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Banking and Insurance

Module I. COMMERCIAL BANKING

Evolution of Banking Services and its history in India.


The modern banking and its networking are the products of modern
western civilization.
Britishers brought with them this modern concept of banking in India.
The Bank of England was started in 1694. In 1708, the monopoly and the
right to issue notes was given to Bank of England through an Act.
Several Joint Stock Banking Companies started operating early in the
nineteenth century.These banks primarily carried on commercial
functions like receiving money on deposits,lending money, transferring
money from place to place and bill discounting.
History of Banking in India

Early History:
The Vedic period has literature which records giving of loans to others.
The Manusmriti speaks of deposits, pledges, loans and interest rate.
Interest could legally be charged at between two to five percent per
month.The maximum amount of interest collectable on the principal was
laid down by the State.
The main instrument through which banking and transfer of funds was
carried out through the inland bills of exchange or the Hundi.
Business developed so well that certain castes and communities
traditionally came to regard banking as their family business.
History of Banking in India
Modern History:
Modern banking in India began with the rise to power of the British.
The British consolidated their power and became the most powerful force in India
after vanquishing Tipu Sultan in the battle of Srirangapattan in 1799.
The quest for power by Lord Mornington.Governor General of Fort William in Bengal at
that time led to a serious depletion of the resources of the East India Company. This
led to the Company promoting the Bank of Culcutta in 1806 to raise resources.
The native money lender lent to the farmers at 40, 50, and 60 per cent.
Indian business men were very often acted as lender to the European business men
with rate of interest lower than the market rate.
The Swadeshi Movement which prompted the Indians to start many new
institutions also provided an impetus for starting new banks.
History of Banking in India
In 1921, the Three Presidency Banks at Calcutta, Bombay and Madras
were merged in to Imperial Bank by passing Imperial Bank of India act
1920.The Imperial Bank did not have power of issuing notes, but was
permitted to manage the clearing house and hold government balances.
With the passing of RBI Act of 1934, the Reserve Bank of India came in to
being to act as the Central Bank. It acquired the right to issue notes and
acted as the banker to the Government in place Imperial Bank.
By passing of SBI Act, the Imperial Bank was taken over and the assets
vested in a new bank, the State Bank of India.
The RBI was a originally shareholders bank . It was nationalized by the
RBI(Amendment) Act,1948, consequent to the nationalization of Bank of
England in 1946.
Bank Nationalization
The major historical event in the history of banking India after in
after independence is undoubtedly the nationalization of 14
major banks on 19 th July, 1969. In 1980 six more private sector
banks were nationalized.
Nationalization was recognition of the potential of the banking
system to promote broader economic objectives.
The branch network which was 8262 in June 1969 to over 1969
expanded to over 60,000 by 1992 with major expansion (80%) in
rural areas.
The average number of people served by branch came down from
60,000 to 11,000.
Bank Nationalization
The deployment of credit is more widely spread
all over the country as against only in advanced states.
In 1969 deposits amounted to 13 % of GDP and advances to 10 %.By
1990 deposits grew to 30 % and advances 25 % of GDP.
Rural deposits as percentage of deposits grew from 3 % to 15 % making
for increased mobilization of resources from rural areas.
Deposits grew from a figure of Rs. 4669 crores in July1969 to Rs.2,
75,000 crores on 31.3.1993.
40% of the total credit was directed to priority sector.
45% of the total deposits was used by the government to fund its five
year plans.
...Nationalization
However the growth did not come without its costs .

The banking system has grown too large and unmanageable.

Customer service has suffered due to increasing costs and lower


productivity.

The directed credit program has led to large overdues affecting


the very viability of the banking system.
Definition of Banking
The Banking Regulation Act,1949 defines
the term Banking as,
accepting, for the purpose of lending or
investment, of deposits of money from
the public, repayable on demand or
otherwise,and wihtdrawable by cheque,
draft, order or otherwise . [Sec.5 (b)].
Definitions of Banking terms
Section 5(c) of Banking Regulation Act,1949 defines banking
company as ,
Any company which transacts the business of banking in India.

