banks included:

1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Comm.
5. Punjab & Sind Bank
6. Vijaya Bank 

Apart from the above mentioned 20 banks, there were seven subsidiaries of SBI
which were nationalised in 1959:

1. State Bank of Patiala 

2. State Bank of Hyderabad 
3. State Bank of Bikaner & Jaipur 
4. State Bank of Mysore 
5. State Bank of Travancore 
6. State Bank of Saurashtra 
7. State Bank of Indore

All these banks were later merged with the State Bank of India in 2017, except
for the State Bank of Saurashtra, which merged in 2008 and State Bank of
Indore, which merged in 2010.
Note: The Regional Rural Banks in India were established in the year 1975 for
the development of rural areas in India. Candidates can get the list of RRBs in
India at the linked article.
 

Impact of Nationalisation
There were various reasons why the Government chose to nationalise the banks.
Given below is the impact of Nationalising Banks in India:

 This lead to an increase in funds and thereby increasing the economic

condition of the country
 Increased efficiency
 Helped in boosting the rural and agricultural sector of the country
 It opened up a major employment opportunity for the people
 The Government used profit gained by Banks for the betterment of the
people
 The competition decreased, which resulted in increased work efficiency 
This post Independence phase was the one that led to major developments in the
banking sector of India and also in the evolution of the banking sector. 
Refer to the Government exam preparation links below:

Liberalisation Period (1991-Till Date)

Once the banks were established in the country, regular monitoring and
regulations need to be followed to continue the profits provided by the banking
sector. The last phase or the ongoing phase of the banking sector development
plays a hugely significant role.
To provide stability and profitability to the Nationalised Public sector Banks, the
Government decided to set up a committee under the leadership of Shri. M
Narasimham to manage the various reforms in the Indian banking industry.
The biggest development was the introduction of Private sector banks in India.
RBI gave license to 10 Private sector banks to establish themselves in the
country. These banks included:

1. Global Trust Bank

2. ICICI Bank
3. HDFC Bank
4. Axis Bank
5. Bank of Punjab
6. IndusInd Bank
7. Centurion Bank
8. IDBI Bank
9. Times Bank
10. Development Credit Bank

The other measures taken include:

 Setting up of branches of the various Foreign Banks in India

 No more nationalisation of Banks could be done
 The committee announced that RBI and Government would treat both
public and private sector banks equally
 Any Foreign Bank could start joint ventures with Indian Banks
 Payments banks were introduced with the development in the field of
banking and technology
 Small Finance Banks were allowed to set their branches across India
 A major part of Indian banking moved online with internet banking and
apps available for fund transfer
Thus, the history of banking in India shows that with time and the needs of
people, major developments have been brought about in the banking sector with
an aim to prosper it. 
Banks in India - List of Different Types of Banks in
India
Banks are financial institutions that perform deposit and lending functions.
There are various types of banks in India and each is responsible to perform
different functions.
In terms of the government exam syllabus, a candidate must know the types of
banks and the role of each of them in managing the financial system of a
country.

Prepare for the upcoming Government exams with the help of the below-mentioned links:

 Online Government Exam Quiz

 Static GK
 Daily Current Affairs

The bank takes deposit at a much lower rate from the public called the deposit
rate and lends money at a much higher rate called the lending rate.
Banks can be classified into various types. Given below are the bank types in
India:-

 Central Bank
 Cooperative Banks
 Commercial Banks
 Regional Rural Banks (RRB)
 Local Area Banks (LAB)
 Specialized Banks
 Small Finance Banks
 Payments Banks
This is an important topic for the IAS Exam. In this article, aspirants will get
information on the banking system in India, its functions, and the type of banks
in India.
The types of banks in India, their functions and the list of banks under each
section forms a very important part of the banking awareness syllabus which is
included in most Government exams.

Banks in India (UPSC Notes):- Download PDF Here

Functions of Banks
The major functions of banks are almost the same but the set of people each
sector or type deals with may differ. Given below the functions of the banks in
India:

1. Acceptance of deposits from the public

2. Provide demand withdrawal facility
3. Lending facility
4. Transfer of funds
5. Issue of drafts
6. Provide customers with locker facilities
7. Dealing with foreign exchange

Apart from the above-mentioned list, various utility functions also need to be
performed by the various banks.
Aspirants can read about different bank exams at the linked article.

Central Bank
The Reserve Bank of India is the central bank of our country. Each country has a
central bank that regulates all the other banks in that particular country.
The main function of the central bank is to act as the Government’s Bank and
guide and regulate the other banking institutions in the country. Given below are
the functions of the central bank of a country:

 Guiding other banks

 Issuing currency
 Implementing the monetary policies
 Supervisor of the financial system
In other words, the central bank of the country may also be known as the
banker’s bank as it provides assistance to the other banks of the country and
manages the financial system of the country, under the supervision of the
Government.

Cooperative Banks
These banks are organised under the state government’s act. They give short
term loans to the agriculture sector and other allied activities.
The main goal of Cooperative Banks is to promote social welfare by providing
concessional loans
They are organised in the 3 tier structure

 Tier 1 (State Level) – State Cooperative Banks (regulated by RBI, State

Govt, NABARD)

 Funded by RBI, government, NABARD. Money is then

distributed to the public
  Concessional CRR, SLR applies to these banks. (CRR- 3%, SLR-
25%)
 Owned by the state government and top management is elected
by members
 Tier 2 (District Level) – Central/District Cooperative Banks
 Tier 3 (Village Level) – Primary Agriculture Cooperative Banks

Commercial Banks
 Organised under the Banking Companies Act, 1956
 They operate on a commercial basis and its main objective is profit.
 They have a unified structure and are owned by the government, state, or
any private entity.
 They tend to all sectors ranging from rural to urban
 These banks do not charge concessional interest rates unless instructed
by the RBI
 Public deposits are the main source of funds for these banks
The commercial banks can be further divided into three categories:

1. Public sector Banks – A bank where the majority stakes are owned by
the Government or the central bank of the country.
2. Private sector Banks – A bank where the majority stakes are owned by
a private organization or an individual or a group of people
3. Foreign Banks – The banks with their headquarters in foreign countries
and branches in our country, fall under this type of bank

Given below is the list of commercial banks in our country:

Commercial Banks in India

Public Sector Banks Private Sector Banks Foreign Banks

State Bank of India Catholic Syrian Bank Australia and New Zealand
City Union Bank Banking Group Ltd.
Allahabad Bank National Australia Bank
Dhanlaxmi Bank
Andhra Bank Westpac Banking
Federal Bank Corporation
Bank of Baroda Jammu and Kashmir Bank
Bank of Bahrain & Kuwait
Bank of India BSC
Karnataka Bank
Bank of Maharashtra Karur Vysya Bank AB Bank Ltd.
Canara Bank HSBC
Lakshmi Vilas Bank
Central Bank of India Nainital Bank CITI Bank
 Corporation Bank Ratnakar Bank Deutsche Bank
Dena Bank South Indian Bank DBS Bank Ltd.
Indian Bank Tamilnad Mercantile Bank United Overseas Bank Ltd
Indian Overseas Bank Axis Bank J.P. Morgan Chase Bank
Oriental Bank of Development Credit Bank (DCB Bank Standard Chartered Bank
Commerce Ltd)
There are over 40 Foreign
Punjab National Bank HDFC Bank Banks in India
Punjab & Sind Bank ICICI Bank
Syndicate Bank IndusInd Bank
Union Bank of India Kotak Mahindra Bank
United Bank of India Yes Bank
UCO Bank IDFC
Vijaya Bank Bandhan Bank of Bandhan Financial
Services.
IDBI Bank Ltd.

Regional Rural Banks (RRB)

 These are special types of commercial Banks that provide concessional
credit to agriculture and rural sector.
 RRBs were established in 1975 and are registered under a Regional
Rural Bank Act, 1976.
 RRBs are joint ventures between the Central government (50%), State
government (15%), and a Commercial Bank (35%).
 196 RRBs have been established from 1987 to 2005.
 From 2005 onwards government started merger of RRBs thus reducing
the number of RRBs to 82
 One RRB cannot open its branches in more than 3 geographically
connected districts.
Aspirants can check the list of Regional Rural banks in India at the linked
article.

Local Area Banks (LAB)

 Introduced in India in the year 1996
 These are organized by the private sector
 Earning profit is the main objective of Local Area Banks
 Local Area Banks are registered under Companies Act, 1956
 At present, there are only 4 Local Area Banks all which are located in
South India
Specialized Banks
Certain banks are introduced for specific purposes only. Such banks are called
specialized banks. These include:

 Small Industries Development Bank of India (SIDBI) – Loan for a small

scale industry or business can be taken from SIDBI. Financing small
industries with modern technology and equipments is done with the help
of this bank
 EXIM Bank – EXIM Bank stands for Export and Import Bank. To get
loans or other financial assistance with  exporting or importing goods by
foreign countries can be done through this type of bank
 National Bank for Agricultural & Rural Development (NABARD) – To
get any kind of financial assistance for rural, handicraft, village, and
agricultural development, people can turn to NABARD.
There are various other specialized banks and each possesses a different role in
helping develop the country financially.

Small Finance Banks

As the name suggests, this type of bank looks after the micro industries, small
farmers, and the unorganized sector of the society by providing them loans and
financial assistance. These banks are governed by the central bank of the
country.
Given below is the list of the Small Finance Banks in our country:

AU Small Finance Bank Equitas Small Finance Jana Small Finance Bank Northeast Small Finance
Bank Bank

Capital Small Finance Fincare Small Finance Suryoday Small Finance Ujjivan Small Finance
Bank Bank Bank Bank

Esaf Small Finance Utkarsh Small Finance

Bank Bank

Payments Banks
A newly introduced form of banking, the payments bank have been
conceptualized by the Reserve Bank of India. People with an account in the
payments bank can only deposit an amount of up to Rs.1,00,000/- and cannot
apply for loans or credit cards under this account.
Options for online banking, mobile banking, the issue of ATM, and debit card
can be done through payments banks. Given below is a list of the few payments
bank in our country:
  Airtel Payments Bank
 India Post Payments Bank
 Fino Payments Bank
 Jio Payments Bank
 Paytm Payments Bank
 NSDL Payments Bank

Bank and other financial institutions

Banking Financial Institutions

Last updated date: 11th Feb 2023
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In today's financial services the financial institutions are created to

provide a wide variety of deposits, lending and deposit procedures
are required to be carried out to facilitate the individuals,
businesses or the both. Financial Institutions focus on providing the
services and accounts for the general public, while others serve
specific consumers with specialised offerings.
Financial institutions are developed to appropriate the needs of the
society and thus it is important to understand the difference
between the types of institutions which will be more appropriate to
serve their individual needs.
There are different types of financial institutions from non-banking
ones to banking ones and they are as follows: 
 Central banks: These are responsible for overseeing as well
as managing all the other banks. No individual consumer has
direct contact with a central bank because other big
institutions tend to work with the Federal Reserve Bank for
providing the general public with various products and
services. 
 Retail and commercial banks: These tend to offer products
and services like savings accounts, checking accounts,
personal loans, mortgage loans, credit cards, etc. 
  Credit unions: A credit union is owned by their members
and they tend to operate for their personal benefit. 
 Internet banks: These are further classified as digital banks
and neo banks, wherein the former is online-only platforms
and the latter are strictly digital native banks, holding no
affiliation with any other bank but themselves. 
 Investment banks and companies: These are known to
help individuals and businesses to raise their capital through
the issuance of securities. 
 Savings and loan associations: Individuals take the help of
savings and loan associations for mortgage lending,
personal loans, and deposit accounts. And these financial
institutions don’t lend more than 20% when it comes to
businesses. 
 Brokerage firms: This helps both businesses as well as
individuals to buy and sell securities if there are any available
investors. 
 Insurance companies: An insurance company is one that
helps out an individual to transfer the risk of loss. 
 Mortgage companies: Most mortgage companies are
focused on serving the individual consumer market.
However, there are a chosen few whose lending options are
specialised in commercial real estate only.

The Difference Between a Bank and a Financial

Institution 

Commercial Bank
Banks, more precisely termed as retail or the commercial banks,
fall under the category known as the banking financial institutions.
A bank is actually a financial intermediary, they act as a middleman
between the suppliers of funds or the depositors and the
borrowers. The major task of the bank is to accept the deposits and
use the funds which will later on to offer loans to the customers.
Yet another duty of a bank is to act as a payment agent, that is
done by offering a payment. A bank makes money by investing the
deposits in the financial securities and assets, but they mostly
make money by lending the funds further to its customers. The
primary reasons that the public deposits the money in banks are for
convenience, safety and to gain interest income.
Financial Institutions
While financial institutions include all the categories of banks –
banks, investment banks, insurance companies, investment funds
and other categories of money sector corporates. Except for banks,
all are known as non-banking financial institutions who provide
financial services to the public but that differs from those of a bank. 
The main difference between other financial institutions and banks
is that other financial institutions cannot accept deposits into
savings and demand deposit accounts, while the same is the core
business for banks.

Advantages of a Commercial Bank

The Advantages of Commercial Banks are as follows:
 
1. Location
The commercial banks are large companies thus, these companies
are to be found all over the town, state or country. Some of these
commercial banks have businesses in other foreign countries as
well and hence their location facilitates the people. Commercial
banks are literally located anywhere even inside of malls or retail
stores, the ability to access money and account information can be
done from almost any location.
2. Discounts
Commercial banks also serve the customers with low prices. Like
wholesale companies, the commercial banks buy in bulk and sell to
the public at a discount. These discounts may offer free checking,
no fees while opening savings or checking accounts. They also
provide the customers with low interest rates on real estate loans.
3. Product Offerings
Commercial banks offer more products and service offerings.
Commercial banks offer every banking service which a small
banking company would offer also CDs, investment accounts,
commercial real estate loans, even mortgage plans and the option
to have a debit card, credit card or both.
4. Online Banking
With the increasing growth of technology, commercial banks also
offer their services online. Customers can keep track of their
checking and savings accounts, transfer money to either of their
accounts, also pay bills or apply for a loan over the internet itself. 
5. Electronic Banking
By using the 24-hour ATMs, customers can withdraw or deposit
money and also can access their account information or transfer
their funds.

Limitations of Financial Services 

The limitations with these financial institutions are as follows:
 Restriction on dividend payment which is imposed on the
powers of the borrowing capacity of financial institutions.
 These institutions come under the government criteria hence,
they follow rigid rules for granting these loans. 
 Too many formalities are attached which is indeed time
consuming. 
 Financial institutions have their nominees on the Board of
Directors of the borrowing company thereby restricting the
powers of the company to borrow funds.

Functions Of Bank
In competitive exams, the topic ‘Functions of the Bank’ forms an important part
of the question paper, and its knowledge is crucial to score good marks. 
Especially, candidates appearing for various bank exams such as IBPS Exam,
SBI Exam, or RBI exam definitely encounter questions related to important
banking functions in the paper or at the time of interview. 
For other graduate-level government examinations such as the SSC exam, the
questions related to bank functions are asked under the professional knowledge
heading. Therefore, this article will walk you through important banking
functions, their categories, and more.
Candidates preparing for any competitive or government exams can check the
following links for their preparation:

Bank General Awareness Static GK Daily News

SSC General Awareness Current Affairs Free Online Mock Tests

What Is a Bank?
A bank is a lawful organisation that accepts deposits that can be withdrawn on
demand. Banks are institutions that help the public in the management of their
finances, public deposit their savings in banks with the assurance to withdraw
money from the deposits whenever required.
Banks accept deposits from the general public and from the business community
as well and give two assurances to the depositors –

1. Safety of deposit
2. Withdrawal of deposit, whenever needed

Banks give interest on deposits which adds to the original deposit amount and is
a great incentive to the depositor. This promotes saving habits among the public.
Bank also grants loans based on deposits thereby adding to the economic
development of the country and well being of the general public. With this
stature, it becomes important to understand the major functions of a bank. 
Candidates can check the important Banking Abbreviations in the linked article. 
Aspirants preparing for various government exams can check the important
topics given below:

Unemployment In India Famous Books and Authors

Millets In India Letter Writing Format

Idioms & Phrases Principles Of Insurance

Banking Reforms Tenses Rules

Important Functions of Bank

There are two types of functions of banks:

1. Primary functions – being primary are also called banking functions.

2. Secondary Functions

Both the types of functions of bank are explained below in detail:

Primary Functions of Bank

All banks have to perform two major primary functions namely:

1. Accepting of deposits
2. Granting of loans and advances
Accepting of Deposits
A very basic yet important function of all the commercial banks is mobilising
public funds, providing safe custody of savings and interest on the savings to
depositors. Bank accepts different types of deposits from the public such as:

1. Saving Deposits:  encourages saving habits among the public. It is suitable for
salary and wage earners. The rate of interest is low. There is no restriction on
the number and amount of withdrawals. The account for saving deposits can
be opened in a single name or in joint names. The depositors just need to
maintain minimum balance which varies across different banks. Also, Bank
provides ATM cum debit card, cheque book, and Internet banking
facility. Candidates can know about the Types of Cheques at the linked page.
2. Fixed Deposits: Also known as Term Deposits. Money is deposited for a fixed
tenure. No withdrawal money during this period allowed. In case depositors
withdraw before maturity, banks levy a penalty for premature withdrawal. As
a lump-sum amount is paid at one time for a specific period, the rate of
interest is high but varies with the period of deposit.
3. Current Deposits: They are opened by businessmen. The account holders get
an overdraft facility on this account. These deposits act as a short term loan to
meet urgent needs. Bank charges a high-interest rate along with the charges
for overdraft facility in order to maintain a reserve for unknown demands for
the overdraft.
4. Recurring Deposits: A certain sum of money is deposited in the bank at a
regular interval. Money can be withdrawn only after the expiry of a certain
period. A higher rate of interest is paid on recurring deposits as it provides a
benefit of compounded rate of interest and enables depositors to collect a big
sum of money. This type of account is operated by salaried persons and petty
traders.

Granting of Loans & Advances

The deposits accepted from the public are utilised by the banks to advance loans
to the businesses and individuals to meet their uncertainties. Bank charges a
higher rate of interest on loans and advances than what it pays on deposits. The
difference between the lending interest rate and interest rate for deposits is bank
profit.
Bank offers the following types of Loans and Advances:

1. Bank Overdraft: This facility is for current account holders. It allows holders to
withdraw money anytime more than available in bank balance but up to the
provided limit. An overdraft facility is granted against collateral security. The
interest for overdraft is paid only on the borrowed amount for the period for
which the loan is taken.
2. Cash Credits: a short term loan facility up to a specific limit fixed in advance.
Banks allow the customer to take a loan against a mortgage of certain
property (tangible assets and / guarantees). Cash credit is given to any type of
account holders and also to those who do not have an account with a bank.
Interest is charged on the amount withdrawn in excess of the limit. Through
 cash credit, a larger amount of loan is sanctioned than that of overdraft for a
longer period.
3. Loans: Banks lend money to the customer for short term or medium periods of
say 1 to 5 years against tangible assets. Nowadays, banks do lend money for
the long term. The borrower repays the money either in a lump-sum amount
or in the form of instalments spread over a pre-decided time period. Bank
charges interest on the actual amount of loan sanctioned, whether withdrawn
or not. The interest rate is lower than overdrafts and cash credits facilities.
4. Discounting the Bill of Exchange: It is a type of short term loan, where the
seller discounts the bill from the bank for some fees. The bank advances
money by discounting or purchasing the bills of exchange. It pays the bill
amount to the drawer(seller) on behalf of the drawee (buyer) by deducting
usual discount charges. On maturity, the bank presents the bill to the drawee
or acceptor to collect the bill amount.

Secondary Functions of Bank

Like Primary Functions of Bank, the secondary functions are also classified into
two parts:

1. Agency functions
2. Utility Functions

Agency Functions of Bank

Banks are the agents for their customers, hence it has to perform various agency
functions as mentioned below:
Transfer of Funds: Transfering of funds from one branch/place to another. 
Periodic Collections: Collecting dividend, salary, pension, and similar periodic
collections on the clients’ behalf. 
Periodic Payments: Making periodic payments of rents, electricity bills, etc on
behalf of the client.
Collection of Cheques: Like collecting money from the bills of exchanges, the
bank collects the money of the cheques through the clearing section of its
customers.
Portfolio Management: Banks manage the portfolio of their clients. It
undertakes the activity to purchase and sell the shares and debentures of the
clients and debits or credits the account.
Other Agency Functions: Under this bank act as a representative of its clients
for other institutions. It acts as an executor, trustee, administrators, advisers, etc.
of the client.
Utility Functions of Bank

 Issuing letters of credit, traveller’s cheque, etc.

 Undertaking safe custody of valuables, important documents, and securities
by providing safe deposit vaults or lockers.
 Providing customers with facilities of foreign exchange dealings
  Underwriting of shares and debentures
 Dealing in foreign exchanges
 Social Welfare programmes
 Project reports
 Standing guarantee on behalf of its customers, etc.

RECENT TRENDS IN BANKING

 
1)      Electronic Payment Services – E Cheques 
 
            Now-a-days we are hearing about e-governance, e-mail, e-
commerce, e-tail etc. In the same manner, a new technology is being
developed in US for introduction of e-cheque, which will eventually
replace the conventional paper cheque. India, as harbinger to the
introduction of e-cheque, the Negotiable Instruments Act has already
been amended to include; Truncated cheque and E-cheque instruments. 
 
2)      Real Time Gross Settlement (RTGS) 
 
             Real Time Gross Settlement system, introduced in India since
March 2004, is a system through which electronics instructions can be
given by banks to transfer funds from their account to the account of
another bank. The RTGS system is maintained and operated by the RBI
and provides a means of efficient and faster funds transfer among banks
facilitating their financial operations. As the name suggests, funds
transfer between banks takes place on a ‘Real Time' basis. Therefore,
money can reach the beneficiary instantaneously and the beneficiary's
bank has the responsibility to credit the beneficiary's account within
two hours. 
 
3)      Electronic Funds Transfer (EFT) 
 
 Electronic Funds Transfer (EFT) is a system whereby anyone
who wants to make payment to another person/company etc. can
approach his bank and make cash payment or give
instructions/authorization to transfer funds directly from his own
account to the bank account of the receiver/beneficiary. Complete
details such as the receiver's name, bank account number, account type
(savings or current account), bank name, city, branch name etc. should
be furnished to the bank at the time of requesting for such transfers so
that the amount reaches the beneficiaries' account correctly and faster.
RBI is the service provider of EFT. 
 
