Practice & Law of Banking

7/31/2019 Practice & Law of Banking

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WhatarethemainFunctionsoftheCentralBank?CentralBanksdifferfromcountrytocountryintheirstructureandorganization,intheirpoliciesandtechniques.Buttheirfunctionsareverysimilar.TheCentralBankrendersthefollowingimportantfunctionsinalmostallcountries:(i)Issuingofnotesandregulatingthevolumeofcurrency(ii)Actsasbankertothegovernment(iii)Actsasbankertothebanks(iv)ActsascustodianofNation'sreserves(v)Actsasthelenderoflastresort(vi)FunctionsasNationalClearingHouse(vii)Actsascontrollerofcredit(viii)Publisheseconomicstatisticsandotherinformation(ix)Developmentfunctions(x)Supervisestheactivitiesoffinancialinstitutions.TheCentralBankislegallyempoweredtoissuecurrencynotes.TheCentralBankischargedwiththeresponsibilityofmaintainingpricestability,inflationlevel,i.e.,thedomesticvalueofitsmoneyaswellasitsexternalvalue.Thesupplyofmoneyconsistsofthelegallendermoneyandthebankmoney.TheCentralBankhasthemonopolypowerofthenoteissuetoregulatethesupplyoflegaltendermoney.Thisenablesittoimpartelasticitytothecurrencysystemandtomaintainstabilityinthecirculationofmoney.InHongKongtheresponsibilityofissuingcurrencynoteshasbeenentrustedwithaprivatesectorbank,viz.HongKongandShanghaiBankingCorporation(HSBC).Bythefunctionofnoteissuethecentralbankachievesthefollowingmerits:

(a)Enhancethepublicconfidenceonthemonetarysystem.(b)Maintaininguniformityinthemonetarysystemthroughoutthecountry.(c)Flexibilityinthemonetarysystem.BythefunctionofnoteissuetheCentralBankcanmaintainthecirculationoftheeconomyatdesiredlevel.(d)Creditcreationcanbeeffectivelycontrolled.ThesolerightofnoteissueenablestheCentralBanktoregulatethecreationofcreditbycommercialbanksandadjustthesupplyofmoneytothedemandforit.(e)Maintainingtheinternalandexternalvalueofmoney.TheCentralBankfollowsdifferentsystemsofnoteissueaccordingtothecurrencyregulations.Thedifferentsystemsofcurrencyare,(a)Fixedfiduciarysystem(b)Minimumfiduciarysystem(c)ProportionalReservesystem

(d)Foreignexchangereservesystem(i)MinimumReservesystemWhatevermaybethesystemthreebasicprinciplesaretobefollowed.Theyare(i)Uniformity(ii)Securityand(iii)elasticity.Thecurrencyissuedmustbeuniformandasingleauthoritymustbevestedwiththepowerofnoteissuetoachieveuniformity.Theremustbesecurityforthecurrencywithoutanydangersofover-issue.Publicmusthaveconfidenceinthecurrency,whichtosomeextent,dependsuponthegoldandforeignexchangereservesitholds.Atthesametimethecurrencysupplymustbeelastic.TheCentralBankmustbeabletoexpandortocontractthesupplyofcurrencyaccordingtothechangingneedsfromtimetotime.(ii)BankertotheGovernment:

TheCentralBankactsasthebanker,financialagentandadvisortothegovernment.ThesurplusmoneyofthegovernmentiskeptwiththeCentralBank.Itlendsmoneytobothcentralandstategovernments.Ithelpsthegovernmenttotideoverthetimegapbetweentheirexpenditureandcollectionoftaxes.TheCentralBankisusuallyrequiredtomaketemporaryadvancestothegovernmentinanticipationofcollectionofrevenues.Theseadvancesareknownas"waysandmeansadvances"inIndiaandaremadeforshortperiods.TheCentralBankalsoundertakestoprovidethegovernmentwithnecessaryforeignexchangeformakingpaymentsabroad.Itisnecessarythatthereshouldbecloseco-operationbetweentheCentralBank


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TheCentralBankactsasthenationalclearinghouse.ThemaintenanceofaccountsbyallcommercialbankswiththeCentralBanken-ablesittosettleinter-bankindebtedness.Aclearinghouseisaninstitutionwhereinterbankclaims,i.e.,claimsofbanksagainstoneanotheraresettled.ThenetbalancesordifferencescalledtheclearingbalancesaresettledbymeretransfersbetweentheirrespectiveaccountsattheCentralBank.Theclearinghousesfacilitateexpeditiousandeconomicalsettlementofinter-bankclaims.TheCentralBankactsasabankofclearance,settlementandtransferandestablishesclearinghousesintheimportantcitiesandtownsinthecountry.TheyarehousedinthepremisesoftheCentralBankadministeredbyitorattheirAgentbanks.Clearinghousesareestablishedintheimportantcitiesandtownsofacountrybytherespectivelocalbanks.IftheCentralBankhasnoofficesofitsown,theclearinghousesarehousedinthepremisesoftheagentsoftheCentralBank.TechniqueofClearanceThetechniqueofsettlingtheinter-bankindebtednessissimple.Theclearinghouseoperatesasfollows.Therepresentativesofvariousmemberbanksofaclearinghousemeetattheclearinghouseataparticulartime.Everyrepresentativedeliverstoothersthechequeandotherclaimswhichhisbankholdsagainstthem.Similarly,hereceivesfromotherstheclaimswhichtheyholdagainsthisbanks.Chequesdishonoredarereturnedtotheconcernedrepresentatives.Theamountreceivableandpayableareadded.Thenetclearingbalancesofbanksaresettledbydebtorbanksbyissuingcheque

sagainsttheiraccountswiththecentralbankinfavourofcreditorbanks.Thus,theinter-bankclaimsaresettledbymerebookentriesintheaccountsmaintainedwiththecentralbank.Thesedaysthepaymentsystemoperatesmoreefficientlythroughcomputerizedoperations.AdvantagesofClearingHouseCentralBanks'functionofclearinghouseprovidesthefollowingadvantages:(a)Clearinghousesreducethecostinvolvedinthecollectionofchequesandclaims.(b)Theyavoidthedelayintheclearingofcheques.(c)Theyensureconvenienceandeconomyinthesettlement(d)Theyminimisetheriskinvolvedintherealisationofcheques.(e)Theyminimisethenecessityofholdinglargecashbalancesbycommercialbanks.

(f)Theycanbeusedasacommonplatformforthediscussionoftheproblemsofmemberbanks.(g)Theypromoteco-operationamongmemberbanks.(h)CentralBanksalsogetinformationabouttheliquiditypositionofcommercialbanks.(i)Clearinghousesoffervaluabledatatoknowthetrendsintheoperationsofcommercialbanks.(vii)Actasthecontrollerofcredit:TheCentralBankfunctionsasthecontrollerofcreditinthecountry.AccordingtoDeKick,thisfunctionisconsideredasthemostimportantfunctionoftheCentralBank.Thecreditcreationbythecommercialbankshasadirectimpactontheeconomy.Ifthebanksexpandthecreditlimitsthatleadstoinflationandiftheyundulycontractcredititleadstodeflation.Thus,thecentralbankisempoweredtoc

ontrolthecreditcreationofthecommercialbanks.Thecommonlyusedmethodsofcreditcontrolare,(a)BankRatePolicy(b)OpenMarketOperations(c)Variationofcashreserves(d)Creditrationing(e)Variationofmarginrequirements(f)Regulationofconsumer'scredit(g)Moralsuasion(h)Directaction


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(i)SelectivecreditcontrolByadoptingthesemethods,theCentralBankcontrolsboththequantityandqualityofcreditcreatedbythebanks.Publisheseconomicstatisticsandotherinformation:TheCentralBankregularlycollectsandpublishesthestatisticsregardingvariouseconomicactivitiesofthegovernment,bankingsystem,etc.Furtheritprovidesusefulinformationregardinggovernmentpolicies.Developmentfunctions:TheCentralBankActsasthecatalystofeconomicgrowthofthecountry.Itactsasanagencyofeconomicgrowth.Itrendersvariousdevelopmentalfunctionssuchas(i)Provisionofcreditfacilitiestoagriculturalindustryandotherprioritysectorsthroughcommercialbanksandco-operativebanks.(ii)Expansionofbankingfacilitiesinthecountry.(iii)Maintainingpricestabilityinthecountry.(iv)Mitigatingtheeffectsoftradecyclesbyitseffectivemonetarypolicies,etc.TheresponsibilityoftheCentralBankisincreasingeverydayanditsfunctionsareexpanding.Thewell-administeredcentralbankingfunctionsarenecessaryforallthecountriesespeciallyforthedevelopingcountriestomaintainpricestabilityandeconomicgrowth.However,thedevelopmentalroleofReserveBankofIndiawasgraduallybranchedoutintoseparatedevelopmentfinancialinstitutions,suchasIDBIandNABARDandinvestmentinstitutionslikeUTIoveraperiodoftime.

FormsandFunctionsofModernBanking 1.ModernBankingMeasuresoftheMoneySupply,FunctionsandTypesofFinanciaInstitutions,AndModernE-Banking 2.MeasuringtheMoneySupplyTounderstandModernBanking,anunderstandingofhatconstitutestheMoneySupply,themoneyavailableintheeconomy,isneeded.TheMoneySupplyisdividedintotwodistinctcategories:M1Assetsthatcanbeeasilyaccessedandimmediatelyusedtopurchasegoodsandservices.ThesearereferredtoasLiquidAssets.MoneydepositedinCheckingAccountsmeetsthiscriteriabecausechecksrepresentDemandDeposits,astheyarepaidOnDemandforthecashintheaccount.M2AllofM1andassetsthatcannotbeuseddirectlyascashbutcaneasilybeconvertedtocash.MoneyMarketMutualFundsareexamplesofthisbecausetheycanbeusedascollateralagainstcertaintypesofchecks.Savingsaccountsalsofallintothiscategory.

3.FunctionsofFinancialInstitutionsFinancialInstitutionsutilizetheMoneyupplytoperformmanyrolesincluding:StoringMoneySavingMoneyLoansMortgagesCreditCardsConveyingInterest(SimpleandCompound)EarningaProfit 4.StoringMoneyOneofthebasicfunctionsofabankistoprovideasafe,andonvenient,storagelocationforvaluables,chieflymoney.Vaultsaregenerallyfireproofandnearlyimpenetrable.Banksareinsuredagainstlossesduetotheft. 5.SavingMoneyBanksofferavarietyofmeansofsavingmoneysuchas:SavingsccountsCheckingAccountsMoneyMarketAccountsCertificatesofDepositBanksgenerallypayinterest,anamountpaidfortheuseofyourmoney,ontheseaccounts. 6.LoansBanksofferloans,moneygivenoutforaperiodoftimeinexchangefofeesandinterestcharges.Banksarelimitedinthetotalamountofloansthat

theyissuebecauseoftheFractionalReserveSystem.Thisistheideathatbanksmustkeepacertainpercentageofthevalueofloansthattheyissueonhandintheformofdeposits. 7.MortgagesMortgagesarespecifictypesofloansusedtobuyrealestate.Theygenerallycomeintermlengthsof15,25,or30years.AkeydeterminingfactorindeterminingtheinterestrateandthetermonthemortgageistheborrowersCreditworthiness.Thatisareflectionofthelikelihoodthattheborrowerwillbeabletorepaytheloanandnotdefault,orfailtorepaytheloan. 8.CreditCardsCreditCardsarecardsthatallowtheirholderstomakepurchaseofgoodsandservicesinexchangeforthecreditcardsproviderimmediatelypayi


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ngforthegoodorservice,andthecardholderpromisingtopaybacktheamountofthepurchasetothecardprovideroveraperiodoftime,andwithinterest.Theamountofcreditavailabletoacardholderisoftenareflectionoftheircreditworthiness. 9.SimpleandCompoundInterestBanksearnincomethroughtheinterestthattheychargeontheirlending.Aswehavealreadyestablished,Interestisthepricepaidtouseborrowedmoney.Incantaketwoforms:SimpleInterestpaidonanannualizedbasisasapercentageofthevalueoftheloanordepositknowasthePrincipal.CompoundInterestpaidannuallyonthetotalprincipal,andtheaccumulatedinterestfromprevioustimeperiods. 10.EarningaProfitBanksexisttoearnmoneythesameasanyotherbusiness.Teydothisthroughcharginginterestontheirlendingandthroughchargingvariousfeesfortheirservices. 11.ModernE-CommerceModernBanksutilizeelectronicformatstocompletemanyotheirfunctions.Theseelectronicformatscaninclude:AutomatedTellerMachines(ATMs)DebitCardsHomeBankingAutomaticClearingHouses(ACHs)StoredValueCards 12.ATMsATMsreplacehumanbanktellersinperformingbasicbankingfunctionsschas:DepositsWithdrawalsAccountInquiriesKeyadvantagesofATMsinclude:24houravailability.Eliminationoflaborcosts.Convenienceoflocation. 13.DebitCardsDebitcardsareusedtoelectronicallywithdrawfundsdirectlyfomthecardholdersaccounts.MostdebitcardsrequireaPersonalIdentificationNumber(PIN)tobeusedtoverifythetransaction. 14.HomeBankingHomebankingistheprocessofcompletingfinancialtransaction

fromyourownhomeasopposedtoutilizingabranchofabank.Actionscaninclude:MakeAccountInquiriesTransferMoneyPayBillsApplyforLoansDirectDeposit 15.AutomaticClearingHouses(ACHs)ACHsfacilitatethepaymentofbillswithoutheneedtowriteacheck.AnACHcanbeusedtocreateautomaticmonthlybillpaymentssothatthepayerdoesnothavetoinitiatethepaymentofthebill.BenefitsInclude:PostalSavingsNoForgottenPaymentsTimeSavings 16.StoredValueCardsStoredValueCardsareusedinamannerverysimilartoaDebitCard.ThecardisLoaded,orcredited,withasetvalue.Thatvaluecanthenbeusedtomakepurchases.Examplesofthisconceptinclude:PrepaidCallingCardsStoreGiftCardsACCESSCardsEconomicDevelopmentandtheEvolvingImportanceofBanksandStockMarkets SubmittedbyAsliDemirg-KuntonThu,2012-01-1911:55