Section 5(c)a. of Banking Regulation Act,1949 defines banking


policy as Any policy which is specified from time to time by the
Reserve Bank in the interest of the banking system or in the
interest of monetary stability or sound economic growth , having
due regards to the interests of depositors, the volume of deposits
and other resources of the bank and the need for equitable
allocation and the efficient use of these deposits and resources.
Definitions of Banking terms
Section 5 (f) of Banking Regulation Act ,1949 defines demand
liabilities as, liabilities which must be met on demand. And
Times Liabilities
as liabilities which are not demand liabilities.
Development Bank means Industrial Development Bank of
India established under Section 3 of IDBI Act of 1964.
Gold includes gold in the form of coin, whether legal tender or
not, or in the form of bullion or ingot, whether refined or not.
National Bank means National Bank for Agriculture and Rural
Development established u/s 3 of NABARD Act, 1911.
Definitions of Banking terms
Exim Bank means Export Import Bank of India established
under Section 3 of Export Import Bank of India of 1981.
Reconstruction Bank means the Industrial Reconstruction
Bank of India established under section 3 of the Industrial
Reconstruction Bank of India ,1984.
Secured loan or advance means a loan or advance made on
security of assets the market value of which is not any time less
than the amount of such loan or advance ; and unsecured loan
or advance means a loan or advance not so secured.
Other definitions of Banker/Bank
Dr. H. C. Hart A banker or bank is a person or company
carrying on the business of receiving of money and collecting of
drafts, for customers subject to the obligation of honoring checks
drawn upon them from time to time by the customers to the
extent of amount available in their accounts.

H. P. Sheldon The function of receiving money from his


customers and repaying it by honoring their checks as and
when required is the function above all other functions, which
distinguishes a banking business from any other kind of
business.
BUSINESS OF BANKING COMPANIES
Forms of business in which banking companies may engage in any one or more of the
following forms of business namely;
The borrowing, raising, or taking up of money; the lending or advancing of money either
upon or without security;the drawing, making accepting and discounting , buying,
selling collecting and dealing in bills of exchange, hundis, promissory notes, coupons,
drafts, bills of lading, railway receipts,warrants, debentures, certificates, scripts and
other instruments,and securities whether transferable or negotiable or not; the granting
and issuing of letters of credit, travelers checks and circular notes; the buying,selling
and dealing in bullion ; the buying and selling of foreign exchange including foreign
bank notes; the acquiring ,holding ,issuing on commission, underwriting and dealing in
stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and
investments of all kinds ; the purchasing and selling of bonds, scrip or other forms of
securities on behalf of the constituents or others, the negotiating of loans and advances;
the receiving of all kinds of bonds , scrip or valuables on deposits or for safe custody or
otherwise; the providing of safe deposit vaults; the collecting and transmitting of money
and securities;
Various types of Banking Services
The flow chart given below shows the following types of banking services;
1.Central Banking services:The Central Bank of any country(i)Issues currency
and bank notes;
(ii) Discharges the treasury functions of the Government, (iii)Manages the money
affairs of the nation & regulates the internal and external value of money (iv)acts
as the bank of the Government and last but not the least, acts as bankers bank

2.Commercial Banking Services:Commercial banking services include


(i)receiving various types of deposits;(ii) giving various types of loans(iii)
Extending some non-banking customer services like facilities of locker,
rendering services in paying directly house rent, electricity bill, share calls,
insurance premium and the like.Commercial bank also advices on investment,
re-investment,allotment or transfer of funds.
Contd
3.Specialized Banking Services: Special banking institutions are established for
definite specialized banking services like industrial banks to supply industrial long term
credit and working capital;land mortgage bank for granting loans on equitable
mortgage; Rural credit banks for generating funds for extending rural credit;
development banks to support any developmental activities.These types of banks
accept all types of deposits but mobilizes the amount in its specially focused area.

