Q. 6. Discuss the position of collecting banker:
(i) As an agent.
(ii) As a trustee.
(iii) As a bailee.
Ans. (i) As an agent. In certain matters, the bankers act as agents of their customers. For 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]
(ii) As a Trustee.-The banker is also trustee of the customer. If the bank as per instruction of the customer credits the amount of the bill or other document, the creditor-debtor relation arises. However, no such relation arises if the bank suspends its business before the receipt of the amount, the bank holds it as a trustee whether or not the customer has account with the bank on the date of receipt of money or the amount is credited to the account or not. Jini Sports Ltd. v. New Bank of India Ltd., 1948 Comp. Cas. 253] The bank is trustee when the money is paid with it with the instruction to retain it pending the instructions of the payer or when the instruction is given to pay it to a person who has or not the account in the bank or when the instruction is given that the part of the amount lying with it be forwarded to meet a bill. On the money being delivered to the bank, an intention to create relation of creditor and debtor is generally presumed but this presumption is one of fact arising from the nature of business carried on by the Bank and is a rebuttable presumption by proof of special circumstances or circumstances attending the transaction. [New Bank of India v. Peareylal, AIR 1962 SC 1003]
Where the bank receives the money as a receiver, it is a trustee for the money received. [Bhawanipur Banking Corporation Ltd. v. Bijoy Kumar Addy, AIR 1954 Cal. 556]
In order that a trust should arise, the money must be delivered to the employee in course of employment. An employer is not liable if the money delivered is misappropriated by the employee when he receives it not in course of employment. [Llyod v. Grace Smith & Co., (1912) AC 716]
(iii) As a Bailee. Where the goods, articles or securities are deposited by the customer in safe custody of the bank, the person delivering the things is bailor and the bank is bailee. If the bank charges the money for safe-deposit, it is a non-gratuitous bailee or bailee for reward but where the bank does not charge the money, it is gratuitous bailor. Pointing out difference between the agency and bailment Justice Jagnnath Shetty in United Commercial Bank v. Hema Chandra Sarkar, AIR 1990 SC 1359, observed:
“Bailment is the delivery or transfer of possession of chattel with specific mandate that requires the identical res either to be returned to the bailor or to be dealt with in a particular way by the bailee according to the directions of the bailor. One important distinction between agency and bailment is that the bailee does not represent the bailor. He merely exercises with the leave of the bailor, certain powers of the bailor in respect of his property. Secondly, a bailee has no power to make contract on behalf of the bailor. Nor can he make the bailor liable for any act that he does by himself in relation to the property bailed.”
Q. 7. Define ‘banker’. Explain the rights and obligations of banker.
Or
Briefly discuss the various rights of banker against his customer alongwith Banker’s lien and limitation.
Or
Discuss the rights and obligation of banks.
Ans. Banker. The word “Banker” has been defined under Section 3 of the Negotiable Instruments Act. 1881 but this term simply states that what will be included in the term “banker” and does not specifically defined what actually means by Banker. According to the provisions of Section 3 banker will include the following :
“Banker includes any person acting as a banker or any post office or Savings Bank”.
As far banker and banking companies are concerned these terms have been defined under Banking Regulation Act, 1949. Help can be taken from the definition while deciding whether a particular body or corporation is covered by the term banker or not. Sir Johnson’s Dictionary defines as under “bank is a place where money is laid up to be called occasionally and a banker is one that traffic’s in money. Emphasizing the inclusive definition of the word banker it has been held in Upendra Kumar v. Don Finance Corpn. Mangalore, 2009 (77) AIC 712 (Kar H.C.) that Cooperative Society doing banking business would be covered by the definition of banker as defined under Section 3 of the Act.
Rights and obligations of Banker
(1) Right to credit balance on customer’s death to nominee.- Where the depositor nominates a person, the payment of the deposited amount to such person by the bank validly discharges it from all the liability as he is entitled to take it from the bank
Right of lien. There are two kinds of lien-Particular and general.
(i) Particular lien. A particular lien is exercised in respect of particular goods. Under Section 170 of the Indian Contract Act, where the goods are entrusted to the bailee for providing any service involving labour or skill regarding the goods, the bailee, in the absence of any contract to the contrary, has right to retain such goods till the receipt of remuneration for providing services. Where under a contract, the Fixed Deposit Receipts were entrusted to the bank by the depositor as a security for guarantee, it was held to be a particular lien and the bank could not exercise general lien against them. [Vijay Kumar v. Jullunder Body Builders. AIR 1981 Del 126]
(ii) General lien. In Brandao v. Burnett, (1846) 3 CB 519 (HL), the House of Lords held-Bankers most undoubtedly have a general lien on all securities deposited with them as bankers by a customer, unless there be an express contract or circumstances that show an implied contract inconsistent with lien. The general lien is considered to be something more than an ordinary lien. By virtue of Section 43 of Negotiable Instruments Act such distinction is of no significance in case of notes, bills of exchange and cheques as the banker is regarded the holders for value who can exercise the lien to the extent of the amount due. In respect of other Negotiable Instruments e.g. bearer bonds, coupons and share warrants to bearer, it is the character of the pledge that enables the banker to sell them after the expiry of the time fixed by the agreement and in case no time is fixed after a reasonable time with a prior notice. This right exists in respect to all securities and properties with the banker but not in respect of title-deeds of immovable property of the customer which can only be retained.
While exercising the lien, the banker need not any instruction for transfer of money from the deposit account of customer to his loan account. Bank of Southwales v Gailburn Butter Factory, (1902) AC 543]. Where the banker acts honestly, any defect in the title of the customer or equities in favour of third person will not affect the right of lien.
The banker cannot exercise lien after the notice of defect of title. [Locke v. Prescolt, (1683) Beav 261]
In Shivam Construction Co., Ahmedabad v. Vijaya Bank, Ahmedabad, AIR 1997 Guj 24, the overdraft made by the bank to a partnership firm were not paid despite the notice to the firm by the Bank. The bank liquidated the fixed deposits of the firm and adjusted the amount towards loan account. The Court held that not only under the terms of loan the bank could appropriate the amount towards overdraft but it had also the right of set-off and the banker’s lien.
The bank cannot exercise the general lien in respect of the gold ornaments pledged to the bank as security for the gold loan taken by the debtor when he cleared that loan but another person failed to clear his loan amount to the bank for whom he stood as a surety Alakha Sahoo v. Puri Urban Coop. Bank Ltd., AIR 2004 Orissa 144]
Fixed Deposit. The whole amount of a fixed deposit amount in the joint name of the husband and wife payable to “either or survivor” which is appropriated towards a loan for which the husband is guarantor is wrong. It is only half of the amount that can be appropriated. The wife is entitled to recover half of the amount with interest, compensation for mental agony and costs. [Anumati v Punjab National Bank Ltd., AIR 2005 SC 29]
An oral agreement of lien on FDR is void. It is non est and not binding on the holders of FDR more particularly when the receipt is payable to either or survivor. Santosh Kumar Agarwal v. Oriental Bank of Commerce. (2001) 2 BC 356 (Cal)]
Whether a security deposited for a specific loan with a banker can be retained by it after repayment of that loan in exercise of lien for some other debt due to be paid to the banker held to be doubtful in Jones v Peppercome. (1858) 28 LJ Ch 158.
In Wilkinson v. London and Country Bank, (1884) 1 TLR 63, it was held that such security would be recovered by the customer.
In re London and Globe Finance Corporation, (1902) 2 Ch 416, the t Court held that such securities left with the banker after repayment of loan become subject to general lien as they are deemed to be redeposited. If on the sale of securities deposited to secure loan by the customer some surplus remains with the bank, it can set-off surplus as against other sums due to it by him.
Banker’s lien and limitation. The Limitation Act bars only remedy not the discharge of debt. The banker’s right of lien is not affected by the Act.