Howshouldtherelativeimportanceofbanksandstockmarketschangeascountrisdevelop?Isthereanoptimalfinancialstructureinotherwords,shouldthemixtureoffinancialinstitutionsandmarketschangetoreflecttheevolvingneedsofeconomiesastheydevelop? Previousresearchhasfoundthatboththeoperationofbanksandthefunctioninofsecuritiesmarketsinfluenceeconomicdevelopment(Demirguc-KuntandMaksimovic,1998;LevineandZervos,1998),suggestingthatbanksprovidedifferentservicestotheeconomyfromthoseprovidedbysecuritiesmarkets.Indeed,banksgenerallyhaveacomparativeadvantageinfinancingshorterterm,lowerrisk,wellcollateralizedinvestments,whilearmslengthmarketsarerelativelybettersuitedindesigningcustomfinancingformorenovel,longerrunandhigherriskprojects. However,economictheoryalsoemphasizestheimportanceoffinancialstructure,

i.e.,themixtureoffinancialinstitutionsandmarketsoperatinginaneconomy.Forexample,AllenandGales(2000)theoryoffinancialstructureandtheircomparativeanalysesofGermany,Japan,theUnitedKingdom,andtheUnitedStatessuggestthat(1)banksandmarketsprovidedifferentfinancialservices;(2)economiesatdifferentstagesofeconomicdevelopmentrequiredifferentmixturesofthesefinancialservicestooperateeffectively;and(3)ifaneconomysactualmixtureofbanksandmarketsdiffersfromtheoptimalstructure,thefinancialsystemwillnotprovidetheappropriateblendoffinancialservices,withadverseeffectsoneconomicactivity. Empiricalresearch,however,hasbeenlargelyunsuccessfulatclarifyingtheev


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lvingimportanceofbanksandmarketsduringtheprocessofeconomicdevelopment.InourearlierresearchRossLevineandIshowthatbanksandsecuritiesmarketstendtobecomemoredevelopedaseconomiesgrowandthatsecuritiesmarketstendtodevelopmorerapidlythanbanks(Demirguc-KuntandLevine,2001).Thus,financialsystemsgenerallybecomemoremarket-basedduringtheprocessofeconomicdevelopment.Butthispatterncouldsimplyreflectsupplysidefactors,suchthatsecuritiesmarketsgrowmorerapidlythanbanksaseconomiesexpand,withnoimplicationthatfirmsandhouseholdschangetheirrelativedemandfortheservicesprovidedbybanksandmarketsrespectively. InarecentpaperwithErikFeyenandRossLevine,wetrytoevaluateempiricalythechangingimportanceofbanksandsecuritiesmarketsaseconomiesdevelop.Inparticular,wefocusonassessingwhethereconomiesincreasetheirdemandforthetypesofservicesprovidedbysecuritiesmarketsrelativetotheservicesprovidedbybanksascountriesgrow.Wedothisbytestingwhethertheeconomicdevelopmentreturnstoimprovementstobothbankandsecuritiesmarketdevelopmentchangeaseconomiesgrow.Atamoreexploratorylevel,wealsoexaminewhethereachlevelofeconomicdevelopmentisassociatedwithanoptimalfinancialstructure,suchthatdeviationsfromthisoptimumareassociatedwithlowerlevelsofeconomicactivity.Weusedataon72countries,overtheperiodfrom1980through2008,andweaggregatethedatain5-yearaverages(datapermitting),sothatwehaveamaximumofsixobservationspercountry.Weuseseveralmeasuresofbankandsecuritiesmarketdevelopment,includingstandardindicatorssuchasbankcredittotheprivatesectorasashareofgrossdomesticproduct(GDP),thevalueofstockmarkettransactionsrelativetoGDP,andthecapitalizationofequity

andprivatedomesticbondmarketsrelativetoGDP. Theprimarymethodologicalcontributionofthispaperisusingquantileregressonstoassesshowthesensitivitiesofeconomicactivitytobothbankandsecuritiesmarketdevelopmentevolveascountriesgrow.Ordinaryleastsquares(OLS)regressionsprovideinformationontheassociationbetween,forexample,economicdevelopmentandbankdevelopmentfortheaveragecountry,thecountryattheaveragelevelofeconomicdevelopment.Butquantileregressionsprovideinformationontherelationshipbetweeneconomicactivityandbankdevelopmentateachpercentileofthedistributionofeconomicdevelopment.Thus,weassesshowtheassociationsbetweeneconomicdevelopmentandbothbankandsecuritiesmarketdevelopmentchangeduringtheprocessofeconomicdevelopment. Figure1illustratesourfindings.InFigure1thegraphontheleftsideplotsthecoefficientsfromquantileregressionsforeachofthe5thto95thpercentil

esofLogRealGDPpercapita,wherethedependentvariableisLogRealGDPpercapitaandthemainregressorisPrivatecreditandwealsocontrolforStockvaluetraded.Acircleindicateseachcoefficientestimate.Quantilecoefficientsforprivatecreditandsecuritiesmarketactivity

Theleftaxisprovidesinformationonthevaluesofthecoefficientestimates.hus,theestimatedcoefficient,indicatedbyacircle,depictsthesensitivityofLogRealGDPpercapitaassociatedwithachangeinPrivatecreditateachpercentileofeconomicdevelopment.ThegraphalsoplotstheactualvalueofPrivatecreditateachpercentile.Atriangleindicatestheseactualvalues,wherethescaleisprovidedontherightaxis.ThetrianglesprovidetheaveragequantityofPrivatecreditateachpercentileofeconomicdevelopment.Inthegraphontheright,weprovidesimilarinformationontherelationshipbetweeneconomicactivi

tyandStockvaluetraded.Inbothfigures,thehorizontaldottedlineistheOLSestimateofthecoefficientonthefinancialdevelopmentindicator.ThesolidlinesaretheestimatedlinearrelationshipbetweenthesensitivitycoefficientsandlogGDPpercapital. Intermsofbankdevelopment,Figure1showsthatasLogRealGDPpercapitaries,twothingshappen:(1)Privatecreditrises(triangles)and(2)themarginalincreaseinLogRealGDPpercapitaassociatedwithanincreaseinPrivatecreditfalls(circles).Putdifferently,quantitiesriseandsensitivitiesfall.Thisrelationshipisalsostatisticallysignificant:aseconomicactivityincreases,thereisasignificantreductioninthesensitivityofLogRealGDPpercapita


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toanincreaseinPrivatecredit. Theresultsaredifferentforsecuritiesmarketdevelopment.AsLogRealGDPpecapitarises,(1)Stockvaluetradedrisesand(2)themarginalincreaseinLogRealGDPpercapitaassociatedwithanincreaseinStockvaluetradedalsorises.Thatis,quantitiesandsensitivitiesrise.Thiseffectisalsostatisticallysignificant:thesensitivityofeconomicactivitytoStockvaluetradedincreasesasLogRealGDPpercapitarises. Theseresultssuggestthattherelationshipbetweenbankdevelopmentandeconomcactivitydiffersfromthatbetweensecuritiesmarketdevelopmentandeconomicactivity.Aseconomiesdevelop,themarginalincreaseineconomicactivityassociatedwithanincreaseinbankdevelopmentfalls,whilethemarginalboosttoeconomicactivityassociatedwithanincreaseinsecuritiesmarketdevelopmentrises.Theseresultssuggestthatthedemandfortheservicesprovidedbysecuritiesmarketsincreasesrelativetothedemandforthoseprovidedbybanksaseconomiesdevelop. Wealsoconductapreliminaryexaminationofwhetherdeviationsofacountrysualfinancialstructurefromourestimateofthecountrysoptimumareassociatedwithlowerlevelsofeconomicactivity.Toestimatetheoptimalmixtureofbanksandmarketsforeachlevelofeconomicdevelopment,wefirstregressameasureoffinancialstructure(suchastheratioofbanktosecuritiesmarketdevelopment)onGDPpercapitaforthesampleofhigh-incomeOECDcountries,whilecontrollingforkeyinstitutional,geographic,andstructuraltraits.Themaintainedhypothesisisthatconditionalonthesetraits,thehigh-incomeOECDcountriesprovideinformationonhowtheoptimalfinancialstructurevarieswitheconomicde

velopment.Wethenusethecoefficientsfromthisregressiontocomputetheestimatedoptimalfinancialstructureforeachcountry-yearobservationforallcountries.Next,wecomputetheFinancialstructuregap,whichequalsthenaturallogarithmoftheabsolutevalueofthedifferencebetweentheactualandtheestimatedoptimalfinancialstructure,controllingforsystematicvariationinthepredictionerrors.TheFinancialstructuregapmeasuresdeviationsofactualfinancialstructurefromtheestimatedoptimum,wherelargervaluesindicatebiggerdeviations,regardlessofwhetherthedeviationsarisebecausethecountryistoobank-basedortoomarket-based. Wefindthatdeviationsofaneconomysactualfinancialstructurefromitsesttedoptimumi.e.,increasesintheFinancialstructuregapareassociatedwithareductionineconomicoutput.Evenwhencontrollingforbankdevelopment,securitiesmarketdevelopment,countrycharacteristics,andcountryfixedeffects,there

isanegativerelationshipbetweentheFinancialstructuregapandeconomicactivity.Althoughwedonotidentifyacausalimpactoffinancialstructureoneconomicdevelopment,theseresultsareconsistentwiththeviewthatthemixtureofbanksandmarketsandnotjustthelevelofbankandmarketdevelopmentisimportantforunderstandingeconomicdevelopment. Whyisthisrelevantforpolicy?Thisresearchsuggeststhatweexpecttheoptialmixtureofinstitutionsandmarketstochangeaseconomiesdevelop.So,thecostsofpolicyandinstitutionalimpedimentstotheevolutionofthefinancialsystemcanbesignificant.Wedontknowenoughtotargetagivenfinancialstructureforaparticularcountry.However,ifwedoseethatmarketorbankdevelopmentistooskewedcomparedtowhatwewouldexpect,thesefindingsgiveusareasontodigmuchdeeper.Wecantrytofindoutiftaxes,regulations,legalimpedimentsorotherdistortionsareleadingtoexcessiverelianceonbanksormarket

s.Hencethisresearchcanjustifyamorefocused,in-depthinvestigationofparticularcharacteristicsofthefinancialsystemthatmightbehinderingeconomicprogress. INVESTMENTPOLICYOFBANKS Thenancialpositionofacommercialbankisreectedinitsbalancesheet.Thancesheetisastatementoftheassetsandliabilitiesofthebank.Theassetsofthebankaredistributedinaccordancewithcertainguidingprinciples.Theseprinciplesunderlinetheinvestmentpolicyofthebank.Theyarediscussedbelow:


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Liquidity: Inthecontextofthebalancesheetofabankthetermliquidityhastwointerprtations.First,itreferstotheabilityofthebanktohonourtheclaimsofthedepositors.Second,itconnotestheabilityofthebanktoconvertitsnon-cashassetsintocasheasilyandwithoutloss.Itisawellknownfactthatabankdealsinfundsbelongingtothepublic.Hence,thebankshouldalwaysbeonitsguardinhandlingthesefunds.Thebankshouldalwayshaveenoughcashtomeetthedemandsofthedepositors.Infact,thesuccessofabankdependstoaconsiderableextentuponthedegreeofcondenceitcaninstillinthemindsofitsdepositors.Ifthedepositorslosecondenceintheintegrityoftheirbank,theveryexistenceofthebankwillbeatstake.So,thebankshouldalwaysbepreparedtomeettheclaimsofthedepositorsbyhavingenoughcash.Amongthevariousitemsontheassetssideofthebalancesheet,cashonhandrepresentsthemostliquidasset.Nextcomescashwithotherbanksandthecentralbank.Theorderofliquiditygoesondescending.Liquidityalsomeanstheabilityofthebanktoconvertitsnon-cashassetsintocasheasilyandwithoutloss.Thebankcannothaveallitsassetsintheformofcashbecauseeachisanidleassetwhichdoesnotfetchanyreturntothebank.Sosomeoftheassetsofthebank,moneyatcallandshortnotice,billsdiscounted,etc.couldbemadeliquideasilyandwithoutloss. Protability: Acommercialbankbydenition,isaprothuntinginstitution.Thebankhastoprottoearnincometopaysalariestothestaff,interesttothedepositors,dividendtotheshareholdersandtomeettheday-to-dayexpenditure.Sincecashist

heleastprotableassettothebank,thereisnopointinkeepingalltheassetsintheformofcashonhand.Thebankhasgottoearnincome.Hence,someoftheitemsontheassetssideareprotyieldingassets.Theyincludemoneyatcallandshortnotice,billsdiscounted,investments,loansandadvances,etc.Loansandadvances,thoughtheleastliquidasset,constitutethemostprotableassettothebank.Muchoftheincomeofthebankaccruesbywayofinterestchargedonloansandadvances.But,thebankhastobehighlydiscreetwhileadvancingloans.3. SafetyorSecurity: Apartfromliquidityandprotability,thebankshouldlooktotheprincipleofetyofitsfundsalsoforitssmoothworking.Whileadvancingloans,itisnecessarythatthebankshouldconsiderthethreeCsofcreditcharacter,capacityandthecollateraloftheborrower.Thebankcannotaffordtoinvestitsfundsrecklesslywithoutconsideringtheprincipleofsafety.Theloansandinvestmentsmade

bythebankshouldbeadequatelysecured.Forthispurpose,thebankshould alwaysinsistonsecurityoftheborrower.Oflate,somehoworotherthebanksavenotbeenpayingadequateimportancetosafety,particularlyinIndia.4. Diversity: Thebankshouldinvestitsfundsinsuchawayastosecureforitselfanadequteandpermanentreturn.Andwhileinvestingitsfunds,thebankshouldnotkeepallitseggsinthesamebasket.Diversicationofinvestmentisnecessarytoavoidthedangerousconsequencesofinvestinginoneortwochannels.Ifthebankinvestitsfundsindifferenttypesofsecuritiesormakesloansandadvancestodifferentobjectivesandenterprises,itshallensureforitselfaregularowofincome.5.

