Banking LAW notes for llb and bba llb PDF

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KLE LAW ACADEMY BELAGAVI(Constituent Colleges: KLE Society’s Law College, Bengaluru, Gurusiddappa Kotambri Law College, Hubballi, S. Manvi Law College, Gadag, KLE Society’s B. Bellad Law College, Belagavi, KLE Law College, Chikodi, and KLE College of Law, Kalamboli, Navi Mumbai)STUDY MATERIALforBANK...

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KLE LAW ACADEMY BELAGAVI (Constituent Colleges: KLE Society’s Law College, Bengaluru, Gurusiddappa Kotambri Law College, Hubballi, S.A. Manvi Law College, Gadag, KLE Society’s B.V. Bellad Law College, Belagavi, KLE Law College, Chikodi, and KLE College of Law, Kalamboli, Navi Mumbai)

STUDY MATERIAL for

BANKING LAW Prepared as per the syllabus prescribed by Karnataka State Law University (KSLU), Hubballi

Compiled by

Reviewed by

S.T. Murashillin, Asst. Prof.

Santosh Ramachandra Patil, Principal

K.L.E. Society’s S.A. Manvi Law College, Gadag

This study material is intended to be used as supplementary material to the online classes and recorded video lectures. It is prepared for the sole purpose of guiding the students in preparation for their examinations. Utmost care has been taken to ensure the accuracy of the content. However, it is stressed that this material is not meant to be used as a replacement for textbooks or commentaries on the subject. This is a compilation and the authors take no credit for the originality of the content. Acknowledgement, wherever due, has been provided.

About Study Material This study material is a compilation of resources on the basis Karnataka State Law University Syllabus. Notes are extracted from the following sources.

1. Tannan M. L., Banking Law and Practice, 2. M.S Parthasarthy , Khergamvala, Negotiable Instruments Act 3. Avatar sing, Laws of Banking and Negotiable Instruments 4. Goyel, L.C., The Law of banking and Bankers 5. https://www.jagranjosh.com 6. https://groww.in 7. https://www.iedunote.com 8. https://www.srdlawnotes.com 9. http:www.studypoints.blogspot.com 10. https://www.economicsdiscussion.net 11. https://indiacode.nic.in/ The student can refer the above for further reading

SYLLABUS

COURSE-III: OPTIONAL-II: BANKING LAW

UNIT-I Nature and Development of Banking - History of banking in India and elsewhere- indigenous banking-evolution of banking in India – different kinds of banks and their functions.-Multifunctional banks- growth and legal issues. Law Relating to Banking Companies In India: Controls by government and its agencies: On management-On accounts and audit-Lending-Credit policy-Reconstruction and reorganizationSuspension and winding up. UNIT-II Banking Regulation Act, 1949: Evolution of Central Bank, Characteristics and functions, Economic and social objectives, The Central bank and the State - as banker’s bank, The Reserve Bank of India as the Central Bank. Organisational Structure – Functions of the RBI- Regulation of monitory mechanism of the economy - Credit control - Exchange control-Monopoly of currency issue - Bank rate policy formation. Control of RBI over non- banking companies, Financial companies, Non financial companies. The Deposit Insurance Corporation Act, 1961: Objects and reasons- Establishment of Capital of DIC, Registration of banking companies insured banks, liability of DIC to depositors. Relations between insured banks, DIC and Reserve Bank of India.

UNIT-III Relationship of Banker and Customer: Legal character, Control between banker and customer, Banker’s lien, Protection of bankers, Customers - Nature and type of accounts-Special classes of customers- lunatics, minor, partnership, corporations, local authorities, Right and duties of Banker & customer. Consumer protection - banking as service. UNIT-IV Law Relating to Negotiable Instruments, 1881 ACT (read with the amended act of 2002) Negotiable Instrument – Kinds- Holder and holder in due course – Parties - Negotiation – Assignment - Presentment – Endorsement – Liability of parties – Payment in due course –

Special rules of evidence – material alteration – Noting and protest – Paying banker and collecting banker – Bills in sets – Penal provisions under NI Act- Banker’s Book Evidence Act UNIT-V Lending by Banks: Good lending principles- Lending to poor masses- Securities for advancesKinds and their merits and demerits – Repayment of loans: rate of interest, protection against penalty- Default and recovery – Debt Recovery Tribunal. Recent Trends of Banking System in India: New technology, Information technology, Automation and legal aspects, Automatic Teller Machine and use of internet, Smart card, Use of expert system, Credit cards.

