Anda di halaman 1dari 59

BANKING AND INSURANCE LAW

III B.COM CA
S.SELVI

Unit – I

Banker and Customer – Definition – Relationship - Functions of Commercial Banks –


Recent Developments in Banking,

Unit – II

Negotiable Instrument Act - Crossing - Endorsement - Material Alteration – Payment of


cheques : Circumstances for dishonour - Precautions and Statutory Protection of Paying and
Collecting Banker.

Unit – III

Insurance : Meaning - Functions - Principles : General, Specific and Miscellaneous.


Classification of Insurance: Based on Nature, Business and Risk – Impact of LPG on Indian
Insurance Industry.

Unit – IV

Legal dimension of Insurance : Insurance Act, 1938 – Life Insurance Act , 1956 – General
Insurance Business Act, 1932 – Consumer Protection Act,1986.

Unit - V
IRDA - Mission - Composition of Authority - Duties, Powers and Functions - Powers of
Authority - Duties, Powers and Functions- Powers of Central Government in IRDA
Functioning.
UNIT-I
ORIGIN OF BANKING

The word, ‘Bank’ is said to have derived from the French word ‘Banco’ or ‘Bancus’ or ‘Bank’
or ‘Banque’ which means, a ‘bench’. In fact the early Jews in Lombardy transacted their
Banking business by sitting on benches. When their business failed, the benches were
broken and hence the word ‘bankrupt’ came into vogue.
Another common held view is that the word ‘bank’ might be originated from the
German word ‘Bank’ which means a joint stock fund of course bank essentially deals with
funds. In due course, it was Italianized into ‘banco’, Franchised into ‘bank’ and finally
Anglicized into ‘bank’. This view is most prevalent even today.

DEFINITIONS
1. BANKING:
The Banking Regulation Act’ which gives a statutory definition to the term banking
According to section 5(b) of the act ‘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”.

BANKER:
Dr. Herbert L.Hart defines a banker as “one who in the ordinary course of business
honours cheques drawn upon him by persons from and for whom he receives money on
current account.
According to Sir John Paget, “no person or body corporate or otherwise, can be a
banker who does no (1) take deposits accounts, (2) take current accounts, (3) issue and
pay cheques, and (4) collect cheques crossed and uncrossed, for his customers.

CUSTOMER:
The term ‘customer’ of a bank is not defined by law. Ordinarily a person who has an
a/c in a bank is considered its customers thus; to constitute a customer the following
essential requisites must be fulfilled.
i) A bank a/c – 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.
A customer of a banker need not necessarily be a person. A firm, joint stock Company a
society or any separate legal entity may be a customer.

CHARACTERISTICS OF BANKING BUSINESS:


1. There should be acceptance of deposits:
There is difference between the terms ‘loans’ and “deposits”. Generally, when
amounts are borrowed on condition that they should be repaid on the expiry of a term, they
are regarded as loans rather than deposits. In case of deposits, the liability to repay arises
only when a demand for repayment has been made.
2. Deposits should be from the public:
The acceptance of deposits by an institution from its own members does not
constitute banking. This means that ‘nithis’ or ‘mutual benefit societies’ which collects
deposits only from their members are not banks. However, the words, “deposits from
public” have given rise to practical difficulties for example in the case of many co-operative
credit institutions a substantial portion of their deposit business may be from their
members.
3. Repayable on demand or otherwise:
The definition covers acceptance of all deposits whether repayable on demand or on
the expiry of a term or after a specified period of notice.
4. Withdrawable by cheque, draft, order, or otherwise:
This means that withdrawal of deposits need not be try means of a negotiable
instrument like cheque. Withdrawal may be permitted in any other firm eg. A request may
be made to transfer funds from are a/c to some other a/c.

5. Purpose of acceptance of deposits:


The purpose of accepting deposits should be ‘lending’ or ‘investment’. Thus,
companies which accept deposits for financing their trading or manufacturing business will
not come within the definition of banking companies not banking companies can combine
manufacturing or trading activities along with the banking business.
 To purchase durable goods such as VCRs, refrigerators, TVs, etc. These are clean
loans and banks keep a lien on the goods and reserve the right to seize them if the
borrower fails his part of the contract.
 Loan Participation: Some of the larger borrowers are financed by more than
one institution on a participation basis. This is done either because the amount
involved is very large and beyond the resources of a single institution, or because
the amount is beyond what an institution would like to risk on a single borrower.
Schemes for Financing Agriculture Banks grant term-loans to small-scale industrial
units for expansion, modernization, and renovation and also provide them with working
capital finance.

