Banking Law Notes (Very Descriptive) PDF

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MOD MODEL EL A NSWE NSWER R BANKING LAW & PRACTICE AC ACCOR COR CORDING DING TO K SLU PA PATTE TTE TTERN RN (2020) SU SUBJEC BJEC BJECT T TEA TEACHER CHER CHER:: Mrs Yasmeen Tabassum (Vice Principal) 1. DI DISCUS SCUS SCUSS S THE V AR ARIOUS IOUS TYPE OF B ANKS A LON LONG G WIT WITH H THE THEIR IR FUN FUNCTI CTI CTIONS ONS Broadly, banks are classified either into commercial banks or as central bank. They are also classified as Scheduled and Non-scheduled Banks. Scheduled banks have been included in the second schedule of the Reserve Bank, and fulfils the following three criteria: 1. It must have a paid up capital of at least Rs. 5 lakhs. 2. It must fulfil the RBI norms about no activity that may be detrimental to the depositors’ interests. 3. It must be a Corporation (not a partnership or a single ownership firm). Non-Scheduled Banks are excluded from the Second schedule of RBI. The Reserve Bank does not exercise much control over them, but they report monthly to RBI. The central bank has the primary function of regulating commercial banks and other economic activities in the economy. It acts as a Banker’s Bank. In India, the central Bank is the Reserve Bank of India. It is the apex bank who controls all other banks by regulating and supervising their activities. Commercial banks , These are those banks which provide banking services to people with a profit motive. They charge a certain prescribed amount for the services they provide. There are several types of commercial banks functioning in India based upon different categories: I. Public Sector Banks – Majority stake is held by Government • State Bank of India and its associate banks: These associate banks are State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, and State Bank of Travancore. • Nationalised Banks– These are those commercial banks that have been nationalized for fulfilling the social objectives of the government. There are 20 Nationalised banks in India. These are – Allahabad Bank, Andhra Bank, Bank of Maharashtra, Bank of Baroda, Canara Bank, Central Bank of India, Bank of India, , Corporation Bank, Dena Bank,

Indian Overseas Bank, IDBI Bank Ltd., Oriental Bank of Commerce, Indian Bank, Punjab & Sind Bank, Punjab National Bank, Union Bank of India, Syndicate Bank, United Bank of India,UCO Bank, and Vijaya Bank. • Regional Rural Banks(RRB)– These banks have been established to strengthen the rural economy. They facilitate the credit and deposit flow for farmers, artisans, labourers in their limited local area. These banks are jointly owned by the central and state government along with a sponsor commercial bank. II. Private Sector Banks – Majority share capital is with private individuals & corporates • Old Private Banks – There are fourteen old private banks operating in India. These banks were not nationalized when other banks were nationalized in 1969 and 1980. These are- Catholic Syrian Bank Ltd., Dhanalakshmi Bank Ltd., City Union Bank Ltd., Federal Bank Ltd., Lakshmi Vilas Bank Ltd., ING Vysya Bank Ltd., KarurVysya Bank Ltd., Karnataka Bank Ltd., , Nainital Bank Ltd., Ratnakar Bank Ltd., Jammu & Kashmir Bank Ltd., South Indian Bank Ltd., SBI Commercial & International Bank Ltd, and Tamilnad Mercantile Bank Ltd. • New Private Banks- There are seven new private banks functioning in the Indian economy. These are- Axis Bank Ltd., Development Credit Bank Ltd, ICICI Bank Ltd., IndusInd Bank Ltd., Kotak Mahindra Bank Ltd., HDFC Bank Ltd., and Yes Bank Ltd. • Foreign Banks- These banks have their registered head offices in a foreign country, while they operate their branches in India. They can operate in India either through wholly-owned subsidiaries or through branches. There are 32 foreign banks operating their various branches in India. • Co-operative Banks – Cooperative banks are those scheduled banks that are regulated by RBI, under a cooperative structure to provide credit to all actegories of businesses. Their ownership structure is unique where like minded individuals and companies pool in money together to support credit facilities to businesses. These can operate in either Urban or Rural setting. That is another criteria to differentiate these cooperative banks. 2. WR WRITE ITE A N EXP EXPLANA LANA LANATOR TOR TORY Y NOT NOTE E ON TH THE E FUN FUNCTIO CTIO CTIONS NS OF CO COMMER MMER MMERCIA CIA CIAL L BANK OF INDI NDIA. A. In modern economy commercial Banks play an important role in the financial sector. A Bank is an institution dealing in money and credit. Credit money is the major component of money supply in a modern

