1.Q Explain the organization and financing, balance of payments, Ans- Banking in India forms the 2.

Increased Efficiency
functions of Central Bank of etc. base for the economic 3. Helped in boosting the rural
India. 3. Custodian of Cash Reserves of development of the Country. Major and agricultural sector of the
Ans:- A central bank has been Commercial Banks: changes in the banking system country
defined in terms of its functions. Commercial banks are required by and management have been seen 4. lt opened up a major
According to Vera Smith,"The law to keep reserves equal to a Over the years with the employment opportunity for the
primary definition of central certain percentage of both time advancement in technology, people
banking is a banking system in and demand deposits liabilities considering the needs of people. 5. The Government used profit
which a single bank has either with the central banks. It is on the The History of Banking in India gained by Banks for the betterment
complete control or a residuary basis of these reserves that the dates back before India got of the people
monopoly of note issue." central bank transfers funds from independence in 6. The competition was decreased,
W.A. Shaw defines a central bank one bank to another to facilitate 1947. The banking sector and work efficiency had increased.
as a bank which control credit. the clearing of cheques. development can be divided into This post Independence phase
According to Sayers, the central Thus the central bank acts as the three phases: was the one that led to major
bank "is the organ of government custodian of the cash reserves of Phase 1: The Early Phase which developments in the banking
that undertakes the major financial commercial banks and helps in lasted from 1770 to 1969 sector of India and also in the
operations of the government and facilitating their transactions. There Phase II: The Nationalisation evolution of the banking sector.
by its conduct of these operations are many advantages of keeping Phase which lasted from 1969 to Liberalisation Period (1991-Till
and by other means, influences the the cash reserves of the 1991. Date)
behaviour of financial institutions commercial banks with the central Phase Il: The Liberalization or Once the banks were established
so as to support the economic bank, Exchange Reserves:. the Banking Sector Reforms in the country, regular monitoring
policy of the Government." Sayers according to De Kock. Phase which began in 1991 and and regulations need to be
refers only to the nature of the 4 Custody and Management of continues to flourish till date followed to continue the profits
central bank as the government's Foreign Exchange reserves: Pre Independence Period (1786- provided by the banking sector.
bank. All these definitions are The central bank keeps and 1947) The last phase or the ongoing
narrow because they refer only to manages the foreign exchange The first bank of India was the phase of the banking sector
one particular function of a central reserves of the country. It is an "Bank of Hindustan", established in development plays a significant
bank. official reservoir of gold and foreign 1770 and located in the then, role.
Functions of a Central Bank: currencies. It sells gold at fixed Indian capital, Calcutta. However, To provide stability and
A central bank performs the prices to the monetary authorities this bank failed to work and profitability to the Nationalised
following functions, as given by De of other countries. It also buys and ceased operations in 1832. Public sector Banks, the
Kock and accepted by the majority sells foreign currencies at During the Pre Independence Government decided to set up a
of economists. international prices. Further, it fixes period over 600 banks had been committee under the leadership of
1. Regulator of Currency: the exchange rates of the domestic registered in the country, but only Shri. M
The central bank is the bank of currency in terms of foreign a few managed to survive. Narasimham to manage the
issue. It has the monopoly of note currencies. Following the path of Bank of various reforms in the Indian
issue. Notes issued by it circulate 5. Lender of the Last Resort: Hindustan, various other banks banking industry.
as legal tender money. It has its De Kock regards this function as a were established in The biggest development was the
issue department which issue sine qua non of central banking. India. They were introduction of Private sector
notes and coins to commercial By granting accommodation in the The General Bank of India (1786- banks in India.
banks. Coins are manufactured in form of re-discounts and collateral 1791) RBI gave license to 10 Private
the government mint but they are advances to commercial banks, bill Oudh Commercial Bank (1881- sector banks to establish
put into circulation through the brokers and dealers, or other 1958) themselves in the Country.
central bank. Central banks have financial institutions, the central Bank of Bengal (1809) These banks included:
been following different methods of bank acts as the lender of the last Bank of Bombay (1840) 1. Global Trust Bank
note issue in different Countries. resort Bank of Madras (1843) 2. ICICI Bank
The central bank is required by law 6. Clearing House for Transfer and During the British rule in India, 3. HDFC Banks
to keep a certain amount or gold Settlement: The East India Company had 4. Axis Bank
and foreign securities against the As bankers' bank, the central bank established three banks: Bank of 5. Bank of Punjab
issue of notes. In some countries, acts as a clearing house for Bengal, Bank of Bombay and Bank 6. Indusland Bank
the amount of gold and foreign transfer and settlement of mutual of Madras and called them the 7. Centurion Bank
securities bears a fixed proportion, claims of commercial banks. Since Presidential Banks. These three 8. IDBI Bank
between 25 to 40 per cent of the the central bank holds banks were later merged into one 9. Times Bank
total notes issued. Reserves of commercial banks, it single bank in 1921, which was 10 .Development Credit Bank
2. Banker, Fiscal Agent and transfers funds from one bank to called the "Imperial Bank of India The other measures taken include:
Adviser to the Government: another banks to facilitate clearing The Imperial Bank of India was -Setting up of branches of the
Central banks everywhere act as of cheques. This is done by later nationalised in 1955 and was various Foreign Banks in India
bankers, fiscal agents and making transfer entries in their named The State Bank of India, -No more nationalisation of Banks
advisers to their respective accounts on the principle of book- which is currently the largest could be done
governments. As banker to the keeping. To transfer and settle Public sector Bank. -The committee announced that
government, the central bank claims of one bank upon others, Post Independence Period RBI and Government would treat
keeps the deposits of the central the central bank operates a (1947-1991) both public and private sector
and state governments and makes separate department in big cities At the time, when India got banks equally
payments on behalf of and trade centres. This department independence, all the major banks -Any Foreign Bank could start joint
governments. But it does not pay is known as the "clearing house of the country were led privately ventures with Indian Banks
interest on governments deposits. and it renders the service free to which was a cause of concern as -Payments banks were introduced
It buys and sells foreign currencies commercial banks. the people belonging to rural areas with the development in the field of
on behalf of the government. 7. Controller of Credit: were still dependent on money banking and technology
It keeps the stock of gold of the The most important function of the lenders for financial assistance. -Small Finance Banks were
government. Thus it is the central bank is to control the credit With an aim to solve this problem, allowed to set their branches
custodian of government money creation power of commercial bank the then Government decided to across India
and wealth. As a fiscal agent, the in order to control inflationary and nationalize the Banks. These -A major part of Indian banking
central bank make short- term deflationary pressures within this banks were nationalized under the moved online with internet banking
loans to the government for a economy. For this purpose, it Banking Regulation Act, and apps available for fund
period not exceeding 90 days. It adopts quantitative methods and 1949. Whereas, the Reserve Bank transfer
floats loans, pays interest on them, qualitative methods. Quantitative of India was nationalized in 1949. Thus, the history of banking in
and finally repays them on behalf methods aim at controlling the cost Impact of Nationalization India shows that with time and the
of the government. Thus it and quantity of credit by adopting There were various reasons why needs of people, major
manages the entire public debt. bank rate policy, open market the Government chose to developments have been done in
The central bank also advises the operations, and by variations in nationalise the banks. the banking sector with an aim to
government on such economic and reserve ratios of commercial Given below is the impact of prosper it.
money matters as controlling banks. Nationalisation of Banks in India: Q.3 Explain the various
inflation or deflation, devaluation or . Q 2 Trace the evolution of 1. This lead to an increase in obligations of a banker towards
revaluation of the currency, deficit Banking institutions in India. funds and thereby increasing the its customer.
economic condition of the country

1
Ans- The relationship that arises the right to retain the goods or or both. In addition, bank handles (f) That the grant of license would
between banker and customer, in property connected with particular purchase and sale of foreign not be prejudicial the operation
conducting various businesses debt. currencies and also lends for and consolidation of the banking
involve certain obligations and 4 Mandate :The account holder import and export trade. The system consistent with monetary
rights on the banker as well as the alone has the right to operate his commercial banks lend money by stability and economic growth.
customer. account with the bank. No person way of overdrafts, demand loans, Thus a license can be granted if
1. Obligation to Pay Cheques other than the account holder can cash credit, or by way of purchase the company has satisfactory
It is a statutory obligation of the order the bank to debit the or discounting of bills of exchange financial position. In case of a
bank, having sufficient funds of the account. or hundies, for the purpose of foreign bank, the Reserve Bank
customer to pay cheques duly But the account holder can give financing trade, commerce, must also be satisfied about the
drawn and presented. A bank will mandate or a power of attorney to industrial or any other business fact that
be forced to compensate the another person to operate his activity. 1) the carrying of banking business
customer for any loss or damage account. Lending by the banks is mostly by such bank in India will be in the
caused by its default. The bank's A mandate is an authority given by against security such as goods, public interests,
liability for Wrongful dishonor of the account holder in favour of a book debts, land and buildings, 2) that the government or law of
cheque is of serious nature. The third person. This is issued by an livestock, share, securities etc. the country of its origin does not
bank will be forced to pay account holder with a direction to When the advance is given against discriminate against banking
exemplary damage to the his banker authorizing third person such security, it is termed as a companies registered in India, and
customer. However, bank may to operate the account. t is secured advance and in cases (3) that the Company Complies
refuse payment of a unstamped letter signed by the where the advance is not backed with all the provisions of the Act
cheque for reasons such as- customer. by any security, it is classified as applicable to such company . the
1. Insufficient funds in the account 5. Power of Attorney unsecured or clean advance. Reserve Bank is also empowered
ii. Cheque is not properly drawn It is a document executed by the Q 4. What is bank? Discuss the it cancel the license granted to a
iii. Cheque is stale (presented after donor or principal in favour of powers and functions of banking company.
