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LEGAL ASPECTS OF
BANKING OPRATIONS
Manjunath Babu
Chief Manager,
State Bank f M!"re#
$ea% Offi&e#
For JAIIB EXAMINATIONS
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La'" that Cntr( BankingLa'" that Cntr( Banking
Companies Act 1956Companies Act 1956
Banking Regulations Act 1949Banking Regulations Act 1949
RBI Act 1934RBI Act 1934 RRB Act 1976RRB Act 1976
Banking companies Act 1970Banking companies Act 1970
State Bank of India Act 1955State Bank of India Act 1955 SBI Su!sidia"#$s Act 1959SBI Su!sidia"#$s Act 1959
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La'" that inf(uen&e BankingLa'" that inf(uen&e Banking
Indian Cont"act Act 1%7&Indian Cont"act Act 1%7& 'egotia!le Inst"uments Act 1%%1'egotia!le Inst"uments Act 1%%1
Sale of (oods Act 1930Sale of (oods Act 1930 )"ansfe" of *"ope"t# Act 1%%&)"ansfe" of *"ope"t# Act 1%%& Banke"s !ook +,idence Act 1%91Banke"s !ook +,idence Act 1%91
-+.A 1999 /"eplacing -+RA 1973-+.A 1999 /"eplacing -+RA 1973 Indian imitation Act 1963Indian imitation Act 1963
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La'" that inf(uen&e BankingLa'" that inf(uen&e Banking
Companies ActCompanies Act
Indian *a"tne"s2ip Act 193&Indian *a"tne"s2ip Act 193& Indian )"usts ActIndian )"usts Act
Indian Stamp ActIndian Stamp Act
Regist"ation ActRegist"ation Act Religious and C2a"ita!le +ndoments ActReligious and C2a"ita!le +ndoments Act Coope"ati,e Societies ActCoope"ati,e Societies Act
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La'" that affe&t BankingLa'" that affe&t Banking
Consume" *"otection ActConsume" *"otection Act
Banking m!udsman Sc2eme &00&Banking m!udsman Sc2eme &00&
La'" that a""i"t BankingLa'" that a""i"t Banking
Reco,e"# of e!ts due to Banks and -I 1993/R)Reco,e"# of e!ts due to Banks and -I 1993/R) SAR-ASI Act &00&SAR-ASI Act &00&
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A C)*an!A C)*an!*u!lic *"i,ate Re(e+ent A&t
"e&tin
.em!e"s min8ma 7 & 8 50 Se-.
i"ecto"s.in
.a
3 & Se./.
As pe" a"ticles of Association Se./0
:p to 1& di"ecto"s it2out seeking (o,t app"o,al Se./1
Ce"tificate of Inco"po"ation Ce"tif#ing t2at all t2e "e;ui"ements unde" t2e la2as !een complied it2
Se 2/
Ce"tificate ofCommencement of !usiness
*"oof of sta"ting !usiness
/fo" pu!lic companies onl#
Se-31
.emo"andum of
Association
Constitution of t2e compan#
*u"pose < !=ecti,e < *lace
Se -2
A"ticles of Assn Rules of (o,e"nance /Subr%inate tMe)ran%u) 4
Se
*oe" to !o""o As specified in A A Se.1..12
:lt"a >i"es Const"ucti,e notice
Indoo" .anagement
Be#ond poe"s 8 Assumed to 2a,e "ead t2e .A 8
*"otect against inte"nal a""angement
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T $ E B A N KT $ E B A N K
A compan# unde" companies act An association of minimum of & o" 7 .aimum of 10 mem!e"s i"ecto"s 3 and ma as pe" a"ticles
Banking defined as pe" Sec 5 of BR Act *aid up capital 8 Rese",es < Sec11 BR act /onl# o"dina"# S2a"es ? Sec
1&/1 i"ecto"s knoledga!le pe"sons f"om all alks of life < Sec10A >oting Rig2ts )#pes of Bank
*u!lic Secto" @ *"i,ate Secto"@ -o"eign Banks@ Coope"ati,e Banks /unde" state Coopt Act Regional Ru"al Bank /RRB Act 1976
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$' 6e" RBI Cntr( Bank" 7$' 6e" RBI Cntr( Bank" 7 icense to ope"ate < Sec&& of BR act icense to open B"anc2es < Sec&3 2at !usiness to do sec6/1 2at not to do Sec%
