UNIT - IINTRODUCTION- BANKING Structure of Indian banking system Role of RBI Classification and Functions of banks Banking legislations, banking sector reforms, nonperforming assets. Banker customer relationship Negotiable instruments

Banking - DefinitionAccording to Sec.51 (1) b, Banking Regulation Act 1979 Banking means accepting for the purpose of lending or investment of deposits of money form the public, repayable on demand or otherwise and withdrawalable by cheques, draft, order or otherwise

Features of Banking Dealing in money Deposits must be

withdrawable Dealing with credit Commercial in nature Nature of agent

Structure of Indian Banking SystemReserve Bank of IndiaCommercial BanksPublic Sector

Regional Rural BanksPrivate Sector

Co- operative Banks

IndianState Bank Group State Bank of India

State Co-Operative Banks

Foreign Central Co-operative BanksPrimary Credit Societies

Other Nationalized Banks Associate Banks

RBIThe Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Main function to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."

ORGANISATION STRUCTURE : CENTRAL BOARD OF DIRECTORS

Commercial BanksAn institution which accepts deposits, makes business loans, and offers related services. Commercial banks also allow for a variety of deposit accounts, such as savings, and time deposit. These institutions are run to make a profit and owned by a group of individuals. While commercial banks offer services to individuals, they are primarily concerned with

List of Commercial Banks in IndiaSBI & Associates: State Bank of India State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Travancore

Nationalized Banks: Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of

Indian Bank Indian Overseas

Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank

Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of

Foreign Banks: ABN Amro Bank Abu Dhabi Commercial Bank American Express Banking

Corporation Antwerp Diamond Bank AB Bank Bank International Indonesia Bank of America Bank of Bahrain & Kuwait Bank of Ceylon Bank of Nova Scotia Bank of Tokyo Mitsubishi UFJ Barclays Bank BNP Paribas Calyon Bank Chinatrust Commercial Bank

Citibank DBS Bank Deutsche Bank Hongkong & Shanghai Banking Corporation JP Morgan Chase Bank JSC VTB Bank Krung Thai Bank Mashreq Bank Mizuho Corporate Bank Oman International Bank Shinhan Bank Societe Generale Sonali Bank Standard Chartered Bank State Bank of

Other Scheduled Commercial Banks: Axis Bank Bank of Rajasthan Catholic Syrian Bank City Union Bank Development Credit Bank

Jammu & Kashmir

Dhanalakshmi Bank Federal Bank HDFC Bank

ICICI Bank IndusInd Bank ING Vysya Bank

Bank Karnataka Bank Karur Vysya Bank Kotak Mahindra Bank Lakshmi Vilas Bank Nainital Bank Ratnakar Bank SBI Commercial & International Bank South Indian Bank Tamilnad Mercantile Bank

Commercial BanksCurrently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 29 private banks and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs.

Regional Rural BankThe Government of India set up Regional Rural Banks (RRBs) on October 2, 1975. The banks provide credit to the weaker sections of the rural areas, particularly the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs. Initially, five RRBs were set up on October 2, 1975 which were sponsored by Syndicate Bank, State Bank of India, Punjab National Bank, United Commercial Bank and United Bank of India. Capital share being 50% by the central government, 15% by the state government and 35% by the scheduled bank. The total authorized capital was fixed at 1 crore which has since been raised to 5 Crore. Till date in rural banking in India, there are 14,475 rural banks in the country of which 2126 are located in remote rural areas.

Co-operative BanksCo operative Banks in India are registered under the Act. CoThe

operative

Societies

cooperative bank is also regulated

by the RBI. They are governed bythe Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.

Cooperative banks in India finance rural areas under:Farming Cattle

MilkHatchery Personal finance

Cooperative banks in India finance urban areas under:Self-employment Small scale units Home finance Consumer finance Personal finance

Role of RBIMonetary Role a) Note issuing authority b) Bankers bank and Lender of the last resort c) Banker to the Government d) Custodian of foreign exchange reserves e) Control of credit

Role of RBI2. Non Monetary Role a) Collection and publication of data b) Regulatory and supervisory function c) Development and promotion function

Role of RBIMonetary Role RBI has played and important role in the development of money and capital market in India, through its various monetary functions are as follows a) Note issuing authority RBI has the sole right to issue currency notes ( excluding one rupee note and coins which are issued by finance Secretary to the Government of India) b) Bankers bank and Lender of the last resort The RBI Controls volumes of reserves of all commercial, cooperative and regional rural banks. The determination of ability to create deposit/credit creation is by the RBI. The RBI is also connected with appointment of chief executives of these banks and has set up an autonomous department of supervision to ensure sound banking practices. In times of need the banks borrow funds from RBI and hence it is called the banker of last resort/lender of last resort.