stipulated date) donee or agent to act on behalf of Reserve Bank of india in 2) Permission for opening
iv. Cheque is crossed but the former as per authority given in regulating the commercial branches:
presented for cash the document. The following banks. Sc. 23 requires every banking
v. Cheque is received after points must be taken into Also company to take Reserve bank's
receipt of notice of death, consideration by the banker while Explain the relationship between prior permission for opening a new
insolvency or lunacy of the drawer accepting power of attorney issued the RBI and the commercial place of business in India or to
of the cheque. by the customer. banks. change the location of an existing
So also, when instructions There are two types of power of also place of business in India or
are received from the drawer to attorney Explain the role of RBI in outside. The Reserve bank takes
stop the payment of Cheque or 1. Special Power, and development and control of into account the financial position,
when attachment garnishee order 2. General Power. functioning of Commercial the history, the general character
is received from a competent while the special power of banks. of management and adequacy of
authority, payment can be refused. attorney is given for a specific Ans- By virtue of the powers its capital structure and earning
If the drawer's signature differs, purpose, the other one covers conferred upon it by the Reserve prospects and the tact whether
bank can use payment and also many activities. Power to sign the Bank of India Act 1934, and the public interest will be served or not
when the amount of the cheque cheque, stop payment, signing Banking regulation Act, 1949 the before granting permission.
differs in words and figures. loan documents when given to relationship between the Reserve 3. Power it Inspect Baking
Power of Attorney holder, the Bank of India and the scheduled companies: Under Section 35, the
donor is ultimately liable to pay the commercial banks is very close Reserve Bank may either at its
2 secrecy loan amount. It is a stamped and of varied nature. own initiative or at the instance of
It is one of the principal duties of document. The original power of As Supervisory and Controlling the Central Government, inspect
the banker to maintain complete attorney should be perused and a Authority over Banks any banking company's books of
secrecy of the status of customer's copy should be obtained and filed The Baking Regulation Act, 1949 accounts. If on the basis of the
account and failure to do so will with the Bank. The donor can confers wide powers upon the section report submitted by the
make the bank to compensate the withdraw or cancel the Power of Reserve bank to supervise and Reserve bank, the Central
customer for any damage or loss Attorney at any time. control the affairs of banking Government is of the opinion that
suffered. However, a Dank is 6 Circumstances Leading to companies as follows: the affairs of the banking company
justified in making disclosure, Closure of Accounts: 1. Licensing of banking are being conducted to the
under the due process of law or The relationship between the Companies: Section 22 requires detriment of interests on its
under express or implied consent banker and the customer is every banking company to hold a depositors, it may be order in
of the customer. Custom established by mutual agreement license from the Reserve bank to writing prohibit the banking
Disclosure in the bank's interest is open and operate the account. carry on the business of banking in company from receiving fresh
permitted. So also it is an accepted This relationship may be India. The Reserve bank is deposits, or direct the Reserve
among the bankers to disclose terminated at anytime by either empowered to conduct an bank to apply for the winding up of
certain information to a fellow party by closing the accounts. In inspection of the books of the banking company.
banker on written request. While fact, the banker-customer the banking company for this 4 Power to Issue Directions:
disclosing information to others, relationship imposes an implied purpose, and to issue a license if it Sections 35-A confers powers on
only bare facts should be revealed obligation on the banker not to is satisfied that the following the Reserve Bank to issue
and not any comments and close the account of the customer conditions are fulfilled: directions to a banking company or
conclusions on the matter. The except in extraordinary case a) The company is or will be in a companies in the public interest or
disclosing bank should indicate to supported by indisputable reasons. position to pay its present or future in interests of banking policy or to
the other bank that in turn it should In other words, the banker should depositors in full as their prevent the affairs of the banking
maintain secrecy. carefully examine the issue before claims accrue. company being conducted in a
3. Banker's Lien closing the customer's account (b) That the affairs of the company manner detrimental to the interests
Lien generally is the right of the and unless there are justifiable are not being or are not likely to be of the depositors or in manner
creditor to retain possession of the reasons, it should not close the conducted in a manner detrimental prejudicial to the interest of the
goods and securities owned by the accounts of the customer. to the interests of its present or banking company or to secure
debtor until the debt is repaid. It A bank may take initiative to future depositors; proper management of the banking
however, does not vest the right to close the account of an (C) That the general character of company. Section 36 confers
sell the goods. But the banker's undesirable customer after giving the proposed management of the powers on the Reserve Bank to
lien has a wider connotation. It is proper notice for the following company will not be prejudicial to caution or prohibit banking
an implied pledge. reasons. the public interest or the interests companies against entering into
The bank has the right to sell the a. Frequent return of cheque for of its depositors; any
subject matter in possession in the insufficient balance. (d) That the company has particular transaction, and
ordinary course of business as a b. Forgery/malpractice committed adequate capital structure and generally gave advice to any
banker, and adjust the unpaid by the customer. earning prospects; banking company. lt may pass
debt. Lien may be however, a customer may close (e) That the public interest will be orders requiring the banks to carry
a general or particular lien. the account at any time. served by the grant of a license to out the specified instructions.
General lien empowers the bank to 7. Loans and Advances the company to Carry on banking 5. Control over Top management:
retain all movables in its As already said, the Bank deposits businesss in India; The Reserve Bank of India has
possession but particular lien gives are used for lending or investment wide powers of overall control over

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the top Management of banks some cases, the cards are value of electronic money, possibly C. Contracting for public and
Reserve Bank's prior approval is designed exclusively for use on the in a private currency private loans and negotiating and
necessary for appointment or re- Internet, and so there is no v. Wire transfer via an international issuing the same.
appointment or termination of physical card. banking network (generally carries d. Carrying on and transacting
appointment of a chairman, The use of debit cards has a higher fee every kind of guarantee and
managing director manager or become widespread in many vi.. Electronic Benefit Transfer. indemnity business.
chief executive officer. countries and has Electronic Clearing Services e. Managing, selling and realizing
Q. 5.Write a brief note on latest Over taken the cheque and in (ECS): any property which may come into
development in banking some instances cash transactions It is a mode of electronic funds the
technology. by volume. Like credit cards, debit transfer from one bank account to possession of the company in
Ans. In recent years, the Reserve cards are used widely for another bank account using the satisfaction or part satisfaction of
Bank has endeavored to improve telephone and Internet purchases, services of a Clearing House. This any of its claims.
the efficiency of the financial and unlike credit cards the funds is normally for bulk transfers from f. Undertaking and executing
system by ensuring the presence are transferred from the bearer's one account to many accounts or trusts.
of a safe, secure and effective bank account instead of having the vice-versa. This can be used both g. Undertaking the administration
payment and settlement system. In bearer to pay back on a later date. for making payments like of estates as executor, trustee or
the process, apart from performing Credit Card: distribution of dividend, interest, otherwise.
regulatory and oversight functions A credit card is part of a system of salary, pension, h. The acquisition, construction,
the Reserve Bank has also played payments named after the small etc. by institutions or for collection maintenance and alteration of any
an important role in promoting the plastic card issued to users of the of amounts for purposes such as building or works necessary for the
system's functionality and system. It is a card entitling its payments to utility companies like purposes of the company.
modernization on an ongoing holder to buy goods and services telephone, electricity, or charges I. Selling, improving, managing,
basis. based on the holder's promise to such as house tax, water developing, exchanging, leasing,
The consolidation of the existing pay for these goods and services. tax, etc or for loan instalments of mortgaging disposing of or turning
payment systems revolves around The issuer of the card grants a line financial institutions/banks or into account or otherwise dealing
strengthening computerized of credit to the consumer (or the regular investments of persons. with all or any part of the property
cheque clearing, and expanding user) from which the user can There are two tupes of ECS and rights of the company
the reach of Electronic Clearing borrow money for payment to a called ECS (Credit) and ECS J. Acquiring or undertaking the
Services (ECS) and Electronic merchant or as a cash advance to (Debit). whole or any part of the business
Funds Transfer (EFT). the user. Usage of the term "credit 1. ECS (Credit) is used for of any person or company, when
The critical elements of the card" to imply a credit card affording credit to a large number such business if of a nature
developmental strategy are the account is a metonym. of beneficiaries by raising a single enumerated or described in this
opening of new clearing houses, Equated Monthly debit to an account, such as sub-section.
interconnection of clearing houses Installment/Equal Monthly dividend, interest or salary Doing all such other things as are
through the Indian Financial Installment (EMI): payment. incidental or conducive to the
Network (INFINET) and the It is a fixed payment amount made 2. ECS (Debit) is used for raising promotion or advancement of the
development of a Real- Time by a borrower to a lender to be debits to a number of accounts of business of the company.
