BANKING LAW

IVTH SEMESTER

LL.B.
 CHAPTER – 1
HISTORY OF BANKING IN INDIA

Banking in India forms the base for the economic development of the country. Major changes in
the banking system and management have been seen over the years with the advancement in
technology, considering the needs of people. The banking sector development can be divided
into three phases:
Phase I: The Early Phase which lasted from 1770 to 1969
Phase II: The Nationalisation Phase which lasted from 1969 to 1991
Phase III: The Liberalisation or the Banking Sector Reforms Phase which began in 1991 and
continues to flourish till date
given below is a pictorial representation of the evolution of the Indian banking system over the
years:

Pre Independence Period (1786-1947)

The first bank of India was the “Bank of Hindustan”, established in 1770 and located in the then
Indian capital, Calcutta. However, this bank failed to work and ceased operations in 1832.
During the Pre Independence period over 600 banks had been registered in the country, but only
a few managed to survive.
Following the path of Bank of Hindustan, various other banks were established in India. They
were:

 The General Bank of India (1786-1791)

 Oudh Commercial Bank (1881-1958)
 Bank of Bengal (1809)
 Bank of Bombay (1840)
 Bank of Madras (1843)
During the British rule in India, The East India Company had established three banks: Bank of
Bengal, Bank of Bombay and Bank of Madras and called them the Presidential Banks. These
three banks were later merged into one single bank in 1921, which was called the “Imperial Bank
of India.”
The Imperial Bank of India was later nationalised in 1955 and was named The State Bank of
India, which is currently the largest Public sector Bank.
Given below is a list of other banks which were established during the Pre-Independence period:

Pre-Indepence Banks in India

Bank Name Year of Establishment

Allahabad Bank 1865

Punjab National Bank 1894

Bank of India 1906

Central Bank of India 1911

Canara Bank 1906

Bank of Baroda 1908

If we talk of the reasons as to why many major banks failed to survive during the pre-
independence period, the following conclusions can be drawn:

 Indian account holders had become fraud-prone

 Lack of machines and technology
  Human errors & time-consuming
 Fewer facilities
 Lack of proper management skills

Post Independence Period (1947-1991)

At the time when India got independence, all the major banks of the country were led privately
which was a cause of concern as the people belonging to rural areas were still dependent on
money lenders for financial assistance.
With an aim to solve this problem, the then Government decided to nationalise the Banks. These
banks were nationalised under the Banking Regulation Act, 1949. Whereas, the Reserve Bank of
India was nationalised in 1949.
Candidates can check the list of Banking sector reforms and Acts at the linked article.
Following it was the formation of State Bank of India in 1955 and the other 14 banks were
nationalised between the time duration of 1969 to 1991. These were the banks whose national
deposits were more than 50 crores.
Given below is the list of these 14 Banks nationalised in 1969:

1. Allahabad Bank
2. Bank of India
3. Bank of Baroda
4. Bank of Maharashtra
5. Central Bank of India
6. Canara Bank
7. Dena Bank
8. Indian Overseas Bank
9. Indian Bank
10. Punjab National Bank
11. Syndicate Bank
12. Union Bank of India
13. United Bank
14. UCO Bank

In the year 1980, another 6 banks were nationalised, taking the number to 20 banks. These banks
included:

1. Andhra Bank
2. Corporation Bank
 3. New Bank of India
4. Oriental Bank of Comm.
5. Punjab & Sind Bank
6. Vijaya Bank

Apart from the above mentioned 20 banks, there were seven subsidiaries of SBI which were
nationalised in 1959:

1. State Bank of Patiala

2. State Bank of Hyderabad
3. State Bank of Bikaner & Jaipur
4. State Bank of Mysore
5. State Bank of Travancore
6. State Bank of Saurashtra
7. State Bank of Indore

All these banks were later merged with the State Bank of India in 2017, except for the State
Bank of Saurashtra, which merged in 2008 and State Bank of Indore, which merged in 2010.

Impact of Nationalisation
There were various reasons why the Government chose to nationalise the banks. Given below is
the impact of Nationalising Banks in India:

 This lead to an increase in funds and thereby increasing the economic condition of the
country
 Increased efficiency
 Helped in boosting the rural and agricultural sector of the country
 It opened up a major employment opportunity for the people
 The Government used profit gained by Banks for the betterment of the people
 The competition decreased, which resulted in increased work efficiency
This post Independence phase was the one that led to major developments in the banking sector
of India and also in the evolution of the banking sector.

Liberalisation Period (1991-Till Date)

Once the banks were established in the country, regular monitoring and regulations need to be
followed to continue the profits provided by the banking sector. The last phase or the ongoing
phase of the banking sector development plays a hugely significant role.
To provide stability and profitability to the Nationalised Public sector Banks, the Government
decided to set up a committee under the leadership of Shri. M Narasimham to manage the
various reforms in the Indian banking industry.
The biggest development was the introduction of Private sector banks in India. RBI gave license
to 10 Private sector banks to establish themselves in the country. These banks included:

1. Global Trust Bank

2. ICICI Bank
3. HDFC Bank
4. Axis Bank
5. Bank of Punjab
6. IndusInd Bank
7. Centurion Bank
8. IDBI Bank
9. Times Bank
10. Development Credit Bank

The other measures taken include:

 Setting up of branches of the various Foreign Banks in India

 No more nationalisation of Banks could be done
 The committee announced that RBI and Government would treat both public and private
sector banks equally
 Any Foreign Bank could start joint ventures with Indian Banks
 Payments banks were introduced with the development in the field of banking and
technology
 Small Finance Banks were allowed to set their branches across India
 A major part of Indian banking moved online with internet banking and apps available
for fund transfer
Thus, the history of banking in India shows that with time and the needs of people, major
developments have been brought about in the banking sector with an aim to prosper it.

CHAPTER – 2
MEANING , NATURE ,DEFINITION AND SCOPE OF BANKS
Banking is an industry that handles cash, credit, and other financial transactions. Banks provide a
Safe place to Store extra cash and credit .They offer savings accounts, Certificates of Deposit, and
checking accounts. Banks use these deposits to make loans. These loans include home mortgages,
business loans, and car loans.

A Bank is a financial institution licensed to receive deposits and make loans. Two of the most
common types of banks are commercial/retail and investment banks. Depending on type, a bank
may also provide various financial services ranging from providing safe deposit boxes and
currency exchange to retirement and wealth management.

Definition

Banking is defined as “Accepting of deposits of money from public for the purpose of Lending or
Investment, repayable on demand or otherwise and withdrawable by cheque , draft, or otherwise”

Banking can be defined as the business activity of accepting and safeguarding money owned by
other individuals and entities, and then lending out this money in order to earn a profit. However,
with the passage of time, the activities covered by banking business have widened and now
various other services are also offered by banks. The banking services these days include issuance
of debit and credit cards, providing safe custody of valuable items, lockers, ATM services and
online transfer of funds across the country / world.

Objective of Bank

 Business objectives.

 Social objectives.

 Business objectives

 Making profits.

 Providing services.

 Currency issue.

 Creation of transaction media.

 Receiving deposit.

 Making loan.
 Ensuring safety.

 Investment.

Social objectives

1. Creating savings.

2. Capital formation.

3. Industrialization.

4. Employment.

5. Developing living standard.

6. Economic development.

Features of Banking

1. Deals with money

The bank accept deposits from the public and advancing them as loans to the needy people. The
deposits may be current, fixed saving etc.

1. Provide loans

The banks are the institutions that can create credit i.e. creation of additional money for lending
Thus ‘creation of credit is the unique features of banking. Banks make extra money by providing
loans for different Product to the loan. The bank makes the extra money by lending money to the
eligible person at certain rates. Nowadays, banks provide loans for various requirements such as
study loan, car loan, home loan, personal loans, etc. Different banks provide different loans at
different interest rates. You can compare the interest rates of different banks to get a loan at
minimum interest rates

 Middle man
Banks serve as a middle man from the money surplus unit to be money deficit unit. They are
intermediaries, who transfer funds from savers to investors through grants for business,
commerce, education, housing etc.

1. Deposits must be withdrawable

The deposits are usually withdrawable on demand. it may be withdrawable by cheque, draft or
otherwise.

 Internet Services

Bank is that modern banks are also providing internet services. The development of the internet
and its inclusion in the banking sector has made it even more easy for people to carry out various
transactions.

Banks are providing online services through their apps. You can pay bills, buy food, go shopping
without having cash with you. With the help of banking apps, you can pay for everything online.

Nowadays, more and more banks are taking their business online. It helps in making safe and
risks free transactions, and there are fewer chances of stealing taxes. There are specific terms for
these types of transactions, such as internet banking and mobile banking.

 Commercial in nature

Since all the banking activities of Commercial banks are carried on with the aim of Making profit,
it is regarded as an commercial institution .

The bank uses our money to lend it to others or by investing it in profitable businesses to make
profits. If you think your money is sitting in a banks locker, then you are wrong.
You might have digits of the money mentioned in your passbook, but you might be rotating
between one person to another to make more money to the investor.

 Size transformation

Bank Create a reservoir of fund from the numerous small deposits collect from customer and than
provide large loan to Investor.

 Nature of agent
Beside the basic function of accepting deposits and lending money as a loan , bank ,possess the
characteristics of an agent because of its various agency services .

CHAPTER – 3
RELATIONSHIP OF BANKER AND CUSTOMER
The relationship between a Banker and a Customer is based on trust. In today’s world, banks are
considered a pivotal element for the economy of the country. It is an effective banking system
that paves the way for the proper growth of the economy. Customers avail different kinds of
services from the bank. This article critically analyses different types of relationship between
customer and banker. It also discusses different legislations that protect the interest of the banker
and customer and also provide proper remedies to them.

Different kind of relationship

Relationship of debtor and creditor

When a customer opens a bank account with the bank, he fills the form and other requisites
compulsory for the same. When he deposits money in his bank account, he becomes a creditor to
the bank. The bank becomes the debtor. The obligations of the bank to carry further business
from the deposits of the consumer are solely dependent on their own choice. The bank can invest
that money according to their own convenience. If the consumer wants to take back that money,
then he needs to follow a procedure of withdrawal.

Relationship of pledger and pledgee

When a customer pledges an article (goods and documents) with the banker as a security for the
payment of debt or performance of the promise, the customer becomes a pledger and the banker
becomes the pledgee.
Relationship of bailor and a bailee

Section 148 of the Indian Contract Act, 1872 defines Bailment, bailor and bailee . A “Bailment”
is the transfer of goods from one person to another for some purpose, upon a contract that they
shall return the goods after completion of the purpose or will dispose of the goods according to
the direction agreed as per the terms and conditions of the contract. The person delivering the
good is called the bailor and the person to whom the good is delivered is called the bailee. Banks
secure their advances by taking some tangible assets as securities. Sometimes they keep valuable
items, or land and other things as security. By doing so, the bank becomes the baillee and the
consumer becomes the bailor.

Relationship of lesser and lessee

Section 105 of Transfer of Property Act, 1882 defines lease, lessor, lessee, premium and rent.

