BANKING LAW
PART-I
BANKING REGULATION ACT, 1949
Q. 1. Define ‘Banking Company’ and ‘Business of Banking Companies’. Explain the prohibited function of the banks as given under the Banking Regulation Act, 1949.
Or
Discuss the prohibited function of banks as given under the Banking Regulation Act, 1949.
Ans. Meaning of company as defined under Section 5 of the Banking Regulation Act and the various business of the bank alongwith prohibited functions are given herender:
Section 5 of the Banking Regulation Act deals with interpretation of various terms such as banking, banking companies, banking policies are given hereunder:-
“Banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.
“Banking, company” means any company which transacts the business of banking in India.
“Banking policy” has been defined to mean as any policy which is specified from time to time by the Reserve Bank in the interest of the banking system or in the interest of monetary stability or sound economic growth, having due regard to the interests of the depositors, the volume of deposits and other resources of the bank and the need for equitable allocation and the efficient use of these deposits and resources.
The oft repeated terms like bank, banking, banker and banking company has been defined under Section 7 that “no company other than a banking company shall use as part of its name or in connection with its business any of the words “bank”, “banker” or “banking” and no company shall carry on the business of banking in India unless it uses as part of its name at least one of such words”
Clause (2) lays down that. No firm, individual or group of individuals shall, for the purpose of carrying on any business, use as part of its or his name any of the words “bank”, “banking” or “banking company”.
Clause (3) specifies that Nothing in this section shall apply to-
a subsidiary of a banking company formed for one or more of the purposes mentioned in sub-section (1) of Section 19. whose name indicates that it is a subsidiary of that banking company:
any association of banks formed for the protection of their mutual interests and registered under Section 25 of the Companies Act, 1956 (1 of 1956).
Main Functions of a bank-
(i) Money deposit
(ii) Money lending
(iii) Money transfer
(iv) Issuing of notes
Other functions of a bank:-
(i) Agency service
(ii) General utility service
(iii) Issuing of bank guarantee
(iv) Issuing of letter of credit
(v) Functions in regard to foreign exchange
Main functions of a bank
(i) Money deposit. The banks are trusted depositories of money. To encourage the deposits by the public, they give interest on the deposits Generally, there are following kinds of deposits:-
Savings bank deposit. This deposit is meant for the small deposits and interest is paid to the depositors. The depositors hold the Savings Bank Account. The interest provided is at a low rate to the depositors. There is a limit of the withdrawals from this account.
Fixed deposit.- In fixed deposit, the money is deposited for a fixed time. This is also called as term deposit. The money is deposited for a term ie. for some months or years. In this deposit the rate of interest given by the bank is higher than the Saving Bank deposit. On the expiry of term for which the money is fixed, the deposited amount with the interest is paid to the depositor. The term, on the completion of which money is paid, is called as maturity. If the money is withdrawn before the maturity, a certain percentage of amount is deducted from the interest payable to the depositor
Current deposit.- The deposit in the current account is generally made by the businessmen Sometimes, the facility of such deposit is given to the persons other than the businessmen also. There is no limit of withdrawal from such accounts. Generally, no interest is paid to the depositors holding such account.
Recurring deposit. – Recurring deposit is to encourage the deposits on monthly basis. A certain amount is deposited by the account holder every month. The period of deposit may extend to the months or years as provided in the scheme of the bank and the interest payable to the depositor is generally at fixed deposit rates of the bank. For earlier withdrawal of money. a certain percentage of amount is deducted from the interest.
(ii) Money lending. With the decline of indigenous money-lenders. the money lending by the banks have gained importance. These days banks advance loans for agricultural purposes, small scale industries and big industries both and for other trading and commercial activities. The banks also grant housing loans. With the increase of income and repayment capacity of the individuals, the banks, besides some other financial institutions, grant consumer loans also. By advancing loans in industrial, agricultural, housing and consumer sectors, banks earn profits by way of interest.
(iii) Money Transfer. The banks transfer the money of customers from one place to another by drawing the Bank Drafts on their branches or agents. They also purchase bills of exchange of merchants and others so that they receive the payments from their debtors at other places. These days, the electronic transfer of money has become very popular which results in quick transfer of money. This facility has proved beneficial not only within the country but at international level also.
