Iibf Short Jaiib -3

Compiled by Sanjay Kumar Trivedy, Sr. Manager, RSTC, Mumbai Page 1

LEGAL FRAMEWORK OF REGULATION OF BANKS

SUMMARY : Banking means acceptance of deposits of money from the public for lending orinvestment. Suchdeposits may be repayable on demand or may be for a period of time as agreed to, by the bankerand the customer, and may be repayable by cheque, draft or otherwise. Apart from banking, banksare authorised to carry on other business as specified in Section 6 of the Banking Regulation Act.Banks are, however, prohibited from undertaking any trading activities.1. Banks are constituted as companies registered under the Companies Act, 1956, statutory corporations

constituted under Special Statutes or Co-operative societies registered under the Central or StateCo-operative Societies Acts. The extent of applicability of the regulatory provisions under theBanking Regulation Act and the Reserve Bank of India Act to a bank depends on the constitution ofthe bank.

2. Reserve Bank of India is the central bank of the country and the primary regulator for the bankingsector. The government has direct and indirect control over banks. It can exercise indirect controlthrough the Reserve Bank and also act directly in appeals arising from decisions of the ReserveBank under the various provisions of the Banking Regulation Act. In public sector banks like theState Bank of India and its subsidiaries, nationalised banks and the regional rural banks, 50% ormore of their shares are held by the Central Government. Central Government has substantialcontrol over the management of these banks. Only certain provisions of the BR Act are applicableto these banks as indicated in that Act. Co-operative banks operating in one state only are registeredunder the State Co-operative Societies Act and are subject to the control of the State Governmentas also the Reserve Bank. In the case of non-banking business of the banks, they are subject tocontrol by other regulatory agencies.

2. Fill in the gaps choosing the answers from the brackets.(i) Reserve Bank was constituted under _____(BR Act, RBI Act, Companies Act)(ii) A Regional Rural Bank is______(a body corporate created under a special statute, a cooperative society,

a company)(iii) Banking companies are licensed by __

Company Law Board)(iv) Business which a banking company may undertake other than banking is as stipulated by (Reserve

Bank, BR Act, RBI Act)(v) BR Act was enacted for _____ (regulating banking companies, creating Reserve Bank,regulatingacceptance of deposits from public)

State whether the following statements are True or False,(i) Central Government can give direction to the Reserve Bank,(ii) All kinds of business of banks is regulated only by the Reserve Bank,(iii) Central Government is the primary regulator of banks,(iv) State governments have no control over co-operative banks.(v) On cancellation of licence of any bank, an appeal lies with Central Government.

1.13 ANSWERS

A.1. (i) True; (ii) False; (iii) True; (iv) False; (v) False.2. (i) RBI Act (ii) a body corporate created under a special statute

(iii) Reserve Bank (iv) BRAct(v) for regulating banking companies.

B. 1. (i) True; (ii) False; (iii) False; (iv) False; (v) true.2. (i) Multi-State Co-operative Societies Act

(ii) On recommendation of RBI(iii) Reserve Bank

(Reserve Bank, Registrar of Companies,

B. 1


(iv) Authorities under the Companies Act(v) SEBI.

CONTROL OVER ORGANISATIONOFBANKS

SUMMARY : A company wanting to commence banking business requires prior licence from the Reserve Bank.The Reserve Bank has the discretion to reject licence or approve the licence on such conditions as it thinks fit.Before granting licence, Reserve Bank has to be satisfied by inspection or otherwise of the suitability of thecompany for licence. A licence once given may also be cancelled after giving the bank an opportunity to beheard. Further, for opening new branches or shifting branches outside a city, town or village, permission of theReserve Bank is required. Banking companies have to have minimum capital and reserves as specified in theBanking Regulation Act. The shareholders of a banking company are entitled to dividends only after all thecapitalised expenses are written off. The commission or brokerage payable on selling shares is restricted to two andhalf per cent of the paid-up value of the shares. The board of directors of a bank has to be constituted with personshaving special knowledge or experience in accountancy, banking, economics, law, etc., as stipulated. The directorsshould not have substantial interest in other companies or firms. The maximum period of office is limited to eightyears continuously. The Reserve Bank is empowered to reconstitute the board, if the board is not properlyconstituted. Every banking company should have a full-time chairman (or a full-time managing director, if there isno full-time chairman) with the specified qualifications. The Reserve Bank has powers to remove the chairman andappoint a suitable person in his place in certain cases. The Reserve Bank also has powers to remove the directors ormanagerial personnel or other employees of banking companies. The principles of corporate governance includingthe 'fit and proper' criteria for directors apply to banking companies as well as public sector banks..

CHECK YOUR PROGRESS1. Fill in the gaps choosing the answers from the brackets.

(i) A company has to obtain a ______ from the Reserve Bank to commence banking businessin terms ofSection 22 of the BR Act. (registration; licence; commencement certificate)(ii) Shifting of a bank's branch in the same does not require Reserve Bank's permission

under Section 23. (district; state, city, town or village)(iii) Foreign banks are required under Section 11 of the BR Act to depositof their business in India with theReserve Bank, (twenty per cent of profit for each year; thirtyper cent of profit for each year; twenty per centof the depositscollectedeachyear)(iv) Banks may float subsidiaries for carrying on the business specified in . (theirMemorandum ofAssociation; Section 6(1)(a) to (o) of the BR Act; their Articles of Association)(v) A shareholder of a banking company can exercise voting rights up to of the total

voting rights of all shareholders, (one per cent; ten per cent; hundred per cent)(vi) Banking companies are not permitted to give dividend until all_____ are written off.

(bad debts, expenses, capitalised expenses)Say whether True or False,

(i) A temporary branch for less than thirty days in a town where a bank has an existing branchdoes notrequire permission from Reserve Bank.

(ii) A company whose banking licence is rejected can undertake business as a moneylenderorundertake other business,(iii) The decision of Reserve Bank to revoke licence is final and no appeal lies from it.

(iv)Banking companies are permitted to give brokerage up to two-and-half per cent of the paid-upvalueof shares.

(v) No person can hold the shares of banks beyond ceiling specified under the BR Act.(vi) (vi) A banking company cannot hold shares in any other company other than a subsidiary.

2.


3. Fill in the gaps choosing the answer from the brackets.(i) A director of a banking company should not have _____ in any other company, (beneficialinterest, anyinterest, substantial interest)(ii) At least___________________________________ of the directors should have the qualificationsprescribed under Section10A(2) of the BR Act. (50 per cent, 75 per cent, 51 per cent)(iii) When the board of a banking company is ordered to be reconstituted under Section 10A of theBR Act,directors will be removed ________________________ for the purpose of reconstitution. (by rotation,bylots, by majority decision)(iv) Before removing the chairman of a bank from office, Reserve Bank has to . (give

compensation for loss of office, give opportunity of being heard, give an option to continue asdirector) (v)The provisions of Section 36AA of the BR Act regarding removal of managerial personnel haveover otherlaws, (no effect, overriding effect, persuasive effect)

(vi) Reserve Bank is authorised to appoint _____ under Section 36AB of the BR Act. (directors,additionaldirectors, managing director)(vii) The ______________________________ (Central Government; RBI; SEBI) has stipulated the 'fit andproper' criteriafor directors of banking companies.

4. Say whether True or False.(i) The maximum period of office that may be held continuously by an ordinary director in a

banking company is eight years,(ii) The decisions of the board of directors, during the period when the board's constitution isdefectiveshall be void.

(iii) The post of chairman of a banking company may be on part-time basis,(iv) The chairman of a banking company can hold office only for a maximum period of eightyears,(v) From the order removing chairman of a banking company, appeal lies to the Central Governmentwithin thirtydays of the order.(vi) Reserve Bank has the power to remove any officer or other staff of a banking company underSection 36Mof the BR Act.'(vii) The concept of 'fit and proper' criteria for directors is not applicable to public sector banks.

2.17 ANSWERS TO CHECK YOUR PROGRESS'1. (i) licence; (ii) same city, town or village; (iii) 20 per cent of profit for each year; (iv) Section

6(l)(a) to (o) of BR Act; (v) 10 per cent; (vi) capitalised expenses.2. (i) True; (ii) True; (iii) False; (iv) True; (v) False; (vi) False.3. (i) substantial interest; (ii) 51 per cent; (iii) by lots; (iv) give opportunity of being heard; (v) over

riding effect; (vi) additional directors; (vii) RBI4. (i) True; (ii) False; (iii) True; (iv) False; (v) True; (vi) True; (vii) False

REGULATIONOFBANKINGBUSINESS

SUMMARY : i. The Banking Regulation Act empowers the Reserve Bank to issue directions to bankingcompanies in public interest, in the interest of banking policy and in the interest of depositors. Section 21 providesfor the issue of directions to regulate loans and advances by banking companies. This may be done by regulatingthe purposes of lending, margins in respect of secured loans, rate of interest and terms and conditions of lending.Section 35A gives wide general powers to issue directions. The Reserve Bank issues directions from time to timeunder Section 21 (read with Section 35 A) regulating acceptance of deposits and lending. Under Section 21A of theAct, the rate of interest on loans and advances contracted between a bank and its customer is not liable to bereopened by a court of law. Section 20 of the Act imposes restrictions on loans and advances to directors, andcompanies and firms in which directors are interested as director, partner, etc.ii. A banking company which is a scheduled bank has to maintain a certain percentage of the time and demand

liabilities as cash reserve with the Reserve Bank under Section 42 of the Reserve Bank of India Act, as notifiedby the Reserve Bank from time to time. Failure to do so renders the banking company liable to penalty. For non-


scheduled banking companies, Section 18 of the BR Act provides for cash reserve. Banking companies havealso to maintain a certain percentage of their demand and time liabilities in liquid assets as stipulated underSection 24 of the BR Act. These assets may be maintained to the extent and in the form and manner as notifiedby the Reserve Bank. Apart from this, banking companies are required to maintain such assets in India at notless than seventy five per cent of demand and time liabilities as at the close of business of the last Friday ofevery quarter. Banking companies also have to transfer to the reserve fund twenty per cent of their annualprofits as disclosed in the profit and loss account.