Gross Settlement (RTGS) System, paid at a specified date each consumers/ account holders for L. Any other form of business
a Centralized Funds Management calendar month. Equated monthly crediting a particular institution. which the Central government
System (CFMS), a Negotiated installments are used to Q.6. what is Banking company? may, by notification in the Official
Dealing system (NDS) and the pay off both interest and principal Write an exhaustive note on the Gazette, specify as a form of
Structured Financial Messaging each month, so that over a business on which a banking business in which is lawful for a
System (SFMS). Similarly, specified number of years, the loan company may engage. banking company to engage.
integration of the various payment is paid off in full. Ans- Section 5(b) of the Banking Q.7. Discuss the salient features
products with the systems of With most common types loans, Regulation Act, 1949 states that of the Banking Regulation Act,
individual banks has been another such as real estate mortgages, the banking' 1949. do
thrust area. borrower means the accepting, for the you like to suggest any
ATM makes fixed periodic payments to purpose of lending or investment, modification of the Act?
An automated Teller Machine the lender over the course of the of deposits of money from the Ans- The Indian Banking law is
(ATM) or automatic banking goal of retiring the loan. EMIs differ public, repayable on demand or based to a large extent upon the
machine (ABM) is a Computerized from variable payment plans, in otherwise, and English banking system. The law
telecommunications device that which withdrawable by cheque, draft, of contract, the law of tort and
provides the clients of a financial the borrower is able to pay higher order or otherwise. Thus the other branches of commercial and
institution with access to financial payment amounts at his or her ingredients of banking may be civil law are applicable to banks as
transactions in a public space discretion. In EMI plans, borrowers stated to be as- a. The purpose of to others. The law relating to
without the need for a cashier, are usually only allowed one fixed acceptance of deposit should be banking as we find in India today,
human clerk or bank teller. payment amount each month. lending or investment. is the outcome of the gradual
On most modern ATMs, the Electronic Funds Transfer b. There should be acceptance of process of evolution.
customer is identified by inserting (EFT): deposits. The Banking Regulation Act,
a plastic ATM card with a magnetic Electronic Funds Transfer or EFT C. Acceptance of deposits should 1949 deals with the banking
stripe or a plastic smart card with a refers to the computer-based be from the public. companies and does not purport to
chip that contains a unique card systems used to perform financial d. These deposits can be codify the law of banking. It is
number and some security transactions electronically. A withdrawable through cheques, mainly a regulatory Act, meant to
information such as an expiration process allowing the lender or the drafts etc. regulate the functioning of banking
date or CVVC (CVV). borrower to transfer payments Business on which a banking companies.
Authentication is provided by the electronically between bank company may engage (Salient features of the Banking
customer entering a personal accounts or to a lender. According to Section 6(1) of the Regulation Act, 1949.
identification number (PIN. Using The term is used for a number of Banking Regulation Act, 1949- In As per the statement of Objects
an ATM, customers can access different concepts: addition to the banking, a banking and reasons, following are the
their bank accounts in order to I. Card holder-initiated company may engage in any one salient features of the Act-
make cash withdrawals (or credit transactions, where a cardholder or more of the following business, 1. A comprehensive definition of
card cash advances) and check makes use of a payment card namely- a. the borrowing, raising "banking" has been given by the
their account balances as well as ii. Direct deposit payroll payments or taking up of money, the lending Act.
purchase cell phone prepaid credit. for a business to its employees, or advancing of money either upon 2. Prohibiting non-banking
Debit Card: possibly via a payroll services or without security and other allied companies from accepting
A debit card (also known as a bank company activities. deposits repayable on demand.
card or check card) is a plastic iii. Direct debit payments from b. Acting as agents for government 3. Prohibition of trading with a view
card that provides an alternative customer to business, where the or local authority or any other to eliminating non-banking risks.
payment method to cash when transaction is initiated by the person, the carrying on of agency Prescription of minimum capital
making purchases. business with customer permission business of any description standard.
Functionally, it can be called an iv. Electronic bill payment in online including the clearing and 5. Limiting the payment of
electronic cheque, as the funds are banking, which may be delivered forwarding of goods, giving of dividend.
withdrawn directly from either the by EFT or paper check receipts and discharges and 6. Inclusion of the scope of the
bank account or from the Transactions involving stored otherwise acting as an attorney. legislation of banks incorporated or
remaining balance on the card. In registered

3
outside India. majority according to the law to banker should see she owns cannot be withdrawn before the
7. Introduction of a comprehensive which he is a subject, and who is separate property in her own name expiry of that fixed period. The rate
licensing of banks and their of sound mind and is not and precaution should be kept in of interest on this account is higher
branches. disqualified from contracting by mind regarding her status and than on any other type of deposits.
8. Inspection of the books and any law to which he is subject."(As capacity to pay and the purpose The longer the period, the higher
accounts of a bank by Reserve a drunkard is a person who is not for which the borrowings are being will be the rate of interest.
Bank of India. in his senses, and as such he made. d. Recurring accounts- Generally,
9. Provisions of bringing the RBI cannot enter into a lawful contract, 8. Joint Hindu Family Hindu money in these accounts is
into closer touch with the banking a banker will not open an account Undivided Family- A joint Hindu deposited in monthly installments
companies. of a drunkard and shall not prefer Family or a Hindu Undivided for a fixed period and is repaid to
10. Provision of an expeditious to have a drunkard as a customer Family consists of all persons the depositors along with interest
procedure for legislation. of the bank. lineally descended from a common on maturity. These accounts are
11. Widening the powers of the If a customer, presents a ancestor and includes their wives. intended to encourage regular
RBI so as to enable it to come to cheque at a counter in a drunken The eldest member of the HUF is savings by the public particularly
the aid of banking companies in state. it would be better that the known as the Karta' or manager of by the fixed income group.
times of emergency. cheque is not paid, and in case the the family. He manages the affairs 10.Q. Discuss the special
12. Prescription of a special form cheque is paid then it would be of the HUF. features of banker customer
of balance sheet and conferring of better to have a witness for A banker my open an account relationship.
powers on the RBI to call for payment, otherwise the banker far a HUF either in the name of the Also
periodical return. may face certain difficulty. Karta or in the name of the family Q. Explain the rights and
13. Empowering the central 4. Insolvent or bankrupt An business. The account should be obligations of bankers and
government to take action against undischarged insolvent or bankrupt duly introduced. Generally the customers.
banks is a banks have got their own standard Ans:- By opening an account with
Conducting their affairs in a person against whom insolvency form of application 1or opening an the banker, there will be some
manner detrimental to the interest proceeding is pending and the account called the HUF rights conferred and
of the depositors. order or discharge has not been Declaration form. responsibilities or obligation
8.Q. Explain various types of granted to him by the court. When 9.Q. Write a brief note on imposed to the banker as well as
special customers of a bank. a person is unable to discharge his various types of accounts of the customer. A number of duties
Ans:- A bank's special customers debts, in full, it results in his being customers with the bank. are implied on the part of a bank
are generally minors, married an insolvent. Ans- A banking company in India under the contract between and
women, illiterate persons, lunatics, When a customer gives notice has been defined in the Banking the customer, and this can be
blind peoples, drunkards, to his creditors that he has Regulation modified by express agreement.
insolvents etc. Generally they are suspended or is about to suspend Act, 1949 as one "which transacts These rights
not competent to open an account payment of his debts, banker business of banking which means and duties are reciprocal, the
in a bank. But, however, accounts should stop all business the accepting, for the purpose of bankers duties are the customer's
may be Opened in their names transactions with him. No further lending or investment, of deposits rights and the bankers rights are
through their agents, attorneys, loan or advance should be allowed of money from the public, the customer duties. These rights
executors, trustees etc. So, the him. repayable on demand or otherwise and responsibilities or duties are
bankers have to take special care 5. Illiterate person- A person who, and withdrawable by cheque, draft called the special features of
and precautions for ensuring that for the want of education cannot or otherwise." relationship between the banker
the account of such an institution read or write and who cannot sign Accepting deposit is the primary and the customer. This special
or person is being conducted in his name is known as illiterate. function of a commercial bank. By feature of relationship between the
accordance With the legal Although the person is illiterate, if receiving deposits from the public, banker and the customer may be
provisions. he is of sound mind and of the age commercial banks mobilise discussed under the following
Following are the special of majority, competent to contract savings of the househola sector. heads-
customers of a bank- and bank may open the account of Deposits are considered to be the A. The general obligation of a
1. Minors and infants- A minor is a illiterate person. As he is illiterate, life and blood of banks. Banks banker towards its customer, in
person who is not a major. special care should be observed accept deposits from the public respect of- : i. Obligation to
According to by the banker before opening the only after the public becoming a honour cheque.
