STD.

XI

BANKING (A-5)

PAPER – II

By R. U. Shinde
Ness Wadia College of Commerce, Pune – 1.
 BANKING REGULATION ACT’1949

The Banking regulation Act 1949 is a landmark in the history if banking legislation in India. The act
was passed in the year 1949 and came into effect from 16th March 1949 to regulate banking
business/transaction. It extends to whole India. This act was previously known as the Banking
Companies Act.

This act was passed in order to remove the defects in the banking systems and to strengthen the
banking structure so that the banking system can be used as an instrument of economic change in the
country. This act also gives powers to the Reserve Bank of India to control and supervise the
activities of the commercial banks in India.

Some of the important provisions of the Banking Regulation Act 1949 are as follows.

1. Definition of Banking : “Banking means accepting, for the purpose of lending or investment of
deposit of money from public, repayable on demand or otherwise, and withdrawable by cheque,
order or otherwise.” [sec. 5 (b)]

2. It prohibits trading i.e. (a bank cannot directly or indirectly deal in the buying or selling of
goods). [sec. 8]
3. It prohibits managing agents i.e. Director, Chairman or Secretary of any company. (sec.16)
4. Power of RBI to control Loans and Advance. [sec. 35]
5. It requires that a bank has to maintain a certain minimum balance as reserve in cash (CRR) or
securities with RBI. [sec. 18]
6. It prohibits banks to give advances against their own shares to the public. [sec. 20]
7. Every banking company has to obtain a license from RBI for its banking business in India. [sec.
22]
8. Restriction on opening new branches of any bank. (under RBI permission only, bank can open
a new branch.) [sec. 23]
9. Control on voting rights on share holder.
10. Every banking company has to prepare Balance Sheet & Profit & Loss Account at the expiry
of each year. [sec. 29 to 33]
11. The Balance sheet must be audited by a duly qualified auditor.
12. Power to inspect the commercial banks. (Sec. 35)
13. Power of the RBI for the following directions.
a) In the public interest.
b) In the Interest of banking policy of the government.
c) Control over the management of the banking industry.

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GENERAL WORKING OF COMMERCIAL BANK

There is no unanimity of opinion among economists and bankers about the meaning of the term
`Banking’. The term ‘Banking’ has not been defined in any of the legislative enactments. Thus the
word “bank” is easy to understand but difficult to define.

The term “bank” is said to have been derived from the word “Banco”, “Banque” and “Bancus”. The
word “Banco” in Portuguese means a bench. The same is the meaning of the other terms mentioned
above, which are of Italian or French origin. It appears that the word “Bank” must have been derived
from the word “Banco” and must have acquired its present meaning in England, ever-since the
fourteenth century. Money lending and banking business was mainly in the hands of the Jews. These
Jews used to have their business in Lombard Street, London, where they used to keep money on the
bench and transact business. In those days, money was made of metal coins, but unfortunately there is
no proof to show that the word “Bank” originated from the word “Banco. “

In modern times, a bank means an institution which performs the functions of accepting deposits and
advancing loans as and when demanded. In addition to this, several other functions are performed by
modern banks.

The commercial banks in India are joint Stock banks, governed by the Indian Companies Act’1956. All
these banks carry on the banking business in India and some have branches in other countries also.
Commercial Banks are of great importance in today’s banking system. They form the largest, most
powerful and useful segment [ a part, cut of, a part of a circle] of the whole banking system in India.

DEFINITION OF BANK:
1. General definition of Bank: Bank is an institution which deals in cash and credit.

2. Dr. H. L. Hart. “A banker is one who in the ordinary course of his business, honours cheques
drawn upon him by persons from and for whom he receives money on current account”.

3. Kinley: “Bank is an establishment which makes to individuals such advances of money or other
means of payments as may be required and safely made and to which individuals entrust money
or means of payment when not require by them for use”.

4. Sir John Paget: “No person or body corporate or otherwise can be banker who does not-
i) Take deposit accounts, ii) take current accounts, iii) Issue and make payment of cheques
drawn upon himself iv) collect cheques crossed and uncrossed for his customer”.

Sir John further adds that one who claims to be banker must satisfy two more conditions.
1. The Banker must be one whom the public acknowledged and accepts as a banker &
2. Banking should be his only or main business.

5. Banking Regulation Act’1949: [sec. 5 (b)]

“Banking means accepting, for the purpose of lending or investment of deposit of money from
public, repayable on demand or otherwise, and withdrawable by cheque, order or otherwise.”

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FEATURES OF A BANK:

1. Business of banking:
A bank deals mainly with other people’s money. Bank accepts deposits from the public. If a bank
does not receive deposit and only deals with its own money, it cannot be called a bank. It can, at
best be called a money lending firm.

2. Repayment of Deposit:
Bank repays deposits to the depositors either on demand or after the expiry of a specified period by
honouring cheques or by other instruments of withdrawals.

3. Not subsidiary to any other business:

A banks main business should be banking. It should not be subsidiary to any other business.

4. Right to utilize the money:

A bank is a borrower which reserves the right to utilise the money given to it in a way it considers
best.

5. Name: A bank should add the word ‘bank’ to its name and let people know that it is a bank.

6. Performance of other activities:

A bank can perform other subsidiary services in addition to its main function of accepting and
lending of deposits.

IMPORTANCE OF BANKS:
Banking is an aid to trade. Business activities can not operate smoothly without banking services. The
efficient administration of the banking system can provide a healthy and prosperous life to the nation.
Banking is useful to trade and commerce in the following ways.
1. Safety of money: Money deposited in a bank remains safe. Precious articles can be kept in the
safe custody or in the safe deposit vaults in the banks.

2. Increase in credit: Customers with bank accounts enjoy better credit worthiness in the business
world. Banks also provide credit to their customer.

3. Savings: Banks encourage the habit of saving and thrift among the people. They mobilize public
savings and invest them in productive avenues. They increase the rate of capital formation in the
country.

4. Transfer of money: Banks provide a remittance facility to the customer for transferring their
money from one place to another. Moreover, payments made through cheques/Demand Drafts
provide a legal proofs of the transaction.

5. Collection of money: Banks collects and realise the bills, interest, etc. on behalf of their
customers.

6. Facilitate Foreign Trade: Foreign trade can not be carried on smoothly without banking. Banks
receive and make payments, provide credit and deal in foreign exchange. They issue letter of
credit and provide information on the credit worthiness of importers. They give financial
references on behalf of their customers.
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TYPES OF BANKS:
1. Commercial banks: These are joint stock banks which receive deposit from the public and
business firms. They also provide short term, medium term and long term loans to customers.
These banks carry on all kinds of banking functions within the framework of the Banking
Regulation Act 1949 in India. Commercial banks are classified into two broad categories –
scheduled and non-scheduled banks. Scheduled banks are those included in the second schedule
of the Reserve bank of India Act and which paid up capital plus reserves are more than Rs. 5
lakh. A non-scheduled bank is one which do not comply with the abovementioned conditions.

In India, banking business is divided into public sector and private sector. The banks working in
public sector are owned by the government.

Bank of Maharashtra, Bank of Baroda, State Bank of India, Union Bank of India, Punjab
National Bank etc. are examples of public sector banks. Global Trust Bank, Bank of Rajastan
etc. are the examples of private sector banks. The State Bank of India is the largest commercial
bank in India.

2. Central bank: The central bank is the apex banking and monetary institution of the country. It’s
main function is to control, regulate and stabilize the banking and monetary system of the
country in the interest of the nation. The Reserve Bank of India is the central bank of India. The
RBI is established on 1st April 1935 under the Reserve Bank of India Act 1934 and nationalised
in the year 1948. Its head office is in Mumbai. The chief person of the bank is called as the
Governor. Dr. D. Subbarao is the present Governor of the RBI.

3. Industrial banks: These banks play an important role in the industrial development of the
country. They provide medium and long term finance to the industrial concerns. They provide
managerial and technical assistance to industries. E.g. Industrial Development Bank of India
(IDBI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Finance
Corporation of India (IFCI), Maharsthra State Financial Corporation (MSFC) etc.

4. Co-operative banks: These banks are organized by the people with limited means for their
mutual benefits and are managed on a co-operate basis. Like commercial banks, they accept
deposits from the depositors and grant loans to their members at concessional rates of interest.
Such banks are found in both rural and urban areas. Co-operative banks encourage the habit of
savings among their members. In rural areas there are agricultural co-operative banks which
accept deposits and give loans to the farmers and rural artisans. Co-operative banks are
controlled by the District Central Co-operative Bank and State Co-operative Bank, at district
level and state level respectively.

5. Exchange banks: These banks provide foreign currency and other related facilities to the
importers and exporters. They buy and sell foreign currency exchange (currency) and specialize
in financing foreign trade. They are also called foreign exchange banks. These banks also
render services such as collecting and supplying information about the foreign customers,
remittance of funds from one country to another, etc.
e.g. The Export and Import Bank (EXIM Bank).

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6. Foreign banks: These banks finance the foreign trade of a country. Therefore, they deal in
foreign currency. These banks also render other services such as collecting and supplying
information about foreign customers, providing remittance facilities etc. Like ordinary
commercial banks, these banks also deal in usual banking business. These banks have their head
offices in located outside India. E.g. American Express Bank (USA, City Bank (USA).

7. International banks: These banks work at the international level. They look after financing
large projects which require foreign investments involving many currencies. The members of an
international bank are various countries, which keep their deposits with the bank at the
government level in their own currencies which can be utilized for settling imports and exports
and also for international co-operation in the field of industry, commerce, agriculture, technology
etc. Such banks collect long term deposits from industrially advanced nations and lend them on
easy terms to underdeveloped countries for industrialization and development.
E.g. International Monetary Fund (IMF), Asian Development Bank (ADB), International
Finance Corporation (IFC), World Bank, International Bank for Reconstruction and
Development (IBRD).

8. Land Development Bank / Land Mortgage / Agricultural Banks: These banks finance the
agriculture and provide medium and long term loans to the farmers against the security of their
land. In agriculture long term loans are very essential for purchasing tools, implements, cattle,
and making permanent improvement (tube-well, Water pipe line, Well, Land Leveling etc.) The
long term loan is recovered in annual installments. These banks do not accept deposits from the
public but instead raise huge funds by issuing of long period debentures. E.g. The National Bank
for Agriculture and Rural Development (NABARD).

9. Savings banks / Post Office Banks: These banks accept various types of deposits from the
public and give a low rate of interest on these deposits. They invest this money in bonds etc.
Generally restrictions are placed on the number and amount of withdrawals during a month.
Savings banks encourage savings and thrift. They collect the small savings of the people but do
not advance them. These banks are popular in the villages where banking facilities are not
available. Post office serves as savings banks for the benefit of the general public. The post
office also provides facilities like making payment through a) Postal Stamps, b) Postal Orders
and c) Money orders.

10. Indigenous Bankers and Money Lenders: These are money lenders in villages and small
towns. They accept deposits from and grant loans to farmers, artisans and local traders. The also
deal in hundies. Hundies are regarded as native bills of exchange. They generally charge high
rate of interest. E.g. Mahajans, Seths, Sahukars, Shroffs, Sarafs, etc.

11. Scheduled and Non Scheduled Banks:

The joint stock or commercial banks in India are divided into two categories.
A) SCHEDULED BANKS B) NON-SCHEDULED BANKS

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A) SCHEDULED BANKS:
Scheduled banks means, those Commercial banks, whose names are included in the second schedule
of Reserve Bank of India Act’1934 having paid up capital and reserve Rs. 5 lakh or more. The
conditions, which are to be fulfilled by a commercial bank before its name is included in the above-
mentioned schedule, are as under.

a) It should have a minimum paid-up capital and reserve of Rs. 5 lac or more. The value must
be real and not book value.
b) It should only carry on it’s banking business in India.
c) It should be
i) Either a company, as defined in section `3’ of the Indian Companies Act’1956 or
ii) An institution notified by the central government in this behalf with the enforcement of the
Banking Laws (application to co-operative societies) Act’1956’ the State Co-operative banks
have been declared eligible for being included in the second schedule with effect from
March, 1966.

Now the scheduled banks have been divided in to two categories. These are -
1) Scheduled Commercial Banks:
a) Indian Scheduled Banks
b) Foreign Scheduled Banks

2) Scheduled State Co-operative Banks.

Those banks which have registered offices in Indian are called Indian scheduled commercial banks and
those banks, which are incorporated outside of India, are called foreign scheduled commercial banks.

Similarly, the public sector banks i.e. The State Bank of India and it’s seven subsidiaries are notified as
scheduled banks by the Central Government under section 42 (6).

B) NON-SCHEDULED BANKS:
Those commercial banks which have not been included In the second schedule of the Reserve
Bank of India Act’1934 as they do not fulfill the conditions laid down for their inclusion are
called Non-scheduled banks.

These non-scheduled banks have been classified into following four categories.
a) Banks having paid up capital and reserve Rs. 5 lac but whose name have not been included in the
second schedule of the RBI Act’1934.
b) Banks having paid up capital and reserve Rs. 1 lac to 5 lac. but whose name have not been
c) Banks having paid up capital and reserves of Rs. 50,000/-
d) Banks having paid capital and reserve less than Rs. 50,000/-.

These non-scheduled banks also receive concession, advice and guidance from the RBI. The RBI
has the right of inspection and audit of these banks. Utmost [ greatest] care is taken by the RBI to
see that all commercial banks are run on sound business principles and to the advantage of the
depositors.

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Development and Historical Background of Commercial Banks in India:

By the end of the 17th century and during the first few years of the 18th century, British and European
traders established trading centers and agency houses at different places in India. When the British
traders started the banking business, it was not independent banking as such. They started the services
of accepting deposits and advancing loans along with their trade and commerce amongst [between]
themselves. It was not a regular banking but it served their purpose. It was mainly for the East India
Company and its employees. The main interest was trade, but gradually they stared to the banking
activities like receiving deposits and advancing loans.

With the beginning of the 19th century, the need for a well organised commercial bank was felt by the
East India Company itself. So it took the lead in establishing the first presidency bank in India viz.
Bank of Bengal in 1806 at Calcutta. The bank was one of the oldest and powerful banks of the
presidency banks.

Then Bank of Madras was established in 1940 at Madras with a share capital of Rs. 30 lac, out of which
Rs. 3 lac were contributed by the East India Company.

Then the another Presidency Bank, `Bank of Bombay’ was established in 1843 at Bombay with a capital
of Rs. 52 lac out of which a capital of Rs. 3 lac was contributed buy the East India Company.

Thus, European joint stock banks knows as presidency banks [Bank of Bengol – 1806, Bank of Madras –
1840 and Bank of Bombay – 1843] had come to their prominence [importance] in the Indian banking
system.

After 1860, the banking business in India got a new fillip [boost, tonic] of a stream of new banks. The
Allahabad Bank was established in 1865, the Bank of Simla in 1875, the Punjab National Bank in 1895,
the Peoples Bank of India in 1901 and so on.

After the First World War, for a period of 4 to 5 years the banking business was established, but after
1922 bank failures increased again. The period of 1913 to 1924 was very critical for bank in India.
During this period as many as 161 banks were failed (closed). During 1929 to 1939 373 banks were
failed.

To regulate the banking business The Reserve Bank of India formed on 1st April, 1935 under the
Reserve Bank of India Act 1934.

Functions of Commercial Banks:

Modern commercial banks perform a large number of functions and render numerous [ very/many]
valuable services to industrialists, traders and businessmen.

The functions performed by modern banks can be broadly classified into two categories.
A) Primary Functions/Banking Functions
1) Accepting/Collecting Deposits 2) Advancing Loans
2) Discounting of Bills of Exchange 4) Credit Creation

C) Secondary Functions/non/banking functions/ supplementary/subsidiary functions.

1) General Utility Services 2) Agency Services

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All commercial banks receive deposits from the public. The persons who entrust their savings to the
banker are called the deposits of the bank. All modern commercial banks try to attract as many deposits
from the public as they can. For attracting deposits, they offer a rate of interest on the deposits.
Depositors can withdraw the amount from their account in the bank either in the form of cash or through
cheques etc. Deposits accepted from the people by the banks are usually (mostly) in the form of:-
1) Savings Banks Account, 2) Current Deposit Accounts
3) Fixed Deposit Accounts 4) Recurring Deposit Accounts.

1) Savings Banks Accounts:

These accounts are meant (help) to encourage savings and at the same time to develop the savings
habit amongst public. Money can be deposited in this account at any time but it can not be
withdrawn more than two or three times a week. Banks pay interest on savings account @ 3.5% to
5% p.a. Money can be withdrawn from this account by issuing cheques or by using bank’s
withdrawal slip. This type accounts suits to salary earners and individuals.

2) Current Deposit Accounts:

Deposits in current account are also known as demand deposits. A customer can deposit his money
from this account any time during the banking business hours. The customer can also withdraw his
money from this account any time during the banking business hours.

Generally, no interest is given on money deposited in this account. Overdraft facility is available
only to current account holders. Current accounts are convenient to businessmen, societies, traders,
industrialists, institutions, companies etc..

The importance of a current account is that, a banker has always to keep ready cash to pay money on
demand.

3) Fixed Deposit Accounts

In this account a certain amount is deposited for a fixed period. No withdrawal or further deposit is
allowed during that period. After the expiry of the period, the amount with interest is returned to the
depositor. The rate of interest that is paid on this account is generally more than the interest given
on savings deposit account.

Generally, the rate of interest, paid on this account for different period is as under.

Period of Deposits Rate of Interest (p.a.)

15 days to 45 days 3.5
46 days to 90 days 4%
91 days to less than 6 months 5%
Six mounts to less than 9 months 5.5%
9 months to 1 year 6%
1 year to less than 2 years 6.5%
2 years to less than 3 years 7%
3 years to less than 5 years 7.5 %
5 years and above 8%

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The fixed deposit receipt issued bank is non-transferable and hence it is not a saleable asset. Both
form the point of view of the depositors and the bank, fixed deposit accounts are profitable as compared
to other two types of account.

4) Recurring Deposit Accounts:

This deposit account is introduced in recent days by commercial banks in India. It combines feature
of fixed deposit and savings deposits account. Like fixed deposits the amount can not be withdrawn
by cheques before maturity of a period but saving deposit the amount is deposited monthly in
multiplies of Rs. 5/- or Rs. 10/-.

The interest given on this account is higher than the interest given on saving account and lower than
fixed deposit account.