(2) Right to set off. Where a person has some claim of a liquidated money against another who also makes a cross claim against the former, the amount can be set-off. Thus, where A owes a sum of Rs. 2000 to B while B owes a sum of Rs. 1,000/- to A, A can set-off Rs. 1000/- owed by B to him when B makes a claim of Rs. 2,000/- from A. There must be mutuality of debts between the parties for set-off. Set-off is available between the same parties. Mutuality of debt should precede a claim for set-off. Set-off cannot be pleaded against a party in the representative capacity. Thus, A cannot plead set off against ‘B’ if ‘B’ owes some amount to A as trustee of ‘C’. In Halsbury’s Laws of England, set-off has been stated in these words: A joint debt or several debts cannot be set-off against each other. Thus, in an action for a debt due from the defendant to the plaintiff separately, the defendant cannot set-off a debt due from the plaintiff jointly with others who are not co-plaintiff’s in the action, but he may set-off a debt due from the plaintiff severally as well as jointly with others”.
Any one of joint promisors may be compelled to perform (Sec. 43). When two or more persons make a joint promise, the promise may. in the absence of express agreement to the contrary, compel any one or more of such joint promissors to perform the whole of the promise.
Each promisor may compel contribution, Each of two or more joint promisor may compel every other joint promisor to contribute equally with himself to the performance of the promise, unless a contrary intention appears from the contract.
Sharing of loss by default in contribution. If any one of two or more joint promisors makes default in sach contribution, the remaining joint promisors must bear the loss arising from such default in equal shares.
Disclosure in public interest.- As per recommendations of Banking Commission, 1972, in the following matters, the banks need to furnish information
(1) Where the Government officials seek such information concerning the commission of crime and the bank has reasonable cause to believe that commission of crime and the disclosure of information by the bank may lead the apprehension of the offender.
(2) Where the bank considers the customer’s activities prejudicial to the interest of the country.
(3) Where the bank’s books reveal the contravention of the provisions of any law by the customer.
(4) Where its constituent gets sizable money from abroad.
Liability for wrongful disclosure
(i) Liability towards the Customer-Where the bank furnishes any wrong information or such unfavourable opinion regarding its customer that he suffers loss, the bank is liable to compensate him.
(ii) Liability towards the third party. Where the bank intentionally furnishes wrong information regarding its customer to the third party which suffers due to reliance on such information, the bank is liable to the third party. In Hedley Byrne & Co. Ltd. v. Heller & Partners, (1963) 2 All ER 575 (HL), the plaintiffs were advertising agents. They sought through their bankers reference regarding Easipowers Ltd. Co. for giving safe credit to them, from the bankers of Easipowers Ltd. who gave favourable opinion regarding their creditworthiness. The plaintiffs incurred heavy expenditure for Easipower Ltd. which went into liquidation and the plaintiff suffered a heavy loss of £ 17000. Since the opinion had been given with a clause “without responsibility, the defendants were held not liable. The House of Lords clearly held that negligent statements would amount to breach of duty for which the liability would arise.
Q. 8. Discuss the banker and customer relation and the duration theory.
Ans. Banker and Customer Relations. Following type of relations can be established between banker and customer:-
(1) Debtor and creditor.
(2) Mortgagor and Mortgagee.
(3) Producer and consumer
(4) Principal and Agent.
(5) Lessor and Lessee.
(6) Pawnor and Pawnee.
(7) Bailor and Bailee.
(8) Guarantor and Beneficiary
(1) Debtor and Creditor. When the customer opens his account in the bank and deposits the money in the bank a debtor and creditor relation comes into being. Following type of relations may be studied under this head-
(a) Repayment.
(b) Nature of money deposited in Bank.
(c) Demand at proper place and time.
(d) Manner of demands.
(a) Repayment- It has been held by the Supreme Court in Shanti Prasad Jain v. Director of Enforcement, AIR 1964 SC 1023, that banker and customer relationship in respect of money deposited in the account of a customer with the bank is that of debtor and creditor. This principle was further followed by this Court in respect of fixed deposit. The fixed deposit receipt is merely a written acknowledgment by the bank that it holds a certain sum to the use of its customers. The bank is thus a debtor to the account holders with interest on the expiry of an agreement period. [Anumati v. Punjab National Bank, AIR 2005 SC 29)
Emphasizing the same point it has again been held in Anumati v Punjab National Bank, AIR 2005 SC 29, that a fixed deposit in the joint names of two persons is nothing but a joint account which, as the name itself suggests, is repayable on the expiration of the agreed period. The fixed deposit receipt is merely a written acknowledgment by the Bank that it holds a certain sum to the use of its customers. The bank is thus a debtor to the account holders in respect of the amount deposited as a debt which is repayable by the bank to the account holders with interest on the expiry of an agreement period.
(b) Nature of money deposited in Bank. The person depositing money in bank stand in relation to an ordinary relation of debtor and creditor The only obligation that lies with the bank is to repay a like sum in the like currency
(c) Demand at proper place and time. The demand for payment of money by the customer should be made in the same branch and during prescribed hours. However, arrangements can be made for payment of money from another branch as well. It has bean held in the case of Indo Allied Industries Ltd. v. Punjab National Bank, AIR 1970 All 108. that the demand for payment of money by the customer should be made during schedule of hours
(d) Manner of demands. Where a customer directs a banker to pay a certain amount to a certain person that amount must be paid to that person It was held in First National Bank Lad. v. Pioneer Commercial Bank, AIR 1951 Cal. 34, that when the bills (cheques) are sent for collection and bank is directed to issue drafts and the bills are collected by the banks but the drafts are not issued in disregard of customer’s instructions, the customer is entitled to claim the amount from the bank as a trust money. It should also be noted here that for want of instruction such amount will be considered as debt on the banker.
In yet another case where a remittance was sent to a banker with instructions to purchase shares in a certain company, the bank bought some shares, but before completing the rest of the purchase it failed. It was held that the bank stood in the position of trustee to the remitter and therefore, he was entitled to a refund of the inspect balance of the amount.
(2) Mortgagor and Mortgagee.- Mortgagor is a person who transfers an interest in specific immovable property by creating a mortgage. Object of the mortgage is to secure the payment of money advanced or to be advanced by way of loan an existing or future debt or performance of an agreement giving rise to pecuniary liability.
(3) 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.
(4) 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.
(5) 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.
(6) Pawnor and Pawnee. When the customer takes loan from the bank by way of security of moveable property a relation of Pawnor and Pawnee comes into being between banker and the customer. Customer becomes the Pawnor (Pledgor) and the bank becomes Pawnee (Pledgee).
(7) Bailor and Bailee. In the case of use of Lockers by the customer bailor and bailee relation is reflected between banker and their customer.
In the case of Allahabad Bank v. Banbeer Singh. (2006) | CPR 280 MP tampering was noticed with the locker of a bank. Bank took the defence that the customer himself must have removed the lock of the locker and then must have left it as it is. Supreme Court negatived this argument and held that bank is under a duty to constantly watch the state of lockers in the safety vault and had the bank been vigilant enough in its duty it would not have taken such a long time to inform its customer that the lock of the locker has been broken.
(8) Guarantor and Beneficiary. Guarantor is a person who gives a promise to answer for the payment of some debt or the performance of some duty in the case of the failure of another person, who, is the first instance, is liable to such payment or performance. The guarantor by executing the guarantee assures the bank or the holder of guarantee that on any break of the contract or promise or to discharge any liability by the borrower the guarantor would make good the same. Beneficiary is a person whose interest is protected by the Guarantor.
