Banking What is a Bank? A bank is defined as a commercial institution licensed as a receiver of deposits and giver of loans both short and long term Section 5(1)(b) of the Banking Regulation Act, 1949 definesbanking as, ing for the purpose of lending or investment, of deposits from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise. Section 5(1)( c) defines a banking company as, any company which transacts the business of banking in India. Banking involves therefore: the accept

The borrowing, raising or taking up of money; The lending or advancing of money either with or without security; The drawing, making, accepting, discounting buying, selling, collecting and dealing in bills of exchange, hundis, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments and securities whethertransferable or negotiable or not; The granting and issuing of letters of credit, travelers chequesand circulars not es; The buying and selling of foreign exchange including bank notes; The buying and selling of bullion and specie; The acquiring, holding, issuing on commission, underwriting anddealing in stocks , funds, shares, debentures, bonds, obligations, securities and investments of all kinds; The purchasing and selling of bonds, scrips or other forms ofsecurities on behal f of constituents or others, the negotiating of loansand advances; The receiving of all kinds of bonds or valuables on deposit or forsafe custody o r otherwise; The providing of safe deposit vaults; The collecting and transmitting of money and securities; Carrying on and transacting every kind of guarantee andindemnity business; Managing, selling and realizing any property which may form thesecurity or part of the security for any loans or advances or which maybe connected with any such security; Acting as agents for any government or local authority or anyother person or per sons; Contracting for public or private loans and negotiating and issuingthe same; The effecting, insuring, guaranteeing, underwriting, participatingin managing an d carrying out of any issue, public or private, municipal

or other loans or of shares, stock, debentures or debenture stock of any company, corporation or association and the lending of money forthe purpose of any such issue; Undertaking and executing trusts; Undertaking the administration of estates as executor, trustee orotherwise; Establishing, supporting and aiding institutions funds, trusts etc. for the benefit of its present employees and granting money forcharitable purpos es; Acquiring, constructing and maintaining any building for its own purpose; Selling, improving, managing, developing, exchanging, leasing, mortgaging or disposing its property; Doing all such things that are incidental or conducive to thepromotion or advanc ement of its business; Doing all other business specified by the Central Government asthe lawful busine ss of a banking company. Leasing and factoring hasbeen specified as permissible for banks by the Central Government. Prohibited Activities There are some activities banks are not allowed to do. The Banking Regulation Act prohibits banks from: Engaging directly or indirectly in trading activities andundertaking trading ris ks. Buying or selling or bartering of goods directly or indirectly. However, a bank can realize securities given to it or held by it for aloan, if n eed arises for the realization of the amount lent. Any activity that may be in direct conflict with their other work. This includes acting as brokers on the stock exchange or in the moneymarket or i n trading goods. Engaging on its own account alone or with others in wholesale orretail trade inc luding import or export trade. Acquiring or purchasing any immovable property or any interestexcept as necessar y for the purpose of conducting its business or ofhousing or providing amenities for its staff or for its own use. Otherwiseit should not be held for more than seven years. This period may beextended by the Reserve Bank by another five year s if it is satisfiedthat this extension is in the interest of the depositors. Acquiring or holding any part of the share capital of, or otherwisehave a direct interest in any financial, commercial, agricultural or otherundertaking. Engaging in any trade or buying, selling or bartering of goods forothers except in connection with undertaking the administration ofestates as executor, trustee or otherwise. Holding shares in any company whether as pledgee or mortgagee

or absolute owner of an amount exceeding 30 percent of the paid upcapital of tha t company or 30 percent of its own share capital andreserves whichever is less. Investing in a subsidiary company, financial services company, financial institution, stock or other exchange where the investmentexceeds 10 pe rcent of the bank s paid up capital and reserves. Investment in all such companies should not exceed 20 percent of thebank s paid up capital and reserves. Participating in equity of financial services ventures includingstock exchanges without obtaining the prior approval of RBI. Subsidiary Banking companies may form a subsidiary company, after obtainingthe prior approv al of the RBI for: Undertaking of any business permitted for a banking company. Carrying on the business of banking exclusively outside India Undertaking of such businesses which, in the opinion of theReserve Bank, would b e conducive to the spread of banking in India Transacting leasing business and or investing in shares ofequipment leasing comp anies Services rendered by banks Acceptance of deposits; Provision of credit; Collection of cheques, demand drafts, bills of exchange, promissory notes, hundis and foreign documentary and clean bills; Purchase of local and foreign currency documentary/ clean bills, negotiation of bills under inland and foreign letters of credit, advising ofinla nd and foreign letters of credit established by branches andcorrespondents; Carrying out standing instructions for payments; Issuance of performance and financial guarantees; Keeping in safe custody deeds and securities; Purchase and sale of securities; Remittance of funds; Collection of interest on securities, dividend on shares and collection of bills; Credit transfers; Issue of travelers cheques and gift cheques; Acting as executors and trustees; Issuance of credit cards; Underwriting, acting as bankers to new issues and as bankers forrefunds. Banker and Customer

Banker Section 3 of the Negotiable Instruments Act says that the term banker includes any person acting as a banker. Dr.Herbert Hart, in his book Law of Banking says, a banker is one who in the ordinary course of his business, honors cheques drawn upon him by persons from and for whom he receives money on current account. Halsbury s Laws of England defines a banker as an individual, partnership or corporation whose sole predominating business is banking, that is the receipt of money on current account or deposit account and the payment of cheques drawn by and the collection of cheques paid in by a customer. Sir John Paget says in his book, The Law of Banking , no person or body corporate or otherwise can be a banker who does not (1) take deposit accounts, (2) take current accounts, (3) issue and pay cheques and (4) collect cheques crossed and uncrossed for its customers. He adds that, one claiming to be a banker must profess himself to be one, and the public must accept him as such; his main business must be that of banking from which generally he should be able to earn his living. Customer Sir John Paget says, to constitute a customer, there must be some recognizable course or habit of dealing in the nature of regular banking business .. it is difficult to reconcile the idea of a single transaction with that of a customer . It was held in Mathews vs William Brown & Co (1894) that to constitute a customer , he should havesome sort of an account with the bank. The initial transaction in opening an account did not set up the relation of a banker andcustomer, and ther e had to be some measure of continuity andcustom. This came to be known as the Du ration Theory . The duration theory was set aside by Justice Bailhache in Ladbrokevs. Todd (1914 ) wherein it was stated, The relation of banker and customer begins as soon as the first cheque is paid in and accepted for collection and not merely when it is paid. Lord Dunedin observed, customer signifies a relationship in which the duration is not of the essence. In General Western Railway C. vs. London and County Banking Co. Ltd., it was stated, A customer is a person who has some sort of account, either deposit or current or some similar relation with a bank and from this it follows that any person may become a customer by opening a deposit or current account or having some similar relation with a bank. In Central Bank of India vs. Gopinathan Nair, the Kerala High Courtstated, a cust omer is a person who has the habit of resorting to the

same place or person to do business . It should be noted: A single transaction may constitute a customer. The customer should have an account Some frequency in transactions is expected. The dealing must be of a banking nature. The customer need not be a person but can be a company, asociety or other legal entity. General Relationship The relationship is that of a debtor and creditor. The positionwill depend on wh ether the bank has lent money or accepted deposits. The banker is not a mere depository or trustee. A depositoryreceives a sealed pa cket and undertakes to return it unopened. Banksdo this but it is a secondary fu nction. The banker is a bailee (customer bailor) when the customerdeposits valuables, bo nds or other documents with the bank. As thecustodian of the customer s assets, th e banker is liable for any losssuffered by the customer due to his negligence. The opening of an account by a customer and the bankeraccepting this involves a contractual relationship with rights andobligations both for the banker and the customer. The banker has to afford the facility to the customer to draw fundsfrom his acco unt in the bank by issue of cheques. Demand necessary in case of debt from the banker. This meansthe depositor has to demand his money as the banker will not in theordinary course of events return the deposit unless it is asked for. The banker is an agent of the customer for remittances, collectionof cheques and payments on his behalf. The banker is a lessor when he leases safe deposit lockers to a customer. The banker is a trustee with regard to safe custody depositsdeposited with the b ank. The banker is a consultant when he advises customers. Under the Indian Limitation Act 1963, to file a suit to recover money deposited by a customer when it is payable on demand is threeyears from th e date of demand. With regard to fixed deposits it is threeyears from the date t he receipt is produced for payment. Banks are liable for thefts or embezzlement by employeescommitted during the cou rse of the bank s business. It is irrelevantwhether it was done for the benefit of the employer or not. The banker acts as an agent of his customer and performs severalagency functions for the convenience of customers such as thecollection of cheques.