II) Advancing Loans }

III) Credit Creation } Refer Banking Paper-I
IV) Discounting of Bills } Functions of commercial bank

II SECONDARY FUNCTIONS (or Subsidiary Functions or Non-Banking Functions)

These functions are also called as subsidiary or supplementary services. By providing wide variety of
such services, banks attract more deposits and get increasing business.
These non-banking or subsidiary services can be classified in two main divisions.
A) Agency Services &
B) General Utility Services or miscellaneous services.

A) Agency Services:
The agency services are provided to regular customers of the bank. While providing agency services,
banker acts as the agent of the customer. Nominal service charges are taken from the customers
but valuable services are offered to them. While providing such services, bankers should work
strictly according to the instructions of the customers. Banker should insist [to urge, to press]
for instructions in writing from their customers.
a) Payment of insurance premium, subscriptions and contributions etc. of societies, clubs and
association etc.
b) Collection of salary and pension bills, dividend coupons, and interest payable on debentures and
other securities.
c) Transfer of funds of customers from one bank to another by means of bank drafts, mail or
telegraphic transfers.
d) Purchase and sale of stocks, shares, debentures and other securities as per instructions from the
customer.
e) Collection and payment of cheques, bills, and promissory notes etc.
f) Acting as an attorney or representative of clients.
g) Acting as a trustee, executor and administrator.
h) Execution [ to carry out] of standing orders/instructions e.g. payment of
electric bills, water charges, corporation taxes, telephone bills, LIC premium etc.
i) Collection of postal orders.
j) Filing of Income-Tax returns.

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B) General Utility Services (Miscellaneous Services):

Under utility or miscellaneous services may be included a number of functions performed by a modern
bank. These services are of general nature and any customer can take the benefit of the same. Banks
charge some commission or service charges for providing these services. Here, the banker does not act
as the agent of the customer but provides the services directly. Some important utility services are as
follows.

a) Receiving in safe custody customer’s valuables, ornaments and jewels, documents and important
deeds.
b) Issuing of letters of credit, circular notes, bank drafts, travelers’ cheques.
c) Underwriting loans to be raised by the Government, public bodies and corporations.
d) Compilation [a book made of selections] and distribution of statistics and business information
regarding trade, commerce and industry.
e) Promotion of savings and economy.
f) Acceptance of bills of exchange for customers.
g) Dealing in foreign exchange, foreign trade and business in connection with import-export
transactions.

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Banker Customer Relationship

Definition of a customer:
It is very essential to know who is a customer and when the relationship of a banker and a customer
starts.

The term `customer’ of a bank is not defined by law. A person who has an account in a bank is
considered its customer.

According to older view as expressed by Sir John Paget, there are some conditions to be satisfied in
order to become a customer.
1) He should have an account with the bank, whether fixed, savings or current.
2) The dealing with the banker should be of a banking nature
3) There must be habit of dealing between him and the bank.

In simple words: A person becomes a customer of a bank when he/she goes to the bank, with money or
a cheque and asks to have an account opened in his / her name and the bank accepted the money or the
cheque and is prepared to open an account in the name of that person, after that the person is entitled to
be called a customer of a bank.

Relationship between Banker and Customer:

The relationship between a banker and a customer is of two kinds.
A) The general relationship between banker & customer.
B) The special relationship between banker & customer.

Nature of Relationship:
The relationship between a banker and a customer is mainly that of a contract. The banker is the debtor
and the customer is the creditor as long as the customer’s funds remains with the bank in the way of
deposits.

A) General Relationship:
1) Relationship as Debtor & Creditor:
In the first place, the relationship is that of debtor and creditor, depending upon the position of
the account of the customer. If the customer has a deposit account with the bank, the Bank is the
debtor and the customer is the creditor. But, incase of an overdraft or a loan the customer
becomes the debtor while the bank is the creditor.
The loans and advances granted by a banker are usually secured by tangible assets of the
borrower. In that case the banker becomes a secured creditor of his customer.
In the case of debt between a customer and a banker, it may be noted that the money deposited
with a bank is absolutely at the disposal of the banker, which can be invested according to wish
of the banker. (Under the guidance of the Reserve Bank of India). The debt due from a banker
is not repayable, unless it is demanded by the customer, but no demand is necessary for a debt
due from the customer to the bank and it must be repaid on due date.
The customer (creditor) should make his demand at a proper place and in proper time. He can
demand for payment only at the branch where he is maintaining his account, unless special
arrangements have been made by the banker for payment at any other branch. Demand should
be made in proper manner. The demand should be made at the proper time i.e. during banking/
business hours of the bank.
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According to the legal definition of banking “Deposits are withdrawable by cheques, drafts and
order or otherwise. It means that the demand for refund of money deposited, must be made
though a cheque or an order (withdrawal slip/ written application etc)

2) Relationship as Trustee & Beneficiary:

Always banker is a debtor of his customer but in certain circumstances he acts as a trustee also.
Banker accepts securities or valuable from the customer for safe custody. The articles deposited
with the bank for safe custody continue to be owned by the customer. It is banker’s duty to
preserve them properly and hand over them to the customer. The banker does not get the
ownership of those articles, the ownership remains with the customer. The banker is to deal with
the articles as per the instructions of the customer. The banker is a trustee of the customer in
respect of cheques and bills of exchange deposited by the customer for collection till they are
collected and credited to the customer’s account.
Always customer is the owner of the valuables or securities or cheques etc deposited with the
bank and they are not available for distribution among the bank’s creditors in the event of the
bank’s liquidation and the bank remains a trustee of the customer.

E.g.: If the bank is liquidated before the cheque is released (encashed) the bank remains a
trustee of the customer.

[A trustee holds money or assets and performs certain functions for the benefit of some other
person called the beneficiary.]

E.g.: XYZ is a company. Mr. A is a trustee of the company XYZ. But Mr. A has no sufficient
time to act as a trustee of the company and so Mr. A appoints a bank as to act such and then Mr.
A becomes beneficiary.

3) Relationship as Agent & Principal:

A banker acts as an agent of his customer and performs a number of agency functions for the
convenience of his customer. E.g.: He purchases & sales securities on behalf of his customer,
collects cheques on his behalf and makes payments of various dues of his customers. i.e.
Insurance Premium, Rent & Taxes, collection of dividends, interests, pension, provident funds
etc.

In this case he acts for collection of interest as an agent of his customer according to the standing
instructions (orders) received from the customer.

4) Relationship as Lesser & Lessee:

When a customer hires as Safe Deposit Locker /Vault in the bank, Banker becomes the Lesser
and Customer becomes lessee.

5) Relationship as Bailee & Bailor:

When a customer keeps his articles into a safe custody of his banker, in this case the banker’s
position is the Bailee and Customer’s position is the Bailer.

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6) Indemnifier and Indemnified:

(Customer-Indemnifier and Banker-Indemnified or Indemnity Holder)
Indemnity: A contract by which one party promises to save the other from loss caused to him by
the conduct of any other person is called a contract of Indemnity. Sec. 124 (Indian Contract
Act1872),

In the case of banking, this relation happens in transactions of issue of the duplicate demand
draft, fixed deposit receipt etc. The underlaying point in these cases is that either party will
compensate the other of any loss arising from the wrong/excess payment.

Banker Customer Relationship Chart

Sr. Type of Transaction Banker Customer

No. Relationship
1 Acceptance of Deposit Debtor & Creditor
2 Overdraft / Loan / Cash Credit / Dr. Balance Creditor & Debtor
3 Collection of Cheques /bills on behalf of the customer Agent & Principal
4 Sale / Purchase of securities / shares on behalf of the customer Agent & Principal
5 Carrying on Standing Instructions (eg. Paying Insurance Premium / Agent & Principal
Electricity Bills / Corporation Tax / Telephone Bills etc.)
6 Purchaser of DD / MT / TT and Issuing Bank. Agent & Principal
7 Issuing Bank and Payee of DD / MT / TT. Trustee & Beneficiary
8 Contract of Safe Custody Articles with a bank Bailee & Bailer
9 Contract of Safe Deposit Locker / Vault Lessor & Lessee
10 Money Tendered to bank for it’s disposal as per the Customers’ Trustee & Beneficiary
Instructions.

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Special Types of Customer

A banking institution solicits [to ask for earnestly/to beg for] deposits of money from the public. An account
in a bank for this purpose may be opened by any person who is legally capable to enter into valid
contract and applies to the banker in the proper manner. It means, he follows the procedure laid down
by the banker and accepts the terms & conditions stipulated by the banker.

The banker, however, possesses the rights to reject an application received for opening an account, if he
is not satisfied with the person. It is very essential to know who is a customer and when the relationship
of a banker and a customer starts.

The term `customer’ of a bank is not defined by the law. A person who has an account in a bank is
considered its customer. According to older view as expressed by Sir John Paget, there are some
conditions to be satisfied in order to become a customer.
1) He should have an account with the bank, whether fixed, savings or current.
2) The dealing with the banker should be of a banking nature
3) There must be habit of dealing between him and the bank.

In simple words: A person becomes a customer of a bank when he/she goes to the bank, with money or
a cheque and asks to have an account opened in his / her name and the bank accepted the money or the
cheque and is prepared to open an account in the name of that person, after that the person is entitled to
be called a customer of a bank

Some persons like the minors, lunatics and drunkards (who take wine often) are not component
[ability/worthiness] to enter into valid contract. Some persons who act on behalf of others have
limitations on their powers to the contract. (e.g. the agent/trustees/executors etc.) Institutions like
schools, colleges, clubs, societies, corporate bodies etc. are the impersonal customers of a banker. The
authority, powers and functions of the persons managing these institutions are embodied [to include/to
incorporate] in their respective constitutions.

The banker should, therefore, take special care and precautions to ensure that the accounts of these
institutions are being conducted in accordance with the provisions of their respective charters
(constitutions).

The present chapter discusses the legal position of the special cases of a banker’s customers and the
necessary precautions that a prudent [careful, wise, cautious] banker should take while dealing with them.

The types of customers can be discussed as follows.

A) Minor B) Married Women

C) Pardanshin Women D) Lunatics, drunkard
E) Illiterate Person F) Insolvent Person
G) Joint Account Holders H) Joint stock company
I) Trust J) Partnership Firm

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A) MINOR

[A person who has not completed 18 years of age is a minor. If a guardian to this person or property is
appointed by the court of law before he completes 18 years he remains minor till he completes his 21
years. A Minor is an individual who has not completed 18 years of age under Indian law and 21 years
under the English law.]

According to the Indian Contract Act’1872, a minor is not capable to enter into a valid contract. If a
minor enters into a contract is treated as void [ not binding in law]. A contract for the supply of
necessaries of life to a minor is however a valid contract. In case of all other contracts, a minor may
repudiate [to reject] his promise or consent.

A banker should, therefore, be very careful in dealing with a minor and take the following precautions.

1. The banker may open a savings bank account (and not a current account) in the name of minor in
any of the following ways.
a) In the name of minor himself.
b) In the joint names of minor and his/her guardian.
c) In the name of guardian in the following style,
“`XYZ’, natural guardian of minor `ABC’”
In the case of a & b above, it is essential that a minor has to attain the age of 14 years and he can
read and write Hindi (National Language), English (International Language and regional
Language.

2. The bank records the date of birth of the minor as given by him (minor) or his/her guardian.

3. In the event of death of a minor the money will be repayable to his guardian. In case, the guardian
dies before the minor attains the majority, the balance should be paid to the minor on his/her
attaining majority or to a person appointed by the court as the guardian of the property of the minor.

4. In case the minor dies, the balance in the account is permitted to be withdrawn by the guardian and
in case of joint account the balance will be held at the absolute disposal of the guardian.

5. No risk is involved if an account is opened in the name of a minor, so long as the account is not
overdrawn by the minor. But if an overdraft or advance is granted to a minor even by a mistake, the
banker has no legal remedy to recover the amount from the minor. The assets of a minor pledged
with the banker as security for the advance taken by the minor are not legally available to the banker
because such pledge agreement itself is invalid. The banker shall have to return these securities to
the minor and he cannot exercise his right of sale in case of default by the minor.

6. A minor may draw, endorse or negotiate a cheque or a bill but he cannot be held liable on such
cheque or bill. He cannot be sued in respect of a bill accepted by him during his minority. Such a
bill or cheque never the less will be a valid instrument and all other parties will be liable in their
respective capacities. (Section 26 of N.I.Act’1881). The banker should therefore, be very cautious
in dealing a negotiable instrument, to which a minor is a party.

7. A minor can also be a partner in a partnership firm, but he has the right to repudiate [ to reject/to refuse
to acknowledge] his liability on attaining majority for the loans granted to the firm, while he was the
minor partner. So the banker must be careful in lending to a firm in which a minor is a partner.
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8. Legal provisions regarding guardianship of a minor.

The guardian of a minor may be as under -
a) A natural guardian
b) A testamentary guardian
c) A guardian appointed by court.

The first two types of guardians are governed by the provisions of the Hindu Minority &
Guardianship Act’1956 but guardian is appointed by the court under the Guardians and Wards
Act’1890.

a) Natural Guardian:
According to section 6 of the Hindu Minority and Guardianship Act’1956, in case of minor boy or
unmarried girl his/her father and after him the mother shall be the natural guardian. In case of
married girl (minor) her husband shall be the natural guardian. The term father or mother does not
include step-father or step-mother. If the father becomes a `Sanyasi’ or does not remain Hindu, he
shall not be entitled to remain as guardian. If father is alive and is not removed from guardianship
the mother does not become the natural guardian of her minor child.

b) Testamentary Guardian:
A Hindu father, who is entitled to act as the natural guardian of his minor, legitimate [children] may
by will, appoint a guardian for any of them to look after the minor and his properly. Such guardian
acts after the death of the minor’s father or mother.

c) Guardian Appointed by Court:

A guardian may be appointed by the Court under the Guardian and Wards Act’1890. But court shall
not be authorised to appoint or declare a guardian of the person of a minor, if his/her father is alive
and is not in the opinion of the court, unfit to be guardian of the person of the minor. Similar is the
case of minor married girl, whose husband is not in the opinion of the court, unfit to be a guardian of
her person.

B) MARRIED WOMEN:
A married woman is competent to enter into a valid contract. The banker may, therefore, open an
account in the name of married woman. Her husband will not be liable except in the following
circumstances.
a) If the loan is taken with his consent or authority and
b) If the debt is taken for the supply of necessaries of life to the wife, in case the husband defaults
in supplying the same to her.

The husband shall not be liable for the debts taken by his wife in other circumstances. The creditor
(Banker) may in that case recover his debt out of the personal assets of the married woman. While
granting a loan to a married woman the banker should therefore, examine her own assets and ensure
that the same is sufficient to cover the amount of the loan, if she fails to repay the same.

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C) PARDANSHIN WOMAN:
A pardanshin woman observes complete seclusion [retirement] in accordance with the custom of her
own community. She does not deal with the people, other than the members of her own family. As
she remains completely secluded a presumption in law exists that-
a) Any contract entered into by her, might have been subject to undue influence or
b) The same (the contract) might not have been made with her free will and with full understanding
of what the contract actually means.

Thus a contract entered into by a pardanshin woman is not a contract free from all defects. The other
party to the contract shall have to prove that the contract with her was free from the above-
mentioned defects in order to enforce the same.

In order that the lady may not set aside any contract on the ground of undue influence, the banker
will have to prove that –
a) The terms of the contract are fair and reasonable.
b) The transaction is real and bonafide.
c) The lady had an independent advice in the matter.
d) The deed was explained to her and
e) She understood it and its effects on her interest in full.

The banker should, therefore, take due precaution in opening an account in the name of pardanshin
woman. The identity of such a lady is not possible to determine and hence therefore, usually the
banks refuse to open an account in her name.

D) LUNATICS:
According to 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 judgment as to its effect upon his interest.
(Section 12 of I. C. Act’1872) It is important that he should be of sound mind at the time, when 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 can not enter into a valid contract, when he is of unsound mind. A
contract entered into by a person of unsound mind is void [ not binding in law] contract,
according to the Indian Contract Act’1872.

The banker should, therefore, does not open an account in the name of a person who is of unsound
mind.

DRUNKARD PERSON:
According to the Indian Contract Act’1872, a person of under influence of alcohol or any illegal
drugs, not competent to enter into a valid contract. A person is said to be of competent for the
purpose of making a contract, if he is free from any alcoholic or illegal drugs influence and capable
of understanding it and of forming a rational judgment as to its effect upon his interest. It is
important that he should be of sound mind at the time, when he enters into a contract. If a person
pretends that as a result of intoxication (naSaa À QauMdI´, he was not capable of understanding the nature
and terms of the contract at the time of borrowing or withdrawing money from the bank accoount,
the contract may be void and the bank may lose money because the bankers looses the statutory
protection. A transaction made with a drunkard is one the same line as transaction with a lunatic.
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E) ILLITERATE PERSON: (Uneducated Person)

Illiterate persons can not sign their names and hence the bankers take their thumb impression of left
hand thumb as a substitute for the signature and also a copy of their recent photograph, attested by
first class magistrate for the purpose of identification.

An illiterate person may open an account with a bank. The banker should take the following steps
(precautions) while opening and operating his/her account.

a) Thumb Impression:
The left-hand thumb impression of the depositor should be obtained on the account opening form
and on the specimen signature card in the presence of an authorised supervising officer of the
bank.

b) Permanent Identification Mark:

Where possible, brief details of one or two permanent identification marks of the depositor
should be noted on the account opening form and specimen signature card under the
authorisation of an authorised official. (E.g. a mole on neck, face; colour of eye etc.)

c) Recent Photograph:
Two copies of the passport size photographs of the depositor should be obtained and got renewed
every three years. One copy of the photograph will be pasted on the account opening form and
another on the specimen signature card.

d) General Information:
Implications and conditions for operation of the account should be explained to the depositor by
an authorised official. [He should append { to add, to attach} a certificate to the effect that he
had done so on the account opening form] Withdrawals from the account should generally
allowed only when the person comes personally and produces his/her passbook to the authorised
bank official.

F) INSOLVENT PERSON:
An insolvent is a person who is unable to meet his debts fully. He has been declared insolvent
under the insolvency law and he has no contractual capacity so long as he continues to be to be
un-discharged insolvent. The bank should not grant any advance to such person. Also the bank
should not grant any withdrawal or payment from his deposit account except the tax liability.
Once the customer becomes insolvent as per the law all his assets and liabilities are given into
the custody of a person appointed as an Official Receiver. If the existence borrower becomes an
insolvent, the bank should prefer his charge over the security lodged by the borrower and if the
advance is unsecured, the bank should submit its claim among the general creditors of the
insolvent borrower to the ‘Official Receiver’.