Real Time Gross Settlement (RTGS). RTGS was introduced in India in March 2004. It is maintained and operated by RBI providing efficient and faster transfer of funds. In this system, a bank gives electronic instruction to another bank for transfer of money from its account to the account of another bank. The money reaches the beneficiary’s bank instantaneously and the bank is responsible to credit beneficiary’s account within two hours. This is the reason that it is called Real Time Gross Settlement.
National Electronic Funds Transfer System (NEFT)-NEFT is a variant of EFT. It was introduced in India in November, 2005. It is a nation wide retail electronic transfer of funds mechanism between the branches of the bank at the network. It provides integration with the Structured Financial Messaging Solution (SFMS) of Indian Financial Network (IHF INET). NEFT uses SFMS for EFI message creation and transmission from the branch to bank’s gateway and to the NEFT centre which entrances security in the transfer of funds. [https://www.dnb.co.in/BFSI Sector In India/Bank C6.asp)
(iv) Issuing of notes. Almost in all the countries, the notes are issued by a Central Bank of the Country. In India, the note of one rupee denomination and coins are issued by the Government of India. The notes of ation of rupees 2, 5, 10, 50, 100, 500 and 1000 are issued by the denomination Reserve Bank of India. The payment by the cheque has also assumed importance. In European Countries, the cheque currency is dominating the mode of payment.
Other Functions of a bank
(i) Agency service. – The banks also provide agency services. They collect and pay cheques, Bills. Promissory notes. Hundis. Coupons and postal orders. They pay subscriptions, premium, rents, dividends, interest warrants, salaries and pensions etc. The Banks buy and sell stocks and shares, operate Demat accounts.
(ii) General utility services. – The Banks also provide general utility services where they do not act as the agents of the customers. They receive deeds, securities and other valuables for safe custody, issue letters of credit and letters of indication, circular notes, etc.
(iii) Issuing of Bank Guarantee.- Ordinarily, such bank guarantees provide for the amount of the maximum liability thereunder and also a period during which the guarantee would remain in force. It is necessary that the terms of the guarantee should be clear so as to affix a liability on the bank on a demand being made by the person to whom the guarantee is given irrespective of the fact that there may be dispute between him and the bank’s customer, on whose behalf the guarantee is given.
It is necessary to point out that when a liability arises under the guarantee within its period, a suit for the recovery of the amount of the liability can be filed against the bank within the period of limitation as provided in the Limitation Act. If the guarantee is given to the Central Government or a State Government or the President of India or the Governor of a State, the period of limitation for filing a suit for recovery of the amount under the guarantee is 30 years. In all other cases, the period is three years. Some banks provide, in a guarantee given to the Government, to the effect that the claim for any liability arising within the period of the guarantee should be made within a specified period, say six months and that if such a claim is not made, all the rights of the Government under the guarantee shall be extinguished. This is thought to be not a violation of the law of limitation by agreement, but it is a provision for the forfeiture and extinction of a right under certain conditions.
(iv) Issuing of Letter of Credit.- A letter of credit, gives authority to whomsoever it is addressed, to draw bills, according to its terms on the bank issuing it and includes a promise by the issuing banker to accept all bills so drawn up to the limit of the credit. When the promise to accept is made conditional on the attachment of documents of title to goods, such as the invoice, the bill of lading, the policy of insurance etc., the letter is known as a documentary letter of credit. It is clean and open credit where the promise is unconditional or without reference to the attachment of documents of title to goods clean and documentary letters of credit are issued in respect of mercantile transactions only. Before issuing a documentary letter of credit, bankers usually require margins varying from 10 to 30 per cent of the credit to be placed on deposit by the customer besides creating a charge on the merchandise in respect of which the letter of credit is granted.
(v) Functions in regard to Foreign Exchange.- Reserve Bank exercises powers and functions in regard to foreign exchange regulation and management which are provided in the Foreign Exchange Management Act, 1999.