Section 3 of the Indian Majority bank account. For example, the customer of the bank by opening a ii. Obligation to maintain secrecy
Act, 1875 a minor is a person who account of an illiterate person may bank account in the respective and disclosure of information
has not attained the age of 18 be opened provided he calls on the bank. For this purpose there are required by law.
years and in case a guardian is bank personally along with a several forms of accounts which B. The rights of a banker in respect
appointed, it is 21 years. witness who is known to both the are allowed to be opened by the of:
The banker may open a savings depositor and the banker. customer. Banks generally accept i. Bankers right of general lien.
bank account and not a current 6. Blind person-_A blind person is deposit in the following types of ii. Banker right of set off
account. competent to contract and a bank accounts- .
Bank account may be opened in cannot refuse to open the account a. Current account- Current iii. Bankers right for appropriation
the following ways- on the ground of his blindness. A accounts are also called deemed of payment.
i. In the name of the minor, or bank should allow the person deposits' or demand liabilities'.
ii. In the joint names of the minor when well-introduced to open an These accounts are generally Let us discuss the above points in
and his guardian, or account jointly with one person, maintained by the traders and more detail
iii. In the name of the guardian. who can see, read and write and a firms who have to make a number 1. The general obligatiorn of a
2. Lunatics- Lunatics are persons bank may allow a joint operation of payments everyday. Normally banker towards its customer to
of unsound mind. They cannot on the account. The bank must be no interest is paid on these honour cheque:
form a rational judgment on careful in respect of cash accounts. Rather, the depositors Banker accepts the deposits from
matters and so they are withdrawal by the blind customer have to pay certain incidental the customer with an obligation to
disqualified from contracting but himself from the account. charges to the bank for the repay
the disqualification does not apply 7. Married women- A banker may services rendered by it. These it to him by way of honouring
to contract entered into by lunatics open an account in the name of a types of accounts also provide cheques drawn upon the bankers.
during the period of their sanity. married woman as the banker cheque facilities. The banker is under a statutory
Since a lunatic has no capacity opens an account to any other b. Savings Account- Saving obligation to honour his customer’s
to enter into a contract no banks customer. However, a banker accounts are maintained for cheques. Because it is recognized
will knowingly open an account in should exercise caution when an encouraging savings of under section 31 N.I. Act 1881.
a lunatic's name. But, if an existing account is opened for the wife of households. There are some However, in honouring the cheque
customer becomes lunatic, a an undischarged insolvent. While restrictions on the amount to be by the banker, the customer has to
banker must immediately stop the opening an account of a married drawn at time and also on the fulfill certain pre-conditions which
operation of the account. It is so woman, the banker should inquire number of withdrawal made during are as follows-
because the banker has no right to about her means and a period. Banks pay a rate of a. Sufficient balance
debit his account for payment circumstances and if she is living interest on the savings account b. Presentation of the cheque
made out of his account. with her husband, something about deposits as prescribed by the within working hours of business.
3. Drunkards- According to Section him and his occupation or position Central Bank. Cheque facility C. Presentation of cheque within a
11 of the Indian Contract Act, in life, and if he is an employee, available in this account. reasonable time.
1872, every person is competent the name of his employer. But, in C. Fixed account- Deposits in fixed
to contract who is of the age of case she applies for overdraft, the accounts are time deposits. They

4
d. Cheque should be presented at resultant balance if any, upon a private sector banks, co operative scheduled commercial banks and
the branch where the account is demand being made by the banks, regional rural banks and therefore they enjoy the same
kept. customer. This right of set-off on local areas banks. privileges and facilities as the
e. Signature of the customer the part of the banker's can be 3. Non-Scheduled commercial scheduled banks.
should be there in the cheque and exercised only in respect of debts, Bank:- The non-scheduled 7. Co-Operative Banks:-
it should be identical with the that is the credit balance held in commercial banks represent those The co-operative movement in
specimen signature that is being the accounts of the customer. joint stocks bank which are India started with the enactment of
maintained by the respective 5. Banker's right for appropriation included in the second schedule to the India Co-operative Society Act,
branch for that particular. of payment:- the RBI Act, 1934 on account of 1904. Co-operative bank started
f. Proper form of the cheque The question of appropriation their failure to comply with the functioning in India provisions of
g. Mutilated cheque, torned or arises only when debtor owes two minimum requirements for being the co-operative societies Act of
cancelled cheque shall be not be or more different debts to the scheduled. At the outbreak of the states. These co- operative
honoured by the bank. creditor and he pays smaller second world war about 1500 joint credit society and banks provide
h. Correctness of amounts in amount to the creditor which is not stocks undivided banks operating short term and medium term credit
words and figures. sufficient to meet any debt. The in India out of which were over to agriculture and village industry.
2. Obligation of the banker to rule of appropriation of payment is 14O0 were non-scheduled banks. The co-operative banks are based
maintain secrecy and disclosure of that where a customer pays in Thereafter, the Government on the principles of self reliance
information required by law- The money for stated purpose the perused the policy of consolidating and mutual co-operation.
foundation of a banker and banker is obliged to apply such banking system of the country 8. Local Areas Banks:
customer relationship is of payment only for such stated through a process of voluntary Local areas banks have been
confidence and secrecy. The purpose. In participation arrangements of week allowed to be set up in district town
banker is under and obligation to India the rules regarding and inefficient banks. with local
take utmost care in keeping appropriation of payment have amalgamation, transfer for customers being focused their
secrecy about the accounts of the been laid down in section 59 to 61 liabilities and assets and activities. These banks may be
customers. By keeping secrecy is of the Indian Contract Act. They These measures, over the years promoted by individual corporate
meant that the account books of are- appropriation by the debtor reduced the non-scheduled bank entities, trust and societies. As per
the bank will not be thrown open to (section 59), appropriation by the and the today there is no non- the guidelines of the Reserve Bank
the public or Government officials creditor (section 60) and scheduled bank in the country. of India published on 24th August
and the banker will take all appropriation by the law (section 4. Public Sector Banks- 1996, the local area banks are to
necessary precautions to ensure 61) Scheduled bank consists the be set up in private sector to cater
that the state of affairs of a Q.11 Write a brief note on public sector banks. The public the credit need of the local people
customer's accounts is not made various types of banks sector in Indian Banking System and to provide efficient and
known to others by any means. functioning in India. reads its present position in three competitive financial intermediation
This duty of maintenance of Ans-The Indian Banking System is stages- First, the conversion of the services in their area of operation.
secrecy by the banker is a legal headed by the Reserve Bank of imperial bank of India into state 12. Q. Write notes on- (6 x 2
one arising out of the contract India which is the monetary bank of India in the year =12)
entered into with the customer not Authority of the Country and of 1955 followed by the a. E-commerce and E-banking
to disclose his affairs without his performs the role of central establishment of its seven b. Electronic Cheque
concern. banking. The banking system may subsidiaries banks. Secondly, the Ans-E- Commerce
It is an implied term of contract be classified into the categories of nationalization of 14 major The online business industry is
between a banker and his scheduled Commercial banks, commercial banks in the year of well established in India. And,
customer that the banker will not non-scheduled commercial banks, 1969 and thirdly, the everyday some or the other new
divulge to third person without the co-operative banks and nationalization of 6 more player is taking a plunge. Though,
express or implied consent of the development banks. commercial bank in the year 1980. a major contribution to its growth is
customer either the state of the 1. The Reserve Bank of India- :The Thus, as of today 27 banks provided by e-commerce industry.
customer's account or any of his Reserve Bank of India was constitute public sector in Indian Even so, not many understand the
transaction with the bank of any established on 1st April, 1935 Commercial Banks. Under the intricacies involved in e-commerce
information relating to the under the Reserve Bank of India privatization policy of India, the industry.
customer acquired through the Act, 1934. It was stated originally shares of banks were issued in By definition e-commerce
keeping of his account unless the as a shareholder bank its paid-up open market. stands for electronic commerce.
banker is compelled to do so by capital was Rs 5 crores. After 5. Private Bank- Dealing in goods and services
order of a court or the independence, the Government of After the nationalization of the through the electronic media and
circumstances give rise to a public India, the Reserve Bank (Transfer banks, private sector bank could internet is called as E-commerce.
duty of disclosure or protection of to Public Ownership) Act. not be set up in India though there E-Commerce or E-business
the banker own interest requires it. 1948 was passed and the was no legal bar to that effect. The involves carrying on a business
3. Banker's right of general lien- Government took over the Reserve RBI issued guidelines for the with the help of the internet and by
Lien means a legal claim to hold Bank of India from private share- setting up of new private sector using information technology like
property as security. It is a right of holders by paying adequate bank in the country in 1993 and Electronic Data Interchange (EDI.