RBI Can appoint di"ecto"s@ C2ai"man Sec 10BB RBI can "emo,e c2ai"man@ C+@ di"ecto" o" an#
office" Sec36AA Rest"ict a Bank to accept eposits Sec35/4 BR Act
and 4& of RBI Act inding up Sec3783% BR Act Sc2eduled Banks
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$' 6e" RBI Cntr( Bank" 7$' 6e" RBI Cntr( Bank" 7 Rest"iction on Ad,ances Sec&0
Regulate Rate of Int Sec&1 835 i"ected ending Sec&1 Cont"ol of A,aila!ilit# of -unds
CRR < Sec1% / 3 to &0 Sc2Banks Sec4& RBI Act
SR < Sec &4 / &0 to 40 Accounts and BalS2eet Sec&9 &0 of p"ofit to Rese",e -und Sec 17/1 su!mit B8S to RBI RC Sec3&
Su!mit "egula" "etu"ns to RBI Sec &7 Inspection of Banks < Sec35 Banking m!udsman < Sec35A Allos Banks to "etu"n paid inst"uments Sec45/
*enalt# p"o,isions Sec46847847A
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F E M AF E M AFreign E8&hange Manage)ent A&t4Freign E8&hange Manage)ent A&t4
-+RA as mo"e "ules and "egulations-+RA as mo"e "ules and "egulations -+.A aimed at o"de"l# de,elopment of fo"e ma"ket-+.A aimed at o"de"l# de,elopment of fo"e ma"ket
Capital A8c < c2ange in assets and lia!ilitiesCapital A8c < c2ange in assets and lia!ilities Residents 8 'onResidentsResidents 8 'onResidents
Cu""ent A8c < t"ansactions "elating to fo"eign t"ade@ se",ices@ inte"est pa#ments@Cu""ent A8c < t"ansactions "elating to fo"eign t"ade@ se",ices@ inte"est pa#ments@
fo"eign t"a,el?etcfo"eign t"a,el?etc
Aut2o"ised eale"Aut2o"ised eale"
-o"eign Cu""enc#-o"eign Cu""enc#
-o"eign +c2ange-o"eign +c2ange
Resident 8 'onResident 8 -o"eign national /1%& da#s sta# p"eceding financialResident 8 'onResident 8 -o"eign national /1%& da#s sta# p"eceding financial#ea"#ea"
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C O N T R A C T SC O N T R A C T S
2at is a Cont"act D Sec& *"omise 8 *"omiso" 8 *"omisee Sec& In,itation @ ffe" and Acceptance Sec 3 Consiode"ation Sec& Communication of offe" acceptance
Capacit# to ente" into Cont"act >oida!le Cont"acts
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9i%ab(e Cntra&t"9i%ab(e Cntra&t"
.ino" Sec10 Cont"act Act an# cont"act ,oid a!initio Eto !e t"eated as in,alid f"om t2e outsetE
a mino" can !ind all ot2e"s ecept 2imself
:nsound .ind Sec1& Cont"act Act "unkenness
-o"eign 'ationals
:lt"a >i"es cont"acts /!e#ond poe"s
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Agen&!Agen&! Sec1%& &3% of Indian Cont"act ActSec1%& &3% of Indian Cont"act Act
Agent is a pe"son emplo#ed to an# act fo" anot2e"Agent is a pe"son emplo#ed to an# act fo" anot2e"pe"son o" "ep"esent a pe"son in dealing it2 t2i"dpe"son o" "ep"esent a pe"son in dealing it2 t2i"dpe"sonpe"son
*"incipal is t2e pe"son 2o aut2o"ies t2e agent to act*"incipal is t2e pe"son 2o aut2o"ies t2e agent to act
on 2is !e2alfon 2is !e2alf An agent can$t delegateAn agent can$t delegate A mino" can act as an agent and !ind t2e p"incipal !utA mino" can act as an agent and !ind t2e p"incipal !ut
2e cannot !e !ound2e cannot !e !ound
*"incipal is not !ound 2en agent eceeds aut2o"it#*"incipal is not !ound 2en agent eceeds aut2o"it# *"incipal "esponsi!le fo" all laful acts of t2e agent in*"incipal "esponsi!le fo" all laful acts of t2e agent in
due cou"se of !usinessdue cou"se of !usiness
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In%e)nit!In%e)nit!
