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NATIONAL LAW SCHOOL OF INDIA UNIVERSITY BANGALORE

MASTERS IN BUSINESS LAW EXAMINATION JUNE 2010 BANKING LAW AND PRACTICE-Key Answer Total Marks 100 Time 3 hrs.

INSTRUCTIONS

i. Students are expected to rely entirely upon the question paper as it is, and respond to it. Clarifications can be sought; ii. No bare acts are allowed to be consulted during the examination; iii. Mobile phones are strictly prohibited inside the examination hall. Any one found in possession of same will be subject to disciplinary proceedings; iv. ANSWER ANY FIVE QUESTIONS; v. All questions carry equal marks. -----------------1. Answer the following in brief a. Regulation of foreign banks (in addition to domestic banks); i. Standing and stability of all the banks is extremely critical for overall strength of financial sector hence, banks are to be regulated; and more so the foreign banks; ii. Foreign banks are those which are incorporated outside India and have their branches (or banking business in India); iii. Entry point barrier (through license U/s 22 of Banking Regulation act) whether carrying on of banking business is in the public interest? Whether the origin country discriminates any banking company registered in India whether the company complies with the provisions of the BR act as applicable to foreign companies; iv. Sec. 17 Reserve Fund to be created the foreign banks shall deposit 20% of their deposits with RBI every year; the amount may be in cash or in unencumbered approved securities b. RBIs power to regulate commercial banks. i. At the point of entry s.22 ii. At the time of expansion of branches (s. 23) iii. Capital & Reserve [S. 12(1)] subscribed capital shall not be less than 50% of the its authorized capital; - paid up capital shall not be less than 50% of its subscribed

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v. vi. vii. viii. ix. x. xi.

capital the capital structure is changed then these proportions shall also be changed. Sec. 21 directions regarding advances the purposes for which the advances may or may not be made margins to be maintained the maxim guarantee rate of interest and other terms & conditions for making advances Sec. 35A general power to issue directions, which are binding upon the banks Sec. 36 the RBI may caution and advise the bank; Sec. 17 creation of reserve fund not less than 20% of the profit has to be transferred to its reserve fund. Sec. 42 cash reserve to be maintained 3% to 20% daily balance of the total demand deposit and time deposits as specified by the RBI from time to time; RBI also provides for additional cash reserve (however not exceeding the ceiling of 20%) S. 24 maintenance of liquid assets not exceeding 40% of the total demand and time liabilities in cash, gold or unencumbered approved securities Sec. 29 regulation regarding accounts and audit.

2. Explain the following a. Paying and collecting banker; including the protection envisaged under negotiable instruments act; i. Paying banker is one who is expected to pay under the cheque, either to the payee directly, or to the collecting banker; ii. There is protection envisaged under Negotiable Instruments Act, for paying banker under sec. 10, 85 and 89 Where as S. 10 talks about the payment in due course S. 85 specifically deals with specific protection available to the paying banker iii. And it states that the banker is dischared from his duty when he makes payment in due course either to the holder in due course, if the cheque is order cheque or to the bearer of the instrument, if the cheque is a bearer cheque. Finally s. 89 deals with altered instruments and payment made there under. iv. Collecting banker is on who is causing the proceeds of the cheque collected from the paying banker on behalf of his customer v. If the cheque is crossed one then it is imperative that, the cheque must be collected through the intervention of the collecting banker; vi. He is also protected under the NI act. vii. Cases which may be cited in support of this answer 1. Bhatoria Trading Company v Allahabad Bank, AIR 1977 Cal. 363;

2. Madras Provincial Co-operative Bank Ltd., v Official Liquidator, South Indian match Factory Ltd., AIR 1945 Mad. 30; 3. Bank of Maharashtra v Automotive Engineering Ltd., (1993) 2 SCC97; 4. Canara Bank v Canara Sales Corporation & Others (1987) 2 SCC 666. b. Holder and holder-in-due course. i. Holder is one who is (s. 8 of the Negotiable Instruments Act) 1. Entitled in his own name to the possession of the instrument; and 2. Have the right to receive or recover the amount due thereon from the parties thereto. ii. Otherwise a holder means 1. The payee; or 2. The bearer; or 3. The endorsee of an instrument iii. Holder in due course is a person who takes an instrument in good-faith and for value - And he becomes the true owner of the instrument and is known technically as holder in due course iv. Holder must have taken the instrument for value [consideration] v. Must have obtained the instrument before its maturity vi. Instrument must be complete and regular on its face; and vii. Must have taken the instrument in good faith and without notice of any defect either in the instrument of the title of the person negotiating it to him viii. The development of English law on the point of goodfaith may be explained with the assistance of 1. Brooks v Mitchell (1841) 2. Miller v Race etc., ix. Finally the wordings of Indian Law However, under the Act, the words used in sec. 9 are without having sufficient cause to believe therefore, the legislature seems to have intended to make due care and caution on the part of the holder, a test of his bona fides and that mere good faith on his part would not suffice. Accordingly, it seems negligence on the part of a holder at the time of taking a negotiable instrument, would disentitle him to the rights of a holder in due course. There will be sufficient cause to believe in the existence of defects if the holder was in fact negligent or careless, though he was acting honestly and in good faith. Khergamwala