creditor in possession of goods, compensation to them. On January revised the same in 2001. Private It relates to a website of a vendor
securities or any other assets 1, 1949, the Reserve Bank of India bank can be again classified into selling or providing services
belonging to the debtor to retain started functioning as a state- two categories. First, India Banks- directly from its portal to the
them until the debt is repaid owned Central Banking Institute. These banks are the banks other customers. They use a digital
provided that there is no contract 2. Scheduled Commercial Bank- than nationalized banks owned shopping cart system and allow
either express or implied to the According to section 2(e) of the and controlled by the Indian payment through credit card, debit
contrary. General lien is a right to RBI Act, 1934 "Scheduled Bank' entrepreneur and second Foreign card or electronic fund transfer
retain all the goods or any property means a bank included in the Banks- These are the banks payments. The e-commerce
(which is in possession of the second schedule to the RBI Act incorporated outside India but industry helps in reducing costs in
holder) of another until all claims of 1934. The scheduled banks are having a place of business in India. managing orders while also
the holder are satisfied. It extend entitled to avail certain facilities 6. Regional Rural Bank- interacting with a wide range of
to all transaction and thus more from the RBI such as obtaining The Government of India in 1975 suppliers and trading partners. It
expensive than of a particular lien. accommodation in the form of appointed a working group to the also involves any form of business
4. Banker's right of set-off: refinance and loans and advances, setting up of new rural banks to transaction in which the parties
Set-off is the legal right by which remittance facilities of concessive cater credit needs of the rural interact electronically rather than
debtor is entitled to take into rates as also grant of authorized people as per the recommendation by physical exchanges or direct
account a debt owing to him by a dealer's license to handle foreign of this working group, the regional physical contact.
creditor while paying a debt due exchange business. Similarly rural bank were established on 2nd The growth of E-commerce
from him to the creditor. Like any banks bear certain obligation to the October 1975. Presently, there are volumes in India is also attracting
other debtor, the right of set-off is RBI like the maintenance of cash 196 regional rural banks having a the attention of players
available to the banker's also. reserve as per prescribed levels strong network of their branches in opportunities for business and also
Accordingly, when a customer and submission of fortnightly the state and their closely linked opens up opportunities for
keeps to or more account at the returns from time to time. The with some commercial banks. education and academics, which
same bank, some of which are scheduled commercial banks These banks are separate body seems to have tremendous
over drawn and some in credit, the comprise the state bank of India corporate with perpetual potential in the future of e-
bank has a right to combine such and its associates bank, other succession and common seal. The commerce in India
two or more accounts and pay the nationalized banks, foreign banks, Regional Rural Banks are Types of E-comnmerce:

5
Business to Business (B2B) - It 3. ATM: Automated Teller cryptography, digital signatures, The relationship between the
involves the full spectrum of online Machine, popularly known as ATM encryption, among others. banker and customer arises out of
business occurring between two is one of the most common and How an Electronic Cheque Works the contract between them and
organizations, including initial service, provided under e- An electronic cheque is part of the cannot be created except by
purchasing and procurement, banking. It is not just a machine larger electronic banking field and mutual consent. Basing on the
supplier management, inventory with which you can withdraw cash part of a subset of transactions functions of banking, there are the
management, channel as and when required, but it also referred to as Electronic Fund following general relationships
management, sales activities, allows you to check your account Transfers (EFTs), This includes between the banker and the
payment management, and status, transfer fund, deposit fund, not only electronic cheques but customer-
service and support. changes mobile number, change also other computerized banking 1. Debtor and creditor relationship
Business to Consumer (B2C) - Debit Card PIN, i.e. Personal functions such as ATM 2. Principal and Agent relationship
Business to Consumer E- Identification Number. withdrawals and deposits, debit 3. Fiduciary relationship
commerce refers to the exchanges 3. Debit Card: Debit cards are card transactions and remote 4. Trustee and beneficiary
between Business and Consumer. used in our day to day life so as to cheque depositing features. The relationship
It changes the traditional way of perform end number of transactions require the use of 5. Bailor and Bailee relationship
doing business with customer by transactions. Debit cards are various computer and networking 6. Pawnor and Pawnee
getting goods from linked to the customer's bank technologies to gain access to the relationship
Manufacturer/Retailer to the account and so the customer only relevant account data to perform 7. Mortgagor and Mortgagee
consumer directly. needs to swipe the card, in order the requested actions. Electronic relationship
Consumer to Consumer (C2C)- to make payment at Point of Sale cheques were developed in 8. Lessor and Lessee relationship
Consumer to Consumers involves (POS) outlets, online shopping, response to the transactions that 9. Guarantor and Guarantee
transactions between and among ATM withdrawal. In this way, the arose in the world of electronic Relationship.
consumers. These transactions amount is deducted from the commerce. Electronic cheques can Let us discuss the above
may or may not include a third customer's account directly. be used to make a payment for relationships one by one in detail.
party involvement. Consumer to 5. Credit Card: Just like a debit any transaction that a paper 1. Debtor and creditor relationship-
Business (C2B) -Consumer to card, a credit card is also a cheque can cover, and are The general relationship between
Business is relatively a new model payment card which the banks governed by the same laws that the banker and a customer is that
of commerce and is a reverse of issue to the customers on their apply to paper cheques. of a debtor and creditor i.e.
the traditional commerce models. request, after checking their Credit The Benefits of Electronic borrower and lender. Instead of the
Here consumers provide services score and history. It enables the Cheques money being set apart in a safe
or goods to businesses and create cardholder to borrow funds upto Generally, the costs associated room, it is replaced by a debt due
value for the business. the pr-approved limit and make with issuing an electronic cheque from the banker. The money
Business to Business to Consumer payment. The limit is granted by are notably lower than those deposited with him becomes his
(B2B2C) -This is a variant of the the banks which issue Cardholder associated with paper cheques. property and is absolutely, at his
B2B2C model wherein there is an promises to repay the amount Not only is there no requirement disposal with an added obligation
additional intermediary business to within a stipulated time, with some for a physical paper cheque, which to honour the customer's cheques
assist the first business transacts charges, for the use of credit card. costs money to produce, but also drawn upon his balance. Hence
with the end consumer. 6. Point of Sale (POS): Points of electronic cheques do not require there exist a relationship of debtor
E- Banking: sale system refers to the point, n s physical postage in cases of and creditor, the banker being the
Definition: E-banking is a blanket of payments being made to entities debtor and the customer being the
term used to indicate a process c ne and place (retail outlet) where outside the direct reach of the creditor.
through which a customer is the customer makes a payment, entity issuing the funds. 2. Principal and agent- One of the
allowed to carry out, personal or using a plastic card, for the 13.Q. What do you mean by the important relationship between the
commercial banking transactions purchase made or services term "customer"? Discuss the banker and the customer is that of
using electronic and received relationship a principal and agent. In the
telecommunication network. It is a Electronic Data Interchange (EDI): bétween banker and customer. course of business incidental to
product offered by banks which is a new mode of communicating Also banking, a banker performs many
facilitates online banking, with the information between businesses Q. what is the relationship services of the customer which
help of which the customer can electronically using a standardized between a banker and his include buying and selling
have access to the bank account , which was conventionally paper- customer? securities on behalf of customer,
in just one click. based. Ans:- Betore going to discuss the collection of cheques, dividend
E-banking covers facilities such as 7.Electronic Fund Transfer (EFT): relationship between the banker warrants, bills of exchange,
- fund transfer, checking account When money is transferred and the customer, it is important to promissory, notes etc, acting as
statements, utility bill payments, electronically from one bank to understand the terms banker' and trustee, attorney executor,
opening of bank account, locating another, it is called as electronic 'customer for ease of discussion. payment of insurance premium,
nearest ATM, obtain information fund transfer. It covers direct debit, A Banker is an individual, telephone bills etc. In these
on financial products and services, direct deposits, wire transfers, partnership or corporation whose circumstances, the banker acts as
applying for loans, etc. using a NEFT, RTGS, IMPS, etc. sole or predominating business is an agent of the principal that is the
personal computer, smartphone, In a nutshell, any type of banking, that is, the receipt of customer.
laptop or personal digital assistant. banking transaction performed money on current or deposit 3. Trustee and Beneficiary:- A
E-banking Services E-banking through electronic mode comes account, and the payment of Banker becomes trustee under
promotes paperless/cashless under E-banking. cheques drawn by and the certain Circumstances. For
transactions. It comes with a it is a secure, fast and convenient collection of cheques paid in by a instance, when money is deposited
number of rights, responsibilities electronic banking facility that customer. According to Macleod, for a specific purpose, till that
and fees as well. The range of allows its Customers to undertake "The essential business of a purpose is fulfilled, the banker is
services covered under E- banking online banking services anytime banker is to buy money an debts regarded as a trustee for the
are: during the day and at any place by creating other debts. A banker money. If the customer deposits
1. Internet Banking: A banking using the internet, for which the is essentially a dealer in debts or securities or other valuables with
facility provided to the customers customers used to visit the banks credit." the banker for safe custody, the
through which the customers are in earlier days. As per Bill of Exchange Act, latter acts as a trustee of his
able to perform a number of Electronic Cheque 1882 banker is a person or a body customer. The customer continues
monetary and non- monetary What Is an Electronic Cheque of persons incorporated or not, to be the owner of the valuables
transactions, using the internet, An electronic cheque, or e-cheque, carrying on the business of deposited with banker.