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 : 19 :

G) JOINT ACCOUNTS:
When two or more persons open an account jointly, it is called a joint account.
The banker should take the following precautions while opening and operating such account.

a) The application for opening a joint account must be signed by all the persons intending to
open a joint account.

b) The banker should obtain clear instructions in writing, signed by all the joint account holders
regarding the operation of the account. (E.g. authority for withdrawal etc.)

c) The mandate must include the name of the person who is authorised to operate the joint
account and must specify the extent to which they are authorised to take loans and advances
or to pledge the securities etc. In absence of such instructions, the banker should honor only
those cheques, which bear the signatures of all persons in whose name the account stands.

d) The joint account holder who is authorised to operate the joint account, himself, alone can
not appoint an agent or attorney to operate the account on his behalf. Such attorney of agent
may be appointed with the consent of all the joint account holders.

e) Any joint account holder (including the one who is not authorised to operate the account) can
stop payment of a cheque issued on a joint account. Banker must honour such order even if
an agent or attorney has been appointed to operate the account.

f) The full name of the account holders must be given in all the documents furnished to the
banker, even if the account is to be operated upon by one or few of the joint account holders.

g) The banker should also take a mandate to ascertain whether the persons operating the joint
account are also authorised to overdraw account

h) The authority to operate the account can be revoked by any of the persons giving such
authority. It is automatically revoked if the latter dies, becomes bankrupt or unsound mind.
The banker must stop payment in such cases.

i) The persons opening a joint account are also required to give a mandate, in the application
form itself, specifying the person to whom the balance in the account shall be payable.

The balance in the joint account shall be payable.

i) Both or all of them (jt. account holders) or the survivor or survivors of them or
ii) Either any one or more of them (Jt. account holders) or the survivor or survivors of them.

j) Death of joint account holder: In case of death of one or more joint account holders, the
balance in the account will vest [power, authority] with the survivor or survivors. On the
death of all joint account holders, who dies last, provided that no instructions to the contrary
[opposite] have been given.

k) In the case of insolvency of a joint account holder, the mandate given to the bank regarding
operating the joint account shall then be made on the joint direction of the official receiver of
the insolvent account holders. Bank, usually in such a case, closes the old account and open
a new account to record transactions after insolvency.

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 : 20 :

H) JOINT STOCK COMPANY

A company is brought into existence and controlled by the regulations of the Indian Companies
Act, 1956 which came into force on 1st April, 1956. A company is a legal person having entity
separate from the shareholders who own it. It has a perpetual succession and common seal.
There are two classes of companies i.e. Private Limited Company and Public Limited Company.

Private Limited Company is one where –

1. The minimum number of share holders is two and maximum number is 50 exclusing
employees and ex-employees.
2. The transfer of shares is restricted.
3. The invitation to the public to subscribe to its shares or debentures is prohibited, and
4. The name of the company should end with the words as ‘Private Limited’ or ‘Pvt. Ltd.’.

Public Limited Company:

A company which is not a private limited company is a Public Limited Company. But it must
comply with the following additional requirement.
1. The minimum number of shareholders should be seven with no maximum limit.
2. It should be able to appeal to the general public by inviting them to subscribe for its shares.
3. Its name should end with the words ‘Limited’ or ‘Ltd.’

When the company approaches to the bank for opening of an account, the banker should ask
them to submit the following documents long with the application form.

1) Address Proof 2) Tax Registration Certificates (GST CST etc.)

3) ID Proof of the directors 4) Income Tax Registration Certificates
5) Mandate 6) Copy resolution passed in the AGM
7) Memorandum of Association 8) Articles of Association
9) Certificate of incorporation 10) Certificate of Commencement of Business
11) Shop Act License etc.

1] MEMORANDUM OF ASSOCIATION:
This document is the most important document of the company. It is the constitution of the
company. The first step in the formation of the company is to prepare a Memorandum of
Association. It is the charter of the company and defines its powers. It also defines the
relationship between the company and with the outside world. (Its purpose is to enable
shareholders and creditors and those who deal with company to know what is the permitted
range of the enterprise. It is generally regarded as an unalterable charter being the very
basis of the company.)

Thus the Memorandum of Association is a very important document. Every company private
or public, has to prepare the Memorandum of Association. The Memorandum of
Association must be printed and suitably divided into paragraphs which should be numbered
serially. It is necessary to mention the name, Occupation and address of each signatory to the
document. The witness has also to add his name, occupation and address. The
Memorandum must be dully dated and stamped as required under the Indian Stamp Act.

.
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 : 21 :

Form and Contents of the Memorandum of Association:

The Memorandum of Association is made up of 6 clauses. The following are the clauses of
the Memorandum.

1. The Name Clause

2. The Domicile Clause
3. The Objects Clause
4. The Liability Clause
5. The Capital Clause &
6. The Association and Subscription Clause.

1) The Name Clause

This clause mentions the name of the company. There are various provisions under the
Companies Act regarding the name of Company.
a) The name of a Public company must end with the word “Limited”
b) The Name of private company must end with the name “Private Limited”
c) It is not necessary to include the word “Company” in the name of a company.
d) The company cannot adopt the name of any other existing company or a name similar to that
of any existing company.
e) The name should not use the words like Emperor, King, Royal, Imperial, President of India
or any words that denote the government support or the patronage of the ruling power.

2) The Domicile Clause: (for the companies registered office address)

This clause mentions the State in which the registered office of the company is to be situated.
This helps to determine its domicile, nationality and jurisdiction [ ] of the court
under which it comes.

Every company must have its registered office from the date on which it commences its business
or within thirty days after the date of incorporation, whichever is earlier. The Registrar must be
informed about the exact address of the registered office. The address must be painted outside
its registered office and made to appear on the seal and on all its official documents. If the
domicile clause is to be altered, a special resolution is to be passed in the general meeting and a
copy of such a resolution is to be filed with the Registrar within 30 days of passing of such a
resolution. The company has to obtain the sanction of the Company Law Board. The order is to
be filed with the registrar of both the states after receiving the transfer certificate from the
Registrar. The change can thus, be brought into effect.

3) The Object Clause:

This Clause states the objects of the company. It also states the sphere of operation and scope of
the company. It lays down he boundaries for the operations and the powers of the company.
The shareholders also come o know as to how and where their investment is employed.
According to the amendment of 1965, the objects of the company must be divided into two sub-
clauses as a) The main objects and b) The Other Objects (subsidiary objects).

a) The Main Objects: Under This sub-clause the main objects to be pursued by the company
on its incorporation and objects incidental and ancillary to the attainment of the main objects,
must be stated.
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 : 22 :

b) The Other Objects (Subsidiary): Under this sub-clause, other objects of the company not
stated in the “Main Objects ” clause are to be stated.
[For example, a sugar factory may have the production of sugar as the main object and
processing of by-products like molasses, [ ] jaggery, [
] bug-gas etc. will be the subsidiary objects. However, to carry out these objectives, an
ordinary resolution or special resolution together with the permission from the Central
Government is necessary.]

While selecting the objects, the company has to see that they are not illegal, not opposed to
public policy nor contradictory to the Companies Act or any other law.

[ a) The objects of the company must not be illegal

b) They must not be against the provisions of the Companies Act
c) They must not be against the public policy
d) They must be stated clearly and definitely.]

4) The Liability Clause:

This clause states that the liability of the members is limited to the amount, if any, unpaid on
their shares. In case of a company limited by shares, the liability of members of the company is
limited to the face value of the shares purchased by them. In the case of a company limited by
guarantee, the amount which the members undertake to contribute to the assets of the company
in the event of its winding up. The company may make the liability of the directors unlimited if
it is agreed by the directors. Unlimited companies do not mention this clause in the
Memorandum of Association because their liability is unlimited.

5) The Capital Clause:

This clause mentions the maximum capital of the company and its division into shares of a fixed
denomination. It is to be registered with the Registrar. This capital is also known as Authorized
capital or Registered Capital. The authorized capital is fixed at a high level so that the issued
capital can be increased as and when required. In this clause, the details of the shares issued
whether equity shares or preference shares and the face value of the shares must be stated.

An unlimited company having a share capital is not required to have the capital clause in the
Memorandum. The Articles of Association of such company state the amount of registered
capital.

6) The Association or Subscription Clause:

This clause states that the person who sign the Memorandum are desirous of forming themselves
into a company to achieve the objects mentioned in the Memorandum and that they agree to take
up the number of shares in the company, mentioned against their names in the memorandum. At
least 7 members in the case of a public company and at least 2 members in the case of a private
company are required to sign the memorandum. The signatories or subscribers to the
Memorandum are the original members of the company. They usually act as first directors of the
company. Their signatures are attested by at least one witness who cannot be one of the
subscribers. Each subscriber has to purchase at least one share. In the case of a company limited
by guarantee or having unlimited liability and having no share capital, this condition does not
apply.
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2] ARTICLES OF ASSOCIATION:

The Articles of Association is a document which regulates the internal management and conduct
of business of a company. The Articles of Association contains a set of rules and regulations
governing the internal management of the company. The Articles of Association are also signed
by the subscribers/members to the Memorandum and are complimentary to the memorandum.

Contents of Articles of Association:

1. Amount of share capital, its division into different classes.
2. Rights of shareholders, variation of these rights.
3. Allotment and calls on shares.
4. Issuing share certificates.
5. Conversion of shares into stock.
6. Transfer and transmission of shares, lean on shares.
7. Forfeiture and reissue of shares.
8. Payment of commission to underwriters.
9. Re-organisation, consolidation and alteration of capital.
10. Adoption of preliminary contracts.
11. Conducting Board & General Meetings.
12. Voting rights of members, proxies and polls.
13. Payments of dividends and creation of reserves.
14. Appointments, powers, duties, qualifications, remuneration, etc. of directors, managing
directors, manager, secretary and others.
15. Appoints and remuneration of Auditors.
16. Maintenance of accounts and their audit.
17. Borrowing powers of directors.
18. Use of common seal of the company.
19. Capitalisation of profits.
20. Arbitration provisions.
21. Winding up.

Finally, the Articles are expected not to contain anything contrary to the law of the land, the
Companies act, the public policy and the provisions in the Memorandum of Association.

I) TRUST:
A trust is body or social organisation which is established through a document called ‘Trust
Deed’ / ‘Trust Letter’ as per the provisions of the Indian Trust Act 1882. After formation it
should be registered with the charity commissioner of similar authority.

The trust is managed by the trustees to whom the property is entrusted to deal with for the
benefits of others as per the instructions given by the creator of the trust.
The trustees have no individual powers. They have to act jointly and cannot delegate the powers
to other person. They have no implied powers to borrow against the trust property nor can they
pledge or mortgage the same unless it is specifically authorized to do so by the trust deed.

A bank account opened for the benefit of the ‘Trust’ is known as trust’s account. An account can
be opened in the name of the trust directly. Following documents are required to open a bank
account in the name of a trust.
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 : 24 :

1) Trust deed / letter 2) Certificates of Registration issued by Charity Commissioner

3) Address Proof of trust 4) ID & Address proof of trustees
5) Mandate 6) Copy resolution passed in the AGM of the trustees, etc.

The bank can grant an advance only after a proper scrutiny of the trust deed and after taking a
legal opinion in case of need. As a precautionary measure, the bank grants the advance only
when the trustees are respectable persons and that too after obtaining their personal guarantee.

J) PARTNERSHIP FIRM:
A partnership has been defined u/s 4 of the Indian Partnership Act 1932 as “It is a relation
between persons who have agreed to share the profits of a business carried on by all or any
of them acting for all”. A partnership firm is formed through the ‘Partnership Deed. The
rights as well as the obligations of the partnership firm are those of the partners. As per section
25 of the Indian Partnership Act 1932, all partners are jointly and severally liable for loans taken
by them. Also the banker should not grant any advance where one or more partners are
minor/minors.

Following documents are required to open a bank account in the name of the partnership firm.
1) Partnership Deed / Partnership Letter 2) Tax Registration Certificates (GST CST etc.)
3) Income Tax Registration Certificates 4) Address Proof of partnership firm
5) Mandate 5) ID Proof & address proof of all partners
7) Shop Act License etc.

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BALANCE SHEET

The financial strength of a bank is measured from it’s Balance Sheet. With the help of the balance
sheet, we can understand that how do the banks earn money, how they invest it, and such other facts
about the transactions of a bank. The balance sheet is the mirror of the bank’s position. It is usually
prepared for a period of six months or one with specific reference to its liabilities and distribution of
assets.

A Balance sheet is a consolidated statement of the total business conducted by a bank during a
particular period.

Under section 29 of the Banking Regulation Act 1949, every banking company has to prepare Balance
Sheet and Profit & Loss account at the expiry of each year. The Balance Sheet must be audited by a
duly qualified auditor.

Thus a balance sheet of a bank is prepared under section 29, as per ‘The Third Schedule’ and ‘Form –
A’, of the Banking Regulation Act’1949. The Profit & Loss account of the bank is prepared as per the
same provision but under the ‘Form-B’.

Important items appearing in the balance sheets:

Liability Side:
The liability side shows the sources of funds of a bank. It is a legal obligation on the bank to return all
such funds taken from the depositors on deposit accounts and loans taken from the others. Hence the
funds collected are rightly treated as liabilities on the bank, because it is public’s money.

A.1 Share Capital:

The capital is the first important item appearing on the liability side of the balance sheets. The
commercial banks operate as a joint stock companies and has legal right to collect capital through
the issue of shares. The amount contributed through share capital usually not returned to the share
holders. But in the case of liquidation the bank is liable to pay the amount of share capital to the
share holders. The bank has to obtain permission to collect the required capital from the RBI.

Share means a small unit of capital purchased by a person. He gets bonus on the shares if the
company is running in profit at a certain rate which is declared and accepted in the annual general
meeting of the members of the company. The share holders are the members of the company and
hence they are treated as the owner of the company.

a) Authorised Capital
It is a capital with which every company is registered and permitted to collect the capital up to
this extent.

b) Issued Capital:
This is a part of the authorised capital which is issued to the public for subscription.

c) Subscribed Capital:
Subscribed capital is a part of the issued capital which is subscribed by the public through their
acceptance.
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d) Called up capital:
It is a capital on which calls are made to the members to pay money to the company. Usually 4
calls are made by the company to the members. E.g. 1st call @ 25%, 2nd call @ 25%, 3rd call
@ 25% and final call @ 25% on face value of the share.

e) Paid up capital:
Paid up capital is the capital on which actual amount is received from the share holders.

A.2 Reserve & Reserve Fund:

The banking company creates such reserve and reserve funds out of the profits secured from time
to time. Such funds bring financial stability to the bank and as such it is absolutely necessary.

Under the Banking Regulation Act every bank is under legal obligation to transfer 20% of the net
profits towards a Reserve fund every year before the declaration of the dividend on shares.
A provision for bad and doubtful debts is also made under this head. Examples : Statutory
Reserve, Capital Reserve, revenue and other reserves etc.

A.3 Principal/Subsidiary State partnership:

The commercial banks accepts the amount of share capitals of the Central / State Co-operative
Banks, Primary Agricultural Credit Societies, and other credit societies which payable to them on
their demand or on winding up of them.

A.4 Deposits and other accounts:

Perhaps the largest amount of funds collected by the banks is in the form of deposits. So this is a
very important item in the balance sheet. Normally deposits are of four kinds. i.e. Savings
Deposits, Current Deposits, Fixed Deposits, and Recurring Deposits.. As the mounts are received
on these deposit accounts, are repayable to the depositors either on demand or on maturity.
Therefore the deposits are termed as the liability of the bank. These deposits are received from the
public, individuals, State Co-operative Bank, Credit Societies etc.

Savings Deposit: people, having a limited capacity to save normally deposits / invest their money
under these deposits. Money up to a certain limit can be withdrawn, by the depositor and as when
required. The rate of interest on such deposits is less than on fixed / recurring deposits.

Current Deposits: The depositor is entitled to withdraw the money deposited, in these types of
accounts at any time. One can also deposit the money and at any time. This type of deposit is
extremely suitable for traders and businessmen. These deposits are used like money. Normally
no interest is given on these deposits

Fixed Deposits: These deposits are kept for a definite period of time by the depositors. The longer
period of the deposits gives the higher rate of interest. Banks can use these deposits for that period
as the amount can not be withdrawn by the customer till the maturity date.

Recurring Deposits: This deposit account is introduced in recent days by commercial banks in
India. It combines feature of fixed deposit and savings deposits account. Like fixed deposits the
amount can not be withdrawn by cheques before maturity of a period but saving deposit the
amount is deposited monthly in multiplies of Rs. 5/- or Rs. 10/-.

The interest given on this account is higher than the interest given on saving account and lower
than fixed deposit account.
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A.5 Borrowings:
The commercial bank obtains loans and advances (borrowing) from the RBI, other commercial
banks, State or Central Co-operative banks in the form of Cash Credits, Over Drafts, Term loans
(short term, medium term, long term) against the securities of tangible assets like government and
other approved securities to meet the need of additional cash.

A.6 Bills for collection being bills receivable as per contra:

The commercial banks receive bills of exchange for collection on behalf of their customers. After
receiving the proceeds of the bills the concern customer’s account is credited. This contra entry is
made under this head.

A.7 Branch adjustments:

Under this account inter branch adjustments regarding payment made by the other branches of the
same bank are shown. For example, payment of DD, Pay Order / Bankers cheque etc.

A.8 Overdue Interest Reserve:

This account shows the amount of adjustment made for the reserve of overdue interest payable on
borrowing subject to the changes in the interest rate by the lending bankers.

A.9 Interest payable

This account shows the amount of interest payable on various deposit accounts. Usually the
interest is credited to savings bank account twice in the year i.e. in August/September and
February/March.

A.10 Other Liabilities:

This account states the amount of
(i) Bills payable (under the rediscounting of bills with the RBI)
(ii) Unclaimed dividends (to be payable to its own share holders which are not claimed up to
the date of the preparation of the balance sheet)
(iii) Liabilities under Suspense Account
iv) Liabilities of Sundries Expenses.

A.11 Profit and Loss:

This account head states the amount of profit as per the last year’s balance sheet with addition of
current years profit if any.

B) ASSET SIDE
The asset side shows how funds are invested or employed by the bank. The bank collects money
from the public and has a moral responsibility to use it with maximum care. The interest of the
share holder and the depositors must be protected. It has also to consider the social and
economic needs of the country, while investing the funds, i.e. the public’s money.