Refusal by the banker not to provide service to a customer is notproper even if the customer owes money that has not been repaid. A banker can combine one or more accounts kept by a customerin his own right unl ess he is under obligation to keep them separate. However, a banker cannot combine a customer s personal account witha joint account . The right to combine two or more accounts is notapplicable to contingent or fu ture debts. The customer has no right to treat two accounts as one orcombine them. Obligations Banks have an obligation to honor cheques drawn on it if thecustomer has suffici ent funds. It is also obliged to honor cheques uptothe overdraft limit of a cust omer. The obligation is extinguished by agarnishee order from the court Banks are obliged to maintain secrecy of client accounts. Thereare times when in formation may be divulged. The banker may giveinformation: When he is statutorily required to do so. With express or implied consent of the customer. To other banks. This is known as common courtesy betweenbanks. In this case apar t from making general statements no specificinformation such as balances and the like are given. If it is in the bank s interest. If the disclosure is in public/ national interest. Banker is bound to act according to the directions given by thecustomer. If no d irections are given the banker should act according tohow he is expected to act. Care should be taken to ensure that the information given isgeneral and only fac ts that are evident should be revealed. The bankershould avoid giving opinions. Lien Lien means the right (of a creditor) to retain (in the absence of anagreement to the contrary) goods and securities owned by the debtorbailed (given as security ) to the bank until the loan due from thedebtor is repaid. The creditor (bank) h as the right to retain the securityof the debtor but not to sell it. The lien ma y be particular or general. Particular Lien A craftsman can retain those goods on which he has spent time, effort and money until he is paid. General Lien General lien gives the banker the right to retain goods and

securities entrusted to him in his capacity as a banker and in theabsence of a c ontract inconsistent with the right of lien (Section 171 ofthe Indian Contracts Act, 1872). It extends to all goods placed with himas a banker by his customer w hich are not specifically identified foranother purpose. He cannot exercise gene ral lien if: The goods and securities have been entrusted to the banker as a trustee or an agent. A contract exists between the banker and the customer that is inconsistent with the banker s right of general lien. A banker s lien is more than a general lien. It is an implied pledgeand he has the power to sell the goods in case of default. The right of lien is conferred upon the banker by the IndianContract Act and as a consequence no separate agreement is required. To be safe though the banker should take a letter of lien stating thatthe goods/ securities are entrusted as security for a loan existing andfuture and that the banker can exercise his lien on them. The banker can also sell the goods if the customer defaults. It should however be noted that the right of lien can be exercisedonly on goods standing in the name of the borrower and not jointly withothers. The banker can exercise his right of lien on securities remaining inhis possessi on after the loan for which they were lodged is repaid bythe customer, if no con tract to the contrary exists. In such cases thereis a presumption that the custo mer has re-offered the same securitiesas a cover for any other advance outstandi ng or to be takensubsequently. There are exceptions: The banker has no lien on valuables entrusted to the banker as a bailee or trustee. There is no lien on documents deposited for a special purpose orwith specific in struction that the proceeds are to be utilised for aspecific purpose. The banker s general lien is displaced by circumstances that showan implied agreem ent inconsistent with the right of general lien. The banker has no lien on securities left with the banker negligently or inadvertently. The banker cannot exercise his lien on securities deposited as atrustee in respe ct of his personal loan. If the banker is not aware thatthey do not belong to th e customer, his lien is not affected. The banker s right of lien extends over goods and securitieshanded over to the ban ker. Money deposited in the bank and creditbalance in the account does not fall in the category of goods andsecurities. The banker can therefore use his right o f setoff as opposedto lien with regard to money deposited with him.

The s the The oods. The Right

right can be exercised on the customer s property only andnot on joint account debtor has. banker cannot exercise the right when the debt has notmatured or on stolen g banker cannot exercise lien when he can exercise set off. of set-off

This enables a debtor to set off a debt owed to him by a creditorbefore the latt er recovers a debt due to him from the debtor. Banks possess the right of set-off. Banks can combine twoaccounts in the name of the same customer and set off the debit balance in one account with the credit balance in the other. The funds must belong to the customer. The right of set-off can be exercised if there is no agreementexpress or implied that is contrary to this right. It can be exercised onlyafter a notice is serve d on the customer intimating the customer thatthe banker intends to exercise the right of set-off. To be on the safeside bankers take a letter of set-off from t he customer authorizing thebank to exercise the right of set-off without giving him any notice. Automatic right of set off Death of the customer. When a customer becomes insolvent. Garnishee order issued on the customer s account by court. When a notice of assignment of credit balance to someone elsehas been given by t he customer to the banker. When a notice of second mortgage has been received by thebank on the securities already charged to the bank. There are some conditions: The accounts must be in the same name and in the same right(the capacity of the account holder must be the same). Funds held in trust accounts are deemed to be in different rights. The right can be exercised in respect of debts due and not inrespect of future o r contingent debts. The amount of debts must be certain and absolute. The banker may exercise this right at his discretion. The banker has right to exercise this right before a garnisheeorder is made effe ctive. There must be no agreement to the contrary. Right of Appropriation In the normal course of business, a banker receives paymentsfrom customers. If customers have more than one account or has taken more than

one loan, the customer has the right to direct his banker against whichdebt the payment should be appropriated. If the customer does notadvise and there is more than one debt outstanding in the name of thecustomer, the bank can exercise its right and apply it in payment ofany debt. The banker can even apply it against time barred debts. However, once an appropriation has been made it cannot be reversed Section 59 of the Indian Contract 1872 states the right ofappropriation is veste d in the debtor. He can appropriate the payment by an express intimation orunder circumstances im plying that the payment is to be applied to thedischarge of some particular debt . If the creditor accepts this, it must be applied accordingly. Money received should first be set off against interest. Section 60 of the Indian Contract Act states that if the debtor does not intimate or there is no circumstance indicating how thepayment is to be applied, the right of appropriation is vested in thecreditor. Section 61 of the Indian Contract Act states that where neither party makes any appropriation, the payment shall be applied indischarge of the d ebts in order of time. If the debts are of equalstanding, the payment should be applied in discharge of eachproportionately. Any payment made by a debtor should be applied in the firstinstance towards sati sfaction of interest and thereafter towards principal unless there is an agreement to the contrary. If a customer has a single account and he deposits and withdrawsmoney from it re gularly, the order in which the credit entry will set offthe debit entry is in t he chronological order. This is known as Clayton srule and is based on the judgmen t made in the Clayton case. Right to charge interest As a creditor the banker has the implied right to charge intereston the advances granted to the customer. Bankers normally chargeinterest monthly. There may be an agreement otherwise in which casethe manner agreed will determine how interes t is to be charged. Right to charge service charges Banks charge customers if their balance is below a stipulatedamount, for the usa ge of ATMs (Automated Teller Machines) andwithdrawals. Banks are free to charge these but the Reserve Bank of Indiaexpects banks to adv ise their customers of this at the time of openingthe account and advise them wh en changes are being made. Period of limitation

The period of limitation for the refund of bank deposits is threeyears from the date a customer makes a demand for his money. Withregard to fixed deposits, the limitation is from the date it matures. Termination of Relationship The banker customer relationship terminates on: Voluntary termination. Death of the customer Bankruptcy of the customer Liquidation of the company Insanity of the customer BANK CUSTOMERS A customer is one who has an account with a bank. Customers may beminors, marrie d women, pardanashin women, illiterates, lunatics, trustees, executors and administrators, power of attorney holders, jointaccount holders, proprietorships, Hindu undivided families, partnerships, limited companies, clubs, societies and charitableinstitutions. Th ey may also be non-residents and foreigners. Minors A minor is someone who is under 18 years of age. If a minor has acourt appointed guardian he/ she will remain a minor till the age of 21. In the case of a Hindu minor, the natural guardian is the father andthen the mot her. This does not include stepfathers/ stepmothers. Inregard to a minor married girl, her husband shall be the naturalguardian. If the father becomes a sanyasi (Hindu holy man) or does notremain a Hindu he will not remain a guardian. A Hindu father may appoint a guardian. Such a guardian will act afterthe death o f the parents. The court may appoint a guardian if, in the court s opinion, the fatheris unfit be a guardian. The Supreme Court has held that a mother can act as the naturalguardian if the f ather is not in actual charge of the affairs of the minorbecause of his indiffer ence or because of an agreement with themother. The Reserve Bank has advised banks to permit the opening ofminor s accounts (fixed , saving and recurring deposit accounts) withthe mother as the guardian even if the father of the minor is alive. TheSupreme Court in Githa Hariharan & another held that and after him does not mean after the death of the father but refers to the father s absence from the care of the minor s property. Banks must have inplace safeguards to ensure that the accounts are never overdrawn and