SaleabilityofSecurities: Further,thebankshouldinvestitsfundsinsuchtypesofsecuritiesascanbeasilymarketedatatimeofemergency.Thebankcannotaffordtoinvestitsfundsinverylongtermsecuritiesorthosesecuritieswhichareunsaleable.Itisnecessaryforthebanktoinvestitsfundsingovernmentorinrstclasssecuritiesorindebenturesofreputedrms.Itshouldalsoadvanceloansagainststockswhichcanbeeasilysold.6. StabilityintheValueofInvestments: Thebankshouldinvestitsfundsinthosestocksandsecuritiesthepricesofwhcharemoreorlessstable.Thebankcannotaffordtoinvestitsfundsinsecuri


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ties,thepricesofwhicharesubjecttofrequentuctuations.7. PrinciplesofTax-ExemptionofInvestments: Finally,theinvestmentpolicyofabankshouldbebasedontheprincipleoftaexemptionofinvestments.Thebankshouldinvestinthosegovernmentsecuritieswhichareexemptedfromincomeandothertaxes.Thiswillhelpthebanktoincreaseitsprots.Oflate,therehasbeenacontroversyregardingtherelativeimportanceofthevariousprinciplesinuencingtheinvestmentpolicyofabankparticularlybetweenliquidityandprotability.Itisinterestingtoexaminethiscontroversy.Letusexaminewhathappensifthebankstickstotheprincipleofliquidityonly.Itistruethatifthebankpaysimportancetoliquidity,itcaneasilymeetthedemandsofthedepositors.Thebankshouldhaveadequatecashtomeettheclaimsofthedepositors.Itistruethatasuccessfulbankingbusinesscallsforinstallingcondenceinthemindsofthedepositors.But,itshouldbenotedthatacceptingdepositsisnottheonlyfunctionofabank.Moreover,thebankcannotaffordtoforgetthefactthatithastoearnincometopaysalariestothestaff,interesttothedepositors,dividendtotheshareholdersandmeettheday-to-dayexpenditure.Ifthebankkeepsallitsresourcesinliquidform,itwillnotbeabletoearnevenarupee.Butprotabilityisamustforthebank.Thoughcashonhandisthemostliquidasset,itistheleastprotableassetaswell.Cashisanidleasset.Hence,thebankercannotconcentrateonliquidityonly.Ifthebankattachesimportancetoprotabilityonly,itwouldbeequallydisastroustotheverysurvivalofabank.Itistruethatabankneedsincometomeetitsexpenditureandpayreturnstothedepositorsandshareholders.Thebankcannotunderminetheinterestsofthedepositors.Ifthebanklendsoutallitsfunds,

itwillbeleftwithnocashatalltomeettheclaimsofthedepositors.Itshouldbenotedthatthebankshouldhavecashtohonourtheobligationsofthedepositors.Otherwise,therewillbearunonthebank.Arunonthebankwouldbesuicidaltotheveryexistenceofthebank.Loansandadvances,thoughthemostprotableasset,constitutetheleastliquidasset.Itfollowsfromtheabovethatthechoiceisbetweenliquidityandprotability.Theconstanttugofwarbetweenliquidityandprotabilityisthefeatureoftheassetsside.AccordingtoCrowther,liquidityandprotabilityareopposingorconictingconsiderations.Thesecretofsuccessfulbankingliesinstrikingabalancebetweenthetwo.

PromoteCommercialVirtues:Thebusinessmenaremoreafraidofabankerthanapreacher.Thebusinessmenshouldhavecertainbusinessqualitieslikeindustry,forethought,honestyandpunctu

ality.Thesequalitiesarecalledcommercialvirtueswhichareessentialforrapideconomicprogress.Thebankerisinabetterpositiontopromotecommercialvirtues.Banksarecalledpublicconservatorsofcommercialvirtues.FulllmentofSocio-economicObjectives:Inrecentyears,commercialbanks,particularlyindevelopingcountries,havebeencalledupontohelpachievecertainsocio-economicobjectiveslaiddownbythestate.Forexample,nationalisedbankinIndiahaveframedspecialinnovativeschemesofcredittohelpsmallagriculturists,self-employedpersonsandretailersthroughloansandadvancesatconcessionalratesofinterest.Bankingisthususedtoachievethenationalpolicyobjectivesofreducinginequalitiesofincomeandwealth,removalofpovertyandeliminationofunemploymentinthecountry.Thus,banksinadevelopingcountryhavetoplayadynamicrole.Economicdevelopme

ntplacesheavydemandontheresourcesandingenuityofthebankingsystem.Ithastorespondtothemultifariouseconomicneedsofadevelopingcountry.Traditionalviewsandmethodsmayhavetobediscarded.AnInstitution,suchasthebankingsystem,whichtouchesandshouldtouchthelivesofmillions,hasnecessarilytobeinspiredbyalargersocialpurposeandhastosubservenationalprioritiesandobjectives.Awell-developedbankingsystemprovidesarmanddurablefoundationfortheeconomicdevelopmentofthecountry.ConclusionFromtheabovediscussion,undoubtedly,wecansaythat,commercialbanksformthemostimportantpartofnancialintermediaries.Itacceptsdepositsfromthege


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neralpublicandextendsloanstothehouseholds,rmsandthegovernment.Banksformasignicantpartoftheinfrastructureessentialforbreakingviciouscircleofpovertyandpromotingeconomicgrowthandapartycanborrow.Marginrequirementisagoodtooltoreducethedegreeandextentofspeculationincommoditymarketandstockexchanges.2.RegulationofConsumerCredit:DuringtheSecondWorldWaranacutescarcityofgoodswasfeltintheU.S.A.,andthepositionwasworsenedbythesystemofbankcredittoconsumerstoenablethemtobuydurableandsemi-durableconsumergoodsthroughinstalmentbuying.TheFederalReserveBanksoftheU.S.A.,wereauthorisedtoregulatethetermsandconditionsunderwhichconsumercreditwasextendedbycommercialbanks.Therestraintsundertheseregulationsweretwo-fold:(a)Theylimitedtheamountofcreditthatmightbegrantedforthepurchaseofanyarticlelistedintheregulations;and(b)theylimitedthetimethatmightbeagreeduponforrepayingtheobligation.Supposeabuyerwasrequiredtomakeadown-paymentofone-thirdofthepurchasepriceofacarandthebalancetobepaidin15monthlyinstalments.Undertheregulationsrestrainingconsumercredit,thedown-paymentwasmadelargerandthetimeallowedwasmadeshorter.Theresultwasareductionintheamountofcreditextendedforthepurchaseofcarsandthetimeitwasallowedtorun;andtheultimateresultwastherestriction,inthedemandforconsumergoodsatatimewhentherewasashortageinsupplyandwhentherewasanecessityforrestrictiononconsumerspending.ThismeasurewasasuccessinAmericaincontrollinginationarypressuresthere.Inthepast-warperiod,ithasbeenextensivelya

doptedinallthosecountrieswherethesystemofconsumercreditiscommon.RationingofCredit:Rationingofcredit,asatoolofselectivecreditcontrol,originatedinEnglandintheclosingyearsofthe18thcentury.Rationingofcreditimpliestwothings.First,itmeansthatthecentralbankxesalimituponitsrediscountingfacilitiesforanyparticularbank.Second,itmeansthatthecentralbankxesthequotaofeveryafliatedbankfornancialaccommodationfromthecentralbank.RationingofcreditoccupiesanimportantplaceinRussianEconomicPlanning.ThecentralbankoftheRussianFederationallocatestheavailablefundsamongdifferentbanksinaccordancewithadenitecreditplanformulatedbythePlanningCommission.Butthecriticismofrationingofcreditisthatitcomesintoconictwiththefunctionofthecentralbankasalenderofthelastresort.Whenthecentralbankact

sasalenderofthelastresortitcannotdenyaccommodationtoanybankthroughithasborrowedinexcessofitsquota.Moreover,thismethodproveseffectiveonlywhenthedemandforcreditexceedsthesupplyofit.ControlthroughDirectives:Inthepost-warperiod,mostcentralbankshavebeenvestedwiththedirectpowerofcontrollingbankadvanceseitherbystatuteorbymutualconsentbetweenthecentralbankandcommercialbanks.Forinstance,theBankingRegulationActofIndiain1949specicallyempoweredtheReserveBankofIndiatogivedirectionstocommercialbanksinrespectoftheirlendingpolicies,thepurposesforwhichadvancesmayormaynotbemadeandthemarginstobemaintainedinrespectofsecuredloans.InEngland,thecommercialbankshave

beenaskedtosubmittotheCapitalIssueCommitteeallloanapplicationsinexcessof50,000.Thereisnouniformityintheuseofdirectivestocontrolbankadvances.Ontheoneextreme,thecentralbankmayexpressconcernovercreditdevelopments;theconcernmaybecombinedwithmildthreattoavoidincreaseordecreaseintheexistinglevelofbankloans.Ontheextreme,therecanbeaclearandopenthreattothecommercialbanksnancingcertaintypesofactivities.MoralSuation:Thisisaformofcontrolthroughdirective.Inaperiodofdepression,thecentralbankmaypersuadecommercialbankstoexpandtheirloansandadvances,toacce


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ptinferiortypesofsecuritieswhichtheymaynotnormallyaccept,xlowermarginsandingeneralprovidefavourableconditionstostimulatebankcreditandinvestment.Inaperiodofinationarypressure,thecentralbankmaypersuadecommercialbanksnottoapplyforfurtheraccommodationornottousetheaccommodationalreadyobtainedfornancingspeculativeornon-essentialactivitieslestinationarypressureshouldbefurtherworsened.TheBankofEnglandhasusedthismethodwithafairmeasureofsuccess.Butthishasbeenmainlybecauseofahighdegreeofco-operationwhichitalwaysgetsfromthecommercialbanks.DirectAction:Directactionorcontrolisoneoftheextensivelyusedmethodsofselectivecontrol,byalmostallbanksatsometimeortheother.Inabroadsense,itincludestheothermethodsofselectivecreditcontrols.Butmorespecically,directactionreferstocontrolsanddirectionswhichthecentralbankmayenforceonallbanksoranybankinparticularconcerninglendingandinvestment.TheReserveBankofIndiaissuedadirectivein1958totheentirebankingsystemtorefrainfromexcessivelendingagainstcommoditiesingeneralandforbiddingcommercialbanksgrantingloansinexcessofRs.50,000toindividualpartiesagainstpaddyandwheat.Thereisnodoubtabouttheeffectivenessofsuchdirectactionbutthentheelementofforceassociatedwithdirectactionisresentedbythecommercialbanks.Publicity:Underthismethod,thecentralbankgiveswidepublicityregardingtheprobablec

reditcontrolpolicyitmayresorttobypublishingfactsandguresaboutthevariouseconomicandmonetaryconditionoftheeconomy.Thecentralbankbringsoutthispublicityinitsbulletins,periodicals,reportsetc.LimitationsofSelectiveCreditControls(a)Theselectivecontrolsembracethecommercialbanksonlyandhencethenon-bankingnancialinstitutionsarenotcoveredbythesecontrols.(b)Itisverydifculttocontroltheultimateuseofcreditbytheborrowers.(c)Itisratherdifculttodrawalineofdistinctionbetweentheproductiveandunproductiveusesofcredit.(d)Itisquitepossiblethatthebanksthemselvesthroughmanipulationsadvanceloansforunproductivepurposes.(e)Selectivecontrolsdonothavemuchscopeunderasystemofunitbanking.(f)Developmentofalternativemethodsofbusinessnancinghasreducedtheimportanceofselectivecontrols.