CHECK YOUR PROGRESS1. Fill in the gaps choosing the answers from the brackets.

(i) Reserve Bank may issue directions to banking companies under Section 21 of BR Act on .(audit, loans and advances, capital structure)

(ii) _____________may regulate acceptance of deposits including rate of interest on depositsbybanking companies under Section 35A of the BR Act. (Government, Reserve Bank, Board ofDirectors)

(iii)The banking ombudsman can settle a dispute between . (a bank and its customer/s, two or morecustomers, a bank and the Government)

(iv)Directions can be issued to banking companies on loans and advances . (in strict confidence, inpublic interest, in the interest of borrowers)

(v) The purpose of is to make credit available to essential sectors of the economy according tonational priorities, (selective credit control, maintenance of cash reserve, reserve fund)

(vi)___________ Act prohibits lending at exorbitant rates and empowers reopening of such contracts.(BR Act, RBI Act, Usurious Loans Act)

Say whether the following statements are true or false.(i) Reserve Bank can issue directions on loans and advances under Section 21 of the BankingRegulation

Act.(ii) Regulation of credit to different sectors of the economy is known as selective credit control.(iii)Banks are free to lend to their directors.(iv) Banks have to file a return to Reserve Bank regarding unclaimed deposits under Section 26 of the BR Act(v)Directions may be issued under RBI Act to banks in respect of loans and advances in the interest of

depositors.(vi) The directions issued by Reserve Bank under Section 35 A of the BR Act may be either generally to banks or

to a particular bank.Fill in the gaps choosing the answers from the brackets.

i. _______________________________________________________________ The amounttransferable to the reserve fund by the banks incorporated in India is _______

of the profit for each year. (25 per cent, 20 per cent, 10 per cent)ii. Every banking company has to maintain certain amount of assets under Section 25 of theBanking

Regulation Act as at the (last Friday of every fortnight, last Friday ofevery month, last Friday ofevery quarter)

iii. _________ The penalty which is payable by a banking company which is a scheduled bank for failuretomaintain the cash reserve in any week for the first time is (3 per cent, 3 per centover the bank rate, 5per cent over the bank rate)

iv. _________ have to maintain cash reserve under Section 18 of the BR Act. (Cooperativebanks,Banking companies which are not scheduled banks, Nationalised banks)The liquid assets to be maintained under Section 24(2A) of BR Act are of thebalances maintained under Section 42 of the RBI Act. (inclusive, not inclusive, partly inclusive)

v.__________________ The payment of penalty under Section 24 of BR Act can be enforced by making anapplicationbefore________ (the Government, civil court, high court)

whether the following statements are true or false.


Only scheduled banks have a duty to maintain cash reserve under Section 42 of the ReserveBankof India Act.

Every banking company has to maintain the liquid assets as required under Section 24 of theBankingRegulation Act.(hi) The share capital and reserves of a banking company form part of its demand and timeliabilitiesfor the purpose of Section 42 of the RBI Act.

The cash reserve required under Section 42(1) of the RBI Act will be a minimum of three percent of thedemand and time liabilities,(v) Interest is payable to scheduled banks on the cash reserve maintained as required under Section42(1) of theRBI Act.(vi) No banking company incorporated in India is required to maintain reserve fund under Section

17(1) of the BR Act.

ANSWERSTO'CHECKYOURPROGRESS'(i) Loans and Advances (ii) Reserve Bank(iii) a bank and its customer/s (iv) in Public Interest(v) Selective Credit Control(vi) Usurious Loans Act(i) True; (ii) True; (iii) False; (iv) True; (v) False; (vi) True(i) 20 per cent (ii) last Friday of every quarter (iii) 3 per cent over bank rate

(iv) banking companies which are not scheduled banks (v) not inclusive (vi) civil court(i) True; (ii) True; (iii) False; (iv) False; (v) False; (vi) False

3.18ANSWERSTO'CHECKYOURPROGRESS'(i) Loans and Advances (iii) a bank and its customer/s (v) Selective Credit Control(i) True; (ii) True; (iii) False; (iv) True; (v) False; (vi) True(i) 20 per cent

(ii) last Friday of every quarter (iii) 3 per cent over bank rate(iv) banking companies which are not scheduled banksFill in the gaps choosing answers from the brackets.

1. The directions of the Reserve Bank issued to the banking companies under Section 35A of theBanking Regulation Act are ______ . (binding on them only; not binding on them and are inthe nature of guidelines; binding on the banks and the public)

2. A contract if entered into by a banking company with any party in contravention of a directionissued by the Reserve Bank ______ . (shall be invalid; shall render the banking companyliable to prosecution for violation of directions; shall render the bank and any other party to the contractliable to prosecution for violation of directions)

3. Liquid assets are required to be maintained in India under Section 24 of the BR Act, may be heldin the form of _______ . (cash only; cash and gold only; cash, gold or unencumbered approvedsecurities)

4. For the purpose of maintenance of liquid assets under Section 24 of the BR Act, unencumberedapproved securities shall be valued at ______ . (face value; current market price; average ofmarket price for previous six months)

5. The penal interest chargeable on a banking company under Section 24(4) of the BR Act for notmaintaining liquid assets as specified under Section 24(2A) of the Act ____ . (may bewaived by the Reserve Bank if it is satisfied that the bank had sufficient cause for the failure; has to becharged in all cases and the Reserve Bank has no option but to waive penal interest; can be reduced by theReserve Bank, but, not completely waived).


RETURNS, INSPECTION, WINDING UP

SUMMARY : Every banking company has to prepare its balance sheet and profit and loss accountannually as at the end of the calendar year or at the end of twelve months as on a date notified by theCentral Government. The accounts have to be audited by auditors duly qualified to be auditors ofcompanies. Three copies of the balance sheet, profit and loss account and the auditor's report have to besubmitted as returns to the Reserve Bank and to the Registrar of Companies. Banking companies havealso to furnish other returns like return on maintenance of cash reserve, maintenance of liquid assets,etc. The Reserve Bank is authorised to inspect or conduct, scrutiny of banking companies, their booksand accounts. The Board for Financial Supervision set up by the Reserve Bank by statutory regulationsframed under the Reserve Bank of India Act supervises the affairs of banking companies. TheGovernment may acquire the undertakings of banking companies in certain circumstances based on areport from the Reserve Bank. The Central Government may also order moratorium on bankingcompanies on the application of the Reserve Bank. During moratorium, the Reserve Bank may prepare ascheme for amalgamation, which may be sanctioned by the Central Government. Such an amalgamationscheme will have overriding effect on any laws, agreements, etc. The Reserve Bank may also apply to theHigh Court for winding up of a banking company when it is not able to pay its debts and also in certainother circumstances. The Reserve Bank of India Act and the Banking Regulation Act impose certainpenalties for contravention or default committed by banking companies or other persons.

1. Fill in the gaps choosing answers from the brackets.(i) A banking company has to prepare profit and loss accounts and balance sheet as at the or at theexpiration of twelve months ending with such date as notified by theCentral Government, (end ofcalendar year, end of March, end of June)(ii) The balance sheet and profit and loss account shall be audited by a person duly qualified tobe . (acertified financial analyst, auditor of companies, auditor of cooperativesocieties)

(iii) Three copies of the balance sheet and accounts along with the auditor's report of a banking companysent to the Reserve Bank under Section 31 of the BR Act, have also to be sent to . (the CentralGovernment, Registrar of Companies, Company Law Board)

(iv) Reserve Bank is empowered to conduct______ of a banking company under Section35(1) of the BRAct. (inspection, special audit, audit)

(v) A copy of the inspection report, relating to a banking company, to that bankingcompany, (should be given, need not be given, should be given at request)

(vi) The board for Financial Supervision is constituted by_____ . (the Government,ReserveBank, Indian Banks Association) (vii) Under Section 35(4) of the BR Act, Central Governmentcan prohibit a banking companyfrom accepting fresh deposits if the business of the bankingcompany is conducted __________________________ . (not profitably, not in compliance with theAct, to the detriment of interest ofits depositors)

Say whether true or false:(i) Foreign banks have to prepare accounts and balance sheet in respect of all business transactedby them inIndia,(ii) Reserve Bank requires the permission of the Central Government for ordering special auditof a bankingcompany,(iii) Three copies of the balance sheet, profit and loss account, and auditor's report of a bankingcompanyhave to be submitted to the Reserve Bank as returns,(iv) A copy of scrutiny report has to be given to the banking company whether requested by itor not.(vii) The Board for Financial Supervision is set up under the regulations framed by the ReserveBankunder Section 58 of the Banking Regulation Act.

(viii) The Central Government is not empowered to order Reserve Bank for inspection ofabanking company,(ix) Central Government has to give notice to the banking company before

2.


publishingitsinspection report or any part of it.Fill in the gaps choosing answers from the brackets.