‘Customer-Duration Theory. By the word ‘customer’, the general impression is a person having an account with the bank. There was old Duration Theory that a person should not only have an account with the bank but it must be for some duration. The theory is discarded these days. That to be a customer for a person he should be in the habit of dealing with the bank. According to John Paget, to constitute a customer, there must be some recognisable course of habit of dealing in the regular banking business. The idea of a single transaction is difficult to be reconciled with the customer of the bank. In other words, there must be some continuity in dealing. The aforesaid view stands no more acceptable. In Tate v. Wilts and Dorset Bank, (1899) | Legal Decisions affecting Bankers, a person who had no account with a bank went to collect a cheque and stated that he would open an account with the cheque was held to be not a customer. In Ladbroke v. Todd. (1914) 30 TLR 433. Bailhache J. held-A person begins to become a customer of a bank when he goes to the bank with the money or a cheque and asks to have an account opened in his name and the bank accepts the money or cheque and is prepared to open an account in the name of that person.
Q. 9. Define a ‘bank’ and the term ‘banker’. Explain “Banking Business”.
Ans. Definition of Bank. The word “bank” is said to be derived from the Italian word banco, a bench. The early bankers, the Jews in Lombardy transacted their business, at benches in the market place. When a banker failed his banco was broken up by the people whence our word “bankrupt”. [Vide Dishonour of Cheque, Supra p. 24)
One of the earliest Italian banks, the Bank of Venice, was originated for the management of a public loan, or monte, as it was called. Macleod, in his elements of Banking says “at that period the Germans were masters of a great part of Italy and the German word “bank” came to be used as its Italian equivalent monte, and was Italianised into banco, and the loans were called indifferently monti or banchi” [Vide Thomson’s Dictionary of Banking, 12th Edn., p. 47]
Commercially bank is a place where money is deposited for the purpose of being let out to interest, returned by exchange, disposed of to profit, or to be drawn out again as the owner shall call for it. [Vide Wharton’s Law Lexicon]
Bank and banker mean:
(a) any company or corporation carrying on the business of banking.
(b) any partnership or individual to whose books the provisions of the Bankers Books Evidence Act shall have been extended as hereinafter provided.
(c) any post office savings bank or moneyorder office. [Vide Banker’s Books Evidence Act, 1891, Section 2 (2))
Webster defines it as an establishment which traders in money. [Vide New ‘Webster’s Dictionary of English Language. OSA 1981 p. 76]
Definition of Banker. The word banker has been defined under Wharton’s Law Lexicon as under:
“Banker, one who receives money to be drawn out again as the owner has occasion for it, the customer being lender, and the banker borrower, with the superseded obligation of honouring the customer’s cheques up to the amount of the money received and still in the banker’s hands.
A customer’s money may become irrecoverable if six years have elapsed without payment by the banker of principal or interests after demand. The relation of banker and customer is merely that of debtor and creditor, with a superseded obligation on the banker to honour the customer’s cheques, so that the Limitations Act, 1623, (21 Jan. 1, c. 16), runs against the customer. [See Unclaimed Property]
A cheque is not an assignment to the payee of the customer’s balance, so that if a customer having a balance of 991, give a cheque for 1001, the banker is legally justify in dishonouring it by refusing payment altogether (Schroeder v. Central Bank of London, (1876) 34 L. T. 735]. If a customer overdraws his account, this amounts to a request for a loan. [Cuthbert v. Roberts & Co.. 1909 2 Ch. 226]
A banker may not disclose to a third person, without the consent of the customer express or implied, either the state of the customer’s account or any of his transactions with the bank, or any information relating to the customer acquired through the keeping of his account, unless the banker is compelled to do so by order of the Court or in certain circumstances when the protection of the banker’s own interests require it. [Tournier v. National Provincial and Union Bank of England, 1924 1 Κ. Β. 461, but see next title)
Note.-/For Banking Business see Answer to Questions No. 1)
Q. 10. Explain the following:
(a) Passbook. What is importance in bank transactions?
(b) Credit Card
(c) Letter of credit
(d) Letter of indication
(e) Bank Guarantee
(f) Letter of comfort
(g) Digital Money
(h) Saving Account
(i) Smart Card
(j) Introduction for opening of accounts
Ans. (a) Passbook. Passbook is an important document issued by the Bank to its customer. Passbook contains code of the bank, name and address of the bank and also the name, address and and Account No. of the customer. It also contains the day-to-day entry regarding deposit and withdrawal of the money. Every bank has its own norm regarding the minimum balance in the account. If the balance goes less then the bank deducts some nominal charges from the customer’s account. Bank requires Passbook in case of withdrawal of money, but when withdrawal is made through cheque, no passbook is required.
(b) Credit Card. It is often seen that the traders face problem in transaction with foreign countries and the credit card is issued to solve such problem. It is made of plaster. It bears the name of its holder, his address. signature and concerning computer code number, its validity and its duration and other necessary details. On the basis of credit card the holder can purchase goods. Such card can be given (and would be valid) only to such institutions who have given their consent for such cards. They cannot be compelled to give goods in lien of credit cards.
According to Halsburry’s Laws of England. Volume 34 para 309 p. 185. the effect of credit card is irrebutable and its contract between bank and its customer is most immediate.
(c) 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.
According to Supreme Court Bank guarantee is just like letter of credit. Central India Ltd. v. Vilemar Impex, AIR 1986 SC 1924)
The Supreme Court in the case of United Commercial Bank v. Bank of India, AIR 1981 SC 1926, has held that the banker’s obligation under an irrevocable letter of credit to pay is absolute and his buyer-customer cannot instruct him not to pay The Court also observed that the same considerations should apply to a bank guarantee and added, a letter of credit sometimes resembles and is analogous to a contract of guarantee.
In yet another case U. P. Co-operative Federation Ltd. v Singh Consultant and Engineers, 1989 (65) Comp. Cas 283 (SC), the Supreme Court has observed that an irrevocable commitment either in the form of a confirmed bank guarantee or an irrevocable letter of credit cannot be interfered with except in the case of fraud or where a case of apprehension of irretrievable injustice has been made out. In order to restrain the operation either of an irrevocable letter of credit or of a confirmed letter of credit or of a bank guarantee, there should be a serious dispute and there should be a good prima facie case of fraud, and special equities in the form of preventing irretrievable injustice between the parties. Otherwise, the very purpose of bank guarantees would be negatived and the fabric of trading operations would get jeopardised.
(d) Letter of Indication. This is used also as identity card. This is issued by the Bank alongwith circular letter of credit or note. It also bears the name of the person to whom it is issued. This is the reason why it is also known as letter of identification. The object is to identify the person. who is being paid money.
(e) 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 liability on the bank on a 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.
(f) Letter of Comfort.- No definite legal definitions can be given of letter of comfort. This is the common form of security contract in developed countries. In true sense it creates only a moral obligation between parties There is no legal biding in it. This type of delegation ation is based on status of the parties, importance of the particular trade, mutual transaction and the commercial behavioural practices.
(g) Digital Money. This is the latest technique of withdrawal of money by customers. The Automatic Trailer Machine (A.T.M.) is also covered under the terms Digital money. ATM system is used in all the nationalized bank.
ATM card bears many information which are contained in the form of code. ATM machines are being installed very widely and its use has become very common and is most convenient to customers.
(h) Saving Account. Savings deposits are not so important to bankers as fixed or current deposits but their early history is quite interesting
(i) Smart Card. It is of a small size and has its storage value. Perhaps the best type of smart card to be used in the world in France which is a telephone card. This card can be purchased therefrom any newspaper vender.
(j) Introduction for opening accounts. Generally, the banks used to permit to open accounts with it without any introduction. It was sufficient if a person went to the bank, took an account opening form, filled up his name and address and made his signatures on it. In case of cheque-book facility, the banks required introduction by an account holder with the bank. Due to number of frauds increasing day by day and with a view to check money laundering and to keep an eye on income, these days, the need has been felt of proper introduction of the account. For it, the proof of residence. Permanent Account Number (PAN) with income-tax department, photograph of the person who wants to open the account need to be given to the bank The Reserve Bank of India requires the banks to comply with “Know your Customer” (KYC) and “Anti Money-Laundering” (AML) guidelines.