Fromtheabovediscussion,wearriveattheconclusionthatthetwotypesofcreditcontrolmeasures,quantitativeaswellasqualitative,arenotrivals,but,onthecontrary,theysupplementeachother.Forsuccessfulmonetarymanagement,thecentralbankshouldcombinethetwomethodsofcreditcontrolinappropriateproportions.Infact,ajudiciousandaskilfulcombinationofgeneralandselectivecreditcontrolmeasuresistherightpolicytofollowforthecentralbankofacountry.Itmust,however,bepointedoutthatthevariousmethods,whetherquantitativeorqualitative,cannotensureperfectcreditcontrolinaneconomyinviewoftheseverallimitationsfromwhichtheysuffer,andothercomplexitiesinvolvedinthesituation.ConclusionToconclude,thecentralbankofacountryactsastheleaderofthemoneymarke

t,supervising,controllingandregulatingtheactivitiesofcommercialbanksandothernancialinstitutions.Itactsasabankofissueandisinclosetouchwiththegovernment,asbanker,agentandadvisertothelatter

Anumberofbankshavestartedeveningbranches,Sundaybranchesforthebenetoftheircustomers.Apartfromthequantitativeincreasesindeposits,therehasbeenanimpressivequalitativeshift.Thenumberofsmallaccountholderswiththebankshasbeenincreasingday-by-day.Aggregatedepositsarecomposedtotimedepositsanddemanddeposits.Earliertherewaspredominanceofdemanddeposits.Nowthereispredominanceoftimedeposits.Theratiooftimedepositstototalde


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positshasbeenincreasing.CreditExpansion:Theexpansionofbankcredithasalsobeenmorespectacularinthepost-banknationalisationperiod.BankcreditshadincreasedfromRs.4,700croresin1970-71toRs.4,43,180croresin1999-2000.Atpresent,banksarealsomeetingthecreditrequirementsofindustry,tradeandagricultureonamuchlargerscalethanbefore.Creditisthepillarofdevelopment.Bankcredithasitscrucialimportanceinthecontextofdevelopmentandgrowthwithsocialjustice.InvestmentinGovernmentSecurities:Thenationalisedbanksareexpectedtoprovidenanceforeconomicplansofthecountrythroughthepurchaseofgovernmentsecurities.Therehasbeenasignicantincreaseintheinvestmentofthebanksingovernmentandotherapprovedsecuritiesinrecentyears.TheinvestmentsincreasedfromRs.1,727croresin1970to74,370croresin1995.AdvancestoPrioritySectors:Animportantchangeafterthenationalisationofbanksistheexpansionofadvancestotheprioritysectors.Oneofthemainobjectivesofnationalisationofbankstoextendcreditfacilitiestotheborrowersinthesofarneglectedsectorsoftheeconomy.Toachievethis,thebanksformulatedvariousschemestoprovidecredittothesmallborrowersintheprioritysectors,likeagriculture,small-scaleindustry,roadandwatertransport,retailtradeandsmallbusiness.Thetotal

creditprovidedbybankstotheprioritysectorshasincreasedfromRs.440croresin1969toRs.91,300croresinMarch1998.Asaresult,advancestoprioritysectorsaspercentageoftotalcreditincreasedfrom15%in1969to42%in1998.Thebanklendingtoprioritysectorwas,however,notuniforminallstates.ItwasquitelowinmanybackwardstateslikeU.P.,BiharandRajasthan.Underthenewbankingpolicystressislaidontheweakerandunder-privilegedgroupsintheprioritysectorweakersectionsrefertoallpersonswhobecamesuppressed,depressedandoppressedbecauseofsocio-political,socio-economicorsocio-religiousreasons.Theconceptofprotabilityhasbeensubstitutedbysocialpurposeswithregardtolendingtoweakersectionsofthesociety.Quantitatively,bankshavedonewellinprioritylending.Butoverduesandbaddebtshavebeenaseriousproblemfacedbybanksinrespectofadvancesmadetotheweakersectionsofthesociety.Thereisalwaystheproblemofensuringtheeffectiveenduseoftheloansgiven

totheprioritysectors.7.SocialBanking-PovertyAlleviationProgrammes:Commercialbanks,especiallythenationalisedbankshavebeenparticipatinginthepovertyalleviationprogrammelaunchedbythegovernment.(a)DifferentialInterestScheme:WithaviewtoprovidebankcredittotheweakersectionsofthesocietyataconcessionalratethegovernmentintroducedtheDifferentialinterestratesschemefromApril1972.Underthisscheme,thepublicsectorbankshavebeenprovidingloansat4%rateofinteresttotheweakersectionsofthesociety.Theschemehassh

ownnotableprogress.Thenumberofaccountswas2millionandtheadvancesoutstandingwereRs.640croresattheendofMarch1996.(b)IntegratedRuralDevelopmentProgramme(IRDP):Thisisapioneeringandambitiousprogrammetorectifyimbalancesinruraleconomyandalsoforall-roundprogressandprosperityoftheruralmasses.Underthisprogrammebankshasassistednearly1.8millionbeneciariesduring1997-98anddisbursedatotalamountofRs.1990croresasloan.Outofthebeneciaries,over1millionbelongedtoscheduledcastesandscheduledtribesand0.7millionwerewomen.OtherimportantschemeintroducedbythegovernmentofIndiaandimplementedthroughthebankingsystemincludes(a)self-employmentschemeforeducatedy


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outh,(b)self-employmentprogrammeforurbanpoor,and(c)credittominoritycommunities.8.GrowingImportanceofSmallCustomers:Theimportanceofsmallcustomerstobankshasbeengrowing.Mostofthedepositsinrecentyearshavecomefrompeoplewithsmallincome.Similarly,commercialbankslendingtosmallcustomershasassumedgreaterimportance.ThusbankingsysteminIndiahasturnedfromclass-bankingtomass-banking.9.InnovativeBanking:Inrecentyears,commercialbanksinIndiahavebeenadoptingthestrategyofinnovativebankingintheirbusinessoperations.Innovativebankingimpliestheapplicationofnewtechniques,newmethodsandnovelschemesintheareasofdepositmobilisation,deploymentorcreditandbankmanagement.Mechanisationandcomputerisationprocessesarebeingintroducedintheday-to-dayworkingofthebanks.10.DiversicationinBanking:ThechangeswhichhavebeentakingplaceinIndiasince1969havenecessitatedbankingcompaniestogiveuptheirconservativeandtraditionalsystemofbankingandtaketonewandprogressivefunctions.Thegovernmenthadbeenencouragingcommercialbankstodiversiytheirfunctions.Asaresult,commercialbankshavesetupmerchantbankingdivisionsandareunderwritingnewissues,especiallypreferencesharesanddebentures.Therearenoweightcommercialbankswhichhavesetupmutualfundsalso.Commercialbankshavestartedlendingdirectlyorindirect

lyforhousing.Venturecapitalfundisalsostartedbyonepublicsectorbank.StateBankofIndiaandCanaraBankhaveset-upsubsidiariesexclusivelyforundertakingfactoringservices.Infutureallcommercialbankscanbeexpectedtodiversifytheirfunctionsandadoptnewtechnologies.11.Globalisation:Theliberalisationoftheeconomy,inowofconsiderableforeigninvestments,frequencyinexportsetc.,haveintroducedanelementofglobalisationintheIndianbankingsystem.8.CreditCardsNow-a-dayssomebanksareissuingcreditcards.Thesystemofissuingcreditcar

dsoriginatedintheU.S.A.CreditcardshavebecomeverypopularintheU.S.A.Creditcardsareissuedinthenameofcompaniestobeusedbydesignatedexecutives.Theyarealsoissuedinthenameofindividualstobechargedtothecompanysaccountortothepersonalaccount.Thecreditcardsystemisutilisedbybigcompanies,superrichandhighlypaidexecutivesinourcountry.Butcreditcardsarenotacceptedbyallestablishmentsinthecountry.Inourcountryonlyluxuryhotels,airlines,shopsandotherestablishmentsdealingincostlyandluxurygoodsorprovidingcostlyservicesacceptcreditcardsprovided,theyhavearrangementswiththeissuingbank.AdvantagesofCreditCardsCreditcardholdersenjoycertainprivilegesandadvantages.Theyare:1.Creditcardsenablepersonstopurchasegoodsandservicesoncreditinestablishmentswhichacceptthem.Theyenjoycreditfacilitywithoutpayinginterestforabovef

ourtosixweeks.2.Carryingacreditcardismoreconvenientandsaferthancarryingcashorchequebook.3.Thecreditcardgivesthetravellerpeaceofmindasittakescareofallhisneeds.4.Creditcardisasaferandconvenientmethodofpayment.5.Acreditcardholderwillberecognisedasamanofsoundnancialstanding.6.Theissuingbankorconcernwilldebitthecreditcardholderorcustomersaccountonceinmonthafterreceivingdetailsaboutpurchases.LimitationsorDrawbacksofCreditCardsThefollowingarethelimitationsordisadvantages:1.Creditcardscannotbeusedformakingpurchasesinallbusinessestablishments.2.Issuingbankwillplacealimitontheexpenditurebythecreditcardholder.3.Creditcardsystemwill


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increaseindebtednessamongthecardholders.Forexample,indebtednesshasincreasedtremendouslyonaccountofthecreditcardsystemintheU.S.A.Inspiteofthelimitations,creditcardshavebecomepopularinstrumentinrecentyearsinmostofthecountriesintheworld.Thefuturecommerceise-commerce.Creditcardsfacilitatee-commerce.ConclusionItisthusclearthatinIndia,therearedifferentkindsofbanks,viz.,indigenousbankers,money-lenders,co-operativebanks,NABARD,landdevelopmentbanks,regionalruralbanks,commercialbanksincludingtheStateBankofIndiaanditssubsidiariesandforeign-exchangebanks.Overalltheseinstitutions,thereistheReserveBankofIndiawhichisthecentralbankofthecountry

DisclosureatthewillofCustomer:Thebankercandisclosethestateofaffairsofthecustomersaccountwhenthecustomergiveshisconsenttodisclosetheaccounts.Theauditoroftheorganizationcanfullyexaminethecustomersaccountwhenanexpressconsentisgivenbyhim.Similarlywhenacustomergivesthenameofguarantor,theguarantorcanexaminetheaccountsofthecustomerwhichthebankershouldfurnish.Whenbankeractsasareference,hecandisclosetheaccountsofthecustomer.(d)ToProtecthisOwnInterest:Wheneverthebankerisrequiredtoprotecthisowninterest,ifhedisclosesthedetailsofacustomersaccount,itmustbeareasonableandproperoccasion.Forexample,ifthebankeristorecoverhisownmoneyfromaparticularcustomer,hemaygivethedetailstohislawyers.

(e)ToProtectPublicInterest:TheBankingCommission(1972)opinedasfollows:Whenbanksarerequiredtogiveoutinformationregardingtheircustomersintheinterestofthepublic,theinformationshouldrelatetonancialaspectofthecustomers.Thefollowingareinstancesofsuchcases:(i)Whereconsiderableamountsarereceivedfromothercountries.(ii)Incasethebankthinksthatthecustomeriscarryingonsuchactivitieswhicharenotcongenialintheinterestofthenation.(iii)Incasethebankerthinksthatthecustomeristryingtobreaktheprovisionsofthelawonthebasisofhisrecords.(iv)WhentheGovernmentcallsuponthebanktogiveinformationregardingaparticularcustomerandwhenthebankfeelsthataparticularcustomerhascommittedanoffence.3.ObligationtoReceiveChequesandOtherInstrumentsforCollectionBasically,thebusinessofbanking,asitisknowntoday,comprisesacceptanceo

fmoneyondepositaccountandpaymentofcheques.Italsoincludescollectionofcheques.Itmayrightlybecontendedthatanyonewhodoesnotperformtheseessentialservicesisnotabanker.Wheneverabankerisentrustedwiththejobofcollectionofcheques,theymustbecollectedasspeedilyaspossiblethroughtheacceptedchannels.Failuretoexercisepropercareandemploytherecognisedrouteforcollectionmaymakethebankliableforanylosswhichthecustomermaysustain.4.ObligationtoGiveReasonableNoticebeforeClosingtheAccountAccordingtolaw,adebtorandacreditormayterminatetherelationshipwithoutnoticebythedebtorpayingoffthebalanceorthecreditorrecallingthedebt.Itisnotsosimplebetweenabankerandacustomerfortheobviousreasonthatthebankerisunderanobligationtohonourhiscustomerscheques.Ifthisobligationcouldbeterminatedbythebankerwithoutnotice,thecustomermightbefaced

withanembarrassingsituation.Reasonabletimemustbegrantedtoenablehimtomakealternativearrangements.Whereanycustomerbecomesanuisancethroughoverdrawingwithoutarrangementorissuingpost-datedchequesetc.,itisadvisabletoclosehisaccount.Butreasonabletimehastobegiventoenablehimtomakealternativearrangementsifhesodesires.Ifabankabruptlyclosesthecustomersaccount,itmightaffecthiscredit,givingcauseforanactionagainstthebankfordamages.ObligationsofCustomers