(i) The undertaking of a banking company may be acquired by the Central Government if it is satisfied ona report from the Reserve Bank that the banking company has failed on morethan one occasion to comply with the______ . (directions of the Government, directionsunder Sections 21 and 35A of BR Act, provisions of the Companies Act)(ii) The Central Government may make a __ after consultation with the Reserve Bankfor carrying outthe purposes of part IIC of the BR Act, in relation to an acquired bank.(scheme, plan,memorandum) ______________________ may apply to the High Court for winding up of abanking company under(iii)Section 38 of the BR Act. (Registrar of Companies, Reserve Bank, Central Government)(iv) The High Court shall order winding up of a banking company if the banking company isunableto (pay its debts, file returns in time, eliminate non-performing assets)

(v) In a winding up proceeding the depositors shall _____ for the amounts shown in thebooks of the bankstanding to their credit, (be deemed to have filed claim, have to file claim,have no claim)(vi) The ___________________________________ may apply to the Central Government for anorder of moratorium inrespect of a banking company, (banking company, Registrar of Companies,Reserve Bank) (vii) The provisions of a scheme of amalgamation sanctioned by the CentralGovernment underSection 45 of the BR Act will ______ the provisions of other laws, (not affect, haveoverriding effect on, will be subject to).

4. Say whether true or false(i) Central Government can acquire the undertaking of a banking company under Section36AE ofthe Banking Regulation Act in the interest of banking policy without any reportfrom the ReserveBank on the affairs of the banking company,(ii) The undertaking of an acquired bank may vest in the Central Government or in any companyorcorporation as directed by the Central Government,(iii) On the application of Reserve Bank, the High Court may stay the commencementorcontinuance of proceedings against any banking company for any period,(iv) The Reserve Bank or State Bank or another person as specified by the Reserve Bank initsapplication before the High Court may be appointed as liquidator of a banking company,(v) On winding up of a banking company, all the depositors as a class get the firstpreferenceforpayment,(vi) The Reserve Bank may prepare a scheme for reconstruction or amalgamation of abankingcompany under moratorium under Section 45 of the BR Act.(vii) Making any false statement in a return or other document submitted under the provisions ofthe BRAct is punishable with imprisonment and fine also.

ANSWERS TO 'CHECK YOUR PROGRESS'1. (i) end of calendar year (ii) auditor of Companies

(iii) Registrar of Companies (iv) Inspection(v) should be given (vi) Reserve Bank

(vii) to the detriment of interest of the depositors2. (i) True; (ii) False; (iii) True; (iv) False; (v) False; (vi) False; (vii) True3. (i) directions under Sections 21 and 35A of the BR Act

(ii) Scheme (iii) Reserve Bank(iv) Pay its debts (v) be deemed to have filed claim(vi) Reserve Bank (vii) have overriding effect on

4. (i) False; (ii) True; (iii) False; (iv) True; (v) False; (vi) True; (vii) True

TERMINAL QUESTIONSFill in the blanks choosing answers from brackets

3.


1 A bankingcompany has tn prepare its annual accounts in the forms_. (decided by theboardof the banking company and approved in general meeting; specified by the Department ofCompany Affairs; in the form set out in the Third Schedule to the BR Act or as near thereto ascircumstances admit)

2. A banking company has to submit three copies of its accounts and balance sheet together withauditors'report . (to the Reserve Bank and also to the Registrar of Companies; onlyto the Reserve Bank; only tothe Registrar of Companies).3. The expenses incidental to a special audit under Section 3O(1B) of the BR Act shall be borne by . (the

Reserve Bank of India; the banking company; the Government of India)4. The balance sheet and profit and loss account of a banking company, have to be audited, asstipulatedunder Section 30 of the Banking Regulation Act, by . (a person duly qualifiedunder any law for the time being in force to be an auditor of companies; Reserve Bank; Registrar ofCompanies).

5. Reserve Bank shall cause an inspection of a banking company, by one or more of its officers . (if sorequired by shareholders representing at least ten per cent of the shares of thebank; if so required by the CentralGovernment; if so required by the Registrar of Companies.)

PUBLICSECTORBANKSANDCO-OPERATIVE BANKS

SUMMARY : 1. The public sector banks, namely, State Bank and its subsidiaries, the Nationalisedbanks and the regional rural banks are statutory corporations (or body corporate) established under specialstatutes. State Bank and its subsidiaries, as Nationalised banks, are commercial banks engaged in thebusiness of banking and other forms of business permissible for banking companies. The regional ruralbanks are also commercial banks but operating in limited local areas to cater to rural industries,trade,farmers, artisans, etc. The State Bank and its subsidiaries and the Nationalised banks also act as agents of theReserve Bank to transact the banking business of the Central Government. All public sector banks are governedby their respective, statutes and the rules, regulations or schemes made under these statutes. In addition to this,these banks are also governed by certain provisions of the Banking Regulation Act as stipulated in Section 51 ofthat Act. The provisions of the Reserve Bank of India Act are also applicable to them.2. The co-operative banks, functioning in one state only are registered under the state laws on co-operative

societies. The co-operative banks operating in more than one state, are registered under the multi-state Co-operative Societies Act. The Banking Regulation Act is applicable to co-operative banks as provided inSection 56 of that Act with certain modifications. For this purpose, a co-operative bank means a state co-operative bank, Central co-operative bank and a primary co-operative bank. While, the constitution ofthe bank is governed by the cooperative laws, the business of banking undertaken by them is regulated bythe Reserve Bank under the BR Act.

CHECK YOUR PROGRESS :1. Fill up the blanks choosing answers from the brackets.

(i) The State Bank of India is a __________constituted under the State Bank of India Act.(banking company, body corporate, society)

(ii)The chairman of the State Bank is appointed by.Bank, (the Central Board, Banking Service Recruitment Board, Central Government)

(iii) State Bank has to act as ____________and carry out Central Government business and otherbusinessentrusted by the Reserve Bank, (agent of Reserve Bank, agent of Central Government,advisor to the CentralGovernment)

(iv) The provisions of the______________are applicable to State Bank as stipulated in Section 51 ofthe BR Act. (RBI Act, Banking Regulation Act, Companies Act)(v) The majority of shares of subsidiary banks are held by _. (Reserve Bank, CentralGovernment,StateBank)(vi) Regional rural banks operate in __________ . (a notified area, the whole of a state, only adistrict)

in consultation with the Reserve


(vii) The management of the affairs of a regional rural bank vests in _________. (the SponsorBank, its board ofdirectors, the National Bank)

Say whether true or false(i) The State Bank can make statutory regulations for carrying out the purposes of the StateBank of India

Act, in consultation with Reserve Bank and with previous approval of theCentral Government,(ii) The Central Government is not authorised to give any directions to the StateBank in mattersof policy involving public interest,(iii) The provisions of Section 42 of the Reserve Bank of India Act relating to cash reserve appapplyto StateBank.

(iii) Subsidiary banks do not have apply to state bank(iv) Subsidibary banks do not have to maintain liquid assets under Section 24 of the BR Act.(v) Regional rural banks may transact the business of banking as defined in Section 5(b) of theBR Act andalso other business specified in Section 6(1) of that Act.

(vi) Two regional rural banks may be amalgamated by the Reserve Bank by notification in thegazette,

(vii) The management of Nationalised Banks is governed by the Nationalised Banks (ManagementandMiscellaneous Provisions) Schemes of 1970 and 1980.

Fill in the gaps choosing answers from the brackets.(i) Unless the context otherwise requires, the reference to a

Regulation Act shall be construed as reference to a co-operative bank, (co-operative society,banking company, body corporate)

(ii) ________ in relation to a co-operative society, for the purpose of BR Act, includes amember of any committee or body for the time being vested with the management of theaffairs of that society. (Director, Member, Manager) (iii) The requirement of minimumpaid-up capital and reserves for a co-operative bank tocommence or carry on bankingbusiness is . (Rs. 1 crore, Rs. 1 lakh, Rs. 10 lakh)

(iv) There are restrictions on co-operative banks on _____ in other co-operative societiesunder Section 19 of the BR Act. (holding of shares, keeping deposits, acquiring any interest)

(v) Central and state co-operative banks have to submit their returns under Section 31 of BRAct to_____ . (Reserve Bank and National Bank, National Bank only, Reserve Bank only)

(vi) Under Section 23 of the BR Act, without the permission of Reserve Bank, a ____can open a new place of business within the area of its operation, (central co-operativebank, state co-operative bank, primary co-operative bank) (vii) Co-operative banks have toprepare their balance sheet and profit and loss account in theforms set out in the Third Schedule to ______ . (Banking Regulation Act, Reserve Bankof India Act, State Co-operative Societies Act)

Say whether true or false.(i) Banking Regulation Act was made applicable to co-operative banks by the Banking Laws

(Application to Co-operative Societies) Act, 1965.(ii) A primary co-operative bank does not require licence from the Reserve Bank to carry onbanking business,(iii) The provisions of the Banking Regulation Act as provided in Section 56 of the Act apply toco-operative banks,(iv) A 'Co-operative Bank' means a primary co-operative bank, central co-operative bank andA state co-operative bank,(v) There are no restrictions under the BR Act on lending by co-operative banks to their directorsor firms in which they are interested,(vi) A scheduled co-operative bank has to maintain cash reserve as stipulated in Section 42 ofthe

Reserve Bank of India Act (as applicable to co-operative societies).(vii) Inspection of co-operative banks is done by the state Government under the Co-operative Societies Act andthe Reserve Bank has no power to inspect under the Banking Regulation Act.