3. Write short notes on the following a. Banking Ombudsman Scheme; i. The scheme prepared and implemented by the RBI 1. First with the active assistance of all banks ii. Now (in a sense) entirely by itself 1. Legislative power to introduce and implement the scheme 2. Sec. 35A, Banking Regulation Act, 1949 iii. the present scheme came into force from January 1, 2006 iv. First introduced in 1995 v. Revamped in the year 2002 vi. Enlargement of the process in 2006 1. being satisfied that, it is necessary in public interest and in the interest of banking policy to enlarge the extent and scope of the authority and functions of Banking Ombudsman for redressal of grievances against deficiency in banking services, concerning loans and advances and other specified matters vii. Amendment in the year 2007 (May) viii. The Scheme (as updated from time to time) provides 1. a forum to bank customers to seek redressal of their most common complaints against banks, including those relating to 2. credit cards, 3. services charges, 4. promises given by the sales agents of the banks, but not kept by the banks, 5. delays in delivery of bank services. ix. 15 Banking Ombudsmen have been appointed 1. offices located mostly in the State Capitals x. Coverage of the Banks 1. All Scheduled Commercial Banks, 2. Regional Rural Banks and 3. Scheduled Primary Cooperative Banks xi. Appointment, qualifications of the ombudsman and general procedure of resolving the complaint. b. Bankers Book Evidence law. i. in certain respect modifies, and in few other respects supplements, the provisions of the general law of evidence ii. Most notably, it permits certified copies of certain books of bankers to be given in evidence without summoning the original iii. This is to facilitate Bankers working generally iv. Bankers books include 1. ledgers, 2. day-books, 4

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vi.

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viii.

3. cash-books, 4. account-books and 5. all other books used in the ordinary business of a bank; Legal Proceeding means 1. any proceeding before the court or 2. Inquiry being conducted by the authority competent for that 3. in which evidence is or may be given and 4. Proceedings of arbitration. Certified Copy means a copy of any entry in the books of a bank together with certificate written at the foot of such copy that 1. it is a true copy of such entry, 2. that such entry is contained in one of the ordinary books and was made in the usual and ordinary course of business, and 3. that such book is still in the custody of the bank, 4. and if the copy was obtained by a mechanical or other process that, in itself ensures the accuracy of the copy, a further certificate to that effect. 5. If after taking out the copy from the books of the bank, the original books are destroyed in usual course of the banks business a further certificate to that effect of having destroyed the book is necessary. 6. Each of such certificates above should be dated and subscribed by the principal accountant or manager of the bank with his name and official title. If the concerned record is maintained in electronic form 1. Consists of printouts of data stored in a floppy, disc, tape or any other electromagnetic data storage device; or 2. A copy of such printout; 3. And it should contain a certificate having all the applicable contents detailed above. 4. If the record is maintained in mechanical form 5. A printout of any entry in the books of a bank stored in a micro-film, magnetic tape; or 6. Any other form of mechanical or electronic data retrieval mechanism obtained by a mechanical or other process; And it should contain the certificate having all the applicable contents detailed above.

4. Write short notes on the following a. Legal status of the passbook;

i. Pass book is issued to banks customer, who generally keeps savings account ii. In case of current accounts it is issued only upon demand by the customer iii. Pass book is replica of the ledger at the bank branch iv. In case of current accounts statement of their accounts are given to them periodically (daily, weekly, fortnightly etc.) v. Entries made in the pass-book 1. Two prominent thoughts Once the passbook entry is made and passed on the customer he shall verify and raise objection if any afterwards the entries made in the passbook shall be treated as final Passbook entries are for general convenience hence, the entries can be questioned any time by the parties vi. Entries favouring the customer 1. the passbook belongs the customer and the entries made in it by the bank are statements on which the customer is entitled to act In Atlantic Mines Ltd., v Economic Bank [(1904) 2 KB 471] 2. If the position of the customer has not been adversely affected, by relying upon the passbook, the banker may rectify it (within reasonable time) 3. A fictitious entry made by a bank employee cannot be relied upon by a customer 4. Example State Bank of India v Shyma Devi, AIR 1978 SC 1263 vii. Entries favouring the bank 1. The proposition of law is extremely difficult to make in this regard 2. Therefore the following few points in this regard are to be taken into account (all these points arise out of decisional law from time to time) viii. Interesting point is when the customer has acted on the basis of a wrong entry (favouring the customer) and then shifted his position to his detriment then what would be the situation? b. Bankers duty to maintain secrecy (of customers account). i. banker is a privileged creditor in some special sense the customer is also privileged in some sense ii. The banker is obligated to maintain the secrecy of the customers accounts iii. the duty to maintain secrecy is an added obligation or an exception to the general rule that the relationship between a banker and the customer is that of a debtor and creditor