4.Non-banking financial services: Many institutions are established for carrying on


non-banking financial services.Mutual funds are institutions accepting finances from its
members and investing in long term capital of companies both directly and indirectly in
primary market as well as indirectly in the capital market.Financial institutions acting as
portfolio managers receive funds from the public and manage the funds for or on
behalf of its depositors.The portfolio managers undertake the responsibility of
managing the funds of the principal so as to generate maximum return.
The Narasimhan Committee Report
The 1980s were the decade of private enterprises all over the world. The
collapse of the USSR at the end of the 1980s is the end of one experiment of
socialism.In India the country went through traumatic moments in 1990, after
the heady economic growth in the 1980s, due to a foreign exchange crises on
account of large scale external borrowings in the 1980s that had weakened
the countrys ability to service its debts.
The government felt that there was a need to initiate reform in the
financial system and banks, as the system had developed weaknesses.
Banks were burdened by a large percentage of non-performing loans (NPAs).
Customer service had suffered, and out-dated practices were in vogue.
Narasimhan committee was set up to recommend changes in the financial
system.
Narasimhan Committee Recommendations

Narasimhan Committee made revolutionary recommendations on


emphasizing the need for de-regulation and liberalization.
Banks were to be allowed to raise capital from the public.
Also no further nationalization of banks were to be made.
New private sector banks were to be allowed and no distinction
was to be made between private banks and public sector banks.
Foreign banks were to be allowed freedom to open branches.
The pattern of banking structure should be broadened with 3-4
large banks on a international level 8-9 large banks on a national
level and the other as local banks.
Narasimhan Committee Report Recommendations. [contd]

Control over the banking system should be centralized with the


RBI and not split between the RBI and department of banking of
government .
SLR and CRR should be reduced to prudent levels.
Concessional lending should be phased out.
Deposit interest rates to be raised along with reduction of SLR.
The appointment of CEO should be de-politicized banks should
be free to make their own recruitments.
The Role and Functions of Commercial Banks
in India
Utility of Banking Institutions:
Banks are extremely useful and indispensable institutions for a modern
community .They are the custodians and distributors of liquid capital the
essential ingredient for commercial and industrial activities.
a] The banks create purchasing power,in the form of purchasing power, in the
form of bank notes, checks, bill,drafts,etc.
b] Banks transfer funds, by bringing borrowers and lenders together, and by
helping funds move from person to person and place to place in convenient
manner.
c] Banks encourage the habit of saving among the people and enable small
savings, which otherwise would have been scattered ineffectively, to be
accumulated in to large funds and thus made available for investments of
various kinds.They promote economic development through capital formation.
Contd..
By encouraging savings and investment, the banks increase the productivity of
the resources of the country and thus contribute to general prosperity and
welfare by promoting economic development.

Banks agency functions are very useful to customers of the bank.They


undertake to make payments of various kinds on behalf of their customers
and also make several types of collections on their behalf.

Thus, banks are useful to both the community in general and the individual
customer in particular.
Role of Commercial Banks
in Economic Development
Banks promote capital formation:
a) they attract deposits by offering attractive rates of interest,thus converting savings which
would have remained idle, in to active capital
b) they distribute these savings through loans among enterprises which are connected with
economic development
Optimum utilization of resources:
The banks exercise a degree of discrimination which not only ensures their own safety but
also makes for optimum utilization of the financial resources

Financing the priority sectors:


For successful implementation of the development programs it becomes necessary to make
credit facilities available to high priority sectors.The banks and financial institutions operate
in such a manner as to conform to the priorities of development and not in terms of return
on their capital.
Contd..
Banks promote balanced regional development:
By opening branches in backward areas the banks make credit facilities
available there. Also the funds collected in developed regions through deposits
may be channelised for investment in the underdeveloped regions of the
country.
Expansion of credit:
To maintain a high level of economic activity, it is imperative that credit must
expand. Banks make valuable contribution to the speed and level of economic
development in the country.
Banks promote growth with stability:
Banks regulate the rates of investment by influencing the rates of interest.
Contd.
In recent years , commercial banks in India have been adopting the strategy
of innovative banking in their business operations
To attract more deposits, banks have introduced many attractive saving
schemes such as education deposit plan,perennial pension plan retirement
schemes, loan linked recurring deposit schemes, housing finance, credit
cards, packing credit and post shipment credit for exporters ,consumer credit,
24 hr banking, working on Sundays, etc. Mobile bank branches have also
been opened by number of banks.
In addition to various activities like innovative banking , promoting
entrepreneurship, retail banking and rural development, the commercial
banks have promoted various schemes like advance to priority sectors and
credit guarantee schemes.Thus banks come to p[lay an t role in economic
development.
MERCHANT BANKING
Merchants bankers are governed by the Securities and
Exchange Board of India(Merchant
Bankers)Rules,1992.
Merchant Banker is defined as, any person who is
engaged in the business of issue management either by
making arrangement regarding selling, buying or
subscribing to securities as Manager,Consultant,
Adviser or rendering corporate advisory service in
relation to such issue management.
Role Of Merchant Bankers:
Merchant bankers are designed as managers to the issue.
They are specialized agencies whose main business is to attract public money to Capital
issues. They render the following services.
1. Drafting of prospectus and getting it approved from the stock exchanges
2. Appointing and assisting in appointing bankers ,underwriters, brokers,
advertisers etc.
3.Obtaining the consent of all the agencies involved in public issue.
4. Holding brokers conference / investors conference
5.Deciding the pattern of advertising
6.Deciding the branches where applications money should be collected.
7.Deciding the dates of opening and closing of the issue.
merchant bankers
8.Obtaining the daily report of the application money collected at various
branches
9. After the closing of issue , obtaining the consent of stock exchange for
deciding basis of allotment etc.

Merchant Bankers charge a heavy fee for rendering the above mentioned
services.The fees are so lucrative that many nationalized banks which had
separate merchant banking divisions have now opened separate subsidiary
companies for rendering merchant banking services.
Merchant Bankers
a. All merchant bankers must obtain the authorization of SEBI
b. SEBI may collect from the merchant bankers an initial authorization fee an
annual fee and a renewal fee.
c. The Merchant bankers must have a minimum net worth say Rs 1 crore.
d. Lead manager / Merchant bankers would be responsible for ensuring timely
refunds and allotment of securities to the investor.
e. The merchant banker shall make available to SEBI such information
documents returns and reports as may be prescribed and called for.
f. SEBI has already prescribed code of conduct for merchant bankers, which
they should adhere to.
merchant bankers.
The above terms of authorization have been framed to make
merchant bankers more responsible and liable and any
negligence on the part of the merchant bankers can be
proceeded against legally.
This will ensure that fake companies whose only intention is to
defraud the public do not have any access to the stock market
and the investing public at large.
DIVERSIFICATION IN BANKING
The Government of India issued guidelines to the banks under section 6 of the Banking
Regulation Act,1949 permitting and encouraging them to diversify their functions.
MERCHANT BANKING AND UNDERWRITING: Commercial banks have now set up
merchant banking divisions and are underwriting new issues,especially preference
shares and debentures.
MUTUAL FUNDS: Mutual Fund offers investors a proportionate claim on portfolio of assets
that fluctuates in value with the value of the assets that make up the intermediaries port
folio.Some banks have now been permitted to float subsidiaries as mutual funds.
RETAIL BANKING: Commercial banks in India are increasingly taking up retail banking as
an attractive market segment with opportunities for growth and for profit. Retail banking
refers to housing loans,consumer loans for purchase of consumer goods.The loan
values can average between Rs.20,000 to Rs 1 crore.The repayment period can be up
to 7 years with housing loans granted even up to 15 years.Retail banking has been
facilitated by growth in banking technology and automation of banking processes.
Diversification in Banking,,,,,,,,,,,,,,,,