2.

in the Banking


ANSWERSTOCHECKYOURPROGRESS'1. (i) body corporate (ii) (iii) Agent of Reserve

Bank (iv) (v) SBI(vii) its board of directors(vi)

2. (i) True; (ii) False; (iii) True; (iv) False; (v) True; (vi) False; (vii) True3. (i) Banking company (ii) Director

(iii)Rs. 1 lakh (iv) Holding of shares(vi) Central co-operative bank (vii) Bunking Regulation Act 4. (i) True; (ii) False; (iii)

True; (iv) True; (v) False; (vi) True; (vii) FalseCASE LAWS ON RESPONSIBILITY OF PAYING BANK

SUMMARY : The Negotiable Instruments Act, 1881 lays down the law relating to the payment of a customer'scheque and the protection that is available to a banker making payment of a cheque in due course. Sections 10,85, 85A, 89 and 128 of the Act deal with the protection available to a banker whereas Section 31 lays down thecondition as to when a bank has to make payment on a cheque drawn by the customer. The banker on making thepayment in due course is entitled to seek protection provided the cheque has not been altered or the alteration, ifaltered, is not apparent. However, the banker does not get protection, if signature of the customer is forged

CHECK YOUR PROGRESS1. State whether true or false.

(i) The law relating to the payment of cheques and protection to a banker is contained in theIndian ContractAct.

(ii) The responsibility of a banker to pay back the money of the customer specifically stated inthe NegotiableInstruments Act, 1881.Section 31 of the Negotiable Instruments Act applies only to the banker,

(iii) The banker is first bound to honour a customer cheque and only thereafterexercise hisright of set off.(iv) A forged signature is no mandate of the customer,(v) A customer is bound to inform the bank about lost cheque leaves,(viii) In a joint account if one of the signatures is forged, the bank and the customer are

equallyliable,(ix) Payment to be made in due course need not always be made to holder but can be made tohis agent or

servant,(x) In case bank makes payment by mistake it can recover the same even if the payee haschanged his

position,(xi) If a bank makes payment without checking the instrument under an ultraviolet lamp, it canbe held liable

on the grounds of negligence.

ANSWERS TO 'CHECK YOUR PROGRESS'1. (i) False; (ii) True; (iii) True; (iv) False; (v) True; (vi) False; (vii) False; (viii) True; (ix) False; (x) False

CASE LAWS ON RESPONSIBILITY OF COLLECTING BANK

SUMMARY : However, the Negotiable Instruments Act does not specifically lay down the duties of acollecting banker while collecting cheque, it gives protection to a collecting banker under Section 131. FromSection 131, it can be deduced that a banker to claim protection should comply with certain basic duties failingwhich he will not be entitled to seek protection under Section 131. These duties are:1. The collecting banker should have acted in good faith.2. He should have acted without negligence.3. He should receive payment for a customer.

CentralGovernmentBRActnotified area


4. The cheque should be crossed generally or specially to himself.In concluding whether the bank had been negligent or not the following matters would be relevant and if thebanker has failed to carry out any of the following duties then he can be liable on the grounds of negligence. Theseduties are:

(i) To open the account with proper references and documentary proof.(ii) To confirm the reference, where the referee is not known and or does not come personally.(iii) To ensure crossing and special crossing.(iv) To verify the instruments or any apparent defect in the instruments.(v) To take into account the state of customer's account.(vi) To make enquiries by the collecting bank in collecting cheques payable to third parties.

.CHECK YOUR PROGRESS :1. State whether true or false.(i) The statutory protection to a collecting banker is as per Section 6 of the Indian Contract Act.(ii) Section 131A of the Negotiable Instruments Act extends the protection granted to a bankerwhilereceiving payment of a cheque, and drafts,(iii) The duties of collecting bank to claim protection has been laid down under the Indian ContractAct andBanking Regulation Act.(iv) In the absence of proper reference the banker can be held liable on the grounds of negligence,(v) It is necessary for the banker to make enquiries regarding the reference given by the customer.

ANSWERS TO'CHECK YOUR PROGRESS' : 1. (i) False; (ii) True; (iii) False; (iv) True; (v) True

INDEMNITIES

SUMMARY : Sections 124 and 125 of the Indian Contract Act respectively, lays down the laws of indemnityand the rights of indemnity holder. These sections are not exhaustive and the general law of indemnity, which iswider, has been applied in cases not covered by Sections 124 and 125. The indemnifier has to compensate theindemnity holder who is entitled to the damages suffered, costs incurred and to recover any sums paid in acompromise of any suit. Bankers obtain indemnities to protect themselves from any loss that they may incur whileissuing duplicate of instruments like demand drafts or travellers'cheques, FDRS, pay-orders, etc..

CHECK YOUR PROGRESS :

of the Indian Contract Act defines an indemnity.(ii) A person promising to save another from loss is called(iii) ________ is a person who is promised to be saved from loss.

2. State whether the statements are true or false.(i) Contract of Indemnity as defined in the Contract Act is exhaustive,(ii) Insurance Contracts are notcontracts of indemnity.

B. 1. Fill in the blanks.(i) There are ________parties to a contract of indemnity.(ii) Indemnifiers liability in a contract of indemnity is _____ .

2. State whether the following statements are true or false.(i) There are three parties to a contract of indemnity, the indemnifier, the indemnity holder and

the person on whose behalf the indemnity is given, (ii) Indemnifter's liability occursonly if the indemnity holder suffers loss.

C. 1. State whether the statements are true or false.

(i) Section __


(i) Customers as a matter of right and without an indemnity can obtain duplicate of demanddrafts or travellers'cheques.

(ii) Indemnities are required by banks purely as a formality and does not serve any other purpose,(iii) The indemnity obtained by banker only protects him from the actual value of the instrument.

D. 1. What are the two conditions that an indemnity holder is bound to comply before being indemnifiedfor a loss?2. To what extent is the indemnity holder entitled to be indemnified?3. In case of compromise the indemnity holder has to satisfy certain conditions before recovering

the loss from the indemnifier, what are these conditions?4. State whether the statements are true or false.

(i) An indemnity holder can act beyond his authority.(ii) An indemnity holder can be compensated only for damages and not for the costs incurred

by him. (iii) An indemnity holder is entitled to compromise a suit as thought fit by him though contraryto the orders of the indemnifier.

ANSWERSTO 'CHECKYOURPROGRESS'A. 1. (i) 124; (ii) Indemnifier; (iii) Indemnity holder

2.(i) False; (ii) FalseB. 1. (i) 2; (ii) Primary

2. (i) False; (ii) TrueC. 1. (i) False; (ii) False; (iii) False.D. 1. (i) He should act within the scope of his authority and should not contravene any directionsof the

indemnifier.2. To the extent of the damages suffered, costs incurred and sums paid for compromise of anysuit.3. (i) The compromise was not contrary to the orders of the indemnifier.

(ii) Such compromise was prudent.(iii) the indemnifier had authorised the indemnity holder to compromise the suit.4. (i) False; (ii) False; (iii) False

BANKGUARANTEES

SUMMARY : A bank guarantee is a contract by which the bank guarantees a certain sum to aperson/entity on the customer failing to fulfil any contractual or legal obligation to the said person/entity.Guarantee issued by banks mainly are financial guarantees, performance guarantees, deferred paymentguarantees and statutory guarantees. Bank under a contract of guarantee is bound to honour itsguarantee and its obligations to pay is primary and independent of the underlying contract between thecustomer on whose behalf the guarantee is given and the beneficiary. This has been settled by the variousdecisions of the Courts. The only exception for a bank not to make payment under a guarantee is when afraud exists, which must be proved beyond doubt or special equity is in favour of the debtor.While issuing a guarantee a bank has to ensure that, the amount guaranteed and the period of theguarantee is specifically stated in the guarantee. Pursuant to the amendment to Section 28 of the IndianContract Act, the limitation period on a contract of guarantee cannot be restricted to less than theperiod provided under the Limitation Act. As such, if the guarantee is invoked in time then the beneficiarycan sue the bank within thirty years in case the beneficiary is a Government or municipal body or threeyears in all other cases. The bank while making payment under a guarantee has to ensure that theinvocation is proper and that the person invoking the guarantee has the authority to invoke the guarantee.The bank while issuing a guarantee has to obtain a counter guarantee from its customer and if necessary,additional security to protect the bank in case it is required to pay under the guarantee.

CHECK YOUR PROGRESS : State briefly what is a bank guarantee?1. What purpose does a bank guarantee serve?


2. List the various types of bank guarantees and explain in brief their specific nature.3. Explain in brief- 'On a bank guarantee the banks duty to pay is primary.'4. There are two exceptions to the general rule that banks must pay on a guarantee. What are these

two exceptions? Explain in brief.5. Choose the right answer from the choices given:

(i) In bank guarantees the bank makes payment on:(a) being convinced that the beneficiary has incurred loss;(b) on being sued by the beneficiary;(c) on the guarantee being invoked and after seeking concurrence of the debtor;(d) merely on demand by the beneficiary.

(ii) In case of bank guarantees on behalf of company that is in liquidation the bank on invocation ofthe guarantee by the beneficiary:(a) must pay the amount to the Liquidator and not the beneficiary;(b) must deposit the amount in the court to avoid any controversy;(c) must pay the beneficiary;(d) need not pay, since the bank guarantee lapses on the company being liquidated.