4)      Electronic Clearing Service (ECS) 
 
Electronic Clearing Service is a retail payment system that can be
used to make bulk payments/receipts of a similar nature especially
where each individual payment is of a repetitive nature and of relatively
smaller amount. This facility is meant for companies and government
departments to make/receive large volumes of payments rather than for
funds transfers by individuals. 
 
5)      Automatic Teller Machine (ATM) 
              
Automatic Teller Machine is the most popular devise in India,
which enables the customers to withdraw their money 24 hours a day 7
days a week. It is a devise that allows customer who has an ATM card
to perform routine banking transactions without interacting with a
human teller. In addition to cash withdrawal, ATMs can be used for
payment of utility bills, funds transfer between accounts, deposit
of cheques and cash into accounts, balance enquiry etc. 
 
6)      Point of Sale Terminal 
 
Point of Sale Terminal is a computer terminal that is linked
online to the computerized customer information files in a bank and
magnetically encoded plastic transaction card that identifies the
customer to the computer. During a transaction, the customer's account
is debited and the retailer's account is credited by the computer for the
amount of purchase.
 
7)      Tele Banking 
              
Tele Banking facilitates the customer to do entire non-cash
related banking on telephone. Under this devise Automatic Voice
Recorder is used for simpler queries and transactions. For complicated
queries and transactions, manned phone terminals are used.
 
8)      Electronic Data Interchange (EDI) 
 
Electronic Data Interchange is the electronic exchange of
business documents like purchase order, invoices, shipping notices,
receiving advices etc. in a standard, computer processed, universally
accepted format between trading partners. EDI can also be used to
transmit financial information and payments in electronic form. 
 
IMPLICATIONS 
 
The banks were quickly responded to the changes in the
industry; especially the new generation banks. The continuance of the
trend has re-defined and re-engineered the banking operations as whole
with more customization through leveraging technology. As technology
makes banking convenient, customers can access banking services and
do banking transactions any time and from any ware. The importance
of physical branches is going down.  
 
CHALLENGES FACED BY BANKS
 
The major challenges faced by banks today are as to how to cope
with competitive forces and strengthen their balance sheet. Today,
banks are groaning with burden of NPA’s. It is rightly felt that these
contaminated debts, if not recovered, will eat into the very vitals of the
banks. Another major anxiety before the banking industry is the high
transaction cost of carrying Non Performing Assets in their books. The
resolution of the NPA problem requires greater accountability on the
part of the corporate, greater disclosure in the case of defaults, an
efficient credit information sharing system and an appropriate legal
framework pertaining to the banking system so that court procedures
can be streamlined and actual recoveries made within an acceptable
time frame. The banking industry cannot afford to sustain itself with
such high levels of NPA’s thus, “lend, but lent for a purpose and with a
purpose ought to be the slogan for salvation.”
 
The Indian banks are subject to tremendous pressures to perform
as otherwise their very survival would be at stake. Information
technology (IT) plays an important role in the banking sector as it
would not only ensure smooth passage of interrelated transactions over
the electric medium but will also facilitate complex financial product
innovation and product development. The application of IT and e-
banking is becoming the order of the day with the banking system
heading towards virtual banking.
 
As an extreme case of e-banking World Wide Banking (WWB)
on the pattern of World Wide Web (WWW) can be visualized. That
means all banks would be interlinked and individual bank identity, as
far as the customer is concerned, does not exist. There is no need to
have large number of physical bank branches, extension counters.
There is no need of person-to-person physical interaction or dealings.
Customers would be able to do all their banking operations sitting in
their offices or homes and operating through internet. This would be
the case of banking reaching the customers.
 
Banking landscape is changing very fast. Many new players with
different muscle powers will enter the market. The Reserve Bank in its
bid to move towards the best international banking practices will
further sharpen the prudential norms and strengthen its supervisor
mechanism. There will be more transparency and disclosures. In the
days to come, banks are expected to play a very useful role in the
economic development and the emerging market will provide ample
business opportunities to harness. Human Resources Management is
assuming to be of greater importance. As banking in India will become
more and more knowledge supported, human capital will emerge as the
finest assets of the banking system. Ultimately banking is people and
not just figures.
India's banking sector has made rapid strides in reforming and
aligning itself to the new competitive business environment. Indian
banking industry is the midst of an IT revolution. Technological
infrastructure has become an indispensable part of the reforms process
in the banking system, with the gradual development of sophisticated
instruments and innovations in market practices. 
 
IT IN BANKING 
 
Indian banking industry, today is in the midst of an IT
revolution. A combination of regulatory and competitive reasons has
led to increasing importance of total banking automation in the Indian
Banking Industry. Information Technology has basically been used
under two different avenues in Banking. One is Communication and
Connectivity and other is Business Process Reengineering. Information
technology enables sophisticated product development, better market
infrastructure, implementation of reliable techniques for control of risks
and helps the financial intermediaries to reach geographically distant
and diversified markets. 
 
The bank which used the right technology to supply timely
information will see productivity increase and thereby gain a
competitive edge. To compete in an economy which is opening up, it is
imperative for the Indian Banks to observe the latest technology and
modify it to suit their environment. Not only banks need greatly
enhanced use of technology to the customer friendly, efficient and
competitive existing services and business, they also need technology
for providing newer products and newer forms of services in an
increasingly dynamic and globalize environment. Information
technology offers a chance for banks to build new systems that address
a wide range of customer needs including many that may not be
imaginable today.
 
         It is becoming increasingly imperative for banks to assess and
ascertain the benefits of technology implementation. The fruits
of technology will certainly taste a lot sweeter when the returns
can be measured in absolute terms but it needs precautions and
the safety nets. 
         It has not been a smooth sailing for banks keen to jump onto the
IT bandwagon. There have been impediments in the path like the
obduracy once shown by trade unions who felt that IT could turn
out to be a threat to secure employment. Further, the expansion
of banks into remote nooks and corners of the country,
where logistics continues to be a handicap, proved to be another
stumbling stock. Another challenge the banks have had to face
concerns the inability of banks to retain the trained and talented
personnel, especially those with a good knowledge of IT. 
         The increasing use of technology in banks has also brought up
‘security' concerns. To avoid any pitfalls or mishaps on this
account, banks ought to have in place a well-documented
security policy including network security and internal security.
The passing of the Information Technology Act has come as a
boon to the banking sector, and banks should now ensure to
abide strictly by its covenants. An effort should also be made to
cover e-business in the country's consumer laws. 
         Some are investing in it to drive the business growth, while
others are having no option but to invest, to stay in business. The
choice of right channel, justification of IT investment on ROI, e-
governance, customer relationship management, security
concerns, technological obsolescence, mergers and acquisitions,
penetration of IT in rural areas, and outsourcing of IT operations
are the major challenges and issues in the use of IT in banking
operations. The main challenge, however, remains to motivate
 the customers to increasingly make use of IT while transacting
with banks. For small banks, heavy investment requirement is
the compressing need in addition to their capital requirements.
The coming years will see even more investment in banking
technology, but reaping ROI will call for more strategic
thinking. 
         The banks may have to reorient their resources in the form of
reorganized branch networks, reduced manpower, dramatic
reduction in establishment cost, honing the skills of the staff, and
innovative ways of attracting talented managerial pool. The
Government of India and the Reserve Bank of India (RBI) on
their part would strengthen the existing norms in terms of
governing and directing the functioning of these banks. Banks
needs to strengthen their audit function. They would be
evaluated based on their performance in the market place. It is in
this context that we have invited the chief executive officers of
Indian banks to respond to the issues mentioned earlier
 
FUTURE OUTLOOK
           
Everyone today is convinced that the technology is going to hold
the key to future of banking. The achievements in the banking today
would not have make possible without IT revolution. Therefore, the
key point is while changing to the current environment the banks has to
understand properly the trigger for change and accordingly find out the
suitable departure point for the change. 
 
Although, the adoption of technology in banks continues at a
rapid pace, the concentration is perceptibly more in the metros and
urban areas. The benefit of Information Technology is yet to percolate
sufficiently to the common man living in his rural hamlet. More and
more programs and software in regional languages could be introduced
to attract more and more people from the rural segments also. 
 
Standards based messaging systems should be increasingly
deployed in order to address cross platform transactions. The surplus
manpower generated by the use of IT should be used for marketing new
schemes and banks should form a ‘brains trust' comprising domain
experts and technology specialists. 
 
CONCLUSION 
 
Indian banking system will further grow in size and complexity while
acting as an important agent of economic growth and intermingling different
segments of the financial sector. It automatically follows that the future of
Indian banking depends not only in internal dynamics unleashed by ongoing
returns but also on global trends in the financial sectors. Indian Banking
Industry has shown considerable resilience during the return period. The second
generation returns will play a crucial role in further strengthening the
system. The banking today is re-defined and re-engineered with the use of
Information Technology and it is sure that the future of banking will offer more
sophisticated services to the customers with the continuous product and process
innovations. Thus, there is a paradigm shift from the seller's market to buyer's
market in the industry and finally it affected at the bankers level to change their
approach from "conventional banking to convenience banking" and "mass
banking to class banking". The shift has also increased the degree of
accessibility of a common man to bank for his variety of needs and
requirements. Adoption of stringent prudential norms and higher capital
standards, better risk management systems, adoption of internationally accepted
accounting practices and increased disclosures and transparency will ensure the
Indian Banking industry keeps pace with other developed banking systems.

E-banking is a broad term that includes

everything from internet and mobile banking
to NEFT and IMPS transfers.
 
When did you last visit your bank to change your ATM PIN or update
your personal details, such as your registered mobile number? It has
been a while for many customers, thanks to the internet. E-banking
comes naturally to customers when they need to resolve an issue with
their bank or make a financial / non-financial transaction. Given its
convenience, the types of E-banking and the problems that it has solved
merits an assessment.

What is E-banking?

E-banking is an arrangement between a bank or a financial institution

and its customers that enables encrypted transactions over the internet.
Short for electronic banking, E-banking has various types that cater to
customers' different requirements, which can be resolved online.
E-banking is also helpful for non-financial transactions such as changing
your ATM PIN, getting a mini statement, updating your personal details,
balance inquiry or printing an account statement. Essentially, it refers to
any transaction that doesn't involve any movement of funds to or from
your account.

READ MORE

Benefits of POS Terminals for store owners

The many benefits of using IDFC FIRST Bank’s FASTag

 
 
Types of E-banking

The major types of E-banking are online internet banking, mobile

banking, automated teller machine (ATM), and debit and credit cards.
There's a good chance you've already heard about most of these.
However, let's understand each and how they cater to different customer
requirements.

Mobile and Internet banking

Internet banking and E-banking are almost synonymous, except the

latter is a broader term encompassing the former. Any transaction –
financial or non-financial – that you make over through a web page
(generally the bank's website) or a web application constitutes internet
banking.
You can experience banking at your fingertips with IDFC FIRST Bank's
internet banking services, which facilitate easy transfers, quick bill
payments and access to loan details. On the other hand, mobile banking
happens through your mobile phone via a bank's mobile banking app.

IDFC FIRST Bank enhances

your mobile banking experience
with SMS, WhatsApp, and video
banking.
Credit and debit cards

Credit and debit cards are a form of E-banking, too! Debit cards can help
us easily withdraw cash from ATMs and POS (Point of Scale) machines.
On the other hand, credit cards allow customers to borrow funds up to a
pre-approved limit and help them avail a range of offers.

ATMs

ATM was the first E-banking service provided by banks when they
started going digital. An ATM makes the process of withdrawing and
depositing money convenient.

Electronic Data Interchange (EDI)

EDI is a technology that is restricted to business transactions. It is used

to improve operational efficiency and reduce transaction costs across a
supply chain consisting of manufacturers, suppliers, logistics providers,
retailers, and wholesalers, etc. EDI has succeeded in making
transactions across businesses paperless and seamless.

Electronic Fund Transfer (EFT)

An EFT is used to electronically transfer money from one bank account

to another. Some examples of EFT are National Electronic Funds
Transfer (NEFT), Immediate Payment Service (IMPS) and Real-Time
Gross Settlement (RTGS). Hence, E-banking comprises a range of
different mediums of transacting online.

Why should you prefer E-banking?

E-banking enables digital payments which are secure, transparent, and

fast. In addition, E-banking allows you to access your bank account
whenever you want to. Add to this the benefit of lower transaction costs
on transactions made through E-banking. The instant notifications are
also a plus, as they help you know everything about your bank account
in real-time.

UNIT II

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 as Advisor and Client
The relationship between banker and customer can be as advisor and
client in a case when the customer invests in securities. The bank gives
advice to its customer for investing. For example, if you are planning to
take any kind of loan, but are not sure which loan you should take. Here,
the bank can advise you officially or unofficially to take the right decision.
In that case, the banker will be your advisor and you will be his client.

Relationship as Mortgagor and Mortgagee

Section 58(a) of the Transfer of Property Act, of 1882 defines
the mortgage as “A mortgage is the transfer of an interest in specific
immovable property for the purpose of securing the payment of money
advanced by way of loan, etc.”
When the banker provides the credit facility to his customer against the
security of immovable property, the customer becomes a mortgagor and
the bank is a mortgagee.

Relationship as Indemnity holder and Indemnifier

There are various types of indemnity given under the Indian contract act.
Indemnity is one of the types of contract in which one person promise to
save another party by paying his loss that occurred due to the person
who is making the contract or by the act of any other person.
In the relationship between banker and customer, the banker act as an
indemnity holder if any wrong transaction is done while making the
payment by the customer.

For example, if you make an online transaction with another person but
the transaction failed and your money is deducted. The bank will repay
the loss that occurred due to fault occurred in the transaction. Though, it
requires all the necessary written evidence to prove this in litigation.
Relationship as Hypothecator and Hypothecatee
The relationship between banker and customer converts into
Hypothecator and Hypothecatee when the bank customer hypothecates
some movable or immovable property or any other assets into the bank
to take the loan from the bank. In this case, the bank customer is a
hypothecator and the banker is Hypothecatee.

 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.

Relationship as principal and Agent

The bankers provide agent services to their customers. The agent
is defined under section 182 of the Indian contract act as the agent
is the person who is employed by a person by giving him the power
of attorney to work or deal on his behalf. The banker pay taxes,
electricity bills, insurance premium etc. at the command of the bank
customer who acts as principal.  The bank usually charges for
these services provided by the bank to its customer.
In the banking industry, the relationship between a banker and a
customer can be considered as a principal-agent relationship. In
this type of relationship, the customer (the principal) entrusts the
bank or the banker (the agent) with their money and other financial
assets, and the bank or the banker acts on the customer’s behalf to
manage and invest those assets.

The customer, as the principal, is the party who has the ultimate
control over their assets and makes the final decisions on how they
should be managed. The bank or the banker, as the agent, is the
party who is responsible for executing the customer’s instructions
and managing their assets in accordance with the customer’s
wishes.

Relevant laws 

Consumer Protection Act, 2019

The Consumer Protection Act, 2019 is implemented with the
objective to secure and protect the interest of the consumers. It
provides redressal to the grievances of consumers, who are not
satisfied by the service of the service provider. Under this act
section 2(1)(o) of the act defines the “service”. Section 2(1)(g) of
the Act provides the definition of the term “services”. Banking
services also come under the scope of the service provided under
the Consumer Protection Act, 1986.  Deficiency in any kind of
services can be brought to the consumer forums for redressal of
grievances. Section 2(1)(d) of the Act says that a consumer is a
person who avails services for the consideration.  
Limitation Act, 1963
The Limitation Act, 1963 provides for the prescribed time period
within which any suit, appeal or application can be made. The
“prescribed period” means the period of limitation computed in
accordance with the provisions of the Limitation Act. A banker is
allowed to file a suit, appeal or an application for recovery of the
loan only when the document is within the period of limitation.
Therefore, the bank should be careful that all the legal loan
documents are within the time limit and are held as valid. 

Revival of the document

 Acknowledgement Debt
As per Section 18 of the Limitation Act, acknowledgement of the
debt in writing by the borrower on the requisite stamp paper
before the expiration of expiration period can extend the limitation
period.

 Part Payment
When the part repayment is made by the borrower himself or by
his authorised agent before the expiry of the document, evidence
of such payment has to be taken in writing and duly signed by the
borrower.

 Fresh set of Documents

When the fresh set of documents are received by the bank before
the expiry of the original document, then the fresh period of
limitation starts. The revival of the time-barred debt is governed
under Section 25(3) of the Indian Contract Act, 1872.

Recovery of debts due to banks and

financial Institutions Act, 1993 (DRT Act)
This Act came into operation on 24th June, 1993. Recovery of
dues of the loan of the banks and financial institution through
court became tough. There was a huge backlog of cases. To
overcome this problem and expedite the process of loan recovery,
this legislation was enacted.

Important things in the legislation

  This Act constituted the “Debt Recovery Tribunal” for the
speedy recovery of the loans.
 This Act is applicable for the debt due to any bank or any
financial institution or any consortium of them, for the
recovery of the debt above 10 lakhs.
 The term “Debt” cover the following types of debts:

1. Any liability inclusive of interest, whether secured or

unsecured.
2. Any liability payable under a decree or order of any Civil
Court or any kind of the arbitration award.
3. Any liability payable under the mortgage or subsisting
upon or legally enforceable and recoverable on the date
of the application.

Lok Adalat Act

Lok Adalats are organised under the Legal Services Authorities
Act, 1987. They are intended for the settlement of a dispute or
potential dispute out of the courts. Lok Adalat derives by the
consent of the parties or when the court is satisfied that the
dispute can be settled by the Lok Adalat. They have to decide the
matter based on the principle of equity, justice and good
conscience. In case of a settlement, the award shall be binding on
both the parties. No appeal should lie in any court against the
award.

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.

Case laws
In the case of Motigavri vs. Naranjidwarkadas, the Bombay High
Court held that the relationship between banker and banker is that
of a lender and borrower.
In the case of Canara Bank vs. Canara Sale Corporation and
others, a wider approach was taken into consideration and it was
held that a relationship between the customer of a bank and a
customer is that of a debtor and creditor.

In the case of Surender S/O Laxman Nikose vs. Chief Manager

and authorised officer, State bank of India, it was held by the
Bombay high court that once the relationship between the banker
and customer ends, it waives off every right including the right of
lien.

Conclusion
With the advancement of the internet and different online
mechanisms, the world has become a global village. People keep
their savings and valuables in banks for better returns. At times
we have seen that people have seen instances of online fraud. The
regulation should be made in ensuring complete protection and
also should satisfy the consumer. The arbitrary action of granting
loans to people with brand value should be curbed and the
account must be fixed if anyone is found responsible for the
inaction or impropriety. The rising non-performing assets have
become a concern for everyone in the country. It directly or
indirectly affects common people of the country. So, we should
understand the need of the hour and make regulations in that
direction.

Rights and Duties of Banker and Customer

It is very difficult to live without a bank account as it is required for many
things. As more than 50% of Indians have bank accounts, it is very
important for you to know the rights and duties of both bankers and
customers. In this blog, we will discuss the rights and duties of bankers
and customers.

Rights of a Banker
1. Right to charge interest

Every bank in India has the right to charge interest on the loans and
advances sanctioned to customers. Interest is usually charged monthly,
quarterly, semiannually or annually.

2. Right to levy commission and service charges

Along with interest, banks also have the right to levy a commission and
service charges for the services rendered. The service rendered by the
bank might be SMS notification service, retail banking and so on. Banks
can also debit these charges from the customer's bank account.

3. Right of Lien

Another important right enjoyed by banks is the Right of Lien. Banks

have the right to keep goods and securities belonging to the debtor as a
security, until the loan is repaid by the debtor. Banks have only the right
to maintain the security of the debtor and not to sell. 

4. The Right of Set-off

The banker has the right to set off customer accounts. Banks can merge
a couple of accounts which are in the name of the customer and set off
the debit balance in one account with the credit balance in the other,
provided the funds belong to the customer.

5. Right of Appropriation

Let us consider that a customer has taken many loans from the bank and
he deposits some money in the bank without any instructions. If that
amount is not sufficient to discharge all loans, the bank has the right to
appropriate the amount deposited to any loan, even to a time-barred
debt. But the customer should be informed on the same.

6. Right to Close the Account

If the customer’s account is not properly maintained, banks have all the
right to close the account by sending a notice to the customer. Bankers
have no right to close the account, without sending a written notice.

See Also: 6 Banking services which attract GST in India

Rights of a Customer
1. Right to fair treatment

According to this right, banks cannot discriminate between customers on

the basis of gender, age, religion, caste, and physical ability while
providing services. This does not mean that banks cannot offer schemes
which are designed for a particular set of people. Banks have all the right
to offers differential rates of interest or products to customers.

2. Right of transparent, fair and honest dealing

The contract between the banks and customers should be easily

understood by the common man. It is the responsibility of the bank to
make the customer understand interest rates, the risk involved and all
other terms and conditions. Banks should not hide anything from the
customer before the signing of the agreement. Even if there are any
short comings, they should be communicated to the customer. The
language in the contract should be simple and easily understood.

3. Right to suitability

You might have come across a lot of cases of mis-selling of financial

products, especially life insurance policies. Usually, customers are forced
to buy the product which offers the highest commission to an agent. As
per this right, customers should be sold the product which is suitable to
them. So, banks should always keep customers needs in mind, before
selling any product.

4. Right to privacy

As per this law, the personal information provided by the customers to

the bank, must be kept confidential. Bankers can disclose only such
information, which is required by law or only after customers have given
permission. Banks are not allowed to provide your details to
telemarketing companies or for cross-selling.

5. Right to grievance redressal and compensation

Banks are responsible for all the products and services offered by them
and customers have the right to easy and simple grievance redressal
systems in case the bank fails to adhere to basic norms. Along with their
own products, bankers are responsible for the products of third parties
like insurance companies and fund houses. If the customer complaint is
not resolved by the bank, customers can go to the banking ombudsman.

See Also: How your bank may cheat you?

Duties of customers to banks

1. It is the duty of customers to present the cheque and other negotiable

instruments only during the business hours of the bank.

2. In the case of any disagreement in the bank statement, customers

should inform the bank.

3. Whenever photographs of customers are required by the bank, it

should be submitted.

4. It is the duty of the customer to present the instrument of credit within

the due time from the date of issue.

5. The cheque should be filled by customers very carefully.

6. If the cheque book is lost or stolen, it is the duty of the customers to

inform the bank.
7. If the customer notices any forgery in the amount of the cheque,
he/she should inform it to the bank immediately.

8. Customers should provide proper information in the Know Your

Customer (KYC) form.

9. Customers should make the repayment of all the dues on time.

10. It is the duty of the customers to read the MITC ( Most Important
Terms and Conditions)

Obligations of Bankers

1. It is the duty of the bank to honor the cheques of its customers up to

the amount standing to the credit of the customer’s account. The bank is
liable to pay the compensation to the customer, if it wrongfully refuses to
honor the cheque.