economy. Commercial banks are the creators of credit. The strength of economy of any country basically depends on a sound and solvent banking system. A Commercial bank is a profit seeking business firms dealing in money or rather claims to money. It safeguards the savings of the public and give loans and advances. The Banking Companies Act of 1949, defines banking company as “accepting for the purpose of lending or investment of deposit money from the public, repayable on demand or otherwise and withdrawable by cheque, drafts, order or otherwise”. FU FU FUNCTI NCTI NCTIONS ONS O F COMM COMMERC ERC ERCIAL IAL B ANKS : Modern commercial banks perform a variety of functions. They keep the wheels of commerce, trade and industry always revolving. Major functions of a commercial bank are: - Primary or Banking functions and Secondary or Non-Banking functions. Pr Primar imar imaryy Func Function tion tions s :Commercial banks have two important banking functions. One is accepting deposits and other is advancing loans. 1)

Deposits:-

One of the main functions of a bank is to accept deposits from the public. Deposits are accepted by the banks in various forms. a)

Current Account Deposits:-

Current Accounts are usually opened by businessmen who have a number of regular transactions with the bank, both deposits and withdrawls. There is no restriction on number and amount of deposits. There is also no restriction on withdrawls. No interest is paid on current deposits. Banks may even charge interest for providing this facility. These accounts are also known as demand deposits as amount can be withdrawn on demand. b)

Saving Account Deposits:-

Saving Accounts are opened by salaried and other less income people. There is no restriction on number and amount of deposits. Withdrawls are subject to certain restrictions. It earns Interest but less than fixed deposits. It encourages saving habit among salary earners and others. Saving deposits are an important source of funds for banks.

c)

Fixed Account Deposits :-

Deposits in fixed account are time deposits. Money under this account is deposited for a certain fixed period of time varying from 15 days to several years. A high rate of interest is paid. If money is withdrawn before expiry date, the depositor receives lower rate of interest. Deposits can be renewed for further period. Many banks sanction loans against security of fixed deposits. d)

Recurring Account Deposits:-

In Recurring deposit, a specified amount is regularly deposited by account holder, at an internal of usually a month. This is to form the habit of small savings among the people. At the end of maturity period, the account holder gets a substantial amount. Interest on this type of deposit is almost equal to fixed deposits. Thus by creating variety of deposits, banks motivate people in a variety of ways and encourage savings in the economy. 2)

Loans and Advances:-

Banks not only mobilize money but also lend to its credit worthy customers for maximizing profits. Loans and Advances are granted To:a)

Business And Trade:-

Commercial banks grant short-term loans to business and trade activities in following forms:i)

Overdraft :-

Commercial banks grant overdraft facility to current account holders Under this system a borrower is allowed to draw more than what is deposited in his account. The borrower is granted to a fixed additional amount against collateral security. Interest is charged for actual amount drawn. ii)

Cash Credit :-

Cash credit is given by the bank to any businessman to meet regular working capital needs, against the security of goods or personal security. Interest is charged on actual amount drawn by the customer. iii)

Discounting Of Bills :-

When the holder of the bill is not in a position to wait till the maturity of the bill and requires cash urgently, he sells the bill of exchange to bank. Bank advance credit by discounting bills of exchange, government securities or any other approved financial instruments. The bank purchases the instruments at a discount. iv)

Money At Call :-

Banks also grant loans for a very short period, generally not exceeding 7 days. Such advances are repayable immediately at a short notice hence they are called as Money at Call or Call money. These loans are given to dealers or brokers in stock market against Collateral Securities. v)

Direct Loans :-

Loans are given to customers against the security of moveable properties. Their maturity varies from 1 to 10 years. Interest has to be paid on entire loan amount sanctioned. Loans are of many types like :a) Personal loans, term loans, call loans, participative loans, collateral loans etc. b)

Loans to Agriculture :-

Banks grant short-term credit to agriculture at a lower rate of interest. Loans are granted for irrigation, purchase of equipments, inputs, cattle etc. c)

Loans To Industries :-

Banks grant secured loans to small and medium scale industries to meet their working capital needs. The time period may be from one to five years. It may be in the form of Overdraft, cash credit or direct loan. d)

