BANKING LAW AND PRACTICE

Introduction:

Banking sector plays a vital role in the development of the economy of a country and day by day
the importance of bank is increasing in everybody’s daily life. There are various risks like Credit
Risk, market risk, operational risk, business risk etc. faced by the Banks.

What is Bank

Banks are a subset of the financial services industry. It is a financial institution that provides
banking and other financial services to their customers. A bank is generally understood as an
institution which provides fundamental banking services such as accepting deposits and
providing loans.

General Functions of bank

1. Acceptance of Deposits from the public

2. Provide demand withdrawal facility

3. Lending facility

4. Trasfer of funds

5. Issue of draft

6. Provide customers with locker facilities

7. Dealing with foreign exchange

What is Banker? Or who is a Banker?

The bill of exchange Act of 1882 defines the banker “Banker includes a body of persons
whether incorporated or not who carry on the business of banking”.

What is customer? Or who is a customer for Bank?

According to Sir John Paget’s view “To constitute a customer there must be some recognizable
course or habit of dealing in the nature of regular banking business”.

Relationship between Banker and Customer

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Relationship between a banker and a customer may be divided into two types, they are:

• General relationship.

• Special relationship

General Relationship:
The general relationship between a banker and a customer may be sub-divided into:

a) Primary general relationship

b) Subsidiary general relationship

(a) Primary General Relationship:

The primary general relationship arises from a contract between the two i.e. banker and a
customer. So it is a contractual relationship. It is governed by the various terms of
agreement between the two parties.

• Banker is only a debtor in respect of customer’s money

• Customer is only general creditor of the banker

• Demand for repayment of deposits is necessary

(b) Subsidiary General Relationship

The banker and the customer can also enter into subsidiary relationships like that of bailee &
bailor, trustee & beneficiary, and agent & principal by special agreement or arrangements.

• Bailee and Bailor:

• Trustee and Beneficiary:

• Agent and Principal:

• Mortgagee and Mortgagor relationship:

• Guarantor and Guarantee relationship:

Bailee and Bailor :

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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 the
direction agreed as per the terms and conditions of the contract.

The Person delivering the goods is called the Bailor, and the person to whom the goods is
delivered is called the Bailee.

Example: Land or any tangible assets as securities or valuable items.

Trustee and Beneficiary :

Trustee is an Individual who is responsible for a property or an Organization on behalf of some

other Individual.

If the customer deposits securities or valuables with the banker for safe custody, banker becomes
a trustee of his customer. The customer is the beneficiary so the ownership remains with the
customer

Mortgagee and Mortgagor:

Mortgagee is an entity that lends money to a borrower for the purpose of purchasing real estate.

In a mortgage lending deal the leader serves as the mortgagee and the borrower I known as
mortgagor.

Guarantor and Guarantee Relationship

A bank as guarantor gives guarantee to it's customer by issuing a 'letter of credit'. It is a kind of
credit facility to its customer to facilitate trade.

Section 126 of the Indian contract Act 1872 defines a "contract of guarantee" as contract to
perform the promise or discharge the liability of a third person in case of his default. The person
who gives guarantee is called the surety, the person in respect of whose default the guarantee is
given is called the "principal debtor" and person to whom the guarantee is given is called the
"creditor"

Special Relationship

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Special relationship between a banker and a customer refers to the special obligations and rights
of the banker against the customer and vice-versa. The rights and obligations are reciprocal i.e.
customers rights are bankers duties and bankers rights are customer duties.

Obligations:
a) Banker’s obligation to honour his customer’s cheques:

• Sufficient funds must be available

• Funds must be properly applicable to the payment of the cheque

• Banker must be duly required to pay the cheque

• There must be no legal bar presenting the payment of the cheque

b) Banker’s obligation to maintain the secrecy of the customer’s account

c) Obligations to maintain account record properly

d) obligations to close the account of the customer

Rights:

a) Right of General Lien

b) Right of set-off or banker’s right to combine account

c) Banker’s right to charge compound interest

d) Banker’s right to charge incidental charges

e) Banker’s obligation and rights when a customer’s account is

attached by a garnishee order

Meaning of Lien:
Lien is the right of one person to retain the property, in his possession, belonging to
another, until the debt due from the owner of the property is repaid.

