Bank Management

(Course Material Module I & II )

MBA - Semester IV

Course Facilitator: A.Bhuvanes Kumar,

Assistant Professor,
ISMS

CONTENTS
1 | Page

Section
Syllabus

Module - I

Topic
Bank Management

Evolution of Commercial Banks

Banking System-Structure of Commercial Banks

RBI Role & functions

Method of Credit Control
Banking Regulation ACT
Recent trends in Indian Banking Sector.

Module - II

Page
No.

6
7
8
9

Functions of Commercial Banks

11

BankerCustomer Relationship

13

Bankers as a trustee & an Agent-Appropriation of Payment

Garnishee Order
Right of Lien &Set off

14
16
17

2 | Page

FM01 - Bank Management Syllabus

Module I
Evolution of Commercial Banks-Banking System-Structure of Commercial Bank-RBI Role & functionsMethod of Credit Control--Banking Regulation ACT Recent trends in Indian Banking Sector.

Module II
Functions of Commercial Banks- Agency Services General utility services-Credit Creation- Banker
Customer Relationship-Bankers as a trustee & an Agent-Appropriation of Payment- Right of Lien &Set off
Garnishee Order-Law of Limitation.

3 | Page

Module I
INTRODUCTION
As early as 2000 B.C., the Babylonians had developed a banking system. There is evidence to show that the
temples of Babylon were used as banks, and such great temples as those of Ephesus and of Delbhi were the
most powerful of the Greek banking institutions. But the spread of irreligion soon destroyed the public sense
of security in depositing money and valuables in temples, and the priests were no longer acting as financial
agents. The Romans did not organize State Banks as did the Greeks, but their minute regulations, as to the
conduct of private banking, were calculated to create the utmost confidence in it. With the end of the
civilisation of antiquity, and as a result of administrative decentralization and demoralization of the
Government authority, with its inevitable counterpart of commercial insecurity, banking degenerated for a
period of some centuries into a system of financial makeshifts.
Banking : Definition
A banking company is defined a company which transacts the business of banking in India. The Banking
Regulation Act 1949 defines the business of banking by stating the essential functions of a banker. It also
states the various other businesses a banking company may be engaged in and prohibits certain businesses to
be preformed by it.
The term Banking is defined as accepting, for the purpose of lending or investment, of deposits of money
from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order of otherwise
Evolution of Commercial Banks
The banking sector is meant to meet the financial needs of the economy. Too much of money can cause
inflation too little can stifle economic growth and create problems of unemployment and lost opportunity.
Accordingly the apex banking institution, the Reserve Bank of India (RBI) has a basic function "...to
regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India
and generally to operate the currency and credit system of the country to its advantage
The RBI, which commenced operations on April 1, 1935, is at the centre of Indias financial system. Hence
it is called the Central Bank. It has a fundamental commitment to maintaining the nations monetary and
financial stability. It started as a private share-holders bank but was nationalized in 1949, under the
Reserve Bank (Transfer of Public Ownership) Act, 1948.

The largest commercial bank in the country is State Bank of India (SBI). Its origins can be traced back to
1806, when Bank of Calcutta was constituted. It was re-named Bank of Bengal in 1809. Bank of Bombay
(created in 1840), Bank of Madras (created in 1843) and Bank of Bengal were amalgamated in 1921 to form
4 | Page