Sec1&4 < 1&5 of Cont"act ActSec1&4 < 1&5 of Cont"act Act nl# to pa"ties to t2e cont"actnl# to pa"ties to t2e cont"act
Indemnifie" and t2e IndemnifiedIndemnifie" and t2e Indemnified
Indemnif# a t2i"d pa"t# fo" t2e commissionsIndemnif# a t2i"d pa"t# fo" t2e commissionso" omissions of t2e custome"o" omissions of t2e custome"
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G:ARANTEEG:ARANTEE Su"et#@ C"edito"@ *"incipal e!to" < Sec1&6Su"et#@ C"edito"@ *"incipal e!to" < Sec1&6
S2ould !e a ,alid cont"act@S2ould !e a ,alid cont"act@
:nde"l#ing conside"ation necessa"#:nde"l#ing conside"ation necessa"#
ia!ilit# coetensi,e it2 de!to"ia!ilit# coetensi,e it2 de!to"
a of Su!"ogationa of Su!"ogation
Release of su"et# Sec 133 139Release of su"et# Sec 133 139
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BAILMENTBAILMENT
Sec 14% < 16%Sec 14% < 16%
eli,e"# of goods !# one pe"son to anot2e" it2eli,e"# of goods !# one pe"son to anot2e" it2
inst"uctions to deli,e" as pe" di"ections afte" t2e pu"poseinst"uctions to deli,e" as pe" di"ections afte" t2e pu"pose
is accomplis2edis accomplis2ed
Bailo" 8 BaileeBailo" 8 Bailee Bailee to take "easona!le ca"e/151Bailee to take "easona!le ca"e/151
Bailee lia!le to !ailo" fo" unaut2o"ised usage of !ailedBailee lia!le to !ailo" fo" unaut2o"ised usage of !ailed
p"ope"t#/154p"ope"t#/154 Bailee 2as *a"ticula" lien toa"ds c2a"ges /170Bailee 2as *a"ticula" lien toa"ds c2a"ges /170
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Banker Cu"t)er Re(atin"hi*Banker Cu"t)er Re(atin"hi*
Banke"Banke" Custome"Custome" )"ansaction)"ansaction
11 e!to"e!to" C"edito"C"edito" epositseposits
&& C"edito"C"edito" e!to"e!to" oansoans
33 esso"esso" esseeessee ocke"socke"s
44 BaileeBailee Bailo"Bailo" Safe custod# 8 *ledgeSafe custod# 8 *ledge
55 )"ustee)"ustee Beneficia"#Beneficia"# )"ust)"ust
66 AgentAgent *"incipal*"incipal A(( Agen&! fun&tin"
77
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Banker" Bk E+i%en&e A&tBanker" Bk E+i%en&e A&t
Int"oducedInt"oduced
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T!*e" f Cu"t)er"T!*e" f Cu"t)er"
Indi,idualsIndi,iduals ("oups("oups F:- < Ga"ta and copa"cne"sF:- < Ga"ta and copa"cne"s
Ga"ta eac2 mem!e" 2as "ig2t fo" a s2a"e )"usts)"usts
In%ian Tru"t A&t -00. , Tru"t %ee% Pur*"e f Tru"t
Tru"tee %utie" an% re"*n"ibi(itie" *a"tne"s2ips /*a"tne"s2ips /In%ian *artner"hi* A&t -12. CompaniesCompanies
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*a"tne"s2ip fi"ms
/Indian *a"tne"s2ip Act 193&