2. It is the duty of the bank to follow the instructions given by the

customers. If the customer has not given any instructions, the bank
should act as per rules and regulations.

3. Bankers should not disclose personal information given by customers

to any outsider.

4. Banks should maintain all details of transactions made by the

customer.

Not happy with a product or service? Just visit IndianMoney.com’s

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Special Types of Banker’s

Customers
In discharge of primary function, banker invites the public to
open an account with the bank. Opening of an account with a
bank, is creation of a special contract so that the principles
of contract viz. capacity to contract, free consent etc. are strictly
adhered to. Therefore, a banker must be very careful, while
opening an account in the name of a customer particularly at the
time of opening/accepting accounts in the name of special
category of customers viz. minors, partnership firm, joint stock
company, club etc. This lecture deals with the precautions to be
taken by the Banker, while opening as account in the name of
the “Special Types of Customers” as follows:

1. Minor
2. Illiterate
3. Lunatic
4. Married woman
5. Purdanashin Woman
6. Joint account
7. Joint Hindu Family
8. Trust account
9. Clubs, Societies and Charitable Institutions
10. Partnership Firm and
11. Joint Stock Companies.
Minor
A minor is a person, who has not completed 18 years of age.
The minority extends to 21 years, if a guardian of his person or
property is appointed by the Court (See 3 of Indian Majority Act,
(1875). Before 1969, in England the age of minority was 21
years. The age of minority is reduced to 18 years after passing of
the Family Law Reforms Act, 1969. In other words, in England
also, a person who has not completed the age of 18 years is a
minor.

According to Sec. 11 of the Indian Contract Act, 1872, a minor is

not competent to contract. A contract entered into by a minor is
void ab initio i.e. invalid from the very beginning (as laid down by
the Privy Council in Mohori Bibee v/s Dharmodas Ghose1).
However, a contract with a minor for supplying of necessaries to
minor or his dependants is valid and enforceable (Section. 68,
Indian Contract Act, under the Principle of Equity).

According to Section. 26 of the Negotiable Instruments Act, a

minor may draw, endorse, deliver and negotiate such
instruments so as to bind all the parties, except himself. He need
not incur any liability under the negotiable instrument, but he can
acquire rights over the instruments. However, the minor is
bound by the withdrawals made by him and the bank can
legally debit his account.

Therefore, a Banker may open an account in the name of a

minor in the following ways:
1. In the name of the minor or
2. In the joint names of the minor and his guardian or
3. In the name of the guardian.
In the first case an account can be operated by the minor himself
and there is nothing unlawful, since, Sec. 26 of the Act allows
the minor to do so. In the second case, an amount can be
operated jointly by the minor and his guardian. In the third case,
when the account is operated on behalf of the minor, the Minor
should have completed 14 years and he must be capable of
reading and writing.

As the minor is immune from liability under the contract, the

Banker must be very careful and should take the following
precautions while dealing with the Minor.

1. He (the banker) may open savings bank account (and not a

current account) in the name of a minor.
2. The bank records the date of birth of the minor as given by
the minor or his/her guardian. When the minor attains
majority, the banker has to close the account and should
open a new account in his name as major (i.e. the name of
the minor, who became the major). The credit balance if any
(from the account closed) should be transferred/credited to
the new account.
3. In case the minor dies, the guardian can be permitted to
withdraw the amount. In case of joint account in the names of
minor and his/her guardian, the balance will be held at the
absolute disposal of the guardian.
4. There is no risk involved so long as the minor’s account
shows credit balance. In case, the minor’s account is
overdrawn even by mistake or unintentionally, the banker
cannot recover the amount. Even if the minor has pledged
some asset as security, such pledge itself is invalid and the
Banker cannot exercise any lien over it. The reason is, a
minor can be a promise or beneficiary but cannot be a
promisor.
5. The Banker should not grant an advance to a minor even
against the guarantee by a third person, who is a major since
the contract with minor itself is void, the guarantor or surety
also is not liable unless there is some specific provision to
that effect.
6. A minor may draw, endorse or negotiate a cheques or
a bill but he cannot be held liable on such cheques or bill. He
cannot be sued in respect of a bill accepted by him during his
 minority. Such bill or cheque, nevertheless, will be a valid
instrument and all other parties will be liable in their
respective capacities (Section 26 of the Negotiable
Instruments Act, 1881). The banker should, therefore, be very
cautious in dealing with a negotiable instrument, to which a
minor is a party.
Illiterate
Illiterate persons cannot sign their names and hence the banker
take their thumb impression as a substitute for signature, and
also a copy of their recent photograph. The application form and
the photograph should be attested by an approved witness. For
withdrawing money, he must attend personally and affix his
thumb impression in the presence of an official of the bank, for
the purpose of identifications.

Lunatic
According to Sec. 12 of the Indian Contract Act, 1872, a person
of unsound mind is not competent to enter into a valid contract.
A person is said to be of sound mind for the purpose of making a
contract if he is capable of understanding it and of forming a
rational judgement as to its effect upon his interests2). It is
important that he should be of sound mind at the time he enters
into a contract. If a person is usually of unsound mind but
occasionally of sound mind, he may make a contract when he is
of sound mind. Similarly, if a person is usually of sound mind but
occasionally of unsound mind, he cannot enter into a valid
contract when he is of unsound mind. A contract entered into by
a person of unsound mind is a void contract according to the
Indian Contract Act, 1872.

The banker should therefore, not open an account in the name

of a person who is of unsound mind. But if a banker has
discounted a bill duly written, accepted or endorsed by a lunatic
he can realize the money due on the same from such person
except in the circumstances where it is proved that the banker
was aware of the lunacy of the person concerned at the time he
discounted the bill. The banker should suspend all operations on
the account of a customer as soon as he receives the news of
his lunacy till he gets the proof of his sanity or is served with an
order of the court.

Married Woman
A married woman (Hindu) has the contractual capacity (if about
18 years of age) and has the right to acquire or dispose of her
personal property called “Stridhana” in Hindu Law. The manager
should make the usual essential enquiries in opening the
account of a married woman. In the application (account opening
form), she should fill up in addition to her name, address etc., the
name of her husband,, his address (and the address of the
employer of the husband). Proper introduction is necessary. As a
competent person, she can draw and endorse cheques and
other documents and these can be debited to her account. As
long as credit balance is there in her account, there will be no
risks, but, if loan or overdraft is to be given the Bank should
ascertain her credit worthiness, her personal properties
(Stridhana) the nature of the properties held by her etc. The
Husband is not liable for her debts, except for those loans
incurred for “necessaries of life” for her and her family.

Precautions in granting loans or overdraft are necessary as:

1. she may have no property as stridhana,

2. Her Husband's property is not liable except for necessaries,
3. she may plead undue influence or ignorance of the nature of
loan transaction,
4. she cannot be committed to civil prison.
Purdanashin Woman
She is one who wears a veil (Purdah), as per her customs, and
is secluded except the members of her family. Some Muslim
women observe this as custom in their community. The Manager
should of course follow the preliminary enquiries as usual and
may allow such a woman to open an account. Her identity and
that she is opening the account out of her freewill are essential.
To be on the safer side the manager may require a responsible
person known to the bank attest her signature. Better if he insists
such attestation in respect of her withdrawals also.

Joint Account
While opening the joint account, all the concerned persons
should sign the application form. The necessary forms are filled
up and signed to specify how the account is to be operated and
also who is authorised on all matters including cheques, bills,
securities, advances etc. Operation of the account may be by
one or more persons but clear instructions are essential to draw
cheques etc. Instructions regarding survivorship are also a part
of the process of opening of accounts. Generally the account is
made payable to either or survivor and the survivor is entitled to
the amounts standing to the credit. The joint holders may
nominate a person, if they so desire. Example of Joint Account is
Husband and Wife. In a case of an account with instructions
payable to either or survivor it is held that on the demise of the
husband, the wife would be entitled to the amount if the husband
had such an intention to benefit her, but, if there is no intention, it
becomes part of the estate of the husband and hence heirs will
be entitled as per law. Death of the husband, will not constitute a
gift to the wife. The burden of proving the intention is on the
wife.3)

Partnership Firm
When two or more persons (subject to a maximum of 100) carry
on business to share profits and losses equally or in proportion
of capitals, it is called ‘Partnership business’. The Indian
Partnership Act, 1932 defines partnership as “The relation
between the persons who have agreed to share the profits of the
business carried on by all, or by any one of them acting for all”.
The persons are called ‘Partners and the business is called
‘Partnership Firm’. In partnership, the liability of partners is
unlimited.

A banker should take the following precautions, while opening an

account in the name of a partnership firm:

1. He (Banker) must examine carefully, the partnership deed to

acquaint himself with the constitution and business of the firm.
2. He must check that the number of partners is not less than
two and not more than 100.
3. The account should be opened in the name of the firm, not in
the name of partner/partners.
4. The Banker can insist all the partners to join, to open the
account, and must obtain specimen signatures of all the
partners.
5. The Banker should take a letter or mandate containing:
a. the names and addresses of the partners;
b. nature of business undertaken by the firm;
c. name/names of the partner/partners who will operate the
account.
6. If a cheque in favour of firm is endorsed to a partner, the
banker should not honour it without making necessary
enquiry.
7. If there is a minor partner, his date of majority should be
obtained to ensure that a fresh partnership later signed by
him on attaining majority.
Joint Stock Companies
A company is an artificial person, created by law with perpetual
existence and common seal. To acquire legal personally (to sue
and be sued) it must be incorporated/registered under the Indian
Companies Act, 1956. A Banker has to take the following
precautions while opening an account in the name of a Joint
Stock Company.

1. He (Banker) must ensure that the company (applicant to open

an account in the Bank) is incorporated/registered under the
Indian Companies Act, 1956 (so that the Banker can sue the
company for default or breach of contract if any in future).
2. He has to thoroughly examine the following documents of the
company:
a. Certificate of Incorporation, issued by the Registrar of Joint
Stock Companies to ensure that the company (whether
Private Limited or Public Limited) is incorporated under
Companies Act.
b. Certificate of Commencement of Business in case, the
applicant is a Public Limited Company. (A Private
Company can start business after getting the certificate of
Incorporation. But a public company can start business
only after obtaining the certificate of commencement of
Business issued by the Registrar of Joint Stock
Companies).
c. Memorandum of Association and Articles of Association
are the most important documents, submitted to the
‘Registrar for Incorporation. Memorandum contains the
relationship between the company and outsiders (public)
while the Articles contain the constitution of the company.
3. He must obtain from the applicant, a copy of the ‘Resolution
passed by the Board of Directors’:
a. to ensure that the Bank is appointed as Banker of the
Company’.
b. To know the persons authorized to operate the Account,
and
 c. to know the borrowing power of the company and the
persons so authorized to borrow.
4. If the person authorized to operate the company’s account is
having his personal account also with the bank, the banker
must properly enquire about the cheques endorsed and
deposited in personal account so as to avoid unauthorized
transfer/diversion of Company’s funds.

Introduction
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.
What is Set-off
It is the legal right of the bank to set off or adjust the debit
amount against the credit amount in the balance of the same
borrower. The right of set-off is also known as the right to balance
debit with credit or a combination of accounts. 

For example, X buys a mobile from Y, for Rs.10,000. Later, A sells

to B Bluetooth headphones worth Rs.5000. B is perfectly entitled
to set off the cost of headphones against his liability for mobile
and needs to pay only Rs.5000 as a settlement towards the net
debt.

Difference between Banker’s Lien &

Set-off
A banker’s lien differs from the right to set off. A lien is confined
to only the securities and property upon which banks have
custody. A set-off relates to money and may arise from a contract
or mercantile usage, or by using the law.

Banker’s Right to Lien

It is a condition that entitles bankers to recover their due amount
by selling the goods of debtors, which are in their possession. The
recovery can only be made once a reasonable time and notice are
provided to the debtor. In other words, a bank has the right to
retain the Goods and securities of a customer until the customer
pays the bank’s dues. The bank can sell these goods after giving
due notice to the customer as per the law. 

These goods are the ones that Banker has possessed during the
ordinary course. 

Lien is not permissible in the following scenarios: 

1. When there is an express Contract e.g., Counter

Guarantee.
2. When there is no mutual demand b/w Banker and
customer.
3. When the valuables are put in with banks under safe
custody e.g., lockers.
4. The banker has no lien on the bill of exchange or other
documents entrusted to him for some special purpose.  
5. The right of the lien provided to the banker is not barred
by law of limitation. The effect of limitation is only limited
to bar the remedies available under law and not the
discharging of the debts.
6. Credit and liability must be the same rights. For example,
if a person has a current account or a deposit account
and there is a debt due from a firm, then the right to lien
is not applicable since the credit and liability do not exist
in the same rights. 

Conditions when Banker can choose the

Right of Set-off
The banker’s power to combine different accounts of a person
against the debt it holds against the same person is called the
right to set off. 

Some important requirements to initiate set-off are 

1. All the funds must prima facie belong to the customer.

2. When debt amounts are certain.
3. When the debts are in the same rights. 
4. There is no contract expressed or implied in contrast. 
Case laws

Right of Lien

Chettinad Mercantile Bank Ltd. v/s PL.A. Pichammai

Achi AIR 1945
It was held that the right of a banker to keep possession of items
delivered to him if and so long as the customer to whom the
things belonged or who acquires the power of disposing of them,
when so delivered, is indebted to the banker on the balance of the
account between them, provided the banker has obtained
possession in such circumstances which do not imply that he has
agreed to eliminate this right. 

City Union Bank Ltd v/s Thangarajan (2003)

It was observed that the bank gets the right of a general lien
w.r.t. all securities of a customer including negotiable instruments
and Fixed Deposits, but only to the extent to which that customer
is liable. In the event that the bank fails to return the balance
amount to the customer, and the latter suffers a loss thereby, the
bank will be liable to pay associated damages to the customer. In
the above case, the Court has relied its decision on the principle
which states that for invoking a lien by a bank, there should exist
interdependency between the bank and the customer. Detaining
the customer’s properties beyond the total liability is unauthorised
and would attract damages as a liability on banks.

Right of Set-off

Radha Raman Choudhary & Others v. Chota Nagpur

Banking Association Ltd. (1945)
In this case, the plaintiff’s father had a fixed deposit with the bank
and had also executed four hand notes jointly with certain
persons, in favour of the bank. Plaintiff’s father died and the fixed
deposit account was transferred to the names of the plaintiff on
their undertaking of all the liabilities of their father to the bank. 
The bank, without the knowledge of the plaintiffs, adjusted the
fixed deposit against the dues on the aforesaid hand notes. The
plaintiffs filed a suit against the bank claiming the amount of the
deposit which had been adjusted as mentioned above. They
contended that their father was merely a surety for the other
executants of the notes and not a principal debtor. Alternatively,
the plaintiffs sought a decree against those executants (or their
legal representatives) for different portions of the amount
adjusted, if the court held that the adjustment made by the bank
was legal. The high court made a clear distinction between a lien
and set off in the light of Section 171 of the Indian Contract
Act made in this case. It was held that the banks have a right to
merge one or more accounts of the same customer, but a bank
cannot combine a customer’s personal account with a joint
account of the customer and another party.

I.S. Machado v. Official Liquidator of Travancore

National and Quilon Bank Ltd., 1941 
This case has drawn a distinction between Indian Law and England
Law. In India, if a debt is incurred by the members of a
partnership, they will be jointly and severally liable. So far as the
amounts due to the members of the firm are concerned, the claim
will be a joint claim both in England and in India. Consequently, if
X and Y, who are the members of a firm sue Z, Z cannot set off a
debt due by X alone, whereas if Z sues X & Y, X can set off a debt
due by Z. It was held that a partner can claim a set of a debt due
from his partnership to a bank against the credit balance on a
deposit account in his name with the bank.

Conclusion 
The Right to Lien is an instrument that can be used by a banker in
the event of any default from the borrower. However, a bank
needs to decide the reasoning for enforcement of this right given
to them by Law. They need to ensure that only the legitimate
amount is retrieved from the borrower’s asset (only when allowed
by law) and in line with Sections 170 & 171 of the Indian Contract
Act, 1872. A banker should not execute a right of lien when there
is an express Contract.

Introduction 
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.

A discharge of a contract by agreement, on the other hand, is

when the contract is ended because the conditions are not
fulfilled. However, the involved parties can also terminate a
contract when the primary terms and conditions of the said
contract have not been fulfilled. Essentially, the difference
between a discharge of a contract and terminating contract is the
reasons why the contract is coming to an end.

 Appropriation by debtor
Under Section 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 Case
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. 

Several and Distinct Debts

Section 59 applies to the debt which is several and distinct and
does not apply in the cases where there is only one debt even if it
is to be paid in installments. The test to know whether the debts
are distinct is the person can sue for it separately. 

Intimation by the Debtor

The debtor must at the time of the payment of the debt, must
intimate the creditor that the amount must be paid for the
liquidation of a certain debt, and the creditor has to appropriate it
accordingly. The creditor has the right to refuse any conditions
made by the debtor during the payment of the debt. Once
appropriation has been accepted, then the creditor cannot alter
the terms of the appropriation, without the consent of the debtor. 

The debtor should communicate his appropriation either expressly

or impliedly, through the circumstances indicating such intention.

Proof of Intention
Intention about the appropriation of the payment by the debtor
must be proved by circumstances. Where the debtor alleges
appropriation in a particular manner then he must prove it.
Moreover, entries in the book of the creditor could be considered
for the proposed appropriation by the debtor.

Contract of Guarantee
The right to appropriate is available to the debtor and not the
surety. A surety is also bound by the creditor’s appropriation.
Also, the surety has no right to insist on the appropriation of any
payment to the guaranteed debt, unless the circumstances of the
case are such that they show such intention.

Appropriation by creditor 
Under Section 60, the creditor is also competent for appropriation.
If the debtor makes any payment without any appropriation then
the creditor can use his discretion to wipe out any debt which is
due. He may use it for the payment of a time-barred debt or wipe
out the debt which is carrying a lower interest rate. The right of
appropriation lies with the creditor until the last moment, even
when he is examined at the trial or before any act which renders
him inequitable for him to exercise this right. The creditor, in this
case, has a lot of scope for exercising his right, he can put himself
in the most advantageous position. Moreover, he need not express
himself in express terms while doing so. As long as notice has not
been given in respect of the appropriation of any amount, the
creditor can change it and can appropriate some other claim.

Lawful Debts
The creditor must establish the existence of a lawful debt actually
due. Under this section, the appropriation cannot be made against
any unlawful debt. In several cases, it was held by the court that a
creditor can even appropriate towards an unenforceable debt due
to some defect.

Time-Barred Debts
The creditor, in the absence of any appropriation by the debtor,
can appropriate the amount of a debt barred by the Limitation
Act,1963. This usually happens as the creditor appropriate the
amount to a time-barred debt and sue the debtor for the ones not
barred. However, the amount cannot be appropriated to a debt
barred by a statute after an action has been brought and
judgment has been delivered. 

Principal and Interest on Single Debt

There is a lot of conflict amongst the opinion of the court as to
whether the provisions of this Section would apply to the principal
and interest of the debt or not. In the case of Jia Ram vs Sulakhan
Mal (Air 1941 Lahore 386), it was held that the principal and the
interest would not be applicable under this. 

As under the common law, the rule that applies is that where the
principal and interest has accrued on a debt, sums paid where
interest has accrued must be applied first to the interest. This rule
is based on “common justice” else it would deprive the creditor of
the benefit to which he is entitled under his contract and would be
most unreasonable for him.

Appropriation by law 
Section 61 is applied in a situation when neither of the parties
makes the appropriation. To settle this deadlock, then the law
gets the right to appropriate. In such cases, the debt is settled in
accordance with the order of the time they have incurred. In case
all the debts are of the same time then the debts would be
discharged proportionately. Under this Section not only the
express agreement but also the mode of dealing between the
parties.

Assignment of contracts 
Assignment of contract means the transfer of the contractual
rights or liabilities by a party of the contract to some other person
who is not a party to the contract. For Example- A owes B debt
and B owes to C. B can ask A to directly pay the amount to C, and
if A agrees to this, then this will be an assignment of a contract. 

Assignment of liabilities 
In an assignment of the contract, it is important to note that the
liabilities cannot be assigned. The promisor has to insist that the
responsibility of the performance of the contract lies on the
promisor himself. It becomes more important when the work is of
personal nature and demands personalized skills like painting,
singing. The promisor, in that case, can object to the performance
of the contract which is done by some other person who is not a
party to the contract.

The contractual liabilities may be assigned in the following two

ways:

By the act of the party

  Assignment with the consent of the other party and the
assignee;
For Example- novation of a contract. 

 Assignment with the consent of other parties, but without

the consent of the assignee. 
For Example- A and B are party to a contract, they both decided
to assign the liabilities on C, who is a stranger to a contract.

 The assignment without the consent of the other party

but with the consent of the assignee i.e. a voluntary
assignment.
For Example- A and B are party to a contract, B assigns the
liabilities of the contract to C, who is a stranger to contract, with
his consent but without the permission of A.

By operation of law
The operation of law is another mode of a valid assignment of any
contractual liabilities to a stranger. Such assignment is also called
an ‘involuntary assignment’ or an ‘automatic assignment’ of
contractual burdens or obligations. Such assignment may take
place in the following circumstances:

1. On the death of the promisor.

2. On the retirement of a partner.
3. On insolvency of the promisor.
4. On winding up of a company.

Assignment of rights 
The rights are assignable under a contract unless the contract is
personal in nature or the rights are incapable to be assigned either
by law or under any contract that is entered by the parties. The
intention regarding the assignment of the rights needs to be
gathered from the nature of the agreement or from the prevailing
circumstances. 

Even when there is no prohibition as to the assignment of the

rights, but if the court from the facts of the case determines that
there are various personal obligations under the contract, hence
the rights under this cannot be assigned. 
One of the leading authorities is the decision of the Supreme Court
in the case of Khardah vs Raymon, in this case, it the dispute
arose because of a contract for the purchase of mill by a Pakistani
jute dealer who failed to supply the goods as agreed. The court
held that the contract for the purchase of the foreign jute was not
assignable because the goods had to be imported from under the
license which was not transferable. The other question which was
put up was whether the dealer could assign his rights to that price
on the delivery of the goods. The court accepted that there is
nothing personal about the sale of goods. Moreover, it is
established that the arbitration clause does not take away the
right of the party to assign if it is otherwise assignable. In fact,
the rights of the seller also do not obstruct the assignability of the
contract. In the case, there was no provision in the contract which
prohibits the assignment. The court stated that in the law there is
a clear distinction between the assignment of the rights under a
contract by the party who has performed the contract and his
obligations, and the assignment of a claim for compensation which
one party has against the other party for the breach of contract.
The latter is just a claim of damages that can not be assigned in
law, the former is the benefit under the agreement, which is
capable of assignment.

