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BANKING THEORY LAW AND PRACTICE

BBA 2.1

BANKING THEORY LAW AND PRACTICE


Evolution of Banks Functions of Commercial Banks Balance Sheet of Commercial Banks Credit Creation, Organization and structure of Banks Unit Banking and Mixed Banking "ationalization of Commercial Banks O!#ects rogress$ Central Bank Evolution Functions Credit Control Measures Mone% market &ndian mone% market Com'onents Characteristics of develo'ed and under develo'ed mone% market$ Banker and Customer (eneral and S'ecial relationshi's "egotia!le instruments Features )%'es of accounts )%'es of customers ass Book Che*ue Features Crossing Endorsements a%ing !anker +uties ,older in due course a%ment in the due course rotection Collecting !anker +uties rotection Text and Reference B -$ Basu . /$ Muran#an S$0$ 1$ 2edd% 3 4''anniah . 5$ "atara#an 3 (ordon . !"# )heor% and ractice of +evelo'ment Banking . Modern Banking in &ndia Banking )heor% and ractice Banking )heor% and ractice u!lic Sector and rivate Sector Banks

Le"" n 1 E$OL%TION O& BANKING E' ()t* n f Ban!*n+ In"t*t)t* n" Origin of the 6ord 7Bank8$ O'inion is divided in regard to this$ 4ccording to some authorities, the 6ork 7Bank8 itself is derived from the 6ords 7!ancus8 or 7!an*ee,8 that is, a !ench$ )he earl% !ankers, the 9e6s in :om!ard%, transacted their !usiness on !enches in the market 'lace$ ;hen a !anker failed his 7!anco8 6as !roken u' !% the 'eo'le, hence the 6ord 7!ankru't$8 )his et%molog% is ho6ever, ridiculed !% Macleod on the ground 4ges8$ )here are others, 6ho are of the o'inion that the 6ord 7!ank8 is originall% derived from the (erman 6ord 7!ack8 meaning a #oint stock fund, 6hich 6as &talianised into 7!anco8 6hen the (ermans 6ere masters of a great 'art of &tal%$ )his a''ears to !e more 'ossi!le$ But 76hatever8 !e the origin of the 6ord <!ank=, 7as rofessor 2amchandra 2ao sa%s > resent? +a% Banking in &ndia, -st edition,'@@A 7&t 6ould trace the histor% of !anking in Euro'e from the Middle 4ges$8 E42:B ,&S)O2B OF B4"0&"( 4s earl% as /CCC B$C$, the Ba!%lonians had develo'ed a !anking s%stem$ )here is evidence to sho6 that the tem'les of Ba!%lon 6ere used as !anks, and such great tem'les as those of E'hesus and of +el!hi 6ere the most 'o6erful of the (reek !anking institutions$ But the s'read of irreligion soon destro%ed the 'u!lic sense of securit% in de'ositing mone% and valua!les in tem'les, and the 'riests 6ere no longer acting as financial agents$ )he 2omans did not organize State Banks as did the (reeks, !ut their minute regulations, as to the conduct of 'rivate !anking, 6ere calculated to create the utmost confidence in it$ ;ith the end of the covilisaiton of anti*uit%, and as a result of administrative decentralization and demoralization of the (overnment authorit%, 6ith its inevita!le counter'art of commercial insecurit%, !anking degenerated for a 'eriod of some centuries into a s%stem of financial makeshifts$ But that 6as not the onl% cause$ Old 're#udices die hard, and 4ristotle=s dictum, that the charging of inerest 6as unnatural and conse*uentl% immoral 6as adhered to fanaticall%$ Even no6 some Mohammedans, in o!edience to the commands contained in that !ehalf in their religious !ooks, refuse to acce't interest on mone% loans$ )he follo6ers of 4ristotle=s dictum forgot that the ancient 6orld, the ,e!res included, although it had to s%stem of !anks that 6ould !e considered ade*uate from the modern 'oint of vie6, and maintained mone%lenders and made no sin of interest, !ut onl% of usur%$ ,o6ever, u'on the revival of civilization, gro6ing necessit% forced the issue in the middle of the -/th centur%, and !anks 6ere esta!lished at Denice and (enoa, though in fact the% did not !ecome !anks as 6e understood them toda%, till long after$ 4gain the origin of modern !anking ma% !e traced to the mone% dealers in Florence, 6ho received mone% on de'osit, and 6ere lenders of mone% in the -5th centur%, and the names of the Bardi, 4ccia#uoli, eruzzi, itti and Medici soon !ecame famount throughout Euro'e, as !ankers$ 4t one time, Florence is said to have had eight% !ankers, though it could !oast of no 'u!lic !ank$ T,e De'e( -.ent f Br*t*", Ban!*n+ 2OB4: EEC,4"(E2 in England, 6e find during the reign of Ed6ard &&&, mone% changing?an im'ortant function of the !ankers of those da%s?6as taken u' !% a 2o%al Exchanger for the !enefit of the Cro6n$ ,e exchanged the various foreign coins, tendered to his m% travelers and merchants entering the kingdom, into British mone%, and, on the other hand, su''lied 'ersons going out of the countr% 6ith the foreign mone% the% re*uired$ ),E (O:+SM&),S &t is 'ro!a!l% true to sa% that the ground 6as 're'ared for modern !anking in England, !% the influx of gold from 4merica in the Eliza!ethan 4ge and the simultaneous gro6th of foreign trade$ :and ceased to !e the onl% form of 6ealth, and the countr% gentlemen and the to6n merchants, !egan to hold 'art of their 7ca'ital8 in cash$ &m'etus 6as given to 'u!lic !anking !% the seizure, !% Charles & in -F5C of -1C,CCC !ullion left for safe custod% !% the cit% merchants at the 2o%al Mint$ 4s a result of this 2o%al re'udiation, the merchants !egan to entrust their cashiers 6ith large sums, !ut the later mis?a''ro'riated their masters= mone% for their o6n !enefit$ Finding that their em'lo%ees had not treated them !etter than their king, the cit% merchants decided to kee' their cash 6ith goldsmiths,6ho in those da%s had strong rooms and em'lo%ed 6atchmen$ E42:B 2E(&""&"( OF 7&SSUE8 4"+ 7+E OS&)8 B4"0&"( ? )hus, large sums of mone% 6ere left 6ith the goldsmiths for safe custod% against their signed recei'ts, kno6n as 7goldsmiths= notes,8 em!od%ing an undertaking to return the mone% to he de'ositor or to !earer on demand$ )6o develo'ments *uickl% follo6ed, 6hich 6ere the foundation of 7issue8 and 7de'osit8 !anking, res'ectivel%$ )he first 6as that the goldsmiths= note !ocmome 'a%a!le to !earer, and so 6as transformed from a recei't to a !ank note$ &t 6as 'a%a!le on demand, and en#o%ed considera!le circulation$ Secondl%, the goldsmiths graduall% discovered that large sums of mone% 6ere left in their kee'ing for long 'eriods and, follo6ing the exam'le of +utch !ankers, the% thought it safe and 'rofita!le to lend out a 'art of their customers= mone% 'rovided such loans 6ere ra'id 6ithin a fixed time$ Further, realizing that the !usiness of loaning of other 'eo'le=s mone% at interest 6as 'rofita!le, and in order to attract larger amounts, the more enter'rising of the goldsmiths !egan to offer interest on mone% de'osited 6ith them, instead of charging a fee for their services in guarding their clients= gold$ )his marks an im'ortant ste' in the develo'ment of !anking in England$ Business gre6 to such an extent that it soon !ecame clear that a goldsmith could al6a%s s'are a certain 'ro'ortion of his cash for loans, regardless of the date at 6hich his notes fell due$ &t e*uall% !ecame safe for him to make his notes 'a%a!le at

an% time, for so long as his credit remained good, he could calculate, on the la6 of average, the amount of gold he needed to meet the dail% claims of his note holders and de'ositors$ 7CU22E") 4CCOU")8$ &t 6as in -FG/, that this develo'ment of English !anking received a rude set!ack$ Charles && !orro6ed heavil% from the goldsmiths and 'rom'tl% like his father re'udiated his de!ts$ 4 crisis ensued, and 6as follo6ed !% a general sus'ension of 'a%ments$ Confidence, ho6ever, 6as restored in s'ite of the shock and the general !elief, 6hich it 'roduced among 'eo'le that the goldsmiths 6ere guilt% of im'rudence and exor!itant 'ractices$ &t 6as soon after this date that the goldsmiths found that the% could receive mone% on 6hat is no6 termed 7current account,8 i$e$, mone% 6ithdra6al 6ithout notice$ EARLY GROWTH O& /OINT01TOCK BANK1 IN INDIA )he origin of modern !anking in &ndia dates !ack to -GGC 6hen the first #oint?stock !ank, named the ,industan Bank, 6as started !% the English 4genc% house of 4lexander 3 Co, in Calcutta$ )he !ank 6as, ho6ever, 6ould u' in -@1/$ Pre"*denc2 Ban!" )he real gro6th of modern commercial !anking !egan in the countr% 6hen the government 6as a6akened to the need for !anks in -@CF 6ith the esta!lishment of the first residenc% Bank, called the Bank of Bengal, in Calcutta in that %ear$ )hen follo6ed the esta!lishment of t6o other residenc% Banks, namel%, the Bank of Bom!a% in -@5C and the Bank of Madras in -@51$ )o each of these !anks, the government had su!scri!ed 2s$ 1 lakhs to their share ca'ital$ ,o6ever, a ma#or 'art of their share ca'ital 6as contri!uted !% the Euro'ean shareholders$ )hese residenc% Banks, ho6ever, en#o%ed the mono'ol% of government !anking$ )he% 6ere also given the right of note?issue in -@/1, 6hich 6as ho6ever, 6ithdra6n in -@F/$ )hese three residenc% Banks continued till -H/C$ &n -H/- the% 6ere amalgamated into the &m'erial Bank of &ndia$ Ind*an / *nt01t c! Ban!" )he %ear -@FC is a landmark in the histor% of 'u!lic !anks in &ndia, since in that %ear the 'rinci'le of limited lia!ilit% 6as first a''lied to #oin?stock !anks$ Since -@FC till the end of the nineteenth centur%, a num!er of &ndian #oint stock !anks come into existence$ For instance, the 4llaha!ad Bank 6as started at 4llaha!ad in -@FI$ &n -@GI, the 4lliance Bank of Simla 6as started$ &n -@@H, another &ndian !ank called Oudh Commercial Bank 6as esta!lished$ &n -@HI, the famous un#a! "ational Bank came into existence$ &ns'ired !% the S6adeshi Movement, several &ndian entre'reneurs ventured into the modern !anking !usiness$ +uring the !oom 'eriod of -HCF?-1, thus, there 6as s mushroom gro6th of !anks$ Man% 'rominent !anks also came into existence during this 'eriod$ )hese 6ere the Bank of &ndia >-HCFA, the Canara Bank >-HCFA, the Bank of Baroda >-HC@A, and the Central Bank of &ndia >-H--A$ & re*+n Ban!" &n addition to the &ndian #oint?stock !anks, a num!er of multi?national foreign !anks called 7exchange !anks8, 6ith their head offices in their home countries, entered the !anking s%stem of &ndia$ Exchange !anks 6ere essentiall% meant for financing the foreign trade of the countr%, !ut the% also conducted !anking activit% in com'etition 6ith &ndian !anks$ )he exchange !anks are termed 7foreign !anks8, !ecause the% 6ere financed and managed !% non?&ndians$ Ban! Cr*"*" )ill a!out the middle of the t6entieth centur%, &ndian #oint?stock !anks had a checkered career in the countr%$ )he !anking sector ex'erience severe set?!acks during the 'riod?-H-1?-G, as -C@ !anks failed and another 1G1 !anks failed on -H//?1F 6hich 6as again follo6ed !% the failure of F/C more !anks in -H1G?1@$ )he Central Banking En*uir% Committee >-H/HA traced the follo6ing ma#or causes of !ank failure in &ndia. >-A &nsufficient 'aid?u' ca'ital and reservesJ >/A oor li*uidit% of assetsJ >1A Com!ination of non?!anking activities 6ith !anking$ >5A &rrational credit 'olic% causing reckless and in#udicious advancesJ >IA Favouritism !% the directors the their vested interestsJ >FA &ncom'etent and inex'erienced directorsJ >GA MismanagementJ >@A +ishonest managementJ >HA Creation of long?term loans on the !asis of short?term de'ositsJ >-CA &ndulgence in s'eculative investmentJ >--A &gnorgance of the 'eo'le a!out !anking !usinessJ >-/A :ack of co?ordinate among #oint?stock !anksJ >-1A 4!sence of a central !ank for overall su'ervision and controlJ >-5A :ack of suita!le !anking legislation for regulation of !anks$

4nd a!ove all, the shattered 'u!lic confidence in !anks ma% !e accounted for the failure of man% &ndian commercial !anks over time$4nother event of !ank failure took 'lace in -H5F?5G, 6ith the crash of the 4$B$C$ Bank, the Exchange Bank of &ndia and 4frica and the "ath Banks$ Eventuall%, at the time of &nde'endence >in -H5GA, &ndia inherited an extremel% 6eak !anking structure, 6ith the ur!an?orientation, com'rising I55 small non?scheduled !anks and HF scheduled !anks, giving !ulk finance to the trading sector$ Moreover, onl% a fe6 of them 'ossessed on all?&ndia character, 6hile most of them had limited geogra'hical coverage in their !usiness$ 3A/OR BANKING DE$ELOP3ENT14RE&OR31 D%RING THE PLANNING ERA 4fter inde'endence, the (overnment of &ndia launched economic 'lanning in the countr% since -HI-$ +uring the last 1G %ears of the 'lanning era, commercial !anking has undergone drastic transformation through several im'ortant develo'mentsK reforms and 'olic% measures introduced !% the government$ Some of the ma#or changes introduced in the &ndian !anking s%stem ma% !e enlisted as follo6s. >-A :i*uidation and amalgamation of !anksJ >/A "ationalization of the 2eserve Bank of &ndiaJ >1A Banking legislationJ >5A Evolution of 'u!lic sector !anking through !ank nationalization$ >IA +eclining significance of foreign !anksJ >FA Structural changes of commercial !ankingJ >GA "e6 strategies in !anking !usiness$ Ban!*n+ # Def*n*t* n 4 !anking com'an% is defined a com'an% 6hich transacts the !usiness of !anking in &ndia$ )he Banking 2egulation 4ct defines the !usiness of !anking !% stating the essential functions of a !anker$ &t also states the various other !usinesses a !anking com'an% ma% !e engaged in and 'rohi!its certain !usinesses to !e 'reformed !% it$ )he term <Banking= is defined as 7acce'ting, for the 'ur'ose of lending or investment, of de'osits of mone% from the 'u!lic, re'a%a!le on demand or other6ise, and 6ithdra6a!le !% che*ue, draft, order of other6ise8 >Section I>!A )he sailent features of this definition are as follo6s. >iA 4 !anking com'an% must 'erform !oth of the essential functions, viz$, >aA acce'ting of de'osits, and >!A lending or investing the same$ &f the 'ur'ose of acce'ting of de'osits is not to lend or invest, the !usiness 6ill not !e called !anking !usiness$ )he ex'lanation to Section I>cA makes it clear that an% com'an% 6hich is engaged in the manufacture of goods or carries on an% trade and 6hich acce'ts de'osits of mone% from the 'u!lic merel% for the 'ur'ose of financing its !usiness, as such manufacturer or trader shall not !e deemed to transact the !usiness of !anking$ >iiA )he 'hrase <de'osit of mone% from the 'u!lic= is significant$ )he !anker acce'ts de'osits of mone% and not a an%thing else$ )he 6ord <'u!lic= im'lies that a !anker acce'ts de'osits from an%one 6ho offers hisKher mone% for such 'ur'ose$ )he !anker ho6ever, can refuse to o'en an account in the name of the 'erson 6ho is considered as an undesira!le 'erson, e$g$, a thief, ro!!er, etc$ 4cce'tance of de'osits should !e the kno6n !usiness of a !anker$ )he mone%?lenders and indigenous !akers de'end on their o6n resources and do not acce't de'osits from the 'u!lic$ &f the% ask for mone% from their friends or relatives in case of need, such mone% is not deemed as de'osit acce'ted from the 'u!lic$ >iiiA )he definition also s'ecifies the time and mode of 6ithdra6al of the de'osits$ )he de'osited mone% should !e re'a%a!le to the de'ositor on demand made !% the latter or according to the agreement reached !et6een the t6o 'arties$ )he essential feature of !anking !usiness is that the !anker does nor refund the mone% on his o6n accord, even if the 'eriod for 6hich it 6as de'osited ex'ires$ )he de'ositor must make a demand for the same$ )he 4ct also s'ecified that the 6ithdra6al should !e effected through an order, che*ue, draft or other6ise$ &t im'lies that the demand should !e made in a 'ro'er manner and through an instrument in 6riting and not merel% !% ver!al order or a tele'honic message$ &t is thus clear that the underl%ing 'rinci'le of the !usiness is that the resources mo!ilized through the acce'tance of de'osits must constitute the main stream of funds 6hich are to !e utilized for lending or investment 'ur'oses$ )he !anker is, thus, an intermediar% and deals 6ith the mone% !elonging to the 'u!lic$ 4 num!er of other institutions, 6hich also deal 6ith mone%, are not designated as !anking institutions, !ecause the% do not fulfill all the a!ove? mentioned 're?re*uisites$ )he s'ecialized financial institutions, e$g$, &ndustrial Finance Cor'oration of &ndia and State Finance Cor'oration, are not !anks !ecause the% do not acce't the de'osits in the 'rescri!ed manner$ )he essence of !anking !usiness lies in the t6o essential functions$ )his is also evident from the definition given !% Sir 9ohn aget, a noted authorit% on Banking$

1*r / ,n Pa+et5" Def*n*t* n# 4ccording to Sir 9ohn aget, 7"o 'erson or !od% cor'orate or other6ise, can !e a !anker 6ho does not >iA take de'osit, accounts, >iiA take current accounts, >iiiA issue and 'a% che*ues, and >ivA collect che*ues, crossed and uncrossed, for his customers$8 )his definitions 'oints out the four essential functions of the !anking !usiness$ Sir 9ohn aget also la%s em'hasis on the 'erformance of the a!ove functions in a regular and recognized manner$ 4ccording to his, 7one claiming to !e a !anker must 'rofess himself to !e one and the 'u!lic must acce't his as such, his main !usiness must !e that of !anking from 6hich, generall%, he should !e a!le to earn his living$8 )he a!ove?mentioned function are considered as the essential functions of a !anker !ut this definition does not include the other functions 6hich are no6 !eing 'erformed !% modern !ankers$ "ame must include the 6ord <Bank=, <Banker= or <Banking=$ Section G makes it essential for ever% com'an% carr%ing on the !usiness of !aking in &ndia to use as 'art of its name at least one of the 6ords?!ank, !anker, !anker, !anking or !anking com'an%$ Besides, it 'rohi!its an% other com'an% of firm, individual or grou' of individuals, from using an% of these 6ords as 'arts of itsKhis name$ Section G has !een amended in -H@1 6ith the effect that an% of these 6ords cannot !e used !% an% such com'an% event 7in connection 6ith its !usiness$8

LE11ON 2 &%NCTION1 O& CO33ERCIAL BANK1 4 commercial !ank is a financial institution 6hose main !usiness is to acce't de'osits from the 'u!lic and to give loans to those 6ho re*uire it for short 'eriods$ )he general functions of a commercial !ank ma% !e summarized as follo6s.? 1. Rece*'*n+ f De- "*t" )he most im'ortant functions of the commercial !anks is to receive de'osits form the 'u!lic$ )he commercial !anks not onl% 'rotect them !ut also hel' transfer of funds through che*ues and even undertake to re'a% the mone% in legal tender mone%$ +e'osits received !% the commercial !anks are of various t%'es, ? fixed de'osits, savings de'osits, current de'osits and recurring de'osits$ Fixed de'osits or )ime de'osits are 6ith the !ank for a s'ecified 'eriod of time and the% can !e 6ithdra6n onl% after the ex'ir% of the said 'eriod$ )he interest rate de'ends on the time agreed u'on$ )he longer the maturit% 'eriod, the higher the interest rate and vice versa$ Form the 'oint of vie6 of safet% and interest, fixed de'osits are 'refera!le$ Savings de'osits are those de'osits received su!#ect to certain restrictions$ For instance, the interest is normall% lo6er on savings de'ositsJ 6ithdra6als ma% !e made once or t6ice a 6eek$ Current de'osit or demand de'osits as the% the often called, are those de'osits 6ithdra6a!le !% the de'ositor at an% time 6ithout an% 'rior notice !% means of che*ues$ )he !anks do not 'a% an% interest on demand de'osits, !ut in fact make a small charge on customers 6ith current account$ 2ecurring de'osits are those de'osits received !% the !anks in e*ual monthl% 'remium for a certain num!er of %ears the total of 6hich 6ill !e 'aid to the de'ositor 6ith interest due thereon after the ex'ir% of the date of maturit%$ +e'osits at cal according to 6hich de'osits ma% !e 6ithdra6n 6hen asked for !% the de'ositor, de'osits at short notice !% 6hich de'ositors are re*uired to give notice !efore certain num!er of da%s >G,/-,1C,5I or HCA for 6ithdra6al of de'osits, short?time de'osits for short 'eriod of a %ear or less for lo6er interest and retirement !enefits de'osits, are some of the im'ortant forms of de'osits received !% the commercial !anks$ 2. 3a!*n+ ( an" and Ad'ance" )he second 'rinci'al functions of the commercial !ank is to make loans and advances out of the 'u!lic de'osits$ +irect loans and advances are given to all 'ersons against 'ersonal securit%, gold and silver and other mova!le and immova!le assets$ )his the !anks do !% overdraft facilities, that is, !% allo6ing the !orro6er or overdra6 his current account and also !% discounting !ills of exchange$ )he merchants and manufacturers ena!led to o!tain ade*uate funds for 'roduction of goods and services$ )he% hel' in the develo'ment of those industries 6hich 'erform the most useful service to the communit%$ )he loans and advances made !% the commercial !anks are of various forms, like cash credit, overdraft, demand loan, hire 'urchase loan, etc$ Cash credit is that loan given !% a commercial !ank in installments against the securit% of ra6 materials, 'roduced goods, etc$ Overdraft is made on securit% against stock and shares, insurance 'olicies, etc$, under current account$ +emand loan is 'aid in full to the de!tor at a time$ ,ire 'urchase loans are made to all 'ersons for the 'urchase of customer dura!le goods like radio, !ic%cle, tailoring machine, sites for !uildings etc and these loans are re'a%a!le to the !ank in eas% installments 6ith interest due thereon$ 6. A+enc2 1er'*ce" 4 commercial !ank 'rovides a range of investment services$ Customers can arrange for dividends to !e sent to their !ank and directl% remitted into their !ank accounts, or for the !ank to detach cou'ons from !earer !onds and 'resent them for 'a%ments and to act u'on announcements in the ress of dra6n !onds, cou'ons 'a%a!le, etc$ Orders for the 'urchase or sale of stock exchange securities are executed through the !anks= !rokers 6ho 6ill also their o'inions on securities or lists of securities$ Similarl%, !anks 6ill make a''lications of !ehalf of their customers for allotments arising from ne6 ca'ital issues, 'a% calls as the% fall due >that is, su!scri'tions to ca'ital issues made over a 'eriodA, and ultimatel% o!tain the share certificate or other documents of title$ On certain agreed terms the !anks 6ill allo6 their names to a''ear on a''roved 'ros'ectuses or other documents as !ankers for the issue of ne6 ca'ital, the% 6ill receive a''lications and carr% out other instructions$ 4 commercial !ank undertakes the 'a%ment of su!scri'tions, 'remia, rents and collection of che*ues, !ills, 'romissor% notes etc$, on !ehalf of its customers$ &t also acts as a corres'ondent or re'resentative of its customers, other !anks and financial cor'orations$ Most of the commercial !anks have an executor and trustee de'artmentsJ some ma% have affiliated com'anies to deal 6ith this !ranch of their !usiness$ )he% aim to 'rovide, !efore, a com'lete range of trustee, executor, or advisor%

services for a small charge$ )he !usiness of !anks acting as trustees, executors, administrators, etc$, has continuousl% ex'anded 6ith considera!le usefulness to their customers$ B% a''ointing a !ank as an executor or trustee of his 6ill the customer secures the advantage of continuit%, and avoids having to make changesJ im'artialit% in dealing 6ith !eneficiaries and in the exercise of discretionsJ and the legal and s'ecialized kno6ledge 'ertaining to executor and trustee services$ ;hen a 'erson dies 6ithout making a 6ill the next?of?kin can em'lo% the !ank to act as administrator and to deal 6ith the estate in accordance 6ith the rules relating to intestacies$ 4lternativel%, if a testator makes a 6ill !ut fails to a''oint an executor, or if an executor is una!le of un6illing to act, the !ank can usuall% undertake the administration 6ith the consent of the 'ersons 6ho are immediatel% concerned$ Banks 6ill act solel% or #ointl% 6ith others in these maters, as also in the case of trustee for stocks, shares funds, 'ro'erties or other investments$ Under a declaration of trust, a !ank undertakes the su'ervision of investments and distri!ution of incomeJ a customer=s investments can !e transferred into the !ank=s name of control, this ena!ling it to act immediatel% u'on a notice or rights issue, allotment letters, etc$ 4lternativel%, 6here it is not desired to a''oint the !ank as nominee, these services ma% still !e carried out !% a''ointing the !ank as attorne%$ ;here !usiness is included in an estate or trust, a !ank 6ill 'rovide for its management for a limited 'eriod, 'ending its sale to the !est advantage as a going concern or transfer to a !eneficiar%$ rivate com'anies 6ishing to set u' 'ension funds ma% a''oint a !ank as a custodian, trustee and investment adviser, 6hile retaining the administration of the scheme in the hands of the management of the fund$ Most !anks 6ill undertake on !ehalf of their customers the 're'aration of income tax returns and claims for the recover% of over'aid taxJ the% also assist the customers in checking of assessments$ &n addition to the usual claims involving 'ersonal allo6ances and reliefs, claims are 're'ared on !ehalf of residents a!road, minors, charities, etc$ 7. Genera( %t*(*t2 1er'*ce" )hese services are those in 6hich the !ankers 'osition in not that of an agent for his customer$ )he% include the issue of credit instruments like letters of credit and travellers= che*ues, the acce'tance of !ills of exchange, the safe custod% of valua!les and documents, the transaction of foreign exchange !usiness, acting as a referee as to the res'ecta!ilit% and financial standing of customers and 'roviding s'ecialized advisor% service to customers$ B% selling drafts or orders and !% issuing letters of credit, circular notes, travellers= che*ues, etc$, a commercial !anker is discharging a ver% im'ortant function$ 4 !anker=s draft is an order, addressed !% one office of a !ank to an% other of its !ranches or !% an% one !ank to another, to 'a% a s'ecified sum to the 'erson concerned$ 4 letter of credit is a document issued !% a !anker, authorizing some other !anker to 6hom it si addressed, to honour the che*ues of a 'erson named in the document, to the extent of a stated amount in the letter and to charge the same to the account ofhte grantor of the letter of credit 4 letter of credit includes a 'romise !% the issuing !anker to acce't all !ills to the limits of credit$ ;hen the 'romise to acce't is conditional on the recei't of the documents of title to goods, it is called a documentar% letter of credit$ But the !anker 6ill still !e lia!le for !ills negotiated !efore the ex'ir% of the 'eriod of its currenc%$ <Circular letter of Credit= is generall% intended for travelers 6ho ma% re*uire mone% in different countries$ )he% ma% !e divided into travelers letters of credit and guarantee letters of credit$ 4 travelers letter of credit carries the instruction of the issuing !ank to its foreign agents to honour the !eneficiar%=s drafts, Che*ues, etc$, to a stated amount 6hich it undertakes to meet on 'resentation$ ;hile issuing guarantee letters of credit, the !anker secures a guarantee for reim!ursement at an agree rate of interest or the ma% insist on sufficient securit% for the grant of the credit, the !anker secures a guarantee for reim!ursement at an agreed rate of interest or he ma% insist on sufficient securit% for the grant of the credit$ )here is %et another t%'e 6hich is kno6s as <2evolving Credit$= ,ere the letter is so 6orded that the amount of credit availa!le automaticall% reverts to the original amount after the !ills negotiated under them are dul% honored$ Circular "otes are che*ues on the issuing !aker for certain round sums in his o6n currenc%$ On the reverse side of the circular note is a letter addressed to the agents s'ecif%ing the name of the holder and referring to a letter of indication in his hands, containing an s'ecimen signature of the holder$ )he not 6ill not !e honource unless the letter of indication is 'resented$ )ravellers= che*ues are documents similar to circular notes 6ith the exce'tion that the% are not accom'anied !% an% letter of indication$ Circular che*ues are issued !% !anks in certain countries to their agents a!road$ )hese agents sell them to intending visitors to the countr% of the issuing !ank$ 4nother im'ortant service rendered !% a modern commercial !ank is that of kee'ing in safe custod% valua!les such as negotia!le securities, #e6eller%, documents of title, 6ills, deed?!oxes, etc$, Some !ranches are also e*ui''ed 6ith s'eciall% constructed strong rooms, each containing a large num!er of 'rivate steel safes of various sizes$ )hese ma% !e used !% non?customers for a small fee as 6ell as !% regular customers$ Each licensee in 'rovided 6ith the ke% of an individual safe and thus not onl% o!tains 'rotection for his valua!les, !ut also retains full 'ersonal control over them$ )he safes are accessi!le at an% time during !anking hours and often longer$ For sho'kee'ers and other customers 6ho handle large sums of mone% after !anking hours$ <night safes= are availa!le at man% !anks$ "ight safe take the form of a small metal door in the outside 6all of the !ank, accessi!le from the street, !ehind 6hich there is a chute connecting 6ith the !ank=s strong room$ Customers 6ho re*uire this

service are 'rovided 6ith a leather 6allet, 6hich the% lock !efore 'lacing in the chute$ )he 6allet is o'ened !% the customer 6hen he calls at the !ank the next da% to 'a% the contents into his account$ 4nother function of great value, !oth to !ankers and to !usinessman, is that of a referee as to the res'ecta!ilit% an financial status of the customer$ 4mong the services introduced !% modern commercial !anks during the last *uarter of a centur% or so, the !ank giro and credit cards deserve s'ecial mention$ )he !ank giro is a s%stem !% 6hich a !ank customer 6ith man% 'a%ments to make, instead of dra6ing a che*ue for each item, ma% sim'l% instruct his !ank to transfer to the !ank accounts of his creditor the sum due from him, and he 6rites one che*ue de!iting his account 6ith the total amount$ Credit advices containing the name of each creditor 6ith the name of his !ank and the !ranch 6ill !e cleared through the <credit clearing= of the clearing?house, 6hich o'erates in a similar 6a% as for the clearing of che*ues$ Even non? customers of a !ank for a small charge ma% make use of this facilit%$ 4 direct de!iting service is also o'erated !% some !anks, )his service is designed to assist organizations 6hich receive large num!er of 'a%ments on a regular !asis$ 4 creditor is there!% ena!led 6ith the 'rior a''roval of the de!tor, to claim an% mone% due to him direct from the de!tor=s !ank account$ )o some organizations, for exam'le, insurance com'anies, 6hich receive, sa%, six e*ual sums on six dated in a %ear, the scheme is onl% an <extension of the standing order facilit%J !ut for the 'u!lic utilities and traders 6hich send out invoices for varia!le amounts at differing times, the scheme is an entirel% ne6 one$ Credit cards are introduced for the use of credit?6orth% customers$ Users are issued 6ith a card on 'roduction of 6hich their signature is acce'ted on !ills in sho's and esta!lishments 'artici'ating in the scheme$ )he !anks there!% guarantee to meet the !ill and recover from the cardholders through a single account 'resented 'eriodicall%$ &n some cases uses are re*uired to 'a% a regular su!scri'tion for the use of the service as 6ell$ 4n extension of the scheme allo6s the re'a%ment of large sums >su!#ect to a maximumA over a 'eriod at interest$ Some !anks are o'ening !udget accounts for credit?6orth% customers$ )he !ank guarantees to 'a%, for a s'ecific charge, certain t%'es of annual !ills >for exam'le, fuel !ills, rates, etc$A 'rom'tl% as the% !ecome due, 6hilst re'a%ments are s'read over a -/?monthl% 'eriod from the customer=s current account$ 4ll these ne6 mone% transmission services have 'articular regard to the develo'ments in com'uterized !ook?kee'ing 6hich the !anks in some countries have alread% introduced$ Some !anks are re'orted to !e ex'erimenting 6ith the use of electronic machines 6hich 6ill scan che*ues and dis'ense notes or coins, thus saving time at the counter$ O'er"ea" Tread*n+ 1er'*ce" 2ecognition of overseas trade has led modern commercial !anks to set u' !ranches s'ecializing in the finance of foreign trade and some !anks in some countries have taken interest in ex'ort houses and factoring organizations$ 4ssisted !% !anks affiliated to them in overseas territories, the% are a!le to 'rovide a com'rehensive net6ork of services for foreign !anking !usiness, and ma% transactions can !e carried through from start to finish !% a home !ank or its su!sidiar%$ &n 'laces 6here !anks are not directl% re'resented !% such affiliated undertakings, the% have 6orking arrangements 6ith corres'ondents so that !anks are in a 'osition to undertake foreign !anking !usiness in an% 'art of the 6orld$ )he !anks 'rovide more than #ust a means for the settlements of de!ts !et6een trades !oth at home and a!road for the goods the% !u% and sellJ the% are also 'roviders of credit and ena!le the com'an% to release the ca'ital 6hich 6ould other6ise !e tied u' in the goods ex'orted$ 8. Inf r.at* n and t,er 1er'*ce" 4s 'art of their com'rehensive !anking services, man% !anks act as a ma#or sources of information on overseas trade in all as'ects$ Some !anks 'roduce regular !ulletins on trade and economic conditions at home and a!road, and s'ecial re'orts on commodities and markets$ &n some cases the% invite en*uiries for those 6ishing to extend their foreign trade, and are a!le through their corres'ondents to furnish the names of re'uta!le and interested dealers of goods and commodities and to advise on the a''ointment of suita!le agents$ For !usinessmen traveling a!road letters of introduction, indicating the 'ur'ose of #ourne% taken, can !e issued addressed to !anking corres'ondents in the various centers it is 'ro'osed to visit$ &n this 6a% it is often 'ossi!le to esta!lish ne6 avenues of !usiness$ On re*uest, !anks o!tain for customers, for !usiness houses, confidential o'inions on the financial standing of com'anies, firms or individuals at home or overseas$ Commercial !anks furnish advice and information outside the sco'e merel% of trade$ &f it is desired to set u' a su!sidiar% or !ranch overseas >or for an overseas com'an% to set u' in the home countr%A the% hel' to esta!lish contracts 6ith local !anking organizations$ )o sum u', the service rendered !% a modern commercial !ank is of inestima!le value$ &t mo!ilizes the scattered saving of the communit% and redistri!utes them into more useful channels$ &t ena!les large 'a%ments to !e made over long distances 6ith maximum ex'enses$ &t constitutes the ver% life !lood of an advanced economic societ%$ &n the 6ords of ;alter :eaf. 7)he !anker is the universal ar!iter of the 6orld=s econom%$8

C ..erc*a( Ban!" and Ec n .*c De'e( -.ent Commercial !anks have come to 'la% a significant role in the develo'ment of countries$ &n fact, 6ithout the evolution of commercial !anking in the -@th and the -Hth centuries, &ndustrial 2evolution 6ould not have taken 'lace in England$ &t 6ill !e e*uall% true to state that 6ithout the develo'ment of sound commercial !anking, underdevelo'ed countries cannot ho'e to #oin the ranks of advanced countries$ For, industrial develo'ment re*uires the use of ca'ital 6hich 6ill not !e 'ossi!le 6ithout the existence of !anks to 'rovide the necessar% finance to ac*uire ca'ital$ Besides, industrial develo'ment 6ill !e im'ossi!le 6ithout the existence of markets to dis'ose of the goods 'roduced$ But ho6 can markets !e extended 6ithout the services of commercial !anksL &n this section, 6e shall deal 6ith the im'ortant services 'rovided !% commercial !anks and sho6 ho6 !anks 'la% a significant role in the economic develo'ment of nations$ >iA Banks are necessar% for trade and industr%. 4ll economic 'rogress in the last /CC %ears or so has !een !ased on extensive trade and industrialization, 6hich could not have taken 'lace 6ithout the use of mone%$ But mone% does not mean coins and currenc% notes, onl% since these form onl% a small 'ro'ortion of the total volume of mone% su''l%$ &t is the !ank de'osits on 6hich che*ues can !e issued that constitute the im'ortant sources of mone%$ &n all large transactions, 'a%ments are not made in terms of mone% !ut in terms of che*ues and drafts$ Bet6een countries, trade is financed through !ill so exchange 6hich are discounted >i$e$, !oughtA !% !anks$ ;ithout the use of the !ank che*ue, the !ank draft and the !ill of exchange, internal trade and international trade could not have develo'ed, and 6ithout such trade, s'ecialization and industrial develo'ment could not have taken 'lace$ >iiA Banks hel' in distri!ution of funds !et6een regions. 4nother 6a% !% 6hich commercial !anks encourage 'roduction and enhance national income is !% the transference of sur'lus ca'ital from regions 6here it is not 6anted so much, to those regions 6here it can !e more usefull% and efficientl% em'lo%ed$ )his distri!ution of funds !et6een regions has the effect of o'ening u' !ack6ard regions and 'a%ing the 6a% for their economic develo'ment$ >iiiA Banks create credit and hel' in !usiness ex'ansion. Fluctuations in !ank credit have an im'ortant !earing on the level of economic activit%$ Ex'ansion of !ank credit 6ill 'rovide more funds to entre'reneurs and, hence, 6ill lead to more investment$ Under conditions of full em'lo%ment, ex'ansion of !ank credit 6ill have the effect of inflationar% 'ressure$ But under conditions of unem'lo%ment, it 6ill 'ush u' 'roduction in the countr%$ On the other hand, a decline in !ank credit 6ill result in decline in 'roduction, em'lo%ment, sales and 'rices$ From the vie6 of an under? develo'ed econom%, the ex'ansion of !ank credit offering more financial resources to industries in one of the contri!utor% causes for greater economic develo'ment$ >ivA Banks monetize de!t. 4 ver% im'ortant service the !anks render to he communit% is the creation of demand de'osits in exchange of de!ts of other >viz$, short and long?term securitiesA$ Commercial !anks !u% de!ts of others 6hich are not generall% acce'ta!le as mone%, either !ecause the de!tors are not sufficientl% kno6n or !ecause their de!t is 'a%a!le onl% after a 'eriod of time$ &n return for them, the% issue demand de'osits 6hich are generall% acce'ted as mone%$ B% these exchange o'erations, !anks monetize de!t$ )he significance of !anks toda% flo6s from the fact that the% are 7not merel% traders in mone% !ut also, in an im'ortant sense, manufacturers of mone%$8 Bank mone% is used for the 'romotion of industr% and trade$ &t is rightl% said that the% have not onl% the 'o6er to determine the aggregate volume of !ank mone% in existence !ut to influence the uses to 6hich that mone% should !e 'ut$ >vA Banks 'romote ca'ital formation. Commercial !anks afford facilities for saving and thus encourage ha!its of thrift and industr% among 'eo'le$ )he mo!ilize the idle and dormant ca'ital of the communit% and make it availa!le for 'roductive 'ur'oses$ Economic develo'ment de'ends u'on the diversion of economic resources from consum'tion to ca'ital formation$ 4 higher rate of saving and investment is, therefore, 6hat constitutes real ca'ital formation$ &n this, the role of !anks is invalua!le$ But then there can !e other institutions also in a countr% such as insurance com'anies 6hich ma% hel' in mo!ilizing the savings of the communit% for 'roductive 'ur'oses$ >viA Banks influence interest rates . Banks can influence economic activit% in another 6a% also$ )he% can influence the rate of interest in the mone% market through its su''l% of funds$ B% offering more or less funds, it can exert a 'o6erful influence u'on interest rates$ Besides, it can also influence the 'eo'le to hold more less !ank mone% or less or more other assets$ &n this 6a%, too, it can influence the interest rates$ 4 chea' mone% 'olic% 6ith lo6 rate of interest 6ill tend to stimulate economic activit%, if other conditions are favoura!le$ &n a develo'ing countr% like &ndia, !anking facilities are highl% inade*uate$ )he vast num!er of 'eo'le living in villages and to6s do not have an% !anking facilities and conse*uentl% all their savings are 6asted$ )he o'ening of !anks is these areas or extension of !ank facilities 6ill hel' mo!ilize savings in these areas and, 6hen 'ut in the hands of entre'reneurs, 6ill !ecome 'roductive Besides in &ndia commercial !anks have started undertaking ne6 functions to hel' the 'rivate sector industries$ )he% hel' in concluding deferred 'a%ments agreements !et6een &ndian industrial units and foreign firms to ena!le the former to im'ort machiner% and other essential items$ )hus, !ans have come to occu'% an im'ortant 'lace in the industrial and commercial life of a nation$ 4 develo'ed !anking organization is a necessar% condition for the industrial develo'ment of a countr%$K

10

LE11ON 6 BALANCE 1HEET O& CO33ERCIAL BANK1 T,e L*a9*(*t*e" and A""et" f a Ban! # A Ba(ance 1,eet Banking is !usiness much like na% other !usiness$ 4n indication of the financial 'osition of a !usiness concern ma% !e o!tained !% examining its statement of lia!ilities and assets, called the <Balance Sheet=$ 4 !alance sheet is al6a%s 're'ared in t6o sections$ &n one section it is customar% to record lia!ilities, normall% on the left side, and assets in the other section on the right side$ :ia!ilities are the de!ts or amounts of mone% o6ned to others$ )he lia!ilities of a !ank consist mainl% of the claims of its shareholders, creditors and the de'ositors$ )he assets, on the other hand, include such items as cash , accounts receiva!le, loans and investments, etc$ 4 !alance sheet al6a%s !alances in total, !ut no individual items necessaril% matches another$ ;e can easil% understand this if 6e have some elementar% kno6ledge of dou!le?entr% accounting$ 4n% change in the one side of the !alance sheet must !e 'recisel% offset !% an e*ual change in some other item on the other side$ )he e*ualit% of assets and lia!ilities is not 'eculiar to !anking alone$ Ever% !alance?sheet !alances$ But a !ank=s !usiness is, in a ver% s'ecial sense, a !alancing of assets and lia!ilities$ 4 !ank ac*uires assets !% increasing its lia!ilities directl%, unlike an% other !usiness 6here lia!ilities are ac*uired indirectl% as a result of trading$ )hus, the first thing 6e 6ant to kno6 a!out a !ank and its o'erations is the amount of its de!ts and credits$ L*a9*(*t*e" )he lia!ilities of the !alance sheet of a !ank is com'arativel% sim'le$ )he lia!ilities re'resent others= claims on the !ank$ )he lia!ilities side of the !alance sheet sho6s ho6 the !ank raises funds to function as a dealer in de!ts and credits$ )he lia!ilities of a !ank usuall% consist of the follo6ing items. >-A Ca'ital. )he !ank ca'ital from its shareholders !% issuing various t%'es of shares, such as ordinar%, 'reference, deferred shares, etc$ )he !alance sheet ma% sho6 the amounts of authorized ca'ital, issued ca'ital, and su!scri!ed ca'ital$ But the actual lia!ilit% of a !ank to its shareholders consists of the ca'ital originall% 'aid in and an% accumulation of undistri!uted 'rofits$ >/A 2eserve Fund . &t is the amount accumulated over the %ears out of undistri!uted 'rofits$ )he !ank ma% use this fund to offset its unex'ected losses in certain %ears$ Sometimes a !ank is re*uired !% lo6 to transfer a 'art of its annual 'rofits to the reserve fund so long as amount in the fund does not !ecome e*ual to its 'aid?u' ca'ital$ >1A +e'osits. +e'osits from the 'u!lic constitute the !iggest 'ro'ortion of !ank=s 6orking funds$ )he de'osits are categorized as the demand de'osits and the time de'osits$ &t is the former that re'resents the !ulk of the mone% su''l% 6ith 'u!lic$ &t is on the !asis of their de'osit lia!ilities that the !anks make loan and investments after kee'ing ascertain cash reserve ratio$ +emand de'osits are distinguished from time de'osits$ )ime de'osits are those against 6hich che*ues cannot !e 6ritten$ +emand de'osits ma% arise out of the credits created !% a !ank as a claim against itself$ But in sim'le terms, a customer is said to have 7made a de'osit8 6hen he gives the !ank cash or its e*uivalent and the !ank gives him a de'osit credit$ 4 de'osit, therefore, is the 'romise that the !ank gives the de'ositor in exchange for the cash he 7de'osits8$ )he cash in an asset, the de'osit is a lia!ilit%$ )he de'ositor is a creditor of the !ank having lent its cash, and he can claim re'a%ment at an% time$ >5A &nter?!ank !orro6ings . :ia!ilities are created 6hen a !ank !orro6s from another !ank on a tem'orar% !asis$ 4 large !ank, in 'articular, ma% have de'osit lia!ilities not onl% for the account of the general 'u!lic !ut also for other !anks in the countr%$ )he !ank ma% also !orro6 form the central !ank of the countr% on the !asis of the eligi!le securities or get financial accommodation in times of need or stringenc% !% rediscounting their !ills of exchange$ >IA :ia!ilities relating to !ills . )he !ank ma% have some !ills 6hich are 'a%a!le !% it out of its resources$ &t ma% also acce't some !ills from its customers for collection$ )he amount 6hen collected is credited to the accounts of the customers$ ,ence the amount under this head is sho6n on !oth the sides of the !alance sheet$ )he% !ecome the lia!ilities of the !ank after collection, !ut the% are to !e treated as assets !efore collection$ )he !anks also acce't of endorse the !ills of exchange on !ehalf of their customers, 6hich sim'l% means that the !ank guarantees the 'a%ment of !ills at maturit%$ )hus, 6hen the !ank has acce'ted !ills for its customers it is technicall% lia!le to meet them on maturit%, !ut since the customers are ex'ected to meet them and have 'resuma!l% given due securit%, this lia!ilit% of the customers to the !ank is an offsetting asset against the acce'tance$ &n addition to the a!ove, the !anks make some 'rovision for the contingent or unforeseea!le lia!ilities$ )he 'rofit earner !% the !ank is also sho6n as the lia!ilit% !ecause it is 'a%a!le to the shareholders$

11

&t ma% !e em'hasized, ho6ever, that the assets of a !ank are !ased on its lia!ilities$ Banks, unlike other !usiness organization, ac*uire onl% a ver% small 'art of their total assets !% issuing ca'ital?account claims$ 4n even more im'ortant 'oint is that the volume of ca'ital?account claims or share ca'ital changes onl% slo6l% and 6ithin narro6 limits relative to !ank assets$ Bank reserves, !orro6ings from other !anks and the central !ank are also ver% small relative to total assets$ Most of the assets of !anks are ac*uired !% creating and issuing !ank credits in the form of de'osit claims$ )he volume of de'osits that the !anking s%stem can issue de'ends on its reserve re*uirements enforced !% the central !ank and the currenc% volume of reserves availa!le to !anks$ A""et" ;e shall no6 !riefl% descri!e the main items of a !ank=s assets in descending order or li*uidit% and ascending order of 'rofita!ilit%, and sho6 ho6 the% reflect these t6o considerations$ 1. Ca", Ba(ance" )he first asset in the 'ortfolio of a commercial !ank=s assets is cash?6ith itself and 6ith the central !ank of the countr%$ &n certain countries, as in &ndia, ever% commercial !ank is re*uired !% la6 to kee' some cash reserves against its de'osits$ Cash is called the 'rimar% reserve of a !ank$ B% ex'erience a !ank kno6s ho6 much cash reserves 6ill have to !e ke't to meet the demands of de'ositors$ art of this cash is ke't in the !ank=s 'remises, a certain 'ortion 6ith other commercial !anks for 'ur'oses of inter?!ank ad#ustments and a certain 'ortion is ke't as de'osit 6ith the central !ank of the countr%$ 4 de'osit 6ith other commercial !anks or 6ith the central !ank is regarded as cash !% a commercial !ank$ &n &ndia, commercial !ank are o!liged, !% la6, to kee' a certain 'ro'ortion of total de'osits in the form of cash reserves 6ith the 2eserve Bank of &ndia$ )he success of a !ank de'ends u'on the maintenance of sufficient cash reserves to honor the che*ues 'resented !% the clients$ But onl% a small 'ercentage of de'ositors ma% !e 6ithdra6ing their de'osits through che*ues and other methods at an% 'articular time$ 4t the same time, if some are 6ithdra6ing, others ma% !e de'ositing$ 4 commercial !ank has therefore, to ad#ust its !usiness in such a 6a% that the amount of cash flo6ing in and the amount of cash flo6ing out should !e e*ual, kee'ing of course a margin of extra cash for the sake of safet%$ )oo much of cash 6ill reduce the 'rofit?earning ca'acit% of a !ank, at the same time, it should not kee' too lo6 cash reserves !elo6 the minimum considered necessar% or 'rudent$ 2. 3 ne2 at ca(( and 1, rt N t*ce Cash, !eing a !arren asset, should not !e ke't !e%ond the minimum necessar% for safet%$ But a !ank ma% feel that there ma% !e a heav% 'ressure on its cash reserves due to seasonal changes in de'ositors= and !orro6ers= re*uirements$ )o meet this 'ressure, it ma% !e !orced to carr% large cash reserves even in times 6hen the% are not re*uired at all$ )he other and !etter alternative for the !ank is to kee' some highl% li*uid !ut earning assets 6hich can !e converted into cash *uickl% and 6ithout loss$ )here are t6o t%u'es of such assets, viz$, >aA call and short notice loans to the !rokers in the stock market$, dealers in the discount market and to other !anks, >!A short?term treasur% !ills >!orro6ings of the government for short 'eriodsA$ )hese assets can !e *uickl% converted into cash and 6ithout loss, as a and 6hen the !ank 6ants$ ,ence !anks regard such assets as secondar% reserves as different from cash 6hich is their 'rimar% reserve$ 4t the same time, these assets !ring in some revenue income to the !ank$ 6. 1, rt0ter. B*((" 4 commercial !ank like to ac*uire assets 6hich are for short 'eriod >generall% for HC da%sA and 6hich are easil% marketa!le and hence sufficientl% li*uid and at the same time !ring in some interest income to the !ank$ Such assets are sometimes called 7self?li*uidating8 !ecause there is evidence of genuine commercial transactions, at the end of 6hich the necessar% finance 6ill !e realized to re'a% the original loan$ )hese self?li*uidating !ills consist mainl% of !ills of exchange$ 4 !ill of exchange is 6ritten 'romises !% a merchant, 6ho has ordered certain goods, to 'a% a s'ecified sum of mone% on a s'ecified sum of mone% on a s'ecified date$ )his !ill ma% !e guaranteed !% a !ank or a 6ell?kno6n merchant house?kno6n in :ondon as the 4cce'tance ,ouses$ Besides commercial !ills, there are short? dated treasur% !ill through 6hich the government !orro6s funds for short 'eriods$ Commercial !anks like short?dated 'a'er or !ill for a num!er of reasons . First of all, these assets are highl% negotia!le and can !e easil% !ought and sold$ &n countries like England, there is a s'ecial !ill market in 6hich these !ills are !ought and sold >or discountedA$ )herefore, if a commercial !ank re*uires additional funds, it can easil% rediscount the !ills in the !ill market or the discount market$ Secondl%, these !ills are eligi!le for rediscounting 6ith the central !ank of the countr%$ )hat is, if a commercial !ank 6ants cash, it can rediscount >or sellA the short?term !ills 6ith the central !ank$ )hirdl%, these !ill !ring in handsome interest for the commercial !anks$ )hus, commercial !anks 'refers these short?dated !ills !ecause of their high marketa!ilit% as 6ell as their interest incomeJ the% are regarded as ideal !ank assets !ecause the% satisf% the t6in considerations of li*uidit% and 'rofit$

12

7. L an" and Ad'ance" )he most 'rofita!le of all assets is !ank loans and advances$ )his asset is universall% sought after !% !anks$ Bank loans and advances ma% !e made to !usinessmen either !% the s%stem of overdrafts of an agreed amount or !% discounting !ills of exchange$ :oans and advances carr% a high rate of interest !ecause of the risk involved, lo6 li*uidit% and the difficult% of shifting them$ )he% involve great risk to the !ank !ecause of the 'ossi!le failure of the !orro6ers and in extreme cases !ecause of their insolvenc% and li*uidation$ 4gain, these loans and advances have a lo6 li*uidit% and lo6 shifta!ilit% in the sense that the% cannot !e converted into cash easil% as and 6hen the !ank re*uires additional cash to meet 6ithdra6als, nor is there an% 'ossi!ilit% of shifting them to other !anks or institution$ 4s a matter of fact, all !ank failure ma% !e ascri!ed to fault% 'olicies regarding loans and advances$ From the 'oint of vie6 of safet% of the !ank and its li*uidit%, loans and advances are 'oor assets$ But the high %ield of these assets com'ensates for the difficulties associated 6ith them$ )hese assets, thus, have lo6 li*uidit% !ut high %ield$ 8. In'e"t.ent" Banks make investments in the 'rofit?%ielding securities$ &nvestments in government securities re'resent the !ook value of central and state government securities, including treasur% !ills and treasur% de'osit recei'ts etc$ Banks ma% make investments in other a''roved securities as 6ell$ )he different t%'es of investments are sho6n se'aratel% in the !alance sheet$ Banks regard their short?term investments as their secondar% reserves as different from cash 6hich is their 'rimar% reserve$ :. Pr -ert*e" Building, furniture and fixtures etc$ are the other assets of the !anks$ )hese fixed assets are often referred to as 7+ead Stock8$ )he% are generall% sho6n at their de'reciated value$ )hese are, in a 6a%, the secret reserves of the !anks 6hich can !e availed of in case of crises or colla'se$ )he amount of assets that a !ank can command de'ends u'on the amount of its lia!ilities$ Man% t%'es of assets are availa!le to a !ank, 'rofitless and 'rofita!le, li*uid and non?li*uid$ 4 !ank must therefore formulate a 'ortfolio 'olic% determining 6hat t%'es and 'ro'ortions of assets it 6ill ac*uire and hold$

13

LE11ON 7 CO33ERCIAL BANK1 # CREDIT CREATION C ntr ( f Ban!" 'er De- "*t" Bank de'osits are of t6o t%'es$ )here are current de'osits 6hich are used !% !usinessmen, industrialists and others to settle de!ts$ )hese current de'osits, in 6hich che*ues are issued, are also kno6n as cash de'osits or demand de'osits$ )he second t%'e of !ank de'osits, 6hich are not meant for current transactions, are kno6n as savings de'osits$ )he% are ke't in !ans as a form of savings or investments so as to earn interest from the !anks$ )he savings de'osits are not held to meet the needs of the 'resents or the near future, !ut are ke't !% individuals as 'art of their total stock of 6ealth, Savings de'osits ma% also !e kno6n as time de'osits$ On t%'e of savings de'osits is kno6n as fixed de'osits, i$e$, de'osits of mone% 6hich can !e 6ithdra6n onl% after a given 'eriod of time$ )he distinction !et6een current de'osits and savings de'osits a matter of degree onl%$ Mone% is ke't in a !ank for the sake of convenience$ &t is used to meet excess of 'a%ments over recei'ts$ Current de'osits are useful to meet 'a%ments immediatel% !ut savings de'osits are ke't to settle de!ts in future$ &n the case of current de'osits the de'ositor ex'ects onl% convenience of 'a%ment of de!ts$ &n the case of savings de'osits, ho6ever, the de'ositor ex'ects an interest income also$ ;ho decides the distri!ution of de'osits into current de'osits and savings de'ositsL &t is the customer 6ho decides 6hether he 6ould 'refer current de'osits or savings de'osits$ Besides, if a de'ositor feels that he has too large a volume of current de'osits from 6hich he is getting nothing, he ma% convert 'art of it into savings de'osit$ :ike6ise, a customer 6ith savings de'osit ma% turn 'art of it into current de'osit$ )he !ank has nothing to do 6ith this$ Pr*.ar2 and Der*'at*'e De- "*t" +e'osits ma% !e created in t6o 6a%s. >aA eo'le ma% de'osit their cash 6ith the !anking s%stem$ i$e$, the% convert their cash into demand de'osits$ One form of mone% >cash 6ith the 'u!licA has !een changed into another form of mone% >!ank mone%A$ )he initiative for creating de'osits is taken !% he customers themselves$ Such de'osits are kno6n as 'rimar% de'osits$ 4''arentl% the total volume of mone% remains the same through, in fact, it is not so$ >!A rimar% de'osits !ring cash to the !anking s%stem$ Using this cash, the !anking s%stem !u%s assets from the market >!ills, !onds, de!entures, etc$A or it lends to !usinessmen and industrialists$ "o6, 6henever a !ank !u%s assets from the market or ends to certain 'arties, it does not give to them !ut creates demand de'osits to their name$ )hese de'osits are secondar% or derived from the 'rimar% de'osit?hence the% are kno6n as derivative de'osits$ )he initiative for creating de'osits comes from the !anking s%stem$ &n a modern mone% econom%, the second from the de'osits has !ecome *uite significant$ ;hen 6e sa% !anks have control over de'osits has !ecome *uite significant$ ;hen 6e sa% !anks have control over de'osits, 6e mean that the% have control over the total volume of de'osits$ :et us see ho6 the !anking s%stem is a!le to create the derivative de'osits through ac*uiring assets$ L an" Create De- "*t" Mone% at call and short notice are extremel% short?'eriod loans made !% a !ank to s'eculators and !rokers in the mone% market and the ca'ital market >i$e$, stock exchangeA$ )he !ank credits the de'osit accounts of these s'eculators and dealers for their 'romises to re'a% at call or short notice$ )he s'eculators and dealers 6ould use these de'osits to 'a% off their creditors$ )he creditors 6ho receive che*ues or drafts credit them to their accounts$ )hus as a result of loan made !% !ank, de'osits e*ual to the value of the loans have !een created$ Bills discounted refer to the commercial !ills and financial !ills 6hich are short?dated 'a'er >generall% for HC da%sA 6hich a !ank ac*uires from the !ill market$ ;hen a !ank !u%s >or discountA a !ill of exchange from a 'art%, it 6ill credit the account of the latter >if the 'art% kee's an account 6ith !ankA or it 6ill 'a% the 'art% through a che*ue on itself$ )he 'art% selling the !ills 6ill de'osit the che*ue in its !ank account$ &n !oth cases, !ank de'osits 6ill increase$ Bank advances, commonl% kno6n as loans, are made !% the !ank to industrialists, !usinessmen, traders and others$ ;hen a loan is sanctioned, the !ank creates a de'osit in the name of the !orro6er$ &t allo6s the !orro6er to dra6 on

14

this de'osit to 'a% off his creditors$ &n this case also, ever% loan a !ank makes is creating a de'osit$ "aturall%, the !anks create more de'osits sim'l% !% making more and more advances$ Finall%, investments are made !% a !ank 6hen it 'urchases and holds (overnments !onds and other securities 6hich have a longer life than three months$ ;hen a !ank !u%s a !ond from the (overnment, it 'laces at he dis'osal of the (overnment a !ank de'osit 6hich the (overnment can use in an% 6a% it likes$ &f a !ank !u%s an old (overnment !ond from the stock exchange, it 6ill create a de'osit in the name of the seller 6ho is free to use the mone% in an% 6a% he likes$ From 6hat 6e have descri!ed a!ove, it should !e clear that ever% time a !ank ac*uires an earning asset, it creates a de'osit in the name of the 'erson or institution from 6hom the asset is 'urchased$ )he asset ma% !e 'romise to 'a% 6ithin a da% or t6o or it ma% !e a 'romise to 'a% 6ithin three months or it ma% !e a (overnment=s &$O$U$ to !e redeemed over a long 'eriod of time$ 4gainst the 'romises of individuals, institutions and the (overnment, 6hich do not constitute mone% the !ank gives it o6n 'romise >viz, the !ank de'ositA 6hich is mone%, i$e$, it is creating mone%$ )6o 'oints should !e mentioned here$ First, ever% asset ac*uired !% !ank an e*uivalent !ank de'osit$ &t is 'erfectl% correct to state that !ank loans create de'osits$ Bank take the initiative to give loans and advances and ac*uire other earning assets. !% doing go, the% control the total volume of de'osits in the !anking s%stem$ Secondl%, commercial !anks monetize the de!t of others$ 4gainst the 'romises of other to 'a%, the !anks give their o6n 'romises to 'a%$ )he former is not mone% !ut the latter is mone%$ &n this sense, !anks create mone%$ L*.*tat* n" t Creat* n f De- "*t" 4n im'ortant *uestion arises here$ &f a !ank can !u% assets #ust !% giving its o6n 'romise to 'a% >i$e$, !ank de'ositsA, is there an% limit to its !u%ing of assetsL &s there an% limit to its creation of de'ositsL ;e are an6ering this *uestion rather ela!oratel% in the next section$ One 'oint, ho6ever, ma% !e em'hasized here$ 4gainst its de'osits, a commercial !ank has to kee' cash reserves$ )he 'ro'ortion of cash to de'osits ma% !e fixed !% la6 or its ma% !e determined according to convention and general usage$ 4s the volume of earning assets increases, the volume of !ank de'osits also increases !ut the ratio of cash de'osits rises, !usiness transactions 6ill increase, giving rise to an increase in 'rice levels$ eo'le, therefore, 6ill demand more currenc% notes for 'ur'oses of trade and exchange$ ;hen the 'u!lic dra6 out cash from !anks, the ratio of cash to !ank de'osits 6ill decline still further$ )he cash ratio is thus, su!#ect to decline on t6o rounds . >aA increase in de'osits, and >!A drain of cash into circulation$ &f the a!solute size of the cash reserves 6ith commercial !anks in the countr% is given, the maximum amount of de'osits 6hich !anks can create 6ill de'end u'on the cash reserve ratio to de'osits$ Su''ose that commercial !anks have cash reserves of 2s$ -CC crores and further the legal cash reserves ratio to de'osits is -C 'er cent$ )hen the commercial !anks can create and maintain de'osits 6orth 2s$ -,CCC crores$ &f the volume of !ank de'osits is less, !anks can ac*uire some more earning assets and increase the !ank de'osits also$ Of course, it is assumed that there are 'eo'le 6illing to !orro6 from commercial !anks$ Su''ose that the volume of de'osits 2s$ -,/CC crores 6hile the size of cash reserves in 2s$ -CC crores$ ;ith legal cash reserve ratio at -C 'er cent, commercial !anks 6ill have to reduce their de'osits !% dis'osing of some of their earning assets$ )here 6ill, thus, !e a simultaneous decline of !ank assets and !ank de'osits, till the ratio of cash reserves to !ank de'osits !ecomes -C 'er cent$ )hus the commercial !anks have a!solute control over the volume of !ank de'osits, su!#ect or course to . >aA the su''l% of cash, >!A the 'u!lic demand for cash, and >cA the cash reserve ratio to !e maintained$ )he central !ank enters the 'icture through its control of cash$ B% su''l%ing more cash, the central !ank can ex'ect commercial !ank to increase their earning assets and increase their !ank de'osits$ B% reducing cash, the central !ank can attem't to achieve the o''osite result$ T,e tec,n*;)e f Cred*t Creat* n +emand de'osits or cash de'osits are mone% are used as such, for ever% de'ositor having a current account in a commercial !ank can meet his o!ligations through che*ues dra6n on his account$ Ex'ansion or contraction of de'osits, therefore, means ex'ansion and contraction of mone% in the countr%$ "o6, as indicated alread%, !anks have the 'o6er to ex'and or contract demand de'osits and the% exercise this 'o6er through granting more or less loans and advances$ "o6, this 'o6er of commercial !anks to ex'and de'osits through ex'anding loans and advances is kno6n as credit creation$

15

Bank credit reall% refers to !ank loans and advances and creation refers to the multi'lication of loans and advances$ 4s ever% !ank loan creates an e*uivalent de'osit, credit creation !% the !anks im'lies also multi'lication of !ank de'osits$ )he 6ord creation= is used to im'l% that !ank are uni*ue institutions and that the% can create assets >or give loans and 'urchase !ills and !ondsA out of nothing$ Or 6ith a small amount of cash, the% are in a 'osition to ac*uire a large amount of assets$ 4t one time, there 6as needless controvers% regarding the a!ilit% of commercial !anks to create credit$ Some 6riters meant !% !ank credit !ank loans and investments and, therefore, maintained that !ank could never and more than the amount 6hich it had !een entrusted 6ith !% the de'ositors$ Su''ose that a 'erson de'osited 2s$ -,CCC 6hich a !ank, the latter could lend u' to 2s$ -,CCC and not more$ &n fact, it should lend for less, since it had to maintain a small margin of cash reserve against the 6ithdra6al of mone% !% the de'ositors$ &n an% case the !ank could not lend more than 2s$ -,CCC and, therefore, it 6as concluded that !ank could not create credit$ &t is true that a !ank cannot lend more than 6hat it has got$ But it is e*uall% true that 6hat is lent out !% a !ank comes !ack to the !ank !% 6a% of ne6 de'osits, 6hich ma% again !e lent out, and so on?de'osit !ecoming the !asis for a loan or investment, 6hich again returning to the !ank as fresh de'osit !ecomes the !asis for a loan or investment, 6hich again returning to the !ank as fresh de'osit !ecomes the !asis for a ne6 loan, and so on$ Commercial !anks, therefore, are a!le to multi'l% loans and investments and thus multi'l% de'osits$ 4 small volume of cash is the !asis for multi'lication of de'osits through multi'lication of loans and advances >7loan create de'osits8A$ &t is in this sense that !anks create credit$ Credit creation can !e defined as the ex'ansion of !ank de'osits through the 'rocess of more loans and advances and investments$ Tec,n*;)e f Cred*t Creat* n :et us ex'lain, in highl% sim'lified manner, the techni*ue or the 'rocess of credit creation !% assuming. >aA the existence of a num!er of !anks, 4,B,C,+, etc$, each 6ith different sets of de'ositors. >!A Ever% !ank has to kee' /C 'er cent of cash reserves, according to la6J and >cA 4 ne6 de'osit of 2s$ -,CCC has !een made 6ith !ank 4 to start 6ith 4fter the ne6 de'osit of 2s$ -,CCC has !een made in Bank 4, the !alance sheet of the !ank >taking onl% the ne6 transactionA is as follo6s. Ba(ance 1,eet f Ban! A :ia!ilities "e6 +e'osit )otal 4mount >2s$A -,CCC -,CCC "e6 Cash 4ssets 4mount >2s$A -,CCC -,CCC

Under the dou!le?entr% s%stem the amount of 2s$ -,CCC is sho6n on !oth sides$ )he de'osit of 2s$ -,CCC is a lia!ilit% for the !ank since it is o!liged to return the amount to the de'ositor 6henever he demands$ 4t the same time, the amount is an asset to the !ank 6hich it ma% use to earn an interest income$ Bank 4 has to kee' onl% /C 'er cent reserve, i$e$, 2s$ /CC against its ne6 de'ositJ it has a sur'lus of 2s$ @CC 6hich it can 'rofita!l% em'lo%$ Su''ose that Bank 4 gives a loan to Mr$ E 6ho uses the amount to 'a% off his creditors$ 4fter the loan has !een made and the amount so 6ithdra6n !% Mr$ E to 'a% ff his creditors, the !alance sheet of Bank$ 4 6ill !e as follo6s . Ba(ance 1,eet f Ban! A :ia!ilities +e'osit )otal 4mount >2s$A -,CCC -,CCC Cash :oan to Mr$ E 4ssets 4mount >2s$A /CC @CC -,CCC

16

"o6, the creditors of Mr$ E, 6ho got 2s$ @CC from the latter, ma% !e assumed to de'osit the amount 6ith their !ank, viz$, Bank B$ >)his assum'tion is unnecessar%, for the creditors of Mr$ E ma% !e !anking 6ith Bank 4 de'ositing 2s$ @CC 6ith Bank 4 itselfA$ )he !alance sheet of Bank B 6ill !e as follo6s. Ba(ance 1,eet f Ban! B :ia!ilities "e6 +e'osit )otal 4mount >2s$A @CC @CC 4ssets "e6 Cash 4mount >2s$A @CC @CC

4fter kee'ing a cash reserve of 2s$ -FC, >viz$, /C 'ercent of 2s$ @CCA, Bank B is free to lend the !alance of 2s$ F5C to an% one$ Su''ose that the !ank !u%s !ills 6orth 2s$ F5C$ )he !alance sheet of Bank 6ill !e. Ba(ance 1,eet f Ban! B :ia!ilities +e'osit )otal 4mount >2s$A @CC @CC "e6 Cash Bills 4ssets 4mount >2s$A -FC F5C -,CCC

;e can assume that the sellers of !ills 6ho received 2s$ F5C from Bank B 6ould !e de'ositing the amount in their !ank, viz, Bank C$ Bank C=s !alance sheet 6ill as follo6s. Ba(ance 1,eet f Ban! C 4mount 4ssets >2s$A F5C )otal F5C "e6 Cash

:ia!ilities +e'osit

4mount >2s$A F5C F5C

Bank C finds that it has excess cash reserves to the extent or 2s$ I-/ >since under /C 'er cent cash reserve, it 6ill have to kee' a cash reserve of 2s$ -/@ onl% against a de'osit of 2s$ F5CA$ Su''ose that Bank C invests 2s$ I-/$ &ts Balance Sheet 6ill !e as follo6s Ba(ance 1,eet f Ban! C 4mount 4ssets >2s$A F5C )otal F5C "e6 Cash &nvestment

:ia!ilities +e'osit

4mount >2s$A -/@ I-/ F5C

"o6, Mr$ B 6ho sold the long?term securities to Bank C for 2s$ I-/ ma% !e ex'ected to de'osit the amount 6ith his !ank, viz$, Bank +, 6hich in turn ma% kee' /C 'er cent as cash reserve and lend the rest$ 4nd this 'rocess of a de'osit !ecoming a loan or an investment 6hich, in turn, !ecoming a ne6 de'osit goes on and on till the original de'osit of 2s$ -,CCC is com'letel% exhausted$ )he original de'osit of 2s$ -,CCC !ecomes additional de'osits of 2s$

17

@CC, F5C, I-/, 5-C, 1/@, etc$ &f 6e add u' all these de'osits, the total 6ill !e 2s$ 5,HHH$HH or 2s$ ICCC$ )his is the 'rocess of de'osit multi'lication through the 'rocess of credit creation$ T,e f r.)(a f Cred*t Creat* n 4s credit creation de'ends u'on the ratio of cash reserves to de'osits, the de'osit multi'lier is 1 in #hich r K = "eposit multiplier r = ratio o! cash reserves to deosits ! cash reserves ratio is 20 per centr or 0.2, the deposit multiplier is K= K= 1 1 = =5 20% 0.2

&f cash reserve ratio is -C 'er cent or C$- the de'osit multi'lier is -C, and so on$ )he higher the cash reserve ration, the lo6er 6ill !e the de'osit multi'lier$ )he total de'osit creation 6ill !e additional cash >MA multi'lied !% the de'osit multi'lier$ )hat is 4dditional 4ggregate +e'osit >+A M M E 0 &f the commercial !anks get fresh cash of 2s$ -C crores, as a result of (overnemnt s'ending, the% 6ould !e a!le to multi'l% de'osits through loans and investments to the extent or 2s$ IC crores >assuming a cash reserve of 2s$ /C 'er centA$ )hat is + M M M ME0 2s$ -C crores E I 2s$ IC crores

So far, 6e have assumed that credit creation 6ill take 'lace 6hen there are man% !anks$ ,o6ever, it is not reall% necessar% that there should !e man% !anks, it is #ust sufficient that there is onl% one !ank$ Even then, the 'rocess of credit creation 6ill !e the same$ )hat is, 6henever the !ank ahs excess cash reserves, it 6ill lend or invest the sameJ this amount 6ill come !ack to the !ank in the form of a ne6 de'osit 6hich 6ill !ecome the !asis for %et another loan, and so on$ )he mone% 6hich goes out from the !ank !% 6a% of loans etc$, and the mone% concerned as to ho6 a de'ositor gets the cash 6hich 6as 6ith the !ank a 6hole ago$ )hus credit creation 6ill take 'lace, 6hether 6e consider onl% one !ank in an isolated to6n or 6e consider the !anking s%stem as a 6hole$ Cred*t C ntract* n" 9ust as there is multi'le ex'ansion of de'osits there is multi'le contraction of !ank de'osits too, 6hen cash is removed from the !anking s%stem$ Su''ose there are a num!er of !anks in the !anking s%stem$ 4nd each !ank has to kee' a cash reserve ratio of /C 'er cent against de'osits$ :et us further assume for the sake of sim'licit% that ever% !ank ahs a cash reserve of 2s$ -C,CCC, total de'osits of 2s$ IC,CCC and loans and investments 6orth 2s$ 5C,CCC$ Su''ose that a de'ositor 6ithdra6s 2s$ -,CCC from Bank 4$ )he !alance sheet of Bank 4 6ill !e as follo6s. Ban! A :ia!ilities +e'osit )otal 4mount >2s$A 5H,CCC 5H,CCC Cash :oans 3 &nvestments 4ssets 4mount >2s$A H,CCC 5C,CCC 5H,CCC

18

4gainst de'osit lia!ilities of 2s$ 5H,CCC Bank 4 re*uires 2s$ H,@CC as cash reserve, >)his is /C 'er cent of de'ositsA$ But the Bank has onl% 2s$ H,CCC, leaving it 6ith a deficienc% of 2s$ @CC$ )he !ank 6ill make u' the deficienc% !% dis'osing of 2s$ @CC 6orth of investments to someone 6ho ma% !e assumed to the !anking 6ith Bank B and 6ho, therefore, dra6s a che*ue against Bank B in 'a%ment$ 4fter Bank 4 has collected the amount from Bank B, the !alance sheet of Banks 4 and B 6ill !e as follo6s. Ban! A 4mount >2s$A 5H,CCC )otal 5H,CCC Ban! B 4mount >2s$A 5H,/CC )otal 5H,/CC Cash :oans 3 &nvestments Cash :oans 3 &nvestments

:ia!ilities +e'osit

4ssets

4mount >2s$A H,@CC 1H,/CC 5H,CCC

:ia!ilities +e'osit

4ssets

4mount >2s$A H,/CC 5C,CCC 5H,/CC

From the !alance sheet of Bank 4, it 6ill !e clear that !% dis'osing of some investments it has !een a!le to restore itself to a satisfactor% 'osition$ ,o6ever, the !alance shee' of Bank B sho6s a reduction of 2s$ @CC from its de'osits and of the same amount from it cash$ )his account has !een 'aid to Bank 4 against the sale of investments of 2s$ @CC$ Bank B is no6 deficient of cash to the extent of 2s$ F5C$ >&t re*uires 2s$ H$@5C against total de'osits of 2s$ 5H,/CCJ !ut it actuall% has 2s$ H,/CC onl%A )o make u' the deficienc%, Bank B 6ill sell some of the investments to some one 6ho ma% !e !anking 6ith Bank C, and 6ho issue che*ue against Bank C in 'a%ment$ 4fter Bank B has received the 'a%ment from Bank C, the !alances sheets of the t6o !anks 6ill !e. Ban! B :ia!ilities +e'osit )otal 4mount >2s$A 5H,/CC Cash :oans 3 &nvestments 5H,/CC Ban! C 4mount >2s$A 5H,1FC )otal 5H,1FC Cash :oans 3 &nvestments 4ssets 4ssets 4mount >2s$A H,@5C 1H,1FC 5H,/CC

:ia!ilities +e'osit

4mount >2s$A H,1FC 5C,CCC 5H,1FC

Bank B has ad#usted itself, !ut !ank C has deficienc% of cash 6hich it 6ill make u' !% de'osing of its investments or !% contracting loans$ )his 'rocess goes on till al the effects are full% exhausted$ )hus the original reduction de'osits !% 2s$ -,CCC from Bank 4 is follo6ed !% reduction of de'osits !% 2s$ @CC from Bank B, of 2s$ F5C form Bank C, and so on$ )he 'rocess of contraction of Bank de'osits in the same as that of ex'ansion?onl% in the reserve direction$ L*.*tat* n" n Cred*t Creat* n

19

)heoreticall%, the !anking s%stem can create an unlimited amount of mone% !% 6a% of ex'ansion of de'osits$ ,o6ever, there are creation factors on 6hich the volume of credit creation de'ends$ &t is not 'ossi!le, rather it is dangerous, to attem't credit ex'ansion !e%ond a creation limit$ >iA 4mount of cash held . )he firs im'ortant factor on 6hich the extent of credit creation de'ends is the amount of cash 6hich commercial !anks 'osses$ ;e have sho6n that !anks have to redeem their demand de'osits in coins and currenc% notes at the re*uest of their de'ositors$ Fialure to do so 6ill mean instantaneous failure of the !ank$ )he larger the amount of cash 6ith the !anking s%stem, the larger 6ill !e the credit creation$ 4s Cro6ther 'uts it, 7)he !ank=s cash in the lever 6ith 6hich the 6hole gigantic s%stem is mani'ulated$8 >iiA 2atio of cash reserves . )he re*uired ratio of cash reserves to de'osits is another im'ortant factor on 6hich the volume of credit creation 6ill de'end$ ;e have sho6n that credit creation 6ill !e the reserve of the cash reserve ratio$ &f a !ank considers or the la6 re*uires that cash reserve e*uivalent to -C 'er cent of de'osits should !e ke't as cash, the !ank ma% ex'and the amount of its de'osits to -C times the volume of its cash resources, if a !ank is re*uired to kee' /C 'er cent cash reserve against its de'osits, credit creation 6ill !e to the extent of I times onl%$ )hus, he higher the 'ercentage of cash reserve ratio to !e ke't, the smaller 6ill !e the volume of credit creation$ >iiiA u!lic=s desire to hold cash . Credit creation de'ends u'on the amount of cash 6ith the !anking s%stem 6hich 6ill in turn de'ends u'on the desire of the general 'u!lic to hold cash$ &f for an% reason the% decide to have more cash >assuming the total amount of currenc% notes and coins to !e constantA, the !anks 6ill !e left 6ith a smaller amount of cash and thus credit creation 6ill !e smaller$ &n fact, large ex'ansion of de'osits 6ill add to the total amount of mone% su''l% in the countr% and this 6ill !e accom'anied !% an increased volume of !usiness, rising 'rices, 6ages, retain trade, and so on$ )he de'ositors 6ill like to kee' more cash in the form of coins and currenc% notes$ )his 6ill mean reduction in the volume of cash reserves 6ith the !anks$ >ivA "ature of !usiness conditions in the countr% . Credit creation 6ill de'end u'on ht nature of !usiness conditions$ Credit creation 6ill !e large during a 'erious of !usiness 'ros'erit% 6hile it 6ill !e smaller during a de'ression$ &n 'eriods of !usiness 'ros'erit%, there 6ill !e more demand for loans and advances for investment 'ur'oses$ 4nd as 6e have seen, ex'ansion of de'osit de'ends u'on the volume of !ank loans and advances$ )herefore, during 'eriods of !usiness 'ros'erit%, man% 'eo'le a''roach !anks for loans and advances and hence the volume of !ank credit 6ill !e high$ Besides, the !anks are 6illing to lend freel% during such 'eriods !ecause of the general o'timism and the high 'ercentage of returns$ +uring 'eriods of !usiness de'ression, ho6ever, the amount of loans and advances 6ill !e small !usinessmen and industrialists ma% not come for6ard to !orro6 in this 'eriod$ Besides, !anks ma% 'refer to kee' excess reserves and sacrifice earnings$ )here can !e man% reasons for this$ >aA Banks ma% antici'ate a 'ossi!le loss of de'ositor=s confidence in them and therefore, of 'ossi!le run on them$ >!A )he% ma% not !e sure a!out the a!ilit% of !orro6ers to re'a%, &n de'ression, the credit is contracted, 'artl% !ecause of deficienc% of sound investments of !orro6ers and 'artl% !ecause 'ro'er securities are not availa!le$ >cA )he% ma% !e afraid of falling 'rices of securities$ ,ence the% ma% not like to invest in them$ )hus, the% ma% elect to hold more cash reserves 6ith themselves and ma% not ex'and credit to the maximum extent, !ut in normal times 6e can ex'ect them to lend and invest u' to the maximum extent 'ermitted !% their cash reserves$ >vA :eakages in credit creation . )here ma% !e a difference !et6een the maximum 'otential credit ex'ansion and the actual ex'ansion !ecause of certain leakages in credit creation$ )hese leakage have !een actuall% omitted in our sim'le exam'le of credit creation given a!ove$ )he im'ortant leakages are. >aA )he !anks ma% not !e a!le to make loans and investments exactl% according to the sur'lus funds the% ma% have$ For exam'le, if a !ank has a sur'lus fund of 2s$@CC, it is not necessar% that the exact amount of 2s$ @CC ma% !e lent out$ )o the extent that the actual loan is short of 2s$ @CC, credit creation 6ill !e smaller$ >!A )he amounts of advances made !% the !anks have !een assumed to return to them !% 6a% of ne6 de'osits$ But the% ma% not, as the 'u!lic ma% 6ish to hold some cash 6ith themselves$ 4gain, therefore, the ne6 de'osits ever% ma% not !e !% full amount of the loans made earlier$ Credit creation, therefore, 6ill !e limited again$

20

>ivA Monetar% 'olic% of the central !ank$ )he extent of credit creation 6ill largel% de'end u'on the monetar% 'olic% of the central !ank of the countr%$ For one thing, the central !ank has the influence the volume of mone% in the countr% and for another, it can directl% or indirectl% influence the !anks 'o6er to ex'and or contract credit$ 1*+n*f*cance f Cred*t Creat* n and C ntract* n Bank de'osits in modern communities form the 'redominant t%'e of mone% and hence ex'ansion of !ank de'osits means ex'ansion of mone% su''l%, and contraction means contraction of mone% su''l%$ But fluctuations in the volume of mone% su''l% have a direct effect on the level of !usiness activit%, 'rices and 6ages$ 4n increase in the volume of credit, !% leading to an increase in the mone% su''l%, 6ill lead to a rise in 'rices and 'rofit margins and conse*uentl% increase in !usiness and economic activit%$ On the other hand, contractions, of !ank credit 6ill result in contraction of !usiness activit%$ 4t one time, the ex'ansion and contraction of credit 6ere given the 'ride of 'lace in the ex'lanation of !usiness c%cles and also in an% 'olic% designed to control them$ But, these da%s, the% are given a secondar% im'ortance onl%$ )hat is, ver% ma% not !e res'onsi!le for 'ros'erit% or de'ression !ut 6hen once 'ros'erit% or de'ression starts, credit ex'ansion contraction accelerates the tem'o of c%clical fluctuations$ )he ex'ansion of !ank credit to the maximum extent ma% 7!oom the !oom8, 6hile the failure to create as much credit as their reserves 'ermit ma% 7de'ress the de'ression8$ ;hether credit ex'ansion >and contractionA 'la%s are 'rimar% role or onl% a secondar% role in the causation of c%clical fluctuations, it is !ut o!vious that an% 'olic% designed to !ring a!out !usiness sta!ilit% should include measures to !ring a!out sta!ilit% in credit ex'ansion and contraction$

21

LE11ON 8 ORGANI1ATION AND 1TR%CT%RE O& BANK1 Ban!*n+ Or+an*"at* n" 1. Pr*'ate Ind*'*d)a(" :a6 does not 'rohi!it a 'rivate individual from carr%ing on !anking !usiness$ ,is main difficult% 6ould !e to attract de'ositors in the 'resent da%s 6hen there are re'uted !ig !anking com'anies and cor'orations in the 'rivate and 'u!lic sectors$ )he maximum num!er of de'ositors have also !een restricted under the 2eserve Bank of &ndia 4ct$ rohi!ition of acce'tance of de'osits !% unincor'orated Bodies Cha'ter &&&C has !een &"SE2)E+ &" ),E 2eserve Bank of &ndia 4ct, -H15 !% the Banking :a6s >4mendmentA 4ct, -H@1 6ith effect from -I$/$-H@5 containing sections 5I2, 5IS and 5I)$ Section 5IS 'rovides that no 'erson, !eing an individual or a firm or an unincor'orated associations of individuals shall have de'osits from more than follo6ing num!er of de'ositors. >iA &ndividual >iiA Firm "ot more relatives$ than /I de'ositors excluding

"ot more than /I de'ositors 'er 'artner and not more than /IC in all, excluding relatives of an% of the 'artner$ "ot more than /I de'ositors 'er individual and not more than /IC in all, excluding relatives of an% of the individuals$

>iiiA Unincor'orated association of individuals

Su!?sections / 'rovides that 6here at the commencement of the 4ct num!er of de'ositors, exceed the a!ove limit, the 'erson shall re'a% 6ithin / %ears such num!er of de'ositors to !ring them 6ithin the limits s'ecified$ >aA a 'erson shall !e deemed to !e a relative of another if, and if, ? >iA the% are mem!ers of a ,indu undivided famil%, or >iiA the% are hus!and and 6ife, of >iiiA the one is related to the other in the manner indicated in the list of relatives. >!A a 'erson in 6hose favor a credit !alance is outstanding for a 'eriod not exceeding F months in an% account relating to mutual dealings in the ordinar% course of trade or !usiness shall not, on account of such !alance alone, !e deemed to !e a de'ositor$ &n 0anta Mehta D$ Union of &ndia and others, >-H@GA, the +elhi ,igh Court has held that section 5I?S >read 6ith section 5@B>I4A of Cha'ter &&&?C of the 2eserve Bank of &ndia 4ct, -H15, as introduced !% section -C of the Banking :a6s >amendmentA 4ct, -H@1, 6hich im'oses a ceiling on de'ositors in the case of &ndividuals, Firm and 4ssociation is not discriminator% and does not affect he fundamental right to carr% on !usiness or to form association or unions$ &t is not violative of 4rticles -5 and -H of the Constitution, )here is nothing demonstra!l% irrelevant or 'erverse in limiting the num!er of de'ositors that an individual, form or association could acce't$ "or is there an% element of com'ulsion on individuals and firms or associations 6hich are not incor'orated to incor'orate themselves as a com'an%$ Cha'ter &&&?C im'oses reasona!le restrictions on the right of individuals firms and unincor'orated association to carr% on the !usiness of acce'tance of de'osits and advancing or giving loans to the 'u!lic$ )here is a further safeguard that Cha'ter &&&?C is !eing o'erated under the su'ervision and control of the 2eserve Bank of &ndia$ Section 5I) further 'rovides that an officer of the 2eserve Bank or the State (overnment, authorized in this !ehalf, ma% o!tain a search 6arrant from courts so as to ena!le them to enter into and search an% 'remises sus'ected to !e used for the 'ur'ose connected 6ith the recei't of the de'osits in contravention of sections 5IS$ Such 6arrant shall !e executed in the same 6a% and shall have the same effect as a search 6arrant issued under the Code of Criminal rocedure, -HG1$ II. Partner",*- &*r."