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Customersareundertheobligationstofullcertaindutieswhiledealingwithbanks.Suchobligationsareasunder:(a)Nottodrawchequeswithoutsufcientbalance.(b)Todrawchequesinsuchamannersoastoavoidanychangeofalternation.(c)Topayreasonablechargesforservicesrendered.(d)Tomakeademandonthebankerforrepaymentofdeposit.Sofarwehavediscussedtheprimaryandspecialrelationshipbetweenthebankerandthecustomer.Thisrelationshipstartsrightfromthemomentanaccountisopenedanditcomestoanendimmediatelyonclosureoftheaccount.Therelationshipstandsestablishedassoonastheagreementorcontractisenteredinto.Thisrelationshipisshowninthefollowingchart.GeneralRelationshipSecondaryDebtorandcreditorAgentTrusteeBaileeSpecialRelationshipRightsObligationsLienSet-offAppropriatepaymentChargeinterestGarnisheeorderCloseaccountsMaintainsecrecyCollectionofchequesIssuenoticePrimaryBankerobligationsCustomersobligationsTohonourcustomerschequesRELATIONSHIPBETWEENBANKERANDCUSTOMERConclusionToconclude,itisrightlysaidthattherelationshipbetweenabankeranditscustomeristhatofabaileeandbailor.Asabailee,thebankerisboundtotakeasmuchcareofthegoodsbailedtohimasamanofordinaryprudencewould,undersimilarcircumstances,takeofhisowngoodsofthesamebulk,qualityandvalueasthegoodsbailed.However,intheabsenceofanyspecialcontract,thebaileegetsprotectionandisnotheldresponsiblefortheloss,distructionordeteriorationofthethingbailed,ifheh

astakentheamountofcareofit194Banking(d)SmallLoans(Co-operativeBanks)GuaranteeScheme,1984;(e)SmallLoans(Co-operativeCreditSocieties)GuaranteeScheme,1982;(2)CreditGuaranteeSchemeforsmall-scaleindustries,1981.NominationFacilityTheBankingLaws(Amendment)Act,1983,insertedanewPartIIIBintheBankingRegulationAct,1949togiveeffecttosomeoftherecommendationsoftheBankingCommission.NewlyinsertedSection45ZAandtherulesframedthereunderin1985provideforthefacilityofnominationbydepositorsinbanksasfollows:(a)Adepositormaynominate,intheprescribedmanner,persontowhom,intheeventofthedeathofthedepositor,theamounttohiscreditmaybepaidbythebanking

company.(b)Incaseofajointaccount,allthedepositorstogethermaynominateapersontowhom,intheeventofdeathofallthejointdepositors,theamountoftheircreditmaybepaidbythebankingcompany.Thus,thenomineesrighttoreceivedepositmoneyarisesonlyafterthedeathofallthedepositors.Therecannotbemorethanonenomineeinrespectofajointaccount.(c)Nominationfacilityisavailabletoalltypesofdepositaccounts,includingtheaccountsopenedforcreditofpension.(d)Nominationcanbemadeinfavourofindividualsonlyandnotassociations,societies,trustsoranyorganisationortheirofce-bearers.(e)Inthecaseofadepositmadeinthenameofaminor,thenominationshallbemadebyapersonlawfullyentitledtoactonbehalfoftheminor.(f)Thenomineecanbeaminor.Thedepositormay,whilemakingthenomination,appointanotherindividualnotbeingaminor,toreceivetheamountofthedepositonbehalfofthenomineeintheeventofdeathofthedepositor,orasthecasemaybe,allt

hedepositorsduringtheminorityofthenominee.(g)IncaseSafeDepositLockersinjointnameswithoutsurvivorshipbenet,nominationcanbemadeinfavourofmorethanoneperson.Aminorisnotacceptedasanomineeincaseofsafedepositlockers.(h)Incaseofdeathofasoledepositor/allthejointdepositors,thenameofthenomineecanbesubstitutedathiswrittenrequestinthedepositaccount/receiptsincludingoverduedeposits.(i)Thenominationmaybevariedorcancelledbythedepositorintheprescribedmanner.Incaseofajointaccount,variationorcancellationofasubsistingnominationcanbemadebyallthesurvivingdepositorsactingtogether.OnmakingpaymentundertheprovisionsofthisSection,thebankingcompanyshallbefullydischargedfromitsliabilityinrespectof


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thedeposit.Therightorclaimofanyotherpersonagainstthenominee,towhomanypaymentismadeunderthissection,shallnotbeaffectedbysuchpayment.Nootherpersonshallbeabletogetnoticeofhisclaimtosuchdepositstothebankingcompany.Norshallthebankingcompanybeboundbysuchnoticeeventhroughexpresslygiventoit.Non-ResidentAccountThenon-residentaccountisdenedastheaccountsmaintainedwithbanksinIndiabypersons,companies,rms,banksetc.,residentorsituatedoutsideIndia.Whentheaccountopensinthenameofpersons,rms,companiesorassociationsitisreferredtoasPrivateNon-ResidentAccount.WhileinthecaseofbankssuchaccountsarecalledasNon-ResidentAccounts.Itshouldbenotedthatanon-residentmeansacitizenofIndiawhoislivingoutsideIndiainthefollowingcases:(a)TakingupemploymentoutsideIndia.(b)CarryingonbusinessoutsideIndia.RecentDevelopmentTherearenomajorpolicychangesintheregulationsgoverningForeignCurrencyNon-ResidentAccounts(FCNRA)andNon-Resident(External)RupeeAccounts[NR(E)RA]exceptfortheconversionratetobeappliedforsuchremittancestoNREA/CswhichiscoveredundertheheadofLiberalizedExchangeRateManagementSystem(LERMS).Thebudgetfor1992-93hascitedtwomorefacilitiestoNon-ResidentIndians(NRIs)whicharegivenbelow:1.GoldImportScheme:TheNRIsandreturningIndiansarepermittedtoimportgoldupto5kg.onthep

aymentofdutyofRs.440per10gmsinForeignExchange.ThedutywasreducedtoRs.220per10gmssubsequently.EachNRIcomingfromabroadwillbeabletobringintoIndiaamaximumof5kg.ofgoldprovidedthepersonconcernedhadspentatleastsixmonthsabroad.NRIscanavailthemselvesofthefacilityonceinsixmonths.2.NewDepositScheme:(WithFlexibleDepositRates):ThisschemewaseffectivefromJune15,1992.Thisschemecoversthefollowing:(a)AuthorisedDealers(ADs)canopentheseaccountswithfreshforeigninwardremittancesortransfersfromexistingNRE/FCNRaccounts.(b)Thedepositcanbeacceptedforaminimumperiodofsixmonthsandmaximumperiodofthreeyears.(c)Thedepositwillnotbeincludedinthenetdemandandtimeliabilities(NTL)ofthebanksandhencethesearefreefromreserverequirements.(d)Principalandinterestarenotrepatriable.(e)Oncethesedeposits

arewithdrawn,thesebenetscannotbeextendedevenifthedepositisredepositedinotherbanks.3.HomeLoanAccountScheme:TheHomeLoanAccountSchemewhichhasbeeninoperationsinceJuly1,1989,hasnowbeenextendedtoselecthousingnancecompaniesandApexCo-operativeHousingFinanceSocieties.Underthisschememorethan12lakhaccountshavebeenopenedbytheendofNovember1997.TheamountofdepositscollectedwasaboutRs.100crores.ConclusionToconclude,itisrightlysaidthattherelationshipbetweenabankandacustomerbeginswhenthecustomeropensanaccountwiththebank.Fortheattractiono

fcustomersthebanksofferdifferenttypesoffacilities.InordertoavoidmeaninglesscompetitionamongseveralbankstheReserveBankofIndiahasbeengiventhepowertoxdepositinterestrates.Forthispurpose,theRBIissuesdirectivesfromtimetotime.Here,itismadeclearthatalltheaccountsareopenedwiththebankwiththecashmoneybythecustomerandthatiswhy,inotherwords,theseareknownasDepositAccounts.UnderSection6oftheBankingRegulationAct1949,themostimportantfunctionofamodernbankistoacceptdepositofmoneyfromthepublic.Thebankshave,therefore,introduceddifferenttypesofaccountswithvariousfacilitiesandprivileges


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INTRODUCTIONAbankerreceivesdepositsoncurrentandsavingsaccountsfromhiscustomers.Thecustomersareallowedtowithdrawtheamountfromtimetotimeneededbythemthroughchequesorwithdrawalslipsfromtheaccount.Theamountsdepositedandwithdrawnbyeachcustomerfromtimetotimeareenteredinaseparateaccountopenedinthenameofthecustomerintheledgeraccountofthebanker.Similarly,thetransactionsareenteredinabookandhandedovertothecustomerforhisreferenceandinformation.Theentriesmadeinthebookalsostandasevidenceofthetransactionsbetweenthebankerandthecustomer.ThisbookisknownasPassBook.MeaningofPassBookPassbookisanimportantbookintheoperationofabankaccount.Itcontainsacopyofthecustomersledgeraccountasitappearsinthebankersbooks.Itisanexactextractorcopyofthecustomersaccountinthebanksledger,asonaparticulardate.Itis,inotherwords,arecordofdealingsbetweenthecustomerandthebank.Itiswrittenbythebankfromitsownrecords.Itissuppliedbythebanktoitscustomerfreeofcharge.Itismeantfortheinformationofthecustomer.Itindicatestohimthestateofhisaccountinthebank.Thecustomersendsitperiodicallytothebanksothatuptodateentriesmayberecordedbythebank.Asitpassesperiodicallybetweenthebankerandthecustomer,itiscalledaPassBook.Everyentrymadeinpassbookissignedbyaresponsibleofcialofthebank.Somebigbankssupplyperiodicalstatementsofaccountinplaceofthepassbook.Incaseofforeignaccounts,somebanksmakeuseofphotographytosavethelabourofwritingstatementsofaccounts.Thephotostatcopiesofthecustomersa

ccountaresenttothecustomersfortheirapproval.ObjectorPurposeofPassBookTheobjectofapassbookistoinformthecustomerfromtimetotimethestatusofhisaccountasitappearsonthebooksofthebank.Itsuppliesevidenceinfavourofthecustomerintheeventofthelitigationordisputewiththebank.Inthisway,itprotectsthecustomeragainstthecarelessnessorfraudofthebank.ThepassbookalsoenablesthecustomertopreparebankreconciliationstatementforthepurposeofndingoutthecausesofdifferencebetweenthebalanceasshownbyhiscashbookandthebankpassbookLegalPositionofEntriesinthePassBookItisdifculttodenepreciselythedecisivelegaleffectsofentriesshowninthepassbook.Whenitisissuedtocustomerandifhedoesnotraiseanyobjection,obviouslyitbecomesaccountstatedorsettledaccountbetweenhimandthebanker.

uttherehasbeenaconictofopinionregardingconclusivenessofthepassbookregardingentriesmadetherein.SirJohnPagetisoftheviewthattheproperfunctionofapassbookistoconstituteaconclusive,unquestionablerecordofthetransactionsbetweenbankerandcustomer,anditshouldberecognisedassuch.HecitesDaveyness.VsNoblecaseinsupportofhisview.Inthiscase,itwasstatedthatondeliveryofthepassbooktothecustomer,heexaminesitandifthereappearsanerrororomission,sendsitbackforrecticationorifnot,hissilenceisregardedasanadmissionthattheentriesarecorrect.InVaglianaBrothersVsBankofEngland,alsoitwasheldthatthereturnofabalancedpassbookbythecustomerwithoutcommentsamountstosettlementofaccount.So,thereturnofpassbookbythecustomerrendersasastatedandsettledaccountasontheparticulardateofbalancing.ButthelegalpositionbothinEnglandandinIndiaisquitedifferent.AccordingtorecentjudicialdecisionsinEnglandandIndia,the

entriesinthepassbookcannotberegardedasaconclusiveproofoftheiraccuracyandassettledaccount.Anyentryinthepassbookisopentocomparisonandvericationbycustomer.Thecustomercanlegitimatelyquestiontheentriesatanytimewheneverhenoticesthem.Thebankerisboundtomakethesuitablecorrections.Theentrieswronglymadeorincludedmaybeadvantageseithertothecustomerorthebanker.Boththepartiescanindicatethemistakesoromissionstogetthemrectied.Soentriesmadeuptodateareprimafacieevidenceandnotconclusiveevidence.InKeptigullaRubberEstatesCo.VsNationalBankofIndia,itwasheldthatWhenapassbookisreturnedtothebankbythecustomerwithoutobjection,theaccountcannotberegardedassettledaccountanditisnotbindingonbotht