             Click Above

Personal Nature of the Contract

The contract of personal nature involved the personal
creditworthiness of the buyer even in the case of the mode of
payment, which was not capable of being assigned. This was held
in the case of SAIL vs State of MP in which the central government
assigned a piece of land to its own corporate undertaking with
rights, liberties and privileges, one of which was the exemption
from tax. The court rules that the assignee became entitled to the
exemption as the successor.

Unilateral cancellation of the sale deed

It is not possible for the vendor to make a deed of cancellation of
the sale deed made, even if the ground is full of consideration was
not received by the vendor. Such a deed would result in the
revocation of the contract and would require the order of the
court. Moreover, a deed of cancellation of a sale unilaterally
executed by the transferor does not create, assign, limit or
extinguish any right, title or interest in the property and is of no
effect. Hence such a deed could not be accepted for registration.

Effect and formalities of assignment

Consideration 
The assignment requires some form of consideration from the
assignor to the assignee. In the absence of any consideration
between them, the assignment will be revocable. But when an
assignment is made by way of gift, by following all the essential
conditions of a gift, then it can not be revoked. In order to make a
voluntary settlement valid, the settlor must do everything, which
according to the nature of the property was necessary to do in
order to transfer the property.

Subject to equities 
The title of the assignee is subject to all the equities that exist or
arise up to the time when the notice of assignment is given to the
debtor. (for instance, A is the assignor, B is the assignee and C is
the debtor).The assignee would not be affected by the equity of
personal nature between the assignor and the assignee. For
example, the right to claim damages for the fraud committed by
the assignor cannot be used to defeat the right of the assignee. 

Notice of assignment 
Notice of assignment should be given to the debtor. This is very
useful as it binds the debtor. If the notice is not given then the
debtor could make the payment of the assignor himself and will
get discharged. Moreover, if notice is given then the assignment
would not be affected by any equity that may arise. Moreover, if
the notice is paid to the assignor who has many assignments then,
in that case, the notice is given to him at that point of time, then
that assignment will have priority over others even if it was
received later.

What is Clayton Rule?

January 1, 2018 by Study Mentor Leave a Comment

Business, banking, trade and monetary transactions have been the life
blood of any civilization. Man has been engaged in trade and financial
business since time immemorial.

However, certain times, difficult and confusing situations arises as to the

distribution of assets and liabilities within a group of co-owners and in
that case, certain laws have been made to ensure free and fair share of
everyone’s rights and responsibilities to the funds and liabilities without
fear, favour, affection or ill-will of any person.

The Clayton rule is a common law in relation to the distribution of assets

in the form of money from a bank account. This rule was made as part of
the judgement of the Devaynes vs. Noble case of 1816. The judgement
was taken as a president and a common law known as Clayton’s rule
was put into effect for further cases of such nature.

Case background

The famous case dates to 1816 when Mr. Clayton had an account with a
banking form which was a partnership named Devaynes, Dawes, Noble,
and Co. One of the partners William Devaynes died. The amount then
due to Clayton was £1717. The living partners remaining there after paid
out to mystically 10 more than the amount while Clayton himself on his
part made for the deposits with the firm. The firm subsequently went
bankrupt.

According to the judgement it was concluded that whatever period is paid

or is to be applied according to the mode laid down by the payer.
Therefore according to this when a debtor makes a payment,
appropriation of the fund can be done to any of the debt that he pleases.
And the creditors must be agreeing to it.
 Table of Contents

 Clayton rule in the Indian context

o Exception
Clayton rule in the Indian context

In the Indian constitution the Clayton rule has been incorporated by the
provision of the Indian contracts act 1872. Appropriation of payments
and the rules relating to it made by the debtor who owes a number of
distinct dates to his creditor are present in sections 59 to 61 of the Indian
Contract Act 1872.

In order to further delve into the Indian Contract Act we need to first
know the meaning of appropriation of funds. Appropriation of funds refers
to the allocation of money for a particular purpose. Sometimes when
there are multiple transactions we do not know which payment has been
sent against which purchase. In order to clear out this confusion the
Clayton’s rule is applied.

There are few distinct cases which call for different situations and
applications of the law:

 Appropriation in order of receipts and payments– the rule of

Clayton’s law is applicable when the two parties have an account that
owns no interest. In that case appropriation takes place in the order in
which the receipts and payments take place and are carried into the
account. Thus as per the rule unless there is contrary intention the items
on the credit of an account must be appropriated against the items on the
debit in order of date.
 When the debtor does not intimate and creditor fails to appropriate
– According to section 61, if the debtor does not expressly intimate and
where the creditor fails to make any appropriation, the payment shall be
applied in discharge of the debt in chronological order. If the debts are of
equal standing, the payment shall be applied in discharge of each
proportionately.
 Where the debtor intimates – According to section 59:
(i) Appropriation of payment is a right primarily of thedebtor and for his
benefit. If the debtor expressly intimates at the time of actual payment
that the payment must be applied towards the discharge of a particular
debt, the creditor must do so.
(ii) If there is no express intimation by the debtor, the Law will look to the
circumstances attending on the payment for appropriation. There is an
established maxim that when money is paid, it is to be applied according
to the express will of the payer, not to the receiver.
 When the debtor does not intimate and the circumstances are not
indicative (Sec.60) :
(i) When the debtor does not expressly intimate or where the
circumstances attending on the payment do not indicate any intention,
 the creditor may apply his own discretion to any lawful debt actually due
and payable to him from the debtor.
(ii) The creditor may also, until he has declared appropriation to the
debtor, alter the appropriation.
(iii) He cannot, however, apply the payment to a disputed and unlawful
debt, but he may apply it to a debt, which a barred by the law of limitation.
 Part-payment is applied for the interest first and for the principal
afterwards – Regarding part-payment, the general principle, subject to
any contract to the contrary, is that the payment should first be applied to
the interest and after the interest is fully paid off, to the principal.

Whenever the borrower repays loans to lender, the interest amount will
be satisfied first and then will eat satisfy the principal amount. Also these
rules do not come into effect unless there are multiple transactions
between the lender and the borrower.

That means number of monetary transactions have to be done in

different period of time. Appropriation of payment does not apply to
single transactions.

The rule is only a presumption, and can be displaced. Notwithstanding

the criticisms sometimes leveled against it, and despite its antiquity, the
rule is commonly applied in relation to tracing claims where a fraudster
has commingled unlawfully obtained funds from various sources.

Exception
The rule does not apply to payments made by a fiduciary out of an
account which contains a mixture of trust funds and the fiduciary’s
personal money. In such a case, if the trustee misappropriates any
moneys belonging to the trust, the first amount so withdrawn by him will
not be allocated to the discharge of his funds held on trust but towards
the discharge of his own personal deposits, even if such deposits were,
in fact made later in order of time.

Bank Pass Book

Passbook or Bank Statement is a copy of the account of the
customer as it appears in the bank’s books. When a customer
deposits money and cheques into his bank account or withdraws
money, he records these transactions in the bank column of his
cashbook immediately.

Correspondingly, the bank records them in the customer’s

account maintained in its books. Then they are copied in a
passbook and given to the customer. With the computerization of
banking operations, bank statements (in lieu of passbook) are
issued to the customers periodically.

Thus passbook is a record of the banking transactions of a

customer with a bank. All entries made by a customer in his
cashbook (bank column) must be entered by the bank in the
passbook.

Hence, the balances as per bank column of the cashbook must

agree with the balance as per passbook. Of course the balances
will be equal and opposite in nature. For example, if the cash
book shows a debit balance of Rs.5000, then the passbook must
show a credit balance of Rs.5000 and vice versa. But in most
cases, these two balances may disagree on account of various
reasons.

I. INTRODUCTION

The number of frauds and forgeries in banks are increasing throughout the world.
Forgeries are either

committed by the employers of the bank or the outsiders. Sometimes, forgeries are
committed by the outsiders

with the help of bank employees or by the negligence of the bank employees. The RBI
even set guideline to

safeguards by way of suitable procedure and internal checks. However, the Reserve
Bank of India advices

commercial bank about major fraud and forgery prone areas and safeguard necessary
for prevention.

II. MEANING OF FORGERY

Forgery is the false making or materially altering of records with intent to defraud, of
any writing which if

genuine, might apparently be of legal efficacy or the foundation of legal liability.

Forgery is a false making of

any writing instrument for the purpose of fraud or deceit, including every alteration of
or addition to a true

instrument.1

In the nutshell we can say that forgery is the fraudulent making or alteration of any
record, deed

writing, register, stamp, instrument etc.

According to Section 463 of Indian Penal Code, 1860 defines forgery as “Whoever
makes any false documents

or any false electronic record or part of a document or electronic record, with intent to
cause damage or injury,

to the public or to any person, or to support any claim or title, or to cause any person
to part with property or to

tender into any express or implied contract, or with intent to commit fraud or that
fraud may be committed,

1 Dr. S.R. Myneni, Law of Banking 350 (Asia Law House, Hyderabad, 2nd Edition.

www.ijlmh.com ©2019 IJLMH | Volume 2, Issue 2 | ISSN: 2581-5369

International Journal of Law Management & Humanities Page 2

commits forgery.2

Explanation 1- A man’s signature of his own name may amount to forgery

Explanation 2- A draws a bill of exchange, upon a fictitious person and fraudulently

accepts the bill in the name

of such fictitious person with intent to negotiate it, A commits forgery.3

Forgeries are committed by using computers. Some examples are: printing of

counterfeit currency notes,

certificates and stamp papers. Modern printers and scanners photocopiers are used to
carry out such frauds.4

III. PUNISHMENT OF FORGERY

Forgery has been made an offence and the punishment for the forgery has been
provided under Section 465 of

the Indian Penal Code, 1860 which states that whoever commits forgery shall be
punished with imprisonment

for a term which may extend to 2 years or fine or both.5

IPC deal with using a forged document as genuine, using as genuine, forged or
counterfeit currency notes or

bank notes is punishable under Section 498B of IPC and possession of forged or
counterfeit currency notes or

bank notes is punishable under Section 498C of IPC.6

IV. REMEDIAL MEASURE

Both the prevention and detention of frauds through forgery are important for a bank.
Forgery of signatures is
the most continuing fraud in banking business. A banker as per legal obligation is
supposed to know the

signature of his customer and in case of any doubt he has to consult the specimen
signatures of his customer,

which has already been taken during the course of opening of account of a customer.
The specimen signatures

are always kept in safe custody of the bank. The bank should take reasonable care
when the instrument has been

presented either order or bearer, in case a bank pays forged instrument, he would be
liable for the loss to the

genuine customer.7
.

Forgery

I. INTRODUCTION

The number of frauds and forgeries in banks are increasing throughout the world.
Forgeries are either

committed by the employers of the bank or the outsiders. Sometimes, forgeries are
committed by the outsiders

with the help of bank employees or by the negligence of the bank employees. The RBI
even set guideline to

safeguards by way of suitable procedure and internal checks. However, the Reserve
Bank of India advices

commercial bank about major fraud and forgery prone areas and safeguard necessary
for prevention.

II. MEANING OF FORGERY

Forgery is the false making or materially altering of records with intent to defraud, of
any writing which if

genuine, might apparently be of legal efficacy or the foundation of legal liability.

Forgery is a false making of

any writing instrument for the purpose of fraud or deceit, including every alteration of
or addition to a true

instrument.1
In the nutshell we can say that forgery is the fraudulent making or alteration of any
record, deed

writing, register, stamp, instrument etc.

According to Section 463 of Indian Penal Code, 1860 defines forgery as “Whoever
makes any false documents

or any false electronic record or part of a document or electronic record, with intent to
cause damage or injury,

to the public or to any person, or to support any claim or title, or to cause any person
to part with property or to

tender into any express or implied contract, or with intent to commit fraud or that
fraud may be committed,

Explanation 1- A man’s signature of his own name may amount to forgery

Explanation 2- A draws a bill of exchange, upon a fictitious person and fraudulently

accepts the bill in the name

of such fictitious person with intent to negotiate it, A commits forgery.3

Forgeries are committed by using computers. Some examples are: printing of

counterfeit currency notes,

certificates and stamp papers. Modern printers and scanners photocopiers are used to
carry out such frauds.4

III. PUNISHMENT OF FORGERY

Forgery has been made an offence and the punishment for the forgery has been
provided under Section 465 of

the Indian Penal Code, 1860 which states that whoever commits forgery shall be
punished with imprisonment

for a term which may extend to 2 years or fine or both.5

IPC deal with using a forged document as genuine, using as genuine, forged or
counterfeit currency notes or

bank notes is punishable under Section 498B of IPC and possession of forged or
counterfeit currency notes or

bank notes is punishable under Section 498C of IPC.6

IV. REMEDIAL MEASURE

Both the prevention and detention of frauds through forgery are important for a bank.
Forgery of signatures is

the most continuing fraud in banking business. A banker as per legal obligation is
supposed to know the
signature of his customer and in case of any doubt he has to consult the specimen
signatures of his customer,

which has already been taken during the course of opening of account of a customer.
The specimen signatures

are always kept in safe custody of the bank. The bank should take reasonable care
when the instrument has been

presented either order or bearer, in case a bank pays forged instrument, he would be
liable for the loss to the

genuine customer.7

V. BANKERS LIABILITY FOR PAYMENT MADE ON FORGED CHEQUES

 Banker Customer Relationship

The relationship between a banker and his customer is that of a debtor and creditor.
When a cheque with a

forged signature is presented in the bank, the banker has no authority to make
payment on it and if he does such

payment the he would be acting contrary to the law and would be liable to the
customer for the said amount.8 A

bank in such cases can escape liability only if it can show that the customer is not
entitled to make a claim on

account of adoption, estoppel or ratification.9

Canara Bank v. Canara Sales Corporation and Others.10

It has been held that the bank can escape from liability only if it can establish
knowledge to the customer of the

forgery in the cheques and negligence for continuously long period cannot by itself
provide a relevant ground

for the bank to escape the liability.

 Detecting of Forged Cheque

There are always natural variations in the handwriting of an individual and there are
fundamental variations in

the handwriting of two persons, if the signature is carefully compared with the
specimen signature. The forged

signatures are written hesitatingly. The paying banker should carefully confirm that the
cheque bears the

genuine signature of the drawer after comparing the same with his specimen
signature.11 The bankers should
check the cheques under the instruments with a magnifier and if he gets any doubt
banker should reject the

cheque.

Prabhu dayal v. Jwala bank.12

The banker was held liable for the loss, though the customer was not doubt
negligence, but his negligence was

not a proximate cause of the loss. Further it was held that it was the duty of the
employees of the bank to

identify the signature of the customer and if they fail to do so thereby suffer loss.

 Protection Against Forgery

According to Section 82(2) of the Negotiable Instruments Act, 1881, gives protection
only when the payee or

endorsed signature is forged and the banker makes payment in due course.13 If a
banker pays a cheque which

carries a forged signature of his customer, it does not amount to payment in due
course. It is so because every

banker is expected to know the signature of his own customers. Hence, he cannot
even think of claiming

protection in the case of forged endorsement of the drawer.14

However, if the customer by his conduct enables the forgery of his signature then the
paying banker is relieved

International Journal of Law Management & Humanities Page 4

from his liability.15 Whether the customer has enabled the forgery or not depends
upon the circumstances fact

of the case.

National westminister bank v. Barclays bank international ltd. And another.16

It was held that the mere fact that a banker honoured a cheque, on which the
customer’s signature had been

undetectable, forged and did not carry with it an implied representation of the banker
to the payee that the

drawer’s signature was genuine and that the paying bank can recover money.17

Brewer v. Westminister bank ltd.18

It has been held that the bank did not obtain a good discharge by paying the forged
cheques. Undoubtedly a
banker who pays a forged cheque is bound to pay the amount against to his customer,
because in the first

instance he pays without authority.

Lewes sanitary loundary co. V. Barclay beven and co.19

The secretary who was previously convicted for forgery was allowed to keep the
company’s pass book and

cheque book. He forged the signature of the directors and obtained payment for many
cheques. It has held that

the banker was liable and the customer did not enable the forgery.

Bihar Cooperative Development And Cane Marketing Union Limited And Another.20

The Supreme Court held that:

 Since one of the signatures on the cheque was forged, there was no mandate to the
bank at all.

 A document in cheque from to which the customer’s name as drawer is forged or

placed thereon without

authority is not a cheque but merely nullity.

 The bank was negligent is not ascertaining whether the signatures on the cheque
were genuine.

 The circumstances attending to the encashment of cheque conclusively show that

the bank was

negligent and its officers were fraudulent right from the beginnings.

 The dishonesty of an official of the union was not the proximate cause of the loss to
the bank.21

International Journal of Law Management & Humanities Page 5

Greenwood v. Martins bank.22

Mr. Greenwood, the customer did not inform the banker of the forgery of his
signature by his wife. He was

silent even though he knew about the forgery. It has held that the customer was liable,
as it is the duty of the

customer to disclose the relevant information. So also, if the customer comes to know
of any suspicious

activities of any officer of a bank connected with banking, he must report the matter
to the director

immediately.23
VI. CONCLUSION

Hence, it is understood that bank is liable for forged payment as there exit a
contractual relationship between

bank and customer is that of a debtor and creditor. Bank can escape from its liability
when the customer had

knowledge of the forgery and it is the duty of the customer to inform the bank about
the irregularities when he

come to know about it.24 In case customer is unaware of any fraudulent transaction
then duty will not exist.

Forged endorsement is a type of fraudulent payment. For example, someone may

write a cheque with a forged signature. In this case the forged signature makes the
endorsement fraudulent. Forging endorsements can be used to prevent the person
or legal entity that the payment is made out to from being able to receive its value
(such as cashing a cheque).

Legal description[edit]
If an instrument is endorsed in full, it cannot be endorsed or negotiated except by
an endorsement signed by the person to whom or to whose order the instrument is
payable. Thus, if such an instrument is negotiated by way of a forged endorsement,
the endorsee will not acquire the title even though he be a purchaser for value and
in good faith, because the endorsement is nullity. But where the instrument has
been endorsed in blank, it can be negotiated by mere delivery and the holder
derives his title independent of the forged endorsement and can claim the amount
from any of the parties to the instrument.

Examples[edit]
A bill is endorsed, “payable to X or order”. X endorses it in blank and it comes into
the hands of Y, who simply delivers it to A. A would then forge Y's endorsement
and transfers it to B. B, as the holder, does not derive his title through the forged
endorsement to Y, but through the genuine endorsement of X and can claim
payment from any of the parties to the instrument in spite of the intervening forged
endorsement.

Introduction
Consumers are those who with due consideration of money use a
service of any goods and services provided by the manufacturer or
service provider. Similarly, the moment a person opens an
account with the banker, he becomes the bank’s client.
There is also a special relationship between customer and banker,
with specific duties and obligations. Given the different services
offered to its customers by a banker these days, the relationship
between a banker and customer could be of different types. For
example, if a client leaves certain articles in safe custody with the
bank, the relationship is one of the bailor and bailee. 

In another instance when the banker collects his customer’s

cheque and pays money on his behalf, the arrangement is
between principal and agent. This implies that the banker must do
their job very effectively when offering these services for any
transaction to the customer. Similarly, in a debtor-creditor
relationship, when the customer takes a loan from the bank then
the banker will be the creditor and the customer will be a debtor

The customer, in this case, the debtor has a special obligation to

pay the installments in due course of time, there should be no
delay in paying the installments to discharge the amount of the
loan. They are thus bound by certain duties and obligations
towards each other.

Banker-customer relationships are contractual, based on an

express or implied arrangement between the two.

A contractual arrangement between banker and customer springs

from this. In a case where a person asks the banker to open an
account for him and the bankers’ acceptance thereof, constitutes
implied contract of relationship.
The primary banking purpose was and is to keep money in
custody and lend a part of it to other citizens. Such roles were
slowly expanded, and new additional ones were introduced. As a
result, the market’s dependency on banking has become so great
that the cessation of bankers ‘ operation, even for a day or two,
will totally paralyze a nation’s economic existence in modern
money economy. It will be appropriate to say that the banking
system has become the lifeline of the country. 

Definition of Banking 
The Indian Banking Regulation Act defines the business of banking
by stating the essential functions of a banker. It also states the
various other businesses a banking company may be engaged in
and prohibits certain business to be performed by it.

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 arise 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.”

Who is a 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.   

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.

Safety measures and obligatory

roles of Paying Banker    
Any customer who deposits cash with a creditor is entitled to ask
the bankers who are debtors for the money.

Section 31 of the Negotiable Instruments Act, 1881 lays down the

obligation on behalf of the banker.  

The banker must take the following precautions while honouring

cheques:

 Crossed Cheque: Crossed cheques are an area where a

banker will have to take the most precautions. A banker
 has to confirm whether the cheque is open or crossed. As
with crossed cheques, he should not pay cash across the
counter. If the cheque is a crossed one, he should see if
it is crossed general or crossed special. If it is a general
crossing, it is necessary to ask the holder to bring the
cheque over to the banker and pay it to a banker. If a
special crossing is carried by the cheque, the banker will
pay for the bank whose name appears at the crossing.
The real owner can hold the banker responsible if the
banker pays a cheque that does not comply with the
transit.
 Open Cheque: When it’s an open cheque, a banker will
pay cash across the counter to the payee or the
manager. If the banker pays against the instructions as
stated above, he shall be liable for any loss incurred to
pay the amount to the true owner. In fact, a banker loses
legal protection in the event of forged endorsement.
 Proper Form: A banker should see if the cheque is in the
proper form. This means that the test should be in the
manner prescribed by the Negotiable Instruments Act
provisions. It should have no condition whatsoever.
 Presentment of Cheque: Cheque presentation should
be in the correct format and location. A banker will accept
the checks provided that they are addressed to that bank
branch where the drawer has an account or other branch
if it is a multi-city search.
 Date of the Cheque: The paying banker is expected to
see the cheque date. It has got to be dated correctly. It
should not be a post-dated cheque, or a stale- cheque. If
a cheque bears a date to come, it becomes a post-dated
cheque. If the cheque is submitted on the date indicated
in the report, there is no need for the banker to honor it.
He loses statutory security if the banker ignores a cheque
before the date specified in the cheque. Normally,
undated cheques are not honoured.
 Words and Figures: The sum of the cheque should be
represented in terms or words and figures that should be
in accordance with each other. The banker should deny
payment if the sum in words and figures varies.
 Alterations and Overwriting: It should be seen by the
banker if the cheque includes any changes or
overwriting’s. If any change happens, the drawer will
validate this by inserting his full signature. Without the
drawer proof, the banker should not pay a
cheque containing material modification. The banker
should take reasonable care in detecting these
 modifications. He has to take the risk, otherwise.
Changes in materials make cheques invalid.
 Proper Endorsements: Cheques have to be endorsed
properly. A bearer cheque does not have to be endorsed
legally. It is given in the case of an order cheque. A
cheque to bearer always remains a cheque to bearer.
Until making payment, the paying banker should check
all endorsements on the cheque.