22

4 firm 6ith more than ten 'artners cannot carr% on !anking !usiness . it has to !e registered as a com'an% >Section -->-A of the Com'anies 4ct, -HIFA$ 4 !anking firm of ten 'artners or less faces the same difficulties as an individual 6ould face$ )he la6 relating to artnershi' Firms is laid do6n in the &ndian artnershi' 4ct, -H1/$ III. H*nd) / *nt &a.*(2 12"te. 4 man% 'laces in &ndia other than cities !anking !usiness 6as carried on !% 'rivate !anks o6ned !% #oint ,indu Families$ )he most 'rominent among these are the D4ish%a, the 9ain and the Marathi families scattered all over &ndia, the "attukottai Chett%s in the State of MadrasJ the 0hatries and the 4uroras in un#a!, and the Multanies in (u#arat and the Uttar radesh$ )his s%stem !ears striking resem!lance to our modern #oint stock !anks in more than one res'ect$ &ts lie is institutional, and not 'ersonal, and as such, it en#o%s un!roken continuit%, it has a distinct existence in la6 and the going out or the coming in of 'ersons makes not the slightest difference to the continuit% of that !od%$ )he conce't of 9oint ,indu famil% is recognized !% la6$ 4 !usiness, according to that la6, is a distinct herita!le asset$ ;here a ,indu dies leaving a !usiness it asses like other herita!le 'ro'erties to his heirs$ &f he dies leaving male issues it descends to them$ &n the hands of the male issues it !ecomes 9oint Famil% !usiness and the firm 6hich consists of the male issued !ecomes a #oint famil% firm >Mulla=s ,indu :a6A$ )he #oint o6nershi' is not an ordinar% 'artnershi' arising out of contract !ut a famil% artnershi' created !% the o'eration of :a6$ )he rights and lia!ilities of the co?'artners constituting the famil% firm as also of the 'ersons dealing 6ith the firm are not to !e determined !% exlusive reference to the &ndian artnershi' 4ct !ut are to !e considered 6ith regard to certain rules of the ,indu :a6$ I$ Ban!*n+ C .-an*e" and C r- rat* n" )he !ulk of !anking !usiness no6 in &ndia is carried on !% scheduled !anks 6hich are the Banking Com'anies and the nationalized Banks$ Bulk of the !anking !usiness in the countr% is in the 'u!lic sector$ )here are altogether /G !anks in the 'u!lic sector, com'rising the State Bank of &ndia and its G associate !anks, -H commercial !anks nationalized in 9ul% -HFH, and in 4'ril -H@C$ )he 'u!lic sector !anks account for a!out HCN of the total !anking !usiness in &ndia$ )he 'rovisions regulating the formation, management and administration of the !anking com'anies in the rivate sector are laid do6n in the Banking 2egulation 4ct >'reviousl% kno6n as the Banking Com'anies 4ct, -H5HA$ )he Board of +irectors of !anking com'an% in the 'rivate sector is to !e constituted under section -C4 of the Banking 4c$ )he Chief Executive of such a !anking com'an% is the 'rivate sector is to !e constituted under section -C4 of the Banking 2egulation 4ct$ )he -H !anks in the 'u!lic sector have their o6n directors a''ointed !% the Central (overnment under the 'rovisions of the Banking Com'anies >4c*uisition and )ransfer of UndertakingsA 4ct, -HGC and -H@C$ %n*t $er")" Branc, Ban!*n+ )he structure of !anking differs from countr% to countr% de'ending u'on the socio, economic and 'olitical conditions$ Broadl% s'eaking, there are t6o t%'es of !anking s%stems?!ranch !anking and unit !anking$ )here 6as a gro6ing controvers% among economist and !ankers as to the relative su'eriorit% of the t6o !anking s%stems$ Even no6 the echo of the controvers% has not altogether 'assed a6a%$ )he controvers% has, ho6ever, no 'ractical significance$ Branc, Ban!*n+ )he !ranch !anking s%stem is a s%stem in 6hich ever% commercial !ank has a net6ork of !ranches o'erating throughout the countr%$ Ever% !ank is a se'arate legal entit% and ahs one !oard of directors and one grou' of shareholders$ 3er*t f Branc, Ban!*n+ Branch !anking has certain definite advantage over unit !anking$ )he follo6ing are some of them$

23

1. Ad'anta+e f t,e (ar+e "ca(e 0 -erat* n" Firstl%, the !ranch !anking s%stem has the advantages of large scale o'erations$ 2$S$ Sa%ers is also of the same vie6$ Efficienc% in administration, econom% in 6orking, effective central !anking control, etc$, are some of the im'ortant advantages of having !ranch !anking s%stem$ )he !anking functions can !e divided into a num!er of de'artments and 'laced under different individuals or grou's of individuals$ Bank officers can !e given management and su'ervisor% training at the training centres esta!lished for that s'ecific 'ur'ose$ Ex'ert advice from the head office is al6a%s availa!le to all the !ranches$ 2. Ec n .2 f re"er'e" Ever% !ank is su''osed to kee' a certain of its total de'osits as cash reserves in order to gain and retain the 'u!lic confidence at large$ But 'rofita!ilit% is an o''osing consideration$ )he greater the amount of cash 6ith the !anks, the lesser the 'rofita!ilit% and the lesser the amount of cash 6ith the !anks, the greater the 'rofita!ilit%$ &n !ranch !anking, ho6ever, the existence of a large num!er of !ranches ena!les a !ank to kee' the reserves at as lo6 a level as 'ossi!le so that the 'rofit?earning ca'acit% of the !ank 6ould not reduced$ 6. Pr -er d*"tr*9)t* n f ca-*ta( Branch !anking makes 'ossi!le the movement of ca'ital from one 'lace to another through the !ranches of a !ank$ Because of such transfers of ca'ital, there are certain advantages$ Firstl%, funds can !e transferred from those 'laces 6here the% are a!undant to those 'laces 6here the% are scarce$ Secondl%, the dis'arities in the different rates of interest ruling at different 'laces can !e largel% mitigated$ )hirdl% idle ca'ital in one lace can !e transferred to another 'lace 6here it can !e 'rofita!ilit% invested$ Fourthl%, ca'ital is 'ut to the most 'roductive use$ :astl%, the 'rofit?earning ca'acit% of the !ank is greatl% increased$ 7. L an" and ad'anta+e" +*'en n .er*t" Under the s%stem of !ranch !anking, local influential, !ut not credit?6orth% 'ersons cannot secure an% loans or advance from the !ank !ecause the !ranch manager can al6a%s shift the res'onsi!ilit% of refusal on to the head office at a far off cit%$ )his is !ecause loans and advances are made on the !asis of merits f the 'ur'oses for 6hich the% are sought !% the customers$ 8. Re.*ttance 9)"*ne"" .ade ea"2 ;hen the !ank has several !ranches in different 'laces, remittance !usiness can !e 'erformed 6ith great ease or 6ith little difficult%$ :. Benef*t t ".a(( c ..)n*t*e" Even small communities en#o% the advantage of the services of the more 'o6erful and sunder !anks$ <. Ge +ra-,*ca( "-read*n+ f r*"!" ;hen a !ank has its !ranches at different localities, it can minimize its risks !ecause the losses incurred in de'ressed areas can !e offset !% the 'rofits earned in 'ros'erous areas$ For exam'le, 6hen English !anks incurred heav% losses due to the de'ression in the cotton textile industr% in :ancashire in -H/H, the losses 6ere made u' !% the 'rofits earned in other areas$ )hus risks can !e s'read all over the countr% under !ranch !anking s%stem$ =. Lar+e f*nanc*a( re" )rce" )he financial resources of !ranch !anks are of greater magnitude$ ,ence, the re*uirement of large customers can !e easil% metJ loans and advances can !e made on more li!eral termsJ and the% are ca'a!le of 6ithstanding greater shocks$ )hus the !ranch !anking has a sound and strong financial sta!ilit%$ De.er*t" f Branc, Ban!*n+ )he s%stem of !ranch !anking has man% disadvantages$ )he follo6ing are some of them$ 1. De(a2 *n tran"act* n"

24

)he !ranch managers do not have ade*uate 'o6ers in granting large loans and the% have to get the a''roval of the head office !efore transacting such large !usiness$ )his means dela%$ But this arguments is not valid in these da%s !ecause the !ranch managers are in close touch 6ith the head office through tele'hone and telegram$ 2. Lac! f "2.-at,2 f r ( ca( need" )he !ranch managers do not have an% kno6ledge a!out the local condions or local 'ro!lems and difficulties or local !orro6ers$ )his is 'erha's, due to the fre*uent transfer of !ranch managers$ )herefore the !anch !anking s%stem does not s%m'athise 6ith the local needs$ 6. &)nd" f a re+* n )"e e("e>,ere Funds of one region or localit% ma% !e used in other regions or localities$ 7. Creat* n f . n - (2 - >er )he !ranch !anking s%stem creaters some sort of mono'ol% 'o6er$ Under !ranch !anking, there is concentration of financial resources in the hands of a fe6 !anks 6hich results in the creation of mono'ol%$ 8. C .-et*t*'e >a"te +ue to keen com'etition !et6een the !ranches of different !anks in one region or localit%, there is found to !e a large 6astage of time, energ% and financial resources of the region or localit%$ :. Preferent*a( treat.ent ", >n t near92 f*r." )he !ranches of the !anks sho6 a good deal of 'referential treatment to those firms 6hich are situated near!% the !ranches detrimental to the gro6th of firms at far off 'laces$ <. 1)-er'*" r2 -r 9(e." &n !ranch !anking, there are man% su'ervisor% 'ro!lems in matters of managing and controlling the far?flung !ranches of the !ank$ &n the !ranch offices, there is an ever?'resent danger of mis?management$ )hus the s%stem of !ranch !anking has !oth man% advantages as 6ell as disadvantages of its o6n$ %n*t Ban!*n+ 4 unit !anking s%stem is a s%stem in 6hich the !usiness of each !ank is confined to a single office 6hich has no !ranch at all$ Each !anking com'an% is a se'arate com'an%, se'aratel% licensed, having its o6n ca'ital, !oard of directors and shareholders$ (enerall%, there is onl% one 'lace of o'eration$ ,o6ever, there ma% !e !ranches 6ithin a strictl% limited area$ )he area of the o'eration of the !ank as 6ell as the size of the !nak are smaller$ 3er*t f %n*t Ban!*n+ Unit !anking s%stem has also some im'ortant merits of its o6n$ >aA 2esources of the localit% are used for the economic develo'ment of the localit% and are not transferred to other areas$ >!A )he unit !anker has s'ecialized kno6ledge of the local industries and occu'ations, customs and 're#udices$ ,e can serve the local needs of the small communities in an effective manner$ &n fact, he 'a%s great attention to the financial 'ro!lems and needs of the individual enter'rises in his area$ >cA Since the affairs of the !ank are less scattered, there are ver% fe6 'ossi!ilities for fraud and irregularities, management and su'ervision do not offer an% serious 'ro!lems$ >dA Unit !anking is free from the diseconomies of large?scale o'erations 6hich are generall% associated 6ith !ranch !anking$ D*"ad'anta+e" f %n*t Ban!*n+

25

4mong the disadvantages of unit !anking, the most im'ortant is that a unit !ank has limited financial resources and, therefore, cannot 6ithstand a !usiness de'ression or a run on it$ 4 ver% im'ortant factor 6hich contri!utes to the lo6 survival rate of a unit !ank is its lack of diversification of de'osits and assets and s'ecialization in those industries 6hich are located in the area$ 4n% difficult% in these industries 6ill automaticall% land the !ank also in difficulties$ &n fact, during the (reat +e'ression of -H1C=s so man% unit !anks failed in the U$S$4$ nearl% I,-CC !anks that it !ecame clear that such !anks 6ere ill?e*ui''ed to 6ithstand adversit%$ 4nother demerit of unit !anking is that it is not a!le to 'rovide full and ade*uate !anking facilities to small communities !ecause the area of its o'erations is restricted and the unit !ank ma% not command ade*uate resources$ &nade*uac% of financial resources is res'onsi!le for the ina!ilit% of unit !anking s%stem to su''ort an efficient management$ :astl%, the unit !anker, !eing a local man, ma% have to follo6 considerations other than strict ecoCnomic 'rinci'les in granting loans and advances$ For instance, it ma% !e ver% difficult and even dangerous for the !anker to refuse an influential local !usinessman 6ho ma% not !e so credit6orth%$ &f he lends, the !usinessman ma% default and land the !ank in difficulties, and if the loan is refused, the unscru'ulous !usinessman ma% circulate remours a!out the solvenc% of the !ank and thus !ring a!out the !ank=s failure$ )o sum u', it is agreed that the !ranch !anking s%stem has far more su!stantial merits and has greater 'o6er of survival than the unit !anking s%stem$ Even in 4merica, traditionall% considered as the home of unit !anking, the trend since -H1C=s has !een to6ards !ranch !anking, or to get the advantages of !ranch !anking !% 6hat are kno6n as grou' !anking and chain !anking s%stem$ Ot,er Ban!*n+ 12"te." )here are three other t%'es of !anking s%stem also, viz$, the grou', the chain and the corres'ondent !anks$ (rou' !anking is one 6here t6o or more se'aratel% incor'orated !anks are !rought under the control of a holding com'an% 6hich ma% or ma% not !e a !anking com'an%$ )he !anks so !rought together ma% !e unit !anks or !ranch !anks or !oth$ Chain !anks refer to se'aratel% incor'orated !anks !rought under common control !% a device other than the holding com'an%$ )his ma% !e through some 'ersons !eing directors of t6o or more !anking com'anies or same grou's of 'ersons o6ning them$ Under the corres'ondent !anking s%stem, !anks are linked together through de'osits !% smaller !anks of some of their cash reserves 6ith !igger !anks$ ,ere the !igger !anks 6ith 6hich de'osits are so made are called corres'ondent !anks$ )hese !anks in turn ma% de'osit some of their cash !alances 6ith still !igger !anks in metro'olitan cities$ )he corres'ondent !anks have ex'ert consultants 6hose services can !e utilized !% other !anks de'ositing cash$ )he corres'ondent !anks also transfer cash !alances of !anks$ 4ll these three t%'es ena!le some of the advantage of !ranch !anking to !e en#o%ed even !% unit !anks$ De- "*t Ban!*n+ $er")" 3*xed Ban!*n+ Banks and other institutions are classified into de'osit !anks, investment !anks and mixed !anks$ )his classification of !anks 6as made on the !asis of the functions that the !anks 'erform$ 4 ver% rigid functional classification is not onl% ver% difficult, !ut also ver% unrealistic$ ,o6ever such a classification is necessar% to understand and a''reciate the nature and functions of different !anking institutions$ De- "*t Ban!*n+ +e'osit Banking is that s%stem of !anking in 6hich the commercial !anks 'ool together the savings of the communit% and make them availa!le for short?term credit 'roductive undertakings$ )he commercial !anks 'erform t6o im'ortant functions of attracting 'u!lic de'osits and of lending them for traders, industrialists and other for short 'eriods !% means of advances, overdraft facilities, discounting !ills, etc$ )he 'u!lic de'osits 6ith the commercial !anks are re'a%a!le on demand or at short notice and hence the% are lent onl% for short 'eriods of time to 'rovide onl% short?term finance or 6orking ca'ital to industries for 'urchase of ra6 materials, 'a%ment of 6ages and salaries to 6orkmen, etc$ &f the commercial !anks 6ere to invest these funds in loans extending over long 'eriods of time, the commercial !anks 6ill cease to functions !oth as the custodians as 6ell as trustees for the hard earned mone% of the vast ma#orit% of the de'ositors$ Mackenzie, 6hile descri!ing the de'osit !anking, 6rites thus. 7)he 'olic% of our !anks has al6a%s !een to made advances to trade and industr% for current and seasonal re*uirements and for short 'eriods and not to lend ca'ital for an indefinite term de'arture from this 'olic% is attended 6ith risk$8

26

+e'osit !anking 6ill 'rove to !e a good s%stem onl% 6hen the follo6ing conditions are 'resent$ aA )he existence of ade*uate facilities and good financial machiner% of ca'ital market to 'rovide for the fixed ca'ital re*uirements of industries is a 'rere*uisite for the successful o'eration of de'osit !anking in a countr%$ !A )he !anks should not lock u' their financial resources for long 'eriods$ cA &ntelligent investors 6ith ade*uate stock of financial resources should !e 'resent in the countr%$ )hese are the essential conditions for the successful o'eration of de'osit !anking$ England has all these conditions !efore -H-5$ 4s a result, onl% 'ure de'osit !anking develo'ed there$ Ind)"tr*a( Ban!*n+ &ndustrial Banking, also kno6n as investment !anking is that s%stem of !anking in 6hich the !anks 'la% a significant role in the industrialization of the countr% !% 'roviding the longer term ca'ital for esta!lishment, ex'ansion and reorganization of industries in the countr%$ )he loana!le funds of the industrial !anks consist of 'aid?u' ca'ital and long?term de!entures and hence are not re'a%a!le on demand or at short notice$ )he (erman !anks in the 'eriod -@5@?-@GC offer a good exam'le of industrial !anking s%stem$ &n this 'eriod, a series of !anks 6ere esta!lished in (erman% 6ith the 'rimar% o!#ectives of 'romoting industrial develo'ment !% esta!lishing ne6 com'anies and !% consolidating the existing concerns$ )he industrial or investment !anks had the follo6ing advantages$ &n the first 'lace, the re'resentative of the !anks acted on the Board of Su'ervisors of industrial concerns in order to safeguard the interest of the !anks$ &n the second 'lace, the !anks avoided the risks involved in the 'rovision of long?term finance !% making ever% line of their activit% self?!alancing$ )his the% could 6ell do !% using short?term financial resources >de'ositsA for short term loans and long terms financial resources >ca'ital and reservesA onl% for long?term loans$ &n the third 'lace, the industrial !anks has a good amount of large ca'ital and reserve resources$ )he% 6ere, therefore, in a !etter 'osition to 'rovide long?term finance for industries$ &n the fourth 'lace, the !anks acted as an association kno6n as Consortium or S%ndicate there!% s'reading the risks over a num!er of !anking com'anies$ &n the fifth 'lace, the !anks 6ere in a s'ecial and advantageous 'osition to 'erform useful functions to investors$ &n the last 'lace, the (erman !anks had ver% high order of management$ Com'etent ex'erienced and honest men !ecame the managers of the !anks$ 3a!*n+ Ban!*n+ "o6?a?da%s, the trend has !een to6ards the esta!lishment of mixed !anks$ Mixed !anking s%stem is that s%stem of !anking 6hich com!ines de'osit >commercialA !anking and industrial !anking$ &n other 6ords, 6here the commercial !anks themselves act as industrial !anks, the% are kno6n as mixed !anks$ )he mixed !anks attract de'osits fro the general 'u!lic and 'rovide short?term, medium?term and long?term ca'ital to industries$ )his mixed !anking is the most common form of !anking ever%6here (erman%, 4ustria, S6itzerland and &tal% are good exam'les of countries having mixed !anking s%stem$ &n &ndia, there has !een a long?standing controvers% !et6een t6o grou's of men, one for introducing mixed in &ndia and the other against it$ )he advocates of mixed !anking in &ndia 6ere ver% much influenced !% the ra'id industrialization of (erman% in the last *uarter of the -H th centur%$ )herefore the% recommended the introduction of mixed !anking in &ndia for a ra'id industrial develo'ment in &ndia$ But the antagonists 6ere strongl% against the esta!lishment of mixed !anking in &ndia$ )he% listed do6n the follo6ing arguments against mixed !anking$ Firstl%, the small size of !anks and their meager ca'ital resources do not 6arrant the undertaking of risk% lines of !usiness !% the

27

commercial !anks$ Secondl%, the de'osits of he !anks are of short?term nature and the% ma% !e 6ithdra6n at an% time on demand or at short notice$ )hirdl%, mixed !anking re*uires technical and entre'reneurial skill and &ndians do not 'osses it$ Fourthl%, the !anks ma% !e tem'ted to 'rovide more and more short?term finance$ Fifthl%, interlocking of !anking funds has !een an evil associated 6ith &ndian !anking s%stem for *uite a long time$ )he !ank=s funds ma% !e utilized !% the same 'ersons on the !oards of the commercial !anks$ Finall%, a (erman !anking authorit% said that &ndian !anks are 6eaker and it 6ill !e detrimental to the gro6th of !oth the !anks as 6ell as industries if these !anks 6ere to 'artici'ate in industrial financing$ C(a""*f*cat* n f Ban!"# 4 !ank ma% carr% on all kinds of 6ork connected 6ith lending and !orro6ing$ But some !anks s'ecialized in 'articular lines of !usiness$ On this !asis !anks ma% !e classified as follo6s$ 1? C ..erc*a( 9an!" Commercial !anks are financial institutions 6hich 6ill finance trade and industr% 6ith short term loans$ )he% also lend mone% to manufactures !ut onl% for short 'eriods$ Most of the 9oint Stock !anks in &ndia, are commercial !anks, e$g$ )he Bank of &ndia, the united Commercial !ank the un#a! "ational Bank$ Exc,an+e Ban!" Commercial !anks 6hich s'ecialize in financing international trade >im'ort and ex'ort tradeA and dealing in foreign mone% are kno6n as exchange !anks$ )he exchange !anks o'erating in &ndia are foreign o6ned 6ith head offices in foreign countries$ )he exchange !anks 'rovide foreign currencies to 'ersons 6ho are engaged in im'ort and ex'ort trade, e$g$, )he commercial Bank, )he :lo%eds Banks, )he (ridla%s Bank etc$ Ind)"tr*a( and In'e"t.ent Ban!"# )hese are !anks 6hich !orro6 mone% for long 'eriods and give long term loans to industries$ )he also organize and undertake the sale of ne6 issues of shares and de!entures of com'anies$ 4n industrial !anks thus acts as a !ridge !et6een ca'ital savers and industrialists and therefore it has !een called the entre'reneur of entre'reneur$ E$g$, )he &ndustrial Credit and &nvestment Cor'oration of &ndia$ Internat* na( Ban!" )hese !anks are financial institutions s'eciall% created to deal 6ith international financial relations >'rovision of loans short and term to various countriesA$ )he most im'ortant international !anks of to?da% are the &nternational Monetar% Fund, &nternational Bank for 2econstruction and +evelo'ment kno6n as the ;orld Bank and the &nternational +evelo'ment 4ssociation$ Centra( Ban!"# 4 Central Bank is the Central Monetar% authorit% in a countr%, usuall% issuing currenc% and controlling the 6hole !anking s%stem$ &n almost ever% countr% to?da% there is a Central !ank$ )he% are kno6n !% different name in different countries, e$g$ )he 2eserve Bank of &ndia$ )he Fedral 2eserve >U$S$4$A, )he Bank of England >U$0$A, )he Bank of France >FranceA$ C 0 -erat*'e Ban!"# )hese are small !anks organized on co?o'erative 'rinci'les 6ith a vie6 to give short and medium term loans mainl% to agriculturists and artisans like ;eavers and S'inners$ Land 3 rt+a+e Ban!"# )hese !anks lend mone% on the securit% of land to the agriculturist for a long 'eriod, usuall% /C or /I %ears$ )he% secure funds !% the sale of de!entures usuall% 6ith the government guarantee and assistance$

28

LE11ON : P%BLIC 1ECTOR BANK1 Nat* na(*"ed C ..erc*a( Ban!" )he (overnment of &ndia naitonalised fourteen ma#or &ndian scheduled !anks in the 'rivate sector, having de'osits of 2s$ IC crores or over each, as on the last Frida% of 9une -HFH, 6ith effect from 9ul% -H, -HFH$ )he aggregate de'osits of these fourteen !anks, at the end of -HI@, amounted to 2s$ /,G5-$@ crores, nearl% G/ 'er cent of the total de'osits of the &ndian scheduled !anks$ )heir advances amounting to 2s$ -G51$F crores 6ere FI 'er cent of the total advances$ )hese !anks has a total 'aid?u' ca'ital of 2s$ /@$I crores 6hich 6as a!out - 'er cent of their aggregate resources$ )heir o6ned funds at the end of -HF@ amounted to 2s$ FF$C crores and their aggregate net 'rofits amounted to 2s$ F$F crores$ )he oldest of the ma#or !anks 6as 4llaha!ad Bank >-@FIA and the %oungest 6as United Bank of &ndia >-HICA$ Since United Bank of &ndia 6as set u' !% amalgamating foru existing !anks it 6ould not !e 'ro'er to consider it as an altogether ne6 !ank$ )his 6a%, United Commercial Bank esta!lished in -H51 6as the %oungest of all these !anks$ 4llaha!ad Bank, !efore, its nationalization, 6as su!sidiar% of a foreign !ank?Chartered Bank$ 4ll others 6ere full% &ndian Banks mostl% set u' and dominated !% !ig industrial houses$ )he% 6ere constituted as #oint stock com'anies 6ith limited lia!ilit% and, therefore, each of these !ansk used ot add <)he= !efore its name and <:td=$ after its name$ >For exam'le, )he Central Bank of &ndia :td$, )he Bank of &ndia :td$, etc,A$ Form the 'oint of vie6 of the num!er of offices o'ened !% each of the ma#or !anks !efore nationalization, un#a! "ational Bank had the highest >I55A and 4llaha!ad Bank the lo6est num!er >-/@A as at the end of -HF@$ 4ctuall%, the 'osition and the size of a !ank are #udged on the !asis of its de'osits and advances$ On this !asis, Central Bank of &ndia 6as the !iggest follo6ed !% Bank of &ndia, un#a! "ational Bank, Bank of Baroda, United Commercial Bank, Canara Bank, United Bank of &ndia, 4llaha!ad Bank, S%ndicate Bank, &ndian Overseas Bank, &ndian Bank and Bank of Maharashtra$ 4t the end of -HF@, Central Bank of &ndia had aggregate de'osits amounting to 2s$ 511$/G crores$ Bank of Maharashtra 6as the smallest of these !anks, having de'osits of 2s$ G1 crores$ &t is remarka!le to not that even among the -5 !anks, the !ulk of the de'osits and advances >a!out F1 'er centA 6as controlled !% the first five ma#or !anks$ Of the total o6ned funds of 2s$ FF crores, the !ig five !anks accounted for a!ut F5 'er cent, 6hile their share in the aggregate net 'rofit 6as a!out GC 'er cent$ Some large !usiness houses, 6ho controlled these !anks, claimed a lion=s share of the !ank=s resources$ B% nationalizing the ma#or !anks, the (overnment secured control over 6hat Mrs$ &ndira (andhi descri!ed as <the commanding heights of the econom%8$ )he most im'ortant reasons for nationalization of !anks related to the structure, 'olicies and 6orking of the 'rivate commercial !anks$ )he !anks had ex'anded their !usiness and increased the num!er of their officers$ )here 6as a five?fold increase in their de'osits !et6een -HI- and -HFH$ Over the %ears, the &ndian !anks 6ere made sound and via!le through a s%stem of licensing and ins'ection !% the 2eserve Bank and encouragement of mergers and amalgamations$ )he 2eserve Bank 6as given 6ide 'o6ers to regulate the functioning of !anks$ racticall%, ho6ever, !anks 6ere not serving he 'u!lic interest and the% had failed to 'rovide credit for the desired 'riorit% channels$ &nstead, the% had !ecome tools in the hands of mono'olists and !een encouraging s'eculative activit%$ )he <social control= measures had failed to 'revent misuse of !ank credit$ 4ll these factors led to the take?over the ma#or !anks in -HFH$ )he immediate causes res'onsi!le for nationalization of !anks 6ere 'olitical in nature, !ut there 6as ade*uate #ustification for the action the% 'urel% on economic and social considerations$ Smt$ &ndira (andhi announcing the nationalization in a !roadcast to the nation on 9ul% -H, -HFH said, 7)he 'ur'ose of ex'anding !ank credit to 'riorit% areas 6hich have hitherto !een some6hat neglected as also >iA the removal of control !% a fe6, >/A 'rofusion of ade*uate credit for agriculture and small industr% and ex'orts, >1A the giving of a 'rofessional !ent of !ank management, >5A the encouragement of ne6 classes of entre'reneurs, and >IA the 'rovision of ade*uate training as 6ell as reasona!le terms of service for !ank staff still remain and 6ill call for continuous effort over a long time$ "ationalization is necessar% for the s'eed% achievement of these o!#ectives8$ Six more !anks, nationalized on 4'ril -I, -H@C 6ere . 4ndhra Bank, Cor'oration Bank, "e6 Bank of &ndia, Oriental Bank of Commerce, un#a! and Sind Bank and Di#a%a Bank$ )hese six !anks has sho6n a 'henomenal gro6th in their o'eration during the 'ast decade$ )he 'riorit% sector advance of the six !anks constituted 1C$H 'er cent of their total advances at the end of -HG@$ )heir record in !ranch ex'ansion 6as also *uite im'ressive$ &t is remarka!le to note that the six !anks had an average of 5C 'er cent of their !ranches in the rural areas$ 4mong the six !anks, un#a! and Sind Bank in 'articular, exhi!ited the highest gro6th rate in !ranch?ex'ansion, de'osit?

29

mo!ilization and advances$ 0ee'ing their all?round 'rogress in vie6, the *uestion arises that 6h% these six !anks 6ere nationalized$ )he reasons given officiall% for nationalization 6ere sim'le and straight for6ard and almost the same one as in -HFH$ Better credit?'lanning and larger allocations to 'riorit% sectors 6ere the guiding factors$ )he cut?off 'oint this time 6as 'laced at over 2s$ /CC crores of de'osits as on March -5, -H@C as against 2s$ IC crores in -HFH$ )he Ordinance for the ac*uisition and transfer of the six !anking com'anies sa%s in the 'ream!le that these have !een taken over 7having regard to their size, resources coverage and organization, in order further to control the heights of the econom%, to meet 'rogressivel%, and serve !etter, the needs of the develo'ments of the econom% and to 'romote the 6elfare for the 'eo'le, in conformit% 6ith the 'olic% of the state to6ards securing the 'rinci'les laid do6n in Clauses >BA and >CA of 4rticle 1H of the Construction$8 )he nationalization of six more !anks in -H@C can thus !e considered as an extension of the measure of nationalization initiated in -HFH$ "e6 Bank of &ndia, one of the six !anks nationalized in -H@C, had !een making losses during the 'ast four %ears$ ;ith the introduction of 'rudential accounting standards in 4'ril -HH/, the im!alance in the financial 'osition of the "e6 Bank of &ndia came into shar'er focus$ &n these circumstances, it !ecame necessar% in the interest of de'ositors to merge it 6ith a stronger !ank$ &n Se'tem!er -HH1, it 6as merged 6ith the un#a! "ational Bank$ )his is the first time that a nationalized !ank has !een merged$ Pr +re"" f Ban!*n+ After 1@:@ &t 6as intended to achieve the !road aims of !ank nationalization through a t6o 'ronged a''roach. one, ex'anding the !anking net6ork in all 'arts of the countr% 6ith s'ecial em'hasis on setting u' ade*uate !anking facilities in hitherto un!anked or under?!anked areas . and t6o, making !ank credit availa!le to all segments of the econom% and regions of the countr%$ 4s it is o!vious from the account given !elo6, remarka!le success has !een achieved in !oth these res'ects$ 1. Branc, Ex-an"* n . 4 significant features of !anking develo'ment after nationalization of ma#or !anks has !een the increasing tem'o of !ranch ex'ansion$ Over the 'eriod of several decades in 6hich modern !anking develo'ed in &ndia till 9une -HFH, commercial !anks had o'ened @,/F/ offices$ )he num!er of offices of commercial !anks has increased to 5@@-C at the end of March -HHF$ 4s a result of !ranch ex'ansion !% !anks, the national average 'o'ulation 'er !ank?office has declined from FI,CCC at the time of nationalization in -HFH to -1,CCC at the end of 9une -H@I and -C,CCC as at the end of March -HHF$ 4 ra'id !ranch ex'ansion 6as 6itnessed in the seventies and the eighties$ &n recent %ears, ho6ever, there has !een considera!le em'hasis on the consolidation of the !anking s%stem$ )o6ards that end the !ranch :icensing olic% for the 'eriod 4'ril -H@I to March -HHC >extended u' to March -HH1A 6as formulated kee'ing in vie6 he need for !anks to concentrate on consolidation of their 'osition and achieving a coverage of -G,CCC 'o'ulation >-H@censusA 'er !ank office in rural and semi?ur!an areas of each !lock and 'roviding !anking facilities in those 'ockets of rural areas 6here 6ide s'atial ga's existed$ ;ith the ado'tion of the Service 4rea 4''roach in -H@H, it had !ecome necessar% to allo6 o'ening of additional !ranches in rural areas so that the num!er of villages allocated to the rural !ranch 6as 6ithin a managea!le limit of -I to /I villages 'er !ank !ranch$ &n other areas, o'ening of !ranches is allo6ed 'urel% on via!ilit% criteria$ 74''roach to Future Branch Ex'ansion8 circulated !% the 2B& in Se't$ -HHC 'rescri!ed that the 'hase of consolidation 6as to continue 6ith em'hasis on all?out effort to im'rove o'erational efficienc% , *ualit% of assets and financial strength of !anks and the gro6th of !ank offices 6ill de'end on 6ell?esta!lished need, !usiness 'otential and financial via!ilit% of the 'ro'osed offices$ Under the -H@I?HC !ranch licensing 'olic%, I,1FC ruralKsemi?ur!an centres 6ere allotted to !anks in addition to -,5I5 rural centers allotted under the Service 4rea 4''roach and F1I centres in ur!anKmetro'olitanK'ort to6n centres$ Out of G,55H centres allotted as a!ove !anks 6ere a!le to o'en offices at F,H-/ centres u' to end 9une -HH/ 6ith the ex'ir% of the extended validit% 'eriod on March 1-, -HH1, all the 'ending licences 6ere cancelled$ )he main thrust of the !ranch licensing 'olic% for -HHC?HI continues to !e on 'roviding freedom to !anks to rationalize the structure of their !ranches$ 4ccordingl%, the distance sti'ulation of 5CC meters !et6een t6o !ranches of !anks in to6ns have !een 6ithdra6n$ Banks have !een allo6ed to o'en one s'ecialized !ranch 'er centre each in the categor% of industrial finance, "2& and )reasur% !ranches 6ithout the 'rior a''roval of the 2eserve Bank$ )he% can also convert their non?via!le rural !ranches into Satellite Offices on certain conditions and 'rovide locker facilities

30

in extension counters$ Banks have also !een allo6ed to close, on mutual consultation, one loss making !ranch at rural centres served !% t6o commercial !ank !ranches excluding 22Bs$ 2. D*"-er"a( f Ban! ff*ce" . )6o as'ects need to !e underlined in this context . first, the thrust of ex'ansion 6as 'rimaril% in un!ankede areasJ secondl%, !ranch ex'ansion 6as 'lanned in such a manner as to reduce regional dis'arities in !anking develo'ment$ Of the I/,H@F o'ened !et6een 9ul% -HFH and 9une -HH1, a!out FF 'er cent offices 6ere o'ened in un!anked centres$ Since a large num!er of un!anked centres 6as in rural areas, the 'ace of !ranch ex'ansion in recent %ears has mace considera!le 'rogress in 'enetration into the rural areas$ )he 'ro'ortion of !ank?offices in rural areas to the total 6as //$- 'er cent at the end of 9une -HFH$ )his 'ro'oration increased to IG$@ 'er cent at the end of 9une -HH1$ )he 'olic% aim of achieving coverage of one !ranch for ever% -G,CCC 'ersons in rural and semi ur!an areas has !een largel% achieved$ )he regional dis'arities in the distri!ution of !ank offices have also declined su!stantiall% after -HFH$ )he under?!anked States and Union )erritories have received s'ecial attention in !anking develo'ment$ 2egional dis'arities in res'ect of distri!ution of !ank offices still continue, the southern region accounts for the largest share, 6hile the north?eastern and eastern regions are lagging far !ehind other regions$ But the dis'arities are less 'ronounced no6$ 6. O'er"ea" Ex-an"* n . 4t the end of -HF@, there 6ere IH offices of seven &ndian Banks in -5 foreign >excluding -G offices in akistan and // in Bangladesh 6hich have !een taken over !% the Custodian of Enem% ro'ert%, akistanA$ 4fter nationalization of !anks in -HFH, -H foreign offices had to !e closed !et6een -HFH and -HG1 mainl% !ecause the la6s of certain countries did not 'ermit the functioning of an% State?o6ned or foreign !ank$ ,o6ever, the %ears su!se*uent to -HG1 6itnessed a marked acceleration in the field of overseas !ranch ex'ansion$ 4t the end of March -HHF there 6ere -/5 !ranches of H &ndian !anks$ Foreign offices of &ndian !anks 'rovide the necessar% infrastructure for the collection and transmission of the remittances from a!road$ &n addition to their traditional !usiness, covering activities su''lemental to the countr%=s trade and assisting ex'artriate &ndians, the% have started to 'la% a ma#or role in hel'ing &ndian #oint ventures a!road in the form of extension of credit, 'roviding information on the countr%, hel'ing arrangements for e*uit% 'artici'ation and serving of the necessar% ca'ital movements$ 2e'resentative offices, 6hich have no o'erational res'onsi!ilit%, 'la% an im'ortant role in ex'loring and 'romoting !usiness o''ortunities and 'rovide su''orting services for other !ank? offices$ 7. 3 9*(*Aat* n f Re" )rce" # )he commercial !anks have made concerted efforts at de'osit mo!ilization through a series of measures and schemes$ )he aggregate de'osits of scheduled commercial !anks had increased from 2s$ @@- crores at the end of March -HI- to 2d$ 5,F5F crores at the end of 9une -HFH$ )he de'osits increased ver% ra'idl% after nationalization of ma#or !anks$ 4ggregate de'osits of scheduled commercial !anks at the end of March -HHF stood at 2s$ 5IGF1H crores$ 4ll all?round increase in !ank de'osits has !een largel% due to rising mone% su''l% in the econom%$ ,o6ever, the ex'ansion of !ank offices and the attem'ts at de'osit mo!ilization !% !anks have also greatl% hel'ed in raising the volume of resources availa!le to !anks in the form the 'u!lic$ &t is true that the high rate of inflation in the 'ost? nationalization %ears 6ould cot the gro6th rate in de'osits !% more than half, !ut a real average annual gro6th rate of @ or H 'er cent is still ver% im'ressive$ 8. Cred*t Ex-an"* n # )he credit 'olic% of !anks, as directed !% the 2eserve Bank, 6as directed to6ards 'romoting investment, aiding 'roduction and ex'orts, and assisting the 'riorit% sectors and 6eaker sections of the societ%$ Bank credit >loans and advances together 6ith !ills 'urchased and discountedA of scheduled commercial !ansk increased from 2s 1,IHH crores to 2s$ /I/5CC crores !et6een 9une -HFH and March -HHF$ Bet6een -HFH and -H@C the average annual rate of increase in !ank credit 6as around -@ 'er cent, as against -C$F 'er cent !et6een -HI- and -HFH$ Bet6een -H@C?H- and -H@H?HC the average annual rate of increase 6as -F$@ 'er cent$ On an average !asis, ex'ansion in !ank credit in -HH1?H5 at 2s$ -/,51F crores >@$/ 'er centA 6as much smaller than an increase of /-$C 'er cent in -HH/?H1$ &n recent %ears there 6as a decline in advances made for food 'rocurements, i$e$, food credit$ )he gro6th rate of non?food credit in -HH1?H5 >I$G 'er centA 6as also su!stantiall% lo6er than that in -HH/?H1 >/C$- 'er centA$ )his is largel% due to the fact that cor'orate entities have started rising large amount of funds from the ca'ital market and !anks have restricted credit in the context of 'rudential norms$

31

&nvestment in (overnment securities !% scheduled commercial !anks increased from 2s$-,CII crores in March -HFH to 2s$ -F,GGF crores in March -H@I and 2s$ -/@--/@ crores in March -HHF$ )his 6as in addition to investments in other a''roved securities$ :. Lend*n+ t Pr* r*t2 1ect r" and Wea!er 1ect* n" f t,e 1 c*et2 # 4'art from financing 'u!lic food 'rocurement and ex'orts, commercial !anks, !oth in the 'rivate sector and the 'u!lic sector, have extended li!eral credit facilities to the 'riorit% and neglected sectors of the econom% 6hich include agriculture, small?scale industries and other 'riorit% sectors com'rising small !usinessmen, 'rofessional and self?em'lo%ed 'ersons and 'ersons desirous of receiving higher education$ 4 scheme of differential interest rates >+2&A !% 'u!lic sector !anks on advances made to the 6eaker sections of the communit% 6as announced !% the (overnment in March -HG/$ )he 2eserve Bank laid do6n the criteria for identif%ing 'ersons 6ho 6ill !e eligi!le for concessional loans under the scheme and the condition under 6hich loans should !e given$ Since "ovem!er -HG@, the 'rivate sector !anks have !een 'ut under the same o!ligations as the 'u!lic sector !anks in the de'lo%ment of their funds$ )he !anks have !een asked to lend one 'er cent of total advances under the +2& scheme, 5C 'er cent of such lending !eing to Scheduled Castes and )ri!es$ u!lic sector !anks as a grou' exceeded the target in -H@C$ <. R)ra( Lend*n+ # Service 4rea 4''roach. )he realization of &ndian Commercial !anking has meandered through man% 'olic% 'rescri'tions$ 2ural !ranches of commercial !anks constitute a!out I@ 'er cent of total !ranches$ Commercial !anks and 2egional 2ural Banks >22BSA, s'onsored !% the scheduled commercial !anks, 'rovide multi?'ur'ose and multi?term credit for agriculture and allied activities$ 4s a result, !oth farmers and non? farmers in the rural sector have com'arativel% an eas% access to the lending 6indo6s of the commercial !anks$ u!lic sector !anks 6ere direct to attain !% March -HGH a credit de'osit ratio of FC 'er cent in rural and semi? ur!an areas se'aratel%$ )he sti'ulation 6as later extended to 'rivate sector !anks also$ Scheduled commercial !anks as a 6hole have succeeded in attaining the target in res'ect of rural !ranches$ )he% have, ho6ever, fallen short of the target in case of semi?ur!an !ranches$ Service 4rea 4''roach to rural lending 6hich is o'erative since 4'ril -, -H@H ahs envisaged that each rural and semi?ur!an !ranch of commercial !anks 6ould !e assigned a s'ecific area com'rising a cluster of village 6ithin 6hich the% 6ill o'erate, ado'ting a 'lanned a''roach for its economic gro6th and thus avoiding du'lication of efforts and scattered lending over 6ide areas$ ;ithin the cluster of allotted villages, onl% one !ranch 6ill o'erate, there!% avoiding multi'le financing and scattered lending and ensuring greater credit disci'line$ Service 4rea 4''roach aims at im'roving the credit deliver% s%stem and making !ank !ranches effective instruments of rural develo'ment$ Each Branch Manager is ex'ected to make a detained surve% of the villages included in his service area, stud% the develo'ment 'otential and credit needs under various activities in the context of availa!ilit% of market and infrastructure facilities and develo'ment 'rogrammes for the area and 're'are his 'rogramme for !anking on the !asis of such a stud%$ )he annual credit 'lans are 're'ared !% !ank !ranches$ Credit 'lanning in !anks 6ould thus start from the grass?roots and !e aligned 6ith the 'rogrammes of develo'ment agencies$ )his a''roach esta!lishes direct res'onsi!ilit% of the !ranches for ensuring the extension of !etter and more 'ur'osive credit facilities to the rural 'eo'le so that an o'timum alignment among agricultural credit, 'roductivit%, 'roduction and rec%cling of foods is esta!lished$ =. Ex-and*n+ Cred*t t Ex- rt 1ect r # )he ex'ort sector has all along received high 'riorit% in the 'rovision of !ank credit$ 4s a result, the ex'ort credit outstanding at the end of March -HH5 amounted to 2s$ -G,CH5 crores 6hich 6as --$/ 'er cent of total net !ank credit against the sti'ulated target of -C 'er cent to !e reached !% end?9une -HH1$ Under directions from 2eserve Bank Several measures have !een introduced to ensure the availa!ilit% of ade*uate and timel% credit to the ex'ort sector$ )he terms of various ex'ort credit schemes have !een li!eralized from time to time$ &n order to 'rovide credit to &ndian ex'orters at international com'etitive rates of interest, it has !een decided in Octo!er -HH1 that re?shi'ment Credit in Foreign Currencies > CFCA 6hich is availa!le for ex'ort related im'orts since "ovem!er -HH-, 6ould !e availa!le in ma#or converti!le currencies to ex'orters at :&BO2? related rates of interest for financing of domestic in'uts, also of goods ex'orted$ Banks in &ndia could also arrange for lines of credit from a!road for the 'ur'oses of extending CFC and rediscounting of ex'ort !ills a!road$ @. Lead Ban! 1c,e.e# )he :ead Bank Scheme >:BSA 6as introduced !% the 2eserve Bank in +ecem!er -HFH on the !asis of the recommendation of a stud% grou' a''ointed !% the "ational Credit Council under the chairmanshi' of the late rof$ +$2$ (adgil$ )he !asic o!#ectives 6as one of orienting !anking develo'ment in the

32

countr% to6ards an 7area a''roach8 and thus ensuring that the develo'mental needs of all regions and all sections of the communit% are served !% the !anking s%stem in conformit% 6ith the national 'riorities$ )he administrative unit <district= 6as taken as the nucleus of this a''roach and all the districts in the countr% 6ere initiall% allotted among the State Bank (rou', -5 nationalised !anks, and three 'rivate !anks$ Each !ank 6as ex'ected to surve% the 'otential for !anking devel'ent in the allotted districts, to identif% institutional and credit ga's and to take the initiative in endeavouring to fill them and thus intensivel% involve itself in the 'rocess of economic advancement of the districts concerned$ )he :ead Bank does not have a mono'ol% over !anking !usiness in the districts allotted to it$ ,o6ever, it acts as the leader of all the other ansk in those districts, 6orks closel% 6ith them and the other financial institutions in the area and the (overnement +e'artments, and #ointl% s'onsors the !anking develo'ment of those districts so as to hel' in their overall economic develo'ment$ )he :ead Banks 're'are district credit 'lans, !ut non?lead !anks have as much res'onsi!ilit% as the :ead Banks in 'romoting develo'ment efforts in the districts concerned$ :ead Banks undertake the formulation of +istrict Credit lans for their lead districts and also 4nnual 4ction lans !efore the commencement of each %ear$ )he credit 'lan is a com'rehensive 'lan indicating credit targets for institutional credit agencie5s in the district on a !lock?6ise, sector?6ise, scheme 6ise and !ank?6ise !asis$ )he :ead Bank Scheme has !een o'erating in 5@1 districts of the countr% at the end of March -HH5$ 1B. Inn 'at* n" and D*'er"*f*cat* n f B)"*ne"" # Commercial !anks have !een encouraged to diversif% into fresh areas of !usiness, viz$, merchant !anking, e*ui'ment leasing, venture ca'ital, mutual funds, housing finance and other financial services$ )he% have introduced innovative schemes of de'osit mo!ilization, 'roviding consumer credit, issuing credit cards etc$ Several !anks have set u' se'arate su!sidiaries for the 'ur'ose$ )6o !anks have set u' su!sidiaries to commence factoring services$ )he (overnment securit% market in &ndia has traditionall% !een narro6 and ca'tive 6ith lo6 cou'on rates, distri!utional investors such as !anks and other institutions dominate the market to meet their statutor% re*uirements$ )heseK!ansk institutions have invested huge sums of mone%$ ,o6ever, there is no active secondar% market in securities$ )he raising of cou'on rates on (overnment securities, freeing of inter?!ank callKnotice market from ceilings on interest rates, introduction of ne6 instruments >like -@/ da%s )reasur% Bills, inter?!ank 'artici'ations, Commercial a'er, Certificated of de'osits, etc$A 6here the rates of interest are not administered g!u determined !% market forces and such other li!eralizations have !een much hel'ful to commercial !anks$ )o encourae !ill culture, ste's like lo6ering of !ill discounting rates, sti'ulation of norms for use of !ills for credit 'urchases and credit dales etc$ have !een taken$ rudential norms of lending have !een laid do6n for !anks so as to reduce the risks for individual !anks and ena!le them to gro6 in health% lines$ Over the %ears, !anks have !een gro6ing into !road?!ased financial service institutions$ )he innovations Commercial !anks indicate their ada'tive skills and the vital role the% have !een 'la%ing in the 'rocess develo'ment, s'anning rural and ur!an, agricultural and non?agricultural and organized and unorganized sectors the econom%?each sector needing different a''roaches, skills and techni*ues$ ,ere lies the real achievement Commercial !anks in &ndia$ of of of of

33

LE11ON < INDIAN PRI$ATE 1ECTOR BANK1 Ever since the nationalization of the -5 ma#or commercial !anks on -H 9ul% -HFH, the entire thrust of the !anking 'olic% had !een to 'ro#ect the image of 'u!lic sector !anks$ )he olic% documents, s'eeches !% the authorities, articles, 6rite?u's etc$ in fact, the 6hole trend of thinking consciousl% or unconsciousl%, 6as concentrated on highlighting the role of 'u!lic sector !anks in economic develo'ment$ rodigious 'romotional literature 6as 'u!lished 'ro#ecting the %eoman services rendered !% 'u!lic sector !anks to !ring a!out social transformation through economic develo'ment$ &t needs to !e stressed that the o!#ective of 7mass !anking8 had to !e thrust on the nationalized !anks$ )he 'rivate sector !anks have !een fulfilling this o!#ectives right from their ince'tion, since the% are 7at home8 6ith the sons of the soil$ Much of the service rendered !% them, ho6ever, 6ent unnoticed$ &n the 'rocess, great damage 6as un6ittingl% done to the innocent 'rivate sector !anks$ &t is indifference to the ver% existence of the &ndian 'rivate sector !anks that led to 'olic% discrimination in the 4gricultural and 2ural +e!t 2elief Scheme of -HHC$ )he scheme 6as made a''lica!le to 'u!lic sector !anks and coo'erative !anks !ut not to the 'rivate sector !anks$ ;hat is intriguing and even irritating is the fact that des'ite re'eated re*uests !% the 'rivate sector !anks to make the scheme availa!le to their !orro6ers, this re*uest 6ent unheard$ Under such circumstance of utter neglect, it is sur'rising that these 'rivate sector !anks continue to survive and even thrive$ )he% dra6 their ins'iration lo%alt% and devoted service of their staff$ &t is an ackno6ledged fact that of the different grou's of !anks, customer service is the !est in the &ndian rivate Sector !anks$ WIND1 O& CHANCE )he gloom% and sullen climate 6hich the &ndian 'rivate sector !anks suffered silentl% for more then t6o decades has changed for the !etter$ )6o im'ortant recommendations of the "arasimham Committee 6hich !ring a refreshing air for the &ndian 'rivate sector !anks are. >iA >iiA )he (overnment should indicate that there shall !e no further nationalization of !anks and )here should not !e an% difference in treatment !et6een 'u!lic sector and 'rivate sector !anks$

&n res'onse to the firs 'oint the then rime Minister 6hile at +evos in S6itzerland declared that there 6ill !e no further nationalization$ 4s regards the second, the industr% ministr% has issued a circular to al Central 'u!lic sector undertaking 6hich states that the% can, unlike in the 'ast select an% !ank, 'rivate, 'u!lic or foreign of their choice for 'ur'oses of their transactions$ )hee develo'ments have o'ened u' ne6 vistas for the gro6th and ex'ansion of 'rivate sector !anks on a massive scale$ &t must, ho6ever, !e recognized that the mere issuance of a circular 6ill no ensure availa!ilit% of !usiness of the 'u!lic sector undertaking to the &ndian 'rivate sector !anks$ 4'art from the central 'u!lic sector undertakings, there are a num!er of state 'u!lic sector undertakings and de'artments of central and state governments as 6ell as local governments 6hich are not covered !% the circular of the Ministr% of &ndustr%$ Unless the State (overnments and the local (overnments also fall in line the discrimination !et6een 'u!lic and 'rivate sector !anks 6ill continue$ More im'ortantl%, the 'rivate sector !anks, handica''ed as the% 6ere for more than t6o decades, have if the doors of the cages are thro6n o'en to?da%, the% are una!le to fl% forcefull% in the o'en$ "evertheless, an atmos'here of freedom and no discrimination 6ill eventuall% strengthen these !anks to go in for aggressive !anking$ 4t 'resent 6e have 1C 'rivate sector !anks com'rising of old 'rivate !anks and G ne6 !anks set u' in -HHCs$ 4ll these !anks are 6ell 'laced in terms of 'roductivit% and 'rofita!ilit%$ PER&OR3ANCE# )he &ndian rivate Sector Banks 'osted excellent o'erational results for the %ear ended March -HHI$ Ca'ital and 2eserves over the 'revious %ear increased !% F- 'er cent and GH 'er cent res'ectivel%$ +e'osits gre6 !% 1- 'er cent, investments !% 1/ 'ercent, advances !% 5/ 'ercent and total assets !% 5- 'er cent$ &ncome gro6th during the %ear at 1I 'er cent 6as *uite im'ressive com'ared to /F 'ercent in the 'revious %ear$ (reater control in ex'enditure 6as evident 6ith its gro6th of /G 'ercent during the %ear, slightl% higher to that of /1 'er cent re'orted in the 'revious %ear$

34

&ncrease in !usiness, enhanced thrust in income, focus on curtailing ex'enditure resulted in the net 'rofits of this grou' on &ndian rivate Sector Banks #um'ing !% an im'ressive t6o fold during the %ear$ )hese !anks have !een a!le to sho6 noticea!le rise in 'rofita!ilit% and 'roductivit%, through there is no 'erce'ti!le change in the s'read$ &ndian rivate Sector Banks have !een alert in rea'ing the !enefits of the li!eralization and deregulation of the !anking sector$ )a!le - ,ighlights the Suring rofita!ilit% of rivate Sector Banks$ Ta9(e 1 1)r+*n+ Pr f*ta9*(*t2 Net Pr f*t a" C f W r!*n+ &)nd" -HH/?H1 D%s%a Federal 930 2a#asthan South &ndian United ;estern 0arur D%s%a 0arnataka Madura Catholic S%rain )" Mercantile :akshmi vilas Sangli Bharat Overseas +hanalakshmi Cit% Union Benaras?State "edungadi :ord 0rishna Bareill% Cor'$ "ainital 2atnakar un#a! co?o' )otal erformance of the &ndian highlighted !elo6. C$FG C$5/ C$/C C$5C$// C$-@ C$@/ C$FG C$I1 C$/G C$HH C$FG C$-/ C$-/ C$/C$F/ ?5$F5 C$C5 -$G1 C$C5 C$IC C$C1 ?/$HH C$15 -HH1?H5 C$GF C$FF C$I1 C$@5 C$GG C$1/ -$-F C$FI C$1C C$5/ -$-/ C$FI C$/F C$F5 C$5/ C$IF ?1$5I C$CF C$H@ ?C$F5 C$-I C$IH ?1$CG C$IG -HH5?HI -$F5 -$1C C$I@ /$C5 C$@I C$F1 -$I1 C$@C /$C@ C$1I -$1I -$IF C$-@ C$GH C$@5 -$CG ?-$@G C$/H -$5/ ?C$// C$/I C$IF ?C$IH -$-F

rivate Sector Banks for the %ear ended March -HHI in 0e% areas of !usiness is

Ca'ital of the &ndian rivate Sector Banks during the %ear increased from 2s$ -/- crores to -H5 crores$ 2eserves moved u' form 2s$ I5I crores to 2s$ HGF crores$ Ca'ital and reserves together #um'ed !% GF 'er cent from 2s$ FFF crores in March -HH5 to 2s$ --GC crores in March -HHI$ Benaras State Bank sho6ed massive infusion of

35

ca'ital from 2s$ -I crores to 2s$ F- crores during the %ear 6here as it sho6ed as marginal decline in the reserves$ 4s man% as seven !anks more than dou!led their reserves during the %ear$ For the second successive %ear, 'rivate sector !anks have !een a!le to re'ort de'osit gro6th of over 1C 'er cent 1C$IN in -HH1?H5 and 1-$5N in -HH5?HI$ )otal de'osits increased from 2s$ /CCFH crores in March -HH5 to 2s$ /F1HI crores in March -HHI$ Eleven !anks managed to cross the grou' average 6ith gro6th rates ranging from 1/ 'er cent to @1 'er cent$ One Bank in the scheduled categor% and one in the non?scheduled categor% re'orted gro6th rates of less than -C 'er cent$ )he gro6th in advances 6as *uite ro!ust from 2s$ HGH@ crores in March -HH5 to 2s$ -1HIG crores in March -HHI$ Bill 'urchased !% 11 'er cent, cash creditsKoverdrafts !% 5F 'er cent and term loans !% 5- 'er cent$ Eleven !anks crossed the grou' average of advances gro6th >5/NA ranging from 51 'er cent to -CG 'er cent$ &nvestments re'orted a health% gro6th 1/ 'er cent$ &nvestments in (overnments Securities increased !% /5 'ercent, in other a''roved securities !% G 'er cent, in shares !% 1GI 'er cent and in de!entures and !onds !% H@ 'er cent$ )he income of the &ndian rivate Sector moved u' from 2s$ /1G/ crores during the %ear -HH1?H5 to 1/-crores during the %ear -HH5?HI$ &nterest and +iscount rose !% 1/ 'ercent, income on investments !% 5- 'ercent and other income !% 5- 'ercent and other income !% 5F 'ercent$ Under the other income, sale of investments re'orted highest #um' of FH 'ercent, follo6ed !% commissionKexchangeK!rokerage 6hich gre6 !% 1@ 'ercent$ )he ex'enditure of these !anks rose from 2s$ //IH crores to 2s$ /@F1 crores$ &nterest ex'enditure sho6ed a rise of 1- 'ercent and o'erating ex'enses !% /@ 'er cent$ )he net 'rofit of the &ndian rivate Sector Banks sho6ed a significant rise from 2s$ --/ crores in -HH1?H5 to 2s$ 15G crores in -HH5?HI$ 4ll the ke% o'erational 'erformance indicators sho6ed a surge$ rofit as a 'ercentage of 6orking funds rose from C$5H 'ercent in -HH1?H5 to -$-/ 'ercent in -HH5?HI$ "on?interest income as 'ercentage to total income from -/$GH 'er cent to -1$@C 'er cent, +e'osit er Em'lo%ee from 2s$ 1G lakhs to 2s$ 5@ lakhs, 4dvances er Em'lo%ees from 2s$ -@ lakhs to 2s$ /I lakhs$ Esta!lishment Ex'enses as 'ercentage to total ex'enditure remained same as of the 'revious %ear at around -G 'ercent$ PRO1PECT1# rivate Sector !anks 'resentl% o'erating in &ndian are inherentl% strong and this could !e seen from the fact that the% had a smooth transition from the 're?reform 'eriod to the 'ost?reform 'hase$ Some of the !anks covered in the 'rofiles section achieved ca'ital ade*uac% norm in -HH1 itself$ )he level of non?'erforming assets is *uite lo6 for man% of them, in fact, it is less than I 'er cent for some of them$ (enerall%, the% have !een a!le to 'ost good results$ Conservative management st%les 'revalent in these !anks have ensured adherence to 'rudential norms?reform or no reform$ &n other 6ords, the% 6ere su!#ected to market disci'line even !efore the 'rocess of reform 6as initiated$ rofita!ilit% of man% of the 'rivate sector !anks has !een *uite good$ +ividend 'a%ment to shareholders has !een a regular feature and the rates of dividend have !een going u' over the %ears$ Shareholders are also re6arded 6ith !onus shares and right issues 'eriodicall%$ )he need for augmenting the ca'ital !ase as a result of financial sector reforms, has made 'rivate sector !anks to seek these avenues *uite fre*uentl% in the recent 'ast$ )he 'rivate sector !anks have also come out 6ith 'u!lic issues 6hich have received good res'onse from the investors indicating their confidence in these !anks and their gro6th 'ros'ects$ )he shares of 'rivate sector !anks are *uoted in ma% stock exchanges at su!stantial 'remium$ )he good track record of the 'rivate sector !anks can also !e a cause of anxiet% for the managements of 'rivate sector !anks in the li!eralized environment as it tem'ts outsiders to make takeover attem'ts$ Since, man% of these !anks are closel% held !% certain communities, attem'ts$ Since, man% of these !anks are closel% held !% certain communities, attem'ts !% outsiders to takeover has !een resisted$ ;hile, some managements feel that takeover !ids !% themselves are not !ad 'rovided the institution is !enefited, others 6ant to safeguard the interests of the existing shareholders$ One method 6hich has !een used !% some !anks is to invite institutions to 'artici'ate in the e*uit% contri!ution of &C&C& in Federal Bank is 'ro'osed to !e used !% the management for !usiness ex'ansion$ &C&C& ma% !e ex'ected to 'artici'ate in the management of the !ank !% having its nominee on the !oard$ Business s%nergies !et6een the t6o institutions ma% also !e 6orked out, according to Shri M$ $0$, "air, Chairman 3 Chief Executive Officer of the Federal Bank :td$ On the *uestion of increasing com'etition in the deregulated environment, Shri "air 6elcomes the entr% of ne6 'rivate sector !anks and feels that this 6ill !enefit the customers ultimatel%$ 4nother !ank 6hich has &C&C& and other institutions 'artici'ating in its ca'ital is )he South &ndian Bank :td$ Shri Cherian Darghese, Chairman 3 Chief Executive Officer, South &ndian Bank :td$ excudes confidence a!out the

36

future of the 'rivate sector !ank in &ndia$ )he% are set to gro6 faster in the coming %ears$ ,e is also rece'tive to the 'rocess of li!eralization unfolding in the &ndian econom% and !anking, !ut, if of the ne6 that it should go hand in hand 6ith control and su'ervision of !anks !% the 2B&$ 4s for the future, the 'rivate sector !anks can look for6ard to a 'eriod of high gro6th accom'anied !% greater 'rofita!ilit%$ )he industr% re'ort on &ndian Banking 're'ared !% 9ardine Fleming &ndian Broking :imited affirms this$ )he re'ort 6hich covered -I 'rivate sector !anks finds that these !anks have handled their !ad de!ts *uite 6ell on account of consistent monitoring of loan 'ortfolio$ Better customer service also ensures *ualit% of assets$ )he 'rivate sector !anks, are 'oised to sho6 higher 'rofita!ilit% in coming %ears$ )he% have also come out on to' on studies other than 9ardine Fleming mentioned a!ove, the nota!le exam'le !eing the C2&S&: stud%, the results of 6hich are *uoted !% some !anks in their annual re'orts$

37

LE11ON = CENTRAL BANKING E$OL%TION Central !anking is of recent origin$ rior to the commencement of the t6entieth centur%, there had !een no clearl% defined conce't of central !anking$ But toda% there is no countr% in the 6orld 6hich does not have a central !ank$ &t is the !ank that acts as the leader of the mone% market$ &t su'ervises, regulates and controls the functions of commercial !anks and other financial institutions$ &t acts as the !anker to the government$ &t 'la%s an active role in im'lementing government=s economic 'olic% in the countr%$ 4ccording to ;alls 2oger, central !ank occu'ies the coveted 'osition of !eing one fo the three great inventions that have taken 'lace since the !eginning of times, the other t6o !eing the fire and the 6heel$ 4lthough some 'eo'le ma% seriousl% dou!t if central !ank could !elong to such an exalted com'an%, !ut the% all agree that the central !ank is one of the most useful economic institutions 6hich has !een develo'ed to hel' societ% to manage its collective financial affairs$ )oda%, central !ank is the central arch of the monetar% and fiscal frame6ork in ever% countr% of the 6orld and its activities are essential for the 'ro'er functioning of the econom% and indis'ensa!le for the fiscal o'erations of the government$ Centra( 9an!*n+ E' ()t* n 4lthough some central !anks esta!lished more than t6o centuries ago, central !anking is mostl% a recent develo'ment !eing essentiall% a 'roduct of the nineteenth centur%$ )he earlier institutions 6ere !% and large, !anks of issue 6ith the sole of 'rinci'al right of note issue$ Modern central !anking techni*ues 6ere unkno6n to them$ )he% 6ere not much different from other existing institutions doing !anking !usiness exce't for the s'ecial relations 6hich the% had 6ith their res'ective governments$ &t 6as onl% through 'rocess of trial and error did the% come to occu'% a 'ivotal and strategic status 6hich the% en#o% in the 'resent da% monetar% and !anking structure$ )he oldest central !ank in the 6orld is the 2iks Banks of S6eden$ &t 6as esta!lished in -HIF$ )he Bank of England come into !eing in -FH5$ ,o6ever it 6as the first !ank to assume the 'osition of a central !ank and to develo' 6hat are not generall% recognized as the fundamentals of the art of central !anking$ )he histor% of the Bank of Englanc is universall% acce'ted as the histor% of the evolution of central !anking 'rinci'les and techni*ues$ )he successful 6orking of the Bank of England stimulated the develo'ment of central !anking in other 'arts of the 6orld$ )he Bank of France 6hich 6as organized in -@CC 6as closel% connected 6ith the state ever since its esta!lishment$ )he 2eiches !ank in (erman% 6as esta!lished in -@GF$ )he Bank of "etherlands 6as founded in -@-5 on the ruins of the old Bank of 4msterdam$ )he "ational Bank of 4ustria, 6hich 6as reorganized as the Bank of 4ustria?,ungar% in -@GG 6as esta!lished in -@-G to restore order in the national monetar% s%stem 6hich had deteriorated due to over issue of 'a'er currenc%$ )he Bank of "or6a%, the "ational Bank of +enmark, the "ational Bank of Belgium and the Bank of S'ain 6ere esta!lished in -@FC to consolidate mone% circulation and to float de!t for the 2ussian Em'ire$ )he Bank of 9a'an 6as set u' on -@@/ to restore order in the currenc% s%stem of the countr%$ )he Bank of &tal% 6as esta!lished in ortugal, 2umania, Bulgaria, Servia, )urke%, 9ava, Eg%'t and 4lgeria$ )hese !anks 'ossessed the mono'ol% the mono'ol% of note issue$ )hus nineteenth centur% 6as a centur% 'ar excellence of the esta!lishment of central !anks in man% countries of the 6orld, 'articularl% in Euro'e, 6here almost ever% countr% had esta!lished a central !ank em'o6ered to issue notes 6ith s'ecial 'rivileges and 'o6ers$ &n due course of time, these !anks !ecame !ankers and advisers and advisers to their res'ective governments$ 4lthough !% the end of the nineteenth centur% almost ever% countr% in Euro'e had a central !ank, the conce't of central !ank 6as not, of course, too clearl% articulated or understood !efore the turn of the centur% and some of these !anks 6ere not full% a6are of their s'ecial functions and res'onsi!ilities$ For exam'le, the S6edish 2iks!ank and the Bank of &tal% 'ro!a!l% did not !ecome 7real8 central !anks until a!out the turn of the centur%$ Moreover, the countries in other continents of the glo!e, !arring a fe6, also did not have central !anks$ &n fact, in -HCC, there no central !ank in the ;estern hemis'here$ )he Federal 2eserve S%stem in the U$S$4$ 6as esta!lished in -H-1, 6hile the Bank of Canada 6as esta!lished in -H15$ &m'ortant countries of East such as &ndia and China had no central !anks$ )hus, in the t6entieth centur%, the 6ork of esta!lishing the central !anks continued$ )he First ;orld ;ar and the conse*uent chaotic monetar% conditions !rought home to those countries 6ithout a central !ank the im'erative necessit% of esta!lishing a centralized institution ca'a!le of creating and maintaining e*uili!rium in the monetar% s'here$ )he great encouragement of the develo'ment of central !anking 6as 'rovided at the &nternational Financial Conference held in Brussels in -H/C$ )his conference resolved that 7all those countries 6hich had not %et esta!lished a central !ank should 'roceed to do so as soon as 'ossi!le, not onl% 6ith a vie6 to facilitating the restoration and maintenance of sta!ilit% in their monetar% and !anking s%stems !ut also in the interest of 6orld Coo'eration8$ )he (enoa Conference, in the s'ring of -H// also em'hasized the im'ortance of a central !ank as an agenc% to correct the financial dise*uili!rium and to 'romote international coo'eration in the monetar% 6orld$