through the bank's website or is a form of payment made via the banking. 4. Bailee and Bailor- On many
application. Internet, or another data network, Again the term customer has been occasions, a banker becomes
2. Mobile Banking: designed to perform the same defined as a customer is one who Bailee. It happens when it receives
Almost all the banks have function as a conventional paper has an account with a banker or gold ornaments and important
designed their mobile applications cheque. Since the cheque is in an for whom a banker habitually documents for safe custody. The
with which you can perform electronic format, it can be undertakes to act as such. A banker takes charge of those
transactions at your fingertips. For processed in fewer steps. customer is a person who has articles goods etc as bailee and
this, four things are required - a Additionally, it has more security some sort of account either deposit not as trustee or agent. In that
smartphone, internet, mobile 1eatures than standard paper or current account or some similar case, he cannot make use of them
application, and mobile banking cheques and including relation with a banker. Relationship to his best advantage because he
service enabled in your bank authentication, public key between banker and customer: is bound to return the identical
account. articles on demand. A banker does

6
not allow any interest on these 4. In contract of indemnity there banking can be divided into 2. Giving Loans and Advances:
articles. It is only the customer who are two parties indemnifier and the Deposit Banking, Investment Another function of commercial
has to pay rent for the locker indemnity holder. Banking and Mixed Banking. banks is to extend loans and
services or safe custody services 5. In Contract of indemnity there is Branch Banking: advances out of the money which
provided by the banker. only one agreement i.e the This refers to a system under comes to them by way of deposits
5. Pawnee and Pawnor- Pawnee is agreement between indemnifier which two or more banks are to businessmen and entrepreneurs
a person with whom a pledge or and indemnity holder. opened under a single ownership. against approved securities such
mortgage for payment of money 6. Contract of indemnity protects Examples are State Bank of India, as gold or silver bullion,
lent is deposited. Pawnor is a the promise from loss. Punjab National Bank, Indian Bank government securities, easily
person depositing a pawn. Pawn 7. In Contract if indemnity ,the etc. which have several branches saleable stocks and shares and
is a thing given, deposited or left in promisor cannot file the suit spread all-over India. marketable goods.
another's keeping as a security for against third person until and Unit Banking: Bank advances to customers may
a debt or for the performance of unless the promise relinquishes his This refers to that system of be made in the following ways:
some action. It is the duty of the right in favour of the promisor. banking in which banking (i) Overdrafts,
banker to safeguard the securities Contract of Guarantee operations are carried on through (ii) discounting bills,
of pawnor/customer. If any of the 1. It refers to a Contract to perform a single organisation, without any (ii) money-at-call and short notice,
valuables disappeared or the promise or discharge the branches. This system used to be (iv) loans and advances
fraudulently misappropriated by liability of a third person in case of popular in America. (v) various forms of direct loans to
the staff of the bank, or stolen or his default. One great advantage of branch traders and producers.
converted by any staff, due to the 2. In contract of guarantee, the banking is that the same bank can 3. Using Cheque System: Banks
carelessness and negligence of primary liability is of principal cater to several parts of a large also render important services by
the banker, he will be held debtor and the liability of surety is country (through its branches providing an expensive medium of
responsible to compensate the secondary. situated in those parts) which a exchange, such as cheques. In
pawnor. 3. Contract between surety and unit bank would find difficult to do. modern business transactions, the
6. Mortgagee and mortgagor- The principal debtor is implied and As against this, a unit bank has the use of cheques to settle debts is
relationship between a banker as between creditor and principal advantage that its efforts are found to be much more convenient
mortgagee and his customer as debtor is express. concentrated in one area so that it than the use of cash. In fact, the
mortgagor is established when the 4. In contract of guarantee there can serve that area well. cheque is also known as the most
latter executes a mortgage deed in are three parties i.e. creditor, the Group Banking: developed credit instrument.
respect of his immovable property principal debtor and surety. This is a system under which two 4. Other Functions: Commercial
in favour of the bank or deposits 5. In contract of guarantee there or more banks, separately banks also perform a multitude of
the title deeds of his property with are three agreements i.e. incorporated, are connected by other non- banking functions which
the bank to create an equitable agreement between the Creditor being controlled by a single may be classified as (a) agency
mortgage as security for an and principal debtor, the creditor holding company as trust. services and (b) general utility
advance. and surety and surety and principal Chain Banking: services.
7. Lessee and Lessor- When a debtor. This is similar to Group Banking (a) Agency services:
customer hires locker in the bank's 6. Contract of guarantee is for the Here two or more banks are The bankers perform certain
safe deposit vault, the bank surety of the creditor. controlled by a single group functions for and on behalf of their
undertakes to take necessary 7. In contract of guarantee, the through the ownership of shares or customers. such as:-
precautions for the safety of the surety does not require any otherwise. (i) To act as executor, trustee and
articles left in the locker. The relinquishment for filing of suit. The Deposit Banking: attorney for the customer's will.
relationship between the parties is surety gets the right to file suit In this category, the banks act as (ii) To collect or make payments
that of a lessee and lessor. against the principal debtor as and custodian or trustees of the for bills, cheques, promissory
8. Bank as quarantor- Guarantor is when the surety pays the debt. depositors notes, interest dividends, rents,
one who gives a promise to 15. Q. explain the function of the Investment Banking: subscriptions, insurance premium,
answer for the payment of some commercial bank This refers to banks whose main etc. For these services, some
debt or the performance of some Also function is to provide finance for charges are usually levied by the
duty in the case of the failure of Q. Write about the structure and investment to industrial concerns. banks.
another person who in the first functions of a commercial bank. They provide this by purchasing (iii) To remit funds on behalf of the
instance is liable to such payment Ans:- Commercial Banks: Its shares and debentures of newly clients by drafts or mail or
or performance. A bank as Structure and Functions floated companies. telegraphic transfers.
guarantor gives guarantee to its A bank is an institution where Mixed Banking: (iv) To arrange income-tax experts
customer by issuing a letter of debts (usually referred to as bank Most banks in India play both to prepare income tax returns for
credit'. It is a kind of credit facility deposits) are commonly accepted roles. Deposit Banking and their customers, and help them to
to its customer. A letter of credit is in final settlement of other peoples' Investment Banking. Such type of get refund of income tax in
used in international trade and debts. banking is called mixed banking. appropriate cases.
transactions. A bank which gives Yet another definition defines Functions of Commercial Banks: (v) To work as correspondents,
guarantee must honour guarantee banking as "the accepting for the The major functions of Commercial agents or representatives of their
according to its terms. A bank purpose of lending, investment of Banks are as follows: clientss.
guarantee is not an indemnity. It is deposits of money from the public, 1. Acceptance of Deposits: The (b) General Utility Services:
a peculiar type of guarantee. All repayable on demand or otherwise main function of commercial banks The modem Commercial banks
the provisions of the Indian and with drawable by cheques, is to accept deposits from the usually perform certain general
Contract Act from sections 124 to drafts or otherwise." public. Banks maintains demand utility services for society, such
147 shall apply to bank guarantee. The modern bank thus, carries deposits accounts for their as:-
14.Q. Distinguish between out several functions. It provides customers and converts deposit (i) Bank drafts and traveler's
contracts of indemnity and safe custody for those savers who money into cash and vice versa, at cheques are issued in order to
contracts of guarantee. Discuss want to put their savings with it and the direction of the latter. Demand provide facilities for transfer of
the situations under which letter earns an income also offers deposits are technically accepted funds from one part of the country
of indemnity are obtained. facilities to the busy businessmen in current accounts, which are with to another.
Ans:- The following table shall or professional as the cheque draw able any time by the (ii) Letter of credit may be given by
state the various distinguishing facility, thus making the flow of depositor by means of cheques. the banks to their customers to
features of contract of indemnity payments and receipts easier Deposits are made in fixed enable then to go abroad.
and contract of guarantee. while at the same time acting as deposit accounts which are with (iii) Dealing with foreign exchange
Contract of Indemnity the custodian of their funds. It also draw able only after a specific or finance foreign trade by
1. It refers to a Contract by which provides finance for the needy period. Thus, fixed deposits are accepting or collecting foreign bills
one party promises to save the ones by allowing overdraft and time liabilities of the banks. of exchange.
other from loss caused by conduct loan facilities by creating credit. Deposits are also received in (iv) Shares floated by Government,
of the promisor or another person. Types of Banking: (Structure of saving bank accounts subject to Public bodies and corporations
2. In contract of indemnity, the banking) certain restrictions on the amount may be underwritten by banks.
liability of the promisor is primary. Banks can be classified into receivable and with draw able. (v) Banks arrange the safe
3. Contract between the different groups either on the basis This is how banks pool the deposits vaults to the customers
indemnifier and the indemnity of their structure or on the basis of scattered savings of the for their valuables.
holder is express and specific. their function. Structurally banking community and serve as the (vi) Banks also compile statistics
can be divided into Branch banking reserves of its savings. and business information relating
and Unit Banking. Functionally, to trade, commerce and industry.