Dishonour of cheque
A cheque is said to be dishonoured when it is refused to be
accepted or paid when presented to the bank. It is a condition in
which the paying banker does not pay the amount of the cheque
to the payee.

Reasons for dishonour of cheque

A paying banker may refuse payment on cheques, issued by its
customers due to the following reasons:

Insufficiency of funds
When sufficient funds are not available in a customer’s account,
the cheque may be dishonoured. If the banker pays a
counterclaimed cheque, he will not only be obliged to cancel the
application but will also be held liable for damages for
dishonouring the cheques actually submitted, which would
otherwise have been honoured.

Notice of the Customer’s Death

The banker should not make payments on cheques presented
after the death of the customer. He should return the cheque with
the remark ‘Drawer Deceased’.
Notice of the Customer’s Insolvency
 A banker must refuse payment on the cheques immediately after
the consumer has been deemed insolvent.

Receipt of the Garnishee Order

Where Garnishee order is received adding the entire amount, after
receiving such an order, the banker will stop payment on cheques
received. But if the order is for a specific amount, leaving the
specified amount, cheques should be honoured if the remaining
amount is sufficient to satisfy them.

Presentation of a post-dated cheque

The banker may refuse the cheque when the cheque is presented
before the valid date. 

 Stale Cheques: 
When the cheque is presented after a period of three months from
the date it bears, the banker may refuse to make payment. 

 Material Alterations:
 When there is material alteration in the cheque, the banker may
refuse payment.

 Drawer’s Signature: 
If the drawer’s signature on the cheque doesn’t match the
signature of the specimen, the banker can refuse to pay.

Types of dishonour
There are two categories for which a cheque is dishonoured:

Rightful Dishonour
Dishonour of cheque by the drawee banker for any of the reasons
given above or for any other legitimate reason. There is no
recourse available against the banker in this situation but the
holder has, in due course, both civil and criminal remedies against
the drawer.

Wrongful Dishonour 
Dishonour of cheque by the banker due to negligence or
carelessness by its employees. The drawer may bring an action
against the bank for losses suffered by him. The payee has no
action against the banker in this case.

Leading case laws on payment of

cheques by a bank
 Canara Bank vs Canara Sales Corporation and
Others [(1987) 2 Supreme Court Cases 666]
In this case, the Supreme Court ruled that the bank is not allowed
to pay when the customer signs the check. Since such a banker
has no right to debit the account of the customer on such falsified
cheque. Since the customer-bank link is between the borrower
and the debtor, a cheque that has a forged signature has no
authority on the bank to pay.

 Bank of Bihar vs Mahabir Lal (AIR 1964 Supreme

Court 397)
In this case, the Supreme Court held that only where payment
was made to the holder or to his agent, i.e. in due course, a
banker would claim cover under Section 85. Payment to an
individual without a business or to a bank’s agent is not a
payment to a corporation
Collecting banker
One who undertakes to collect cheques, drafts, bill, pay order,
traveller cheque, letter of credit, dividend, debenture interest,
etc., on behalf of the customer is known as a Collecting banker

A banker is not legally obligated to receive cheques from the

client, but now the collection of checks has become a main feature
of a banker with a widening banking procedure and a broader use
of crossed checks, which are invariably only obtained by a banker.

A banker receives cheques from his client and behaves

1. as a holder for value, or 

2. as his agent,

Banker as a holder for value 

A banking entity becomes the holder for value in the below
mentioned ways: 

(a) by lending further with the same value of the cheque; 

(b) By paying the amount of the cheque or any share of it in cash

or in the account before being sent for clearing

(c) by committing to that client, either at the time or earlier , that

he may draw the cheque before it is cleared;

(d) by approving a current overdraft in avowed reduction of the

check; and 

(e) by providing cash for the cheque over the counter while it is in
for collection.

Collecting Banker as an Agent 

A collecting banker acts as the customer’s agent when he credits
the check to the latter’s account after a drawee’s banker actually
pays the money. He then will be permitted to take the sum of the
cheque.
Conversion by the Collecting Banker
Often a banker is charged incorrectly converting checks to which
his customer has no title or defective title. It means an improper
or morally wrong interference (i.e., use, sale, invading or taking)
with the property of another person that is not coherent with the
owner’s right of possession. Negotiable instruments come under
‘property’ so a banker could be responsible for conversion if he
receives cheques for a client who does not have a title or faulty
instrument title.

Statutory Protection to Collecting

Bank
Under Section 131 of the Negotiable Instruments Act the collection
banker is secured as under:

Section 131: Non-liability of a banker

receiving payment of cheque
A banker who, in reasonable care and without fault, has accepted
money for the customer of a cheque crossed in particular or
expressly for himself shall not incur any liability for the true owner
of the cheque, in the event that the title to the cheque appears to
be faulty, solely on the ground that he has received such
payment.

Duties of the collecting bank

The Negotiable Instruments Act, in Section 131 which offers
immunity to the collecting bank, specifies that the bank should not
have been negligent amid other conditions. The bank will have to
prove that it has taken all the steps that would be expected of a
responsible banker to obtain a cheque to demonstrate that the
bank has not been careless. Over the years, these protections
have been developed based on practices and judicial declarations
as duties placed on bankers, which the bank can be responsible
for failure to comply on the grounds of negligence.

The duties are given as below:

  Obligation to open an account with references and
sufficient documentary evidence 
It is too well understood by today’s banker that the requirement
to open an account only after properly identifying the new account
holder is unlikely without an introduction. The need to get a good
customer introduction is to keep away crooks and fraudsters who
can open accounts to collect forged cheques or other tools. RBI
has insisted as an added precaution that photographs of the
customer and sufficient documentary evidence for constitution and
address be obtained while opening accounts.

 To identify the reference where the referee is not

identified or reference in absentia
As practice bankers in India require the introduction of an existing
bank customer, particularly when the branch is newly opened, this
may not always be possible. In these instances, clients are
expected to obtain references from the local people or the current
bankers. In such a scenario, the banker must ask the referee to
confirm that the person with a newly opened account is a genuine
person.

 Obligations relating to Crossing and special

crossing
The banking officer’s responsibility is to ensure the check is clearly
crossed and to deny collection if the cheque is handed over to
another banker. Likewise, when the check is moved into a certain
account, the credit of the check will render him liable for
negligence without requiring any required inquiries.

 Obligation to check the instruments or any obvious

flaws in it
The instrument presented for collection will sometimes send a
notice to the banker that a customer who submitted the
instrument is either committing a breach of trust or mismanaging
the money belonging to someone else. In the event that a banker
does not heed the warning requested by a prudent banker, he
could be held liable for negligence.

 The obligation to know the status of the customer’s

account
The collecting banker is required to know the status of the
customer and different dealings that have taken place in the
customer’s account. It will be the banker’s duty to take the
necessary precautions if there are any amounts coming into the
account that are unlikely to be received by him and when
collecting such cheques.
Leading case laws on duties of
collecting banks 
 Ladbroke vs Todd (1914) 
In this scenario, a thief stole a transit cheque and obtained it from
a banker where, without reference, he opened an account and
presented himself as the payee whose signature the thief forged.
The thief withdrew the sum after the cheque was obtained. The
bank was kept responsible for making the sum good because it
behaved negligently when opening the account to the degree that
it did not receive any reference.

 Harding vs London Joint Stock Bank [1914] 

In this particular case, after having complied with the requisite
formalities, an account was opened for a new client. As is common
practice, the account was not opened by depositing cash, but by
paying a third-party cheque. In the situation, the bankers made
inquiries with the client, who subsequently produced a forged
letter provided by his employer granting him authority to deal with
the cheque. The cheque was eventually found to have been stolen
by the customer and transferred to his account. The bank was
deemed incompetent for failing to make the employer’s necessary
inquiries as to whether the client who was an individual really had
the requisite authority to deal with the cheque.

Conclusion
The primary aim of banking was and is to hold money in custody
and to send other people some of it. Such functions were
extended gradually and clarified in depth.

In the modern economic world, the banking system plays a

significant role. Banks are gathering the individuals ‘ savings and
lending them to business people and producers. Bank loans make
trading easier.

Manufacturers borrow the money from banks required to buy raw

materials and meet certain requirements, such as working capital.
Maintaining money in banks is free. Thereby interest is also
gained. The savings may be used to create new capital assets.
Thus, the banks play an important role in a country’s development
of new capital (or capital formation) and thus support the cycle of
growth.
‘A cheque should always be checked before they are presented to the
bank.’  A cheque is a widely used modern method of payment and if
there is a default with it, our financial relations may get disrupted. So it
is of great importance to know about the dishonor of a cheque, not
just as a law student, also to avoid being cheated!

Overview: A cheque is a financial instrument (exchange bill) that is

drawn upon a banker so that, on submitting it to the bank, the bank
gives the designated amount of money as demanded by the applicant.
The individual/ organization issuing the cheque is known as the
‘drawer’ and in whose favor the cheque is drawn is known as
‘drawee’. It is a written document, specifying the bank and having an
unconditional order.

A cheque is bounced when, after giving it to the bank by the drawee

for encashing, is returned unpaid by the bank. It is also known as
cheque dishonored. This may happen due to a lot of reasons, like
insufficient balance in the account of the drawer. In a cheque dishonor
case, the bank always issues a cheque return memo for non-payment
as soon as it gets bounced.

Consult the best cheque bounce lawyer

Consequences of wrongful dishonor of cheque

What is wrongful dishonor of cheque?

It refers to a mistake on the part of the bank to honor a valid

negotiable instrument like a cheque by mistake that has been
presented to it for payment. If all the essentials of a valid cheque are
fulfilled and there is enough money in the account for its payment and
it’s still not honored within the time period specified by the Uniform
Commercial Code (UCC), it results in wrongful dishonor. This is in
accordance with Article 4, section 402 of UCC. In case of wrongful
dishonor of cheque, the payer bank is liable to its customer for
damages. The bank is liable for actual, provable damages only
including any potential consequential damages. The damages include
actions such as arrest or prosecution of the customer caused by the
wrongful dishonor of the instrument in question. Dishonor of cheques
by a banker without any justifiable reason is called wrongful dishonor
of cheques.

What happens when a bank dishonors a cheque?

If a cheque is dishonored by mistake or for some other reason, the

drawee bank issues a ‘cheque return memo’ to the banker of the
payee mentioning the reason for non-payment. Thus, the dishonored
cheque gets canceled. The holder or payee can then resubmit the
cheque within three months of the date on it if he can recover the
circumstances, the presence of which makes the cheque dishonored.
However, if the issuer of the cheque fails to pay the stipulated amount
of money, the payee has the right to prosecute the drawer legally. For
suing, the amount mentioned in the cheque should be towards
discharge of a debt or any other liability of the defaulter towards the
payee. If the drawer is sued under Section 138 of the act, he should
be given a chance for payment of the money mentioned in the cheque
immediately in the form of a written notice.

The payee has to send notice of cheque bounce within 30 days from

the receiving of the memo by the bank. The drawer has to pay within
15 days from the receiving of such notice. If the drawer fails to make
payment within 30 days from the date of the notice, the payee can file
a suit against him under Section 138 of the Negotiable Instruments
Act, 1881. However, registration of the complaint is necessary within a
month of the expiry of such notice. Also, a cheque bounce
lawyer should be consulted. For the prosecution, it is also necessary
that the cause for cheque bounce should be insufficient balance in the
account of the drawer and the cheque is issued towards discharge of
a debt or legal liability.

Consequences of wrongful dishonor of cheque: In normal

circumstances, if a cheque is dishonored, the defaulter may be
punished with imprisonment up to two years or with a monetary
penalty or with both as it is a criminal offence; this is in accordance
with section 138 of the Negotiable Instrument Act, 1881. However, in
case the cheque is dishonored wrongfully, the banker must bear some
penalty according to section 31 of the Act. When a customer has a
sufficient balance in his account, the banker is bound to honor such a
cheque. If he fails to do so, he shall compensate the drawer for any
loss or damage caused by such default. Chapter XVII of the Act,
consisting of sections 138-142 deals with the dishonor of cheque. It
may be rightful or wrongful dishonor of cheque.

Get in touch with the best cheque bounce lawyer online

In wrongful dishonor of cheque, the banker has the liability to honor

the cheque of the customer if there is no valid dispute. This is in lieu
of a healthy banker-customer relationship. The banker may dishonor
the cheque intentionally without any valid reason or by mistake or due
to negligence. He then has to compensate for the loss of the
customer. All this is in accordance with wrongful dishonor of cheque
by the banker in India with the help of the Negotiable Instrument Act,
1881.

One leading case in this regard is Marzetti vs. Williams. Here, the
customer Marzetti had a bank account with Williams bank and had 69
pounds in his account. Later, on the same day, 40 pounds were
added to his account. Some hours later, a cheque was presented
before the bank for 87 pounds from that account. The bank did not
take due notice of the additional 40 pounds and dishonored the
cheque. The Court held that the bank must suffer damages as
compensation to the customer as the hours were sufficient to know
the actual balance of the account by the bank. It may be injurious to
the customer, especially if he is a person in trade to have such a small
amount of payment having been refused for payment.

UNIT III

Negotiable Instruments
Explained
Negotiable instruments assure payment/repayment to an
entity or individual. These legal documents are so
prepared that the time of payment and the recipient’s
name are mentioned. Such instruments are written
promises signed by payers and made to payees, per which
the former guarantees to make the payment on the
mentioned date or on-demand. 

These are nothing but evidence of indebtedness, as the

instrument holder has an unconditional right to recover
the amount of money stated in the instrument from its
maker. These instruments are used as a substitute for cash
to safely transfer the payments between the merchants
and have a risk-free business transaction.
These legal notes make individuals and entities trust each
other with payments and repayments. They are negotiable
as these notes or drafts involve two parties that agree to
take forward a transaction. Though unconditional, these
documents must have the assignee’s name mentioned on
them. Hence, the payment is made to the mentioned
payee only.

Features
These documents exhibit a wide range of characteristic
traits. For example, some of the negotiable instruments
features include:

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1. It is a written document signed by the issuer.
2. It is like a valid contract easily transferable from one party
to another. The holder can transfer the document to
another individual or entity without hassle. It is this feature
that makes such instruments negotiable.
3. As named on the instrument, the payee enjoys complete
ownership of the legal document. This means the title gets
transferred when the note is handed over to the
consecutive parties.
4. A negotiable instrument always mentions the payee’s
name, which signifies making the payment to a specific
person or firm.
5. In addition to the payee, the time is also predetermined
and is certain. A payee can present the document to
encash it or receive the payment as promised within the
specified date or on-demand.
6. There is flexibility as the payee can receive the funds in
cash or transfer the document to another party for
consecutive usage.

Types of Negotiable
Instruments
These legal drafts and notes are available in wide varieties.
Some of the widely found negotiable instruments
types are as follows:

Checks
A check is a note containing the amount paid by one party
to another party. It includes the bearer’s name and
account number from which the money would be debited.
In addition, it also mentions the name of the payee. As a
result, even if the check goes missing, no third party can
misuse it. In short, checks are the safest mode of making
payments or transferring funds from one party to another.

Though debiting the amount from one account and

crediting the same in the other takes a bit more time,
people still consider issuing a check for safety reasons.
People and firms use various checks, like traveler’s checks,
personal checks, certified checks, cashier’s checks, etc. 
Promissory Notes
A promissory note means one party promises to pay a
sum of rupees to another party whose name is mentioned
on the note along with a fixed future date. Generally, it is
used as short-term trade credit, , and the maker pays the
due amount on or before the note’s expiry. As a safe
mode of transferring money, business people frequently
use it to have smooth business transactions. 
Individuals or firms can claim the outstanding funds after
the expiry of the term in the event of non-payment of the
promised money. It is also issued as a debt instrument,
which corporations use to finance their short-term
projects.
Certificates of Deposit (CD)
Banks and financial institutions offer Certificate of
Deposit as a financial product. In the process, the
customers deposit a certain amount and keep it safe for a
fixed tenure while receiving a high-interest rate on the
amount in return. The interest rate tends to increase
constantly with the increasing deposit span. The
individuals can withdraw the amount plus interest once
the CD matures. However, in case of early withdrawal, one
would need to pay the penalty.
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Bills of Exchange
Bills of Exchange are similar to promissory notes and can
be used for national and international trade. Using this
instrument, one party promises to pay the sum of money
to another party or any other person on a fixed future
date. The person it is endorsed for is the drawee, who has
a valid claim on the bill writer or the drawer for the
amount mentioned on the bill.
Money Orders
It is a substitute for the check for making payments on-
demand. In a money order, the amount is specified. To
process the money order, the payer has to pay the amount
to a financial institution beforehand and a small
processing fee. In return, the financial institution issues the
money order. It has long been the traditional way of
transferring money from one party to another with utmost
security guaranteed. These are the best mode of money
transfer for those who do not possess a bank account.

Bearer Bonds
These are the unregistered bonds issued by the
Government or Corporate, and as the name suggests, the
bondholder is entitled to get a coupon and principal
payment thereon. The issuer doesn’t keep the record of
the original bond owner. Whoever has physical possession
of the bearer bonds will be treated as the legal owner.
Therefore, there is a huge risk of loss, theft, or otherwise
the destruction of these bonds.

Examples
Let us consider the following negotiable instruments
examples to understand the concept better:

Example 1
Anne applied for a loan of $100,000 from a banking
institution. The bank checks her credit scores and verifies
her income and other proof to ensure she can repay the
amount. However, in receiving repayment assurance, the
bank asks Anne to sign a promissory note to ensure
repayment in time.
In the event of default, despite all verifications, the
promissory note will give the bank the right to legally
claim the amount or take the borrower to the court of law
to settle things further.
Example 2
Multiple nations have introduced certain laws to ensure
the ethical usage of these instruments and also the
security of the payee’s rights. For example, India enforced
the Negotiable Instruments Act, 1881, to govern the
practices of using the above instruments effectively,
including the rights, duties, and obligations of parties
involved in the transactions. 

However, recently, India introduced The Negotiable

Instruments (Amendment) Bill, 2017, to safeguard the
rights of the payees in case of dishonor of checks.

Negotiable Instruments –
Current Trends
While most of the negotiable instruments have already
witnessed a downtrend and have become less preferred
among individuals and entities, there are a few of them,
the use of which is still trending. 

Today, the virtual mode of transactions has become way

more popular. Therefore, individuals and businesses tend
to use online banking channels to ensure transactions do
not take much time and occur instantly. Nowadays, people
are more comfortable doing transactions through NEFT,
RTGS, debit & credit cards, etc.

Though the time taken for transactions is less in the case

of modern financial instruments, the security concerns
are major. As a result, when the sum or amount to be
transferred is huge, people still prefer using traditional
money transfers, like issuing checks, money orders, etc.
Frequently Asked Questions
(FAQs)
What is a negotiable instrument?
A negotiable instrument is a legal document written and
signed by one party to ensure it will pay or repay the
required amount within a specific time range or on-
demand. It is transferable, and an individual or entity has
the liberty to decide whether they want to encash it or
transfer it to consecutive payees. Some of such
instruments include checks, promissory notes, Certificates
of Deposit, Bills of Exchange, money orders, etc.

What are negotiable instruments in banking?

A banknote, promissory note, checks, draft, and money
order are the most widely used negotiable instruments in
banking.

Are bonds negotiable instruments?

Yes, bonds issued by the government and corporates are
negotiable forms of instruments. The ones possessing
ownership currently are only considered as the complete
owner. The issuer has nothing to do with the original bond
owner.

Essential Features of Negotiable Instruments are given below:

1. Writing and Signature:

Negotiable Instruments must be written and signed by the parties
according to the rules relating to Promissory Notes, Bills of Exchange
and Cheques. Demand Drafts are also construel as Negotiable
Instruments in the limiting case as they have the same property as N.I.
Instrumes.
2. Money:
ADVERTISEMENTS:

Negotiable instruments are payable by legal tender money of India. The

liabilities of the parties of Negotiable Instruments are fixed and
determined in terms of legal tender money.

3. Negotiability:
Negotiable Instruments can be transferred from one person to another by
a simple process. In the case of bearer instruments, delivery to the
transferee is sufficient. In the case of order instruments two things are
required for a valid transfer: endorsement (i.e., signature of the holder)
and delivery. Any instrument may be made non-transferable by using
suitable words, e.g., “pay to X only.”

4. Title:
The transferee of a negotiable instrument, when he fulfils certain
conditions, is called the holder in due course. The holder in due course
gets a good title to the instrument even in cases where the title of the
transferrer is defective.

5. Notice:
It is not necessary to give notice of transfer of a negotiable instrument to
the party liable to pay. The transferee can sue in his own name.

6. Presumptions:
ADVERTISEMENTS:

Certain presumptions apply to all negotiable instruments. Example: It is

presumed that there is consideration. It is not necessary to write in a
promissory note the words “for value received” or similar expressions
because the payment of consideration is presumed. The words are
usually included to create additional evidence of consideration.

7. Special Procedure:
A special procedure is provided for suits on promissory notes and bills of
exchange (The procedure is prescribed in the Civil Procedure Code). A
decree can be obtained much more quickly than it can be in ordinary
suits.
8. Popularity:
Negotiable instruments are popular in commercial transactions because
of their easy negotiability and quick remedies.

9. Evidence:
A document which fails to qualify as a negotiable instrument may
nevertheless be used as evidence of the fact of indebtedness.

Crossing a Cheque
A crossing is an instruction to the paying banker to pay the
amount of cheque to a particular banker and not over the
counter. The crossing of the cheque secures the payment to
a banker.

It also traces the person so receiving the amount of cheque.

Addition of words ‘Not negotiable’ or ‘Account Payee
only’ is necessary to restrain the negotiability of the cheque.
The crossing of a cheque ensures security and protection to
the holder.

However, we can negotiate a crossed bearer cheque by

delivery and a crossed order cheque by endorsement and
delivery.