Q. 11. Discuss the rights and liabilities of surety.
Ans. Rights and liabilities of surety- What amounts to surety and what are the rights and liabilities of the surety is being discussed in the lines below-
(1) Meaning of surety. Surety has been defined under Section 126 of the Indian Contract Act as under-
“Contract of guarantee”, “surety”, “principal debtor” and “creditor”. A contract of guarantee is a contract to perform the promise, or discharge the laibility, of a third person in case of his default The person who gives the guarantee is called the “surety”, the person in respect of whose default the guarantee is given is called the “principal debtor, and the person to whom the guarantee is given is called the “creditor” A guarantee may be either oral or written.
Thus, it is clear from the definition that the person who gives the guarantee is called the “surety”, the person in respect of whose dafault the guarantee is given is called the “principal debtor” and the person to whom the guarante is given is called the “creditor”.
It is necessary that there must be a conditional promise to be liable on the default of the principal debtor. Where a liability is incurred independently of a default the same will not be covered within the definition of guarantee.
(2) Rights of surety- (a) Call for particulars of liability’s extent. A surety can ask the banker to supply necessary information to him as to the extent of the existing liability. The bank has to accede to his requests and to give appropriate particulars and to act equitably.
(b) Revocation – A surety has the right to withdraw or revoke the guarantee in special circumstances.
(c) Notice for a specified period – A continuing guarantee can be determined at any time so far as future transactions are concerned on specific notice from the surety of a specified period. On receipt of the notice of the death of a surety, the banker usually rules off the account under guarantee and opens new one.
(d) Right against Principal Debtor and Co-sureties. The surety sends a notice to the principal debtor and co-sureties before paying the amount demanded by the creditor, of his intention as to banker’s demand and can claim rightfully paid from the principal debtor and co-sureties for the amount proportionately A co-surety also has the right to the benefit of a counter-security given to another surety by the principal debtor
(e) Right to be discharged -A Surety has the right to a complete discharge in the following cases
(i) When the creditor discharges the Principal debtor;
(ii) When the creditor acts in a manner de novo or against the terms of the contract, as held in Chittur Service Co-operative Bank Ltd. v. R.C Pankunny & ors. (1988) 64 Comp Cas 78 (Ker.);
(iii) When the credit makes a composition with or promises to give time to, or not to sue the debtor, but without the consent of the surety as observed in John Kuruvilla & another. Parmeswaram Pillai. CRP No. 3051 of 1978 Kerala High Court.
(iv) When the creditor acts inconsistently with the surety’s right impairing the eventual remedies, as per provisions of Sections 137. 139 and 141 of the Indian Contract Act.
(3) Liabilities of surety- (a) Liability of surety is co-extensive with that of Principal Debtor-The liability of the surety as laid down under Section 128 of the Indian Contract Act is co-extensive with the principal debtor unless it is otherwise provided by the contract. The illustration appended to the section is as under-
A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by CA is liable not only for the amount of the bill but also for any interest and charges which may have become due on it.
The expression liability to be “co-extensive with that of principal debtor” means maximum extent of surety’s liability. In other words, it means that he is liable for the whole of the amount for which the principal debtor is liable and he is liable for no more. Illustration appended to the section that if the payment of a loan bond is guaranteed, the surety is liable not only for the amount of the loan, but also for any interest and charges which may have become due on it.
(b) Condition precedent to liability Section 144 of the Indian Contract Act which deals with condition precedent to liability lays down as under-
Guarantee on contract that creditor shall not act on it until co- surety joins. Where a person gives a guarantee upon a contract that creditor shall not act upon it until another person has joined in it as co- surety, the guarantee is not valid if that other person does not join.
It is as such clear that the surety can attach any condition to his liability. The defendant being co-guarantor will not be liable if he has not signed the agreement or that he may add a condition to his liablity that on default of the principal debtor an independent demand for the payment shall be raised upon the guarantor.
(c) Right of the surety to limit his liability-The surety has a right to limit his liability. The surety may expressly declare his guarantee to be limited to a fixed amount. Where such an express condition of liablity is expressed the surety cannot be held liable beyond it.
(d) Liability in matters of continuing guarantee-Section 129 of the Indian Contract Act deals with liability under continuing guarantee and lays down that a guarantee which extends to a series of transaction is called continuing guarantee. Two illustrations as given under Section 129 are referred hereunder-
(a) A. in consideration that B will employ C in collecting the rent of B’s Zamindari, promises B to be responsible, to the amount of 5,000 rupees, for the due collection and payment by C of those rents. This is a continuing guarantee
(b) A guarantees payment to B. a tea-dealer, to the amount of £ 100, for any tea he may from time to time supply to C B supplies C with tea to the above value of £100 and C pays B for it. Afterwards, B supplies C with tea to the value of £200 C fails to pay The guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the extent of £ 100.
One important point of continuing guarantee is that it applies not to a specific number of transaction but to any number of transaction and thus makes the surety liable for the unpaid amount at the end of guarantee.
(e) Liability under bank guarantee-Where a guarantee is given by a bank it is a sort of absolute undertaking given by the bank under an agreement with its customer that the bank will pay the creditor whenever right of guarantee are invoked. In the case of Maharashtra State Electricity Board Official Liquidator. AIR 1982 SC 1497, the Supreme Court allowed guarantee money to be collected without caring for the insolvency of the customer or the bank’s relation with the customer.
Q. 12. Discuss the control over banks by Ombudsman.
Or
How does an Ombudsman control over the banks.
Ans. Ombudsman exercises control over the banks in the following manner. Complaints may be made to the Ombudsman regarding deficiency in bank
1. Grounds for complaint.- (1) A complaint on any one of the following grounds alleging deficiency in banking or other services may be filed with the Banking Ombudsman having jurisdiction :
(a) non-payment or inordinate delay in the payment or collection of cheques, drafts, bills, etc.,
(b) non-acceptance, without sufficient cause, of small denomination notes tendered for any purpose, and for charging of commission in respect thereof.
(c) non-acceptance, without sufficient cause, of coins tendered and for charging of commission in respect thereof.
(d) non-payment or delay in payment of inward remittances :
(e) failure to issue or delay in issue of drafts, pay orders or banker’s cheques.
(f) non-adherence to prescribed working hours,
(g) failure to honour guarantee or letter of credit commitments:
(h) failure to provide or delay in providing a banking facility other than loans and advances promised in writing by a bank or its direct selling agents:
(i) delays, non-credit of proceeds to parties accounts, non-payment of deposit or non-observance of the Reserve Bank directives, if any, applicable to rate of interest on deposits in any savings, current or other account maintained with a bank:
(j) delays in receipt of export proceeds, handing of export bills. collection of bills etc., for exporters provided the said complaints pertain to the bank’s operations in India:
(k) complaints from Non-resident Indians having accounts in India in relation to their remittances from abroad, deposits and other bank related matters.
2. Procedure for complaint.-(a) The complaint in writing shall be duly signed by the complainant or his authorized representative and shall be, as far as possible, in the form specified in Annexure ‘A’ or as near as thereto as circumstances admit, stating clearly:
(i) the name and the address of the complaint,
(ii) the name and address of the branch or office of the bank against which the complaint is made,
(iii) the facts giving rise to the complaint,
(iv) the nature and extent of the loss caused to the complainant, and
(v) the relief sought for
(b) The complainant shall file alongwith the complaint, copies of the documents, if any, which he proposes to rely upon a declaration that the complaint is maintainable under sub-clause (3) of this clause.
(c) A complaint made through electronic means shall also be accepted by the Banking Ombudsman and a print out of such complaint shall be taken on the record of the Banking Ombudsman.