ATMs: ATMs (Automated Teller Machines ,or any time money as one bank has
been wittily advertising) have emerged as an alternative banking channel
which facilitate low cost banking transaction.Bank customers need not go to
the bank branches but can withdraw money and deposit checks in ATMs
These are the normal purposes for which persons go to bank.This is now avoided
by the neighborhood ATM.The use of ATMs by foreign banks and private
sector banks has helped these banks to expand their reach and compete
effectively with public sector banks(PSBs).PSBs also in turn rapidly introducing
ATMs.
ANY WHERE BANKING: Any where Banking is the new system of banking
adopted and made popular by a few foreign banks and is now being
increasingly adopted by PSBs. This facility is a technology based customer
friendly service for the convenience of customers.
Contd
Under Any Where Banking,a customer having an account with any branch
can operate it from other designated branches of the bank through out the
country.The facility includes cash withdrawal , cash deposit, transfer of funds,
collection of local cheques, intra city, and inter city transactions, etc.Now
distance is no hindrance and banking is made more convenient , wherever the
consumer may reside.
INTERNET BANKING :Growth of internet and wireless communication
technologies, advances in telecommunications, etc. have dramatically
changed the structure and nature of banking and financial services.
Contd.
RBI has issued guidelines to the banks on internet banking covering :
(a) the risks associated with internet banking;
(b)the technology and security standards for internet banking;
(c) legal issues relating to this new type of activity;
(d) the regulatory and supervisory concerns of RBI.
VENTURE CAPITAL FUNDS: The purpose of VCFs is to provide equity capital
for pilot plants attempting commercial application of indigenous technology
and adaptation of previously imported technology technology to domestic
conditions.
The Government of India has issued detailed guidelines and procedures for
establishment of VCF, management structure, size and investment of the
fund,etc.
Corporate Advisory Services &
Consultancy Services
Corporate Advisory Services are needed to ensure that a corporate
enterprises runs efficiently at its maximum potential through effective
management of financial and other services.
It also rejuvenates old- line companies and ailing units and guides existing
units in locating areas/activities of growth and diversification.Corporate
Advisory Services represent an important component of the portfolio of the
activities of merchant bankers.
Corporate Advisory Services:
a) Providing guidance in areas of diversification based on the Governments
economic and licensing policies.
b) Appraising product lines and analyzing growth and profitability and fore
casting future trends.
Main Corporate Advisory Services
1.Making of Public Issue and Issue Management
2.Project Counseling and Pre-Investment
Studies.
3.Corporate Restructuring
4.Capital structuring and Restructuring
5.Loan Syndication
6.Liaison with foreign collaborators and making
preparation for joint-ventures
Contd.Corporate Advisory Services]

7.Raising Foreign Currency Loans Euro issues,


etc.
8.Mergers and Acquisitions.
9.Making Valuation and Re-valuation of Assets.
10.Consultancy for Rehabilitation of Sick
Industrial Units
11.Other Corporate Advisory Services
Fee based Services
Issue Management
Corporate Advisory Services
Credit Rating
Mutual Funds
Fund Based Services
Leasing and Hire Purchase
Housing Finance
Credit Cards
Venture Capital
Bill Discounting.
Module II.
RELATIONSHIP BETWEEN BANKER AND
CUSTOMER

Definition of Banker and Customer:


BANKER:
There is no statutory definition of the term customer.According to Hart , Banker
is one , who in the ordinary course of his business , honors checks drawn
upon by him by persons ( customers) from and for whom he receives money
on current accounts.
According to the Banking Regulation Act,1949 Banking Company is a
company which transacts the business of banking in India. [Sec.5(c)]
According to the Banking Regulation Act,1949 the term Banking means
accepting for the purpose of lending or investment of deposits of money from
the public repayable on demand ,order or otherwise or withdraw able by
check, order or draft or otherwise.
CONTD.