Imperial Bank of India. Until 1935 (when RBI commenced operations), the Imperial Bank of India
performed the functions of Central Bank as well as Commercial Bank.
In 1955, State Bank of India was constituted to take over the Imperial Bank of India. Later, state associated
banks (State Bank of Jaipur, State Bank of Bikaner, State Bank of Patiala, State Bank of Hyderabad, State
Bank of Indore, State Bank of Mysore, State Bank of Travancore and State Bank of Saurashtra) were
brought under SBI. Subsequently, State Bank of Jaipur and State Bank of Bikaner merged to form State
Bank of Bikaner and Jaipur. In course of time, State Bank of Saurashtra and State Bank of Indore were
merged into SBI. In order to benefit economies of scale and technology, SBI has a grand vision to merge the
other associate banks too, into itself.
RBI earlier owned the entire share capital of SBI. Later, when SBI went public, other investors too became
shareholders. A few years ago, the shares of SBI that were owned by RBI were transferred to the
Government of India. The reach of the banking network is a key determinant of banking services available
for the economy. In order to ensure that banks focus on building that reach irrespective of profitability
considerations, the Government of India went through two rounds of nationalization of banks:
In 1969, 14 major Indian commercial banks (like Central Bank of India and Punjab National Bank) were
nationalized (SBI, as seen earlier, was already under the control of RBI).
6 more banks (like Vijaya Bank and Corporation Bank) were nationalized in 1980.SBI, its subsidiaries, and
the 20 nationalised banks are generally referred to as public sector Banks
Other private sector banks (essentially the smaller ones of Indian origin) were allowed to continue as private
entities under RBI supervision. These are commonly referred to as old private banks. Foreign banks that
were operating in the country were similarly allowed to continue as private entities. In order to enhance
banking services for the rural sector, a framework of Regional Rural Banks came up in 1975. Ownership of
these banks is split between three stake-holders viz. Central Government (50%), concerned State
Government (15%) and the bank which sponsors the RRB (35%). The sponsoring bank is expected to assist
the RRB in its operations The smaller RRBs are in the process of being merged with each other so that they
have the critical mass
for meaningful banking operations.
Another vehicle for local reach is the Co-operative Banks, which have been in existence for over a century.
They are registered under the Co-operative Societies Act, 1960 and regulated under the Banking Regulations
Act, 1949 and Banking Laws (Co-operative Societies) Act,1956. Several states have their own regulations.
Urban co-operative banks finance small scale units and self-employment businesses, besides home finance,
consumer finance and personal finance. Rural co-operative banks are active in areas like farming, cattle,
hatcheries and milk.
5 | Page

BANKING STRUCTURE IN INDIA

After independence, the Government of India launched economic planning in the country since 1951.
During the last37 years of the planning era, commercial banking has undergone drastic transformation
through several important developments/ reforms and policy measures introduced by the government.
Some of the major changes introduced in the Indian banking system may be enlisted as follows:
(1) Liquidation and amalgamation of banks;
(2) Nationalization of the Reserve Bank of India;
(3) Banking legislation;
(4) Evolution of public sector banking through bank nationalization.
(5) Declining significance of foreign banks;
(6) Structural changes of commercial banking;
(7) New strategies in banking business.
Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is
the State Bank of India, a government-owned bank that traces its origins back to June 1806 and that is the
largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India,
which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it
to commercial banking functions. After Indias independence in 1947, the Reserve Bank was nationalized
and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the
government nationalized the six next largest in 1980.
Currently, India has 88 scheduled commercial banks (SCBs) 27 public sector banks (that is with
the Government of India holding a stake), 31 private banks (these do not have government stake; they may
be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of
over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the
public sector banks hold over 75 percent of total assets of the banking industry, with the private and
foreign banks holding 18.2% and 6.5% respectively.
The following are the steps taken by the Government of India to Regulate Banking Institutions in the
Country:

1949 : Enactment of Banking Regulation Act.

1955 : Nationalisation of State Bank of India.

6 | Page

1959 : Nationalisation of SBI subsidiaries.

1961 : Insurance cover extended to deposits.

1969 : Nationalisation of 14 major banks.

1971 : Creation of credit guarantee corporation.

1975 : Creation of regional rural banks.

1980 : Nationalisation of seven banks with deposits over 200 crore.

RBI ROLE AND FUNCTIONS

Central banking is of recent origin. Prior to the commencement of the twentieth century, there had been no
clearly defined concept of central banking. But today there is no country in the world which does not have a
central bank. It is the bank that acts as the leader of the money market. It supervises, regulates and controls
the functions of commercial banks and other financial institutions. It acts as the banker to the government. It
plays an active role in implementing governments economic policy in the country. According to Walls
Roger, central bank occupies the coveted position of being one fo the three great inventions that have taken
place since the beginning of times, the other two being the fire and the wheel. Although some people may
7 | Page

seriously doubt if central bank could belong to such an exalted company, but they all agree that the central
bank is one of the most useful economic institutions which has been developed to help society to manage its
collective financial affairs. Today, central bank is the central arch of the monetary and fiscal framework in
every country of the world and its activities are essential for the proper functioning of the economy and
indispensable for the fiscal operations of the government.