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hebankerandcustomer.InMowjiVsRegistrarofCo-operativeSocieties,Madras,itwasstatedthattheentriesinthepassbookcanberegardedasprimafacieevidenceandnotconclusiveevidence.Thusentriesinthepassbookarenotconclusiveevidenceoftheircorrectness,instatingthepositionofcustomersaccount.Theyaresubjecttoalternationonthebasisofrealfactscustomer,and(b)Thelossofcreditorreputationinthemarket.Thus,thebankerisliabletocompensatethedrawernotonlyfortheactualmonetarylosssufferedbyhim,butalsofortheinjurytoporlossofhisreputation,asaresultofdishonourofacheque.Incasethecustomerhappenstobeatrader,thelosswouldbesubstantialdamages.Incasethecustomerisanon-trader,thebankerwouldbeliableonlyfornormaldamages{(Case:RobinVsSteward(1854)146-B595)(Case:GibbsVsWestministerBank(1939)2K.B.882)}.InthecaseofSterlingVsBarclaysBankLtd.,wherethebankerhadmadeamistakeinwrongfullydishonouringthecustomerscheque,thecustomerwasnotentitledtosubstantialdamagesbutreasonabledamagesasthecustomerhadtwochequesdishonouredearlierandfurther,peopleinthattradedidnotthinkmuchofchequesbeingdishonouredastheyjustcarriedontheirlivingwithbarenecessaries.(Case:DavidsonVsBardaysBankLtd.,1940AII.E.R.316).Thecustomerhadissuedachequefor2-15-8anditwasdishonouredandthematterwasreferredtothecourtandthecourtorderedthatsubstantialdamagestothetuneof250shouldbepaid.2.ObligationtoMaintainSecrecyofCustomersAccountIneveryprofession,therearecertainthingstobemaintainedabsolutelyinsecret;forexample,adoctorisnotexpectedtodisclosethedetailsofhispatientstoothers.Theprofessiondemandsfromhimthathemustmaintainthosematters

instrictcondence.Similarly,abanksprofessionalsodemandsthatheshouldmaintaintheparticularsofhiscustomersaccountsinsecret.Thebankerhasanimpliedobligationtomaintainsecrecyofthecustomersaccount.Heshouldnotdisclosemattersrelatingtothecustomersnancialpositionsinceitmayadverselyaffectthecustomerscreditandbusiness.Thisobligationcontinuesevenaftertheaccountofthecustomerisclosed.Onlyinthefollowingcircumstances,disclosureisjustied:(a) ToSatisfyStatutoryRequirements:AccordingtotheIncomeTaxAct,thebankerisrequiredtogiveoutinformationregardinghiscustomerstotheIncomeTaxDepartment.Similarly,wheneverthecourtneedsanyinformationregardingthecustomers,thebankerisrequiredtogivetheinformation.AccordingtotheBankingRegulationAct,allbanksarerequiredtogiveintheprescribedformsdetailedinformationregardingthecustomerstoth

eReserveBankofIndia.(b)AsaCommonCourtesy:Inthiscase,itisacommonpracticefollowedamongbankerstoexchangeinformationregardingtheircustomers,accountsetc.,asamatterofcommoncourtesy.Wheneverthebankeriscalledupontogiveinformationregardinghiscustomers,hecandosowithoutanydifculty.Asfaraspossible,heshouldfurnishbarefactswhileexpressinghisopinion.Heshouldbeverycarefulwhileexpressinghisopinion.Heshouldnotexaggeratenorunderestimatethenancialstandingofhiscustomers.DisclosureatthewillofCustomer:Thebankercandisclosethestateofaffairsofthecustomersaccountwhenthecus

tomergiveshisconsenttodisclosetheaccounts.Theauditoroftheorganisationcanfullyexaminethecustomersaccountwhenanexpressconsentisgivenbyhim.Similarlywhenacustomergivesthenameofaguarantor,theguarantorcanexaminetheaccountsofthecustomerwhichthebankershouldfurnish.Whenbankeractsasareference,hecandisclosetheaccountsofthecustomer.(d)ToProtecthisOwnInterest:Wheneverthebankerisrequiredtoprotecthisowninterest,ifhedisclosesthedetailsofacustomersaccount,itmustbeareasonableandproperoccasion.Forexample,ifthebankeristorecoverhisownmoneyfromaparticularcustomer,hemaygivethedetailstohislawyers.


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(e)ToProtectPublicInterest:TheBankingCommission(1972)opinedasfollows:Whenbanksarerequiredtogiveoutinformationregardingtheircustomersintheinterestofthepublic,theinformationshouldrelatetonancialaspectofthecustomers.Thefollowingareinstancesofsuchcases:(i)Whereconsiderableamountsarereceivedfromothercountries.(ii)Incasethebankthinksthatthecustomeriscarryingonsuchactivitieswhicharenotcongenialintheinterestofthenation.(iii)Incasethebankerthinksthatthecustomeristryingtobreaktheprovisionsofthelawonthebasisofhisrecords.(iv)WhentheGovernmentcallsuponthebanktogiveinformationregardingaparticularcustomerandwhenthebankfeelsthataparticularcustomerhascommittedanoffence.3.ObligationtoReceiveChequesandOtherInstrumentsforCollectionBasically,thebusinessofbanking,asitisknowntoday,comprisesacceptanceofmoneyondepositaccountandpaymentofcheques.Italsoincludescollectionofcheques.Itmayrightlybecontendedthatanyonewhodoesnotperformtheseessentialservicesisnotabanker.Wheneverabankerisentrustedwiththejobofcollectionofcheques,theymustbecollectedasspeedilyaspossiblethroughtheacceptedchannels.Failuretoexercisepropercareandemploytherecognisedrouteforcollectionmaymakethebankliableforanylosswhichthecustomermaysustain.4.ObligationtoGiveReasonableNoticebeforeClosingtheAccountAccordingtolaw,adebtorandacreditormayterminatetherelationshipwithoutnoticebythedebtorpayingoffthebalanceorthecreditorrecallingthedebt.Itisnotsosimplebetweenabankerandacustomerfortheobviousreasonthatt

hebankerisunderanobligationtohonourhiscustomerscheques.Ifthisobligationcouldbeterminatedbythebankerwithoutnotice,thecustomermightbefacedwithanembarrassingsituation.Reasonabletimemustbegrantedtoenablehimtomakealternativearrangements.Whereanycustomerbecomesanuisancethroughoverdrawingwithoutarrangementorissuingpost-datedchequesetc.,itisadvisabletoclosehisaccount.Butreasonabletimehastobegiventoenablehimtomakealternativearrangementsifhesodesires.Ifabankabruptlyclosesthecustomersaccount,itmightaffecthiscredit,givingcauseforanactionagainstthebankfordamages.ObligationsofCustomersCustomersareundertheobligationstofullcertaindutieswhiledealingwithban

ks.Suchobligationsareasunder:(a)Nottodrawchequeswithoutsufcientbalance.(b)Todrawchequesinsuchamannersoastoavoidanychangeofalternation.(c)Topayreasonablechargesforservicesrendered.(d)Tomakeademandonthebankerforrepaymentofdeposit.Sofarwehavediscussedtheprimaryandspecialrelationshipbetweenthebankerandthecustomer.Thisrelationshipstartsrightfromthemomentanaccountisopenedanditcomestoanendimmediatelyonclosureoftheaccount.Therelationshipstandsestablishedassoonastheagreementorcontractisenteredinto.Thisrelationshipisshowninthefollowingchart.GeneralRelationshipSecondaryDebtorandcreditorAgentTrusteeBaileeSpecialRelationshipRightsObligationsLienSet-offAppropriatepaymentChargeinterestGarnisheeorderCloseaccountsMaintainsecrecyCollectionofchequesIssuenoticePrimaryBanker

obligationsCustomersobligationsTohonourcustomerschequesRELATIONSHIPBETWEENBANKERANDCUSTOMERConclusionToconclude,itisrightlysaidthattherelationshipbetweenabankeranditscustomeristhatofabaileeandbailor.Asabailee,thebankerisboundtotakeasmuchcareofthegoodsbailedtohimasamanofordinaryprudencewould,undersimilarcircumstances,takeofhis.lationshipowngoodsofthesamebulk,qualityandvalueasthegoodsbailed.However,intheabsenceofanyspecialcontract,thebaileegetsprotectionandisnotheldresponsiblefortheloss,distructionordeteriorationofthethingbailed,ifheh


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astakentheamountofcareofit.

OpeningandOperatingBankAccounts6.OnInsolvencyoftheCustomer:Whenthebankcomestoknowofinsolvencyofhiscustomer,hemuststoppayment.Thebalancestandingtothecreditofthecustomer,hemuststoppayment.Thebalancestandingtothecreditofthecustomeristransferredtotheofcialreceiverorassignee.7.OnReceiptofGarnisheeOrder:ThebankershouldreserveamountspeciedintheGarnisheeOrder.Hemaymakepaymentofthecustomerschequesoutoftheremainingbalance,ifany.8.OnReceivingNoticeofAssignment:Whenthebankerhasreceivednoticeofassignmentofthecreditbalanceinthecustomersaccount,hemuststoppaymentfromtheaccount.Thebankisliabletopaythebalancetotheassignee.InsuranceofBankDepositTheBankDepositInsurancemeansgivingaguaranteetodepositorsthattheirdepositswillbereturnedifthebankfails.Theneedforsuchaguaranteehasarisenafterthefailureofseveralbanksonaccountofinadequatecapital,unsoundbankingpracticesetc.InIndia,thenecessityofDepositInsurancewasfeltafterthefailureofPalaiCentralBank,aScheduledBankofSouthIndia.DepositInsuranceisregardedasthemostpowerfulcompetitiveedgeofbankingindustry.Howe

ver,theapplicationoftheschemeinitspresentformhasshieldedtheindustryfrommarketdiscipline.Sincethedepositorshavenoincentivestofavouronebankoveranother,badlymanagedbanks,evennearinginsolvency,havebeenabletoattractdepositsaseasilyashealthyandwell-runinstitutions.ItishightimethatDepositInsurancepricestheinsurancecoveronthebasisofqualityofassetsratherthanonuniformpricingbasis.Thiswouldbyitselfconsiderablystrengthenthebankingindustry.DepositInsuranceandCreditGuaranteeCorporation(DICGC)TheDepositInsuranceCorporationActwaspassedbytheParliamentin1961whichsetuptheDepositInsuranceCorporationwitheffectfromJanuary1,1962.IttookovertheundertakingoftheCreditGuaranteeCorporationofIndiaLtd.,witheffectfromJuly15,1978.Later,bytheintegrationoftwoorganisationstheCorporationwasrenamedastheDepositInsuranceandCreditGuaranteeCorporation(DIC

GC).ObjectivesTheDICGChastwinobjectivesofgivinginsurancetosmalldepositorsinbanksandvecreditguaranteeschemes(fourforsmallborrowersandoneforsmall-scaleindustries)guaranteeingtheprioritysectoradvancesgrantedbyparticipatingbanksandnancialinstitutions.CreditGuaranteeFunctionTheDICGCisoperatingfollowingschemes:(1)CreditGuaranteeSchemesforsmallborrowers,e.g.,(a)SmallLoansGuaranteeScheme,1971;(b)SmallLoans(FinancialCorporation)GuaranteeScheme,1971;(c)ServiceCo-operativeSocietiesGuaranteeScheme,1971;

(d)SmallLoans(Co-operativeBanks)GuaranteeScheme,1984;(e)SmallLoans(Co-operativeCreditSocieties)GuaranteeScheme,1982;(2)CreditGuaranteeSchemeforsmall-scaleindustries,1981.NominationFacilityTheBankingLaws(Amendment)Act,1983,insertedanewPartIIIBintheBankingRegulationAct,1949togiveeffecttosomeoftherecommendationsoftheBankingCommission.NewlyinsertedSection45ZAandtherulesframedthereunderin1985provideforthefacilityofnominationbydepositorsinbanksasfollows:(a)Adepositormaynominate,intheprescribedmanner,persontowhom,intheeventofthedeathofthedepositor,theamounttohiscreditmaybepaidbythebanking


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company.(b)Incaseofajointaccount,allthedepositorstogethermaynominateapersontowhom,intheeventofdeathofallthejointdepositors,theamountoftheircreditmaybepaidbythebankingcompany.Thus,thenomineesrighttoreceivedepositmoneyarisesonlyafterthedeathofallthedepositors.Therecannotbemorethanonenomineeinrespectofajointaccount.(c)Nominationfacilityisavailabletoalltypesofdepositaccounts,includingtheaccountsopenedforcreditofpension.(d)Nominationcanbemadeinfavourofindividualsonlyandnotassociations,societies,trustsoranyorganisationortheirofce-bearers.(e)Inthecaseofadepositmadeinthenameofaminor,thenominationshallbemadebyapersonlawfullyentitledtoactonbehalfoftheminor.(f)Thenomineecanbeaminor.Thedepositormay,whilemakingthenomination,appointanotherindividualnotbeingaminor,toreceivetheamountofthedepositonbehalfofthenomineeintheeventofdeathofthedepositor,orasthecasemaybe,allthedepositorsduringtheminorityofthenominee.(g)IncaseSafeDepositLockersinjointnameswithoutsurvivorshipbenet,nominationcanbemadeinfavourofmorethanoneperson.Aminorisnotacceptedasanomineeincaseofsafedepositlockers.(h)Incaseofdeathofasoledepositor/allthejointdepositors,thenameofthenomineecanbesubstitutedathiswrittenrequestinthedepositaccount/receiptsincludingoverduedeposits.(i)Thenominationmaybevariedorcancelledbythedepositorintheprescribedmanner.Incaseofajointaccount,variationorcancellationofasubsistingnominationcanbemadebyallthesurvivingdepositorsactingtogether.OnmakingpaymentundertheprovisionsofthisSection,thebankingcompanyshallbefullydischargedfromitsliabilityinrespectofthedeposit.Therightorclaimofanyotherpersonagainstthenominee,towho