CLASSIFICATION OF BANKS:
Today is the age of specialization and w can find specialization in all fields including
banking. The banks have specialized in a particular line of finance. Various types of banks
have developed to suit the economic development and requirements of the country. The
principal banking institutions of a country may be classified into the following types.
I. Central Banks II. Commercial Banks
III. Industrial or Development Banks IV. Exchange Banks
V. Co-operative Banks. VI. Land Mortgage Bank.
VII. Indigenous Banks VIII. Savings Banks
IX Supranational Bank X. International Bank
i. Central Bank:
Central Bank is the bank of a country – a nation. Its main function is to issue
currency known as ‘Bank Notes’. This bank acts as the leader of the banking system and
money market of the country by regulating money and credit. These banks are the bankers
to the government, they are bankers’ banks and the ultimate custodian of a nations foreign
exchange reserves. The aim of the Central Bank is not to earn profit, maintain price stability
and to strive for economic development with alround growth of the country. There is now
hardly any country, which does not have a Central Bank of its own. It acts as a great engine
of growth of a State. In India, the RBI was established in 1935 and this Bank has since been
functioning as the Central Bank of the country (this is not to be confused with ‘Central Bank
of India’, which is only a commercial bank). The Central Bank of different countries is known
by different names like Reserve Bank in India, Bank of England in U.K Federal Reserve
System in U.S.A., etc.
ii) Commercial Banks:
A bank, which undertakes all kinds of ordinary banking business is called a
commercial bank. It is so called because it so called because it provides money and credit
for public and grand short-term loans, and advances. They supply working capital to
industries and enable them to carryon production and manufacturing activities. They grant
loans and advances on the stocks of agricultural commodities, industrial goods, etc., they
discount internal and foreign bills and thereby finance the International trade. They also
perform certain agency services such as collection of cheques, dividends, interest on
investments, issue of drafts, letter of credit, Traveler’s Cheques, Investment Advisory
Services, etc.,
iii) Industrial Bank or Financial Institutions
An industrial Bank is one which specializes by providing loans and fixed capital to
industrial concerns by subscribing to share and debenture issued by public companies. They
play an important role in the establishment and growth of industries. The block capital
required for the acquisition of fixed assets, etc., is supplied by investment banks. They
provide long-term loans and credits for period varying between 5 and 15 years for
industries to acquire fixed assets. They may serve as catalytic agents in mobilization of
capital in other forms of assistance such as, underwriting, guarantee, etc., these banks are
nowadays grouped as ‘Development Financial Institutions’.
These banks are very popular in Germany and Japan. In India, we have several
Industrial Finance Corporation in addition to the “Industrial Development Bank of India”.
Both, Development Financial Institution and Commercial banks, nowadays, finance
infrastructure development activities, which include construction of transport facilities,
building of power-supply stations, etc.,

iv) Exchange Banks (Authorized Dealers in Foreign exchange):