38

)here 6as a 6elcome recei'tion to these advices throughout the 6orld$ )he next three decades sa6 man% countries e*ui''ing themselves 6ith central !anks$ From -H/- to -H1G, !arring -H/H and -H1C, ever% %ear one or more !ank 6as added to the list of central !anks$ 9ust as the Brussels conference of -H/C accelerated the 'ace of gro6th of the central !anks after ;orld ;ar &, in the same 6a% the &MF further facilitated the develo'ment of central !anks in the ne6 4fro 4sian and :atin 4merican countries$ )he governments of these countries found that the central !ank could deal more effectivel% 6ith the &MF and other related matters relating to foreign exchange$ )he im'ortance of central !anking institutions has thus gained universal recognition and no6 the% occu'% a uni*ue 'osition in the economic ma' of ever% civilized countr%$ &t took nearl% three centuries for the art of central !anking to attain the 'resent da% im'ortance$ "evertheless, it 6ould not !e correct to sa% that central !anking has attained its full gro6th$ &ndications are that the role of central !anks is continuall% ex'anding$ &n 6ords of +e 0ock, 7central !anks have develo'ed their o6n code of rules and 'ractices, 6hich can !e descri!ed as the art of central !anking !ut 6hich in a changing 6orld, is still in the 'rocess of evolution and su!#ect to 'eriodical read#ustment$ )he central !anks 6ere originall% started as 'rivatel% o6ned #oint stock !anks$ )he% 6ere managed !% the share holders$ )he structure and organization of the central !anks 6ere closel% connected 6ith the economic conditions 6hich 'revailed at the time of their esta!lishment$ )he% 6ere 'rivatel% o6ned !ecause their o!#ect 6as to 'rovide finance to the government$ Even then most of the central !anks 6ere su!#ect to a certain degree of control !% their governments$ (raduall% the trend to6ards nationalization of central !anks gathered momentum$ Central !anks have no6 !ecome im'ortant organs of the governments$ )he% changes in the economic conditions of each countr% raised the status of central !anks to the 'osition of the leader of the entire !anking s%stem in the res'ective countries$ W,at *" a Centra( Ban!D 4 modern central !ank 'erforms so man% functions of different nature that it is ver% difficult to give an% !rief !ut accurate definition of a central !ank$ 4n% definition of a central !ank is derived from its functions and these functions have varied from time to time and from countr% to countr%$ &n other 6ords, the functions of central !anks have gro6n over time making it more difficult to give an% !rief and unchanging definition of a central !ank$ ;e ma% sa% that a central !ank is one 6hich acts as the !anker to the governments and the commercial !anks, has the mono'ol% of note issue, o'erates the currenc% and credit s%stem of the countr% and does not 'erform the ordinar% commercial !anking function$ Economists have defined central !ank differentl%, em'hasizing its one function or the other$ 4ccording to Dera Smith, 7the 'rimar% definition of Central !anking is a !anking s%stem in 6hich a single !ank has either com'lete or a residuar% mono'ol% of note issue8$ &n the statutes of the Bank for &nternational Settlements, a central !ank is the !ank in an% countr% to 6hich has !een entrusted the dut% of regulating the volume of currenc% and credit in the countr%8$ )he fact that several !anks have !een named reserve !anks, a''ears to sho6 that in the o'inion of some authorities the custod% of !ank reserves is the characteristic function of a central !ank$ M$,$ +ekock=s definition of a central !ank a''ears to !e !etter than man% of the other definitions$ &n his definition, he includes all the im'ortant functions of the central !ank$ ,o6ever, his definition lacks !revit% 6hich is an essential *ualit% of an% definition$ 4ccording to +ekock, a central !ank is a !ank 6hich constitutes the a'ex of the monetar% and !anking structure of its countr% and 6hich 'erforms, as !est as it can in the national economic interest, the follo6ing functions$. >aA )he regulation of currenc% in accordance 6ith the re*uirements of !usiness and the general 'u!lic, for 6hich 'ur'ose it is granted either the sole right of note issue or at least a 'artial mono'ol% thereof$ >!A )he 'erformance of general !anking and agenc% services for the (overnment$ >cA )he custod% of the cash reserves of the commercial !anks$ >dA )he custod% and the management of the nation=s reserves of international currencies$ >eA )he 'rovision of credit facilities in the form of rediscounts or collateral advances, to commercial !anks, discount houses, !ill !rokers and dealers or other !anking institutions, in its ca'acit% as the !ankers= !ank and the general acce'tance of the res'onsi!ilit% of lender of last resort$ >fA )he settlement of clearance !alances !et6een the !anks and the 'rovision of facilities for the transfer of funds !et6een all im'ortant centres$ >gA )he control of credit in accordance 6ith the needs of !usiness and the econom% generall% and for the 'ur'ose of carr%ing out the !road monetar% 'olic% ado'ted !% the (overnment$

39

;hile the older central !anks 'erformed the functions enumerated a!ove mostl% as the result of tradition, the ne6er central !anks and some of those functions s'ecificall% entrusted to them !% statute$ ream!les sti'ulating 'articular o!#ectives of monetar% 'olic% 6ere also introduce in the thirties$ For exam'le, in the 'ream!le to the Bank of Canada 4ct, that !ank 6as directed 7to regulate credit and currenc%, to control and 'rotect the external value of the national monetar% unit and to mitigate !% its influence fluctuations in the general level of 'roduction, trade 'rices and em'lo%ment so far as ma% !e 'ossi!le 6ith in the sco'e of monetar% action8, the 'ream!le to the 2eserve Bank of &ndia 4ct referred to that !ank as !eing constituted to 7regulate the issue of !ank notes and the kee'ing of reserves 6ith a vie6 to securing monetar% sta!ilit% in &ndia, and generall% to o'erate the currenc% and credit s%stem of the countr% to its advantage8$ Moreover, the statutes of man% of the ne6er central !anks circumscri!e their 'o6ers and functions to such an extent that those statutes amount almost to a definition of 6hat a central !ank should or should not do$ )he noticea!le trend in central !anking legislation to6ards a more or less standard t%'e, after allo6ing for the 'olitical constitution and the stage of economic develo'ment of different countries, affords a 'ractical illustration of the existence of a clearl% defined conce't of central !anking$

40

LE11ON @ &%NCTION1 O& A CENTRAL BANK 4ccording to +e 0ock, a central !ank should 'erform the follo6ing seven functions$ )hese seven functions are contained in his famous 6ork 7Central Banking8$ 1. Ban! f I"")e )he most im'ortant functions of a central !ank is that it acts as the !ank of issue$ &t is charged 6ith the res'onsi!ilit% of issuing notes$ )he 'rivilege of the note issue is the mono'ol% of the central !ank$ "o other !anks have the right to 'rint and issue currenc% notes$ &n the o'inion of +e 0ock$ 7 )he 'rivilege of note issue 6as almost ever%6here associated 6ith the origin and develo'ment of central !anks$8 )he central !anks take into consideration three im'ortant vie6s in the issue of notes?uniformit%, elasticit% and securit%$ )he concentration of note?issue in onl% one !ank >central !ankA has man% advantages$ Firstl%, it !rings a!out uniformit% in the note?issue$ Secondl%, the uniformit% in the note?issue facilitates trade and commerce 6ithin the countr%$ )hirdl%, the s%stem of note?issue !% onl% one !ank attaches distinctive 'restige to the currenc% notes$ Fourthl%, this s%stem ena!les the central !ank to influence and control credit o'erations of the commercial !anks$ Fifthl%, this s%stem avoids the over?issue or under?issue of currenc% notes$ Sixthl%, the (overnments can a''ro'riate 'artl% or full% the 'rofits of note?issue$ Finall%, there is a good amount of securit% to the note?issue as there is a ver% close and cordial relationshi' !et6een the central !ank and the government$ 2. Ban!erE A+ent and Ad'*" r t t,e G 'ern.ent )he central !ank ever%6here acts as the !anker, fiscal agent and adviser on all im'ortant financial matters to the government$ &n the first 'lace, it conducts the !anking accounts of government de'artments and enter'rises$ &t advances short?term loans to government$ )hus it 'erforms certain !anking functions to the government$ &n the second 'lace, the central !ank 'erforms certain functions for, and on !ehalf, on the government$ &t makes and receives on !ehalf of the governments certain 'a%ments$ &t is the agenc% through 6hich government loans are floated$ &t 'a%s interest on the national de!t$ &t carries out all the arrangements concerning redem'tion of 'u!lic de!t$ )hus the central !ank acts as the agent of the government$ &n the third 'lace, it also acts as the adviser to the government in all financial and economic matters$ &t advises the government to follo6 a suita!le monetar% 'olic% in times of !ooms and de'ressions$ &t advises the government in the matters of 'u!lic !orro6ing$ &t 'rescri!es methods for redem'tion of national de!t$ )hus the central !ank is a !anker, financial agent and adviser to the government$ 6. Ban!er"5 Ban! )he central !ank acts as the !ankers= !ank$ 4s !ankers= !ank it 'erforms several functions$ Firstl%, the commercial !anks of the countr% are re*uired, either !% la6 or !% custom, to kee' a certain 'ortion of the de'osits the% receive from the 'u!lic$ )hus 'ortion of de'osits ke't 6ith the central !ank is kno6n as the cash reserves of the commercial !anks$ )he% can dra6 currenc% from the central !ank during !us% seasons and 'a% in sur'lus currenc% during slack seasons$ )hus the central !ank acts as the custodian of the cash reserves fo the commercial !anks$ Secondl%, the central !ank rediscounts !ills of commercial !anks$ )hirdl%, the central !ank 'rovides good and am'le leadershi' to the commercial !ank$ &t gives directions to the commercial !anks during 'eriods of grave concern$ &n its notes to individual !anks, it ma% 'oint out their failings and exhort them to fall in line 6ith its 'olic%$ )he commercial !anks al6a%s look to the central !ank for guidance and directions$ Fourthl%, effects centralization of the cash reserves of the commercial !anks in the communit%$ ;hen these reserves are 'ooled together !% the central !ank, it em'lo%s these reserves to the fullest extent 'ossi!le and in most effective manner during 'eriods of seasonal strain, financial crises and general emergencies$ B% 'erforming these various functions, the central !ank acts as the !ankers !ank$ 7. C)"t d*an f t,e & re*+n C)rrenc2 Re"er'e" f t,e C )ntr2 )he central !ank also acts as the custodian of the foreign currenc% reserves of the countr% concerned$ Under gold standard, the central !anks 6ere re*uired !% la6 to maintain gold reserves against note?issue$ 4nd no6, after the a!andonment of gold,$ Standard, the central !anks are su''osed to kee' !oth gold as 6ell as foreign currenc% as reserves against note?issue$ )his most im'ortant function is entrusted to the central !ank for three o!vious reasons?to correct an% dise*uili!rium in the !alance of 'a%ments 'osition of the countr%, to maintain the rate of exchange and to manage exchanger control$

41

8. Lender f t,e La"t Re" rt )he central !ank also acts as the ultimate lender of the last resort$ B% lender of the last resort, the central !ank of the countr% assumes the res'onsi!ilit% of meeting directl% or indirectl% all reasona!le demands for financial accommodation from the commercial !anks, discount houses and certain other credit institutions$ )oda% this im'ortant function has come to !e regarded as the sine *ua non of central !anking$ B% rediscounting first class !ills, or !% taking advances on a''roved short?term securities from the central !ank, other !anks can increase their cash resources at the shortest 'ossi!le notice$ ;henever crisis or a 'anic develo's into a run on !anks, this facilit% !% turning their good assets into cash at a moment=s notice is a great advantage to them$ )hus the central !ank is the ultimate source from 6hich the commercial !anks can get emergenc% credit to meet the demand for cash on the 'art of the 'anic?stricken 'eo'le$ :. Centra( C(earanceE 1ett(e.ent and Tran"fer 4s !anker=s !ank, the central !ank kee's the cash !alances of all commercial !anks$ &t is easier for mem!er? !anks to ad#ust their claims against each other in the !ooks of the central !ank$ For exam'le, if Bank 4 has a che*ue for 2s$ -,CCC on Bank B 6hich has a che*ue for 2s$-,ICC on Bank 4, the easiest 6a% to clear and settle the t6o claim is for Bank 4 to give a che*ue to Bank B for an amount of 2s$ ICC on the central !ank of the countr%$ 4s a result of this transfer, Bank 4=s account 6ill !e de!ited !% 2s$ ICC, 6hile Bank B=s account 6ill !e credited !% 2s$ ICC$ )here is thus no necessit% for mone% to come into the 'icture at all$ 4'art from econom% in the use of mone%, much of la!our and inconvenience, associated 6ith the individual s%stem of clearance and settlement, is removed$ <. C ntr ((er f Cred*t ro!a!l% the most im'ortant of al the functions 'erformed !% a central !ank are that of controlling the credit o'erations of commercial !anks$ &n modern times, !ank credit has !ecome the most im'ortant source of mone% in the countr%, relegating coins and currenc% notes to a minor 'osition$ Moreover, it is 'ossi!le, as 6e have 'ointed out in a 'revious cha'ter, for commercial !anks to ex'and credit and thus intensif% inflationar% 'ressure or contract credit and thus contri!ute to a deflationar% situation$ &t is, thus, of great im'ortance that there should !e some authorit% 6hich 6ill control the credit creation !% commercial !anks$ 4s controller of credit, the central !ank attem'ts to influence and control the volume of Bank credit and also to sta!ilize !usiness condition in the countr%$ R (e f Centra( 9an! *n a de'e( -*n+ ec n .2 )he modern central !ank is an institution res'onsi!le not onl% for the maintenance of economic sta!ilit%J it also 'erforms a variet% of develo'mental and 'romotional functions 6hich 6ere regarded in the 'ast as !eing outside the normal 'urvie6 of central !anking$ )he main o!#ective of a central !ank=s monetar% 'olic% is to achieve gro6th 6ith sta!ilit% 6ithin the frame6ork of the general economic 'olic% of the State$ For the sake of economic develo'ment, the central !ank should 'rovide sufficient *uantit% of mone% a''ro'riate to gro6th 'rocess$ 4 gro6ing volume of 'roduction and investments cannot !e maintained 6ithout an increasing su''l% of mone%, and credit$ )he mone% su''l% should gro6 at least at a rate roughl% e*ual to that of increase in real income$ &t ma% !e essential to mo!ilize domestic savings for 'roductive uses and the flo6 of funds ahs to !e guided, *ualitativel% as 6ell as *uantitativel%, to 'ro'er lines of investment$ )hus, one of the ma#or functions of a central !ank is to su''ort the gradual ex'ansion and 'roliferation of commercial !anks, savings !anks, coo'erative !anks, investment !anking, government !ond market, !ill market, etc$ for the 'ur'ose of meeting the re*uirements of economic develo'ments of the countr%$ )he central !ank has also the res'onsi!ilit% to 'u!lish statistical re'orts on trends in the mone% and ca'ital markets$ &n a develo'ing econom%, 'articularl%, the central !ank has im'ortant roles to 'la% in the 'rocess of develo'ment$ )he under?develo'ed economies have under develo'ed mone% markets 6here !anking s%stem is not 'ro'erl% organized$ )here are institutional ga's in the mone% and ca'ital markets 6hich hinder economic gro6th$ )hus, 'romotion of sound, organized, 6ell?integrated institutions and agencies of mone% and ca'ital markets !ecomes the im'ortant function of a central !ank in a develo'ing econom%$ )he lanning Commission in &ndia has stressed the develo'mental role of central !ank in these 6ords$ 7Central !anking in a 'lanned econom% can hardl% the confined to the regulation of the over?all su''l% of credit or to a some6hat negative regulation of the flo6 of !ank credit$ &t 6ould have to take a direct and active role, first, in creating or hel'ing to create the machiner% needed for financing develo'ment activities all over the countr% and secondl%, in ensuring that the finance availa!le flo6s in the directions intended8$ Some vital sectors, like agriculture, small industries, etc$, in the develo'ing economies have suffered due to unsatisfactor% organization for the su''l% of credit to these sectors$ )he central !ank ahs the res'onsi!ilit% to im'rove

42

the 'osition !% making s'ecial efforts for 'roviding credit facilities to these <'riorit% sectors= on relativel% easier terms$ )he central !ank is also re*uired to make ade*uate arrangements for the ex'ansion of long?term finance for industries, some se'arate institutions ma% have to !e created for the 'ur'ose$ )he central !ank also meets a 'art of the re*uirements of the government finance through deficit finance, the magnitude of 6hich has to !e decided carefull% so that economic sta!ilit% is not greatl% im'aired$ &n develo'ing economies, in fact, the develo'ment as'ect of central !anking functions is of greater im'ortance than its regulator% as'ect$ 4ccording to Ed6ard "evin, the usefulness of a central !ank in a develo'ing econom% must !e stressed 'rimaril% in terms of its a!ilit% to assist the 'rocess of economic gro6th and ca'ital formation, the contri!ution it can make to the regulation, direction and guidance of such credit institutions as exist at the time must !e of secondar% and lesser consideration$ )he o!#ectives of central !anking 'olic% in a develo'ing econom% ma%, this !e stated as follo6s. -$ )o assist in the mo!ilization of savings in the communit% and 'romote ca'ital formation$ /$ )o 'romote the s'read of monetization and monetar% integration through the develo'ment of an integrated commercial !anking s%stem$ 1$ )o make ade*uate 'rovision of credit necessar% for fulfillment of the targets of 'roduction and trade$ 5$ )o extend monetar% su''ort to the authorities in the central task of allocation of resources among different sectors in the econom%$ I$ )o hel' in maintaining general 'rice sta!ilit% and 'reventing inflationar% tendencies from getting out of hand$ )hus, in a develo'ing econom%, the central !ank 6ill activel% 'artici'ate in the gro6th 'rocess and create favoura!le conditions for fostering gro6th 6ith sta!ilit%$

43

LE11ON 1B CENTRAL BANK 3ETHOD1 O& CREDIT CONTROL &n the last cha'ter, 6e sa6 ho6 credit control is an im'ortant function of the central !ank$ Darious 6ea'ons or methods are availa!le to a central !ank to control credit creation and contraction !% commercial !anks$ Some of these 6ea'ons are traditional and have !een in use for decades 6hile some have !een develo'ed and 'erfected onl% in recent %ears$ Some are called *uantitative controls, since the% are su''osed to control and ad#ust total *uantit% or the size or the volume of de'osits created !% commercial !anks, the% relate to the volume and costs of !ank credit in general 6ithout regard to he 'articular field of enter'rise or economic activit% in 6hich the credit is used$ )here are other methods of credit control kno6n as 'articular or selective or *ualitative controls, since the% control certain t%'es of credits and not all credits$ 4s exam'le 6ill illustrate the distinction !et6een *uantitative and *ualitative controls$ Su''ose the 2eserve Bank of &ndia the central !ank in this countr%?!elieves that the safe limit for credit ex'ansion is 2s$ I,CCC crores !ut at a given time the actual !ank credit is 2s$ F,CCC crores$ )he 2eserve Bank ma% use !ank rate and certain other 6ea'ons to reduce the *uantit% of credit from 2s$ F,CCC crores to 2s$ I,CCC crores$ Such methods of control are *uantitative$ On the other hand, the 2eserve Bank ma% feel that the inflationar% 'ressure in the econom% is due to commercial !anks= loan to s'eculators and hoarders 6ho have 6orsened the su''l% situation so as to 'ush u' the 'rice level and, hoarders$ )he control here is selective or *ualitative since the influence is on a 'articular t%'e of credit$ Ouantitative control are traditional and indirect 6hile selective controls are modern and direct$ Ouantitative controls consist of !ank rate or discount rate 'olic%, o'en?market o'eration and reserve re*uirements$ Oualitative controls consist of regulation of margin re*uirements regulation of consumer credit, control through directives moral suasion, rationing of credit and direct action$ F)ant*tat*'e 3et, d" 1? $ar*at* n f t,e Ban! Rate# Bank rate is the official minimum are at 6hich the central !ank discounts a''roved !ills of exchange or advance loans against a''roved securities to the commercial !ansk and the discount houses$ Broadl% s'eaking the !ank rate is the lending rate of the central !ank$ ;hen the !ank rate is raised, the market rate of interest tends to rise$ )his discourages ne6 loans and 'uts 'ressure on de!tors to re'a% their existing loans$ )hus a rise in the !ank rate leads to contraction of credit$ Mone% does nto leave the !anks$ On the other hand mone% flo6s into the !anks !ecause more 'eo'le ma% no6 save more mone% and de'osit it in the !anks$ Funds ma% flo6 in, even from a!road, as the raising of the !ank rate is follo6ed !% the raising of interesst on de'osits$ )he contraction in the volume of credit and mone% su''l% follo6ing a rise in the !ank rate leads to a fall in 'rices$ )his 6ill encourage ex'orts and discourage im'orts$ )he fall in 'rices 6ill also discourage investments and em'lo%ment$ )hus a rise in the !anks rate 6ill discourage !orro6ing, encourage saving, and thus lead to a contraction in the volume of credit and mone% su''l%$ )he interval !et6een the rising of the !ank rate and the decline of the 'rices ma% !e considera!le$ Bank rate is raised during 'eriods of rising 'rices and infavoura!le !alance of 'a%ments 'osition$ Conversel% 6hen !ank rate is lo6ered it 6ill lead to an ex'ansion of credit and cause a rise in 'rices$ 4 lo6 !ank rate 6ill naturall% lead to an increased !orro6ing and s'ending$ &t 6ill lead to increased investment and em'lo%ment$ 4 lo6 !ank rate is usuall% fixed then 'rices sho6 a tendenc% to fall$ :imitations . )here are some serious limitations to the effectiveness of the !ank rate 'olic% in controlling credit$ Firstl%, the changes in the !anks rate not onl% affect the mone% market rates and conse*uentl% the su''l% and demand for !ank credit$ But under certain conditions, the% also lead to enormous international movements of ca'ital and the central !ank in a 'articular countr% 6hich is considered safe for foreign investments, 6ill find that there is an increased inflo6 of foreign ca'ital into the countr% conse*uent on the rise in the !ank rate$ )he conse*uence 6ould !e an increase in the su''l% of foreign exchange value of the countr%=s currenc% 6hich 6ould tem'oraril% !ecome over valued$ )his 6ould discourage ex'ort from this countr% to the determent of national interest$ 4s changes in the !ank rate directl% influence the inflo6 and outflo6 of ca'ital 6ith far reaching effect on exchange rates, changes in the !ank rate are not likel% to !e made$ Changes in the !ank rate affect the 'rices of government securities$ 4n increase in the !ank rate 6ould de'ress the 'rices of government securities$ )his might affect not onl% government=s credit !ut also the value of the assets of the commercial and other !anks 6hich hold government securities$ )he central !ank therefore does not change the !ank rate 6ith out careful consideration of the conse*uence of its 'olic% on the assets of the !anking s%stem$

44

Finall% the effectiveness of the changes in the !ank rate in a countr% de'ends on the stage of develo'ment of its mone% and the 6a% in 6hich the different mone% market rates move 6ith the !ank rate$ &n a countr% like &ndia 6here the mone% market is %et to !e 'ro'erl% develo'ed and 6here the mone% market rates are not altogether de'endent on the !ank rate and 6here there is still a large non?monetized sector >&ndigenous !anks and mone% leadersA on 6hich the central !ank has no control, the effectiveness of the !ank rate as an instrument of monetar% 'olic% is considera!l% reduced$ 2. O-en0.ar!et -erat* n" +eli!erate and direct !u%ing and selling of securities and !ills in the mone% market !% the central !ank, on its o6n initiative, is called o'en?market o'erations$)he theor% of o'en?market o'erations is as follo6s. &n 'eriods of inflationar% situation, the central !ank 6ill sell in the market first class !ills in its 'ossession$ Bu%ers of these !ills?6hether the% are commercial !anks themselves or others?make 'a%ments to the central !ank through commercial !anks$ Since commercial !anks hold certain reserves or de'osits 6ith the central !anks, 'a%ment !% the former to the latter actuall% means reduction in the size of the cash reserves held !% the commercial !anks 6ith the central !ank$ 2eduction of cash reserves forces commercial !anks to reduce their loans and advances and at the same time to refuse loans$ )hus, investments activit% in the countr%, 6hich is !ased on !ank loans and 6hich is res'onsi!le for !oom conditions, 6ill !e cut short$ &n times of de'ression, the central !ank 6ill !u% !ills in the market, for 6hich it 6ill 'a% cash to the commercial !anks$ ;hen the commercial !anks find their cash reserves increased, the% ex'and their loans and advances and thus hel' in the ex'ansion of investment, em'lo%ment, 'roduction and 'rices$ )hus !% !u%ing and selling securities in the o'en market, the central !ank in influences the credit o'erations of commercial !anks and ultimatel% !usiness activit% and economic conditions in the countr%$ 1)-er* r*t2 f O-en0.ar!et O-erat* n" 'er Ban! Rate Strategicall%, o'en?market o'eration, as a method of influencing the mone% su''l%, is su'erior to !ank rate 'olic%, 'rimaril% !ecause of the fact that the initiative is ke't !% the central !ank itself, 6hile the effectiveness of discount rate 'olic% 6ill de'end u'on the commercial !anks$ For instance in correcting an inflationar% situation, the central !ank ma% sell securities in the market and thus reduce the cash reserves of commercial !anks, 6ith less cash reserves the latter ma% !e ex'ected to reduce their loans and advances$ But in the case of discounts, the central !ank cannot do more than esta!lish a !ank rate until a commercial !ank a''lied for credit accommodation$ Bank rate 'olic% is, therefore, 'assive in the sense that its success de'ends u'on the 6illing res'onse of the commercial !anks and their customers to changes in the !ank rate$ )he o'en?market o'erations 'olic% has im'ortant uses$ &n the firs 'lace, o'en?market o'erations are used to su''ort the !ank rate 'olic% and make it effective$ For exam'le, in a 'eriod of de'ression, the monetar% authorit% 6ill lo6er the !ank rate and attem't to !ring a!out a chea' mone% 'olic%, at the same timeJ it 6ill !u% securities from the market and thus 'rovide additional cash to commercial !anks so as to ena!le them to increase their loans and advances$ O'en?market o'erations are, therefore, used to create and maintain conditions of chea' mone% as an aid !usiness recover%$ Secondl%, o'en?market o'erations are used to su''ort government securities$ B% !u%ing government o!ligation >!ills and !ondsA 6hen the 'rice is ruling lo6 and selling them 6hen their 'rice is high, the central !ank can !ring a!out sta!ilit% in the 'rice of government securities$ )hirdl%, such o'erations influence the internal 'rices and 6ages and thus influence the movements of the !alance of 'a%ments as 6ell as the inflo6 and outflo6 of gold$ For instance, the selling of securities in the market !% the central !anks 6ill reduce the cash reserves of commercial !anks 6hich 6ill contract their loans and advances$ 4 deflationar% situation 6ill result 6ith falling 'rices and 6ages$ )he countr%=s ex'orts 6ill !e stimulated >!ecause of increased foreign demand due to lo6er 'ricesA 6hile its im'orts 6ill decline >!ecause 'rices in foreign countries are at a higher levels com'ared to local 'ricesA$ 4 favoura!le !alance of 'a%ments 6ill result, and under gold standard, gold 6ill move into the countr%$ :astl%, o'en?market o'erations are used to offset the seasonal movements in the econom% due to the 'resence of too much mone% >during the slack seasonA or financial stringenc% >during the !us% seasonA$ Excess mone% is drained of the mone% market through the central !ank selling securities, the financial stringenc% is sought to !e overcome through 'urchase of securities from the market for 6hich the central !ank 'rovides cash$ )hus, o'en? market o'erations have come to !e recognized as an im'ortant techni*ue of monetar% management$

45

L*.*tat* n" f P (*c2 f O-en03ar!et O-erat* n" )he success of the o'en?market o'erations de'ends on one im'ortant assum'tion, viz, 6henever commercial !anks find themselves 6ith additional cash$ )he% 6ill ex'and credit and 6henever the% find their cash reserves reduced, the% 6ill contract credit$ )his assum'tion, ho6ever, ma% not hold good in 'ractice, 'articularl% in a!normal times$ ;e have sho6n earlier ho6 the credit ex'ansion and contraction reflect, to a great extent, the 'revalent mood of !usinessmen and !ankers$ &n !oom 'eriods, o'timism 'revails all round and !ankers 6ill !e tem'ted to ex'and credit as much as 'ossi!le and 6ill not !e unnecessaril% 6orried even if their cash reserves at the central !ank are reduced !% the o'en?market o'erations$ )6o alternatives are o'en to commercial !anks to neutralize the o'en?market o'erations 'olic%$ )he commercial !anks ma% elect to 6ork 6ith lo6 reserve, or the% ma% re'lenish their cash !% discounting some of their eligi!le !ills at the central !ank$ +uring 'eriods of de'ression and falling 'rices and gro6ing unem'lo%ment, commercial !anks 6ill not ex'and credit des'ite higher cash reserves >through the !ank !u%ing securities from the market and 'a%ing cash against themA$ 4s a !usiness de'ression is dangerous to com'anies and !anks, the latter ma% elect to 6ork 6ith higher cash reserves rather than ex'and credit$ Moreover, the central !ank, !eing the custodian of the de'osits of the general 'u!lic, 6ill not have the moral force to com'el commercial !ask to lend more and risk the de'ositor=s mone%$ 4!ove all, there is the most difficult and formida!le 'ro!lem associated 6ith credit ex'ansion, viz$, and 6illingness of !usinessmen to come for6ard to !orro6$ )hus o'en?market o'erations ma% not !e useful to control a de'ression and !ring a!out !usiness revival$ Finall%, there are definite limits to 6hat o'en?market o'erations can achieve !% 6a% of s*ueezing the resources availa!le to !anks since the 6illingness of !anks to a!sor! securities in certain situations is limited$ Moreover, the% cannot !e effectivel% used in an undevelo'ed countr% like ours as all the conditions necessar% for their success do not exist here$ )o conclude, the o'en?market o'erations method has !een significant onl% after ;orld ;ar & and in the %ear after -H1-, it has !ecome a recognized and regular techni*ue of monetar% management$ 4s o'en?market o'erations affect the li*uidit% of commercial !anks and conse*uentl% the amount availa!le for lending or investing, the% have !een considered ver% 'o6erful for influencing the volume of !ank credit and mone%$ ,o6ever, this 6ea'on is generall% used as a su!sidiar% instrument to su''ort the !ank rate 'olic%$ 6? $ar*at* n f t,e Re"er'e Rat* r c,an+e" *n t,e .*n*.). ca", re"er'e" f c ..erc*a( 9an!"

;ith a vie6 to ena!le the central !anks to have control over the mone% market and to ena!le it to control the ca'acit% of the commercial !anks to ex'and or contract credit, the central !ank is given the 'o6er to decrease or increase the minimum cash reserve >2eserve 2atioA 6hich the commercial !anks are re*uired to kee' 6ith the central !ank$ )he reserve ratio is the com'ulsor% minimum 'ercentage of the time and demand lia!ilities 6hich the commercial !anks must kee' as de'osit 6ith the central !ank$ )he central !ank might not al6a%s find it 'ossi!le or 'rofita!le to engage in o'en market o'erations$ For eg$ ;hen there is a shortage of securities to !u% and sell or 6hen it considers it un'rofita!le to !u% securities at higher 'rices or to sell securities at lo6er 'rices$ Under such circumstances, the 'o6er is given to the central !ank to decrease or increase the reserve ratio$ O!viousl% it hel's to increase or decrease the volume of !ank credit$ ;hen the reserve ratio is increased, the !anks 6ill have a smaller amount of cash reserves for credit creation$ O'en market o'erations and variation of the !ank rate ma% 'rove to !e ineffective so long as the !anks 'osses a large volume of reserves$ So the 'o6er to change the reserve re*uirements of commercial !anks gives the central !anks an additional 6ea'on to use, to !ring a!out the desired change in the su''l% of !ank credit$ )he 2eserve Bank in &ndia can ask the scheduled !anks to kee' 6ith it u' to -IN of their demand and time lia!ilities$ Further the 2eserve Bank ma% re*uire the schedule !ank to maintain 6ith it additional cash reserves in relation to the excess of demand and time lia!ilities a!ove a certain level on a 'articular date$ But here also there are some limitations$ For instance it has !een 'ointed out that the sur'lus reserves are not e*uall% distri!uted among the !anks of countr% and it is therefore likel% that 6hen reserve re*uirements are increased, some !ank 6ill !e affected more than the others$ Secondal% like o'en market o'erations, the changes in the reserve re*uirements 6ill also !e the effect of increasing or decreasing the availa!le su''l% of !anking mone%$ But such changes do not al6a%s !ring a!out corres'onding or 'ro'ortionate changes in the volume of credit actuall% created either !ecause the commercial !anks do not al6a%s increase or decrease their loans and investments in accordance 6ith the increase or decrease in

46

the availa!le su''l% of cash or !ecause the demand for !ank credit does not al6a%s increase or decrease accordingl%$ ,ence although the method of changing the reserve ratio of !anks is an effective method of !ringing a!out changes in the su''l% of !ank credit, much moderation and discretion are necessar% in its use$ 1e(ect*'e C ntr ( )he *uantitative controls given a!ove affect indiscriminatel% all sections of the econom% 6hich de'end u'on credit$ For exam'le, 6hen the !ank rate is raised and !orro6ing is made more costl%, all those 6ho have de'ended u'on !ank credit 6ill have to suffer$ But then there ma% !e man% grou's of !orro6ers 6ho ma% !e engaged in im'ortant s'here of economic activit% and 6hom the central !ank 6ill definitel% like to exem't$ Ouantitative controls, !eing general controls, affect indiscriminatel% all industries$ )o overcome this 6eakness and to select onl% those industries 6hich are sensitive to inflationar% 'ressure selective control 6ere designed during and after ;orld ;ar &$ )he s'ecial features of selective or *ualitative control are. >aA )he% distinguish !et6een essential and non?essential uses of !ank credit, >!A Onl% non?essential uses are !rought under the sco'e of central !anks controls, and >cA )he% affect not onl% the lenders !ut also the !orro6ers$ )hough the selective controls have come into fashion onl% in recent %ears, es'eciall% during and after ;orld ;ar &&, the% have !een kno6n to central !anks much earlier$ T2-e f 1e(ect*'e C ntr (" Selective controls have !een used to control the total volume of credit, !ut !asicall% through cutting do6n the credit extended for non?essential 'ur'oses or used :oans extended to s'eculator to hoard goods, or !anks credit to consumers to raise their demand for dura!le consumer goods 6ill 'rove to !e inflationar% 6hen there is alread% excessive demand as com'ared to the limited su''l%$ Essentiall% therefore selective controls are meant to control inflationar% 'ressure in a countr%$ )he% can allo6 the ex'ansion of !ank credit in the essential industries, 6hile the% kee' in check !anks credit to non?essential industries$ For, additional credit in the former case 6ill raise the level of 'roduction and real income$ On the other hand, loans given to non?essential industries 6ill contri!ute onl% to accentuating inflationar% 'ressure$ &m'ortant selective control is given !elo6. G*? 3ar+*n Re;)*re.ent" Before the stock market crash of -H/H, in U$S$4$ there 6as extensive s'eculation in stock markets in 4merica and the Federal 2eserve Banks of 4merica ordered commercial !anks to restrict their loans and advances to stock !rokers !% raising their margin re*uirements$ Since then, man% central !anks have !een follo6ing this method of controlling credit to !rokers and s'eculators in the stock exchanges and commodit% markets$ )he o'eration of margin re*uirements is sim'le and direct$ 4 commercial !ank does not lend u' to the full amount of the value of a securit% !ut lends something lo6er$ Su''ose, a securit% is 6orth 2s$ -,CCC, the !ank ma% lend u' to 2s$ GCC and kee' a margin of 2s$ 1CC$ )he !ank is said to kee' a 1C 'er cent margin as a cushion against the decline in the value of the securit%$ Commercial !anks ma% !e directed !% the central !ank of the countr% to fix higher or lo6er margins$ Su''ose, commercial !anks are ordered to kee' 5C 'er cent margin, then the% can lend u' to FC 'er cent of the value of a securit%$ &f the margin is raised to -CC 'er cent, the !ank can lend nothing$ 4 -CC 'er cent margin re*uirement 6as actuall% fixed !% the Federal 2eserve Banks in -H5F?5G to control the stock market !oom 6hich 6as 'ushing u' the inflationar% 'ressure in the U$S$4$ 4 higher margin 6ill reduce the amount of loans given !% the commercial !ank and this 6ea'on 6ill !e used at a time of inflationar% situation, a lo6er margin 6ill increase the amount of loans given !% the !anks and this 6ill !e resorted to in 'eriod of de'ression 6hen the monetar% authorities 6ant to ex'and the level of economic activit% in the countr%$ G**? Re+)(at* n f C n").er Cred*t Originall% used in the U$S$4$ since the !eginning of ;orld ;ar &&, regulation of consumer credit is no6 !eing used extensivel% in man% countries$ +uring ;orld ;ar &&, an acute scarcit% of goods 6as felt and the 'osition 6as 6orsened in the U$S$4$ !% the s%stem of !ank credit to consumers to ena!le them to !u% dura!le and semi?dura!le consumer goods through installment !u%ing$ )his 6as res'onsi!le not onl% for intensif%ing the inflationar% 'ressure in

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the countr% !ut also in distur!ing 'roduction of goods for defense 'ur'oses$ )he Federal 2eserve Banks of the U$S$4$ 6ere authorized to regulate the terms and conditions under 6hich consumer credit 6as extended !% commercial !anks )he restraints under these regulations 6ere t6ofold. >aA )he limited the amount of credit for the 'urchase of an% article listed in the regulationJ and >!A the% limited the time for re'a%ing the de!t$ )o tae an exam'le, su''ose a !u%er 6as re*uired to make a do6n 'a%ment of one?third of the 'urchase 'rice of a refrigerator and 'a% the !alance in -I monthl% installments$ Under the regulations restraining consumer credit, the do6n?'a%ment 6as made larger and the time allo6ed shorter$ )he result 6as a reduction in the amount of credit extended for the 'urchase of refrigerators and the time it 6as allo6ed to run, and the ultimate result 6as the contraction in the demand for refrigerators and other non?essential goods at a time 6hen there 6as a shortage in su''l% and 6hen there 6as a necessit% for restriction consumer?s'ending$ )his measure 6as a success in 4merica in controlling inflationar% 'ressure$ &n the 'ost?6ar 'eriod, it has !een extensivel% ado'ted in al those countries 6here the s%stem of consumer credit is common$ Monetar% authorities have come to recognize the significance of restriction of consumer credit$ For instance, in the 'eriod of 'ros'erit% and inflationar% conditions, consumers= 'urchases on installment 6ill tend to !e large, 6hile during 'eriods of de'ression the% ma% fall of dangerousl% 6orsening the de'ression still further$ &t is, therefore, generall% considered essential to regulate consumers= 'urchases !% 'rescri!ing stiffer terms in a !oom 'eriod and 'ermitting easier terms during a deflation and thus reduce come 6hat the extreme fluctuations in !usiness conditions$ G***? C ntr ( t,r )+, D*rect*'e" &n the 'ost?6ar 'eriod, most central !anks have !een vested 6ith the direct 'o6er of controlling !ank advances$ )his 'o6er has !een granted to the central !anks either !% statute or !% mutual consent !et6een the central !ank and commercial !anks$ For instance, the Banking 2egulation 4ct of &ndia, -H5H, s'ecificall% em'o6ers the 2eserve Bank of &ndia to give directions to commercial !anks in res'ect of their lending 'olicies, the 'ur'oses for 6hich advances ma% or ma% not !e made and the margins to !e maintained in res'ect of secured loans$ )he 2eserve Bank can also 'rohi!it an% 'articular !ank or the !anking s%stem as a 6hole against entering into an% 'articular transactions of class of transactions$ Since -HIF the 2eserve Bank of &ndia has made use of the method *uite fre*uentl%$ &n England, the commercial !anks have !een asked to su!mit to the Ca'ital &ssue Committee all loan a''lications in excess of IC,CCC$ &n man% cases, this control ma% !e exercised through the hel' of directives issued !% the (overnment or the monetar% authorities, as 6ell as through certain formal and its credit institutions$ )he effectiveness of 7directives8 6ill de'end to a large extent on the 'restige of the central !ank$ )here is no uniformit% in the use of directives to control !ank advances$ On the one extreme, the central !anks ma% ex'ress concern over credit develo'ments the concern ma% !e com!ined 6ith mile threat to avoid increase or decrease in the existing level of !ank loans$ On the other extreme, there can !e clear and o'en threat to the commercial !unks financing certain t%'es of activities$ &n man% cases directives given !% the central !anks ma% !e com'lied 6ith !ut ma% not !e liked !% the !anking s%stem$ &n England, there has !een considera!le discussion regarding the 'ro'riet% of this method$ &n England, there has !een considera!le discussion regarding the 'ro'riet% of this method$ But there is no dou!t a!out its effectiveness$ G*'? 3 ra( 1)a"* n Moral sussion im'lies 'ersuassin and re*uest made !% the central !ank to the commercial !ank to follo6 the general monetar% 'olic% of the former$ &n a 'eriod of de'ressin, the commercial !anks ma% !e 'ersuaded to ex'nd their loans and advances to acce't inferior t%'es of securities 6hich the% ma% not normall% acce't, fix lo6er margins and, in general, 'rovide facoura!le conditions to stimulate !ank credit and investment$ &n a 'eriod of inflationar% 'ressure, the central !ank ma% 'ersuade commercial !anks not to a''l% for further accommodation or not to use the accommodation alread% o!tained for financing s'eculative or non?essential activities$ )here is some dou!t a!out the effectiveness of moral suasion$ Some have ex'ressed the o'inion that moral suasion as a method of credit control cannot !e reall% successful, it ma% have restraining influence, !ut 6hen forces making for ex'ansion or credit contraction are ver% strong, moral suasion 76ithout na% teeth in them8 6ill !e ineffective$ On the other hand, taking the exam'le of England, some have argued in favour of moral suasion$ )he Bank of England has used this method 6ith a fair measure of success$ But this has !een mainl% !ecause of a high degree of co?o'eration 6hich it al6a%s gets from the commercial !anks$ ;hile the method has the 's%chological advantages as it does not carr% an% threat or legal sanction, it ma% not !e ver% effective in times of emergenc%$

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G'? Rat* n*n+ f Cred*t Credit rationing is a method of controlling and regulating the 'ur'ose for 6hich credit is granted !% the commercial !anks$ Credit rationing ma% assume t6o forms$ )he first?kno6n as the varia!le 'ortfolio ceilings refers to the s%stem !% 6hich the central !ank fixes a ceiling or maximum amont of loans and advances for ever% commercial !ank$ )he second?kno6n as the varia!le ca'ital assets ratio?refers to the s%stem !% 6hich the central !ank fixes the ratio 6hich the ca'ital of the commercial !ank should have to the total assets of the !ank >or to an% categor% of assetsA$ &n other 6ords, rationing of credit is a method !% 6hich the central !anks seeks to limit the maximum or ceiling of loans and advances and, also in certain cases, fix ceiling for s'ecific categories of loans and advances$ &f the rationing of credit is done 6ith reference to the total amount, it is a *uantitative control, !ut if it is done 6ith reference to s'ecific t%'es of credit, it assumes a *ualitative character$ 2ationing of credit ma% also !e taken in sense, i$e$, it refers to the 'o6er of a central !ank to allo6 onl% a fixed amount of accommodation to mem!er?!anks !% means of rediscount$ "ormall%, this ma% not !e used since it is not com'ati!le 6ith the function of a central !ank as the lender of the last resort$ &t is, ho6ever, maintained the rationing of credit has a significant role to 'la% in a 'lanner econom%, in diverting financial resources into the channels fixed !% the 'lanning authorities$ But if cannot !e denied that the freedom and initiative of commercial !anks is severel% curtailed !% credit rationing$ G'*? D*rect Act* n +irect action one of the extensivel% used methods of selective control$ &t has !een follo6ed !% almost all !anks at some time or the other, and in a !oard sense, it includes all the other methods of selective credit controls$ But, more s'ecificall%, direct action refers to all the controls and direction 6hich the central !ank ma% enforce on all !anks or ma% !anks in 'articular concerning lending and investment$ &f the central !ank is a6are that the !anking s%stem has made use of !ank credit for s'eculation in securities or in commodities it ma% ado't suita!le measures to restrict credit and 'enalize the offending !ank or !anks$ )o cite an exam'le of direct action, the 2eserve Bank of &ndia issued a directive in -HI@ to the entire !anking s%stem to refrain from excessive lending against commodities in general and for!idding commercial !ans from granting loans in excess of 2s$ IC,CCC to individual 'arties against 'add% and 6heat$ )he directive 6as an immediate success$ +irect action can also take the form of the central !ank charging a 'enal rate of interest for mone% !orro6ed !e%ond the 'rescri!ed amount or refusing to grant further rediscounting facilities to he erring !anks$ )here is no dou!t a!out the effectiveness of such direct action !ut then the element of force associated 6ith direct action is resented !% the commercial !anks$ &n man% cases, commercial !anks themselves ma% not !e res'onsi!le for the 6a% loans are s'ent !% the 'arties?it is al6a%s 'ossi!le for a firm to !orro6 for one 'ur'ose and s'end it for some other 'ur'ose$ &t man% cases, unless the monetar% authorities clearl% s'ecif%, it ma% !e difficult to distinguish !et6een essential and non?essential industries, 'roductive and un'roductive activities, and !et6een investment, s'eculation and gam!ling$ Finall%, direct action ahs !een criticized on the ground that it results in division of res'onsi!ilit% !et6een the central !ank and commercial !anks$ For instance, the commercial !anks continue to extend credit till the% are sto''ed !% the central !ank$ )he former are continuousl% o'erating under fear of direct action !% the central !ank$ Such a 'er'etual fear ma% result in o'en evasion of central !anks regulations !% some and confused o!servance !% others$

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LE11ON 11 3ONEY 3ARKET Financial markets in generalJ like the commodit% markets and the real estate markets are 'art of the vast s%stem of exchange and division of la!our 6hich goes to make u' the modern econom%$ )he financial markets are generall% classified as the <ca'ital market= and the < mone% market=$ &n Economiecs, the term market does not mean an% 'articular 'lace 6here things are !ought and sold !ut the 6hole of an% reagion in 6hich !u%ers and sellers are in such free intercourse 6ith each other that the 'rice of the same commodit% tends to !e e*ual$ 4s such, the ca'ital market is 'rimaril% concerned 6ith transactions in funds for relativel% long terms use$ )he mone% market, on the other hand, includes the entire machiner% of the channeling of short term funds$ )his lesson undertakes to descri!e the mone% market and 6hat goes on it$ T,e 3 ne2 3ar!et0It" def*n*t* n 4s alread% stated, mone% market is a market for the lending and !orro6ing of short term funds$ &t is a mechanism through 6hich a large 'art of the financial transactions of a countr% is cleared$ &t is essentiall% a reservoir of short term funds and is concerned 6ith the !u%ing and selling of tem'orar% sur'lus funds$ &t does not deal in cash or mone% !ut in trade !ills, 'romissor% notes and governments 'a'ers 6hich are dra6n for short 'eriods$ )hese short term !ills are kno6s as near mone%$ +efined most sim'l%, a mone% market ma% !e descri!ed as 7the centre for dealings, mainl% of a short term character, in monetar% assets, it meets the short term re*uirements of !orro6ers and 'rovides li*uidit% or cash to the lenders$ &t is the 'lace 6here short term sur'lus investi!le funds at the dis'osal of financial and other institutions and individuals are !id !% !orro6ers, again com'rising institutions and individuals and also !% the government8 >)he 2eserve Bank of &ndia Functions and ;orkingA$ 4ccording to ($ Cro6ther 7&t is the collective name given to the various firms and institutions that deal in the various grades of near mone%8$ )he mone% market has no single meeting 'lace$ "egotiations are carried on through the tele'hone, the telegra'h and the mail$ 4 geogra'hical name ma% !e given to the mone% market according to its location$ Exam'les, are the :ondon mone% market, the "e6 Bork mone% market and the Bom!a% mone% market$ )he :ondon mone% market o'erates largel% in :om!ard Street through dealers and !ankers talking over the tele'hone$ &t attracts short term funds from all over the 6orld and it is recognized as an international sco'e and o'erate largel% in ;all Street$ )he Bom!a% mone% market is the centre 6here short term loana!le funds of not onl% Bom!a% !ut the 6hole of &ndia are attracted and are *uickl% !orro6ed and lent$ )he dealers in the mone% market consist of the (overnments$ Commercial and industrial concerns, stock exchange !rokers, dealers in government and other securities, merchants, manufacturers, farmers etc$ commercial !anks and the central !ank$ )he demand for funds for short 'eriods comes from the government !usiness and industrial concerns and other individuals$ )he (overnments has !ecome 'ro!a!l% the !iggest !orro6er ever%6here, mone% !eing re*uired to meet current deficits$ &ndustrial and commercial concerns !orro6 funds for 6orking ca'ita needs$ Sometimes the% !orro6 to ena!le them to carr% additional stocks$ )he stock !rokers, merchants and other need short terms funds for various 'ur'oses$ Commercial !anks themselves ma% re*uire additional funds and ma% !orro6 from the central !ank or from each other$ )he su''l% of loana!le funds in the mone% market comes mostl% from the central !ank of the countr%, the commercial !anks and other finance com'anies$ )he central !ank is the 'rimar% source of credit to commercial !anks 6hile the latter constitutes the most im'ortant sources of short term credit in !oth individuals and !usiness houses and also to stock exchange !rokers$ Mone% market ma% !e distinguished from ca'ital market$ )he ca'ital market is concerned 6ith the su''l% of and the demand for long term investi!le funds, 6hile mone% market is concerned 6ith short term funds$ )he short term funds dealt in a mone% market ma% !e re*uired for a 'eriod not exceeding six months 6here as the funds dealt in Ca'ital market ma% !e re*uired for a 'eriod of more than I %ears$ &nstruments such as !ills of exchange, treasur% !ills, and short term governments !onds are, used in the mone% market$ :ong term securities such as shares and de!entures of industrial concerns, de!entures and !onds of *uasi government=s organization and !onds and 'romissor% notes of the government are used in the ca'ital market$ Such long term securities are called the stock exchange securities$

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&n addition to the a!ove said differences, there is also another difference of institutional control$ 4 s'ecial set of institutions deals in long term funds$ )he% ma% !e called as investment !anks, mone% lenders, !rokers or !% an% another name$ )he% constitute the various elements that go to make u' the ca'ital market in a countr%$ 4 different set of institutions deals in short term funds$ )he% mainl% consist of commercial !anks and discount houses$ &n 'ractice !oth mone% market and ca'ital market are interrelated and there is a certain amount of overla''ing !et6een transactions in short term and long term loans$ )he same institutions man% a time deal in !oth t%'es of loans and thus ma% o'erate in !oth markets$ )he volume of transactions in one market greatl% influences the conditions in other market$ Since the t6o markets are intimatel% related to each other, some 6riters do not make an% distinction !et6een the mone% market and the ca'ital market$ C .- "*t* n f t,e . ne2 .ar!et )he mone% market is not single homogenous market !ut it is com'osed of several su! markets, each one of 6hich deals in different t%'es of short term credit$ ,o6ever, as such mone% market has different t%'es of su!markets, it is im'ossi!le to s'eak a!out the com'osition of a mone% market in general, 6ithout s'ecif%ing the market that is !eing studied$ )he most im'ortant com'onents of the mone% market 6hich are common to most mone% markets are descri!ed !elo6. 1. Ca(( 3 ne2 3ar!et &t refers to the market of extremel% short 'eriod loans$ )hese loans are given u' to seven da%s !ut more often from da% to da% or overnight onl%$ )hese loans are kno6n as call mone% or call loans since the lending !anks can call them at the shortest 'ossi!le notice$ Such loans are 'rovided !% commercial !anks to !ill !rokers and dealers in the stock exchange 6ho re*uire financial accommodation for short 'eriod to finance their customer=s trading on margin and their o6n holdings of securities ;hen mone% is called !% one !ank, it can usuall% !e re!orro6ed from another and a circulating fund is there !% ke't in constant em'lo%ment$ Call loans are found useful !% !anks for more than one reason$ First of all since call loans can !e converted to cash at an% time, the% are almost like cash and form the second line of defence for !anks after cash$ Secondl% unlike cash, the% !ring some income for the !anks$ )he call mone% market, com'osed of commercial !anks as lenders and stock exchange !rokers and dealers as !orro6ers, has al6a%s !een a ver% im'ortant segment of the mone% market$ )here ma% also !e an inter?!ank call mone% market 6here the demand on excess reserves !alances of certain !anks comes from other !anks that need to command such !alances in?order to ad#ust their reserve 'ositions to accord 6ith existing statutor% re*uirements$ 2. Acce-tance 3ar!et &t refers to the market for !ankers acce'tances 6hich arise out of trade?!oth inland and foreign$ ;hen goods are sold to an% one on credit, the !u%ers acce'ts a !ill$ Such a !ill cannot !e discounted an%6here easil%$ )he !anker adds his credit to the !ill !% acce'ting it on !ehalf of his customer 6ho has 'urchased the goods$ )hus a !anker=s acce'tance ma% !e descri!ed as a draft dra6n !% an individual or a firm u'on a !ank and acce'ted !% the !ank, ordering it to 'a% to the !earer or to the order of he designated 'art% a certain sum of mone% at a s'ecified future date$ )he !anker=s acce'tance market$ &n the :ondon mone% market, there are s'ecialist firms kno6n as acce'tance houses 6hich acce't !ills dra6n on them !% traders instead of dra6ing on the true de!tors$ )he acce'tance market en#o%ed a 'rominent 'lace as a segment of mone% market in the 'ast$ ,o6ever its im'ortance has declined considera!l% no6$ 6. B*(( 3ar!et Bill market of the discount market refers to the market in 6hich short dated 'a'er or !ills are !ought and should$ )he !ills of exchange and the treasur% !ills are the most im'ortant t%'es of short dated 'a'ers$ )he !ills of exchange is an unconditional 6ritten order signed !% the dra6er re*uiring the 'art% to 6hom it is addressed to 'a% on demand or at a s'ecified future date a certain sum of mone% to the order of a s'ecified 'erson or to the !earer$ &t is a commercial 'a'er 6hich can !e discounted !% commercial !anks to get financial accommodation$ )reasur% !ills are an &OU or the 'romissor% note of the government to 'a% a s'ecified sum after a s'ecified 'eriod, generall% H-da%s from the date of issue$ )reasur% !ills are generall% sold !% the central !ank on !ehalf of the government$ Before the First ;orld ;ar the most im'otent 'e''er discounted in the :ondon mone% market 6as the commercial !ill 6hich 6as used to finance !oth inland and foreign trade$ +uring the inter 6ar 'eriod the im'ortance of

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the commercial !ills declined$ )heir 'lace has !een taken !% the treasur% !ills$ &n vie6 of their un'arallel excellence in li*uidit% and marketa!ilit%, treasur% !ills are heavil% !ought !% commercial !anks for the 'ur'ose of maintaining their secondar% reserves$ 7. C ((atera( L an 3ar!et &t refers to the market for loans secured !% stock and !onds or collateral loans$ &n its a''ro'riate sense, the collateral market im'lies the market for collateral loans to !rokers and dealers in securities, either on call or for a com'arativel% short 'eriod of time$ )he im'ortance of the collateral loan market has declined since the stock market crash of -H/H$ &t should !e 'ointed out that the different markets 6hich collectivel% form the mone% market can, in fact !e com!ined into one market$ )he call mone% market, for exam'le refers to the !orro6ing and lending of call loans and advances$ )he !orro6ers are those 6ho deal in discount market$ 4gain the acce'tance market refers to the acce'tance of !ills and 'ro'erl% s'eaking, acce'tance of !ills naturall% leads to the discounting of !ills, >in the discount marketA$ )herefore all the markets 6hich com'rise the mone% market can !e com!ined into one market and ma% !e designated as the discount market$ ;hile s'eaking a!out the com'osition of the mone% market some 6riters s'eak a!out the !ond market, the government long term loan market, the ne6 issues market, the stock exchange and so on$ But these markets 'ro'erl% !elong to the long term ca'ital market and not to the short term mone% market$ 4'art from these institutions of the mone% market, there is the central !ank of the countr%, 6hich, as the ultimate authorit% and controller of monetar% and !anksng conditions in the countr%, is the acce'ted leader of the mone% market$ )he Central Bank has the res'onsi!ilit% to control and guide the institutions of the mone% market and to6ards this endJ it is armed 6ith !oth *ualitative and *uantitative 6ea'ons of credit control$ C,aracter*"t*c" f de'e( -ed and %nde'e( -ed . ne2 .ar!et" &n ever% countr% of the 6orld, some t%'e of mone% market exists, !ut 6hile some of these are ver% highl% develo'ed, a good man is still undevelo'ed$ rofessor S$"$ Sen has descri!ed the characteristics of a develo'ed mone% market in his 6ell kno6n !ook <Central Banking in Undevelo'ed Mone% Markets=$ )he a!sence of one or more of these conditions 6ill make a 'articular mone% market an undevelo'ed one$ )he features of a develo'ed mone% market are discussed !elo6. 1. A >e(( r+an*Aed 9an!*n+ "2"te. 4 develo'ed mone% market is characterized !% the 'resence of a 6ell organized commercial !anking s%stem$ 4 6ell develo'ed !anking s%stem is one that can meet all the reasona!le needs of the countr%$ &n a develo'ed mone% market, commercial !anks constitute the nucleus of 6hole mone% market$ )he% are the most im'ortant su''liers of short term funds and therefore, an% 'olic% the% follo6 regarding loans and advances and investments 6ill have re'ercussions on the entire mone% market$ Because of their intimate relations 6ith the central !ank of the countr%, the% serve as a connecting link !et6een the various segments of the mone% market and the central !ank$ &n a develo'ed mone% market, the commercial !anks tend to em'lo% their cash reserves more economicall%$ )his is evidenced either !% the emergence of more or less sta!le !ehavioural 'atters 6ith regard to cash ratios or !% the acce'tance of lo6er cash ratios$ Occasionall% there ma% !e elements of !oth$ )he more economical use of cash is an im'ortant !% 'roduct of trul% integrated !aking structure grou'ed around a central !ank that is ca'a!le and 6illing to act as a true lender of last resort$ )hus a full% develo'ed mone% market is characterized !% the 'resence of a highl% organized commercial !anking s%stem, 6hereas in an undevelo'ed mone% market, the !anking s%stem is not full% develo'ed$ 2? Pre"ence f centra( 9an! 9ust as a state control function 'ro'erl% 6ithout a government, so also a mone% market cannot function 'ro'erl% 6ithout a central !ank$ 4 strong central !ank is an essential 'rere*uisite for the more economical em'lo%ment of cash !% 'ermitting !anks to maintain either relativel% sta!le or lo6er cash ratios$ )here are man countries 6here !anking !usiness is su!#ect to *uite market seasonal fluctuations$ &n such condition !anks can have recourse to the Central !ank against the lodgeemnt of securit% on those occasions 6hen the 'ressure of demand for loans andKor cash is heav%$ )hrough rediscounting of eligi!le !ills the central !ank ena!les the mone% market ot

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convert near mone% assets into cash in times of crisis$ Besides it 'erforms a valua!le serice through o'en market o'erations 6hen it a!sor!s sur'lus cash during off seasons and 'rovides additional li*uid%t in times of financial stringenc%$ )hus the central !ansk to the !anking s%stem is like a commander to the arm%, it is the leader of the mone% market, as 6ell as its controller and guide$ 4 develo'ed mone% market cannot exist 6ithout an efficient central !ank$ 4 develo'ed mone% market cannot exist 6ithout an efficient central !ank$ &n an underdevelo'ed mone% market, the central !ank does not exist or if it exists, it is not in a 'osition to influence and control the mone% market$ )hrough the existence of a 6ell organized !anking s%stem and a central !anks are the essential 're're*uisites for the develo'ment of a 6ell organized mone% market these re*uisites alone are not sufficient$ rofessor Sen cites exam'le of 4ustralia 6here the !anking s%stem including the central !ank has made remarka!le 'rogress and is ver% 6e5ll develo'ed !ut there is no organized mone% market$ rofessor Sen is therefore correct 6hen he sa%s that !esides a 6ell organized !anking s%stems and an efficient central !ank, other factors should also !e 'resent for the existence of a 6ell organized and 6ell develo'ed mone% market$ G6? A'a*(a9*(*t2 f -r -er cred*t *n"tr).ent"# 4 develo'ed mone% market 6ill re*uire a continuous su''l% of highl% acce'ta!le and negotia!le instruments like !ills of exchange, treasur% !ills, short term government !onds etc$ 4 develo'ed !ill market is an essential characteristic of a develo'ed mone% market$ &t is also essential that there should !e a num!er of dealers and !rokers in the mone% market 6ho are 're'ared to deal in !ills and securities$ )hese dealers and !rokers are res'onsi!le for !orro6ing funds from the !anks and using them to !u% and hold short term assets$ ;ithout their 'resence there cannot !e an% com'etition or <life= in the mone% market$ )hus the availa!ilit% of ade*uate short term assets and the 'resence of dealers and !rokers to deal in them are essential conditions for the evolution of an organized and develo'ed mone% market$ 4n undevelo'ed mone% market is characterized !% the a!sence of sufficient short term securit% as 6ell as dealers and !rokers to deal in such securities$ G7? Ex*"tence f a n).9er f ")9 .ar!et"# 4nother features of a 6ell develo'ed mone% market is the existence of num!er of su! markets, each s'ecializing in a 'articular t%'e of short term assets$ )he :ondon mone% market, 6hich is 'ro!a!l% the most develo'ed in the 6orld has 6ell develo'ed Call mone% market, the acce'tance market, the Commercial market, the foreign exchange market and so on$ Each t%'e of short term asset has a s'ecialized su! market$ rofessor Sen o!serves, 7)he larger the num!er of su! markets, the !roader and more develo'ed 6ill !e structure of the mone% market8$ )6o im'ortant 'oints should !e em'hasized as regard the existence of su! markets$ Firstl%, in order to s'ecialize each su! market should consist of a good num!er of dealers and should 'osses ade*uate sources of su''l% of funds for dealing in 'articular short term assets$ Secondl% the su! markets should !e intimatel% connected to each other$ S'ecialization should not !e confused 6ith <Com'artmentalization=$ )his essential for the free flo6 of funds from one market to another, for the existence of a common rate of interest in all su! markets and for the effective control of the entire mone% market !% the central !ank$ 4n undevelo'ed mone% market, on the other hand does not 'osses all the im'ortant and essential su! markets, es'eciall% the !ill market$ )here is also a!sence of coordination !et6een the different sections of the mone% market, if it is undevelo'ed$ G8? Perfect . 9*(*t2 f f)nd" 4 fundamental re*uirements of a develo'ed mone% market is the free movement of mone% and of monetar% assets, so that tem'orar% sur'lus funds can !e a!sor!ed at 'oints in the s%stem 6here there is a demand for them$ )his ensures a tendenc% to6ards e*ualit% of rates for similar t%'es of !usiness even at 6odel% se'arated 'oints in the econom%$ Moreover, a develo'ed mone% market re*uires am'le resources to finance the dealings in the various su! markets$ )hese resources generall% come from 6ithin the countr%, !ut it is also 'ossi!le that foreign funds ma% also !e attracted$ )he :ondon and "e6 Bork mone% market attract funds from all over the 6orld$ Undevelo'ed markets do no attract foreign funds due to 'olitical insta!ilit% and a!sence of sta!le exchange rates and even internal mo!ilit% ma% !e a 'ro!lem$ G:? Ex*"tence f an *nte+rated "tr)ct)re f .ar!et" and *n"t*t)t* n"# &ntegration of structure is considered to !e the most essential characteristic of a develo'ment mone% market$ 4ll other characteristics, in a 6a% are likel% to emerge out of an a''ro'riate degree of integration$ &ntegration of

53

structure assists in economizing cash reserves of !anks and assures full em'lo%ment of such li*uid resources as are availa!le in the market$ &t also ena!les the central !ank to exert its influence !% conferring directl% 6ith the res'ective grou's of interest$ &n :ondon, for exam'le, the (overnor of the Bank of England can at an% time call for informal discussion the chairmen of the Clearing Bankers=$ 4ssociation G<? 3*"ce((ane )" fact r" 4'art from the a!ove conditions, there are also other factors 6hich influence the character of the mone% market$ 4 large volume of international trade leading to the availa!ilit% of !ills of exchange, ra'id industrial develo'ment leading to the emergence of a stock exchange, sta!le 'olitical conditions, favoura!le conditions for the esta!lishment and management of foreign concerns etc$ are some of the miscellaneous factors res'onsi!le for the evolution of a develo'ment mone% market$ 4ctuall% s'eaking, it is difficult to come across an% reall% develo'ed mone% markets characterized !% the re*uisites stated a!ove$ )he :ondon mone% market ho6ever, 'rovides the !est exam'le of develo'ed mone% market$ "e6 Bork mone% market is another develo'ed market 6hich has greatl% develo'ed in the 'ost 6orld 6ar && %ears$ &t ma%, ho6ever, !e em'hasized the ever% countr% has its o6n 'ro!lems and environment$ )he model of the :ondon mone% market has evolved out of its o6n conditions and environment and ma% !e no #ustification for its a''lication to the rest of the 6orld$ )his model, nevertheless, serve the 'ur'ose as a <Standard of reference= 4ccording to 9$S$($ ;ilson, 7Enviornments ma% differ !ut the essential characteristics, as distinct from the 'recise institutional forms, have a generalit% of 'ossi!le a''lication much 6ider than ma% at first !e conceded8$

54

Le"" n 12 Ind*an 3 ne2 3ar!et )he term <mone% market= as alread% defined a''lies to that grou' of related market, 6hich deals in short term assets of relative li*uidit% such as call mone%, treasur% !ills, !ills of exchange or other commercial 'a'ers and short dated governments securities, Mone% market structure, actuall% sho6s a 6ide diversit% of form, de'ending mainl% on the economic set u' and environment in a 'articular countr%$ 1tr)ct)re f t,e Ind*an 3 ne2 3ar!et )he most outstanding feature of the &ndian mone% market is its dichotom%$ 4s in most develo'ing countries, the mone% market in &ndia com'rises t6o sectors 6hich ma% !e !roadl% termed as the <organised= and the <unorganised= markets$ &n !et6een these t6o sectors of the market, there is the coo'erative sector$ T,e Or+an*"ed 3 ne2 3ar!et )he organized market consists of the 2eserve Bank of &ndia, the State Bank of &ndia 6ith its seven associated !anks, nationalized commercial !anks, other scheduled and non scheduled commercial !anks, foreign !anks, 2egional 2ural Banks, +evelo'ment !anking institutions and other non !anking institutions$ Besides there are financial intermediaries such as call loan !rokers, general finance and stock !rokers and under6riters$ T,e Re"er'e Ban! f Ind*a GRBI? )he 2B&, 6hich is the central !ank of the countr% 6as constituted in -H1I under the 2eserve Bank of &ndia 4ct, -C15, to 7regulate the issue of !ank notes and the kee'ing of reserves 6ith a vie6 to securing monetar% sta!ilit% in &ndia and generall% to o'erate the currec% and credit s%stem of the countr% to its advantages8$ )he Bank 6as originall% constitute as the share holders= !ank !ut 6as nationalized 6ith effect from - st 9anuar% -H5H$ )he Bank is 'erforming a num!er of functions as a central !anking authorit% and occu'ies a strategic 'osition in the mone% market$ &t, !eing the residual source of su''l% of funds, is the ke% constituent of the mone% market$ Under the Banking 2egulation 4ct, -H5H, the Bank is vested 6ith large 'o6ers of su'ervision, control, direction and ins'ection of commercial !anks in the countr%$ )he 'o6ers originall% given to the 2B& have !een enhanced from time to time through various amendments to the !anking legislation$ Further, under the !anking :a6s >Miscellaneous rovisionsA 4ct -HF1, the 2B& has !een granted certain regulator% 'o6ers over non !anking institutions 6hich acce't de'osits$ Under the Banking :a6s >4''lication to Coo'erative SocietiesA 4ct, -HFI, certain 'o6ers have !een further vested in the 2B& in the matter of su'ervision, control, ins'ection etc$, of coo'erative !anks$ 1c,ed)(ed C ..erc*a( Ban!" Commercial !anks are classified under t6o grou's viz$, scheduled !anks and non scheduled !anks$ Scheduled !anks are those !anks 6hich are included in the second schedule to the 2B& 4ct$ )he% are eligi!le for certain facilities es'eciall% the facilit% of o!taining accommodation from the 2B& and corres'ondingl% !ear certain o!ligation to6ards the Bank$ Section 5/>FA>aA of the 2B& 4ct 'rescri!es the conditions 6hich a !ank must fulfill to *ualif% for inclusion in the second schedule$ )hese are. >iA the !ank must have a 'aid u' ca'ital and reserves of an aggregate value of not less than 2s$ I lakhs$ >iiA it must satisf% the 2B& that its affairs are not !eing conducted in a manner detrimental to the interests of its de'ositors and >iiiA it must !e a com'an% as defined in the com'anies 4ct, -HIF or an institution notified !% the Central (overnment in this !ehalf or a cor'oration or a com'an% incor'orated !% or under an% la6 in force in an% 'lace outside &ndia$ Scheduled !anks from a heterogeneous grou'$ )he% can !e !roadl% grou'ed into four categories viz$, the 'u!lic sector !anks, 'rivate sector !anks, 2egional 2ural Banks and foreign !anks$ u!lic sector !anks com'rise of the State Bank of &ndia grou' and other nationalized !anks$ 4mong the 'u!lic sector !anks, the SB& stands in a class !% itself$ &t is the largest commercial !ank in terms of !ranches and it=s the leader in the !anking s%stem of the countr% in terms of de'osits and advances too$ )he state !ank of &ndia has seven associate !anks 6hich 6ere formerl% the !anks of the 'rincel% states$

55

;ith effect from -Hth 9ul% -HFH, fourteen ma#or &ndian commercial !anks, each having de'osits exceeding 2s$ IC crores accounting for G/ 'er cent of aggregate de'osits of all scheduled commercial !anks 6ere nationalized$ Six more !anks 6ere nationalized on 4'ril -I, -H@C$ But recentl% one such !ank 6as merged 6ith another nationalized !ank for lack of via!ilit%$ )hus at 'resent 'u!lic sector !anks com'rise of the State Bank of &ndia 6ith its seven associate !anks and -H nationalized !anks$ )hose /@ !anks, >exclusive of regional rural !anksA account for more than HCN of the !anking !usiness in &ndia$ &n addition to a strong 'u!lic sector set u', &ndian mone% market also houses 'rivate sector !anks 6hich have !een organized as #oint stock com'anies$ &n -HFH, each one of these had de'osits of less than 2s$ IC crores Ma#orit% of them have ex'anded their !usiness su!stantiall% since then$ Further, the (overnment=s latest ste' of granting eas% entr% to 'rivate sector !anks has given a !oost to 'rivate sector !anking in the countr%$ "o6 'rivate sector !anks are one of the strong forces in the &ndian mone% market, 'osing neck to neck com'etition 6ith 'u!lic sector !anks$ 2egional 2ural Banks >22BsA have !een set u' in terms of he 'rovision of the 2egional 2ural Bank 4ct, -HGF 6hich came into force 6ith effect from Fe!ruar% -HGF$ Each 22B is s'onsored !% a scheduled !ank and is associated !% the s'onsoring !ank in a num!er of 6a%s$ )he main o!#ective of a 22B is to 'rovide credit and other facilities es'eciall% to the small and marginal farmers, agricultural la!ourers, artisans and small entre'reneurs 6ithin its s'ecified area of o'erations$ )he% have !een included in the second schedule to the 2eserve Bank of &ndia 4ct and are considered to !e scheduled !anks$ Foreign !anks also called as the exchange !anks are those !anks 6hich are foreign in origin and 6hich have their head offices located outside &ndia$ +uring the earl% 'art of he &ndian !anking histor% these !anks used to 6ield great influence in the &ndian mone% market$ )heir contri!ution to the develo'ment of &ndian 9oint stock !anking has !een significant$ Even !efore -@GC, there 6here certain exchange !anks doing !usiness in &ndia$ )he main !usiness of these exchange !anks is the financing of &ndia=s foreign trade$ 4s a matter of fact !anks 6ere esta!lished in &ndia mainl% 6ith this o!#ect in vie6$ But the% graduall% entered the field of internal trade and started com'eting 6ith &ndian !anks in attracting de'osits of all kinds, discounting !ill of exchange and making advances to tradeKindustr%$ ,o6ever the financing of foreign trade still remains their main field of o'eration$ N n 1c,ed)(ed C ..erc*a( Ban!" )he !anking com'anies other than those included in the second schedule to the 2eserve Bank of &ndia 4ct are termed as <"on scheduled !anks=$ )he !usiness and the num!er of non scheduled !anks have declined steadil% over the %ears$ )his is 'artl% o6ing to some of them attaining scheduled !anks= status, !ut mainl% due to their ina!ilit% to conform to the o'erational standards lain do6n in the Banking 2egulation 4ct$ &n -HFC, the 2B& 6as given 'o6ers under section 5I of the Banking 2egulation 4ct to secure com'ulsor% mergers and to formulate 6ith (overnment=s a''roval, schemes of reconstruction and amalgamation of !anks$ )here have !een a large num!er of voluntar% amalgamations and com'ulsor% mergers of smaller and 6eaker !anking unit since then$ )here 6ere onl% 1 non scheduled !anks functioning at the end of March -HHC as against 11I at the end of 9une -HFC$ )he non?scheduled !anks thus account for onl% a negligi!le 'art of the !anking !usiness in the countr%$ De'e( -.ent Ban!" )erm lending institutions called as develo'ment !anks have !een esta!lished for 'romoting gro6th of a more diversified, !road and e*uita!le economic develo'ment$ Setting u' the &ndustrial Credit and &nvestment Cor'oration of &ndia :td$ >&C&C&A in -HII marked the !eginning of !road !ased institutional organization of strength$ )he% 6ere 'ioneers in institutional under6riting of stocks and shares$ )he &ndustrial Finance Cor'oration of &ndia >&FC&A, the first institute set u' in -H5@, follo6ed &C&C& in this regard$ )hereafter came u' State Financial Cor'orations >SFCsA under the 'rovisions of the State Financial Cor'oration 4ct, -HI-$ )he &ndustrial +evelo'ment Bank of &ndia >&+B&A 6as esta!lished in -HF5 as the a'ex institution to coordinate the activities of all term lending institutions$ )he em'hasis on industrialization during the )hird Five Bear lan necessitated the esta!lishment of state?level institution viz$, S&&CSKS&+Cs$ )hese develo'ment !anking institutions along 6ith investment institutions such as the :&C, (&C and the Mutual funds, through 'rimaril% confine their activities to the ca'ital market, 'artici'ate in the mone% market o'eration too on a limited scale$

56

P "t Off*ce 1a'*n+" Ban!" )he oldest of the official small savings scheme in &ndia is the ost Office Savings Bank S%stem$ )he 'ostal savings !ank is a government agenc% created for the 'ur'ose of encouragement of thrift and attraction of savings$ 4n% 'erson can o'en a ost Office Savings Bank account at an% 'ost office 6hich does savings !ank 6ork 6ith a minimum amount 2s$ I onl%$ Maximum !alance u'to 6hich interest in 'ermissi!le in a single account is 2s$ IC,CCC in case of an individual account and 2s$ -,CC,CCC in case of an account in #oint names$ "o de'osit or 6ithdra6al in cash is 'ermitted from an account 6ithout 'resenting the 'ass !ook at he 'ost office 6here one has o'ened the account$ Facilit% of 6ithdra6al !% che*ues in also allo6ed at certain !ig 'ost offices$ ost offices allo6 the account holders to nominate one or more 'ersons including minors to receive the !alance at the credit of the account on the death of holder$ )he ost Offices also o'erate u!lic 4ccounts, Securit% +e'osit, and time de'osits$ )he% also sell "ational Savings Certificates of different denominations$ Man% of he de'osit schemes 6ere started in earl% -HGCs$ )he im'ortance of 'u!licizing small savings scheme has received increased attention since then$ N n Ban!*n+ C .-an*e" "on !anking com'anies are classified as >iA non?financial com'anies, engaged in trading or industrial or other non?financial activities, and >iiA financial com'anies, engaged mainl% in financing of hire 'urchase, advancing loans to industries, trading in shares and securities and com'anies 6hose 'rinci'le !usiness is the ac*uisition of shares, stocks, de!entures or other securities$ T,e %n r+an*"ed 3 ne2 3ar!et# Ind*+ene )" Ban!*n+ )he unorganized mone% market is largel% made u' of indigenous !ankers and mone% lenders$ )he &ndian Central Banking En*uir% Committee defines an indigenous !anker of !ank as an individual or 'rivate firm receiving de'osits and dealing in hundis or lending mone%$ 4ccording to the committee those 6ho do no acce't de'osits 6ere to !e treated as mone%?lenders$ But as 6as 'ointed out !% the Madras rovincial Banking En*uir% Committee, receiving de'osits could not !e treated as the sole distinguishing feature of indigenous !ankers$ So a !etter is that of the Bengal rovincial Banking En*uir% Committee according to 6hich indigenous !ankers are defined as <individuals or firms 6ho deal in hundis, 6hether the% acce't de'osits or not=$ )hus the distinguishing feature of an indigenous !anker is dealing in hundis and not acce'ta!le of de'osits$ &ndigeneous !anking is mono'ol% of certain castes$ )he% ma% !e grou'ed as Shroffs, Seths, Sahukars, Maha#ans, Chettis etc$, in different 'arts of the countr%$ )he% var% in their size from 'ett% mone% lenders generall% o'erating in the villages to !ig indigeneous !ankers o'erating in the to6ns and the cities 6hose !usiness, at times, exceeds that of some of the smaller !anks$ )he indigenous !ankers are to !e distinguished from small mone% lenders in several res'ectsJ >aA 6hile the indigenous !ankers receive de'osits and deal in hundis >an indigenous credit instrumentA, rather like a 'romissor% noteA, the mone% lenders do not do soJ >!A the indigenous !ankers finance trade and industr%, 6hile the mone% lenders advance small loans to 'ersons generall% of small means$ >cA the indigenous !ankers take 'articular care a!out the 'ur'ose of the loan, 6hile the mone% lenders are merel% concerned 6ith the interest that the% get, and >dA in the case of indigenous !ankers the re'a%ment is more 'unctual and the rate of interest is lo6er$ )he t6o grou's, ho6ever merge on into the other$ )here are three t%'es of indigenous !ankers$ >-A those 6hose main !usiness in !anking >/A )hose 6ho com!ine !anking !usiness 6ith trading and commission !usiness, and >1A )hose 6ho are mainl% traders and commission agents !ut 6ho do a little !anking !usiness also$ )he ma#orit% of indigeneous !ankers !elong to the second categor%$ )he% deal as merchants, lend mone% and also do hundi !usiness$