BANKING LAW UNIT: I

Nature and Development of Banking A bank is a financial institution that provides banking and other financial services to their customers. A bank is generally understood as an institution which provides fundamental banking services such as accepting deposits and providing loans. Banks are a subset of the financial services industry. Almost in any country, banks represent main pillar of financial stability. Beside financial intermediaries, banks play an important role as national financial institutions in everyday life. A banking system provide and offer cash management services for customers, reporting the transactions of their accounts and portfolios throughout the day, trade with financial and bank’s financial instruments, offer exchange of currency and disburse different type of funds. The Banking sector offers several facilities and opportunities to their customers. All the banks safeguard the money and valuables and provide loans, credit, and payment services. The banks also offer investment and insurance products. As a variety of models for cooperation and integration among finance industries have emerged, some of the traditional distinctions between banks, insurance companies, and securities firms have diminished. In spite of these changes, banks continue to maintain and perform their primary role accepting deposits and lending funds

from these deposits. Banks are institutions which provide and hold liquidity sustainable flow for all other financial and non financial institutions. Through the monitoring and controlling of the banks, central bank can sustain and provide impact on country’s financial situations.

Today banks deal with different personality, different consumer behavior, manners and cultures. Customers can be seen as different generally, because they have different opportunities, financial capabilities, personalities, egos, social characters, different tastes and by any other aspects they are absolutely different from one to another. Through the segmentation bank differentiate customers and rank them according to its own interests and needs.

Banks generate profit from customer’s activities and by offering different services to them. A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank is the connection between customers that have capital deficits and customers with capital surpluses. Due to their influence within a financial system and an economy, banks are generally highly regulated in most countries.

Banks act as payment agents by conducting checking or current accounts for customers, paying checks drawn by customers on the bank, and collecting checks deposited to customers’ current accounts. Banks also enable customer payments via other payment methods such as Automated Clearing House (ACH), Wire transfers or telegraphic transfer, EFTPOS (pos terminal devices), and automated teller machine (ATM). Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending. Bank uses different channels of distribution such as Automated Teller Machines, a branch is a retail location, Offices (smaller unite that the branch), Call center, Mail, Agents, Sales Forces, Internet banking, Mobile banking, Relationship Managers, Telephone banking, Video banking and others.

Today customers have options they have power to influence over the banks. Customers are taking greater control of their banking relationships, and the banks that can provide more choice and flexibility will gain more control over their own destinies.

History and Evolution of Banking : Origin of the word Bank: According to some authorities, the word “Bank” is derived from the word bancus or banque, which means a bench. Some other authorities opine that the word “Bank” is derived from the German word “back” which means a joint stock fund. Early history of Banking: The Babylonians had developed a banking system as early as 2000 B.C. The Roman’s minute regulations as to the conduct f private banking were calculated to creat the utmost confidence in it. In the middle of 12 th century banks were established at Venice and Genoa. The modern banking may be traced to the money dealers in Florence.

In England: In England, during the reign of Edward III money changing was taken up by a Royal Exchanger for the benefit of the Crown. Later on merchants decided to keep their cash with goldsmiths. In 1672 English Banking received a rude setback. The Bank of England was established in 1694. With the enactment of Tonnage Act small private banking firms were extremely affected by the new bank. Another important Act gave a monopoly of note issue to the Bank of England. This was the first of the central banks and is still the banker for the English government. The BOE was originally privately owned but was nationalised in 1946 and eventually became an independent organization in 1998. The BOE issues all banknotes for England and Wales and it is

responsible for regulating bank notes issued by Scottish and Northern Irish banks. As the forerunner to the modern banking system of the UK, the BOE manages monetary policy and has its headquarters in the City of London. The Bank of England keeps safe all the gold reserves of the UK and that of some other countries. It is the largest protector of gold reserves in the world.