Regi"tratin i)*rtant 'hi(e Bank" %ea( 'ith the)#
Se/5;/0 regi"tratin#
Se3 < Nn;regi"tratin &n"e=uen&e"#
Fir) &annt "ue an! thir% *art!#
A(( *artner" jint(! an% "e+era((! re"*n"ib(e#
A )inr &an be a *artner fr *rfit" n(!#
Partner"hi* at 'i(( fr a fi8e% *eri% *arti&u(ar
*ur*"e#
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Companies
/go,e"ned !# Companies Act 1956
N# f )e)ber" -> fr banking &)*anie" .> fr ther" un(e"" it i"regi"tere% a" a &)*an! un%er thi" A&t, r i" fr)e% in *ur"uan&e f
")e ther In%ian La'# ?"e--@# In&r*ratin Se-. < gi+e" (ega( "tatu"# Me)ran%u) f a""&iatin ; na)e , *(a&e, bje&ti+e", %ire&tr"# Arti&(e" f a""&iatin < internatina( )anage)ent, brr'ing
*'er"# P+t# Lt%# C)*an! < n f )e)ber" /> ?&("e(! he(%@ < n *ub(i
tra%ing r (i"ting f "hare" ? %ire&tr" )a8 -. )in .@ Pub(i& Lt%# C)*an! < n re"tri&tin f )e)ber", "hare" free(!
tra%ab(e ? )in 2 %ire&tr" < Ma8 -.@# Regi"tratin f Charge" < 'ithin 2> %a!" Se-./?-@ f I#C# A&t# Nn &reatin f &harge" < Se-./ nt +a(i% again"t the (i=ui%atr"
an% 'i(( nt an! *ririt! ?*# .00@# :(tra 9ire"
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Negtiab(e In"tru)ent" A&t -00-Negtiab(e In"tru)ent" A&t -00- efinitionsefinitions
*"omisso"# 'ote < Sec4 Bill of +c2ange Sec5 C2e;ue Sec6 "ae" 8 "aee 8 pa#ee 82olde" Sec7
*a#ment in due cou"se < Sec10*a#ment in due cou"se < Sec10 'egotiation !# endo"sement 8 deli,e"#'egotiation !# endo"sement 8 deli,e"# ut# to 2onou" c2e;ues < Sec31ut# to 2onou" c2e;ues < Sec31 *a#ment in due cou"se < Sec%5*a#ment in due cou"se < Sec%5 Accepted fo" 2onou" Sec10%116Accepted fo" 2onou" Sec10%116
*"esumed conside"ation Sec11%*"esumed conside"ation Sec11% C"ossing < Sec1&3 < 130C"ossing < Sec1&3 < 130 Collecting Banke" < Sec131Collecting Banke" < Sec131 is2onou" of C2e;ues < Sec13%is2onou" of C2e;ues < Sec13%
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TPE OF BORROAL ACCO:NTSTPE OF BORROAL ACCO:NTS
-und Based ,e"d"aft@ Cas2 C"edit,e"d"aft@ Cas2 C"edit
emand oans@ )e"m oanemand oans@ )e"m oan
Bills and Recei,a!lesBills and Recei,a!les
'on -undBased ette" of C"editette" of C"edit
Bank (ua"anteeBank (ua"antee
efe""ed *a#ment (ua"anteeefe""ed *a#ment (ua"antee
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Nature f A&&unt"Nature f A&&unt"
pe"ati,e Accountspe"ati,e Accounts Cas2 C"edit 8 ,e"d"aftCas2 C"edit 8 ,e"d"aft -o" o"king capital "e;ui"ements-o" o"king capital "e;ui"ements Secu"ed on Cu""ent AssetsSecu"ed on Cu""ent Assets pe"ates !ased on imit 8 "aing *oe"pe"ates !ased on imit 8 "aing *oe" 'eeds "eneal at pe"iodical inte",als'eeds "eneal at pe"iodical inte",als