always remain in credit. The Contract Act 1872 states that a minor is not capable of enteringinto a valid contract. A contract for the supply of necessaries of life to aminor is, howeve r, a valid contract. A minor can repudiate all othercontracts. A banker must the refore be careful in his dealings withminors. If a minor enters into a contract representing himself as a major andthen refuse s to honor the contract on the grounds that he is a minor, the minor has to restore the benefits he got through the contract. Savings accounts (not current accounts) may be opened in the nameof minors. This may be: In the name of the minor to be operated upon by the guardian. In the name of the minor to be operated by himself if he is 12 yearsold or more. Two minors above the age of 12 can operate a joint account At the time of opening the account, the date of birth of the minor isrecorded. When the minor reaches maturity, the minor s account in theguardian s name should be closed and the balance should be paid tothe accountholder or the balance should be transferred to a new account If the father of a Hindu minor dies, his mother becomes the natural guardian. If the mother dies also during his minority there would beeither a gua rdian appointed by the will of the mother (naturalguardian) or a guardian will b e appointed by court. Banks would returnthe balance in the account to that guard ian. In the case of Muslim minors mothers cannot sign as guardians. If a minor dies, the guardian can withdraw the balance in theaccount. If it is a joint account the balance will be at the absolutedisposal of the guardian. If the guardian dies the balance can be paid to the minor aftermaturity or to th e natural guardian. There is no risk in opening an account in the name of a minor so longas it is no t overdrawn. Bankers cannot recover money due if there is aloan or an overdraft as it is ab initio invalid. If a minor has pledgedassets for a loan, the banker cannot possess these assets, as thepledge is invalid. If an advance is granted to a minor on the guarantee of a third party, this advance cannot be recovered from the guarantor also as thecontract between the creditor (banker) and the principal debtor (minor) is invalid. Minors can draw, endorse or negotiate cheques and bills but cannotbe held liable or sued if these are not honored. A minor can be admitted to a partnership with the consent of theother partners b ut he will not be liable for losses. He must within 6

months of becoming a major repudiate his liability as a partner. Otherwise he can be held liable for the debts of the partnership. A minor can be an agent but he cannot be held responsible to hisprincipal. Married Women A married woman may enter into a valid contract. She may open abank account. With regard to debts taken the husband will not be liable unless theloan is take n with his consent and authority or it is for the necessariesof life. Pardanashin Woman As a pardanashin women is normally completely secluded and doesnot generally dea l with the public at large, it is presumed that: 1. Any contract that she enters may have been subject to undueinfluence and 2. The contract may not have been made freely and with fullunderstanding of the contract. To enforce the contract the other person will have to prove that thelimitations mentioned above do not exist. Illiterate Persons Accounts may be opened for illiterate persons. As they cannot sign their names their thumb impressions are usuallytaken. These should be attested by a person known to the bank. Normally illiterate persons are not given cheque books. To withdrawmoney the acc ount holder is expected to come in person and affix histhumb impression in the p resence of a bank official for identification. There is no legal bar in two illiterate persons having a joint account. Ideally account opening forms should have a clause wherein it isstated that the terms of account opening and banking has beenexplained to the account holder. Th e account holder should affix histhumbprint in the presence of a witness/ offici al. Lunatics Lunatics and persons of unsound mind are not competent to enterinto a valid cont ract. Accounts should not be opened for persons of unsound mind. If abanker has discou nted a bill written, accepted or endorsed by a personof unsound mind, the banker can realize the money only if he canprove that he was not aware of the lunacy o f the other person. All transactions in the account of a person declared to be of unsoundmind must b e suspended when a banker receives notice that anaccount holder is of unsound mi nd.

If an account holder becomes senile or of unsound mind, he should not be permitted to handle his account. Trustee A trustee is a person on whom confidence is reposed. Trusts are formed by a document called the trust deed. Bankers should examine the trust deed thoroughly and determine thepowers vested in the trustees. Trustees are usually expected to actjointly. They are not permi tted to delegate their powers unless the trustdeed permits them to do so. If there are two or more trustees, there must be clear instructions on who may operate the account. If one or more trustees dies or retires, the authority vested in theremaining tr ustees will be as stated in the trust deed. When all thetrustees are dead, new t rustees may be appointed by court. The insolvency of a trustee does not affect the trust property and acreditor can not recover his claim from the trust. The banker must safeguard the interest of the beneficiaries. Otherwise he may have to compensate them for any fraud on the partof the trustee . Trustees may borrow from banks and pledge or mortgage trustproperty only if the trust deed confers these powers on them. Executors and Administrators Executors are persons appointed by the will of a person to managehis estate afte r his death. The powers and authority of an executor isderived from the will and he has to act in accordance with the directions given in the will. Administrators are appointed by the court to manage the estate of adeceased pers on. The administrator is appointed by the court througha letter of administratio n, which will detail his authority. They are expected to realize the assets of the deceased person andpay off his de bts. On the death of an account holder, all payments from his accountmust be stopped. The executor may be allowed to operate the accountafter he has had the will pro bated. The administrator can operate theaccount after he has received the letter of administration. An account will normally be opened in the name of the executor/ administrator and styled, MNO executors to the estate of DEF deceased. If two executors/ administrators are appointed, they will have a jointinterest i n the estate of the deceased. This interest cannot be divided. With regard to bank accounts they should jointly agree on how it is tobe operate d. If this is revoked, they should sign jointly or the bankershould take a fresh letter of authority.

The banker must be careful to ensure there is no misappropriation. He should not permit transfers to the personal accounts of executors/ administrators. If an executor/ administrator dies and he is one of the jointsignatories of an a ccount, cheques issued should not be dishonoredbecause his powers are vested in the surviving executors/ administrators. Bankers cannot exercise their right of set off of the deceased s debitbalance agai nst the creditor balance in the executor s personal account. If the executor requires a loan to make payments before receipt ofthe probate, t he advances are made on the personal security of the executor. After probate is granted, the executor may pledge specific assets toobtain an ov erdraft unless the will specifically forbids it. If a loan is given all the executors should sign the documents. Power of Attorney Holder A customer may give another his power of attorney to operate hisbank account. It is a general notice and an authority. It is different from an ordinarymandate to operate a bank account. The power of attorney holder is an agent of the account holder andacts in his na me. This may be special or specific (to operate the bank account or otherspecific po wers like the sale of property) or general (which may givethe holder authority t o act on the customer s behalf for many activitiesincluding banking). The power of attorney should be stamped and registered with theRegistrar of Docu ments or attested by a notary public. It must be in force at the time the bank account is operated. The attorney holder must be acting within the scope of authoritygiven to him. The power of attorney holder must be properly identified and hisaddress should b e verified. As far as possible account the principal should sign the accountopening form. If the power of attorney permits the holder to openaccounts he may do so. However, confirmation from the principalshould be obtained before actual operation. The account should be opened in the name of the principal with theheading ABC (pri ncipal) by DEF (agent/ power of attorney holder). It is not necessary to use the word constituted attorney. If it is signed per pro ABC, it means that the holder has the limitedauthority to sign cheques. It must be ensured that the power of attorney does not contain

conditions or events on it that will make it difficult for the banker. A condition such as, during my absence from India indicates that on hisreturn the po wer of attorney would be cancelled. The difficulty could bethat the bank would n ot know when exactly the person returned. A power of attorney holder cannot delegate his powers/ authority toanother. A power of attorney is cancelled: If the principal cancels the power of attorney If the purpose for which it has been given ends. If the principal dies or in some other way loses the ability to enter intoa cont ract (unsound mind) Joint Account A joint account is in the name of more than one person. The application for the joint account must be signed by all thepersons opening t he account. Banks should examine every request to open joint accounts carefully. In particular the purpose, the nature of business and the financialstatus of the holders. Clear instructions must be procured regarding the manner ofoperation which may b e: By all the depositors jointly; By either or survivor; By former or survivor; By the depositor jointly or by the survivor. It should be clearly stated as to who may operate the account andstate their aut hority. If this is not given then only cheques signed by allthe persons in whose name the account stands should be honored. A joint account holder who is authorized to operate the accountcannot by himself appoint an agent to operate the account. Any joint account holder (even one not authorized to operate theaccount) can sto p payment of a cheque. The full name of the account should be given on all documents sentto the bank ev en if the account is operated by one or some of the jointaccount holders. The banker must take a mandate to determine who are permitted tooverdraw the acc ount. The authority to operate the account can be revoked by any of thejoint holders. It is automatically revoked if any of the joint holders dies, becomes bankrupt or of unsound mind. In these situations all chequesmust be stop ped. The banker must be given clear instructions with regard towithdrawal of securiti es in the joint account and the powers of jointaccount holders to pledge these s ecurities. If one or more of the jointholders becomes insolvent, the mandate joi ntly given by them to the