Business of Banking Companies
In addition to the business of banking, a banking company may engage in any one or more of the following form of business, namely:
1. Borrowing of money.- The borrowing, raising, or taking up of money the lending or advancing of money either upon or without security. the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hoondees, promissory notes, coupons, drafts. bills of landing, railway receipts, warrants, debentures, certificates, Scripts and other instruments and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller’s cheques and circular notes; the buying, selling and dealing in bullion and specie, the buying and selling of foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations. securities and investments of all kinds; the purchasing and selling of bonds. scripts or other forms of securities on behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds of bounds. scripts or valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities.
2. Acting as agents. – Acting as agents for any Government or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a Managing Agent or Secretary and Treasurer of a company.
3. Contracting for public and private loan. – Contracting for public and private loans and negotiating and issuing the same.
4. Carrying guarantee. Carrying on and transacting every kind of guarantee and indemnity business.
5. Managing property. Managing, selling and realising any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims.
6. Acquiring and holding property. – Acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security
7. Construction and alteration of building The acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company
8. Acquiring business. Acquiring and undertaking the whole or any part of the business of any person or company, when such business is of a nature enumerated or described in this sub-section
9. Doing all incidental work-Doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company [Vide Section 6 of the Banking Regulation Act]
Prohibited functions of the banks. – Section 8 of the Banking Regulation Act deal with prohibition of trading defines that “notwithstanding anything contained in Section 6 or in any contract, no banking company shall directly bartering of or indirectly deal in the buying or selling or goods, except in connection with the realisation of security given to or held by it, or engage in any trade, or buy, sell or barter goods for others otherwise than in connection with bills of exchange received for collection or negotiation or with such of its business as is referred to in Clause (i) of sub-section (1) of Section 6.
Another important provision dealt with in this part is Section 21 which deals with power of Reserve Bank to control advances by banking companies. Sub-section (1) lays down that where the Reserve Bank is satisfied that it is necessary or expedient in the public interest or in the interests of depositors or banking policy so to do, it may determine the policy in relation to advances to be followed by banking companies generally or by any banking company in particular, and when the policy has been so determined, all banking companies or the banking company concerned, as the case may be, shall be bound to follow the policy as so determined.
Sub-section (2) lays down that without prejudice to the generality of the power vested in the Reserve Bank under sub-section (1), the Reserve Bank may give directions to banking companies, either generally or to any banking company or group of banking companies in particular, has to the purposes for which advances may or may not be made, the margins to be maintained in respect of secured advances the maximum amount of advances or other financial accommodation which, having regard to the paid- up capital, reserves and deposits of a banking company and other relevant considerations, may be made by that banking company to any one company. firm, association of persons or individual; the maximum amount up to which, having regard to the considerations referred to in clause (c), guarantees may be given by a banking company on behalf of any one company, firm, association of persons or individual, and the rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given. Sub-section (3) lays down that every banking company shall be bound to comply with any directions given to it under this section.
Q. 2. Describe licensing of Banking Companies and its cancellation.
Or
Describe the governing principle of licensing of Banking Companies. State the condition when a license may be cancelled.
Ans. Licensing of Banking Companies alongwith various conditions of licensing and its cancellation is being dealt with as under-
For licensing of banking companies information on the following points are necessary-
(1) Necessity for licensing
(2) Application and procedure for getting license
(3) Conditions for licensing.
(4) Cancellation of license.
Historical perspective.- Demand for licensing of Boards arose along with demand for business by foreign banking. This was also recommended by the Indian Central Banking Enquiry Committee. The object was to prohibit the entry of banks started in countries which discriminated against Indian Banks.
Section 22 however introduces a comprehensive system of licensing of banks by the Reserve Bank the grant of a licence in case of banks incorporated in India is dependent upon the maintenance of a satisfactory financial condition coupled with the additional qualification in case of foreign banks, vide sub-section (3-A) which has been inserted by the Banking Laws (Amendment) Act, 1983 (1 of 1984) on the basis of existing clause (c) of sub-section (3), that the countries of their origin do not discriminate in any way against banks registered in India. It also provides for the issue of conditional licence.
(1) Necessity for licensing- Need for licensing of foreign banks in India was felt because Indian Banks were discriminated in those countries. Demand for licensing of foreign banks working in India was also raised by the Indian Central Banking Enquiry Committee. Resultantly provision was made under Section 22 for licensing of banking companies.