Role of Central bank in a developing economy

The modern central bank is an institution responsible not only for the maintenance of economic stability; it
also performs a variety of developmental and promotional functions which were regarded in the past as
being outside the normal purview of central banking. The main objective of a central banks monetary policy
is to achieve growth with stability within the framework of the general economic policy of the State. For the
sake of economic development, the central bank should provide sufficient quantity of money appropriate to
growth process. A growing volume of production and investments cannot be maintained without an
increasing supply of money, and credit. The money supply should grow at least at a rate roughly equal to
that of increase in real income. It may be essential to mobilize domestic savings for productive uses and the
flow of funds ahs to be guided, qualitatively as well as quantitatively, to proper lines of investment. Thus,
one of the major functions of a central bank is to support the gradual expansion and proliferation of
commercial banks, savings banks, cooperative banks, investment banking, government bond market, bill
market, etc. for the purpose of meeting the requirements of economic developments of the country. The
central bank has also the responsibility to publish statistical reports on trends in the money and capital
markets.

FUNCTIONS OF RBI
1. Bank of Issue
The most important functions of a central bank is that it acts as the bank of issue. It is charged with the
responsibility of issuing notes. The privilege of the note issue is the monopoly of the central bank. No other
banks have the right to print and issue currency notes. In the opinion of De Kock. The privilege of note
issue was almost everywhere associated with the origin and development of central banks. The central
banks take into consideration three important views in the issue of notes-uniformity, elasticity and security.
2. Banker, Agent and Advisor to the Government
The central bank everywhere acts as the banker, fiscal agent and adviser on all important financial matters to
the government. In the first place, it conducts the banking accounts of government departments and
enterprises. It advances short-term loans to government. Thus it performs certain banking functions to the
8 | Page

government. In the second place, the central bank performs certain functions for, and on behalf, on the
government. It makes and receives on behalf of the governments certain payments.

3. Bankers Bank
The central bank acts as the bankers bank. As bankers bank it performs several functions. Firstly, the
commercial banks of the country are required, either by law or by custom, to keep a certain portion of the
deposits they receive from the public. Thus portion of deposits kept with the central bank is known as the
cash reserves of the commercial banks. They can draw currency from the central bank during busy seasons
and pay in surplus currency during slack seasons. Thus the central bank acts as the custodian of the cash
reserves fo the commercial banks. Secondly, the central bank rediscounts bills of commercial banks. Thirdly,
the central bank provides good and ample leadership to the commercial bank.
4. Custodian of the Foreign Currency Reserves of the Country
The central bank also acts as the custodian of the foreign currency reserves of the country concerned. Under
gold standard, the central banks were required by law to maintain gold reserves against note-issue. And now,
after the abandonment of gold,. Standard, the central banks are supposed to keep both gold as well as foreign
currency as reserves against note-issue.
5. Lender of the Last Resort
The central bank also acts as the ultimate lender of the last resort. By lender of the last resort, the central
bank of the country assumes the responsibility of meeting directly or indirectly all reasonable demands for
financial accommodation from the commercial banks, discount houses and certain other credit institutions.
Today this important function has come to be regarded as the sine qua non of central banking.
6. Central Clearance, Settlement and Transfer
As bankers bank, the central bank keeps the cash balances of all commercial banks. It is easier for member
banks to adjust their claims against each other in the books of the central bank.
7. Controller of Credit
Probably the most important of all the functions performed by a central bank are that of controlling the
credit operations of commercial banks. In modern times, bank credit has become the most important source
of money in the country, relegating coins and currency notes to a minor position. Moreover, it is possible, as
we have pointed out in previous chapter, for commercial banks to expand credit and thus intensify
inflationary pressure or contract credit and thus contribute to a deflationary situation.
9 | Page