manypaymentismadeunderthissection,shallnotbeOpeningandOperatingBankAccounts195affectedbysuchpayment.Nootherpersonshallbeabletogetnoticeofhisclaimtosuchdepositstothebankingcompany.Norshallthebankingcompanybeboundbysuchnoticeeventhroughexpresslygiventoit.Non-ResidentAccountThenon-residentaccountisdenedastheaccountsmaintainedwithbanksinIndiabypersons,companies,rms,banksetc.,residentorsituatedoutsideIndia.Whentheaccountopensinthenameofpersons,rms,companiesorassociationsitisreferredtoasPrivateNon-ResidentAccount.WhileinthecaseofbankssuchaccountsarecalledasNon-ResidentAccounts.Itshouldbenotedthatanon-residentmeansac

itizenofIndiawhoislivingoutsideIndiainthefollowingcases:(a)TakingupemploymentoutsideIndia.(b)CarryingonbusinessoutsideIndia.RecentDevelopmentTherearenomajorpolicychangesintheregulationsgoverningForeignCurrencyNon-ResidentAccounts(FCNRA)andNon-Resident(External)RupeeAccounts[NR(E)RA]exceptfortheconversionratetobeappliedforsuchremittancestoNREA/CswhichiscoveredundertheheadofLiberalisedExchangeRateManagementSystem(LERMS).Thebudgetfor1992-93hascitedtwomorefacilitiestoNon-ResidentIndians(NRIs)whicharegivenbelow:1.GoldImportScheme:TheNRIsandreturningIndiansarepermittedtoimportgoldupto5kg.onthepaymentofdutyofRs.440per10gmsinForeignExchange.ThedutywasreducedtoRs.220per10gmssubsequently.EachNRIcomingfromabroadwillbeabletobri

ngintoIndiaamaximumof5kg.ofgoldprovidedthepersonconcernedhadspentatleastsixmonthsabroad.NRIscanavailthemselvesofthefacilityonceinsixmonths.2.NewDepositScheme:(WithFlexibleDepositRates):ThisschemewaseffectivefromJune15,1992.Thisschemecoversthefollowing:(a)AuthorisedDealers(ADs)canopentheseaccountswithfreshforeigninwardremittancesortransfersfromexistingNRE/FCNRaccounts.(b)Thedepositcanbeacceptedforaminimumperiodofsixmonthsandmaximumperiodofthreeyears.(c)Thedepositwillnotbeincludedinthenetdemandandtimeliabilities(NTL)ofthebanksandhencethesearefreefromreservereq


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uirements.(d)Principalandinterestarenotrepatriable.(e)Oncethesedepositsarewithdrawn,thesebenetscannotbeextendedevenifthedepositisredepositedinotherbanks.3.HomeLoanAccountScheme:TheHomeLoanAccountSchemewhichhasbeeninoperationsinceJuly1,1989,hasnowbeenextendedtoselecthousingnancecompaniesandApexCo-operativeHousingFinanceSocieties.Underthisschememorethan12lakhaccountshavebeenopenedbytheendofNovember1997.TheamountofdepositscollectedwasaboutRs.100crores.ConclusionToconclude,itisrightlysaidthattherelationshipbetweenabankandacustomerbeginswhenthecustomeropensanaccountwiththebank.Fortheattractionofcustomersthebanksofferdifferenttypesoffacilities.InordertoavoidmeaninglesscompetitionamongseveralbankstheReserveBankofIndiahasbeengiventhepowertoxdepositinterestrates.Forthispurpose,theRBIissuesdirectivesfromtimetotime.Here,itismadeclearthatalltheaccountsareopenedwiththebankwiththecashmoneybythecustomerandthatiswhy,inotherwords,theseareknownasDepositAccounts.UnderSection6oftheBankingRegulationAct1949,themostimportantfunctionofamodernbankistoacceptdepositofmoneyfromthepublic.Thebankshave,therefore,introduceddifferenttypesofaccountswithvariousfacilitiesandprivileges.

DoubleCrossing:

AccordingtoSection127oftheNegotiableInstrumentsAct,1881:Whereasachequeiscrossedspeciallytomorethanonebanker,exceptwhencrossedtoanagentforthepurposeofcollection,thebankeronwhomitisdrawnshallrefusepaymentthereon.Thistypeofcrossingmaybeusedonlywhenthebankerinwhosefavourthechequeisspeciallycrosseddoesnothaveanybranchattheplacewherethechequeistobepaid.Aspecimenofsuchacrossingisgivenbelow:SignificanceofCrossing:Inthecaseofgeneralcrossing,theadditionofthewords&Co.doesnothaveanylegalsignicance;butthewordsnotnegotiablehavelegalsignicance.Bycrossingachequegenerallythepersonwhoisnotentitledtogetitspayment,ispreventedfromgettingthechequecashedatthecounterofthepayingbanker.Whileinthecaseofspecialcrossing,thenameofthebankermustbewrittenonthefaceofthecheque,towhomortowhosecollectingagent,paymentofchequeistobemade.

Itistobenotedthatthelinesarenotessentialforaspecialcrossing.BycrossingaChequespecially,itisquitesaferthanthegenerallycrossedcheque.Insuchacasethebankertowhomachequeiscrossedspecially,mayappointanotherbankerashisagentforthecollectionofsuchcheques.Suchchequesmaybesentthroughordinarypost.Inshort,achequecanbecrossedbythedrawer,holderorbanker.Section125oftheNegotiableInstrumentsActstates,Whereasachequeiscrossedgenerallyorspecially,theholdermayaddthewordsnotnegotiable.Inthecaseofabanker,theaboveSectionfurtherstates:whereasachequeiscrossedspecially,thebankertowhomitiscrossedmayagaincrossitspeciallytoanotherbankerashisagentforcollection.Whileinthecaseofadrawer,hehastherighttocancelthecrossingbyputtinghisfullsig

natureandwritingthewordsPayCash.ENDORSEMENTEndorsementliterallymeanswritingonthebackoftheinstrument.ButunderNegotiableInstrumentsAct,itmeanswritingofapersonsnameonthebackoftheinstrumentoronanypaperattachedtoitforthepurposeofnegotiation.Thepersonwhosignstheinstrumentforthepurposeofnegotiationiscalledtheendorser.Thepersontowhomtheinstrumentisendorsedortransferrediscalledtheendorsee.Mereendorsementisnotsufcientunlesstheinstrumentisdeliveredtotheendorsee.Theendorsementiscompletedbydeliveringthesignedinstrumenttotheendorsee.Thepurposeorobjectofendorsementisnegotiationortransferoftheinstrum


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ent.DefinitionofEndorsementAccordingtoSection15oftheNegotiableInstrumentsActwhenthemakerorholderofanegotiableinstrumentsignshisname,otherwisethanassuchmaker,forthepurposeofnegotiation,onthebackorfacethereoforonaslipofpaperattachedthereto,heissaidtohaveendorsedtheinstrument.Thusapersonentitledtogetmoneyonanegotiableinstrumentcantransferhisrighttoanother.Hemaybeamakerorholderoftheinstrument.Ifhewantstotransferhisrighttoanother,hemustsigntheinstrument.Thesignatureisusuallymadeonthebankoftheinstrument.EssentialsofaValidEndorsementThefollowingaretheessentialsofavalidendorsement:(a)Endorsementmustbeonthebackorfaceoftheinstrument.Ifnospaceisleftontheinstrument,itmustbemadeonaseparatepaperattachedtoit.(b)Itshouldbemadeinink.Anendorsementinpencilorrubberstampisinvalid.(c)Itmustbemadebythemarkerorholderoftheinstrument.Astrangercannotendorseit.(d)Itmustbesignedbytheendorser.(e)Itmustbecompletedbydeliveryoftheinstrument.(f)Itmustbeanendorsementoftheentirebill.Apartialendorsementdoesnotoperateasavalidendorsement.KindsofEndorsementEndorsementmaybeofanyofthefollowingkinds:1.Blankendorsement,2.Specialendorsement,3.Partialendorsement,4.Restrictiveendorsement,5.Conditionalendorsement.1.BlankEndorsement:

Itisalsocalledgeneralendorsement.Anendorsementissaidtobeblankiftheendorsersignshisnameonlyonthefaceorbackoftheinstrument.Endorsementinblankspeciesnoendorsee.Itsimplyconsistsofthesignatureoftheendorserontheendorsement.Anegotiableinstrumenteventhoughpayabletoorderbecomesabearerinstrumentifendorsedinblank.Thus,ablankendorsementconvertsanorderinstrumentintoabearerone.Itisnegotiablebydeliveryoftheinstrument.Example:AbillispayabletotheorderofSwaroop.Swaroopsignsonthebackofthebill.ThisisanendorsementinblankbySwaroop.Thebillbecomespayabletobearerandisnegotiablewithoutanyfurtherendorsement.2.SpecialEndorsement:Itisalsocalledfullendorsement.Inthistypeofendorsement,thenameoftheendorseeisspecicallystated.Iftheendorseraddsdirectiontopaytheamountmen

tionedintheinstrumentto,ortotheorderofaspeciedperson,theendorsementissaidtobespecial.Inotherwords,itspeciesthepersontowhomortowhoseorderthechequeistobepayable.Ablankendorsementcanbeeasilyconvertedintoaspecialendorsementbyanyholderofnegotiableinstrument.Example:(a)Paytoxororder,(b)Paytotheorderofx3.PartialEndorsement:Ifaninstrumentisendorsedforapartofitsamount,suchanendorsementissaidtobepartial.Similarly,ifaninstrumentisendorsedtotwoormoreendorseesseparatelyandnotjointly,theendorsementbecomespartial.Suchanendorsementdoesnotoperateasanegotiationoftheinstrument.Norightofactionarisesunderapartialendorsement.Itisinvalid.Example:

TheholderofapromissoryforRs.1,000writesonitpayBRs.500andendorsesthenote.Theendorsementisinvalidforthepurposeofnegotiation.4.RestrictiveEndorsement:Anendorsementissaidtoberestrictivewhenitprohibitsorrestrictsthefurthernegotiabilityoftheinstrument.Itmerelygivestheholderoftheinstrumenttherighttoreceivetheamountontheinstrumentforaspecicpurpose.Itdoesnotgivepowertohimtotransferhisrightsinendorsementtoanyoneelse.PayXonlyorpayXformyuseareexamplesofrestrictivetypesofendorsement.5.ConditionalEndorsement:Itisalsocalledqualiedendorsement.Anendorsementwheretheendorserlimitsorn


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egativeshisliabilitybyputtingsomeconditionintheinstrumentiscalledaconditionalendorsement.Ifforinstance,theendorserendorsesaninstrumentwiththewordspayAororderonhismarryingB,theendorsementbecomesconditional.Aconditionalendorsement,unliketherestrictiveendorsement,doesnotaffectthenegotiabilityoftheinstrument.Itdoesnotinvalidatetheinstrument.Anendorsementmaybemadeconditionalinanyofthefollowingforms:(a)SansrecourseEndorsement:Anendorsermay,byexpresswords,excludehisownliabilitythereontotheendorseeoranysubsequentholderincaseofdishonouroftheinstrument.Suchanendorsementiscalledanendorsementsansrecourse(withoutrecourse).PaytoAororderwithoutrecoursetomeisanexampleofthistypeofendorsement.Theendorsersansrecourseishowever,liabletothepreviousendorsers.(b) FacultativeEndorsement:Anendorsementwheretheendorserextendshisliabilityorgivesupsomerightsunderanegotiableinstrument,iscalledafacultativeendorsement.PayAororder,noticeofdishonouriswaivedisanexampleoffacultativeendorsement.Thus,endorsermakeshimselfliabletosubsequentendorseesofthechequeeventhoughnonoticeofdishonourisreceivedbyhimfromtheholder.Inthistypeofendorsement,theholdersdutiestowardstheendorserarewaived.(c)SansFraisEndorsement:Wheretheendorser,doesnotwanttheendorseeoranysubsequentholdertoincuranyexpensesonhisaccount,ontheinstrument,theendorsementiscalledsansfra

isendorsement.LegalEffectsofanEndorsementTheendorsementofachequeofbillorexchangehasavariedsignicance.Ithasfollowinglegaleffects:(a)Ittransfersthepropertyinthenegotiableinstrument.(b)Itgivestherighttosuetheacceptorofthebillforrecoveryoftheamountduethereon.(c)Itgivestherighttorecoverfromtheendorseeandthoseabovehimondishonour.(d)Itgivestheholdertherightoffurthernegotiationtoanyonehepleases.DifferencesbetweenaBillofExchangeandChequeAllchequesarebillsofexchange,butallbillsofexchangearenotcheques.Thefollowingarethemaindifferencesbetweenabillandacheque:1.Drawee:Achequeisalwaysdrawnonabanker.Butabillcanbedrawnonanypersoninclu

dingabanker.2.PayableonDemand:Achequeisalwayspayableondemand.Asamatteroffact,achequeismeantforimmediatepayment.Butabillofexchangemaybepayableondemandorontheexpiryofaxedperiod.ChequePromissorynote3.Drawee3.ApromissorynotemaybeThedraweeofachequeisalwaysexecutedeitherbyabankerorbyanon-banker.\Payableondemand4.ApromissorynotemaybeAchequeisalwayspayablepayableeitherondemandorondemand.afteracertainperiod.5.Bearerororder

5.ApromissorynotecannotbeAchequemaybepayabletoorderormadepayabletothebearerontobearer.demand.Crossing6.ThereisnopracticeofcrossingAchequecanbecrossed.apromissorynote.Stamping7.ApromissorynotemustbeAchequedoesnotrequireanystamp.properlystamped.8.Daysofgrace8.AgraceperiodofthreedaysisGracedaysarenotallowedbecausetheallowed.chequeisalwayspayableondemand.