Types of Cheque Crossing (Sections 123-

131 A):
 General Crossing – cheque bears across its face an
addition of two parallel transverse lines.
 Special Crossing – cheque bears across its face an
addition of the banker’s name.
 Restrictive Crossing – It directs the collecting banker
that he needs to credit the amount of cheque only to
the account of the payee.
 Non-Negotiable Crossing – It is when the words ‘Not
Negotiable’ are written between the two parallel
transverse lines.

Let us learn about types of cheque crossing in greater detail.

General Cheque Crossing

In general crossing, the cheque bears across its face an

addition of two parallel transverse lines and/or the addition
of words ‘and Co.’ or ‘not negotiable’ between them.

In the case of general crossing on the cheque, the paying

banker will pay money to any banker. For the purpose of
general crossing two transverse parallel lines at the corner
of the cheque are necessary.

Thus, in this case, the holder of the cheque or the payee will
receive the payment only through a bank account and not
over the counter. The words ‘and Co.’ have
no significance as such.
But, the words ‘not negotiable’ are significant as they
restrict the negotiability and thus, in the case of transfer, the
transferee will not give a title better than that of a
transferor.

Learn more about the Bills of Exchange in detail here.

Special Cheque Crossing

In special crossing, the cheque bears across its face an

addition of the banker’s name, with or without the words
‘not negotiable’.

In this case, the paying banker will pay the amount of

cheque only to the banker whose name appears in the
crossing or to his collecting agent.
Thus, the paying banker will honor the cheque only when it
is ordered through the bank mentioned in the crossing or its
agent bank.

However, in special crossing two parallel transverse lines

are not essential but the name of the banker is most
important.

Restrictive Cheque Crossing or Account Payee’s

Crossing

This type of crossing restricts the negotiability of the

cheque. It directs the collecting banker that he needs
to credit the amount of cheque only to the account of the
payee, or the party named or his agent.

Where the collecting banker credits the proceeds of a

cheque bearing such crossing to any other account, he shall
be guilty of negligence.

Also, he will not be eligible for the protection to the

collecting banker under section 131 of the Act.

However, such crossing will have no effect on the paying

banker. This is so because it is not his duty to determine
that the cheque is collected for the account of the payee.

8. “Holder”.—The “holder” of a promissory note, bill of exchange or cheque

means any person entitled in his own name to the possession thereof and to
receive or recover the amount due thereon from the parties thereto. Where
the note, bill or cheque is lost or destroyed, its holder is the person so
entitled at the time of such loss or destruction.
THE NEGOTIABLE INSTRUMENTS ACT, 1881
9. “Holder in due course”.—“Holder in due course” means any person who
for consideration became the possessor of a promissory note, bill of
exchange or cheque if payable to bearer, or the payee or indorsee thereof,
if 1[payable to order], before the amount mentioned in it became payable,
and without having sufficient cause to believe that any defect existed in the
title of the person from whom he derived his title.

Who is a Holder?
A person who has obtained the negotiable instrument legally through a
third party by delivery or endorsement is known as a holder. He is
usually the payee of a negotiable instrument. He is entitled to claim the
amount due on the negotiable instruments through the parties liable. The
party that is transferring this negotiable instrument should be capable of
doing it in the eyes of law.
1. If the instrument is obtained by the holder through false
endorsement then the previous endorser is considered to be the
owner.
2. In case of a bearer cheque, the person in whose name it is made
or payee is only the holder of that cheque.
3. If it is damaged or lost the last endorsee is considered as the
holder of the cheque. The reasoning is that a thief cannot be a
holder.
4. If the instrument is lost, the holder has a right to obtain a duplicate
from the drawer.
5. Post the death of payee or endorsee, the legal heir is considered
to be the holder not the holder in course.
6. A holder has a right to cross the cheque.
 

Who is a Holder in Due Course?

A holder in due course obtains the negotiable instrument in good faith for
consideration prior to it becomes due for payment. Holder in due course
refers to the person who is in possession of the value before it becomes
overdue when it is payable to the bearer. When it is payable to order, the
holder in due course is the person who is the endorsee or payee of the
instrument before it matures.
 

What are the Differences between Holder and

Holder in due course?
Following are the main differences between holder and holder in due
course:
 
1. Possession: A holder may or may not be in possession of the
instrument but, the holder in due course is always in possession of the
instrument. This is the primary difference between these two.
 
2. Entitlement: The holder is entitled to the possession of the instrument
in his own name. Holder in due course has obtained it in good faith for
some consideration.
 
3. Consideration: Consideration is not necessary in case of a holder but,
in case of a holder in due course consideration is vital.
 
4. Title: If the prior parties are fraudulent and don’t have a legal title to
deliver or endorse the instrument to the holder, the holder also has no
right to the same. However, a holder in due course is free from the
fraudulent prior parties and has a better title than the transferer.
 
5. Right to sue: A holder does not have a right to sue all the prior parties
related to the transaction. However, the holder in due course has a
complete right to sue all the prior parties.
 
6. Good Faith: The holder may or may not obtain the instrument in good
faith but, the holder in due course always obtains the instrument in good
faith.
 
7. Privileges: Privileges of a holder are very minimal whereas privileges
given to the holder in the course are much more.
 
8. Maturity of the instrument: Maturity of the instrument can also be used
to differentiate between holder and holder in due course. A person can
be a holder before or after the maturity of the instrument; however, a
holder in due course is valid only until the maturity of the instrument.
 
The Negotiable Instruments Act, 1881 is traced back to 1866 when the
3rd Indian Law Commission drafted this Act. However, due to objections
raised by the mercantile committee because of its deviation from English
Law, it could not be adopted. After three successive failures, the fourth
draft was presented and accepted in the council which then turned into
law in 1881 becoming the 26th Act of the year 1881. A person who has
obtained the negotiable instrument legally through a third party by
delivery or endorsement is known as a holder. He is usually the payee of
a negotiable instrument. Holder in due course obtains the negotiable
instrument in good faith for consideration prior to it becomes due for
payment. Holder in due course refers to the person who is in possession
of the value before it becomes overdue when it is payable to the bearer.
These two can be differentiated on the basis of their possession,
entitlement, consideration, title, right to sue, good faith, privileges, the
maturity of the instrument. Holder in due course holds a better title than a
holder. He has a right to sue all the prior parties involved in the
transactions. Holder in due course obtains the instrument in good faith
through consideration. On the contrary, a holder is entitled to the
instrument.
Liability of maker of Notes and acceptor of Bills Drawer of Cheques

Liability of Parties – Cheque

The provisions relating to the liability of parties to
negotiable instruments are under section 30 to 32 and 35 to
42 of the Negotiable Instrument Act, 1881.

Browse more Topics under Negotiable Instruments

Act

 Definition of Negotiable Instrument

 Classification of Negotiable Instruments
 Promissory Notes
 Bills of Exchange
 Parties of a Cheque and Essentials
 Crossing and Types of Cheque Crossing
 Endorsement of Instruments
 Presentment for Acceptance
 Notice of Dishonor
 Hundi
 NEFT and RTGS
The Liability of parties is as follows:

1. Liability of Drawer (Section 30)

Drawer means a person who signs a cheque or a bill of

exchange ordering his or her bank to pay the amount to the
payee.
In case of dishonour of cheque or bill of exchange by the
drawee or the acceptor, the drawer of such cheque or bill of
exchange needs to compensate the holder such amount.
But, the drawer needs to receive due notice of dishonour.

So, the nature of the drawer’s liability on drawing a bill is:

(i) On due presentation:- It should be accepted and paid

accordingly.

(ii) In the case of dishonour:-  Drawer needs to compensate

the holder such amount, only when he receives a notice of
dishonour by the drawee.

Learn more about  Classifications of Negotiable

Instruments here in detail.

2. Liability of the Drawee of Cheque (Section 31)

 The person who draws a cheque i.e drawer having

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

The drawee of a cheque will always be a banker. As a

cheque is a bill of exchange, drawn on a specified banker
by the drawer, the banker is bound to pay the cheque of the
drawer, i.e., the customer. For the following conditions are
need to be satisfied:

(i) Sufficient amount of funds to the credit of customer’s

account should be there with the banker.
(ii) Such funds are required to be properly applied against
the payment of such cheque, e.g., the funds are not under
any kind of lien etc.

(iii) The cheque is duly required to be paid, during banking

hours and on or after the date on which it is made payable.

If the banker unjustifiably refuses to honour the cheque of

its customer, it shall be liable for damages.

3. Liability of Acceptor of Bill and Maker of

Note  (Section 32)

 As per section 32 of negotiable instrument act, in the

absence of a contract to the contrary, the maker of
a promissory note and the acceptor before the maturity of a
bill of exchange are under the liability to pay the amount
thereof at maturity.

They need to pay the amount according to the apparent

tenor of the note or acceptance respectively.  The acceptor
of a bill of exchange at or after maturity is liable to pay the
amount thereof to the holder on demand.

The liability of the acceptor of a bill or the maker of a note

is absolute and unconditional but is subject to a contract to
the contrary and may be excluded or modified by a
collateral agreement.

4. Liability of Endorser (Section 35)

 An endorser is the one who endorses and delivers a

negotiable instrument before maturity. Every endorser has a
liability to the parties that are subsequent to him.
Also, he is bound thereby to every subsequent holder in
case of dishonour of the instrument by the drawee, acceptor
or maker, to compensate such holder of any loss or damage
caused to him by such dishonour. However, he is to
compensate only after the fulfilment of the following
conditions:

(i) There is no contract to the contrary

(ii) The Endorser has not expressly excluded, limited or

made conditional his own liability

(iii)And, such endorser shall receive due notice of

dishonour

 
 Source: freepik.com

5. Liability of Prior Parties (Section 36)

 Until the instrument is duly satisfied, every prior party to a

negotiable instrument has a liability towards the holder in
due course. The prior parties include the maker or drawer,
the acceptor and all the intervening endorsers. Also, there
liability to a holder in due course is joint and several. In the
case of dishonour, the holder in due course may declare any
or all prior parties liable for the amount.

Read the definition of Negotiable Instrument here

6. Liability Inter-se

 Every liable party has a different footing or stand

with respect to the nature of liability of each one of them.

7. Liability of Acceptor when Endorsement is

Forged (Section 41)

 An acceptor of a bill of exchange who had already

endorsed the bill is not relieved from liability even if
such endorsement is forged. This is so even if he knew or
had reason to believe that the endorsement was forged
when he accepted the bill.
8. Acceptor’s Liability when Bill is drawn in a
Fictitious Name

An acceptor of a bill of exchange who draws a bill in a

fictitious name, payable to the drawer’s order will be liable
to pay any holder in due course. He or she will not be
relieved from such liability by reason that such name is
fictitious.

Discharge of indorser’s liability

Section 40 in The Negotiable Instruments Act, 1881

40. Discharge of indorser’s liability.—Where the holder of a negotiable
instrument, without the consent of the indorser, destroys or impairs the
indorser’s remedy against a prior party, the indorser is discharged from
liability to the holder to the same extent as if the instrument had been paid at
maturity. Illustration A is the holder of a bill of exchange made payable to
the order of B, which contains the following indorsements in blank:— First
indorsement, “B”. Second indorsement, “Peter Williams”. Third indorsement
“Wright & Co.”. Fourth indorsement, “John Rozario”. This bill A puts in suit
against John Rozario and strikes out, without John Rozario’s consent, the
indorsements by Peter Williams and Wright & Co. A is not entitled to
recover anything from John Rozario.

ACCOMMODATION BILL
Definition:
An accommodation bill, a note, or a draft is drawn and acknowledged by the
drawer and the drawee without having any consideration in it. These drafts,
notes, or bills are attracted to help either one party or all parties for their
monetary aid in a bill of exchange.

Meaning:
Bills of exchange appear due to similar trading activities. A bill is drawn on the
debitor for the consideration of goods sold by the creditor. This bill is known by
many names, such as a trade bill, bills of exchange, windmills, wind bills, and
kite bills. Accommodation bills are not enforceable by law since they lack
consideration, and they run on the moral understanding of the parties that draw
the bill.

Parties in a formation of a bill:

An accommodation bill hosts the accompanying parties in particular.
Drawer: A drawer is an individual who makes the bill or issues the bill or
composes the bills of exchange. This individual is usually the creditor or the
seller.
Drawee: The drawee is the individual on whom the bill of trade is drawn for his
acknowledgement. Typically, he is the purchaser, and he needs to pay the
measure of the bill of trade to the cabinet on the due date.
Payee: The payee is the individual to whom the amount of a bill of trade is to be
paid. The payee can simply be the drawer or the drawer’s creditor.
Endorser: The endorser is the individual who moves privileges of payment.
Endorsee: The endorsee is the individual in whose favour of the bill of
exchange is supported by the drawer.
Bearer: A bearer is the individual possessing the title bearer in the bill of trade.

How does an accommodation bill work?

Accommodation bills are composed to offer monetary help to either one party or
all parties, and a significant inquiry is how to accomplish their work.
As far as how an accommodation bill works, the drawer makes the bill and the
drawee acknowledges it. Then, at that point, the bill can be discounted by the
maker’s bank of the bill and has received the money. The discounted sum is
utilised by the drawer or both the drawee and the drawer.
Prior to the due date, the maker or the drawer of the bill sends the sum they used
to the drawee to empower the drawee to pay the bill. On the due date, the
receiver or the drawee honours the bill.

Section 82 – Discharge from liability

The maker, acceptor or indorser respectively of a negotiable instrument is
discharged from liability thereon:
 1. by cancellation; to a holder thereof who cancels such acceptor’s or indorser’s
name with intent to discharge him, and to all parties claiming under such
holder;
2. by release; to a holder thereof who otherwise discharges such maker,
acceptor or indorser, and to all parties deriving title under such holder after
notice of such discharge;
3. by payment ,to all parties thereto, if the instrument is payable to bearer, or
has been indorsed in blank, and such maker, acceptor or indorser makes
payment in due course of the amount due thereon.

Section 83 – Discharge by allowing drawee more

than forty-eight hours to accept
If the holder of a bill of exchange allows the drawee more than forty-eight
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.

Section 84 – When cheque not duly presented and

drawer damaged thereby.
Where a cheque is not presented for payment within a reasonable time of its
issue, and the drawer or person on whose account it is drawn had the right, at the
time when presentment ought to have been made, as between himself and the
banker, to have the cheque paid and suffers actual damage through the delay, he
is discharged to the extent of such damage, that is to say, to the extent to which
such drawer or person is a creditor of the banker to a larger amount than he
would have been if such cheque had been paid.
In determining what is a reasonable time, regard shall be had to the nature of the
instrument, the usage of trade and of bankers, and the facts of the particular
case.
The holder of the cheque as to which such drawer or person is so discharged
shall be a creditor, in lieu of such drawer or person, of such banker to the extent
of such discharge and entitled to recover the amount from him.

Illustrations

1. A draws a cheque for Rs. 1,000 and, when the cheque ought to be presented,
has funds at the bank to meet it. The bank fails before the cheque is
presented. The drawer is discharged, but the holder can prove against the
bank for the amount of the cheque.
2. A draws a cheque at Ambala on a bank in Calcutta. The bank fails before the
cheque could be presented in ordinary course. A is not discharged, for he has
not suffered actual damage through any delay in presenting the cheque.
3. Section 85 – Cheque payable to order.
4. Where a cheque payable to order purports to be endorsed by or on behalf
of the payee, the drawee is discharged by payment in due course.
 Where a cheque is originally expressed to be payable to bearer, the
drawee is discharged by payment in due course to the bearer thereof,
notwithstanding any endorsement whether in full or in blank appearing
thereon, and notwithstanding that any such endorsement purports to
restrict or exclude further negotiation.

Section 85A – Drafts drawn by one branch of a

bank on another payable to order
Where any draft, that is, an order to pay money, drawn by one office of a bank
upon another office of the same bank for a sum of money payable to order on
demand, purports to be endorsed by or on behalf of the payee, the bank is
discharged by payment in due course.

Section 86 – Parties not consenting discharged by

qualified or limited acceptance
If the holder of a bill of exchange acquiesces in a qualified acceptance, or one
limited to part of the sum mentioned in the bill, or which substitutes a different
place or time for payment, or which, where the drawees are not partners, is not
signed by all the drawees, all previous parties whose consent is not obtained to
such acceptance are discharged as against the holder and those claiming under
him, unless on notice given by the holder they assent to such acceptance.

Explanations

An acceptance is qualified:

1. where it is conditional, declaring the payment to be dependent on the

happening, of an event therein stated;
2. where it undertakes the payment of part only of the sum ordered to be paid;
3. where no place of payment being specified on the order, it undertakes the
payment at a specified place, and not otherwise or elsewhere; or where, a
place of payment being specified in the order, it undertakes the payment at
some other place and not otherwise or elsewhere;
4. where it undertakes the payment at a time other than that at which under the
order it would be legally due.

Section 87 – Effect of material alteration

Alteration by indorsee. Any material alteration of a negotiable instrument
renders the same void as against any one who is a party thereto at the time of
making such alteration and does not consent thereto, unless it was made in order
to carry out the common intention of the original parties.
Alteration by indorsee. And any such alteration, if made by an indorsee,
discharges his indorser from all liability to him in respect of the consideration
thereof.
The provisions of this section are subject to those of sections 20, 49, 86 and 125.

Read more at: https://devgan.in/nia/chapter_07.php

There are three ways from which parties are discharge from liability:

1.By Cancellation;

2.By Release; or

3.By Payment

Section 82 of the Negotiable Instrument Act, 1881 says that the maker, acceptor or
endorser of a negotiable instrument is discharged from liability thereon by
cancellation, release or payment.

There are also other modes of discharge of liability that co-exist as prescribed under
various sections of the Act.

The parties to the negotiable instrument may be discharged in the following ways:

1.Discharge by Cancellation:

Section 82(a) of the Negotiable Instrument Act, 1881 says that when the name of the
party on the Instrument is cancel from the instrument by holder or his agent with an
intension to discharge him, such party and all subsequent parties, who have a right of
recourse against the party whose name is cancelled, are discharged from liability to
the holder.

2.Discharge by Release:
Section 82(b) of the Negotiable Instrument Act, 1881 says that where the holder of a
negotiable instrument releases any party to the instrument by any method other than
cancellation, the party so released is discharged from liability.

The party so released and all parties subsequent to him who have a right of action
against the party so released are discharged from liability. Thus, the effect of release is
the same as that of cancelling a party’s name.

3.Discharge by Payment:

Section 82(c) of the Negotiable Instrument Act, 1881 talks about the discharge by
payment. Section 78 states that “When payment on an instrument is made in due
course, both the instrument and the parties to it are discharged subject to the
provision of Sec. 82 (c).

The payment with respect to the instrument may be made by any party to the
instrument provided it is made on account of the party liable to pay.

4.Section 83 of the Negotiable Instrument Act, 1881 says that if the holder of a bill of
exchange allows the drawee more than forty eight hours i.e. these forty eight hours
are except Public Holidays, these are given to drawee to consider whether he will
accept the same, if he will accept all previous parties not consenting to such allowance
are thereby discharged from liability to such holder.

5.Section 86 of the Negotiable Instrument Act, 1881 says that if the holder of a bill
agrees to a qualified acceptance all prior parties whose consent is not obtained to such
an acceptance are discharged from liability. Acceptance of a bill is deemed to be
qualified and unconditional.

6.Section 84 of the Negotiable instrument Act, 1881 says that if a holder does not
present a cheque within reasonable time after its issue, and the bank fails causing
damage to the drawer, the drawer is discharged as against the holder to the extent of
the actual damage suffered by him.

7.The general principle is that “present right and liability united in the same person
cancel each other.” So by considering this principle Section 90 of the Negotiable
Instrument Act, 1881 if a bill of exchange which has been negotiated is, at or after
maturity, held by the acceptor in his own right, all rights of action thereon are
extinguished.
8.According to section 87 of the Negotiable Instrument Act, 1881 provides that if a
material alteration is made by an endorsee, the endorser will be discharged from his
liability even in respect of the consideration thereof.”

If the holder of a negotiable instrument makes a material alteration of instrument he

loses his right of action against those parties who would otherwise have been liable
towards him.

PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENT

Sections 118 and 119 of the Negotiable Instrument Act lay down

certain presumptions which the court presumes in regard to

negotiable instruments. In other words, these presumptions need not

be proved as they are presumed to exist in every negotiable

instrument. Until the contrary is proved the following presumptions

shall be made in case of all negotiable instruments:

1. Consideration: It shall be presumed that every negotiable

instrument was made drawn, accepted or endorsed for consideration.

It is presumed that; consideration is present in every negotiable

instrument until the contrary is presumed. The presumption of

consideration, however may be rebutted by proof that the instrument

had been obtained from, its lawful owner by means of fraud or undue

influence.
2. Date: Where a negotiable instrument is dated, the presumption is

that it has been made or drawn on such date, unless the contrary is

proved.

3. Time of acceptance: Unless the contrary is proved, every

accepted bill of exchange is presumed to have been accepted within

a reasonable time after its issue and before its maturity. This

presumption only applies when the acceptance is not dated; if the

acceptance bears a date, it will prima facie be taken as evidence of

the date on which it was made.

4. Time of transfer: Unless the contrary is presumed it shall be

presumed that every transfer of a negotiable instrument was made

before its maturity.

5. Order of endorsement: Until the contrary is proved it shall be

presumed that the endorsements appearing upon a negotiable

instrument were made in the order in which they appear thereon.

6. Stamp: Unless the contrary is proved, it shall be presumed that a

lost promissory note, bill of exchange or cheque was duly stamped.

7. Holder in due course: Until the contrary is proved, it shall be

presumed that the holder of a negotiable instrument is the holder in

due course. Every holder of a negotiable instrument is presumed to

have paid consideration for it and to have taken it in good faith. But

if the instrument was obtained from its lawful owner by means of an

offence or fraud, the holder has to prove that he is a holder in due

course.

8. Proof of protest: Section 119 lays down that in a suit upon an

instrument which has been dishonoured, the court shall on proof of

the protest, presume the fact of dishonour, unless and until such fact

is disproved.

TYPES OF NEGOTIABLE INSTRUMENT

 Promissory Notes

 Journal Entry for Bills of Exchange

 Retirement of Bills of Exchange

TYPES OF NEGOTIABLE INSTRUMENTS

Let us take a look at some of the most common types of negotiable

instruments.
 Promissory Note:

In this case, the debtor is the one who makes the instrument. And he

promises unconditionally to the creditor (or the bearer of the

document) a certain sum of money on a specific date.

 Bills of Exchange:

This is an order from the creditor to the debtor. This instrument

instructs the drawee (debtor) to pay the payee a certain amount of

money. The bill will be made by the drawer (creditor)

 Cheque:

This is just another form of a bill of exchange. Here the drawer is a

bank. And such a cheque is only payable on demand. It is basically

the depositor instructing the bank to pay a certain amount of money

to the payee or the bearer of the cheque.