LETTERS OF CREDIT

SUMMARY : A letter of credit (LC) otherwise called a banker's commercial credit is a device used for effectingpayment by bankers for goods supplied or services provided between two parties and is mostly used in foreigntrade. It is similar to a bank guarantee, inasmuch as the bank, issuing the LC, guarantees payment to the seller,in case the terms as required under the LC are complied with. There are various parties to a letter of credittransaction. The opener of the letter of credit otherwise called the Buyer or Importer. The bank, which issues theLC called the Issuing Bank or the Opening Bank or Importer's Bank. The person in whose favour the LC isissued - the Beneficiary, also called the Exporter or Seller. The Advising Bank that advises the LC to thebeneficiary, also called the Notifying Bank. The Negotiating Bank,.i.e. the bank that makes payment on the billsdrawn by the seller also called the Nominated Bank or Paying Bank. The Confirming Bank, which is theadvising bank when it also confirms the credit. The Reimbursing Bank, which reimburses, thenegotiating/paying/confirming bank. Letter of credit are classified based on the various terms and conditionsthey contain. Main among them, are the following Acceptance Credit, where the payment is made after a certainperiod; Revocable Credit, where the credit terms can be unilaterally altered or cancelled by the issuing bank incontrast to an Irrevocable Credit where any alteration of terms or cancellation requires the concurrence ofbeneficiary; Confirmed Credit, where the advising bank adds its own confirmation to the credit while advisingthe beneficiary; With Recourse Credits - where the beneficiary is liable on a bill drawn by him under an LC incontrast to a Without Recourse, where the beneficiary is not liable; Transferable Credits, where rights under anLC can be transferred to third parties; Back-to-Back Credits, where on the basis of LC in favour of thebeneficiary, his bank opens another LC in favour of the beneficiary's supplier. Red Clause Credits, where thebeneficiary is entitled to advance payment before production of documents; Green Clause Credits whereinaddition to advance, the beneficiary is entitled to payment of storage/warehousing charges; Revolving Credits,where the amount is fixed but can be utilised repeatedly as and when the earlier bills drawn are paid. There are twobasic principles that underline every LC transaction the first one being that in every transaction strict complianceof terms is required and the other being the independent nature of LC transaction. As such, it is necessary to ensurestrict compliance of the documents required under an LC. The documents include bill of exchange (drafts,bills), invoice, transport documents, insurance documents are primary for most transactions. Over and abovethese documents the credit terms, which may require various certificates and/or other documents. The rights andliabilities of all parties to an LC have been laid down in the UCP 600 a document published by the InternationalChamber of Commerce. The UCP 600 though not enforceable as law, is incorporated as a part of the credit


terms and as such is enforceable as a contractual term.A letter of credit being similar to a bank guarantee, the liability to make payment by a bank under an LC is primaryand the Supreme Court has endorsed this view in various decisions.

CHECK YOUR PROGRESS : 1. State whether true or false.(i) A letter of credit is a form of guarantee given by banks on behalf of its customer. (ii)Letters of credit are bills of exchange drawn by a seller or a buyer, (iii) LCs are negotiableinstruments.

2. Choose the right answer.(a) The letter of credit is opened on the request of

(i) Issuing bank (ii) Applicant (iii) Beneficiary(iv) Confirming bank

(b) The LC issuing bank is also called(i) the importers bank or the opening bank

(ii) the advising bank or the confirming bank(iii) the negotiating bank or the nominated bank(iv) the reimbursement bank

(c) The right to receive payment under a letter of credit or the right to draw bills on a letter ofcreditis vested in

(i) the opener of the LC (ii) the issuing bank only(iii) the seller only (iv) all the three parties

(d) The advising bank's responsibility is(i) to inform the issuing bank as to whom to issue the letter of credit (ii) to advisethe buyer the despatch of documents by the seller (iii) to inform thebeneficiary/seller about the letter of credit (iv) none of the above

(e) The advising bank is also called the(i) Confirming bank (ii) Notifying bank

(iii) Reimbursing bank (iv) None of the above(f) Negotiating bank is the bank which

(i) negotiates the preliminary contract of sale between the buyer and the seller (ii)makes payment of the bills drawn by the seller and accepts the documents(iii) guarantees payment by the issuing bank(iv) none of the above

(g) When the LC specifies the bank that is to negotiate the bills drawn under the LC then thebank is also called

(i) Confirming bank (ii) Reimbursing bank(iii) Nominated bank (iv) None of the above

(h) The confirming bank is(i) the issuing bank when it confirms the issue of the LC (ii) the negotiatingbank when it confirms the negotiation of the bills (iii) the advising bank whenit confirms the LC (iv) none of the above

(i) When the confirming bank confirm the credit it (i) doesnot take any liability(ii) undertakes on its part the liability under the LC(iii) undertakes to make timely delivery of the documents and bills to the buyer or his bank(iv) none of the above

(j) Reimbursing bank is the bank(i) that reimburses the seller(ii) that reimburses the negotiating/paying or confirmingbank(iii) that reimburse the buyer on the goods being found defective(iv) none of the above

3. Fill in the blanks.(a) Ordinary letters of credit are usually ______, i.e. the bills drawn hereunder have to bepaid immediately.


(b) Letter of credit under which usance bills can be drawn is called an _____.(c) In a revocable LC the credit can be amended or cancelled by the ____ .(d) Only ________letters of credit can be confirmed.(e) Credit in which the beneficiary is not liable for the bills drawn thereunder is ____

credit.(f) A back-to-back credit would involve at least bank, viz., the ____ bank, the ________

bank and the _______ bank.4. State whether true or false.

(a) All parties to a letter of credit transaction need to comply with the terms only as far aspractical andnot strictly.

(b) In case the documents submitted by seller do not comply with the terms of letter of creditthen thesame can be accepted and sent for confirmation of buyer.

(c) A bill of exchange is a document to title to goods.(d) A bill of exchange is also called a 'bill' or a 'draft'.(e) Invoice in a letter of credit transaction is a document similar to a quotation based on whichthe buyer

places his order.(f) A bill of lading on a bona fide transfer confers on the transferee a right to the goods.(g) An airway bill is also a document evidencing title to goods.

ANSWERS TO CHECK YOUR PROGRESS'1. (i) True; (ii) False; (iii) False2. (a) ii; (b) i; (c) iii; (d) iii; (e) ii; (f) ii; (g) iii; (h) iii; (i)ii;j)ii3. (a) Sight credits; (b) Acceptance credits; (c) Issuing bank; (d) Irrevocable; (e) without recourse;

(f) Three; issuing, advising, third4. (a) False; (b) False; (c) False; (d) True; (e) False; (f) True; (g) False

DEFERRED PAYMENT GUARANTEE

SUMMARY : A deferred payment guarantee (DPG) is an unconditional and irrevocable guarantee givenby a bank to a seller/exporter that on his supplying goods to the buyer/importer (who is the bank'scustomer) on instalment basis the bank would ensure payment on the due dates. DPGs are usuallyinsisted upon, when capital goods are imported and the seller/exporter requires an additional assurance thatthe instalment payment allowed by him to the buyer/importer is met. In a DPG the bank guarantees eitherthe payment of the instalments and the interest on the due dates or the payment of the bills drawn onvarious dates by the seller/exporter. A DPG being a guarantee given by a bank, its commitment to honourthe same is absolute unless there exists a case of fraud.

.

CHECK YOUR PROGRESS :1. Say whether true or false.(i) In a deferred payment guarantee, the guarantee is to ensure delivery of eoods.

(ii) A deferred payment guarantee is mostly based on a primary contract between the buyer andthe seller,

(iii)A deferred payment guarantee differs from other kinds of guarantee issued by banks asregardspayment liability of the bank on invocation,

(iv) In a deferred payment guarantee the banks liability comes into existence only if all theinstalments


are not paid and not on the non-payment of any one instalment by the customer.

ANSWERSTO CHECKYOUR PROGRESS: 1. (i) False; (ii) True; (iii) False; (iv) False.

LAWSRELATINGTOBILLFINANCE

SUMMARY :Law relating to bills is provided in the Negotiable Act, 1881.1. Categories of bills financed by banker are:

(i) Clean bills (ii) Documentary bills(iii) Bills drawn under credit

3. Maker of bill of exchange is called drawer.4. Drawee of a bill of exchange is a person who is directed to pay the value of bill, and in the case

of usance bill of exchange, the drawee is called acceptor.5. In the case of bills relationships between the parties are:

(i) The drawer of the bill is creditor, (ii) The drawee of a bill is the debtor.6. Holder in due course means any person who for consideration became the possessor of the bill

and is entitled to all the rights of holder of the bill.7. Payment in due course means payment in accordance the tenor of bill to the holder in due course

or to the holder of the bill, in due course and in good faith and without negligence.8. Endorsement means signing the bill of exchange for the purpose of transfer.9. Depending upon the place where the bills are made, they can be classified into

(i) Inland Bills (ii) Foreign Bills10. Documentary bill means a bill accompanying documents of title to goods.

CHECK YOUR PROGRESS:

1. Bill of exchange means a unconditional direction to the drawer to pay the moneys. (True/False)2. The maker of the bill is called ______ .3. Bill purchase facility is granted in the case of demand bills. (True /False)4. ________ facility is granted in the case of usance bills.5. ________ of the bill is bound in case of dishonour of bill.

6. Ownership of goods can be transferred by endorsement and delivery of ____ .7. In bills co-acceptance facility the banker becomes a surety for the value of bill. (True/False)

12.8 ANSWERS TO 'CHECK YOUR PROGRESS':1. True; 2. Drawer; 3.True; 4. Bill Discounting; 5. Drawer;6.Document of title to goods; 7. True.