(d) The Banking Ombudsman shall also entertain complaints covered by this Scheme received by Central Government or Reserve Bank and forwarded to him for disposal. [Vide Clause 9 of the Banking Ombudsman Scheme. 2006.1
3. Settlement of complaint. Clause 11 lays down that on receipt of complaint the Banking Ombudsman shall send a copy of the complaint to the branch or office of the bank named in the complaint, under advice to the Nodal Officer referred to in sub-clause (3) of clause 15, and endeavour to promote a settlement of the complaint by agreement between the complainant and the bank through conciliation or mediation.
For the purpose of promoting a settlement of the complaint, the Banking Ombudsman may follow such procedure as he may consider just and proper and he shall not be bound by any rules of evidence. It is also laid down that the proceedings before the Banking Ombudsman shall be summary in nature. (Vide [Vide Clause 11 of the Banking Ombudsman Scheme. 2006]
4. Award by Ombudsman. Provision for award by the Ombudsman has been made under Clause 12 of the Ombudsman Scheme. 2006 Clause 12 lays down that where a complaint is not settled by agreement within a period of one month from the date of receipt of the complaint or such further period as the Banking Ombudsman may allow the parties, he may, after affording the parties a reasonable opportunity to present their case pass an award or reject to complaint.
The Banking Ombudsman shall take into account the evidence placed before him by the parties, the principles of banking law and practice. directions, instructions and guidelines issued by the Reserve Bank from time to time and such other factors which in his opinion are relevant to the complaint.
Q. 13. What is Merchant Banking? Explain Merchant Banking in India.
Ans. Merchant Banking.- Merchant banking provides various services about the capital market, finance services as to capital market and finance to corporate sector. It includes activities for above-noted purposes in the country and also arranges funds from outside the country.
According to Security and Exchange Board of India merchant banker is a person engaged in the business which is related to issue management by making arrangement as to selling. buying or subscribing to securities or acting as manager, consultant or rendering corporate advisory services as to such issue.
Merchant banking differs from ordinary banking. Merchant banking of commercial bank renders following main services:-
(i) Management of public issue in which prospectus preparation/ scrutiny and till the completion of issue all matter thereafter are included. Provides advice in relation to restructuring of capital. amalgamation and mergers etc.
(ii) For the help of client liasion work and get various governmental consent in which letters of intent, industrial licence and other permissions from government/semi-government bodies are included.
(iii) To identify a project scrutiny of technical feasibility reports from management and financing angles pre-investment and feasibility studies.
(iv) To meet the requirements of promotors, term lenders, controller of capital issue. underwriter, investors etc assisting in formulation of financing plans.
On financial management system sometimes day to day consultancy is offered, which is specifically useful for small scale units only and it may not be able to afford management audits. For small industry customers advisory assistant is provided. The planning of such small industry customers to enter medium scale sector by undertaking expansion or diversification of their activities. Merchant banking may help to locate and evaluate new markets in foreign countries and assist in finding out foreign collaboration.
Thus Merchant Banking try to assist industry and contribute indirectly in rapid industrialization of the country in proper way at large scale.
Q. 14. (a) Define Commercial Banks and discuss their functions.
(b) What are the various banking business.
Ans. (a) Commercial Banks and their functions alongwith the various banking business are as under-
Commercial Banks. Commercial Banks are either Public Sector Banks or Private Sector Banks.
(a) Public Sector Banks-
(i) State Bank Group
(ii) Nationalized Banks
(iii) Bhartiya Mahila Bank
(b) Private Sector Banks
(a) Public Sector Banks
(i) State Bank Group The State Bank was established in 1955 under the State Bank of India Act by nationalization of Imperial Bank of India. There are wholly owned seven subsidiaries of the State Bank of India, State Bank of Bikaner and Jaipur. State Bank of Patiala, State Bank of Hyderabad. State Bank of Saurashtra, State Bank of Travancore. State Bank of Indore and State Bank of Mysore State Bank of India, as regards offices. work and man-power, is the largest Bank in India and the largest bank in the world. In India. it acts as an agent of the Reserve Bank at the place where it or its subsidiary has branch and there is no branch of Reserve Bank
(ii) Nationalised Banks. Fourteen private commercial banks were nationalized by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and six private commercial banks were nationalized in 1980 by the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1980. With the merger of New Bank of India in the Punjab National Bank, the number of the nationalised bank is 19.
(iii) Bhartiya Mahila Bank-After Pakistan and Tanzania. India is the third country to have a bank for women. Bhartiya Mahila Bank was established in 2013 and it was inaugurated by the then Prime Minister Dr. Manmohan Singh on 19th November, 2013, the date of birth of the former Prime Minister Smt. Indira Gandhi. Initially, it were reported to be a bank for women but it invites deposits from everyone but the lending will be predominantly to the women In India, only 20% women have accounts in financial institutions whereas the men have 46% and per capita credit to women is 80% lower than men.
One of the key objectives of the Bank is to focus on the needs of women and promote economic empowerment through women’s growth and developments.
The Bank’s objective is to place emphasis on finding for skills. development to help in economic activity. The lending to the women will be at slight consessional rates. The plan is to mobilize the women to train them in vocations of toy-making, driving tractors or mobile repairs etc. One of the objectives is to promote asset ownership among the women which reduces domestic violence. Such preferential treatment to the women will give them reverence and protection. [En Wikipedia Org/Wiki/Bhartiya Mahila Bank]
Capital. The Bank’s capital at present is Rs. 1000 Crores. The Government’s plan was to set up 25 branches by the end of March, 2014 and to have 500 branches by 4th year of operation ie. 2017.
It has 42 branches and plan to have 80 branches till March, 2015 and 700 branches within 2 years.
(b) Private Sector Banks
Private sector banks fall in two categories-Indian Banks and Foreign Banks.
(i) Indian Banks-These banks are owned by the private entrepreneurs.
(ii) Foreign Banks. These banks are incorporated under the foreign law but carry on their business in India
(b) Various Banking Business are detailed below- There are following functions of a modern bank:-
Main Functions of a bank-[See discussion under Question No. 1]
Q. 15. Discuss the Commercial Banks, Industrial Banks and Agricultural Banks.
Or
“Banks are the foundation of Trade and Industry in modern times.” Discuss the different types of banks and their major functions.
Ans. Banks are definitely foundation of Trade and Industry in modern times because of the growing needs of the people. This is the reason that the function of the bank has increased tremendously. The classification of Banks and its different functions are being dealt with below-
Classification of Banks in India. The banks in India can be classified as follows-
Apex Banks. (i) Industrial Development Bank of India.
(ii) National Bank for Agriculture and Rural Development (NABARD).
(iii) Industrial Investment Bank of India Ltd.
(iv) Export Import Bank of India.
(v) National Housing Bank.
(vi) Other Banks
(i) Industrial Development Bank of India Ltd This Bank was established in 1964 as a wholly owned subsidiary of Reserve Bank of India under the Industrial Bank of India Act to provide term finance to industries It was made an independent bank as an apex financial institution in 1976. Later on, Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003 was created and L.D.B.I. Bank Ltd. was formed under the Companies Act. 1956 and it took over the business of the Industrial Bank of India. It started its banking business w.e.f. 1.10.2004 under the licence granted by the Reserve Bank of India under Banking Regulation Act, 1949. Now it functions as a ‘Commercial bank but it has to finance for the development of industries also.
(ii) National Bank for Agriculture and Rural Development (NABARD).This bank was established in 1982 under the NABARD Act, 1981. This is the top development bank to provide financial assistance to the agriculture and village development. The Act was amended in 2001 and it was classified as a Development Bank.
Regulatory functions. It inspects Regional Rural Banks and Co- operative Banks (other than primary Co-operative Banks) It is only on the prior recommendation of NABARD that the Reserve Bank of India permits to open a new branch of such banks.