B.1 Cash in Hand

Every bank has to keep a certain amount of cash to meet the day-to-day demands of the
depositors and its own expenses. Besides that every bank has to keep a deposit with the RBI
according to the prescribed percentage of the total deposits collected by the bank.

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B.2 Balances with other banks:

Some banks keep some amount of deposit in form of Savings Bank Deposits, Current Deposit
Account, and Fixed Deposit account. Some banks keep with other banks viz. State Bank of India,
Other Nationalised Banks, State / Central Co-operative bank, etc..

B.3 Money at call and short Notice:

Every bank lends funds which can be recovered on demand or on a short notice. All such loans are
called call money or money at call. These loans are given for a period of 24 hours to seven days.

B-4 Investments:
Banks invest their surplus money in various types of Shares, Debentures, Government Securities /
bonds etc. The main aim is to get as much profits as possible. But banks prefer Government
Securities, Shares or Bonds etc. because these can be easily disposed off in the open market if they
need money.

Debenture is a bond issued under section 1 of the Indian Companies Act 1956. It is an
acknowledgement of the debt due by the company and promising to repay the debt on or after a
fixed time and mean time to pay interest thereon at a fixed date. Thus against the investment of
money in debentures the debenture holders get interest at the fixed rate. Therefore the debenture
holders are the creditors of the company.

B.5 Loans and Advances:

All banks give loans and advances to the needy borrowers in form of Cash Credit, Over Draft,
Term loans and so on.

The Overdraft facility is usually granted to the current account holder for the period of six months
with slightly higher rate of interest.

The Cash Credit facility is usually granted to the customer for a period one year which can be
renewed again and again as per the agreement of the banker and the customer.

The term loans are granted as stated below.

Short term loan – up to 15 months.
Medium term loans – From 15 months to 5 years.
Long-term loans – over 5 years.

The loans and advances granted to the borrowers are the asset of the company hence all the loans
and advances are shown on the asset side of the balance sheet of a bank.

B.6 Interest Receivable:

This account shows the amount of interest payable on various loan accounts which is overdue and
considered for bad and doubtful of recovery.

B-7 Branch adjustments:

Under this account inter branch adjustments regarding the amounts paid by the bank against the
instruments drawn by the other branches / banks in favour of beneficiaries are shown. For
example, payment of DD, Pay Order / Bankers cheque etc. drawn by the other branches / banks.

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B.8 Bills receivable being bills for collection as per contra…..

The commercial banks receive bills of exchange for collection on behalf of their customers.
After receiving the proceeds of the bills the concern customer account is credited. This contra
entry is made under this head.

B.9 Premises :
Under this account head the cost of the premises of the bank is shown after
1) Addition during the year,
2) Deductions during the year and
3) Deduction of depreciation to the date of the balance sheet.

B.10 Other Assets (including furniture and fixtures)

Other assets in which bank’s money is invested, [such as furniture, fixture, electric & electronic
instruments (telephone system and computers etc.)] are shown on the asset side under the head
Other Assets. The amount of the other assets is revalued by -
1) Additions during the year
2) Deductions during the year
3) Depreciation to date

B.11 Non-banking Assets [acquired satisfaction of claims (stating mode of valuation)]

Non-banking assets in which bank’s money is invested, excluding the assets mentioned as above
is shown on the asset side under the Non-Banking Assets. The amount of the other assets is
revalued by as a certain mode of valuation.

B.12 Profit and Loss

This account head states the amount of loss faced by the banking company up to the date of the
Balance Sheet if any.

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"THE THIRD SCHEDULE"

[See Sec. 29]
FORM - 'A'
BALANCE SHEET
As on 31st March, ………..

Capital and Liabilities Amount Properties and Assets Amount

1 Capital 1 Cash -----

a) Authorised Share Capital -----
b) Issued Capital ----- 2 Balances with other banks -----
c) Subscribed Capital -----
d) Called up Capital ----- 3 Money at call and short notice -----
e) Paid up Capital -----
4 Investments -----
2 Reserve Fund and other Reserves -----
5 Loans and Advance -----
3 Principal / Subsidiary State -----
Partnership 6 Interest receivable -----

4 Deposits and other accounts ----- 7 Bills receivable being bills for -----
collection as per contra
5 Borrowings -----
8 Branch adjustments -----
6 Bills for collection Being bills -----
receivable as per contra 9 Premises -------- -----
Less Depreciation --------
7 Branch adjustments -----
10 Furniture & Fixtures -------- -----
8 Overdue Interest Reserve ----- Less Depreciation --------

9 Interest payable ----- 11 Other assets ------- -----

(to be specified)
10 Other Liabilities ----- Less Depreciation --------
a) Bills Payable -----
b) Unclaimed Dividend 12 Non banking assets acquired -----
c) Suspense satisfaction of claims
d) Sundries (stating mode of valuation)

11 Profit and Loss (Profit) ----- 13 Profit and Loss Account (Loss) -----

TOTAL ----- TOTAL -----

CONTINGENT LIABILITIES
i) Outstanding liabilities for Guarantees
issued
ii) Others
TOTAL ----- TOTAL -----

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SIMPLE BANKING OPERATIONS

VARIOUS TYPES OF DEPOSIT ACCOUNT

Accepting deposits is an important function of a commercial bank. Because banks mainly depend on the
funds deposited with them by the public. By offering various types of deposits accounts, banks mobilize
the savings of the community. A bank’s financial strength is measured by its ability to attract the
various types of deposits. People who have surplus money deposit the same with a bank for safe-
keeping. The commercial banks not only protect deposits but also give interest on such deposits.

Bank receives deposits from the following four types of deposit accounts.
I) Current Account II) Savings Bank Account
III) Fixed Deposit Account IV) Recurring Deposit Account.

Now, let us see how the abovementioned accounts are get opened, operated and closed.

I) Current Accounts:
A current account is a running and active account which may be operated upon any number of times
during a working day. There is no restriction on the number and the amount of withdrawals
from a current account. As the banker is under an obligation to repay these deposits on demand,
they are called demand liabilities of a banker. To meet such liabilities, the banker keeps sufficient
cash reserves against such deposits vis-à-vis the savings and fixed deposits. Current accounts suit
the requirements of the businessmen, joint stock companies, institutions, partnership firms, traders,
public authorities and public corporations etc., whose banking transactions happen to be numerous
on every working day. Special characteristics of the current accounts are as follows

1) A current account is meant for the convenience of his customers, who are relieved of the task of
handling cash themselves and to take the risk inherent therein. Thus the primary object of a
current account differs from the object of other deposit accounts which are meant to solicit the
savings of the people.

2) As the banker undertakes to make payments and to collect the bills, drafts, cheques etc, any
number of times daily, the operating cost, i.e. the cost of bank personnel, involved in current
account is considerable. It is therefore, customary for the banks not to pay interest on the credit
balance in the current accounts. The Reserve Bank of India’s directive prohibits the payment of
interest on current accounts or on deposits up to 14 days or deposits subject to withdrawal or
repayment by notice of 14 days or less, except with the prior approval of the Reserve Bank No
countervailing interest is payable on any current account maintained by a borrower with any
bank.

3) Banks charge incidental charges on such accounts in some cases. The State Bank makes no
charge for keeping an account provided the balance maintained is sufficient to compensate the
bank for the work involved. In case of un-remunerative accounts involving lot of work but
without the maintenance of sufficient balances, the banker charges accidental expenses from the
customer.

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4) A current account carries certain privileges which are not given to a savings bank account-
holder e.g.
a) Third Party cheques and cheques with endorsements may be deposited in the current
account for collection and credit.
b) Overdraft facilities are given in case of current account only.
c) The loans and advances granted by banks to their customers are not given in the form of
cash but through the current accounts. Current accounts thus earn interest on all types of
advances granted by the banker.

II) Savings Bank Account

A savings bank account is meant for the people of the lower and middle classes who wish to save a
part of their current incomes to meet their future needs and also intend to earn an income from their
savings. The banks, therefore, impose certain restrictions on the savings bank account and also
offer a reasonable rate of interest. The need of keeping cash reserves against such deposits is
comparatively larger vis-à-vis the fixed deposits but smaller of withdrawals. With the extension of
banking facilities during the last decade and the growth of banking habit amongst the people, the
savings deposits of all scheduled commercial banks have gone up subsequently.

Following are the main features of this account.

a) Habit of Savings: As the name indicates, the accounts are opened for the purpose of
mobilising savings. These accounts are meant to encourage savings and to develop the
habit of thrift {- habit of savings).
b) Restrictions on withdrawals: Though money can be deposited in this account, as often as
the depositor wishes, it can not be withdrawn more than twice or thrice a week. At present
25 withdrawals are permitted quarterly by most of the banks. Rules in this regard may vary
from bank to bank from time to time and from place to place.
c) This account can be opened even by depositing Rs. 500/-.
d) The rate of interest payable by the banks on this account is generally prescribed by the
Central Bank of the country. It is generally 4% to 5% p.a. The current rate of interest
payable on savings bank account is 3.5% p.a. Interest is calculated on minimum monthly
balances at credit of the account, generally between the close of the sixth day and the last day
of each calendar month. (Interest may be paid twice a year.)
e) Money from this account can be withdrawn by cheques or by using bank’s withdrawal slips.
f) No limit is prescribed in India for the maximum amount that may be held in savings bank
account. But banks in India allow interests on a maximum balance of Rs. one lakh only in
one SB account.
g) Savings account is not given overdraft facilities like current accounts.
h) This account is more suitable to salary earners, wage earners and persons of limited means.
i) Other banking services are also provided to savings bank account holders.

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A) OPENING OF A CURRENT ACCOUNT AND A SAVINGS BANK ACCOUNT:

By opening an account with the banker, customer enters into relationship with a banker. The
following formalities are required to be completed before an account is opened in a bank.

1) Application in the prescribed form:

The request for opening a current account and or savings account is made through the prescribed
application form of the bank concerned. Banks provide separate application forms for opening
current or savings accounts for individuals, partnership firms and companies. The applicant is
required to mention his name, occupation, full address, specimen signature, information and
signature of referee, etc. He has also to declare that he shall comply with the bank rules in force
from time to time for the conduct of the account. It means that the rules prevalent at the time to
opening

2) Introduction of the applicant:

Before opening a current or savings account in the name of an intending customer the banker get
the true identity of the applicant in order to ensure that he is a respectable person. The banker thus
reserves the right not to open an account in the name of a person whose true identity has not been
established pr who is considered to be an unfit person e.g. a thief, robber etc. The applicant is also
required to furnish in the application form, the name and address along with account number of the
referee from whom the bank may make enquiries regarding the character, integrity and
respectability of the applicant. The applicant may be introduced to the banker in the three ways.

a) Introduction by a respectable person (existing customer of the same branch):

Either a customer of the same branch or who is known to the staff of the branch, introduces him
by signing on the application form as a referee with full name, address, account number etc.

b) Introduction by a respectable person:

The applicant may give the name of any respectable person or that of another bank as referee.
The banker may inquire from the said referee about the identity, honesty, respectability and
financial standing of the applicant and his past experience in dealing with the applicant. If the
referee does not send the reply, the banker should not open the account unless satisfactory
introduction is given otherwise.

c) The Reserve Bank of India has advised the banks that pay-books or postal identification cards
or identity cards of armed forces / police / government departments / pass ports may be
considered sufficient for establishing the identity of the persons desiring to open deposit
accounts without cheques book facility.

3) Specimen Signature on Specimen Signature Card:

The applicant is required to give his specimen signature on a prescribed form, generally a card for
the purpose of bank’s record. These signature-cards are preserved by the banker. The signature of
the account holder given on the cheque, withdrawal slip and other important documents are
compared with the signature given on the specimen signature card. If the formatter differs from the
latter, the banker can refuse to pay money against the withdrawal slip or cheque. Thus the
specimen signature card protects the banker against the forgery. He should be very careful in
comparing the signature of the customer given on cheque or withdrawal slip with his specimen
signature.

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4) Mandate:
In case a customer, desires to get his account operated by another person, the banker will obtain a
mandate in writing to that effect as well as the specimen signature of the person in whose favour
the mandate is given. “Mandate is just a simple letter of authority given by an account holder to
the bank to allow certain named person to operate his account on his behalf.”

5) Nomination:
The banker should ask the applicant to fill up the nomination form as it is now compulsory as per
the rules. In case the customer dies, the amount lying in the account is given to the nominee as per
the nomination.

6) Necessary Documents.
The necessary documents such as copy of PAN/GIR Number, identity & residential proof, form
no. 60 if the applicant doesn’t have PAN/GIR number.

7) Opening of the account:

After the above formalities are over, the banker opens an account in the name the applicant. It is
essential that the applicant deposits, some amount at the time of opening an account. Generally,
the minimum amount (equivalent to the minimum balance in the account) is to be initially
deposited through the pay-in-slip along with the account opening form.

The minimum amount requirement is as follows.

Savings account without cheque book facility - Rs. 0500
Savings account with cheque book facility - Rs. 1000
Current account in rural areas - Rs. 2000
Current account in urban and metropolitan areas - Rs. 5000
The above mentioned amount of minimum balances varies from bank to bank and place to place.

When the banker accepts the proposal of opening of an account with initial cash deposit, it is said
that the account is opened in the name of the applicant.

B) OPERATING THE BANK ACCOUNT:

The word ‘operate’ in relation to the bank account means that the customer deposits further sums
of money and cheques etc. into the bank account and withdraws money according to the need and
convenience. A special feature of banking business is that each and every transaction of money
with the customer is supported by a separate slip or document. A customer is, therefore, required
to make use of the following.
1) Pay in slip, for depositing money into the bank account.
2) Cheques-book for self withdrawals and making payments to third parties from the bank
account.
3) Withdrawal slips used to withdraw money from the savings bank account.
4) Pass-Book to know the banking transaction on the bank account.

1) Pay-in-slip book
The pay-in-slip book contains blank slips with perforated counterfoils to be filled in by the
depositor himself or by his agent at the time of depositing the money (i.e. cash, cheques, bank
drafts, bills etc.) to the credit of his account. Usually every bank supplies these slips at free of
cost to the customers. Separate pay-in-slips for deposing cash or cheque or bank draft are to be
used as per the bank’s rules.

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Though the size and design of such slips vary from bank to bank but the contents are same to
give the information relating to the name and address of the bank & branch, date of deposit,
current / savings bank account number, name of the account holder, the amount of deposit in
words and figures; denomination of currency notes (in case of cash deposit only); cheque
number, name of the drawee (in case of cheques only).

2) Cheques-book
The cheque-book contains blank forms of cheques which are used as an instrument to
withdraw money from the bank. The blank forms of cheques are serially numbered in
magnetic ink. The cheque book also contains a requisition slip, duly filled in, which contains a
formal written demand for a cheque-book by the customer for obtaining another cheque book
from the bank.

In case of the Current account the amount is always withdrawn through cheque only.

In case of savings bank account a cheque book facility is provided only to those customers who
undertake to maintain a minimum balance of Rs. 1000/- to their credit.

4) Withdrawal slips:
Withdrawal slip is a slip which is used to withdraw money from the savings bank account.
These slips are provided by the bank at free of cost by the bank. But the Pass-Book must
accompany with the withdrawal form/slip every time. Without pass-book the banker may
refuse to pay money against the withdrawal form/slip.

5) Pass-Book / Statement of Account:

Pass is a small handbook issued by a banker to his customer. It contains the information of the
account and date-wise records of deposits and withdrawals from the account of the customer.
Pass book is an authenticated copy of the customer’s account with the bank, written by
the banker recording all dealings held between the banker and customer.

The customer sends it to the bank so that up-to-date entries may be recorded by the bank.
Usually pass-book is provided by the banks on savings account and recurring account, whereas
Statement of Account is provided to current account holder in place of pass-book. The
statements of account are given by the banks to the customers periodically viz. monthly or
quarterly or half yearly or yearly or even weekly also.

The customer prepares Bank Reconciliation Statement with the help of the pass-book or the
statement of account to find out the causes of difference between the balance as shown in his
cash book and the pass-book / statement of account.

Entries in the passbook:

There has been conflict of opinion regarding conclusiveness of the passbook regarding entries
made therein. However, both in India and England in majority of the cases it has held that
entries in the passbook do not form the conclusive evidence of their correctness or accuracy.
Both customer and the banker can indicate the mistakes or omission and get them rectified.

a) Entries in the passbook are to be recorded by the clerk of the bank and must bear the
initials of the accountant. The customer should not write any entry himself, even for the
purpose of reconciling his account.
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b) If the passbook is lost by the customer, a duplicate passbook may be issued by the banker
marked as ‘DUPLICATE’.
c) Whenever the banker sends a passbook to the customer, it must show up-to-date entries.
d) In case of savings bank account, the passbook must accompanied with the withdrawal form
every time when money is withdrawn through a withdrawal form.

The legal position can be studied from two angles.

1) Where the entries are to the advantage of the customer.
2) Where the entries are to the disadvantage of the customer.

Entries are to the advantage of the customer:

In case the banker gives a wrong credit to the customer’s account and the customer presuming
it to be his own money, withdraws it and spends it away, the banker will not be able to debit
the customer’s account with such a wrong debit.

This rule is subject to the following conditions.

1. The customer will have to prove that, he was ignorant of this fact that a wrong credit has
been given to him. In those cases where the customer is regularly maintaining his account
books and the bank has also been sending him regularly passbook, it can not be presumed
that the customer has no knowledge of the wrong credit given to him by the bank.
2. The customer has altered his position to his prejudice [injustice / discrimination] by sending the
same.

Entries are to the disadvantage of the customer:

In case the banker gives wrong debit to the customer’s account, or a due credit has not given to
the customer’s account the legal consequences will be as follows.
1. The customer, on finding out the mistake may get the balance rectified. It is to be noted
that the customer is not bound to examine the passbook regularly or periodically.
2. However, the customer will not be entitled to get the mistake rectified if it is proved that-
a) The customer was negligent.
b) The entries in the passbook constitute a settled account and
c) The position of the banker has been subsequently altered to it’s prejudice.

Contents of the Passbook:

Name of the bank and branch with address, Name and address of customer, Photograph of the
customer, Name of the account and account number, Account operation status, Date of account
opening, Signature of Branch Manager,
Passbook columns– date, particulars, cheque no., Deposits, Withdrawals, Balance, Initials, etc.