57

&ndigenous !ankers generall% rel% on their o6n resources or !orro6 from one another to carr% on their !usiness$ )he% also acce't de'osits$ &n times of emergenc% ho6ever, the% !orro6 from commercial !anks !% rediscounting hundis$ &t is an this 6a% that certain links !et6een the commercial !ask and the indigenous !ankers are in existence, !ut so far as smaller indigenous !ankers and mone% lenders are concerned the% have no direct links 6ith the organized sector of the mone% market$ On account of the ver% rigid condition on 6hich !anks are 're'ared to lend, the recourse !% the indigenous !ankers to the organized sector has !een declining considera!l%$ Since the commercial !anks have o'ened their doors to small industrialists and traders, the% do not feel an% need to route funds through the indigenous !anks 6ho charge ver% high rates of interest$ )he lack of integration !et6een the organized and the unorganized sectors of he mone% market has resulted into the fact that the !azaar hundis rate >i$e$ the rate at 6hich indigenous !ankers discount hundis at different mone% market centresA is *uite different from the !ank=s lending rates and the market rates of interest$ )he 6orking of the indigenous !ankers suffers from several defects viz$, their old and varied methods of doing !usinessJ lack of distinction !et6een short term and long term finance and also !et6een the 'ur'ose of finance, their higher rate of interest and the lack of firm integration 6ith the organized sector of the mone% market$ &ns'ite of all these defects the% occu'% a ver% 'rominent 'osition in the &ndian mone% market$ )he% 'la% a ver% im'ortant role in as much as the% meet the credit re*uirements of those 6ho do no find eas% access to the !anking sector$ )heir methods of o'erations are ex'editious and flexi!le$ From the 'oint of vie6 of the !orro6ers, their chief virtue is the a!sence of formalities and dela%s !esides their eas% accessi!ilit%$ Re+)(at* n f *nd*+ene )" 9an!*n+ 4s earl% in -H1-, the Central Banking Committee had em'hasized the necessit% of unif%ing the indigeneous and the modern !anking sectors of the &ndian mone% market and had recommended the linking of the indigeneous !ankers 6ith the 2eserve Bank of &ndia on the creation of the latter$ ;hen the 2eserve Bank of &ndia 6as esta!lished, it attem'ted to !ring the indigeneous !ankers into more direct contact 6ith the organized mone% market$ &n -H1G, it issued a draft scheme offering the indigeneous !ankers all the facilities and 'rivileges en#o%ed !% the scheduled !anks, su!#ect to their shedding of non?!anking !usiness, maintaining 'ro'er !ooks of account o'en to the Bank for ins'ection and the filing of 'eriodic statements similar to those su''lied !% the scheduled !anks$ )he indigeneous !ankers, ho6ever, 6ere not 're'ared to acce't those conditions and 'referred to continue the old arrangements 6here!% the% received accommodation from the &m'erial Bank and the other scheduled !anks$ "evertheless the 2eserve Bank of &ndia left its offer o'en and remained read% to take u' the matter again, if the indigeneous !ankers did not decide to conform 6ith its conditions or could suggest an% other 'ractica!le alternative$ ,o6ever the attem'ts to forge a link !et6een the indigenous !ankers and the 2eserve Bank of &ndia have to materialize so far$ )he Banking Commission -HG/, recognizing the useful role of indigenous !ankers in the mone% market, made some recommendations to introduce a certain measure of financial and social disci'line into the activities of these !ankers$ 2egarding a link of indigenous !ankers 6ith the 2eserve Bank of &ndia, the Banking Commission o!served that a direct link neither !e necessar% nor 'ractica!le$ 4n indirect influence should !e exercised over them through the medium of commercial !anks !% la%ing do6n guidelines for their dealing 6ith indigeneous !ankers, there!% indicating the t%'e of hundis eligi!le for discounting, *uantum of limits to !e sanctioned etc$ )he Banking Commission suggested to codif% the 'ractices and usages a''lication to all the indigenous negotia!le instruments like hundi and !ring these instruments under the frame6ork of codified lo6$ 4 code of conduct for indigeneous !ankers should !e formulated for their o'erations and the% should !e engaged to get incor'orated, 4ctuall% s'eaking, the Banking commission onl% re'eated and endorsed all the suggestions that had !een made from time to time of linking indigenous !ankers to the organized !anking sector$ &t ho6ever failed to take into account the sim'le fact that the indigenous !ankers had seen un6illing all these %ears to take u' this offer on an% terms dictated to them$ 2egarding the small 'rofessional mone% lenders o'erating in the to6ns and villages, the state governments have made various attem'ts, over a 'eriod of %ears to regulate their activities and to restrict their mal'ractices through suita!le legislation$ &n 'ursuance of the /C of the /C 'oint Economic rogramme ado'ted !% the then Congress (overnment, man% state governments 'assed legislation for moratorium, discharge or scaling do6n of de!ts incurred !% small farmers, marginal farmers, agricultural la!ourers, and rural artisans from 'rivate mone% lenders$ )hese de!t relief measures have resulted !% the large in dr%ing u' the non institutional sources of credit for 6eaker sections of the communit%$ )he effect has !een virtual disa''earance of the 'rofessional mone% lenders from

58

man% areas$ )aking into account the risks involved, it has no longer seemed 6orth his 6hile to o'erate under the ne6 'rovisions$ ,e has therefore chosen to change his calling and to !ecome merchant or trader, though 'ro!a!l% he still carries on an illicit mone% lending !usiness on a restricted scale$ &t has !ecome essential to develo' institutional agencies of finance, 'articularl% in the small areas, to meet the credit re*uirements of the 6eaker sections of the societ%$ C -erat*'e 1ect r

)he coo'erative credit societies 6ere get u' in &ndia in -HC5, under the Coo'erative Credit Societies 4ct 'assed in the same %ear$ )heir main 'ur'ose 6as to su''lant the indigenous sources of rural credit, 'articularl% the mone% lenders, since the credit 'rovided !% the mone% lenders 6as su!#ect to man% dra6?!acks and the% used to charge ver% high rates of interests$ Several attem'ts 6ere made from time to time to im'rove the structure and the 6orking of the coo'erative credit societies, !ut the% remained in a dormant 'osition for IC %ears$ &n -HI5 the 2ural Credit Surve% Committee of the 2B& had re'orted that coo'erative societies 6ere meeting onl% 1 'ercent of the credit re*uirements of the farmers in the village 6hereas the mone% lenders 'rovided nearl% GC 'ercent of their credit re*uirements$ On the lines suggested !% the committee, some intensive measures 6ere ado'ted to develo' coo'erative societies, to strengthen their ca'ital resources and to increase their coverage$ )he 2B& has hel'ed the coo'erative !anks in a num!er of 6a%s$ )he coo'erative !anks 'rovided !oth short term as 6ell as long term credit$ )here is a three tier structure of short term coo'erative credit$ 4t the a'ex of the 6hole structure in the state stand the State Coo'eratives !anks$ )he 'rimar% Credit Societies at the village level form the !ase of foundation of the 6hole structure$ )he Central Coo'erative Banks, normall% at the district level, come in !et6een the State Coo'erative Banks and rimar% Credit societies$ )he long term credit structure consists ordinaril% of the central land develo'ment !anks and 'rimar% land develo'ments !anks >or land mortage !anks as the% 6ere called formerl%A$ )he 2B&=s role in !uilding u' of the coo'erative credit organization has !een that of an active colla!orator in dra6ing u' schemes of develo'ment 6ith the (overnment of &ndia and state governments$ &t has !een 'roviding finance first to the state (overnments for contri!ution to the share ca'ital of coo'erative credit institutions at the various level and secondl% to the coo'erative credit structure itself to meet its re*uirementation of the Bank=s role from that of lender of last resort to that of an active agenc% for the 'romotion of an a''ro'riate structure of institutions as 6ell as 'olicies and 'rocedures for ena!ling the coo'erative agenc% to take a larger share in the financing of rural credit$ )he "ational Bank for 4gricultural and 2ural +evelo'ment >"4B42+A 6as esta!lished on 9ul% -/, -H@/$ )his !ank has !een taken over from the 2B& its refinancing functions in relation to State Coo'erative Banks and 2egional 2ural Banks$ &t has also undertaken the entire undertaking of the 4gricultural 2efinance and +evelo'ment Cor'oration$ )he ca'ital of the "4B42+ has !een su!scri!ed !% the Central (overnment and the 2B& in e*ual 'ro'ortions$ )he financial facilities 'rovided !% the "4B42+ to coo'erative are 'rovided through the state governments, State Coo'erative Banks and the Central :and +evelo'ment Banks$ )hese facilities consist of short term, medium term and long term credit$ C,aracter*"t*c" f t,e Ind*an 3ar!et )he main characteristics of the &ndian Mone% ma% !e summed u' as under. >-A )he &ndian mone% market has remained divided into t6o man sectors, 6hich are !roadl% termed as organized and unorganized sectors of the mone% market$ )he former concerns itself 6ith modern institutions and 'ractices as have develo'ed in advanced 6estern countries$ )he lattes is derived from indigeneous !anking 'ractice 6ith a tradition going !ack man% hundred of %ears$ )hese t6o sectors are not 6holl% unconnected 6ith each other, !ut the links 6hich exist are some6hat tenuous and com'lete integration into a unified s%stem has %et to !e achieved$ >/A "on !anking com'anies, !oth financial and non financial and the other financial intermediaries cater to the financial needs of the industrial sector$ )he coo'eration !anks 6hich have su!stantiall% increased their !usiness, o'erate mostl% for the rural or agricultural sector of the econom%$ >1A )he 2B& has !een vested 6ith 6ide 'o6ers of control over different institutions in the mone% market$ )he indegeneous !anking has ho6ever remained outside the s'here of the 2B&=s direct control$ )he rate of interest in the unorganized sector are therefore, su!stantiall% higher than those in the organized sector$

59

>5A &ndian mone% market is isolated from foreign mone% markets$ )he mone% markets of advanced 6estern countries are characterized !% large movements of ca'ital !et6een them, 6hereas there is hardl% an% movement of funds !et6een the &ndian mone% market and foreign markets$ )his is 'artl% due to the exchanger control restrictions on ca'ital movements$ >IA )he call mone% market is restricted almost entirel% to dealing !et6een !anks$ )he core of &ndian mone% is the inter !ank call mone% market$ 4lthough the magnitude of funds dealt in this market is not large in relation to the de'osit resources of !anks$ erha's this is the most sensitive sector of the mone% market >2eserve Bank of &ndia, Functions and ;orkingA$ >FA Considering the demand for funds, there are t6o seasons in &ndia the !us% season and the slack season$ )he !us% season s%nchronizes 6ith the movements of cro's from agricultural centres to market to6ns$ &t commences from a!out "ovem!er ever% %ear and continues till a!out 4'ril of the follo6ing %ear$ )here is great demand for funds all over and the 'ressure for finance on mone% market increases during this 'eriod$ )he slack season starts from a!out Ma% and end sometimes in Octo!er the same %ear$ Funds start returning to !anks during the slack season$ &t should, ho6ever !e noted that there is no exact date 6hen the !us% season ends and the slack season commences and viceversa$ >GA )here is almost com'lete a!sence of acce'tance !usiness and discount housed in the &ndian mone% market$ )his is largel% due to the fact that there is no true market for !ills, either commercial or treasur%$ )hough !anks discount !ills, the% have not got into the ha!it of rediscounting exce't during emergencies$ >@A )he structure and constituents of &ndian mone% markets !eing ver% much different from those of the develo'ed mone% markets like :ondon mone% market, it is usual to think of the divided into t6o main sectors along the lines of our earlier anal%sis, 6ithin !oth these t6o main divisions, *uite a high degree of s'ecialization has develo'ed including some 'rovision of facilities for the flo6 of funds !et6een them$ &t ma% !e o!served, therefore, that from the 'int of vie6 of s'ecialization of functions and organized relationshi's, the &ndian mone% market ma% !e considered to !e com'arativel% 6ell develo'ed$ >HA +uring the last thirt% %ears or so, the cor'orate sector !oth 'u!lic and 'rivate in &ndia has !een gro6ing from strength to strength$ "ot onl% is their num!er gro6ing, !ut so is their size and im'ortance$ Man% com'anies toda% are keen to use their short term funds 6ith maximum advantages to the com'an%$ )his is creating ne6 demand for 'rofita!le avenues for 'arking short term funds of the com'anies$ Defect" f t,e Ind*an 3 ne2 3ar!et" 4s a conse*uence of the esta!lishments of 2B&, 'assing of the Banking Com'anies 4ct in -H5H and the su!se*uent amendments, made from time to time, setting u' of the State Bank of &ndia nationalization of ma#or commercial !anks and the ex'ansion of their !ranches and !usiness, 'rogress of coo'erative societies, and the measure ado'ted !% the 2B& for the regulation and control of different institutions, the &ndian mone% market has !een strengthened and im'roved in several res'ects$ ,o6ever one can notice the follo6ing shortcomings of &ndian mone% market$ G1? A9"ence f *nte+rat* n 4 !asic defect of the &ndian mone% market 6as the division of the mone% market into several sections 6ith each section !eing ver% loosel% connected 6ith the other sections$ 4t one time, the different commercial !anks, coo'erative !anks and indigenous !ankers confined themselves to a 'articular class of !usiness and remained inde'endent in their o6n s'here$ Der% often the different sections of the mone% market sho6ed hostilit% to6ards one another$ )hus the &ndian 9oint stock !anks 6ere #ealous and sus'icious of the old &merial Bank of &ndia and foreign exchange !anks, as the% 6ere 'atronized !% the then &m'erial (overnments of &ndia$ )he organized !anking s%stem and unorganized indigenous !ankers did not have na% contract !et6een them remaining com'letel% aloof from each other$ ;ith the emergence of the 2eserve Bank of &ndia as a genuine central !ank of the countr% since -H1I, this defect is !eing graduall% removed$ )he 2B& effectivel% controls the affairs of the organized sector of the &ndian mone% market 6hich has graduall% !ecome the more im'ortant 'art of the &ndian mone% market$ )he Commercial and Coo'erative !anks have come to de'end increasingl% on the 2B& for the financial accommodation !% 6a% of rediscounting and !orro6ings facilities 'rovided !% the 2B&$ 4dditionall% the central !ank also guides the commercial !anks in the matter of their lending o'erations, decides their !ranch o'ening 'olic% and ins'ects their !ooks and accounts regularl%$ G2? Ex*"tence f )n r+an*Aed "ect r# )he &ndian mone% market is dichotomized into organized and unorganized sectors$ )he unorganized sector dominated !% the activities of indigenous !ankers constitutes a ma#or 6eakness of the &ndian mone% market !ecause the indigenous !ankers follo6 their o6n rules and 'ractices of finance and !anking and are not su!#ect to the

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regulation and control of the 2B&$ Man% attem'ts 6ere made !% the 2B& to !ring the indigenous !ankers under the organized market and, thus, under its influence and control$ )hese attem'ts failed, since indigenous !anes as a 6hole have not acce'ted the conditions 'rescri!ed !% the 2B&$ )o the extent these !ankers are outside the organized market, the 2B&=s influence over them is limited$ G6? D*'er"*t2 *n t,e . ne2 *ntere"t rate"# &n countries 6ith 6ell develo'ed mone% markets, the rates of interest 'revailing over the entire mone% markets 6ill not var% much$ But in the case of the &ndian mone% market the rate of interest charged !% the various institutions not onl% var% !ut also var% from season to season$ For instance the rates of interest charged !% the indigenous !ankers or the mone% lenders do not !ear an% com'arison 6ith the rates of interest charged !% #oint stock !anks$ ,ighlighting the glaring defect of the &ndian mone% market more than fie decades ago, the &ndian Central Banking En*uir% Committee in -H1- had stated$ 7)he fact that a call rate of P 'ercent, a hundi rate of 1 'ercent, a !ank rate of 5 'ercent, a !azaar rate for small traders of F /K1 'ercent and a Calcutta Bazar rate for !ills of small traders of -C 'ercent can exist simultaneousl% indicates extraordinar% sluggishness of the movement of credit !et6een various markets8$ )his divergent interest rates limits the efficienc% of the !ank rate 'olic% of the 2B&$ &mmo!ilit% of funds from one 'lace to another ma% !e considered as an im'ortant reason for this multi'licit% of interests rates$ Moreover the mone% rates of interest also differ !et6een different regions or centres due to the difficult% of making chea' and *uick remittance of funds from one financial centre to others$ 4lthough the 6ide divergence !et6een interest rate does not exist at 'resent, still the situation cannot !e said to !e identical 6ith that found in the develo'ed mone% market$ G7? 1ea" na( "tr*n+enc2 f f)nd" 4 ver% striking characteristic feature of the &ndia mone% market has !een the seasonal monetar% stringenc% and high mone% rates during the !us% season 6hen funds are re*uired to more the cro's from the villages and u' countr% districts to the cities and 'orts$ On the other hand, during the slack seasons accumulation of the idle funds is ex'erienced$ )hus 6ide fluctuation is noticed in the mone% rates from one 'eriod of the %ear to another$ Before -H1I, the call mone% rates rose sometimes to G to @ 'ercent in the !us% season 6hile in the slack season the% fell to as lo6 as - 'ercent to Q 'ercent$ 2B& has done a useful #o! !% 'um'ing in funds during !us% seasons had reducing them during slack seasons$ Besides the !ank rate has noticea!l% reduced the seasonal fluctuations in interest rates$ ,o6ever the seasonal fluctuations in the su''l% of funds in the mone% market continue till no6$ G8? A9"ence f t,e 9*(( .ar!et Finall% the reluctance of mone% lenders and indigenous !ankers to shed their non !anking !usiness and come under the control and su'ervision of the 2B& also frustrated the Bank=s 'lan to create a !ill market$ 4 6ell organized !ill market is essential for the smooth 6orking of the credit s%stem$ &t is also necessar% for linking u' the various credit agencies ultimatel% and effectivel% to the central !ank of the countr%$ )hus, to remed% the defect of the &ndian mone% market, suggestions are often made !% various *uarters for the esta!lishment of acce'tance houses and discount houses 6hich 6ere instrumental in the develo'ment of an organized !ill market in the :ondon Mone% Market$ ,o6ever it is not 'ractica!le in all cases$ 4s o!served !% 4F; lum'tre, 7)he need of develo'ing countries is not for the tra''ing of financial maturit%, !ut for institutions much close to the economic and 'olitical grass roots$ &ndeed, 6ith the 'ressing need to allocate ver% scarce ca'ital 6ith highl% urgent uses, the esta!lishment and develo'ment of financial markets ma% actuall% lead to a diversion and 6astage of ca'ital$8 &n this connection, the setting u' of the +iscount and Finance ,ouse of &ndia :imited in -H@@ has !een a ste' in the right direction$ &t is ho'ed that this 6ould go a long 6a% to6ards the develo'ment of a secondar% market in treasur% !ills, commercial !ills and other mone% market instruments$ Similarl% suggestions have also !een made from time to time for the develo'ment of factoring institutions to 6hich accounts receiva!le in res'ect of 6hich !ills cannot !e dra6n can !e sold for a fee$ )rade dues 6ill !e collected !% the factoring institutions, thus factoring services, if availa!le, can alleviate the difficulties ex'erienced !% industrial units, 'articularl% those in the small scale sector, in collecting 'a%ments for he su''lies made !% them to various 'urchasers from !oth the 'u!lic and the 'rivate sectors$ 2eacting to this suggestion, the 2B& in the earl% -HHCs has 'ermitted some of the 'u!lic sector !anks to set u' factoring su!sidiaries$ From the foregoing descri'tion, it is o!vious that the &ndian mone% market is not so develo'ed as that of the :andonK"e6 Bork mone% market$ ,o6ever, it has !een graduall% strengthened u'on the various ste's taken !% the 2B&$ )he measures taken !% the 2B& include strengthening of the commercial !anking infrastructure, setting u' of the s'ecialized financial institutions, introduction of innovative mone% market instruments etc$, ,ence it can !e concluded that the &ndian mone% market is com'arativel% 6ell develo'ed in terms of the organized relationshi's and s'ecialization of functions$

61

LE11ON 16 RELATION1HIP BETWEEN BANKER AND C%1TO3ER Before 'roceeding to discuss the relationshi' !et6een Banker and Customer, it is essential to kno6 the 'recise meaning of the 6ords <Banker= and <Customer=$ 3ean*n+ f Ban!er )here are numerous definitions of the 6ords <Bank= and <Banker=$ But most of them are not satisfactor%$ +r$ ,$C$ ,art has given a t%'ical definition$ 4ccording to him, 74 !anker of !ank is a 'erson or com'an% carr%ing on the !usiness of receiving mone% s and collecting drafts, for customers su!#ect to the o!ligation of honouring che*ues dra6n u'on them from time to time !% the customers to the extent of the amounts availa!le in their Current 4ccount8$ )he a!ove definition insists on the follo6ing re*uirements !efore recognizing a 'erson or institution as a !anker or !ank$ aA 4cce'tance of mone% on current account and the collection of che*ues and drafts for the customer$ !A a%ment of che*ues or orders dra6n !% customers 6hich are essentiall% 'a%a!le on demand$ Of course these instruments 6ill !e honoured to the extent amounts are availa!le in the current account or u' to an agreed overdraft limit, and cA Banking !usiness must !e the main !usiness of such 'erson or com'an%$ )his vie6 6as held in Stafford D$ ,enr% >-@ICA$ &n this case one :e!ertouche had carried on a ver% varied !usiness, 'art of 6hich 6as at that time regarded as !anking, !ut as it 6as not his main !usiness, it 6as held that he 6as not a !anker$ Sir 9ohn aget has given another definition$ 4ccording to him, oen can !e a >!anker 6ho does not -A take de'osit accounts /A take current account 1A issue and 'a% che*ues and 5A collect crossed and uncrossed for his customers$ )he fre*uentl% used definition of a !anker as a dealer in mone% and credit is not satisfactor%, since there are man% other forms of financial !usiness other than !anking 6hich deal in mone% and credit e$g$ mone% lenders deal in mone% and credit, the% ma% even receive de'osits, !ut do not come under the categor% of !ankers$ Similarl% !uilding societies receive de'osits and the% also 'rovide credit !ut the% are not !anks$ &n !oth cases, demand de'osits against 6hich che*ues can !e dra6n !% customers are not ke't$ Def*n*t* n f a c)"t .er )he term <customer= of a !ank is not defined !% la6$ Ordinaril%, a 'erson 6ho has an accounts in a !ank is considered its customer$ Banking ex'erts and legal #udgments in the 'ast, ho6ever, used to *ualif% this statements !% la%ing em'hasis on the 'eriod for 6hich such account had actuall% !een maintained 6ith the !ank$ &n Sir 9ohn=s vie6 7to constitute a customer there must !e some recogniza!le course or ha!it of dealing in the nature of regular !anking !usiness8$ )his definition of a customer of a !ank la%s em'hasis on the duration of the dealings !et6een the !anker and the customers and is, therefore, called the <duration theor%=$ 4ccording to this vie6 'oint, a 'erson does not !ecome a customer of the !anker on the o'ening of an account, he must have !een accustomed to deal 6ith the !anker !efore he is designated as a customer$ )he a!ove mentioned em'hasis on the duration of the account is no6 discarded$ )hus in :ad!roke D$ )odd 9ustice Bailhache said that the relation of !anker and customer !egins as soon as the first ceh*ue is 'aid in and acce'ted for collection, and not merel% 6hen it is 'aid$ )his vie6 6as further su''orted in Commissioners of )axation B$ English, Scottish and 4ustralian Bank :td$ 6here the riv% Council said that 7the 6ord customer signifies a relationshi' of 6hich duration is not of the essence$ )he contract is not !et6een ha!ituR and ne6corner, !ut !et6een a 'erson for 6hom the !ank 'erforms a causal serviceS and a 'erson 6ho has an account of his o6n at the !ank$ 4ccording to +r$ ,art, 7a customer is one 6ho has an account 6ith a !anker or for 6hom a !anker ha!ituall% undertakes to act as such8 Su''orting this vie6'oint, the 0 0erela ,igh Court o!served. 7Broadl% s'eaking, a customer is a 'erson 6ho has the ha!it of resorting to the same 'lace or 'erson to do !usiness$ So for as !anking transactions are concerned he is a 'erson 6hose mone% has !een acce'ted on the footing that the !anker 6ill honour u' to the amount standing to his credit$ &rres'ective of his connection !eing of short or long standing8

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)hus, a 'erson 6ho has a !ank account in his name and for 6hom the !anker undertakes to 'rovide the facilities as a !anker, is considered to !e a customer$ &t is not essential that the account must have !een o'erated u'on for some time$ Even a single de'osit in the account 6ill !e sufficient to designate a 'erson as customer of the !anker$ )hough em'hasis is not !eing laid on the ha!it of dealing 6ith the !anker in the 'ast$ Such ha!it m% !e ex'ected to !e develo'ed and continued in future$ &n other 6ords$ Customer is ex'ected to have regular dealings 6ith his !anker in future$ 4n im'ortant consideration 6hich determines a 'erson=s status as a customer is the nature of his dealings 6ith the !anker$ &t is evident from the a!ove that his dealing 6ith the !anker must !e relating to the !usiness of !anking$ 4 !anker 'erforms a num!er of agenc% functions and renders various 'u!lic utilit% services !esides 'erforming essential functions as a !anker 4 'erson 6ho dose not deal 6ith the !anker in regard to the essential functions of the !anker, & e$ acce'ting of de'osits and lending of mone%, !ut avails of an% of the services rendered !% the !anker, is not called a customer of the !anker$ For exam'le, an% 'erson 6ithout a !ank account in his name m% remit mone% through a !ank draft, encash a che*ue received !% him from others or de'osit his valua!les in the safe de'osit vaults in the !ank or de'osit cash in the !ank to !e credited to the account of the :ife &nsurance Cor'oration or an% #oint stock com'an% issuing ne6 shares But he 6ill not !e called a customer of the !anker as his dealing 6ith the !anker are not in regard to the essential functions of the !anker$ Such dealing are considered as casual dealings and are not in the nature of !anking !usiness$ )hus to constitute a customer the follo6ing essential re*uisites must !e fulfilled. iA iiA a !ank account?savings, current or fixed de'osit?must !e o'ened in his name !% making necessar% de'osit of mone%, and the dealing !et6een the !anker and the customer must !e of the nature of !anking !usiness$

4 customer of a !anker need not necessaril% !e a 'erson$ 4 firm, #oint stock com'an%, a societ% or an% se'arate legal entit% ma% !e a customer$ Ex'lanation to ne6l% introduced Section 7customer8 includes a (overnment de'artment and a cor'oration incor'orated !% or under an% la6$ Genera( Re(at* n",*- Bet>een Ban!er and C)"t .er )he relationshi' !et6een a !anker and his Customer essentiall% flo6s from the contract$ &t is fundamentall% the relationshi' of de!tor and creditor, the res'ective 'ositions !eing determined !% the state of the account$ ,o6ever in relation to other services rendered !% !anker he is sometimes an agent of the customer, as for exam'le, in collection of che*ues, sale of securities, etc$, !ailee in relation to the safe custod% of valua!lesJ and trustee 6hen he is entrusted 6ith 'ro'ert% to !e administered for the !enefit of a named !eneficiar%$ De9t r and Cred*t r re(at* n",*)his conce't of de!tors and creditor relationshi' is a de'arture from the original vie6 that the !anker is a mare de'ositor% of the funds of the customer and 6as enunciated in Fole% D$ ,ill 6here it 6as o!served that 7the mone%, 6hen 'aid into !ank ceases altogether to !e the mone% of the 'rinci'alJ it is then the mone% of the !anker 6ho is !ound to return an e*uivalent !% 'a%ing a similar sum to that de'osited 6ith him 6hen he is asked for it$8 "ormall% the customer is the creditor and the !anker is the de!tor$ But 6hen the account is everdra6n the roles are reversed$ ,o6ever there are certain difference !et6een the ordinar% commercial de!ts and the de!ts due from !ankers$ *? T,e cred*t r .)"t de.and -a2.ent# &n case of ordinar% commercial de!t the de!tor 'a%s the amount on the s'ecified date or earlier of 6henever demanded !% the creditor as 'er the terms of the contract$ But in case of a de'osit in the !ank, the de!torK!aker is not re*uired to re'a% the amount on his o6n accord$ &t is essential that the de'ositor >creditorA must make a demand for the 'a%ment of the de'osit in the 'ro'er manner$ )his difference is u' to he fact that a !anker s not an ordinar% de!tor, he acce'ts the de'osited 6ith an additional o!ligation to honour his customer=s che*ues$ &f he returns the de'osited amount on his o6n accord !% closing the account, some of the che*ues issued !% the de'ositor might !e dishonoured and his re'utation might !e adversel% affected$ Moreover, according to the statutor% definition of !anking the de'osits are re'a%a!le in demand or other6ise$ )he de'ositor makes the de'osit for his convenience, a'art from his motive to earn an income >exce't current accountA$ +emand !% the creditor is, therefore, essential for the refund of the de'osited mone%$ )hus de'osit made !% a customer 6ith his !anker differs su!stantiall% from an ordinar% de!t$

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**? Pr -er -(ace and t*.e f de.and# )he demand !% the creditor must !e made at the 'ro'er 'lace and in 'ro'er time$ 4 commercial !ank, having a num!er of !ranches, is considered to !e one entit%, !ut the de'ositor enters into relationshi' 6ith onl% that !ranch 6here an account is o'ened in his name$ ,is demand for the re'a%ment of de'osit must !e made at the same !ranch of the !ank concerned other6ise the !anker is not !ound to honour his commitment$ ,o6ever, the customer ma% make s'ecial arrangement 6ith the !anker for the re'a%ment of the de'osited mone% at some other !ranch$ For exam'le, in case of !ank drafts, traveller=s che*ues etc$, the !ranch receiving the mone% undertakes to re'a% it at a s'ecified !ranch or an% !ranch of the !ank$ &t is also essential that the demand must !e made during !anking hours onl% on a 6orking da% of the !ank$ &f the makes 'a%ment after or !efore the !anking hours, he might !e held lia!le for the same$ ***? De.and .)"t 9e .ade *n -r -er .anner # 4ccording to the statutor% definition of !aking, de'osits are 6ithdra6a!le !% che*ues, drafts, order or other6ise$ &t means that the demand for the refund of mone% de'osited must !e made through a che*ue or an order as 'er the common usage amongst the !ankers$ &n other 6ords, the demand should not !e made ver!all% or through a tele'honic message or in an% such manner$ Ban!er" a" a Tr)"tee# Ordinaril%, a !anker is a de!tor of his customer in res'ect of the de'osits made !% the latter, !ut in certain circumstances he acts as a trustee also$ 4 trustee holds mone% or assets and 'erforms certain functions for the !enefits of some other 'erson called the !eneficiar%$ For exam'le, if the customer de'osits securities or other valua!les 6ith the !anker for safe custod%, the latter acts as a trustee of his customer$ )he customer continues to !e the o6ner of the valua!les de'osited 6ith the !anker$ )he legal 'osition of the !anker as a trustee, therefore, differs from that of de!tors of his customer$ &n the former case the mone% or documents held !% him are not treated as his o6n and are not availa!le for distri!ution amongst his general creditors on case of li*uidation$ )he 'osition of a !anker as a trustee or as a de!tor is determined according to the circumstances of each case$ &f he does something in the ordinar% course of his !usiness, 6ithout an% s'ecific direction from the customer, !e acts as a de!tor >or creditorA$ &n case of mone% or !ills, etc$, de'osited 6ith the !ank for s'ecific 'ur'oses, the !anker=s 'osition 6ill !e determined !% ascertaining 6hether the amount 6as actuall% de!ited or credited to the customer=s account or not$ For exam'le, in case of a actuall% de!ited or credited to the customer=s account or not$ For exam'le, in case of a che*ue sent for collection from another !anker, the !anker acts as trustee till the che*ue is realized and credited to his customer=s account and thereafter he 6ill !e the de!tor for the same amount$ &f the collecting !ank fails !efore the 'a%ment of the che*ue is actuall% received !% it form the 'a%ing !ank, the mone% so realized after the failure of the !ank 6ill !elong to the customer and 6ill not !e availa!le for distri!ution amongst the general creditors of the !ank$ On the other hand, if a customer instructs his !ank to 'urchase certain securities out of his de'osit 6ith the latter, !ut the !ank fails !efore making such 'urchase, the !ank 6ill continue to !e a de!tor of his customer >and not a trusteeA in res'ect of the amount 6hich 6as not 6ithdra6n from or de!ited to his account to carr% out his s'ecific instruction$ )he relationshi' !et6een the !anker and his customer as a trustee and !eneficiar% de'ends u'on the s'ecific instruction given !% the latter to the former regarding the 'ur'ose of use of the mone% or documents entrusted to the !anker$ &n other 6ords, 6hen a 'erson dealing 6ith a !ank delivers mone% to a intention to create a relationshi' of creditor and de!tor !et6een him and the !ank is 'resumed, unless this 'resum'tion is re!utted$ For exam'le, iA 6hen the mone% is to 'aid to a !ank 6ith s'ecial instructions to retain the same 'ending further instructions, or iiA to 'a% the same to other 'erson 6ho has no account 6ith the !ank and the !ank acce'ts the instruction and holds the mone% 'ending instruction from that other 'erson, iiiA 6here instructions are given !% the customer to his !anker that a 'art of the amount l%ing in his account !e for6arded to another !ank to meet a !ill to !ecome due and 'a%a!le !% him and the amount is sent !% the !anker as directed, a trust results and the 'resum'tion 6hich ordinaril% arises !% reason of 'a%ment of mone% to the !ank is re!utted$ &n case the !orro6er transfer to the !anker certain shares in a com'an% as a collateral securit% and the transfer is dul% registered in the !ooks of the issuing com'an% no trust is created in res'ect of such shares and the !ank=s 'osition remains that of a 'ledge rather than a trustee$

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Ban!er a" A+ent 4s stated earlier a modern !anker 'erforms man% functions as the agent of his cusotemr and for his convenience$ Some of the agenc% functions are !u%ing and selling securities, collection of che*ues, 'a%ment of !ills and 'eriodic 'a%ments$ &n this 'osition the !anker and customer relationshi' is governed !% the la6 relating to rinci'al and 4gent$ )he !anker en#o%s all the rights of an agent and in turn is su!#ect to all the o!ligations that flo6 from agenc%$ R*+,t" and D)t*e" GO9(*+at* n"? f Ban!er 4rising fro the relationshi' of a !anker and customer the !anker has the follo6ing rights and duties$ R*+,t" -$ /$ 1$ 5$ I$ D)t*e" -$ )o receive his customers= mone% and che*ues and other instruments for collection$ /$ )o re'a% the customer=s de'osit on the 'resentation of customer=s mandate kno6n as the che*ue$ 1$ )o maintain secrec% in res'ect of customer=s account and affairs$ 5$ )o give a reasona!le notice !efore closing a customer=s account$ Some of the rights and duties are discussed su!se*uentl% in detail$ Banker en#o%s a general lien over customers= securities in his 'ossession$ ,e has an im'lied right to charge a reasona!le commission for his services and interest u'on loans$ ,e has the right of set?off like ma% other de!tor$ ,e has the right to a''ro'riate 'a%ments as 'er the rules do6n in Cla%tons= case$ Banker need not seek out the creditor to make the 'a%ment$ &t is the creditor 6ho should demand 'a%ment$

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LE11ON 17 OBLIGATION1 O& A BANKER )hough the 'rimar% relationshi' !et6een a !anker and his customer is that of a de!tor and a creditor or vice versa, the s'ecial features of this relationshi', im'ose the follo6ing additional o!ligations on the !anker$ 1. O9(*+at* n t , n )r t,e c,e;)e"# )he de'osits acce'ted !% !anker are his lia!ilities re'a%a!le on demand or other6ise$ )he !anker is therefore, under a statutor% o!ligation to honour his customer=s che*ues in the usual course$ Section 1- of the "egotia!le &nstruments 4ct$ -@@-, la%s do6n that. 7)he dra6ee of a che*ue having sufficient funds of the dra6er in his hands, 'ro'erl% a''lica!le to the 'a%ment of such che*ue must 'a% the che*ue 6hen dul% re*uired to do so and in default of such 'a%ments must com'ensate the dra6er for an% loss or damage caused !% such default$ )hus, the !ankers is !ound to honour his customer=s che*ues 'rovided the follo6ing conditions are fulfilled. iA )here must !e sufficient funds of the dra6er in the hands of the dra6ee$ B% sufficient funds is meant funds at least e*ual to the amount of the che*ue 'resented$ )he funds must !e sufficient in the hands of he !anker$ (enerall%, the che*ues sent for collection !% the customer are not related as cash in the hands of the !anker until the same are realized$ )he !anker credits the amount of such che*ues to the account of the customer on their realization$ 4 !anker should, therefore, !e given sufficient time to realize the amount of the che*ue sent for collection !efore the said amount is dra6n u'on !% the customer$ &f the customer dra6s a che*ue 6ith the remark <Effects not cleared=$ Further, the credit !alances in other accounts of the customer at other !ranches or head office of he !ank need not !e taken into account in com'uting the sufficienc% of funds for this 'ur'ose$ Che*ues are generall% 'a%a!le at the !ranch 6here the account of the customer is ke't and each !ranch of a !ank of is treated as a district entit% for this 'ur'ose$ &t is to !e noted that the funds in the hands of dra6ee !anker must !e e*ual to or more than the amount of the che*ue 'resented for 'a%ment$ )he !anker is directed !% the dra6er to 'a% a s'ecified sum of mone% to the 'a%ee ant if such sum is not in the hands of the !anker at the time of 'resentation of the che*ue, the latter is under no o!ligation to make 'art 'a%ment of the che*ue$ ,e 6ould, therefore, !e #ustified in refusing 'a%ment of the che*ue$ &f the 'a%ee of the che*ue makes a de'osit in the account of the dra6er to make u' such deficienc% and then 'resents the che*ue for 'a%ment, the !anker 6ill !e #ustified in making such 'a%ment$ But the !anker should not disclose to the 'a%ee the amount !% 6hich the credit !alance in the dra6er=s account fall sthort of the amount of the che*ue, other6ise he 6ill !e lia!le for damage for disclosing information ao!ut his customer=s account to a third 'art%$ iiA )he funds must !e 'ro'erl% a''lica!le to the 'a%ment of the che*ue$ 4 customer might !e having several !ank accounts in his various ca'acities$ But it is essential that the account on 6hich a cheu*e is dra6n must have sufficient funds$ &f the customer is having a de!it !alance in his current account, he cannot dra6 a che*ue on the !asis of his fixed de'osit 6ith the !anker as the latter is a de'osit under a se'arate agreement for a s'ecific 'eriod and can !e 6ithdra6n in the 'rescri!ed manner and not through a che*ue$ )he !anker=s o!ligation to honour the che*ues is further extended if an agreement if reached !et6een the !anker and the customer, either ex'ressl% or im'liedl%, 6here!% the !anker agrees to sanction an overdraft to the customer$ &n such cases the !anker=s o!ligate to honour the customer=s che*ues is extended u' to the amount of overdraft sanctioned !% him$ &f the !anker su!se*uentl% reduces the limit of overdraft or 6ithdra6s in altogether, he must honour the che*ues issued !% the customer !efore the notice of such reduction or 6ithdra6al is served u'on him$ Sometimes an o!ligate also emerges out of the 'ast 'ractice follo6ed !% the !anker$ For exam'le, if the !anker has honoured the che*ue of a customer on several occasions in the 'ast 6ithout sufficient funds and later on re*uested the customer to make good the deficienc% in his account, an im'lied arrangement to overdra6 the account is 'resumed to exist$ )he !anker should not discontinue such 'ractice 6ithout giving 'rior notice to the customer$ iiiA )he !anker must !e re*uired to 'a%. )he !anker is !ound to honour the che*ues onl% 6hen he id dul% re*uired to 'a%$ )his means that the che*ue, com'lete and in order, must !e 'resented !efore the !anker at he 'ro'er time$ Ordinaril% a 'eriod of is months is considered sufficient 6ithin 6hich a che*ue must !e 'resented for

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'a%ment On the ex'ir% of this 'eriod the che*ue is treated as stale and the !anker dishonours the che*ue$ Similarl%, a 'ost?dated che*ue is also dishonoured !% the !anker !ecause the order of the dra6er !ecomes effective onl% on the date given on the che*ue$ ivA )here must !e no legal !ar 'reventing the 'a%ments of such che*ues e$g$, if a (ranishee order is issued !% a court attaching the funds in a 'articular account, che*ues dra6n against such accounts must necessaril% !e returned$ Garn*",ee rder# (arnishee order is an order from the court o!tained !% a #udgment?creditor attaching the funds in the hands of a third 'art% due to the #udgment de!tor$ )his is su!#ect to the condition that the funds attached must !e actuall% due from the garnishee, i$e$, the third 'art% and in our context, the !anker$ ,o6ever an existing de!t through 'a%a!le at a further date, ma% !e attached$ )hus fixed de'osits coming under this categor% can !e su!#ect to attachment$ But fixed de'osits 6hich can !e 6ithdra6n after the customer=s notice cannot !e attached$ )he reason is sim'le$ &n such a case there is no existing de!t unless and until the notice is given !% the customer$ )%'es of orders. )here are t6o t%'es of orders that ma% !e made !% a court (arnishee order is onl% an interim order and o'erates as an order freezing de!t$ "o funds are 'a%a!le !% the !anker to the court until the order is made a!solute !% the court$ Since the (arnishee order attaches onl% the existing de!t$, it is 'ossi!le for the !anker to o'en ne6 account for sums de'osited su!se*uentl% and allo6 him to dra6 che*ues$ )he follo6ing are some of the legal decision affecting garnishee orders. - ;here there is #oint account in the name of hus!and and 6ife, such an account cannot !e attached in favour of hus!and=s #udgments creditor$ /$ Funds 'aid into the custoemr=s account su!se*uent to the recei't of the order are not attacha!le$ 1$ )he !anker immediatel%, after the order is received, can exercise his right or set?off$ >)%a!alle D$ 4tmarmaA 5$ Unclosed che*ues 'reviousl% 'aid into the customer=s account are not attached unless the !anker !% agreement or usage allo6ed che*ues to the dra6n against such accounts$ >4$: Under6ood :td$ D$ Barcla%s Bank :td$A I$ artnershi' accounts cannot !e attached unless the order is made against all the 'artners, or in the name of the 'artnershi'$ F$ (arnhishee orders can attachR trust mone%s also, 'rovided the amount is to the customer=s credit$ )he reason is that such a mone% is a de!t o6ing to the customer and as such attacha!le$ G$ Balances to the credit of customer=s account at !ranches of the !ank in a foreign countr% cannot !e attached$ Bank=s 'rocedure on recei't of order -$ &f the order is served on the !ank=s head office, then the !ranch 6here the account is held should !e notified for 6hich a reasona!le time is al6a%s allo6ed$ /$ )he *uestion of attachment does not arise, if the customer=s !alance is in de!it$ Such an order 6ill !e 6ithdra6n and therefore, does not 6arrant !% action$ 1$ )he garnishee order must state the name of the customer correctl%, to ena!le the !aker to identif% the #udgment?de!tor$ Other6ise, the !ank is not !ound to act u'on it$ 5$ Customer should !e advised of the order and also the !anker=s intention to com'l% 6ith the order$ I$ ;hen the customer is having a large !alance and the attachment is for a limited amount far less than the !alance, the !anker can transfer the necessar% amount >including court costs if an%A to a se'arate account 'ending 'a%ment to the court and the customer can !e allo6ed to o'erate the !alance in the account$ But if the order attaches

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all the de!ts o6ing to the customer 6ithout limit, then his account must !e sto''ed$ Even in such a case, if the amount of the #udgment de!t and the costs is ascertained, the !anker at his discretion can allo6 the customer an overdraft on a ne6 account against the sur'lus !alance of the garnished account$ L*a9*(*t2 f t,e Ban!er *n ca"e f >r n+f)( D*", n )r f C,e;)e"# 4 !anker has the statutor% o!ligation to honour his customer=s che*ues unless there are valid reasons for refusing 'a%ments of the same$ &n case !e dishonours a che*ue, intentionall% or !% mistake, he is lia!le to com'ensate the customer for the loss suffered !% him$ 4ccording to Section 1- of the "egotia!le &nstruments 4ct, -@@-, the !anker is lia!le to com'ensate the dra6er for an% loss or damage caused !% the default on his 'art in dishonouring the che*ues 6ithout sufficient reason$ )he !anker thus incurs heav% lia!ilit% for an% mistake or default committed in dishonouring his customers= che*ues$ Ca)"e" f Wr n+f)( D*", )r# ;rongful dishonour of a che*ue means a dishonour committed !% mistake of !% negligence on the 'art of the !anker or an% of its em'lo%ees$ 4 !anker must honour the che*ues of the customer so long as the latter=s account has sufficient funds$ &f the !anker commits a mistake in his account !ooks 6hich reduces correct !alance in the account of the customer and thus a che*ue is dishonoured, the !anker 6ill !e lia!le for such 6rongful dishonour$ For exam'le, if a credit made !% a customer is 'osted to some other account or de!it entr% of some !od% else is 'osted to the customer=s account, the latter 6ill not sho6 the correct !alance$ Similarl%, if a 'ost?dated che*ue is honoured !% the !anker !efore eh date of the che*ue and thus the !alance in the customer=s account is reduced, the !anker 6ill !e lia!le for 6rongful dishonour of a che*ue su!se*uentl% 'resented for 'a%ment$ )he !anker 6ill, ho6ever, not !e res'onsi!le for 6rongful dishonour if the customer makes a de'osit or a credit is received !% main in order to make the funds sufficient after the che*ue has !een dishnonoured !% the !ank$ Similarl%, if the !anker has not !een furnished 6ith the names and s'ecimen signature of the 'ersons 6ho have !een authorized to sign che*ues on !ehalf of a 'erson, com'an% or institution, he can #ustifia!l% dishonour the che*ues signed !% them$ &t 6as stated earlier that 6hen a !anker allo6s the customer to o'en a current account the sti'ulation is that he should not in#ure the customer=s credit !% refusing the 'a%ment of che*ues dra6n against such account ex'ect on reasona!le and 'ro'er grounds$ From this it naturall% follo6s that 6hen a customer=s credit is in#ured the !anker has to com'ensate !% 'a%ing damages$ )his has !een stated in Section 1- of the "egotia!le &nstruments 4ct$ -@@- >ref$ O!ligation to honour customer=s mandate.A$ )his damage is not limited to the actual loss suffered !% the customer and extends to loss of credit or !usiness re'utation 6hich entitles a customer to claim heav% damages$ 4fter an anal%sis of the various decisions on this 'oint the follo6ing rules emerge$ -$ )he amount of damages 6ill !e more in the case of a trader customer and such damages are 'resumed 6ithout 'roof$ +amages ma% !e su!stantial or exem'lar%$ &n the case of non?trading customers su!stantial damages 6ill !e a6arded onl% if it is 'roved as s'ecial damages$ (i!!on D$ ;est minister Bank :imited >-H1CA$ &n this case the 'laintiff 6as a customer of the defendant !ank and she 'aid a certain sum of mone% to her account$ ;hich 6as !% mistake credited to a 6rong accunt !% the !anker$ :ater on a che*ue issued !% her 6as dishonoured !ecause of this mistake$ U'on the dishonour she filed a suit claiming su!stantial damages$ But it 6as held that as the 'laintiff 6as a non?trader, 6ho had not 'roved an% s'ecial damager, she 6as entitled to nominal damages onl% and 6as a6arded #ust 5C shillings$ )he same vie6 6as held in an &ndian case "e6 Central ,all D$ United Commercial Bank :td$ /$ )he maxim is 7smaller the che*ue, greater the damage8$ &t must not !e assumed that s'ecial damages 6ill !e a6arded onl% if the amount of the che*ue is ver% large$ Courts have invaria!l% a6arded more damages in the case of che*ues involving small amounts$ )he reason is sim'le$ Customer suffers more loss of re'utation 6hen a che*ue for a small amount is dishonoured$ +avidson$ D$ Barcla%s :imited$ &n this case the 'laintiff, a !ook maker dre6 a che*ue for 5/?-I?@$ &t so ha''ened that the !anker 'aid 'reviousl% a che*ue 6hich the 'laintiff had counter manded$ On the account the che*ue in *uestion 6as returned !ecause of insufficient funds on a suit !% the 'laintiff for damagers the court a6arded a sum of T/IC$ 1$ )he amount of damages 6ill de'end u'on the histor% of the customer=s account$ &f the customer alread% has to his discredit one or t6o instances of his che*ues !eing dishnonoured due to insufficient funds, the court ma% a6ard nominal damages onl%$

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4n% additional or alternative action for the tort or li!el ma% !e !rought under certain circumstances$ For exam'le if the che*ue is marked 72efer to dra6er8, the general vie6 is that the 6ords 72efer to dra6er8 merel% inform the holder that he must a''roach the dra6er as to the reason for the dishonour of the che*ue$ )he old vie6 6as in case of im'ro'er dishonour 6ith such an ans6er there 6ould !e !reach of contract !ut not li!el$ :i!el is sometimes more ex'ensive for the !anker than a !reach of contract !ecause damages are a6arded 6ithout the need to 'rove a s'ecific loss$ ;hereas if it is sim'l% a !reach of contractJ such loss 6ill have to !e 'roved$ But in %ke D$ ,i!ernian Bank :td$, 6here certain che*ues 6ere 6rongl% dishonoured !% the dra6ee !ank !eing marked 72efer to dra6er8, it 6as held that the dra6er of the che*ue 6as entitled to damages of T- for !reach of contract and T 5CC for li!el$ )he court 6as of the vie6 that the 6ords refer to dra6er meaning to 7no funds8 amounted to li!el$ &n 9a%son D$ Midland Bank >-HF@A the court #ustified the return of the 'laintiff che*ue marked 72efer to dra6er8$ But the court held that the 6ords 6ould have !een li!elous if funds had !een availa!le$

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LE11ON 18 OBLIGATION1 O& A BANKER II )he relationshi' !et6een a !anker and his customer if confidential even though the dut% of secrec% is not attached to the ordinar% relationshi' of de!tor and creditor$ &t is one of the im'lied terms of the contract that the !anker must not divulge the customer=s financial 'osition or state of his account and affairs exce't in accordance 6ith la6 or 'ractice or usages customar% among !anks$ &n the case of nationalized !anks, under Sections -1 of the !anking Com'anies >4c*uisition and )ransfer of UndertakingsA 4ct, -HGC, ever% director, mem!er of a local !oard or a committee, or auditor, adviser or other em'lo%ee !efore entering u'on his duties is re*uired to make a declaration of fidelit% and secrec% in the in the forms set out in the )hird Schedule to the 4ct$ Similarl%, all other !anks cal o'en ever% mem!er of their res'ective staff to sign 6hat is kno6n as a <Sectec% ledge= relating to their customer=s !usiness transacted in the course of their duties$ &n fact, secrec% is a #ealousl% guarded tradition of !ankers$ 4 !anker=s dut% of secrec% is a legal one and arises out of the contractual relationshi' 6ith the customer from the moment he o'ens the account and, in the o'inion of Sir 9ohn aget, does not end even 6ith the closing of the customer=s affairs is essential for the 'rotection of his 'rivate and !usiness interests$ )he customer na% enforce this dut% !% seeking an in#unction from the court to restrain the !ank from disclosing information a!out his account or affairs to an% 'erson 6hom he has not authorized to receive it$ &f the !ank has alread% disclosed such information, the customer ma% sue it for !reach of contract and recover damages for the loss he has sustained as a result of im'ro'er disclosure$ )he guiding case on this su!#ect is )ournier D$ "ational and Union Bank of England >-H/5A 6here the Court of 4''eal held that the !anker=s dut% of secrec% is not a!solute !ut *ualified since there are occasions on 6hich a !anker if #ustified to make the disclosure$ &n this case, )$ a customer of the !ank, 6ho 6as allo6ed to overdra6 the account !% a small amount 6ithout 'revious arrangements, agreed to re'a% it atU- 'er 6eek$ On his failure to kee' to the arrangement, the !ank manager tele'honed to his 6ork'lace and, !eing una!le to s'eak to ), discussed )=s !anking arrangements 6ith his em'lo%er mentioning also that ) 6as !etting$ 4t the end of his 'ro!ationar% 'eriod ) lost the #o!$ ) claimed that the !ank 6as lia!le for !reach of secrec% and this 6as u'held !% the Court of 4''eal$ &n this case, the Court classified the *ualifications under four heads. a$ 6here disclosure is under com'ulsion !% la6J !$ ;here there is a 'u!lic dut% to discloseJ c$ ;here the interests of the !ank re*uire disclosureJ and d$ 6here the disclosure is made !% ex'ress or im'lied consent of the customers$ T,e"e c nd*t* n" are exa.*ned 9e( ># 1. D*"c( ")re f Inf r.at* n Re;)*red 92 La># 4 !anker is under a statutor% o!ligation to disclose the information relating to his customer=s account 6hen the la6 s'ecificall% re*uires him to do so$ )he !anker 6ould, therefore, !e #ustified in disclosing information to meet the follo6ing statutor% re*uirements. *? %nder t,e Inc .e0tax ActE 1@:1# 4ccording to Section -1-, the income?tax authorities 'ossess the same 'o6ers as are vested in a Court under the Code of Civil rocedure, -HC@, for enforcing the attendance of an% 'erson including an% officer of a !anking com'an% and examining on oath and com'elling the 'roduction of !ooks of accounts and other documents and issuing commissions$ Section -11 em'o6ers the income?tax authorities to re*uire an% 'erson, including a !anking com'an% or an% officer thereof, to furnish information in relation to such 'oints or matter, or to furnish statements of accounts and affairs giving information in relation to such 'oints on matters, as in the o'inion of the income?tax authorities are thus authorized to call for necessar% information from the !anker for the 'ur'ose of assessment of the !ank=s customers$ Section /@I of the &ncome?tax 4ct, -HF-, re*uires the !anks to furnish to the &ncome?tax Officers the names and address of all 'ersons to 6hom the% have 'aid interest exceeding 2s$ 5CC mentioning the actual amount of interest 'aid !% them$

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**? %nder t,e C .-an*e" ActE 1@8:# ;hen the Central (overnments a''oints an &ns'ector to investigate the affairs of na% #oint stock com'an% under Section /1I or /1G of the Com'anies 4ct$ -HIF, it shall !e the dut% of all officers and other em'lo%ees and agent >including the !ankersA of the com'an% to? a$ 'roduce all the !ooks and 'a'ers of, or relating to, the com'an%, 6hich are in their custod% or 'o6er, and !$ other6ise to give to the &ns'ector all assistance in connection 6ith the investigation 6hich the% are reasona!l% a!le to give >Section /5CA$ )hus the !anker is under an o!ligation to disclose all information regarding the com'an% !ut not of an% other customer for the 'ur'ose of such investigation >Section /I-A$ ***? B2 rder f t,e C )rt )nder t,e Ban!er5" B !" E'*dence ActE 1=@1# ;hen the Court order the !anker to disclose information relating to a customer=s account the !anker is !ound to do so$ &n order to avoid the inconvenience likel% to !e caused to the !ankers from attending the Courts and 'roducing their account !ooks as evidence, the Banker=s !ooks are to !e treated as sufficient evidience and 'roduction of the !ooks in the Courts cannot !e forced u'on the !ankers$ 4ccording to Section 5 of the 4ct, 7a certified co'% of na% entr% in a !anker=s !ooks shall in all legal 'roceedings !e received as 'rima facie evidence of the existence of such entr% and shall !e admitted as evidence of the matters, transactions and accounts therein recorded in ever% case 6here, and to the same extent, as the original entr% itself is not !% la6 admissi!le, !ut not further or other6ise8$ )hus if a !anker is not a 'art% to a suit, certified co'% of the entries in his !ooks 6ill !e sufficient evidence$ )he Court is also em'o6ered to allo6 an% 'art% to legal 'roceedings to ins'ect or co'% from the !ooks of the !anker for the 'ur'ose os such 'roceedings$ *'? %nder t,e Re"er'e Ban! f Ind*a ActE 1@67# )he 2eserve Bank of &ndia collects credit information from the !anking com'anies and also furnishes consolidated credit information to an% !anking com'an%$ Ever% !anking com'an% is under a statutor% o!ligation under Section 5I?B of the 2eserve Bank of &ndia, 4ct -H15, to furnish such credit information to the 2eserve Bank$ )he 4ct, ho6ever, 'rovides that the credit information su''lied !% the 2eserve Bank to the !anking com'anies shall !e ke't confidential$ 4fter the enactment of the 2eserve Bank of &ndia >amendmentA 4ct, -HG5, the !anks are granted statutor% 'rotection to exchange freel% credit information mutuall% among themselves$ '. %nder t,e Ban!*n+ Re+)(at* n ActE 1@7@# Under Section /F, ever% !anking com'an% is re*uired to su!mit a return annuall% of all such accounts in &ndia 6hich have not !een o'erated u'on for -C %ears$ Banks are re*uired to give 'articulars of the de'osits standing to the credit of each such account$ '*? %nder t,e G*ft Tax ActE 1@8=# Section 1F of the (ift )ax 4ct, -HI@ confers on the (ift )ax authorities 'o6ers similar to those conferred on &ncome )ax authorities under Section -1- of the &ncome )ax 4ct$ '**? D*"c( ")re t P (*ce# Under Section H5>1A of the Criminal rocedure Code, the !anker is not exem'ted from 'roduction the account !ooks !efore the 'olice$ )he 'olice officers conducting an investigation ma% also ins'ect the !anker=s !ooks for the 'ur'ose of such investigation >Section I, Banker=s Books Evidence 4ctA$ '***? %nder t,e & re*+n Exc,an+e Re+)(at* n ActE 1@<6# Banking com'anies dealing in foreign exchange !usiness are designated as <authorised dealers= in foreign exchange$ Section 51 of this 4ct em'o6ers the officer of the +irectorate of Enforcement and the 2eserve Bank to ins'ect the !ooks and accounts and other documents of an% authorized dealer and also to examine on oath such dealer or its director or officials in relation to its !usiness$ *x. %nder t,e Ind)"tr*a( De'e( -.ent Ban! f Ind*a ActE 1@:7# 4fter the insertion of su!?section -4 in Section /H of this 4ct in -HGI, the &ndustrial +evelo'ment Bank of &ndia is authorized to collect from or furnish to the Central (overnment, the State Bank, an% su!sidiar% !ank, nationalized !ank or other scheduled !ank, State Co? o'erative Bank, State Financial Cor'oration credit information or other information as it ma% consider useful for the 'ur'ose of efficient discharge of its functions$ )he term <credit information= shall have the same meanings as under the 2eserve Bank of &ndia 4ct, -H15$ 2. D)t2 t t,e -)9(*c t d*"c( "e# Banker ma% #ustifia!l% disclose an% information relating to his customer=s account 6hen it is his dut% to the 'u!lic to disclose such information$ &n 'ractice this *ualification has remained vague and 'laced the !anks in difficult situations$ )he Banking Commission, therefore, recommended a statutor% 'rovision

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clarif%ing the circumstances 6hen !anks should disclose in 'u!lic interest information relating to the affairs of their customers !% enumerating some s'ecific cases cited !elo6. a$ ;hen a !ank is asked for information !% a government official concerning the commission of a crime and the !ank ahs reasona!le cause to !elieve that a crime has !een committed and that the information in the !ank=s 'ossession ma% lead to the a''rehension of the cul'rit$ !$ ;here the !ank considers that the customer is involved iactivities 're#udicial to the interests of the countr%$ c$ ;here the !ank=s !ooks reveal that the customer is contravening the 'rovisions of an% la6$ 6. D*"c( ")re *n ,*" >n *ntere"t# ;here the !anker discloses the state of the account of a customer in his o6n interest, as for exam'le 6hen the 6ants to recover the mone% due fro the customer, such disclosure is #ustified$ Similarl% 6hen a de!t due fro a customer is guaranteed !% another 'erson the !anker can disclose the state of the account to the guarantor 6ith a vie6 to recover the amount due to his from such a customer$ 4 leading case on this 'oint, i$e$, disclosure in his o6n interest is Sunderland D$ Barcla%s Bank :td$ &n this case the customer, a 6oman issued a che*ue to her dressmaker$ )he che*ue 6as dishonored !ecause of insufficient funds$ )he !ankers did not 6ish to allo6 an% overdraft !ecause the% kne6 of the customer=s !ook making transactions$ )he customer 'rotested a!out the dishonour to her hus!and, a doctor !% 'rofession, 6ho advised her to take u' the matter 6ith the !ank$ She did so on 'hone and after a 6hile the hus!and interru'ted the conversation to add his o6n 'rotest$ )he !ankers then disclosed to him that che*ues had 'reviousl% !een dra6n !% her in favour of !ookmakers 6hich led to a suit for damages against the !ank for !reach of dut%$ )he !ank contended that the conversation 6ith the hus!and 6as a continuation of that 6ith 6ife and that the% had her im'lied consent to the disclosure$ )his 6as denied !% the customer$ But the 9udge held that on the facts the !anks must succeed, the disclosure !eing in their interest, coming under the third *ualification in the )ournier case$ 7. W*t, Ex-re"" r I.-(*ed C n"ent f t,e C)"t .er# )he !anker 6ill !e #ustified in disclosing an% information relating to his customer=s account 6ith the latter=s consent$ &n fact the im'lied term of the contract !et6een the !anker and his customer is that the former enters into *ualified o!ligation 6ith the latter to a!stain from disclosing information as to his affairs 6ithout his consent$ )he consent of the customer ma% !e ex'ress or im'lied$ Ex'ress consent exists in case the customer directs the !anker in 6riting to intimate the !alance in his account or an% other information to his agent, em'lo%ee or consultant )he !anker 6ould !e #ustified in furnishing to such 'erson onl% the re*uired information and no more$ &t is to !e noted that the !anker must !e ver% careful in disclosing the re*uired information to the customer or his authorized re'resentative$ For exam'le, if an oral en*uir% is made at the counter, the !ank em'lo%ee should not s'eak in louder voice so as to !e heard !% other customers$ Similarl%, the 'ass!ook must !e sent to the customer through the messenger in a closed cover$ 4 !anker generall% does not disclose such information to the customer over the tele'hone unless he can recognize the voice of his customer other6ise he !ears the risk inherent in such disclosure$ &n certain circumstances, the im'lied consent of the customer 'ermits the !anker to disclose necessar% information$ For exam'le, if the !anker sanctions a loan to a customer on the guarantee of a third 'erson and the latter asks the !anker certain *uestions relating to the customer=s account, the !anker is authorized to do so !ecause !% furnishing the name of the guarantor, the customer is 'resumed to have given his im'lied consent for such disclosure$ )he !anker should give the relevant information correctl% and in good faith$ Similarl%, if the customer furnished the name of the !anker to a third 'art% for the 'ur'ose of a trade reference, not onl% an ex'ress consent of the customer exists for the disclosure of relevant information !ut he !anker is !anker is directed to do so, the non?com'liance of 6hich 6ill adversel% affect the re'utation of the customer$ &m'lied consent should not !e taken for granted in all cases even 6here the customer and the en*uirer ha''en to !e ver% closel% related$ For exam'le, the !anker should not disclose the state of a lad%=s account to her hus!and 6ithout the ex'ress consent of the customer$ Ban!er5" O-*n* n" &t is a 6ell esta!lished 'ractice of !anks to ans6er status en*uires addressed to them !% other !anks >the onl% medium recognized !% themA 6ith regard to the financial 'osition and !usiness integrit% of their customers$ )his

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'ractice is of mutual !usiness advantage to !anks and the !usiness communit% in making credit facilities availa!le to them !% !anks$ Banks no6 also res'ond to status en*uires a!out the customers from certain (overnment de'artments for securing su''l% contracts from them$ )he legal im'lication of this 'ractice should !e of interest to !anks for if the !anker=s re'ort is too favoura!le, he ma% have to fact an action for misre'resentation or negligence !rought a!out !% the en*uirer, and if he s'eaks too unfavoura!l%, there ma% !e action for li!el !rought !% the customer$ ,o6ever, the customer might have even a cause for com'laint if an ans6er to an en*uir% 6as refused since un6illingness to s'eak might !e construed as derogator% to the customer$ Bankers have either ex'ress or im'lied consent of their customers to ans6er status en*uiries$ &t is considered that 6hen a customer o'en an account, it has !% im'lication, authorized the !ank to follo6 the routine 'ractice of res'onding to status en*uiries received from other !anks$ &t is, therefore, not necessar% that the !anker should not re'l% to an en*uir% 6ithout the customer=s agreement$ Fre*uentl%, customers give their !anker=s name as a reference? this is an ex'ress consent?!ut a large num!er of en*uiries are made 6hich are not at the instance of the customer$ T,e Genera( R)(e f La> 4 !anker should exercise great care in ans6ering all status en*uiries and ensure that he is not negligent in this regard 6hich is the onl% dut% incum!ent on a !anker$ G (den R)(e )he golden rule in ans6ering status en*uiries is to re'l% in general terms and allo6 the en*uirer to dra6 conclusions !% inference$ For this 'ur'ose, the !anker should confine himself to general statement and should not disclose the actual state of the account unless s'eciall% authorized !% he customer to do so$ Secondl%, he should see that the confines his ans6ers to facts 6ithin his kno6ledge or as disclosed !% the account and does not !ase his o'inions on the rumours that ma% !e afloat regarding credit of his customers$ )hirdl%, he is not !ound to make en*uiries outside as to the solvenc% or other6ise of the customer a!out 6hom an en*uir% is made$ Finall%, he must take care nto to furnish information 6hich is false$ )he onl% dut% of the !anker in such a case is that of 7common honest%8, 6hich in more 'recise terms means that he must not !e fraudulent$ 4n% misre'resentation as to the customer=s financial 'osition 6hich has !een made innocentl% 6ill not !e actiona!le, and the en*uirer can sue the !anker onl% if it can !e sho6n that there 6as negligence in dealing 6ith the en*uir%$ )o *uote :ord ;ren!ur% in Ban!ur% D$ Bank of Montreal >-H-@A, 7&nnocent misre'resentation is not the cause of action, !ut evidence of negligence 6hich is the cause of action8$ &t ma% !e stated here that in the normal 6a% there is no contractual relationshi' !et6een a !anker and the customer of another !ank and, therefore, there is no contractual dut% and no ground for na% action !ased on negligence$ Each case, ho6ever, 6ill de'end u'on the 'articular facts$ 4ccordingl%, so long as the !anker ans6ers honestl% from the kno6ledge of his customer=s affairs, he cannot !e held res'onsi!le for an% loss the en*uirer ma% sustain in his dealing 6ith the customer$ &n ans6ering the en*uir%, the !anker, as has !een stated !efore, need not go out of his 6a% to o!tain additional information from other sources$ ;here an affirmative ans6er cannot !e given the re'l% must !e couched discreetl%, leaving to the en*uirer to dra6 his conclusions ver% largel% !% inference$ )he 'rinci'le a !anker should al6a%s !ear in mind is that he must not 6rite an%thing that might !e construed derogator%$ R*"!" f %n>arranted and %nH)"t*f*a9(e D*"c( ")re# )he o!ligation of the !anker to kee' secrec% of his customer=s accounts?exce't in circumstances noted a!ove?continue even after the account is closed$ &f a !anker discloses information un#ustifia!l%, he shall !e lia!le to his customer and the third 'art% as follo6s. a. L*a9*(*t2 t t,e c)"t .er# )he customer ma% sue the !anker for the damages suffered !% him as a result of such disclosure$ Su!stantial amount ma% !e claimed if the customer has suffered material damages$ Such damages ma% !e suffered as a result of un#ustifia!le disclosure of an% information or extremel% unfavora!le o'inion a!out the customer !eing ex'ressed !% he !anker$ 9. L*a9*(*t2 t t,e t,*rd -art*e"# )he !anker is res'onsi!le to the third 'arties also to 6hom such information is given, if ?