(iii) Industrial Investment Bank of India Ltd-An Industrial Investment Bank of India (IIBI) was established in 1985 under IIBI Act, 1984 to provide and for rehabilitation of sick and dead industries. Previously, it functioned as Industrial Reconstruction Corporation of India (IRCI) which was established in 1971 in view of growing problems of industrial sickness. This undertaking was transferred to Industrial Investment Bank of India (IIBI) on 17th March, 1997 which was established as a Government Company with additional flexibility in operation.
(iv) Export-Import Bank of India (Exim Bank) -This Bank was established on January 1, 1981 under the Export Import Bank of India Act. 1981. This is a lead Bank in India to promote international trade by providing financial assistance to the export and import business and to co- ordinate the functioning of the institutions engaged in such finance It not only provides loans to Indian Companies but also Indian Companies establishing joint ventures overseas.
(v) National Housing Bank-This Bank was established under the National Housing Bank Act. 1987 as a wholly subsidiary of Reserve Bank. It is an apex institution to provide housing finance and other support to the institutions engaged in providing housing finance. It can inspect the books and accounts of any housing finance institution to which it provides financial institution.
(1) Other Banks-
(A) Commercial Banks.
(B) Regional Rural Banks.
(C) Co-operative Banks:
(D) Development Banks/Corporations:
(i) Industrial Finance Corporation
(ii) Industrial Credit and Investment Corporation of India (merged with I.C.I.C.I Bank).
(iii) Small Industries Development Bank of India (SIDBI).
(iv) State Land Development Banks/Corporation:
(a) State Finance Corporation.
(b) State Industrial Development Corporation
(c) North State Development Finance Corporation Ltd.
(In the sub-head (D) only Small Industries Development Bank of India has been discussed).
Small Industries Development Bank of India (SIDBI) Ltd. -SIDBI was established on April 2, 1990 under SIDBI Act, 1989. This was a wholly owned bank of Industrial Development Bank of India. SIDBI was made a wholly independent Bank by the amendment of SIDBI Act in 2000. It is the principal development financial institution to promote, finance and develop small scale industries and to co-ordinate the functions of other similar Financial institutions such as State Financial Corporations, State Industrial Development Corporations, State Small Industries Corporations. Scheduled Banks and State Co-operative Banks SIDBI is one of the top thirty Development Banks of the world. SIDBI is supervised and regulated by RBI SIDBI finances micro, small and medium enterprises for economic growth, employment generation and balanced regional developmert Micro finance programme was started by SIDBI in 1994 by providing small credit funds to NGOs all over India which acted as intermediaries to provide funds to their clients. In 1999, SIDBI Foundation for Micro Credit (SFMC) was established for the creation of strong micro finance Institutions in the country to finance the poor.
Q. 16. (a) Distinguish between a Commercial Bank and a Co- operative Bank and discuss their comparative advantages and disadvantages.
(b) Discuss briefly the constitution and working of a Co- operative Credit Society.
Ans. (a) Differences between Commercial Bank and a Co-operative Bank and also the constitution and working of a Co-operative credit society is discussed hereunder-
Co-operative Banks. The Co-operative Banks have played an important role in implementation of Government schemes. There has been rapid expansion of these banks after independence in India.
Co-operative Banks and Commercial Banks. The Saraiya Commission has made the comparison between the Co-operative Bank and Commercial Banks regarding their structure and functions as follows :
The functions of co-operative banks are mainly to cater to the needs of the rural areas and small borrowers and are concerned more with the financing of agriculturists. Although they also perform the main banking functions, their range is limited as compared to that of commercial banks. Apart from these, there are important organisational differences between commercial and co-operative banks. These are:
(1) Commercial Banks operate through their network of branches spread- over mainly, at least before nationalisation, in urban and semi-urban areas and their management and policies were controlled by the Head Office. Co operative Banks, however, are distinct entities by themselves with separate jurisdiction and independent Board of Directors. The Co-operative Banks are organised on a co-operative basis and are governed by their members according to the co-operative laws.
(2) Commercial Banks are subject to the Banking Regulation Act and the control of the Reserve Bank of India as well as in certain respects of the Central Government. Co-operative Banks, on the other hand, are organised on a co-operative basis and are governed by their members according to the co-operative laws and are under the control of State Governments and to a lesser extent of the Reserve Bank. Certain provisions of the Banking Regulation Act also apply to the Co-operative Banks.
(3) Commercial Banks are audited by external auditors whereas the audit and inspection of Co-operative Banks is done by the State Co-operative Department and Reserve Bank of India. The method of audit and supervision of the Commercial Banks by the Reserve Bank of India and audit by external auditors appear to be more effective.
(4) Deposits of Commercial Banks are derived from public borrowings from Reserve Bank being only marginal. Co-operative Banks on the other hand rely for their resources on borrowing from Reserve Bank of India at concessional rates. They are less dependent on deposits from public than Commercial Banks.
(5) Commercial Banks are required to maintain minimum ratios between their balance with the RBI, other cash and investments in approved securities and demand time deposits whereas Co-operative Banks maintain cash reserves and liquid assets in relation to deposits only
(6) Deposits of Commercial Banks may be collected in one area and lent in other areas and they can be shifted from one centre to another while deposits raised by Central Co-operative Banks can be used for financing agricultural activities only.
(7) Commercial Banks can invest more freely than their co-operative counterparts who have to follow the rules for investments laid down by the Registrar of Co-operative Societies.
(b) Urban Co-operative Banks and Primary Co-operative Credit Institution. These banks have a singletic structure The apex Bank is the State Co-operative Banks and Primary Co-operative Banks are generally known as Urban Cooperative Banks. In the urban areas, there are Primary Credit Societies also which advances loan to their members. If these societies need loan, they can take the same from U.P. Cooperative Banks or District Co-operative Banks on becoming their members. The credit societies are subject to the control of the State Co-operative Department. These credit societies may also deposit the money on the approval of the Reserve Bank of India.
Rural Co-operative Credit Institutions. In the rural areas, there are two sets of institutions which provide (i) short-term credit, and (ii) long- term credit.
(i) Short term credit Institutions. These societies are institutions and have three tier federal structure. At the apex are State Co-operative Banks. At district level are District Central Co-operative Banks. They are also called as Central Co-operative Bank. At the village level, these are Primary Agricultural Credit Societies. District Co-operative Banks are intermediaries between these societies and U.P. State Co-operative Banks. It is only in North Eastern Region, the unitary structure is generally observed where the State Co-operative Banks directly provide credit to the Primary Agricultural Credit Societies without any intermediary.
(ii) Long term credit Institutions. In such type of institutions, at the apex level are State Co-operative Agriculture and Rural Development Banks and at the district or block level Primary Co-operative Agriculture and Rural Developnient Banks.
Regulation and supervision of Urban Co-operative Banks. The Urban Co-operative Banks are primarily co-operative societies. They are under the supervision and regulation of Urban Banks Department of R.BI The same department also regulates such Bank. The department acts in co ordination with Registrars of Co-operative Societies of the State Governments. Thus, the urban co-operative banks are under the dual control and supervision. The Co-operative Societies Acts regulate the registration, administration and amalgamation of these Banks. The Banking related functions e.g. licence to start new banks or sanction rate of interest, loan policy, norms of immaterial exposure are regulated by the RBI under the Banking Regulation Act.
Regulation and supervision of Rural Co-operative Banks. State Co-operative Banks and District Co-operative Banks are under the supervision of NABARD under the provisions of Section 35(6) of the Banking Regulation Act. Under Section 13(3) of the NABARD Act. the NABARD has constituted Board of Supervision for State Co-operative Banks, District Co-operative Banks and Rural Regional Banks The Board issues directions and guidance regarding policies and the matter relating to supervision and inspection.
Q. 17. Discuss the following:
(a) Main features of the Industrial Finance Corporation of India.
(b) The Agricultural Finance Corporation Limited.
(c) The Industrial Credit and Investment Corporation of India.