'onope"ati,e Accounts'onope"ati,e Accounts )e"m oan 8 emand oans)e"m oan 8 emand oans
-o" Ac;ui"ing fied assets-o" Ac;ui"ing fied assets Secu"ed !# -ied assetsSecu"ed !# -ied assets Single o" multiple dis!"usement and "epa#ment o,e" a fiedSingle o" multiple dis!"usement and "epa#ment o,e" a fied
pe"iodpe"iod
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BILLS B:SINESS
Inland 8 -o"eign
emand 8 :sance
Clean 8 ocomenta"#
Collection 8 'egotiation ocuments to title of goods
Folde" in due cou"se 8 Folde" fo" ,alue Sec % 89
'oting and *"otest Sec99104 Set of Bills < Sec13&
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LETTERS OF CRE6ITLETTERS OF CRE6ITPURCHASER
(Opener)
SELLER
(Beneficiary)
BANK (OpeningBank)
BANK
'egotiating Bank
Ad,ising Bank
Confirming Bank
Send
st2e
1C
Sale 8*u"c2ase Cont"act
A
p
p
l
ie
s
fo"
C
Sends t2e me"c2andise
ocumentsAs *e" C
Sends t2e documents
Reim!u"sement of mone#
*a#ment
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Bank Guarantee"Bank Guarantee" Issued on !e2alf of a custome"Issued on !e2alf of a custome"
Issued fa,o"ing a t2i"d pa"t# /!eneficia"#Issued fa,o"ing a t2i"d pa"t# /!eneficia"# -o" a ce"tain sum@ co,e"ing a ce"tain pe"iod-o" a ce"tain sum@ co,e"ing a ce"tain pe"iod
:nde"l#ing cont"act !eteen custome" and !eneficia"#:nde"l#ing cont"act !eteen custome" and !eneficia"#
Indemnif#ing against an# acts /omissions 8Indemnif#ing against an# acts /omissions 8commissions of its custome"commissions of its custome"
An# claim is !inding on t2e !ank i""especti,e of t2eAn# claim is !inding on t2e !ank i""especti,e of t2e
position !eteen t2e custome" and !eneficia"#position !eteen t2e custome" and !eneficia"#
All claims s2ould !e 2ono"ed if t2e claimed it2in t2eAll claims s2ould !e 2ono"ed if t2e claimed it2in t2e
"elati,e gua"antee pe"iod"elati,e gua"antee pe"iod
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TPES OF SEC:RITIESTPES OF SEC:RITIESS+C:RI)I+S CFAR(+ Rele,ant la
11 +*SI)S (ene"al ien 171 < Cont"act Act
Specific ien 170 < Cont"act Act
&& (old 8 'SC 8 S2a"es *ledge 17& < 179
Cont"act Act
33 IC *olic# Assignment 130 < )* Act
44 Book e!ts Assignment 130 < )* Act
55 Stocks 8 goods F#pot2ecation
66 Stocks 8 goods *ledge 17&179 ContAct
77 .o,ea!le assets F#pot2ecation
%% Immo,ea!le asset .o"tgage 5% /a to 5%/g )*Act
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Tran"fer f Pr*ert! A&t -00.Tran"fer f Pr*ert! A&t -00.