c) Banker to the Government: RBI is the banker to central and state governments. It provides all banking services such as acceptance and withdraw of deposits, making and collecting payments on behalf of the government, transfer of funds and management of public debt. d) Custodian of foreign Exchange reserves Under section 40 of the RBI Act, the RBI is required to maintain the stability of the external value of the rupee. All foreign exchange receipts and payments are required to be transacted through RBI, or its authorized dealers (mainly major commercial banks) e) Control the credit The Reserve Bank of India function as the controller of credit by regulating the quality of credit, and

Non-Monetary Role a) Collection and publication of data: The reserve bank of India has a separate department of statistics for collecting, compiling and disseminating statistical information and conducting research related to bank and other financial sectors of the company including supply of money, credit banking operation and foreign exchange. b) Regulatory and supervisory Role: The RBI Act and banking Regulation Act have both conferred extensive powers of regulations and supervision to the RBI over commercial and cooperative banks to check malpractices and protect interests of investors. The RBI grants licenses without which no banking business can be commenced. c) Development and Promotional role: RBI has been aiding development an promoting saving and banking habits. Development of the Institutional agricultural

Central BankA bank which is entrusted with the functions of guiding and regulating the banking system of a country is known as its Central bank. Such a bank does not deal with the general public. It acts essentially as Governments banker, maintain deposit accounts of all other banks and advances money to other banks, when needed. The Central Bank provides guidance to other banks whenever they face any problem. It is therefore known as the bankers bank. The Reserve Bank of India is the central bank of our country. The Central Bank maintains record of Government revenue and expenditure under various heads. It also advises the Government on monetary and credit policies and decides on the interest rates for bank deposits and bank loans. In addition, foreign exchange rates are also determined by the central bank. Another important function of the Central Bank is the issuance of currency notes, regulating their circulation in the country by different methods. No other bank than the Central Bank can issue currency.

Commercial Banks Commercial

Banks are banking institutions that accept deposits and grant short-term loans and advances to their customers. In addition to giving short-term loans, commercial banks also give medium-term and long-term loan to business enterprises. Now-a-days some of the commercial banks are also providing housing loan on a long-term basis to individuals

Types of Commercial banks(i) Public Sector Banks: These are banks where majority stake is held by the Government of India or Reserve Bank of India. Examples of public sector banks are: State Bank of India, Corporation Bank, Bank of Boroda and Dena Bank, etc. (ii) Private Sectors Banks: In case of private sector banks majority of share capital of the bank is held by private individuals. These banks are registered as companies with limited liability. For example: The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd., Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global Trust Bank, Vysya Bank, etc. (iii) Foreign Banks: These banks are registered and have their headquarters in a foreign country but operate their branches in our country. Some of the foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, Grindlays Bank, etc. The number of foreign banks operating in our country has increased since the financial sector reforms of 1991.

Development BanksBusiness often requires medium and long-term capital for purchase of machinery and equipment, for using latest technology, or for expansion and modernization. Such financial assistance is provided by Development Banks. They also undertake other development measures like subscribing to the shares and debentures issued by companies, in case of under subscription of the issue by the public. Industrial Finance Corporation of India (IFCI) and State Financial Corporations (SFCs) are examples of development banks

Co-operative BanksPeople who come together to jointly serve their common interest often form a co-operative society under the Co-operative Societies Act. When a co-operative society engages itself in banking business it is called a Co-operative Bank. The society has to obtain a license from the Reserve Bank of India before starting banking business. Any co-operative bank as a society is to function under the overall supervision of the Registrar, Cooperative Societies of the State. As regards banking business, the

Types of Co-operative Banks(i) Primary Credit Societies: These are formed at the village or town level with borrower and non-borrower members residing in one locality. The operations of each society are restricted to a small area so that the members know each other and are able to watch over the activities of all members to prevent frauds. (ii) Central Co-operative Banks: These banks operate at the district level having some of the primary credit societies belonging to the same district as their members. These banks provide loans to their members (i.e., primary credit societies) and function as a link between the primary credit societies and state co-operative banks. (iii) State Co-operative Banks: These are the apex (highest level) co-operative banks in all the states of the country. They mobilise funds and help in its proper channelisation among various sectors. The money reaches the individual borrowers

Specialized BanksThere are some banks, which cater to the requirements an provide overall support for setting up business in specific areas of activity. EXIM Bank, SIDBI and NABARD are examples of such banks. They engage themselves in some specific area or activity and thus, are called specialized banks. Let us know about them.