banker ceases to operate. No payments from the account should bepermitted in ord er to determine the liability of the person who hasbecome insolvent. Payments ma y be made only on the instructions ofall the joint account holders and the recei ver of the insolvent accountholder. The application form should have a clause stating to whom thebalance is payable in the event of the death of an account holder/ account holders. This may be a specific person or the survivor. Thisinstruction can be revoked by any of the account holders. In that casethe amount will be pay able on the discharge of all the joint account holders. On the death of a joint holder: If there is no agreement to the contrary, his representative and thesurviving jo int holder/s are jointly entitled to claim money from thebank. If all the joint holders die, the legal representatives of all of themcan jointly claim the amoun t (section 45 of the Indian Contract Act1872). Where an account is opened either or survivor , the banker is notbound to repay the amount to the representatives of the deceased andthe survivor jointly. It permi ts him to repay the amount to the survivor. The banker should also not honor cheques drawn by the deceased jointholder witho ut obtaining the concurrence of the surviving joint holders. If the joint account has a debit balance, the account should be closedto determi ne the liability of the deceased joint holder. If not the rule inClayton s case wi ll become applicable. If the banker pays the balance to the survivor/s he gets gooddischarge (if it is accordance with the mandate of the joint accountholders. He need not investigat e whether the survivor is entitled to theamount in question. The legal heirs of the deceased will need to movethe court if they wish to claim the balance or a p art of it. Joint holders may together nominate a person who should receive themoney should all of them dies. Proprietorships A proprietorship, though the account of an individual, is the accounthe maintain s for a commercial enterprise that he owns. It is not important that the proprietor alone operates the account. Hecan permit / authorize others to do so too. Hindu undivided family A Hindu undivided family possesses ancestral property and carries onancestral bu siness. All the members (coparceners) are descended from a common ancestor. Ownership of the assets (property) passes onto the members of the

family. In those families governed by the Mitakshara School of Indian lawevery male memb er acquires an interest in the joint property on birth. After the passing of the Hindu Succession Act the share of adeceased coparcener is divisible among his wife, daughters and otherfemale members as defined in the act. The family business and assets are managed by the eldest malemember. He is known as the karta. The karta has an implied authorityto take a loan, execute the req uired documents and pledge securitieson behalf of the family for the sake of the business. It is recommendedthough that either all the family members sign the d ocuments or theyauthorize the karta in writing. This is to avoid disputes at a l ater stage. The karta is permitted to borrow only for purposes beneficial to thefamily. Coparceners liability for loans granted is limited to the extent of theirinterest in the joint property. If, however, they along with the kartaratify the loan, t hen they become personally liable. If there is a minor coparcener, his guardian must sign the documentson his behal f. When he reaches 18, he should sign again to signify hisassent to the undertak ing given by the adult coparceners. The account is normally opened in the name of the karta or in thename of the HUF business. The account is operated by the karta or authorized coparceners. Partnership A partnership is the relation between persons who have agreed toshare the profits of the business carried on by all of them acting forall. A partnership is established by an agreement. This may be oral orwritten. As sev eral bodies expect the partnership to be registered andto avoid ambiguity it is better partnership agreements are written. The minimum number of partners in a firm cannot be less than two. The number of partners should not exceed the statutory limit. Apartnership firm of more than 10 persons carrying on banking businessor more than 20 persons carr ying on any other business is illegalunless it is registered under the Companies Act 1956 or is a Hinduundivided family or formed in pursuance of some other law . If thepartnership exceeds this limit it is illegal and it cannot enter into ac ontract or sue in its own name. If a partner joins or leaves the partnership, the old partnership endsand a new one comes into place unless there is an agreement ofcontinuity. A minor may be admitted into a partnership provided there are twoothers since a minor cannot enter into a legal contract. A partnership account must always be opened in the name of the

firm and not in the name of the individual partner/ partners. At the time of opening a bank account, the application form shouldbe signed by a ll the partners or by those authorized by the partners. Inthe latter case there should be a resolution signed by all the partners. If a partner is out of the country the other partners can open anaccount. To be safe operations should not be allowed until the partnerreturns and signs the acc ount opening documents. Specimen signatures of all the partners must be procured. The bank should take a letter signed by all the partners that has: The names and addresses of the partners, The nature of business undertaken and The names of the partners who will operate the account. The authority for a partner to operate the account can be revoked byany of the p artners by giving notice to the banker. In that circumstancethe banker must stop payment of cheques signed by that partner. Though the banker may pay cheques signed by all the partners, it isrecommended t hat a fresh mandate signed by all the partners besought. A partner can also stop the payment of a cheque signed by any otherpartner of th e firm. Furthermore sleeping partners and partners whoare not authorized to oper ate the bank account can also revoke theauthority of other partners and issue in structions to the bank. In suchcases a fresh mandate from the partners should be sought. A partner authorized to operate the account cannot delegate hisauthority to anot her person without the consent in writing by all the partners. If a cheque payable to the partnership is endorsed by a partner and isdeposited by him to be credited to his personal account, thetransaction should be done onl y after checking with all the other partners. A partner acts as an agent of the partnership for the purpose of thebusiness of the partnership (firm) and thus binds the partnership by hisacts and deeds. This authority is called implied authority . Every partner is liable both individually and jointly with other partnersfor all the acts of the firm or instruments executed provided they weredone: In the name of the firm and In connection with the business of the firm Even one partner can bind the firm for the debts incurred by him onbehalf of the firm. To bind the firm the signature should state thelegend for and on behalf of the firm Just stating XYZ, Partner ABC & Co is not sufficient. If a partner does something which is not related to the kind ofbusiness carried on by the firm, other partners will not be liable for

losses/ debts incurred. A partner has the power to borrow on behalf of the firm to carry onthe firm s busi ness. Such a debt will be binding on the firm and all thepartners. If however th e partner s powers are limited and he is notpermitted to manage the affairs of the firm, then he does not possessthe power to borrow. The liability of a partner is unlimited unless he is a limited partner. At dissolution the debts of the firm shall be settled out of the assets of the firm and the surplus is to be applied to paying the debts of the partners. If the partners are also indebted, the personal assets of thepartners should be applied first to meet the claims of their individualcreditors. The rem aining should be used to meet the dues to thecreditors of the firm. If however t he documents are signed by thepartners individually as well as jointly (as a par tner) creditors of thefirm can recover their debts simultaneously. The joint and several liability of partners continue till: 1. All the debts of the firm are paid 2. The constitution of the partnership changes due to death, retirementor insolv ency of a partner. If a partner dies the partnership ends if there is no agreement to thecontrary. The heirs of the partner do not automatically becomemembers. They have a right t o the deceased s share of the partnership assets. On the dissolution of the partnership arising from the death of apartner, the fi rm s bank account should be closed. This is importantsince if the account is overd rawn the liability of the individual partnerswould need to be determined. If the firm is not dissolved, a new account should be opened in thename of the r econstituted firm. When a partner retires, his liability to outside parties (including thebank) cea ses in respect of all transactions entered into after hisretirement. If the bank er is not informed, the retiring partner willcontinue to be liable. If a partner becomes insolvent the partnership comes to an end. Theinsolvent par tner ceases to be a partner from the date he is declaredinsolvent and will not b e liable for transactions entered into after that date. An insolvent partner s cheques written before his becoming declaredinsolvent shoul d be paid only after getting confirmation from all other partners. As soon as a partner is declared insolvent, the account should beclosed and a ne w account should be opened. Limited Companies Limited companies are legal entities under the law. They are viewed