(2) Application and procedure for getting licence.- (a) Carrying on banking business. No company shall carry on banking business in India unless it holds a licence issued in that behalf by the Reserve Bank and any such licence may be issued subject to such conditions as the Reserve Bank may think fit to impose.
(b) Application to Reserve Bank- Every banking company in existence on the commencement of this Act, before the expiry of six months from such commencement, and every other company before commencing banking business in India, shall apply in writing to the Reserve Bank for a licence under this section.
(c) Prohibition of carrying on business-Proviso to this section lays down that in the case of a banking company in existence on the commencement of this Act, nothing in sub-section (1) shall be deemed to prohibit the company from carrying on banking business until it is granted a licence in pursuance of this section or is by notice in writing informed by the Reserve Bank that a licence cannot be granted to it. It further lays down that the Reserve Bank shall not give a notice as aforesaid to a banking company in existence on the commencement of this Act before the expiry of three years referred to in sub-section (1) of Section 11 or of such further period as the Reserve Bank may under that sub-section think fit to allow.
(3) Conditions for licensing- Following conditions have been imposed.
Sub-section (3) of Section 22 lays down that before granting any licence under this section, the Reserve Bank may require to be satisfied by an inspection of the books of the company or otherwise that the following conditions are fulfilled, namely :-
(a) that the company is or will be in a position to pay its present or future depositors in full as their claims accrue;
(b) that the affairs of the company are not being, or are not likely to be, conducted in a manner detrimental to the interests of its present or future depositors;
(c) that the general character of the proposed management of the company will not be prejudicial to the public interest or the interest of its depositors,
(d) that the company has adequate capital structure and earning prospects;
(e) that the public interest will be served by the grant of a licence to the company to carry on banking business in India;
(f) that having regard to the banking facilities available in the proposed principal area of operations of the company, the potential scope for expansion of banks already in existence in the area and other relevant factors the grant of the licence would not be prejudicial to the operation and consolidation of the banking system consistent with monetary stability and economic growth,
(g) any other condition, the fulfilment of which would, in the opinion of the Reserve Bank, be necessary to ensure that the carrying on the banking business in India by the company will not be prejudicial to the public interest or the interests of the depositors.
(4) Cancellation of licence – The Reserve Bank may cancel a licence granted to a banking company under this section :
(i) if the company ceases to carry on banking business in India, or
(ii) if the company at any time fails to comply with any of the conditions imposed upon it under sub-section (1); or
(iii) if at any time, any of the conditions referred to in sub-section (3) and sub-section (3-A) is not fulfilled.
Proviso lays down that before cancelling a licence under clause (11) of clause (iii) of this sub-section on the ground that the banking company has failed to comply with or has failed to fulfil any of the conditions referred to therein, the Reserve Bank, unless it is of opinion that the delay will be prejudicial to the interests of the company’s depositors or the public, shall grant to the company on such terms as it may specify, an opportunity of taking the necessary steps for complying with or fulfilling such conditions.
Q. 3. Write short notes on the following:
(a) Restrictions on loans and advances.
(b) What restrictions have been imposed on the use of words “Bank”, “Banker”, “Banking” and “Banking Business”
(c) Business which a Banking company may not transact
Ans. Restrictions on loans and advances alongwith restrictions that have been imposed on the use of the words “Banker”. “Banking” and “Banking Business” and also the business which a banking company may not transact are being answered below-
(a) Restrictions on laons and advances-Section 21 of the Banking Regulation Act, 1949, gives Power to Reserve Bank to control advances by banking companies.-(1) Where the Reserve Bank is satisfied that it is necessary or expedient in the public interest or in the interests of depositors or banking policy so to do, it may determine the policy in relation to advances to be followed by banking companies generally or by any banking company in particular, and when the policy has been so determined, all banking companies or the banking company concerned, as the case may be, shall be bound to follow the policy as so determined.