Different Types of Account

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a. Individual Account

b. Partnership Firm

c. HUF

d. Sole Proprietary Firms

e. Limited Liability Partnership

f. Companies

g. Clubs & Societies

i. Trust

Individual Account
i. Single Account
ii. Minor Account
iii. Joint Account

Documents Required to open Single Account

 KYC (Pan Card Copy, Aadhar Card Copy, Photo)

 Account Opening Form (Which includes an Introduction must be completed)
 Nominee

What is Minor Account?

Minor Account is opened by the Parents or Legal Guardian whose age is below18 Years. Or a
minor is someone who has not reached the age 18.

Documents Required to Open Account:

 KYC of Natural Guardian or in the absence of Natural Guardian Legal Guardian

(Pan Card Copy, Aadhar Card Copy, Photo)
 Minor’s Birth Proof (Birth Certificate or Aadhar Card Copy)
 Account Opening Form

What is Joint Account?

A joint account is a bank or brokerage account shared between two or more individuals. Joint
accounts are most likely to be used by relatives, couples, or business partners who have a level
of familiarity and trust with each other.

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Joint Account can be opened by 2 or more person

Documents Required to Open Account:

 KYC required all Individual Holders

 Account Opening Form

What is Sole proprietorship?

The sole proprietor has unconditional and full control over its business.

Example: Beauty parlour, barbershop, general store and sweet shop run by a single owner.

Documents required to open the Account

1) GST Registration

2) Individual Identity proof

3) Account opening form

What is Partnership Firm ?

A partnership is a formal arrangement by two or more parties to manage and operate a business
and share its profits.

A partnership is a kind of business where a formal agreement between two or more people is
made who agree to be the co-owners, distribute responsibilities for running an organization and
share the income or losses that the business generates.

Documents Required to open the Account

1. Basic Documents

1. Partnership Deed

2. PAN Card in the Name of the Partnership Firm

3. Address Proof of the Partnership Firm

4. Identity Proof of all Partners

5. Partnership Registration Certificate (if Registered Partnership)

First Entity Proof (Any one of the following documents)

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1. Any certificate issued for registration/operations/Trade License/business by Local/ State/
Central Government/ Government Agency/ SEBI/ IRDA/ ICAI/ ICSI/ ICWAI/ Office of
Registrar of Newspapers for India in the name of entity/firm. Eg: Sales Tax, TIN/ TAN etc.

2. APMC/ Mandi License/ Certificate

3. Labour License/Certificate

4. Professional Tax Registration Certificate

5. Trade Mark Registration Certificate

6. Liquor License/ Registration Certificate

7. Drug License

8. Registration Certificate issued by Excise & Customs Department.

9. License/ Certificate to Sell/ Stock/ Exhibit for Sale or Distribute Insecticide/Pesticide

10. Registration Certificate issued under Weight & Measurement Act

11. Police Department Permission/License/Certificate

12. Regional Transport Office Permit/Registration Certificate

13. Consent to Operate document issued by State/Central Pollution Control Board

14. Sales Tax Registration Certificate/ TIN Certificate/ GST certificate/ TAN certificate.

15. Valid Shops & Establishment Certificate/ Trade License. Validity can be extended up to the
grace period for renewal as mentioned in such certificate.

16. Certificate Issued by SEZ, STP, EHTP, DTA and EPZ in the name of the entity mentioning
the address allotted.

17. Importer–Exporter Code Certificate along with PAN Card (if PAN is quoted on the IEC
Certificate).

18. Gram Panchayat Certificate (should be on letterhead and not more than 3 months old).

19. Trade License in the name of the entity.

20. District Industries Center (DIC)/ Small Scale Industries (SSI) Certificate – Acknowledgment
Part -II issued by DIC/ SSI containing Entrepreneur’s Memorandum Number. Duly stamped and
signed by issuing authority.