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iA the !anker furnishes such information 6ith the kno6ledge that it is false and iiA such 'art% relies on the information and suffers losses$ Such third 'art% re*uire the !anker to com'ensate him for he losses suffered !% him rel%ing on such information$ But the !anker shall !e lia!le onl% if it is 'roved that he furnished the 6rong or exaggerated information deli!eratel% and intentionall%$ )hus he 6ill !e lia!le to the third 'art% on the charge of fraud !ut not for innocent misre'resentation$ Mere negligence on his 'art 6ill not make him lia!le to a third 'art%$ )his 'oint 6as ver% clearl% decided !% the ,ouses of :ords in ,edle% B%rne and Co$ D ,eller and artners :td >-HF5A$ &n this case the !anker of a com'an% in re'l% to an en*uire from a firm of advertising agents, gave his o'inion as follo6s. 7)he com'an% 6as a res'ecta!l% constituted com'an%, considered good for its ordinar% !usiness engagements8$ )he !anker also added that the figure of T-CC,CCC >mentioned !% the en*uirerA 6as larger than the% 6ere accustomed to see$ )he !anker also stated that the o'inion 6as given 6ithout res'onsi!ilit% on the 'art of the ans6ering !anks or its officials$ )he com'an% su!se*uentl% 6ent into li*uidation and the advertising firm suffered a loss of T-G,CCC and sued the com'an%=s !anker for the recover% of this amount on the ground that the re'lies 6ere give negligentl% and in !reach of dut% to exercise care in giving them$ )he )rial Court held that trough the !anker 6as negligent in his assessment of the 'osition of the com'an% !ut dismissed the claim on the ground that the !anker o6ed no dut% of care to the advertising firm$ )he ,ouse of :ords u'held this decision$ :ord 2eid stated that in general an innocent and negligent misre'resentation gives !% itself no cause of action and that there must !e something more than mere misstatement in order to fasten lia!ilit% on the 'erson making it$ :ord Morris o!served that the !anker, to 6hom the reference 6as made, 6as not ex'ected to make a detailed in*uir% and 'roduce a 6ell?!alanced re'ort$ 4ll that 6as ex'ected 6as that he should ans6er honestl% the *uestion 'ut to him from 6hat he kne6 from the !ooks and accounts !efore him$ )he general conclusions of the Court can !e summarized as follo6s. -$ 4 !anker ans6ering a reference form another !anker on !ehalf of the latter=s constituent o6es a dut% of honest% to the said constituent$ /$ &f a !anker gives a reference in the form of a !rief ex'ression on o'inion in regard to credit 6orthiness, he does not acce't and there is not ex'ected of him an% higher dut% than that of giving an honest ans6er$ 1$ &f the !anker sti'ulates in his re'l% that it is 6ithout res'onsi!ilit%, he cannot !e held lia!le for negligence in res'ect of the reference$ Pract*ca( C n"*derat* n Re+ard*n+ D*"c( ")re# )he risk of un#ustifia!le or inadvertent disclosure on the 'art of the staff in their dail% 6orking is al6a%s 'resent and the grave conse*uences resulting from !reach of the !anker=s dut% of secrec% should !e !rought home to them$ For exam'le, if the holder of a che*ue for 2s$ -,CCC is informed 'ersonall% !% an% !ank official that there is insufficient !alance !%, sa%, 2s$ IC in the dra6er=s account and if the holder himself 'a%s in the differences so that he losses 2s$ IC ro so for the sake of 2s$ HIC$ an action 6ould lie against the !ank$ )hat 6ould !e un#ustifia!le disclosure and might also constitute a fraud on other creditors of the customers, as 6as held in Foster D$ Bank of :ondon >-@F/A$ Similarl%, if on en*uir% form the customer, the ladger?kee'er, shouted across the counter his de!it !alance and hearing this the customer=s chief creditor, 6ho ha''ens to !e 'resent in the !anking hall, sto's further credit to him, this might afford a reasona!le ground for action against the !ank$ ;ith a vie6 to eliminating the risk of unla6ful disclosure, !anks should !e 6ell advised to o!serve the follo6ing safeguards. iA &f there is an% dou!t 6hether the disclosure 6ould !e 'rotected !% the exce'tions= the customer=s authorit% to disclose should !e o!tained$ iiA ;hen a customer en*uires his !alance or 6ants an% information regarding the state of his account on tele'hone, the !anker should al6a%s check his credentials !efore divulging the information$ &f the customer=s voice cannot !e re!ognised on tele'hone, the !anker should, instead of re#ecting the re#ecting the re*uest outright, tr% to satisf% himself a!out the 'roer' identit% of the en*uirer !% other means such as en*uire% from him a!out the a''roximate !alance in his account, or the amount of recent standing orders or items 'aid in during the 'ast 6eek or so$ &t is not ver% sensi!le to ask for the account num!er or for de!its of recent che*uesJm if it is thief 6ith the

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customer=s che*ue !ook at the other end of the 'hone, he 6ill !e a!le to give this information and the !anker 6ill then innocentl% tell him the !alance of the account so that he kno6s ho6 much to dra6 out on a forged che*ue$ iiiA &nformation should !e given ot the customer=s agents or messenger onl% if the custoerm has give!n his ex'ress consent to the !ank in this regard$ &f the information is to !e 'assed on to the custoeemr through his messenger, it must al6a%s !e sent in a closed cover$ ivA )here shold !e not o!#ection to 'ass on the information 6here it is o!vious that there is im'lied authorit% of the customer as, for exam'le, the statement of account of a com'an% customer ma% !e delivered to its secretar% on his re*uest$

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LE11ON 1: RIGHT1 O& A BANKER 1. Genera( L*en 4 :ien is the right to retain the 'ro'ert% !elonging to a de!tor until ha has discharged the de!t due to the retainer of the 'ro'ert%$ 4 lien is merel% a right to retain and is lost 6hen 'ossession is lost$ 4 lien ma% !e either aA 'articular or !A general line$ 4 'articular lien arises from the 'articular transaction connected 6ith the 'ro'ert% su!#ect to the lienJ a general lien arises not merel% out of the 'articular transaction, !ut for the general dealing !et6een the t6o 'arties in res'ect of other transactions of similar character$ articular lien is en#o%ed !% craftsmen like )ailors and (oldsmiths and Bailess like re'airers and u!lic Carriers$ For exam'le a goldsmiths can retain the #e6el till the charges are 'aid$ &n !oth cases the right of lien is not availa!le for an% other sums due$ Bankers and Factors en#o% (eneral :ien$ Under Section -G- of the &ndian Contract 4ct, -@@-, !ankers, in the a!sence of an agreement to the contrar%, retain as a securit% for a general !alance of account na% goods and securities !anked to them$ &t extends to all securities 'laced in his hands as a !anker, !% his customer 6hich is not s'ecificall% a''ro'riated$ )he leading case on this su!#ect is Brandao D$ Barnett$ &n this case the !anker=s lien 6as descri!ed !% :ord Cam'!ell as follo6s. 7Bankers most undou!tedl% have a general lien on al securities de'osited 6ith them, as !ankers, !% a customer unless there !e an ex'ress contract or circumstances that sho6 an im'lied contract inconsistent 6ith the lineS$$8 1-ec*a( &eat)re" f a Ban!er5" R*+,t f Genera( L*en# iA )he !anker 'ossesses the right of general lien on all the goods and securities entrusted to him ca'acit% as a !anker and in the a!sence of a contract inconsistent 6ith the right of line$ )hus he cannot exercise his right of general lien if ? aA the goods and securities have !een entrusted to the !anker as a trustee or an agent of the customer, and !A a contract?ex'ress or im'lied?exists !et6een the customer and the !anker 6hich is inconsistent 6ith the !anker=s right of general lien$ &n other 6ords, if the goods or securities are entrusted for some s'ecific 'ur'ose, the !anker cannot have a lien over them$ )hese exce'tional cases are discussed later on$ iiA 4 !anker=s lien is tantamount ot an im'lied 'ledge. 4s noted a!oe the right of lien does not confer on the creditor the right of sale !ut onl% the right to retain the goods till the loan is re'aid$ &n case of 'ledge the creditor en#o%s the right of sale$ 4 !anker=s right of lien is more than a general lien$ &t confers u'on him the 'o6er to sell the goods and securities in case of default !% the customer$ Such right of lien thus resem!les a 'ledge and is usuall% called an 7im'lied 'ledge8$ )he !anker thus en#o%s the 'rivileges of a 'ledge and can dis'ose of the securities after giving 'ro'er notice to the customer$ iiiA )he right of lien is conferred u'on the !anker !% the &ndian Contract 4ct$ "o se'arate agreement of contract is, therefore, necessar% for this 'ur'ose$ ,o6ever, to !e on the safe side, the !anker takes a letter of lien from the customer mentioning that the goods are entrusted to the !anker as securit% for a loan?existing or future?taken from the !anker and that the latter can exercise his right of lien over them$ )he !anker is also authorized to sell the goods in case of default on the 'art of the customer$ )he latter thus s'ells out the o!#ect of entrusting the goods to the !anker so that the same ma% not !e denied !% the customer later on$ ivA )he tight of lien can !e exercised on goods or other securities standing in the name of the !urro6er onl% and not #ointl% 6ith others$ For exam'le, in case the securities are held in the #oint names of t6o or more 'ersons the !anker cannot exercise his right of general lien in res'ect of a de!t due from a single 'erson$ vA )he !anker can exercise his right of lien on the securities remaining in his 'ossession after the loan, for 6hich the% 6ere lodged, is re'aid !% the customer, if no contract to the contrar% exists$ &n such cases it is an im'lied

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'resum'tion that the customer has re?offered the same securities as a cover for an% other advance outstanding on that date or taken su!se*uentl%$ )he !anker is also entitled to exercise the right of general lien in res'ect of the customer=s o!ligation as a suret% and to retain the securit% offered !% him for a loan o!tained !% him for his 'ersonal use and 6hich has !een re'aid$ &n Ste'hen, Manager "orth Mala!ar (ramin Bank D$ Chandra Mohan and State of 0erala, the loan agreement authorized the !ank to treat the ornaments not onl% as a securit% for that loan transaction, !ut also for an% other transactions or lia!ilit% existing or to !e incurred in future$ 4s the lia!ilit% of he suret% is #oint and several 6ith that of the 'rinci'al de!tor, such lia!ilit% also came 6ithin the am!it of the a!ove 'rovision of the agreement$ Ca"e" >,ere t,e Ban!er cann t Exerc*"e H*" R*+,t f L*en# -$ &n the case of securities de'osited 6ith the !anker for safe custod% onl%, the !anker is acting merel% as a !ailee, and has no lien over such articles$ /$ &n the case of funds and securities s'ecificall% a''ro'riated, the !anker cannot exercise his right of lien !ecause there is an ex'ress contract inconsistent 6ith the lien$ 1$ 4 general lien cannot arises in res'ect of 'ro'ert% of a customer 'ledged as securit% for a 'articular de!t$ 5$ )he !anker cannot exercise his right of lien in res'ect of 'ro'ert% coming into his hands !% mistake or 6hich is 'laced in his hands to cover an advances that is not granted >:ucas D$ +orrenA$ I$ "o lien arises until the due date in res'ect of an advance of a s'ecific amount made for a definite 'eriod$ F$ "o lien arises in case the credit and lia!ilit% do not exist in the same right$ )hus, the !anker cannot exercise his right of lien over the securities or funds of a 'arner in res'ect of a de!t due from the firm$ G$ )he !anker cannot exercise his right of lien in res'ect of a se'arate account maintained !% a customer 6hich is kno6n to the !anker as a )rust 4ccount$ @$ "o lien arises over 'ro'erties on 6hich the customer has no title$ H$ 2ight of (eneral :ien !ecomes that of articular :ien$ Banker=s right of general lien is dis'laced !% circumstances 6hich sho6 an im'lied agreement inconsistent 6ith the rights of general lien$ &n Di#a% 0umar Ds$ MKs 9ullundur Bod% Builders +elhi, and Others >4$&$2$ -H@-, +elhi -/FA, the S%ndicate Bank furnished a !ank guarantee for 2s$ HC,CCC on !ehalf of its customer$ )he customer de'osited 6ith it as securit% t6o fixed de'osit recei'ts, dul% discharged, 6ith a covering latter stating that the said de'osits 6ould remain 6ith the !ank discharged, 6ith a covering letter stating that the said de'osit 6ould remain 6ith the !ank so long as an% amount 6as due to the Bank from the customer$ Bank made an entr% on the reserve of the 2ecei't as 7:ien to B( --K@C8$ ;hen the !ank guarantee 6as discharged, the !ank claimed is right of general lien on the fixed de'osit recei't, 6hich 6as o''osed on the ground that the entr% on the reverse of the letter resulted in the right of a 'articular lien, i$e$, onl% in res'ect of !ank guarantee$ )he +elhi ,igh Court re#ected the claim of the !ank and held that the letter of the customer 6as on the usual 'rinted form 6hile 7the 6ords 6ritten !% the officer of the !ank on the reverse of the de'osit recei't 6ere s'ecific and ex'licit$ )he% are the controlling 6ords, 6hich unam!iguousl% tell us 6hat 6as in the minds of the 'arties at the time$ )hus the 6ritten 6ord 6ill 'revail over the 'rinted 6ord$8 )he right of the !anker 6as deemed that of 'articular lien rather than of general lien$ R*+,t t 1et0 ff )he right of set?of is a statutor% right 6hich ena!les a de!tor to take into account a de!t o6ed to him !% a creditor, !efore the latter could recover the de!t due to him from the de!tor$ &n other 6ords, the mutual claims of de!tor and creditor are ad#usted totether and onl% the remainder amount is 'a%a!le !% the de!tor$ 4 !anker, like other de!tors, 'ossesses this right of set?off 6hich ena!les him to com!ine t6o accounts in the name of the same customer and to ad#ust the de!it !alance in one account 6ith the credit !alance in the other$ For exam'le, 4 ha taken an overdraft from his !anker to the extent of 2s$ I,CCC and he has a credit !alance to the extent of 2s$ /,CCC in his

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savings !ank account, the !anker can com!ine !oth of these accounts and claim the remainder amount of 2s$ 1,CCC onl%$ )his right of set?off can !e exercised !% the !anker if there is no agreement?ex'ress or im'lied?contrar% to his right and after a notice is served on the customer intimating the latter a!out the former=s intention exercise the right of set?off$ )o !e on the safer side, the !anker takes a letter of set?off from the customer authorizing the !anker to exercise the right of set?off 6ithout giving him an% notice$ C nd*t* n" f 1et0 ff# )he right to com!ine accounts to exercise the right of set?off is hedged 6ith *ualifications, as noted !efore, and demands close stud%$ Se'arate 4ccounts of Same Customer. )he se'aration of accounts such 7"o$ - 4KC8, "o$ / 4KC8 and accounts at different !ranches of the same !ank does not of itself de'rive the !anker of the rights of set?off$ Such se'aration is 'rima facie for the sake of convenience and it is the !alance of he com!ined accounts 6hich forms the de!t$ 4 !anker has a right of set?off as !et6een the current and fixed de'osit accounts of a customer$ )his rights of set?off exists 6hether the !anker does or does nto hold the relative de'osit recei't, and can !e exercised although the customer after dra6ing the che*ue ma% have !ecome insolvent, and since the recei't is not negotia!le or even transfera!le, this right of set?off is not defeated should the de'ositor have transferred his de'osit recei't to a holder 6ho takes it in good faith and for value$ Su''ose a customer has a 'rivate account and also other accounts in his name designated as follo6s. a$ Estate 4ccount !$ Executor of C deceased c$ )reasurer of the + School d$ )reasurer of the E Friendl% Societ% e$ 4nnual Function 4ccount$ &f the customer overdra6s na% of the accounts >aA to >eA, it is considered that he is 'ersonall% lia!le for such overdrafts and that the !ank 6ould have a right of set?off against the credit !alance on his 'rivate account, the reason !eing that all the accounts are in the customer=s name$ it does not follo6 that the !ank >exce't in the case of Estate 4ccount, if the <estate= is the customer=s o6nA has a corres'onding right to set off credit !alances on some of the designated accounts against overdraft on others of them, or on the 'rivate account$ &n the case of E Friendl% Societ% the account should not have !een o'ened in the name of an individual, !ut should have !een o'ened in the name of the Societ%$ De9t" D)e *n D*fferent R*+,t"# )hese de!ts cannot !e set off on the 'rinci'le that on man=s mone% cannot !e used to 'a% off other man=s de!ts, as sho6n in the follo6ing cases. *? 1e-arate and / *nt De9t"# Unless the 'arties have agreed to !e #ointl% and severall% lia!le for a #oint de!t, to right of set?off exists !et6een customer=s 'rivate account and an% #oint account in 6hich his name a''ears, as the% are not the de!t due as !et6een the same 'arties and in the same rights$ Similarl%, the #oint credit !alance cannot !e set off against de!it in either of the sole names unless the% have agreed 6ith the !ank that it ma%$ But if it is sho6n that a #oint account through ke't in t6o names is reall% in trust for one of them, the amount due under one account can !e set off against the amount due on another account$ Under the la6 'revailing in &ndia, a de'osit !% a ,indu hus!and in the name of himself and his 6ife 'a%a!le to either or survivor must, in the a!sence of evidence to the contrar%, !e 'resumed to !elng to the hus!and$ )hus, a credit !alance in an account in the #oint names of hus!and and 6ife can !e set off against an overdraft in the sole name of the hus!and$ **? 3*n r5" Acc )nt" and Pr*'ate Acc )nt f G)ard*an# 4n account of a 'art% as guardian for a minor is not to !e treated in the same right as his o6n account 6ith the !anker and so the right of set?off is not availa!le$ ***? A Partner5" Pr*'ate Acc )nt and t,e &*r.5" Acc )nt# &t is an esta!lished rule that !anker cannot set off the credit !alance on a 'artner=s 'rivate account against a de!t due on the firm=s account and vice versa as these are accounts not in the same right$ But if the 'artners are #ointl% and severall% res'onsi!le to the !ank for an% de!t on the firm=s account >as in usuall% the caseA, the !anker 6ould have the right to set off an% credit !alance on the 'artner=s se'arate account against a de!t on the firm=s account$ &n such a case, a reasona!le notice should first !e given

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unless an authorit% to com!ine the accounts is held$ &n case of a sole trader, the account in his 'ersonal name and that in the firm=s name are deemed to !e in the same right and hence the right of set?off can !e exercised in these accounts$ *'? Per" na( Acc )nt" and Acc )nt" *n a &*d)c*ar2 Ca-ac*t2# )he mone% held !% a 'erson in his fiduciar% ca'acit%, i$e$, as executor, administrator or trustee, cannot !e set off against his 'rivate de!t as the same are not held n the same ca'acit%$ But if the fiduciar% account is overdra6n he is 'ersonall% lia!le for the overdraft and his 'rivate credit !alance can !e set off against it, unless the terms on 6hich the overdraft 6as arranged is inconsistent 6ith such a right of set?off$ 4 customer 6ho 'urchased a draft in his o6n name on !ehalf of a 'rinci'le and refused to endorse 6as a trustee in res'ect of the draft amount and the !anker could not set off the trust mone% against the lia!ilit% of the customer in his 'rivate account$ Similarl%, the !alance held in the client=s account of an advocate is held !% him as a trustee and is not to !e treated to !e held in the same ca'acit% in 6hich the amount is held in his 'rivate account$ 4gain, a credit !alance on an account in the name of executor as, for exam'le, 74$B$ Executor of E$B$ +eceased8 is not good set?off against a de!it !alance standing on the account of E$B$ deceased$ De9t" D)e and &)rt,er r C nt*n+ent De9t" )he right of set?off can !e exercised in res'ect of de!ts due and not in res'ect of future or contingent de!ts$ 4 de!t not %et due cannot !e set off against a de!t alread% due$ For exam'le, a !anker cannot set?off a de!t due to him u'on a loan account re'a%a!le on demand or at a certain future date against credit !alance on current account for until demand or arrival of the due date the loan is not due for 'a%ment$ Similarl%, the !anker has no right to set off a de'osit !alance against the de'ositor=s contingent lia!ilit% on current discounted !ills, !ut in the event of customer=s insolvenc%, the !anker has a right to set off credit !alance on the account against the contingent lia!ilit% on an% !ill he has discounted for the customer$ &f the customer has a de'osit account and is also a 'art% to !ill l%ing un'aid, the !anker can refuse 'a%ment of the de'osit to him and a''l% the amount or so much as is re*uired, to the de'ositor=s matured o!ligation held !% the !ank$ 1a(e f 1ec)r*t*e" ;here a !orro6er has lodged securities as cover for an advance and if the !anker a''lied the amount in satisfaction of the amount due and is left 6ith a sur'lus, ha has a right of set?off against the sur'lus for an overdraft on another account even though maintained at another !ranch of the same !ank$ 1t --ed Acc )nt" &n the case of <sto''ed= accounts, the right of set?off !ecomes availa!le to a !anker automaticall%$ 4n account is <sto''ed= 6hen a customer dies or is declared insolvent or insane, or !% the service of a garnishee order$ &n such an event all the accounts of the customer in the same right must a immediatel% com!ined in order to ascertain ho6 much is due to or from the customer=s estate$ )he same ste's 6ill !e taken in the case of a failure of a firm or li*uidation of a com'an%$ )he accounts of a deceased customer are !roken !% his death and all the accounts ma% !e com!ined, setting off an% de!t !alances, !efore 'aving over to the legal 'ersonal re'resentative of the deceased$ ;here a garnishee order is served in res'ect of a customer having more than one account in his o6n right, the !anker has the right to first exercise the right of set?off !efore accounting to the #udgment creditor$ &f the trustee in !ankru'tc% of a customer, 6ho has mone% on de'osit and also an overdraft account, claims, !% 'resenting the de'osit recei't of 'ass !ook, to have the amount of de'osit 'aid to him leaving the !ank to 'rove the 6hole amount of the overdraft, the !anker can refuse to o!lige the trustee and set off the de'osit against the overdraft$ Decea"ed C)"t .er5" O'erdraft Acc )nt and t,e Acc )nt f Exec)t r" r Ad.*n*"trat r" On the death of a customer having an overdra6n account, the !ank cannot de!it his executors or administrator=s account 6ithout their authorit% even though the grant of 'ro!ate or administration is 'roduced !ecause the% cannot !e made 'ersonall% lia!le for the deceased=s de!t 6ithout their consent$ Executors or administrators are 'ersonall% >!ut #ointl%, not severall%A lia!le for mone% 6hich the% !orro6, and for other de!ts 6hich the% incur, in the course of their administering their testator=s or in estate=s estate, and their creditors are not the creditors of the estate >Farhall D$ Frhall -HG-A$ Even if the% have an account in their #oint names 6ith a !alance sufficient to discharge the

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de!t, there is no right of set?off !et6een that account and deceased=s$ )he mone% in the hands of the 'ersonal re'resentative is availa!le for distri!ution amongst all the creditors of the estate$ &f the deceased=s account 6as overdra6n at the time of his death, the !ank ma% continue to hold the securities, if an%, de'osited !% the deceased against his overdraft, !ut if the executors or administrators take the overdraft into their o6n names >6hich the% are not o!liged to doA, it !ecomes a 'ersonal lia!ilit% of theirs, and ceases to !e secured !% securities de'osited !% the deceased, unless the% are recharged !% them to secure such lia!ilities$ &t is the 'ractice of !anks to o!tain an ackno6ledgement of #oint and several lia!ilit% from #oint executors or administrators !efore 'ermitting overdrafts in their names$ )his is usuall% included in the mandate form$ 4mounts of +e!ts Must !e Certain. &t is essential that the de!ts due from !oth the 'arties to each other must !e definitel% ascertaina!le other6ise the right of set?off cannot !e exercised$ For exam'le, a !anker cannot set off credit !alance in the account of a guarantor of a loan account till his lia!ilit% as a guarantor is determined$ &f the guarantee is on demand, no de!t in a o6ing !% the guarantor 'a%a!le until the demand is made and accordingl% until then there can !e no right of set off$ 4s soon as the demand is made the right of set?off can !e exercised$ 6. Ban!er5" R*+,t f A--r -r*at* n GR)(e *n C(a2t n5" Ca"e?# &n the course of his usual !usiness, a !anker receives 'a%ments fro his customer$ &f the latter has more than one account or has taken more than one loan fro the !anker, the *uestion of a''ro'riation of the mone% su!se*uentl% de'osited !% him naturall% arises$ Section IH to F- of the &ndian Contract 4ct, -@G/ contains 'rovisions regarding the right of a''ro'riation of 'a%ments in such cases$ 4ccording to Section IH such right of a''ro'riation is vested in the de!tor 6ho makes a 'a%ment to his creditor to 6hom he o6nes several de!ts$ ,e can a''ro'riate the 'a%ment to his creditor to 6hom he o6es several de!ts$ ,e can a''ro'riate the 'a%ment !% iA an ex'ress intimation r iiA under circumstances im'l%ing that the 'a%ment is to !e a''lied accordingl%$ For exam'le, 4 o6es B served de!ts, including 2s$ -,CCC u'on 'romissor% note 6hich falls due on -st +ecem!er -HHF$ ,e o6es B no other de!t of the amount$ On -?-/?-HHF 4 'a%s B 2s$ -,CCC the 'a%ment is to !e a''lied to the discharge of the 'romissor% note$ &f the de!tor does not intimate or there is no other circumstances indicating to 6hich de!t the 'a%ment is to !e a''lied, the right of a''ro'riation is vested in the creditor$ ,e ma% a''l% it at his discretion to an% lo6ful de!t actuall% due and 'a%a!le to him from the de!tor$ >Sec FCA Further, 6here neither 'art% makes an% a''ro'riation, the 'a%ment shall !e a''lied in discharge of the de!ts in order of time$ &f the de!ts are of e*ual standing the 'a%ment shall a''lied in discharge of each 'ro'ortionatel% >Sec, F-A$ &n a recent case MKs 0haravela &ndustries vt$ :td$ Ds Orissa State Financial Cor'oration and Others >4&2 -H@I Orissa -I1 >4AA, the *uestion arose 6hether the 'a%ment made !% the de!tors 6as to !e ad#usted first to6ards the 'rinci'al or interest in his a!sence of an% sti'ulation regarding a''ro'riation of 'a%ments in he loan agreement$ )he Court held that in the case of de!t due 6ith interest, an% 'a%ment made !% the de!tor is in he first instance to !e a''lied to6ards satisfaction of interest and thereafter to6ards the 'rinci'al unless there is an agreements to the contrar%$ &n case a customer has a single account and he de'osits and 6ithdra6s mone% from it fre*uentl%, the order in 6hich the credit entr% 6ill set off the de!it mone% is the chronological order, as decided in the famous Cla%ton=s Case, discussed !elo6. C(a2t n5" Ca"e GDe'a2ne" $. N 9(e # 1=1:? 4 firm of !anker kno6s as +eva%nes, +eives, "o!le 3 Co$, had five 'artners$ +eva%nes, the senior 'artner, died and the surviving 'artners, carried on the !usiness of !anking under the same name$ )he executors of he deceased 'artner o!#ected to the continuance of the name of +eva%nes in the firm=s name$ 4fter a %ear the firm !ecame !ankru't and various classes of creditors of the firm 'laced their claims against the estate of +eva%nes, the deceased 'artner$ "$ Cla%ton 6as one of the those creditors 6ho continued to deal 6ith the surviving 'artners !% making 'a%ments to and receiving 'a%ments from the firm$ 4t the time of death of +eva%nes, Cla%ton=s !alance 6as T-,G-1$ +uring the next fe6 da%s he 6ithdre6 several times and thus the !alance 6as reduced to T5I1$ )hereafter surviving 'artners 'aid more than T-,G-1 to him and su!se*uentl% his de'osits 6ith the firm largel% exceeded the amounts

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6ithdra6n !% him and thus his credit !alance at the time of !ankru'tc% of the firm 6as larger than the amount 6hich 6as due to him at the time of death of +eva%nes$ Cla%ton claimed that the amount of T5I1 >as reduced !% the divided on this amount 6hich he received from the :i*uidator of the firmA 6as due to him from the estate of the deceased 'artner$ ,is contention 6as that? iA the 6ithdra6als from the account after the death of the 'artner 6ere 'aid out of the de'osits made in the same 'eriod and thus$ iiA the credit !alance standing at the time of the 'artner=s death 6as recovera!le from the deceased 'artner=s assets$ )hese arguments 6ere not acce'ted !% the Court and Cla%ton=s claim 6as re#ected$ Sir ;illiam (rant M$2$ o!served the general rule of a''ro'riation as follo6s. 7)his is the case of a !anking account 6here all the sums 'aid in form one !alanced fund, the 'arts of 6hich have no longer an% district existenceSS &n such a case there is no room for an% other a''ro'riation than that 6hich arises from the order in 6hich the recei'ts and 'a%ments take 'lace and are carried into the account$ resuma!l%, it is the sum first 'aid in, that is first dra6n out$ &t is the first item on the de!it side of the account, that is discharged or reduced, !% the first item on the credit side$8 )hus the first item on the de!it side 6ill !e the item to !e discharged or reduced !% a su!se*uent item on the credit side$ )he credit entries in the account ad#ust or set off the de!it entries in the chronological order$ )he rule derived from the Cla%ton=s case is of great 'ractical significance to the !ankers$ &n case of death, retirement or insolvenc% of a 'artner of a firm, then the existing de!t due from the firm is ad#usted or set off !% su!se*uent credit made in the deceased, retired or insolvent 'artner and ma% ultimatel% suffer the loss if the de!t cannot !e recovered from the remaining 'artners$ )herefore, to avoid the o'eration of the rule given in the Cla%ton=s case the !ank closes the old account of the firm and o'ens a ne6 o'en in the name of the reconstituted firm$ )hus the lia!ilit% of the deceased, retired or insolvent 'artner, as the case a% !e, at the time of his death, retirement or insolvenc% is determined and he ma% !e held lia!le for the same$ Su!se*uent de'osits made !% survivingKsolvent 'artners 6ill not !e a''lica!le to discharge the same$ 7. R*+,t t C,ar+e Intere"t and C ..*""* n )he Banker has an im'lied right to charge a reasona!le commission >kno6n as !ank chargesA for its services to the customer and interest on loans advanced$ )he right to charge interest ma% !e either !% ex'ress agreement or !% !anking custom$ )he right to charge interest ceases on the death or insolvenc% of the customer$ Sim'le interest is 'aid in the case of de!ts due to others$ But in the case of !ankers unless there is an agreement to the contrar% the customer has to 'a% interest once in a *uarter$ ;here it is not 'aid in cash it 6ill !e added to the 'rinci'al and it amounts to com'ound interest$ Bankers like6ise make half?%earl% interest 'a%ments on the de'osis the% receive$ Bank charges are levied in the case of overdrafts, cash credit and current accounts !ut not in the case of Savings accounts$ ;here the customer maintains large !alance in the current account, !ankers 6aive these charges, since it is 'rofita!le to have large !alances 6ithout interest$

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LE11ON 1< NEGOTIABLE IN1TR%3ENT1 Bills of Exchange, Che*ues and romissor% "otes are the negotia!le instruments 6ith 6hich the !anker mainl% deals and therefore it is essential to kno6 the la6 and 'ractice relating to these instruments in great detail$ Of course, of the three instruments che*ues are more im'ortant to !ankers, !ut then most of the legal sti'ulations are common to all the three instruments$ W,at *" a Ne+ t*a9(e In"tr).entD "egotia!le &nstruments are essentiall% credit instruments 6ith features of negotia!ilit%$ )herefore, to clearl% understand them one should first understand their commercial character$ Credit is the 'rivilege to !u% no6 and 'a% later$ &t also includes !orro6ing of mone% no6 6ith a vie6 to 'a% later$ &nstruments 6hich evidence or ackno6ledge such credits are called Credit &nstruments$ )here are some credit instruments 6hich are not negotia!le$ )hat is the% are credit instruments !ut the% do not have the features of negotia!le$ &$O$U$ >lo6e %ouA and 'ostal order are exam'les of such non?negotia!le credit instruments$ Of the negotia!le instruments, some are negotia!le under la6 >i$e$ "egotia!le &nstruments 4ct of -@@-A$ ;hile the other are negotia!le !ecause of mercantile usage and custom, !ills of exchange, 'romissor% notes, and the che*ues are the three instruments 6hich are negotia!le under la6$ 4 detailed discussion of the three instruments follo6s later, !ut at this stage a !rief distinction !et6een the three instruments is given$ Su''ose 4 sells goods 6orth 2s$ -,CCC to B on credit$ )he credit so allo6ed ma% !e secured !% means of different instruments 6hich are given !elo6. -$ 4 ma% dra6 an unconditional order on B to 'a% the mone% himself or some other s'ecified 'erson$ Such an order is called the Bill of exchange$ /$ B ma% execute an unconditional 'romise to 'a% the mone% to 4 or his order$ )he instrument containing the 'romise is called 'romissor% note$ 1$ B ma% dra6 a unconditional order on his !anker >6ith 6hom he has de'osited mone% on Current 4ccountA to 'a% 4 or his order a sum of 2s$ -,CCC onl%$ Such an order on the !anker is called a che*ue$ (overnment of &ndia Bonds and dividend 6arrants are exam'les of instruments 6hich are negotia!le according to usage and custom$ )his is so !ecause (overnment of &ndia Bonds are similar to 'romissor% notes and dividend 6arrants are similar to che*ues$ Def*n*t* n f Ne+ t*a9(e In"tr).ent" )he "egotia!le &nstruments 4ct does not define a negotia!le instruments and merel% states that <a negotia!le instruments means a 'romissor% note, !ill of exchange of che*ue 'a%a!le either to order or !earer8 >Section -1A$ )his does not indicate the characteristics of negotia!le instrument !ut onl% states that three instruments?che*ue, !ill of exchange and 'romissor% note are negotia!le instruments$ )hese three instruments are, therefore, negotia!le instruments !% statute$ Section -1 does not 'rohi!it an% other instruments, 6hich satisfies the essential features of negotia!ilit%, to !e treated as negotia!le instrument$ )he essential feature of a negotia!le instrument is its negotia!ilit% as discussed !elo6$ 9ustice 0$C$ ;illis defines a negotia!le instrument as 7one the 'ro'ert% in 6hich is ac*uired !% an% one 6ho takes it !onafide, and for value8 not 6ithstanding an% defect of title in the 'erson from 6hom he took it$ 4nother useful definition is given !% )homas 6ho states that <an instrument is negotia!le 6hen it is, !% a largel% recognized custom of trade or !% la6, transfera!le !% deliver% or !% endorsement and deliver%, 6ithout notice to the 'art% lia!le, in such a 6a% that aA the holder of its for the time !eing ma% sue u'on it in his o6n name, and !A the 'ro'ert% in it 'asses to a !ona fide transferee for value free from an% defect in the title of the 'erson from 6hom he o!tained it8$ )hese definitions clearl% reveal the true nature of a negotia!le instrument$ 4 negotia!le instrument is a transfera!le documents either !% the a''lication of the la6 or !% the custom of the concerned$ )he s'ecial feature of

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such an instrument is the 'rivilege it confers on the 'erson 6ho receives it !ona fide and for value, to 'osses good title thereto ever if the transferor had no title or had defective title to the instrument$ D ctr*ne f Ne+ t*a9*(*t2 )here are three essential *ualities attached to a negotia!le instrument$ Firstl%, a negotia!le instruments must !e transfera!le, that is the 'ro'ert% in it?the legal o6nershi'?must !e transfera!le !% mere deliver%, accom'anied, in the case of an instrument 'a%a!le to order, !% endorsement$ "o instrument of transfer is re*uired and no notice of transfer need !e given to the 'art%K'arties lia!le on the instrument$ Secondl%, it must give to the 'erson 6ho takes it in good faith, for value and 6ithout notice of an% defect in the title of the transferor, an indefeasi!le title against all comers$ 4lso the title 'asses free from e*uities and counter? claims !et6een 'revious 'arties of 6hich the transferee has no notice$ )hirdl%, a negotia!le instruments must contain a right of action in itself, the 'ossessor of it is deemed to !e the true o6ner ca'a!le of enforcing an% claims thereon?!e is under no dut% to #ustif% his title in the first instance$ +eliver%. +eliver% is defined as a transfer of 'ossession from one 'erson to another and is essential for the negotiation of a negotia!le instrument$ &f an instrument is to !e negotia!le, it must !e 'ossi!le to 'ass title ot the instrument and the rights em!odied in it !% mere deliver% or !% deliver% and endorsement, de'ending u'on 6hether it is 'a%a!le to !earer or order$ 4 document is not negotia!le if title to it can onl% !e transferred !% some se'arate document of transfer andKor the transfer is to !e recorded in some reister of title as, for exam'le, shares registered in the !ooks of the issuing com'an% and re'resented !% a share certificate$ On the other hand, a share 6arrant in !earer form and a !earer de!enture 6hich can !e transferred !% deliver%, are negotia!le$ +eliver% ma% !e actual or constructive >Section 5FA$ 4ctual deliver% takes 'lace !% actual change of 'ossession of the instrument from one 'erson to another$ )he instrument must !e handed over 'h%sicall% to 6hom it is actuall% intended to !e delivered or to his authorized agent$ For instance, 6hen 4, the holder of a negotia!le instrument 'a%a!le to !earer, delivers it to B=s agent to !e ke't for B, the instrument has !een negotiated$ Constructive deliver% im'lies that the instruments is not delivered or handed over to the 'erson to 6hom it is interned to !e delivered !ut the 'ossession of the instrument is in la6 deemed to have !een transferred 6hen deliver% is com'leted !% some act 6hich change the 'ossession in the e%es of la6 form the transferor to the transferee$ &n such a case the *uestion of intention comes in$ For exam'le 4, the holder of a negotia!le instrument 'a%a!le to !earer, 6hich is in the hands of 4=s !anker directs the !anker to transfer the instrument to B=s account 6ith him$ )he !ank on acce'ting the instructions no6 holds the instrument as a agent of B$ )he instrument has !een negotiated and B has !ecome the holder of it$ Mode of )ransfer. )he mode of transfer 'rovided !% the "egotia!le, &nstruments 4ct de'ends u'on the character of instrument$ 4ccording to Section -1 a negotia!le instrument ma% !e 'a%a!le to . iA !earer, or iiA s'ecified 'erson or order ;hile a !earer che*ue 'asses !% sim'le deliver%, an order che*ue 'asses !% endorsement and deliver%$ 4n instrument is said to !e 'a%a!le to !earer 6hich is sim'l% so ex'ressed 7 a% !earer8, or 6hich is ex'ressed thus$ 7 a% to Sham :al or !earer8, or 6hich having !een made 'a%a!le to a s'ecified 'a%ee or his order has !een endorsed in !lank, that is, he has 6ritten nothing more than his signature$ &n effect, an 7endorsement in !lank8 converts the 7order8 instrument into a !earer instrument$ )he legal right to the 'roceeds of a 7!earer8 che*ue 'asses from the dra6er to 6hoever 'resent if for 'a%$ 4n instrument is 'a%a!le to order 6hich is 'a%a!le to order of a s'ecified 'erson or 6hich is 'a%a!le to a s'ecified 'erson or his order$ 4n instrument in the form of 7 a% to the order of 48 is of the same effect as one dra6n 'a%a!le to 74 or order8 6hich is 'a%a!le to 4 or his order$ ;ith an order che*ue the legal right to the 'roceeds of the che*ue 'asses from the dra6er to the 'a%ee$ &f the 'a%ee 6ishes it to 'ass to another 'erson !e must endorse the che*ue to 'ass on the title$

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4n instrument made 'a%a!le to a 'articular 'erson and not containing 6ord 'rohi!iting transfer or indicating an intention that it shall not !e transfera!le is defined to !e instrument 'a%a!le to order and is negotia!le$ )hus, the 6ord 7order8 or 7!earer8 are not necessar% to render a che*ue negotia!le$ For exam'le, if a che*ue is dra6n < a% 4= 6ithout the 6ords <or order= or <or !earer= the che*ue is transfera!le and negotia!le and not 'a%a!le onl% to <4= in 'erson$ But it is unfortunate that some !ankers are udder the 6rong notion that a che*ue from 6hich the 6ord <!earer= is struck and there is no su!stitution of the 6ord <order= is not negotia!le and the%, therefore, refuse to 'a% such a che*ue unless 'resented !% the 'a%ee himself in his !anker$ "otice of )ransfer or &nstrument of )ransfer "ot "ecessar%. ;hen a negotia!le instrument, sa% a che*ue, is engorsed to someone, there is no need for either the endorser or endorsee to inform the dra6er or to com'lete an% ancillar% document$ )his characteristic is not true of non?negotia!le instruments, as, for exam'le, 6hen an% life insurance 'olic% is assigned to a !anker as securit% for an advance, notice of assignemtn 6il have to !e given to the insurance com'ant$ &n the cases of assignment of choses?in?action, it is necessar% to give notice of assignmenrt to the de!tor or fund?holder so as to 'revent him from dealing 6ith the chose?in?action in a manner detrimental to the interests of the assignee unless the de!tor or fund?holder is a 'art% to the assignment$ 4 chose?in?action is a 7thing8 to 6hich a 'erson has a right and can enforce that right !% action in a court of la6, !ut he does not actuall% have 'ossession of the 7thing8$ :ife 'olicies and de!entures, for exam'le, are chosen?in?action$ **? Tran"fer f T*t(e# )he 'hrases <free from e*uities= and <'erfect title= occur fre*uentl% in descri!ing the rights of a holder of a negotia!le instrument$ Other common 'hrases are <free from all deference8 or 7free from defects of title8$ )hese 'hrases all have the same ultimate meaning and it is im'ortant that the meaning is gras'ed soundl% at an earl% stage$ 4n e*uit% defence or defect refers to a sustaina!le reason for dis'uting or refusing 'a%ment of the !ill$ &f a che*ue is issued for goods 6hich 'rove to !e defective or su!standard, the dra6er has grounds for sto''ing the che*ue refusing 'a%ment$ )his is an e*uit% or defence against the 'a%ee$ Similarl%, a !earer che*ue 6hich has !een lost or stolen has thereafter an e*uit% or defence against the 'a%ee$ Similarl%, a !earer che*ue 6hch has !een lost or stolen has thereafter an e*uit% or defence attached to it$ )he finder of thief is a 6rongful 'ossessor$ )he dra6er has the right to refuse 'a%ment s the finder=s or thief=s title is defective$ &n !oth these instances, under the !asic rule of transfera!ilit%, the ne6 holder 6ould take the che*ue su!#ect to e*uities$ )hat is he 6ould inherit all the 6eaknesses in the title of his transfer and an% defence or argument 6hich could !e raised against the transfer could !e sustained e*uall% 6ell against the ne6 holder$ 4 negotia!le instrument gives to a 'art% 6ho takes it in good faith, for value and 6ithout notice of an% defect in the title of the transfer, an indefeasi!le title against all 'arties and he 6ill not !e affected !% an% 'rior defect in the title$ )he title to the instrument 'asses free from defects in the title of 'revious 'arties and from all counter?claims !et6een the 'arties$ So 'aramount is the *ualit% of conferring a good title that a 'art% taking a stolen negotia!le instrument under the conditions #ust mentioned 6ould have a good title against the 'art% from 6hom it has !een stolen$ )he reci'ient 'art% and the holders of the documents su!se*uent to him ma% disregard the defects in title and enforce the document as if it 6ere in ever% res'ect 'erfect$ )he legal relations hi' !et6een the 'erson first !ound and the 'erson first entitled on a negotia!le instrument is one of contract and in la6 there is a !asic 'rinci'le that onl% the immediate 'arties to a contract ma% !e entitled on and !e !ound !% it$ )he 'rinci'le of negotiation, a''lica!le to !ills of exchange >including che*uesA, is an exce'tion to the aforesaid !asic 'rinci'le as sho6n a!ove$ 4gain, in la6 there is a 'rinci'le that a 'erson 6ith a defective title to 'ro'ert% ma% not normall% give a 'erson to 6hom he transfers the 'ro'ert% a !etter title than he himself has$ )his is often ex'ressed in the :atin maxim nemo dat *uod non ha!et >"o!od% can give 6hat he has not gotA$ &f the transfer had a defective title, the same defective title is the onl% title 6hich he could transfer$ ;hen a 'erson o!tains 'ro'ert% from one 6ho is dealing 6ith it 6ithout the authorit% of the true o6ner, no title is ac*uired against the true o6ner unless the 'rinci'le of esto''els o'erates against him$ )hus, a !u%er cannot get a valid title to stolen goods sold to him !% the thief even if the !u%ers has no notice of theft$ "egotia!ilit% is also an exce'tion to this 'rinci'le$

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&n the case of negotia!le instrument, a !onafide transferee for value ac*uires a god title su!#ect to his satisf%ing certain conditions even if the title of the transferor 6ere defective$ Such a transferee is kno6n as a 7holder in due course8, and he ma%, in fact get a !etter title than the transferor$ For instance, if a !earer che*ue is stolen and the thief transfers it for value to an innocent third 'art%, the latter 6ould get a 'erfect title 'rovided he *ualifies as holder in due course$ )he transferee is generall% not re*uired to investigate the transferor=s title to the instrument !ecause the negotia!le instruments are intended to !e dealt 6ith s'eedil%$ )hus, it is the exce'tions to these t6o 'rinci'les of nemo dat *uod non ha!et and 'rivit% that constituties the essence of negotia!ilit%$ &n other 6ords, 6hen a !ill of exchange >including che*ueA is negotiated >either !% deliver% or !% deliver% 'lus endorsementA the ne6 holder can, under s'ecified circumstances, take the !ill <free from e*uities= 4rguments, dis'utes or reasons for refusing 'a%ment against the original holder cannot !e raised against the ne6 holder$ ***? An Act* n *n La># &f a che*ue or !ill is dishonoured 6hen 'resented for 'a%ment, the holder can sue on it in his o6n right$ ,e does not have to claim through 6ho transferred he instruments to him$ )here is right of action in he instrument itself$ Because of the characteristics mentioned a!ove, negotia!le instruments can 'ass freel% from hand to hand$ )he negotia!ilit% can, ho6ever, !e destro%ed if it contains 6ords to that effect as, for exam'le, in the case of che*ue crossed 7"ot "egotia!le8 T2-e" f Ne+ t*a9(e In"tr).ent" )hough the negotia!le instruments 'osses the a!ove?mentioned features, the% fall under t6o categories as follo6s. iA "egotia!le &nstruments !% Statute. 4s alread% stated the "egotia!le, instruments 4ct states three instruments?che*ue, !ill of exchange and 'romissor% notes?as negotia!le instruments$ )he% are, therefore called negotia!le instruments !% statute$ iiA "egotia!le &nstruments !% Custom or Usage. Some other instruments have ac*uired the character of negotia!ilit% !% the custom or usage of trade$ Section -1G of the )ransfer of ro'ert% 4ct$, -@@/ also recognized that an instrument ma% !e negotia!le !% la6 or custom$ )hus in &ndia (overnments romissor% notes Shah 9og hundis, deliver% orders and rail6a% recei'ts have !een held to !e negotia!le !% usage or custom of the trade$ Exce'tional Case of "egotia!le &nstruments. (enerall% the negotia!le instruments 'ossess all the essential features discussed a!ove$ But sometimes the dra6er or the holder ma% take a6a% the essential characteristic of negotia!ilit% and thus the instrument ceases to !e a transfera!le or negotia!le instrument$ Exam'les. iA &f a che*ue is 'a%a!le to a s'ecific 'erson onl% and not to his order or the !earer, it cannot !e transferred to an% other 'erson and hence it loses its negotia!ilit%$ iiA if a che*ue is crossed <"ot "egotia!le=, it can !e transferred !ut 6ithout conferring on the transferee a!solute and good title in all cases$ )he transferee of such a che*ue 6ill stand at 'ar 6ith the transferee of an% other commodit% and shall not 'osses title !etter than that of his transferor$ Def*n*t* n" f Pr .*"" r2 N teE B*(( f Exc,an+e and C,e;)e romissor% "ote. 4 <'romissor% note= is an instrument in 6riting >not !eing a !ank not or a currenc% noteA containing an unconditional undertaking, signed !% the maker, to 'a% a certain sum of mone% onl% to, or to the order of, a certain 'erson or to the !earer of the instrument >Section 5A From this definition, it is clear that a 'romissor% note -$ must !e in 6riting, /$ must contain an undertaking or 'romise to 'a%$ )hus, a mere ackno6ledgement of inde!tedness is not sufficient$ 4lso, a recei't for mone%, if it does not contain ex'ress 'romise to 'a% is not a 'romissor% note$ But, if the recei't is cou'led 6ith a 'romise to 'a%, it shall !e a 'romissor% note$

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Exam'le . 7;e have received a sum of 2s$ H,CCC from Shri 2$2$ Sharma$ )his amount 6ill !e re'aid on demand$ ;e have received this amount in cash8 ,eld, this is a 'romissor% note >Sur#it Singh Ds$ 2am 2atanA ,o6ever notice, that the use of the 6ord <'romise= is not essential to constitue an instruments as <'romissor% note=$ 1$ the 'romise to 'a% must not !e conditional$ )hus, instruments 'a%a!le on 'erformance or non?'erformance of a 'articular act or on the ha''ening or non?ha''ening of an event are not 'romissor% notes$ Exam'le . iA 4 'romises to 'a% B 2s$ ICCC 'rovided C leaves sufficient mone% in favour of 4 after C=s death, is not a 'romissor% note$ iiA 4 'romises to 'a% B 2s$ I,CCC seven da%s after his marriage 6ith C, is again not a 'romissor% note$ ,o6ever, the 'romise to 'a% ma% !e su!#ect to a condition 6hich according to the ordinar% ex'erience of mankind is !ound to ha''en$ )hus, 6here 4 'romises to 'a% B 2s$ I,CCC after the death of C, it is not a conditional 'romise !ecause it is certain that C shall die and hence it is a valid 'romissor% note$ 5$ )he undertaking must !e to 'a% a certain sum of mone%$ For instance 6here the 'romise is to 'a%, sa% 2s$ -C,CCC 6ith interest, it is not a 'romissor% note$ But, ho6ever, 6here rate of interest is s'ecified it makes the sum certain$ I$ )he mone% ma% !e 'a%a!le either to or to the order of a certain 'erson or to the !earer of the note$ F$ &t must !e signed !% the maker$ Exa.-(e" f Pr .*"" r2 N te -$ & 'romise to 'a% B or order 2s$ ICC$ /$ & ackno6ledge m%self inde!ted to B in 2s$ -,CCC to !e 'aid on demand for value received$ )he follo6ing are not 'romissor% notes$ -$ /$ 1$ 5$ I$ F$ G$ Mr$ B$&$O$U >& o6e %ouA 2s$ ICC & am lia!le to 'a% %ou 2s$ICC 7& 'romise to 'a% B 2s$ I,CCC and all other sums 6hich shall !e due to him8$ 7& 'romise to 'a% B 2s$ I,CCC, first deducting thereout an% mone% 6hich he ma% o6e me8 7& 'romise to 'a% B 2s$ -C,CCC seven da%s after m% marriage 6ith C8 7& 'romise to 'a% B 2s$ -C,CCC on +=s death, 'rovided + leaves me enough to 'a% that sum8$ 7& 'romise to 'a% B 2s$ I,CCC and to deliver him m% !lack horse on - st 9anuar% next8

1PECI3EN O& PRO3I11ORY NOTE ??????????????????????????????????????????????????????????????????????????????????? 2s$ -C,CCC "e6 +elhi --C C-F Oct$ -1, -H@G Six months after date & 'romise to 'a% E or order the sum of 2u'ees )en )housand onl% for value received$ )o E 4ddress ?????????????? Stam' Sd. ?????????? ?????????????????????????????????????????????????????????????????????????

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On the !asis of the a!ove discussion, 6e ma% summarize the !asic features of a 'romissor% note as given !elo6. ??????????????????????????????????????????????????????????????????????? E""ent*a(" r C,aracter*"t*c" f a Pr .*"" r2 N te -$ /$ 1$ 5$ I$ F$ G$ @$ H$ &t must !e stam'ed$ &t must contain a 'romise or undertaking to 'a% )he 'romise must not !e conditional )he undertaking must !e to 'a% certain sum of mone% &t ma% !e 'a%a!le on demand or after a 'articular date &t cannot !e 'a%a!le to !earer >Sec 1- or 2B& 4ctA &t cannot !e 'a%a!le to !earer on demand >Sec 1- of 2B& 4ctA &t cannot !e crossed like a che*ue "um!er, 'lace, date, etc$, are not essential for a 'romissor% not$ &f it does not !ear a date, it is deemed to have !een made 6hen it 6as delivered -C$ &t ma% !e 'a%a!le !% installments$ ?????????????????????????????????????????????????????????????????????????????????????? B*((" f Exc,an+e 4 <!ill of exchange= is defined !% Sec$ I of the "egotia!le &nstrument 4ct$, -@@- as 7an instrument in 6riting, containing an unconditional order, signed !% the makers, directing a certain 'erson to 'a% a certain sum of mone% onl% to or to the order of, a certain 'erson, or to the !earer of the instruments8$ &n England, a !ill of exchange is defined under Section 1 >-A of the Bill of Exchange 4ct as <an unconditional order in 6riting, addressed !% one 'erson to another, signed !% the 'erson giving it, re*uiring the 'erson to 6hom it is addressed to 'a% on demand or at a fixed or determina!le future time a sum certain in mone% to or to the order of a s'ecific 'erson, or to the !earer8$ Both these definitions 'oints out that a !ill exchange should !e -A in 6riting, /A unconditional, 1A in the form of an order not a 'romise or re*uest, 5A for a sum of mone%, not for a sum of mone%, not for a commodit% or an%thing and IA 'a%a!le to a certain 'erson or to his order or to the !earer of the instrument$ 1PECI3EN O& PRO3I11ORY NOTE ??????????????????????????????????????????????????????????????????????????????????? 2s$ -C,CCC "e6 +elhi --C C-F Oct$ -1, -H@G Six months after date 'a% to order the sum of 2u'ees )en )housand onl% for value received$ )o V 4ddress ?????????????? Stam' Sd. ?????????? ????????????????????????????????????????????????????????????????????????? )he s'ecimen given a!ove is of a usance !ill, 'a%a!le after a s'ecified 'eriod of time$ 4 !ill of exchange ma% !e dra6n 'a%a!le <at sight= i$e$ on demand or 'a%a!le <after certain time after sight= Basic features of a !ill exchange ma% !e summed u' as hereunder$ ????????????????????????????????????????????????????????????????????????

87

E""ent*a(" r C,aracter*"t*c" f a B*((" f Exc,an+e -$ /$ 1$ 5$ I$ F$ G$ @$ H$ -C$ &t must !e stam'ed &t contains an order to 'a% Order must !e unconditional Sum 'a%a!le must !e certain Ma% !e dra6n 'a%a!le to !earer Cannot !e made 'a%a!le to !earer on demand Cannot !e crossed like a che*ue 2e*uires acce'tance !% the dra6ee unless 'a%a!le on demand &t is dishonoured !% non?acce'tance or non?'a%ment &t ma% !e 'a%a!le !% instalments

??????????????????????????????????????????????????????????????????????????????????? C,e;)e# 4 che*ue is defined as 7a !ill of exchange dra6n on a s'ecified !anker and not ex'ressed to !e 'a%a!le other6ise than on demand8$ >Section F of the "egotia!le &nstruments 4ct, -@@-A$ )hus a che*ue is a !ill of exchange !ut al6a%s dra6n on a s'ecified !anker and is al6a%s 'a%a!le on demand, not other6ise$ D*"t*nct* n 9et>een Pr .*"" r2 N te and B*(( f Exc,an+e romissor% note differs from a !ill of exchange in the follo6ing res'ects$ Pr .*"" r2 N te -$ )here are onl% t6o 'arties, the maker >de!torA and the 'a%ee >creditorA B*(( f Exc,an+e )here are three 'arties the dra6er, the dra6ee and the 'a%ee, although an% t6o of these ca'acities ma% !e filled !% one and the same 'erson &t contains an unconditional order to the dra6ee to 'a% according to the dra6er=s directions$ 4 !ill 'a%a!le <after sight= must !e acce'ted !% the dra6ee or his agent !efore it is 'resented for 'a%ment$ )he lia!ilit% of the dra6er is secondar% and conditional u'on non?'a%ment !% the dra6ee "otice of dishonour must !e given !% the holder to the dra6er and the intermediate indorsers to hold them lia!le thereon$ )he maker or dra6er does immediate not stand in intermediate relation 6ith the 'a%ee !ut 6ith the acce'tor or dra6ee$

/$ 4 note contains an unconditional 'romise !% the maker to 'a% the 'a%ee 1$ "o 'rior acce'tance is needed

5$ )he lia!ilit% of the maker on dra6er is 'rimar% and a!solute$ I$ "o notice of dishonour need !e given

F$ )he maker of the note stands in relation 6ith the 'a%ee

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D*fference 9et>een B*(( f Exc,an+e and C,e;)e )hough a che*ue is defined as a !ill of exchange, it differs from the latter in the follo6ing res'ects$ C,e;)e -$ &t must !e dra6n onl% on a !anker /$ )he amount is al6a%s 'a%a!le on demand$ 1$ )he holder of a che*ue is of grace 5$ 4cce'tance is not needed I$ 4 che*ue can !e crossed F$ "otice of dishonour is not necessar%$ )he 'arties thereon remain lia!le, even if no notice of dishonour is given G$ 4 che*ue is not to !e noted or 'rotested in case of dishonour @$ )he 'rotection given to the 'a%ing !anker in res'ect of crossed che*ues is 'eculiar to this investment$ B*(( f Exc,an+e &t can !e dra6n on an% 'erson including a !anker )he amount ma% !e 'a%a!le on demand or after a s'ecified time$ 4 holder of a !ill is entitled not entitled to da% to three da%s of grace 4 !ill 'a%a!le after sight must !e acce'ted Crossing of a !ill of exchange is not 'ossi!le "otice of dishonour is necessar% to hold the 'arties lia!le thereon$ 4 'art% 6hich does not receive a notice of dishonour can generall% esca'e is lia!ilit% thereon 4 !ill is noted or 'rotested to esta!lish dishonour "o such 'rotection is availa!le in the case of !ills

+istinguishing Features of Che*ues, Bill of Exchange and romissor% "ote. Based on the a!ove statutor% definitions, the follo6ing are the distinguishing features of the three negotia!le instruments indicating the similarities and contracts !et6een them. 1. In"tr).ent" *n >r*t*n+ # )he lo6 re*uires that a che*ue, !ill or 'romissor% note must !e an instrument in 6riting$ &t does not s'ecif% an% 'articular material 6ith 6hich it is to !e 6ritten$ )hough a negotia!le instruments 6ritten 6ith a 'encil is not 'rohi!ited !% la6, in 'ractice the !ankers do not acce't such instruments !ecause of risk involved 4lternations therein ma% !e easil% made 6hich cannot !e detected$ 2. %nc nd*t* na( rder4-r .*"e# 4 che*ue and a !ill of exchange contain an order to the dra6ee 6hereas a 'romissor% note contains a 'romise !% the maker to his creditor$ )hus the main difference !et6een a che*ue and a !ill on the one hand and a 'romissor% note on the other is that the che*ue and the !ill contain an order from the creditor to the de!tor to 'a% a sum of mone% 6hile he 'romissor% note contains an undertaking or 'romise made !% the de!tor to his creditor to 'a% the sum s'ecified therein$ ,o6ever, there is one common feature of a 'romissor% note, che*ue and a !ill$ )he 'romise in the former and the order in the latter must !e an unconditional one i$e$, the 'a%ment should not !e made de'endent u'on the ha''ening or occurrence of a 'articular event or on the fulfillment of an% condition$ But if the time for 'a%ment of the amount >or an% of its installmentsA is ex'ressed to !e on the la'se of a certain 'eriod after he occurrence of s'ecified event, the 'romise or order to 'a% is not deemed <conditional= 'rovided the event is certain to ha''en according to ordinar% ex'ectation of mankind, although the time of its ha''ening ma% !e uncertain >Section IA )hus, a distinction ma% !e made !et6een an event 6hich is !ound to take 'lace according to human ex'ectation and the one 6hich ma% or ma% not at all take 'lace according to human ex'ectation and the one 6hich ma% or ma% not at all take 'lace$ For exam'le, the death of a 'articular 'erson is an event 6hich shall definitel% take 'lace, its timing ma !e uncertain$ But the marriage of a 'erson, or his de'arture to or return from a foreign countr% are events 6hich are uncertain to take 'lace$ )he !anker ma% refuse to honour a che*ue having conditional order of the dra6er$ )he dra6er of a che*ue

89

ma%, ho6ever, cross the che*ues and there!% instruct the !anker the manner in 6hich and the intermediar% through 6hich the 'a%ment is to !e made$ Such instructions do not make the order of the dra6er a conditional one$ )he 6ords in the che*ue or the !ill must !e in the nature of an order rather than a re*uest, though it is not necessar% that the 6ord <order= is s'ecificall% mentioned therein$ ;ords of courtes%, if an% such as <'lease= do not make the instruments invalid on this ground$ )he 6ords in the 'romissor% note should also amount to an unconditional 'romise to 'a% the s'ecified amount, other6ise it 6ill not !e treated as a 'romissor% note$ For exam'le, in the follo6ing cases, unconditional 'romise is not given !% the 6riter of the note. -$ /$ 1$ 5$ I$ F$ G$ Mr$ B$&$O$U >& o6e %ouA 2s$ ICC & am lia!le to 'a% %ou 2s$ICC 7& 'romise to 'a% B 2s$ I,CC and all other sums 6hich shall !e due to him8$ 7& 'romise to 'a% B 2s$ I,CC, first deducting thereout an% mone% 6hich he ma% o6e me8 7& 'romise to 'a% B 2s$ ICC seven da%s after m% marriage 6ith C8 7& 'romise to 'a% B 2s$ ICC on +=s death, 'rovided + leaves me enough to 'a% that sum8$ 7& 'romise to 'a% B 2s$ ICC and to deliver him m% !lack horse on -st 9anuar% next8

&n the follo6ing case, the 6riter of the 'romissor% note makes an unconditional 'romise$ iA iiA & 'romise to 'a% B or order 2s$ I,CCC$ & ackno6ledge m%self inde!ted to B in 2s$ -,CCC to !e 'aid on demand, for value received$

6. T,e dra>ee f a c,e;)e r 9*(( # )he main difference !et6een a che*ue and a !ill is that the former is al6a%s dra6n on and is 'a%a!le !% a !anker s'ecified therein, 6hile a !ill of exchange ma% !e dra6n on an% 'erson, firm or com'an%$ )hus onl% a customer of a !ank having a current or a savings !ank account is entitled to dra6 a che*ue on his !anker i$e$, the 'articular !ranch of a !ank 6here he has o'ened his !ank account$ )he name and address of the dra6ee !ank are s'ecificall% 'rinted on the che*ue form$ 4 !ill of exchange is generall% dra6n !% a seller on his customer, or !% a creditor on his de!tor$ Sometimes accommodation !ills are also dra6n to hel' a familiar 'art%$ 7. T,e a. )nt f t,e *n"tr).ent .)"t 9e certa*n# )he order of the dra6er of a che*ue or a !ill and the 'romise !% the 6riter of a 'romissor% note must !e to 'a% a certain sum of mone% and not an%thing else, e$g$, securities or goods, etc$ )he amount of mone% to !e 'aid must !e certain and s'ecified in 6ords and figures$ 4ccording to Section I, the sum 'a%a!le ma% !e <certain= although$ iA it includes future interest, or iiA it is 'a%a!le at an indicated rate of exchange, or iiiA it is according to the course of exchange, or ivA the instrument 'rovides that on default of 'a%ment of an instalment, the !alance un'aid shall !ecome due$ )he amount ma% !e mentioned in a foreign currenc% as 6ell, 'rovided the rate of conversion of the domestic currenc% into foreign currenc% is stated !% the dra6er or is left to !e decided according to the market conditions$ 8. T,e *n"tr).ent .)"t 9e -a2a9(e e*t,er It rder5 r It 9earer5# 4ccording to Section -1, a 'romissor% note, !ill of exchange or che*ue must !e 'a%a!le either <to order= or <to !earer=$ )he meanings of these 6ords are ex'lained as under$ *? Pa2a9(e t rder# 4 'romissor% note, !ill of exchange or che*ue is 'a%a!le to order if it is ex'ressed to !e so 'a%a!le or if it ex'ressed to !e 'a%a!le to a 'articular 'erson and does not contain 6ords 6hich 'rohi!it its transfer or 6hich indicate an intention that it shall not !e transfera!le$ For exam'le, if a che*ue is dra6n as 7 a% to 2am :al8 its 'a%ment ma% !e made to 2am :al or an% 'erson as 'er his order$ )he che*ue can !e endorsed, even if it does not contain the 6ords 7or order8$ But if he che*ue is dra6n as 7 a% to 2am :al onl%8, it cannot !e endorsed !% 2am :al !ecause the 6ord 7onl%8 sho6s the intention of the dra6er to restrict its further transfer$ Such a che*ue shall !e 'a%a!le to 2am :al onl%$ &f a negotia!le instrument, either originall% or !% endorsement, is ex'ressed to !e 'a%a!le to the order of a s'ecified 'erson, and not to him or his order, it is nevertheless 'a%a!le to him or his order at his o'tion$ For exam'le, if a !ill of exchange is ex'ressed as <'a% to the order of 2adhe% Sh%am or order8, it is still 'a%a!le to 2adhe% Sh%am or if he so chooses to the 'erson s'ecified !% him$

90

**? Pa2a9(e t 9earer# 4 'romissor% note, !ill of exchange and che*ue are 'a%a!le to !earer aA if it is ex'ressed to !e so 'a%a!le, or !A if the onl% or the last endorsement is an endorsement in !lank$ )his means a che*ue 'a%a!le <to order= !ecomes a !earer che*ue if it is endorsed in !lank$ &f the 6ord !earer 'rinted on a che*ue form is scored off, it does not make the che*ue non?transfera!le or non?negotia!le, nor does not it render it 'a%a!le onl% to the 'a%ee$ Such a che*ue remains 'a%a!le to order and is negotia!le as such, >M$ (eorge 3 Brothers D$ Cherian, -HHC >-A 0erala :a6 )imes -11A$ :. T,e -a2ee .)"t 9e a certa*n -er" n# )he 'erson to 6hom 'a%ment of he instrument is to !e made must !e certain$ )he 'a%ee is considered as <certain 'erson= for this 'ur'ose even if he is mis?named or is designated !% descri'tion onl% >Section IA$ )he term <'erson= includes, !esides individuals, !odies cor'orate, local authorities societies and associations of 'ersons, etc$, and che*ue ma% !e dra6n 'a%a!le to the 2egistrar, rinci'al, +irector, Secretar%, etc$, of these institutions$ <. T,e -a2ee .a2 9e . re t,an ne -er" n# 4 negotia!le instrument ma% !e made 'a%a!le to t6o or more 'a%ees #ointl% or it ma% !e made 'a%a!le in the alternative to one of t6o or one of some of several 'a%ees >Section -1>/AA$ For exam'le, a che*ue ma% !e 'a%a!le to? 2am and Sh%am or 2am or Sh%am &n !oth these cases, it is 'a%a!le to a certain 'erson$ =. T,e t*.e f -a2.ent# 4 che*ue is al6a%s 'a%a!le on demand, through 6ords to this effect are not mentioned therein$ 4 !ill ma% !e 'a%a!le at sight or after a 'eriod of time s'ecified therein$ 4 'romissor% not or a !ill of exchange in 6hich no time for 'a%ment is s'ecified is 'a%a!le on demand >Section -HA$ &f a !ill is 'a%a!le after a certain 'eriod it must !e acce'ted !% a dra6ee$ But no such acce'tance is necessar% in case of a che*ue$ &f che*ue is a 'ost?dated che*ue is does not constitute an order to the !anker till the date s'ecified therein a''roaches Banks do not make 'a%ment of such che*ues !efore the date given in the che*ues$ @. 1*+nat)re f t,e dra>er 4-r .*"" r# 4 negotia!le instrument is valid onl% if it !ears the signature of the dra6erK'romisor$&n case of a che*ue the signature of the dra6er must tall% 6ith his s'ecimen signature given to the !anker at the time of o'ening his account$ 1B. De(*'er2 f a *n"tr).ent *" e""ent*a(# 4 'romissor% note, !ill of exchange and the che*ue is a negotia!le instrument$ )he making, acce'tance or endorsement of such an instrument is com'leted !% deliver% >Section 5FA$ )his means that a negotia!le instrument is deemed to have !een dra6n, 6hen it is 6ritten !% the 'erson concerned and delivered to the other 'art% to 6hom it is meant$ +eliver% ma% !e either actual or constructive$ 11. 1ta.-*n+ f -r .*"" r2 n te" and 9*((" f exc,an+e *" nece""ar2# )he &ndian Stam' 4ct, -@HH re*uires that the 'romissor% note and the !ills of exchange must !e stam'ed$ )his is not re*uired in case of a che*ue$ )he value of stam' de'ends u'on the value of the note or the !ill and 6hether it is 'a%a!le on demand or at a future date$ 4 note or !ill 6ithout stam' cannot !e admitted in evidence$ &t ma% !e stam'ed either !efore or at the time of its execution$ Currenc% "otes and "egotia!le &nstruments. )he currenc% notes 'osses all the *ualities of a negotia!le instrument$ &n fact a currenc% note is a 'romissor% note >exce't in case of inconverti!le currenc%A issued !% he monetar% authorities of a countr% 'a%a!le to !earer on demand$ )he right to issue such currenc% notes is no6 !eing conferred on the central !anks of all the countries$ &n order to 'rohi!it an% other 'erson or institution from issuing such 'romissor% notes 'a%a!le to !earer on demand, Section 1- of the 2eserve Bank of &ndia 4ct$, -H15, s'ecificall% la%s do6n that$ 7"o 'erson in &ndia other than the 2eserve Bank or, as ex'ressl% authorized !% this 4ct, the Central (overnment, shall dra6, acce't, make or issue an% !ill of exchange, hundi, 'romissor% note or engagement for the 'a%ment of mone% 'a%a!le to !earer on demand, or !orro6, o6e or take u' an% sum or sums of mone% on the !ills, hundis or notes 'a%a!le to !earer on demand of an% such 'erson. rovided that che*ues or drafts including hundis 'a%a!le to !earer on demand or other6ise, ma% !e dra6n on a 'erson=s account 6ith a !anker, shroff or agent8$ )his Section 'revents 'ersons >exce't the 2eserve Bank and the Central (overnmentA from dra6ing, acce'ting, making or issuing a !ill or note 'a%a!le to !earer on demand$ )his restriction is im'osed 6ith the o!#ect that instruments similar to currenc% notes are not issued !% a 'rivate 'art%$ ,o6ever, !earer che*ues or drafts 'a%a!le on demand ma% !e issued on the dra6er=s 'ersonal account 6ith a !anker or an agent$ LE11ON 1=

91

DI&&ERENT TYPE1 O& ACCO%NT1 IN A BANK 4 Bank is essentiall% an intermediar% of short term funds$ ,e can carr% out extensive lending o'erations onl% 6hen he can effectivel% channelise the savings of the communit%$ 4 good !anker is one 6ho effectivel% mo!ilizes the savings of the communit% as 6ell as makes such use of savings !% making it availa!le to 'roductive and 'rior sectors of econom% there!% fostering the gro6th and develo'ment of "ation=s econom%$ )raditionall% the !anker used to acce't there t%'es of de'osits viz$, current, fixed and savings de'osits$ But !ecause of the intense com'etition for resources, there are a variet% of other innovations introduced !% the !ankers in recent times$ )he 'ractice, forms and legal incidents relating to such de'osits are discussed in this cha'ter$ & r. f De- "*t" From the stand'oint of 6ithdra6al, de'osits acce'ted !% !anks fall into t6o categories, demand de'osits and time de'osits$ +emand de'osits are 'a%a!le on demand and can !e 6ithdra6n 6ithout 'revious notice to the !ank$ )hese de'osits are maintained !% the de'ositors 6ho have need for li*uid !alance, and include current accounts, savings accounts u' to a s'ecified limit and call de'osits$ 4n% de'osit 6hich is not re'a%a!le on demand, or a de'osit 6hich is re'a%a!le on a fixed date or after a 'eriod of notice is a time de'osit$ Such de'osits include fixed de'osits, notice de'osits >i$e$, 'a%a!le after a notice 'eriodA and recurringKcumulative de'osits$ C)rrent Acc )nt" 4 current account is a running and active account 6hich ma% !e o'erated u'on an% num!er of times during a 6orking da%$ )here is no restriction on the num!er and the amount of 6ithdra6als from a current account$ 4S the !anker is under an o!ligation to re'a% these de'osits on demand, the% are called demand lia!ilities of a !anker$ )o meet such lia!ilit% the !anker kee's sufficient cash reserves against such de'osits vis?W?vis the savings and the fixed de'osits$ Current accounts suit the re*uirements of !ig !usinessmen, #oint stock com'anies, institutions, 'u!lic authorities and 'u!lic cor'orations, etc$, 6hose !anking transactions ha''en to !e numerous on ever% 6orking da%$ S'ecial characteristics of a current account are as follo6s. -$ 4 current account is meant for the convenience of his customers, 6ho are relieved of the task of handling cash themselves and to take the risk inherent therein$ )hus the 'rimar% o!#ect of a current account differs from the o!#ect of other de'osit accounts 6hich are meant to solicit the savings of the 'eo'le$ /$ 4s the !anker undertakes to make 'a%ments and to collect the !ills, drafts, che*ues, etc$, an% num!er of times dail%, the o'erating cost, i$e$, the cost of !ank 'ersonnel involved in current account is considera!le$ &t is, therefore, customar% for the !anks not to 'a% an% interest on the credit !alance in the current account$ )he 2eserve Bank directive 'rohi!its the 'a%ment of interest on current account$ "o countervailing interest is 'a%a!le on an% current account maintained !% a !orro6er 6ith an% !ank, Banks ma% 'a% interest on current account of 2egional 2ural Banks at half 'er cent !elo6 the !orro6ing rate fixed for the 22B !% the s'onsor !ank$ Sinced Ma% -H@1, !anks have !een 'ermitted to 'a% interest on !alances l%ing in current accounts in the name of a deceased de'ositor from the date of death of the de'ositor till 'a%ment to the legal heirs$ &nterest on such amount shall !e 'a%a!le at savings !ank de'osit rate$ 1$ Banks makes no charge for kee'ing an account 'rovided the !alance maintained is sufficient to com'ensate the !ank for 6ork involved$ &n case of unemunerative accounts involving lot of 6ork !ut 6ithout the maintenance of sufficient !alance, the !anker charges indicidental ex'enses from the customer$ )he 'u!lic sector !anks no6 im'ose a uniform <:edger folio charge= of 2s$ /C 'er folio >i$e$ one side of the ledger 'ageA on accounts having average !alance !elo6 2s$ /I,CCC$ 5$ 4 current account carries certain 'rivileges 6hich are not given to a savings !ank account?holder, e$g$, iA )hird 'art% che*ues 6ith endorsement ma% !e de'osited in the current account for collection and credit$ iiA Overdraft facilities are given is case of current accounts onl%$ iiiA )he loans and advances granted !% the !anks to their customers are not given in the form of cash !ut through the current accounts$ Current accounts thus earn interest on all t%'es of advances !% the !anker$ 1a'*n+" Acc )nt"

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Savings accounts are mainl% meant for non?trading customers 6ho have some 'otential for saving and 6ho do not have numerous transactions entering their account$ Salaried classes of the lo6er and middle income grou', small traders and farmers mainl% o'en such accounts$ W, can -en a 1a'*n+" Acc )nt"D -$ B% a 'erson on hisKher o6n !ehalf$ /$ B% more than one 'erson 'a%a!le to an% one or more of them or survivor or survivors$ 1$ B% a guardian on !ehalf of minor, in 6hich case a declaration as to the date of !irth of the minor should !e o!tained from the guardian$ 5$ B% the minor himselfKherself for reasona!le amounts 'rovided the minor 'roduces satisfactor% 'roof a!out hisKher date of !irth$ I$ B% one 'erson for another 'erson 6ith the sti'ulation that the de'osit can !e 6ithdra6n !% the latter onl% on his or her attaining the ma#orit% or marriage or some other s'ecified time$ F$ B% Secretaries, )reasurers, Managers or other officers of non?trading concerns such as schools, clu!s, hos'itals, religious and charita!le instritutions$ ,o6ever in these cases, the rules and !%?la6s governing such institutions and all other necessar% information should !e furnished to the !ank 6hen the account is o'ened$ G$ Savings Bank 4ccount in the name of )rading Concern >!e it a 'ro'rietorshi', firm or #oint stock com'an%A can !e o'ened for 'lacing their s'ecial funds such as rovident fund etc$ But the% cannot o'en Savings Bank 4ccounts for conducting trade$ 1 .e f t,e feat)re" f 1a'*n+" Acc )nt" -$ 4ccounts could !e o'ened 6ith a minimum of five ru'ees$ )he smallest amount that ma% !e de'osited or 6ithdra6n at an% time is 2e$ -$ 4 minimum !alance of 2s$ I should !e maintained in the account and the account ma% !e closed if for a continuous 'eriod of six months or over account sho6s a !alance !elo6 the minimum$ /$ Ever% a de'ositor is 'ermitted a maximum of /I 6ithdra6als in a *uarter 6hether !% che*ue or other6ise$ )he total amount of one or more 6ithdra6als on an% da% should not exceed -CN of the !alance in the account or 2s$ -,CCC 6hichever is greater, unless -C da%s advance notice is given$ 1$ Banks have introduced the 'ractice of im'osing a service charge of 2s$ -C 'er annum on these savings accounts in 6hich? iA )he minimum !alance is not maintained$ )his minimum !alance is 2s$ ICC for savings accounts 6ith che*ue facilit%. >Su!#ect o variation !et6een !anksK!ranchesA$ iiA )he num!er of 6ithdra6als exceeds the a!ove limit and iiiA the amount of 6ithdra6als exceeds the s'ecified limit$ Banks 6aive this charge in case of res'ecta!le customers$ a%ment of &nterest . )he rate of interest 'a%a!le !% the !anks on de'osits maintained in savings accounts is 'rescri!ed !% the 2eserve Bank$ 4t 'resent the rate of interest on savings de'osits is 5$IN$ Scheduled commercial !anks 6ith de'osits less than 2s$ /I crores ma%, at their discretion, give an additional interest of Q 'er cent$ )he a!ove rate of interest is 'a%a!le irres'ective of 6hether che*ue facilit% is extended or not$ &nterest is calculated at *uarterl% or longer rests on the minimum !alance to the credit of the account during the 'eriod from the tenth da% to the last da% of each calendar month on ever% com'lete sum of 2s$ -C and is credited to the account$ )he State Bank of &ndia credits interest once in a %ear$ &*xed De- "*t Acc )nt" Fixed de'osits or term de'osits are acce'ted for a 'eriod at a fixed rate of interest agreed u'on, de'ending u'on the 'eriod for 6hich the% are acce'ted$ 4t the end of the fixed 'eriod, the de'ositor ma% either 6ithdra6 the amount or rene6 the de'osit for a further fixed 'eriod$ Fixed de'osit received for a 'eriod of, sa%, less than -/ months are called short?term de'osits$ )he fixing of 'eriod in advance ena!les the !ankers to em'lo% the funds more

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'rofita!l% 6ithout kee'ing a cash reserve to meet the dra6ings$ )he !anker, therefore, offers a higher rate of interest on such de'osits !ecause the de'ositors 'art 6ith li*uidit% for a definite 'eriod$ Fixed de'osits are ver% 'o'ular among !anks !ecause the% 'rovide sta!le funds$ 4'art from the traditional t%'e of fixed de'osits, !anks no6 offer different t%'es of de'osit schemes to meet diverse needs of the 'u!lic and to attract different classes of savers in the communit%$ Such schemes include recurringKcumulative de'osits reinvestment 'lan de'osits, monthl% income 'lan, retirement income 'lan, child education 'lan, marriage 'lan, housing loan linked de'osits, etc$ 4ll these de'osits indicated 'roduct differentiation of term de'osits since the de'osits rate schedule is determined !% the 2eserve Bank of &ndia$ &f a de'osit is made for a fixed 'eriod, it !ecomes re'a%a!le at the ex'ieration of that 'eriod 6ithout the customer making an% demand$ &f, ho6ever, a de'ositor allo6s mone% due under a fixed de'osit to !e 6ith the !anker, an intention to treat the de'osit as one 'a%a!le on demand could !e inferred, thus making the 'eriod of limitation of three %ears run onl% form the date of demand as 6as also held !% the 9ammu and 0ashmir ,igh Court in 9ammu and 0ashmir Bank :td$, D$ "irmala +evi >-HIHA$ B% its ver% nature a fixed de'osit cannot !e dra6n on !% a che*ue$ 4 !ank 6hose customer dra6s a che*ue for an amount exceeding the credit !alance in his current account 6ould, therefore, !e 'erfectl% #ustified in dishonouring it, des'ite the fact that the amount standing to the credit of his fixed de'osit is sufficient to meet the excess$ &n actual 'ractice, ho6ever, !anks usuall% honour che*ues dra6n in these circumstances and rel% on their right of set?off to recou' the excess amount of the che*ue out of the customer=s fixed de'osit account$ N t*ce De- "*t "otice de'osits are time de'osits 6ithdra6a!le at a certain notice to !e given !% he de'ositor$ )he notice in 6riting ma% have to !e given -I da%s or more in advance !efore the mone% can !e 6ithdra6n$ +e'osits re*uiring longer notice carr% a higher rate of interest than those re*uiring shorter notice$ Rate f Intere"t f &*xed De- "*t" )he rate of interest and other terms and conditions on fixed de'osits acce'ted !% !anks are regulated !% the 2eserve Bank of &ndia in exercise of the 'o6ers conferred u'on it !% sections /- and 1I4 of the Banking 2egulation 4ct$ -H5H$ Fixed de'osits are classified into various categories 6ith var%ing 'eriods of maturities starting form -I da%s and ending 6ith I %ears or more$ )he longer the 'eriod, the higher is the rate of interest and this 'rovides an incentive to the de'ositors to get higher rate of interest on de'osits for a longer 'eriod$ Smaller !anks are allo6ed to 'a% slightl% higher rate of interest on various categories of fixed de'osits$ &nterest is 'a%a!le at the sti'ulated rate at the maturit% of the fixed de'osit recei't$ ,o6ever, !anks usuall% 'a% interest half?%earl% at the close of 9une and +ecem!er >no6 March and Se'tem!erA each %ear at the re*uest of the de'ositor$ &nterest ceases on the maturit% of the de'osit !ut in case of rene6al overdue interest on the de'osit ma% !e allo6ed 6ith effect from the due date according to !ank rules$ &*xed De- "*t Acc )nt De- "*t Rece*-t ;hen a fixed de'osit account is o'ened, the de'ositor is re*uired to fill in an account o'ening from and the !anker issues the recei't mentioning the amount of fixed de'osit acce'ted, the name of the de'ositor, the rate of interest allo6ed and the 'eriod for 6hich the amount is de'osited$ )he due date is also mentioned on the recei't exce't in ht case of notice de'osits$ )he rules relating to the fixed de'osits are 'rinted on the !ack of the recei't for the information of the de'ositor$ )he recei'ts are not transfera!le !% endorsement and deliver%$ ,o6ever, the 'roceeds of the de'osit recei'ts ma% !e 'aid to a third 'art% or to a collecting !anker on the due date is the recei't is 'resented dul% discharged along 6ith an a''ro'riate letter of authorit% signed !% the de'ositor authorizing 'a%ment to the third 'art% for 6hich 'ro'er identification should !e o!tained or to the collecting !anker, as the case ma% !e$ Re-a2.ent4Rene>a(4Pre-a2.ent f &*xed De- "*t" &f cash 'a%ment of the de'osit recei't is to !e made on the due date, it is necessar% to have the recei't discharged !% the de'ositor on a revenue stam' of /C'$ &n the case of rene6al, mere discharge of the de'ositor 6ithout stam'ed recei't is sufficient$ Even the discharge is 6aived in case the rene6al instructions of the de'ositor