A lease of immovable property is transferred to the right to enjoy the property for a certain
period of time. The transferor is the lessor. The transferee is called the lessee.

Relationship of trustee and beneficiary

When a bank receives money or other valuable securities, then the banker’s position is of a
trustee. On the other hand, when a bank receives money and uses it in various sectors, the bank
becomes the beneficiary.

Rights and Duties of Banker and Customer

It is very difficult to live without a bank account as it is required for many things. As more than
50% of Indians have bank accounts, it is very important for you to know the rights and duties of
both bankers and customers. In this blog, we will discuss the rights and duties of bankers and
customers.

Rights of a Banker

1. Right to charge interest

Every bank in India has the right to charge interest on the loans and advances sanctioned to
customers. Interest is usually charged monthly, quarterly, semiannually or annually.
2. Right to levy commission and service charges

Along with interest, banks also have the right to levy a commission and service charges for the
services rendered. The service rendered by the bank might be SMS notification service, retail
banking and so on. Banks can also debit these charges from the customer's bank account.

3. Right of Lien

Another important right enjoyed by banks is the Right of Lien. Banks have the right to keep
goods and securities belonging to the debtor as a security, until the loan is repaid by the debtor.
Banks have only the right to maintain the security of the debtor and not to sell.

4. The Right of Set-off

The banker has the right to set off customer accounts. Banks can merge a couple of accounts
which are in the name of the customer and set off the debit balance in one account with the credit
balance in the other, provided the funds belong to the customer.

5. Right of Appropriation

Let us consider that a customer has taken many loans from the bank and he deposits some money
in the bank without any instructions. If that amount is not sufficient to discharge all loans, the
bank has the right to appropriate the amount deposited to any loan, even to a time-barred debt.
But the customer should be informed on the same.

6. Right to Close the Account

If the customer’s account is not properly maintained, banks have all the right to close the account
by sending a notice to the customer. Bankers have no right to close the account, without sending
a written notice.

Rights of a Customer

1. Right to fair treatment

According to this right, banks cannot discriminate between customers on the basis of gender,
age, religion, caste, and physical ability while providing services. This does not mean that banks
cannot offer schemes which are designed for a particular set of people. Banks have all the right
to offers differential rates of interest or products to customers.
2. Right of transparent, fair and honest dealing

The contract between the banks and customers should be easily understood by the common man.
It is the responsibility of the bank to make the customer understand interest rates, the risk
involved and all other terms and conditions. Banks should not hide anything from the customer
before the signing of the agreement. Even if there are any short comings, they should be
communicated to the customer. The language in the contract should be simple and easily
understood.

3. Right to suitability

You might have come across a lot of cases of mis-selling of financial products, especially life
insurance policies. Usually, customers are forced to buy the product which offers the highest
commission to an agent. As per this right, customers should be sold the product which is suitable
to them. So, banks should always keep customers needs in mind, before selling any product.

4. Right to privacy

As per this law, the personal information provided by the customers to the bank, must be kept
confidential. Bankers can disclose only such information, which is required by law or only after
customers have given permission. Banks are not allowed to provide your details to telemarketing
companies or for cross-selling.

5. Right to grievance redressal and compensation

Banks are responsible for all the products and services offered by them and customers have the
right to easy and simple grievance redressal systems in case the bank fails to adhere to basic
norms. Along with their own products, bankers are responsible for the products of third parties
like insurance companies and fund houses. If the customer complaint is not resolved by the bank,
customers can go to the banking ombudsman.

Duties of customers to banks

1. It is the duty of customers to present the cheque and other negotiable instruments only during
the business hours of the bank.

2. In the case of any disagreement in the bank statement, customers should inform the bank.

3. Whenever photographs of customers are required by the bank, it should be submitted.

4. It is the duty of the customer to present the instrument of credit within the due time from the
date of issue.
5. The cheque should be filled by customers very carefully.

6. If the cheque book is lost or stolen, it is the duty of the customers to inform the bank.

7. If the customer notices any forgery in the amount of the cheque, he/she should inform it to the
bank immediately.

8. Customers should provide proper information in the Know Your Customer (KYC) form.

9. Customers should make the repayment of all the dues on time.

10. It is the duty of the customers to read the MITC ( Most Important Terms and Conditions)

Obligations of Bankers

1. It is the duty of the bank to honor the cheques of its customers up to the amount standing to
the credit of the customer’s account. The bank is liable to pay the compensation to the customer,
if it wrongfully refuses to honor the cheque.

2. It is the duty of the bank to follow the instructions given by the customers. If the customer has
not given any instructions, the bank should act as per rules and regulations.

3. Bankers should not disclose personal information given by customers to any outsider.

4. Banks should maintain all details of transactions made by the customer.

Right of Lien
Lien is the right of an individual to retain goods and securities in his possession that belongs to
another until certain legal debts due to the person retaining the goods are satisfied. Lien does not
endorse a power of sale but only to retain the property. This varies from other forms of charges
as it does not arise from an implied or express agreement. Whereas , it arises from the dealings
between the parties.

Conditions for Exercising Lien

There are three important conditions to exercise the right of lien . The are

 The goods for which this right is to be executed has to be possessed by the creditor who
exercises it.
 There has to be a lawful debt due to the person in possession of the goods by the owner.
 There should not be any contract to the contract.
Types of Lien
There are three different types of Lien namely

 Possessory Lien
 Equitable Lien
 Maritime Lien

Possessory Lien
A possessory lien can be exercised only by the person in possession of the goods. It is lost by

 Loss of possession
 When money due is paid
 Substitution of security
 When a right of lien is waived

The pre-requisite that is required for a possessory lien is that the possession has to be continuous,
rightful and not for any special purpose. Further, this can be divided into

 Particular Lien
 General Lien

Particular Lien
Particular Lien is that which confers the right to retain a specific commodity for which the
particular debt arose. Such debts usually arise from services that are provided or labourer or
money that is spent on the goods on which the right it is to be exercised.

The ingredients of a Particular Lien are

 A right to retention of goods till debt due is paid off.

 It does not need any specific agreement.
 Arises in the ordinary course of business.

The essentials of a Possession Lien are

 A possession that is acquired in the ordinary course of business.

 The owner has a lawful debt of an obligation that has to be discharged.
General Lien
A general lien refers to the right to retain goods and securities of a particular debt but in respect
of the general balance that is due by the owner of the goods and securities, to the individual who
is in possession of the goods. This may be conferred by an agreement to that effect or by custom
and usage or by the provisions of any statue. The right of general lien is particularly given by law
to bankers, solicitors, brokers, wharfingers and warehouse-keepers. A banker comprises cash,
cheque, bill of exchange and securities that are deposited or any money that is due to him as a
banker.

The ingredients of a general lien are given below.

 It extends to a general balance of accounts.

 It is a right of defence , not a right of action.
 It also extends to prior transactions.
 It extends to properties/ securities which a banker has come in possession of in the
ordinary course of business such as cheques that are deposited for collection.
 Securities/ goods that are held for a special purpose are not subjects of General Lien.

Banker’s Lien
Banker’s Lien is an implied pledged and the banker has the right to sell the property after
reasonable notice where the property comes into the hands in the ordinary course of business.
Section of the contract act lays down that a banker’s lien can be applied if

 The property is in the control of the banker.

 The instruments of the money or goods of the banker are not for a particular purpose
inconsistent with the lien.
 The possession of the instruments is obtained lawfully as a banker.
 There is no implied or expressed agreement contrary to the lien.

The banker only obtains a lien over pledged goods for the recovery of his dues and is liable to
sell those goods to reimburse himself. A banker’s general lien will not be extended to securities
that are deposited with him for a specific purpose inconsistent with the lien. Therefore, the
following situations are not covered by the banker’s lien.

 It does not extend to securities that do not belong to the customer of the banker.
 The articles and goods that are deposited by the owner for safe custody.
 The securities or valuables that are lying in safe deposit locker.
  The securities that are deposited for sale, the collection of interest, dividend etc. Although
he will not be able to exercise his right of lien on Government promissory notes and
shares, he is entitled to do so for any interest that is earned and the dividend is collected.
 A banker has no lien for fully paid-up shares except for partly-paid shares.
 A banker has no lien on an insurance policy that is pledged as a security for a loan post
the repayment of debt.
 A banker has no lien on the current account balance on any bill discounts made by him.
 Conveyance of land is not subject to such lien but title deeds that are left without a
memorandum of deposit are subject to such lien.
 Fixed deposit for the collection of interest from another bank will not come under the
right of lien.
 The securities that are deposited upon a particular trust.
 Any security that is left in the banker’s hands to cover a proposed advance which will be
subsequently declined.
 A banker cannot forfeit share in the satisfaction of a debt due to a shareholder.
 A bank does not have a lien over the credit balance lying in a customer’s account. The
banker’s right, in this case, is a right of ‘set-off’.

What are banking instruments?

Banking instrument means a cheque, draft, telegraphic or electronic transfer or other similar
instrument; Sample 1. Banking instrument means a negotiable instrument including a cheque,
draft, traveller's cheque, bill of exchange, postal note, money order, postal remittance, or other
similar instrument.
Credit Instrument # 1. Cheque:
According to Section 6 of the Negotiable Instrument Act, 1881, “A cheque is a bill of exchange
drawn upon a specified banker and payable on demand.”

i) It is always drawn on a specified banker, and

(ii) It is always payable on demand.

In essence, a cheque may be defined as a written order, signed by a customer of a bank, directing
the bank to pay on demand out of his (the customer’s) account a stated sum of money to or to the
order of a specified person, or to bearer.
Essentials/Characteristics of a Cheque:
1. A cheque must be in writing.

2. Cheque is an order on a specified bank to pay the amount.

3. The order to pay the amount must be an unconditional order.

4. A cheque is always drawn on a banker.

5. It must be signed by the drawer.

6. The amount ordered to be paid by the bank must be certain.

7. It is always payable on demand without any days of grace.

8. A cheque requires no acceptance.

9. A cheque to be valid must be made payable to, or to the order of a certain person or to the
bearer of the instrument

10. A cheque may be crossed.

Parties to a Cheque:
There are three parties to every cheque: (i) drawer, (ii) drawee, and (iii) payee.

i. Drawer:
The drawer is the person who signs the cheque ordering the bank to pay the amount.

ii. Drawee:
The drawee is a bank on which cheque is drawn.

iii. Payee:
The payee is a person to whom the sum of money expressed in the order is payable. Sometimes
drawer and payee are the same person.

Dishonour of a Cheque:
The banks may refuse payment or may dishonour a cheque in the following cases:
1. When there are insufficient funds to the credit of the drawer.

2. When the cheque is post-dated and is presented before the date it bears.

3. When a cheque is not duly presented, e.g. presented after banking hours.
4. When the signatures of the drawer do not tally with the specimen signatures.

5. When the cheque is presented at a branch where the customer has no account.

6. When the amount in figures and in words does not tally.

7. When the cheque is mutilated, ambiguous, irregular or otherwise materially altered.

8. When the cheque is not presented within 6 months of the issue of the cheque.

9. When some persons have joint account and the cheque is not signed by all jointly or by the
survivors of them.

10. When a cheque is crossed and not presented through a bank.

Types of Cheque:
There are two types of cheques:
(i) Open cheque, and

(ii) Crossed cheque.