BANKING REGULATION ACT, 1949

As per Section 5(c) of Banking Regulation Act, 1949 a "Banking Company" means any company which
transacts the business of banking in India.
Explanation: Any company which is engaged in the manufacture of goods or carries on any trade and which
accepts the deposits of money from public merely for the purpose of financing its business as such
manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this
clause."
As per Section 5(b) of Banking Regulation Act, 1949 , banking means the accepting, for the purpose of
lending or investment, of deposits of money from the public, repayable on demand or otherwise, and
withdrawal by cheque, draft, order or otherwise.
As per Section 5(d) of Banking Regulation Act, 1949 , company means any company as defined in Section 3
of the Companies Act, 1956 and includes a foreign company within the meaning of Section 591 of that Act.
As per section 51 of Banking Regulation Act, 1949 , certain provisions of the Banking Regulation Act are
also applicable to the State Bank of India , any corresponding new bank, a regional rural bank and any
subsidiary bank. "Corresponding new bank" has been defined under clause(ee)of section 2 of the DICGC
Act to mean a corresponding new bank constituted under the Banking Companies (Acquisition and Transfer
of Undertakings ) Acts of 1970 or 1980.

RECENT TRENDS IN INDIAN BANKING SECTOR

Indias banking sector is currently valued at Rs 81 trillion (US$ 1.31 trillion). It has the potential to become
the fifth largest banking industry in the world by 2020 and the third largest by 2025, according to an industry
report. The face of Indian banking has changed over the years. Banks are now reaching out to the masses
with technology to facilitate greater ease of communication, and transactions are carried out through the
Internet and mobile devices.
With the Parliament passing the Banking Laws (Amendment) Bill in 2012, the landscape of the sector will
likely change. The bill allows the Reserve Bank of India (RBI) to make final guidelines on issuing new bank
10 | P a g e

licenses. This could lead to a greater number of banks in the country; the style of operation could also evolve
with the integration of modern technology into the industry.
Online Banking
IDBI Bank Ltd has started an online Public Provident Fund (PPF) subscription facility for its customers. The
bank had already received approval from the government to operationalize PPF transactions through the
Internet. The facility would help accomplish the governments initiative of electronic transactions in banking
services, and also provide a strong platform to mobilise funds through the Small Saving Schemes. PPF
account holders of the bank will have the benefit of accessing their PPF account online, view account
details, print statements, and make subscription to PPF by way of online transfer of funds.
Simple steps such as memorising personal identification number (PIN), bringing down credit limits on cards,
using virtual cards for internet transactions and deactivating transactional services linked to a mobile number
can limit bank frauds, according to experts. Changing the password regularly can also save an account from
fraud attacks.
Online money transfers and money credited directly to an account are the second preferred mode of inward
remittances in India, rising to 22 per cent in fiscal 2013 from 14 per cent in 2009, according to an RBI
report. "While electronic wires/SWIFT continue to be the dominant mode of transferring remittances by
overseas Indians, in the recent period, there has been a significant increase in the share of remittances
transmitted through direct transfer to bank accounts and through online mode," the report stated.
Key Statistics
The revenue of Indian banks increased four-fold from US$ 11.8 billion to US$ 46.9 billion in the period
20012010. In that phase, the profit after tax rose about nine-fold from US$ 1.4 billion to US$ 12 billion.
Banking Index with the Sensex (Bankex) that tracks the performance of primary banking sector stocks grew
at a compounded annual growth rate (CAGR) of nearly 20 per cent over the period 20032012.Total number
of onsite and offsite ATMs of Indian Banks reached 100042 in July 2012.
Recent Developments
The central banks of Japan and India have agreed to a proposal that expands the maximum amount of the
Bilateral Swap Arrangement (BSA) between the two countries to US $50 billion. The agreement is for a
three-year period (201215); the previous size of the BSA was US $15 million. The new agreement will
enable the two countries to swap their local currencies against the US dollar for an amount up to US$50
billion.
Public sector banks will soon offer customers insurance products from different companies as against
products from one company. The finance ministry has asked public sector banks to become insurance
11 | P a g e