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are contained in a covering letter accom'an%ing the de'osit recei't$ &n case of rene6al surrender of the original recei't is a must$ &f the de'ositor re*uire s mone% !efore the due date, t6o courses are o'en to him$ ,e should a''roach the !ank either to encash the de'osit recei't !efore the due date or to rais a loan there against$ )he !ank has the discretion to encash the de'osit recei't at he rate of t6o 'er cent !elo6 the rate a''lica!le to the 'eriod for 6hich the de'osit has run, as 'er schedule of rates 'revailing at the time 6hen the de'osit 6as originall% acce'ted$ &nterest alread% 'aid on the de'osit, if an%, should !e taken into account at the time of encashment$ 4lternatel%, the loan is granted at a rate t6o 'er cent higher than the rate allo6ed on the de'osit and a margin of /I 'er cent is ke't$ &n either case, the recei't should !e discharged !% all the de'ositors and in the case of a 're'a%ment, a letter of re*uest and in the case of a 're'a%ment, a letter of re*uest and in the case of a loan, a letter of 'ledge should !e signed !% all the de'ositors, even if the de'osit is 'a%a!le to either or survivor or to an%one or survivor$ L "" f De- "*t Rece*-t &n case of loss of de'osit recei't, the amount can !e 'aid to the de'ositor on the due date, or a du'licate de'osit recei't can !e issued against an ordinar% indemnit% as a de'osit recei't is not transfera!le and cannot !e legall% transferred to a third 'art%$ Rec)rr*n+ De- "*t r C).)(at*'e De- "*t Acc )nt" 4 variant of the savings !anks accounts is the recurring de'osit or cumulative de'osit account introduced !% !anks in recent %ears$ )his account is intended to inculcate the ha!it of savings on a regular !asis as an inducement is offered in the form of com'arativel% higher rate of interest$ 4 de'ositor o'ening a recurring de'osit account is re*uired to de'osit an amount chosen !% him, generall% a multi'le of 2s$ I or -C, in his account ever% month for a 'eriod selected !% him$ )he 'eriod of recurring de'osit varies from !ank to !ank$ Banks o'en such accounts for 'eriods ranging form - to -C %ears$ )he rate of interest on the recurring de'osit account stands favoura!l% as com'ared to the rate of interest on the savings !ank account !ecause the former 'artl% resem!les the fixed de'osit account$ 4ccording to the directive of the 2eserve Bank, Bank are re*uired to ensure that the rates of interest offered !% them on recurring de'osits are generall% in accord 6ith the rates 'rescri!ed for various term de'osits$ )he rate of interest is, therefore, almost e*ual to that of the fixed de'osit account$ &ncase a de'ositor is com'elled to close the account !efore its maturit%, the !ank 'a%s no interest if the de'osits are made for less than 1 months, interest at - Q N is 'a%a!le for de'osits made u' to F months, u' to 5N for de'osits made u' to -/ months and -N !elo6 the rate a''lica!le to a recurring de'osit of the 'eriod for 6hich the de'osit has actuall% run in case of de'osits are held for over %ear, the accounts are transfera!le from one !ranch to another 6ithout charge$ )he recurring de'osit account can !e o'ened !% an% 'erson, more than one 'erson #ointl% or severall%, !% a guardian in the name of a minor and even !% a minor$ ;hile o'ening the account, the de'ositor is given ass Book 6hich is to !e 'resented to the !ank at the time of monthl% de'osit and re'a%ment of amount$ 4ccumulated amount 6ith interest 6ill !e 'a%a!le a month after the 'a%ment of the last installment$ O-en*n+ f C)rrent and 1a'*n+ Acc )nt" B% o'ening an account 6ith the !anker, a customer enters into relationshi' 6ith a !anker$ )he !anks should !e ver% careful in o'ening an account in the name of a customer$ )he !anker reserves the right to o'en account on !eing satisfied a!out he identit% of he customer$ )he follo6ing 'recautions should !e taken in this regard$ -$ 4''lication on the rescri!ed Form. )he re*uest for o'ening a savings or current account is made on the 'rescri!ed form of the !ank concerned$ Banks 'rovide se'arate a''lication forms for o'ening savings and current accounts for individual, 'artnershi' firms and com'anies$ )he a''licant is re*uired to mention his name, occu'ation, full address, s'ecimen signature and the name and signature of a referee$ ,e also undertakes to com'l% 6ith the !ank=s rules in force form time to time for the conduct of the account$ &t means that the rules 'revalent at the time of o'ening of an account ma% !e changed or modified !% the !anker and such modified rules shall !e acce'ta!le to the customer$ )he 2eserve Bank of &ndia has asked all commercial !anks to o!tain 'hotogra'hs of the de'ositorKaccount holders 6ho are authorized to o'erate the accounts, at the time of o'ening of ne6 accounts$

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Banks generall% 'rint different forms for individuals, com'anies, 'artnershi's, executors, #oint accounts etc$ &n the case of a''lications 'rinted for individuals the follo6ing 'oints amongst other things are mentioned$ aA &n the matter of collection of che*ues, !ills etc$ at 'laces 6here the !ank has not !ranches the !anker is re*uested to collect them through an% !ank at his risk and res'onsi!ilit%$ !A &n the case of !ills discounted !% the !anker the a''licant agrees to reim!urse the !anker if the latter fails to realize such !ills$ cA ,e agrees to !e !ound !% the !ank=s rules for the time !eing in force for the conduct of such accounts$ ,e also declares that the rules in force have !een read !%Kto him$ dA &n the case of illiterates the form 'rovides for an undertaking to call in 'erson for 6ithdra6ing mone% from the account, and restraining his from issuing che*ues in favour of third 'arties$ )hese sti'ulations are !inding on the customer and as such 6ill considera!l% minimize the risk of the !anking !usiness$ 2. Intr d)ct* n f t,e A--(*cant # Before o'ening a savings or current account in the name of an intending customer, the !anker must get true identit% of the former in order to ensure that he is a res'ecta!le 'erson$ )he !anker thus, reserves the right not to o'en an account in the name of a 'erson 6hose true identit% has not !een esta!lished or 6ho is considered to !e an undesira!le 'erson, e$g$, a thief etc$ )he a''licant ma% !e introduced to the !anker in an% of the three 6a%s. iA 4 res'ecta!le 'erson?either a customer of the same !ranch of the !ank or 6ho is kno6n to the staff of the !ranch introduces him !% signing on the a''lication form itself along 6ith his full address$ iiA )he a''licant ma% give the name of an% res'ecta!le 'erson or that of another !ank as referee$ )he !anker en*uires from the said referee a!out the integrit%, honest%, res'ecta!ilit%, and financial standing of the a''licant and his 'ast ex'erience in dealing 6ith the a''licant$ &f the referee sends no re'l%, the !anker should not o'en the account unless satisfactor% introduction is given other6ise$ iiiA )he 2eserve Bank has advised !anks that 'a% !ooks or 'ostal identification cards or identit% cards of armed forcesK'oliceKgovernment de'artments or 'ass'ort ma% !e considered sufficient for esta!lishing the identit% of 'erson desiring to o'en de'osit accounts 6ithout che*ue facilit%$ R*"!" *n O-en*n+ Acc )nt" W*t, )t Pr -er Intr d)ct* n# )he a''licant must !e 'ro'erl% introduced to the !anker$ &f the later o'en an account 6ithout 'ro'er introduction or sho6s carelessness in this regard, cases of fraud or mis?re'resentation ma% occur fre*uentl%$ "ot onl% the !anker runs the risk in such cases !ut the general 'u!lic ma% also !e received !% undesira!le customers$ )he risks inherent in such cases are as follo6s. iA )he !anker cannot avail of the statutor% 'rotection. Section -1- of the "egotia!le &nstruments 4ct 'rovides statutor% 'rotection to the !anker, if he collects che*ue, !ill etc$, on !ehalf of a customer 6ho has no title thereto or his title is defective$ )he collecting !anker 6ill incur no lia!ilit% to the true o6ner of the che*ue 'rovided the former has acted in good faith and 6ithout negligence$ )he !anker cannot avail of this statutor% 'rotection if he o'ens an account in the name of an undesira!le 'erson 6ithout 'ro'er introduction and such 'erson sends a stolen or forged che*ue for collection and he !anker does so, !ecause his failure or carelessness to find out the true identit% of the customer 6ill constitute a negligence on his 'art$ &f such undersira!le 'ersons are 'ermitted to o'en accounts in the names of some!od% else and the% realize the stolen or forged che*ues through such accounts and later on disa''ear the !anker remains lia!le to the true o6ner$ iiA 2isk is case of overdrafts. &f a !anker grants an overdraft, even !% mistake or !% negligence, to a customer 6ho is not 'ro'erl% introduced, he !ears the risk of loss incase it is not re'aid !% the customer$ )he !anker remains una6are of the assets of such customer$ iiiA 2isk in case of undischarged insolvent. &n case of 'ersons 6ho are declared insolvent, all assets or funds are attracta!le, until or unless he is discharged$ )he de'osits received !% a !anker from an undischarged insolvent, 6ithout 'ro'er introduction carries the risk of attachment$

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ivA 2isk in case of issue of !ogus che*ues. &f a !anker 'rovides a che*ue !ook to an undesira!le customer not 'ro'erl% introduced, there is the risk that !e might defraud the general 'u!lic !% issuing !ogus che*ue on his account 6ithout having sufficient !alance$ )he !anker must, therefore, seek 'ro'er introduction of the a''licant for o'ening a current account, !ecause all the a!ove mentioned risks ma% !e faced !% a !anker in a case of current accounts$ )he !anker ma% not insist on introduction if the a''licant a''lied for o'ening a savings account 6here onl% cash o'erations are 'ermitted !ecause, neither a che*ue !ook is issued to him not is the 'ermitted to de'osit che*ue etc$, for collection or to take overdrafts$ But in other cases 'ro'er introduction is necessar%$ "o introduction is necessar% in case of o'ening a fixed de'osit account for the same reasons$ Intr d)ct* n # Ca"e La>" iA Savor% 3 Com'an% D$::o%ds Bank :td$, >-H1/A. )6o dishonest stock !roker clerks in the em'lo%ment of the 'laintiff firm stole !earer che*ue !elonging to the em'lo%ers and dra6n 'a%a!le to third 'arties$ One clerk 6as having an account in his o6n name and the other in his 6ife=s name$ )hese che*ues 6ere 'aid in at the cit% offices of the :lo%ds Bank for crediting the accounts ke't at countr% !ranches$ )he 'laintiff !rought an action against the !ank for conversion$ &n the case of the clerk=s account, it 6as held the !ank had !een negligent in not o!taining his em'lo%er=s name, 6hen o'ening the account$ &n the case of the 6ife=s account it 6as held that the !ank 6as negligent in not o!taining her hus!and=s occu'ation and em'lo%er=s name at the time of o'ening account$ /A Marfani 3 com'an% :td$ D Midland Bank :td$ >-HF@A . )he office manager of the 'laintiff com'an% introduced himself to a restaurant 'ro'rietor as o'en Eliaszade stating, the he 6as a!out to set u' restaurant$ ,e gave the name of the 'ro'rietor of the restaurant as one of t6o referees$ )he he dre6 a che*ue for 2s$ 1,CCC 'a%a!le to Eliaszade, a creditor of Marfani, and got the signature of Marfani$ )his che*ue !e 'aid into his account 6ith the Midland Bank, 6hich he o'ened in the name of Eliaszade$ )he restaurant 'ro'rietor, himself a good customer of the !ank indicated that he had kno6n Eliaszade for some time and !elieved that he 6as a!out to set u' as restaurateur$ )he !ank there u'on issued a che*ue !ook and in a!out a fortnight the !alance of the account 6as 6ithdra6n$ 4fter discovering the fraud Marfani sued the !ank for conversion of the che*ue$ )he com'an% alleged that the account 6as o'ened 6ithout making sufficient en*uir%$ &t 6as held that the !ankers ado'ted a normal !anking 'ractice and com'lied 6ith the standard of care ex'ected of a 'rudent !anker$ )herefore the !anker could not !e charged 6ith negligence$ 1A :umsden 3 Com'an% D$ :ondon )rust% Savings Banks >-HG-A . &n this case !oth the a''licant and the referee 6ere su''osed to !e 'rofessional men, 6ho arrived recentl% from 4ustralia$ )he !ank 6as held negligent for not verif%ing the customer=s 'ass'ort and to en*uire further a!out the referee 6ho failed to give his !anker=s name$ )he 'rotection given to the collecting !anker is conditional and is availa!le onl% 6hen the collection is made 76ithout negligence8$ But from the a!ove cases it is clear that it is not enough if care is taken merel% at the time of collection$ )he !ank has the o!ligate to take care from the var% !eginning of the relationshi' at 6hich stage, information should !e o!tained not onl% a!out the character of the customer !ut also the name of em'lo%er and such other details 6hich are relevant for the !anker, to ensure that the account is not misused for o!taining the 'a%ment of che*ues, fraudulentl% converted to his o6n !enefit$ )he decision in Marfani=s case in favour of !anker should not !e regarded as relaxation of the earlier 'osition on the 'oint$ )his decision should not encourage the !anker to !e less careful in o'ening the account$ ;hat should !e the contends of a 'ro'er introduction and 6hat is the dut% of the !anker in this regard 6as considered !% the Madras ,igh Court in &ndian Bank Ds Cathoic S%rian Bank >-H@C )" :a6 "otes 9ournal '$ /1A$ &n this case the a''licant for o'ening a current account 6as introduced to the !ank !% a 6ell kno6n customer of the !ank$ But 6hat he did 6as to take the a''licant to the !ank and informed the !ranch manager that he 6as a man from &ndore and that !e 6anted to o'en a !ank account to ena!le him to 'urchase car'ets at that 'lace$ )he introducer had to give an assurance that the a''licant 6as kno6n to him or that the% had long standing !usiness association and that 6as a !ond?fide customer and account could !e safel% o'ened in his name$ )he ,igh Court therefore held that the !ank 6as negligent in securing 'ro'er introduction of the a''licant$ &n the circumstances of the case, !ank ought to have made more en*uires than usual to test the credentials of the 'ros'ective customer !efore allo6ing him to o'en an account$

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&t ma% !e concluded from the a!ove, that the !anker should full% ascertain the true identit% of the a''licant !% other means also, and should not de'end exclusivel% on the causal 6ords of the introducer$ & r." )"ed *n t,e O-erat* n f Acc )nt &mmediatel% after o'ening the account the customer is su''lied free of charge 6ith the follo6ing. iA iiA iiiA )he a%?in?sli' )he Che*ue Book and )he ass?!ook

iA )he a%?in?sli' Book. Ever% de'osit made !% the customer in cash or che*ues or !ills must !e accom'anied !% this !ook$ )his !ook contains li's 6ith 'erforated counterfoils$ Se'arate sli's are to !e made out for cash and che*ues$ Some !anks have devised different forms, 6hile others made use of the same form 6ith 'rovisions for !oth$ )he form is to !e filled !% the de'ositor and the !ank after recei't of the cash or che*ues, 'uts the date?stam' and the counterfoil is initiated !% res'onsi!le officer and serves as a record for the customer$ &t is also 'refera!le for the customer to record on the !ack of the counter foil the source of recei't so that he 6ill !e in a 'osition to ex'lain the credits in the ass Book to the )ax 4uthorities$ )he sli' retained !% the !anker !ecomes the !asis for making necessar% entries in the ledger$ iiA Che*ue Book. &t consists of -C or /C !lank forms$ 4s 'er the rules and regulations the cusotemr is ex'ected to dra6 the che*ues onl% in the forms 'rovided !% the !anker$ Che*ue Books are given in recent %ears to saving !ank account holders also !ut on the condition the% should maintain a minimum !alance of 2s$ -CC$ ersons un6illing to maintain such !alance can make use of 6ithdra6al forms from the !anker$ Such 6ithdra6als are 'ermitted onl% after 'roducing the 'ass !ook$ Che*ue !ooks are issued onl% on the !asis of a re*uisition sli'$ Ever% che*ue !ook contains one such a sli' to facilitate the customer to o!tain ne6 !ook !efore the old one is exhausted$ )o 'revent the misuse of che*ue forms the !anker enters the amount num!er on each che*ue and !ook is issued onl% after o!taining the signature of the customer$ iiiA ass Book. 4 'ass?!ook is nothing !ut a co'% of the account of the customer as it a''ears in the !ank=s ledger$ 4ll the amounts de'osited are credited and the che*ues 'aid against the account are de!ited$ )he !alance is sho6n from time to time$ C( "*n+ f a Ban! Acc )nt )he relationshi' !et6een a !anker and his customer is a contractual one and continues as long as !oth of them so desire$ )he relationshi' ma% !e terminated !% either of them !% giving notice of his intention to the other 'art%$ Moreover, the !anker is !ound to sus'end 'a%ment out of the customer=s account under the com'ulsions of la6$ )he rights and o!ligations of a !anker in this regard are as follo6s. -$ &f a custoerm direct the !anker in 6riting to close his account, the !anker is !ound to com'l% 6ith such direction$ )he latter need not ask the reasons for the former=s direction$ )he account must !e closed 6ith immediate effect and the customer !e re*uired to return the unused che*ues$ /$ &f an account remains uno'erated for a ver% long 'eriod, the !anker ma% re*uest the customer to 6ithdra6 the mone%$ Such ste' is taken on the 'resum'tion that the customer no longer needs the account$ &f the customer could not !e traced after reasona!le effort, the !anker usuall% transfers the !alance to an 7Unclaimed +e'osit 4ccount8, and the account is closed$ )he !alance is 'aid to the customer as and 6hen he is traced 1$ )he !anker is also com'etent to terminate his relationshi' 6ith the customer, if he finds that the latter is no more a desira!le customer$ )he !anker takes this extreme ste' in circumstances 6hen the customer is guil!% of conducting his account in an unsatisfactor% manner, i$e$, if the customer is convicted for forging che*ues or !ills or if the issues che*ues 6ithout sufficient funds or does not fulfill his commitment to a% !ack the loans or overdrafts, etc$ )he !anker should take the follo6ing ste's for closing such an account. aA )he !anker should give to the customer due notice of his intention to close the account and re*uest him to 6ithdra6 the !alance standing to his credit$ )his notice should give sufficient time to the customer to make alternate arrangements$ )he !anker should not, on his o6n, close the account 6ithout such notice or transfer the same to an% other !ranch$

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!A &f the customer does not close the account on recei't of the aforesaid notice, the !anker should give another notice intimating the exact date !% 6hich the account !e closed other6ise the !anker himself 6ill close the account$ +uring this notice 'eriod the !aker can safel% refuse further credit form the customer and can also refuse to issue fresh che*ue !ook to him$ Such ste's 6ill not make him lia!le to the customer and 6ill !egin consonance 6ith the intention of the notice to close account !% a s'ecified date$ )he !anker should, ho6ever, not refuse to honour the che*ues issued !% the customer, so long as his account has a credit !alance 6hich 6ill suffice to 'a% the che*ue$ &f the !anker dishonour an% che*ue 6ithout sufficient reasons, he 6ill !e held lia!le to 'a% damages to his customer under Section 1- of the "egotia!le &nstruments 4ct, -@@-$ cA &n case of default !% the customer to close the account, the !anker should close the account and send the mone% !% draft to the customer$ ,e 6ill not !e lia!le for dishonouring che*ues 'resented for 'a%ment su!se*uentl%$ 5$ On recei't of the notice of death of a customer, the !anker must sto' the o'eration of his account !ecause the authorit% of the customer terminates as the dies$ I$ &f a !anker receives a notice regarding the insanit% of his customer, he is !ound to sto' 'a%ments from his account$ F$ )he relationshi' !et6een the !anker and his customer is also affected if the customer !ecomes insolvent or the cor'orate customer goes into li*uidation$ )he credit !alance of the customer is transferred to the Official 2eceiver of the insolvent customer$ G$ On recei't of a (arnished Order from the Court, the !anker is !ound to sus'end 'a%ment from the account of the customer$ &f the order 'rohi!its the 'a%ment of a s'ecified sum from the account, the !anker ma% honour the che*ues out of the remainder amount$ @$ ;hen the !anker has received a notice of assignemtn of the credit !alance in the account of a customer to a third 'art%, the !anker is !ound to 'a% the same amount to the said third 'art%$

99

Le"" n 1@ D*fferent T2-e" f C)"t .er" 4 !anking institution solicits de'osits of mone% from the mem!ers of the 'u!lic$ 4n account in a !ank for this 'ur'ose ma% !e o'ened !% an% 'erson 6ho >iA is legall% ca'a!le of entering into a valid contract, >iiA a''lies to the !anker in the 'ro'er manner, i$e$, he follo6s the 'rocedure laid do6n !% the !anker and acce'ts the tersm and conditions sti'ulated !% the latter$ )he !anker, ho6ever, 'ossesses the right to re#ect an a''lication for o'ening an account, if he is not satisfied 6ith the identit% of the a''licant, i$e$, if the latter is deemed to !e an undesira!le 'erson$ Some 'ersons like the minors, lunatics and drunkards are not com'etent to enter into valid contracts$ Some 'ersons 6ho act on !ehalf of others have limitations on their 'o6er to contract, e$g$, the agents, trustees, executors etc$, &nstitutions like schools, colleges, clu!s, societies, and cor'orate !odies are the im'ersonal customers of a !anker$ )he authorit% 'o6er and functions of the 'ersons managing these institutions are em!odied in their res'ective constitutions$ )he !anker should, therefore, take s'ecial care and 'recautions to ensure that the accounts of these institutes are !eing conducted in accordance 6ith the 'rovisions of their res'ective charters$ )he 'resent cha'ter discusses the legal 'osition of the s'ecial cases of a !ank=s customers and the necessar% 'recautions that a 'rudent !anker should take 6hile dealing 6ith them$ 3*n r 4 'erson under the age of -@ %ears is a minor, if a guardian of his 'erson or 'ro'ert% of !oth has !een a''ointed !% a Court or if the su'erintendence of his 'ro'ert% has !een assumed !% a Court of ;ards !efore the minor assumed the age of -@ %ears, he remains minor till he com'letes the age of /- %ears >Section 1 of the &ndian Ma#orit% 4ct, -@GIA$ 4 minor has certain disa!ilities and en#o%s certain 'rotections under the la6 6hich a !anker must take into consideration 6hen dealing 6ith a minor$ Under the &ndian Contracts 4ct, all contracts !% minors are void a!?initio exce'ting contracts for necessaries of life such as food, clothing and accommodation or for his !enefit$ )he la6 im'oses an o!ligation on a minor to 'a% a reasona!le sum for goods and services su''lied to him at his re*uest, if the goods are a''ro'riate to his need at the time, having regard to his means and social standing$ ,is estate !ecomes lia!le for contracts in res'ect of his necessaries and other !enefits$ &n case of all other contracts a minor ma% re'udiate his 'romise or contracts$ 4s minor have limited contractual 'o6ers, a !anker should take the follo6ing 'recautions in dealing 6ith them. *? O-en*n+ t,e Acc )nt# Banks 'refer to o'en a saving !ank account and a fixed de'osit account of a minor, and 6ould not o'en hisKher current account$ )here is no risk in dealing 6ith a minor so long as his account is ke't in credit and is not 'ermitted to !e overdra6n !ecause an% dealing in the form of a loan of mone% to the minor 6ould !e void$ )he !aker o!tains a good discharge in 'a%ing che*ues and can effectivel% de!it them to the minor=s account$ 4 !ank account in the name of a minor ma% !e o'ened in one of the follo6ing 6a%s. aA in the name of the minor himselfKherself 6ith the consent of hisKher natural guardianJ !A in the #oint names of the minor and hisKher guardianJ or cA in the name of the minor under the natural guardianshi' of hisKher father, and if he is dead, under the natural guardianshi' of mother, and if !oth are dead, under the guardianshi' of a 'erson a''ointed !% a com'etent court$ &n cases >aA and >!A a!ove, minor must !e aged -/ %ears or more and should !e a!le to read and 6rite English, ,indi or a regional languageJ he should a''ear com'etent to transact !usiness$ "o difficult% is likel% to arise in allo6ing the mone% to !e 6ithdra6n !efore the minor comes of ageJ he could not claim the mone% over again on attaining his ma#orit%$ Un?dou!tedl%, a !ranch manager 6ould !e ver% circums'ect in allo6ing 6ithdra6als of su!stantial sums to him$ Further, a !anker 6ill treat a #oint account in the name to a minor and his guardian as an% other #oint account exce't that he must !ear in mind the non?lia!ilit% of the minor for an% overdraft$ &n cases >!A and >cA, onl% the guardian of the minor o'erates on the account during the 'eriod of minorit%$ **? Date f B*rt,# )he date of !irth of the minor, as stated !% his guardian, is recorded !% the !ank$ On attaining ma#orit%, the minor=s account under the guardianshi' should !e closed and transferred to a ne6 account in

100

the sole name of minor >6ho had !ecome ma#orA$ &n case >cA the minor on !ecoming ma#or is 'ermitted to o'erate u'on the account and his s'ecimen signature is taken for !ank record$ ***? L an t a 3*n r# Mone% lent to a minor cannot !e recovered from his even after he attains his ma#orit%$ 4n% agreement !% a minor to re'a% mone% lent or to !e lent is a!solutel% void, so also is agreement made after ma#orit% is attained to re'a% loan contracted during minorit%, &f a !ank makes a loan to a minor or 'ermits him to overdra6 his account even !% mistake or unintentionall%, it cannot recover the amount advanced or interest thereon, !% suing the minor, even if he has fraudulentl% misre'resented himself as !eing of full age >2 :eslie :td$ D$ Sheill -@-5A$ Conse*uentl%, an% securit% given !% the minor for the advance is void and the !ank cannot retain or realize securities de'osited !% the minor$ &f a third 'art% lodges securities of his o6n to secure the inde!tedness of a minor, the de'osit 6ould !e void and the de'ositor can claim the securities 6ithout 'a%ing of the amount secured$ )here is, of course, nothing to 'revent a minor from re'a%ing a loan of his o6n free 6ill, and once he has done this, he cannot demand for the return of mone%$ *'? G)arantee"# "o minor can give a valid guarantee nor !orro6 against the guarantee of an adult !ecause such a guarantee cannot !e enforced on the legal 'rinci'le that there cannot !e a suret% 6ithout a 'rinci'al de!or$ 4s the minor cannot make himself lia!le as 'rinci'al de!tor, so the intending guarantor cannot make himself lia!le as suret% for him$ &n Man#u Mahadeo D$ Shiva''a Man#u >-H-@A and eston#i Mod% D$ Meher!ai >-H/@A, the Bom!a% ,igh Court held that under section -/@ of the Contract 4ct, -HG/, the lia!ilit% of the surel% is co?existence 6ith that of the 'rinci'al de!torJ it can !e no more than the 'rinci'al de!torJ and that the surel%, therefore, cannot !e held lia!le for a guarantee given for default !% a minor$ &f a minor cannot default, the lia!lilit% of the guarantor, !eing a secondar% >and not a 'rimar%A lia!ilit% does not arise at all$ )he same vie6 6as taken !% the Madras ,igh court in a case, Edavan 0ella''a "m!ir D$ Moolanki 2aman >-HIGA$ ,o6ever, if lending to a minor does take 'lace, the !ank usuall% takes an indemnit% from an adult$ Under an indemnit% the adult takes 'rimar% lia!ilit% for the de!t 6hich means heKshe is res'onsi!le for it, as com'ared 6ith secondar% lia!ilit% under the guarantee 6here heKshe is onl% res'onsi!le if the !orro6er fails to re'a% the de!t$ )hus, an intending suret% can !e made lia!le as an indemnifier under a contract of indemnit% 6hether included in the guarantee or su!#ect of a se'arate document$ Unless the !ank=s form of guarantee includes an indemnit%, a s'ecific indemnit% should !e taken from the suret%$ '? 3*n r a" a Part2 t a Ne+ t*a9(e In"tr).ent# Under Section /F of the "egotia!le &nstruments 4ct, -@@-, a minor ma% dra6, endorse, deliver and negotiate negotia!le instruments so as to !ind all 'arties exce't himself, such !ills or che*ues 6ill !e valid instruments and other 'arties 6ill !e lia!le in their res'ective ca'acities$ For the !anker, this means that the minor !% la6 having no ca'acit% to contract, cannot !e sued on an% che*ue that he ma% dra6 and that if he exchanged a che*ue for a minor he cannot recover the 'roceeds if the che*ue is after6ards returned to him dishonoured$ ,o6ever, !% making 'a%ment to a minor of his o6n che*ue or of third 'art% che*ue, if it is other6ise a 'a%ment in due course, the !anker gets a valid discharge$ 4 minor cannot !e sued in res'ect of a !ill acce'ted !% him during his minorit%$ '*? 3*n r a" a Partner# 4 minor can !e admitted to the !enefits of 'artnershi' 6ith the consent of all the 'artners !ut he 6ill not !e lia!le for losses and de!ts of the firm$ 4ccording to Section 1C>GA >aA of the &ndian artnershi' 4ct, -H1/, unless, a minor ex'ressl% re'utidiates his lia!ilit% 6ithin six months after !ecoming of age, he 6ould !e held lia!le as a 'artner from the date he 6as admitted to the !enefit of the 'artnershi'$ Should the minor avoid his 'artnershi' contract, the adult 'artner is entitled to insist that the 'artnershi' assets !e a''lied to the de!ts of the firm, and until the% are 'rovided for, no 'art of the asset ma% !e received !% the minor$ '***? 3*n r a" an A+ent# 4 minor ma% !e a''ointed to act as an agent on !ehalf of his 'rinci'al$ &n this ca'acit% he ma% dra6 and sign che*ues on his 'rinci'al=s account and if the account !ecomes overdra6n as a result, the 'rinci'al 6ill !e lia!le !ecause the agent stands in his 'lace and the acts 'ro'erl% done !% him are considered to !e the acts of he 'rinci'al$ )he !anker should o!tain 6ritten authorit% of the 'rinci'al s'ecif%ing the 'o6er and the extent of the authorit% entrusted to the agent and should see that the minor?agent does not deal !e%ond the delegated 'o6ers$ *x? 3*n r a" a W*tne""# 4 minor can legall% 6itness a signature if he is old enough to a''reciate the significance of his act$

101

x? 1afe C)"t d2 Art*c(e"# Mr$ and Mrs$ B are #oint account customers 6ho have de'osited for safe custod% among their various holdings "ational Savings Certificated 'urchased !% them in the name of their minor son 6ho, on reaching the age of -@, re*uests the !ank to deliver the certificated 'urchased in his name to him claiming that he is the true o6ner$ 4lthough on the face of it the true o6ner of the "ational Savings Certificates is the 'erson in 6hose name the% 6ere 'urchased, these are held in safe custod% on !ehalf of Mr$ and Mrs$ B 6hose discharge alone is acce'ta!le to the !ank$ x*? 1t c! and 1,are"# 4 !anker should neither acce't from a customer an order to 'urchase stock or shares in the name of a minor, nor should !e sending to the com'an% stock and shares for registration of transfer in the name of a minor 6ithout informing the com'an% that the transferee is a minor$ 4 minor is not legall% ca'a!le of im'lementing a contract of 'urchase, or acce'ting the stock or shares 6hen 'urchased$ 4 transfer to a minor is voida!le at his o'tion, and he cannot com'el the com'an% to register him as a shareholder, nor if he has !een registered, to kee' him on the register 6hen the com'an% discovers that he is under age$ 4 transfer !% a minor can !e validit% executed onl% in 'ursuance of an order of the court$ )here is, ho6ever, no o!#ection to a transfer into the #oint names of an adult and a minor$ ;here stock is standing in the #oint names of a minor and an adult, a letter of attorne% for the recei't of the dividends ma% !e given !% the adult$ / *nt Acc )nt ;hen t6o or more 'ersons o'en an account #ointl%, it is called a #oint account$ Such accounts ma% !e o'ened !% an% t6o 'ersons for the sake of convenience of o'eration of account and also for 6ithdra6al of mone% after the death of an% one of them$ )he !anker should take the follo6ing 'recautions in o'ening and dealing 6ith a #oint account. aA 4ll 'ersons should sign the a''lication for o'ening the account$ !A )he !anker should ascertain the st%le under 6hich the account is to !e o'ened$ cA )he nature of account must also !e ascertained dA ,e must ascertain the mode of o'eration of the account$ &n this connection he must note that the authorit% given to an% one of the #oint account holders to o'erate the account does not extend to 6ithdra6als of articles de'osited for safe custod%, does not make one 'art% lia!le for overdrafts taken !% another, and does not cover dealings in !ills and securities$ )herefore, he must get clear instructions regarding these matters$ eA &n the a!sence of s'ecific instructions the che*ues must !e signed !% all the #oint account holders$ &n order to secure his 'osition the !anker must o!tain a clear mandate from the 'ersons desiring to o'en a #oint account$ )his mandate must !e signed !% all the 'ersons 6hich must contain the follo6ing 'articulars$ Acc )nt" 3andate A. Dra>*n+" )he mandate must state the name of 'ersons 6ho are authorized to dra6 che*ues on the #oint account$ &n the a!sence of such clear instructions he must honour onl% the che*ues 6hich are signed !% all$ )he ordinar% rule regarding #oint de!ts is that 'a%ment !% a de!tor to o'en of the several #oint creditors, is a good discharge against all, 'rovided hat the de!tor 6as una6are of an% lack of authorit% on the 'art of the creditor in *uestion$ )his, ho6ever, does not a''l% to de!ts due from !ankers$ 4 !anker, as a de!tor of his #oint customers, does not get a good discharge unless he 'a%s the de!ts 6ith the consent of all$ ,o6ever, the authorit% given to an%one terminates on the death, insolvenc% or insanit% of an% one of the #oint account holders$ &n addition to this che*ue dra6n !% an% one on the authorit% given !% others ma% !e countermanded !% an% one of them$ B. 1)r'*' r",*)he mandate should also deal 6ith the *uestion of survivorshi'$ )his is not ho6ever necessar% since under the la6 of devolution a''lication to #oint o6ners on the death of an% one of them the survivors are entitled to the !alance standing to the credit of the account$ )herefore the executors of the deceased cannot claim a share in the !alance$ But in order to avoid future dis'utes the a''lication to o'en the #oint account contains the clause 7&n the event of death, insolvenc% or 6ithdra6al of an% of us, the survivor or survivors of us shall have full control or an% mone%s then and thereafter standing to our credit in our account 6ith %ou8$

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C. P >er t

'erdra>

)he mandate must also contain the names of 'ersons 6ho are authorized to overdra6 on the #oint account$ &n such a case in addition to the #oint lia!ilit%, several lia!ilit% also must !e included$ )his, ho6ever, does not arise in &ndia, since Under the &ndian la6, lia!ilit% !% more than one 'erson is #oint and several$ &f shares in the #oint names are 'ledged as the securit% for loans, transfers must !e effected !% all of them$ D. Ot,er 3atter" )he mandate must state 6hether 'o6er is given to an% of them to 6ithdra6 securities and other items de'osited for safe custod%$ +eath of one of the 9oint?4ccount ,olders. &f the account is in credit the rule of survivors, a''lies$ But the !anker should o!tain a fresh mandate, from the remaining survivors, this is !ecause death cancels the mandate$ &n case of de!it account, the !anker should close the account 'revent the o'eration of rule in Cla%ton=s case to determine the lia!ilit% of the deceased=s estate$ ;ith regards to safe custod% articles as the la6 is not certain, it is safe for the !anker to 'art 6ith them on the recei't executed !% survivor and the re'resentatives of the deceased 'art%$ &nsolvenc% of one of the 9oint?4ccount ,olders. )he o'eration of the account must !e sto''ed immediatel% after the recei'ts of notice of insolvenc%$ &f the !alance is in credit, the amount can !e released on the #oint authorit% of the solvent 'art% >or 'artiesA and the official receiver$ &n the case of de!it !alance also the account must !e stoo'ed to determine the lia!ilit% of the insolvent=s estate$ &n the case of safe custod% items, the% must !e delivered onl% after o!taining the recei't from the solvent 'art% and the official receiver$ 2ule of Survivorshi' in the Case of ,us!and and ;ife. 4ll the rules a''lica!le to #oint accounts also hold good in cases 6here the account is o'ened in the #oint names of the hus!and and 6ife$ ,o6ever, as regards the doctrine of survivorshi', there is a lot of controvers%$ &n vie6 of these, the follo6ing rules can !e lain do6n 6hich are a''lica!le onl% to this t%'e of #oint account$ &f the account is o'ened !% the hus!and for his convenience, the !alance in the a!sence of an% 6ritten mandate to that effect, cannot !e claimed !% the 6ido6, !ut it is to !e transferred to the estate of the deceased hus!and$ )his 6as laid do6n in Marshall v$ Crut6ell >-@GIA$ &f, ho6ever, the account is o'ened 6ith the intention of making a 'rovision for the 6ife, the !alance can !e claimed !% the 6ido6 6ho is entitled to get the same and the amount cannot !e claimed !% the creditors$ Fole% v, Fole% >-H--A$ Partner",*- &*r. 4 'artnershi' is not regarded as an entit% se'arate from the 'artners$ )he &ndian artnershi' 4ct$ -H1/, defines 'artnershi' as the 7relation !et6een 'arsons 6ho have agreed to share the 'rofits of he !usiness, carried on !% all or an% of them acting for all8$ 4 'artnershi' firm is thus esta!lished !% an agreements amongst the 'arents$ )his agreement ma% !e oral or 6ritten$ )he o!#ect of constituting a 'artnershi' firm must !e to >iA carr% on a !usiness 6hich ma% !e conducted !% all the 'artners or !% an% of them on !ehalf of the rest, and >iiA to share the 'rofits of such !usiness amongst themselves$ )he 'artnershi' deed contains the details of the agreement reached !et6een the 'artners$ )he &ndian artnershi' 4ct$ -H1/, la%s do6n the general 'rovisions 6hich govern a 'artnershi' !usiness$ 4 !anker should take the follo6ing 'recautions 6hile o'ening an account in the name of a 'artnershi' firm$ 1. N).9er f -artner"# )he !anker should ver% carefull% examine the artnershi' +eed, 6hich is the charter of the firm, to ac*uaint himself 6ith the constitution and !usiness of the firms$ )he !anker should see that the num!er of 'artners does not exceed the statutor% limit$ 4ccording to Section -- of the Com'anies 4ct, -HIF, a 'artnershi' firm consisting of more than -C 'ersons for the 'ur'ose of carr%ing on !anking !usiness and of more than /C 'ersons for the 'ur'ose of carr%ing on an% other !usiness for the ac*uisition of gain or 'rofit, shall !e an illegal association unless it is registered under the Com'anies 4ct$, -HIF, or is formed in 'ursuance of some other &ndian :a6 or is a 9oint ,indu Famil% carr%ing on such !usiness$ &f the num!er of 'artners exceeds these limits, the 'artnershi' !ecomes an illegal

103

association of 'ersons, 6hich cannot enter into an% contract, and sue or !e sued$ )he minimum num!er of 'artners in a firm must !e t6o, excluding a minor 'artner, 6ho is not com'etent to enter into a contract$ 4 minor ma% !e admitted into the 'artnershi' 6ith the consent of all other 'artners !ut he shall not !e lia!le for the losses or de!ts of the firm$ )he !anker should note the date 6hen the minor 'artner attain ma#orit% so that a fresh 'artnershi' letter signed !% him and other 'artners is o!tained !% the !anker$ 2. T*t(e f f*r.5" Acc )nt# 4 form=s account should al6a%s !e o'ened in the name of the name of the firm and not in the name of the individual 'artnerK'artners$ 6. O-en*n+ f an acc )nt# 4n account in the name of a firm ma% !e o'ened !% a !anker on recei't of an a''lication form one or more of the 'artners$ 2anks, ho6ever, insist that all the 'artners should #oin to 'en the firm=s account$ &f an% 'artner has gone out of the countr%, the rest of the 'artners can o'en a !ank account in the name of the firm$ S'ecimen signatures of all the 'artners should also !e taken for the 'ur'ose of record$ But if an% of the 'artners is de'rived of he right to o'en an account in the firm=s name and this fact is 6ithin the kno6ledge of the !anker, he should not o'en the firm=s account at re*uest of such 'artner$ )he !anker should, therefore, confirm the right of the a''licantKa''licants to 'en an account in the name of the firm from the 'artnershi' deed or from an% other availa!le evidence, e$g$ the authorit% letter signed !% all other 'artners$ 7. T,e Partner",*- Letter r 3andate# )he !anker should take letter signed !% all 'artners stating. >iA the names and addresses of the 'artners$ >iiA the nature of the !usiness undertaken !% the firm, and >iiiA the nameKnames of the 'artnerK'artners 6ho 6ill o'erate the account on !ehalf of the firm and 6ill have the authorit% to dra6 and acce't !ills etc$, and to sell and mortgage the 'ro'ert% of the firm$ )he !anker should honour the che*ues signed !% all the 'artners or !% those 'artners 6ho are authorized to o'erate the account$ 8. Re' cat* n f a)t, r*t2 t -erate t,e acc )nt#

)he authorit% given in favour of a 'articular 'artnerK 'artners to o'erate the firm=s account ma% !e 6ithdra6n !% an% of them !% giving a notice to the !anker$ &n such circumstance, the !anker should sto' 'a%ment of che*ues signed !% all the 'artners$ 4 'artner can also sto' the 'a%ment of a che*ue issued !% an% other 'artner on the firm=s account$ )he 'o6er to revoke the authorit% to o'erate the account is vested in an% 'artner 6ho is a slee'ing 'artner or is not authorized to o'erate the account$ F$ 4 'artner authorized to o'erate the firm=s account cannot delegate his authorit% to another 'erson 6ithout the consent in 6riting of all other 'artners$ &f such consent is given !% all of them, the authorized 'artner ma% execute a o6er of 4ttorne% in favour of such other 'erson$ G$ &n a che*ue 'a%a!le to the firm is endorsed !% a 'artner in this o6n favour and is de'osited !% him to !e credited to his 'ersonal account, the !anker should do so after making an en*uir% a!out it form other 'artners and after !eing satisfied a!out it Other6ise, he 6ill !ear the risk of losing the statutor% 'rotection granted to the collecting !anker under the "egotia!le &nstruments 4ct, -@@-$ )he !anker should !e 'articularl% careful in this regard if the 'artner sends such a che*ue in res'onse to a re*uest from the !ank to re'a% overdraft taken !% him from the !ank$ I.-(*ed a)t, r*t2 f a -artner# 4 'artner acts as an agent of the firm for the 'ur'oses of the !usiness of the firm and !inds the firms !% his acts and deeds$ 4ccording to Section -H>-A of the &ndian artnershi' 4ct$, -H1/, 7the act of a 'artner 6hich is done to carr% on, in the usual 6a%, !usiness of the kind carried on !% the firm !inds the firm8 )his authorit% of a 'artner is called the im'lied authorit%$ Ever% 'artner is lia!le not individuall% and #ointl% 6ith other 'artners or all the acts of the firm or the instruments executed 'rovided the some are done.

104

>iA in the name of the firmJ and >iiA in connection 6ith the !usiness carried on !% the firm$ 4n% 'artner has an im'lied 'o6er to sto' 'a%ment of a che*ue dra6n on the firm=s account and the !anker is !ound to com'l% 6ith the instruction of the 'artner$ So also an% one or more 'artners ma% cancel the authorit% given to o'erate in the account, and in that case the !anker should not honour che*ues dra6n !% such an authorit%$ Ever% 'artner in a commercial 'artnershi' >trading firmA has im'lied authorit% to !ind the firm !% making, dra6ing, singing, endorsing, acce'ting, negotiating and discounting negotia!le instrumentas in thename and on account of the 'artnershi'$ ,e has also authorit% to !orro6 mone%$ ,o6ever, the !anker shuld not honour che*ues or other instruments signed !% a 'artner 6hom the !ank mandate does not authorize to sign on !ehalf of the firm$ )he 'o6er of a 'artner to !orro6 is also de'endent on the instruments in the mandate$ 4 'artner in a non?trading firm has no im'lied authorit% to !orro6 or to make to issue negotia!le instruments, although he ma% sign che*ues$ )herefore, the !anker should get the signature of all the 'artners in a non?trading firm for all transactions involving advances to the firm, or the discounting or the negotiating of !ills of exchange$ 4nother im'lied authorit% of a 'rtner in a commercial 'artnershi' is his 'o6er to 'ledge the firm=s 'ro'erties$ But this im'lied 'o6er is consigned to those transactions incident to the firm=s ordinar% course of !usiness$ ,ence, the safer course for the !anker 6ould !e to get the assent of all the 'artner$ 4 'artner has no im'lied 'o6er to !ind his co?'artners !% deed$ So the !anker should see that he gets the assent of all the 'artners 6hen immova!le 'ro'erties of the firms are mortgaged as other6ise the !anker 6ill get onl% an e*uita!le title and not a valid legal title$ &t ma% !e mentioned here that the im'lied authorit% of a 'artner to !ind the firm does not extend to guarantees$ 4 'artner can not !ind the firm !% giving a guarantee on !ehalf of the firm, unless it is customar% for that firm, or 'artner can not !ind the firm !% o'ening an account in his o6n name on !ehalf of the firm unless he is ex'ressl% authorize to do so !% all the 'artners$ )he !anker should not acce'ted for the credit of the 'rivate account of a 'artner che*ues 'a%a!le to the firm$ ;hen such a che*ue is 'resented, the !anker should make en*uiries$ Omission to make en*uiries 6ill de'rive a !anker of his statutor% 'rotection$ @$ ;hen a ne6 'artner is admitted to the firm, the !anker need not sto' the o'erations in account 'rovided the account should o!tain a ne6 mandate signed !% all the 'artners, including the ne6 'artner$ But 6hen the 'artnershi' account sho6s a de!it !alance, the !anker should sto' the o'erations in old account and o'en a ne6 account$ 4 ne6 mandate should also !e o!tained$ )he !anker ma% take an agreement signed !% the ne6 'artner undertaking the lia!ilit% in res'ect of the outstanding de!ts of the firm, !alance on the 'artnershi' account$ )he can give the !anker a valid discharge for it$ &n case the 'artnershi' account sho6s a de!it !alance, the account should !e sto''ed to fix the lia!ilit% of the deceased, and an% che*ues 'resented thereafter should !e returned 6ith the remark 'artner deceased$ )he rule a''lies even 6hen the che*ues are signed !% the deceased 'artner$ -C$ &n the event of insolvenc% of a 'artner, the solvent 'artners have a right to o'erate the 'artnershi' account in connection 6ith the 6inding?u' of the !usiness$ ,o6ever, if the 'artnershi' firm is inde!ted to the !ank, the account should !e sto''ed and a ne6 account should !e o'ened in order to avoid the a''lication of the 2ule in Cla%ton=s case$ )he !anker should not honour che*ues dra6n !% the insolvent 'artner$ Che*ue dra6n !% him !efore ad#udging him an insolvent ma% !e honoured !% the !anker$ ,o6ever it is al6a%s advisa!le to o!tain the confirmation of other 'artners$ --$ &n the caser of retirement of a 'artner, the retiring 'artner 6ill continue to !e lia!le to the !anker till the latter is served 6ith a notice of the retirement of the former$ On receiving such a notice the !anker should take a ne6 mandate from the continuing mem!er$ &f the 'artnershi' account sho6s a de!it !alance, the account should !e sto''ed in order to avoid the a''lication of the 2ule in Cla%ton=s case$ -/$ &n the case of lunac% of a 'artner, the 'artnershi' firm does not stand dissolved$ ,o6ever, u'on a''lication of a fello6 'artner the court ma% order a dissolution$ On such a dissolution the !anker ma% allo6 the other 'artner to continue the account if is sho6s a credit !alance$ &f, on the other hand, the account sho6s a de!it !alance, the !anker should sto' the account$

105

-1$ &t should !e remem!ered there that alterations in the constitution of a firm 6ill affect an% charge 6hich ma% have !een given on the 'artnershi' 'ro'ert%$ )herefore, the !anker should o!tain a ne6 mortgage deed signed !% all the ne6 and continuing 'artners$ / *nt 1 c! C .-an*e" 4 #oint stock com'an% is a se'arate legal entit% *uite distinct from its shareholders, having 'er'etual succession and a common seal$ So even if onl% one shareholder holds all the shares, the com'an% is distinct form such shareholder$ )hus in Solomon D$ Solomon 3 Co$ :td$ >-@HGA, the 'laintiff 6as 'rinci'al shareholder and 6as also holding secured de!entures for X -C,CCC$ )he unsecured creditors 6anted to de'rive him of the securit% on the 'lea that he and the com'an% 6ere one 'erson it 6as held that the com'an% 'ossessed se'arate legal entit%, it 6as 'erfectl% legal for Salomon to contract 6ith it and therefore entitled to 'riorit% in res'ect of his securit%$ )he account o'ening formalities and the 'recautions needed in o'erating the 4ccounts of com'anies 6hose lia!ilit% is limited !% shares are discussed !elo6. 1te-" t 9e ta!en *n O-en*n+ an Acc )nt -A )he Banker should ensure that the com'an% is incor'orated !% looking into the certificate of incor'oration granted !% the register of 9oint Stock Com'anies$ /A )he !anker should o!tain co'ies of Memorandum and 4rticles of 4ssociation and ins'ect them carefull% !efore he esta!lished the relation 6ith the com'an%$ )he !anker should also get it dul% certified !% the Secretar% that the co'ies are u'to?date, since !oth the clauses in the Memorandum and the 4rticles can !e altered from time to time$ ;here the Banker gets an% dou!t he can ins'ect these documents in the office of the 2egister of 9oint Stock Com'anies$ ,e must not the !orro6ing 'o6ers, 'o6ers to give guarantees and other securities and the restriction if an% on director=s 'o6ers to !orro6$ 1$ )he !anker should also o!tain the certificate to commerce !usiness and return the same after recording the 'articulars$ )his is the certificate granted !% the 2egistrar certificate that all formalities have !een com'leted !% the com'an% and the com'an% is entitled to commerce the !usiness$ 5$ )he !anker should also o!tain co'ies of recent !alance Sheet and rofit and :oss 4ccount in the case of an existing com'an% r in the case of a ne6l% formed com'an% a co'% of the ros'ectus or a Statement in lieu thereof$ &f the com'an% is not 6illing to give the Balance Sheet, ade*uate details regarding ca'ital, lia!ilities, assets and statement of !usiness must !e sought$ I$ &n the case of a ne6 Com'an% the !anker should scrutinize the 4rticles to see if the first director and Bankers of the Com'an% are named therein$ ,o6ever it is not common to find these in the articles$ F$ )he !anker should o!tain a certified co'% of the resolution of the Board a''ointing him as a !anker of the com'an% and usuall% such resolution em!odies ex'licit instructions as to 6ho shall dra6 che*ue, dra6, acce't and endorse !ills and deal 6ith securities and safe custodies$ )he !ankers should also o!tain the s'ecimen signatures of the officers 6ho are authorized !% the resolution to o'erate the account$ Such a co'% should !e signed !% the Chairman of the meeting and the Secretar% of the Com'an%$ Preca)t* n"# -A )he Borro6ing o6ers of the com'an% must !e ascertained 6ith reference to the Memorandum and 4rticles$ &n the case of trading com'anies the 'o6er to !orro6 is im'lied$ But in the case of non?trading com'anies, the 'o6er must !e s'ecificall% stated$ /$ )he !anker should note 'articularl% the 'rovision in the Com'anies 4ct$, -HIF that the Board of +irectors of a u!ic :imited Com'an% cannot !orro6 mone%s 6here the mone%s to !e !orro6ed together 6ith the mone%s alread% !orro6ed exceed the aggregate of the 'aid u' ca'ital of com'an% and its free reserves, i$e$, reserves not set a'art for an% s'ecific 'ur'ose$ &n com'uting the total !orro6ings, loans re'a%a!le on demand and short?term loans for 'eriods not exceeding six months are excluded$ Ever% time a loan is contracted !% the +irectors, the !anker should ensure that it is 6ithin their 'o6ers$ Other6ise the consent of com'an% in general meeting should !e o!tained$ Com'anies consent is in the form of a resolution and it should state the total amount that can !e !orro6ed !% the directors$ 4'art form thisJ the 4rticles of the com'an% ma% im'ose additional restrictions$ u!lic :imited

106

1A ;here the !orro6ing is conducted under the delegation of 'o6ers the !anker should see that it is strictl% in accordance 6ith the articles$ ,e should also see that the documents are signed giving reference to the resolution$ 5A )he !anker should see that the !orro6ing is not ultra?vires the Memorandum i$e$ not for the 'ur'oses s'ecified in it$ &f the !orro6ing is ultra?vires, it is not !inding on the com'an%$ &n 2e?&ntroductions :td$, >-HFHA, the "ational rovincial Bank lent mone%s to &ntroductions :td$ for a ig?feeding scheme !e%ond its 'h%sical o!#ects, !ut rel%ing on an 7inde'endent !orro6ing o!#ect8$ )he Court of 4''eal held that such an o!#ect must !e related to other o!#ects, and therefore the !orro6ing !eing ultra?vires, the loan and securit% are not !inding on the li*uidator$ Even if all the shareholders a''rove of it, it cannot !ecome valid$ ,o6ever, 6here the !orro6ing is ultra?vires the directors, !ut intra?vires the Memorandum such a !orro6ing can !e ratified !% a s'ecial resolution of the Com'an%$ I$ 4t the time of 6inding u', the 'o6ers of directors cease exce't to the extent 'ermitted !% the com'an% or li*uidator$ )he !anker after receiving the notice of the resolution for 6inding u', should not honour che*ues issued !% +irectors, unless such 'o6er is conferred on them either !% the com'an% in (eneral Meeting or !% the li*uidator$ F$ Section -/I of the Com'anies 4ct$ -HIF gives a list of charges re*uiring registration$ )he list of charges is of s'ecial interest to the !ankers and 6hen a 'articular charge is made on the com'an% in connections 6ith the !orro6ing he should find out 6hether it re*uires registration$ )he charge must !e registered 6ithin 1C da%s from the date on 6hich it is actuall% signed or sealed$ Failure to register the charge 6ill make the securit% void as against the li*uidator or ma% creditor of the com'an%$ &n addition, su!se*uent registered charges 6ill have 'riorit% over the unregistered charges, event if the 'erson in 6hose favour the su!se*uent charge is created has ex'ress notice of the 'rior unregistered charge$ >&n 2e$ Moolthic Building Com'an% D$ )acon Co$A 4 registered charge can !e cancelled !% sending Memorandum of Satisfactions to the 2egister$ Charges 2e*uiring 2egistration aA 4 charge for the 'ur'ose of securing an% issue of de!enturesJ !A 4 charge on uncalled share ca'ital of the com'an% cA 4 charge on an% immova!le 'ro'ert% 6herever situated, or an% interest thereinJ dA 4 charge on an% !ook de!ts of the com'an%, eA 4 charge, not !eing a 'ledge, in an% mova!le 'ro'ert% of the com'an%J fA 4 floating charge on the undertaking or na% 'ro'ert% of the com'an% including stock in?trade$ gA 4 charge on calls made !ut not 'aidJ hA 4 charge on a shi' or na% share on a shi'J iA 4 charge on good6ill or a 'atent or a licence under a 'atent, on a trade mark or on a co'%right or a licence under a co'%right$ Pr ced)re f r Re+*"trat* n )he com'an% must file 'rescri!ed 'articulars of the charge together 6ith the co'% of the instruments creating the charge$ ;henever a !ank gives a loan !% creating a change 6hich re*uires registration, he should see that the charge is registered 6ithin the 'rescri!ed 'eriod$ &t is in the interests of the !anker to see that the charge is immediatel% registered !ecause an% 'erson ac*uiring such 'ro'ert% or a 'art of it or an% interest therein is deemed to have notice of the charge from the date of registration and not form the date of its creation$ )herefore, even a su!se*uent charge 6hen registered earlier 6ill en#o% 'riorit% over the 'revious charge$ Exec)t r" and Ad.*n*"trat r" Executive and administrators are 'ersons 6ho are a''ointed to conduct the affairs of a 'erson after his death$ ;hen a 'erson kno6s as testator a''oints another 'erson for this 'ur'ose through a 6ill, he is kno6n as an executor$ &f the 6ill of the testator does not mention the name of the executor, or if the 'erson a''ointed as executor dies or refuses to act, the Court a''oints a 'erson for the 'ur'ose 6ho is hYkno6 as administrator$ Both the executor and the administrator 'erform the same duties, i$e$, to realize the assets of he deceased and to 'a% of off his de!ts$ )he executor is a''ointed !% the 6ill$ ,is 'o6ers and authorit% are vested therein$ ,e has to act according to the directions given in the 6ill, !ut he is re*uired to o!tain a 'ro!ate >official confirmation of the 6illA from the court$ )he administrator is a''ointed !% the court through a letter of 4dministration and is directed, in the a!sence of the 6ill, to settle the affairs according to the 'rovisions of the la6$ )he !anker should take the follo6ing 'recautions 6hile dealing 6ith executors and administrators$ -$ On the death of a customer, the !anker must sto' 'a%ments from his account$ )he executor should !e 'ermitted to o'erate the account of the deceased after he has o!tained the 'ro!ate from the Court$ )he administrator

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is authorized to do so after securing the :etter of 4dministration$ )he !anker should examine these documents !efore the a''ointed 'erson is 'ermitted to o'erate the account$ 4m account in the name of an executorKadministrator is o'ened in the follo6ing st%le and the !alance in the account of the deceased is transferred to such account$ 74BC executors >or administratorsA to the Estate of EBV deceased8 /A &n case t6o or more 'ersons are a''ointed as executors or administrators, the% shall have #oint interest in the estate of the deceased$ )his interest is not ca'a!le of division$ One or more executors ma% dra6 che*ues on the account !ut a letter of authorit% signed !% all of them, stating the name$ "ames of the 'ersons 6ho 6ill o'erate the account, is taken !% the !anker$ &f this authorit% is revoked, either all of them should o'erate the account #ointl% or a fresh letter of authorit% is given to the !anker$ 4n% of the executorsKadministrators is com'etent to countermand the 'a%ment of the che*ue issued % an% other executorsKadministrator$ 1$ )he !anker should !e ver% cautious in conducting the account of executorsKadministrators so as to 'revent them from misa''ro'riating the funds of the deceased$ )he !anker should not 'ermit transfer of funds from the estate account to the 'ersonal account of the executor to re'a% an overdraft taken !% the executor$ Similarl% the !anker should not have recourse to the securities !elonging to the deceased for granting 'ersonal loan to the executors$ 5$ &n case of death of one of the executors or administrators a che*ue issued on such account should not !e dishonoured even if he is one of he t6o or more #oint signatories, !ecause on the death of one of he executors >unless other6ise 'rovided in the 6illA or of an administrator, his 'o6ers are vested in the surviving executors and administrators$ Of course, in such cases a ne6 :etter of 4dministration is to !e secured from the Court$ I$ )he !anker cannot exercise his right of set?off against the credit !alance in the executor=s 'ersonal account in res'ect of a de!it !alance in the account of the deceased$

F$ &f the executor re*uires an overdraft or a loan !efore he o!tains the 'ro!ate in order to make necessar% 'a%ment, the !anker usuall% advances such loans on the 'ersonal securit% of the executor, so that he can recover the same in case the 'ro!ate is not granted$ )he executors are made #ointl% and individuall% lia!le for such loans$ G$ 4fter the court grants 'ro!ate or issue a :etter of 4dministration, the executor or the administrator ma% 'ledge s'ecific assets of the testator to o!tain an overdraft from the !anker$ But if the 6ill s'ecificall% for!ids such 'o6ers, the executor cannot do so$ )he !anker should therefore, ver% thoroughl% examine the 6ill to ascertain the !orro6ing 'o6er of the executors$ &n case a loan is granted, all the executors must sign the documents$ )he executors ma% also make themselves 'ersonall% lia!le for such loans$ Tr)"tee 4 trustee is a 'erson to 6hom 'ro'ert% is entrusted so that he ma% deal 6ith it in accordance 6ith the directions given !% the creator of the trust, a 'erson he can trust to carr% out his 6ishes honestl% and efficientl%$ )he 'erson setting u' the trust is called donor or author of the trust$ )hose 6ho are to !enefit under it are called !eneficiaries$ )he document !% means of 6hich a trust is usuall% formed is called the 7)rust +eed8$ )he la6 relating to trusts is contained in the &ndian )rust 4ct$ -@@/$ )here is a 6ide variet% of trusts in o'eration in this countr% toda%$ )he% ma% !e categorized into iA 'rivate trusts, and iiA cor'orate trusts$ )he distinction is not clear cut as, for exam'le, some trusts such as charita!le trusts are h%!rid in the sense that the% fall into either categor%$ rivate trusts fall into t6o !road categories?those 6hich arise under a 6ill and those 6hich are made inter vivos >i$e, those made !% deed in donor=s lifetimeA$ 4 trustee could !e a friend or relation, a solicitor, or a cor'orate trustee such as a !ank$ )rusts are found in different ca'acities$ 4 common exam'le is 6here a man sets u' a trust for the !enefit of his children$ )o do this he has to choose a trustee and give over to him the securities 6hich from the trust 'ro'ert%$ 4s the securities 'roduce interest at regular intervals, the trustee 'a%s the mone% out to the children in accordance 6ith the terms of the trust instrument$ erha's the most familiar form is a trustee in insolvenc% >!ank?ru'tc% under English la6A 6hose task is to take charge of the assets of an insolvent, turn them into mone%, and then a''l% that mone% as far it 6ill go in settling

108

the de!ts$ 4nother is a trust under the deed of arrangement 6hich is a kind of alternative to insolvenc%, if the creditors 6ill agree to it$ )he trustee administers the 'ro'ert% of a de!tor for the !enefit of the creditors$ Before o'ening an account in the name of a trust, the !anker should examine carefull% the )rust +eed and ascertain such matters as the 'o6er of the trustee to delegate their 'o6ers to an% one or more of them, their 'o6er to !orro6 mone% and the manner of o'erating on the account in case of death or insolvenc% of a trustee$ &t ma% !e noted here that unless the )rust +eed given authorit% to the trustees to delegate their 'o6ers, the% cannot do so$ Conse*uentl%, in the a!sence of an ex'ress 'rovision in the )rust +eed to the contrar%, the !anker should honour onl% such che*ues as are signed !% all the )rustees$ Even 6hen an account is o'ened not descri!ing it as a trust account, if the !anker comes to kno6 that it is trust account, he should not allo6 the customer to dra6 out mone% for a 'ur'ose o!viousl% inconsistent 6ith the customer=s dut% as a trustee$ ,o6ever, his does not mean that the !anker should act as a detective$ ;here a customer has more than one account, the !anker need not necessaril% 'resume that one of them ma% !e a trust account$ &n some cases, the ver% title of the account itself ma% indicate that it is a trustee account$ Certain other titles ma% not descri!e the account as a trustee account$ &n such cases if the !anker has information that the account is a trust account, he cannot esca'e lia!ilit% merel% on the ground that there 6as no indication of the fact in the title of the account$ For instance, the o'ening of an account under the title <0umar (hosh= does not descri!e the account as a trust account$ &t onl% sho6s that the account is a 'rivate account 6ith reference to a 'articular transaction 6ith (hosh$ ,o6ever, the !anker should 'a% regard to the circumstances, or to an% information sho6ing that the account is a trust account$ 4gain, the o'ening of an account under the title <0umar 'er (hosh= does not necessaril% descri!e the account as a trust account$ &t ma% mean an account !elonging to 0umar consisting of funds !rought in !% (hosh$ "evertheless, if the title means that the account has !een o'ened !% 0umar to !e dra6n on !% (hosh, then it is a trust account$ &t 6as held in 9ohn D$ +od6ell >-H/@ 4$C$ IF1A that if a customer had one !ank account in his 'ersonal name and another in the trust name, a transfer of mone% from the trust account to the 'ersonal account should 'ut the !anker on en*uir%$ )his is 'articularl% im'ortant 6hen the transferee account ha''ens to !e overdra6n$ )he !anker 6ould !e held lia!le for !reach of trust, if it could !e 'roved that the !anker derived some !enefit out of the transfer$ )he !anker should not credit to the trustee=s 'rivate account che*ues dra6n in favour of the trust$ 4gain the !anker is not entitled to use his right of set?off !et6een the trustee=s 'rivate and the trust account$ But if he has no notice of the character of the accounts, he ma% exercise his right of set?off$ Further, the !anker should not grant an advance on a trustee=s 'rivate account against trust securities$ Unless the )rust +eed gives to trustee ex'ress 'o6ers to !orro6 and 'ledge the trust 'ro'ert%, the !anker should note that he is not entitled to !orro6 mone% or give an% securit%$ But if the +eed gives ex'ress 'o6ers to the trustee to !orro6 mone% !% mortgaging trust 'ro'ert%, he ma% do so$ On recei't of the notice of the death of one of the trustees, the !anker should ascertain fro the )rust +eed 6hether or not the surviving trustees are entitled to act 6ithout the a''ointment of a ne6 trustee$ &f a ne6 trustee is re*uired, the !anker should sus'end all o'erations on the account until a ne6 trustee is a''ointed$ ;here a trustee !ecomes an insolvent, it does not involve the trust 'ro'ert%$ )he trust 'ro'ert% !elongs to the !eneficiaries, and the 'rivate creditors of the trustee have no right to claim it$ )he trustee=s right to deal 6ith the trust 'ro'ert%, for the 'ur'ose of trusteeshi', is also not affected unless the )rust +eed 'rovides other6ise On recei't of the notice of the insanit% of a trustee o'eration on the account !% that trustee should !e sus'ended$ C()9"E 1 c*et*e" and C,ar*ta9(e In"t*t)t* n" Clu!s, societies, charita!le and religious, institutions, li!raries, schools, colleges, etc$, not engaged in trading activities, maintain their accounts 6ith the !anks$ )he !ank should o!serve the follo6ing 'recautions in dealing 6ith them. iA )he Societ% must !e incor'orate. )he Societies 2egistration 4ct$ -HFC, 'rovides for the registration of societies for the 'romotion of literature, science, fine arts or for charita!le 'ur'oses$ Such institutions ma% also !e incor'orate under the Com'anies 4ct, -HIF, or the Co?o'erative Societies 4cts$ 4 societ% gets the legal recognition

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as an entit% se'arate from its mem!ers onl% after its incor'oration under an% of these 4cts$ )hereafter, it is em'o6ered to enter into valid contracts and to sue or !e sued$ )he !anker should, therefore, ensure that the a''licant societ% is a 'ro'erl% incor'orated !od%$ )he unregistered societ% cannot !e sued in la6$ iiA 2ules an !%?la6s of the Societ%. 4 registered societ% is governed !% the 'rovisions of the 4ct under 6hich it ha !een registered$ &t ma% have its o6n Constitution, Charter or Memorandum of 4ssociation and rules and !%?la6s, etc$, to carr% on its activities$ 4 co'% of the same should !e furnished !% the societ% to the !anker to ac*uaint the latter 6ith the 'o6ers and functions of the 'ersons managing its affairs$ )he !anker should ensure that these rules are o!served !% the 'ersons res'onsi!le for managing the societ%$ iiiA 2esolution of the Managing Committee. For o'ening !ank account, the Managing Committee of the societ% must 'ass a resolution$ aA 4''ointment the !ank concerned as a !anker of the societ%J !A Mentioning the nameKnames of the 'erson or 'ersons, 6ho are authorized to o'erate the accountJ and cA giving an% other direction for the o'eration of the said account$ 4 co'% of the resolution must !e o!tained !% the !ank for its o6n record$ ivA Borro6ing o6er of the Societ%. &n case a registered societ% intends to !orro6, the !anker must certain the !orro6ing 'o6er of the societ% from this charter or Memorandum$ )he 'ur'ose for 6hich such !orro6ing is 'ermissi!le must also !e noted and the 'o6ers of the managing committee or its office?!earers to create a charge over he assets of the societ% for the 'ur'ose of !orro6ing should !e en*uired into$ 4 resolution must !e 'assed !% the Managing Committee for this 'ur'ose and a co'% thereof must !e sent to the !anker$ vA +eath or 2egistration. &n case the 'erson authorized to o'erate the account on !ehalf of a societ% dies or resigns, the !anker should sto' the o'eration of the societ%=s account till the societ% nominates another 'erson to o'erate its account$ viA Care to !e exercised in case of ersona 4ccounts. &f the 'erson authorized to 'erate the societ%=s account is also having his 'ersonal account 6ith the same !ranch of the !ank, the !anker is under an o!ligation to ensure that the funds of the societ% are not !eing credited to the 'ersonal account of the said 'erson or officer?!earer$ For exam'le, the rinci'al of College is authorized to o'erate the account of a College 6ith Bank E$ ,e also has his 'ersonal account 6ith the same !ank$ ,e sends to the !ank for collection and credit to his 'ersonal account a che*ue dra6n !% a donor in favour of the College )he !anker is under an o!ligation to ensure that he receives 'a%ment in !ehalf of the true o6ner of the said che*ue, i$e$, on !ehalf of the college$ &f he fails to do so he 6ill !e held guilt% of negligence and shall not !e a!le to avail of the statutor% 'rotection under Section -1- of the "egotia!le &nstruments 4ct$ &n these circumstances, the !anker should not collect such che*ue for crediting the same to the account of the rinci'al$

ZZZZZZZZZZZZZZZZZZ

110

Le"" n 0 2B C)"t .er5" Pa"" B !

ass !ook is a hand% small account !ook, issued !% the !anker to a customer, to record all dealings of recei'ts and 'a%ments !et6een them$ &t contains an exact co'% of the account in his !anker ledger and is so named !ecause it 'asses fre*uentl% to and fro !et6een the !anker and the customer$ )he o!#ect of a 'ass !ook is to inform the customer from time to time the condition of his account as it a''ears on the !ooks of the !ank$ &t not onl% ena!les him to discover errors to his 're#udice !ut also su''lied evidence in his favour in the event of the litigation or dis'ute 6ith the !ank$ &n this 6a% it 'rotects him against the carelessness or fraud of the !ank$ Some !ig !anks send to the customers a statement of their account 'eriodicall%, i$e$, fortnightl% or monthl%, instead of a 'ass !ook$ )he 'ass !ooks are al6a%s hand6ritten$ ;hen statements of accounts are given, some !anks get them 're'ared on machines$ )he statement of account, in the a!sence of an% #udicial decision, stands on the same footing as the 'ass !ook. 4 'ass !ook ma% take an% of the follo6ing forms. &n 4ccount 6ith the SSSSSSSS Bank :imited Folio SSSSS$ 4Kc "oSSSS$ Date -HH9une /C 9ul% 5 9ul% F 9ul% -/ 9ul% -I 9ul% -F )o >che*ue "o$ IIF/A B% Cash )o M >Che*ue "o$ II@F5A -CC 1IC -/IC Part*c)(ar" B% Cash )o E >Che*ue "o$ II@F-A -IC @IC W*t,dra>a( R". De- "*t" R". ICC Ba(ance R". ICC 1IC -/CC @IC /-CC /CCC In*t*a(

&n 4ccount ;ith the N SSSSSSSSS$$ Bank :imited FolioSSSSSSSS$ 4Kc "oSSS$$ +r$ Cr$ Date Part*c)(ar R". Date 1@:1 9ul% 5 9ul% -/ 9ul% -F )o E II@F-A )o B I@/H-A )o M II@F5A ! >che*ue >che*ue >che*ue "o$ "o$ no -IC 1IC -CC 1@:1 9une /C 9ul% F 9ul% -I

Part*c)(ar B% Cash B% Che*ue >II@F/A Bills collected

R". ICC 1IC -/IC

C .-(et* n f Pa"" B

)he follo6ing 'oints are relevant and of im'ortance in the com'letion of the 'ass !ooks. iA Entries in the 'ass !ook should !e made in the hand of onl% !ank officials$ )he customer should not !e allo6ed to make an% entr% in the 'ass !ook himself, even for the 'ur'ose of reconciling the account$ iiA 4 'ass !ook should !e 6ritten onl% after the credit ad de!it entries had !een 'osted in the ledger and not !efore$ )here is then, little likehood of a mistake 'assing unnoticed$

111

iiiA 4 'ass !ook 6hen sent out to a customer must sho6 u'?to?date entries and if he alters his 'ositions on out?of?date information, he certainl% has a cause of grievance against the !ank$ ivA &n those cases in 6hich alternations are necessar%, the 6rong figures should !e ruled through and correct one neatl% 6ritten a!ove$ Scratching out a 'enknife or an erasure should never !e 'ermitted$ vA &f the 'ass !ook is lost !% the customer and he re*uests for a du'licate one, a du'licate 'ass !ook should !e issued !% the !anker and marked 7+u'licate8 free of charge or at a small charge var%ing 6ith the 6ork involved$ 4 note to the effect that a du'licate 'ass !ook has !een issued should !e given on the relative ledger folio and in the even of the original turning out again, the account holder should return in to the !ank$ viA &n the case of savings !ank accounts, !ank rules 'rovide that the 'ass !ook must accom'an% the 6ithdra6al form ever% time the mone% is 6ithdra6n through the 6ithdra6al from$ )he 'ass !ook should !e com'leted and returned to the account holder there and then instead of detaining it in the !ank and returning it later even though there is #ust one entr% to !e made therein$ )he attri!uted of a good 'ass !ook are accurac% and neatness$ 4 sha!!il% 6ritten 'ass !ook is a't to create for the !ank an undesira!le re'utation for carelessness$ "othing looks more contem'ti!le than a 'ass !ook in 6hich alternations and over6riting are !oth numerous and !adl% made$ &t 6ould !e a''ro'riate to re'roduce here the o!servations and recommendation of the Banking Commission >-HG/A 6hich are as relevant toda% as 6hen the% 6ere made sixteen %ears ago$ 7)he statements of accounts and 'ass !ooks should !e 6ritten neatl%, legi!l% and accuratel% and furnished to the customer 'rom'tl%$ Considera!le difficult% is ex'erienced !% !anks 6hen the 'ass !ooks are 'resented !% savings !ank account holders 6ho are allo6ed to make 6ithdra6als !% che*ues for !eing !rought u'to date after long intervals and cones?*uentl% the return of 'ass !ooks to customer is dela%ed$ Banks should therefore, discontinue the issue of 'ass !ooks to such account holders and instead furnish them 6ith statements of accounts sa% at !i?monthl% intervals$ )he !anks 6hich still issue 'ass !ooks to current account de'ositors should also6itch over to the s%stem of furnishing statements of accounts 7$ >2e'ort of the Banking Commission, (overnment of &ndia, -HG/, '$ /1@A Undou!tedl%, some customers are ver% careless in the matters of sending the 'ass !ooks to the !ank to !e 6ritten u', as o!served !% the Banking Commission 4gain, some others leave the !ook at the !ank and do not care to see it from one %ear=s end to another$ Both classes of customers should !e asked to have their 'ass !ooks com'leted at least once a month, so that the !alance ma% !e agreed$ For this 'ur'ose, it 6ould !e necessar% for the !ank to kee' a check on the movements of 'ass !ooks through a ass Book 2egister in 6hich all 'ass !ooks received and given out must !e entered under the res'ective dates 6hich should !e authenticated !% a res'onsi!le officer of the !ranch$ ;hether ass !ook can !e relied on as a Settled 4ccount$ ;hen the ass Book is su!mitted to the customer it amounts to a statement of account rendered !% the !anker$ &f the customer agreed to this it !ecomes an 7account settled8$ ro!a!l% !ased on similar thinking$ Mr$ aget sa%s, 7its 'ro'er function is to constitute a conclusive and un*uestiona!le record of the transactions !et6een !anker and customer and it should !e recognized as such8$ )i is also im'lied in the case of an account stated, that the !alance 6ill !e 'aid as a lum' sum !% the 'art% agreed to !e in de!t 6ithout reference to the individual items$ ;hen an account has once !een stated, the individual items !ecome merged in the final !alance and can no longer !e used u'on individuall%$ ,o6ever, according the la6 in England and &ndia, 'ass?!ooks are not so 6ell settled, accounts as stated in the earlier 'aragra'h$ &n man% cases the 'ass?!ook is not acce'ted as an account settled$ )hus the la6 is unsatisfactor% from the vie6?'oint of !ankers$ But it ma% !e 6orth?mentioning here that in 4merica it is o!ligator% on the 'art of the customer, to examine the 'ass?!ook and vouchers and to re'ort to the !ank 6ithout an% unreasona!le dela% an% errors 6hich ma% !e discovered$ "o6 6e shall consider the 'osition of the !anker and customer in relation to entries made in the 'ass?!ook$ )his can !e studied !% dividing such entries into those favoura!le to the !anker and those favoura!le to the customer$

Entr*e" *n C)"t .er5" &a' )r

112

)he account of a customer ma% sometimes sho6 a 6rong credit !alance 6hich ma% !e higher than the correct credit !alance$ )his ma% !e due to iA du'lication of credit entries, iiA incorrectl% high amount for credit entries, of iiiA omission of an% de!it entr%$ )he legal 'osition of !anker and his customer in such a situation 6ould !e as follo6s$. iA )he 'ass !ook is 6ritten !% the !anker and hence the entries therein ma% form an evidence against the !anker$ )he customer is rightl% entitled to !elieve them as correct and to act on the !asis of such entries$ &f the 'ass !ook sho6s a higher !alance and the customer 6ithdra6s such !alance treating it as his o6n and su!se*uentl% s'ends it a6a%, the !anker shall not !e entitled to recover such amount 6rongl% 'aid to the customer$ But the customer shall have to 'rove that aA he acted in such manner rel%ing on the correctness of the !alance sho6n in the ass Book and had no kno6ledge of the mistakes therein, and !A he altered his 'osition !% s'ending the same$ )his !enefit has !een given to the customer in various #udgments !ecause of the 'resum'tion that normall% a 'erson s'ends 6hat he 'resumes to !elong to him and if the !anker 'ermits him to 6ithdra6 excess mone% on the a!ove 'resum'tion, it 6ould !e a great 're#udice if he is called to 'a% it !ack$ iiA )here are some exce'tions to the a!ove mentioned 'rinci'le of esto''el$ &f the customer regularl% maintains his account !ooks and the !ank regularl% sends him the ass Book >or statement in lieu of the ass BookA the customer cannot act on the !asis of the a!ove 'resum'tion$ )ough it si not o!ligator% for him to check the ass Book >or the statementsA, !ut in such circumstances, it is difficualt to esta!lish that he 6as igrnoratn a!out the mistakes in the ass Book, !ecause he regularl% maintained the account !ooks$ &n such circumstances, a constructive notice of the mistake is su''osed to have !een given to him$ )he decision of the Madras ,igh Court in Okel% Bo6den and Co$ Ds$ )he &ndian Bank :td$ >4$&$2$ -HF5, Madras /C/A ma% !e cited in this connection$ )he !rief facts of the case 6ere as follo6s. Okle% Bo6den and Co$ had current account 6ith the &ndian Bank :td$ at its head office at Madras$ )he com'an% had dealings 6ith t6o customers at (untur, 6ho used to 'a% into the (untur !ranch of the Bank amounts 'a%a!le !% them to the Com'an% and the said !ranch used to send advices of the amounts so 'aid to the head office 6hich used to credit the said amounts to the current account of the Com'an% 6ith it$ )he (untur !ranch of the !ank received t6o de'osits for the credit of the Com'an% in -HI/$ Each of these credits 6as advised !% telegram !% the (untur !ranch to the head office, 6hich credited the account in the account of the Com'an% accordingl%$ )he ver% same to6 credits 6ere advised !% the (untur !ranch to the head office !% ordinar% 'ost also$ )he head office did not a''arentl% realize that the t6o credits advised !% 'ost related to the identical credits covered !% the telegrams$ )he head office advised the com'an% !% mistake of four credits instead of t6o$ )he mistake 6as detected !% the Bank in -HI5 and filed a suit against the com'an% for the recover% of the amounts covered !% the du'licate credit entries$ )he Com'an% in the mean6hile settled its accounts 6ith the customers at (untur on the !asis of these entries communicated to it !% the Bank$ )he Com'an%, therefore, raised the 'oint that the !ank 6as esto''ed from claiming that the t6o entries 6ere du'licate entries$ )he )rial Court and first 4''ellate Court held that the Com'an% had the means of kno6ledge and, therefore, ever% o''ortunit% to kno6 the real 'osition and, therefore, it could not 'lead esto''el against the Bank$ )he Courts 6ere of the vie6 that it 6as 'ossi!le for the Com'an% to have detected the du'licate credit from 'erusal of the accounts$ On a''eal, the Madras ,igh Court held that 7(enerall% s'eaking, a !ank o6es a dut% to its customers to maintain 'ro'er and accurate accounts of credits and de!its$ &f a !ank makes 6rong credit entries 6ithout kno6ing the fact at the time the entries 6ere made and intimates to its customer the credit entries and the customer acting u'on the intimation of credit entries, alters his 'osition to his 're#udice, the !ank, therefore, 6ill !e sto''ed from contending that the credit refunded to it !% the customer$ Such an intimation !% the !ank is o!viousl% a re'resentation made to the customer, 6hich the customer is at li!ert%, in fact entitled, to act u'on$ Once it is acted u'on !% the customer !onafide, of course, it 6ill then !e too late for the !ank to resile from the credit entries the% made mistakenl% and seek to have recom'ense !% means of ad#ustment in the accounts or recover% of the amounts from the customer$ )he Court o!served that if the Com'an% had even cursoril% scrutinized the 'eriodic statements received !% it from its t6o customer, it 6ould have detected that t6o of the credit entries 6ere in fact onl% du'licate entries$ )he Court held that the Com'an% 6as negligent in scrutinizing the accounts and that it had constructive notice of the du'licate entries and, therefore, it could not raise the 'lea of esto''el against the !ank$ &t 6as held that the !ank could recover the amounts in *uestion$