8. When the cheque is not presented within 6 months of the issue of the cheque.

9. When some persons have joint account and the cheque is not signed by all jointly or by the
survivors of them.

10. When a cheque is crossed and not presented through a bank.

Types of Cheque:
There are two types of cheques:
(i) Open cheque, and

(ii) Crossed cheque.

8. When the cheque is not presented within 6 months of the issue of the cheque.

9. When some persons have joint account and the cheque is not signed by all jointly or by the
survivors of them.

10. When a cheque is crossed and not presented through a bank.

Types of Cheque:
There are two types of cheques:
(i) Open cheque, and

(ii) Crossed cheque.

(i) Open Cheque:

A cheque, which is payable in cash across the counter of the bank, is called an open cheque. If its
holder loses it, its finder may go to the bank and get the payment. In order to avoid the losses
incurred by open cheques getting into the hands of wrong parties the custom of crossing was
introduced.

(ii) Crossed Cheque:

A crossed cheque is one on which parallel transverse lines with or without the words ‘& Co.’ are
drawn. A crossing is a direction to the paying banker to pay the money generally to a banker or a
particular banker, as the case may be, and not to pay to holder across the counter. The crossing
provides a protection and safeguard to the owner of the cheque. Crossing does not affect the
negotiability of a cheque, except where the words ‘not negotiable’ are added.

Types of Crossing: There are two types of crossing:

(a) General Crossing, and

(b) Special Crossing.

a. General Crossing:
General crossing implies simply putting two parallel transverse lines on the face of a cheque.
Some words like ‘& Co.’, ‘Not Negotiable’ may be inserted in these lines. If a cheque is crossed
generally, the paying banker shall pay only to a banker.

b. Special Crossing: Where a cheque bears across its face an addition of the name of a banker,
either with or without the words ‘Not Negotiable’ the cheque is deemed to be crossed specially.
The payment of a specially crossed cheque can be obtained only through the particular banker
whose name appears between the lines. Transverse lines are not compulsory in case of a
special crossing. Endorsement of a Cheque:
Endorsement means signing at the back of instrument for the purpose of negotiation. The act of
signing a cheque, for the purpose of transferring it to someone else, is called the endorsement of
cheque. Under the Negotiable Instruments Act, the term endorsement means writing the name of
a person on the back of the instrument with the intention of transferring the rights therein.
The person who endorses the cheque is called endorser. The person to whom the cheque is
endorsed is called endorsee.

The endorsement is usually made on the back of the cheque. If no space is left on the cheque, the
endorsement may be made on a separate slip to be attached with the cheque.

Kinds of Endorsement:
1. General or Blank Endorsement:
An endorsement is said to be general or blank if the endorser simply puts his signature on the
instrument without specifying the endorsee. For example, if a cheque is payable to Ram Lai or
order and Ram Lai endorses the cheque by simply putting his signature, it is a general or blank
endorsement, as:

1. General or Blank Endorsement:

An endorsement is said to be general or blank if the endorser simply puts his signature on the
instrument without specifying the endorsee. For example, if a cheque is payable to Ram Lai or
order and Ram Lai endorses the cheque by simply putting his signature, it is a general or blank
endorsement, as:

2. Complete or Special Endorsement:

When the endorser adds a direction to pay the amount mentioned in the instrument to, or to the
order of a specified person and signs it, the endorsement is said to be ‘complete’ or ‘special’.

For example:

3. Restrictive Endorsement:
A restrictive endorsement is one where the endorser restricts further negotiation of the
instrument.

For example:
4. Partial Endorsement:
A partial endorsement is one where the endorsement is made for a part of the amount of
instrument.

For example:

5. Sans Recourse Endorsement:

If the endorser wants to avoid his liability as endorser he can do so by adding appropriate words
at the time of endorsement.

For example:
(i) ‘Pay X or order sans recourse’, or

(ii) ‘Pay X or order without recourse to me’, or

(iii) ‘Pay X or order at his own risk’.

6. Conditional or Qualified Endorsement:

A conditional endorsement is one when the endorser inserts some condition in his endorsement.

For Example:
‘Pay A or order on his marriage’ is an example of conditional endorsement.

Bearer Cheque:
A ‘bearer cheque’ is one which is payable to its bearer or holder who presents it to the bank for
the payment. In such cheques, the word ‘bearer’ is written after the name of the payee. A bearer
cheque is transferable merely by delivery. The drawee bank need not take any pains to get the
identification of person to whom the payment is being made. It need not be endorsed.

Order Cheque:
An ‘order cheque’ is one which is payable to the person named in the cheque or to his order. In
such cheques, the word ‘order’ is written after the name of the payee. It is not transferable
merely by delivery.

Difference between Bearer Cheque and Order Cheque:

Credit Instrument # 2. Hundi:

A hundi is almost an Indian bill of exchange, which has been in use since time immemorial. It is
the oldest surviving form of credit instrument in India.

A hundi may be defined as “A written order, usually unconditional, drawn by one person on
another for payment on demand or after a specified time of a certain sum of money, to a
person named therein.”
A bill of exchange is always unconditional, but a hundi is sometimes conditional, e.g., Jokhami
Hundi.

Types of Hundis:
Some of the important hundis used in India are discussed below:
1. Namjog Hundi:
A hundi payable to a specified person named in the hundi is known as Namjog Hundi. It can be
negotiated by endorsement and delivery.

2. Shahjog Hundi:
A shahjog hundi is one which is payable to or through a Shah. Shah means a respectable person
in the market. It is like a crossed cheque.

3. Dhanijog Hundi:
A dhanijog hundi is one which is payable to the person who holds or to the bearer thereof. The
word ‘Dhani’ means owner.

4. Firmanjog Hundi:
A firmanjog hundi is one which is payable to order.

5. Darshanhar Hundi:
A darshanhar hundi is one which is payable to bearer.

6. Darshani Hundi:
A darshani hundi is one which is payable at sight or on demand. Darshani hundi is similar to a
demand bill.

7. Muddati Hundi:
A muddati hundi is one payable after the expiry of a certain period. This is also called ‘Miadi
Hundi’ or ‘Thavani’.

8. Jawabi Hundi:
A jawabi hundi is used for remittance of money from one place to another. It is similar to a
money order. The person receiving the money has to send a Jawab (answer) to the remitter
showing that he has received the money.

9. Jokhami Hundi:
A jokhami hundi is one which is drawn against goods shipped on the vessel named in the hundi.

According to Justice Baley, “A Jokhami Hundi is in the nature of a policy of insurance, with the
difference that the money is paid before hand to be recovered if the ship is not lost.”

It is payable only when the goods reach safely at the destination.

10. Nishanjog Hundi:

This type of hundi is payable only to the person who presents it.
Difference between Hundi and Bill of Exchange:

Credit Instrument # 3. Bank Draft:

It is usually drawn by one branch of a bank upon its another branch, instructing the latter to pay a
specified amount to payee named therein or to his order. There cannot be any bearer draft. Bank
drafts are always payable to a certain payee named in the draft or to his order. They may be
crossed like a cheque. Bank drafts are called ‘Demand Drafts’ as they are payable on demand
without any days of grace.

Bank draft is the most convenient and economical method for sending money from one place to
another. A person who wants to send money, obtains the draft from the bank by paying the
necessary amount and the bank commission. He sends the draft to the payee by post. He (payee)
presents the draft in the concerned branch and get the payment.
Credit Instrument # 4. Bill of Exchange:
It is an important part of negotiable instruments used both in inland and overseas trade. Its use
has increased manifold due to expansion of trade and commerce.

According to Negotiable Instruments Act, 1981, “A ‘bill of exchange’ is an instrument in

writing and containing an unconditional order signed by the maker, directing a certain
person to pay a certain sum of money only to or to the order of a certain person or to the
bearer of the instrument.”
Characteristics/Essentials of a Bill of Exchange:
1. It should be in writing.

2. It should contain an order to pay

3. It should have unconditional order.

4. It must be signed by the drawer.

5. It must contain amount of money.

6. All the three parties-drawer, drawee and payee must be mentioned.

7. The bill may be made payable on demand or after specified period of time.

8. It must bear the required revenue stamp.-

Parties to a Bill of Exchange:
There are three parties to a bill of exchange:
1. Drawer:
The maker/writer of the bill is called Drawer. He is generally the creditor.

2. Drawee:
The person on whom the bill is drawn is called Drawee. He is normally the debtor.

3. Payee:
The person who is entitled to receive the amount of bill on its maturity is called Payee. Writer of
the bill can be drawer as well as payee of the bill.

Advantages of a Bill of Exchange:

The main advantages of a bill of exchange are:
1. Helps in Enhancing Business:
Those persons who are not in a position to run their business due to scarcity of funds, can run
their business by obtaining credit through bills or by discounting the bills from bank.

2. Legal Document:
It is a legal document under Negotiable Instrument Act. And if, after accepting the bill, the
drawee fails to pay the amount, the dishonoured bill is sufficient proof for court to decide the
liability of the drawee.
3. Negotiable Instrument:
A bill of exchange is a negotiable instrument. So, it can be transferred from one person to
another in the settlement of debts.

4. Discounting:
If the holder of the bill needs funds before the due date, he can get money readily by discounting
the bill with a bank.

5. Foreign Payments:
The difficulties in payment of foreign debts are also removed by bill of exchange and now trader
of one country can very easily make payment to his foreign counterpart.

6. Credit Facility:
A bill of exchange enables a person to buy goods on credit.

7. Easy Transfer of Money:

A bill of exchange provides an easy way of sending money from one place to another.

8. Exact Date of Payment:

By drawing a bill on drawee, the drawer knows that when he is going to receive certain payment.
The drawee is also certain about the time of making the payment.

Credit Instrument # 5. Promissory Note:

According to Negotiable Instrument Act, 1881, “A promissory note is an instrument in
writing (not being a bank note or a currency note) containing an unconditional
undertaking signed by the maker to pay a certain sum of money only to or to the order of a
certain person or to the bearer of the instrument.”
Essential Characteristics of a Promissory Note:
1. It should always be in writing.

2. It is always unconditional.

3. It is a promise by debtor to pay.

4. The promise is always for payment of money.

5. It must be signed by the maker.

6. The maker must be a certain person.

7. The payee must be a certain person.

8. The amount of payment under promissory note must be certain.

9. A promissory note must be stamped as prescribed by the Indian Stamp Act.

10. The place, time and date of payment are not essentials of a promissory note.

But usually these are also given in a promissory note.

Parties to a Promissory Note:

1. Drawer/Maker. Drawer is a person who promises to pay the amount stated in the promissory
note. He is the debtor.

2. Payee is the person to whom the promise is made for the payment. He is the creditor.

Kinds of Promissory Note:

A promissory note may be made or drawn by one or more than one person and thus it is
classified as given below:
1. Simple or Single Promissory Note:
When a promissory note is made or drawn by one person, it is called a simple/single promissory
note. The maker of this promissory note is individually liable for the amount.