iv. May be it has woven in to the banking tradition from time immemorial v. All employees and officers of the bank have to sign and submit a declaration of fidelity and secrecy at the time of their joining service vi. The Exceptions 1. Where the disclosure is under compulsion of law; 2. Where there is a duty to the public to disclose; 3. Where the interests of the bank require disclosure; and 4. Where the disclosure is made with the express or implied consent of the customer vii. Some specific reference to the disclosure under the Banking Regulation Act. 5. Write short notes on the following a. Bankers lien; i. The general concept of lien; ii. Categories of lien; iii. The banker as a person enjoying special lien iv. The extent of his exercise over his customers accounts, goods etc., b. Consortium lending. i. The challenge 1. Meeting the credit needs of borrowers (which are ever increasing); and 2. Safeguarding the lender from (various risks) ii. To meet the said challenge consortium lending gained prominence over the last century iii. It is a mechanism by which single borrower is financed by multiple lenders (generally who are related to each other in many ways) iv. The consortium lending has grown immensely in all over the world (including India) v. But.. There are some challenges 1. Improper (or no) regulations 2. Lack of guidelines by the regulatory agencies vi. Indian system has no dedicated legal framework to regulate consortium lending 1. Hence we have to have piecemeal approach vii. The main law is law of contracts viii. There is very little decisional law on the point 1. As consortium lending in India has not faced much of litigation as of now ix. But there is some amount of soft law on the point x. In 1973 RBI set up a study group to develop a policy xi. The study groups strongly supported the development and accepted this as a foundational aspect of banking xii. Based on the report of the study group the RBI developed certain guidelines 7

xiii. RBI Guidelines 1. Large credit amounts to any borrower in the public or private sector, in excess of 1.5% of banks deposits, should be extended as consortium loan 2. Where multiple lenders exist, with no consortium arrangement, a procedure for the coordination between different lenders and an exchange of information should be evolved 3. All consortium lending should try to fulfill all the credit needs of the borrower so as to prevent multiple consortium being formed 4. The bank with the maximum credit limit should act as the agent bank xiv. Reinforcement of the guidelines by the RBI 1. The share of each bank in the consortium should not be less than 10% 2. The lead bank must be given the responsibility for appraising the borrowers credit requirements 3. The terms and conditions under the consortium should be the same for all members 4. The formation of the consortium was obligatory where the credit limit sanctioned by many banks to a single borrower exceeded Rs.5 crores 5. The total drawing from each of the banks in the consortium must be proportional to the ratio of sharing 6. Finally in 2007 the role of RRBs was also highlighted by RBI in consortium lending 6. Write short notes on the following a. Debt recovery tribunals; i. The banks experienced considerable difficulties in 1. Recovering loans; and 2. Enforcement of securities charge with them ii. Significant portion of bank funds were blocked iii. Successful implementation of financial sector reforms 1. Speedy recovery of advances 2. Rapid adjudication of such matters iv. The Narishmam Committee on Financial Systems and v. There were few committees recommended for 1. Setting up of a Special Tribunal for the purpose vi. Keeping in view of the recommendations Bank and Financial Institutions Bill, 1993 was introduced in the Parliament vii. There are two layers 1. The Debt Recovery Tribunal 2. The Debt Recovery Appellate Tribunal

viii. The Central Government is authorized to establish both these tribunals 1. They can go for establishing multiple tribunals as the case deserves ix. The tribunals composition; x. The jurisdiction of the tribunal; xi. Procedure of the tribunal; and xii. Few reference to the constitutionality of these tribunals. b. Letters of credit & banker. i. The concept of letters of credit; ii. The issueance of letters of credit; iii. General banking practice with regard to same; iv. And some decisional law on the point. 7. Solve the following problems a. A is the Chief Accountant at NAL Ltd., a software company, which banks with Axis Bank. A is generally responsible for almost all banking transactions of NAL Ltd. During the date of his retirement, he withdraw Rs.50,000 by forging the signature of his CEO. The NAL Ltd., wants to hold the bank responsible for this loss Decide. i. Here the NAL Ltd., would be able to recover the loss as the cheque was forged one. ii. The authority on the point is Canara Bank v Canara Sales Corporation where the SC has held that, if the cheque is forged there is no mandate on the banker to make the payment and the said situation is different from the protection which is envisaged under the statute for his favour. b. A makes a promissory note in a stamp paper sufficient for Rs.1,00,000 but without stipulating the amount and the date of making the note. However, A actually owes only Rs.75,000 under the instrument. The holder of the said note fill the promissory note for Rs.1,00,000 and endorsed the same to another person Mr. X. Does Mr. A obligated to pay Rs.1,00,000 to Mr. X. i. Here Mr. A is obligated to pay the entire amount of Rs.1,00,000 to Mr. X. ii. When there are blanks left un filled they can be filled later on etc., -0-0-0-0-0-0-0-0-0-0-0-

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