as persons and are entitled to enter into contracts, own property, suein their o wn name and do all acts that an individual may do. A publiclimited company has t o have a minimum of seven members. There isno maximum. On the other hand a priva te limited company has to haveatleast two members. It cannot have more than fift y members. Thisexcludes those in the employment of the company during the period ofshare allotment. Banks must examine the company s memorandum and articles ofassociation to determin e what it may or may not do. The certificate of incorporation and certificate of commencement ofbusiness must be examined as these provide conclusive proof that thecompany is incorporated a nd is permitted to do business. A privatelimited company is not required to obta in a certificate ofcommencement of business. The memorandum of association is the document that details the constitution of the company. It contains the name of the company, itsauthorized share capital, its objects, the amount it may borrow and theliability of the mem bers. The objects clause is important as anycontract entered into contrary to th e objects is unenforceable. The articles of association detail the rules and regulations relating toits inte rnal (day to day) management such as the powers of directors. Along with an application to open a bank account, the company mustfurnish a boar d resolution that approves the opening of the bankaccount and how the account sh ould be operated and by whom. The amount a company can borrow is stated in its memorandum ofassociation. If th e company wishes to borrow more, the excess must beapproved by the members in a general meeting. The maximum thatmay be borrowed is stipulated by Section 293 (1 ) d of the CompaniesAct 1956. If directors borrow money without authorization and the money isused by the comp any, the company is bound to repay the money. Banks must ensure that borrowings are only for purposes mentionedin the memorand um of association. The bank must obtain a certified copy of the resolution to borrow. The board must also pass a resolution that the borrowing is within itslimits. If collaterals are taken for loans/ advances, a charge must be createdwith the r egistrar of joint stock companies within 30 days. While granting a loan, it is important to check whether there are priorcharges ( which may be fixed or floating) as these can have a prior rightover the charge b eing created. If a director of the company has his personal account with the bankand he endors es and deposits cheques drawn on the company to hispersonal account, the banker must ascertain the nature of the deposit.

Clubs, Societies and Charitable Institutions When clubs, societies and charitable institution open accounts withbanks, it sho uld be ensured that they are incorporated. These organizations are governed by their byelaws or its constitutionwhich will detail how they are to operate. A resolution of the managing committee is required to open a bankaccount. This s hould detail who are the signatories and the manner theaccount should be operate d. Before permitting a society or club to borrow it should be ensured theborrowing is permitted. If the person appointed to operate the account dies or resigns, operation should stop till the society/ club nominates another person. Care should be ensured that an authorized signatory does notendorse and bank clu b/ society cheques into his own account. Non-Resident The Foreign Exchange Management Act defines a resident and statesthat all others are non-residents. A person resident in India is: (i) A person residing in India for more than one hundred and eighty twodays duri ng the course of the preceding financial year but does notinclude: (A) A person who has gone out of India or stays outside India, in either case (a) for or on taking up employment outside India, or (b) for carrying on a business or vocation outside India, or (c) for any other purpose in such circumstances as would indicate hisintention t o stay outside India for an uncertain period. (B) A person who has come to India or stays in India, in either caseother than: (a) for or on taking up employment in India, or (b) for carrying on a business or vocation in India, or (c) for any other purpose in such circumstances as would indicate hisintention t o stay in India for an uncertain period; (ii) Any person or corporate body registered or incorporated in India. (iii) An office, branch or agency in India owned or controlled by aperson reside nt outside India. (iv) An office, branch or agency in India outside India owned orcontrolled by a person resident in India. A person resident outside India is a person who is not resident in India i.e. a person who stays outside India or has otherwise gone out of India. (a) for or on taking up employment outside India, or (b) for carrying on a business or vocation outside India, or

(c) for any other purpose, in such circumstances as would indicate hisintention to stay outside India for an uncertain period. This includes: An Indian citizen residing abroad for employment, business, vocationor for any o ther business. Persons of Indian origin holding a passport issued by a foreigncountry residing abroad. An Indian government servant posted abroad. An Indian government servant deputed abroad on assignments withforeign governmen ts or international agencies. An officer of the State government/ public sector deputed abroad ona temporary a ssignment. An Indian student who goes abroad to study. An Indian student who takes up a job after studies in a foreignuniversity Persons of Indian origin In 2002 the Government of India created a new category calledPersons of Indian O rigin (PIO). A PIO is a foreign citizen not being a citizen of Pakistan, Bangladeshand other c ountries as may be specified by the Central Governmentfrom time to time if: (i) he/ she at any time held an Indian passport; or (ii) he/ she or either of his parents or grand parents or great grandparents was born in and permanently resident in India as defined in theGovernment of India Act 1935 and other territories that became part ofIndia thereafter provided neit her was at any time a citizen of Pakistan, Bangladesh and other countries as may be specified by the CentralGovernment from time to time. (iii) he/ she is a spouse of a citizen of India or a person of Indian origincove red under (i) or (ii) above. Facilities available to a PIO He does not require a visa to visit India. He does not need to register if his stay in India does not exceed 180days. If a PIO s continuous stay exceeds 180 days he/ she will have to gethimself/ herse lf registered within 30 days of the expiry of 180 days withthe concerned Foreign ers Registration Officer at the districtheadquarters where the PIO is residing. A PIO holder enjoys parity with NRIs in respect of all facilitiesavailable to th e latter in the economic , financial and educational fields except in matters relating to the acquisition of agricultural/ plantationpropert ies. No parity is allowed in the sphere of political rights.

Dual Citizenship On December 22, 2003 the Citizenship (Amendment) Act 2003 waspassed permitting n ationals of certain countries dual citizenshipprovided they are of Indian origin . In this context Indian origin will mean a citizen of another countrywho is eligi ble to become a citizen of India at the time ofcommencement of the constitution or belonged to a territory thatbecame a part of India after August 15, 1947. The act does not coverthose people who, at any time , were citizens of Pakistan, Ba ngladeshor any other country which the government may notify in the official gazette. Those who acquire citizenship will be known as an overseas citizenof India. An overseas citizen of India is defined as a person who: (i) is of Indian origin being a citizen of a specified country, (ii) or/ was a citizen of India immediately before becoming a citizen of aspecif ied country and is registered as an overseas citizen of India bythe Central Gove rnment. (iii) an overseas citizen will not be entitled to the rights conferred on acitiz en of India and will not have the right to equality of opportunity inmatters of public employment, will not have voting rights and also willnot be eligible to b e a member of either the Lok Sabha or the RajyaSabha. Dual citizenship has been extended to people of Indian origin living inAustralia , Canada, Finland, France, Greece, Ireland, Israel, Italy, theNetherlands, New Z ealand, Portugal, Republic of Cyprus, Sweden, Switzerland, UK and the United States of America. It is proposed tooffer this to those in all countries. No person who has been deprived of his Indian citizenship will beregistered as a n overseas citizen of India except by an order of theGovernment. They will not be required to have a visa while visiting India and canbuy propert y and enjoy equality with non resident Indians ineconomic, financial and educati onal fields. The fee to secure Indian overseas citizenship is Rs. 12,500. Of this$25 would be non refundable if the application is turned down. Foreigners Foreigners are citizens of another country who are not of Indiandescent. Foreigners residing and working in India may open bank accounts. Others may open accounts for a short period of time. Prior to opening an account the passport and other documents shouldbe checked.