 Other Negotiable Instruments Examples:

There are other instruments such as government promissory notes,

railway receipts, delivery orders, etc. These can be negotiable

instruments by custom or practice of the trade.

A dishonoured cheque – what is it?

A cheque falls under the dishonoured category when a payee cannot

successfully deposit the payer’s cheque. A payer is the one who issues a
cheque to the payee. The payee deposits this cheque in the bank. If the
bank refuses to pay the amount mentioned on the cheque, the cheque is
dishonoured.

The payee must inform the payer of the dishonoured cheque and ask
them to inquire about its reason. If the payer believes the cheque will be
honoured a second time, they can resubmit it within three months after
the date on it. However, if the cheque bounces again, the payer can face
legal action.

The payee could file a case if

the amount specified in the
payer’s cheque was for the
discharge of a debt. No legal
action can be taken if the
cheque was given as a gift or
for lending money.

Why do cheques get dishonoured?

Cheques can be dishonoured for a no. of reasons. Some of them are as

below

1. Insufficient funds

Lack of cash in the account is one of the most common reasons for
dishonoured cheques. The bank cannot execute the transaction if you do
not have the required funds in your account. The bank may impose a
cheque bounce penalty on the payer and the payee. The payer has two
options when this occurs: write a replacement cheque or add enough
money to the account.

2. Mismatched signature

Cheques are among the few payment methods that still rely on

signatures. Signatures are, in fact, a key component of cheques. If the
payer’s signature does not match the recorded signature with the bank,
the bank will reject the cheque.

3. The date on the cheque

Date is an essential feature in cheques. Any discrepancy or fault with it

can result in dishonoured or disapproved cheques. The most common
problem with dates on cheques is that they can be distorted or outdated.
Ensure that you check it thoroughly before depositing or offering a
cheque.

4. Damaged cheque

The bank will not accept any cheque in damaged, ripped, or poor
condition. Banks also reject cheques if the details are unclear or there
are too many stains on them. Hence, keep the cheque in readable
condition before processing it forward.

5. Overwriting

Overwriting anything on cheques can lead to rejection. Banks reject them

because it appears suspicious.

While IDFC FIRST Bank closely analyses the cheques it receives, the
bank does not scrutinise mistakes. Writing errors are common, so you
will not be charged for an honest mistake. However, penalties will apply if
the same mistakes are repeated countless times.
 UNIT IV

What is a Bank Guarantee?

A bank guarantee is an assurance that a bank provides to a
contract between two external parties, a buyer and a seller, or in
relation to the guarantee, an applicant and a beneficiary. The
bank guarantee serves as a risk management tool for the
beneficiary, as the bank assumes liability for completion of the
contract should the buyer default on their debt or obligation.

Bank guarantees serve a key purpose for small businesses; the

bank, through their due diligence of the applicant, provides
credibility to them as a viable business partner for the beneficiary
of the guarantee. In essence, the bank puts its seal of approval to
the applicant’s creditworthiness, co-signing on behalf of the
applicant as it relates to the specific contract the two external
parties are undertaking.

Summary

 A bank guarantee is an assurance to a beneficiary that the bank

will uphold a contract if the applicant and counterparty to the
contract are unable to do so.
 Bank guarantees serve the purpose of facilitating business in
situations that would otherwise be too risky for the beneficiary to
engage.
 The underlying contracts to a bank guarantee can be both
financial, such as loan repayment, or performance-based, such as
a service provided by one party to another.

Types of Bank Guarantees

A bank guarantee is for a specific amount and a predetermined

period of time. It clearly states the circumstances under which
the guarantee is applicable to the contract. A bank guarantee can
be either financial or performance-based in nature.
In a financial bank guarantee, the bank will guarantee that the
buyer will repay the debts owed to the seller. Should the buyer
fail to do so, the bank will assume the financial burden itself, for
a small initial fee, which is charged from the buyer upon issuance
of the guarantee.

For a performance-based guarantee, the beneficiary can seek

reparations form the bank for non-performance of the obligation
as laid out in the contract. Should the counterparty fail to deliver
on the services as promised, the beneficiary will claim their
resulting losses from non-performance to the guarantor – the
bank.

For foreign bank guarantees, such as in international export

situations, there may be a fourth party – a correspondent bank
that operates in the country of domicile of the beneficiary.

Real-World Example

For a real-world example, consider a large agricultural equipment

manufacturer. While the manufacturer may have vendors in
many places, it is often best practice to have local vendors for
key parts, both for accessibility and transportation cost reasons.

As such, they may wish to enter into a contract with a small

metalworks shop that is located in the same industrial area. Due
to the small vendor being relatively unknown, the large company
will require the vendor to secure a bank guarantee before
entering into a contract for $300,000 worth of machine parts. In
such a case, the large company will be the beneficiary, and the
small vendor will be the applicant.

Should the small vendor receive the bank guarantee, the large
company will enter into a contract with the vendor. At this point,
the company may pay the $300,000 in advance, with the
understanding that the vendor is to deliver the agreed-upon
parts in the following year. If the vendor is unable to do so, the
agricultural equipment maker can claim the losses resulting from
the vendor breaking the terms of the contract from the bank.
Through the bank guarantee, the large agricultural equipment
manufacturer can shorten and simplify its supply chain without
compromising its financial situation.

Advantages of Bank Guarantees

To the applicant:

 Small companies can secure loans or conduct business that

would otherwise not be possible due to the potential
riskiness of the contract for their counterparty. It
encourages business growth and entrepreneurial activity.
 The banks charge low fees for bank guarantees, normally a
fraction of 1% of the overall transaction, for the assurance
provided.
To the beneficiary:

 The beneficiary can enter the contract knowing due

diligence’s been done on their counterparty.
 The bank guarantee adds creditworthiness to both the
applicant and the contract.
 There is a risk reduction due to the bank’s assurance that
they will cover the liabilities should the applicant default.
 There is an increase in confidence in the transaction as a
whole.

Disadvantages of Bank Guarantees

 The involvement of a bank in the transaction can bog

down the process and add an unnecessary layer of
complexity and bureaucracy.
 When it comes to particularly risky or high-value
transactions, the bank itself may require assurance on the
part of the applicant in the form of collateral.

Bank Guarantees vs. Letters of Credit

For a bank guarantee, the primary debtor is the buyer or

applicant. Only when the applicant defaults on its obligation, will
the bank guarantee step into the transaction. Often, a delayed
payment is not a trigger for a bank guarantee. Contrastingly, in
the financial instrument termed as a letter of credit, the seller’s
claim first goes to the bank.

Thus, a letter of credit offers more confidence that there will be

prompt repayment, as the bank is involved in the transaction
throughout the process. With a bank guarantee, there must be
an inability to uphold the contract on the part of the applicant
before the bank becomes involved.

Banker Rights and Obligations

A banker is a person
who is doing banking activities or business. A banker is an officer
of a bank. In a broad sense, banker conducts the business of
banking. A banker is a person who is doing banking activities or
business. To continue providing the best banking services to
the customers, the banker has some rights and obligations
that must be implemented and followed. Let’s take a look at
all the rights and obligations of bankers.

Rights of Banker
The rights of bankers are;
The product life cycle is broken into four stages: introduction, growth,
maturity, and decline. 00:00/00:00

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1. Rights of general lien.

2. Rights of the set-off.
3. Rights of appropriation.
 4. Rights to Charge Interest and Commission
5. Rights to Close the Account

The rights of a banker that the banker can enjoy are as follows:

1. Rights of General Lien

One of the most important rights enjoyed by a bank is the right

of a general lien.

Lien means the right of the creditor to retain the goods or

securities owned by the debtor until the debt due from him is
repaid. In other words, the lien is a right of a person to retain
goods belonging to another; until the demands of the person in
possession are satisfied.

There are some exceptional cases in which the right of general

lien is not applicable. These are:

 Safe custody deposit.

 Documents deposited for a special purpose.
 Security held in trust.

2. The Right of the Set-off

Right of set-off is the right of a debtor to adjust the amount due

to him from a creditor against the amount payable by him to the
creditor to determine the net balance payable by one to another.
Like any other debtor, a bank also has a right to set off.

When a customer has two or more accounts in the same name

and capacity in a bank, the bank has the right to adjust the
amount standing to the customer’s credit against the debit
balance in the other account. The bank has a right to combine
the two accounts.

A banker possesses the right of set-off, which enables him to

combine two accounts in the same customer’s name and adjust
the debit balance in one account with the credit balance in the
other. The right of set-off can be exercised subject to the
fulfillment of the following conditions:

 The accounts must be in the same name on the same right.

 The right can be exercised regarding debts due only, not
regarding future debts or contingent debts.
 The number of debts must be certain.
 The banker may exercise that right at his discretion.

3. Banker’s Right of Appropriation

A customer may owe several distinct debts to the bank when the
customer deposits some money without specific instructions and
is insufficient to discharge all debts. The problem arises as to
which debt this amount should be adjusted.

In the absence of any specific instructions, the bank has the right
to appropriate the deposited amount to any loan, even to a
time-barred debt. But the banker must inform the customer
about the appropriation.

If the customer has more than one account or has taken more
than one loan from the banker, the banker can appropriation
these loans by the accounts.

4. Right to Charge Interest and Commission

The bank has the implied right to charge interest on loans and
advances and charge commission for services rendered by the
bank, such as SMS notification service, retail banking, multi-city
cheque service, etc. The bank can debit such charges to the
customer’s account.

As a creditor, a banker has the implied right to charge interest on

the loans granted to the customer. In the same way, incidental
charges like service charges, processing fees, appraisal charges,
panel charges may be imposed by the banker on the customer.

Deposit are repayable on the term and made by the customer.

Still, the period of limitation for the refund of bank deposit is
three years with effect from the date a customer made a demand
for his money.

5. Right to Close the Account

If the bank believes that an account is not being operated

properly, it may close the account by sending a written
intimation to the customer. But the notice is mandatory. Without
sending such notice, a banker cannot close any customer’s
account.

Obligations of Banker
The relationship between the banker and customers creates
some obligations on the part of a bank. The fundamental
obligations of a banker towards its customers are;

1. The obligation of bankers to honor checks.

2. The obligation of bankers to maintain secrecy.
3. The obligation of bankers is to maintain proper records.
4. The obligation of bankers to follow customer’s instructions.
 5. The obligation of bankers to give notice before closing the
account.

1. Obligation of Banker to Honor Checks

The bank has a statutory obligation to honor the checks/cheques

of its customers up to the amount standing to the credit of the
customer’s account.

2. Obligation of banker to Maintain Secrecy

The banker must not disclose to any outsider the details about
the customer’s account, as such disclosures may adversely affect
the credit and business of the customer.

3. Obligation of Banker to Maintain Proper Records

The banker is obligated to maintain an accurate record of all the

transactions(credits and debits) of the customers made with the
bank.

4. Obligation of Banker to Follow Customer’s

Instructions

The banker is under a legal obligation to follow the instructions

of the customer. This is so because there is a contractual
relationship between the bank and the customer.

5. Obligation of Banker to give Notice before Closing

the Account

If a banker wishes to close the customer’s account, it must give

reasonable notice to this effect to the customer. Thus, a bank
cannot close a customer’s account on its own wish because it
may have serious consequences to the customer.
What Is a Letter of Credit?
A letter of credit, or a credit letter, is a letter from a bank
guaranteeing that a buyer’s payment to a seller will be received
on time and for the correct amount. If the buyer is unable to
make a payment on the purchase, the bank will be required to
cover the full or remaining amount of the purchase. It may be
offered as a facility.

Due to the nature of international dealings, including factors

such as distance, differing laws in each country, and difficulty in
knowing each party personally, the use of letters of credit has
become a very important aspect of international trade.

KEY TAKEAWAYS

 A letter of credit is a document sent from a bank or

financial institute that guarantees that a seller will receive
a buyer’s payment on time and for the full amount.
 Letters of credit are often used within the international
trade industry.
 There are many different letters of credit including one
called a revolving letter of credit.
 Banks collect a fee for issuing a letter of credit.
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What Is A Credit Reference?

How a Letter of Credit Works

Buyers of major purchases may need a letter of credit to assure
the seller that the payment will be made. A bank issues a letter
of credit to guarantee the payment to the seller, essentially
taking responsibility that the seller will be paid. A buyer must
prove to the bank that they have enough assets or a
sufficient line of credit to pay before the bank will guarantee the
payment to the seller.1

 
Banks typically require a pledge of securities or cash as
collateral for issuing a letter of credit.
Because a letter of credit is typically a negotiable instrument, the
issuing bank pays the beneficiary or any bank nominated by the
beneficiary. If a letter of credit is transferable, the beneficiary
may assign another entity, such as a corporate parent or a third
party, the right to draw.

The International Chamber of Commerce’s Uniform Customs

and Practice for Documentary Credits oversees letters of credit
used in international transactions.2

Letters of credit
Letters of Credit (LC) are widely used in international practice for convenience of
international trade transactions and elimination of possible risks.
PASHA Bank offers its customers various types of LCs. The Bank issues LC both within
its own capabilities and within the cooperation of the world well known 1st class banks.
Bank personnel provide complete consulting support in information about LC and
selection of LC type depending on the customer needs.
In addition to LC for international trade operations, PASHA Bank also offers Trade
financing services.

Description of LC

Advantages of LC

Main types of LC
Due to frequent usage within the international collaboration, the names of LC types are
given in English as well
1. Irrevocable LC. This LC cannot be cancelled or modified without consent of the
beneficiary (Seller). This LC reflects absolute liability of the Bank (issuer) to the other
party.
2. Revocable LC. This LC type can be cancelled or modified by the Bank (issuer) at the
customer's instructions without prior agreement of the beneficiary (Seller). The Bank will
not have any liabilities to the beneficiary after revocation of the LC.
3. Stand-by LC. This LC is closer to the bank guarantee and gives more flexible
collaboration opportunity to Seller and Buyer. The Bank will honour the LC when the
Buyer fails to fulfill payment liabilities to Seller.
4. Confirmed LC. In addition to the Bank guarantee of the LC issuer, this LC type is
confirmed by the Seller's bank or any other bank. Irrespective to the payment by the
Bank issuing the LC (issuer), the Bank confirming the LC is liable for performance of
obligations.
5. Unconfirmed LC. Only the Bank issuing the LC will be liable for payment of this LC.
6. Transferable LC. This LC enables the Seller to assign part of the letter of credit to
other party(ies). This LC is especially beneficial in those cases when the Seller is not a
sole manufacturer of the goods and purchases some parts from other parties, as it
eliminates the necessity of opening several LC's for other parties.
7. Back-to-Back LC. This LC type considers issuing the second LC on the basis of the
first letter of credit. LC is opened in favor of intermediary as per the Buyer's instructions
and on the basis of this LC and instructions of the intermediary a new LC is opened in
favor of Seller of the goods.
8. Payment at Sight LC. According to this LC, payment is made to the seller
immediately (maximum within 7 days) after the required documents have been
submitted.
9. Deferred Payment LC. According to this LC the payment to the seller is not made
when the documents are submitted, but instead at a later period defined in the letter of
credit. In most cases the payment in favor of Seller under this LC is made upon receipt
of goods by the Buyer.
10. Red Clause LC. The seller can request an advance for an agreed amount of the LC
before shipment of goods and submittal of required documents. This red clause is so
termed because it is usually printed in red on the document to draw attention to
"advance payment" term of the credit.

What Is Collateral?
Collateral in the financial world is a valuable asset that a
borrower pledges as security for a loan.

When a homebuyer obtains a mortgage, the home serves as the

collateral for the loan. For a car loan, the vehicle is the
collateral. A business that obtains financing from a bank may
pledge valuable equipment or real estate owned by the business
as collateral for the loan.

A loan that is secured by collateral comes with a lower interest

rate than an unsecured loan. In the event of a default, the lender
can seize the collateral and sell it to recoup the loss.

KEY TAKEAWAYS

 Collateral is an item of value pledged to secure a loan.

 Collateral reduces the risk for lenders.
 If a borrower defaults on the loan, the lender can seize the
collateral and sell it to recoup its losses.
 Mortgages and car loans are two types of collateralized
loans.
 Other personal assets, such as a savings or investment
account, can be used to secure a collateralized personal
loan.
How Collateral Works
Before a lender issues you a loan, it wants to know that you
have the ability to repay it. That's why many of them require
some form of security. This security is called collateral which
minimizes the risk for lenders. It helps to ensure that the
borrower keeps up with their financial obligation. In the event
that the borrower does default, the lender can seize the
collateral and sell it, applying the money it gets to the unpaid
portion of the loan. The lender can choose to pursue legal action
against the borrower to recoup any balance remaining.

As mentioned above, collateral can take many forms. It normally

relates to the nature of the loan, so a mortgage is collateralized
by the home, while the collateral for a car loan is the vehicle in
question. Other nonspecific, personal loans can
be collateralized by other assets. For instance, a secured credit
card may be secured by a cash deposit for the same amount of
the credit limit—$500 for a $500 credit limit.

Loans secured by collateral are typically available at

substantially lower interest rates than unsecured loans. A
lender's claim to a borrower's collateral is called a lien—a legal
right or claim against an asset to satisfy a debt. The borrower
has a compelling reason to repay the loan on time because if
they default, they stand to lose their home or other assets
pledged as collateral.

Types of Collateral
The nature of the collateral is often predetermined by the loan
type. When you take out a mortgage, your home becomes the
collateral. If you take out a car loan, then the car is the collateral
for the loan. The types of collateral that lenders commonly
accept include cars—only if they are paid off in full—bank
savings deposits, and investment
accounts. Retirement accounts are not usually accepted as
collateral.

You also may use future paychecks as collateral for very short-
term loans, and not just from payday lenders. Traditional banks
offer such loans, usually for terms no longer than a couple of
weeks. These short-term loans are an option in a genuine
emergency, but even then, you should read the fine
print carefully and compare rates.

Collateralized Personal Loans

Another type of borrowing is the collateralized personal loan, in

which the borrower offers an item of value as security for a loan.
The value of the collateral must meet or exceed the amount
being loaned. If you are considering a collateralized personal
loan, your best choice for a lender is probably a financial
institution that you already do business with, especially if your
collateral is your savings account. If you already have a
relationship with the bank, that bank would be more inclined to
approve the loan, and you are more apt to get a decent rate for
it.

 
Use a financial institution with which you already have a
relationship if you're considering a collateralized personal loan.

Examples of Collateral Loans

Residential Mortgages

A mortgage is a loan in which the house is the collateral. If the

homeowner stops paying the mortgage for at least 120 days, the
loan servicer can begin legal proceedings which can lead to the
lender eventually taking possession of the house
through foreclosure.1 Once the property is transferred to the
lender, it can be sold to repay the remaining principal on the
loan.

Home Equity Loans

A home may also function as collateral on a second mortgage

or home equity line of credit (HELOC) . In this case, the amount
of the loan will not exceed the available equity. For example, if a
home is valued at $200,000, and $125,000 remains on the
primary mortgage, a second mortgage or HELOC will be
available only for as much as $75,000.

Margin Trading
Collateralized loans are also a factor in margin trading. An
investor borrows money from a broker to buy shares, using the
balance in the investor's brokerage account as collateral. The
loan increases the number of shares the investor can buy, thus
multiplying the potential gains if the shares increase in value.
But the risks are also multiplied. If the shares decrease in value,
the broker demands payment of the difference. In that case, the
account serves as collateral if the borrower fails to cover the
loss.

Loan against Documents of Title of Goods

Documents which in the ordinary course of trade, are regarded as proof
of the possession or control of the goods, are called documents of
title. They authorize the holder thereof to transfer or receive goods
which are mentioned therein. Bill of lading, dock warrants, a warehouse-
keeper’s certificate, wharfinger’s certificate, railway receipts, etc. can be
easily cited as a few examples of documents of title. It is presumed that
the holder of document of title shall have the right to claim possession of
goods from every other person. Since they are regarded as equivalent to
possession of goods, they can be. transferred just like goods either by
mere delivery or by endorsement and delivery.
 
Risks involved
Granting of advances against documents of title involve the following
risks in addition to the risks involved in case of advances against goods:
(i) Possibility of frauds: The transporter issuing a railway receipt or
bill of lading certifies that the goods have been received by him but he
does not certify the contents or quality of the packages delivered to him.
This increases the chances of frauds being played. For example, the
consignor may mention in the forwarding note 10 bags of sugar but may
actually send 10 bags of sand. The bill of lading or railway receipt will
mention. 10 bags of sugar though actually there are 10 bags of sand
instead. In case the banker has advanced money against such a
document of title, it has remedy against the borrower but has no remedy
against the transporter. Moreover, the documents may also be forged.
(ii) Non-negotiability nature:On account of the non-negotiability
nature of the documents of title, the title of the transferee will not be
better than that of the transferor. In other words, if the borrower’s title
is defective, banker’s title will also be defective. The banker will not be in
a position to prove its claim against goods which those documents
represent.
(iii) Obtaining delivery on the basis of indemnity bond: The
borrower , on the one hand, may pledge the documents of title with the
bank and on the other hand, manage to obtain the delivery of goods on
the basis of indemnity bond or some other device. Thus, the banker’s
risk increases.
 
Precautions to be taken
1. The advances against documents should be made only to trusted
and reliable borrowers.
2. The borrower should be asked to submit the complete set of
documents such as bill of lading or railway receipt. invoice, bill of
exchange etc. The documents should be either in the name of the
borrower or the bank. Documents in the name of the consignee should
not be accepted as he may obtain delivery of goods on the basis of
indemnity bond without producing the R/R or lorry receipt.
3. The banker should carefully go through the documents to check that
the documents are of recent origin and they do not contain any onerous
clauses.
4. The borrower should be asked to sign an agreement with the bank
pledging the documents with the bank. The agreement should also
authorise the bank to acquire the possession of goods and sell them, if
necessary
5. The banker should inform the transporter regarding its interest in the
goods and requiring it to deliver the goods only when a proper discharge
receipt from the bank is also produced.
6. In case the consignee fails to take delivery of goods, the bank should
take over the goods in its control, store them properly and later on
dispose them according to the direction of the borrower.
 