VARIOUS TYPES OF SECURITIES

SUMMARY: The effectiveness of a security offered to a banker would largely depend on the nature of thesecurity, which includes its marketability, valuation and other economic factors and certain legal aspects, like theborrower's title, existing encumbrance or liability attached to the security. The various kinds of normally acceptablesecurities include land/real estate, stocks and shares, debentures, goods, life policies, book debts, fixed depositreceipts and supply bills.The securities depending on their nature have various advantages and disadvantages. The banker however, has to


verify the worth of the security and its readability, before accepting it. Of all the kinds of security, fixeddeposit receipt of the bank is the best and most reliable compared to other forms of security. The security ofgoods can be created either by pledging the goods directly or by pledging the title to goods, which in turn is apledge of the goods or by charge by way of hypothecation.

CHECK YOUR PROGRESS

1. State whether true or false.(a) If money lent is more than Rs 100 on the security of land, then the mortgaged (simple)

requires registration.(b) A mortgage deed need not be witnessed.(c) Permission from Income Tax Authorities under the Section 230 to create mortgage is required

only if the land belongs to a company.(d) Arrears of tax constitute a preferential charge on the property.(e) There are three types of shares - ordinary, equity and preference.(f) Debenture is a kind of share issued by a company and has no voting rights.(g) Borrower can create a valid pledge with documents of title to goods.(h) Bills of lading, dock warrants, warehouse-keeper's certificate, etc., are some examples of documents

of title to goods.(i) Documents of title to goods are negotiable instruments.

(j) Only Life Insurance Companies can issue life policies, (k) Insurancecontracts are contracts of absolute good faith.(1) An assignee of a life policy can sue in his/her own name, (m) For a loan against

fixed deposit receipt, the stamp duty is very high, (n) Supply bills are bills of exchange.

ANSWERS TO 'CHECK YOUR PROGRESS': 1. (a) True; (b) False; (c) False; (d) True; (e) False; (f)False; (g) True; (h) True; (i) False; (j) True; (k) True; (I) True; (m) False; (n) False.

LAW RELATING TO SECURITIES AND MODES OF CHARGING - I

SUMMARY :1. Mortgage is a transfer of interest in immoveable property to secure an advancedloan, or an existing debt or a future debt or performance of an obligation.

2. Transfer of Property Act, contemplates six types of mortgages, they are:(a) Simple mortgage (b) Mortgage by conditional sale(c) Usufructuary mortgage (d) English mortgage(e) Mortgage by deposit of title deeds (f) Anomalous mortgage

3. In Simple mortgage, the mortgage is by deposit of title deeds and in English mortgage, thepossession ofthe mortgaged properties is not given to the mortgagee.

4. In usufructuary mortgage and in mortgage by conditional sale, possession of mortgaged propertiesis normallygiven to the mortgagee.

5. In the case of simple mortgage and mortgage by deposit of title deeds, the mortgagee has a rightto proceedagainst the property mortgaged and also personally against the mortgagor.

6. Mortgage is to be created by way of deed and requires to be registered under the Registration Act.7. Mortgage by deposit of title deeds, is not required to be created by way of a deed and does notrequire

registration.8. The rule of priority in case of successive mortgages is in the order of time they are created.9. Limitation period for filing a suit for sale of mortgaged property is twelve years from the datemortgage

debt becomes due.

10. Limitation period for filing a suit for foreclosure is thirty years from the date mortgage debtbecomes


due.11. Enforcement of mortgage is governed by the Code of Civil Procedure, 1908. Suit for sale ofmortgaged

properties are to be filed in the Court, within whose jurisdiction the mortgage propertyis situated.12. In a suit for sale, of mortgaged properties, the Court first passes a preliminary decree and thereaftera final

decree.

CHECK YOUR PROGRESS :

in the immoveable property.2. Simple mortgage is created by an instrument in writing. (True/False)3. Mortgage by deposit of title deeds is required to be registered. (True/False)4. In the case of usufructuary mortgage the possession of the properties is given. (True/False)5. In mortgage by way of conditional sale the property is sold with a condition for re-conveyance.(True/False)6. All successive mortgages created will rank equally and no mortgage will have a greater priorityover the

other. (True/False)7. To decide as to which mortgage will have priority over the other in the case of two or moremortgages on

the same immoveable property, the date of _______________ mortgage is pertinent.8. Limitation period for filing a suit for sale of mortgaged properties is __ years from thedate the mortgagedebt becomes due.

9. Mortgage suits are filed in the Court within whose jurisdiction the mortgagee resides. (True/False)

ANSWERS TO CHECK YOUR PROGRESS':! transfer of interest; 2.True; 3.False; 4.True; 5.True; 6.False;7.execution of; 8. twelve; 9. False

LAW RELATING TO SECURITIES AND MODES OF CHARGING - II

SUMMARY:Pledge means bailment of goods for the purpose of securing a payment of debt or an obligation.1. Pawnee has special property rights in the goods pledged.2. A valid pledge can be created by owner of goods or a mercantile agent.3. A constructive pledge involves only delivery of keys of the warehouse.4. Under the contract of pledge, the pawnee can sell the goods pledged after notice or retain the

goods and file a suit for recovery of debt.5. Mortgage of moveable property is called Hypothecation.

CHECK YOUR PROGRESS :1. Pledge means of goods for purpose of securing a payment of debt orperformance

of promise, (fill with appropriate words)2. The most important characteristic of pledge is _____ of goods, (fill with appropriate words)3. Owner of goods cannot make a pledge. (True/False)4. Hypothecation is an implied pledge in cases where constructive possession of goods is given.

(True/False)5. Hypothecation letter gives a banker right to possession of goods in the event of default.

(True/False)

ANSWERS TO 'CHECK YOUR PROGRESS':1. bailment; 2. possession; 3. False; 4.True; 5. True.

1. Mortgage is


DIFFERENT TYPES OF BORROWERS

SUMMARY :As a banker, it is necessary to be aware of the various types of borrowers and the laws applicablealong with the precautions to be taken while dealing with them. Borrowers can be broadly classified in thefollowing categories: individuals, partnership firms, Hindu Undivided Family, companies, statutory corporations,trusts and co-operative societies. The laws applicable to all these different kinds of borrowers are different.Individuals are governed by the Indian Contract Act, partnership firms by the Indian Partnership Act, HinduUndivided Family by the customary law pertaining to Hindus, companies by the Companies Act, statutorycorporations by the Acts that created them, trusts by the Indian Trusts Act, Public Trusts Act, Religious andCharitable Endowments Act, Wakf Act and co-operative societies by the Co-operative Societies Act or theSocieties Registration Act. .

CHECK YOUR PROGRESS

1. Fill in the blanks.

a.) Individual borrowers are governed by the Act.b) In a Hindu undivided family the business of the family is managed byc) A company is ___ and _________ from its members.d) A Private Limited Company has minimum number of members and a maximumof_________numbers of members.e) A Public Limited Company shares aref) Statutory corporations are established by Acts of Actg) Private trusts are governed by the____ Act.h) Trusts of Hindus are governed by the Act.i) Trusts of Muslims are governed by the Act.

ANSWERS TO CHECK YOUR PROGRESS' : 1. (a) Indian Contract; (b) Karta; (c) separate and distinct;(d) 2, 50; (e) freely; (f) Parliament; (g) Indian Trusts Act; (h) Religious and Charitable Endowments Act; (i)Wakf.

TYPES OF CREDIT FACILITIES

SUMMARY : 1. Credit facilities are mainly classified into:(i) Fund based facilities (ii) Non-fund based facilities

2. Fund based facilities, among other things, include:(i) Cash credits/Overdrafts (ii) Term loans

(iii) Bill finance3. Non-fund based facilities, among other things, include:

(i) Bank guarantee (ii) Letter of credit facility4. Under customary law of bankers, interest can be charged on the temporary overdrafts granted.5. As per rule, in the Clayton's case each credit discharges the earliest of the debit entries.6. Term loans based on period of repayment are classified into:

(i) Short-term loan, (ii) Medium-term loan,(iii) Long-term loan

CHECK YOUR PROGRESS :1. Cash Credit facility is a2. Bills co-acceptance facility is a ______ .

transferable.


3. Banker is entitled to charge interest on temporary overdraft under_____.4. Limitation period for filing a suit in term loans is ___ years from the date of default ofinstalment.

5. Period of repayment in the case of medium-term loan is _____ .

ANSWERSTO'CHECKYOURPROGRESS'1. Fund based facility; 2. Non-Fund based facility; 3.Banking custom; 4.3 (Three); 5. 5-7 years.

SECURED AND UNSECURED LOANS, REGISTRATION OF FIRMS, INCORPORATION OF

COMPANIES

SUMMARY :An insecured loan is one for which the banker has to rely upon the personal security oftheborrower.

1. Secured loans are antithesis to insecured loans.2. Various methods of securing a loan are pledge, hypothecation, mortgage and assignment of debtsof the

borrower.3. If two or more persons come together and agree to share profits of a business, it is called apartnership.4. A partnership firm can be registered under the Section 58 of Partnership Act, 1932.5. If a firm is not registered, then a partner cannot sue the other partners or third parties to enforcecontractual

rights.6. A company is an artificial person created by law.