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C) CLOSING OF A BANK ACCOUNT (CLOSURE OF ACCOUNT)

Banker-Customer relationship is terminated when a bank account is closed. Before closing the
account the banker immediately ask for the unused cheques to the customer. A customer’s account
with a bank may be closed in the following ways / circumstances.

A) Closure by the customer.

B) Closure by the banker.
C) Customer’s Death
D) Customer’s Lunacy or Insanity (madness)
E) Customer’s Insolvency
F) Assignment of balance by the customer to a third party.
G) Serving on the banker a Garnishee Order attaching the whole balance to the credit of the
customer or Garnishee Order for the balance.
H) Change in the Constitution of the customer’s firm.

A) Closure by the customer.

The customer has also a choice in deciding who should be his banker. When a customer decides to
sever [saovhr : to cut / to break of] his connection with his banker, he may inform the banker in
writing his intention to close the account. It is not necessary for him to give any special notice.

When the banker accepts the letter form the customer to close his account, he will have to satisfy
himself whether the request is genuine for closer. Sometimes, parties close the accounts if they are
not satisfied, with the service of the banker, terms offered, or it may be on ground of quarrel or
misunderstanding. But requests for closing an account on grounds of transfer, closure of business
etc, are treated as genuine cases.

However, before, finally accepting the request for closure, the banker will also ensure that the
customer does not have any other liability to the bank. If there is any other liabilities is always
desirable that while closing the account whatever credit balance is there in accounts to reduce the
dues. Then, finally, the banker agrees to close the account. He should ask the customer to return
all unused cheques. The balance standing to the credit is paid off. From then onwards the
relationship as banker-customer is snapped with the bank and the customer becomes only a third
party to the bank.

B) Termination by the banker.

The banker himself can terminate the connection when in his opinion the account of the customer
becomes undesirable by unsatisfactory operations. When the banker wants to close an account, he
is required to give a sufficient notice to the customer. The banker would naturally like to close all
un-remunerative (un-profitable) and un-desirable accounts. Sufficient notice has to be given by
the banker before closing the account. As to what, is an adequate, notice depends on the
circumstance of each case, such as the nature of the business, number of cheques leaves, yet to be
presented and so on. In case the customer is not traceable, the amount standing to his credit may
be transferred to “Unclaimed Deposits” or “Dormant” account. The amount shall be paid to the
customer as and when he is traced.

C) Customer’s Death
The relationship also comes to the end, when the customer dies. On the death of the customer, the
authority given by him, ceases (stops) and the cheques signed by him before death, if presented
after the notice of death, cannot be honoured by the banker.

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D) Customer’s Lunacy or Insanity (madness)

In case of lunacy (Insanity/ madness) of the customer, it can be deemed that, the authority of the
banker to act on behalf of the customer will come to an end, but it is considered desirable to act
only if a notice of Lunacy is served on the banker.

E) Customer’s Insolvency: (Bankruptcy)

When a customer become insolvent, the balance in the account will vest [sa%ta / AiQakar doNao] with the
official receiver or official assignee. As such the insolvency of the customer also terminates the
banker – customer relationship. After an act of insolvency; the banker can no longer, act as the
agent of the customer and he has no authority to pass his/her cheques, or to do any other act on
his/her behalf. These provisions will also apply in the case of winding up a company to determine
the termination of authority of the banker to do any act on behalf of the company. ]

In case the customer is found guilty of having forged cheques & bills of exchange, it may notice in
writing and inform the customer of its intention, to close the account. However, the banker should
follow the following procedure.
a) The banker should give a reasonable time to the customer for making alternative arrangement.
b) In case the customer does not come forward to close the account in spite of getting notice for
closure of account from the bank, the banker should give a second notice to him, stating it
clearly that incase he himself does not close the account by a particular date the banker himself
will close the account.
c) In case the customer does not close the account by the specified date, the banker should send to
him the money lying in his account by a demand draft.

F) Assignment of balance by the customer to a third party.

(Assignment – to transfer of property to someone)
Sometimes a customer may assign his/her credit balance to another person by giving a notice of
assignment. The banker will not be able to honour the cheques received subsequently on the credit
balance assigned. On the other hand, if a portion of credit balance is only assigned, and if there is
sufficient balance in excess after the assignment of the balance assigned then only cheques drawn
against the account may be passed if they are otherwise in order.

G) Serving on the banker a Garnishee Order attaching the whole balance to the credit of the
customer or Garnishee Order for the balance.
Again where a garnishee order is served on the banker, the relationship is snapped and the banker
must not honour cheques drawn on the customer’s account. Garnishee order sometimes applies to
the entire credit balance or to a portion thereof only. It all depends on the terms of the order. The
banker will have to act according to the terms of the order.

If the whole balance is attached, the banker will not be able to pass the cheques of the customer at
all. On the other hand, the order attaches a part of a balance; cheques may be passed in the
account leaving the sufficient balance to meet the garnishee order and the minimum balance.
When the garnishee order is lifted, the relationship becomes once may re-established between the
banker and the customer.

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H) Change in the Constitution of a customer’s firm.

In the case of reconstitution in the constitution of any customer, i.e. change in the constitution of a
partnership, the relationship of the erstwhile [ previous, last, former] firm with the banker
will cease [saIja : to stop] and there will be a fresh relationship of the reconstituted firm with the
banker.

III) Fixed Deposit Account

Broadly speaking, the deposits i.e. liabilities of a banker are classified into two categories.
1) Time Deposits 2) Demand Deposits
In the first category the deposits received by a bank on Fixed Deposit Accounts and Recurring
Deposit Accounts are included. In the second category deposits received by the bank on Savings
Bank Account and Current Account are included.

The time deposits received by the bank are repayable on expiry of the specified period, chosen by
the depositor. The money can be deposited in the form of fixed deposit account usually for the
period of 1, 2, 3, 4, 5 years. The minimum period of the fixed deposit starts from 15 days.

a) Fixed deposits are deposits received for a fixed period, specified in advance. No
withdrawal is allowed during this period. Therefore they are called time deposits also.
b) After opening such an account the fixed deposit receipt is given to the depositor which is
non-transferable. It is not a salable asset.
c) This depositor is neither given a cheque-book nor a passbook.
d) The depositor gets attractive rate of interests on money deposited in this account. The rate of
interest allowed varies with the period. The longer period of deposit gets the higher rate of
interest. Interest is paid half yearly.
e) If the depositor is in need of money before the due date, he can borrow from the same bank
against the security of his fixed deposit receipt. Of course, he has to pay a slightly higher
rate of interest. In India as per the directives of the Reserve Bank of India, banks can charge
a minimum of 1% above the rate payable on such deposits.
f) Individuals, firms or companies with surplus money may invest their idle funds in this
account. The person who want safety of funds and steady return, deposit their money in this
account. These are called earning assets.

A) Opening of Fixed Deposit Account:

1) Account Opening Form:
For opening a fixed deposit account a depositor is required to fill in an application form
where in he mention the amount of deposit is to be paid. He also gives his specimen
signature.
2) No Introduction:
The banker may not insist on introduction in case of opening fixed deposit account. Because
neither a cheque book is issued to the customer not he is permitted to deposit by cheque.

B) Operation of the Fixed Deposit Account

1) A Fixed Deposit Receipt:
A Fixed Deposit Receipt is a receipt issued to the depositor, acknowledging the receipt
of the sum of the money specified therein, to be repaid at the expiry of the period
mentioned therein along with interest at the specified rate. The FDR is marked ‘Non-
Transferable’ and can not be transferred by endorsement.
…..40
 : 40 :

2) Payment of Interest:
Interest is payable at the stipulated rate on these deposits. The depositor is required to
present the receipt for the purpose necessary entry regarding the payment of interest on the
back thereof. Some of the bank have introduced Re-investment Plans, where in, on interest
on FDR is periodically added to the principal and interest also starts earning interest.

3) Payment before Due-Date:

Usually the amount of the FDR is payable on maturity. But some banks in case of urgent
needs of the customer permit encashment of such deposit even before the Due-Date.
The interest on such deposits will be payable as follows:
a) First, the rate of interest applicable for the deposit on basis of the period for which it
remained with the bank is determined.
b) Then the said rate is reduced by 2 percent points.

Advance against FDR:

The banker may also grant a loan to the depositor on the security of the FDR but according to the
directive issued by the RBI. The interest on the loan against the security of FDR shall be –
a) At least 2 % higher than the interest payable on the deposit, if the RDR stands in the name of
the borrower.
b) In case of the FDR stands in the name of a person other than the borrower, the rate of interest
should be determined taking into advance granted.

4) Loss of the FDR:

Some times the depositors report to the bank the loss or theft of FDRs and request it tot issue
a duplicate one. The banker should take following steps in this regard.
a) A letter signed by the depositor / Depositors informing the banker about the loss of the
receipt and requesting to issue a duplicate receipt.
b) A duly stamped letter of indemnity must be obtained from the depositor / depositors to
safeguard its own interest, in case the original receipt is also presented for repayment.
c) A date to this affect should be made in fixed deposit ledger for future guidance.

C) Closure of Fixed Deposit Account:

A fixed deposit account is closed in the following situations.
1) A fixed deposit account is automatically gets closed on maturity date by paying maturity
amount. Maturity amount contains principal amount of deposit and interest payable on it
for the period of deposit.

2) Premature Closer of FD A/c: When the payment of the FD account is made before the
maturity date, it is called premature closer of Fixed Deposit Account. W. e. f. 9.5.1998,
banks are permitted to determine their own penal interest rates for premature withdrawal
of domestic term deposits. This is applicable for fresh and renewed deposits.

D) Renewal of FDR.
A deposit can be renewed only with effect from its date of maturity. If the depositor desires
to renew the FDR with the bank then the banker may renew the FDR according the rules &
regulation, of the bank for specific period chosen by the depositor. The rate of interest is
allowed by the bank according the period for which it is renewed.

…..51
 : 41 :

Automatic renewal:
Request for automatic renewal of deposit for the correspondingly same period can be made at he
time of opening the deposit or even later.

The renewed deposits will carry interest as applicable on the respective dates of maturity.

No new deposit receipt need be issued in case of such renewal. Only an endorsement on the
reverse of the deposit needs to be made.

IV RECURRING DEPOSIT ACCOUNT

A variant of the saving bank account is the recurring deposit or cumulative deposit account
introduced by banks in recent years.

This account is intended to inculcate the habit of saving on a regular basis as an inducement is
offered in the form of comparatively higher rate of interest. A depositor opening a recurring
deposit is required to deposit an amount chosen by him, generally a multiple of Rs. 5 or 10, in his
account every month for a period stated by him. The period of recurring deposit varies from bank
to bank. Banks open such accounts fro periods ranging from 1 to 10 years.

The notable features of this type of account are as follows.

a) This type of account is the latest innovation [ - novelty, change] with most of the
banks in India. Banks have introduced this scheme with the object, to help the small depositors
convenience [ ] incentive for savings.

b) A depositor, opening a recurring deposit account is required to deposit an amount chosen by

him, generally, a multiple of Rs. 5/- in this account every month, for a period selected by
him. The period of recurring deposit varies from bank to bank, generally between one to ten
years.

c) The rate of interest given on recurring account stands favourable as compared with the
savings bank account because the former partly resembles [- to be like] the fixed deposit
account. According to the latest directives of the Reserve Bank of India, banks are required to
ensure that the rates of interest offered by them on recurring deposits are generally in
accordance with the rates prescribed for various term deposits.

d) At the expiry of the period, the depositor gets a lump sum amount and handsome interest on
his savings.

e) In case the depositor needs money before the due date he may borrow up to 90% of the
amount in the account at the prevailing [ generally, current] rate of interest.

f) Recurring deposit accounts are transferable from one branch to another without charge.

g) Any person can open the recurring deposit account, more than one person jointly and by a
guardian in the name of a minor and even by a minor.

In addition banks have introduced many attractive schemes of collecting deposits such as daily
collection schemes; fixed deposits with payment of interest every month, festival deposit schemes
etc.
…..42
 : 42 :

A) Opening of Recurring Deposit Account:

1) Account Opening Form:
For opening a recurring deposit account a depositor is required to fill in an application form
where in he mentions his name, address, signature and installments of each month,
nomination etc. He also gives his specimen signature, photographs, etc.

2) No Introduction:
The banker may not insist on introduction in case of recurring deposit account. Because
neither a cheque book is issued to the customer not he is permitted to deposit by cheque.
3) Nomination:
The banker should ask the applicant to fill up the nomination form as it is now compulsory as
per the rules. In case the customer dies, the amount lying in the account is given to the
nominee as per the nomination.

4) Initial deposit of amount

After the above formalities are over, the banker opens an account in the name the applicant. It
is essential that the applicant deposits, the prescribed amount at the time of opening an account
as a first deposit installment.

B) Operating a Recurring Deposit Account:

The word ‘operate’ in relation to the bank account means that the customer deposits further sums
of money on a specific date of every month into the bank account. A special feature of banking
business is that each and every transaction of money with the customer is supported by a separate
slip or document. A customer is, therefore, required to make use of the following.
1) Pay-in-slip book
The pay-in-slip book contains blank slips with perforated counterfoils to be filled in by the
depositor himself or by his agent at the time of depositing the money every month on a
prescribed date to the credit of his recurring deposit account. Usually every bank supplies
these slips at free of cost to the customers.

2) Pass-Book:
A Pass-book is issued to the account holder, which is to be presented to bank at the time
of monthly deposits and repayment of the amount. The pass-book issued on recurring
deposit account doesn’t contain debit/withdrawal column. Because, no withdrawal is
permitted on this kind of account.

3) Payment of Interest:
Interest is payable at the stipulated rate on these deposits. The depositor is required to
present the recurring account pass-book for the purpose necessary entry regarding the
payment of interest

….43
 : 43 :

C) Closure of Recurring Deposit Account:

A fixed deposit account is closed in the following situations.
1) A recurring deposit account is automatically gets closed on maturity date by paying maturity
amount. Maturity amount contains principal amount of deposit and interest payable on it for
the period of deposit.

2) Payment before Due-Date: (Premature closure)

Usually the amount of the Recurring Deposit Account is payable on maturity. But some
banks in case of urgent needs of the customer permit encashment of such deposit even before
the Due-Date. This is called premature closure. In wimple words, when the payment of
the Recurring Deposit account is made before the maturity date, is called premature closer of
RD Account. 1% rate of interest is given less than the rate applicable for the period for
which the deposit account has opened.

3) Discontinued Accounts :
In case the depositor has defaulted in giving instalments he has two options.
- He can pay the defaulted instalment with penalty or
- Not pay the instalments and continue the irregular deposit till maturity date to earn
compound interest at contracted rate for the full period on available balance.

4) Conversion of balance under RD a/c to any term deposit.

The balance of RD account can be transferred to term deposit account at any time before
maturity. In such a case, interest will be calculated on compounded basis at the rate
applicable for the period for which the deposit has actually run, without any penalty. The
period of the new deposit should be longer than the remaining period of the Recurring
Deposit.
*********
Specimens

WITHDRAWAL SLIP

Passbook should accompany this withdrawal.

Please sign overleaf and state notes required. L.F. No

BANK OF MAHARASHTRA
SAVINGS BANK
Rs. Date:

Pay bearer / self the sum of rupees

Debiting A/c No

Account Holders Signature PAY CASH

Rs.
Sd/ sd/
Cashier / Branch Manager Passing Officer
 : 44 :

STATEMENT OF ACCOUNT
Name of Account Holder MAHARAJA BANK
M/s Ruturaaj Enterprises Bundgarden Road
9-A, Boat Club Road Camp, Pune 411 001
Pune 411 001 Branch Code: - 411-165-105

Account Name : Current Account Date & Time of Statement :

Account Number : 1053954765 31.6.2005 @ 2.30 p.m.
Statement Period : 1.4.2005 to 30.4.2005 Currency : INR

DATE PARTICULARS CHEQUE DEBIT CREDIT BALANCE

NUMBER (Withdrawals) (Deposits)

1.4.2005 Bal C/f 2,12,540.50 Cr

15.4.2005 Insurance Premium 105604 2250.00 2,10,290.50 Cr
17.4.2005 ABC & Co. 15,000.00 2,25,290.50 Cr
30.4.2005 Bal C/o 2,25,290.50 Cr

Total 2250.00 15000.00 2,25,290.50 Cr

Seal S/d

Branch Manager
 : 45 :
BANK PASS-BOOK
LENA DENA BANK
Head Office : 234, Jeevan Marg,
Pune 411 001
Branch : Shivajinagar, Pune Photograph
of the
Branch Code : 411-165-105 Account holder
Name of Account Holder
M/s Ruturaaj Enterprises
9-A, Boat Club Road
Pune 411 001
Occupation : Service
S/d
Savings Account No. : 115395765 Seal Br. Manager
Currency : INR
Mode of Operation : Self

DATE PARTICULARS CHEQUE DEBIT CREDIT BALANCE INITIALS

NUMBER (Withdrawals) (Deposits)

1.4.2005 Bal C/f 2,12,540.50 Cr ABC

15.4.2005 Insurance Premium 105604 2250.00 2,10,290.50 Cr PQR
17.4.2005 ABC & Co. 15,000.00 2,25,290.50 Cr PQR
30.4.2005 Bal C/o 2,25,290.50 Cr ABC

Total 2250.00 15000.00 2,25,290.50 Cr

Bank of Baroda
Station Road Branch, Pune 411 001.

TERM DEPOSIT RECEIPT

Payable either or survivor. Date of Issue :

Date of Maturity :
No.: ………………… Amount of Maturity :

Received from …………………………………………………………………………… the sum

of Rupees ……………………………………………… as a ………………… deposit for
………… months / days to bear interest at the rate of ……… percent per annum from the
period …………… 2006 to …………… 2006.
S/d
Rs.
Manager / Accountant
 : 46 :

Specimen of Pay in Slip

Specimen of Specimen Signature Card

Specimen of Cheque
 : 47 :

LOANS AND ADVANCES

General Principals: Safety, Liquidity & Profitability, (XI STD Paper-II)

Lending funds to the different sectors mainly, commercial sector, agriculture sector,
industrial sector and other sectors to sanction loans and advances to the traders, businessmen,
industrial enterprises etc, is the main business of a banking company.

The major portion of a bank’s funds is employed by way of loans and advances. It is the
most profitable employment of its funds. The major part of bank’s income is earned from
interest on funds so lent. The business of lending, never the less is not without certain
inherent [natural, inborn, inbuilt] risks. Largely, depending on the borrowed funds a banker
can not afford to take undue risks in lending while lending his funds. A banker, therefore,
follows a very cautious policy and conducts his business on the basis of the well-known
principles of sound lending in order to minimize the risks.