These types of banks are primarily engaged in transactions involving foreign
exchange. They deal in foreign bills of exchange import and export of bullion and otherwise
participate in the financing of foreign trade. They do a number of incidental services such as
opening of letters of credit, issue of Foreign Currency Drafts and Travellers’ Cheques and
supply of information about foreign customers. They provide credit and loans in foreign
currency and also accept deposits in Foreign Currency. They require huge capital and
trained staff as it is a risky business. The maintain branches in foreign countries at
important trade centers. In the past foreign bank operating in India would deal in foreign
exchange and were known as exchange banks. Reserve Bank of India and known as
Authorized Dealers in Foreign Exchange. As per foreign Exchange Regulation Act banks
dealing in Foreign Exchange related activities requires the permission of Reserve Bank of
India. This is applicable to both Indian and Foreign Banks.
v) Co-operative Banks:
They are organized on co-operative principles of mutual help and assistance. Thy
grant short-term loans to the agriculturists for purchase of seeds, harvesting and for other
cultivation expenses. They accept money on deposit from and make loans to their members
at a low rate of interest
vi) Land-mortgage Banks (Presently known as Agriculture and Rural Development
Banks):
They are agriculture development banks. The Land-mortgage banks supply loan-
term loans for a period up to 15 years for development of land to improve agricultural
yields. They grant loan for permanent improvements in agricultural lands. They create
negotiable bonds out of real estate like land, buildings, etc. they raise funds by floating
debentures and by borrowing from the government. The agriculture Finance Corporation
was the first Indian Institution to set up finance for development of Agriculture. The
National Bank for Agriculture and Rural Development (NABARD) was constituted by the
Government to promote rural development.
vii) Indigenous Banks:
The Central Banking Enquiry Commission defined an indigenous banker as a
individual or firm accepting deposits and dealing in indigenous lending or money to the
needy.
They form unorganized part of the banking structure, i.e. these are unrecognized
operators in receiving deposits and lending money. In India the Marwaris, the Multanis, the
Jains, the Sowcars, the Nattukottai chettiars are some of the leading indigenous bankers
who charge high rates of interest on their lending. In rural areas, they still provide
substantial financial to agriculturists and small traders
viii) Savings Banks:
These are institutions which collect the periodicals savings of the general public.
Their main objects are to promote thrift and saving habits among the middle and lower
income sections of the society. They have certain restrictions on number of withdrawals in a
year to discourage spending. In almost all countries, postal authorities also run savings
bank account and their working is regulated by the government. The first savings bank was
started in Hamburg in 1765. In India, we have postal savings accounts. These days
separate savings banks as such are very rare. In India, all commercial banks have savings
accounts. The minimum balance which is required to be kept in the account differs from
banks to banks. The rate of interest payable on the accounts by banks is determined by
RBI. Presently it is 4.5 per cent per annum. Co-operative banks are normally allowed to pay
an additional 0.5 per cent interest per annum. Interest rate on savings accounts with post
offices is determined by Government of India.
ix) Supranational Banks:
Special Banks have been created to deal with certain international financial matters.
World Bank is otherwise known as International Bank for Reconstruction of Development
(IBRD) which gives long-term loans to developing countries for their economic and
agricultural development. Asian Development Bank (ADB) is another Supranational Bank
which provides finance for the economic development of poor Asian countries. They
generally provide finance for the economic development of poor Asian countries. They
generally provide finance at concessional interest rates and for loan-term needs. These
institutions are the creations of World bodies promoted by various countries or central
banks of different countries. The European Central Bank established in June 1998 by
countries in the European Union is another example of Supranational Bank
x) International Banks:
International Banks are those which are operating in different countries. While, the
registered office/head office is situated in one country, they operate through their branches
in other countries. They specialize in Banking business pertaining to foreign trade like
opening of letters of credit, providing short-term finance in foreign currency, issue of
performance guarantee, arranging foreign currency credits, etc., they are the main traders
in International Currencies like US’ dollars’, Japanese ‘Yen’, the new-born European
Currency ‘Euro’, etc. they also perform Currency Risk Management functions for clients.
These banks are also known as Multinational Banks since, they operate from many
countries. These banks make possible the follow of money /credit from one country to
another country. They help grow international trade.

Relationship between a Banker and Customer:


The nature of relationship between a banker and customer depends upon the type of
service rendered by the banker. The services rendered by commercial banks in our country
can be classified into two categories.
1. Traditional Services, and
2. New Services.
TRADITIONAL SERVICES
These services mainly relate to:
 Maintenance of different types of deposit accounts e.g. savings, fixed and current
deposit accounts;
 Grant of advances through cash credit, overdraft and loan accounts and through
purchasing/discounting demand and usance bills;
 Collection of cheques, bill of exchange and other instrument (inland and foreign);
 Issue of performance and financial guarantees;
 Provision of remittance facilities by issue of drafts, mail transfers, and telegraphic
transfers;
 Provision of facilities of safe deposit and safe custody; and
 Purchase and sale of securities.

NEW SERVICES
The banks have introduced a number of new services with the accent on deposit
mobilization and grant of credit to weaker sections of society during recent years. Some of
the important new services are as follows:
 Schemes for Deposit Mobilization: A large number of new schemes
have been introduced for deposit mobilization. Some of these schemes are as
follows:

 Certificate of deposit (CD): The Certificate of Deposit (CD) is a


document of title similar to a time receipt issued by a bank. However, there
is no prescribed interest rate on such funds and the banks have the freedom
to issue it at a discount or face value. It is a bearer document, hence, readily
negotiable.
 Daily savings scheme: Under this scheme small depositors are
expected to deposit their money with the bank every day. It is specially
meant for daily wage earners. Syndicate Bank was a pioneer in this field with
its Pigmy Deposit Scheme.
 Minor savings scheme: This scheme has been introduced as an attempt
to encourage children to form the saving habit. Withdrawal facility is also
available under the scheme.
 Ladies Department: In order to attract women as depositors some
banks have Ladies Departments. They also conduct special courses to
acquaint the women with banking habit.
 Monthly interest income schemes: They are fixed deposit accounts on
which instead of annually or half yearly, monthly interest is either paid by
way of cash or is credited to the current or savings deposit account of the
depositor. It may also be credited to a recurring deposit or festival deposit
account. Banks usually allow loan and refund facilities before maturity on
appropriate terms.
 Annuity or retirement scheme: Under this scheme monthly installment of
deposits are collected for a period of years. The amount inclusive of interest
or double the amount received, in monthly installment, is repaid after certain
specified period.
 Farmers deposit schemes: This scheme is intended for the benefit of
those farmers, who can save once or twice a year, when their income is
received after harvest. Under the scheme farmers can deposit their money
once or twice a year as and when they receive the proceeds of the sale of
their crop and they can withdraw up to 1/10 of deposit every month.
 Insurance linked savings bank accounts: The scheme provides life
insurance protection on the life of an account holder covered under a special
Insurance Linked Savings Bank Account. Persons, not below 18 years of age
and not above 49 years of age, and who agree to maintain specified minimum
balance and who have an independent regular income by way of salary,
professional income, rent, dividend on shares are eligible for opening an
account under this scheme. Joint accounts can be opened by two persons
closely related to each other but only one of the joint account holders will be
insured. Insurance cover is provided by the Life Insurance Corporation of
India under a special arrangement with the bank. Besides the insurance
benefits, the depositor has the advantage of getting repayment of the balance
with interest calculated by bank on minimum balance.
 Innovative deposit schemes: In order to attract deposits from
the public many banks (particularly foreign banks) have started innovative
deposit schemes.
1. Multi deposit scheme: In case of a traditional fixed deposit scheme, if
the depositor needs to withdraw even a small sum, he has to break the entire deposit.
Alternatively he can take a loan or overdraft facility on his deposit. However, he will pay a
higher interest on such loan or overdraft as compared to the interest that he gets on his
fixed deposit.
In case of a multi-deposit scheme, a depositor gets free access to his money. It is
so structured that the depositor can use his money whenever he needs it without losing
returns or breaking the entire deposit or paying interest to use his own money.
The depositor is required to open a deposit account with minimum amount say Ra.
1000. His money is treated as multiple of deposits of fixed sum say Rs. 1000. He is
entitled to withdraw as many blocks of Rs.1000 as he wants. There is no compulsion to put
back the money withdrawn.
For example if one opens a 3 years multi-deposit account of Rs. 100000 and decides
to withdraw Rs. 10000 after 9 months, the balance of Rs. 90000 will earn interest at an
attractive rate for these 9 months. As per RBI regulations, premature
withdrawals earn interest at 1% less than the rate applicable for the period for which the
deposit was actually paid.
The cheque facility is also available for withdrawing the amount. Some banks permit
use of their bank cards for this purpose. The banks usually do not issue a Deposit
Certificate to the depositor for this purpose. They give a Credit Advice instead. In the
event of its being lost, its duplicate copy can be obtained without much difficult.
The City Bank is the first bank in the country to introduce multi-deposit scheme.
2. Time-wise savings scheme: This scheme gives such facilities to a depositor
that he saves more time than just money. The salient features of the scheme are as
follows:
 The depositor has to open a deposit account with a minimum amount, say Rs.
10,000.
 The depositors account is credited with interest regularly at the rate applicable to
savings deposit. The interest is credited on the minimum balance in the
depositors account between the 10th and the last day of the month.

 In case a depositor is going out of town, he can have a confidence operating his
account in his absence.
 The depositor is given access to all branches of the bank irrespective of the
branch where he has opened the account. The account holder can deposit or
withdraw up to a fixed amount (say Rs. 3000) at any of the branches of the
bank. Similarly he is also entitled to free transfer of funds from his account in
one branch to the same titled account in any other branch.
 The bank also agrees to pay the routine bills of the depositor if given instructions.
 In case the depositor does not want to receive any bank related correspondence,
at his registered address, the banks at his request can hold his mail to be
collected personally by him.
The Time-wise Scheme was first introduced in India by ANZ Grindlays Bank.
3. Smart-money scheme: This gives the depositor a smart alternative to his
savings account. The depositor can withdraw up to 75% of his deposit whenever he wants
it by just issuing a cheque. On the balance, he continues to enjoy the rate applicable to
fixed deposits as per the directives of the Reserve Bank.
The Smart-money Account scheme has been launched in India by the Hong Kong Bank.
4. Any time money (ATM) scheme: The Scheme enables the depositor though ATM
card, to withdraw, deposit, check balances, transfer money and order for cheque book or
statements, at his convenience, day or night, seven days a week. City Bank and Hong Kong
Bank are pioneers in this field.