2. Joint Promissory Note:

When a promissory note is made or drawn by two or more persons, it is called a joint promissory
note. The makers of this promissory note are jointly liable for the payment.

3. Joint and Several Promissory Note:

When a promissory note is made by two or more persons and the makers of the promissory note
are liable jointly and severally, it is called a joint and several promissory note.
Credit Instrument # 6. Trade Bills:
Ordinarily bills are drawn and accepted for the purpose of receiving or making payments of
goods sold or purchased on credit. Such bills, which are drawn for consideration, are known as
Trade Bills.

1. Purpose:
It is drawn and accepted for any business transaction.

2. Proof:
It is a proof of debt.

3. Consideration:
Trade bill is drawn and accepted for some consideration.
4. Dishonour:
If this bill is dishonoured, payment can be taken with the help of court.
5. Discounting of the Bill:
If such a bill is discounted with the bank, the whole amount of bill remains the drawer.
Credit Instrument # 7. Accommodation Bills:
Sometimes a bill is drawn and accepted without any consideration. It is drawn and accepted just
to help the drawer or both the drawer and the acceptor or raise funds temporarily by getting the
bill discounted. A bill drawn without any consideration is known as Accommodation Bill. It is
also termed as ‘Kite Bill’ or ‘Fictitious Bill’.

1. Purpose:
It is drawn and accepted to raise funds temporarily.

2. Proof:
It is drawn and accepted for financial help.
3. Consideration:
Accommodation Bill is drawn and accepted without any consideration.
4. Dishonour:
If this bill is dishonoured, payment cannot be taken with the help of court.
5. Discounting of the Bill:
If such a bill is discounted with the bank and the money received is distributed between the
drawer and drawee.

List of Banking Services offered by Banks

Apart from primary jobs accepting deposits and granting loans, there are several other functions
of banks in the modern banking era. Consider a few services offered by the banks.
1.Payment and Remittance Services:

This is another important function of banks that enables us to transfer funds from one account to
another, from one city to another. Alongside, modern banking systems allow us to make the
direct online money transfer, pay utility bills, collection of cheques, and more. With the
evolution of technology, payments can be made and collected from any part of the world.

2. Overdraft:

Overdraft services allow account holders to withdraw more than what their deposits allow.
Though, interest is charged on the overdrawn amount. This is one of the many ways banks lend
money to their customers.

3. Currency Exchange:

Imagine if there were no banks where you would acquire foreign currency for travel or trading
purposes. The banks provide foreign currency exchange with local currency in an easy manner.

4. Consultancy:

Modern banks have a holistic approach and they aim to provide all kinds of services to their
customers that involve their financial situation. Modern banks are hiring financial and legal
experts to provide advice and solutions about customers wealth, investment, and trading.

5. Online Banking:

In the digital world, every bank is striving to make space in online banking world. With the help
of the internet, banks allow their customers to perform banking activities through their official
website. This allows the customer to access their account 24/7 without having to visit a physical
branch.

6. Mobile Banking:

Similarly, banks are also providing mobile banking services wherein customers can perform
banking activities through their smartphone apps.
7. Home Banking:

Home banking is another rising trend wherein banking transaction can be made from home
directly. These services require an internet connection or access to online banking.

8. Credit and Debit Cards:

Most of the banks offer credit and debit cards to their customers that can be used to purchase
products and services, and even borrow or withdraw money. This is one of the most important
steps towards a cashless society.
9. Lockers:

Banks also offer safe deposit to their clients to store their valuables safely, at minimal fees.

10. Money Transfer:

There are several ways banks offer to transfer money from one part of the world to the other with
the help of demand drafts, money orders, cheques, online banking, and more.

11. Investment Banking:

Many banks now offer financial services to their customers. They help them make the best of
their wealth by offering several investment products.

12.Wealth Management:

Wealth management is one of the many investment services offered by banks. It allows the
customers to plan their finances to grow long-term wealth.
Apart from all this, banks also offer several auxiliary services to the customers such as solvency
certificates, mutual funds, insurance services, gold coins, and more.
Today, we have a fairly well-organized and highly sophisticated banking system that includes
new-generation banks along with traditional banks. In the banking industry of India, there has
been extraordinary growth that has replaced traditional banking methods with simplified,
accurate, and fast banking methods. Indian banks are subject to tremendous change and are
expected to expand invariably.

LAWS RELATING TO THE BUSINESS OF BANKING

BANKING COMPANIES ACT , 1949
The law relating to banking in India today is the outcome of gradual process of evolution before
1949. The Indian companies Act 1913 contained special provisions relating to banking
companies, which were inadequate and were subsequently incorporated in the comprehensive
legislation passed in 1949 under the name of Banking Regulation Act 1949. This Act was
suitably amended a number of times to insert new provisions and to amend the existing ones to
suit the needs of changing circumstances.

Structure of the Act

The original Act had 56 sections housed in five parts and five schedules. After the amendments
the Act of 1949 has 70 sections in Ten parts.

Salient features of the Act

 A comprehensive definition of banking so as to bring within the scope of the legislation all
institutions which receive deposits, repayable on demand or otherwise for lending or
investment.
 Prohibition of non-banking companies from accepting deposits repayable on demand.
 Prohibition of trading to eliminate non-banking risks.
 Prescription of minimum capital standards.
 Limiting the payments of dividends.
 Inclusion the scope of legislation of banks registered outside the provinces of India.
 Introduction of comprehensive system of licensing of banks and their branches.
 Prescription of a special form of balance sheet and conferring of powers on the Reserve
Bank to call for periodical returns.
 Inspection of books and accounts of a bank by Reserve Bank.
 Empowering the central government to take action against banks conducting their affairs in a
manner detrimental to the interests of the depositors.
 Provision for bringing the Reserve Bank of India into closer touch with banking companies.
 Provision of an expeditious procedure for liquidation.
 Bringing the imperial bank of India within the purview of some of the provisions of the Bill.
 Widening the powers of the Reserve Bank of India so as to enable it to come to the aid of
banking companies in times of emergencies.
 Provision for the extension of the Act to acceding states.
Major Provisions of Banking Regulation Act
All the provisions of the Act have been divided into five parts. There are in all fifty-six Sections
and five Schedules attached to the Act. The main provisions or contents or characteristics of the
Act may be summarised as:
Title, extent and commencement

According to Section 1, the Act is called the Banking Regulation Act, 1949. It extends to the
whole of India. It came into force on 16th March, 1949. A chit fund transaction under the Chit
Fund Act, 1982 is also a banking transaction and is covered under the Banking Regulation Act.
1949.

Definition of Banking

According to Section 5(b), “banking” means the accepting of deposits of money from the public
for the purpose of lending or investment, repayable on demand or otherwise and withdrawable
by cheque, draft, order or otherwise. It may be noted that “banking does not include other
commercial activities carried on by a banking company”.

Section 5(c) states that “banking company” means any company which transacts the business of
banking in India. According to explanation to Section 5, any company which is engaged in the
manufacture of goods or carries on any trade and which accepts deposits of money from the
public merely for the purpose of financing its business, shall not be deemed to transact the
business of banking, and therefore shall not be called a “banking company”.

Section 7 stipulates that every banking company, and no other company, shall use any of the
words “bank”, “banker”, or “banking” as part of its name. Only then, it can carry on the business
of banking in India.

Business of Banks

Section 6 provides a list of various forms of business which a banking company may do in
addition to the business of banking.

Prohibited functions of Banks

According to Section 8 and 9, the banks cannot engage themselves in carrying on the following
activities:

 No banking company shall directly or indirectly deal in the buying or selling or bartering of
goods, or engage in any trade.
 No banking company shall buy or sell, or barter goods for others.
 No banking company shall hold any immovable property howsoever acquired for more than
7 years from the acquisition thereof. However, it can hold any immovable property required
for its own use.
Management of a Bank

With regard to the management of a banking company, Section 10 provides as follows:

 A banking company cannot employ or be managed by a managing agent.

 It cannot employ “any person” who has been adjudicated insolvent, or has been convicted by
a criminal Court for any act of moral turpitude; who is a director of any other company; who
is engaged in any other business or vocation; whose terra of office as a person managing the
company is for more than 5 years at any one time; whose total remuneration or its part takes
the form of commission or of a share in the profits of the company; and whose remuneration
is excessive in the opinion of the Reserve Bank of India.
 The board of directors of a banking company shall include not less than 51% of its total
number of members, persons with professional or other practical experience in the matters
such as accountancy, agriculture and rural economy, banking, cooperation, economics,
finance, law, small scale industry, etc.
 Every banking company shall be managed by a whole-time chairman who shall be entrusted
with the management of the whole of its affairs. The chairman shall exercise his powers
subject to the superintendence, control, and direction of the board of directors. The chairman
shall be one of the directors.
 Section 16 prohibits common directors and states that a banking company cannot have a
person as director, who is a director of any other banking company.
Capital and Reserves

According to Section 11, the aggregate value of a banking company's paid-up capital and
reserves shall not be less than Rs. 5 lakhs, if the bank has been established after 16th September,
1962. This minimum amount varies according to the number of places of business in one or more
states and also with the nature of banks such as Indian banks and foreign banks whose branches
are in India. Section 12 states that the subscribed capital of a banking company cannot be less
than 50% of the authorised capital, and the paid-up capital cannot be less than 50% of the
subscribed capital. Further, the capital of the company shall consist of ordinary shares or equity
shares only. A shareholder cannot exercise Ms voting rights on poll in excess of 10% of the total
voting rights of all the shareholders of the banking company.

According to Section 17, every banking company shall create a Reserve Fund (known as
Statutory Reserve Fund), and before declaring any dividend, transfer to it at least 20% of its
profit each year) When the amount in the reserve fund together with the amount in the share
premium account equals the paid-up capital, then (and not before that) the Central Government
on the recommendation of the Reserve Bank, can allow a banking company not to transfer the
stipulated 20% of profit to the reserve fund. The Reserve Fund cannot be used for any purpose
until it is equal to the paid-up capital. Where a banking company appropriates (uses) any amount
from the Reserve Fund or the share premium account, it shall report the fact to the Reserve Bank
within 21 days of such appropriation, explaining the circumstances thereof.

ection 18 states that every unscheduled bank shall maintain a Cash reserve with itself or in a
current account with the Reserve Bank equal to at least 3% (increasable up to a maximum of
15%) of the total of its demand and time liabilities in India.

According to Section 24, every bank shall maintain a liquid reserve in cash, gold or
unencumbered approved securities at least 25% of the total of its demand and time liabilities in
India.

Restrictions concerning payment of dividend

According to Section 15, no bank shall pay any dividend on its shares until all its capitalised,
expenses (including preliminary expenses, organisation expenses, share-selling commission,
brokerage, amount of losses incurred or any other item of expenditure on intangible assets) have
been completely written off. However, the bank may pay such dividends without writing off the
depreciation on investment in approved securities, or the depreciation on investment in shares,
debentures or bonds (other than approved securities), and the bad debts.