:
CUSTOMER The term customer is also not defined under any statutes.
A person becomes a customer of the bank when the latter agrees to open an
account of the former. Thus customer is one who has some sort of account
with the banker.The duration of relationship is immaterial.
In Ladbroke v.Todd (1914) it was observed that : The relation between
banker and customer begins as soon as the first cheque is paid in and
accepted for collection and not merely when it is paid.
But mere casual acts of service do not create the relationship of banker and
customer.[Commissioner of Taxation v.English, Scottish Australian Bank
Ltd.,(1920)].Thus a person who goes to the bank to remit his life insurance
premium to the Life Insurance Corporation, or to buy a draft or cash a cheque
issued to him by someone else, is not a customer. To become a customer, a
person must have some sort of account with the banker.
Module II.

RELATIONSHIP BETWEEN
BANKER AND CUSTOMER
Between the banker and customer exists a contractual relationship.The services rendered
by commercial banks are classified in to two types; 1. TRADITIONAL & 2. NEW SERVICES. I.
Traditional services mainly relate to;
(a) Maintenance of different types of deposit accounts e.g., savings,
fixed and current accounts;
(b) Granting loans and advances;
(c) Collection of cheques ,bill of exchange and other instruments
( inland and foreign)
(d) Providing financial guarantees;
(e) Remittance facilities by issue of drafts, mail transfers, and
telegraphic transfers;
(f ) Providing safe deposit and safe custody(locker) facilities;
(g) Purchase and sale of securities .
Contd Banker Customer Relationship
II.New Services: 2.Housing Finance
1.Schemes for deposit mobilization 3.Automatic Extension Deposit Scheme
a. Certificate of Deposit(CD) 4.Personal Loan Scheme
b. Savings Scheme 5.Multiple Banking Arrangement
c. Minor Savings Scheme 6.Schemes for Financing SSIs
d. Monthly Interest Income Schemes 7.Schemes for Financing Agriculture
e. Annuity or Retirement Schemes 8.Credit Cards and Debit Cards
f. Farmers Deposit Schemes 9.Electronic Banking:
g. Insurance linked savings bank ANY TIME BANKING
accounts ANYWHERE BANKING
TELE BANKING
h. Innovative Deposit Schemes
INTERNET BANKING
MOBILE BANKING
New Services Contd

11.Smart Cards
12.Rural or Green Cards
13.Traveler's Checks
14.Travel Agency work
15.Gift Checks
Banker-Customer Relationship
The banker customer relationship has been broadly classified in to ;
I.General Relationship, and II.Special Relationship

I.General Relationship Between Banker and Customer.


1. Banker as a Debtor :Uses the money deposited with him for his business.
a) Demand for repayment necessary.
b) Demand Should be made at proper time & at proper place.
c) Demand must be made in proper manner.
2.Banker as a Creditor: Lends loan as a credit to his customers.
3.Banker as a Trustee:A trustee holds money or assets and performs certain
functions for the benefit of some other person called the beneficiary.
Contd
4. Bank as an Agent: Performs agency functions.Buys and sells securities on
behalf of his customer , pay insurance premium collects cheques on his behalf and
makes payments of various dues,like payment of rent, taxes .

6. Banker as a Consultant: Providing consultancy in matters such as taxes


and making investments.