KNOW YOUR CUSTOMER It is important, in these days of drugs smuggling, terrorism, financial fraud, m oney laundering and arms dealing that banks know whom their customers are. Banks must be comfortable with the bona fides and the integrity of their customers. The need i ncreases as external people like general selling agents introduce a number of customers. Apart from this, in order to develop a long- term relationship, it is an imperative th at the banker knows as much as possible about his customer. What does this mean? It means that a banker should know his customers. He should know about their bus iness and as far as possible the nature of their earnings and their moral standing. This is why it is recommended that persons known to the bank recommend prospecti ve customers. Even though the introducers cannot be sued or otherwise held responsi ble, the introducers have a moral responsibility. A banker loses the statutory protection available under section 131 of the Negot iable Instruments Act if it is proved that he was negligent while opening an account. Actually, this is also reinforced by the concept of relationship banking. How ca n you offer your client exceptional service if you do not know what he requires? You n eed to be able to anticipate his requirements. You can do this only if you know your custo mer well. The second reason is on borrowing customers. It would be very short sighted to l end to someone you do not know. Although there was some laxity regarding the enforcement of the Know Your custom er (KYC) imperative, recent happenings such as terrorism, money laundering and drug smuggling has brought the need of KYC to everyone s focus. Headquarters of banks, governments and by extension central banks are insisting on KYC policies being strictly adhered to. Reserve Bank of India In India, The Reserve Bank of India has been issuing guidelines on KYC regularly . Some of the more important instructions are mentioned below. It was instructed: In August 1976 that applicants for demand drafts, travelers cheques and money transfers should affix their Permanent Account Number (PAN) on the application f or transactions of Rs. 10,000 and above. In November 1987 it was stated that cash should not be accepted for retirement o f import bills. It was also stated that there must be a reasonable time (say 6 mon ths) between the time an introducer opens his account and introduces a prospective ac

count holder. Introduction of an account should enable the proper identification of th e person opening the account so that the person can be traced if the account is misused. In April 1991, banks were instructed that travelers cheques, demand drafts, mail

transfers and telegraphic transfers for Rs. 50,000 and above should be by debit to the customer s account or against cheques only and not against cash. In August 1992 banks were advised to adhere to the prescribed norms and safeguar ds while opening accounts. In December 1992 banks were asked to ensure that when customers withdrew amounts from their cash credit/ overdraft accounts that funds were not diverted for the acquisition of fixed assets, investments in associate companies and acquisition of shares an d other capital market investments. In September 1993, banks were asked to be vigilant and ensure proper end use of bank funds. They were to keep vigil over heavy cash withdrawals by account holders th at may be disproportionate to their normal trade/ business requirements. They were also asked to question unusual trends. In November 1993 on account of fraudulent encashment of interest/ dividend warra nts banks were asked to not open accounts without proper introduction. In December 1993 banks were asked to seek customer identification while opening accounts including the obtaining of photographs of customers. In April 1994 the RBI clarified that photographs must be obtained for both resid ents and non- residents and for those authorized to operate accounts. In September 1994 on account of fraudulent operations in deposit accounts, banks were asked to examine every request for opening joint accounts very carefully. General ly crossed cheques and payable to order were to be collected only on proper endorsement. Banks were also asked to exercise care in the collection of cheques of large amounts and ensure that joint accounts are not used for benami transactions. In May 1995 banks were asked to introduce a system of close watch of new deposit accounts and monitor cash withdrawals and deposits for Rs. 10 lakhs and above in deposit, cash credit and overdraft accounts. In September 1995 banks were asked to report to the RBI all transactions of Rs. 10 lakhs and above. In December 2001, banks were asked to keep a watchful eye on transactions that m ay be by terrorist organizations. In April 2002 banks were instructed to freeze accounts of individuals and entiti es identified by the Security Council Sanctions Committee of the United Nations. In May 2002, Banks were asked to ensure no new accounts were opened by banned organizations. In August 2002, the Reserve Bank reinforced its instructions stating: The key principle of the know your customer procedure should be the identification of an individual/ corporate opening an account. This should entail an introductory reference from an existing account holder/ person known to the bank.

The board of directors must have in place adequate procedures to verify the bona fide identification of individuals. There should also be processes to monitor transac tions of a suspicious nature. This instruction raised the requirement of giving PAN to transactions of Rs. 50, 000 or more (earlier it was Rs. 10,000 August 1976).

There must be good control systems plus audits and checks to ensure the bank adh eres to its KYC policies. There should be a system at branch level to ensure that lists of terrorist entit ies are circulated so that accounts/ transactions are not opened/ consummated. Transactions of a suspicious nature must be reported to the appropriate authorit ies. It should be ensured that all the laws are adhered to. In May 2004, it was stated that information collected from the customer for KYC purposes should not be used for cross selling. In recent years on account of the proliferation of banks and their opening branc hes in locations that they had no branches before, it has been difficult to adhere stri ctly to KYC guidelines. In these instances, introductions by prominent citizens and individu als known to the bank are considered acceptable. The concern is usually with respect to ac counts introduced by outsiders retained for this purpose who are remunerated on the bas is of the number of accounts they introduce. The consensus in these days of intensive comp etition is that this is an acceptable risk if proper documentation to verify the anteced ents of the person is taken. In November 2004, the RBI issued comprehensive guidelines. These reiterated that the objective of Know Your Customer (KYC) guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money launderin g activities or for the financing of terrorism. KYC procedures also enable banks t o know / understand their customers and their financial dealings better which in turn hel p them manage their risks prudently. The guidelines are applicable to foreign currency accounts / transactions and to all new accounts. . Banks have been asked to frame their KYC policies incorporating the following fo ur key elements: Customer Acceptance Policy Customer Identification Procedures Monitoring of Transactions Risk management For the purpose of KYC policy, a customer has been defined as: A person or entity that maintains an account and / or has a business relationshi p with the bank; One on whose behalf the account is maintained (i.e. the beneficial owner). This includes beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and Any person or entity connected with a financial transaction, which can pose sign ificant reputation or other risks to the bank, such as a wire transfer or issue of a hig h value demand draft as a single transaction.

Know Your Customer (KYC) procedure is to be the key principle for identification of an individual / corporate opening an account. The customer identification should entail verification through an introductory reference from an existing account holder / a person known to the bank or on the basis of documents provided by the customer. The Board of Directors of the banks are to have in place adequate policies that establish

procedures to verify the bona fide identification of the individual / corporate opening an account. Policies to establish processes and procedures to monitor transactions of a suspicious nature in accounts and systems of conducting due diligence and report ing of such transactions must be in place. Customer Acceptance Policy (CAP) There must be a clear customer acceptance policy that lays down explicit criteri a for acceptance of customers. The Customer Acceptance Policy must ensure that explici t guidelines are in place on the following aspects of customer relationship in the bank. o No account is opened in anonymous or fictitious/ benami name(s); o Parameters of risk perception are clearly defined in terms of the nature of bu siness activity, location of customer and his clients, mode of payments, volume of turn over, social and financial status etc. to enable categorization of customers into low, medium and high risk (banks may choose any suitable nomenclature viz. level I, level II and level III); customers requiring very high level of monitoring, e.g. Politically Expose d Persons (PEPs) may, if considered necessary, be categorized even higher; o Documentation requirements and other information to be collected in respect of different categories of customers depending on perceived risk and keeping in min d the requirements of the Prevention of Money Laundering (PML) Act, 2002 and guideline s issued by Reserve Bank from time to time; o Accounts should not be opened nor should an existing account be closed where t he bank is unable to apply appropriate customer due diligence measures i.e. bank is unable to verify the identity and / or obtain documents required as per the risk categoriz ation due to non cooperation of the customer or non reliability of the data / information fur nished to the bank. It may, however, be necessary to have suitable built in safeguards to avoid harassment of the customer. For example, decision to close an account may be tak en at a reasonably high level after giving due notice to the customer explaining the rea sons for such a decision; o Circumstances, in which a customer is permitted to act on behalf of another pe rson / entity, should be clearly spelt out in conformity with the established law and p ractice of banking as there could be occasions when an account is operated by a mandate hol der or where an account may be opened by an intermediary in a fiduciary capacity; o There must be checks before opening a new account so as to ensure that the ide ntity of

the customer does not match with any person with known criminal background or wi th banned entities such as individual terrorists or terrorist organizations etc. o Banks should prepare a profile for each new customer based on risk categorizat ion. The customer profile must contain information relating to the customer s identity, soc ial / financial status, nature of business activity, information about his clients busi ness and their location etc. The nature and extent of due diligence will depend on the ri sk perceived by the bank. However, while preparing customer profile banks should ta ke care to seek only such information from the customer, which is relevant to the risk c ategory and is not intrusive. The information provided by the customer for KYC complianc e while opening an account is confidential and divulging any details thereof for c ross