Loans To Foreign Trade :-

Loans are granted to export and import in the form of direct loans, discounting of bills, guarantee for deferred payments etc. Here the rate of interest is low. e)

Consumer Credit / Personal loans :-

Banks also grant credit to household in a limited amount to buy some durable consumer goods like television sets, refrigerators, washing

machine etc. Such consumer credit is repayable in installments. Under 20-point programme, the scope of consumer credit has been extended to cover expenses on marriage, funeral etc., as well. f)

Miscellaneous Advances :-

Banks also gives advances like packing credits to exporters, export bill purchased or discounted, import finance, finance to self-employed, credit to weaker sections of society at concessional rates etc.

II.

Secondary Functions :-

Banks gives various forms of services to public. Such services are termed as non- banking or secondary functions :1.

Agency Services:-

Banks perform certain functions on behalf of their customers. While performing these services, banks act as agents to their customers, hence these are called as agency services. Important agency functions are :a)

Collection :-

Commercial banks collect cheques, drafts, bills, promissory notes, dividends, subscriptions, rents and any other receipts which are to be received by the customer. For these services banks charge a nominal amount. b)

payment :-

Banks also makes payments on behalf of their customers like paying insurance premium, rent, taxes, electricity and telephone bills etc for such services commission is charged. c)

Income – Tax Consultant :-

Commercial banks acts as income-tax consultants. They prepare and finalise the income tax returns of their clients. d)

Sale And Purchase Of Financial Assets :As per the customers instruction banks undertake sale and

purchase of securities, shares and any other financial assets. Nominal charges are charged by a bank. e)

Trustee, Executor And Attorney :-

As a trustee, banks becomes the custodian and manager of customer funds. Bank also acts as executor of deceased customer’s will. As an Attorney the banks sign the documents on behalf of customer. f)

E- Banking :-

Through Electronic Banking, a customer can operate his bank account through internet. He can make payments of various bills. He can even transfer money from one place to another.

2.

Utility Services :-

Modern Commercial banks also performs certain general utility services for the community, such as :a) Letter Of Credit :Banks also deal in foreign trade. They issue letter of credit and provide guarantee to foreign traders for the soundness of their customers. b) Transfer Of Funds :Banks arrange transfer of funds cheaply and safely from one place to another. Transfer can be in the form of Demand draft, Mail transfer Travellers cheques etc. c) Guarantor :Banks offer a guarantee of payment on behalf of importer to facilitate imports with deferred payments. d) Underwriting :This facility is provided to Joint Stock Companies and to government to enable them to raise funds. Banks guarantee the purchase of certain proportion of shares, if not sold in the market. e) Locker Facility :-

Safe Lockers are provided to the customers. So that they can deposit their valuables like Jewellery , Securities, Shares and other documents. f) Referee:Banks may act as referee with respect to financial standing, business reputation and respectability of customers. g) Credit Cards :Credit card facility have been introduced by commercial banks. It enables the holder to minimize the use of hard cash. Credit card is a convenient medium of exchange which enables its holder to buy goods and services from member – establishment without using money.

III.

Subsidiary Activities :-

Many commercial banks also undertakes subsidiary activities such as :1)

Housing Finance :-

Housing finance is provided against the security of immoveable property of land and buildings. Many banks such as SBI, Bank of India etc. have set up housing finance subsidiaries. 2)

Mutual Funds :-

A Mutual fund is a financial intermediary that pools the savings of investors for collective investment in diversified portfolio securities Many banks like SBI, Indian Bank etc. have set up mutual fund subsidiaries. 3)

Merchant Banking :A variety of services are offered by merchant banking like :-

Management, Marketing and Underwriting of new issues, project promotion, corporate advisory services, investment advisory services etc. 4)

Venture Capital Fund :-

Venture capital fund provides start-up share capital to new ventures of little known, unregistered, risky, young and small private business, especially in technology oriented and knowledge intensive business. Many commercial banks like SBI, Canara Bank etc. have set up venture Capital Fund Subsidiaries. 5)