In India:

Banking is an ancient business in India with some of oldest references in the writings of Manu. Bankers played an important role during the Mogul period. During the early part of the East India Company era, agency houses were involved in banking. Three Presidency Banks were established in Bengal, Bombay and Madras in the early 19th century. These banks functioned independently for about a century before they were merged into the newly formed Imperial Bank of India in 1921. The Imperial Bank was the forerunner of the present State Bank of India. The latter was established under the State Bank of India Act of 1955 and took over the Imperial Bank. The Swadeshi movement witnessed the birth of several indigenous banks including the Punjab National Bank, Bank of Baroda and Canara Bank. In 1935, the Reserve Bank of India was established under the Reserve Bank of India Act as the central bank of India. In spite of all these developments, independent India inherited a rather weak banking and financial system marked by a multitude of small and unstable private banks whose failures frequently robbed their middle-class depositors of their life’s savings. After independence, the Reserve Bank of India was nationalized in 1949 and given wide powers in the area of bank supervision through the Banking Companies Act (later renamed Banking Regulations Act). The nationalization of the Imperial bank through the formation of the State Bank of India and the subsequent acquisition of the state owned banks in eight princely states by the State Bank of India in 1959 made the government the dominant player in the banking industry. In 1969, fourteen major Indian commercial banks were nationalized. These banks are Allahabad Bank, Bank of Baroda, Bank of India, Canara Bank, Central Bank of India, Dena Bank, Indian Bank, Indian Overseas Bank, Punjab National Bank, Syndicate Bank,

Union Bank of India,

United Bank of India, United Commercial Bank and Vijaya Bank. And in 1980 six more banks were nationalized. These banks constitute the public sector banks while the other scheduled banks and non scheduled banks are in the private sector.

Indigenous Banking: Indigenous bankers are private firms or individuals who operate as banks and as such both receive deposits and give loans. Like banks, they are also financial intermediaries. The system of indigenous banking in India dates back to ancient times. Until the middle of the nineteenth century the indigenous financial agencies constituted the bulk of the Indian financial system. They provided credit not only to traders and producers but also to the governments of the day. The advent of the British had an adverse impact on their business. The European bankers began to enjoy state patronage and prestige. The foreign (exchange) banks took over the financing of external trade. In metropolitan areas and important commercial centres the setting up of modern commercial banks took away more and more the business of indigenous financial agencies who, were gradually pushed to the financing of internal trade. With the growth of commercial and co-operative banking geographically as well as functionally, especially since the mid 1950s, the area of operations of these agencies has contracted further. Still there are thousands of family firms, especially in the western and southern parts of India, who continue to operate as traditional-style bankers. Many of these firms have continued in this business for several hundred years. Indigenous bankers are, by and large, urban-based. Their business, besides being hereditary, is confined to a few castes and communities. Functions of Indigenous Bankers: 1. Accepting Deposits: The indigenous bankers accept deposits from the public which are of current account and for a fixed period. Higher interest rate is paid on fixed account than on current account. Entries relating to deposits received, amount withdrawn and interest paid are made in the pass-books issued to the clients. The indigenous bankers also get funds from the commercial banks, friends, relatives and even from each other. 2. Advancing Loans:

The indigenous bankers advance loans against security of land, jewellery, crops, goods, etc. Loans are given to known parties on the basis of the promissory notes. Loans given on the security of land and buildings are based on mortgages registered with the Registrar of the area. 3. Discounting Hundis: Discounting of hundis is an important function of indigenous bankers. They write, buy and sell hundis which are bills of exchange. 4. Remittance Facilities: The indigenous bankers also provide remittance facilities to their clients. This is done by writing a finance bill to their branches, if they have at other place or to some other indigenous banker, with whom they have such arrangements. 5. Financing Inland Trade: They finance both wholesale and retail traders within the country and thus help in buying, selling, and movement of goods to different trading centres. 6. Speculative Activities: They indulge in speculation of food and non-food crops, and other articles of consumption. 7. Commission Agents: They act as commission agents to firms. 8. Run Firms: Some of the non-professional indigenous bankers run their own manufacturing processing or service firms, and on the strength of that they provide expertise and working capital to small industrialists. 9. Subscribe to Shares and Debentures: They provide long-term finance by subscribing to the shares and debentures of large companies. Importance of Indigenous Bankers:

The indigenous bankers have been playing a significant role in the economic life of India. When commercial banking had not developed, they were the main source of finance for agriculturists, traders, businessmen, small industrialists, etc. After nationalisation of commercial banks and the spread of banking in urban and rural areas, the activities of indigenous bankers have declined, but their importance has not become less because of the difficulties still faced by the borrowers in getting loans from the banks. The borrowers approach them directly and informally and get loans promptly and easily. They do not have any fixed banking hours and do not enter into formalities and procedures followed by commercial banks in advancing loans. That is why they are still popular with traders, businessmen, agriculturists, and ordinary people. They give loans mostly for productive purposes to meet the immediate and short-term needs of the borrowers. Indigenous bankers provide finance and remittance facilities to traders and small industrialists by advancing loans; writing, buying and selling hundis; writing finance bills and trade bills. Thus they help not only in financing internal trade but also in expanding it. In particular, they help in the movement of agricultural products from rural areas to markets and of industrial products to different parts of the country. Those indigenous bankers who combine banking with trading and agriculture help the farmers by lifting their produce from the farms, paying them in cash on the spot, and also giving them loans. The indigenous bankers act as commission agents when they purchase agricultural products on behalf of firms, mills, and trading houses. In this way, they again help in the development of internal trade.The importance of indigenous bankers has increased further with the development of capital market in India. They now provide long-term credit to companies by subscribing to their shares and debentures.

Kinds of Banks:

The principal banking institutions of a country may be classified into following types:

Central Banks: Central Bank is the bank of a country. Its main function is to issue currency known as ‘Bank Notes’. This bank acts as the leader of the banking system and money market of the country by regulating money and credit. These banks are the bankers to the government, they are banker’s banks and the ultimate custodian of a nation’s foreign exchange reserves. The aim of the Central Bank is not to earn profit, but to maintain price stability and to strive for economic development with all round growth of the country. Commercial Banks: A bank, which undertakes all kinds of ordinary banking business, is called a commercial bank. Functions: 1. Receiving money on Deposit 2. Lending of money 3. Transferring money

4. Miscellaneous Functions Viz., the issue of various forms of credit; under writing of capital issues; the acceptance of bills of exchange; the safe custody of valuables; acting as executors and trustees; preparing income tax returns and furnishing guarantees. Industrial Banks: An Industrial Bank is one which specializes by providing loans and fixed capital to industrial concerns by subscribing to share and debenture issued by public companies. Exchange Banks (Authorised Dealers in Foreign Exchange): These types of banks are primarily engaged in transactions involving foreign exchange. They deal in foreign bills of exchange import and export of bullion and otherwise participate in the financing of foreign trade. Co-operative Banks: Co operative Banks have also played a kited but important role in the banking system of the country. They are organized on co-operative principles of mutual help and assistance. They grant short-term loans to the agriculturists for purchase of seeds, harvesting and for other cultivation expenses. They accept money on deposit from and make loans to their members at a low rate of interest. 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.. Some of the regulatory functions in respect of co operative banks have been assumed by NABARD instead of RBI

Land-mortgage Banks (Presently known as Agriculture and Rural Development Banks):They are agriculture development banks. The Land-mortgage banks supply long-term loans for a period up to 15 years for development of land to improve agricultural yields. They gr...