Principal Documents of Title
The following are principal documents of title to the goods.
1. Bill or Lading. A bill of lading is .’a document in writing signed on
behalf of the owner of the ship in which the goods are embarked,
acknowledging the receipt of the goods, and undertaking to deliver them
at the end of the voyage, subject to such conditions as may be
mentioned in the bill of lading”. It serves three functions:
(a) It is an acknowledgement of the receipt of goods on the ship.
(b) It is a contract of carriage. It contains terms and conditions on which
the carrier agrees to carry goods from one port to another.
(c) It is also a document of title and property in goods. It can be
transferred by its mere delivery in case it is a bearer instrument and by
endorsement and delivery if it is an order instrument. Under the Bill of
Lading Act, 1856, the transferee or endorsee of a bin of lading acquires
by such transfer, all the rights as to goods shipped that the transferor
had and is also subject to the same liabilities as that of the transfer,
A bill of lading possesses certain characteristics of a negotiable
instrument. It is (i) a document of title, (ii) freely transferable, and (ii,)
its transferee can sue in his own name and give a valid discharge to the
person liable. But the title of the transferee of a bill of lading will not be
better than that of the transferor though he might have accepted it in
god faith and for valuable consideration. On account of this limitation, it
is considered to be a semi-negotiable instrument.
A bill of lading begins with the words “shipped in good order and
condition” and the last words are “weight, value and the contents
unknown”. When the goods are delivered to the master, he cancels
either of them repenting upon the condition of the good received. In
case goods are received by him in perfect condition, he cancels the
words, “weight, value and contents unknown”. This is called a “clean bill
of lading”. In such a case the captain is bound to deliver goods in the
same condition as they were at the time of loading. If goods are
received by him in a bad condition, he cancels the words, “shipped in
good order and condition”. In such a case the bill of lading is called a
“qualified bill of lading’ “. When goods are to be carried partly by sea
and partly by land or partly in the ship of the ship- owner issuing the bill
of lading and partly in the ship of another ship-owner for an inclusive
freight, the bill of lading in such a case is called “through bill of lading”.
In such a case also, the subsequent transporters are only the agents of
the first ship-owner who continues to be liable to the consignee for any
loss or damage to the goods in transit.
Bills of lading are generally prepared in sets of three. To avoid the risk of
loss in transit one copy is sent by one mail, the second by the following
mail and the third is kept by the shipper. The consignee can obtain
delivery of good on the basis of any of these copies. In each copy a
reference is made of the other two copies and the other copies become
useless on taking delivery of goods on the basis of any of the three
copies. The banker should take all the three copies in its possession
while advancing money on the security of the bill of lading.
2. Warehouse Receipts:It is a receipt issued by a warehouse keeper
certifying that the goods mentioned therein have been received by him
for store- keeping. The Sale of Goods Act though includes a warehouse
receipt in the definition of a document of title, its status depends on the
respective state legislation where the warehouse is situated. For example
Bombay Warehouse Rules provide for the issue of warehouse receipts
both in negotiable and non- negotiable forms. A negotiable warehouse
receipt can be transferred by endorsement and delivery while transfer of
a non-negotiable warehouse receipt requires execution of a separate
document. In any case, a warehouse receipt is not a negotiable
instrument and therefore the title of the transferee (i.e the banker) will
not be better than that of the transferor (i.e, borrower).
Precautions:The bank should take the following additional precautions,
besides the usual precautions which it takes while advancing money
against the security of documents of title:
(I) He should see whether the warehouse is a licensed or an W1licensed
one. No money should be advanced against receipt issued by an
unlicensed warehouse.
(ii) The intending borrower should be entitled to receive goods in his
own name. It will be appropriate to have the following declarations
signed by the borrower.
(a) The goods evidenced by the receipt are his absolute property.
(b) He will not take delivery of goods by furnishing indemnity bond
without payment of bank’s loan.
(c) He will continue to pay all dues to the warehouse-keeper for his
charges. ,
(iii) The banker should immediately intimate the warehouse-keeper
about the lodgment of the warehouse receipt with it as security against a
loan. The warehouse-keeper should also be instructed not to deliver
goods to the depositor unless the warehouse receipt duly discharged by
the banker is produced.
(iv) The goods evidenced by the receipt should be fully covered by
insurance. The premium will be payable by the borrower and the policy
may be taken jointly in the name of the borrower and the bank.
Alternatively, the warehouse-keeper may take the policy. The banker
must see that the premium is paid regularly.
(v) Proper margin must be kept.
3. Railway Receipt: A railway receipt is a document issued by the
railway company acknowledging the receipt of the goods and
undertaking to carry the goods delivered to a place mentioned therein.
The terms and conditions of carriage. are generally printed on the back
of the receipt. The advances are granted against the railway receipt for a
very short period since the receipt is to be presented before the railway
authorities at destination for obtaining delivery of goods. The consignor
usually draws a bill of exchange on the consignee for the amount of the
invoice. The railway receipt is attached with the bill of exchange and the
banker grants advance by discounting such bill. The banker presents the
bill for acceptance or payment (as per the terms of the bill) before the
consignee and on his acceptance or payment. delivers him railway
receipt. A railway receipt is a document of title but not a negotiable
instrument A banker, therefore, should take the following additional
precautions, besides taking the usual precautions, while advancing
money against it:
(i) The banker should either be as a consignee of the railway receipt or it
should be endorsed to him by the consignor as the original owner.
(ii) The goods evidenced by the railway receipt should be at railways
risk’ and preferably they should be ‘freight paid.’
(iii) The banker should immediately inform the railway authorities of its
interest in the goods and ask them to deliver the goods only when the
railway receipt duly discharged by the banker is produced.
 
Documents
1 Application for credit
2 Accepted copy of sanction letter
3 D. P. note
4 Letter of Arrangement
5 Letter of continuity
6 Letter of lien.
7 Letter of assignment
8 Letter of guarantee from 3rd party (if any).
 
Stock-Exchange Share
Stock exchange securities include securities in which dealings take place
on the stock exchanges. They can be classified into three categories :
(i) Government securities:They include securities issued by the
Central and the State Governments.
(ii) Semi-government securities. They include securities issued by
semi-government institutions like Port Trusts, Improvement Trusts etc.
(iii) Corporate securities: They include securities issued by public
limited companies. They may further be classified as (i) ownership
securities consisting of equity and preference shares, and (ii) creditor-
ship securities represented by debentures.
Shares and debentures of private limited companies are not suitable
form of security for grant of bank advances on account of their being not
quoted on a stock exchange, restrictive transferability and non-
marketability.
Government and Semi-government securities (also known as gilt-edged
securities) are the safest form of security on which the banks can
advance money. Out of corporate securities the banks would prefer
debentures in comparison to shares and preference shares in
comparison to equity shares since debentures have a priority in payment
over shares and preference shares have a priority in payment over
equity shares. However, while investing their funds in or granting of
loans against shares, the banks have to keep in mind the statutory
restrictions placed by section 19(2) of the Banking Regulation Act, 1949.
The section provides as follows : “No banking company shall hold shares
in any company, whether as pledgee. mortgagee or absolute owner, of
an amount exceeding 30% of the paid-up share capital of that company
or 30% of its own paid-up share capital and reserves, whichever is less.
 
Merits or stock-exchange securities
In comparison to other form of securities, stock. exchange securities
have the following merits :
(i) Reliability: The security being tangible, is better in comparison to
personal guarantees given for payment of debts. Moreover, it is easier
for the banker to verify the title of the borrower to these securities.
(ii) Liquidity:Stock exchange securities, particularly gilt-edged
securities. are more easily realizable as compared to land, buildings,
goods and similar other securities.
(iii) Price stability:  Good stock exchange securities do not have much
fluctuation in their prices. Hence, a banker can be more sure of
recovering his If the need arises.
(iv) Easier valuation:Since the securities are quoted on the stock
exchange, the banker can ascertain their value quite easily.
(v) Transferability:The ownership of the stock exchange securities can
be easily transferred as compared to other partially negotiable securities
such as land, buildings etc. Moreover, in time of need the banker may
also obtain funds on the basis of these securities.
(vi) Regular recovery: The dividend or interest which is received from
time to time on these securities can be used for recovery of interest due
on the loan or repayment of the principal itself.

An Overview: Banking Regulation

Act, 1949
The Banking Regulation Act, 1949 or rbi Act 1949 is a regulation in India that
manages all banking firms in India. Passed as the Banking Companies Act 1949, it
came into power from Sixteen March 1949 and changed to Banking Regulation Act
1949 from first March 1966. It has been in Jammu and Kashmir since 1956. At first,
the law was material just to banking organisations. In 1965 it was developed to
make it suitable to helpful banks and to present different changes. The Banking
Regulation Act, 2020 came up after it was altered to bring the cooperative banks
under the management of the Reserve Bank of India. The Act gives a system under
which business banking in India is directed and controlled. The Act supplements
the Companies Act, 1956.

The Act gives the Reserve Bank of India (RBI) the ability to permit banks, have
regulation over shareholding and casting ballot rights of investors; oversee the
arrangement of the sheets and the board; manage the activities of banks; set down
guidelines for reviews; control ban, consolidations and liquidation; issue mandates
in light of a legitimate concern for public great and on banking strategy, and force
punishments. In 1965, the Act was revised to incorporate cooperative banks under
its domain by adding Section 56. Cooperative banks, which work just in one state,
are shaped and run by the state government. Yet, RBI controls the permitting and
directs the business operations. The Banking Act was an enhancement to the past
acts connected with banking.

The Banking Regulation (Amendment) Bill, 2020 was presented in Lok Sabha by
the Minister of Finance, Ms Nirmala Sitharaman, on March 3, 2020. The Bill tries to
alter the Banking Regulation Act, 1949, concerning cooperative banks. The Act
directs the working of banks and gives ideas from different angles, for example,
authorising the board, and activities of banks. The Act doesn’t matter to specific
cooperative organisations.   
 Highlights of Banking Regulation
Act 1949
The primary highlights of the banking regulation act are ar the following:

Prohibition of Trading (Section 8): According to Section 8 of the Banking

Regulation Act, a bank can’t straightforwardly or in a roundabout way manage
trading or bargaining of products. Anyway,it might bargain the transactions
connected with bills of trade for reduction or exchange.
Non-banking asset (Section 9): A bank can’t hold any non-movable property, but
obtained except its utilisation, for any period passing a long time from the date of
securing thereof. The organisation is allowed, inside a time of seven years, to
arrange or exchange any such property for working with its removal.
Management (Section 10): This standard expresses that each bank will have one
of its directors as Chairman on its Board of Directors. It additionally expresses that
at least 51% of the complete number of individuals from the Board of Directors of a
bank will comprise people who have extraordinary information or practical
involvement with bookkeeping, farming, banking, financial aspects, money,
regulation and others.
Minimum capital (Section 11): Section 11 (2) of the Banking Regulation Act,
1949, states that no bank will initiate or carry on business in India, except if it has
least settled up capital and money held endorsed by the RBI.
Payment of commission (Section 13): According to Section 13, a bank isn’t
allowed to pay straightforwardly or in a roundabout way via commission, business,
rebate or compensation on issues of its portions more than 2.5% of the PSR.
Payment of dividend (Section 15): According to Section 15, no bank will deliver
any dividend on its portions until all its capital costs (counting primer costs,
association costs, share selling commission, business, a  measure of misfortunes
caused and different things of use not addressed by tangible resources) have been
discounted.

Importance of Banking
Regulation Act 1949
 The Banking Regulation Act provides the capacity to RBI to permit banks and the
regulation of the shareholding awards capacity to RBI to direct the arrangement of
the boards and the executives’ individuals from banks
 It additionally sets down bearings for reviews to be overseen by RBI, and control
consolidating and liquidation
 RBI issues directives on banking strategy in light of a legitimate concern for public
interest and can force punishments whenever required
 Co-operative Banks were formed under this act in the year of 1965

Conclusion
The Banking Regulation Act 1949 is a regulation in India, that states all banking
firms will be controlled under this act. There is an aggregate of fifty-five-five
Sections under the banking regulation act, the law was simply material to banks,
yet after 1965, it was revised to make it appropriate to agreeable banks ore to
present different changes. The act gives a structure that directs and oversees
business banks in India. This act enables the RBI to practice control and direct
banks under management. The act came into power on March sixteenth 1949. It
connects with different perspectives opposite banking in India. The principal
objective of the banking regulation act is to guarantee sound banking through
regulations covering the launch of branches and the support of liquid resources.

SARFAESI ACT
 View Larger Image

The financial sector of India has consistently assumed a critical part in

developing economies. Consequently, it is truly significant that the security
privileges of banks ought to be ensured. SARFAESI Act 2002 advantages banks
and financial institutions with powers to handle various kinds of bad asset
issues.

SARFAESI ACT, 2002

Contents [hide]
 SARFAESI ACT, 2002
 Objectives of Securitization and Reconstruction of Financial Assets and
Enforcement of Securities Interest Act, 2002
 Applicability of SARFAESI Act
 Features of SARFAESI ACT
 Background
 Procedure
 Right of borrowers:
 Preconditions
 Recovery methods
 Securitization:
 Asset Reconstruction:
 Power of Debt Recovery Tribunal
 Role of High Court
 Proposed Amendments to the act
 Conclusion
SARFAESI Act 2002 was passed on seventeenth December 2002 to help Indian
lenders recover their outstanding dues as fast as possible. SARFAESI Act 2002
(Securitization and Reconstruction of Financial Assets and Enforcement of
Securities Interest Act) empowers financial institutions of India to distinguish
and amend the problems related to NPAs (Nonperforming assets). It also lets the
banks and other financial institutions of India sell residential or business
properties with the end goal of loan recovery.

Objectives of Securitization and

Reconstruction of Financial Assets and
Enforcement of Securities Interest Act, 2002
The objectives of the SARFAESI Act are provided below :
 Specifies the legal framework identified with the scanning
activities in India.
 Mentions the procedures for Non – performing assets transfer
to the asset reconstruction companies for their reconstruction
purpose. This allows fast and effective recovery of NPAs with
respect to banks and FIs.
 Allows financial institutions and banks to sell properties
(business or residential), in case the borrower fails to
reimburse their loans.
 Confers powers to the financial institutions to take custody of
the immovable property that is hypothecated or charged for
debt recovery.
 Imposes the security interest with no interspecific legal
framework identified with the scanning activities in India.
Applicability of SARFAESI Act
The SARFAESI Act regulates the securitization and reconstruction of financial
assets. The Act provides a focal database of security interests based on
property rights or matters associated therewith or incidental thereto:
 Registration and regulation of Asset Reconstruction
Companies (ARCs) by the Reserve Bank of India.
  Facilitating securitization of financial assets of banks and
financial institutions with or without the advantage of
underlying securities.
 Advancement of seamless transferability of financial assets by
the ARC to procure financial assets of banks and financial
institutions through the issuance of debentures or bonds or
some other security as a debenture.
 Entrusting the Asset Reconstruction Companies to raise funds
by issue of security receipts to qualified buyers.
 Facilitating the reconstruction of financial assets which are
obtained while exercising powers of enforcement of securities
or change of the management or different powers which are
proposed to be presented on the banks and financial
institutions.
 Presentation of any securitization organization or asset
reconstruction organization registered with the Reserve Bank
of India as a public financial institution.
 Characterizing ‘security interest’ to be any kind of security
remembering mortgage and change for Immovable properties
given for due reimbursement of any financial assistance given
by any bank or financial institution.
 Classification of the borrower’s account as a non-performing
asset as per the directions given or under guidelines issued by
the Reserve Bank of India from time to time.
 The officers authorized will exercise the rights of a secured
creditor for this sake as per the rules made by the Central
Government.
 An appeal against the action of any bank or financial
institution to the concerned Debts Recovery Tribunal and a
second appeal made to the Appellate Debts Recovery
Tribunal.
 The Central Government might set up or cause to be set up a
Central Registry for the purpose of registration of transactions
identifying with securitization, asset reconstruction, and
formation of the security interest.
 Utilization of the proposed legislation at first to banks and
financial institutions and strengthening of the Central
Government to broaden the use of the proposed legislation to
non-banking financial companies and different entities.
 Non-utilization of the proposed legislation to security interests
in agricultural lands, loans less than rupees one lakh, and
cases where 80%, of the loans, is reimbursed by the borrower.
Features of SARFAESI ACT
Securitization and Reconstruction of Financial Assets and Enforcement of
Securities Interest Act, 2002 aims to protect banks and financial institutions
from incurring losses. Its features are provided below :
1. Enforcement of security interests: The Act enforces security
interests by the secured creditors with no involvement of the
court. In case of a default by a borrower, the act authorizes the
bank or a financial institution to issue a demand notice to the
borrower and induces him/her to satisfy off the obligations
within sixty days from the date of the notification.
2. Reconstruction of financial assets: SARFAESI Act allows the
banker and financial institutions to take legitimate measures of
the management, sale, settlements, debt restriction, or take any
possession under SBI guidelines every now and then.
3. Securitization of financial assets and issue security
receipts: The primary point of the securitization act is to make
accessible the enforcement of security interest for example to
take possessions of the assets that were given security for the
loan.
4. Act as an agent of banks or financial institutions: The
SARFAESI Act 2002 acts as the manager of the secured assets
given by the financial institutions and ensures that the dues are
recovered at an ideal time.
Background
The previous legislation enacted for recovery of the default loans was Recovery
of Debts because of Banks and Financial institutions Act, 1993. This act was
passed after the recommendations of the Narasimhan Committee – It was
submitted to the public authority. This act had made the forums such as Debt
Recovery Tribunals and Debt Recovery Appellate Tribunals for expeditious
adjudication of disputes as to truly increasing non-recovered dues.
Notwithstanding, there were several loopholes in the act and these loopholes
were mis-used by the borrowers as well as the lawyers. This prompted the public
authority to introspect the act and this one more panel under Mr. Andhyarujina
was named to inspect banking sector reforms and consideration to changes in the
legal system.

Procedure
The SARFAESI Act, 2002 gives powers of ‘seize’ to banks. Banks can give
notice in writing to the defaulting borrower expecting it to discharge its
liabilities within 60 days. if the borrower fails to comply  to the notification, the
Bank might take recourse to one or more of the accompanying measures:
 take and possession the security for the loan;
 Sale or lease or assign the right over the security;
 Deal with the same or designate any person to deal with the
same.
The SARFAESI Act also provides for the establishment of Asset Reconstruction
Companies regulated by RBI to gain assets from banks and financial institutions.
The Act provides for the sale of financial assets by banks and financial
institutions to asset reconstruction companies. RBI has issued guidelines to
banks on the process to be followed for the sales of financial assets to Asset
Reconstruction Companies.

Right of borrowers:
The above observations clarify that the SAFAESI act was ready to give the
viable measures to the secured creditors to recover their long-standing dues from
the Non-performing assets, yet the rights of the borrowers couldn’t be ignored,
and have been appropriately incorporated in the law.
The borrowers can whenever before the sale is closed, transmit the dues and try
not to lose the security;
In case any undesirable/illegal act is finished by the Authorized Officer, he will
be obligated for corrective consequences;
The borrowers will be qualified to get compensation for such acts;
For redressing the grievances, the borrowers can approach firstly the Debt
Recovery Tribunal and from there on the Debt Recovery Appellate Tribunal in
appeal. The restriction period is 45 days and 30 days respectively.

Preconditions
The act provides four conditions for the enforcement of the rights of the creditor
 the debt should be secured
 the debt should be classified as nonperforming assets by the
banks
 the outstanding dues are one lakh and higher and more than
20% of the principal oan amount and interest
 the security cannot be enforced on agricultural land
Recovery methods
According to this act, the registration and regulation of securitization companies
or reconstruction companies is performed by RBI. These companies are
authorized to raise funds by issuing security receipts to qualified institutional
buyers (QIBs), banks, and Financial institutions to claim securities given for
financial assistance and sell or lease the same to assume control over
administration in case of default. This act makes provisions for two principle
methods of recovery of the Non Performing Assets are as follows:

Securitization:
Securitization is the process of issuing marketable securities supported by a pool
of existing assets such as auto or home loans. After an asset is changed over into
a marketable security, it is sold. A securitization organization or reconstruction
organization might raise funds from just the QIB (Qualified Institutional Buyers)
by forming schemes for obtaining financial assets.

Asset Reconstruction:
Enacting SARFAESI Act has brought forth the Asset Reconstruction Companies
in India. It very well may be finished by either proper administration of the
business of the borrower, or by assuming control over it or by selling a section
or entire of the business or by the rescheduling of payments of debts payable by
the borrower enforcement of security interest as per the provisions of this Act.
Further, the act provides Exemption from the registration of security receipts.
This means that when the securitization organization or reconstruction
organization issues receipts, the holder of the receipts is entitled to unified
interests in the financial assets and there is no need for registration unless and
otherwise, it is compulsory under the Registration Act 1908.
However, the registration of the security receipt is needed in the
accompanying cases:
 There is a transfer of receipt;
 The security receipt is creating, announcing, assigning,
limiting, and extinguishing any right title or interest in an
immovable property
Power of Debt Recovery Tribunal
The debt recovery tribunals have been provided the power to entertain appeals
against any misuse of the powers provided to banks. Any aggrieved individual
by any order given by the debt recovery tribunal may go to Appellate Tribunal
within thirty days from when the date of the order of Debt Recovery Tribunals.

Role of High Court

The act empowers to take the matters to High Court only in some matters which
are related to the implementation of the said act in Jammu and Kashmir.
Nonetheless, High Court has been entertaining writ petitions under Article 226
which is the Power to issue writs of the Constitution of India.

Proposed Amendments to the act

The government had approved a bill to amend the act. The Enforcement of
Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, amends
two Acts — SARFAESI Act 2002, and Recovery of Debts Due to Banks and
Financial Institutions Act, 1993 (DRT Act). Through these amendments:
Banks and asset reconstruction companies (ARCs) will be permitted to change
over any part of the debt of the defaulting organization into equity. Such a
conversion would suggest that lenders or ARCs would will in general turn into
an equity holders as opposed to being a creditor of the organization.
The amendments also permit banks to offer for any immovable property they
have put out for auction themselves, in the event that they don’t get any bids
during the auction. In such a scenario, banks will actually want to adjust the
obligation with the sum paid for this property. This enables the bank to secure
the asset partially satisfaction of the defaulted loan.
Banks would then be able to sell this property to another bidder sometime to
clear up the debt totally.

Conclusion
However the enactment of the SARFAESI Act sought to prepare blocked funds
of the banks in the non-performing assets, the various provisions of the acts have
made profound sorrows for the veritable buyers. The various provisions
intended to adjust the requirements of the borrowers and the banks, have their
equilibrium of favor shifted towards the banks. These powers are, at the majority
of the time, is used by the banks to suitable their interests against the interests of
the buyers. In such a situation it is appropriate for the common courts to assume
more social responsibility for the bigger interest of the borrowers on one hand
and to share the responsibilities of the banks to assemble their funds from the
numerous non-performing assets.