brokers instead of corporate agents. This move was one of the steps stated by finance minister Mr P
Chidambaram in early 2013, as a way to increase insurance penetration.
Citi has promoted Mr Anand Selvakesari as the head of consumer banking for the Association of Southeast
Asian Nations (ASEAN) region. Mr Selvakesari will continue his present role as Citis consumer banking
business head in India a post he has occupied since July 2013 as well as look after the consumer banking
operations in Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam.
Indian Overseas Bank (IOB) has received approval from the RBI to open a second branch in Bangkok,
according to the banks chairman and managing director Mr M Narendra. The bank will likely open the
second branch before March 31, 2014. Also, the bank is looking to expand its presence. "Our focus is on
opening more rural branches and taking banking to villages. We have covered 3,000 villages under the
financial inclusion scheme, said Mr Narendra.
In an effort to expand its revenue streams, Bank of India (BOI) plans to enter the merchant banking space
through BOI Shareholding Ltd. BOI is looking to buy Bombay Stock Exchanges (BSE) entire shareholding
in their joint venture BOI Shareholding Ltd (BOISL). Another reason for BOIs inclination to foray into
merchant baking is to offer a greater range of financial services to its customers.
Government Initiatives
The Cabinet Committee on Economic Affairs (CCEA) has given the go-ahead to a proposal to increase
foreign holding in Axis Bank to 62 per cent from the current 49 per cent. The move could lead to overseas
investment of nearly Rs 7,250 crore (US$ 1.17 billion) into the country. The approval is subject to foreign
institutional investors (FII) holding being capped at 49 per cent.
To counter the liquidity pressure faced by micro and small enterprises, the RBI will provide refinance
aggregating up to Rs 5,000 crore (US$ 813.16 million) to the Small Industries Development Bank of India
(SIDBI). SIDBI can use the funds for direct and onward lending to banks. Also, in an effort to encourage
more lending to medium enterprises, the RBI will include incremental credit given to these units by
scheduled commercial banks (which do not include regional rural banks) under the domain of priority sector
lending.
HDFC Bank Ltd has started its rural financial literacy initiative in the village of Palakkad in Kerala, with the
support of the RBI. The private bank will conduct financial literacy camps in 39 rural and semi-urban
branches across the South Indian state. These camps will allow adults and school children from 234
Panchayat wards in 26 villages to gain theoretical knowledge on financial products and services. This
initiative endorses the RBI's recent circular which recommends that banks, through their branch networks,
should put in more efforts in rural areas to spread financial literacy.
12 | P a g e

Road Ahead
India is one of the top 10 economies in the world, where the banking sector has tremendous potential to
grow. The last decade saw customers embracing ATM, internet and mobile banking. The number of ATMs
has doubled over the past few years, with more than 100,000 in the country at present (70 per cent in urban
areas). They are estimated to further double by 2016, with over 50 per cent expected to be set up in small
towns. Also, the scope for mobile and internet banking is big. At the start of 2013, only 2 per cent of banking
payments went through the electronic system in the country. Today, mobility and customer convenience are
viewed as the primary factors of growth and banks are continuously exploring new technology, with terms
such as mobile solutions and cloud computing being used with greater regularity.

Module II
INTRODUCTION
13 | P a g e

Commercial banks have come to play a significant role in the development of countries. In fact, without the
evolution of commercial banking in the 18th and the 19th centuries, Industrial Revolution would not have
taken place in England. It will be equally true to state that without the development of sound commercial
banking, underdeveloped countries cannot hope to join the ranks of advanced countries. For, industrial
development requires the use of capital which will not be possible without the existence of banks to provide
the necessary finance to acquire capital. Besides, industrial development will be impossible without the
existence of markets to dispose of the goods produced. But how can markets be extended without the
services of commercial banks? In this section, we shall deal with the important services provided by
commercial banks and show how banks play a significant role in the economic development of nations.