7. There are only two types of companies that are registered under the Companies Act. They are:(a)Public Limited Company (b) Private Limited Company

9. Certificate of incorporation is the conclusive evidence of coming into existence of the company.10. Certificate of commencement of business is required for a public company to start business.

CHECK YOUR PROGRESS1. Only personal security of the borrower is available in the case of.2. Secured loans are normally secured by ______ .3. Pledge is _______ of goods as a security for debt.4. Hypothecation is treated as ______ pledge.5. Personal obligation of mortgagor is a distinct feature of___6. Section 58 of Partnership Act, 1932 provides for______ .

7. A partner on behalf of firm cannot institute a suit on contract, if the firm is registered.(True/False)

8. Shares of public limited company are freely transferable. (True/False)9. Certificate of incorporation is a document evidencing existence of company. (True/False)

10. Certificate of commencement of business is required for private limited company to start business. (True/False)

ANSWERS TO 'CHECK YOUR PROGRESS'1. Insecured; 2. pledge, hypothecation, mortgage or assignment of debts; 3. bailment; 4. constructive; 5. mortgageby deposit of title deeds; 6. registration of partnership; 7. False; 8.True; 9.True; 10. False

REGISTRATION AND SATISFACTION OF CHARGES

loans.


SUMMARY : The word 'charge' means any form of security for debt, unless the word is used otherwise.1. All charges created by a company are required to be registered with Registrar of Companiesunder

Section 125 of the Companies Act, 1956.2. Charges can be fixed or floating.3. Charge will have to be registered within thirty days of creation of the charge.4. If the charge created is not registered, then the same is invalid against liquidator and othercreditors on

winding up of the company.5. Sections 124 to 145 of the Companies Act deal with Registration of Charges.

CHECK YOUR PROGRESS

(a) Charge means any form of ___(b) Charges created by company shall be registered with______.(c) Under Companies Act a charge includes______ .(d) Charge, if not registered is not enforceable against company. True/False(e) Charge shall be registered within ______ days from the date of creation of charge.

ANSWERSTO'CHECKYOURPROGRESS'(a) Security, debt; (b) Registrar of Companies; (c) Mortgage; (d) False; (e) 30

INTRODUCTION TO SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS ANDENFORCEMENT OF SECURITY INTEREST, 2002 (SARFAESI ACT,2002)

SUMMARY :In this unit, we have seen how new changes are brought in by the Act. The comfort available forthe lender for his money to come back will give him a confidence for lending.

CHECK YOUR PROGRESS

1. Banks obtain security while lending, so that in the case of need, the money can be____ofsecurities.2. The SARFAESI Act is applicable to the housing finance companies whose names are notified bythe Central

Government. (True or False)3. In Mardia Chemical Case the Supreme Court decided that the condition of deposit of amount isfully invalid.

(True or False)4. After Mardia Chemical Case, the amendment made in the SARFAESI Act stipulates deposit of amount

before preferring the appeal to DRT (Appellate Tribunal).

ANSWERS TO CHECK YOUR PROGRESS'1. realised by sale; 2. True; 3.True; 4.50 per cent.

MULTIPLE CHOICE TERMINAL QUESTIONS

1. Whether moveable securities in possession of the bank can be sold by the bank without theinterventionof the Court?(a) Now, a Court order is required to sale the security.(b) Yes, bank can sell as provided in the Contract Act, 1872.(c) Yes, as the SARFAESI Act, 2002 has made provisions to that effect.(d) No, until the account is not declared as NPA by the bank.

2. As per the laws existing today, the mortgaged security cannot be sold without a Court intervention.Is thiscorrect?(a) Yes, Court intervention is required as per the provisions of the Transfer of Properties Act.

for


(b) No, SARFAESI Act, 2002 has now made enabling provisions.(c) Yes, since the Contract Act has made no provisions about any Court intervention.(d) No, due to the recent amendments in the Transfer of Property Act no Court intervention isrequired.(a) Any moveable or immoveable security charged to the bank or financial institution.To mortgage securities only.(b) Where the security interests are created for repayment of financial assistance given by the

bank or a financial institution.(c) To the properties owned by the defaulter borrower, but those that are not charged to the

bank.4. In the Mardia case what did the Supreme Court declared as invalid?

(a) Entire SARFAESI Act, 2002.(b) Creation of security interest.(c) Formation of Reconstruction Companies.(d) Condition to pay seventy-five per cent of the amounts as pre-condition while preferring

appeal to the DRT.Ans. I. (b); 2. (b); 3. (c); 4. (d).

DEFINITIONS OF SARFAESI ACT, 2002

CHECK YOUR PROGRESS:The SARFAESI Act is applicable for pledged securities also. (True or False)1. For the enforcement of a mortgage security, court intervention is required even for actions underthe

SARFAESI Act. (True or False)2. Banks and financial institutions can issue notice for enforcement over security underSARFAESIAct only if these securities are not creditor and only when the account isclassifiedas .4. If the borrower does not pay within ___' days after notice by the secured creditorthecreditor can ______________________. of the security.5. After receipt of notice from the secured creditor for repayment of dues by the borrower, theborrower is

legally prevented from transferring his property in any way. (True or False)6. On request of the secured creditor the District Magistrate or the Chief Judicial Magistrate can

take possession of the security for handing over it to the creditor. (True or False)7. When the management of the company is taken over by the secured creditor, the directors of

such company are entitled to compensation for loss of office. (True or False)In this unit we have studied various definitions given in the SARFAESI Act, 2002. Some definitions are creatingnew notions. Definitions for asset reconstruction, borrower, default, financial assistance, hypothecation,property, securitisation, security interest and security receipt are some of the important definitions to clear theconcepts of the Act.

ANSWERS TO 'CHECK YOUR PROGRESS'

1. False; 2. False; 3.in possession, NPA; 4. Sixty, take possession; 5.True; 6.True; 7.False.


1. When any bank or financial institution obtains a charge against property, with which authoritywillthe transaction have to be registered under the SARFAESI Act, 2002?

(a) With the Central Registry.(b) With the ROC.


(c) With the Registrar of Assurances within whose jurisdiction the property lies.(d) With the Reserve Bank of India.

2. When can the provisions of SARFAESI Act, 2002 be invoked for proceeding against thechargedproperty?

(a) When the bank feels that it is necessary for the recovery at any time.(b) When the RBI directs to do so.(c) When there is default in repayment by the borrower.(d) When there is default in repayment and the bank declares the account as NPA.

3. Whether existing or future receivables are property?(a) Yes.(b) No.(c) Yes, but if and when charged to the lender.(d) No, if hypothecated to the lender.

4. From the following which function is of a securitisation company?(a) Acquisition of loan transaction from the lender.(b) Help the lender in recovery by sale of charged property.(c) Take legal steps against the defaulter borrower on behalf of the lender.(d) Acquisition of financial asset from the originator.

Ans. 1.(a); 2. (d); 3. (a); 4. (d)

REGULATION OF SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS OF

BANKS AND FINANCIAL INSTITUTIONS

SUMMARY :In this unit, we have seen about the functional part of the securitisation and reconstructioncompany. It includes the registration of these companies, their functional freedom and the RBI restrictions thereon.There are some stipulations for capital requirements and for raising the same. The existing companies requireregistration. There are various conditions based on which the registration is considered by the RBI. We have seenwhen registration of the company can be cancelled and reasons thereof. How financial assets are acquired isimportant and it involves detailed procedure. The effect of contracts, deeds, suits by or against involving thesecurity asset is also seen. There are specific documents involved and the procedure for securitisationtransaction. The acquisition of asset involves the proper notice and procedure. There are conditions for raisingfunds from the qualified institutional investors. Issuance of security receipts and conditions/exemptions for thesame is also seen. The asset reconstruction company can take various measures for realisation from the asset. TheAct provides for dispute settlement between the securitisation/reconstruction company and the investor byarbitration. RBI has powers to issue various guidelines under the Act.

CHECK YOUR PROGRESS

1. A securitisation or reconstruction company needs registration from the RBI for commencementof business.(True or False)

2. Right of acquisition of a financial asset by the securitisation or reconstruction company is subjectto the prioragreements or contracts about the asset. (True or False)

3. Acquisition of a financial asset by the securitisation company or reconstruction company is withthe liabilityalso over such an asset. (True or False)

4. Which are the four documents involved in the securitisation transaction?5. For each asset acquired or to be acquired, by the securitisation company or the reconstructioncompany

there should be ______________ scheme.6. When the securitisation company or reconstruction company issues security receipts, the holderthereof, is


entitled to a _______________ in the financial asset.7. The security receipt issued by the securitisation or reconstruction company requires registration.(True or

False)8. Any direction issued by the RBI under the SARFAESI Act has______effect and is

_______ on the parties concerned.

ANSWERS TO 'CHECK YOUR PROGRESS' :1. True; 2. False; 3.False; 4.offer document, debenture,agreement and security receipt; 5. separate; 6. undivided interest; 7. False; 8.statutory, binding.

MULTIPLE CHOICE TERMINAL QUESTIONS1. After application of the SARFAESI Act what have the existing companies to do about registration with RBI?

(a) They are automatically deemed to be registered.(b) They are required to stop functioning.(c) Existing companies do not require registration(d) They have to get registered within six months from the commencement of the Act.

2. Which, from amongst the following, is a reason for the cancellation of registration of thesecuritisation company and reconstruction company without giving a hearing opportunity?

(a) The company does not keep accounts as per the RBI norms.(b) The company ceases to carry on the business of securitisation or reconstruction.(c) The company fails to hold investment from the qualified investor.(d) The company does not fulfil any of the conditions imposed at the time of registration.