Restriction on nature of subsidiary companies

Section 19 states that a banking company cannot form any subsidiary company. However, it may
establish a subsidiary company in the following circumstances:

 To undertake any one or more forms of business permissible for a banking company under
Section 6; or
 To carry on the business of banking exclusively outside India. However, before creating a
subsidiary company for this purpose, previous permission in writing of the Reserve Bank is
necessary; or
 To undertake such other business which the Reserve Bank may, with the prior approval of
the Central Government, consider to be conducive to the spread of banking in India or to be
otherwise useful or necessary in the public interest.
Restrictions on Loans and Advances

According to Section 20, the following restrictions have been laid down on loans and advances
of a bank:

 A bank cannot grant any loans or advances on the security of its own shares.
 It cannot enter into any commitment for granting any loan or advance to or on behalf of any
of its directors; any firm in which any of its directors is interested as partner, manager,
 employee, or guarantor; any company in which any of the directors of the bank is a director,
managing agent, manager, employee, or guarantor; any company in which any of the
directors of the bank holds substantial interest; or, any individual in respect of whom any of
its directors is a partner or guarantor.
 A bank cannot remit (mitigate or leave) the whole or any part of a loan or advance granted by
it, without the previous approval of the Reserve Bank. Any remission without such approval
shall be void and of no effect.
Licensing of banking companies

According to Section 22, a banking company cannot carry on banking business in India unless it
holds a licence issued in that behalf by the Reserve Bank. Before commencing banking business
in India, every banking company shall apply in writing to the Reserve bank for a licence. Before
granting any licence, the Reserve Bank has to be satisfied that the following conditions have
been fulfilled:

1. The banking company is or will be in a position to pay its present or future depositors in full
as their claims accrue.
2. The affairs of the company are not being or likely to be conducted in manner detrimental to
the interests of its present or future depositors.
3. The general character of the proposed management of the company will not be prejudicial to
the public interest or the interest of its depositors.
4. The company has adequate capital structure and earning prospects.
5. The public interest will be served by the grant of a licence to the company to carry on
banking business in India.
6. Having regard to existing banking facilities and the potential scope for expansion of banks in
the proposed area, the grant of licence would not be prejudicial to the operation and
consolidation of the banking system with monetary stability and economic growth.
7. Any other condition, the fulfilment of which would be in the public interest or the interests of
the depositors, in the opinion of the Reserve Bank.
The Reserve Bank may cancel a licence granted to a bank in the following circumstances:

 if the bank ceases to carry on banking business in India; or

 if the bank fails to comply with any of the conditions imposed upon it by the Act.
However, the aggrieved bank may appeal to the Central Government against the decision of the
Reserve Bank for cancelling the licence, whose decision in the matter shall be final.

Opening of new branches and transfer of existing branches

Section 23 provides that without obtaining the prior permission of the Reserve Bank, a banking
company cannot open a new branch. It cannot change the location of an existing branch. The
same restriction applies to opening or transferring branches outside India. However, a temporary
branch may be opened for a, maximum period of one month for the purpose of affording banking
facilities to the public on the occasion of an exhibition, a conference, or a 'mela' or any other
similar occasion, if the banking company already has a branch in that city, town, or village.

Assets, returns, information, accounts and audit

A banking company is required to observe and comply with the following requirements:

1. As per Section 25, every banking company shall maintain its assets in India at least 75% of
its demand and time liabilities in India. It shall submit to the Reserve Bank a quarterly return
of its assets and liabilities.
2. As per Section 26, every banking company shall submit an annual return of each calendar
year to the Reserve Bank with the details of all accounts which have not been operated upon
for 10 years.
3. As per Section 27, every banking company shall submit a monthly return to the Reserve
Bank showing its assets and liabilities in India. The Reserve Bank has power to call for other
returns and information which it may consider necessary or expedient.
4. As per Section 29, at the expiry of each calendar year, every banking company shall prepare
a balance sheet and profit and loss account for that year in the forms set out in the Third
Schedule or as near thereto as circumstances admit.
5. As per Section 30, the balance sheet and profit and loss account shall be audited by a person
duly qualified to be an auditor of companies.
6. As per Section 31, the accounts, balance sheet and profit and loss account together with
auditor's report shall be published in prescribed manner and three copies thereof shall be
furnished as returns to the Reserve Bank, and as per Section 32, the same number of copies
shall also be sent to the Registrar.
7. As per Section 33, banking companies incorporated outside India shall display at their
principal offices and in every branch office in India, a copy of its first audited balance-sheet
and profit and loss account, in a conspicuous place. Section 34A protects a banking company
from being compelled to give confidential documents and information. Similarly, an
employee of the bank cannot be compelled to do so (AIR 1983).
Inspection

According to Section 35, the Reserve Bank on its own or on being directed by the Central
Government, can cause an inspection of any banking company and its books and accounts; may
also cause a scrutiny of its affairs and books and accounts, and the officers of the company shall
have to fully cooperate with it. The Reserve Bank shall supply a copy of its report on such
inspection or scrutiny to the banking company, and to the Central Government if the inspection
has been directed by her.
Prohibition of certain activities in relation to banking companies

According to Section 36AD, any person must not obstruct the business of a banking company;
must not hold within its office any demonstration which is violent or which prevents its normal
business; and must not act in any manner calculated to undermine the confidence of the
depositors in the banking company. Whosoever contravenes these provisions without any
reasonable excuse, shall be punishable with imprisonment for a term which may extend to 6
months, or with fine which may extend to Rs. 1,000 or with both.

Acquisition of the undertakings of banking companies in certain cases

Section 36AE states that the Central Government has the power to acquire undertakings of a
banking company if upon receipt of a report from the Reserve Bank, she is satisfied that the
banking company has failed to comply with the Reserve Bank's policy in relation to advances or
the directions given by it, or is being managed in a manner detrimental to the interests of its
depositors, after giving a reasonable opportunity of showing cause against the proposed action.
As per Section 36AG, compensation shall be given to shareholders of the acquired bank.

Suspension of business (moratorium) and winding up of banking companies

According to Section 37, if a banking company is temporarily unable to meet its obligations, it
may apply for a moratorium to the High Court. (Moratorium means a legally authorised
postponement of fulfilment of an obligation). The High Court may make an order staying the
commencement or continuance of all actions and proceedings against the company for a fixed
period of time on such terms and conditions as it may think fit and proper. However, the total
period of moratorium shall not exceed 6 months. The High Court shall forward a copy of its
order of moratorium to the Reserve Bank. As per Section 38, the High Court can order the
winding up of a banking company if it is unable to pay its debts, or if an application for its
winding up has been made by the Reserve Bank.

The Reserve Bank may make an application for the winding up of a banking company:

 If the banking company has failed to comply with the requirements concerning minimum
paid-up capital and reserves, or has become disentitled to carry on banking business due to
non-fulfilment of any of the licensing conditions; or has been prohibited from receiving fresh
deposits by an order of the Reserve Bank; or has contravened any provision of the Banking
Regulation Act; or
 If in the opinion of the Reserve Bank a compromise or arrangement sanctioned by a Court
cannot be worked satisfactorily with or without modifications; or the returns and information
furnished to it disclose that the company is unable to pay its debts; or the continuance of the
company is prejudicial to the interests of its depositors.
Procedure for amalgamation of banking companies

According to Section 44A, a banking company cannot be amalgamated with another banking
company, unless a scheme containing the terms of such amalgamation has been placed in draft
before the shareholders of each of such companies separately, and approved by a resolution
passed by a 2/3rd majority of shareholders of each of the said companies, present either in person
or by proxy at a meeting called for the purpose.

Restriction on acceptance of deposits withdrawable by cheque

According to Section 49A, no person other than a bank shall accept deposits of money
withdrawable by cheque.

Change of name of banking company

According to Section 49B, a banking company can change its name if tie Reserve Bank has no
objection to such change and the Central Government gives its approval to such change.

Power of Central Government to make rules

According to Section 52, after consultation with the Reserve Bank, the Central Government may
make rules to provide for all matters for which provision is necessary or expedient for the
purpose of giving effect to the provisions of this Act and all such rules shall be published in the
official Gazette.

Power to exempt in certain cases

Section 53 states that on the recommendation of the Reserve Bank, the Central Government may
declare by notification in the official Gazette that any or all of the provisions of the Act shall not
apply to any banking company or institution generally or for such period as may be specified.

Act to apply to cooperative societies

According to Section 56, the provisions of this Act shall apply to cooperative societies as they
apply to banking companies, but subject to certain modifications.

INTRODUCTION

The Reserve Bank of India was set up in the year 1935 as per the Reserve Bank of India Act,
1934. It is the national bank of India dependent on the multidimensional job. It performs
significant money-related capacities from the issue of cash notes to the upkeep of financial
stability in the nation. At first, the Reserve Bank of India was a private investor’s organization
which was nationalized in 1949. Its issues are administered by the Central Board of Directors
designated by the Government of India. Since its beginning, the Reserve Bank of India had
assumed a significant job in the financial turn of events and money related solidness in the
nation.

MAJOR PROVISIONS OF THE RESERVE BANK OF INDIA ACT, 1934

SECTION 2(e)- Scheduled Bank means a bank whose name is included in the Schedule II of the
RBI Act, 1934.

SECTION 3 of the Act demonstrates the foundation of the Reserve Bank of India for taking over
the administration of the money from the Central Government and of carrying on the matter of
banking as per the provisions of this Act.

SECTION 7 engages the Central Government to issue directions in public interest occasionally
to the bank in meeting with the RBI Governor. This part likewise gives intensity of
administration and direction of the affairs and business of RBI to Central Board of Directors.

SECTION 17- The section manages the functioning of RBI. The RBI can accept deposits
from the Center and the State governments without interest. It can buy and limit bills of
the trade from commercial banks. It can buy foreign exchange from banks and offer it to
them. It can give credits to banks and state monetary enterprises. It can give advances to
the Central government and state governments. It can purchase or sell government
securities. It can bargain in subordinate, repo, and invert repo.

SECTION 22- 29– RBI in India controls the progression of cash in the market. The primary
target is to keep an eye on the credit system and dependent on it keep up the cash in the system.
This is done with the goal that the deposits are maintained. Additionally, RBI is the sole position
with regards to the printing of cash. This capacity of giving notes by RBI has numerous points of
interest. They are:

 It is anything but difficult to administer.

 This aids in the consistency of the notes that are given.
 It turns out to be anything but difficult to control and manage the credit that is within the
framework.
SECTION 42– The RBI attempts the duty of controlling credit made by commercial banks. RBI
utilizes two techniques to control the additional flow of cash in the economy. These strategies are
quantitative and subjective procedures to control and direct the credit stream in the nation. At the
point when RBI sees that the economy has adequate cash supply and it might cause an
inflationary circumstance in the nation then it crushes the cash supply through its tight money
related approach and the other way around.