7. Banker as a Lessor:Provides safe deposit lockers to its customers on


lease for depositing their valuable articles, documents, etc.
Banks held liable for deficiency in service.
The Chartered Accountant ,Feb,2005 / Subhash Agarwal
Applicability of Consumer Protection Act to Banking Sector

a) Wrongful Dishonor of cheques


b) Non-credit of cheques collected
c) Non-issuance of proper receipt
d) Payment of lower rate of interest
e) Default by banks agent
f) Interest not paid on excess amount deposited
Special Features of Banker-Customer
Relationship
OBLIGATIONS OF BANKER
1. OBLIGATION TO HONOUR CHEQUES: Banker has a statutory obligation to
honor cheques
A banker must honour the customer cheques drawn on him provided:
a) He has sufficient funds of customer
b) The funds are properly applicable to the repayment of such cheque.
c) The check has been presented within a reasonable time after the apparent
date of its issue
d) No prohibitory order of the court or any other competent authority e.g., tax
authority etc., is standing against the accounts of the customer
Contd..

f) Cheque should be properly drawn


g) Banker to have reasonable time for crediting funds
h) Cheque should be presented in a bank where the account is
kept
i) No lien or claim on the balance
j) No stop payment instructions
2.Obligation to keep a proper record of transactions
3.Obligation to abide by the instructions given by the customer
4.General lien of bankers
5.Obligation not to disclose the state of his customers account or
affairs
6Right to set-off , and 7. Right of appropriation.
Contd...

RULE IN CLAYTONS CASE(1816)


The rule is applicable where the parties have a current
account , i.e., unbroken account between them.If, for
example, a cheque for Rs.500/- is presented for
payment and the customer has only Rs 490/- to his
credit , the banker may dishonor the check . Again if
two cheque of Rs 250 each are presented at one time,
the banker may dishonor the cheque
Special Features of Banker Customer Relationship.Contd.

2.EXTENSION OF OBLIGATION:
Obligation of the banker to honour the cheques of the
customer, when sufficient balance is available in his account, is
extended by an agreement, express or implied, to the amount of
overdraft agreed upon.
If the banker has been honouring a customers cheques by
granting him temporary overdrafts occasionally and later decides
to discontinue this temporary facility to the customer, he should
give proper notice to avoid responsibility for wrongful dishonor of
cheque. The following case laws are being used.
Special Features of Banker Customer Relationship.Contd.

1.In Indian Overseas Bank, Madras V.Naranprasad


Govindlal Patel,Ahmedabad (AIR1980 Guj.)Gujarat
High Court held that the overdraft arrangement between
the bank and its customer is a contract and it cannot
be terminated by the bank unilaterally,even if it is a
temporary one.
Special Features of Banker Customer Relationship.Contd.

3. OBLIGATION TO MAINTAIN SECRECY OF CUSTOMERS


ACCOUNT
1] Under Law:
The various statutes make it compulsory for the banker to disclose information
about the customers account.The following acts contain such provisions.
(a) The Income Tax Act,1961
(b) The Companies Act,1956
(c) Bankers Books Evidence Act,1891
(d) RBI Act,1934
(e) Banking Regulation Act,1949
(g) The Gift Tax Act,1958
9.Obligation to Maintain Secrecy of Customers Account. [ contd]

2] Under Express or Implied Consent of the Customer


It is an implied term of contract between a banker and his
customer that the banker will not divulge the state of the customers
account to third parties,without the express or implied consent of the
customer. For instance, where a customer has given his banker as a
reference, the banker wi9ll be justified in disclosing legitimate
information to a third party.
In case of loan accounts, when a customer introduces a
proposed guarantor to his banker, the latter has to disclose the
financial affairs of the customer to the proposed guarantor to the
extent it would be necessary for the guarantor to be aware of his
responsibility as guarantor.
Obligation to Maintain Secrecy of Customers Account. [ contd]

3] Under common courtesy among bankers


There is a well recognized practice among banks themselves
generally described as a a common courtesy where bankers
enquire among themselves about information as to the financial
status of a customer.Information given in response to such
enquiries is given confidentially and is worded with scrupulous
care, so as to disclose no more than the general position of the
customer.And it is considered to be permissible in view of the
implied consent of the customer, derived from a well known
practice among banks.
Contd..
4] Disclosure in Banks interest:
A banker will require to disclose information about his
customer to protect his own interest, such as in case of
dispute with the customer.When banker has to realize
his dues on account of loans and advances from the
customer, he will be justified in revealing information to
guarantors about such advances or to an advocate for
initiating legal proceedings in a court of law.
Obligation to Maintain Secrecy of Customers Account. [ contd]