Commercial Banks and Economic Development

(i)Banks are necessary for trade and industry: All economic progress in the last 200 years or so has been
based on extensive trade and industrialization, which could not have taken place without the use of money.
But money does not mean coins and currency notes, only since these form only a small proportion of the
total volume of money supply. Its the bank deposits on which cheques can be issued that constitute the
important sources of money. In all large transactions, payments are not made in terms of money but in terms
of cheques and drafts. Between countries, trade is financed through bill so exchange which are discounted
(i.e., bought) by banks. Without the use of the bank cheque, the bank draft and the bill of exchange, internal
trade and international trade could not have developed, and without such trade, specialization and industrial
development could not have taken place.
(ii) Banks help in distribution of funds between regions: Another way by which commercial banks
encourage production and enhance national income is by the transference of surplus capital from regions
where it is not wanted so much, to those regions where it can be more usefully and efficiently employed.
This distribution of funds between regions has the effect of opening up backward regions and paying the
way for their economic development.
(iii) Banks create credit and help in business expansion: Fluctuations in bank credit have an important
bearing on the level of economic activity. Expansion of bank credit will provide more funds to entrepreneurs
and, hence, will lead to more investment. Under conditions of full employment, expansion of bank credit
will have the effect of inflationary pressure. But under conditions of unemployment, it will push up
production in the country. On the other hand, a decline in bank credit will result in decline in production,
employment, sales and prices. From the view of an underdeveloped economy, the expansion of bank credit
offering more financial resources to industries in one of the contributory causes for greater economic
development.
14 | P a g e

(iv) Banks monetize debt: A very important service the banks render to the community is the creation of
demand deposits in exchange of debts of other (viz., short and long-term securities). Commercial banks buy
debts of others which are not generally acceptable as money, either because the debtors are not sufficiently
known or because their debt is payable only after a period of time. In return for them, they issue demand
deposits which are generally accepted as money. By these exchange operations, banks monetize debt. The
significance of banks today flows from the fact that they are not merely traders in money but also, in an
important sense, manufacturers of money. Bank money is used for the promotion of industry and trade. It is
rightly said that they have not only the power to determine the aggregate volume of bank money in existence
but to influence the uses to which that money should be put.
(v) Banks promote capital formation: Commercial banks afford facilities for saving and thus encourage
habits of thrift and industry among people. To mobilize the idle and dormant capital of the community and
make it available for productive purposes. Economic development depends upon the diversion of economic
resources from consumption to capital formation. A higher rate of saving and investment is, therefore, what
constitutes real capital formation. In this, the role of banks is invaluable. But then there can be other
institutions also in a country such as insurance companies which may help in mobilizing the savings of the
community for productive purposes.
(vi) Banks influence interest rates: Banks can influence economic activity in another way also. They can
influence the rate of interest in the money market through its supply of funds. By offering more or less
funds, it can exert a powerful influence upon interest rates. Besides, it can also influence the people to hold
more less bank money or less or more other assets. In this way, too, it can influence the interest rates. A
cheap money policy with low rate of interest will tend to stimulate economic activity, if other conditions are
favourable. In a developing country like India, banking facilities are highly inadequate. The vast number of
people living in villages and towns do not have any banking facilities and consequently all their savings are
wasted. The opening of banks is these areas or extension of bank facilities will help mobilize savings in
these areas and, when put in the hands of entrepreneurs, will become productive besides in India commercial
banks have started undertaking new functions to help the private sector industries. They help in concluding
deferred payments agreements between Indian industrial units and foreign firms to enable the former to
import machinery and other essential items.