i. Export Import Bank of India (EXIM Bank): If you want to set up a business for exporting products abroad or importing products from foreign countries for sale in our country, EXIM bank can provide you the required support and assistance. The bank grants loans to exporters and importers and also provides information about the international market. It gives guidance about the opportunities for export or import, the risks involved in it and the competition to be faced, etc. ii. Small Industries Development Bank of India (SIDBI): If you want to establish a small-scale business unit or industry, loan on easy terms can be available through SIDBI. It also finances modernization of smallscale industrial units, use of new technology and market activities. The aim and focus of SIDBI is to promote, finance and develop small-scale industries.

iii. National Bank for Agricultural and Rural Development (NABARD): It is a central or apex institution for financing agricultural and rural sectors. If a person is engaged in agriculture or other activities like handloom weaving, fishing, etc. NABARD can provide credit, both shortterm and long-term, through regional rural banks. It provides financial assistance, especially, to co-operative credit, in the field of agriculture, small-scale industries, cottage and village

Functions of Commercial BanksPrimary Functions a) Accepting deposits The most important activity of a commercial bank is to mobilise deposits from the public. Thus, deposits with the bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank. b) Grant of loans and advances The second important function of a commercial bank is to grant loans and advances. Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts. Loans: A loan is granted for a specific time period. Generally, commercial banks grant short-term loans. But term loans, that is, loan for more than a year, may also be granted. The borrower may withdraw the entire amount in lump sum or in installments. However, interest is charged on the full amount of loan. Loans are generally granted against the security of certain assets. A loan may be repaid either in lump sum or in instalments. Advances: An advance is a credit facility provided by the bank to its customers. It differs from loan in the sense that loans may be granted for longer period, but advances are normally granted for a short period of time. Further the purpose of granting advances is to meet the day to day

Modes of short-term financial assistance i) Cash credit Cash credit is an arrangement whereby the bank allows the borrower to draw amounts upto a specified limit. The amount is credited to the account of the customer. The customer can withdraw this amount as and when he requires. Interest is charged on the amount actually withdrawn. Cash Credit is granted as per agreed terms and conditions with the customers ii) Overdraft Overdraft is also a credit facility granted by bank. A customer who has a current account with the bank is allowed to withdraw more than the amount of credit balance in his account. It is a temporary arrangement. Overdraft facility with a specified limit is allowed either on the security of assets, or on personal security, or both. iii) Discounting of Bills Banks provide short-term finance by discounting bills, that is, making payment of the amount before the due date of the bills after deducting a certain rate of discount. The party gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due date, the bank can recover the amount from the customer.

Secondary functions Agency Functions : Various agency functions of commercial banks are To collect and clear cheque. To make payment of rent, insurance premium, etc. To deal in foreign exchange transactions. To purchase and sell securities. To act as trusty, attorney, correspondent and executor. To accept tax proceeds and tax returns. General Utility Functions : The general utility functions of the commercial banks include To provide safety locker facility to customers. To provide money transfer facility. To issue traveller's cheque. To accept various bills for payment e.g phone bills, gas bills, water bills, etc. To provide merchant banking facility. To provide various cards such as credit cards, debit cards, Smart cards, etc.

Banking LegislationThe failure of some Indian banks in the earlier part of the 20th century 87 banks during 1913-1917 and another 373 banks during 1922-1932, completely shattered public confidence in banks. More recently, the spate of failures of cooperative banks in Gujarat and failure of the yes bank in the private sector, have again highlighted the need for control and regulation. With the liberalization of the Indian economy and the subsequent banking sector, the above needs have been reinforced. Legislation the interest of depositors, shareholders, stockholders and confidence of the public at large as well as for the smooth functioning of the monetary and financial system. The RBI Act was passed in 1934 for performing the role of a central bank, and banking regulation Act was passed in 1949 for regulation of banking in India.

The RBI ACT 1934The RBI Was established on April 1, 1935 under the RBI Act of 1934. Originally, it was a shareholder bank which was taken over by the Central Government under the Reserve Bank Act, 1948. It had a paid-up capital of Rs.5 crores. There have been 78 amending acts, ordinances, regulations and adaptation orders till 12th June, 2006. The RBI Act consists of five chapters and five schedules. A

Chapter I : Preliminary: The act may be called the RBI Act, 1934 and extends to the whole of India. It gives a number of definitions including that of the Bank, Bank for International settlement as well as Export-Import Bank, National Housing Bank, Small Industries Development Bank of India, Scheduled Bank, State Financial corporation, State bank, Cooperative bank etc. Chapter II : Incorporation, Capital, management and Business: It encompasses the establishment and incorporation of the bank, provisions regarding share capital, offices, branches and agencies as well as composition, function and meetings of its central board, local boards, as well as terms like disqualification removal, etc. of directors. Chapter III Central Banking functions: This Chapter outline banks obligations and right to transact government business, right to issue bank notes, their denomination, form as well as reissue, recovery and issue of special bank notes. The assets and liabilities of issue