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&n an England case ,olland D$ Manchester and :iver'ool +istrict Banking Co$, the customer=s 'ass !ook sho6ed a credit !alance of X GC, due to an error for X FC$ )he customer on the faith of the 'ass !ook !alance dra6 a che*ue for X FI, 6hich on 'resentation 6as dishonoured$ &t 6as held in an action !% the customer for damages that the !ank 6as lia!le$ But it ma% !e noted, that the !anker can rectif% the 'osition !efore the customer acts u'on it and of course after giving due notice to the customer$ But the 'rinci'le of esto''el 6ill not act in favour of customer 6ho acts malafide$ )o succeed against a !anker 6ho had made entries, the customer must 'rove that he 6as himself acted in good faith$ Usuall% it is difficult for a !usiness man to 'rove that he had relied on a 6rong credit in his 'ass? !ook in honest !elief in its accurac%, for !usinessmen are 'resumed to kno6 the credits their accounts receive either 'aid !% themselves or 'aid !% others$ Entries Favoura!le to Banker . )hese ma% arise in the follo6ing 6a%s. -$ ;rongl% de!iting the account 6ith the che*ues of other customers$ /$ osting the credit due to this account to a 6rong account$ 1$ 4cting 6ithout customer=s mandate$ 4s for exam'le, 6hen a che*ue 6ith the forged signature of the dra6er is 'aid$ )he legal 'osition in this regard in stated !elo6$ iA )he customer is entitled to recover the amount 6rongl% de!ited to his account or omitted to !e credited to his account as soon as he ha''ens to detect the mistake$ )his right of the customer does not la'se even though he returns the 'ass !ook 6ithout raising an% o!#ection a!out an% entr% or he remains silent a after recei't of the 'ass !ook as the customer is not !ound to examine the 'ass !ook 'eriodicall% and regularl%$ iiA )he right of the customer to get the mistake rectified is, su!#ect to one limitation$ )he customer shall not !e entitled to dis'ute the accurac% of an% such entr% if the customer has acted in such a manner that the must have !een guilt% of such negligence as to cause the !anker=s 'osition detrimental affected, or he treated the account as a definitel% settled account$ But there remains the *uestion$ ;hat constitutes is sufficient degree of negligence and 6hat amounts to a settled accountL )he older vie6 that the silence of the customer after receiving his 'ass !ook amounted to the admission of the correctness of the entries there in has !een modified !% later decisions$ )he continual 'assing to and fro if a 'ass !ook 6ithout comment !% the customer does not o'erate as a settlement of the account !et6een the !anker and the customer for each occasion on 6hich the 'ass !ook changes hand$ )he contention that the customer 6ho does not examine his 'ass !ook and discover the error is guilt% of negligence and that this negligence disentitles him from claiming to have the 6rong entries de!ited to his account set aside has not found favour 6ith court$ )he 'ass !ook !% itself cannot !e considered as a conclusive 'roof of a settled account$ &f a !anker 6ants a settled account, the onl% course o'en to him is to get 6riting from the customer to that effect$ Banks no6?a?da%s 'eriodicall% issue to the customers !alance confirmation sli's, 6hich give the !alance in the account as on a given date$ B% signing the !alance confirmation sli's, the customer acce'ts and confirms such !alance$ )he legal effect of the confirmation is to shift the !onus of 'roof from the !anker to the customer$ &t does not mean that either 'art% is de!arred from challenging the correctness of the entries !ut the 'art% challenging must 'rove his contention$ Confirmation of the account amounts to a settled or stated account 6hich either 'art% 6ill have difficult% in reo'ening exce't on the grounds of fraud or misre'resentation$ &n 4llaha!ad Bank :td$ D$ 0ul!hushan >-HF-A, the defendant signed the confirmation sli' acce'ting the !alance due$ Su!se*uentl% he found that certain che*ues had !een forged and charged to his account$ ,e re'orted the matter to the !ank immediatel% thereafter$ &f 6as held that the confirmation sli' is useless and did not 'reclude the defendant challenging the action of !ank in encashing of che*ues$ &t is 'ertinent to note in this connection that the current account rules of the !anks usuall% la% on o!ligation on the !anks usuall% examine the entries and, if an% errors or omissions are discovered, to dra6n them to the attention of the !ank immediatel%, and that the !ank 6ill not !e res'onsi!le for an% loss arising from neglect of this 'recaution$ &t us, this a''arent, that the current account rules, 6hich form the !asis of the agreement !et6een the !aker and the customer, im'ose a dut% on the% customer to carefull% examine the entries$ &f he is negligent in 'erforming this onl% dut% and some loss is caused, the !anker shall not !e lia!le for the same$

114

LE11ON 21 CRO11ING O& CHEF%E1 4 che*ue is an unconditional order, dra6n on a s'ecified !anker and is al6a%s 'a%a!le on demand$ )he dra6er of a che*ue attach an% condition thereto$ ,e ma%, ho6ever, give s'ecific instruction to the 'a%ing !anker regarding the mode of 'a%ment of the che*ue$ Ordinaril%, the 'a%ee of a che*ue is entitled to encash the che*ue at the counter of the 'a%ing !anker !% 'resenting it 6ithin the s'ecified !anking hours on an% 6orking da% of the !ank$ &n case of a !earer che*ue, the 'a%ing !anker need not seek the identification of the holder of the che*ue$ 4n order che*ue is 'aid !% the 'a%ing !anker on !eing satisfied a!out the true identit% of the 'resenter of the che*ue$ ,o6ever, even in the latter case, there is some risk involved$ )he che*ue might have fallen in the hands of a 6rong 'erson, 6ho might have taken 'a%ment from the !anker$ )o avoid such risks, or at least to detect 'a%ments made to 6rong 'ersons, the dra6er ma% give a direction to the 'a%ing !anker through certain 6ords marked on the che*ue itself, 6hich constitute <crossing=$ Crossing is an <instruction= given to the 'a%ing !anker to 'a% the amount of the che*ue through a !anker onl% and not directl% to the 'erson 'resenting it t the counter$ 4 che*ue !earing such an instruction is called a <crossed che*ue=, others 6ithout such crossing are <o'en che*ues= 6hich ma% !e encashed at the counter of the 'a%ing !anker as 6ell$ )he crossing on a che*ue is intended to ensure that its 'a%ment is made to the right 'a%ee$ Section -/1 to -1- of the "egotia!le &nstruments 4ct contains 'rovisions relating to crossing$ 4ccording to Section -1-?4, these Sections are also a''lica!le in case of drafts$ )hus not onl% che*ues !ut !ank drafts also ma% !e crossed$ T2-e f Cr ""*n+ Crossing on che*ues is of t6o t%'es?(eneral Crossing and S'ecial Crossing$ Genera( Cr ""*n+ 4ccording to Section -/1, 76here a che*ue !ears across its face an addition of the 6ords 7and com'an%8 or an% a!!reviation thereof, !et6een t6o 'arallel transverse lines, or t6o 'arallel transverse lines sim'l%, either 6ith or 6ithout the 6ords <not negotia!le= the addition shall !e deemed a crossing, and the che*ue shall !e deemed to !e crossed generall%8$ &t is to !e noted from the a!ove that dra6ing of t6o 'arallel transverse lines on the face of the che*ue constitutes <general crossing=$ )he lines must !e >iA on the face of the che*ue, >iiA 'arallel to each other, and >iiiA in cross direction >i$e$ transverseA$ &nclusion of the 6ords <and com'an%= is immaterial and of no s'ecial conse*uences$ )he effect of general crossing is that the che*ue must !e 'resented to the 'a%ing !anker through an% !anker and not !% the 'a%ee himself at the counter$ )he collecting !anker credits the 'roceeds to the account of the 'a%ee or the holder of the che*ue$ )he latter ma% thereafter 6ithdra6 the mone%$ 1-ec*a( Cr ""*n+ 4ccording to Section -/5, 7;here a che*ue !ears across its face an addition of the name of a !anker, either 6ith or 6ithout the 6ords <not negotia!le=, that addition shall !e deemed a crossing and the che*ue shall !e deemed to !e crossed s'eciall% and to !e crossed to that !anker8$ )he addition of the name of a !anker across the face of a che*ue constitutes <s'ecial crossing=$ +ra6ing of t6o 'arallel lines on the face of the che*ue is not essential in case of s'ecial crossing$ S'ecial crossing differs from (eneral crossing !ecause in case of the former inclusion of the name of a !anker is essential 6hereas in (eneral crossing dra6ing of t6o 'arallel transverse lines is a must$ &t should !e noted that in addition to these minimum statutor% re*uirements for t6o t%'es of crossing addition of 6ords or lines ma% also he included, e$g$, in case of S'ecial Crossing, the name of !anker ma% !e 6ritten 6ithin t6o 'arallel transverse lines or 6ith the 6ords and com'an% <or= <4ccount a%ee onl%= or <"ot negotia!le=$ )he inclusion of these 6ords has !ecome rather customar%$ )he S'ecial Crossing on the che*ue is a direction to the 'a%ing !anker to honour the che*ue onl% 6hen it is 'resented through the !ank mentioned in the crossing and no other !ank$ )he che*ue crossed s'eciall% this !ecomes more safe than the generall% crossed che*ue$ )he !anker, to 6hom a che*ue is crossed s'eciall%, ma% a''oint another !anker as his agent for the collection of such che*ues$

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W,at d e" n t C n"t*t)te Cr ""*n+D Sections -/1 and -/5 defines the t6o t%'es of crossing in ver% clear terms$ )he s'ecific lines or 6ords 6hich constitute general or s'ecial crossing res'ectivel% are s'elt out ver% categoricall%$ )he inclusion of an% other 6ordK6ords, 6ithout the essential ingredients of crossing, on the face of a che*ue does not constitute crossing$ Exam'les. >-A 4 che*ue !ears the 6ords <not negotia!le= or <account 'a%ee= 6ithout t6o 'arallel lines or the name of an% !ank$ )his is not deemed to !e a crossed che*ue !ecause the 6ords <not negotia!le= 6ithin t6o 'arallel transverse lines on the face on the che*ue constitute general crossing >section -/1A$ )he t6o transverse lines are essential in case of general crossing$ )he name of a !ank 6ithout t6o 'arallel lines is a must for S'ecial Crossing$ >/A &f a che*ue !ears single line acrossits face or sim'l% an E mark, the che*ue is not treated as crossed che*ue$ >1A )he inclusion of an% other 6ordK6ords 6ithin t6o 'arallel lines is irrelevant and the che*ue is still deemed to !e a crossed che*ue e$g$, ??????????????????????????? Under 2u'ees one hundred ??????????????????????????? ??????????????????????????? 3 Co$ :uckno6 ??????????????????????????? Per" n" A)t, r*"ed t Cr "" A C,e;)e Section -/I of the "egotia!le &nstruments 4ct -@@-, Exchange, 4ct -@@/ enacts. 6hich corres'onds 6ith Section GG of the Bill of

74 che*ue ma% !e crossed generall% or s'eciall% !% the dra6er8$ 7;here is che*ue is uncrossed, the holder ma% cross it generall% or s'eciall%8$ 7;here a che*ue is crossed generall% or s'eciall%, the holder ma% add the 6ords not negotia!le8$ 7;here a che*ue is crossed s'eciall%, the !aker to 6hom it is crossed ma% again cross it s'eciall% to another !anker his agent, for collection8$ 7;here an uncrossed che*ue or a che*ue crossed generall% is sent to the !anker for collection, he ma% crossKit s'eciall% to himself8$ &t should !e, ho6ever, noted that in the last case, such crossing does not ena!le the collecting !anker to avail himself of the statutor% 'rotection against !eing sued for conversion$ IN t Ne+ t*a9(e5 Cr ""*n+ )he addition of the 6ords 7not negotia!le8 to a crossing is authorized !% the "egotia!le &nstruments 4ct$ Section -1C of the 4ct 'rovides$ 74 'erson taking a che*ue crossed generall% or s'eciall%, !earing in either case the 6ords <not negotia!le=, shall not have, and shall not !e ca'a!le of giving, a !etter title to the che*ue than that 6hich the 'erson from 6hom he took it had8$ 4 che*ue !eing a negotia!le instrument, it is 'ossi!le for a !ona fide transferee for value to have a good title eventhough the transferor=s title 6as fault% or non?existante or there 6as an% 'rior defect in the chain of title$ Su''ose that a !earer che*ue or an order che*ue dul% endorsed in stolen and the thief transferred it for value to one 6ho 6as not a6are of the situation$ Under such circumstances, the transferee has a right to the value re'resented !% the che*ue and the 'revious 'arties 6ould !e lia!le$ )hus, the dra6er of a stolen che*ue ma% still find himself lia!le for the amount of it even though he ma% have 'laced a <sto'= on it$ )he 6a% to avoid such 'ossi!le lia!ilit% for the dra6er is to cross che*ues 7not negotia!le8$

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&f a che*ue is crossed 7not negotia!le8, this *ualit% of negotia!ilit% is destro%ed and no one taking su!se*uent to theft can ac*uire a good title even though the transferee gives value for it$ )his means that a !reak in the 7good title8 remains !roken and an innocent transferee can not ac*uire an% !etter rights than those of the 'erson from 6hom he received it$ "o one can, therefore, !e a holder in due course of such a che*ue$ )he 6ords 7not negotia!le8 are a danger signal e*uivalent to sa%ing 7)ake care, this che*ue ma% !e stolen8$ )he o!#ect of the addition is to give 'rotection to the true o6ner of he che*ue !% 'reserving his rights against an% su!se*uent holder$ 4 che*ue crossed 7not negotia!le8 is still transfera!le$ )his does not mean, as is often mistakenl% though, that the che*ue cannot !e transferred from one 'erson to another$ )he che*ue is de'rived of one of the attri!utes of negotia!ilit%, i$e$, the transfera!ilit% free from e*uities, !ut is left 6ith the other attri!ute unaffected, viz$, the transfera!ilit% !e deliver or !% endorsement and deliver%$ 4 che*ue crossed 7not negotia!le8 ma% 'ass from o'en 'erson to another !ut the transferee should !e continuous !ecause he cannot ac*uire a !etter title than his transferor had$ )his a''lied 6hether the che*ue is 'a%a!le to order or !earer$ 4 crossed che*ue 7"ot negotia!le8 does not solel%, !% reason of the crossing, 'ut a collecting !anker u'on en*uir%, even though the che*ue is tendered for collection !% someone other than the 'a%ee$ 4s Sir 9ohn aget o!served$ 7the <non?negotia!le= crossing has nothing to do 6ith the collecting !anker and he can deal 6ith it freel%8$ :ike6ise, the crossing does not concern the 'a%ing !anker$ Acc )nt Pa2ee Cr ""*n+ )he ex'ression 74ccount a%ee8 or 74ccountSS >name of 'a%ee, sa%, S$ SharmaA8, are often added to the crossing of a che*ue, !ut such a crossing has no statutor% significance as it is not sanctioned !% the "egotia!le &nstruments 4ct$ &n so far as the 'a%ing the che*ue is good faith and 6ithout negligence, his res'onsi!ilit% ceases, and he cannot !e ex'ected to follo6 the mone% after it has reached the collecting !anker, and insist u'on the collecting !anker 'a%ing into the 'ro'er account$ But the collecting !anker is in a different 'osition$ )he crossing 74ccount 'a%ee8 o'erates !% customers instructions to the collecting !anker that the 'roceeds of the che*ue are not to !e collected for an% account other than that of the s'ecific 'a%ee, as other6ise he stands to lose his statutor% 'rotection on the ground of negligence and ma% !e lia!le for conversion >allo6ing a che*ue intended to !e of !enefit of one 'erson to !e converted to the !enefit of anotherA$ ,ence the collecting !anker should not collect che*ues so marked exce't for the named 'a%ee$ )his crossing does 'resent something of a legal anomal%, since !e means of it the dra6er of a che*ue can enforce a dut% of en*uir% u'on a collecting !ank eventhough in the ma#orit% of cases there 6ill !e no contractual link !et6een the dra6er and the collecting !ank, 6hich 6ill !e acting for the 'a%ee or other holder of the che*ue$ D )9(e Cr ""*n+ 4 che*ue !earing a s'ecial crossing is to !e collected through the !anker s'ecified therein$ &t cannot, therefore, !e crossed s'eciall% again to another !anker, i$e$, a che*ue cannot have t6o s'ecial crossing, as the ver% 'ur'ose of the first s'ecial crossing is frustrated !% the second one$ ,o6ever, there is one exce'tion to this rule for a s'ecific 'ur'ose$ &f the !anker, to 6hom a che*ue is s'eciall% crossed, does not have a !ranch at the 'lace of the 'a%ing !anker, or if he, other6ise, feels the necessit%, he ma% cross the che*ue s'eciall% to another !anker, 6ho acts as his agent for the 'ur'ose of collection of the che*ues$ &n such a case, the latter crossing must s'ecif% that the !anker to 6hom it has !een s'eciall% crossed again shall act as the agent of the first !anker for the 'ur'ose of collection of the che*ue, e$g$, ????????????????????????????? un#a! "ational Bank to 4llaha!ad Bank as agent for collection ????????????????????????????? &t essential that the 6ords 7as agent for collection8 must !e included in the s'ecial crossing, su!se*uent to endorsement or discharge$ Section -/G 'rovides that 76here a che*ue is crossed s'eciall% to more than one !anker,

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exce't 6hen crossed to an agent for the 'ur'ose of collection, the !anker on 6hom it is dra6n shall refuse 'a%ment thereof8 )hus a che*ue !earing a dou!le s'ecial crossing as given !elo6 shall not !e honoured !% the 'a%ing !anker$ ???????????????????????????? un#a! "ational Bank 4llaha!ad !ank ???????????????????????????? O9(*terat*n+ a cr ""*n+ Sometimes the crossing on a che*ue is o!literated or erased !% a dishonest 'erson so cleverl% and skillfull% that the 'a%ing !anker is una!le, des'ite utmost efforts on his 'art, to detect such o!literation and 'a%s the che*ue as an o'en che*ue$ Section @H 'rovides 'rotection to the 'a%ing !anker under such circumstances as follo6s. 7;here a che*ue is 'resented for 'a%ment 6hich does not at the time of 'resentation a''ear to the crossed or to have had a crossing 6hich has !een o!literated, 'a%ment thereof !% a !anker lia!le to 'a% and 'a%ing the same according to the a'artment tenor thereof at the time of 'a%ment and other6ise in due course, shall discharge such !anker from all lia!ilit% thereon and such 'a%ment shall not !e *uestioned !% reason of the che*ue having !een crossed$ )his Section 'rovides statutor% 'rotection to the 'a%ing !anker, 'rovided the follo6ing conditions are fulfilled. >aA )he che*ue does not a''ear to !e a crossed one at the time of 'resentation or the o!literation of the crossing is not a''arent, and >!A )he 'a%ment is made according to the a''arent tenor of the che*ue and in due course >under Section -CA )he 'a%ing !anker is discharged from his lia!ilit% if such che*ue is 'aid at the counter on 'resentment$ ,e can de!it the amount of the che*ue to the dra6er=s account $ O-en*n+ f Cr ""*n+ 4 che*ue once crossed need not remain so forever$ )he dra6er has the right to cancel the crossing !% 6riting the 6ords 7'a% cash8 and 'utting his full signature$ )he need for full signatures 6as also em'hasized !% the :ondon Clearing Bankers Committee, in their resolution 'assed in -H-/$ &t stated that 7no o'ening of che*ues !e recognized unless the full signatures of the dra6er !e a''ended to the alternation8$ &t should !e noted that if holder 6rites the 6ords 7'a% cash8 and forges the dra6er=s signatures, the 'a%ing !anker is not 'rotected$ )he reason is that 'a%ing !anker is ex'ected to kno6 the dra6er=s signatures and, thereof, forger% of dra6er=s signatures does not entitle him to an% 'rotection$ 3.I.C.R. C,e;)e"4Draft" ;hat a vie6 to s'eeding u' the che*ue clearing 'rocess, !oth local as 6ell as intercit% che*ues, the 2eserve Bank of &ndia has introduced mechanized che*ue 'rocessing s%stem using M&C2 >Magnetic &nk Character 2ecognitionA technolog% initiall% in the four metro'olitan cities of Bom!a%, Calcutta, Madras and "e6 +elhi$ Under this s%stem, the che*ues are 'rocessed at his s'eed on machines Banks issues che*ues, drafts and other 'a%ment instruments in M&C2 format using the s'ecial *ualit% 'a'er and 'rinting securitizations$ On M&C2 instruments, there is code line at the !ottom containing information 'rinted in magnetic ink, 6hich is re*uired for mechanical 'rocessing$ )he code line contains the follo6ing information$ iA first six num!ers indicate the che*ue "um!er iiA next three num!ers indicate the Cit% Code iiiA next three num!ers indicate the Bank Code ivA next three num!er indicate the Branch Code 4fter some s'ace there is the num!er for transaction code >i$e$, 6hether the transaction is for a savings or current accountA )his magnetized 'ortion, 6hen 'laced under M&C2 e*ui'ment, allo6s for instant reada!ilit% and identification$ M&C2 che*ue should not !e folded$ ins, sta!les, etc$, should onl% !e used on the to' left had corner or the che*ue$ Signature of the dra6er, ru!!er stam', etc$, should !e affixed a!ove the code line$ "othing should !e 6ritten on the code line$ &n 'lace of the counterfoils, M&CS che*ue !ooks 'rovide for 2ecord sli's at the end 6hich are used for recording the details of ever% che*ue issued$

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LE11ON 22 ENDOR1E3ENT1 From the 'revious discussion it is clear that a !ill can !e negotiated !% deliver% or endorsement and deliver$ )he 6ord endorsement is derived from :atin ;ord, <indorsum= meaning <at the !ack= this making it clear that the endorsement must !e made on the !ack of the instrument 6ith a vie6 to transfer it to another 'erson$ Section -I of the 4ct defined endorsement as follo6s. 7;hen the maker of holder of a negotia!le instrument signs the same other6ise as such maker, for the 'ur'ose of negotiation, one the !ack or face thereof, or on a sli' of 'a'er annexed thereto, or so signs for the same 'ur'ose a stam'ed 'a'er intended to !e com'leted as negotia!le instrument he is said to endorse the same and is called the endorser8$ 2e*uisites of a valid Endorsement )he 4ct la%s do6n the follo6ing conditions that must !e com'lied 6ith if the endorsement is to o'erate as 'art of the negotiation of the instrument$ Signature. 4n endorsement to !e valid must !e signed !% the holder or his dul% authorized agent, and must !e 6ritten on the instrument itself$ )he sim'le signature of the 'a%ee or endorsee of an order instrument 6ithout additional 6ords is sufficient$ Fre*uentl% additional 6ords are added to the signature as a direction to 'a% the amount in the instrument to or to the order of a s'ecific 'erson$ )he signature need not necessaril% !e at the foot of the endorsement, it can !e in the !eginning or middle of it$ 4n endorsement on the che*ue 6ould !e signed !% the !anker, other6ise than as such maker, 6hen it is dra6n in favour of <Self or order=$ )he instrument made 'a%a!le to the maker=s order needs his endorsement$ "o 'articular form of language is necessar% to constitute a valid endorsement$ &t is also necessar% that the holder should have come into la6ful 'ossession of the instrument$ lace of Endorsement. )he endorsement must !e 6ritten on the !ack or face of the instrument itself$ Endorsement is derived from the :atin in >u'onA and dersum >the !ackA and, as the derivation suggests, the usual 'lace for an endorsement is u'on the !ack of instrument, !ut it is also legall% 'ermissi!le for an endorsement to !e made on the face of he instrument$ &n actual 'ractice, in vie6 of the time?honoured and universal 'ractice, an endorsement is normall% 6ritten on the !ack of the instrument$ 4llonge. ;here there are so ma% endorsements, alread%, on an instrument that there is no room for more, an 7allonge8, an additional sli' of 'a'er, ma% !e attached to the instrument and further endorsements 6ritten on this 6ill !e regarded on the instrument itself$ 4n allonge is, for all intents and 'ur'oses, a 'art of the instrument$$ Order of Endorsement. ;here there are t6o or more endorsements u'on a negotia!le instrument, it is 'resumed, until the contrar% is 'roved, that the% 6ere made in the order in 6hich the% a''ear thereon >Section --@>cAA$ 4 holder of a !ill has his choice of remedies in case of dishonour !ut for the sake of notices 6hich must !e given under Section H1 in order to hold the 'rior 'arties lia!le, it must !e clear as to 6hat is the order of various endorsements$ &t is, therefore, of ulmost im'ortance that each holder sings his name #ust !elo6 that of the 'erson 6ho endorsed the !ill to him$ Co'ies of a !ill. )he English :a6 >Section 1/ of the Bills of Exchange 4ct, -@@/A 'rovides that an endorsement on a co'% of a !ill issued or negotiated in a count% 6here co'ies are recognized is deemed to !e 6ritten on the !ill itself$ )he &ndian la6 does not recognize co'ies of 6hich 6e find no reference an%6here in the "egotia!le &nstrument$ :egal Effects on an endorsement )he endorsement of a !ill or note follo6ed !% deliver, intended to 'ass title to the endorsee, has four legal effects$ -$ &t transfers the 'ro'ert% in the negotia!le instrument >Section ICA /$ &t gives the right to sue the acce'tor of the !ill or maker of the 'romissor% note, for recover% of the amount due thereon$ 1$ &t gives the right to recover from the endorser and those a!ove him on dishonour, 'rovided re*uisite 'roceedings on dishonour are dul% taken$

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5$ &t gives the holder the right of further negotiating the !ill as holder, or holder in due course, de'ending u'on the nature and validit% of the title as 6ell as on the t%'e of endorsement, in terms of Section IC, as discussed hereafter$ (eneral 2ules regarding the Form of Endorsements. 4n endorsement must !e regular and valid in order to !e effective$ )he a''ro'riateness or other6ise of a 'articular form of endorsement de'ends u'on the 'ractice amongst the !ankers$ )he follo6ing rules are usuall% follo6ed in this regard$ -$ Signature of the endorser. )he signature on the document for the 'ur'ose of endorsement must !e that of the endorser or an% other 'erson 6ho is dul% authorized to endorse on his !ehalf$ &f a che*ue a 'a%a!le to t6o 'ersons, !oth of them should sign their names in their o6n hand6riting$ &f the endorser signs in !lock letters, it 6ill not !e considered a regular endorsement$ /$ S'elling. )he endorser should s'ell his name in the same 6a% as his name a''ears on the che*ue or the !ill as its 'a%ee or endorsee$ &f his name is mis?s'elt or his designation has !een given incorrectl%, he should sign the instrument in the same manner as given in the instrument$ )hereafter he ma% also 'ut his 'ro'er signature, if he likes to do so$ For exam'le, if the 'a%ee=s name is 6rongl% s'elt as <Direndra erkash= instead of <Direndra rakash=, regular endorsement 6ill !e as follo6s . <Direndra erkash= <Direndra rakash= But it must !e in the same hand6riting$ Merel% 6riting the correct name 6ill not !e the regular endorsement$ 1$ "o addition or omission of initial of the name. 4n initial of name should neither !e added not omitted from the name of the 'a%ee or endorsee as given in the che*ue$ For exam'le, a che*ue 'a%a!le to S$C$ (u'ta should not !e endorsed as S$ (u'ta or vice versa$ Similarl%, a che*ue 'a%a!le to ,arish Sexena should not !e endorsed as ,$ Sexena !ecause it 6ill !e dou!tful for the 'a%ing !anker to ascertain that ,$ Saxena is ,arish Saxena and no!od% else$ &t is 'ossi!le that some ,ari Sexena has signed on the che*ue as ,$ Sexena$ 5$ refixes and Suffixes to !e excluded. )he 'refixes and suffixes, to the names of the 'a%ee or endorsee need not !e included in the endorsement$ For exam'le, the 6ords 7Mr$ Messrs$ Mrs$ Miss$ Shri, Shrimathi, :ala, Ba!u, (enernal, +r$, Ma#or, etc$ need not !e given !% the endorser other6ise the endorsement 6ill not !e regular$ ,o6ever, an endorser ma% indicate his title or rank, etc$, after his signature$ For exam'le, a che*ue 'a%a!le to Ma#or 2a#a 2am or +r$ :axmi Chandra ma% !e endorsed as <2a#a 2am, Ma#or= or <:axmi Chandra, M$+$= 4 che*ue 'a%a!le to admashri Dishnu 0ant ma% e endorsed as Diushnu 0ant, admshri$ 0inds of Endorsements 4ccording to the "egotia!le &nstruemnts 4ct, endorsements are of the follo6ing kinds. (eneral or Blank Endorsement. 4n endorsement is called (eneral or Blank 6here the 'a%ee or the endorsee merel% signs his name on the !ank of the instrument 6ithout stating the name of the 'erson tot 6hom it is 'a%a!le e$g$, Di#a% 4mritra#$ )he holder of an instrument endorsed in !lank can convert that endorsement into a full one !% 'utting his o6n name or the name of an% other 'erson a!ove the endorsement$ &n the exam'le given a!ove, 2$ 0rishnan to 6hom the che*ue is given ma% 6rite a!ove the signature of Di#a% 4mritra# the 6ords, 'a% to 2$ 0rishnan or if he 6ants to 'ass on the instrument to Sam!udass he can 6rite over the signature of Di#a% 4mritra# the 6ords 7 a% to Sam!udass8$ &n this case the 6riting o'erates as a full endorsement from Di#a% 4mritra# to Sam!udass and 0rishnan does not incur an% lia!ilit% as endorser$ )he effect of this endorsement is to make the instrument 'a%a!le to !earer even though it 6as originall% made 'a%a!le to order$ Endorsement 7in full8

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&f the endorser adds to his signature a direction to a% the amount mentioned in the instrument to, or to the order of a s'ecific 'erson, the endorsement is said to !e 7in full8 >Section -F>-AA$ Exam'les of endorsement 7in full8 >called <s'ecial endorsement in the Bills of Exchange 4ctA are. iA 7 a% E or Order8 iiA 7 a% to the order of E8, and iiiA 7 a% E8 &f the endorsement reads as 7 a% E8 follo6ed !% the signature of the endorser, then this is e*uivalent to 7 a% E or Order8 and E can in turn endorse >Section @>5A and @>IA of the Bills of Exchange 4ct -@@/A$ )he endorsement 7 a% to the order of E8 follo6ed !% the endorser=s signature is also e*uivalent to 7 a% E or order8 )he 4ct 'rovides that an% holder ma% convert an endorsement in !lank into an endorsement in full, !% 6riting an order to 'a% a s'ecific 'erson over the signature of the endorser, and the holder there!% does not incur the res'onsi!ilit% of an endorser >Section 5HA$ )he che*ueK!ill 6ill then re*uire the endorsement of the 'erson 6hose name has !een inserted in it, if it is !lank D$ (u'ta, &f ; Singh, the holder of the che*ue converts the endorsement <in !lank= into an endorsement <in full= !% 6riting his transferee=s name > a% to + Sharma or orderA a!ove the signature or D (u'ta, he 6ould make the che*ue 'a%a!le to + Sharma 6ithout incurring himself the lia!ilit% of an endorser$ )he endorsee ma% in turn endorse in !lank or in full$ 2estricitve Endorsements. )he terms <restrictive= means that the rights of the endorsee are restricted in some 6a%$ )here are t6o kinds of restrictive endorsements >Section ICA$ )he common t%'e of restrictive endorsement is that 6hich 'rohi!its further transfer of the instruments as, for exam'le, 6hen the endorsement reads 7 a% to E onl%8$ 4nother im'ortant t%'e of restrictive endorsement is 6hen it clearl% indicates that it is not intended to transfer o6nershi' in the instrument !ut to merel% give the transferee authorit% ot deal 6ith the instrument for some limited 'ur'ose$ For exam'le, in 7 a% >e$g$, a !ankerA or order for collection8, the order is to 'a% B or some 'erson B might indicate !% endorsement >7or oder8A in order that B or his endorsee ma% collect the 'roceeds of the instruments from the 'erson 6ho made the endorsement$ Such an endorsements is used !% a !ank on negotia!le instruments sent to another !ank for collection$ )he 'rimar% 'ur'ose of such an endorsement is to 'revent an% 6rongful dealing 6ith the instrument$ &t gives the endorsee the right to receive 'a%ment of the instruments !ut gives him no 'o6er to transfer his rights as endorsee$ Conditional Endorsement &f the endorser of a negotia!le instrument, !% ex'ress 6ords in the endorsement, makes his lia!ilit%, or the right of the endorsee to receive the amount due thereon, de'endent on the ha''ening of a s'ecified event, although such event ma% never ha''en, such endorsement is called a conditional endorsement >Section I/A Such an endorser gets the follo6ing rights. a$ ,e ma% make his lia!ilit% on the instrument conditional on the ha''ening of a 'articular event$ ,e 6ill not !e lia!le to the su!se*uent holder if the s'ecific event hoes not take 'lace, the endorsee in such a case can sue other 'arties to the instrument even !efore the 'articular event takes 'lace$ !$ ,e ma% make the right of the endorsee of the instrument conditional on the ha''ening of a 'articular event$ For exam'le, 7 a% C is he returns from Bom!a%8$ )hus C gets the right to receive 'a%ment onl% on the ha''ening of a 'articular event i$e$ if he returns from Bom!a%$ &f the event does not take 'lace, the endorsee cannot sue an% of the 'arties$ Conditional endorsements do not make the instruments non?transfera!le$ ,o6ever, such endorsements are generall% not used. Endorsement 7Sans 2ecourse8 4n endorser of a negotia!le instruments ma%, !% ex'ress 6ords in the endorsement, exclude his o6n lia!ilit% thereon >Section I/A$ For exam'le, if 2 endorses as che*ue as follo6s. iA a% to E or order at his o6n risk iiA a% to C 6ithout recourse to me

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)he >2A 6ill not !e lia!le to E or an% of the su!se*uent endorsees if the !ank dishonours the che*ue su!se*uentl%$ )he% ma% sue an% 'art% 'rior to such endorser$ But if an endorser 6ho so excludes his lia!ilit% after6ards !ecomes the holder of the instrument, all intermediate endorsers are lia!le to him$ For exam'le, 2 has excluded his 'ersonal lia!ilit% !% endorsing the che*ues 76ithout recourse8$ ,e transfers it to B, B endorses to C, 6ho endorses it !ack to 2$ )hus 2 shall have the rights as endorsee against B and C, 6ho endorsed the instrument, !efore it came !ack to 2$ Facultative Endorsement )he endorsee must give notice of dishonour of the instruments to the endorser, !ut the latter ma% 6aive this dut% of the endorsee !% 6riting in the endorsement <"otice of dishonour 6aived=$ )he endoser remains lia!le to the endorsee for the non?'a%ment of the instrument$

ZZZZZZZZZZZZZZZZZZZ

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LE11ON 26 HOLDER AND HOLDER IN D%E CO%R1E 4 negotia!le instruments is transfera!le from 'erson to 'erson$ )he "egotia!le &nstruments 4ct confers u'on the 'erson, 6ho ac*uires it !ona fide and for value, the right to 'osses good title to the instrument$ Such 'erson is called <holder in due course=$ Each and ever% 'erson in 'ossession of a che*ue or !ill cannot !e its holder in due course and cannot claim the statutor% 'rotection granted under the 4ct$ &f an instrument falls into 6rong hands, the holder thereto cannot en#o% the 'rivileges of a holder in due course$ H (der 4ccording to Section @ the 7holder of a 'romissor% note, !ill of exchange or che*ue means an% 'erson entitled in his o6n name to the 'ossession thereof and to receive or recover the amount due thereon from the 'arties thereto8$ 4 'erson is called the holder of a negotia!le instrument if the follo6ing condition are satisfied$ a$ ,e must !e entitled to the 'ossession of the instrument in his o6n name and under a legal title$ 4ctual 'ossession of the instrument is not essentialJ the holder must have the legal right to 'ossess the instrument in his o6n name$ &t means that the title to the instrument is ac*uired la6full% and in a 'ro'er manner$ For exam'le, if a 'erson ac*uired a che*ue or !ill !% theft fraud, or forged endorsement of finds it l%ing some 6here, he does not ac*uire in his name legal title thereto and hence he cannot !e called its holder$ !$ ,e must !e entitled to receive or recover the amount from the 'arties concerned in his o6n name$ For this 'ur'ose it is essential that the name of the holder a''ears on the document as its 'a%ee or endorsee, if it is an order instrument$ &n case of !earer instrument, the !earer ma% claim the mone% 6ithout having his name mentioned on the che*ue$ )he holder is com'etent to receive 'a%ment or recover the amount !% filing a suit in his o6n name against other 'arties, to negotiate the instrument and to give a valid discharge$ &n case a !ill, note or che*ue is lost or destro%ed, its holder is the 'erson so entitled at the time of such loss or destruction >Section @A$ &n other 6ords, the 'erson 6ho 6as entitled to receive 'a%ment at the time the instrument 6as lost, 6ill continue to !e regarded as its holderJ the finder does not !ecome its holder$ H (der *n D)e C )r"e 4ccording to Section H, 7holder in due course means an% 'erson 6ho, for consideration, !ecame the 'ossessor of a 'romissor% note, !ill of exchange or che*ue, if 'a%a!le to !earer, or the 'a%ee or endorsee thereof if 'a%a!le to order, !efore the amount mentioned in it !ecome 'a%a!le, and 6ithout having sufficient cause to !elieve that defect existed in the title of the 'erson from 6hom he derived his title8$ 4 'erson !ecomes a holder in due course of negotia!le instrument is the follo6ing conditions are satisfied. iA )he negotia!le instrument must !e in the 'ossession of the holder in due course$ &n case of an order instrument, he must !e its 'a%ee or endorsee, i$e$, his name must a''ear on the instrument$ iiA )he negotia!le instrument must !e regular and com'lete in all as'ects$ 4lterations, if an%, must !e confirmed !% the dra6er through his signature$ ,older of in incom'lete document cannot !e its holder in due course$ )he instrument must have !een 'ro'erl% delivered to the holder in due course$ &n case of an order che*ue endorsement in favour of the holder is essential$ iiiA )he instrument must have !een o!tained for valua!le consideration, i$e$, !% 'a%ing its full value$ 4 'erson 6ho receives a che*ue as a gift 6ill not !e called its holder in due course for 6ant of consideration$ )he consideration must !e legal and ade*uate$ For exam'le, if a che*ue is given in res'ect of a de!t incurred in gam!ling, the consideration for the che*ue is unla6ful$ &f the value of the consideration falls short of he amount of the instrument, the 'erson 6ill !e deemed as holder in due course to the extent of the value of consideration$ ivA )he instrument must have !een o!tained !efore the amount mentioned therein !ecomes 'a%a!le$ )his condition is a''lica!le to documents 'a%a!le other6ise than on demand and does not a''l% to a che*ue 6hich is al6a%s 'a%a!le on demand$ vA )he holder in due course must o!tain the instrument 6ithout having sufficient cause to !elieve that an% defect existed in the title of the transfer$ )his is the most im'ortant condition to !e satisfied$ )he title of a 'erson to the negotia!le instrument is deemed to !e defective if he ac*uires it !% unfair means, e$g$, !% fraud, coercion, undue

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influence or !% an% other illegal method or for an illegal consideration$ &f he does not 'ossess an% title thereto, his title is also deemed to !e defective$ Section H la%s heav% res'onsi!ilit% on the 'erson acce'ting a negotia!le instrument in this regard$ ,e should not onl% have no notice of an% defect in the transfero= stitle thereto, !ut he should have no cause to !elieve that the title 6as defective$ &n means that the circumstances of the case should not give rise to an% dou!t or sus'icion a!out the defective title or the transferor$ )he holder in due course should, therefore, exercise great care and take all necessar% 'recautions in finding out if the transferor=s title 6as defective$ &f he sho6s negligence or does not take due care in this regard, he shall not !e called the holder in due course$ +ifference !et6een ,older and ,older in +ue Course. Form the definitions of the terms <holder= and <holder in due course= 6e ma% derive the follo6ing 'oints of difference !et6een them. 1. C n"*derat* n# )he existence of consideration is not essential in case of a holder, !ut a holder in due course o!tains the instrument after 'a%ing its full value$ For exam'le, if a che*ue is used to 'rovide a gift or donation to a Charita!le )rust, the )rust does not !ecome its holder in due course$ On the other hand, tuition fee 'aid to a school or college is for a valua!le consideration$ ,ence the school or the college ac*uire the status of holder in due course$ 2. P ""e""* n# )he 'erson entitled to !e called holder in due course must !ecome the 'ossessor of the instrument !efore it !ecame 'a%a!le$ For exam'le, if a !ill of exchange is 'a%a!le on March /C, -H@5, a 'erson 6ho 'ossesses it !efore this date is entitled to !e its holder inc due course$ &f it is o!tained after this date, the 'ossessor 6ill not !e called its holder in due course$ &n case of a holder neither actual 'ossession nor an% time limit 6ithin 6hich it must !e ac*uired is re*uired$ 6. Defect *n t,e tran"fer r5" t*t(e# )he most im'ortant 'oint of difference is that a holder in due course ac*uires an instrument 6ithout having sufficient cause to !elieve that an% defect existed in the title of the transferor$ )his condition is not essential in case of a holder$ )his condition casts a heav% res'onsi!ilit% on a 'erson 6ho claims to !e a holder in due course?he should not onl% have the kno6ledge of the defective title of the transferor !ut in the circumstances of each case, there should !e no cause to !elieve that an% defect exists in the title of the transferor$ &t means that the holder in due course must o!tain an instrument after taking all 'ossi!le care a!out the transferor=s good title$ R*+,t f a H (der )he holder of a negotia!le instrument en#o%s the follo6ing rights. iA 4n endorsement in !lank ma% !e converted !% him into an endorsements in full$ iiA ,e is entitled to cross a che*ue either generall% or s'eciall% and also 6ith the 6ords 7"ot "egotia!le8$ iiiA ,e can negotiate a che*ue to a third 'erson, if such negotiation is not 'rohi!ited !% the direction given in the che*ue$ ivA ,e can claim 'a%ment of the instrument and can sue in his o6n name on the instrument$ vA 4 du'licate co'% of a lost che*ue ma% !e o!tained !% a holder$ T,e R*+,t" and Pr*'*(e+e" f t,e H (der *n d)e c )r"e -$ 4 holder in due course gets a 'erfectl% good title to the instrument$ ,e is not affected !% an% defects in the title of the transferor or the 'revious 'arties$ 9ust as in the case of a devout ,indu and di' in the (anges frees him from all the sins, a negotia!le instrument in the hands of a holder in due course is relived of all is 'revious defects$ ;hat is more im'ortant is that all the holders su!se*uent to him are also 'rotected$ )he% o!tained the same rights and 'rivileges as that of the holder in due course$ )he im'lication of this right is that the acce'tor of the instruments or maker of a note cannot 'lead against the holder in due course an% right of set?off or a counter claim 6hich he might have had against the transferor of the instrument$

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/$ ,e can recover the amount from al the 'revious 'arties$ 4ll of them 6ill continue to !e lia!le until the instrument is dul% satisfied$ 1$ Sometimes instruments might have !een delivered conditionall% or for a s'ecial 'ur'ose$ ;hen such an instrument comes into the hands of a holder in due course, the other 'arties cannot esca'e lia!ilit% on the ground that the condition or s'ecial 'ur'ose not !e fulfilled$ 5$ &n the case of inchoate instruments, he can recover the full amount covered !% the stam'$ I$ ,is title is not affected even if the instrument 6as the result of fraud or an% other offence as !et6een immediate 'arties$ ,older in due course cannot, !% ver% definition, !e one of such 'arties$ )here are, ho6ever, some exce'tions$ )he signature on the instrument must not !e the result of forger%$ )he instrument must not !e vitiated due to lack of consent >a!sence of consensus ad idemA right from the !eginning$ &n these cases, the holder in due course is affected !% the defects of the instrument like an% other holder$ F$ Ever% holder is 'resumed to !e a holder in due course unless 'roved other6ise$ G$ )he 'erson lia!le to 'a% cannot set u' defences against the holder in due course that the instrument has !een lost or o!tained from him !% means of a fraud or unla6ful consideration$ @$ 4cce'tor is 'recluded from den%ing against the holder the existence of the dra6er, genuineness of his signature, his ca'acit% to dra6, or to endorse or existence of the 'a%ee and his ca'acit% to endorse$ H$ )he dra6er is 'recluded from den%ing the existence of 'a%ee and his ca'acit% to endorse$ -C$ So also the endorser is esto''ed form den%ing the genuineness of dra6er=s signature or of the genuineness of 'revious endorsements$ --$ 4cce'tor cannot raise the 'lea against the holder in due course that the dra6er is a fictitious 'erson$ Pa2.ent *n d)e c )r"e )he 'a%ment of a negotia!le instruments should !e made to the right 'erson !% the 'a%ing !anker or the acce'tor of the !ill, other6ise the latter shall !e res'onsi!le for the same$ )he "egotia!le &nstruments 4ct, 'rovides 'rotection to the 'a%ing !anker or the dra6ee of a !ill, 'rovided the 'a%ment is made as re*uired in the 4ct$ Such 'a%ment is called <'a%ment in due course=$ Section -C states 7'a%ment in due course means 'a%ment in accordance 6ith the a'artment tenor of the instrument in good faith and 6ithout negligence to an% 'erson in 'ossession thereof under circumstances 6hich do not afford a reasona!le ground for !elieving that he is not entitled to receive 'a%ment of the amount therein mentioned$8 4nal%sis of Section -C reveals that the follo6ing conditions must !e satisfied !efore a 'a%ment of a negotia!le instrument can !e called as a 'a%ment in due course. 1. Pa2.ent .)"t 9e *n acc rdance >*t, t,e a--arent ten r f ,e *n"tr).ent# &t is necessar% that a 'a%ment to constitute a 'a%ment in due course should !e made at or after maturit%$ 4 'a%ment !efore maturit% is not 'a%ment in due course$ For exam'le, 'a%ment of a 'ost?date che*ue is not a 'a%ment in due course$ 2. T,e -a2.ent .)"t 9e .ade *n + d >*t, fa*t, and >*t, )t ne+(*+ence# ;hen there exist sus'icious circumstances and the 'a%ing !anker fails to make an% en*uir% as to them, the 'a%ment is not in due course$ So 'a%ment is not in due course 6here a !anker makes 'a%ment on a che*ue materiall% altered 6ith out exercising due care$ 6. Pa2.ent .)"t 9e .ade t t,e -er" n *n - ""e""* n f t,e *n"tr).ent"# 4 'a%ment is not a 'a%ment in due course if it is made to a 'erson not entitled to receive it$ 4 thief is not said to !e in 'ossession of the instrument$ )hus, in the event of sus'icious circumstances, 'a%ment should not !e made 6ithout dra6er=s confirmation$

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7. Pa2.ent .)"t 9e .ade under circumstances 6hich do not afford a reasona!le ground for !elieving that the holder is not entitled to receive 'a%ment of the amount mentioned therein$ So, 6here a 'eon of a com'an% 'resents a che*ue for a !ig amount of !ehalf of the com'an%, 6hich is contrar% to the 'ast ex'erience, the !anker should conduct 'ro'er en*uir% !efore making 'a%ment on such a che*ue$ 8. Pa2.ent .)"t 9e .ade *n . ne2 n(2# a%ment must !e made in mone% onl% unless the 'a%ee to acce't 'a%ment in some other form >e$g$, !ill of exchange or 'romissor% noteA$ Mone% includes !ank notes or currenc% notes !ut excludes che*ue, !ill of exchange, 'romissor% note and goods$

ZZZZZZZZZZZZZZZZZZZZZZZZZZ

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LE11ON 27 PAYING BANEKER )he !ank undertakes to receive mone% and to collect !ills for its customer=s account$ )he 'roceeds so received are not to !e held in trust for the customer !ut the !ank !orro6s the 'roceeds and undertakes to re'a% them$ )he 'romise to re'a% is to re'a% at the !ranch of the !ank 6here the account is ke't and during !anking hours$ &t includes a 'romise to re'a% an% 'art of the amount due, against the 6ritten order of the customer addressed to the !ank at the !ranch, and, as such 6ritten orders ma% !e outstanding in the ordinar% course of !usiness for t6o or three da%s, it is a term or the contract that the !ank 6ill not cease to do !usiness for t6o or three da%s, it is a term of the contract that the !ank 6ill not cease to do !usiness 6ith the customer exce't u'on reasona!le notice$ )he customer, on his 'art, undertakes to exercise reasona!le care in executing his 6ritten orders, so as to mislead the !ank or to facilitate forger%$ 7& think it is necessaril% a term of such contract that the !ank is not lia!le to 'a% the customer the full amount of his !alance until the demands 'a%ment from the !ank at the !ranch at 6hich the current account is ke't$ ;hether, he must demand it in 6riting it is not necessar% no6 to determine,8 >9oachimson D$ S6iss Banking Cor'orationA$ )his 'assage clearl% 'ortra%s the duties of the 'a%ing !anker and his o!ligation to honour customers= che*ue$ )he !anker=s 'rimar% dut% is to re'a% mone%s received for his customer=s account, usuall% !% honouring his che*ues$ &t is this function that constituted the hallmark of a !anker that delineates him from other institutions receiving mone%$ )his o!ligation to 'a% che*ues has !een s'ecificall% laid do6n in Section 1- of the "egotia!le &nstruments 4ct and has alread% !een discussed under 7O!ligation to honour Customer=s mandate$8 Preca)t* n" t 9e ta!en 92 t,e Pa2*n+ Ban!er )he 'a%ing !anker should ensure that the che*ue is regular in all as'ects and should take the follo6ing 'recautions 6hile making 'a%ment of his customer=s che*ues$ 1. Pr -er & r. f t,e C,e;)e )he "egotia!le &nstruments 4ct defines a che*ue !ut does not 'rescri!e its form$ "or does it re*uire that a che*ue should !e dra6n on the 'rinted form issued !% the !ank$ )he !anker should, therefore, not dishonour a che*ue dra6n on a 'iece of 'a'er 'rovided it carries an unconditional order to the !anker and fulfils other re*uisites of a che*ue$ But almost ever% !ank in &ndia re*uires that <che*ues must !e dra6n on the !ank=s 'rinted forms= and <the !ank reserves its right to refuse 'a%ment of an% che*ues dra6n other6ise=$ )his makes it essential that the che*ue forms issued !% the !anker must !e used !% the customers$ Ad'anta+e" f )"*n+ Pr*nted & r."# +ra6ing of che*ues on the 'rinted forms issued !% a !anker is desira!le !ecause of the follo6ing advantages. iA &t is convenient for the dra6er to dra6 a che*ue$ ,e need not take necessar% 'recautions 6hile drafting a che*ue as 'er the re*uirements of the 4ct$ )he chances of dishonor of the che*ue are thus minimized$ iiA )he counterfoils of the che*ues serve the 'ur'ose of record for future reference$ iiiA &f the dra6er 6ishes to countermand 'a%ment of an% che*ue, he can issue instruction to the !anker more convenientl% and 6ith certaint% as ever% che*ue form is seriall% num!ered and can !e easil% identified$ ivA &f the customer kee's the che*ue !ook safel% and carefull%, chances of forger% can !e minimized$ )he serial num!ers of the che*ue forms issued to a customer are recorded !% the !anker, 6ho verifies, at the time of 'resentation, that the che*ue is dra6n !% a 'erson to 6hom the relevant che*ue !ook is issued$ 2. Date f t,e C,e;)e 4 che*ue must !ear a date !ecause the mandate of the customer to the !anker given in the che*ue !ecomes legall% effective on the date mentioned therein$ )he dra6er of a che*ue fills in the date !efore the che*ue is issued, !ut if he has not done so, the instruments does not !ecome invalid$ )he 'a%ee of the che*ue or an% su!se*uent holder thereto ma% fill in the date$ But if an undated che*ue is 'resented for 'a%ment, the !anker must refuse its 'a%ment$

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)he date should not !e incom'lete, i$e$, it must include !esides the %ear, the name of the month and the num!er of the da%$ For exam'le, a che*ue !earing 7Fe!ruar% -H@C8 or 7"ovem!er /I, -H$$8 is not a com'lete dated che*ue as the !anker must refuse its 'a%ment$ &f a che*ues is dated 74'ril 1C, -H@@8, it should !e 'aid if it is 'resented on 4'ril 1C or thereafter$ 1ta(e C,e;)e# Under Section G1 read 6ith Section @5 of the "egotia!le &nstruments 4ct, a che*ue is re*uired o !e 'resented for 'a%ment 6ithin a reasona!le time after its issue other6ise the dra6er 6ill !e discharged from lia!ilit% thereon to the extent of the loss caused !% the dela%$ )hough it has not !een legall% defined 6hat constitutes a reasona!le time !ut the 'ractice of !ankers in returning che*ues 'resented for 'a%ment six months after their issuance has ac*uired the force of la6$ 4 che*ue 6hich is six months old is considered <stale= and returned 6ith the o!#ection <out of date=$ 4 stale che*ue re*uires dra6er=s confirmation, though in la6, a che*ue is not affected !% limitation for a 'eriod of three %ears from the date of issue$ 4 7stale8 che*ue ma% !e distinguished from an ante?dated che*ue$ 4nte?dating means 'utting a date on a che*ue 'rior to that on 6hich it is signed intentionall% or though oversight$ 4 che*ue ma% !e treated as stale if !% ante?dating it or other6ise !% remaining in circulation, it !ecomes older than six months$ 4nte?dating che*ues through oversight ha''ens in the earlier 'art of ne6 %ear 6hen the old %ear is 6ritten in error 6hich re*uires careful attention of the !ankers and the customers$ P "t0dated C,e;)e# 4 che*ue !earing a date later than on 6hich the holder 'resents it for 'a%ment at the !ank is a 'ost?dated che*ue$ Such a che*ue should !e returned !% the !anker 6ith the ans6er 7Che*ue is 'ost?dated8$ 4 !anker is, ho6ever, !ound to 'a% a 7'ost?dated8 che*ue 'resented on or after its ostensi!le date even though he ma% have refused 'a%ments of the same che*ue earlier and marked it 7'ost?dated8, 6hen 'resented !efore the date$ 4 'ost?dated che*ue is not legall% invalid$ &t is not a che*ue 'a%a!le on demand and it is e*uivalent to a !ill of exchange 'a%a!le at a future date and thus used as a device to evade stam' dut%$ ost?dated che*ues are generall% given !% the dra6ers to the arties in the follo6ing circumstances. iA a dra6er una!le to meet the 'ressing demands of his creditors for 6ant of funds !ut ex'ecting sufficient funds !% a certain future dateJ iiA a dra6er ordering goods under manufacture !ut disinclined to entrust cash 'a%ment to the manufacturer till deliver% of goods and getting the o''ortunit% to sto' 'a%ment of the 'ost?dated che*ue in case of non?deliver% of goods, and iiiA !orro6ers raising loans on 'romotes and giving assurance to their creditors for timel% 'a%ment !% issuing 'ost?dated che*ues$ "egotia!ilit% of a che*ue is not im'aired !ecause of its !eing 'ost?dated$ For exam'le, 4 gives B a 'ost? dated che*ue and B gives it to C, !efore the due date, in 'a%ment of a de!t$ C takes the che*ue 6ithout notice of na% dis'ute !et6een 4 and B$ 4 sto's the 'a%ment !ecause B has not fulfilled his contract$ +es'ite this, C ac*uires a good title to the che*ue, and 6hen the date is reached, he can sue 4 for the amount of the che*ue$ 4 che*ue dated on Sunda% should not !e 'aid until the follo6ing 6orking !% and if 'resented on Saturda% 'revious, it should !e returned marked 7 ost?dated8$ Sometimes, a che*ue !earing a date 'rior to the issue of che*ue !ook !% the !anker to the customer, !ut other6ise in order, is 'resented for 'a%ment$ Su'ose a che*ue !ook is issued to a customer on /C th Ma% and he issues a che*ue from this che*ue !ool and dates it -C th Ma%$ )hus, the ante?dating of the che*ue is esta!lished from the facts availa!le on !ank record$ &n such cases, the !anker ma% contract the dra6er to get his confirmation$ But if contract 6ith the dra6er is not 'ossi!le, the !anker 6ould !e 6ithin his right to 'a% the che*ue, as the che*ue is in order and there is no 'rovision in la6 6hich 'rohi!its ante?dating of che*ue$ ;here a !anker 'a%s a che*ue !efore the 'ro'er date of its 'a%ment, he makes the 'a%ment on his o6n res'onsi!ilit% and cannot charge the amount to he dra6er of the che*ue as he has diso!e%ed the customer=s

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mandate and authorit%$ !elo6.

remature 'a%ment of a 'ost?dated che*ue ex'oses the !ank to danger of loss as stated

Firstl%, there is nothing to 'revent the customer from sto''ing 'a%ment of the che*ue at na% time !efore the date it !ears, and if he does so, the !anker stands to lose the mone%$ Secondl%, if a !anker 'a%s a 'ost?dated che*ue and dishonours other che*ues, 6hich 6ould other6ise have !een 'aid, he 6ill !e lia!le to his customer for damage to his credit$ )hirdl%, a !anker 'a%ing a 'ost?dated che*ue 6ould not !e entitled to statutor% 'rotection on the ground that such a 'a%ment cannot !e regarded as a 'a%ment in due course$ Finall%, if the dra6er dies or !ecomes insane or insolvent, !efore the date of the che*ue, the dra6ee !ank 6ould not !e #ustified in de!iting the amount of the che*ue to the deceasedKinsaneKinsolvent dra6er=s account$ 6. A. )nt f t,e C,e;)e )he amount of the che*ue must !e certain and ex'ressed !oth in 6ords and figures$ &n case of an% discre'anc% !et6een the amount ex'ressed in 6ords and figures, Section -@ 'rovides that the amount in 6ords shall !e the amount undertaken or ordered to !e 'aid$ )he !anker ma%, therefore, 'a% the 'ractice the !ankers send !anks the che*ues to the dra6er 6ith the remark= amount in 6ords and figures differ= and seek necessar% correction !% the dra6er$ )he &ndian Banks 4ssociation has advised its mem!er?!anks not to dishonour che*ues on this ground and should 'a% the amount 6ritten in 6ords in conformit% 6ith Sections -@$ &f the amount is ex'ressed in 6ords onl%, the !anker must 'a% the che*ue !ut if the amount is 6ritten in figures onl%, it should !e sent !ack to the dra6er for necessar% entr%$ Funds in the account must !e sufficient. )he !aker is under an o!ligation to 'a% his customer=s che*ues if the latter=s account sho6s sufficient credit !alance$ But if the funds in the customer=s account are insufficient to 'a% the che*ue, the !anker is not !ound to honour the che*ue or even to 'a% the !alance in the account to the 'resenter of the che*ue$ Che*ues are to !e 'aid in full and not in 'art$ For exam'le if a che*ue for 2s$ -,CCC is 'resented for 'a%ment to a !anker 6hile the dra6er=s account has the credit !alance of 2s$ HCC onl%, the !anker is not !ound to honour the che*ue or to make art 'a%ment to the extent or 2s$ HCC !ecause the che*ue contains the order of the dra6er to 'a% a s'ecified sum of mone%$ ;hile considering sufficient funds in the account of the dra6er, the follo6ing 'oints should !e !orne in mind !% the !anker$ iA &f the !anker has alread% agree to grant a loan or overdraft to the customer u' to a certain amount, che*ues in excess of the credit !alance in the account !ut 6ithin the limit of the loan of the overdraft must !e honourded !%t eh !anker in the usual course$ For exam'le, if the !anker agrees to grant Mr$ E an overdraft u' to 2s$ I,CCC he should honour che*ues issued !% Mr$ E till the de!it !alance reaches the limit of 2s$ I,CCC$ &f su!se*uentl%, the !anker decides to reduce the overdraft limit to sa% 2s$ /,CCC onl%, he should not sto' honouring the customer=s che*ues immediatel%$ For this 'ur'ose he should give due notice to the customer and che*ues in excess of the de!it !alance of the 2s$ /,CCC !e dishonoured after the service of such notice$ iiA )he minimum !alance re*uired to !e maintained in a current account of savings accounts is deemed as availa!le for honouring the che*ues$ )hat amount should not !e regarded as frozen !% the !anker$ &f the minimum !alance is reduced !elo6 the 'rescri!ed amount, the !anker should honour the che*ue and ma% charge an incidental charge from the customer for this default$ a%ment !e made in chronological order of recei't$ &n case of a current account, an% num!er of che*ues ma% !e 'resented for 'a%ment on a single da%$ )he !anker generall% follo6s the rule of making 'a%ments of the che*ues in the chronological order of their recei't$ &t means that the che*ue first received !% the !anker on an account 6ill !e 'aid first, and so on$ )he serial num!er of the che*ue or the date of its issue is nto significant for this 'ur'ose$ )he !anker ma% sometimes face a situation 6hen a num!er of che*ues are 'resented simultaneousl% for 'a%ment or are received !% one main or through the same clearing !ut the funds availa!le in the account of the dra6er are insufficient to 'a% all of them$ For exam'le, t6o che*ues for 2s$ ICC and 2s$ 1CC are received !% a !anker for 'a%ment 6hile the dra6er=s account sho6s a credit !alance of 2s$ FCC onl%$ )here ma% !e t6o vie6'oints in such a situation$

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)he !anker ma% treat !oth the che*ues as constituting one demand and hence dishonour !oth of them for shortage of funds$ But this 6ould not !e fair to6ards the dra6er=s interest !ecause the dishonour of !oth the che*ues 6ill affect his re'utation greatl% 6hile funds are sufficient to honour at least one of them$ )he !anker 6ill do 6ell if he honour as ma% che*ues as 'ossi!le till the credit !alance is not exhausted$ &n 'ractice, a che*ue for a !igger amount is 'aid first in such a situation !ut if a che*ue for smaller amount is 'a%a!le to the tax authorities etc, it ma% !e honoured first$ &f !oth the che*ues are of e*ual amounts, the !anker is free to honour an% of them$ 1. 3ater*a( A(terat* n" 4 che*ue contains a mandate of the dra6er to his !anker to 'a% a s'ecified sum of mone% to the !earer or the 'erson mentioned therein or to his order$ 4n% alternation or correction therein, to !e valid, must !e made !%, or 6ith the consent or, the dra6er and confirmed !% his full signature$ )he 'a%ing !anker should !e ver% careful in this regard and should not make 'a%ment if the che*ue !ears an alternation, s'eciall% a material alteration, 6ithout confirmation !% the dra6er$ A .ater*a( a(ternat* n *" ne iA ;hich su!stantiall% changes the rights and lia!ilities of the 'arties or an% of the 'arties to the instrument, or iiA ;hich changes the instrument, or iiiA causes it to s'eak a different language from that it originall% s'oke or ivA Changes the !usiness effect of the instrument changing the follo6ing items$ & (( >*n+ are t,e .ater*a( a(ternat* n"# aA Changing the date, !A )ime of 'a%ment, cA 4mount of he instrument, dA lace of 'a%ment, eA 2ate of interest$ fA )he num!er of 'arties !% addition or deletion gA )he medium of 'a%ment, hA 2emoval of crossing, iA Converting order instrument into !earer etc$ Effect of alternation. &t onl% affects the 'arties at the time of alternation and not affect?'arties su!se*uent to such alternation$ 4 material alternation discharges the 'revious 'arties !ut not the su!se*uent ones$ Under Section @@ of the 4ct an acce'tor or endorser is !ound !% his acce'tance or endorsement not 6ith standing an% 'revious material alternation$ 4n alternation is material onl% if it is effected !% the 6ill of the 'erson !% 6hom or under 6hose direction it is made$ )herefore, an alternation 6hich is the result of an accident does not render the instrument void$ Exam'les of such accidents are ravages of 6hite ants, 6ashing and ironing or a garments in 6hich the document 6as ke'tJ document torn !% a child etc$ 4lternation 'ermitted !% :a6$ )he follo6ing alternations are 'ermitted !% :a6.? -$ 4n alternation made 6ith the consent of all 'arties$ /$ 4lternation made in order to carr% out the common intention of the original 'arties$ 1$ Conversion of an endorsement in !lank into an endorsement in full$ 5$ Com'leting an inchoate instrument$ I$ Crossing of an o'en che*ue, conversion of general crossing to s'ecial crossing, addition or 6ords like not negotia!le to a crossed che*ue$ Material alternation in the case of che*ues. Bankers refuse to 'a% che*ue materiall% altered unless ever% such alternation is 'ro'erl% attested !% the full signature of the dra6er 6hich should tall% 6ith the s'ecimen held !% the !anker$ ;here the che*ue is dra6n !% #oint account holder all of them attest such alternations$ &f a !anker 'a%s a che*ue 6hich has !een altered 6ithout the customer=s consent, then the !ank has no right to de!it the customer=s account$ &t no longer re'resents the customer=s mandate$ )herefore the !anker has to !ear the loss himself unless he is in a 'osition to recover the mone% from the 'erson res'onsi!le for such alternation$ ,o6ever the !anker can de!it can de!it the customer=s account 6ith the amount of such a che*ue$

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-$ 6here the customer did not exercise 'ro'er care in dra6ing the instrument and /$ the alternation 6as not a'artment$ >:ondon 9oint Bank :td$, D Macmillan and 4rthurA Statutor% 'rotection to the a%ing Banker 6hen a che*ue is materiall% altered$ Section @H of the "egotia!le &nstruments 4ct give 'rotection to a 'a%ing !anker 6ho 'a%s a che*ue 6hich is materiall% altered 'rovided the follo6ing conditions are satisfied$ -$ Such alternation is not a''arent. /$ Banker has made the 'a%ment in due course, and 1$ Banker is lia!le to 'a% the che*ue$ )he 'a%ing !anker ma%, therefore, avail of the statutor% 'rotection under Section @H, in case of che*ues 6hich have !een materiall% altered 'rovided$ a$ )he alternation is not a''arentl% clear i$e$, it cannot !e detected 6ith reasona!le care, 'rudence and scrutin%$ For exam'le, if the dra6er has 6ritten the amount so carelessl% !% leaving sufficient s'ace !efore the amount >!oth in 6ords and figuresA and the holder or an% other 'erson raises the amount so carefull% that the additions of the 6ords and figures cannot !e detected 6ith due care and scrutin% on the 'art of the !anker, the latter shall not !e held res'onsi!le for 'a%ing the amount so altered$ )he customer, in fact, 6ould !e guilt% of !reach of his dut% to6ards the !anker to take due care in dra6ing the che*ue$ )he !anker need not undertake an% s'ecific investigation in this regard$ ;hat the la6 re*uires him to do is that he should ensure that the alternation is not a''arent to the naked e%e$ &f, for exam'le, the additions of a 6ord is in different hand6riting or 6ith a different ink, the alternation a''ears to have !een made$ But if the amount has !een altered 6ith the same ink and in the same hand6riting even !% the cleark of the dra6er, after getting the che*ues signed, the !anker 6ould !e #ustified in honouring the che*ue$ !$ )he 'a%ment has !een made in due course as defined in section -C$ the 'a%ing !anker is discharged from his lia!ilit% on the che*ue and he can de!it the account of the dra6er 6ith the amount of the che*ue$ W,en *" t,e a(terat* n a--arentD &t 6as o!served in 6oolatt D$ Salter$9 >-H/@A 7 4n alteration in a !ill is a''arent 6ithin$ Section F5, if it is of such a kind that it 6ould !e o!served and noticed !% an intending holder scrutinizing the document, 6hich he com'lete taking 6ith reasona!le care8 Ca"e L > -A &n )an#ore 'ermanent !ank :td$ D$S$2 2angachari, the defendant gave t6o che*ue singed in !lank and handed over to the official of !ank$ )he official filled the che*ues !% making them 'a%a!le to the customer=s clerk$ Su!se*uentl% he forged their endorsements and misa''ro'riated the mone%$ )he !anker in the a''eal 6as denied the statutor% 'rotection !ecause of the fact the alternations 6ere material and a''arent and 6ere not authenticated !% the dra6er$ rotection 6as also denied on the ground that there 6as no evidence of the 'a%ment to the ostensi!le 'a%ees$ /$ &n Brahma Shum Share 9ug Bahadur D$ Chartered Bank of &ndia, 4ustralia and Chine >-HIFA the 'a%ing !anker o!tained the statutor% 'rotection under Section @H of the 4ct !ecause the alternation 6as not a''arent$ )he facts of the case 6ere, a che*ue for 2s$/IF dra6n in favour of 9$M$ +as (u'ts 6as stolen in transit and materiall% altered$ )he instrument 6as materiall% altered !% raising the amount to 2s$ /,15,@C- and changing the name of 'a%ee to S +ass and Co$ )he learned 9udge held that the instrument on its face did not disclose an% trace of alternation or o!literation and therefore the dra6ee !ank is entitled to Statutor% rotection$

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8. & r+er2 f Dra>er5" "*+nat)re )he 'a%ing !anker should carefull% ascertain that the che*ue !ears the genuine signature of the dra6er after com'aring the same 6ith his s'ecimen signature$ )he che*ue must !e signed !% the dra6er on its face and not on its !ack$ )he account holder ma% change his s'ecimen signature an% time and su''l% to the !anker his fresh s'ecimen signature$ Banker is !ound to acce't the ne6 s'ecimen signature 6ith effect from a s'ecified date$ )hus a !naker has to ensure that the dra6er=s signature on the che*ue are authorized and genuine$ )he signature of the dra6er or his authorized agent on the che*ue must confirm to the one alread% held !% the !ank, the che*ue !eing a mandate from the dra6er to the !anker$ &n the case of #oint account the mandate on the num!er of 'erson to sign or 6ho is to sign must !e o!served$ )he same 6ould a''l% to a 'artnershi' firm=s che*ue and a cor'orate customer=s che*ue$ 4 che*ue ma% !e signed in a trade or assumed name, and the signature of a 'artnershi' firm is e*uivalent to the signature of all the 'artners$ 4''arentl%, a signature !% marks or a thum! im'ression in the 'resence of the !anker 6ill suffice$ )he !anker should exercise great care and caution in 'a%ing che*ues !earing such marks or im'ressions$ &f the dra6er=s signature or the signature authorized !% him differs from the s'ecimen signature 'rovided to the !anker, the !anker should, to 'rotect himself, either get it confirmed or return the che*ue marking it 7Signature +iffers8$ Facsimile Signature >used here to denote an% signature not made directl% !% hand, and include signature made !% stam', 'rint or an% signature 6riting machineA fre*uentl% a''ear on dividend and interest 6arrants$ 4 facsimile signature is valid and !inding if im'ressed !% authorit%$ 4 !ank 6ould authorize the use of a facsimile signature on che*ues onl% if the account holder gives a suita!le indemnit% against the risk of an% loss that might result from the unauthorized use of the signing device or !% the use of an imitation 6hich resem!les the account holder=s facsimile signature$ Signature in an a!normal form ma% !e re*uired to !e 'roved 6ith utmost strictness in legal 'roceedings$ &f in dou!t, reference should !e made to the s'ecimen of dra6er=s signature$ &f need !e, che*ues shoud !e examined 6ith the hel' of s'ecial lam's$ 4 'erson=s signature is likel% to change over a 'eriod of time and as such a !anker should o!tain fresh s'ecimen signature of customers 'eriodicall%$ &t is the res'onsi!ilit% of the 'a%ing !anker to carefull% ascertain that the dra6er=s signature on the che*ue is genuine and authorized 6hen 6ritten !% an agent and is the same as 'er s'ecimen signature su''lied to him$ ;hen a che*ue !aring the forged signature of the dra6er is 'aid !% the cre6ee !ank, the loss generall% falls u'on the !ank unless the forger can !e a''rehened and the mone% recovered from him$ 4 forged signature is <6holl% inor'erative= and the !ank, therefore, has no authorit% to de!it the account 6hen the customer=s signature is forged$ ,o6ever, the onl% circumstance 6hich 6ould im'ose loss u'on the account?holder, rather than the dra6ee !ank, 6ould !e the existence of the facts 'recluding the account?holder from den%ing the genuineness of the signature$ Exce-t* na( C*rc)."tance" )here ma% !e exce'tional circumstances 6hich 6ill ena!le the !anker to de!it his customer=s account !earing a forged signature$ )he customer !% his conduct ma% have misled the !anker, causing him to 'a% the che*ue 6hen other6ise it might have !een refused$ )he !anks are 'rotected !% esto''els or 'ersonal !ar 6hen the% make 'a%ments on che*ues to 6hich their customer=s signature as dra6er has !een forged$ For exam'le. iA &f the customer does not re'udiate the signature as soon as the forger% comes to his notice and the !anker 'a%s it 6hen other6ise he 6ould have returned it or if the !anker is there!% 're#udiced in an% action that he might take against the forger, or iiA &f !% some net of his or !% his conduct, the customer has induced the !ank or to !elieve that the signature 6as a genuine one$ 4 'art% is 7'recluded8 6hen he is 7sto''ed8 form raising the *uestion of the forger% or 6ant of authorit%$ ;hat 'articular act or line fo conduct 6hich 'recludes the dra6er from den%ing the !anker=s right to de!it him 6ith a forged che*ue is a *uestion of fact$ Silence ma% result in a 'art% !eing 'recluded from alleging forger% or 6ant of authorit%, 6hen he kno6s of the irregularit%, is under a dut% to reveal it to the other 'art% and the other 'art% is 're#udiced !% the silence$ )he 'osition 6ill !e clear form the #udgment given in the decided cases cited !elo6. &n (reen6ood D$ Martin Bank :td$ >-H11A, a customer of the !ank learnt that his 6ife has forged che*ues on his account$ &n !reach of his dut% as customer, he did not tell the !ank of these forgeries until after his 6ife died$ ,e

