C. P. MANSOOR S. AHMED.M. COM, PGDBA

THEORY & PRACTICE OF BANKING

Origin

Derived from French words Bancus, Banco, Banc, Banque

BankerPerson doing Banking Business

Earlier View:

“Banker includes a body of persons whether incorporated or not who carry on the banking business.”

Expert’s View:

The essential business of a banker is to buy money and debts by creating other debt. He is essentially a dealer in debts or credit.

DEFINITION

According to Sec 5(b) of Banking Regulation Act.

“Accepting for the purpose of lending and investment, of deposits of money from the public, repayable on demand, order or otherwise and withdraw able by cheque, draft, order or otherwise.”

CustomerEarlier Views:

There must be some sort of an account – either deposit or current account or similar relation – to make a man customer of a bank.

Second View:

To constitute a customer there must be some recognizable course or habit of dealing in the nature of regular banking business

Modern View:

Even a single transaction can constitute a person a customer.

Requirements to become a CUSTOMER:

He must have some sort of an account

Even single transaction may constitute him a customer.

Frequency of transaction is anticipated but not insisted upon.

The dealing must be of banking nature.

Relationship between a BANKER & A CUSTOMER1. General

Relationship

2. Special Relationship

Questions to be asked?

Is there a depositary relationship? A banker as a bailee! Is there a trustee relationship? Is there an agent relationship?

General Relationship Special Relationship

Debtor-Creditor Relationship Express Demand by

the creditor Particular branch Banking Hours Un-secured Law of Limitation Combine accounts

Obligation to honour cheques

Banker’s LienDuty to maintain

secrecyRight to claim

incidental chargesRight to charges

compound interestExceptions from the

law of limitation.

Banker-Customer Relationship

Obligation to honour Cheques1. Availability of

money

2. Correctness of the cheque

3. Proper drawing of he cheque

4. Proper application of funds

5. Proper presentation

6. Reasonable time for collection

Overriding the OBLIGATION Liability to the customer Assessment of damages

Damages“the smaller the amount of cheque the greater the damage” – principle

Ordinary Damage

Special Damage

Grounds of ConfrontationBreach of ContractNegligenceLibel

Implication of law:• Damage for breach of contract to pay

cheques• Damage to general drawer’s business• Damage to general reputation and credit• Damage for the negligence of the banker.

Obligation to PAY the BILLS!

Prior arrangements Indemnity Bonds.

Precautions:1. Particulars2. Stamp3. Due for payment4. Signature

Banker’s LienRight to retain the goods

Kinds of Lien:

1.General Lien

2.Particular Lien

Circumstances of Exercising a lien:

1.Any agreement in consistent of lien

2.Acquired in the capacity of a banker

3.Not for specific purpose.

Lien cannot go beyond the agreement.

Banker’s lien as an implied pledge.Lien on quasi & negotiable

securities.No general lien on Safe custody

deposits.No lien on documents entrusted

for specific purpose.No lien on articles left by mistake.Lien on securities taken back after

repayment of the loan.Lien on Bonds & CouponsNo lien until the due date of a

loan.No lien on deposits.

DISCLOSURESThe disclosure of the financial position of the customer may affect his reputation and bring considerable loss. If a customer suffers any loss on account of the unwanted disclosure of his account the banker will be compelled to compensate for the loss suffered by his customer.

General Acceptance1. Disclosure under the

compulsion of law2. Disclosure in the interest of

public.3. Disclosure in the interest of

bank.4. Disclosure under the

express or implied consent of customer

Disclosure under the Compulsion of LAW!

Sec 4 – Bankers Book Evidence Act – certified copy of customer’s account in his ledger.

Sec 285 – Income Tax Act – interest earned beyond Rs. 10000/-pa

Sec 45B – Reserve Bank of India Act – Collect Credit Information

Sec 26 – Banking Regulation Act – Annual return of deposits (unclaimed for 10 years)

Sec 36 – Gift Tax Act – Books of AccountExchange Control ActGarnishee Order Nisi

Disclosure in the Interest of the Public

Political PurposeUnlawful associationRevolutionary bodyEnemy at times of war.

Disclosure in the Interest of Bank

Disclosure of the account of the customer who failed to repay the loan to the guarantor.

Disclosure to a fellow bankerDefend the past action

Disclosure under the Express or Implied Consent of Customer

Trade ReferenceTo the guarantor

General Precaution1. Damage –

unreasonable disclosure

2. Loss – untrue & misleading information.

Negligent – InformationExpress ConsentBare FactsStrict ConfidenceFellow bankerExact balance

Right to claim incidental ChargesService Charges

Processing Charges

Ledger Folio Charges

Appraisal Charges

Penal Charges

Handling Charges

Collection Charges

LF Chg Rs. 500/-pa Computerized Branch & Rs. 200/- others

Collection Charges

Right to charge compound interest

Compounding is prohibitedQuarterly/Half Yearly/Yearly

Exemptions from the Law of Limitation

3 years Vs 10 years1 year – Dormant Account2 year – Inoperative Account5 year – Tfr to Central Office