 Housing Deposit Scheme: These Schemes are suitable for those wishing to
acquire or construct their own houses. Account holders have to deposit money in
installments for a fixed period at earning an attractive rate of interest.
With the setting up of the National Housing Bank on July 9th 1988, a spurt is
expected in the building activity. The National Housing Bank has introduced with effect
from July 1 st
1989, this scheme is called Home Loan Account Scheme (HLAS) with the co-
operation of scheduled banks.
 Automatic extension Deposit Scheme: Depositors make a lump sum payment
and deposits can be automatically renewed for any term as desired after the
specified period.
 Personal Loan Scheme: The Scheme has been introduced during the last one
decade. Under the scheme individuals, either employed or engaged in business and
having a steady income, are granted loans grant loans to technocrats, technologists,
technicians and entrepreneurs to set up small-scale industrial units.
 Schemes for Agriculturists: A large number of schemes have been
introduced by banks to help agriculturists. They provide short-term loans for
financing seasonal agricultural operations including purchase of inputs. Medium-
term loans are provided for purchase of equipment such as tractors, agricultural
machinery and pump sets, sinking wells, etc. Long-term loans are provided for
purchase of land and other assets of long-term durability. Some of the banks have
adopted certain villages for providing credit facilities for all productive purposes in
the villages adopted. Many of the banks have launched schemes for financing farm-
based activities such as poultry, dairy farming, etc. They have also started providing
loans to fishermen for purchase, construction and mechanization of boats.
 Financing of Road Transport Operations and other small Borrowers:
Loans are granted for purchase of vehicles i.e. taxis, scooters, trucks,
rickshaws to road transport operators, on hypothecation of the vehicle concerned.
Self-employed persons like doctors, lawyers, architects, etc., are also granted loans
to start or expand trade or vocation. Some banks have also introduced schemes for
granting of educational loans to deserving students for graduate and post-graduate
courses in India and for higher studies abroad.
 Credit Transfer System: As a result of increased customer expectations many
banks have introduced schemes for free remittance of funds by their customers
subject to certain conditions. One of such schemes of charge amounts up to a
specified limit at a time from one branch of the bank for credit to any personal
account with any of its branches. Similarly, under another scheme known as ‘Special
Cheque Transfer Scheme’, cheques up to a certain amount drawn on any personal
account can be collected, negotiated at par for the payee of the last endorsee.
 Credit Cards: The Credit Cards System in India is rather a new concept. Of course,
in the West, credit cards are slowly replacing the real money as a medium of
economic transactions in day to day living. The Indian banks which have ventured
into the credit cards scheme are Andhra Bank, Central Bank of India, Bank of
Baroda, Bank of India, Canara Bank, Indian Overseas Bank, Punjab National Bank
and State Bank of India etc. A credit card is a unique scheme in which one uses a
little card and special cheques in place of money. Hence, instead of paying for things
in cash, one can pay for them with credit card. Credit cards are issued to valued
constituents as identification cards. On presentation of the cards, the constituent
can encash his cheques drawn on his account at any of the officers of the bank
issuing the credit card up to a specified amount for a specified period. The cheques
issued by him are also accepted for payments by several institutions viz. Airlines,
hotels, departmental stores, etc. There is no restriction on the number of
withdrawals or on the amount which one can withdraw at one time.
 Rural / Green Cards: Dena Bank and a number of other banks are now
offering ‘Green Cards’ to farmers to provide them production credit to buy agriculture
inputs without repeated visits to them. Under this scheme of ‘green card’ of ‘rural
card’, and agriculturist with a good track record is issued a card to avail credit facility
within indicated limits for three years. He can present special cheques issued along
with a card at anyone of the designated branches convenient to him. The Branch
Manager after comparing his signatures on the card makes cash payments or issues
a bank draft at par in the name of dealer of fertilizer, seeds, pesticides etc. Of
courses, there is a risk of misusing this facility, hence, it is necessary that the banks
should issue such cards only to farmers with good past records. Corporation Bank
issues two types of rural cards, one for crop loans and the other for consumption
loans.
 Travellers Cheques: Travellers cheques are issued by banks to avoid the risk
of loss or inconvenience in having to carry large amount of cash while traveling.
These cheques are issued in suitable denominations and are encashable at any office
of the bank.
 Travel Agency Work: A few banks have started travel agency work for their
clients such as securing of passage, accommodation in hotels, providing general
travel information, etc. Some banks arrange reservation of tickets for a small charge
for their customers only.
 Gift Cheques: These cheques are artistically designed in attractive
folders and covers. The purchaser of the gift cheque need not be an account holder
with that bank or any other bank to avail of that service. The cheque is collectable
at par at all the offices of the issuing banks in India.
 Lock-box and Night Safe Service: In case of lock-box service a box is
kept at the branch of the bank in which the customers lodge the cheques and other
remittances after the bank’s office hours. The bank collects them the next day and
passes the necessary entries. It obviates the need for the customers to go to the
bank during the customers’ own office hours and thus saves time for them. At some
banks efforts have also been made to offer night safe facilities whereby the
customers, particularly the traders, can lodge their cash overnight.
 Services after Banking Hours: In order to provide service to the customers after
banking hours some banks have introduced “Emergency Vouchers Scheme”. These
vouchers, which are sold free of any extra charge, are encashable at the bank’s
branches during office hours and selected Petrol Stations after office hours. A
number of banks have started morning and / or evening banking facilities in
residential areas.
 Other Services: These services include such as tax assistance, executor and
trustee, merchant banking services, etc. Since these services are of a high specified
nature, only a few banks provide them.