7
16. Q Explain the credit creation However, commercial banks There are three important 2. SIDBI participates in the equity
by commercial banks. face many challenges and types of specialized banks with type of loans on soft terms, term
Ans:-The process of credit creation limitations while performing the different functions: loan Working capital both in rupee
is said to be one of the most credit creation in an economy 1. Export Import Bank of India and foreign currencies, venture
important of the functions that are which is discussed below. (EXIM Bank) capital support, and different forms
performed by a commercial bank. Limitations of Credit Creation 2. Small Industries Development of resource support to banks and
The central bank of a country is Following are some of the Bank of India other institutions.
responsible for ensuring money limitations that are experienced by 3. National Bank for Agricultural 3. SIDBI facilitates timely flow of
supply in the economy by currency the commercial banks during the and Rural Development credit for both term loans and
circulation. It also ensures that for credit creation process Export Import Bank of India (EXIM working capital to SSI in
fulfilling all the transactions, there 1. Cash amount present in bank Bank) collaboration with commercial
should be appropriate currency in The higher the amount of The Export-Import (EXIM) Bank of banks.
the system. deposits made by the public, the India is the principal financial 4. SIDBI enlarges marketing
This process cannot be higher credit creation from institution in India for coordinating capabilities of the products of SSIs
implemented by the central bank commercial banks can be seen, the working of institutions engaged in both domestic and international
alone, for this they require the help but there is a certain limit on the in financing export and import markets.
of commercial banks and their amount cash that can be held by trade. It is a statutory corporation 5. SIDBI directly discounts and
reserves. The commercial banks the banks at a time. wholly owned by the Government rediscounts bills with a view to
perform the function of credit This limit is determined by the of India. It was established on encourage bills culture and helping
creation in an economy. central bank, as the central bank January 1, 1982 for the purpose of the SSI units to realise their sale
Therefore, the money that is may contract expand this limit by financing, facilitating and proceeds of capital goods /
created by the commercial banks selling or purchasing the promoting foreign trade of India. equipments and components etc.
is known as credit money. This is securities. This specialized bank grants loans 6. SIDBI promotes employment
achieved by the commercial banks 2. Cash Reserve Ratio or CRR to exporters and importers and oriented industries especially in
in the form of purchasing of It refers to the amount of money in also provides information about the semi-urban areas to create more
Securities and providing loans. form of reserve that needs to be international market. It also gives employment opportunities so that
Commercial banks facilitate the kept with central banks by the guidance about the opportunities rural-urban migration of people can
loans by utilizing the deposits that commercial banks. This amount is for export or import, the risks be checked.
are obtained from the public. used for meeting the cash involved in it and the competition National Bank for Agricultural and
There are restrictions on the requirements of the users. Any fall to be faced, etc. Rural Development (NABARD)
amount of money that can be in the CRR wil1 lead to more credit The main functions of the EXIM It was established on 12 July 1982
provided as credit from the total creation. Bank are as follows: by a special act by the parliament.
deposits that a bank obtains from 3. Excess Reserve 1. Financing of exports and This specialized bank is a central
the public. As per the rule This takes place when a country imports of goods and services, not or apex institution for financing
commercial banks need to faces recession, at that time banks only of India but also of the third agricultural and rural sectors. It
maintain a certain portion of the find it conducive in maintaining world countries can provide credit, both short-term
public deposits as reserves with reserves in place of lending which 2. Financing of exports and and long-term, through regional
the central bank which will be used leads to less credit creation. imports of machinery and rural banks. It provides financial
for meeting the immediate cash 4. Currency Drainage equipment on lease basis assistance, especially, to co-
requirements of the depositors. It refers to the situation when the 3. Financing of joint ventures in operative credit, in the field of
Only after keeping aside the public is not depositing money in foreign countries agriculture, small-scale industries,
required amount of those reserves, the banks, which results in 4. Providing loans to Indian parties cottage and village industries
the commercial banks are reduced credit creation in the to enable them to contribute to the handicrafts and allied economic
permitted to lend to individuals or economy. share capital of joint ventures in activities in rural areas
businesses. 5. Borrower Availability foreign countries Its important functions are:
Formula for determining the Credit Credit creation will flourish if there 5. To undertake limited merchant 1. Takes measures towards
creation are borrowers, credit creation will banking functions such as institution building for improving
The following formulae can be not be done if there are no underwriting of stocks, shares, absorptive capacity of the credit
used to determine the total credit borrowers of the money in an bonds or debentures of Indian delivery system, including
creation economy. companies engaged in export or monitoring, formulation of
Total Credit Creation = Original 6. Prevalent business conditions import rehabilitation schemes,
Deposit X Credit Multiplier If an economy is witnessing a 6. To provide technical, restructuring of credit institutions,
Coefficient Where, depression then the businesses administrative and financial training of personnel, etc.
Credit multiplier coefficient= 1./r will not be seeking credit which assistance to parties in connection 2. Co-ordinates the rural financing
R=Cash reserve requirement also leads to contraction of credit with export and import activities of all institutions engaged
known as Cash Reserve Ratio creation. Whereas, if a nation is Small Industries Development in developmental work at the field
(CRR) prospering then businesses will Bank of India (SIDBI) level and maintains liaison with
Let's understand this with an seek new funds in the form of This specialized bank grant loan to Government of India, State
example credit from the banks which leads those who want to establish a Governments, Reserve Bank of
If the money deposited in bank is to credit creation. Conditions small-scale business unit or India (RBI) and other national level
Rs. 10000 and the bank has a essential for Credit Creation industry. Small Industries institutions concerned with policy
CRR of 10%, then Credit multiplier The following conditions are Development Bank of India (SIDBI) formulation
coefficient will be essential for credit creation in an was established in October 1989 3. Undertakes monitoring and
Credit multiplier coefficient = 1/ economy and commenced its operation from evaluation of projects refinanced
10% 1. Public depositing money into the April 1990 with its Head Office at by it.
- 1/0.1 commercial banks Lucknow as a development bank, 4. NABARD refinances the
10 2. The willingness of commercial exclusively for the small scale financial institutions which finances
Total Credit Creation = 10000 X 10 banks to lend money to individuals industries. It is a central the rural
100000 or businesses in the form of credit. government undertaking. The sector.
Similarly, if CRR = 20 % 3. The willingness of individuals or prime aim of SIDBI is to promote 5. The institutions' which help the
Then businesses in seeking money from and develop small industries by rural economy, NABARD helps
Credit multiplier coefficient = 1/ commercial banks in the form of providing them the valuable factor develop.
20% credit. of production finance. Many 7. It regulates the institution which
1/ 02 17.Q.Write an elaborate note on institutions and commercial banks provides financial help to the rural
5 the Specialised Bank in India. supply finance, both long-term and economy.
Therefore, Total Credit Creation = Ans:- In India, there are many short-term, to small entrepreneurs. 8. NABARD also keeps a check on
10000 X 5 50000 specialized banks, which cater to SIDBI coordinates the work of all its client institutes.
From the above values we can the requirements and provide of them. 9. It provides training facilities to
understand that low CRR value overall support for setting up Functions of Small Industries the institutions working the field of
results in high credit creation and business in specific areas of Development Bank of India rural
high CRR results in less credit activity They engage themselves in (SIDBI): upliftment.
creation. Therefore, with the help some specific area or activity and 1. Initiates steps for technology 10. It regulates the cooperative
of credit creation, money gets thus, are called specialized banks. adoption, technology exchange, banks and the RRB
multiplied in the economy. transfer and upgradation and
modernisation of existing units.

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18.Q. Write an exclusive note on aggregate demand which leads to they are developed by the best makes navigation much stress-free
the role and responsibility of mo production in the economy. mobile application development than if you were trying to use
banks in society. Implementation of Monetary policy: companies India or the in-house online banking through the
Ans:- Banking is in-fact, one of the The Central Bank of the country teams of the banks. browser on your phone.
most ancient and crucial (RBI in our case), controls and With the productive growth of Smart phones have been one of
departments of civil society with its regulates volume of credit through mobile banking and on-the-go the most impactful inventions in
first prototype in the ancient world the active cooperation o the payments, individuals no longer human history.
having begun around 2000 BC The banking system in the country. It need to stand in endless queues to The impact of smart phones, as
Banks do play an important and helps in bringing price stability a perform crucial financial well as tablets, can be felt in just
active role in the prosperity of promotes economic growth with-in operations. Whether it's a about every facet of daily life in
general masses and economic the shortest possible period of monetary transaction or checking terms of how we communicate,
development of a country which I time. account balance, you can always gather information, shop, access
want to briefly enumerate as Monetization of the economy: The refer to the instinctive, interactive, entertainment, and of course, how
under: banks by opening branches in the and advanced banking apps out we bank. For people who are
Banks promote capital formation: rural and backward areas are there. Mobile banking applications planning to go with mobile
Banks accept deposits from reducing the exchange of goods have made things easier for banking, here are few advantages
individuals and businesses, these through barter. The use or money countless people across the globe. to keep in mind.
deposits are then made available has greatly increased the volume Regardless of your location, you 1. Availability at Any Time and Any
to the individuals and businesses of production of goods. The non can execute the most important Where:-
which make use of them for monetized sector (barter economy) financial operations on the go. Mobile Banking is available 24*7
productive purposes in the country. is now being converted into Mobile banking lets customers to and also easy and convenient
Thee banks are, therefore, not only monetized sector with the help of handle banking transactions more mode for many Mobile users even
the store houses of the country's banks. rapidly and conveniently, which in the rural areas.