WATCH = W - Willingness to Pay

A - Ability
T - Time
C - 3 C’s i.e. Character, Capital & Capacity
H - Honesty

General Principles of Sound Lending:

A) A) Safety B) Liquidity C) Profitability

B) D) Purpose of the loan E) Adequacy of Margin F) Diversification of Risk

A) Safety of funds:
As the bank lends funds entrusted to it by the depositors, the first and important principle of
lending is to ensure the safety of the funds lent. By safety is meant [PT of mean] that the
borrower is in a position to repay the loan along with the interest and according to the terms
and conditions of the loan contract. The repayment of loan depends upon the borrowers- a)
Capacity to pay and b) willingness to pay.

The former depends upon his tangible assets and the success of his business. If he is
successful in his efforts, he earns profit and can repay the loan promptly. Otherwise, the loan
is recovered out or the sale proceeds of the tangible assets. The Willingness to pay depends
upon the honesty and character of the borrower.

The banker should, therefore, take utmost, care in ensuring that the enterprise or business for
which a loan is sought [ required / wanted] is a sound one and the borrower is capable
of carrying it out successfully. He should be a person of integrity, good character and
reputation.

…….48
 : 48 :

B) Liquidity:
Banks are essentially intermediaries for short term funds as their deposits are large repayable
on demand or a short notice. They lend funds for short periods and mainly for working
capital.

The loans are therefore, largely repayable on demand. The banker must ensure that the
borrower is able to repay the loan on demand or within a short period. This depends on the
nature of assets owned by the borrower and pledged to the banker.

For example:-
Goods or commodities are easily marketable, while fixed assets (immovable assets) like land
and building, special type of plant and equipments can be liquidated after a time interval.

Thus the banker regards liquidity as important as the safety of the bank’s funds and grants
loan on the security of assets, which are easily marketable without much loss.

C) Profitability:
Commercial banks are Profit-earning Institutions. The nationalised banks are no exception
to this. They must employ their funds, profitable so as to earn sufficient income, out of
which to pay interest to the depositors, salaries to the staff, meet various establishment
expenses and distribute dividends to the share holders (i.e. the Govt in case of nationalised
banks).

The sound principle of lending is not to sacrifice [give up / surrender] safety or liquidity for
the sake [ ] of higher profitability. This is to say that bank should not
grant advances to unsound parties with doubtful repaying capacity, even if they are ready to
pay a very high rate of interest. Such advances ultimately prove to be irrecoverable, no
chance to interests for the banks and the depositors.

D) The Purpose of the loan

While lending his funds, the banker makes inquiries of the borrower regarding his
(borrower’s) purpose for which he (borrower) seeks the loan. Banks do not grant loans for
each and every purpose. They ensure the safety and liquidity of their funds by granting loans
for productive purpose only i.e. meeting working capital needs of a business, or for the
development of agriculture and industrial sectors and for the needs of he other sectors. Loans
are not advanced for speculative [tentative, approximate, rough, provisional] or unproductive
purposes like social functions and marriage or other religious ceremonies or for a pleasure
trips [gambling, race lottery etc.] or for the repayment of a prior loan. After the
nationalisation of major banks, loans for initial expenditure to start their businesses (small
traders, businesses, industries etc.) are also given by the banks.

E) Adequacy of Margin:
In banking terminology, margin implies the excess of the market value of the security over
the advance / loan granted against it. In short, margin means the difference between the
amount of advance sanctioned by the bank and the market value of the security pledged
/ hypothecated to the bank. E.g. If the market value of the security is Rs. 1,00,000/- and the
advance granted against it is Rs. 70,000/-, the margin is Rs. 30,000/-. The value of securities
less margin is known as drawable limit or advanced value.

…..49
 : 49 :

Factors determining the margin:

The margin to be kept by a banker in respect of a particular security depends on several
factors. Some of them are as follows:
a) Fluctuations in Market prices:
b) Financial Soundness
c) Reserve Banks control

a) Fluctuations in Market prices:

A banker will have to keep a larger margin in case commodities, where prices are subject to
greater fluctuations in comparison to the goods, which have more or less a steady (stable/
fixed, balanced) demand.

b) Financial Soundness:
In case of parties, which are financially sound, a banker may keep a lower margin, similarly
in case of securities of good companies, a lower margin to do so.

c) Reserve Banks control:

In case of commodities, which are subject to reserve Bank’s Selective Credit control, the
banker should make the margin in accordance with the directions of the Reserve Bank of
India.

d) Ready Marketability:
A banker should accept such securities, which are easily marketable without much loss in
their value. This is because of funds at the disposal of the banker are for short periods and in
case of customer’s inability to pay the amount, the bank should be in a position to realise it
easily by sale of security.

F) Diversification of risk:
Every advance is subject to risk, however secured it may be. Despite of all the precautions,
there are number of risks in the business world. The business units which are financed by the
bank have to face inflation, natural disaster, political, instability, market trends and so many
other difficulties.

To distribute such risks, the banker should grant advances to different sectors of the
economy, different industries etc. The banker should not lend money against only one type
of security. Otherwise it seems putting all eggs in one bag, may result in damage.

G) Period of advance:
The period is also one of the important factors in granting an advance. Longer the period has
higher risk. Because there is more time in which the things can go wrong. As considerable
portion of the bank deposit is repayable on demand or at short notice, the bank cannot block
the funds by advancing for a long period.

H) Credit rationing as per the national policy:

Now a days the banks cannot remain only as financial institutions, but they are also required
to fulfill certain social obligations and responsibilities. In a developing country like India, if
rapid progress is to be achieved, the bank credit should be made available to the neglected
sectors of the society. Nationalisation of the banks in the year 1969 was the concept of social
banking. The Government and the RBI has formed a policy of the credit rationing according
to which the bank should lend money to different sectors of the economy including the
neglected sectors also.

…..50
 : 50 :

The Borrower (The 3C’s of the borrower):

The business of sanctioning unsecured advances is comparatively more risky and needs
special care and attention on the part of the banker. In the absence of a charge over any
specific assets, the safety of the advance depends upon the honesty and integrity of the
borrower as much as upon the worth of his tangible assets. The banker has therefore make
proper inquiries not only about his capacity to pay but also about his willingness to pay the
amount.

Though such inquiries is also necessary in case of secured advances but its urgency is greater
in case of unsecured advances.

The creditworthiness of a person means that he deserves a certain amount of credit, which
may safely be granted, to him such creditworthiness is judged by the banker on the basis of
his (borrower’s) a) Character, b) Capacity & Capital.

a) Character:
In assessing the creditworthiness of a person, the first consideration is that of the character of
the person includes a number of personal characteristics of a person e.g. his honesty,
integrity, Regularity and promptness in fulfilling his promises, repaying his dues sense of
responsibility, good habits and the reputation and goodwill, which he enjoys in the eyes of
others.

If a person possesses all the qualities without any doubt in the mind of others, he possesses
an excellent character and will be considered creditworthiness by the banker.

b) Capacity:
The success of an enterprise/business establishment largely depends upon the ability and
experience of the entrepreneur. If the borrower posses necessary technical skill, managerial
ability know-how an experience to run a particular industry or trade success of such unit may
be taken for granted and the banker will consider him a deserving case for granting an
advance.

c) Capital:
The importance attached by the banker to the adequacy of capital of the borrower is not
without significance. Banks are the repositories [who stores something with responsibility]
of the public money and lend the borrowed money. The banker, therefore, does not lend
money to an entrepreneur without adequate funds of his own. In case of failure of the
business enterprise, the banker will be able to realise his money if the borrower has his own
and sufficient capital.

Persons of doubtful integrity and without good character are not granted unsecured advances
by banks.

I) Documentation:
The banker should see that the proper documents such as mortgage deed or pledge agreement
containing all terms and conditions of the mortgage or pledge are executed. This should be
done in order to avoid all future disputes.

…..51
 : 51 :

CLASSIFICATION OF LOANS AND ADVANCES

Loan is a fixed amount sanctioned for the definite period of time at a certain rate of interest.
Loan is generally sanctioned for the purchase of fixed assets and for the working capital requirement.

Types of Loan

Security Period Purpose Liquidity

1. Secured Loan 1. Short-Term 1. Business 1. Fund Based

2. Unsecured Loan 2. Medium-Term 2. Agricultural Loan 2. Non-Fund Based
3. Long-Term 3. Industrial
4. Housing Loan
5. Vehicle Loan
6. Educational Loan
7. Personal Loan
8. Consumer Loan
9. SSI/SHG

A) Secured Advances/Loans & Unsecured Advances/Loans (Clean).

According to section 5 (a) of The Banking Regulation Act’1949, “a secured loan or advance
means a loan or advance secured by tangible assets, the market value of which is not at any
time less than the amount of such loan and advances” and “Unsecured loan or Advance means
a loan or advance not so secured”

Thus the distinguishing features of secured loans or advances as follows.

1. The loan must be made on the security of the tangible assets like goods and commodities, land
and buildings, gold & silver, Government securities etc. A charge on such assets offered, as
security must be created in favour of the banker.
2. The market value of such security must not be less that the amount of the loan/advance at any
time till the loan is repaid. If the former falls below the later, because of decline in the market
price, the loan is considered as partly secured.

The distinguish between Secured and unsecured loan is made on the basis of the legal title under the
traditional principles of lending, the borrowing capacity of a person is judged on the basis of the
tangible assets in the possession of the borrower i.e. the larger is the value of his tangible assets.

In fact, unsecured loans are also granted to persons of sufficient means possessing tangible assets
and with sound financial position, but no charge of right is created on any such assets of the
borrower in favour of the banker.

…..52
 : 52 :

Precautions in case of unsecured Advances:

The business of sanctioning unsecured advances is comparatively more risky and needs special care
and attention on the part of the banker. In the absence of a charge over any specific assets, the safety
of the advance depends upon the honesty and integrity of the borrower as much as upon the worth of
his tangible assets. The banker has therefore make proper inquiries not only about his capacity to
pay but also about his willingness to pay the amount.

Though such inquiries is also necessary in case of secured advances but its urgency is greater in case
of unsecured advances.

The creditworthiness of a person means that he deserves a certain amount of credit, which may
safely be granted, to him such creditworthiness is judged by the banker on the basis of his
(borrower’s) a) Character, b) Capacity & Capital.

a) Character:
In assessing the creditworthiness of a person, the first consideration is that of the character of the
person includes a number of personal characteristics of a person e.g. his honesty, integrity,
Regularity and promptness in fulfilling his promises, repaying his dues sense of responsibility,
good habits and the reputation and goodwill, which he enjoys in the eyes of others.

If a person possesses all the qualities without any doubt in the mind of others, he possesses an
excellent character and will be considered creditworthiness by the banker.

b) Capacity:
The success of an enterprise/business establishment largely depends upon the ability and
experience of the entrepreneur. If the borrower posses necessary technical skill, managerial
ability know-how an experience to run a particular industry or trade success of such unit may be
taken for granted and the banker will consider him a deserving case for granting an advance.

c) Capital:
The importance attached by the banker to the adequacy of capital of the borrower is not without
significance. Banks are the repositories [who stores something with responsibility] of the public money
and lend the borrowed money. The banker, therefore, does not lend money to an entrepreneur
without adequate funds of his own. In case of failure of the business enterprise, the banker will
be able to realise his money if the borrower has his own and sufficient capital.

Persons of doubtful integrity and without good character are not granted unsecured advances by
banks.

B) Term Loan
a) A fixed amount sanctioned for a definite period of time is called loan.
b) Loans are repayable at one time or in installments as agreed.
c) Interest is charged on the total amount of loan sanctioned, whether it is utilised or not.
d) Loans are given on the security of shares, Government Securities/Bonds, Life Insurance
Policies, Gold and other assets. In suitable cases, unsecured advances are also granted by
banks. [Unsecured advances means a advances which is not secured by way of any
security)]
e) There are different types of loans i.e. Term Loans, (short, medium, long), Participation
Loans and Personal Loans.
f) Banks charge a slightly lower rate of interest on loan account than overdraft and cash
credit. Other things are being equal.

….53
 : 53

Following are the types of term loan

1. Short Term 2. Medium Term 3. Long Term

C) Loan for specific purpose.

1. Business Loans
Overdrafts:
a) Bank overdraft is a facility granted to to current account holder where he is permitted to
by the banker to withdraw more money than what stands to his credit.
b) The banker may take some collateral security or may grant such advances on the personal
security.
c) The customer is permitted to withdraw the amount as and when he needs and to make
deposit in his/her account as and when it is convenient.
d) Interest is charged on the amount and for the period it is utilised.
e) This facility is given as a temporary arrangement for a short time.

Cash Credit:
a) Under this scheme, the banker specifies a limit for a customer up to a certain limit the
customer is permitted to borrow against security or guarantee.
b) The customer is allowed to withdraw from this account as and when he needs money and
deposits in this account any surplus that he has.
c) Generally the customer is required to provide tangible assets as a security to cover the
amount is borrowed.
d) For the cash credit facility it is not necessary to have an account with the bank.
e) This method of borrowing is very popular in India, accounting for about 90 percent of the
total bank credit. Cash Credit facility is regularly granted to commercial and industrial
concerns for longer periods.
f) Interest is charged on the amount actually utilized by the borrower.

Discounting of Bills of Exchange:

Bill of exchange is a written acknowledgement of the debt, written by the creditor and
accepted by the debtor. Banks also offer financial help to trade and commerce through
discounting of Bills of Exchange and Promissory Notes. Discounting of bills is practically
lending for short periods. Discounting bills is the most important form in which a bank lends
without any collateral security. Bills are self-liquidating papers in the sense that they become
payable automatically after the expiry of the period stated therein.

2. Agricultural Loan
The credit needs of a farmer are met through broad categories of advances viz. direct finance and
indirect finance, based on the period of credit, direct finance is classified as short-term, medium
term and long-term loans.

Direct finance (term loans) are provided to farmer for agricultural purposes. I.e. minor irrigation
work, farm/land development/ farm mechanization, plantation, horticulture, allied activities such
as dairy farming, sheep/goat raring, piggery and rabbit farming, poultry farming, fisheries, bee-
keeping, mushroom cultivation, bio-gas plants etc.

Indirect finance includes credit of financing distribution of fertilizers, pesticides, loans granted
for installation of electric pump-set, finance for construction and running storage facilities in the
producing areas, loans to individuals, institutions or organizations who undertake spraying
operations, advance to State Corporations for onward lending to weaker section.
….54
 : 54

Types of Agricultural Loans:

i) Crop Loan: It is a loan granted to a farmer to meet the expenses for rising of seasonal
crop including the cultivation of land, cost of seeds, fertilizers, pesticides, irrigation
charges, labour charges, etc. Such a loan is granted to the farmer considering crop area
and keeping the margin just 10% of the loan amount granted.

ii) Kisan Credit Card:

All farmers who require loan their cultivation expenses are eligible to get loan under
Kisan Credit Card scheme.

Kisan credit cards can be issued to farmers to meet their cultivation needs and non-farm
requirement, including purchase of inputs and other short-term requirement together with
working capital requirements for allied activities in a flexible and cost effective manner.
Apart from a loan for cultivation purposes, a consumption loan of certain percentage of
limit is also given for other household expenses.

iii) Agricultural Term Loan:

Agricultural term loans are provided for the purchase of assets, (farm machinery, bullocks,
sheep, etc.), creation of assets (orchard development, poultry, dairy development, etc.)
horticulture, plantation, animal husbandry, fishery etc. where the loan amount is repayable
within a period up to 5 years.

iv) Land Development Loan:

Such a loan is provided to the agriculturist/farmer for development of his land. Such loans
are given in the form of direct finance to cultivators for better productivity. Loans under
this head cover various activities like land clearance, (removal of bushes, plants, trees etc).
land leveling and shaping, bench terracing for hill areas, contour stone walls, staggered
contour trenches, disposal drains, reclamation of saline/alkaline soils and fencing etc.

v) Minor Irrigation:
Credit for the creation of irrigation facilities from the underground/surface water
resources. All structures and equipments connected with the proposed facility are also
financed. Loans covering various activities like digging of new wells (open /borewells),
deepening of existing well (traditional/bore), emerging of well (oil engine/electrical pump-
set), laying of pipe lines, installing drip/sprinkler irrigation system and lift irrigation
system.

vi) Farm Mechanisation:

Purpose: Credit for the purchase of farm equipments and machinery for agricultural
operation. The scheme covers activities ranging from purchase of tractors and accessories,
trailers, power tillers, combine harvesters, power sprayers, dusters, threshers etc.

Eligibility: Farmers owning minimum 8 acres of perennially (continuously minimum two years)
irrigated lands are eligible.

Quotations for the assets to be purchased have to be submitted. Land records to ascertain
cultivation rights/title to the property are also required.

….55
 : 55 :

vii) Finance to Horticulture:

Such a loan is given for development of fruit orchards like mango, chikoo, guava, grapes,
pomegranate, apple, lechee etc. as well as the short-term fruit crops, (banana, pineapple
etc.), flowers in open and green houses (roses, jasmine, etc.), and vegetables crops (potato,
tomato, brinjal, gourds, peas etc.)
All farmers havening cultivable land are eligible for such a loan.

viii) Land purchase:

Loan to small and marginal farmers, landless –labours are granted by banks as per the
Govt. policy to purchase land for agriculture purpose.

The purchased land is itself provide security for the above mentioned loan.
Repayment of the said loan is half yearly or yearly installments depending on the harvest
of the crop.

3. Industrial Development Loan: Advances granted to industrial concerns by industrial

development banks and other commercial banks for short, medium and long-term are called
Industrial Finance.

4. Housing Loan (Home Loan):

A home loan is a loan which is granted by the banker to the borrower for purchasing,
repairing, renovating houses for the long term basis. Most of the banks are offering these
loans for long term at a very less rate of interest. Homes loans are granted by the banks as
priority loan as per the RBI’s guidelines and the Government’s Policy.

5. Vehicle Loan: Loans granted by banks to borrowers to buy new or used commercial or non-
commercial vehicles are kwon as vehicle loans. E.g. car, two-wheelers, auto-rickshaw, truck,
tempo, tractor, utility vehicles etc.

Rate of interest charged on such loans are more than housing loan but less than cash credit or
overdraft facility. This loan is granted against the security (hypothecation) of purchased
vehicle and other collateral / intangible assets. The mode of charge created on vehicle is
hypothecation.