21. Factory Registration Certificate in the name of the entity.

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22. SEBI Registration Certificate in the name of the entity.

23. Certificate of enlistment/license/shop allotment letter issued by Municipal Corporation

(Kolkatta, Ludhiana and others).

24. Shops & Establishment Certificate issued by E-Seva Kendra’s (Andhra Pradesh). Receipt
issued only by Municipal Corporation of Hyderabad (MCH) to be accepted along with Shops &
Establishment Certificate.

25. The Shops and Establishment Certificate issued by the Municipal Corporations in West
Bengal are valid till March 31 every year.

Second Entity Proof (Any one of the following documents)

1. Registration of firm with Employee Provident Fund Organization.

2. Registration of firm with Employee State Insurance Corporation.

3. Letter or Certificate (should be on letterhead and not more than 3-month-old) confirming
existence of business issued by Chairman/ President/ CEO/ Head of the Nagar Panchayat/
Parishad, and not by local councillors/ corporators

4. Complete Sales tax return in the name of the firm duly acknowledged. Note: The portion of
the sales tax return showing the name of the firm should be duly acknowledged by the accepting
authority

5. Last available Income/ Wealth Tax Assessment order in the name of the firm.

6. The latest copy of Electricity Bill, not more than 3 months old.

7. The latest copy of Telephone Bill from Telecom operator, not more than 3 months old.

8. Certificate issued by Municipal Corporation/ Local Self Government Bodies confirming the
address of the firm.

9. A true copy of gas connection book in the name of the entity along with the latest gas receipt,
not more than 3 months old or Gas bill in case of pipe connection.

10. Water Tax bill paid to Municipal Body/ Corporations, not more than 6 months old along with
the Tax receipt should stand in the name of the firm.

11. Property Tax bill should not be more than calendar one year old from the bill issuance date
along with Tax receipts for property tax paid to Municipal Body / Corporations. The Tax receipt
should stand in the name of the firm.

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12. Certificate of Verification issued under Weight & Measurement Act–This document will not
be considered if Registration Certificate issued under the same act has been taken as 1st entity
proof document.

What is Joint Stock Company?

A joint-stock company is a business owned by its investors, with each investor owning a share of
the company based on the amount that they've invested.

When a group of person divided the capital of a company into transferable shares a joint stock
company is formed.

Documents Required to open the account

1. Certificate of Incorporation

2. MOA (Memorandum of Association)

3. AOA (Article of Association)

4. Board Resolutions of Identity the authorised board members

5. List of Directors

6. Address proof of registered office address

7. Directors Identity proof

8. Authorised Signatories

9. Proof of appointment of directors

10. Proof of resignation of directors

11. Shareholding patterns of the company

12. Pan card copy of the company

Club/association/trust

Documents Required to open the account

1. Registration certificate of Trust/Society/association club

2. Trust Deed/bye laws

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3. Copy of Pan card of the entity

4. Copy of Address proof of the entity

5. Duly authonticated list of current trustees/ office bearers on the letter of the entity

6. Authorised Signatories

7. Identity proof of the officers

What is NRI? Who is NRI?

Meaning:

The full form of NRI is Non-Resident Indian. An NRI is an Indian-born citizen who has
emigrated to some other country. The reasons for the relocation could be work, education,
residence or some other purpose. They are all people of India who live in other nations.

A person who stayed away from India for more than 182 days in a calendar year known as NRI.
Income taxes are unique for such an individual.

Documents required to Open the Account

1. Individual Identity proof ( pan card copy)

2. Residential address proof

3. Overseas address proof

4. Passport

5. Photo

6. Proof of NRI status ( work permit/valid visa/overseas resident card)

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