Chapter IIIA : Collection and furnishing of credit information: Provisions regarding the power of the bank to collect credit information, procedure for furnishing information and prohibited information are outlines in this chapter. Chapter IIIB: Provisions relating to non-banking institutions receiving deposits and financial institutions: Chapter IIIC: Prohibition of acceptance of deposits by unincorporated bodies: This chapter specifies the deposits are not to be accepted in certain cases. Chapter IIID: Regulation of transactions in derivatives, money market instruments or securities: It gives the definition for derivatives, money market instruments, repo and securities as well as specified

Chapter IV : General Provisions This chapter gives general provisions regarding contribution of central government to reserve funds, national, rural, industrial and housing credit, appointment, powers and duties of auditors, exemption of banks from income tax and super tax, delegation of powers, liquidation of the bank etc. Chapter V Penalties: This chapter lays down penalties for any person, directors auditor and company whoever makes a wrong statement willfully, whether in any application, declaration, return, advertisement, book, account, document, etc. Any default in complying with

SchedulesThe Act also has five schedules, namely, the first schedule, which specifies areas where local boards are to be constituted. The second schedule which lays down provisions for scheduled banks. The third, fourth and fifth schedules have been

The Banking Regulation Act, 1949This Banking Regulation Act Consolidated the law relating to banking and provides for the nature of transactions which can be carried out by banks in India, the control over management suspension and winding up of banking companies and penalties for violating provisions of the Act. The Act contains following five parts: Part I : Preliminary Part II : Business of Banking Companies Part IIA : Control over management Part IIB: Prohibition of certain activities in relation to banking companies Part IIC: Acquisition of the undertakings of banking companies in certain cases Part III: Suspension of business and winding-up of banking companies Part IIIA: Special provision for speedy disposal of winding-up proceedings Part IIIB : Provisions relating to certain operations of banking

Part I Preliminary: It defines a banking companys demand and time liabilities, secured and unsecured loans, managing agents, managing directors, sponsored and subsidiary banks, regional rural banks, etc. Part II Business of Banking companies: Specifies the businesses in which the bank may and must not engage, prohibition on trading rules regarding director and chairman, restriction on commission and brokerage, loans and advances. Nature of subsidiary companies, requirement as to minimum paid-up capital and reserves, account, balance sheets, licensing and auditing. Part III: Suspension of business and winding-up of banking companies This part contains provisions for suspension of

Part IV Miscellaneous: This part lays down penalties for officers, application for fines, special provisions for private banking companies, change of name or alternation of memorandum, power of central government to make rules, etc. Part V Application of the act to cooperative banks: It defines a cooperative bank, a cooperative credit society, a multistate cooperative society. Any dispute regarding their primary object or principal business is referred to and determined by the RBI. It also lays down requirements

Banking Sector ReformsPre-reform Era: Before opening up of the Indian economy and the advent of the banking sector reforms, the Indian banking sector was plagued by the following deficiencies: i) Imposition of stringent regulation by the RBI ii) Low productivity and efficiency of public sector banks iii) Deteriorating portfolio quality, mounting bad debts and increasing NPAs due to government regulations, political interference and poor monitoring. iv) Poor quality of customer service v) Inferior work technology vi) Inability to face competition

In these circumstances that the first Narasimham Committee was set up in 1991 to suggest remedial measures for strengthening the banking system encompassing banking policy, institutional structure, supervisory system, legislative and technological changes. The RBI also implemented the guidelines on capital measures and capital standards as given by the committee on banking regulations and supervisory practice (Basel Committee) w.e.f 1.04.1992. These focused on

First Phase of Banking Sector ReformsThis phase included the following: i) Reduction in SLR and CRR to 25 percent and 10 percent, respectively. ii) Deregulation on interest rates for deposits and advances of all cooperative banks and banks allowed to set their own interest rates on postshipment export credit in rupees. iii) Transparent guidelines for private sector banks. Modification of balance sheet and profit and loss account to disclose more information. iv) Direct access to capital markets for public sector banks. v) Liberalized branch licensing policy and more licenses for private sector banks.

vi) Setting up of debt recovery tribunals to ensure quick recovery of debts. vii) Prudential norms for income recognition, classification of assets and provisioning for bad debts. viii) Asset reconstruction fund (ARF) should be created to take over bad debts of the banks on discount and leave a clean balance sheet. ix) Limit of priority sector advances set at 40 percent of total advances. x) Capital adequacy norms-