eals it2 Sale@ mo"tgage@ lease and actiona!le claimseals it2 Sale@ mo"tgage@ lease and actiona!le claims
.o"tgage is of impo"tance to Banke".o"tgage is of impo"tance to Banke" .o"tgage is t"ansfe" of inte"est of a specific p"ope"t# as.o"tgage is t"ansfe" of inte"est of a specific p"ope"t# as
secu"it# to a moneta"# lia!ilit# o" o!ligation /Sec5%asecu"it# to a moneta"# lia!ilit# o" o!ligation /Sec5%a )#pes of .o"tgage)#pes of .o"tgage
Simple .o"tgage /Sec5%!Simple .o"tgage /Sec5%! .o"tgage !# conditional sale /Sec5%c.o"tgage !# conditional sale /Sec5%c :suf"uctua"# mo"tgage /Sec5%d:suf"uctua"# mo"tgage /Sec5%d +nglis2 .o"tgage /Sec5%e+nglis2 .o"tgage /Sec5%e .o"tgage !# eposit of )itle deeds/Sec5%f HH.o"tgage !# eposit of )itle deeds/Sec5%f HH
Anomalous .o"tgage /Sec5%gAnomalous .o"tgage /Sec5%g
HHHH
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RECO9ER OF BANKSRECO9ER OF BANKS
LOANSLOANS
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$' t re&+er$' t re&+er
B# filing Ci,il SuitB# filing Ci,il Suit it2 "ela,ent documentsit2 "ela,ent documents
it2in t2e limitation pe"iod /3 #ea"sit2in t2e limitation pe"iod /3 #ea"s
Against t2e !o""oe" 8 (ua"anto"Against t2e !o""oe" 8 (ua"anto" !tention of dec"ee!tention of dec"ee
-ile +ecution *etition-ile +ecution *etition
Attac2ment of AssetsAttac2ment of Assets .o,ea!le o" immo,ea!le.o,ea!le o" immo,ea!le
+nfo"ce sale of attac2ed p"ope"ties+nfo"ce sale of attac2ed p"ope"ties
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Banker" Bk E+i%en&eBanker" Bk E+i%en&e
A ce"tified cop# of an# ent"# in a Banke"$sA ce"tified cop# of an# ent"# in a Banke"$s
!ook is sufficient e,idence of eistence of!ook is sufficient e,idence of eistence of
suc2 ent"#suc2 ent"#
ata sto"ed elect"onicall# a p"intout is alsoata sto"ed elect"onicall# a p"intout is also
accepta!leaccepta!le
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S A R F A S I A&t .>>.S A R F A S I A&t .>>.
Secu"itisation of financial assetsSecu"itisation of financial assets
Reconst"uction of financial assetsReconst"uction of financial assets
+nfo"cement of secu"it# inte"est+nfo"cement of secu"it# inte"est )o 2elp c"edito"s "ealise secu"it# it2out inte",ention of)o 2elp c"edito"s "ealise secu"it# it2out inte",ention of
cou"tscou"ts
)2is "emed# is in addition to ot2e" t#pes a,aila!le /R) 8)2is "emed# is in addition to ot2e" t#pes a,aila!le /R) 8
Cou"tsCou"ts
Applica!le to all Banks ecept RRBApplica!le to all Banks ecept RRB
Applies to all immo,ea!le p"ope"ties ecept ag"icultu"alApplies to all immo,ea!le p"ope"ties ecept ag"icultu"al
landslands
SARFASI E fSARFASI E f t
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SARFASI ; Enfr&e)entSARFASI ; Enfr&e)ent
)2e loan must !e identified as '*A
It must !e a secu"ed loan
'otice to !e gi,en !# t2e Bank indicating Bank$s inte"est in enfo"cing t2esecu"it# /taking o,e"
ait pe"iod 60 da#s
Bo""oe" can file o!=ections
Bank to "epl# to o!=ections it2in one eek of "eceipt
Afte" t2e epi"# date !ank to take possession of t2e Asset 8 .anagementCont"ol
)ake all no"mal ca"e to keep t2e Asset 8 !usiness in t2e same condition
ispose off t2e Asset and app"op"iate t2e p"oceeds in t2e o"de" < costs ofeecution of t2e Act@ outstandings in t2e account it2 inte"est and an#"esidue to t2e "ig2tful one"s of t2e asset8!usiness
An# s2o"tfall Bank to app"oac2 t2e Cou"t 8 R)
Bo""oe" 8 ne" of t2e Asset can app"oac2 t2e Cou"t 8 R) againstSAR-A+SI @ !ut must deposit 50 of t2e Bank$s claim !efo"e application