Ans. 1. (d); 2. (b).

ENFORCEMENT OF SECURITY INTEREST

SUMMARY:In this chapter, we have seen the details about enforcement of securities by banks and financialinstitutions and the procedural requirements thereof. We have discussed how, on default being committed by theborrower, the creditor can enforce the securities as per provisions of the Act. For this no Court intervention isrequired as earlier. The service of notice calling for payment and on failing to pay, the creditor can invoke theprovisions for the take over of the asset/management. After the notice, transfer by the borrower is prohibited. Thereply to the notice needs consideration on lines with Supreme Court directions as in Mardia case. Creditor can alsocall for payment due to the borrower from a third party. For the remaining dues after sale of assets, the remedy atCivil Court or DRT are open as per jurisdiction. For initiating various actions under the Act there is need of anauthorised person. While taking possession of the asset, various precautions are required to be taken. For talcingpossession, help of the Chief Metropolitan Magistrate or District Magistrate can be taken. In such an event thepossession is taken by such authorities and handed over to the creditor. Against the possession notice, appeal canbe made but on payment of the amount as prescribed. If possession is wrongfully taken, the creditor has to paycompensation to the borrower. For appeal to the tribunal fifty per cent of the debt amount is required to bedeposited.

1. Asset reconstruction means by any securitisation company or reconstructioncompany of any right or interest of the creditor in any securitisation company or reconstructioncompanyof any right or interest of the creditor in any

2. SARFAESI Act is applicable to the Regional Rural Banks. (True/False)3. Mortgage or asset backed debt instruments can be issued by the securitisation company

orreconstruction company to the general public. (True/False)4. A guarantor to the loan is within the meaning of the word borrower under SARFAESI Act.(True/False)5. SARFAESI Act is applicable only when there is security. (True/False)6. Has SARFAESI Act defined hypothecation and whether the Act is applicable to hypothecationsecurity?


(True/False)

ANSWERS TO CHECK YOUR PROGRESS'1. acquisition, financial assistance; 2. False; 3.False; 4.True; 5.True; 6. True

MULTIPLE CHOICE TERMINAL QUESTIONS1. On giving of a default notice by the creditor, the borrower gives a reply to it. What should the creditor

do?(a) Ignore the notice as the law does not provide for any reply option to the bank.(b) Wait until the borrower initiates any legal action based on his reply.(c) Give due consideration to the reply as per the guidelines issued in the Mardia Chemical caseby

the Supreme Court and reply to it.(d) Take the matter before DRT for resolving issues raised in the reply.

2. On sale of the security asset, the sale proceeds are appropriated firstly.(a) Towards the satisfaction of dues of secured creditor.(b) Towards the payment of dues of labour.(c) Towards payment of cost, charges and expenses for the preservation and protection

ofsecurities, insurance premiums, etc.(d) Towards payment of legal costs incurred by the creditor for taking possession and for

effecting sale.

Ans. 1. (c); 2. (c).CENTRAL REGISTRY

SUMMARY:Central Government has to set up or cause to set up central registry for registration ofsecuritisation and reconstruction transaction and creation of security interest. Registration under other applicablelaws will continue. All transactions and creation of security interest needs to be noted. Modification and satisfactionalso needs noting in prescribed form with payment of fees.


1. Besides the SARFAESI Act, some other laws require some registration of charge created in the property. Issuch double registration avoidable?(a) Yes, the creditor can choose under which law he needs registration.(b) No, registration under the SARFAESI Act as well as any other applicable law will have to bemade as the

SARFAESI Act is not substitution of any other law.(c) Yes, if one charge noting is by a registered document.(d) No, as the Civil Courts and DRT still have jurisdiction against the properties both registrationsare required.

Ans. 1. (b)

OFFENCES AND PENALTIESSUMMARY:If the charges created, modified and satisfied are not intimated to the central registrar it is anoffence. The securitisation company or the reconstruction company is required to perform various duties under theAct. Breach thereof is also an offence. The punishments are up to Rs. 5,000 for each day of default. Breach of RBIdirectives is also punishable by a fine up to Rs. 5 lakh and Rs. 10,000 for continuation per day. Any generalinfringement of provisions of SARFAESI Act is punishable with imprisonment for one year or fine or both.



1. Whether breach of RBI directives is punishable offence and to what extent?(a) Yes, a fine up to Rs. 5 lakh and for continuation of offence a fine of up to Rs. 10,000 perday.(b) Yes, by cancellation of licences of the company.(c) No, these are the administrative directions.(d) No, the Act has not provided for any punishment in specific.

Ans. 1. (a)

MISCELLANEOUSPROVISIONS

SUMMARY:The Act is applicable to securities not in possession of the creditors. We have seen a list of securitiesto which the Act is not applicable. Contravention of the provisions of the Act is punishable. Act has dealt with thesituations for offences committed by individuals, partnerships and a company. By debarring Civil Court or anyother authority for jurisdiction for giving injunction, etc., the implementation of the Act is made effective byremoving legal hindrance, which otherwise the borrower can bring. We have also seen how and when the Act hasan overriding effect. The Act has provided that the provisions of the Limitation Act are applicable for the actionsunder this Act also. The Central Government has powers to make rules for procedural implementation of the Act.The central registry is not yet formed and the provisions relating to the registrations required under Sections 21to 27 are not yet made applicable. The chapter also has dealt with the powers of the Central Government to removedifficulties that may arise while giving effect to the provisions of the Act and about the amendments made in theother Acts by this Act.


1. Provisions of the SARFAESI Act are applicable to which of the following?(a) Pledged goods.(b) Only mortgaged properties.(c) Securities that are not otherwise charged to the creditors.(d) Securities charged to creditors and not in possession of the creditor.

2. When the rules, framed by the Central Government, under the Act get validity?(a) After the appellate tribunal of DRT approves them.(b) On Supreme Court approving the same.(c) Immediately on framing of the rules by the Government and notifying the same.(d) When both the Houses of Parliament approve the Rule so framed.

Ans. 1. (d); 2. (d)

THE BANKING OMBUDSMAN SCHEME, 2006: PURPOSE, EXTENT, DEFINITIONS,

ESTABLISHMENT AND POWERS

SUMMARY : The object of the scheme makes clear the purpose behind introduction of the scheme. We haveseen the definitions of different words used in the scheme. The definition of words have importance as they areused in a particular context in the scheme. We have seen the provisions about appointment and tenure ofbanking ombudsman. The RBI is the authority for appointment and deciding terms of appointment, etc. RBIalso decides the territorial jurisdiction of the banking ombudsman. We have seen about his powers and duties andhow he has to deal with the complaint.


.MULTIPLE CHOICE TERMINAL QUESTIONS

1. What is the object of introducing the banking ombudsman scheme, 2006?(a) For effective monitoring of the NPA accounts in the banks.(b) It is the RBI agency to regulate the disputes amongst the banks.(c) To enable resolution of complaints relating to banking services.(d) For executing the orders passed by the DRT.

2. Complaints relating to non-acceptance of small denomination notes by a bank, can be made to abankingombudsman:(a) Such small denomination notes and coins to be deposited with the Reserve Bank.(b) They may be deposited with a bank having a currency chest facility.(c) Banking ombudsman can deal with the complaints under the scheme.(d) The complainant can seek no remedy at all through banking ombudsman, but has to approach

the consumer disputes redressal machinery.3. Complaints can be made against promises made by sales agents but not fulfilled by the bankrepresented

by them under the banking ombudsman Scheme 2006?(a) No complaint is admissible as he is not the employee of the bank.(b) The sales agent has no authority to make any promise and hence the bank is not bound tofulfil them.(c) The banking ombudsman can entertain the complaint under the scheme.(d) Agency functions are outside the purview of the banking ombudsman scheme.

Ans. 1. (c); 2. (c); 3. (c)

PROCEDURE FOR REDRESSAL OF GRIEVANCE

SUMMARY : We saw the grounds on which a complaint can be filed. It touches all aspects of banking services.It relates to some issues about loans and advances also. The procedural part of filing and dealing with thecomplaint is material and needs to be well noted. We have seen how the information required by the bankingombudsman can be called and how he deals with the complaint. How an award is passed. For awareness of thepublic, a notice about the scheme is required to be displayed at each office along with copy of the scheme.

CHECK YOUR PROGRESS1. Bank can refuse acceptance of small denomination notes from the customer and therefore, onthis ground

there cannot be a complaint to banking ombudsman. (True/False)2. On valid grounds bank can refuse the opening of a new account, but on this ground, complaintbefore the

banking ombudsman is maintainable. (True/False)3. Can a prospective borrower go before the banking ombudsman for non-sanction of his loan bythe bank?

(Yes/No)4. Banking ombudsman has powers to call for any information and certified copies from bank whenhe is dealing

with the complaint.5. For settling the complaint the banking ombudsman is bound by legal rules of evidence.(True/False)6. What is the maximum amount the banking ombudsman can award as compensation? (No limit /10 lakh)7. Limitation period for filing of the review application against the award given by the bankingombudsman

is _________________ days. (60/45 days)8. ANSWERS TO CHECK YOUR PROGRESS'

1. False; 2. False; 3. No; 4. Yes; 5. False; 6.Rs 10 lakh; 7.45

MULTIPLE CHOICE TERMINAL QUESTIONS1. Can a

Date post:	16-Sep-2015
Category:	Documents
Upload:	kunal-sinha
View:	61 times
Download:	8 times