The financial system reforms initiate during 1991-92 are based on twin principles for operational flexibility and functions autonomy so as to continuously enhance efficiency, productivity and profitability of the financial institutions. It aimed at providing a diversified, efficient and competitive financial sector with ultimate objective of improving the allocative efficiency of available resources, increasing the return on investment sand promoting

Second Phase of Banking sector ReformsIn the initial phase of reforms, the focus of reform was on the scheduled commercial banks, given their systemic importance. In the last few years, however the reform process has become increasingly broad-based encompassing other institutions such as RRBs, Urban Cooperative banks, FIs and NBFCs. After evaluation of the performance of the banking sector after the introduction of reforms the second Narasimham Committee gave its report in 1998, and made further suggestion and the following

The banks should reduce the average level of net NPAs for all banks to below 5 percent. ii) An asset is classified as doubtful if it is in the substandard category for 18 months in the first instance, the period was subsequently reduced to 12 months in 2005. iii) For banks with a high NPA portfolio, all loan assets in the doubtful and loss categories should be transferred to an asset reconstruction company (ARC) and issue swap bonds to the banks. iv) Greater attention to be paid to asset liability management to avoid mismatch. v) Banks should be encouraged to adopt statistical risk management techniques.i)

vii)

Prudential norms for income recognition, classification of assets and provisioning for bad debts for commercial banks, regional rural banks and financial institutions. viii) Banks were required to make their balance sheets fully transparent and make full disclosures in keeping with international account standards committee. ix) Freedom to open, shift and swap branches as well as to open extension counter given to banks. x) Banking ombudsman scheme was introduced in 1995 to look into and resolve customer grievances. xi) The developmental financial institutions convert themselves to banks. xii) Interest rate on deposits and advances of all

NPA (NON PERFORMING ASSETS)The Narasimham Committee (1991) identified NPA as one of the possible causes/effects of the malfunctioning of the public sector banks (PSBs). The basis for treating a credit facility as non-performing is as follows: 1. Where the interest on installments on a tem loan remain overdue for a period of more than 90 days. 2. Any bill which remains overdue for a period of 90 days. 3. Any amount due on any other loan which remains overdue for a period of 90 days. 4. Any cash credit/overdraft which

NPA Asset ClassificationStandard: Standard asset is one which does not carry more than normal risk attached to the business and which does not disclose any problems. Substandard: Sub-standard asset is one which has been classified as NPA for a period not exceeding 12 months (with effect from March 31, 2005) Doubtful: A doubtful asset is one which has remained NPA for a Period exceeding 12 months(with effect from March 31, 2005) Loss Asset: A loss asset is one where loss has been identified by the bank or

Banker Customer RelationshipGeneral Relationship Debtor and Creditor

Special Relationship1. 2. 3. 4. 5. Bailor and Bailee Principal and Agent Trustee and Beneficiary Banker as Advisor Other relations

General Relationship1. Debtor and Creditor Relationship: Normally the banker is debtor and the customer generally keeps some amount in his account with the bank. Buy in the case of an overdraft the banker is a creditor. In the case of loan account, banker is a creditor and the customer is a debtor.

Special Relationships1. Bailor and Bailee Relationship: The bank become a bailee incase of the valuable or securities deposited with him for safe custody. It is his duty to preserve them properly and hand them over to the customer. 2. Principal and Agent: When a banker acts as an agent of his customer and performs a number of a agency functions for the convenience of his customer. When banks undertake to purchase or sell securities, collect cheques, bills, interest, dividends etc. and pay insurance premium on behalf of their customers, bank act as agent. 3. Trustee and Beneficiary The position of a banker as a trustee or as a debtor is determined according to the circumstances of each case. For example, in case of a cheque received by the bank from a customer for collection forma an other bank as a bill for collection, the banker acts as a trustee till the cheque is realised and credited to his customers account and

4 Banker as advisor: As bank advisors know, customers seeking investment service 5. Other Relations The banker is a lesser when he lets out safe deposit lockers. When the bank undertakes to render advice to corporate customers on financial matters and to manage their new capital issues, he acts as a manager to the issue, The banker may undertake to make deferred payments or under write share capital or loans, or established letter of credit or even ac t as administrator on behalf of his customer. In that case he

Special Features of Banker Customer RelationshipA. Rights1. Bankers right of General Lien cheques. 2. Bankers right of Appropriation 3. Bankers right of set off 4. Bankers right of incidental expenses. 5. Bankers right to charge compound interest.