I. General Relationship between a Banker and Customer:


1. Primary Relationship (Debtor and Creditor Relationship):
The relationship between a banker and customer is primarily that of debtor and
creditor. On the basis of the existing state of account, respective position of the banker and
customer will
be determined. In other words, if the customer’s account show a credit balance, the banker
becomes a debtor and the customer becomes the creditor. On the other hand, if it shows a
debit balance, the banker becomes a debtor and the customer becomes the creditor. On the
other hand, if it shows a debit balance i.e. overdrawn, the banker becomes a debtor the
money deposited by the customer with a bank is a debt due from the bank to its customer
and it becomes the property of the bank. Therefore, the banker may make use of it
according to his discretion. However, the banker is under an obligation to repay the debt as
and when demanded by the customer. But such repayment need not be made in terms of
the same currency notes and coins deposited by the customer. Such payment may be in
any kind of legal tender money.
However, this relationship of debtor and a creditor between a banker and its
customer differs from similar relationship arising out of ordinary commercial debts, in the
following respects:
(a) Demand for repayment necessary: The general rule that demand for repayment by
creditor is unnecessary and applicable in case of ordinary commercial debts; dones
not apply in case of banks. The customer must make and express demand for
repayment to make the debt actually due for payment by the bank. This is because if
the would amount to summarily closing the customer’s account without notice. This
may damage its customer credit on account of possible dishonour of cheques already
issued by him.
(b) Demand should be made at proper time and place: The demand for repayment
should be made during normal working hours of the bank on a working day. In case
a banker makes.
(c) Payment during any other time, it shall not be taken to be a payment in due course
and it may be held liable to the customer for loss.
Moreover, the demand should be made at the branch of the bank where the
customer has his account unless otherwise agreed. Though branch forms part of one
legal entity, yet the banker obligation to repay is confined to the place where the
accounts is kept.
(d) Demand must be made in the proper manner: The demand for repayment of
money should be made through a cheque or any other written order as per the
common usage among the bankers. A verbal or telephonic demand will not be taken
as a proper demand.
In case the customer has two more accounts with the same branch of the bank, the
banker cannot generally combine these accounts unless it obtains prior approval of
the customer or has given prior notice to the customer. Similarly the customer
cannot also treat two different accounts at the same branch as one. He cannot draw
a cheque on one with insufficient balance presuming that the banker will pay it since
the balance in the other account is sufficient.
3. Trustee and Beneficiary:
The banker acts as a trustee for its customers in those case where it accepts
securities and other valuable for safe custody. In such cases the customer continues
to be the owner of the valuable or securities deposited with the bank and they are
not available for distribution among the bank’s creditors in the event of bank going
into liquidation.
The position of a banker as a trustee or debtor depends upon the practical art
circumstances of each case. This has to be viewed in the light of specific instructions given
by the customer regarding the purpose or use of the documents or money entrusted to the
banker. If specific instruments are given at the time to deposit of money the banker is
taken as a trustee for the money and not as debtor. For example, when the money is paid
to a bank with special instructions to retain it till further instructions, the banker will be
considered as a trustee for the funds and not as a mere debtor. Similarly when a cheque or
bill is deposited with the bank for collection, the banker acts as a trustee of the cheque or
bill till it is collected. But once the cheque or bill is collected and the proceeds are credited
to the customer’s account, the bank goes into liquidation, such instrument will not be
available for distribution among the creditors of the bank.