Ans. (a) The Industrial Finance Corporation of India (IFCI)- The IFCI was the first to be set up in July 1948 to build a term financing structure in India. As a national level development bank, it has been providing medium and long term credit to eligible industrial concerns. It has been notified as a company since 1.7.1993 and a nodal agency for administering “Sugar Development Fund” and “Jute Modernisation Fund” established by the Central Government. Its paid-up Capital, reserves. borrowings from market, IDBI the GOI and credits secured from foreign capital markets and financial institutions form its resources.
The IFCI provides financial assistance in the form of rupees, foreign currency loans, underwriting or subscribing to shares and debentures and guarantees for deferred payments and foreign loans to the medium to large- sized industrial projects. During 1998-99 it sanctioned Rs. 8683.8 crores and disbursed Rs. 4,749.5 crores under various financial schemes as against Rs. 32.2 and 17.4 respectively in 1970-71.
(b) The Agricultural Finance Corporation Limited (AFC)- The AFC is the consortium of commercial banks duly promoted by the Indian Bank’s Association in April, 1968. Covering the entire sector of agricultural and rural development of India, it helps banks in participating more and more in financing the sector aforesaid. It has prepared 350 projects involving institutional credit component of over Rs. 1,000 crores. It is also engaged in international consultancy and provides services of its experts to Joint Missions. It has also participated in over 55 international assignments. Like other Banks and Corporations, the AFC also is a limited company.
(c) The Industrial Credit & Investment Corporation of India Ltd. (ICICI)- Set up in 1955, the ICICI provides risk and loan capital, promotes widespread distribution of industrial securities and furnishes managerial technical and administrative advice to Indian industry. It also encourages others to invest their surpluses. ases. It provides finance to enterprises for creation, expansion and modernisation of productive facilities in various forms. It assists projects at a project size of Rs. 3 crores and even to smaller enterprises. Any company with limited liability or promoter of such a company, any sole proprietory concern, partnership firm and any co- operative society may get ICICI assistance.
ICICI has LIC, GIC and its subsidiaries as its major shareholders. It has also foreign share-holders. It had Rs. 1863 crores of paid-up capital as on 31.03.1999 and a huge capital supplemented by borrowings from GOI, World Bank, KFW of Germany, Govt. of U.K. etc. and issue of bonds and debentures in India and abroad. It has been an important source of foreign currency to the private and joint sector Indian enterprises. It disbursed loans of Rs. 19,225.10 crores, sanctioning Rs. 34,219.60 crores during the year 1998-99. It has taken up virtual banking.
Q. 18. (a) Discuss the constitution, power and function of Debt Recovery Tribunal.
(b) Discuss the mode of Recovery of Debt by the Debt Recovery Tribunal.
Ans. (a) Establishment of Debt Recovery Tribunal and Appellate Tribunal-
(1) Establishment of Tribunal (Sec. 3).- (1) The Central Government shall, by notification, establish one or more Tribunals, to be known as the Debts Recovery Tribunal, to exercise the jurisdiction, powers and authority conferred on such Tribunal by or under this Act.
(2) The Central Government shall also specify, in the notification referred to in sub-section (1), the areas within which the Tribunal may exercise jurisdiction for entertaining and deciding the applications filed before it.
(2) Composition of Tribunal (Sec. 4).-(1) A Tribunal shall consist of one person only (hereinafter referred to as the Presiding Officer) to be appointed by notification, by the Central Government.
(2) Notwithstanding anything contained in sub-section (1), the Central Government may authorise the Presiding Officer of one Tribunal to discharge also the functions of the Presiding Officer of another Tribunal.
The Recovery Officer cannot decide the claims of the parties even if such claims fall within the purview of the Act. He cannot discharge functions of the Tribunal. It is only Tribunal which can adjudicate upon claims and counter claims. [Central Bank, Banglore v. Debts Recovery Appellate Tribunal, AIR 2015 (NOC) 445 (Bom) (DB))
(3) Qualifications for appointment as Presiding Officer (Sec. 5). A person shall not be qualified for appointment as the Presiding Officer of a Tribunal unless he is, or has been, or is qualified to be, a District Judge.
(4) Term of Office (Sec. 6). The Presiding Officer of a Tribunal shall hold office for a term of five years from the date on which he enters upon his office or until he attains the age of sixty five years, whichever is earlier.
Qualifications, terms and conditions of service of Presiding Officer (Sec. 6A).-Notwithstanding anything contained in this Act, the qualifications, appointment, term of office, salaries and allowances, resignation, removal and the other terms and conditions of service of the Presiding Off Officer of the Tribunal appointed after the commencement of Part XIV of Chapter VI of the Finance Act, 2017 (7 of 2017), shall be governed by the provisions of Section 184 of that Act:
Provided that the Presiding Officer appointed before the commencement of Part XIV of Chapter VI of the Finance Act, 2017 (7 of 2017), shall continue to be governed by the provisions of this Act, and the rules made thereunder as if the provisions of Section 184 of the Finance Act, 2017 had not come into force.
In connection with Section 6A for the words and figures “Part XIV of Chapter VI of the Finance Act, 2017, shall be governed by the provisions of the Section 184 of that Act, the words and figures” the Tribunal Reforms Act, 2021, shall be governed by the provisions of Chapter II of the said Act, shall be substituted.
(5) Staff of Tribunal (Sec. 7). The Central Government shall provide the Tribunal with one or more Recovery Officers and such other officers and employees as that Government may think fit.
(6) Establishment of Appellate Tribunal (Sec. 8). The Central Government shall, by notification establish one or more Appellate Tribunals, to be known as the Debts Recovery Appellate Tribunal, to exercise the jurisdiction, powers and authority conferred on such Tribunal by or under this Act.
(7) Composition of Appellate Tribunal (Sec. 9).- An Appellate Tribunal shall consist of one person only (hereinafter referred to as the Chairperson of the Appellate Tribunal to be appointed, by notification, by the Central Government.
(b) Jurisdiction, powers and authority of Tribunals
1. Jurisdiction, powers and authority of Tribunals (Sec. 17).- (1) A Tribunal shall exercise, on and from the appointed day. the jurisdiction, powers and authority to entertain and decide applications from the banks and financial institutions for recovery of debts due to such banks and financial institutions.
(2) An Appellate Tribunal shall exercise, on and from the appointed day. the jurisdiction, powers and authority to entertain appeals against any order made, or deemed to have been made, by a Tribunal under this Act.
2. Power of Chairperson of Appellate Tribunal (Sec. 17-A)- The Chairperson of an Appellate Tribunal shall exercise general power of superintendence and control over the Tribunals under his jurisdiction including the power of appraising the work and recording the annual confidential reports of Presiding Officers.
3. Bar of jurisdiction (Sec. 18). On and from the appointed day, по Court or other authority shall have, or be entitled to exercise, any jurisdiction, powers or authority (except the Supreme Court, and a High Court exercising jurisdiction under Articles 226 and 227 of the Constitution) in relation to the matters specified in Section 17.
(b) The mode of Recovery of Debt by the Debts Recovery Tribunal. The mode of recovery of debt has been dealt with under the following sections of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993-
1. Modes of recovery of debts (Sec. 25). The Recovery Officer shall, on receipt of the copy of the certificate under sub-section (7) of Section 19, proceed to recover the amount of debt specified in the certificate by one or more of the following modes, namely –
(a) attachment and sale of the movable or immovable property of the defendant,
(b) arrest of the defendant and his detention in prison;
(c) appointing a receiver for the management of the movable or immovable properties of the defendant.
In Nitin Gunwant Singh v. Indian Bank, AIR 2012 SC 2160, to recover the debt, the property of the debtor was attached and sold and the recovery officer rejected the objection of third person, the petitioner, that he was a tenant in possession and ordered the property to be handed over to the purchaser, the Court held that interference by the petitioner would delay recovery, he had a remedy to obtain restitution in the suit which was already pending. If the decision of the Recovery Officer was averse to him, he is entitled to file a suit and seek adjudication of his right to protect his interest.