5] Disclosure in Public Interest:


Suppose our nation is at war with a neighboring country.In
such a situation, continuation of trade with that country
would not be desirable.When a banker comes to know
that one of his customers is having secret trade
transactions with the enemy country, he will be justified
in disclosing the facts to proper authorities.Similarly,
when a banker comes to know of some criminal intents
of a customer, It is his duty to disclose the facts to the
appropriate authorities.
Obligation to Maintain Secrecy of Customers Account. [ contd]

4. BANKER TO BE CAUTIOUS WHILE DISCLOSING


INFORMATION :
It is the duty of the banker to take due care while disclosing information about a
customer.Undue or irrelevant information should not be given;only facts should
be communicated and information given in general terms. Only in general
terms like good, fair, satisfactory, unsatisfactory,etc., should be used while
disclosing information. Whenever information is given to another banker , one
of the conditions of disclosure should be that secrecy is maintained by the
recipient of the information also.
Information should not be given to persons not connected with the collection of
information.The obligation to maintain secrecy continues even when the
customers account is closed.
When may a banker dishonor a
customers cheque?
1.Where the banker does not have the sufficient funds to the
credit of the customer.
2.Where the funds to the credit of the customer are not applicable
to the payment of the cheque E.g.,.When money is held in trust.
3.Where the cheque is doubtful legality.
4.Where the cheque is torn so as to make it imperfect
5.Where the cheque is irregular and materially altered.
6.Where the cheque is not duly presented .
7.Where the customers signature does not tally with his
specimen signature.
Contd
8.Where the cheque is post-dated.
9.Where the cheque has become stale (out-dated).
10. Where the cheque is presented at a branch other than the
one where the customer has the account.
11.Where an account is in joint names of few ,but they all have
not signed the cheque.
12.Where the banker has a claim for a set-off on the funds of the
customer and the cheque is for an amount in excess of the
balance above the claim.
When a banker must dishonour the cheque ?

1.When the customer becomes insolvent.


[The reason is obvious.All the assets of the insolvent(the
customer) vest in official receiver or assignee]
2. When the customer countermands payment
[i.e., orders banker not to make payment]
3.When the banker receives notice of the customers death
4.When a garnishee or other legal order attaching or otherwise
dealing with the money in bankers hands is received by the
banker.
Contd.

6.When the customer gives notice to the banker to close


the account.
7.When the banker suspects, or has reason to believe,
that the title of the person presenting the check is
defective.
8.When the holder gives a notice of loss of check to the
banker.
[The banker may however, may insist that the holder
should obtain a countermand from the drawer].
Garnishee Order
In case a debtor fails to make payment due to his
creditor , the latter may apply to the court to issue a
garnishee order on the debtors banker.As a result of
this order the debtors account with the bank is frozen
and the bank cannot make any payment out of the
account.The creditor, on whose request , such an order
is issued is called the judgement creditor; the debtor,
whose account is frozen is called the judgement debtor,
and the banker who has the customers account is
called the Garnishee.
Applicability of Garnishee Order

(i) The amount attached.


(ii) Order applicable only against the debt due

(iii) Amounts not covered by the Garnishee


order.
(iv) Serving of Garnishee Order.
Different types of accounts and
Garnishee order
1.Joint Account:
2. Partnership Account:
3. Trust Account

Attachment order issued by Income Tax Authorities


Section.266(3) of Income Tax Act,1961.
Consequences of Wrongful Dishonor of
Checks:
2.Obligation to maintain secrecy of accounts
Rights of the Banker.
Banker-Customer Relationship
II.Special Relationship Between Banker and Customer.