3. Principal and Agent:


Banker acts as the agents of the customer in those cases where it performs agency
functions such as collection of cheques, bills of exchange, purchasing and selling securities,
payment of insurance premium etc., on behalf of his customer.
Functions of commercial bank

Meaning of bank:

According to the 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.

Functions:

Receiving deposits from the public:


An import function of a commercial bank is to attract deposits from the public. Those
who have cash balances but who want to keep them in a safe place, deposit the same with
a bank. The commercial bank not only protects them but also provides the depositors with a
convenient method for transferring funds through the use of cheques.
Deposits are of various types.
1. Demand Deposits
2. Savings deposits
3. Fixed deposits

1. Demand deposits:

It is also known as current accounts are those which can be withdrawn by the
depositor at any time by means if cheques. The bank does not pay any interest on
demand deposits.
2. Savings deposits:

Savings deposits are those deposits on which the bank pays a certain percentage
of interest to the depositors but the bank places certain restrictions on withdrawal. For
example they may not be withdrawn more than once or twice a week or more than a
fixed sum if money at a time.
3. Fixed deposits:
These deposits are made for specific periods and can be withdrawn only at the
expiry of the specific periods.

Making loans and advances:


The second major function of a commercial bank is to make loans and advances out
of deposits of the public. Direct loans and advances are given to all types of persons,
particularly to businessmen and investors against personal security, gold and silver and
other movable and immovable assets.

Use of the cheque system and the plastic cards:


Apart from these two major functions a commercial bank performs a number of other
useful functions to the community. For example it has developed the cheque system under
which the depositors are given the right to withdrawn from their deposits any amount at
their convenience by means of cheques.
Till recently the cheque was regarded as the most developed credit instrument
evolved by man. This is being gradually replaced by the plastic card which is also based on
bank deposits.

Transfer of funds:

Another function of commercial bank is to provide facilities for transfer of funds from
one part of the country to another or from one country to another. This may be done either
by the cheque itself or through a bank draft. Any amount of money can be transferred
cheaply by these methods.
\Other functions:
Other functions performed by a commercial banks include the provision of safety
locker to keep jewellery and valuable documents of customers in safe custody, acting as
agents for customers to buy and sell securities on their behalf making and receiving
payments on behalf of its depositors. The convenience of the customers’ and in general
performing all functions which bring in profits.

Recent Trends In Indian Banking.


Commercial Banks extend financial assistance or the credit facilities in many
ways depending upon their period of finance, purpose of finance, quantum of finance. The
Indian Banking system has developed enormously after independence particularly after
Nationalization of banks

I. Types of Financing:
1.Take out Financing.
2. Revolving Credit Facilities.
3.Evergreening of loan.
4.Syndicated loan.
5.Bridge loan.
6.Consortium Finance.
7.Preferred Financing.
8.Non-Fund Based Business.

II. Types of Repayment System:


1.Bullet Payment System
2.Balloon Payment System

III. Venture Capital.


IV. Factoring services
V. Bank net
VI. Automated teller machine (A.T.M.)
VII. Phone Banking
VIII. Net Banking or Internet Banking
IX. Deposit Insurance Scheme
X. Gold Deposit Scheme
XI. Multi Dimensional Development
a) Number of commercial banks
b) Expansion of branches in India
c) Concentration in rural areas
d) Deposit Mobilisation
e) Changes in composition of Deposits
f) Population per office
g) Expansion of credit facilities
h) Advance to priority sector
RECENT TRENDS IN BANKING
Types of Financing:
 Take Out Financing: It is long term finance provided for the projects like
infrastructure facilities.
 Revolving Credit Facility: A bank fixes up a credit limit to a borrower for certain
period. Automatic renewal facility is available.
 Ever greening of Loan: A bank provides a second finance facility to a borrower
to help him to pay back the original loan.
 Syndicated Loan: It is a loan facility provided to a single borrower by a group of
banks. Syndicated loans are arranged to finance projects needing large sums of
money where the credit risk is also high. These loans are for financing medium to
long-term requirements.