(2) Without prejudice to the generality of the power vested in the Reserve Bank under sub-section (1), the Reserve Bank may give directions to banking companies, either generally or to any banking company or group of banking companies in particular, as to:-
(a) the purposes for which advances may or may not be made,
(b) the margins to be maintained in respect of secured advances,
(c) the maximum amount of advances or other financial accommodation which, having regard to the paid-up capital, reserves and deposits of a banking company and other relevant considerations, may be made by that banking company to any one company, firm, association of persons or individual,
(d) the maximum amount upto which, having regard to the considerations referred to in clause (c), guarantees may be given by a banking company on behalf of any one company, firm, association of persons or individual, and
(e) the rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given.
(3) Every banking company shall be bound to comply with any directions given to it under this section. [Section 21 of the Act)
Power to control advances. – Under Section 21 of the Banking Regulation Act, 1949 the Reserve Bank has got the power to control advances to be made by the Banking Companies. When the Reserve Bank is satisfied that it is necessary or expedient in public interest or Banking policy so to do. it can determine the policy in relation to advances to be followed by the banking companies generally or any banking company in particular. The banking companies are bound to follow the policy so determined, Reserve Bank has also the power to give directions as to the rate of interest and other terms and conditions on which advances or other financial accommodations may be made or guarantee given. Every banking company shall be bound, to comply with any direction given to it by the Reserve Bank under Section 21. The circulars issued by the Reserve Bank of India regulating rate of interest chargeable on loans and the manner of charging interest are statutory Circulars issued with laudable purposes and are binding on the banks. Venkteswara Rice Mill v. Union Bank of India, 1988 (63) Company Cases 483; Thampan v. Dhanalakshmi Bank Ltd, 1989 (2) KLT 840. Section 21-A of the Banking Regulation Act provides that the rates of interest charged by the Banking Companies accordingly shall not be subjected to scrutiny by Courts. [Y. Jamula Beevi v. State Bank of Travancore, 1991 (1) Bank CLR 593 (Ker.)]
The expression “term loan” is well understood in banking parlance. The expression implies the grant of loan for a fixed term. It has no relevance with the purpose for which loan is granted. Where the term for repayment is long, the loan is called “Long term loan” and where the term exceeds one year but not five to seven years, it is commonly kown as “medium term loan”. According to Tannan’s Banking Law & Practice in India, 18th Edition the expression “loan” is defined as follows:
“Loans- When a banker makes an advance in a lump sum the whole of which is withdrawn and is supposed to be repaid generally/wholly at one time is called a loan. If the customer repay the same either wholly or partially and wishes to have accommodation subsequently, the latter will be treated as a separate transaction to be entered into if the bank agrees to do so and subject to such terms as the bank may like to impose. Thus the bank does not suffer any loss of interest as a result of carrying excessive cash which is necesssary in the case of cash credits and overdrafts Loan Accounts are said to have a lower operating cost than cash credits and overderafts because of the larger number of operations in the case of the latter as compared to the former and consequently a lower rate of interest on loans appears to be justifiable than in the case of overdrafts and cash credits.”
The expresion “term loan” has been defined in the same book as follows:
“Term loan- Whereas a loan is granted for a fixed period exceeding one year and is repayable according to a schedule of repayment, as a “term loan” Where the period exceeds one year but not, say 5 to 7 years, it is commonly known as a medium-term loan, a loan with longer repayment schedule is known as long-term loan. A term loan is generally granted for fixed capital requirements, although such loans for working capital are not unknown, and are supposed to be repaid out of future earnings of impugned award dated 26- 2-1997 and remitted the complaint to the Ombudsman (Hyderabad) for it fresh disposal in the light of the circulars/direction issued by the Reserve Bank of India with regard to charging of rate of interest from the landlord loanees, whose buildings are taken on lease/rent by the concerned bank and calculating the interest at quarterly rest. [Canara Bank v. P.R.N. Upadhya, 2002 (2) Bank CLR 173-177.1
(b) Restrictions on use of the words “bank”, “banker”, “banking” or “banking company”. -Section 7 of the Banking Regulation Act, 1949, lays down that-
(1) No company other than a banking company shall use as part of its name or in connection with its business any of the words “bank”, “banker” or “banking” and no company shall carry on the business of banking in India unless it uses as part of its name at least one of such words.