2. Validity of certificate and amendment thereof (Sec. 26).- It shall not be open to the defendant to dispute before the Recovery Officer the correctness of the amount specified in the certificate, and no objection to the certificate on any other ground shall also be entertained by the Recovery Officer.
In Shanti Jaiswal v. State Bank of India, AIR 2015 Jhar 13, it has been held that Section 27(1) neither gives power to Presiding Officer if the Debtsb Recovery Tribunal nor the Recovery Officer has jurisdiction to accept an amount lesser than the certificated amount.
4. Other modes of recovery (Sec. 28). Where a certificate has been issued to the Recovery Officer under sub-section (7) of Section 19, the Recovery Officer may, without prejudice to the modes of recovery specified in Section 25, recover the amount of debt by any one or more of the modes provided under this section.
Q. 19. (a) Explain the nature and scope of the contract of guarantee.
(b) Explain the contract of indemnity. How is it different from a contract of guarantee?
(c) Explain the difference between ‘contract of guarantee’ and ‘contract of indemnity’.
Ans. (a) The term “a contract of guarantee” is defined in Section 126 of the Indian Contract Act, 1872. It is defined as “a contract to perform the promise, or discharge the liability, of a third person in case of his default” A “guarantee may be either oral or written”. For example, where Mr. Ram being in need of a loan of Rs. 10,000/- induces his friend Mr. Rahim to promise to the bank to repay the loan in case of Mr. Ram’s default, the contract so made is called a contract of guarantee. Mr. Ram is the primary debtor and Mr. Rahim is the guarantor. The creditor Bank advanced loan on Mr. Rahim’s contract of guarantee, popularly called ‘guarantee. The contract of guarantee is a contract of secondary nature, the principal contract being that by Mr. Ram, the primary debtor. The contract of guarantee cannot hold good unless there is debtor’s promise to pay the amount to the creditor bank. Mr. Ram must pay back the loan and in default thereof the guarantor is bound to pay the due amount to the bank.
Under certain circumstances, the guarantor is liable to pay though the principal debtor is not. For instance, where the original contract is void as in the case of contract with a minor, the surety is liable not only as a guarantor but also as a principal debtor. Thus the contract of guarantee is not a collateral but the principal contract. Further the Supreme Court held in S. Chatianatha Karayalar v. Central Bank of India Lad. (AIR 1965 SC 1856) that the principle is well settled that if a transaction is contained in more than one document between the same parties, those must be read and interpreted together. Where the overdraft was sanctioned to the company on hypothecation of the stock after the letter of continuity and promissory note being executed in favour of the bank by the three persons severally and jointly, the guarantor will not be a co-obligant and be the true surety.
(b) Contract of indemnity- At first sight a contract of indemnity appears to be analogous to a contract of guarantee. According to Section 124 of the Indian Contract Act, a contract of indemnity is defined as “a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person.” For instance, where the railway receipt is lost, the goods may be delivered to the consignee on his signing an indemnity bond to compensate the Railways for any loss which the Railways may have to suffer as a result of delivering the goods to him without the production of the Railway Receipt.
(c) Guarantee and Indemnity: Distinguished-The contracts of guarantee differ from contracts of indemnity. In the former case, there must be two contracts, a principal contract between the borrower and the lender and a secondary contract between the lender and the surety But in the latter case (contract of indemnity), there is only one primary contract. In the case of guarantee, it is the principal debtor who is primarily liable and the guarantor’s liability comes into existence only when the principal debtor makes a default. But in the case of indemnity, the promisor is the only person who becomes liable to the promisee in case of latter’s loss due to his doing something at the express desire of the former.
Another point of distinction between a guarantee and indemnity is that in both cases the position of the creditor remains more or less the same whether the payment is made by the principal debtor or by the promisor- surety-either by the guarantor or by the indemnifier. But the legal position of the guarantor-surety will differ very much from that of the indemnifier after the payment of the debt or performance of the promise. A surety can file a suit in his own name if he pays the loan or performs the promise against the debtor but an indemnifier cannot do so.
The test to determine guarantee or indemnity is whether the obligation is undertaken at the debtor’s request or not. In case the contract is on the debtor’s request, express or implied. the contract is one of guarantee. Where the obligation is undertaken without any express or implied request of the loanee, the contract is one of indemnity. It was observed so in Periamma v Banians & Co., ILR 49 Madras 156.
Contract of guarantee are generally required in most of the countries, to be in writing by law though contracts of indemnity can be made orally In India, the law does not prescribe either kind of the contracts to be in writing. However, no banker is agreeable to accept a verbal guarantee and hence all prefer written ones for avoiding any of the legal complications.
Guarantees are treated better than indemnity by the bankers for various reasons. (1) A guarantee is adaptable to different circumstances. (2) Guarantees do not entail many positive obligations on the part of the banker and (3) it is easy to obtain guarantees. However, such a security is entirely depend on (i) the initial and subsequent solvency of the surety and (ii) proper drafting or the completeness of the form of agreement itself. The terms of guarantee are to be interpreted strictly The Apex Court judgment in the State of Maharashtra v. Dr. M.N. Kaul, (1963) 38 Com Cas, confirms it that a guarantor cannot be held liable for more than he has undertaken. It was held so also in Bank of Baroda v Prakash Warehouse & others. (1981)NComp Cas 609 (Del.)
Q. 20. Briefly discuss the different types of securities which may be accepted by a Banker while granting loans or advances to its customers.
Or
Mention one important precaution to be taken by a Banker while granting advance against security of fixed deposit receipts?
Ans. Different types of securities and the mode of secured loans and advances-Bankers advance loans either on the mere personal security of a borrower, or on his personal security coupled with that of one or more other persons. Where loans are secured by guarantees, the guarantor usually does not pledge any tangible security, rather merely promises to pay the loan amount due from the principal debtor in case the latter fails to repay.
Secured Loans- Loans are secured when these are covered by security or securities. There are three kinds of securities (1) a simple lien, the possessory right on the footing as a pledge: (2) a mortgage passing the property out and out; and (3) “a security intermediate between a lien and a mortgage, viz a pledge whereby a contract, a deposit of goods is made as a security for debt and the right to the property vests in the pledge so far as is necessary to secure debt”, as held in Halliday v. Holgate, (1868) I.R 3 Exch. 299. Loans are thus secured now by different kinds of securities according to the locality in which they carry on their business.
Types/kinds of Securities- Bank loans and advances are usually secured by stock exchange securities, bullion, goods, documents of title to goods and immovable property and miscellaneous securities like life policies, ships and account books receivable.
The securities which are officially listed and dealt in, on the stock exchange and their principal features may be noted below:
Collateral Securities
1. Public Debts- Governments borrow very large amounts to meet their current requirements when current revenues from taxes, etc. are inadequate. When a Government borrows, the credit of the entire nation is pledged. The terms as to the repayment and interest are settled according to the conditions of the money-market, the credit and the state of finances of the Government borrowing the money. Securities in the shape of Public debts are considered very safe.
2. Semi- Government securities- Port trusts, improvement trusts. and municipal corporations bonds and debentures are securities of this class. Securities of semi-public bodies also are considered very safe where the legality of their issues is not questioned.
3. Securities of Public utility companies-Various electric supply. gas, telephone, metro, tramways, hydro-electric power companies and other public utility companies also issue bonds etc for rendering necessary services for the welfare of the country. Their securities are regarded quite safe by the bankers.
4. Industrial securities- Shares, stocks, bonds and debentures of manufacturing, trading, shipping, aviation and extracting companies form this class of securities. Bankers prefer debenture stock to preference shares, preference shares to ordinary shares, ordinary to deferred stock.