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9.Discounting9.ApromissorynotecanbeAchequeisnotdiscounted.discountedandrediscountedwithbanks.HOLDERANDHOLDERINDUECOURSEHolderAccordingtoSection8oftheNegotiableInstrumentsAct,aholdermeansanypersonentitledinhisownnametothepossessionofthenegotiableinstrumentandtorecoverorreceivetheamountduethereonfromthepartiesliablethereto.Aholdermust,therefore,havethepossessionoftheinstrumentandalsotherighttorecovermoneyinhisownname.Inotherwords,aholdermustbeinpossessionofitunderalegaltitle.Holderimpliesdejureholderandnotdefactoholder.Thus,apersonwhoisinpossessionoftheinstrumentmayormaynotbeaholder.Forexample,anderoflostinstrumentorathiefcannotbeaholder.Similarly,abeneciaryoranagentinpossessionofaninstrumentwillnotbeaholder.Butlegalrepresentativesofdeceasedholderorofcialassigneeorofcialreceiverwouldbetreatedasholdersoftheinstruments.Itisonlytheholderandnootherperson,whocangiveavaliddischargefortheinstrument.HolderinDueCourseInEnglishLaw,aholderinduecourseisknownasbonadeholderforvaluewithoutnotice.Aholderinduecourseisapersonwhoacquiresapromissorynote,billorchequebonadeforvalueandmaturity.Section9oftheNegotiableInstrumentsActdenesaholderinduecourseasanypersonwhoforconsiderationbecamethepossessorofanegotiableinstrumentifpayabletobearer;orthepayeeorendorseethereof,ifpayabletoorder,beforetheamountmentionedinitbecomespayable,andwithouthavingsufcientcausetobelieve

thatanydefectexistedinthetitleofthepersonfromwhomhederivedhistitle.Inotherwords,aholderinduecourseisapersonwhotakestheinstrumentingoodfaithandforvalue.Thus,aholderinduecoursemustsatisfythefollowingconditions:(a)Hemusthaveobtainedtheinstrumentforvaluableconsiderationorvalue.Considerationmustnotbevoidorillegal.Theconsiderationmustbevaluableandlawful.So,thedoneeofanegotiableinstrumentisnotaholderinduecourse.(b)Hemusthavebecomeaholderoftheinstrumentbeforethedateofitsmaturity.(c)Hemusthavebecomeaholderoftheinstrumentingoodfaith.(d)Hemusthavetakentheinstrumentcompleteandregularonthefaceofit.Itisthusobviousthateveryholderisnotaholderinduecourse.Aholderofanegotiableinstrumentwillnotbeaholderinduecourse,if:(a)hehasobtainedtheinstrumentbygift,or(b)hehasobtainedtheinstrumentforunlawfulconsideration,or(c)hehasobtainedtheinstrumentafteritsmaturity,or(d)hehasobtai

nedtheinstrumentbysomeillegalmethod,or(e)hehasnotobtainedtheinstrumentingoodfaith.PrivilegesofaHolderinDueCourseAholderinduecourseoccupiesaprivilegedpositioninthelawofnegotiableinstruments.Hehasatitlefreefromequities.Heenjoyscertainrightsandprivilegeswhichanordinaryholdercanneverpossess.Theserightsandprivilegesareasfollows:1.InstrumentPurgedorCuredofallDefects:Theholderinduecoursegetstheinstrumentfreefromallthedefectsinthetitle.Onceanegotiableinstrumentpassesthroughthehandsofaholderinduecourse,itispurgedorcuredofdefects.Itislikeacurrentcoin.Anybodywhotakesanegotiableinstrumentfromaholderinduecoursecanrecovertheamountfromallpartiespriortosuchholder.Aninstrumentoncefreefromdefectsisalway

sfree.2.LiabilityofPriorParties:Allpriorpartiestotheinstrument(thedrawer,acceptororendorser)continuetoremainliabletotheholderinduecourseuntiltheinstrumentisdulysatised.Theholderinduecoursecanleasuitagainstthepriorpartiesliabletopayinhisownname.Section36oftheActstatesthateverypriorpartytoanegotiableinstrumentisliablethereontoaholderinduecourseuntiltheinstrumentisdulysatised.3.RightsinCaseofInchoateInstrument:Aninchoateinstrumentisonewhichisincompleteinsomerespects.Apersonwho


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hassignedanddeliveredastampedbutinchoate(incomplete)instrumentcannotargueasagainstaholderinduecoursethattheinstrumenthasnotbeencompletedaccordingtotheauthoritygivenbyhim.4.NoEffectofConditionalDelivery:Whereanegotiableinstrumentdeliveredconditionallyisnegotiatedtoaholderinduecourse,theotherpartiestotheinstrumentcannotescapeliabilityonthegroundthatthedeliveryoftheinstrumentwasconditionalorforaspecialpurposeonly.5.RightinCaseofFictitiousBills:Ifabillisdrawnonbehalfofactitiouspersonandispayabletohisorder,theacceptorisnotrelievedfromhisliabilitytoholderinduecoursebecauseofsuchctitiousname.6.NoEffectofAbsenceofConsideration:Thepleaofabsenceofconsiderationorunlawfulconsiderationisnotavailableagainsttheholderinduecourse.Thepartyresponsibleisliabletomakethepayment.7.EstoppelAgainstDenyingOriginalValidityoftheInstrument:Thepleaoforiginalinvalidityoftheinstrumentcannotbeputforthagainsttheholderinduecoursebythedrawerofabillofexchangeorcheques,orbyanacceptorforthehonourofthedrawer.8.EstoppelAgainstDenyingtheCapacityofthePayeetoEndorse:Themakerofapromissorynoteortheacceptorofabillisprecludedfromdenyin

gagainstaholderinduecoursetheexistenceofthepayeeandhiscapacitytoendorse.9..EstoppelAgainstEndorsertoDenyCapacityofPriorParties:Anendorserofthebillbyhisendorsementguaranteesthatallpreviousendorsementsaregenuineandthatallpartieshadcapacitytoenterintovalidcontracts.Therefore,hecannotsubsequentlydenysignatureorcapacitytocontractofanypriorpartytotheinstrument.10.EveryHolderisaHolderinDueCourse:Thelawpresumesthateveryholderisaholderinduecoursealthoughthepresumptionisrebuttable.DistinctionbetweenHolderandHolderinDueCourseThefollowingarethedifferencesbetweenholderandholderinduecourse:1.Entitlement:

Aholderisentitledinhisownnametothepossessionoftheinstrument.Butaholderinduecourseacquiresthepossessionoftheinstrumentforconsideration.2.Consideration:Incaseofholder,considerationisnotnecessary.Theinstrumentmaybegivenasagiftordonation.Butconsiderationisnecessaryforbecomingaholderinduecourse.Apersoncannotbeaholderinduecourseifhehadobtainedtheinstrumentwithoutconsideration.3.BeforeandafterMaturity:Aholdermaygettheinstrumentevenafterithasbecomepayable.Butaholderinduecoursemustgetthepossessionoftheinstrumentbeforeitsmaturity.4.Title:Aholderdoesnotacquiregoodtitle,ifthetitleofanyofthepriorpartiesw

asdefective.Butaholderinduecourseacquiresgoodtitleeventhoughtherewasdefectinthetitleofanypriorparties,providedhehadnonoticeofthedefect.Histitleisfreefromdefects.5.Presumption:Everyholderinduecourseisaholder,buteveryholdermaynotbeaholderinduecourse.6.RighttoRecovertheAmount:Allpriorpartiestoanegotiableinstrumentcontinuetoremainliabletotheholderinduecourseuntiltheinstrumentisdulysatised.Butaholderofaninstrumentcanrecovertheamountfrommakerandthetransferorbutnotalltheprior


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parties.7.Privileges:Aholderdoesnotenjoyanyspecialprivileges,butaholderinduecourseenjoyscertainspecialprivileges.ConclusionTheabovediscussionclearlyshowsthat,achequeisanegotiableinstrumentspeciedinNegotiableInstrumentsAct,1881.Itisanunconditionalorder,drawnonaspeciedbankersignedbythedrawer,directingthedraweetopayondemandacertainsumofmoneytoortotheorderofaspeciedpersonortothebeareroftheinstrument.Thepaymentofacrossedchequecanbeobtainedthroughthebankoftheholder.Ifachequeiscrosseditiseasytotracethepersonforwhosebenetthepaymentwascollected.Thecrossedchequeisnegotiablebymeredelivery;itispayabletobearerbyendorsementanddeliveryincaseispayabletoorder5.Presumption:Everyholderinduecourseisaholder,buteveryholdermaynotbeaholderinduecourse.6.RighttoRecovertheAmount:Allpriorpartiestoanegotiableinstrumentcontinuetoremainliabletotheholderinduecourseuntiltheinstrumentisdulysatised.Butaholderofaninstrumentcanrecovertheamountfrommakerandthetransferorbutnotallthepriorparties.7.Privileges:Aholderdoesnotenjoyanyspecialprivileges,butaholderinduecourseenjoyscertainspecialprivileges.

ConclusionTheabovediscussionclearlyshowsthat,achequeisanegotiableinstrumentspeciedinNegotiableInstrumentsAct,1881.Itisanunconditionalorder,drawnonaspeciedbankersignedbythedrawer,directingthedraweetopayondemandacertainsumofmoneytoortotheorderofaspeciedpersonortothebeareroftheinstrument.Thepaymentofacrossedchequecanbeobtainedthroughthebankoftheholder.Ifachequeiscrosseditiseasytotracethepersonforwhosebenetthepaymentwascollected.Thecrossedchequeisnegotiablebymeredelivery;itispayabletobearerbyendorsementanddeliveryincaseispayabletoorderIncase,paymentismadetoawrongpersonwhosesignatureisnotaccordingtospecimensignature,theprotectionisgiventoabankerunderSection16(2)oftheNegotiableInstrumentsAct:Itisnotpossibleforabankertoknoweachofthe

endorsersandtheirsignatures.Forgettingtheprotection,thebankershouldnotethefollowing:(a)RegularEndorsement:AccordingtoSection85(1)oftheActtheendorsementshouldberegular.Forexample,ifachequeispayabletoarightpersonandsignatureisbearingsamenameandthesamespellingsthisisknownasregularendorsement.Thoughthisisnotavalidendorsement.(b) PaymentinDueCourse:AccordingtoSection10oftheActthechequeshouldbepaidinduecourse.Incasethepaymentismadeonforgedsignatureoftheendorserandnotthatofthedrawer,thebankergetsstatutoryprotectionunderSection10oftheAct.3.ProtectioninCaseofCrossedCheque:Regardingpaymentofcrossedcheque,thepayingbankergetstheprotectionunder

Section128oftheNegotiableInstrumentsAct,1881:Whereasthebankeronwhomacrossedchequeisdrawnhaspaidthesameinduecourse,thebankerpayingthechequeandthedrawerthereof(incasesuchchequehascometothehandsofthepayee)shallbeentitledrespectivelytothesamerightsandplacedinthesamepositioniftheamountofthechequehadbeenpaidtoandreceivedbythetrueownerthereof.Incasethepaymentismadeontheinstructionsofthedraweringoodfaithwithoutanynegligence,thepayingbankergetsthestatutoryprotectionundertheNegotiableInstrumentsAct,1881:Thepaymentofcrossedchequeinduecoursemakesthedraweebankerliabletothetrueownerofthechequebesidesdisentitlinghimselftodebitthecustomersaccount.4.


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ProtectioninCaseofObliteratedCheques:AccordingtoSection89oftheNegotiableInstrumentsAct,1881,Whereasachequeispresentedforpaymentwhichdoesnotatthetimeofpresentationappeartobecrossedortohavehadacrossingwhichhasbeenobliterated,paymentthereofbyabankerisliabletobepaidandpayingthesameaccordingtotheapparenttenorthereofatthetimeofpaymentandotherwiseinduecourse,shalldischargesuchbankerfromallliabilitythereonandsuchpaymentshallnotbequestionedbyreasonofthechequehavingbeencrossed.ThustheaboveSectionisverymeaningfulwherecrossingofachequeisobliteratedbydishonestperson.UndertheaboveSectionthebankergetstheprotectioninthewaythatthepaymentismadeaccordingtotheapparenttenorofthechequeandduecourse.5.ProtectioninCaseofDrafts:Incaseofdemanddraftsdrawnbyonebranchofabankuponanotherbranchofthesamebank,thebankergetsprotectionunderSection85oftheNegotiableInstrumentsAct.TheSectionstates:Whereasanydraft,thatis,anordertopaymoneydrawnbyoneofceofabankuponanotherofceofthesamebankforasumofmoneypayabletoorderondemand,purportstobeendorsedbyoronbehalfofthepayee,thebankisdischargedbypaymentinduecourse.Inshort,abankermaygetstatutoryprotectionunderthevariousSectionsoftheNegotiableInstrumentsAct,ifhefullsthetermsandconditionsofthesaidSectiono

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