(2) No firm, individual or group of individuals shall, for the purpose of carrying on any business, use as part of its or his name any of the words “bank”, “banking” or “banking company’
(3) Nothing in this section shall apply to:-
(a) a subsidiary of a banking company formed for one or more of the purposes mentioned in sub-section (1) of Section 19, whose name indicates that it is a subsidiary of that banking company:
(b) any association of banks formed for the protection of their mutual interests and registered under Section 25 of the Companies Act, 1956 (1 of 1956).
(c) Business which the Banking Company may not transact.- Following prohibition regarding trading have been imposed under Section 8 which lays down:
Notwithstanding anything contained in Section 6 or in any contract, no banking company shall directly or indirectly deal in the buying or selling or bartering of goods, except in connection with the realisation of security given to or held by it, or engage in any trade, or buy, sell or barter goods for others otherwise than in connection with bills of exchange received for collection or negotiation or with such of its business as is referred to in clause (i) of sub-section (1) of Section 6 :
Provided that this section shall not apply to any such business as is specified in pursuance of clause (a) of sub-section (1) of Section 6.
Q. 4. What are the business in which a banking company apart from its usual functioning may engage. Clarify.
Ans. Forms of business in which banking companies may engage. – Section 6 of the Banking Regulation Act. 1949 lays down that- (1) In addition to the business of banking, a banking company may engage in any one or more of the following forms of business, namely:-
(a) the borrowing, raising, or taking up of money the lending or advancing of money either upon or without security; the drawing, making. accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hoondees, promissory notes, coupons, drafts, bills of lading. railway receipts, warrants, debentures, certificates, scripts and other instruments, and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller’s cheques and circular notes; the buying, selling and dealing in bullion and specie, the buying and selling of foreign exchange including foreign bank notes the acquiring, holding. issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments of all kinds; the purchasing and selling of bonds, scripts or other forms of securities on behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds of bonds, scripts or valuables on deposit or for safe custody or otherwise, the providing of safe deposit vaults; the collecting and transmitting of money and securities.
(b) acting as agents for any Government or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a managing agent or secretary and treasurer of a company.
(c) contracting for public and private loans and negotiating and issuing the same:
(d) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private, of State. municipal or other loans or of shares, stock, debentures or debentures stock of any company, corporation or association and the lending of money for the purpose of any such issue:
(e) carrying on and transacting every kind of guarantee and indemnity business;
(f) managing, selling and realising any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims:
(g) acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security:
(h) undertaking and executing trusts:
(i) undertaking the administration of estates as executor, trustee or otherwise;
(j) establishing and supporting or aiding in the establishment and support of associations, institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees of the company or the dependents or connections of such persons; granting pensions and allowances and making payments towards insurance; subscribing to or guaranteeing moneys for charitable or benevolent objects or for any exhibition or for any public, general or useful object;
(k) the acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company.
(l) selling, improving, managing, developing, exchanging, leasing. mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company.
(m) acquiring and undertaking the whole or any part of the business of any person or company, when such business is of a nature enumerated or described in this sub-section:
(n) doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company:
(o) any other form of business which the Central Government may, by notification in the Official Gazette, specify as a form of business in which it is lawful for a banking company to engage.
(2) No banking company shall engage in any form of business other than those referred to in sub-section (1).
Q. 5. Discuss the obligations of a bank in relation to (1) minors, (2) Agency, and (3) Insolvent and lunatics.
Or
Discuss the obligations of a bank in relation to producer and customer, principal and agent, and lessor and lessee.
Ans. Section 26 of the Negotiable Instruments Act lays down as under-
(1) Capacity to make, promissory notes, etc.- Every person capable of contracting, according to the law to which he is subject, may bind himself and be bound by the making, drawing acceptance, indorsement delivery and negotiation of a promissory note, bill or exchange or cheque
Minor. – A minor may draw, indorse, deliver and negotiate such instrument so as to bind all parties except himself.
Nothing herein contained shall be deemed to empower a corporation to make, indorse or accept such instruments extent in cases in which, under the law for the time being in force, they are so empowered.