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then claimed that the !ank should re'a% to his account the sum 6hich had !een 'aid a6a% on the 6ife=s forgeries, on the !asis of the general rule that a !anker is not entitled to de!it a customer=s account 6hen the customer=s signature as dra6er has !een forged on a che*ue$ &t 6as held !% the ,ouse of :ords that the hus!and 6as 'recluded from making such a claim in res'ect of all the che*ues !% his o6n failure to notif% the !ank of the original forgeries$ )his has induced the !ank to !elieve that the% 6ere genuine che*ues signed !% hus!and himself, and so had 'revented the !ank from 'ursuing the remed% it 6ould have of suing the 6ife for fraud$ Moreover, the !ank has !een led to honour further forged che*ues !% the hus!and=s inaction$ )he validit% of the 'rinci'le of 'reclusion 6as reiterated in a later case$ &n Bro6n D$ ;estminister Bank :td$ >-HF5A, 6here the customer, a 6ido6 aged @F, 6hose affairs 6ere largel% looked after !% a man she em'lo%ed, claimed that the !ank should restore to her account mone% 'adi out on some 1CC che*ues for small amounts 6hich the em'lo%ee had forged for over t6o %ears$ +uring tht 'eriod she had !een visited !% her !ank mananger 6ith statement of her account at six?month interval and she had not res'onded to his re*uest on each occasion that she should check the statement of account and let him kno6 6hether the% 6ere in order, !ut had either affirmed that the% 6ere satisfactor% or had said nothing$ &t 6as held that the customer must have realized that the che*ues had !een forged 6ith her signature from their sheer num!er, and therefore she had failed in her dut% to inform the !ank of this and could not no6 claim that the de!it entries should !e cancelled$ :. A C,e;)e ", )(d n t 3)t*(ated &f a che*ue is torn !% the dra6er 6ith the intention of canceling it, as ma% !e evident from the condition of the che*ue, the !anker 6ill have to suffer loss, if an%, arising from 'a%ing the che*ue to a 'erson 6ho 'resented it after 'asting the 'ieces together$ &f a che*ue is torn accidentall% !% the 'a%ee, mutilation must !e confirmed !% the dra6er or guaranteed !% the collecting !anker !efore it is 'aid !% the dra6ee?!anker$ &n the a!sence of such a confirmationKguarantee, the !anker on 6hom the che*ue is dra6n should return it 6ith the ans6er 7Che*ue mutilated8 or 7Mutilation re*uired dra6er=s confirmation8$ Occasionall%, che*ues are torn at the office of the collecting !ank 6hile o'ening in6ard mail, etc$ &f the collecting !ank confirms mutilation, the 'a%ing should 'a% the che*ue$ &f a che*ue is slightl% torn 6ithout affecting the dra6er=s or other material 'articulars, its 'a%ment ma% not !e effused$ A C,e;)e .)"t 9e -re"ented >*t,*n Ban!*n+ H )r" 4s 'rovided in Section FI of the 4ct, a che*ue must !e 'resented for 'a%ment 6ithin !anking hours$ But actual !anking hours are fixed !% custom and not !% statue, and reasona!le notice of such change must !e given !oth in the 'ress and !% a notice 'rominentl% dis'la%ed in full vie6 of the 'u!lic inside the !ank$ )here is a dual danger in 'a%ing che*ue other then to the dra6er, 6hen 'resented out of !anking hours$ First, !% 'a%ing a stolen che*ue !earing a forged endorsement the 'a%ing !anker 6ould !e lia!le to the true o6ner and to the dra6er as he ma% lose statutor% 'rotection of Section @I for the reason that a 'a%ment out of esta!lished !anking hours 6ould not !e 'a%ment in due course$ Secondl%, a customer might countermand 'a%ment of the che*ue in *uestion and !ring evidence to sho6 that it had !een 'h%sicall% im'ossi!le for the che*ue to !e 'resented 6ithin !anking hours on the same da% he dre6 it$ &n such a case the customer might successfull% resist !eing charged 6ith the amount in *uestion$ 1tat)t r2 Pr tect* n t t,e Pa2*n+ Ban!er a%ment of che*ues involves risk to the 'a%ing !anker !ecause the latter=s dut% is to 'a% the amount of the che*ue to the right 'erson according to the instructions of his customer$ &f he makes 'a%ment to a 6rong 'erson, he himself 6ill !ear the loss$ )he !anker has to honour his customer=s che*ues on demand and hence he cannot make detailed en*uires a!out the title of the 'erson 6ho 'resents the che*ue for 'a%ment$ )o minimize losses likel% to !e suffered !% the 'a%ing !anker, the "egotia!le &nstruments 4ct 'rovides him 'rotection, 'rovided he fulfils his o!ligations as laid do6n in the 4ct$ Pr tect* n *n ca"e r Order C,e;)e" &n case of an order che*ue, Section @I>-A 'rovides statutor% 'rotection to the 'a%ing !anker as follo6s. 7;here a che*ue 'a%a!le to order 'ur'ose to !e endorsed !% or on !ehalf of the 'a%ee, the dra6ee is discharged !% 'a%ment in due course$

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)his Section grants 'rotection to the 'a%ing !anker if he makes 'a%ment of an order che*ue 6ith forged endorsement on !ehalf on the 'a%ee$ 4fter the insertion of Section -F>/A, this 'rotection is availa!le in res'ect of other endorsements also, !ecause the !anker is not ex'ected to verif% the signature of each and ever% endorser$ )he main o!#ect of this section is 7to make the !anker free of al res'onsi!ilities in res'ect of the genuineness, or the validit% of the endorsement 'ur'orting to !e that of the 'a%ee or his authorized agent8$ )6o conditions must !e fulfilled to avail of such 'rotection$ a$ Endorsemnt must !e regular. Section @I>-A 'rovides 'rotection against the risk involved in the 'a%ment of che*ues, 6hich !ear endorsements$ But it is essential that the endorsements are regular though not necessaril% genuine or valid$ )here is a difference !et6een the regularit% of endorsement and its validit% or genuinesses$ &f a che*ue 'a%a!le to a certain 'erson is endorsed under the signature !earing the same name and in the same s'elling as that of the 'a%ee or the endorsee, the endorsement is said to !e regular$ 4''arentl%, it a''ears that the che*ue has !een endorsed !% the 'erson 6hose name a''ears as the 'a%ee or the last endorsee$ 4 valid endorsement is that endorsement 6hich has !een made !% the 'erson 6ho is the true o6ner of the che*ue or has the necessar% authorit% to sign on !ehalf of the 'a%ee$ )o avail of the statutor% 'rotection, the !anker must ascertain that the endorsement is regular$ ,e need not verfit% its validit%$ For exam'le, if a che*ue 'a%a!le to 7Suresh Chandra8 is endorsed 6ith the signature of the same name and in the same s'elling, it is a regular endorsement$ But if the endorser signs as 7Suresh Chandra8, the endorsement 6ill !e irregular$ )he !anker need not concern himself 6ith the identification of the 'erson 6ho signs on the che*ue as the endorser$ &f a che*ue is 'a%a!le to 4 and B #ointl%, it must !e endorsed !% !oth of them in their o6n hand6riting$ Other6ise, it 6ill !e an irregular endorsement$ 9. Pa2.ent .)"t 9e .ade *n d)e c )r"e# 4s alread% noted, Section -C, defines a 'a%ment in due course as 'a%ment in accordance 6ith the a''arent tenor of the instrument in good faith and 6ithout negligence to an% 'erson in 'ossession thereof under circumstances 6hich do not afford a reasona!le ground for !elieving that he is not entitled to receive 'a%ment of the amount mentioned therein$ &t is, therefore, essential that the !anker 'a%s the che*ue in good faith and 6ithout negligence, other6ise statutor% 'rotection cannot !e granted to the 'a%ing !anker$ Pr tect* n *n ca"e f Bearer C,e;)e" Section @I>/A 'rovides 'rotection to the 'a%ing !anker in res'ect of !earer che*ues as follo6s. 7;here a che*ue is originall% ex'ressed to !e 'a%a!le to !earer, the dra6ee is discharged !% 'a%ment in due course to the !earer thereof, not 6ithstanding an% endorsement 6hether in full or in !lank a''earing thereon, and not6ithstanding that an% such endorsement 'ur'orts to restrict or exclude further negotiation$ )his section that che*ue originall% issued as !earer che*ues al6a%s retains its !earer charcter irres'ective of the fact that it !ears endorsement in full or if !land or 6hether an% endorsement restricts further negotiation or not$ )hus the !anker is not re*uired to verif% the regularit% of the endorsements on !earer che*ues, even in case of endorsement in full$ )he !anker shall !e discharged if the makes 'a%ment of an uncrossed !earer che*ue to the !earer in due course$ &f such a che*ue is stolen and the !anker makes its 'a%ment 6ithout the kno6ledge of such theft, he 6ill !e discharged of his o!ligation and 6ill !e 'rotected under Sections @I>/A$ Pr tect* n *n Ca"e f Cr ""ed C,e;)e" )he 'a%ing !anker is under an o!ligation to make 'a%ment of the crossed che*ues in accordance 6ith the instruction of the dra6er conve%ed through the crossing$ &f the does so, he is 'rotected !% Section -/@ 6hich la%s do6n$ 7;here the !anker on 6hom a crossed che*ue is dra6n has 'aid the same in due course, the !anker 'a%ing the che*ue, and >in case such che*ue has come to the hands of the 'a%eeA the dra6er thereof shall res'ectivel% !e entitled to the same rights, and !e 'laced in the same 'osition in all res'ects, as the% 6ould res'ectivel% !e entitled o and 'laced in if the amount of the che*ue had !een 'aid to and received !% the true o6ner thereof8$ )he !anker making 'a%ment of a crossed che*ue is, thus, given 'rotection under Section -/@ if 6e makes the 'a%ment after fulfilling the follo6ing t6o re*uirements$ a$ ,e 6as made 'a%ment in due course >under Section -CA, i$e$, in good faith and 6ithout negligence and according to the a'artment tenor of the che*ue, and

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!$ )he 'a%ment has !een made in accordance 6ith the re*uirement of he re*uirement of the crossing >under Section -/FA i$e$, through an% !anker in case of general crossing and through the s'ecified !anker in case s'ecial crossing$ )hus the 'a%ing !anker is discharged from his o!ligation on a crossed che*ue irres'ective of he fact that the 'a%ment 6as received !% the collecting !anker on !ehalf of a 'erson other than its true o6ner$ For exam'le, if a che*ue in favour of E is stolen !% B, 6ho endorses it is his o6n favour !% forging the signature of E and de'osits it in his !ank for collection, the 'a%ing !anker shall !e discharged if he makes 'a%ment as mentioned a!ove and shall not !e lia!le to 'a% the same to E, the true o6ner of the che*ue$ )he dra6er of the che*ue is also discharged as 'rotection is granted to him also under this Section$ )here is, ho6ever, one limitation to the 'rotection granted under this Section$ &f the !anker cannot avail of the 'rotection granted !% other Sections of the 4ct$, rotection under Section -/@ shall not !e availa!le to him$ For exam'le, if the 'a%ing !anker makes 'a%ment of a crossed che*ue 6ith? iA irregular endorsement, or iiA a material alternation, or iiiA forged signature of the dra6er he loses statutor% 'rotection granted to him under the 4ct for these la'ses on his 'art and hence he cannot avail of the statutor% 'rotection under Section -/@, even if he 'a%s the che*ue in accordance 6ith the crossing$ W,en a Ban!er *" /)"t*f*ed *n Ref)"*n+ Pa2.ent# 4 !anker=s o!ligation to honour his customer=s che*ues is terminated on the ha''ening of na% one of the follo6ing events. 1. N t*ce f r. t,e c)"t .er t "t - -a2.entJ ;hen the customer has the right !% contract to give mandate to the !anker he also has the inherent right to countermand his mandate$ )his is kno6n as counter mandate of 'a%ment or sto''ing of the che*ue$ )he !anker should note the follo6ing 'oints in this regard$ -$ )he order not to 'a% from the customer must !e in 6riting and in clear and unam!iguous terms$ Other6ise it ma% create confusion resulting in the 'a%ment of a sto''ed che*ue and the dishonour of other che*ues !ecause of insufficient !alance$ &n ;estminster Bank :td$ D$ ,ilton >-H/FA the dra6er sued the !ank for having 'aid contrar% to instruction and for having 6rongfull% dishonoured other che*ues, 6hich, !ut for the 6rong 'a%ment could have !een honoured$ &n this case 6hat ha''ened 6as the customer gave the 6rong num!er 6hile instructing the !anker to sto' 'a%ment$ Su!se*uentl% the !ank aid the che*ue 6hich the customer intended to sto', identical in all details !ut !earing a later num!er, 'resuming it to !e a du'licate$ )he decision 6as in favour of the !ank$ &t 6as o!served 76hen it comes to a *uestion of identification it must al6a%s !e remem!ered that the num!er of che*ue is one certain of identification$ )here can !e onl% one che*ue !earing a 'rinted num!er, there ma% !e man% che*ues in favour of the same 'a%ee and for the same amount8$ So the !anker is safe is he gets the num!er of che*ues for sto''ing 'a%ment$ ,e should also not act until he receives confirmation in 6riting of sto' instruction given over 'hone or !% telegram$ /$ )here can !e no constructive countermand of 'a%ment$ &n Curtice D$ :ondon Cit% and Madland Bank :td$ >-HC@A a customer sent the <sto' instruction= !% telegram$ )his 6as received after he !ank hours and 6as 'laced in the !ank letter !ox$ )he next morning, the !ox 6as not 'ro'erl% cleared and the che*ue and the che*ue 6as 'aid !efore the telegram 6as noticed$ ,eld there can !e no constructive countermand of 'a%ment$ )here can !e no sto''ing of che*ue unless it actuall% comes to the !ank=s notice$ Of course there 6as negligence in not 'ro'erl% clearing the letter !ox, !ut that 6ould entitle the customer onl% to nominal damages$ 1$ &n the case of sto's !% telegram or tele'hone the !anker should act carefull%$ ,e can onl% 'ost'one 'a%ment and cannot refuse 'a%ment$ )o 6rite the ans6er on such a che*ue 7'a%ment is sto''ed8 is un6ise and the !anker faces trou!le if the message ha''ens to !e a hoax 'la%ed on the !anker$ So a !etter ans6er 6ould 7 a%ment countermanded !% tele'honeKtelegram, confirmation a6aited8$ Even 6here the instruction is confirmed it is not good

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to use the 6ords 7'a%ment sto''ed8 6hich ma% mean, the dra6er has !ecome insolvent or the 'a%ing !anker has sus'ended the 'a%ment$ Better ans6er 6ould !e 7orders not to 'a%8 or 7 a%ment countermanded !% dra6er8$ 5$ )he customer has the right to sto' 'a%ment an% time !efore the mone% is actuall% handed over to the holder in the case of an o'en che*ue >Cham!er D$ MillerA$ &n the case of che*ues 'assing through clearing, the instruction is effective if re*uired !efore the instrument is cleared$ I$ a%ee of a che*ue has not right to countermand$ &t is onl% the dra6er 6ho has the right to countermand$ )herefore 'a%ee should contract the dra6er in the case if che*ue is lost or stolen$ &t is not safe for !anker to act on the instruction of 'a%ee$ ,o6ever de'ending on the status of the 'a%ee and the other circumstances, the !anker ma% 'ost'one the 'a%ment$ &n the case of executors, trustees or 'artners or #oint account holders, it is sufficient if an% one of them countermands$ ,o6ever it is advisa!le for the !anker to o!tain such authorit% for them at the time of o'ening the account$ F$ ;hen the customer has more than one account 6ith the same !ranch, sto' instruction must !e noted against all accounts$ But 6hen the accounts are ke't at different !ranches, the customer must s'ecif% the !ranch on 6hich it is dra6n$ But if the !anker 'a%s the sto''ed che*ue at some other !ranch in s'ite of the correct instructions of the customer, the !ank 6ill have to suffer the loss >Burnett D ;estminster Bank :tdA 2. N t*ce f deat,E *n" ('enc2 r *n"an*t2 f ,*" c)"t .er r *n t,e ca"e f c .-an2 n t*ce f *t" >*nd*n+ )-# 1? Deat,# )he !ank should not honour customer=s che*ues after receiving he notice of his death$ "otice ma% !e formal given !% some one interested of constructive as for exam'le the ne6s in the 'a'er$ +eath also cancels authorit% given to agents and others, !ut an% contracts in the course of com'letion should !e com'leted and che*ues dra6n to fulfill such commitments can !e 'aid$ &n the case of #oint accounts there is no need to sto' the account, even if one of them is surviving$ Che*ues dra6n !% a deceased director of com'an% against the com'an%=s account can still !e 'aid, as he signed it onl% in the ca'acit% of an agent$ 2. In" ('enc2# &n England, che*ues dra6n 'a%a!le to self, or third 'arties can !e 'aid, !efore the !anker receives notice of an act of !ankru'tc%$ ;ith regards to che*ues dra6n after the recei'ts of notice, !ut !efore the 'resentation of 'etition, the !anker should make a distinction !et6een self che*ues and che*ues dra6n in favour of third 'art%$ )he former can !e 'aid !ut not the latter$ But in 2e +alton >-HF/A the learned #udge 'ointed out that it 6as ridiculous to 'ermit 'a%ment to the customer, so that he could 'a% the creditor is he so chooses$ But dishonour a che*ue dra6n directl% in favour of the creditor$ &n the case of de!it accounts, an% further 'a%ments after the notice of !ankru'tc% cannot !e recovered from the trustee$ )he la6 in &ndia is less stringent and the !anker can 'a% che*ues u' to the time he receives the notice of the 'resentation of 'etition$ ,e need not sto' che*ues sim'l% !ecause the customer has committed an act of insolvenc% 6. In"an*t2 f c)"t .er# ;here a !anker receives notice of a customer=s mental disorder, his authorit% to 'a% che*ues and also to act u'on customer=s mandate given to agents and others is terminated$ &f there is a clear 'roof of mental inca'acit% such as doctor=s certificate or a court order, the !ankers face no 'ro!lem$ Other6ise honouring or dishonouring ma% land him in trou!le$ &f he 'resumes insanit% and dishonours che*ues, he ma% have to 'a% damages to latter, if the 'resum'tion is 'roved to !e incorrect$ &f he 'resumes sanit% and 'a%s the che*ues, he ma% lose right of de!iting customer=s account$ 6. N t*ce f A""*+n.ent f Cred*t Ba(ance# )he credit !alance in the account of a customer ma% !e assigned >or transferredA !% him to another 'erson under Section -1C of the )ransferor or ro'ert% 4ct, -@@/$ On recei't of a notice of such assignment, the !anker must sto' 'a%ment of the che*ues dra6n !% the assignor, as the latter ceases to !e the o6ner of such funds$

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7. Garn*",ee Order# 4s alread% noted, a !anker is !ound to com'l% 6ith the order issued !% the Court restraining him from 'a%ing the mone% from a customer=s account$ ,e must refuse 'a%ment of the che*ue 'resented after the recei't of a (arnishee Order of an% other order of the court attaching the customer=s mone%$ 8. Beac, f Tr)"t# &f the !anker comes to kno6 that the customer, 6ho is o'erating a )rust account, contem'lates to use the funds of the )rust account in !reach of trust, the !anker must sto' 'a%ment of the che*ues dra6n on such account$ :. Defect*'e t*t(e f t,e -art2# &f an% 'erson 'resenting a che*ue has defective title to the che*ue and the !anker is a6are of this fact, he can refuse to honour such a che*ue 6ithout an% risk, !ecause if he makes 'a%ment of the che*ue to such 'erson, it 6ill not !e made in good faith and the 'a%ment 6ill not !e deemed as 'a%ment in due course$ )his a''lies to !earer che*ues as 6ell, !ecause if the !anker has reason to !elieve that the 'resenter ma%Kma% not !e the 'ro'er 'erson to receive 'a%ment, he ma% insist on the identification of the 'resenter of the che*ue, so that the 'a%ment is deemed as 'a%ment in due course$ <. Ban! >*(( 9e H)"t*f*ed *n ref)"*n+ -a2.ent f t,e c,e;)e" *n t,e f (( >*n+ c*rc)."tance"# iA if the che*ue is a 'ost?dated che*ue or a stale che*ue iiA if the che*ue is dra6n on another !ranch of the same !ank, iiiA if the che*ue contains an a''arent material alteration 6hich is not 'ro'erl% authenticated !% the dra6er$ ivA if the signature of the dra6er is a forged one or does not tall% 6ith his s'ecimen signature vA if the funds of the customer in his hands are not sufficient or are not 'ro'erl% a''lica!le to the 'a%ment of such a che*ue$ For exam'le, if a !anker exercises his right of set?off for recovering a loan, the funds in the customer=s account ma% !e insufficient ot honour the che*ue$ But it is necessar% that the !anker should give 'ro'er notice of his action to the customer !efore the sto's 'a%ment of che*ue$ &f there are sufficient funds in another account of the same customer, !anker himself cannot transfer funds from one account to another and can dishonour the che*ue for 6ant of funds$ ZZZZZZZZZZZZZZZZ

137

LE11ON 28 COLLECTI$E BANKER Collection of che*ues crossed and uncrossed for his customer 6as stated as one of the im'ortant functions of a !ank, in the definition of Bank given !% Sir 9ohn ager$ &t is no6 6idel% recognized as an im'lied term in the !anker? customer relationshi'$ &n this role the !anker is referred to as the collecting !anker$ Pr ced)re f r C ((ect* n 4fter a che*ue is received from the customer, the collecting !anker must 'resent the same to the dra6ee !ank 6ithin a reasona!le time$ ;hat is reasona!le time de'ends on the circumstances in each case$ &f it is a local che*ue it should !e 'resented on the same da% or at least the next da%$ &f the che*ue is received late after clearing hours, the customer is informed !% stam'ing the 7 a%?in?sli'8 6ith the 6ords 7)oo late for toda%=s clearing8$ &n the case of outstation che*ues, i$e$, che*ues dra6n on a !ank in a different to6n, the same should !e for6arded to the !ranch of he !nak or if it has no !ranch to its agent or corres'ondent, the da% after recei't$ &f the che*ue is not so 'resented either !% the !anker or his agent 6ithin reasona!le time, as a result of 6hich the customer suffers an% loss, the !anker 6ill have to make good the loss$ )he customer ma% suffer loss either !ecause of the failure of the dra6ee !ank or the dra6er of the che*ue !ecoming insolvent$ ;hen a che*ue is dishonoured, notice of dishonour must !e given to the customer !% collecting !anker$ 2ules of the account 'rovide that such a notice 6ill !e give !% the !ank on the !usiness da% follo6ing the recei't of the un'aid che*ue !% the !ank$ "otice of dishonour is given !% returning the che*ue together 6ith o!#ection memo giving the reason for dishonour$ "otice of dishonour is to !e given to all the 'revious 'arties to the instrument against 6hom the holder 6ants to 'roceed$ But 6here the collecting !anker is onl% acting as an agent and not as a holder for value, notice is given to the customer 6ho in turn 6ill give the necessar% notice to others$ But 6here he is a holder for value he has to give notice to all the 'arties against 6hom he 6ants to 'roceed$ R*"!" *n C ((ect* n &n the collection of che*ues, the collection !anker is ex'osed to serious risks$ &n la6 there is a conce't called <Conversion= Conversion is unauthorized interference 6ith another 'erson=s 'ro'ert% inconsistent 6ith the o6ner=s right of 'ossession$ 4n% 'erson 6ho ho6ever innocentl%, o!tains 'ossession of the goods of a 'erson 6ho has !een fraudulentl% de'rived of them and dis'oses of them 6hether for his o6n !enefit, or that of some other 'erson is guilt% of conversion$ )he 'lea of innocence is of no avail in actions concerning conversion nor the 'lea that the 'erson charged did not derive an% !enefit from it$ )his 'rinci'le a''lies to tangi!le goods onl% and not de!ts$ >chose?in?actionA$ But in the case of "egotia!le &nstruments there is the material 'art re'resenting the 'a'er on 6hich the instrument is 6ritten and the de!t 'art$ 4lthough the material 'art of the instrument ma% not !e of much value, the Courts have al6a%s allo6ed the full value the instrument re'resents, in suits for damages for the conversion of instrument$ )herefore 6hen the !ankers collect che*ues !elonging to other 'ersons, there is the risk of true o6ner of the instrument 'roceeding against the Bank for conversion, 6henever the customer=s title to the instrument is defective$ &t is also usual for the true o6ner to #oin 6ith his claim for conversion, a claim for mone% had and received$ )here is an im'lied 'romise 6hich the la6 im'utes to a 'erson dealing 6ith the mone% of another, to re'a% that mone% to the la6ful o6ner 6hen it is demanded and such im'lied 'romise is the ver% !asis of the claim$ &f E receives 'a%ment of a che*ue !earing a forged endorsement of B 6ho is the true o6ner, B can claim the amount of the che*ue from E 6hom B ma% treat as his agent$ 4 national contract of agenc% is assumed and suit filed !% the o6ner is similar to that filed !% a 'rinci'al against his agent to recover the mone% received on !ehalf of his 'rinci'al$ Need f r 1tat)t r2 Pr tect* n ;e have seen earlier the risks that the collecting !anker has to face 6hen engaged in the collection of che*ues$ &n the case of crossed che*ues the% have to !e collected onl% through a !anker$ )here is not other alternative$ ;hen that is the case it is unfair to su!#ect his to the risks in such collection$ Ever% time he receives a che*ue for collection, it is im'ossi!le for him to find out 6hether it contains a forged endorsement or not$ )herefore unless he is given the statutor% 'rotection it is not 'ossi!le for him to carr% on his !usiness$

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1tat)t r2 Pr tect* n Section -1- of the "egotia!le &nstruments 4ct$, -@@- 6hich governs the 'rotection given to the collecting !anker in &ndia runs as follo6s. 74 !anker 6ho has in good faith and 6ithout negligence received 'a%ment for a customer of a che*ue crossed generall% or s'eciall% to himself shall not, in case the title to the che*ue 'roves defective, incur an% lia!ilit% to the true o6ner of che*ue !% reason onl% of having received such 'a%ment8 ,ere again as in the case of a%ing Banker, the 'rotection given to the !anker is conditional$ )he% are 1. T,e -r tect* n *" f r cr ""ed c,e;)e" n(2# &n the case of o'en che*ues, the collecting !anker has to still face the risk, in case it !ears a forged endorsement !ecause the 'rotection is onl% for crossed che*ues$ &t should !e noted that the crossing must have !een done !efore it reached the hands of the !anker$ 2. He .)"t rece*'e -a2.ent f r a c)"t .er n(2# 4 !anker can claim 'rotection onl% in res'ect of che*ues collected for his customer$ 6. He .)"t ,a'e rece*'ed -a2.ent *n ,*" ca-ac*t2 a" a+ent f t,e c)"t .er# rotection is availa!le to the !anker, 6hen he collects che*ues as agent 6ithout ac*uiring 'ersonal interest or in the ca'acit% of a holder for value$ 4 'ractical difficult% 6as encountered !% !ankers !oth in England and &ndia 6hose 'ractice 6as to credit the customer=s account !efore collecting che*ues$ )o credit customer=s account 6ith amounts of che*ues as cash in deemed to !e e*uivalent to taking a che*ue as transferee for value and the legal effect is same 6hen a customer is allo6ed to dra6 against a che*ue lodged 6ith the !anker for collection$ But their difficult% 6as removed !% adding Ex'lanation to Section -1- of the "egotia!le &nstruments 4ct$ &t reads 7a !anker receives 'a%ment of a crossed che*ue for a customer 6ithin the amount of the che*ue !efore receiving 'a%ment thereof8$ But 6hen a !anker takes a che*ues as an inde'endent holder !% 6a% of endorsement, i$e$, if he gives cash against a che*ue over the counter, the 'rotection is lost in regard to the collection of his che*ue$ 7. He .)"t act *n + d fa*t, and >*t, )t ne+(*+ence# )his sti'ulation refers to the 6hole conduct of the !anker during the entire 'eriod of the transaction, i$e$, from the time of receiving the che*ue for collection till it is credited to the customer=s account$ )he !urden of 'roving good faith and a!sence of negligence is on the !anker, claiming 'rotection >Brahma Shamsher 9ung Bahadur D$ Chartered Bank of &ndiaA$ (enerall% good faith is 'resumed in the case of !ankers and the collecting !anker is likel% to lose 'rotection onl% !ecause of negligence$ W,at *" INe+(*+ence5 n t,e -art f t,e C ((ect*n+ Ban!er )his has !een stated !% :ord +unedin in Commissioners of )axation D$ English Scottish 3 4ustralian Bank :td$ >-H/CA$ )he test of negligence for a !anker 76hether the transaction of 'a%ing in an% given che*ue cou'led 6ith the circumstance antecedent and 'resent 6as so out of the ordinar% course that it ought to have aroused dou!ts in the !anker=s mind and caused them to make en*uir%8 "egligence de'ends u'on the circumstances of each case$ (enerall% s'eaking negligence indicates lack of care 6hich is necessaril% to !e taken in an% circumstances$ &n Central Bank of &ndia :td$, Bom!a% Ds$ D$ (o'inathan "air and Others, the 0erla ,igh Court o!served that.? 7)he test of negligence under Section -1- is 6hether the 'a%ment considered in the light of the circumstances, antecedent, and 'resent, 6as so much out of ordinar% course that it ought to have aroused dou!t in !anker=s mind and caused him to make en*uires8 For exam'le, if the circumstance of case create dou!t or sus'icion a!out the right of the customer to the che*ue, the !anker must make en*uires and take ade*uate 'recautions, Failure to do so 6ill constitute negligence on his 'art$ &t must !e carefull% noted that ordinaril% a !anker o6es dut% to his o6n customer !ut the la6 makes him res'onsi!le to the true o6ner of the che*ue also$ )hus the 'rivilege of statutor% 'rotection can !e availed of !% the !anker if he fulfils his statutor% dut% to6ards the true o6ner of the che*ue and exercises due care in safeguarding the latter=s interest$ Exa.-(e" f ne+(*+ence# 4 collecting !anker loses statutor% 'rotection on the ground of negligence on his 'art$ Exam'les of such negligence are as follo6s.

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1. &a*()re t O9ta*n a 1at*"fact r2 Intr d)ct* n r A"! f r Reference and C,ec!*n+ T,e. Bef re -en*n+ an Acc )nt# 4ll !anks toda% have made a rule, to 6hich there is no exce'tion, to re*uire a satisfactor% introduction or a relia!le reference for all 'ersons 'ro'osing to o'en current accounts$ 4'art from the desira!ilit% of kno6ing that the 'erson to 6hom the che*ue !ooks is to !e issued is not of du!ious honest%, the !anker 6ould certainl% !e negligent if he fails to as for introductionKreference and there 6ould !e no statutor% 'rotection if the customer 'asses through his account che*ues to 6hich he has no title$ &t should !e noted that o!taining and checking introductionKreference is an essential stage in the 'rocess of o'ening an account unless the a''licant is alread% kno6n to the !ank$ &f the !anker asks for and follo6s u' a reference and receives a satisfactor% re'l%, he 6ill have fulfilled his dut% of care in this res'ect$ &n :ad!roke 3 Co$ D$ )odd >-HH5A, a thief o'ened an account 6ith a stolen che*ue, 'rofessing himself to !e the 'a%ee$ )he thief 6as not introduced to the !ank nor did the !ank ask for an% reference$ )he che*ue 6as s'eciall% cleared on the re*uest of the thief, follo6ed !% the 6ithdra6al of the mone% and disa''earance of he thief$ )he dra6er sent another che*ue to the 'a%ee, took an assignment of his rights in the stolen che*ue and sued the !ank, 6hich 6as held to have !een negligent in not taking reasona!le 'recautions to safeguard the interests of 'ersons 6ho might !e the true o6ner of the che*ue?in other 6ords in o'ening an account 6ith a total stranger$ &t 6ill !e noticed that in the a!ove case the !ank no ste' at all to investigate the 'osition or character of their ne6 customer$ 2. Irre+)(ar*t2 f end r"e.ent"# )he collecting !anker should verif% the correctness or regularit% of he endorsements on the order che*ues$ For exam'le. aA &f the collection !anker fails to note that the endorser has not signed his name in the same manner or s'elling as a''ears in the name of the 'a%ee >or endorseeA, the endorsement 6ill !e held irregularJ !A if t6o or more endorsement on a che*ue are in the same hand6riting, their genuineness ma% !e easil% dou!ted and en*uir% should !e made$ Failure to do so 6ill constitute negligence on the 'art of the !ankerJ and cA &f the !anker does not verif% the authenticit% of the authorit% of the 'erson 6ho signs 'er 'rocuration, he 6ill !e held negligent$ 6. &a*()re t cred*t a C,e;)e Pa2a9(e t a C .-an2 t T,at C .-an25" >n Acc )nt# Since it is unusual for com'anies to negotiate che*ues made 'a%a!le to themselves, to others, and since it is the !anking 'ractice to credit such che*ues to the com'an%=s o6n account, it is considered that a !anker 6ho deviates form the esta!lished !anking 'ractice 6ithout making en*uires and o!taining satisfactor% ex'lanation 6ould !e negligence unless he kne6 of s'ecial arrangements, e$g$, !et6een allied com'anies, for such 'ractices$ 7. Cred*t*n+ C,e;)e Pa2a9(e t a C .-an2 t t,e Pr*'ate Acc )nt f an Off*c*a( f t,e C .-an2# &t is no6 the recognized 'ractice of !anker to refuse acce'tance of a che*ue 'a%a!le to a limited com'an% for the credit of an individual=s account 6ithout en*uir%$ &t follo6s that if such a che*ue is acce'ted for a 'rivate account, and is after6ards found to have resulted in conversion !% the customer, the statutor% 'rotection 6ill afford no defence for the !anker$ )his a''lied even 6here the !anker kno6s that his customer is acting 6ithin his delegated authorit% in endorsing the che*ues, !ut the circumstances are such that should !e sufficient to arouse sus'icion$ 8. Cred*t*n+ a Pr*'ate Acc )nt f an A+ent r E.-( 2ee >*t, C,e;)e" Dra>n 92 ,*. n Acc )nt f ,*" Pr*nc*-a( r E.-( 2er. T,*" - *nt *" *(()"trated 92 t,e f (( >*n+ t> ca"e"# &n Midland Bank D$ 2eckitt >-H11A, the !ank collected che*ues dra6n !% 2eckitt=s attorne% for credit of the attorne%=s 'ersonal account in reduction of an overdraft$ )he !ank 6as held to !e negligent in collecting che*ues 6ithout en*uir% for a 'rivate 'erson 6hich had on its face evidence of !eing intended for someone other than the customer in *uestion$ &n Souchettee :td$ D$ :andon Countr% ;estminister and arrs=s Bank :td$ >-H/CA, a customer, 6ho 6as managing director and secretar% of a limited com'an%, 'aid into his 'rivate account che*ues dra6n !% the com'an% 'a%a!le to the order of one of its creditors$ )he !ank kne6 of the relationshi' in 6hich their customer stood to the com'an% !ut no en*uires as to 6h% the che*ues of this descri'tion, 'a%a!le to a third 'art%, 6ere !eing thus used, 6ere held to have !een negligent$

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:. Crediting an 4gent=s rivate 4ccount 6ith che*ues 'a%a!le to him in his ca'acit% as 4gent 6hen it 6as a''arent that the% intended for ,is rincial$ <. Crediting Che*ues a%a!le to the ,older of a u!lic Office to his ersonal 4ccount. &f the fiduciar% ca'acit% of the 'a%ee or endorsee is a''arent from the form of the che*ue, the !anker should not acce't the che*ue for a 'rivate account 6ithout first making careful en*uires$ &t 6ould !e negligence for a !anker to take for 'rivate account che*ues 'a%a!le to tax collector, excise officials and the like under their official denominations$ =. Crediting Che*ues in favour of a )rust, ;hether crossed or uncrossed, to the )rustee=s >or Executor=sA rivate 4ccount$ )he !anker must not 'ut through such transactions other6ise he 6ill make himself lia!le for an% misa''ro'riation on grounds of negligence$ @. Crediting a Che*ue +ra6n !% a himself, into such artner=s rivate account$ artner in a Firm, in accordance 6ith the authorit% given, 'a%a!le to

1B. Collecting a Che*ue 'a%a!le to a :imited Com'an% for the 4ccount of another com'an% 6ithout satisfactor% ex'lanation. &t is unusual for cor'orate !odies to endorse over che*ues, 6hether generall% or s'eciall%$ 4s such, the onl% 'rudent course is for !ankers to refuse to acce't, 6ithout en*uir% or s'ecial instructions, che*ue made 'a%a!le to com'anies for accounts other than those of the 'a%ee$ &n :ondon and Montrose Shi'!uilding and 2e'airing Com'an% :td$ D$ Barcla%s Bank :td$ >-H/FA, the named 'a%ees 6as a limited com'an% and the che*ue had !een endorsed !% that com'an% to an endorseeJ it 6as held that there 6as clear evidence of negligence as the !ank collecting on !ehalf of he endorsee 6as 'ut on en*uir% !ut no action 6as taken$ 11. C ((ect* n W*t, )t 1at*"fact r2 ex-(anat* n c,e;)e" f r a. )nt" *nc n"*"tent >*t, *t" c)"t .er5" act*'*t*e"# )he !anker should 6atch the general state of account for 6hich the che*ue is !eing collected, since this ma% lead to certain transaction 'rom'ting en*uir%, as 6hen large che*ues are suddenl% 'aid in for collection for a small account ke't !% the customer 6ho is not 'articularl% 6ell?to?do$ O'erations of an a!normal character on an account of a kind that should reasona!le 'rovoke comments, 6ill !e regarded as evidence of negligence, if the% 'ass unnoticed$ 12. C ((ect*n+ >*t, )t "at*"fact r2 ex-(anat* n t,*rd -art2 c,e;)e" >,ere t,e c)"t .er ,a" -re'* )"(2 -r 'ed t 9e %nre(*a9(e# &n the under noted case, en*uires 6ere made 6here the circumstances 6ere sus'icious, !ut the court held that such en*uires 6ere not sufficientl% through$ &n Motor )rader (uarantee Cor'oration :td$ D$ Midland Bank :td$ >-H1GA, the 'laintiff had issued a che*ue in favour of a firm of motor dealers and handed it to a man 6ho 6as to use the che*ue to 'urchase a car for himself 6hich the 'laintiff 6ere financing under a hire?'urchase agreement$ )he 'a%ee=s signature 6as forged and the che*ue 'aid into the man=s o6n account$ )he cahier *ueried the transaction !ut 6as given a 'lausi!le ex'lanation and acce'ted the che*ue for collection$ )he !ank=s regulation re*uired such transactions to !e dealt 6ith !% the manager and not !% a cashier, 6hich 6as not done in this case$ )he customer=s !anking histor% 6as unsatisfactor% a large num!er of che*ue having !een dishonoured for 6ant of funds$ &t 6as held that the !ank should not have acce'ted the che*ue 6ithout closer en*uir% than 6as made !% the cashier, and that the !ank 6as guilt% of negligence$ -1$ Collecting che*ue having "o Endorsements or ,aving Manifest &rregularities in Endorsements. &n those cases 6here endorsement is re*uired or it is the 'ractice of !ankers to re*uire endorsements, !ankers have to verif% the regularit% of endorsement on order che*ues handled !% them as 'a%ing or collecting !ankers$ &n 'a%ing or collecting che*ues 6ith irregular endorsements, !anks ma% !e found guilt% of negligence and thus lose the statutor% 'rotection availa!le to them$ -5$ Collecting che*ue for a Customer=s 4ccount dra6n !% him 7'er 'ro8 or !% him and another on !ehalf of his firm or his 'rinci'al and made 'a%a!le to himself$ -I$ Omission to Derif% the 4uthorit% 6hen che*ues are endorsed !% an em'lo%ees or agent 7'er 'ro8 and are tendered for credit to his 'rivate account$

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-F$ +isregard of 74ccount a%ee8 Crossing. )hough this crossing has no legal significance, %et if a !anker credits such a che*ue to an account other than that of the 'a%ee, 6ithout making 'ro'er en*uires, this ma% constitute negligence$ D)t*e" f t,e C ((ect*n+ Ban!er )he collecting !ank acts as an agent of his customer and is res'onsi!le to him for his acts of omission or mistakes$ )he duties of a collecting !anker to6ards his customer are as follo6s. -$ resentation of che*ues for 'a%ment 6ithin reasona!le time. )he !anker should collect the che*ues, sent !% the customers, 6ith due care and should 'resent the che*ues to the dra6ee !ank 6ithin a reasona!le time$ 4ccording to the 'ractice follo6ed !% !ankers if the collecting and 'a%ing !ankers are in the same 'lace, the collecting !anker should 'resent the che*ue the next da% after he receives it$ &n case of outstation che*ues, he should dis'atch the same to the dra6ee !anker on the da% after it is received !% him$ )he che*ue ma% also !e 'resented thorough a clearing house or through the 'ost$ Sections G/ and @5 la% do6n the conse*uences of non?'resentation of che*ue !efore the dra6ee !ank 6ithin a reasona!le 'eriod of time$ &f a che*ue is 'resented 6ith undue dela% and in the mean6hile the dra6er of the che*ue suffers damages, the dra6er is discharged to the extent of such damage$ 4ccording to Section @5>-A, 7;here a che*ue is not 'resented for 'a%ment 6ithin a reasona!le time of its issue and the dra6er or 'erson on 6hose account it is dra6n had the right, at the time 6hen 'resentation ought to have !een made, as !et6een himself and the !anker, to have the che*ue 'aid and suffers actual damage through the dela%, hs is discharged to the extent of such damage, that is to sa%, to the extent to 6hch such dra6er or 'erson is a creditor of the !anker to the larger amount than he 6ould have !een if such che*ue had !een 'aid8 )he reasona!le time for this 'ur'ose shall !e determined having regard to . iA the nature of the instrument, iiA the usage of trade and of !ankers, and iiiA the facts of the 'articular case$ ;hen the dra6er of the che*ue is so discharged, the holder of the che*ue shall !e the creditor of the !anker to the extent of such discharge and shall !e entitled to recover the amount from his under Section @5>1A$ &f the collecting !anker 'resents a che*ue !efore the dra6ee !ank 6ith undue dela% on his 'art and the che*ue is dishonoured, the collecting !anker shall !e lia!le to reim!urse the loss suffered !% his customer in an% of the follo6ing 6a%s. iA &f the collecting !anker fails to 'resent the che*ue to the dra6ee !anker 6ithin a reasona!le time, and in the mean6hile the latter fails, the collecting !anker 6ill !e lia!le to reim!urse his customer in res'ect of the loss caused to him due to the failure of the dra6ee !ank !ecause the collecting !anker 6as negligent in 'resenting the che*ue in time$ iiA &f the dra6er of the che*ue himself !ecomes insolvent during the 'eriod the che*ue remains 6ith the collecting !anker, the latter is lia!le to reim!urse his customer$ iiiA &f the !anker does not em'lo% the normal and usual channel of collection of che*ue and there!% 'a%ment is received 6ith dela% and in the mean6hile a che*ue dra6n !% the customer is dishonoured, the customer 6ill !e entitled to recover damages from the collecting !anker$ 2. N t*ce f D*", n )r# Similarl%, the collecting !anker is re*uired to sho6 the due diligence in informing his customer a!out the dishonour of a che*ue$ )he customer can then 'roceed to recover the amount from the 'arties lia!le on the che*ues$ )he rule a''lica!le to the collection of che*ues is a''lica!le to the notice of dishonour also$ Even 6here a che*ue is dishonoured on 'resentation !ut !efore the 'resenting !anker has had time to return it to his customer, it is reclaimed and 'aid, the !anker should inform his customer a!out it as it ma% hel' him in assessing the dra6er=s true financial 'osition$

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LE11ON 0 2: 1ER$ICE1 TO C%1TO3ER1 Intr d)ct* n 4 modern !anker offers a 6ide variet% of financial and non?financial services to his customers and to the 'u!lic in general in addition to the t6o essential functions of acce'ting de'osits and extending credit$ 4s the maximum rates of interest that can !e offered !% the !anks in &ndia on various t%'es of de'osits are uniform and governed !% the directives of the 2eserve Bank of &ndia, the% can no longer com'lete !% offering higher rate of interest$ Banks are o!liged to devise ne6 schemes and services to overcome the increasing strain on 'rofita!ilit%$ Further, develo'ments in the 6a%s in 6hich !anks ac*uire funds and make them availa!le have !een accom'anied !% im'ortant changes in 'a%ment mechanism in recent %ears$ For the 'ast some %ears commercial !anks in &ndia have !een ado'ting the strateg% of 7innovative !anking8 in their !usiness o'erations$ &nnovative !anking im'lies the a''lication of ne6 techni*ues, ne6 methods and novel schemes in the areas of de'osit mo!ilization, em'lo%ment of credit and !ank Management$ Banks are !ecoming more and more innovative and are t%ing to enlarge the range of ne6 services !% covering more areas of usefulness to their customers and to meet the gro6ing needs of the communit%$ Some of these services are of s'ecialized nature 6hich call for em'lo%ment of ex'erienced and ex'ert staff$ &n this cha'ter 6e shall deal 6ith the follo6ing im'ortant services and facilities 'rovided !% a modern !anker in &ndia. -$ 2emittance of Funds /$ Safe +e'osit :ockers 1$ Safe Custod% of 4rticles 5$ Standing &nstructions I$ Other Bank Services >Financial and "on?FinancialA Re.*ttance f &)nd" Commercial !anks are eminentl% suited for remittance of funds from one 'lace to another through the net6ork of their !ranches s'read over the entire countr%$ )he main instruments for transfer of funds through !anks are !ank drafts, mail transfers, telegra'hic transfers and traveler=s che*ue of 6hich the !ank drafts are !% far the most 'o'ular$ Similar instruments are also used in making overseas 'a%ments in a 6ide range of foreign currencies and are dra6n on overseas !ranches or corres'ondent !anks$ Ban! Draft For remitting mone% from one 'lace to another !anks issue demand drafts >'o'ularl% called !ank drafts or sim'l% draftsA on their !ranches at the 'lace of estimation$ &t is issued on re*uest to customer 6ho has to make a guaranteed 'a%ment, that is, in circumstances 6here the 'a%ee 6ishes to !e certain that the che*ue 6ill !e 'aid u'on 'resentation$ 4fter cash, the next !est thing is a !ank draft 6hich avoids the necessit% of having to carr% sums of mone% to effect a 'a%ment$ Section @I4 of the "egotia!le &nstruments 4ct, -@@-, defines a !ank draft as 7an order to 'a% mone% dra6n !% one office of a !ank u'on another office of the same !ank for a sum of mone% 'a%a!le to order on demand8$ 4 !ank draft is, thus, a 'a%ment instruction similar to a che*ue and is al6a%s dra6n !% one !ranch on another to 'a% a s'ecified sum of mone% to the 'erson named therein or his order$ 4 draft is al6a%s 'a%a!le on demand$ Bank draft must not !e 'a%a!le to !earer on demand since the% 6ould !e e*uivalent to !ank notes 6hich !% Section 1- of the 2eserve Bank of &ndia 4ct$ Cannot !e issued !% an% 'erson other than the 2eserve Bank, or, as ex'ressl% authorized !% this 4ct, the Central (overnment$ 4n order dra6n !% a !ank u'on its current account 6ith another !ank is not a draft in la6 !ut is a che*ue$ 3a*( Tran"fer G3T5"? 4 mail transfer is, in form, a re*uest addressed !% one !ranch of a !ank to another !ranch to 'a% a stated sum of mone% to a names 'art% and, as the name im'lies, the instructions are sent !% mail dul% authenticated under

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authorized signatories$ )he remitter de'osits the amount 'lus a small commission for the service 6ith the remitting !ranch$ On recei't of the M), the receiving !ranch 6ill either issue its o6n 'a% order in favour of the !eneficiar% 6hich he can collect either through a !ank or directl% !% esta!lishing his identit%, or, alternativel%, make 'a%ment to the !eneficiar%=s account 6ith itself or 6ith another !ranch$ )ransfer 'a%ment s%stem avoids certain disadvantages of che*ues and !anker=s draft as instruments of making 'a%ment$ M)s are generall% issued for mail remittances for iA credit to customers= account at the receiving officeJ iiA transferring a de'osit account from one office to another officeJ iiiA 'a%ment to third 'artiesJ ivA other inter?!ranch transactions such as remittance of 'roceeds of !ills, reim!ursement of ex'enses, etc$ 4 mail transfer !eing an arrangement !et6een t6o !ank offices, is not a negotia!le instrument$ Mail transfers are effected no onl% for remittances 6ithin the countr% !ut also for international remittances$ )he 'urchase for the M) 'a%s funds in domestic currenc% on the date of 'urchase !ut the !eneficiar% gets 'a%ment at the foreign centre onl% after recei't of the M)$ )he account of the selling !ank is not de!ited 6ith the amount until arrival of the M) though it received funds at the domestic centre on the da% of the sale$ )his results in gain of interest to the selling !ank for the intervening 'eriod and a corres'onding loss of interest to the 'urchaser$ )he 'urchaser is com'ensated for the loss of interest Mt rates chea'er than )) rates$ ,o6ever, in &ndia, M) and )) rates are *uoted at the same rate$ Mail transfers are confined almost to transactions for small amounts 6hich are carried out !% main in order to save ca!le ex'ress$ 4 mail transfer for remittance of mone% to a foreign countr% can !e sent either !% air mail or !% sea mail$ )he normal 'ractice not is that mail transfers are dis'atched !% air and so mail transfers have !ecome air mail transfer$ Moreover, M)=s are advised in du'licate !% the issuing !ank !% se'arate mail, so that there is no risk of going astra% and since the% are dis'atched on the same date, there is no dela%$ 4s regards dela% in inland transfer of mone%, the 2eserve !ank of &ndia has issued a series of instructions to the !anks stating that the customers should get credit for remittances of mone% through the facilit% of !ank mail transfers 6ithin a maximum 'eriod of seven to ten da%s from the date of a''lication$ )his 6ould s'ecificall% !enefit !orro6er?clients of !anks 6ho send mail transfer for loan re'a%ment 'ur'oses and incur interest on such loans >,industan )imes, dated -H +ecem!er, -H@@A$ Te(e+ra-,*c Tran"fer" GTT"? 4 )$)$ is similar to mail transfer exce't that the transfer is effected !% telegram, tele'hone or telex as desired !% the remitter and the remittance charges are higher than those for !ank drafts and M)s$ &n fact, this is the most ex'ensive and also the most ra'id and convenient method of transfer of funds from one centre to another$ :ike a mail transfer, a )) is an arrangement !et6een t6o !ank offices or 6ith a corres'ondent, and is not a negotia!le instrument$ )here is little risk that telegra'hic message 6ill !e dela%ed or fail to reach its destination since most !anks o'erate a s%stem of se*uential or other check num!ers to determine 6hether a 'articular message is missing$ )he genuineness of the 'a%ment instructions is verified !% an ela!orate ke% s%stem 6hich immediatel% reveals an% error that ma% have !een made either in the amount to !e 'aid or in the name of the !eneficiar%$ Unless the test agrees exactl%, the remitting !ranch is asked for confirmation$ &n the case of foreign remittances, since a )) involves 'a%ment of foreign funds on the same da% as the recei't of domestic mone% at the local centre no ca'ital risk or loss of interest or stam' dut%, as used for a !ill of exchange, is involved$ For this reason, the )) rate is costlier as com'ared to an% other form of remittance$ )he rate of exchange for the !anker=s )) is considered the !asic rate !et6een t6o currencies and the rates of all other methods of remittance are arrived at !% ad#usting the )) rate on making allo6ances for loss of interest, cost of additional service rendered !% the !ank, etc$ Tra'e((er"5 C,e;)e" )ravel facilities from 'art of the !anks= services$ )ravellers= che*ue 'rovide a safe 6a% of carr%ing mone% 6hile traveling !oth in the home countr% or a!road $ )he !igger &ndian !anks su''l% travellers= che*ues in &ndian ru'ees and internationall% traded currencies like US dollar and 'ound sterlingJ the% are also availa!le in the Common Currenc% denomination of the Euro'ean communit%?the ECU >Euro'ean Currenc% UnitA$ )he% are for fixed amounts such 2s$ -C, 2s$ IC, 2s$ -CC, and the foreign currenc% travelers che*ues can !e en?cashed at the current rate of exchange$ )ravellers= che*ues in foreign currencies can !e 'urchased, su!#ect to exchange control regulation

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from a num!er of &ndian !anks, from leading international !anks such as the Bank of 4merica and the First "ational Cit% Bank or their agents and corres'ondents and from local agencies like the 4merican Ex'ress Com'an%$ )ravellers= che*ues can !e 'urchased for their face value at a small commission 6hich ma% !e !uilt in the exchange rate of the travellers che*ues in foreign currencies$ )ravellers= che*ues are signed !% the holder 6hen the% are issued, at the !ank he is re*uired to 'a% for them$ ;hen the% are to !e cashed, the holder countersigns them in the 'resence of the authorized official of the agenc% enchasing the che*ue, 6ho com'ares the signature to see that the% corres'ond, !efore making the 'a%ment, and this also facilitates identification$ 4irlines, shi''ing com'anies and rail6a%s, large hotels and stores ma% acce't travellers= che*ue in lieu of cash 'a%ments and !anks generall% are 're'ared to en?cash travellers= che*ues at a small discount$ )ravellers= che*ues normall% take t6o forms. either the% are in the form of a 'a% order dra6n !% the issuing !ank on itself or the% contain an order from the 'urchaser to the issuing !ank$ &n either case the% are made 'a%a!le to the order of a 'a%ee to !e named$ )he s'ace for 'a%ee=s name is generall% left !lank at the time of issue of che*ues and it is inserted 6hen the% are encashed$ 4lternativel%, the holder ma% 6rite his o6n name as the 'a%ee and he 6ill have to endorse the che*ue at the time of encashment$ )ravellers= che*ues 'rovide greater safet% than currenc%$ &f currenc% notes are lost or stolen, little can !e done a!out it$ Banks issuing travellers= che*ues, ho6ever, are usuall% 're'ared to re'lace them or to refund the face value of those missing$ 1afe De- "*t L c!er" Certain !ank !ranches in the metro'olitan cities and im'ortant to6ns 'rovide safe de'osit locker facilit% 6here!% a customer can rent a safe de'osit locker in a s'eciall% !uilt locker ca!ined 'laced in the !ank=s safe de'osit vaultKstrong room$ :ockers are convenient re'ositories for #e6eller%, documents and securitiesJ the articles 6ill !e ke't !% the customers in the lockers themselves and the !ank has no idea of their contents$ )he main outer door of the safe de'osit vaultKstrong room has a dou!le lock and the t6o ke%s are se'aratel% held !% he !ank officers for dual control$ )he customer is allo6ed access to the vault during the 'rescri!ed !usiness hours$ Ever% !ank has its o6n rules governing the lockers and the renters should a!ide !% all such rules and regulations$ )here are t6o locks to each locker, one ke% !eing ke't !% the customer and the other !% he !anker for dual control$ )he ke% used !% the vault attendant >custodianA is al6a%s referred to !% some terms such as 7guard ke%8 or 7're'arator% ke%8$ )he 6ords 7master ke%8, 7!ank ke%8 or 7'ass ke%8 ma% im'l% that such ke% 6ill o'en a% !ox in the vault 6henever such a term is used !% a customer$ &t should !e ex'lained that it is called the 7guard ke% since it cannot unlock an% !ox !ut sim'l% sets the lock so that the customer=s ke% 6ill unlock the !ox8$ +u'licate ke%s are held !% the !ank !ut 6ould onl% !e used incase of emergenc% in the 'resence of the customer at his re*uest$ C ..erc*a( Letter" f Cred*t &n international trade there is the 'eculiar 'ro!lem of distance and unfamiliarit% !et6een 'arties concerned viz$, ex'orter and im'orter$ Before sending the goods, the ex'orter must !e satisfied 6ith the credit 6orthiness of the im'orter$ &f the im'orter fails to 'a% the 'rice, the ex'orter 6ill find it difficult or too costl% to recover the amount$ )he im'orter is generall% re*uest to o'en a letter of credit 6ith a certain !ank having !ranches in !oth the im'orting and ex'orting countries$ )hus the im'orter has to rove his credit 6orthiness to the foreign ex'orter !% o!taining a letter of credit and sending the same to the foreign dealer$ Def*n*t* n f a C ..erc*a( Letter f Cred*t 4 Commercial :etter of Credit ma% !e defined as 7an order addressed !% a commercial house >usuall% a !ankerA to the agent or corres'ondent or !ranch in another 'lace instructing the latter to honour !ills or drafts or che*ues dra6n u'on him !% a !eneficiar% >usuall% the ex'orterA named and identified >generall% through s'ecimen signatureA in the letter of credit u'to a stated amount and 6ithin a stated 'eriod of time8$ )he letter of credit also contains the terms and conditions, if an%, under 6hen the 'a%ment is made to the !eneficiar%$ &t 6as !een held in Orr and Barter Ds$ Union Bank of Scottland >-@I5A that a letter of credit is not negotia!le instrument$ ,ence the 'a%ing !anker must exercise great care a!out the identit% of the !eneficiar%$ :etter of credit are classified on different !asis$ )he Darious t%'es of letters of credit are discussed !elo6.

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1. D c).entar2 and C(ean Letter" f Cred*t 4 clean or o'en letter is a letter of credit 6hich neither sti'ulates an% conditions for 'a%ment to the !eneficiar% not calls for an% securit% from the 'erson at 6hose re*uest it is o'ened$ &t is o'ened onl% in the case of 'arties of sound financial 'osition$ &f a letter of credit la%s do6n the conditions that the documents of title to goods should !e attached to the !ill of exchange dra6n under it, it is a documentar% or secured letter of credit$ )he interests of the !anker 6ho o'ens the letter of credit are safe?guarded this 6a%, as the documents of title to goods 'rovide securit% to him, if the im'orter makes default in 'a%ment$ 2. &*xed and Re' ('*n+ Letter" f Cred*t &f a letter of credit s'ecified the amount u'to 6hich the !eneficiar% can dra6 !ills of exchange 6ithin the s'ecified 'eriod of time, it is a fixed letter of credit$ 4 revolving letter of credit is one 6here the amount of credit reverts !ack to the original amount after such amount has !een 'aid on 'resentation of the !ill$ &n a revolving letter of credit the amount u'to 6hich !ills dra6n ma% remain outstanding at a time is mentioned and not the amount u'to 6hich the !ills ma% !e dra6n$ So the !eneficiar% or ex'orter can dra6 fresh !ills as soon as the old !ills are 'aid for$ )his t%'e of letter of credit is more advantageous to the ex'orter !ecause he is entitled to dra6 !ills of a higher amount 6ithin the s'ecified 'eriod than in the case of a fixed letter of credit$ 6. Re' ('*n+ and Irre' ca9(e Letter" f Cred*t 4 revoca!le letter of credit is one 6hich can !e cancelled or 6ithdra6n !% a !anker 6ithout notice and 6ithout the consent of the !eneficiar%$ But the !anker has to give a notice of cancellation to the !eneficiar%, if there is a 'rovision in the letter of credit that the !ill dra6n 'rior to the cancellation should !e honoured$ &n the case of an irrevoca!le letter of credit, it cannot !e cancelled 6ithout the consent of the !eneficiar%$ 7. C nf*r.ed and %nc nf*r.ed Letter" f Cred*t ;hen the 'a%ing !ank in the ex'orter=s countr% adds its confirmation to the letter of credit, it !ecomes a confirmed letter of credit$ )he confirming !ank !ecomes a 'art% to the undertaking that the !ills dra6n !% the !eneficiar% 6ill !e honoured$ 4 confirmed letter of credit is al6a%s an irrevoca!le letter of credit, as it cannot !e revoked 6ithout the consent of the confirming !ank and the !eneficiar%$ &f the 'a%ing !ank does not add its confirmation, the letter of credit 6ill !e an unconfirmed one$ )he 'a%ing !ank 6ill !e under no o!ligation to hounour the !ills dra6n !% the !eneficiar% in this case$ 8. Tran"fera9(e and N n0tran"fera9(e Letter" f Cred*t &f the !eneficiar% is given the right to transfer his 'o6er of dra6ing !ills to some one else, under a letter of credit, such a letter of credit is kno6s as a transfera!le letter of credit$ Even the total amount of credit can !e divided into more than one 'art and each 'art ma% !e transferred to a different 'erson$ )ransfera!le letters of credit are normall% issued 6hen the !eneficiar% is onl% an intermediar% and not the ex'orter$ 4 letter of credit under 6hich the !eneficiar% has no right of transfer of his 'o6er to dra6 !ill is non? transfera!le letter of credit$ &f a !eneficiar% re*uests the !anker to o'en a ne6 letter of credit in favour of some other 'ersons on the securit% of the non?transfera!le letter of credit and the same is done, such a letter of credit is kno6n as a Back to Back letter of credit$ :. KW*t,L and KW*t, )t Rec )r"eL Letter f Cred*t &n the case of a letter of credit <6ith recourse=, the !anker can recover the amount of the !ill form the dra6er >usuall% the ex'orterA if the dra6ee of the !ill >usuall% the im'orterA fails to honour, i$e$, the !anker has recourse to the

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dra6er$ )he dra6er or ex'orter ma% 'refer a letter of credit <6ithout recourse= under 6hich the !anker has no recourse to the dra6er$ Ad'anta+e" f a Letter f Cred*t )he advantages of a letter of credit ma% !e anal%zed under t6o heads$ -A 4dvantage to the !eneficiar% or ex'orter, and /A 4dvantages to the &m'orter Ad'anta+e" t t,e Benef*c*ar2 -A 4ssured 'a%ment and a!sence of 2isk. )he !eneficiar% is assured of 'a%ment as the !anker is !ound to honour the !ills dra6n !% him under the letter of credit$ )he financial standing and re'utation of the o'ening !anker >and also confirming !anker in the case of a confirmed letter of creditA 'rovide a!solute securit% against an% risk of dishonour. /A 2ead% "egotia!ilit%. )he ex'orter, if he 6ants can secure the 'a%ment immediatel% !% discounting or negotiating the !ills dra6n !% him under the letter of credit 6ith the confirming !anker or some other !anker$ &n the a!sence of the letter of credit, it ma% not !e 'ossi!le for the ex'orter to get the !ills discounted on the strength of his o6n financial standing counter?indemnit% so that in the event of failure to com'lete the contract and a re*uirement for 'a%ment under the terms of !onds, it 6ill !e a!le to make a claim against the contractor$ )his counter?indemnit% ma% !e !acked !% some from of securit% given !% the customer$ &*nanc*a( G)arantee" &t sometimes ha''ens that customers need the guarantee of a !ank !efore !eing allo6ed to undertake certain actions$ For exam'le, it ma% !e necessar% for an ex'orter to raise funds in foreign currenc% for financing his o'erations in connections 6ith an ex'ort 'ro#ect$ &n such a case, the financing institution a!road ma% need a !ank guarantee to !e furnished !% the ex'orter in accordance 6ith international 'ractice$ )o void the risk of 'ossi!le future loss, a'art from o!taining ex'ort 'erformance guarantee of ECFC if availa!le, the customer 6ill !e asked to give a counter?indemnit% if the !ank is 6illing to com'l% 6ith his re*uest$ &n his 6a% if the !ank has to make a 'a%ment to the foreign institution a!road, it 6ill itself have a claim against the customer$ 1tand*n+ In"tr)ct* n" Banks 'erform another su!sidiar% service for their customers and acce't standing instructions form them either to make 'eriodic 'a%ments, collect monies, or effect transfer of mone% on sti'ulated dates, on their !ehalf either for a limited 'eriod or until further notice$ )he !ank 6ill automaticall% do this !% de!iting 'a%ments or crediting recei'ts to its customer=s account$ Some of the common standing instructions received !% !anks from their customers are given !elo6. -$ )ransfer of funds from one account a another /$ a%ment of insurance 'remiums to :&C 1$ Mem!ershi' su!scri'tion to clu!s, li!raries, 'rofessional associations and institutions$ 5$ eriodic remittances on customer=s account to another account at the same !ranch, or to another !ranch or another !ank or !% mone% orders$ I$ Collection of dividends on !ehalf of customers$ F$ Collection of interest on ($ $ "otes held in safe custod% or other6ise G$ Collection of 'ensions on !ehalf of account holders$ Such instructions 6hich are o!tained from the account holder in 6riting must !e clearl% 6orded and unam!iguous$ )he !anker ma% not acce't standing instructions 6hich are difficult to com'l% 6ith, !ut once acce'ted, it is the dut% of the !ank to carr% out the instructions carefull% and 'rom'tl%$ &f a small !ranch is una!le to carr% out certain instructions !% itself, it ma% sometimes acce't them, and 'ut through one of !igger !ranches or though the ,ead Office$Once the standing order mandate has !een acce'ted, no further action is re*uired !% the customer !e%ond ensuring that necessar% funds are in his account on the s'ecified date$ &f the standing instruction is of o'en? ended t%'e, it is the res'onsi!ilit% of the customer to ensure its cancellation at the a''ro'riate timeJ other6ise the !ank 6ill continue to make the 'a%ment to the 'a%ee$

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Cred*t Card" Credit Cards are issued !% !anks as a method of 'a%ment 6ithout the use of a che*ue$ )he% 'rovide a means of o!taining goods and services immediatel% !ut 'a%ing for them later$ Each card holder is given a credit limit on his credit card account$ a%ment for goods and services can onl% !e made !% this method at 'remises having the s'ecial machines for 're'aring sale vouchers to record the transaction, and retail outlets usuall% dis'la% the sings of the credit cards the% are 're'ared to acce't$ &t 6as in the fifties that man% !ig !anks in 4merica ado'ted the credit card 'lan and it 6as in -HFF that Barcla%s Bank 6as the first British !ank to introduce credit cards kno6n as 7Barcla%card8$ &n the U$0$, the credit cards are, ho6ever, not restricted to !anks, man% retail chains and even small inde'endent stores o'erate their credit cared schemes and the 'henomenal gro6th in their use indicates that 7 lastic mone%8 is graduall% moving closer to a 7cashless societ%$8 )o 'a% for goods, the cared is handed to the retailer, 6ho 'laces it in the s'ecial machine together 6ith a sale voucher, 6hen the machine is o'erated, the em!ossed characters on the card, 6hich detail the name and num!er of the account, are recorded on the sales voucher together 6ith the retailer=s name and address$ )he details and amount of sales entered on the voucher and signed !% the 'urchaser, after com'aring this signature 6ith that on the card, and !eing satisfied 6ith its authenticit%, the retailer gives a co'% of the voucher to the 'urchaser and hands !ack the card$ )he retailer sends his 'art of the sales voucher to the using !ank of the credit cared organization through a local !ranch !ank, and receives 'a%ment accordingl%$ Each month a cardholder is sent a statement de'icting his 'urchases and he has the o'tion of either 'a%ing the full !alance of the account or 'a%ing a certain minimum amount and carr%ing for6ard the remaining !alance to the next month$ Cardholders are charged interest on outstanding !alance and retailers are re*uired to allo6 the !ank a rate of discount on all card sales?this varies from one trade to another, and averages !et6een / and 1 'ercent$ )he card can also !e used to dra6 cash at !ank !ranches and corres'ondent !anks dis'la%ing the relevant credit card sign$ &n &ndia, credit cards are kno6n as 72etail Credit Cards= as a retail trader is fixed a limit in his credit card account on the !asis of his credit 6orthiness$ )he cards are to !e used for he 'urchases made !% the retailer from the 6holesaler or distri!utors to 6hom 'a%ment is made directl% !% the !ank on the !asis of invoices$ On the same lines one !ank in &ndia has introduced <4gricard= scheme 6hich ena!les the small farmer to 'urchase his re*uirement of seeds, manure, 'esticides, etc$, from a''roved agencies$ )he invoices are sent to the !ank 6ith the 4gricard for 'a%ment to !e made directl% to the concerned dealer$ &nterest is charged to the 4gricard holder from the date of 'a%ment$ )he credit card s%stem is advantageous to the traders 6ho su''l% goods and services in that the% are assured of 'a%ment 6ithout having to send reminders for the outstanding de!t$ Further, !ad de!ts are minimized and more li*uidit% of current assets is assumed$ Credit cards under6rite to a fixed amount and for a fixed 'eriod the credit of a card holder$ 3erc,ant Ban!*n+ 1er'*ce" Merchant !anking activit% 6hich 6as in its em!r%onic stage in &ndia fe6 %ears !ack and 6as, !% a large, confined to fe6 larger !anks has no6 !ecome 'art and 'arcel of !usiness of almost ever% !ank$ Merchant !anking +e'artments of !anks offer a range of services to the !usiness communit% and issuing house services are amongst the most s'ecial offered !% !anks$ )here services include advising the clients as to the methods and terms of raising ca'ital organizing the actual issue and arranging for the under6riting$ Methods of raising ca'ital include. -A the issue !% 'ros'ectus, 6here the issue is offered direct to the 'u!lic on !ehalf of the !orro6ing com'an%, iiA the offer for sale, 6here the issuing house >merchant Banking +e'artment of a BankA !u%s the securities from the com'an% and then offers them to the 'u!licJ and iiiA 'lacing the issue 6ith a limited num!er of investors$ )he !ank advises on the most effective method of !ringing the shares to the market and to gain Stock Exchange acce'ta!ilit% for them$ 4'art from assisting ne6 and existing com'anies in e*uit% flotation, merchant !anking activities include s%ndication of loans, a techni*ues used 6hen a grou' of !anker, often from different countries, come together to 'rovide large loans on a #oint !asis$ )he !ank that is organizing the loan called the lead !ank, contracts other !anks to 'artici'ate$ Management of ca'ital issues is one of the main activities of a merchant !anker o'erating in &ndia, as stated !efore$ Der% fe6 of them have tried to develo' other merchant !anking services such as 'ortfolio management, 'ro#ect counseling, management consultanc%, ca'ital restructuring, cor'orate counseling and management of sick units$ Banks 6ill have to develo' the re*uired skills and ex'ertise in these t%'es of activities to render efficient and

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effective service to their customers$ )he !anks ma% also assist the 'romoters to o!tain technical data relating to feasi!ilit%, market demand and other relevant as'ects and 6ould also 6ork out the arrangements, for o!taining finance from various institutions such a &+B&, &FC& and SFCs$ Pr '*d*n+ In'e"t.ent Ad'*ce Banks have 6ide kno6ledge of the financial market conditions !ecause the% invest their o6n sur'lus funds in various securities and shares to com'l% 6ith li*uidit% re*uirements and to earn a reasona!le return on their investment$ But !ankers do not normall% take u'on themselves the res'onsi!ilit% of giving s'ecific advice to their customers on investment$ ;hat the% usuall% do is to either suggest he names of a fe6 relia!le stock and share !rokers 6ithout res'onsi!ilit%, from 6hom the customer ma% get the re*uisite advice or the% themselves o!tain the advice from one or t6o relia!le !rokers and 'ass it on to the customer 6ithout res'onsi!ilit%$ &n this context, there is an im'ortant case of ;oods D$ Martin Bank :td$ >-HIHA in 6hich !oth the defendants? the !ank and the manager?6ere held lia!le for the loss of X-5,@CC caused to the 'laintiff !ecause the financial advice had !een given to the 'laintiff 6ithout the ordinar% care and skill that a !ank manager should 'rocess$ But this decision should not terrif% the !anker if the% act 'rudentl% and resist the tem'tation of introduction to the customer 6ho is seeking ca'ital to another customer 6ho has funds to s'are, as ha''ened in the ;oods case$ 4t least ma#or commercial !anks should make investment information availa!le and 'u!lish a regular revie6, containing u'?to?date statistical information and comment on current economic conditions as 6ell as articles of interest to readers$ 2egular surve%s of the econom% as 6ell as re'ort on im'ortant overseas economies should also !e 'u!lished for the enlightenment of !ank customers and the sta Tax. )his service is of recent origin and 'rovides advice on income tax and other 'ersonal taxes such as ca'ital gains tax and ca'ital transfer tax$ )he !ank=s income tax de'artment offers com'lete tax services 6hich consist of 're'aring the customer=s annual statement of income and ex'enditure, claiming allo6ances as 'ermitted and generall% seeing that the customer 'a%s no more tax than necessar%, and claiming an% re!ate to 6hich he ma% !e entitled$ )he +e'artment can also 'rovide a service to 'ersons 6ho are non?resident of &ndia, !ut 6ho have income in this countr%$ )he tax de'artments are also to advise customers ho6 to arrange their affairs to the !est advantage of themselves and their families$ )his involves a full consideration of the customer=s 6ill, tax 'osition, life insurance and investment of ca'ital so that a suita!le scheme ma% !e 6orked out to reduce taxation and meet his o!ligation and 6ishes$ 4s a customer=s investment choices and tax 'osition are closel% inter6oven, a !ank, 6hen 'roviding tax service, also often undertakes investment management for that customer$ )he !anks accumulate massive ex'ertise in managing their o6n investmentJ selling this ex'ertise to customers makes commercial sense$ 3 9*(e Ban!*n+ &ac*(*t*e" and Exten"* n C )nter 1er'*ce )he mo!ile !anking or <Bank?on?6heel= is a recent innovation in !anking service to reach the rural areas as 'art of 'erforming the !ankers social o!ligation$ Mo!ile !anks can !e of much hel' in securing de'osits from 6idel% scattered areas 6hich 6ould other6ise not !e reached !% normal !anking facilities$ Mo!ile !anking re*uires a mo!ile van 6hich can safel% travel on roads and is fitted 6ith a counter and cash safe and is !ullet 'roof, having a radio tele'hone s%sem$K )he to6ns are generall% fed dail% and the villages !i?6eekl% or tri?6eekl% de'ending on the needs$ )he !ank is staffed 6ith a manager, an accountant, one or t6o clerks and a driver 6ho also acts as a guard$ +es'ite the 'ro!lems of unsatisfactor% communications and securit% in rural areas, this facilit% is 6orth develo'ing !oth in the context of social o!#ectives and 'ossi!ilit% of locating future centers for normal !anking facilities$ Extension counter service is also a recentl% innovated customer service$ )he extension counter is not a full? fledged !ranch of a !ank, !ut is onl% an extension of he de'osit counter of the !ase !ranch, o'ened for the convenience of those 6ho find it difficult% to avail !anking facilities during the usual !anking hours$ )he facilities 'rovided !% extension counter include. iA de'osit transactions, iiA issue and encashment of drafts and mail transfers, iiiA encashment of travellers che*ues, and ivA collection of !ills$ :ike extension counter, morning and evening counter are also o'ened for the convenience of the 'u!lic$

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Te((er 12"te. One of the im'ortant measures for reducing the 6aiting time of customers at the counter is the ado'tion of the teller s%stem$ &t refers to the s%stem under 6hich the teller is authorized to receive cash and make 'a%ments u' to limited amounts 6ithout reference to the ledger !alance or the s'ecimen signature as he is ex'ected to !e thoroughl% conversant 6ith the t%'es of the accounts allotted to him and s'ecimen signatures of the relative de'ositors$ Onl% in case of dou!t the gets the !alance or the signature verified !% the ledger kee'er and the su'ervisor% official 6ho are seated near him$ )he teller s%stem is ado'ted at certain selected !ranches and not all the !ranches of a !ank$ 4 variation of the teller s%stem is the rom't a%ment S%stem 6hich involves maintenance of the record of the customers= account and their s'ecimen signature in du'licate$ On set, in the form of cards, is 6ith the teller 6ho is authorized to 'a% che*ue u' to a s'ecified amount out of the cash 'rovided 6ith him after verif%ing the signature and 'ositing the che*ue in the ledger card$ &n either case, the o!#ect is to ex'edite 'a%ment of che*ues for small amounts$ ;here the amount of the che*ue is in excess of the amount delegated to the teller, the che*ue has to !e dealt 6ith !% the ledger kee'er in the normal 6a% and aid after all the usual formalities have !een com'lied 6ith through certain stages, i$e$, clearance !% ledger kee'er, 'assing officer and 'a%ing cashier$ L c!0B x and N*+,t 1afe 1er'*ce Some !anks 'rovide the <:ock?!ox= service at selected centers, 6hich ena!les the customers, 'articularl% the traders, to lodge the che*ues and other remittances in a !ox ke't at the !ranch of a !ank after office hours to !e collected !% the !ank the next da% and necessar% entries 'assed$ &t o!viates the need for the customers to go to the !ank during the customer=s o6n office hours and thus saves time for them$ Some !anks also 'rovide night safe facilities at selected !ranches 6here!% the customers, can lodge their cash overnight$ )his service is 'articularl%, useful for a trader 6ho receives large sums of cash after the !anks are closed and 6ho for securit% reasons does not 6ish to kee' in on his o6n 'remises$ )he mone% is sim'l% 'laces in a 6allet and delivered through a chute accessi!le from the outside of the !ranch$ 4 customer can either arrange for the !ank to o'en the 6allet and credit his account, or he calls at the !ank, o'ens the 6allet himself and 'a%s into his account in the normal 6a%$ T,e C(ear*n+ 12"te. )he clearing s%stem or sim'l% <clearing= is an arrangement through 6hich a !ank exchanges che*ues dra6n on other !anks for those dra6n on it, thus eliminating the time?consuming and ex'ensive method of 'resenting che*ues at the various !anks at 6hich the% are dra6n$ )his is done at the <Clearing ,ouse= 6hich is a Doluntar% association formed !% a grou' of !anks in a 'articular localit%$ )he clearing 'rinci'le is sim'le !ut the massive num!er of che*ues and drafts, etc$, involved makes the 'rocess intricate$ G*ft C,e;)e" One of the ne6 devices ado'ted !% some !anks to attract customers is the issue of gift che*ues, artisticall% designed in attractive folders and covers$ )he 'urchaser of a gift che*ue need not !e an account holder 6ith that !ank or an% other !ank to avail of this service$ )he che*ue is collecta!le at 'ar at al offices of the issuing !ank in &ndia$

150

BANKING THEORYE LAW AND PRACTICE )ime . 1 hours 3ODEL F%E1TION PAPER Max$ Marks -CC PART A >I x @ M 5CA >4ns6er an% F&DE *uestionsA -$ Ex'lain the constituents of !alance sheet of a commercial !ank$ /$ Ex'lain the functions of central !ank$ 1$ Ex'lain the defects of &ndian Mone% Market$ ;hat are the ste's taken !% 2B& to im'rove mone% market conditionL 5$ +iscuss the s'ecial relationshi' !et6een !anker and customer$ I$ ;hat is crossingL Ex'lain the different t%'es of crossing and their significance$ F$ ;hat are the 'recautions to !e taken !% a !anker 6hile o'ening an account in the name of a 9oint Stock Com'an%$ G$ ;hat is 'ass!ookL Ex'lain its relevance to a customer$ @$ ;hat is che*ueL ;hat are its characteristicsL PART B >5 x -I M FCA 4ns6er an% FOU2 *uestions H$ -C$ --$ -/$ -1$ -5$ -I$ Ex'lain the functions of commercial !ank$ 7:oan Create +e'osits8 Ex'lain the statement and !ring out clearl% the 'rocess of credit creating !% !anks$ +efine the distinguish 7Branch Banking8 and 7Unit Banking8$ Ex'lain the 'rogress of !anks after nationalization$ Ex'lain the *uantitative and *ualitative methods of credit control$ +iscuss the general relationshi' !et6een !anker and customer$ ;ho is a collecting !ankerL Ex'lain the statutor% 'rotection given to him$ ZZZZZZZZZZZZ

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