SECTION 40- To keep the foreign exchange rates stable, the Reserve Bank purchases and sells
foreign monetary standards and furthermore secures the nation’s foreign exchange reserves. RBI
sells the foreign cash in the foreign exchange market when its stock reductions in the economy
and the other way around. Presently, India has a Foreign Exchange Reserve of around US$ 487
bn

ROLES/ FUNCTIONS OF THE RBI

SECTION 22- 29– RBI in India controls the progression of cash in the market. The primary
target is to keep an eye on the credit system and dependent on it keep up the cash in the system.
This is done with the goal that the deposits are maintained. Additionally, RBI is the sole position
with regards to the printing of cash. This capacity of giving notes by RBI has numerous points of
interest. They are:

 It is anything but difficult to administer.

 This aids in the consistency of the notes that are given.
 It turns out to be anything but difficult to control and manage the credit that is within the
framework.
SECTION 42– The RBI attempts the duty of controlling credit made by commercial banks. RBI
utilizes two techniques to control the additional flow of cash in the economy. These strategies are
quantitative and subjective procedures to control and direct the credit stream in the nation. At the
point when RBI sees that the economy has adequate cash supply and it might cause an
inflationary circumstance in the nation then it crushes the cash supply through its tight money
related approach and the other way around.

SECTION 40- To keep the foreign exchange rates stable, the Reserve Bank purchases and sells
foreign monetary standards and furthermore secures the nation’s foreign exchange reserves. RBI
sells the foreign cash in the foreign exchange market when its stock reductions in the economy
and the other way around. Presently, India has a Foreign Exchange Reserve of around US$ 487
bn.
INSTRUMENTS AND MODES OF MONETARY POLICY

It is referred as Federal Reserve. The Central bank maintains it to influence the amount of cash
and credit. The monetary policy comprises of the administration of cash supply and interest rates,
pointed toward meeting macroeconomic goals, for example, inflation control, utilization,
development, and liquidity.

SECTION 49– BANK RATE- It is the standard rate at which RBI is ready to buy or rediscount
certain documents including bills of exchange or commercial papers. Bank rates impact the
loaning rates of commercial banks. Higher bank rate will mean higher loaning rates by the banks.
To control liquidity, the national bank can depend on raising the bank rate and the other way
around. The current bank rate is 4.65%.[2]

SECTION 17- OPEN MARKET OPERATIONS– It can accept money on deposit without
interest from the Central government or the state government. It can sale, purchase and discount
bills of exchange. Under section 17, RBI has much wider authority as compared to section 49. It
can buy and sell foreign exchange and can also deal with transactions abroad. Under this
provision, RBI acts independently. If the commercial banks reduce rates as compared to RBI
then it can go for an open market like other ordinary banks as a participant.

But if the RBI fixes a bank rate and the commercial banks are not ready to sell their promissory
notes to the RBI due to the high rate then RBI can participate in the open market and can use the
demand and supply rule to fix the price.

SECTION 42- CASH RESERVE RATIO– RBI can tell a bank to keep maximum 20% of all
its demand and time liabilities as reserve. CRR is basically the minimum amount of deposit that
the commercial banks have to hold as reserves with the RBI. The reason is to ensure that banks
do not run out of cash to meet the payment demands of their customers. The present CRR is
3%.[3]

SECTION 24- STATUTORY LIQUIDITY RATIO– Commercial banks have to maintain a

stipulated proportion of their demand and time liabilities in the form of cash, gold and
unencumbered securities. The proportion is minimum of 40% and the present SLR is 18.50%.[4]
REPO RATE is the rate at which Central bank lends money to the commercial banks when they
need it. If there is an increase in repo rate, the liquidity will fall and banks will not take loans in
this scenario.

REVERSE REPO RATE is the rate at which RBI borrows money from commercial banks. Both
reverse repo rate and liquidity are inversely proportional to each other.

MARGINAL STATUTORY FACILITY- If bank needs an overnight loan, instead of going to

another financial institution, it comes to the RBI. Here instead of loans, securities are to be
issued.

SELECTIVE CREDIT CONTROL- To select the rate of interest, to whom to give, maximum
amount to be given to a single borrower.

ISSUE OF BANK NOTES- As per Section 22 of the Reserve Bank of India Act, RBI has the
exclusive right to issue cash notes of different divisions aside from one rupee note. The One
Rupee note is given by the Ministry of Finance and it bears the marks of Finance Secretary,
while different notes bear the mark of Governor RBI.

Section 24 mentions that the maximum denomination of a note is rupees ten thousand. Whereas
section 26 describes the legal tender character of Indian bank notes.

According to section 27 of the Act, the bank doesn’t have the right to re-issue the bank notes that
are torn, defaced or excessively spoiled.

RBI & CREDIT INFORMATION

SECTION 45A TO 45G-

It includes any information related to-

 The amount or nature of loan or advances and other credit facilities that are given by the
banking companies to their borrowers,
 The nature of security given by the borrowers for such credit facilities,
 The guarantee granted by the banking company to its customers,
  The antecedents, means, credit worthiness and history of financial transaction to the
borrowers,
 Any such information that the RBI may consider to be relevant.[5]
Power of RBI to collect credit information-

1. It can be collected in such a manner as the RBI thinks fit.

2. It may direct any bank to submit to it the statements related to such credit information.
Any banking company is bound to comply with the regulations of the Reserve Bank of India.

Procedure for granting credit information to banking companies-

On request of a banking company, the RBI shall furnish the applicant with that credit
information related to the matters stated in the application. But the information so furnished will
not disclose the names of banking companies who have submitted such application to the RBI. It
is on the discretion of the RBI to put fees for furnishing credit information and that amount
would not exceed to rupees twenty-five.

Disclosure of information prohibited-

Any credit information contained in any statement should be kept confidential and should not be
published or disclosed except for the purpose of this chapter.

Those exceptions are-

 Disclosure made by any banking company with the prior permission of the RBI.
 If the bank thinks fit, it may publish the credit information in favor of public interest.
 The disclosure or publication can be done as per the practice and usage customary among
bankers or permitted by any other law.
 It can be done under the Credit Information Companies (Regulation) Act, 2005.
 Main Features of the Foreign Exchange Management Act (FEMA)!
 The Foreign Exchange Management Act (FEMA) was an act passed in the winter session
of Parliament in 1999, which replaced Foreign Exchange Regulation Act. This act seeks
to make offences related to foreign exchange civil offences. It extends to the whole of
India.

 The Foreign Exchange Regulation Act (FERA) of 1973 in India was replaced on June
2000 by the Foreign Exchange Management Act (FERA), which was passed in 1999. The
FERA was
passed in 1973 at a time when there was acute shortage of foreign exchange in the country It had
a controversial 27 years stint during which many bosses of the Indian corporate world found
themselves at the mercy of the Enforcement Directorate. Moreover, any offence under FERA
was a criminal offence liable to imprisonment. But FEMA makes offences relating to foreign
civil offences.

FEMA had become the need of the hour to support the pro- liberalisation policies of the
Government of India. The objective of the Act is to consolidate and amend the law relating to
foreign exchange with the objective of facilitating external trade and payments for promoting the
orderly development and maintenance of foreign exchange market in India.

FEMA extends to the whole of India. It applies to all branches, offices and agencies outside India
owned or controlled by a person, who is a resident of India and also to any contravention there
under committed outside India by two people whom this Act applies.

The Main Features of the FEMA:

The following are some of the important features of Foreign Exchange Management Act:
i. It is consistent with full current account convertibility and contains provisions for progressive
liberalisation of capital account transactions.

ii. It is more transparent in its application as it lays down the areas requiring specific permissions
of the Reserve Bank/Government of India on acquisition/holding of foreign exchange.

iii. It classified the foreign exchange transactions in two categories, viz. capital account and
current account transactions.

iv. It provides power to the Reserve Bank for specifying, in , consultation with the central
government, the classes of capital account transactions and limits to which exchange is
admissible for such transactions.

THE NEGOTIABLE INSTRUMENT ACT ,1881

What Is a Negotiable Instrument?

A negotiable instrument is a signed document that promises a sum of payment to a specified

person or the assignee. In other words, it is a formalized type of IOU: A transferable, signed
document that promises to pay the bearer a sum of money at a future date or on-demand. The
payee, who is the person receiving the payment, must be named or otherwise indicated on the
instrument.
Because they are transferable and assignable, some negotiable instruments may trade on
a secondary market.

KEY TAKEAWAYS

 A negotiable instrument is a signed document that promises a sum of payment to a

specified person or the assignee.
 Negotiable instruments are transferable in nature, allowing the holder to take the funds
as cash or use them in a manner appropriate for the transaction or according to their
preference.
 Common examples of negotiable instruments include checks, money orders, and
promissory notes.

Understanding Negotiable Instruments

Negotiable instruments are transferable in nature, allowing the holder to take the funds as cash
or use them in a manner appropriate for the transaction or according to their preference. The
fund amount listed on the document includes a notation as to the specific amount promised and
must be paid in full either on-demand or at a specified time. A negotiable instrument can be
transferred from one person to another. Once the instrument is transferred, the holder obtains a
full legal title to the instrument.

These documents provide no other promise on the part of the entity issuing the negotiable
instrument. Additionally, no other instructions or conditions can be set upon the bearer to
receive the monetary amount listed on the negotiable instrument. For an instrument to be
negotiable, it must be signed, with a mark or signature, by the maker of the instrument—the one
issuing the draft. This entity or person is known as the drawer of funds.

Types of Negotiable Instruments

Promissory notes

A promissory note refers to a written promise to its holder by an entity or an individual to pay a
certain sum of money by a pre-decided date. In other words, Promissory notes show the amount
which someone owes to you or you owe to someone together with the interest rate and also the
date of payment.

For example, A purchases from B INR 10,000 worth of goods. In case A is not able to pay for
the purchases in cash, or doesn’t want to do so, he could give B a promissory note. It is A’s
promise to pay B either on a specified date or on demand.
In another possibility, A might have a promissory note which is issued by C. He could endorse
this note and give it to B and clear of his dues this way. However, the seller isn’t bound to accept
the promissory note. The reputation of a buyer is of great importance to a seller in deciding
whether to accept the promissory note or not

Essentials or Characteristics of a Promissory Note:

From the definition, it is clear that a promissory note must have the following essential elements.
1. In writing - A promissory note must be in writing. Writing includes print and typewriting.
2. Promise to pay - It must contain an undertaking or promise to pay. Thus, a mere
acknowledgement of indebtedness is not sufficient. Notice that the use of the word ‘promise’ is
not essential to constitute an instrument as promissory note.
3. Unconditional - The promise to pay must not be conditional. Thus, instruments payable on
performance or non- performance of a particular act or on the happening or non-happening of an
event are not promissory notes.
4. Signed by the Maker – The promissory note must be signed by the maker, otherwise it is of no
effect5. Certain Parties - The instrument must point out with certainty the maker and the payee of
the promissory note.
6. Certain sum of money - The sum pit is deemed to have been made when it was delivered..
7. Promise to pay money only - If the instrument contains a promise to pay something in addition
money, it cannot be a promissory note.
8. Number, place, date etc. - These are usually found in a promissory note but are not essential in
law. If a promissory note does not bear a date,
9. Installments - It may be payable in installments.
10. It may be payable on demand or after a definite period - Payable 'on demand' means payable
immediately or any time till it becomes time-barred. A demand promissory note becomes time
barred on expiry of 3 years from the date it bears.
11. It cannot be made payable to bearer on demand or even payable to bearer after a certain
period
12. It must be duly stamped under the Indian Stamp Act - It means that the stamps of the
requisite amount must have been affixed on the instrument and duly cancelled either before or at
the time of its execution. A promissory note, which is not so stamped, is a nullity.[4]

Bill of exchange

Bills of exchange refer to a legally binding, written document which instructs a party to pay a
predetermined sum of money to the second(another) party. Some of the bills might state that
money is due on a specified date in the future, or they might state that the payment is due on
demand.
A bill of exchange is used in transactions pertaining to goods as well as services. It is signed by a
party who owes money (called the payer) and given to a party entitled to receive money (called
the payee or seller), and thus, this could be used for fulfilling the contract for payment. However,
a seller could also endorse a bill of exchange and give it to someone else, thus passing such
payment to some other party.