B. Obligations1. Obligation to honour 2. Obligation to maintain secrecy 3. Obligation not to close the account of the customer without proper notice

Rights1. Right to Genera Lien: Lien means the right of the creditor to retain the goods and securities owned by the debtor until the debt due from his paid. 2. Right of Appropriation This is the right of a banker to appropriate the money paid by the customer to any one of the banker to appropriate the money paid by the customer to any one of the loan including a time barred debt. 3. Bankers right to set-off The right of combine or set-off of accounts implies the right of

4. Bankers right to claim incidental change on unremunerative accounts: As long as the relation of a banker and customer exists, the banker has an implied right to claim commission, interest and other incidental charges for the services rendered to the customers. They are not payable in cash, but are debited in the account. 5. Bankers right to charge compound interest: As creditors banker has right to charge interest on loans and advances granted to his customers. The banker can charges compound interest unless there is an agreement to the contrary. 6. Law of limitation: The amount deposited in a bank is a debt repayable by the banker to the depositor but in this case the statute of limitations commences form the date on which the customer demands his money back. Thus although three years might elapse from the date money is deposited in a bank without any transactions having taken place, the debt due by the bank will not be time-barred.

Obligations1. Obligation to honour Cheques: The most important statutory obligation of the banker is to honour the cheques drawn by the customers against their respective accounts. 2. Obligation to maintain secrecy The banker should not, except on reasonable and proper occasions, disclose matters relating to the customers account. 3. Obligation not to close the account of the customer without proper notice The banker should not close

Negotiable InstrumentsAccording to Section 13 (a) of the Act, Negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer, whether the word order or bearer appear on the instrument or not. Thus, the term, negotiable instrument means a written document which creates a right in favour of some person and which is freely transferable. Although the Act mentions only these

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT1. Transferability: It is easily transferable from person to person by mere delivery or by endorsement and delivery. But all the transferable instruments are not negotiable instruments, but all negotiable instrument are transferable. 2. Title The transferee of a negotiable instrument is known as holder in due course. A bona fide transferee for value is not affected by any defect of title on the part of the transferor or of any of the previous holders of the instrument. 3. Rights: The transferee of the negotiable instrument can sue in his own name, in case of dishonour. A negotiable instrument can be transferred any number of times till it is at maturity. The holder of the instrument need not give notice of transfer

4. Presumptions Certain presumptions apply to all negotiable instruments e.g., a presumption that consideration has been paid under it. It is not necessary to write in a promissory note the words for value received or similar expressions because the payment of consideration is presumed. The words are usually included to create additional evidence of consideration. 5. Prompt payment A negotiable instrument enables the holder to expect prompt payment because a dishonour means the ruin of the credit of all

PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENTSections 118 and 119 of the Negotiable Instrument Act lay down certain presumptions which the court presumes in regard to negotiable instruments. 1. Consideration 2. Date 3. Time of acceptance 4. Time of transfer 5. Order of endorsement 6. Stamp 7. Holder in due course 8. Proof of protest

1. Consideration It shall be presumed that every negotiable instrument was made drawn, accepted or endorsed for consideration. It is presumed that, consideration is present in every negotiable instrument until the contrary is presumed. The presumption of consideration, however may be rebutted by proof that the instrument had been obtained from, its lawful owner by means of fraud or undue influence. 2. Date: Where a negotiable instrument is dated, the presumption is that it has been made or drawn on such date, unless the contrary is proved. 3. Time of acceptance Unless the contrary is proved, every accepted bill of exchange is presumed to have been accepted within a reasonable time after its issue and before its maturity. This presumption only applies when the acceptance is not dated; if the acceptance bears a date, it will prima facie be taken as evidence of the date on which it was made. 4. Time of transfer

5. Order of endorsement Until the contrary is proved it shall be presumed that the endorsements appearing upon a negotiable instrument were made in the order in which they appear thereon. 6. Stamp Unless the contrary is proved, it shall be presumed that a lost promissory note, bill of exchange or cheque was duly stamped. 7. Holder in due course Until the contrary is proved, it shall be presumed that the holder of a negotiable instrument is the holder in due course. Every holder of a negotiable instrument is presumed to have paid consideration for it and to have taken it in good faith. But if the instrument was obtained from its lawful owner by means of an offence or fraud, the holder has to prove that he is a holder in due course. 8. Proof of protest Section 119 lays down that in a suit upon an instrument which has been dishonoured, the court shall on proof of the protest, presume the fact of dishonour, unless and until such fact is

TYPES OF NEGOTIABLE INSTRUMENTSSection 13 of the Negotiable Instruments Act states that a negotiable instrument is a promissory note, bill of exchange or a cheque payable either to order or to bearer. Negotiable instruments recognized by statute are: (i) Promissory notes (ii) Bills of exchange (iii) Cheques Negotiable instruments recognized by usage or custom are: (i) Hundis (ii) Share warrants (iii) Dividend warrants (iv) Bankers draft (v) Circular notes (vi) Bearer debentures (vii) Debentures of Bombay Port Trust (viii)Railway receipts (ix) Delivery orders.