Meaning. – This section lays down the capacity to make promissory notes etc. and thus lays down that every person capable of contracting. according to the law to which he is subject, may bind himself and be bound by the making, drawing, acceptance, indorsement, delivery and negotiation of a promissory note, bill of exchange or cheque. Dealing with the provision of minor this section makes it clear that a minor may draw, indorse, deliver and negotiate such instrument so as to bind all parties except himself.
Nothing herein contained shall be deemed to empower a compression to make, indorse or accept such instruments except in cases in which, under the law for the time being in force, they are so empowered.
Capacity to contract. – This section lays down that the person must be capable of contracting. Section 11 of the Indian Contract Act lays down that every person is competent to contract who is of the age of majority and is of sound mind and is not disqualified by contracting to any law to which he is subject.
Thus, there are three requirements :-
1. He must be major.
2. He must be of unsound mind, and
3. Must not be disqualified by contracting by any law to which he is subject.
(2) Agency.- Every person capable of binding himself or of being bound, as mentioned in Section 26, may so bind himself or be bound by a duly authorized agent acting in his name.
A general authority to transact business and to receive and discharge debts does not confer upon an agent the power of accepting or indorsing bills of exchange so as to bind his principal.
An authority to draw bills of exchange does not of itself import an authority to indorse.
In certain matters, the bankers act as agents of their customers. Fot example, collection of cheques, bills of exchange or promissory notes, crediting the instruments like dividend warrants, interest warrants, pension bills. buying or selling securities on behalf of the customer, to act as trustee, attorney, executor, correspondent or a representative.
In Travancore National and Onilon Bank v. A.S.S.R. St. Veerappa Chettiar, AIR 1940 Mad 139, when the applicant paid the money to the bank for being telegraphically transmitted to a company at Bombay, the Court held that the Bank held the money as the property of the applicant and the bank was a mere agent of the applicant.
If the bank receives the money from the customer for a specific transaction, the bank does not hold it as a debtor but holds it in a fiduciary capacity. (Bank of India v. Official Liquidator, AIR 1950 Bom. 375)
When the customer deposits a cheque, with the bank for collection, the bank receives it as the agent of the customer. It can be holder in due course only when it discounts, purchases or negotiates the same because then the property passes to the bank.
Where the customer instructs the bank that a part of the money lying with it in his account may be remitted to another bank in payment of a bill due on him, the amount remitted by the bank is in course of agency Farley v. Turner, (1857) 26 LJ Ch. 710]
Where the customer deposits the money with the bank for being transmitted to another branch of the bank. the bank after transmitting the money does not cease to be a trustee. Even if no commission is charged for transmitting the money, the depositor’s position is not affected. So if the bank opens the fixed deposit account of the money without the consent of the customer when the money was received in the head office, the customer was not bound by it. [New Bank of India v. Pearey Lal, AIR 1962 SC 1003]
(3) Insolvent and lunatics.- In relation to insolvent as the whole property which belonged to the insolvent vests in the official receiver, he cannot sue on a negotiable instrument. In the case of a lunatics, it is same as that of minor.
(4) Producer and Customer.- There is a relation of producer and customer between bank and the bankers. First as producers are liable for their bad products or services in the same way when the services reduced by the banks are not satisfactory, proper or upto the mark bank is held liable for the damages etc. and such services of the bank can be made questionable by consumers under Consumer Protection Act. Reserve Bank has appointed Ombudsman for hearing complaints and providing them remedial measures.
(5) Principal and Agent.- When a bank is engaged in collection of cheques, payments, invoices of the traders, sale and purchase of the securities it acts as agent. This point has been affirmed in the case of Bhelji Lakhan Ji & Co. v. Dr. Banerji, (1995) 255 Comp Cas 395. This relation establishes a fiduciary relation between the bank and its customers.
Unless the bank follows the instruction of any other person there exists agony between bank and its customers. In such a situation bank is more a trustee than a debtor.
(6) Lessor and Lessee. Where there is transfer of interest relating to immovable property between banker and customer such relationship is known as lessor and lessee relation. When the bank constructs flats and the customer pays its rents regularly or when a customer hires a locker in the bank such relation is known as that of lessor and lessee relation.