Characteristic Features of a bill of exchange:

1. It must be in writing.
2. It must contain an order to pay and not a promise or request.
3. The order must be unconditional.
4. There must be three parties, viz., drawer, drawee and payee.
5. The parties must be certain.
6. It must be signed by the drawer.
7. The sum payable must be certain or capable of being made certain.
8. The order must be to pay money and money alone.
9. It must be duly stamped as per the Indian Stamp Act.
10. Number, date and place are not essential.

Parties To A Bill Of Exchange:

# Drawer: The maker of a bill of exchange is called the drawer.
# Drawee: The person directed to pay the money by the drawer is called the drawee. # Payee:
The person named in the instrument, to whom or to whose order the money are directed to be
paid by the instruments are called the payee.

It is to be noted that when the bill of exchange is issued by the financial institutions, it’s usually
referred to as a bank draft. And if it is issued by an individual, it is usually referred to as a trade
draft.

A bill of exchange primarily acts as a promissory note in the international trade; the exporter or
seller, in the transaction addresses a bill of exchange to an importer or buyer. A third party,
usually the banks, is a party to several bills of exchange acting as a guarantee for these payments.
It helps in reducing any risk which is part and parcel of any transaction.

Cheques

A cheque refers to an instrument in writing which contains an unconditional order, addressed to a

banker and is signed by a person who has deposited his money with the banker. This order,
requires the banker to pay a certain sum of money on demand only to to the bearer of cheque
(person holding the cheque) or to any other person who is specifically to be paid as per
instructions given.

Cheques could be a good way of paying different kinds of bills. Although the usage of cheques is
declining over the years due to online banking.

Individuals still use cheques for paying for loans, college fees, car EMIs, etc.
Cheques are also a good way of keeping track of all the transactions on paper.
On the other side, cheques are comparatively a slow method of payment and might take some
time to be processed.

Essentials Of Cheque:
1. In Writing: The cheque must be in writing. It cannot be oral.
2. Unconditional: The language used in a cheque should be such as to convey an unconditional
order.
3. Signature of the Drawer: It must be signed by the maker.
4. Certain Sum of Money: The amount in the cheque must be certain.
5. Payees Must be certain: It must be payable to specified person.
6. Only Money: The payment should be of money only.
7. Payable on Demand: It must be payable on demand.
8. Upon a Bank: It is an order of a depositor on a bank. [5]

Parties To A Cheque
# Drawer: Drawer is the person who draws the cheque.
# Drawee: Drawee is the drawer‟s banker on whom the cheque has been drawn.
# Payee: Payee is the person who is entitled to receive the payment of a cheque. Difference
Between Cheque And Bill Of Exchange: [6]
Basis For
Cheque Bill of Exchange
Comparison
A document used to make easy
A written document that shows the
payments on demand and can be
Meaning indebtedness of the debtor towards the
transferred through hand delivery is
creditor.
known as cheque.

Section 6 of The NegotiableSection 5 of The Negotiable Instrument

Defined in
Instrument Act, 1881 Act, 1881

Validity Period 3 months Not Applicable

Payable to bearer Cannot be made payable on demand as
Always
on demand per RBI Act, 1934

Not Applicable, as it is always

Grace Days 3 days of grace are allowed.
payable at the time of presentment.

A cheque does not require

Acceptance BOE needs to be accepted.
acceptance.

Stamping No such requirement. Must be stamped

Crossing Yes No

Drawee Bank Person or Bank

Noting orIf the cheque is dishonored it cannotIf a BOE is dishonored it can be noted or
Protesting be noted or protested. protested.

Difference B/W Bill Of Exchange And Promissory Note: [7]

Basis For Comparison Bill Of Exchange Promissory Note
A promissory note is a written
BOE is an instrument in writingpromise made by the debtor to
Meaning showing the indebtedness of a buyerpay a certain sum of money to
towards the seller of goods. the creditor at a future specified
date.

Section 5 of Negotiable InstrumentSection 4 of Negotiable

Defined in
Act, 1881. Instrument Act, 1881.

Three parties, i.e. drawer, drawee andTwo parties, i.e. drawer and
Parties
payee payee

Drawn by Creditor Debtor

Liability of Maker Secondary and conditional Secondary and conditional

Can maker & payee be

Yes No
the same person?

Promissory Note cannot be

Copies Bill can be drawn in copies
drawn in copies

Notice is necessary to be given to allNotice is not necessary to be

Dishonor
the parties involved. given to the maker.
Difference B/W Cheque And Promissory Note:[8]
Basis For
Cheque Promissory Note
Comparison
Order And A promissory note contains
It contains order to pay.
Promise promise to pay.

In case of promissory note are only

Number OfIn case of cheque there may be three
two parties, the maker and the
Parties parties, the drawer, drawee and payee.
payee.

Cheque is used because it is a simple and

It is used for receiving and giving
Object easy medium of exchange and serving of
credit.
metallic money.

Crossing A cheque may be crossed. A pro-note cannot be crossed.

Payable ToA cheque is often drawn as payable toA pro-note cannot be drawn
Bearer bearer. payable to bearer.

Its payment can be stopped by giving theA pro-note payment cannot be

Stop Payment
notice to the bank. stopped if once issued.

In case of cheque when it is dishonored, theIn case of promissory note liability

Liability Nature
drawer is liable. is primary.

Promissory note may be drawn on

It is drawn on a printed form issued by a
Use Of Form any paper and there is no need of
particular bank.
any particular form.

A cheque is always drawn to a particularA promissory note can be drawn

Drawee
bank where account is available. on any person.

In case of pro-note there are two

Drawer andIn case of cheque drawee and payee can be
parties and maker cannot be the
Payee the same person.
payee.

Endorsement of Instruments

The act of a person who is a holder of a negotiable instrument in signing his or her name on the back
of that instrument, thereby transferring title or ownership is an endorsement. An endorsement may be
in favour of another individual or legal entity. An endorsement provides a transfer of the property to
that other individual or legal entity. The person to whom the instrument is endorsed is called the
endorsee. The person making the endorsement is the endorser. Let us discuss the Endorsement of
Instruments here in detail. Endorsement of Instruments

Types of Endorsement

 Blank Endorsement – Where the endorser signs his name only, and it becomes payable to
bearer.

 Special Endorsement – Where the endorser puts his sign and writes the name of the person
who will receive the payment.

 Restrictive Endorsement – Which restricts further negotiation.

 Partial Endorsement – Which allows transferring to the endorsee a part only of the amount
payable on the instrument.

 Conditional Endorsement – Where the fulfilment of some conditions is required.

. Blank Endorsement or General Endorsement

An endorsement is blank or general where the endorser signs his name only, and it becomes payable
to bearer. Thus, where a bill is payable to “Ram or order”, and he writes on its back “Ram”, it is an
endorsement in blank by Ram and the property in the bill can pass by a mere presentation.

We can convert a blank endorsement into an endorsement in full. We can do so by writing above
the endorser’s signature, a direction to pay the instrument to another person or his order.

2. Special or Full Endorsement

An endorsement “in full” or a special endorsement is one where the endorser puts his signature on
the instrument as well as writes the name of a person to whom order the payment is to be made.

A bill made payable to Ram or order, and endorsed “pay to the order of Shyam” would be specially
endorsed and Shyam endorses it further. We can turn a blank endorsement into a special one by
adding an order making the bill payable to the transferee.

3. Restrictive Endorsement
An endorsement is restrictive which restricts the further negotiation of an instrument.

Example of restrictive endorsement: “Pay to Mrs. Geeta only” or “Pay to Mrs Geeta for my use” or
“Pay to Mrs Geeta on account of Reeta” or “Pay to Mrs. Geeta or order for collection”.
4. Partial Endorsement
An endorsement partial is one which allows transferring to the endorsee a part only of the amount
payable on the instrument. This does not operate as a negotiation of the instrument.

Example: Mr. Mohan holds a bill for Rs. 5,000 and endorses it as “Pay Sohan or order Rs. 2500”.
The endorsement is partial and invalid.

5. Conditional or Qualified Endorsement

Where the endorser puts his signature under such writing which makes the transfer of title subject to
fulfilment of some conditions of the happening of some events, it is a conditional endorsement.

Negotiation Back
Where an endorser negotiates an instrument and again becomes its holder, we know it as negotiation
back to that endorser. After negotiation back, none of the intermediary endorsees are then liable to
him.

For example, Ram, the holder of a bill endorses it to Bala, Bala endorses to Kala, and Kala to Lala,
and endorses it again to Ram. Ram, being a holder in due course of the bill by the second
endorsement by Lala, can recover the amount thereof from Bala, Kala, or Lala and himself being a
prior party is liable to all of them.

Therefore, Ram having been relegated by the second endorsement to his original position, cannot
sue Bala, Kala, and Lala. Where an endorser so excludes his liability and afterwards becomes the
holder of the instrument, all the intermediate endorsers are liable to him. “the italicized portion of
the above Section is important”.

An illustration will make the point clear. Ram is the payee of a negotiable instrument. He endorses
the instrument ‘sans recourse’ to Bala, Bala endorses to Kala, Kala to Lala, and Lala again endorses
it to Ram.

In this case, Ram is not only reinstated in his former rights but has the right of an endorsee against
Bala, Kala, and Lala.
Negotiation of Lost Instrument or that Obtained by Unlawful Means
When a negotiable instrument has been lost or has been obtained from a maker, acceptor or holder
by means of fraud, or for an unlawful act, no possessor or endorsee, is entitled to receive the amount
due thereon from such maker, acceptor, or holder from any party prior to such holder.

He cannot do so unless such possessor or endorsee is, or some person through whom he claims was,
a holder in due course.

Definition of Negotiation

Negotiation can be described as the process in which the transfer of negotiable instrument, is
made to any person, in order to make that person, the holder of the negotiable instrument.
Therefore the negotiable instrument aims at transferring the title of the instrument to the
transferee.

The term of negotiation for any person except maker, drawer or acceptor, until payment and in
the case of the maker, drawer or acceptor, it should be until the due date. The two methods of
negotiation are:

 By delivery: Negotiation is possible by mere delivery, in the case of bearer instrument,

but that should be voluntary in nature.
 By endorsement and delivery: In the case of order instrument, there must be
endorsement and delivery of the negotiable instrument. The delivery must be voluntary,
with an intention of transferring the underlying asset, to the transferee to complete the
negotiation.