FUNCTIONS OF COMMERCIAL BANKS

15 | P a g e

1. Receiving of Deposits
The most important functions of the commercial banks is to receive deposits form the public. The
commercial banks not only protect them but also help transfer of funds through cheques and even undertake
to repay the money in legal tender money. Deposits received by the commercial banks are of various types, fixed deposits, savings deposits, current deposits and recurring deposits. Fixed deposits or Time deposits are
with the bank for a specified period of time and they can be withdrawn only after the expiry of the said
period. The interest rate depends on the time agreed upon. The longer the maturity period, the higher the
interest rate and vice versa. Form the point of view of safety and interest, fixed deposits are preferable.
2. Making loans and Advances
The second principal functions of the commercial bank is to make loans and advances out of the public
deposits. Direct loans and advances are given to all persons against personal security, gold and silver and
other movable and immovable assets. This the banks do by overdraft facilities, that is, by allowing the
borrower or overdraw his current account and also by discounting bills of exchange. The merchants and
manufacturers enabled to obtain adequate funds for production of goods and services. They help in the
development of those industries which perform the most useful service to the community.
3. Agency Services
A commercial bank provides a range of investment services. Customers can arrange for dividends to be sent
to their bank and directly remitted into their bank accounts, or for the bank to detach coupons from bearer
bonds and present them for payments and to act upon announcements in the Press of drawn bonds, coupons
payable, etc. Orders for the purchase or sale of stock exchange securities are executed through the banks
brokers who will also their opinions on securities or lists of securities.
4. General Utility Services
These services are those in which the bankers position in not that of an agent for his customer. They include
the issue of credit instruments like letters of credit and travellers cheques, the acceptance of bills of
exchange, the safe custody of valuables and documents, the transaction of foreign exchange business, acting
as a referee as to the respectability and financial standing of customers and providing specialized advisory
service to customers.

5. Information and other Services

As part of their comprehensive banking services, many banks act as a major sources of information on
overseas trade in all aspects. Some banks produce regular bulletins on trade and economic conditions at
16 | P a g e

home and abroad, and special reports on commodities and markets. In some cases they invite enquiries for
those wishing to extend their foreign trade, and are able through their correspondents to furnish the names of
reputable and interested dealers of goods and commodities and to advise on the appointment of suitable
agents.

RBI & CREDIT CONTROL

Various weapons or methods are available to a central bank to control credit creation and contraction by
commercial banks. Some of these weapons are traditional and have been in use for decades while some have
been developed and perfected only in recent years. Some are called quantitative controls, since they are
supposed to control and adjust total quantity or the size or the volume of deposits created by commercial
banks, they relate to the volume and costs of bank credit in general without regard to the particular field of
enterprise or economic activity in which the credit is used. There are other methods of credit control known
as particular or selective or qualitative controls, since they control certain types of credits and not all credits.

Credit Control Methods

1) Variation of the Bank Rate
Bank rate is the official minimum are at which the central bank discounts approved bills of exchange or
advance loans against approved securities to the commercial banks and the discount houses. Broadly
speaking the bank rate is the lending rate of the central bank. When the bank rate is raised, the market rate of
interest tends to rise. This discourages new loans and puts pressure on debtors to repay their existing loans.
Thus a rise in the bank rate leads to contraction of credit. Money does into leave the banks. On the other
hand money flows into the banks because more people may now save more money and deposit it in the
banks. Funds may flow in, even from abroad, as the raising of the bank rate is followed by the raising of
interest on deposits. The contraction in the volume of credit and money supply following a rise in the bank
rate leads to a fall in prices.
2. Open-market operations
Deliberate and direct buying and selling of securities and bills in the money market by the central bank, on
its own initiative, is called open-market operations. The theory of open-market operations is as follows: In
periods of inflationary situation, the central bank will sell in the market first class bills in its possession.
Buyers of these bills-whether they are commercial banks themselves or others-make payments to the central
bank through commercial banks. Since commercial banks hold certain reserves or deposits with the central
banks, payment by the former to the latter actually means reduction in the size of the cash reserves held by
the commercial banks with the central bank. Reduction of cash reserves forces commercial banks to reduce

17 | P a g e

their loans and advances and at the same time to refuse loans. Thus, investments activity in the country,
which is based on bank loans and which is responsible for boom conditions, will be cut short.

3) Variation of the Reserve Ratio or changes in the minimum cash reserves of commercial banks
With a view to enable the central banks to have control over the money market and to enable it to control the
capacity of the commercial banks to expand or contract credit, the central bank is given the power to
decrease or increase the minimum cash reserve (Reserve Ratio) which the commercial banks are required to
keep with the central bank. The reserve ratio is the compulsory minimum percentage of the time and demand
liabilities which the commercial banks must keep as deposit with the central bank.