6. Educational Loan: A term loan granted to Indian Nationals for pursuing higher education in
India or abroad where admission has been secured is known as educational loan. Such a
loan is granted for the payment of educational fees, educational expenses are known as
educational loan. This type of loan is granted to the students/student’s parents / guardian to
comply with the educational expenses. Bank charges interest on these loans at a concessional
rate of interest as slightly higher compared to housing loan, i.e. 9 % to 10 % per annum
approximately.

The educational loan covers the following expenses:

• Fees payable to college/school/hostel
• Examination/Library/Laboratory fees
• Purchase of Books/Equipment/Instruments/Uniforms, Purchase of computers-
essential for completion of the course (max. 20% of the total tuition fees payable for
completion of the course)
• Caution Deposit/Building Fund/Refundable Deposit (max. 10% of tuition fees for the
entire course)
• Travel Expenses/Passage money for studies abroad
• Cost of a Two-wheeler up to Rs. 50,000/-

….56
 : 56 :

[Educational loan is granted for the following education:

A) Studies in India:
• Graduation, Post-graduation including regular technical and professional Degree/Diploma
courses conducted by colleges/universities approved by UGC/ AICTE/IMC/Govt. etc
• Regular Degree/ Diploma Courses conducted by autonomous institutions like IIT, IIM etc
• Teacher training/ Nursing courses approved by Central government or the State Government
• Regular Degree/Diploma Courses like Aeronautical, pilot training, shipping etc. approved by
Director General of Civil Aviation/Shipping/ concerned regulatory authority

B) Studies abroad:
• Job oriented professional/ technical Graduation Degree courses/ Post Graduation Degree and
Diploma courses like MCA, MBA, MS, etc offered by reputed universities
• Courses conducted by CIMA (Chartered Institute of Management Accountants) - London, CPA
(Certified Public Accountant) in USA etc.]

Loan Amount:
• For studies in India - maximum Rs. 10 lacs
• Studies abroad - maximum Rs. 20 lacs
• Higher loan limit for studies in India are considered on case-to-case basis
• Higher loan limit for studies abroad are considered under our SBI Global Ed-Vantage
Scheme

Security
Particular Security
Only Parent/ Guardian as co-borrower. No Collateral Security or third
Upto Rs. 7.5 Lacs:
party guarantee
Above Rs. 7.5 Lacs: Parent/ Guardian as co-borrower and tangible collateral security
Margin
• Upto Rs.4 Lacs: Nil
• Above Rs. 4 Lacs : 5% for studies in India, 15% for studies abroad

Repayment:
• Repayment starts one year after completion of course/education.
• Loan to be repaid in 15 years after the commencement of repayment.
• In case second loan is availed for higher studies later, to repay the combined loan
amount in 15 years after completion of second course.

7. Personal Loan: A term loan granted to a customer (salaried persons, pensioners,

professionals) against collateral security or personal guarantee to meet his financial needs is
known as personal loan. E.g. marriage expenses, educational expenses, medical expenses,
celebration of family functions and other household expenses. etc.

Higher rate of interest is charged by lending banks on such loans are higher than housing and
education or vehicle loan .

8. Consumer Loan: (for purchases of domestic appliances)

Loan granted for buying household/domestic appliances like TV, Refrigerator, Air
conditioner, personal computers & accessories, and other household articles for is called as
consumer loan. 10 to 20 % margin is kept by banks while granting such loans. The
articles/appliances purchased through such loans are hypothecated to the lender as security.

Such loans are granted for the period from 6 months to 60 months.
Consumer loans are also classified as hire purchase method and Installment credit system.
 : 57 :

9. Loans to SSI/SHG
Small Scale Industry (SSI):
vmanufacturing, processing of goods, of which investment in the plant, and, machinery (excluding
land and, building), does not exceed Rs.5 crore.

Problems of SSI
a) Inadequate capital
b) Old machinery.
c) No research / experiment
d) Scarcity of raw material
e) Lack of highly qualified employees
f) Lack of planning
g) Lack of division of labour
h) Weak marketing – competition in the market.

Self Help Group (SHG) :

Self Help Group is a voluntary association of poor people, formed with the common goal of
social and economic empowerment. The members volunteered to organise themselves into a
group for the eradication of poverty of the members. They agree to save regularly and
convert their savings into a common fund known as the group corpus. (funds). The members of
the group agree to use this common fund and such other funds. Interest is charged by the
group on such advances given to the members. Registration of SHG is not compulsory if the
total number of members is less than 20.

Mr. Mohammed Yunus of Bangla Desh is the father of SHG movement. He has received
the Nobel Award for SHG movement

The salient features of SHG are as follows:

a) Groups of homogeneous (ekijanasaI) people from similar economic background living in the
neighbourhood.
b) Focus on women.
c) Saving first, credit later.
d) Credit prioritised among the members, which builds pressure for timely repayment.
e) Transparent operation, as decisions are taken collectively in meetings.

Now the banks are also allowed to give finance to SHGs as per the government policy.
.
Small Borrower : means a person of limited means. He is the person whose financial needs
are short/limited. E.g. grocer, tailor, small trader, hawker etc.

Hire Purchase System: is a method of purchasing articles, domestic appliances, goods etc.
In this method, the ownership and possession remains with the borrower, but the borrower
has no right to sell or dispose of the property till the full repayment of advance is made.

Installment Credit Method:

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 :58 :

CROSSING OF A CHEQUE
Drawing two parallel lines on the top face of a cheque is known as crossing. A crossed cheque can
not be encashed at the bank counter. Crossing is a direction given to the paying banker by the
drawer not to make the payment in cash to the payee. The payment of a crossed cheque is made
through the collecting banker and credited to the payee’s / customer’s account.

A cheque can be crossed by the drawer or payee or any holder of the cheque in certain cases but the
paying banker has no right to cross the cheque presented to him for payment.

Kinds of Crossing:
Crossing can be classified as -
1) General Crossing
2) Special Crossing
3) Double Special Crossing
4) Restrictive Crossing.

1) General Crossing
According to section 123 of the Indian Negotiable Act’1881 a cheque is said to be generally
crossed, if it bears across its face, two parallel traverse [go across/go over] lines with or without
words ‘and co., ‘and company’ or its abbreviation ‘& Co.’ and without words ‘Not Negotiable’,
‘ & Co.’, ‘A/c Payee’ etc.

Or we say that, the drawing of two parallel transverse [crossways / sloping] lines on the face of the
cheque is called general crossing.
The lines must be –
a) On the face of the cheque. (Not compulsory to be on the left top corner)
b) Parallel to each other.
c) In cross direction

Specimens of General Crossing:

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 : 59 :

Not Negotiable Crossing:

If the words ‘Not Negotiable’ are included either in general or in special crossing the cheque is said
to be Not Negotiably crossed. (u/s 130). The effect of the words ‘not negotiable’ is not to impede
[encumber / to hold up / hold back] transfer. (In simple words a cheque must be deposited in the account
of the payee only). The effect of the not negotiable crossing is to deprive [Deny or take away] the
holder of this right. It means such instrument will not be treated as a negotiable instrument though it
is negotiable instrument by the Negotiable Instrument Act because of its negotiability is blocked. If
the title of the transferor of such cheque is defective, the title of the transferee of such cheque would
also be defective.

Account Payee Crossing:

Some times the words “account payee” are included in the crossing. It is not only a direction given
to the paying banker but also a warning to the collecting banker, that the cheque must be colleted
only for the benefit of the payee’s account.

2) Special Crossing
According to section 124, a cheque is said to be crossed specially, “if it bears across its face an
addition of the name of a banker with or without words ‘Not Negotiable’ ”. Two parallel lines
may or may not be drawn. The paying banker should make the payment only through the bank
mentioned in the special crossing. i.e. collecting banker.

The special crossing on the cheque is a direction to the paying banker, to honour the cheque only
when it is presented through the collecting banker, whose name is mentioned in the crossing and
no other bank.

The cheque crossed specially thus becomes safer than the generally crossed cheque. The banker
(collecting banker) may appoint another banker as his agent for collection of such.

Special crossing of a cheque means “writing name of a particular bank to whom the payment
of the cheque is to be made, into the parallel lines on the face of the cheque, with or without
the words “Not Negotiable”

The most important factor in this type of crossing is the name of the particular bank. The drawee
bank (paying banker) will make the payment only to the bank mentioned in whose name the
cheque is crossed, for giving credit to the payee / holder. So the special crossing is till safer
method of making payments.

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 : 60 :

3) Restrictive Crossing
This is a third type of crossing, known as “Restrictive Crossing”. In this type the word “Account
Payee”, “Account Payee Only”, or “A/c X only” (X stands for the name of the payee) are added
to the general or special crossing. In recent years the practice of crossing cheques with the words
“Account Payee” or “Account Payee only” has sprung up. Such crossing is termed as
“Restrictive Crossing”.

Restrictive crossing is only a direction to the collecting banker that the proceeds are to be credited
only to the account of the payee named in the cheque. In case the collecting banker allows the
proceeds to be credited to some other, it may be held liable for wrongful conversion of funds. It
does not in any way affect the paying banker, who has simply to see that the cheque has been
presented to it for payment by any bank (named in the crossing) in the case of special crossing.

4) Double Special Crossing

A cheque bearing a special crossing is to be colleted through the banker specified therein. It
cannot, therefore, be crossed specially again to another banker i.e. a cheque cannot have two
special crossing, as the very purpose, of the first special crossing is frustrated (disturbed / irritated) by
the second one.

According to section 127 of the Indian Negotiable Instruments Act 1881, when a cheque is
crossed specially to more than one banker, except when crossed to an agent for the purpose of
collection the banker on whom it is drawn shall refuse payment thereon”. Thus paying banker
shall pay a cheque doubly crossed only when the second banker is acting only as the agent of the
first banker and this has been made clear on the instrument. Such crossing may be done in those
cased where the banker in whose favour the cheque has been specially crossed, does not have a
branch at the place where the cheque is to be paid.

It is essential that the words “as agent for collection” must be included in the double special
crossing. If the words “an agent for collection” are not included in the special crossing, the
paying banker should refuse to pay a cheque bearing double crossing.

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 : 61 :

Person authorised to cross a cheque: (Who can cross a cheque?)

Any bonafide holder of the cheque can cross the cheque.

1. The drawer:
The drawer can make general, special or restrictive crossing on a cheque before it is presented to
the banker.

2. The holder / Payee:

a) Where a cheque is uncrossed, the holder may cross it generally of specially.\
b) Where a cheque is crossed generally, the holder may cross it specially.
c) Where a cheque is crossed generally or specially, the holder may add the words “Not
Negotiable”.

3. The banker:
Where a cheque is crossed specially, the banker to whom, it is crossed may again cross it
specially, to another banker, to work as its agent for collection (Sec. 125). This is called double
special crossing.

Objectives of crossing a cheque:

The main object of crossing a cheque is to prevent the drawee bank and the receiver of the cheque
from any kind of loss. An open cheque may be lost or stolen or the endorsement of the payee of the
cheque may be forged under any of these conditions, the cheque may get into the hands of a wrong
person, who may present it at the banks and may receive the payment.

The banker cannot be expected to verify the identity of the person claming the payment of bearer
cheque. Such cheques always carry risk with them. To avoid such risks, the system of crossing has
been introduced. Special crossing is still safer as it makes difficult for any wrong person to claim the
amount. The banker whose name is mentioned in the special crossing will not agree to collect the
cheque from the drawee bank, unless it becomes sure of the payee’s rightful claim.

Who can open the crossing (who can cancel the crossing)? :
The drawer of the cheque has the right to open a crossed cheque by writing the words “Crossing
cancelled, please pay cash” or “Please pay cash” with his signature. It should be remembered here
that this method of opening a crossing does not have any legal authority behind it. It is dependent
upon the custom of bankers.

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 : 62 :

Difference between General Crossing and Special Crossing

Point of difference General Crossing Special Crossing
1. Method: Two parallel transverse lines on the face Two parallel transverse lines on the
of a cheque are essential. The name of face of a cheque are not essential. The
collecting banker is not written across name of the collecting banker must be
the face of the cheque. written across the face of the cheque
into the parallel lines.

2. Payment The amount of the cheque can be paid The amount of the cheque has to be
to whom: by the paying banker to any banker. paid by the paying banker to the
collecting banker named in the crossing
or its agent for collection.

3. Safety: It is safe as the payment of the cheque It is more safer because the amount of
across the counter is prevented. the cheque has to be collected by the
specified bank.

4. Conversion Conversion of general crossing into a Conversion of a special crossing into

special crossing does not require the general crossing requires the drawer’s
drawer’s confirmation (signature) for confirmation (signature) because such a
payment. conversion is regarded as a material
alteration.

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 : 63 :

ENDORSEMENT
The ownership of a negotiable instrument can be transferred in two ways.
I) By Negotiation & II) By Assignment

I. Negotiation:
The term ‘negotiation’ means “transfer of an instrument, from one person to another person so
as to constitute that person, the holder of the instrument”. (U/S 14)

Negotiation, therefore, involves the transfer of right, title and interest of a person in a negotiable
instrument, to another so as to give a good title to the transferee, and make him a holder thereof.

Negotiation differs from simple transfer. The latter may not necessarily involve the transfer of
the property (ownership) in the negotiable instrument. Negotiation presumes the intention to
transfer the ownership of the instrument by its present holder to another person.

In simple words – when a promissory note, bill of exchange or a cheque is transferred to any
person, so as to make that person, the holder thereof, such pro-note, bill or cheque is said to be
negotiated. So negotiation takes place when the transferee becomes the holder, so that he can
recover the amount due on the instrument from the parties to the instrument.

Parties to Negotiation:
1) Transferor: A person who transfers / draws the instrument.
2) Transferee: A person to whom the instrument is transferred.

II Assignment:
The term ‘assignment’ means “transfer of ownership in an article by means of a written and
registered document under the provisions of the Transfer of Properties Act”.
Parties to assignment:
1) Assignor: A person who transfers the instrument / document.
2) Assignee: A person to whom the instrument / document is transferred.

Negotiable instruments are also be transferred (with the ownership) by assignment. The assignee
also gets the rights of a holder but not of a holder in due course.

In other words, the assignee only acquires the rights of the assignor and no more.

e. g. : “A” executed a promissory note for Rs. 1000/- in favour of “R”, who in turn sold the
promissory note to “N” under a separate sales deed. “N” sued “A” for recovery of the amount of
the pro-note. “A” pleaded that “N” could not recover the money as he was not a holder in due
course. It was held that it was true that “N” was not a holder in due course but he was a holder
under section 8. Therefore, he could recover the money in ordinary course.

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 : 64 :

Difference between Negotiation and Assignment:

1. Formalities:
Though both negotiation and assignment involve transfer of rights in the negotiable instrument
yet the former requires very little formality as compared to the latter. Negotiation of a negotiable
instrument can be affected either by delivery or by endorsement & delivery. But assignment can
be affected only by a written and registered document/agreement, signed by the transferor.

2. Title:
Negotiation gives better title to the transferee than that of the transferor, provided he is a holder
in due course, but in the case of assignment of a negotiable instrument, the assignee would not be
able to get better than what the assignor has. An assignee of a negotiable instrument gets the
same title as that of the assignor whether it is good or bad (defective). Thus in simple words, an
assignee does not get the rights of a Holder-in-Due-Course.

3. Notice of Transfer:
Negotiation dose not require any notice of transfer by the transferee to the debtor but such a
notice is legally necessary in the case of assignment of a negotiable instrument to make it
complete and effective.

Modes of Negotiation:
Negotiation may be affected by transferring a negotiable instrument, with or without endorsement, to
another person. Instrument payable to bearer can be transferred by mere delivery while instrument
payable to order of a person are transferable by endorsement and delivery.

Thus, there are two ways of negotiation –

A) Delivery & 2) Endorsement & Delivery
A) Delivery:
Delivery is the voluntary transfer of the possession of the instrument. It should be given
voluntarily and with the intention of transferring the ownership of the instrument, to the person
to whom it is delivered.

Delivery of a negotiable instrument may be of the following kinds.

1) Actual Delivery2) Constructive Delivery & 3) Conditional Delivery

1) Actual Delivery:
Where the charge of the actual possession of the instrument takes place, the negotiable
instrument is physically handed over to the other person.

2) Constructive Delivery
Where the instrument is delivered to the servant, agent or any other person, who holds the
instrument on behalf of the person, to whom it was to be actually delivered.

[e.g.: ‘A’ endorses a promissory note in favour of ‘B’ and holds it as “B’s agent. There is constructive delivery by
“A” to “B”].

3) Conditional Delivery
Where the instrument is delivered with some conditions attached, the negotiation is not valid till
the condition is fulfilled.
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 : 65 :
B) Endorsement:
The term endorsement of a negotiable instrument means “writing of a person’s name on the back
side of the negotiable instrument, for the purpose of negotiation”. According to section 15,
“When the maker or the holder of a negotiable instrument signs his name, otherwise than such
maker, for the purpose of negotiation, on the back or face thereof, or on a slip of paper annexed
thereto it is said to have endorsed the instrument”.

In simple words, “Endorsement means signing on the back of the negotiable instrument with or
without the name of the person (to whom it shall be payable) for the purpose pf negotiation”.

When the back side of the instrument is full of endorsements and no further space for endorsement is
left out, a blank slip of paper may be attached to the instrument for further endorsement which called
here an “Allonge”.

The endorsement should be made in ink only.

Parties to the endorsement:

Endorser: A person who endorses the instrument is called the endorser.
Endorsee: A person in whose favour the instrument is endorsed is called the endorsee.

An endorsement is therefore, the transfer of the title to the negotiable instrument to the endorsee, by
signature and delivery made by the endorser, can not be made partially (in parts) If the endorsement
made to transfer only a part of the amount payable on the instrument is ineffective and treated as an
irregular endorsement. [u/s 56]

Who can do endorsement?

An endorsement can be made by –
1. The drawer, maker or endorsee of the negotiable instrument.
2. The holder of the instrument.
3. The payee of the instrument.

Rules of endorsement:
1. Endorsement should always be made on the back of the negotiable instrument, either a cheque or
a Bill-of-Exchange or a Promissory Note.

2. Complementary prefixes, suffixes, degrees etc. should not be added while endorsing the
instrument.
For example – A cheque payable to Prof. A B Suru should be endorsed as ‘A B Suru’ dropping
thereby the prefix ‘Prof’.