Definition of Assignment

By the term assignment we mean, the transfer of contractual rights, ownership of property or
interest, by a person, in order to realise the debt.

An assignment is a written transfer of rights or property, in which the assignor transfers the
instrument to assignee with the aim of conferring the right on the assignee, by signing an
agreement called assignment deed. Thus, the assignee is entitled to receive the amount due on
the negotiable instrument, from the liable parties.
Difference Between Negotiation and Assignment
Last updated on June 20, 2017 by Surbhi S

The most important feature of the

negotiable instrument is that it can be freely transferred, which is possible in two ways, i.e.
negotiation and assignment. Negotiation implies the transfer of negotiable instrument, that takes
place in order to make the transferee, the holder of the instrument.

On the other hand, assignment alludes to the transfer of ownership of the negotiable instrument,
in which the assignee gets the right to receive the amount due on the instrument from the prior
parties.

The most important difference between negotiation and assignment is that they are governed by
different acts. To know more differences amidst the two types of transfers, take a read of the
article below.

Comparison Chart
BASIS FOR
NEGOTIATION ASSIGNMENT
COMPARISON

Meaning Negotiation refers to the Assignment implies the

transfer of the negotiable transfer of rights, by a
instrument, by a person to person to another, for the
another to make that person purpose of receiving the
the holder of it. debt payment.

Governing Act Negotiable Instrument Act, Transfer of Property Act,

BASIS FOR
NEGOTIATION ASSIGNMENT
COMPARISON

1881 1882

Effected by Mere delivery in case of A written document duly

bearer instrument and, signed by the transferor.
endorsement and delivery in
case of order instrument.

Consideration It is presumed It is proved

Title Transferee gets the right of Assignee's title is subject to

holder in due course. the title of Assignor.

Transfer notice Not required Must be served by assignee

on his debtor.

Right to sue The transferee has the right to The assignee has no right
sue the third party, in his/her to sue the third party in
own name. his/her own name.

Definition of Holder

As per Negotiable Instrument Act, 1881, a holder is a party who is entitled in his own name and
has legally obtained the possession of the negotiable instrument, i.e. bill, note or cheque, from a
party who transferred it, by delivery or endorsement, to recover the amount from the parties
liable to meet it.

The party transferring the negotiable instrument should be legally capable. It does not include the
someone who finds the lost instrument payable to bearer and the one who is in wrongful
possession of the negotiable instrument.
Definition of Holder in Due Course (HDC)

Holder in Due Course is defined as a holder who acquires the negotiable instrument in good faith
for consideration before it becomes due for payment and without any idea of a defective title of
the party who transfers the instrument to him. Therefore, a holder in due course.

When the instrument is payable to bearer, HDC refers to any person who becomes its possessor for value,
before the amount becomes overdue. On the other hand, when the instrument is payable to order, HDC
may mean any person who became endorsee or payee of the negotiable instrument, before it matures.
Further, in both the cases, the holder in both the cases he must acquire the instrument, without any notice
to believe that there is a defect in the title of the person who negotiated it.

Difference Between Holder and Holder in Due Course (HDC)

While talking about negotiable instruments such as cheques, bills of exchange and promissory
note, we came across the terms holder and holder in due course, quite commonly. Holder refers
to a person; we mean the payee of the negotiable instrument, who is in possession of it. He/She is
someone who is entitled to receive or recover the amount due on the instrument from the parties
thereto.

On the other hand, the holder in due course i.e. HDC implies a person who obtains the
instrument bonafide for consideration before maturity, without any knowledge of defect in the
title of the person transferring the instrument.

Take a read of this article in which we’ve simplified the differences between holder and holder in
due course.

Comparison Chart
BASIS FOR HOLDER IN DUE
HOLDER
COMPARISON COURSE (HDC)

Meaning A holder is a person who A holder in due course

legally obtains the negotiable (HDC) is a person who
instrument, with his name acquires the negotiable
entitled on it, to receive the instrument bonafide for
payment from the parties some consideration, whose
liable. payment is still due.
BASIS FOR HOLDER IN DUE
HOLDER
COMPARISON COURSE (HDC)

Consideration Not necessary Necessary

Right to sue A holder cannot sue all prior A holder in due course can
parties. sue all prior parties.

Good faith The instrument may or may The instrument must be

not be obtained in good obtained in good faith.
faith.

Privileges Comparatively less More

Maturity A person can become holder, A person can become holder

before or after the maturity in due course, only before
of the negotiable instrument. the maturity of negotiable
instrument.

Paying Banker and Collecting Banker Paying banker and collecting banker can be defined as
follows: “The bank on which a cheque is drawn (the bank whose name is printed on the cheque)
and which pays the amount for which the cheque is written and deducts that sum from the
customer’s account.”
The paying banker should use due care and diligence in paying a cheque so as to refrain from
any action potential enough to damage his customer’s credit.
“A Collecting banker is the one who attempts to collect different types of instruments
representing money in favour of his customer or his own behalf from the drawers of these
instruments; some are negotiable instruments as provided for in the Negotiable Instruments Act,
1881.”
Rights and Liabilities of Paying and Collecting Banker
Rights of Paying and Collecting Banker
The rights of the banker include:
 1. Right of General Lien: can be retained till the owner discharges the debt or obligation to the
possessor. A lien is the right of a creditor in possession of goods, securities or any other assets
belonging to the debtor to retain them until the debt is repaid, provided that there is no contract
express or implied, to the contrary. A banker has the right to retain the property belonging to the
customer until the debt due from him has been paid. It is a right to retain possession of specific
goods or securities or other movables of which the ownership vests in some other person and the
possession
2. Right to set off: The right of set off is also known as the right of combination of accounts.
Right to set off is a right of the banker to adjust his outstanding Joan (debit) in the name of the
customer from his credit balance of any of the accounts he s maintaining with the bank. A bank
has a right to set off a debt owing to a customer against a debt due from him. Right to set off is
nothing but combine the two or more accounts of a customer of the customer. If the customer
have two or more account and in case of absence of agreement the banker can exercise has right
of set off:
(a) The two or more accounts must be in the name of same customer
(b) There must be same capacity
(c) There must be same bank ,though different branches
(d) One account should show debit balance and other should show a credit balance
(e) The debt must be manual
(f) The amount of debit should be certain one. Thus set off is adjustment of debit balance with
that of credit balance
3. Right to close an account: There should be no confusion between closing the account and
stopping operation of the account. The contractual relationship between banker and customer is
terminated by closing the account. There is no opportunity for the customer to operate the
account once again. On the other hand, stopping operation of an account refers to the suspension
of the operation of an account for the time being, at the advent of certain events. It is purely
suspension of the relationship between a banker and a customer and the customer can operate the
account, after such events come to a close
The circumstances for closure of account are:
(a) Customer’s intension to close the account
i. The customer can close the account in any of the following condition
ii. If he does not agree to the terms of the banker such as rate of interest, bank charges etc
iii. If the customer does not enjoy such facilities as are offered by some other banks e.g. free
transfer of money up to Rs.10000
iv. When the confidence of the person is shaken.
(b) Bankers intention to close the account Notes
i. The banker can close the account of the customer when he finds
ii. The account is not remunerative
iii. When the customer is not a desirable one.
(c) Customer’s death-as soon as the bank gets notice of the death of the customer, he should
immediately stop the operations of the account. It is because death puts an end to the contract.
(d) Customers insanity-the banker should stop the operation of his account .the banker should
apply for the official copy of Lunacy Order.
(e) Customers insolvency-when the banker comes to know that the customer is insolvent than
the bank will close the account of the customer.
4. Right to appropriate payments: The banker has the right to appropriate the money deposited
by a customer to any one of the loan account due by him. The appropriation arises when the
customer has more than one account one showing the debit balance and the other with a credit
balance. The customer is given the first option to decide the account to which the amount should
be credited. If the customer fails to indicate his choice then the banker has every legal right to
credit the amount in any one account of that customer.
Liabilities of Paying Bankers
Following are the liabilities of paying bankers:
Checking the signature of the drawer.
 Verification of the genuineness of the instrument
 Payment not stopped by the A/c holder
 Holder’s title on the cheque is valid
 A/c is not dormant one. A/c holder is not bankrupt or deceased. A/c is not under subject
of liquidation process.
 No ‘Garnishee Order’ is issued by court.
 Properly endorsed.
 Cheque is not drawn beyond limit fixed by the drawer is respect of amount.
 Instrument being presented is crossed.
 Instrument is not state or postdated.
 No material adjustment is made.
 Sufficient balance in the A/c
 Liabilities of Collecting Bankers
Following are the liabilities of collecting bankers:
1. Acting as agent: While collecting an instrument, the Bankers works as agent of his customer.
As an agent he has to take some steps & precautions to protect the interest or his customer as a
man of ordinary discretion would take to safeguard his own interest.
2. Scrutinizing the instruments: Name of the holder, Branch name, amount in world and figure,
date, material alteration of any to be checked carefully.
3. Checking the endorsement: Bankers have to check the instrument whether it has been
endorsed properly.
4. Presenting the instrument in due time: It is the responsibility of the collecting bank to present
the instrument in due time to the paying bank.
5. Collecting the proceeds in the payee’s account: It is the duty of collecting banks to collect and
credit the proceeds of the instruments to the proper/correct account.
6. Notice of dishonour and returning the instruments: If any instrument is dishonoured by the
paying bank it should be informed to the customer on the day following the receipt of the unpaid
instruments.

Introduction and objective :- Negotiable Instrument act was enacted in India much before its
independence and therefore most of provisions contained in it are based on the English statute.
After independence in 1947, certain modifications were made in Act in order to stringent the
provisions of the Act and in that sequence, an attempt is made out by the Indian legislature to
incorporate chapter XVII namely “Of Penalties in case of Dishonour of certain cheques for
insufficiency of Funds in the Accounts” contains Section 138 to 142 with an objective to
encourage the trend of use of cheques and to increase the credibility of cheques transactions by
making the offence. further to fill the loop wholes in the existing law, the legislature again put
the Chapter under consideration and introduced new provisions from section 143-147 and some
other changes. Again in 2018 Section 143-A and 148 has also been inserted for effecting some
interim compensation measures to discourage the drawer form any frivolous defence.

Legal Frame Work of Dishonour of Cheque

Section 138: An offence committed under Section 138 is a non-cognizable offence (a case in
which a police officer cannot arrest the accused without an arrest warrant). Also, it is a bailable
offence. The offence under this section will be completed with following 5 components:
1. Drawing of Cheque by the drawer for the discharge of debt or other liability
2. Presentation of Cheque within 6 months form the date on which it is drawn

3. Dishonour of cheque and return unpaid by the drawee bank

4. Statutory Notice within 30 days of receipt of information from the bank regarding the return of
cheque as unpaid to the drawer demanding payment of cheque amount

5. Failure to make payment by the drawer within 15 days from the date of receipt of Notice;
Punishment : Imprisonment for a term which may be extended to two years, or with fine which
may extend to twice the amount of the cheque, or with both.