RELATIONSHIP BETWEEN BANKER AND CUSTOMER

Meaning of a Banker
There are numerous definitions of the words Bank and Banker. But most of them are not satisfactory.
Dr. H.C. Harthas given a typical definition. According to him, A banker of bank is a person or company
carrying on the business of receiving money s and collecting drafts, for customers subject to the obligation
of honouring cheques drawn upon them from time to time by the customers to the extent of the amounts
available in their Current Account.
Definition of a customer
The term customer of a bank is not defined by law. Ordinarily, a person who has an accounts in a bank is
considered its customer. Banking experts and legal judgments in the past, however, used to qualify this
statements by laying emphasis on the period for which such account had actually been maintained with the
bank. To constitute a customer the following essential requisites must be fulfilled:
i) a bank account-savings, current or fixed deposit-must be opened in his name by making necessary deposit
of money, and
ii) the dealing between the banker and the customer must be of the nature of banking business.
General Relationship Between Banker and Customer
The relationship between a banker and his Customer essentially flows from the contract. It is fundamentally
the relationship of debtor and creditor, the respective positions being determined by the state of the account.
However in relation to other services rendered by banker he is sometimes an agent of the customer, as for
example, in collection of cheques, sale of securities, etc., Bailee in relation to the safe custody of valuables;
and trustee when he is entrusted with property to be administered for the benefit of a named beneficiary.

18 | P a g e

Debtor and Creditor relationship

This concept of debtors and creditor relationship is a departure from the original view that the banker is a
mare depository of the funds of the customer and was enunciated in Foley V. Hill where it was observed that
the money, when paid into bank ceases altogether to be the money of the principal; it is then the money of
the banker who is bound to return an equivalent by paying a similar sum to that deposited with him when he
is asked for it.
Bankers as a Trustee
Ordinarily, a banker is a debtor of his customer in respect of the deposits made by the latter, but in certain
circumstances he acts as a trustee also. A trustee holds money or assets and performs certain functions for
the benefits of some other person called the beneficiary. For example, if the customer deposits securities or
other valuables with the banker for safe custody, the latter acts as a trustee of his customer. The customer
continues to be the owner of the valuables deposited with the banker.
Banker as Agent
As stated earlier a modern banker performs many functions as the agent of his customer and for his
convenience. Some of the agency functions are buying and selling securities, collection of cheques, payment
of bills and periodic payments. In this position the banker and customer relationship is governed by the law
relating to Principal and Agent. The banker enjoys all the rights of an agent and in turn is subject to all the
obligations that flow from agency
OBLIGATION TO HONOUR THE CHEQUES
The deposits accepted by banker are his liabilities repayable on demand or otherwise. The banker is
therefore, under a statutory obligation to honour his customers cheques in the usual course. Section 31 of
the Negotiable Instruments Act. 1881, lays down that: The drawee of a cheque having sufficient funds of
the drawer in his hands, properly applicable to the payment of such cheque must pay the cheque when duly
required to do so and in default of such payments must compensate the drawer for any loss or damage
caused by such default.

GARNISHEE ORDER
Garnishee order is an order from the court obtained by a judgment-creditor attaching the funds in the hands
of a third party due to the judgment debtor. This is subject to the condition that the funds attached must be
actually due from the garnishee, i.e., the third party and in our context, the banker. However an existing debt
19 | P a g e

through payable at a further date, may be attached. Thus fixed deposits coming under this category can be
subject to attachment. But fixed deposits which can be withdrawn after the customers notice cannot be
attached. The reason is simple. In such a case there is no existing debt unless and until the notice is given by
the customer.
RIGHT TO SET-OFF
The right of set-of is a statutory right which enables a debtor to take into account a debt owed to him by a
creditor, before the latter could recover the debt due to him from the debtor. In other words, the mutual
claims of debtor and creditor are adjusted together and only the remainder amount is payable by the debtor.
A banker, like other debtors, possesses this right of set-off which enables him to combine two accounts in
the name of the same customer and to adjust the debit balance in one account with the credit balance in the
other.

______________________________________________________________________________________

20 | P a g e