selling or any other purpose would be in breach of customer confidentiality obli gations. Any other information from the customer should be sought separately with his/ he r consent and after opening the account. Banks are to strictly ensure compliance w ith their obligations to the customer in this regard. o For the purpose of risk categorizations, individuals (other than high net wort h) and entities whose identities and sources of wealth can be easily identified and tra nsactions in whose accounts by and large conform to the known profile may be categorized as l ow risk. Illustrative examples of low risk customers could be salaried employees wh ose salary structures are well defined, people belonging to lower economic strata of the society whose accounts show small balances and low turnover, Government departme nts & Government owned companies, regulators and statutory bodies etc. In such cases , the policy may require that only the basic requirements of verifying the identity an d location of the customer be met. Customers that are likely to pose a higher than average risk to the bank may be categorized as medium or high risk depending on customers background , nature and location of activity, country of origin, sources of funds and his cli ent profile etc. Banks may apply enhanced due diligence measures based on the risk assessmen t, thereby requiring intensive due diligence for higher risk customers, especially th ose for whom the sources of funds are not clear. Examples of customers requiring higher due diligence may include (a) non-resident customers, (b) high net worth individuals , (c) trusts, charities, NGOs and organizations receiving donations, (d) companies hav ing close family shareholding or beneficial ownership, (e) firms with sleeping partners, ( f) politically exposed persons (PEPs) of foreign origin, (g) non-face to face custo mers, and (h) those with dubious reputation as per public information available, etc. o It is important to bear in mind that the adoption of customer acceptance polic y and its implementation should not become too restrictive and must not result in denial o f banking services to general public, especially to those, who are financially or socially disadvantaged. Customer Identification Procedure (CIP) The policy approved by the board of banks should clearly spell out the Customer Identification Procedure to be carried out at different stages i.e. while establ ishing a banking relationship; carrying out a financial transaction or when the bank has a doubt

about the authenticity / veracity or the adequacy of the previously obtained cus tomer identification data. Customer identification means identifying the customer and verifying his/ her identity by using reliable, independent source documents, data or infor mation. Banks need to obtain sufficient information necessary to establish, to their sat isfaction, the identity of each new customer, whether regular or occasional, and the purpos e of the intended nature of banking relationship. Being satisfied means that the bank mus t be able to satisfy the competent authorities that due diligence was observed based on th e risk profile of the customer in compliance with the extant guidelines in place. Such risk-based approach is considered necessary to avoid disproportionate cost to banks and a burdensome regime for the customers. Besides risk perception, the nature of info rmation / documents required would also depend on the type of customer (individual, corpor ate

etc.). For customers that are natural persons, the banks should obtain sufficient ident ification data to verify the identity of the customer, his address / location, and also hi s recent photograph. For customers that are legal persons or entities, the bank should: o Verify the legal status of the legal person/ entity through proper and relevan t documents; o Verify that any person purporting to act on behalf of the legal person / entit y is so authorized and identify and verify the identity of that person; o Understand the ownership and control structure of the customer and determine w ho are the natural persons who ultimately control the legal person. Banks may frame their own internal guidelines based on their experience of deali ng with such persons/entities, normal bankers prudence and the legal requirements as per established practices. It should be noted that wherever banks desire to collect any information about t he customer for a purpose other than KYC requirements, it should not form part of t he account opening form. Such information may be collected separately, purely on a voluntary basis, after explaining the objectives to the customer and taking his express approval for the specific uses to which such information could be put. There must be Know Your Customer procedures for existing customers. Banks are expected to have adopted due diligence and appropriate KYC norms at th e time of opening of accounts in respect of existing customers. However, in case o f any omission, the requisite KYC procedures for customer identification should be com pleted at the earliest. Additionally, banks must, on the basis of materiality, apply th e KYC guidelines to all existing accounts. Transactions in existing accounts should be continuously monitored and any unusu al pattern in the operation of the account should trigger a review of the customer confidential documentation measures. Banks could apply monetary limits to such accounts based on the nature and type of the account. It may however be ensured that all existing accounts of companies, firms, trusts, charities, religious organization s and other institutions are subjected to minimum KYC standards which would establish the id entity of the natural/ legal person and those of the beneficial owners. Banks should also ensure that term/ recurring deposit reated as new accounts at the time of renewal Where the bank is unable to apply of information and or/ non-cooperation ccount or terminate the relationship after accounts or accounts of similar nature are t and subjected to revised KYC procedures. appropriate KYC measures due to non-furnishing by the customer, the bank should close the a issuing due notice to the customer explainin

g the reasons for taking such a decision. Such decisions need to be taken at a reasona bly senior level. To ensure that existing small account holders are not inconvenienced and the KYC procedure is completed in time, banks may limit the application of KYC procedure s to existing accounts where the credit or debit summation for the financial year end ed March 31, 2003 is more than Rs.10 lakh or where unusual transactions are suspected.

KYC procedures must applied to all existing accounts of trusts, companies/firms, religious/charitable organizations and other institutions or where the accounts are opened through a mandate or power of attorney. Monitoring of Transactions Ongoing monitoring is an essential element of effective KYC procedures. Banks ca n effectively control and reduce their risk only if they have an understanding of the normal and reasonable activity of the customer so that they have the means of identifyi ng transactions that fall outside the regular pattern of activity. However, the ext ent of monitoring will depend on the risk sensitivity of the account. Banks should pay special attention to all complex, unusually large transactions and all unusual patterns, which have no apparent economic or visible lawful purpose. The bank may prescribe threshold limits for a particular category of accounts and pay par ticular attention to the transactions which exceed these limits. Transactions that involve large amounts of cash inconsistent with the normal and expected activity of the customer should particularly attract the attention of t he bank. Very high account turnover inconsistent with the size of the balance maintained may indicate that funds are being washed through the account. High-risk accounts hav e to be subjected to intensified monitoring. Every bank should set key indicators for such accounts, taking note of the backg round of the customer, such as the country of origin, sources of funds, the type of tr ansactions involved and other risk factors. Banks should put in place a system of periodica l review of risk categorization of accounts and the need for applying enhanced due dilige nce measures. Banks should ensure that a record of transactions in the accounts is preserved a nd maintained as required in terms of section 12 of the PML Act, 2002. It may also be ensured that transactions of a suspicious nature and / or any other type of tran saction notified under section 12 of the PML Act, 2002, is reported to the appropriate l aw enforcement authority. Banks should ensure that its branches: o Continue to maintain proper record of all cash transactions (deposits and with drawals) of Rs.10 lakh and above. o Have an internal monitoring system that has an inbuilt procedure for reporting of large cash transactions and those of a suspicious nature to controlling/ head office o n a fortnightly basis. Early computerization of branch reporting will facilitate pro

mpt generation of such reports. o Report transactions of a suspicious nature to the appropriate law enforcement authorities designated under the relevant laws governing such activities. o Have well laid down systems for freezing of suspicious accounts. o There must be quarterly reporting of suspicious accounts to the audit committe e of the board or the board of directors. Terrorism Finance

RBI has been circulating lists of terrorist entities notified by the Government of India to banks so that banks may exercise caution if any transaction is detected with suc h entities. There should be a system at the branch level to ensure that such lists are consu lted in order to determine whether a person/organization involved in a prospective or ex isting business relationship appears on such a list. The authority to whom banks may re port accounts suspected to belong to terrorist entities will be advised in consultati on with Government. Adherence to Foreign Contribution Regulation Act (FCRA), 1976 Banks should also adhere to the instructions on the provisions of the Foreign Contribution Regulation Act, 1976 cautioning them to open accounts or collect ch eques only in favor of associations that are registered under the Act by the Governmen t of India. A certificate to the effect that the association is registered with the Governme nt of India should be obtained from the concerned associations at the time of opening of the account or collection of cheques. Branches of banks should be advised to exercise due care to ensure compliance an d desist from opening accounts in the name of banned organizations and those witho ut requisite registration. Remittances Banks must ensure that any remittance of funds by way of demand draft, mail/ telegraphic transfer or any other mode and issue of travelers cheques for value o f Rs50,000 and above is effected by way of debit to the customers account or agains t cheques and not against cash payment. Customer Education Implementation of KYC procedures requires banks to demand certain information fr om customers which may be of personal nature or which has hitherto never been calle d for. This can sometimes lead to a lot of questioning by the customer as to the motive and purpose of collecting such information. There is, therefore, a need for banks to prepare specific literature/ pamphlets etc. so as to educate the customer of the objecti ves of the KYC program. The front desk staff needs to be specially trained to handle such s ituations while dealing with customers. Introduction of New Technologies Credit cards/debit cards/smart cards/gift cards Banks should pay special attention to any money laundering threats that may aris e from new or developing technologies including internet banking that might favor anony

mity, and take measures, if needed, to prevent their use in money laundering schemes. Many banks are engaged in the business of issuing a variety of electronic cards that are used by customers for buying goods and services, drawing cash from ATMs, and can be used for electronic transfer of funds. Further, marketing of these cards is gene rally done through the services of agents. Banks should ensure that appropriate KYC procedu res are duly applied before issuing the cards to the customers. It is also desirable tha t agents are