wealth, but also provide financial Export promotion cells: In order to also has value. on-the-go 2. Mobile Banking Is Time Sawing
resources necessary for economic increase the exports of the payments, This is one of the biggest benefits
development of nation and country, the banks have An Outline of Mobile Banking of mobile banking. No matter
masses. established export promotion cells. Do you know what the history of where you are, you can "take care
Investment in new enterprises: They provide information about mobile banking is? In the of business" without interrupting
Businessmen normally hesitate to general trade and economic beginning mobile banking existed the rest of your life. Mobile banking
invest their money in risky conditions both inside and outside in crude forms like SMS alerts is being able to handle your
enterprises. The banks provide the country to its customers. The automated call centre etc. Later, in financial life without having to run
short and medium term loans to banks are therefore, making the year 2002 Mobile Banking was into a branch during open hours
entrepreneurs to invest in new positive contribution in the process initiated in India by way of SMS can be a real time- and schedule-
enterprises and adopt new of economic development. banking. saver.
methods of production. The Role of Banks in 21st century:- A full-fledged system as a 3. Decreased infrastructure costs
provision of timely credit increases The banks are now not confined to unique mobile banking platform on Mobile Banking is cost effective
the productive capacity of the local banking. They are fast mobile phones was launched by and Banks offer this service at very
economy. changing into global banking i.e., ICICI in 2008 called Mobile low cost to the customers. Banks
Promotion of trade and industry: understanding the global platform which integrated all the do not have to build or maintain as
With the growth of banking, there customer, using latest information core functionality that we see in many physical branches if more
is vast expansion in trade and technology, competing in the open today's mobile banking customers carry out banking via
industry. The use of bank draft, market with high technology applications. Mobile is a their mobile phone.
cheques, bill of exchange, credit system, changing from domestic breakthrough innovation in banking 4. Enhanced security over Mobile
cards and letters of credit etc has banking to investment banking etc. where practically all internet Banking
revolutionized both national and The banks are now considered the banking transactions can be simply Mobile banking is as secure. All
international trade. nerve system of all economic done on mobiles phones. reliable financial institution use
Development of agriculture: The development in the country. Benefits of Mobile App in Banking encryption that defends and
banks particularly in developing Virtual Banking: Providing the System in India protects your privacy, identity and
countries like India are providing banking services through The Reserve Bank of India your financial information. Some
credit for development of extensive use of information recently informed banks to institutions even provide a security
agriculture and small scale technology without direct recourse encourage mobile banking. In guarantee to make your use of
industries in rural and semi-urban to the bank by the customer is upcoming days we will see more mobile banking truly stress-free.
areas. The provision of credit to called virtual banking. The origin of number of people getting hooked Mobile Banking is said to be more
agriculture sector has greatly virtual banking can be traced to the to the ease of mobile banking. In secured and risk free than
helped in raising agriculture 1970's with the installation of the internet age, mobile banking online/internet Banking.
productivity and income of the ATM's. The principal types of can be considered as boon Mobile phones now often
farmers. virtual banking services include Users can transfer funds from contain face-recognition
Balanced development of different automated teller machines your bank account to another bank scanners, and even iris scanners.
regions: The banks play an (ATM's), Point of Sale terminals account with a smart phone just This biometric data aids the bank
important role in achieving (pos terminals), mobile banking with the help of the internet, from confirm the customer" is really who
balanced development in different and most recently internet banking anywhere to everywhere using they claim to be, and this biometric
regions of the country. They help or e-banking. With the increasing mobile banking. It is obtainable for data offers more security and
in transferring surplus capital from use of internet banking there is 24 hours and easy and convenient protection for customers than
developed regions to the less greater reliance now on mode for many mobile users in the simple telephone banking
developed regions. The traders, information technology and the rustic areas. Mobile Banking is passwords or requests for birth-
industrialists, etc. of less decrease of physical bank said to be more secure and risk date confirmations can provide.
developed regions are able to get branches to deliver the banking free than online Internet Banking. For both the financial institution
adequate capital for meeting their services to the customer. With the help of Mobile, Banking and customer, this means fewer
business needs. This in turn 19.Q. The rise of smart phones user can transfer funds, and pay instances of compromised data
increases investment, trade and and mobile apps has made bills, checking account balance, and fraud. technology, fingerprint
production in the economy. banking more convenient and study your recent transaction, 5. Mobile Banking allows to Pay
Influencing economic activity: The accessible." Explain. block your ATM card, etc. Mobile Bill
banks can also influence the Ans:- Now day's money transfer Banking is lucrative, and Banks You can get reminders when to
economic activity of the country has become so easy. Most of the offer this service at less rate to the pay bills so you never have to pay
through its influence on a) banks have provided their own customers. a late fee. You can even set up
Availability of credit, b) The rat banking apps to make their Mobile banking can be used for recurring bill payments so you
interest. If the banks are able to customers feel comfortable. With most of the same tasks that you don't even have to think about
increase the amount of money in he help of these banking apps we would execute at a bank branch or when a bill is due.
circulation through credit creation can manage our bank accounts on your home desktop computer. 6. Mobile Banking Keeps You in
or by lowering the rate of interest, on-the-move. Even we can ensure In addition, many banks provide Control
it directly affects economic hassle-free online transactions for customers with the ability to Mobile Banking is so easy and so
development. A low rate of interest shopping and transfer Amount to deposit checks. All of this is done convenient, it helps keep you in
can encourage investment. credit different accounts and view through an app that is downloaded control of your finances. You can
creation activity can raise transaction history, etc. People to your smartphone or tablet from monitor your balances and always
trust these apps as they believe your provider's app store. The app know where you're at financially.

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It's an added advantage for your Act other than the requirements
financial life. With account alerts, laid down in section 11, has
you can identify if your account continued such failure, after notice
falls below a certain brink and in writing of such failure or
immediately transfer money into contravention has been conveyed
that account and avoid overdraft to the banking
fees. You can credit checks company.
instantly, which is a great help Voluntary winding up
when you need the cash. All these High Court has some power in
features leave you in control of process of voluntary winding up-
your money on your time. For the purpose of voluntary
20.Q. Discuss in detail about the winding up the banking company
winding up of a banking has to get a letter / certificate from
company. the reserve bank, that the
Ans:- Banking company is playing company is able to pay all their
major role in the society for their debts to its creditors and court can
day to day work, Now a days also keep supervision on such
people has are so much depended banking company if it think fit.
on the banking sector and most of Speedy disposal of winding up for
the time they require their help in banking company
the business or other thing. In such condition of winding up the
Many people keep their money Summary proceedings take place
in the bank for the purpose of and not the general proceeding.
saving also. So their money are [S. 45B The High Court shall, save
kept safely. as otherwise expressly provided in
But sometime it happens that section 45C, have exclusive
some of the bank close down due jurisdiction to entertain and decide
to non recovery of loan or such any claim made by or against a
other issues. In such condition banking company which is being
many people have to suffer as wound up (including claims by or
their money are with that bank against any of its branches in
then. India) or any application made
For this reason there are under 236|section 391 of the
provision for winding up of the Companies Act, 1956 (1 of 1956)]
banking company under The by or in respect of a banking
Banking (Regulation) Act, 1949. company or any question of
The provision from sec. 38 to 44 priorities or any other question
deals with the winding up whatsoever, whether of law or fact,
procedure for banking company. which may relate to or arise in the
Procedure of winding up course of the winding up of a
For the process of winding up in banking company, whether such
banking company, Companies Act claim or question has arisen or
is not to be followed and power for arises or such application has
the same is with the high court been made or is made before or
only. after the date of the order for the
Winding up by High Court winding up of the banking
For the process of winding up S. company or before or after the
391, S.392, S.433 and S.583 is not commencement of the Banking
applicable for banking company. Companies (Amendment) Act,
As per s. 37 (1) of the Banking 1953 (52 of 1953)]
Regulation Act the High court can In some condition court can
order for winding up of a banking also order for sale of debtor's
company on basis of following property, under Section 45D (7)-
conditions [At the time of settling the list of
1. If the banking company is debtors or at any other time prior
unable to pay its debts; or or subsequent thereto, the High
2. If an application for its winding Court shall have power to pass
up has been made by the Reserve any order in respect of a debtor on
Bank under section 37 or this the application of the official
section. liquidator for the realization,
The Reserve Bank can also management, protection,
make an application under section preservation or sale of any
38 for the winding up of a banking property given as security to the
company if it is directed so to do banking company and to give such
by an order under clause(b) of sub powers to the official liquidator to
section (4) of section 35. carry out the aforesaid directions
The Reserve Bank may make as the High Court thinks fit.] This
an application under this section was held in the case of Hanuman
for the winding up of a banking Bank Ltd v. P.T.Munia Servai. This
company- is only done when debtor is
If the banking company has failed not paying debt during the process
to comply with the requirements and this done after serving him a
specified in section 11; or has by valid notice.
reason of the provisions of section
22 become disentitled to carry on
banking business in India; or has
been prohibited from receiving
fresh deposits by an order under
clause (a) of sub-section (4) of
section 35 or under clause (b) of
sub-section (3A) or section 42 of
the Reserve Bank of India,
Act,1934
If the company has failed to
comply with any requirement of the

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