Factoring :-

Factoring is a continuing arrangement between a financial intermediary (factor) and a business concern (client) where by the factor purchases the clients accounts receivable. Banks like SBI and Canara Bank have established subsidiaries to provide factoring services. 3. DI DISCUS SCUS SCUSS S THE POW OWERS ERS O F RE RESER SER SERVE VE BA BANK NK OF IND INDIA IA UN UNDER DER BAN BANKING KING RE REGUL GUL GULATI ATI ATION ON AC ACT, T, 19 1949 49 The Reserve Bank of India (RBI) regulates and supervises Public Sector and Private Sector Banks. Under the provisions of the Banking Regulation Act, 1949, it can, inter alia― i. Inspect the bank and its books and accounts (section 35(1) ibid.); ii. Examine on oath any director or other officer of the bank (section 35(3) ibid.); iii. Cause a scrutiny to be made of the affairs of the bank (section 35(1A) ibid.); iv. Give directions to secure the proper management of the bank (section 35A ibid.); v. Call for any information of account details (section 27(2) ibid.); vi. Determine the policy in relation to advances by the bank (section 21 ibid.); vii. Direct special audit of the bank (section 30(1B) ibid.); and viii. Direct the bank to initiate insolvency resolution process in respect of a default, under the provisions of Insolvency and Bankruptcy Code, 2016 (section 35AA ibid.). Further, in respect of nationalized banks and the State Bank of India (SBI), under the provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980 (“Bank Nationalization Acts”) and the State Bank of India Act, 1955 (“SBI Act”) respectively, inter alia― 1. RBI’s nominee Director is a member on— i. the nationalized bank’s Management Committee of the Board, which exercises the powers of the bank’s Board with regard to credit proposals above specified threshold (section 9(3)(c) of the Bank Nationalization Acts, and paragraph 13 of the Nationalized Banks (Management and Miscellaneous Provisions) Schemes of 1970 and 1980 made by the Government under the Bank Nationalization Acts), and ii. the Executive Committee of the Central Board of SBI, which may deal

with any matter within the competence of the Central Board subject to SBI General Regulations, 1955 and Central Board’s directions (sections 19(f) and 30 of SBI Act, and regulation 46 of SBI General Regulations, 1955); iii. RBI approves the appointment and fixes the remuneration of the bank’s auditors (section 10 of the Bank Nationalization Acts, and section 41 of the SBI Act); and iv. RBI can appoint additional Directors on the nationalized banks’ Boards and State Bank of India’s Central Board (section 9A of the Bank Nationalization Acts, and section 19B of the SBI Act). In addition, whole-time Directors of nationalized banks and State Bank of India are appointed in consultation with RBI. RBI has powers under other laws as well, which include, inter alia, the power under section 12 of the Foreign Exchange Management Act, 1999 to inspect for compliance with the Act and rules etc. made there under. RBI also maintains the Central Repository of Information on Large Credits (CRILC) on aggregate fund-based and non-fund-based exposures of Rs. 5 crore and above of all banks. Further, RBI maintains the Central Fraud Registry and banks report all frauds involving amount above Rs. 1 lakh to RBI. In addition, RBI’s Master Directions on Frauds lay out guidelines on categorization, reporting and review of frauds, along with norms for consequent provisioning. The powers of RBI are wide-ranging and comprehensive to deal with various situations that may emerge in all banks, including public sector banks. No proposal with regard to change in RBI’s powers in respect of public sector banks is presently under consideration/consultation. Improvement in regulatory functioning being an ongoing process, Government engages with stakeholders, including RBI, and discusses issues as they evolve. 4. DE DEFINE FINE CHE CHEQUE QUE QUE.. EX EXPLAI PLAI PLAIN N THE DI DIFFER FFER FFERENT ENT KI KINDS NDS O F CRO CROSSIN SSIN SSING G OF CHEQ HEQUE UE AL ALONG ONG W ITH THEIR E FFECT FFECTS S Meaning of Cheque –Cheque is a negotiable instrument used to make payment in day to day business transaction minimizing the risk and possibility of loss. It is used by individuals, businesses, corporate and others to transact for making and receiving payment. As per negotiable instrument act 1881, A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.

There are three parties in Cheque Transaction – Drawer, Drawee and Payee. • Drawer (Maker of Cheque) – The person who issue the cheque or hold the account with bank. • Drawee – The Person who is directed to make the payment against cheque. In case of cheque, it is bank. • Payee – A person whose name is mentioned in the cheque or to whom the drawee makes payment. If drawer has drawn the cheque in favour of self then drawer...