Promissory notesSection 4 of the Act defines, A promissory note is an instrument in writing (note being a bank-note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money to or to the order of a certain person, or to the bearer of the instruments.

Essential Elements1. It must be in writing A mere verbal promise to pay is not a promissory note. The method of writing (either in ink or pencil or printing, etc.) is unimportant, but it must be in any form that cannot be altered easily. 2. It must certainly an express promise or clear understanding to pay There must be an express undertaking to pay. A mere acknowledgment is not enough. 3. Promise to pay must be unconditional A conditional undertaking destroys the negotiable character of an otherwise negotiable instrument. Therefore, the promise to pay must not depend upon the happening of some outside contingency or event. It must be payable absolutely. 4 It should be signed by the maker The person who promise to pay must sign the instrument even though it might have been written by the promisor himself. 5. The maker must be certain The note self must show clearly who is the person agreeing to

6. The payee must be certain The instrument must point out with certainty the person to whom the promise has been made. 7. The promise should be to pay money and money only: Money means legal tender money and not old and rare coins. A promise to deliver paddy either in the alternative or in addition to money does not constitute a promissory note. 8. The amount should be certain: One of the important characteristics of a promissory note is certaintynot only regarding the person to whom or by whom payment is to be made but also regarding the amount. (a) there is a promise to pay amount with interest at a specified rate. (b) the amount is to be paid at an indicated rate of exchange. (c) the amount is payable by installments with a condition that the whole balance shall fall due for payment on a default being committed in the payment of anyone installment. 9. Other formalities The other formalities regarding number, place, date consideration etc. though usually found given in the promissory notes but are not essential in law. The date of instrument is not material unless the amount is made payable at a certain time after date. Even in such a case, omission of date does not invalidate the instrument and the

Bill of exchangeSection 5 of the Act defines, A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument. A bill of exchange, therefore, is a written acknowledgement of the debt, written by the creditor and accepted by the debtor. There are usually three parties to a bill of exchange drawer, acceptor or

Mechanics of Bills FinancingSale of goods (1)

Seller / Drawer

Drawing of bill & Acceptance (2)

Buyer / Drawee

Banker

Essential conditions of a bill of exchange1. It must be in writing. 2. It must be signed by the drawer. 3. The drawer, drawee and payee must be certain. 4. The sum payable must also be certain. 5. It should be properly stamped. 6. It must contain an

Distinction Between Bill of Exchange and Promissory Note

1. Number of parties: In a promissory note there are only two parties the maker (debtor) and the payee (creditor). In a bill of exchange, there are three parties; drawer, drawee and payee; although any two out of the three may be filled by one and the same person, 2. Payment to the maker A promissory note cannot be made payable the maker himself, while in a bill of exchange to the drawer and payee or drawee and payee may be same person. 3. Unconditional promise A promissory note contains an unconditional promise by the maker to pay to the payee or his order, whereas in a bill of exchange, there is an unconditional order to the drawee to pay according to the direction of the drawer.

4. Primary or absolute liability The liability of the maker of a promissory note is primary and absolute, but the liability of the drawer of a bill of exchange is secondary and conditional. 5. Relation The maker of the promissory note stands in immediate relation with the payee, while the maker or drawer of an accepted bill stands in immediate relations with the acceptor and not the payee.

6. Protest for dishonour: Foreign bill of exchange must be protested for dishonour when such protest is required to be made by the law of the country where they are drawn, but no such protest is needed in the case of a promissory note.

8. Notice of dishonour When a bill is dishonoured, due notice of dishonour is to be given by the holder to the drawer and the intermediate indorsers, but no such notice need be given in the case of a note.

Classification of BillsBills can be classified as: (1) Inland and foreign bills. (2) Time and demand bills. (3) Trade and accommodation bills.

Inland and Foreign BillsInland bill: A bill is, named as an inland bill if: (a) it is drawn in India on a person residing in India, whether payable in or outside India, or (b) it is drawn in India on a person residing outside India but payable in India.