also subjected to KYC measures. Importance of RBI Guidelines It should be noted that RBI guidelines are issued under Section 35 (A) of the Ba nking Regulation Act, 1949 and any contravention will attract penalties under the rele vant provisions of the Act. Banks are advised to bring the guidelines to the notice o f their branches and controlling offices. RBI guidelines also apply to the branches and majority owned subsidiaries locate d abroad, especially, in countries that do not or insufficiently apply the Financi al Actions Task Force (FATF) recommendations, to the extent local laws permit. When local applicable laws and regulations prohibit implementation of these guidelines, tha t fact should be brought to the notice of Reserve Bank. KYC and Lower income Groups In October 2005, the RBI stated that these guidelines should not be an excuse fo r banks to keep the poor away from the banking system. Though the KYC guidelines require an individual opening a new account to produce a number of identification documents , these could be done away with for lower income groups. The RBI has asked banks to ensu re that the inability of the lower income group to produce documents to establish t heir identity and address does not lead to their financial exclusion and denial of ba nking services. A simplified procedure could be provided for opening of account in res pect of those persons who do not intend to keep balances above Rs. 50,000 and whose tota l credit in one year is not expected to exceed Rs.100,000. DEPOSIT ACCOUNTS The acceptance of deposits and maintenance of these deposits is the core activit y of banks. It is arguably the most important function as without deposits banks will not have funds to invest or lend. The relationship between a banker and a customer begins when the customer opens an account and deposits an amount in that account. As customers have different needs, bankers offer different types of deposit acco unts. Types of deposit accounts The different types of deposit accounts a customer can place his money in are: Demand deposits Fixed or time deposits Demand Deposits Demand deposits are those deposits where the money deposited is available to the

depositor on demand. There are two types of demand deposit accounts. These are: Current Accounts. This is defined by the Reserve Bank as a form of demand deposit

wherefrom withdrawals are allowed any number of times depending upon the balance in the account or upto a particular agreed amount and shall also be deemed to inclu de other deposit accounts that are neither savings deposit or term deposit. Savings Accounts. A savings account has been defined as a deposit account ..which

is subject to the restrictions as to the number of withdrawals as also the amoun ts of withdrawals permitted by the bank during any specified period. Call Deposits. These are deposits maintained by banks. These are kept overnight or for a period of time and are interest earning. Fixed Deposit Fixed Deposit. A fixed or time deposit is defined as a deposit received by a bank for a fixed period and which is withdrawable only after the expiry of the said fixed p eriod and shall also include deposits such as recurring, cumulative, annuity, reinvestment deposits, cash certificates and so on. The manner these accounts operate and their differences are detailed in the ensu ing chapters. OPENING OF DEPOSIT ACCOUNTS By opening a deposit account, an individual who has no other account with the ba nk, begins a relationship. The beginning of a relationship imposes several obligatio ns on a banker. He must therefore be careful regarding whose accounts he opens. An account can be opened by anyone who can enter into a valid contract. Minors m ay open an account jointly with their guardians. Bankers may allow minors to open s avings accounts in their single name and operate the account. These will be savings acc ounts and minors will not be permitted to overdraw these accounts. This is to inculcate ba nking habits. Who places their funds in deposit accounts? Deposits are opened by those who have funds in hand. These include: Individuals; Sole Proprietorships; Hindu Undivided Families (HUF); Partnerships; Trusts; Associations / Societies and Clubs; Limited Companies. Persons who are not permitted to open accounts are those who cannot enter into a contract such as persons of unsound mind. Introduction

The Reserve Bank of India insists (and it is good banking practice) that those o pening accounts are properly introduced. This becomes even more important in view of terrorism, frauds and money laundering. The bank must be satisfied that the pers on who opens an account is indeed the person he claims to be and is respectable. The banker will get legal protection under Section131 of the Negotiable Instrume nts Act (which governs payment and collection of negotiable instruments) only if the ban k has acted in good faith and without negligence. It is presumed that he has not acted without negligence if he accepts a customer who has not been properly introduced. The RBI also states that proper identification enables the bank to trace the per son later if required. Therefore the RBI states that the practice of obtaining proper introduction shou ld not be treated as a mere formality but as a measure to safeguard against opening of acc ounts by undesirables or in fictitious names to deposit unaccounted money. The account should not normally be opened without a meeting between the bank off icial and the customer. The introduction should be by: An existing customer. It is required that the individual should be of some stand ing and been a customer for at least 6 months. This is to ensure accounts are not opened on the introduction of new account holders or persons having small and marginal balance s. The RBI recommends this interval to enable the bank to monitor transactions in the a ccount and satisfy itself that transactions in the introducer s account are satisfactory. A respectable person of the local community known to the bank or the bank s staff. This is often the case when a bank is opening its first branch in a town/ city. Another bank/ banker. This occurs when a person is new to a location but has bee n having a banking relationship with another bank in another city. Bank managers/ bank staff should be discouraged from giving the introduction. In these cases, apart from verifying the signatures with the specimen signatures on recor d, written confirmation should be procured of the introduction. Till the confirmation is pr ocured, the bank should not collect cheques/ drafts through the newly opened account. The banker will seek from the introducer comfort that the person being introduce d is a respectable person that he is honest, with integrity and morals. It should be no ted that the introducer has only a moral responsibility. He cannot be sued or otherwise t aken to task if the person he has introduced turns out to be an undesirable person Where the customer is not able to provide a satisfactory introduction, it must b e made incumbent on him to provide sufficient proof of his antecedents before the accou nt is

opened. Customers of good standing should be educated to realize the implications of introducing an account without knowing the person introduced. The RBI makes concessions regarding those who will be getting credits by way of salary and makes payments by cheques to government, semi-government agencies and individuals. In their case a simple introduction is considered adequate However, in the case of accounts which are to be used for remittance transaction s and for collection of cheques of substantial amounts besides business payments, deep er

enquiries are required. The RBI has advised banks to incorporate a certificate in account opening forms confirming the identity, occupation and address of the prospective customer sign ed by the introducer The RBI has also said the role of the introducers should be made more specific. It is not adequate to say that he has known the person for a sufficient length of time. There may be times when the introducer may be unable to visit the bank to introd uce the customer (introduction in absentia). The bank should first verify the signature of the introducer with the specimen signature on record. The bank should then send a le tter to the introducer thanking him for introducing the customer and the introducer must confirm in writing that he has introduced the account. This is to satisfy the banker tha t the introducer has indeed introduced the customer. Till the written confirmation is procured, the bank should not collect cheques/ drafts through the newly opened account. Th e bank should also send a letter to the customer and get his confirmation for opening t he account. A cheque book should be issued only after written confirmation is received from both the customer and the introducer. If the account has not been properly introduced: Deposits received from an un-discharged insolvent not properly introduced carrie s the risk of attachment. The bank may be exposing itself to the dangers of laundered money. Several banks permit fixed deposits to be opened by a self introduction. This is b y the person opening the account depositing a cheque drawn by him on another bank wher e he maintains an account. Banks consider this an acceptable risk. However, this does not give the banker any comfort with regard to the moral standing of the person. While individuals must be introduced, limited companies, trusts and other bodies cannot be. In these cases it is the documents that permit their existence that are take n into account such as the certificate of incorporation and the certificate of commence ment of business. Photographs Banks must obtain photographs of the customer/ customers and all those who are authorized to operate the account. This is to check the identity of the person o perating the account. In the case of minors, the guardian s photograph should be obtained. The bank should obtain the photograph of pardanashin women, in those cases where they ope n/ operate an account. Photographs of NRE, NRO and FCNR account holders must also b e procured.

The photographs should be recent. The cost of the photographs to be affixed on the account opening forms may be bo rne by the customers. The customer/s must submit two photographs. Only one set of photographs need to be obtained. Separate photographs should not be obtained for each category of deposit. The applications for different types of d eposit

accounts should be properly referenced. For operations in the accounts, banks should not insist on the presence of the a ccount holder unless the circumstances so warrant. Photographs cannot be a substitute for specimen signatures. Photographs need not be insisted upon in the following cases: A new savings account where cheque facility is not provided. Fixed and other term deposits upto an amount of Rs. 10,000. Banks, local authorities and government departments (excluding public sector undertakings or quasi-government bodies) are exempt from the requirement of photographs. Photographs need not be obtained for borrowal accounts cash credit, overdrafts a nd the like. Banks need not insist on photographs for accounts of staff members (single/ join t). Address of Account holder Banks must obtain full and complete address of depositors and records these in t he books and account opening documentation so that the customers can be traced with out difficulty. Independent confirmation of t