3. When the back side of the instrument is full of endorsements and no further space for
endorsement is left out, a blank slip of paper may be attached to the instrument for further
endorsement. Such a slip is called an “Allonge”.

4. The endorsement must be made by the drawer, maker or the holder of the instrument. A stranger
can not endorse it.

5. The payee must sign his name, in the same spellings as appearing on the face of the instrument.
While endorsing, there should be no difference in the signature.
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6. When an unmarried girl wants to endorse a cheque or a bill, she should endorse it by writing her
Christian [ik`scana] name followed by her surname.

For an example when the cheque payable to a payee ‘Miss Dhwani Shah’ should be endorsed as

Pay Nilkanth Potdar or order

Dhwani Shah

7. When a payee is a married women, she should endorse the instrument starting with her Christian
name along with husband’s surname followed by the words “wife of …… …(her husband’s name).

So Mrs. Smita Punekar can endorse a negotiable instrument as follows-

Pay Nilkanth Potdar or order

Smita Punekar, wife of P K Puneker

8. Left hand thumb impression should be backed by a proper witness, in the case of an illiterate
person.

9. Endorsement does not require any particular form of words. However, it must contain an order
to pay.

10. When the instrument is payable jointly, the endorsement must bear the signatures of all persons
concerned. Only one, on behalf of all can endorse it, provided he is authorised to do so.

11. In case of joint stock companies, public industries, and associations etc., the endorsement, should
be made by persons, who are duly authorised to sign on behalf of these institutions.
A cheque payable to ‘Maharashtra Co. Ltd.’ may be endorsed as -

“For Maharashtra Co, Ltd.,

Devanand Kapoor”

12. Endorsement must be completed by delivery of the instrument. This is a final and very
important step in endorsement process.

13. Endorsement should not be partial. It treated as invalid endorsement u/s 56.

Kinds of Endorsement
There are different kinds of endorsement.
1. Blank of General Endorsement
2. Special or Full Endorsement
3. Restrictive Endorsement
4. Qualified or Conditional Endorsement
5. ‘Sans Recourse’ Endorsement
6. Facultative Endorsement
7. ‘Sans Frais’ Endorsement

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Kinds of Endorsement
1. Blank of General Endorsement
When the endorser simply puts his signature on the bank of the instrument, without writing
anything or indicating the name of the endorsee, is called Blank or General Endorsement.

For example – the payee of the bill i.e. Mr. Nikhil Kapoor, wishes to endorse it to Mr. Sagar
Adwani, he may do so by making a blank endorsement thus.

Nikhil Kapoor

Such blank endorsement makes the bill a bearer one though originally it was payable to the order
of Mr. Nikhil Kapoor and can be transferred by mere delivery. The holder of a blank endorsed
instrument may convert it, into full endorsement by writing above the signature of the endorser,
the name of the person to whom he wants, it to make payable.

Here though the holder transfers the instrument, he does not incur the responsibility of an
endorser.

2. Special or Full Endorsement

When the endorser signs his name, after the name of the endorsee to whom he wants to make the
instrument payable or to his order, then such an endorsement is called Special or Full
Endorsement.
e.g.
Pay Akshay Oswal or order

Nikhil Kapoor

If the instrument is to be endorsed further then it requires the endorsement of Mr. Akshay Oswal.
A specially endorsed instrument can be further negotiated by endorsement and delivery.

e.g. Pay Smeer Ashraf or order Pay Akshay Oswal or order

Akshay Oswal Nikhil Kapoor

Pay Sameer Ashraf or order

Akshay Oswal
3. Restrictive Endorsement
When the endorser prohibits or restricts further negotiation of the instruments, it is called
restrictive endorsement. In this case the endorsee cannot transfer it to another person, but must
present it for payment when it falls due. Such endorsement is done as under.

Pay Akshay Oswal or order for collection

Pay Akshay Oswal only Pay Akshay Oswal for my use
Nikhil Kapoor
Nikhil Kapoor Nikhil Kapoor

In all the above cases of endorsement, transferability of the instrument is restricted.

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4. Qualified or Conditional Endorsement

Though a drawer can not draw a negotiable instrument conditionally, an endorser can endorse it
in a qualified or conditional manner. When the endorser adds certain conditions or qualifications
to the endorsement, it is called “Conditional or Qualified Endorsement”.

Pay Akshay Oswal or order on arrival of Shahrukh Khan in Mumbai

Nikhil Kapoor

By conditional endorsement, the endorser stipulates that has liability on the bill, depends on the
fulfillment of the condition mentioned. If the holder accepts a bill after it is conditionally
endorsed, he must fulfill the condition mentioned therein.

5. ‘Sans Recourse’ Endorsement

When an endorser does not want to make himself liable on the instrument it is dishonoured, he
may endorse the instrument as such by making it quite clear, that the endorsee or the subsequent
holders should not look to him for payment, if the instrument is dishonoured. This he can do by
adding the words “Sans Recourse” or “without recourse to me” after writing the name of the
endorsee. Such endorsement is called “Sans Recourse” endorsement. The endorser may
endorse such an instrument as under.
Pay Akshay Oswal or oder ‘Sans Recourse’ Pay Akshay Oswal or order without recourse to me

Nikhil Kapoor Nikhil Kapoor

Pay Akshay Oswal or order at his own risk

Nikhil Kapoor

In all the above cases of endorsement, the endorser expressly excludes his liability on the
instrument and he cannot be held responsible if the instrument is later on dishonoured.

6. Facultative Endorsement
Under this endorsement the endorser voluntarily waives [to give up] some of his rights and claims
exemption to the holder from his duties to him. In such a case, endorsement becomes a
facultative endorsement.
Pay Akshay Oswal or order : Notice of Dishonour waived
e.g.
Nikhil Kapoor

7. ‘Sans Frais’ Endorsement

When an endorser does not want the endorsee or any other subsequent holder to incur expenses
on the instrument on his account, he may endorse it as “Sans Frais”.

e. g. Pay Akshay Oswal or order “Sans Frais”

Nikhil Kapoor

In this case, the endorser is not liable for any expenses incurred by the endorsee /
holder.

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Difference between Blank Endorsement and Full (Special) Endorsement

Point of Blank Endorsement Full (Special) Endorsement

difference
1. Procedure Mere signature is made on the bank of Direction with signature is made on the
the instrument. back of the instrument by the endorser.

2. Conversion It converts an order instrument into a It converts a bearer instrument into an

bearer one. No further endorsement is order one. Further endorsement is needed.
needed.
3. Effect A blank endorsement on a bearer Full endorsement on an order instrument
document has no effect on its nature. retains its nature in fact.

4. Signature A blank endorsement can be converted Full endorsement can not be converted
into a full endorsement by addition of into a blank endorsement.
the direction above signature.

Difference between Crossing and Endorsement

Point of Crossing Endorsement

difference
1. Nature: It means drawing to parallel transverse It means signing on the reverse side of the
lines on the face of a cheque with or Negotiable Instrument with or without
without words like ‘& Co”. instructions regarding payment.
2. Where made: Crossing is always made on the face of Endorsement is always made on the
a cheque. reverse side of the Negotiable Instrument.
3. Purpose: The Purpose or effect of crossing is to The purpose or effect of endorsement is to
prevent the cheque being encashed at transfer the title of the instrument to
the counter. another person.
4. When made: It is made as a normal practice before It is done only when the holder wants to
issuing a cheque. transfer the instrument to another.
5. Signature: No signature is required for crossing a Endorser’s signature is required for
cheque. endorsement.
6. Possibility Crossing is possible in case of cheques Endorsement can be done in case of all
only. negotiable instruments payable to order.

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PAYMENT & COLLECTION OF CHEQUES AND BILLS

A) Payment of Cheques & Bills: A) Collection of Cheques & Bills:

a) Introduction & Meaning a) Meaning
b) Important Conditions of paying banker regarding cheque & bill. b) Banker’s position while collecting the cheques
c) Position of Paying Banker c) Duties of Collecting Banker
f) Duties & Responsibilities of paying banker Relating to cheque & d) Banker is bound to show reasonable care & skill in the collection
bill. d) Banker must present the cheque within reasonable time to the
drawee banker.

Cheque is one of the most important negotiable instrument used for making payments. Other
instruments such as promissory note, bill of exchange are also used for making payments.

A cheque is defined u/s 6 of the Negotiable Instrument Acts 1881 as “A Bill of Exchange, drawn on
a specified banker and not expressed to be payable otherwise than on demand.”
The principal parties of a cheque are
a) The drawer – who draws the cheque, i.e. the account holder,
b) The drawee – the specified banker on whom the cheque is drawn,
c) The payee – the person entitles to receive the money mentioned in the cheque from the
drawee.

In case of payment & collection of cheque there are two important banks who play the important role
in making payment or collecting money of the cheque.

a) The paying banker is the banker on whom the cheque is drawn by the drawer for payment of
money to the certain payee. He is the drawer’s banker.

b) The collecting banker is the banker with whom the cheque is presented for collection by the
payee. The banker is also known as the depositing banker, who collects the proceeds of the
cheque on behalf of the depositor, i.e. the payee.

A banker is under statutory obligation to make payment of a cheque drawn on an account.

According to sec. 31 of Negotiable Instruments Act 1881, a banker is statutorily obliged o honour
his customer’s cheque when duly required to do so. This section provides that the drawee of the
cheque has to make payment of the cheques presented considering the following points.

a) Having sufficient funds in the drawers account.

b) The funds in the account are properly applicable to the payment of such cheque.
For example, cheques can be paid out of the balance in the same account on with it is
drawn. The banker should not adjust the balance of two different accounts to make
payment of the cheque presented.

c) Must pay the cheque when presented for payment. Some of the circumstances, when
banker is not duly required to pay the cheque are:
i) The cheque is not properly drawn,
ii) The payment is not demanded within banking hours,
iii) The payment is countermanded (Stopped) by the drawer,
iv) The banker is informed about the death or insolvency of the drawer.

d) In default of such payment the drawee must compensate the drawer for any loss or damage
caused by such default.

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1
PRECUTION TO BE TAKEN BY PAYING BANKER:
The paying banker should take the following precautions before the payment of cheque.

1. The Branch/Bank on which the cheque is drawn.

2. Balance in the account.
3. Payment in due course
4. Date of the cheque.
5. Payee of the cheque.
6. Payable to bearer of order
7. Amount of the cheque.
8. The drawer of the cheque.
9. Drawer’s signature.
10. Mutilated cheque
11. Payment of cheque outside banking hours.
12. Materially altered cheque
13. Crossed cheque.
14. Payees discharge.

1. The Branch/Bank on which the cheque is drawn.

Normally, a cheque is presented for payment only at the branch where the account is maintained
by the drawer. But nowadays, due to Core Banking System, if available on the drawer’s account,
a cheque can be presented at any branch of paying branch for payment.

2. Balance in the account:

The balance in the account should be sufficient to meet the payment of the cheque presented after
leaving the minimum funds in the account. The balance in the account should be clearly
available to meet the payment of the cheque. There should not be any prohibitory order for the
payment such a cheque form the customer. For example, Assignment of Balance, Garnishee
Order, Stop payment order etc.

3. Payment in due course: (u/s 10)

“Payment of due course means payment in accordance with the apparent tenor of the instrument
in good faith and without negligence to any person in possession thereof under circumstances
which do not afford a reasonable ground for believing that he is not entitled to receive the
payment of the amount therein mentioned.”

The payment should be made in accordance with - a) date, b) crossing c) endorsement,

d) name of the payee, e) amount etc. as is apparent in the instrument. Any payment which is
in contradiction to any one of the above is not a payment in due course.

4) Date of the cheque.

The banker should not accept the cheques with the following types of dates.
A) Undated cheque,
B) Cheque with impossible date
C) Stale cheque
D) Post dated cheque,

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A) Undated cheque: A cheque which bears no date should be returned unpaid.

The holder of the cheque has the authority to fill up the proper date. As such a cheque
bearing different hand writing and different ink can be paid.

B) Impossible date: A cheque bearing impossible date should be returned unpaid. For
example, 31.11.2012, 30.2.2013,

C) State cheque: A cheque bearing out of date should be returned unpaid. State cheque means
a cheque which bears out of date.

The date of the cheque fixes the validity period for the payment of the cheque. At present
the validity period for a cheque or a demand draft is three month.

For example, a cheque drawn on 1.9.2012 presented for payment on 1.1.2013 should be
returned unpaid as stale cheque.

D) Post dated cheque:

In a cheque bears a future date, it is called post dated cheque. A paying banker should not
accept a cheque with future date.

But if the cheque is antedated but which validity period is not over, then the banker should
accept the cheque for payment.

A cheque dated on Sundays, holidays can be paid. A cheque bearing dates as per National
Saka Calendar is in order and should be paid.

5. Payee of the cheque.

The payee of the cheque should be certain. Otherwise the banker should not accept the cheque
for payment.

A) Payee – Minor:
As per sec. 26 of N.I. Act “A minor may draw, endorse, deliver and negotiate any
negotiable instrument” so as to bind all parties except himself. As such, a minor can be the
payee of a cheque. For example if a cheque is drawn by a drawer in favour of a minor say
aged 12 years, the cheque if otherwise in order can be paid.

B) Payee – Insolvent:
Where the payee of the cheque is an insolvent person, the cheque should not be paid. The
banker can make payment of such a cheque to the official receiver / assignee of the insolvent
payee.

C) Impersonal Payee:
If a cheque is drawn in favour of impersonal payee / fictitious persons, like ‘Lord Krishna’,
‘Harry Porter’, the banker should return the cheque. Even the cheque is endorsed by such
persons/payees the banker should not pay.

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D) Payee – A Company / Corporation, Govt. Department,

A cheque drawn in favour of a limited company / Corporation, Govt. Department, Trust,
Educational Institution; payable to bearer or order should not be paid in cash. The proceeds
of the cheque should be credited to the payees account.

Where cheques favouring the abovementioned payees are endorsed in favour of the
managing directors / directors, chairman / any employee of the company etc. should not be
paid, as it may lead to abetment of fraud.

E) Drawee Bank as Payee

Where the drawee bank is marked as payee of the cheque, it must ask for clear
instructions (Either on the cheque of by means of letter) for disposal of the proceeds.

F) Payee’s name is left blank.

If a cheque is drawn without writing name of the payee, the banker should return the
cheque with the reason “payees name required”.

6. Payable to bearer of order:

A cheque can be drawn without mentioning the words order or bearer. In absence of such
words, a cheque is treated as an order cheque. Therefore, if a cheque is payable to order, the
payment of such a cheque should be made to the payee only on production of his identity. It can
not be paid to some one except the payee without endorsement.

For Example: A cheque is payable to ‘A or order’ can be paid to ‘A’ or as per his order but by
endorsement. Incase of payment of order cheque, the banker should ask for the identity proof
of the payee or the person encashing the instrument through endorsement.

7. Amount of the cheque.

The amount of the cheque written in words and figures should math each other. If the amount
of a cheque written in words and figures differs from each other, the banker can return such a
cheque with reason ‘Amount in words & figures differs”.

As per section 18 of the Negotiable Instruments Act 1881, and as per the guidelines issued by
the Indian Banks Association, Where there is a difference between the amount written in
words and figures, the bank should pay the amount written in words.

If the amount is written only in words (and not in figures) the cheque can be paid. In case the
amount written in figures alone, the cheque should be returned unpaid with the reason
”Amount should be written in words”.

In practice, usually, the banker doesn’t accept a cheque for payment where there is a difference
between the amount of cheque written in words and figures.

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8. The drawer of the cheque.

The drawer of the cheque should be certain. The cheque should be drawn by the account holder
of the bank having cheque-book facility with the account.

If the drawer is an arrested person/ remanded person/ a person kept under trial, the banker
should not accept the cheque for payment. But cheque can be paid as in such circumstances of
civil liability has contractual obligation remains in fact. For example - payment of TAX, etc.

If the drawer is imprisoned / convicted person the cheque can be paid as the imprisonment does
not take away the contractual powers, where the imprisonment is due to criminal liability.
In other cases cheques should be return unpaid.

If the drawer is adjudged insolvent and imprisoned, a cheque can not be paid.

9. Drawer’s signature:
Before making payment of the cheque, the paying banker should verify the signature/signatures
of the drawer/drawers put on the cheque with the signature given on specimen signature card.
If both of them are matching each other then only the payment of the cheque should be made.

Forged signature: Where a signature is forged, the paying banker has no right to debit the
customer’s account.

Drawer/s signature differs: If the drawer’s signature differs from that given in the specimen
the cheque should be returned unpaid with the reason “Drawer’s signature differs”.

However the cheque can be paid, if the drawer confirms is signature in writing.

10. Mutilated cheque:

If a cheque is torn into two or more pieces, it is called mutilated cheque. The banker should not
make payment of such a cheque unless the mutilation is confirmed by drawer or by the collecting
banker certifying that the “mutilation is unintentional and guaranteed.

11. Payment of cheque outside banking hours:

If the payment of the cheque is made before or after the banking hours is not considered as
payment in due course. (Sec 65)

Cheques presented only within banking hours are to be paid. Actual payment may be made after
the banking hours (if it could not be made within banking hours.)

12. Materially altered cheque:

Any alteration /change in a cheque which makes a significant change in the mandate given by
the drawer, is called as Material Alteration.
For example alteration of date of cheque, amount of cheque, place of payment, name of payee,
order to bearer, crossed cheque to open cheque etc.
Each material alteration of cheque should be supported with the drawer’s signature.
In case a materially altered cheque is presented for payment with drawer’s supportive signature
the banker should not accept the cheque for payment.

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13. Crossed cheque:

Crossing means drawing two parallel transverse line on the top of face of the cheque with
or without the words, ‘not negotiable’, ‘account payee’, ‘A/c Payee’, ‘Not negotiable,
Bank of Maharashra’ Etc.

Object of crossing: Crossing is an instruction to the paying banker not to make payment
in cash, but to credit the amount to the payee’s account.. It also provides the safety of
payment.

If a crossed cheque is presented across the counter the banker should not pay in cash.

If the cheque is specially crossed, the banker should see that the cheque is presented by the
collecting banker whose name is mentioned in the crossing.

14. Payees discharge.

While paying a cheque (Order or bearer) in cash it is the practice of the bank to ask for
signature of the person receiving payment on the back side of the cheque. If the payee
refuses to sign, pleading the law does not require endorsement in case of a bearer cheque, a
separate receipt for such payment (stamped if required) can be insisted upon by the banker.

Thus to get legal protection in making payment of cheques, the paying banker should take the
abovementioned precautions before making payment of cheque.