The following are the Inland bills (i) A bill is drawn by a merchant in Delhi on a merchant in Madras. It is payable in Bombay. The bill is an inland bill. (ii) A bill is drawn by a Delhi merchant on a person in London, but is made payable in India. This is an inland bill. (iii) A bill is drawn by a merchant in Delhi on a merchant in Madras. It is accepted for payment in Japan. The bill is an inland bill. Foreign Bill: A bill which is not an inland bill is a foreign bill. The following are the foreign bills: 1. A bill drawn outside India and made payable in India. 2. A bill drawn outside India on any person residing outside India. 3. A bill drawn in India on a person residing outside

Time and Demand BillTime bill: A bill payable after a fixed time is termed as a time bill. In other words, bill payable after date is a time bill. Demand bill: A bill payable at sight or on demand is termed as a demand bill.

Trade and Accommodation BillTrade bill: A bill drawn and accepted for a genuine trade transaction is termed as a trade bill. Accommodation bill: A bill drawn and accepted not for a genuine trade transaction but only to provide financial help to some party is termed as an accommodation bill.

Example: A, is need of money for three months. He induces his friend B to accept a bill of exchange drawn on him for Rs. 1,000 for three months. The bill is drawn and accepted. The bill is an accommodation bill. A may get the bill discounted from his bankers immediately, paying a small sum as discount. Thus, he can use the funds for three months and then just before maturity he may remit the money to B, who will meet the bill on maturity. In the above example A is the accommodated party while B is the accommodating party. It is to be noted that an recommendation bill may be for accommodation of both the drawer arid acceptor. In such a case, they share the proceeds of the discounted bill.

ChequesSection 6 of the Act defines A cheque is a bill of exchange drawn on a specified banker, and not expressed to be payable otherwise than on demand. A cheque is bill of exchange with two more qualifications, namely, (i) it is always drawn on a specified banker, and (ii) it is always payable on demand. Consequently, all cheque are bill of exchange, but all bills are not cheque. A cheque must satisfy all the requirements of a bill of exchange; that is, it must be signed by the drawer, and must contain an unconditional order on a specified banker to pay a certain sum of money to or to the order of a certain person or to the bearer of the cheque. It does not require acceptance.

Distinction Between Bills of Exchange and Cheque1. A bill of exchange is usually drawn on some person or firm, while a cheque is always drawn on a bank. 2. It is essential that a bill of exchange must be accepted before its payment can be claimed A cheque does not require any such acceptance. 3. A cheque can only be drawn payable on demand, a bill may be also drawn payable on demand, or on the expiry of a certain period after date or sight. 4. A grace of three days is allowed in the case of time bills while no grace is given in the case of a cheque.

5. Notice of dishonour of a bill is necessary, but no such notice is necessary in the case of cheque. 6. A cheque may be crossed, but not needed in the case of bill. 7. A bill of exchange must be properly stamped, while a cheque does not require any stamp. 8. A cheque drawn to bearer payable on demand shall be valid but a bill payable on demand can never be drawn to bearer. 9. Unlike cheques, the payment of a bill cannot be countermanded by the drawer.

HundisA Hundi is a negotiable instrument written in an oriental language. The term hundi includes all indigenous negotiable instrument whether they be in the form of notes or bills. The word hundi is said to be derived from the Sanskrit word hundi, which means to collect. They are quite popular among the Indian merchants from very old days. They are used to finance trade and commerce and provide a facile and sound medium of

PARTIES TO NEGOTIABLE INSTRUMENTSParties to Bill of Exchange 1. Drawer The maker of a bill of exchange is called the drawer. 2. Drawee The person directed to pay the money by the drawer is called the drawee, 3. Acceptor After a drawee of a bill has signed his assent upon the bill, or if there are more parts than one, upon one of such pares and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the acceptor.

4. Payee The person named in the instrument, to whom or to whose order the money is directed to be paid by the instrument is called the payee. He is the real beneficiary under the instrument. Where he signs his name and makes the instrument payable to some other person, that other person does not become the payee. 5. Indorser When the holder transfers or indorses the instrument to anyone else, the holder becomes the indorser. 6. Indorsee: The person to whom the bill is indorsed is called an indorsee. 7. Holder A person who is legally entitled to the possession of the negotiable instrument in his own name and to receive the amount thereof, is called a holder. He is either the original payee, or the indorsee. In case the bill is payable to the bearer, the person in possession of the negotiable instrument

Parties to a Promissory Note1. Maker. He is the person who promises to pay the amount stated in the note. He is the debtor. 2. Payee. He is the person to whom the amount is payable i.e. the creditor. 3. Holder. He is the payee or the person to whom the note might have been indorsed. 4. The indorser and indorsee (the same as in the case of a bill).

Parties to a Cheque1. Drawer. He is the person who draws the cheque, i.e., the depositor of money in the bank. 2. Drawee. It is the drawers banker on whom the cheque has been drawn. 3. Payee. He is the person who is entitled to receive the payment of the cheque. 4. The holder, indorser and indorsee (the same as in the case of a bill or note).