 Bridge loan: It is a short-term temporary loan extended by financial


institutions to help the borrower to meet the immediate expenditure pending
disposal of requests for long-term funds or regular loans.
 Consortium Finance: It is a large credit facility may be jointly arranged by a
combination of several banks. The word consortium refers to ‘a combination of
many banks who have agreed to extend the credit facility’.
 Preferred Financing: In the highly competitive world of banking today, banks
are reaching out to customers, particularly high net worth or wealthy customers.
One area of lucrative finance for bankers is consumer finance, more particularly car
finance.
 Guarantee Services / Non-fund Based Business: Guarantee Service refers to
a legal undertaking by the bank to pay a certain sum of money to a third-party or a
creditor in the event of the bank’s client / customer fails to fulfill his part of
obligation.

NEGOTIABLE INSTRUMENTS
Meaning of Negotiable instruments.
A Negotiable instruments is a transferable document which satisfies certain
conditions.These instruments pass freely from hand to hand.
Definition:
“Negotiable Instruments means promissory note, bill of exchange or cheque
payable either to order or to bearer.”
Characteristics of Negotiable instruments.
1.Easily Transferable
2.Title Free From Defects
3.Right to sue
4.No Notice to transfer
5.Presumptions
6.Credit of the party.
CHEQUE
Meaning: A Cheque, under Section 6 of the Negotiable Instruments Act, is “a bill
of exchange drawn on a specified banker and not expressed to be payable otherwise
than on demand”.
Definition: Section 5 defines a bill of exchange as “an instrument in writing
containing an unconditional order, signed by the maker, directing a certain person to
pay a certain sum of money only to, or to the order of a certain person or to the
bearer of the instrument”.
Thus, a cheque is a species of bill of exchange with two qualifications fulfilled:
First, the cheque should always be drawn upon a banker, and
Secondly, it is always payable on demand.
The person who writes the cheque is the ‘drawer’, the person to whom it is
expressed to be payable is the ‘payee’ and the bank on which the cheque is drawn is
the ‘drawee’.

Requisites of a valid cheque:


1. The instrument to be in writing: The instruments to pay the amount should
be in writing. The writing may be done by pen or typewriter or even by a lead pencil
as it is not prohibited under law. But writing of cheques by lead pencil is to be
discouraged as alterations can be easily effected on such cheques.
2. Drawn on a specified bank: The cheque can be drawn only on the banker
of the customer and on none else. Also the cheque should be drawn only on the
branch of the bank at which the account of the drawer is maintained and the amount
in the account should sufficient to pay the cheque.
3. Payable on demand: The cheque should not be expressed to be payable
otherwise than on demand. It is not necessary that the words “on demand” should
appear on the cheque. A cheque is presumed to be payable on demand unless an
express provision is made in the cheque disturbing this feature.
4. Unconditional order: The cheque should contain an order to the bank to
pay and this order should be unconditional. The words “I order you to pay”, need
not be on the cheque; the words “pay” or “please pay” sufficiently convey the order.
Further, the order should not attach any condition to the payment of the cheque.
5. Certain sum of money: The direction should be to pay a sum of money
which is certain and it should be payable in monetary units. Instructions to pay
‘about Rs. 500’, is not certain. Likewise, direction to pay two kilograms of rice is not
a cheque. A cheque drawn in foreign currency is valid and is payable at the
exchange rate current at he time of payment.
6. Payee to be certain: The person to whom the cheque is drawn payable
should be certain. He need not be an individual as is understood generally, but can
be any legal person recognized under law like corporations, etc. The cheque can be
drawn payable to a certain person or his order or it may be drawn payable to a
certain person or the bearer of the instrument. Order cheque should contain the
name of the payee. It may be omitted in the case of bearer cheques.

CROSSING:
A cheque may be either an open cheque or a crossed cheque. Crossing is an
indication appearing on the face of the cheque that it should be paid only through a
banker; it is usually done by drawing two parallel lines on the face of the cheque.
Crossing has been evolved to prevent wrongful persons from obtaining payment on a
cheque. An open cheque is payable to any person who presents it and it would be
very difficult to locate the payee at a later date. Any person who comes into
possession of a lost or stolen cheque may obtain payment and decamp without
leaving a trace. A crossed cheque is payable only through a banker. The payee
should have an account with any bank through whom the cheque is collected. Or he
should endorse it to a person having a bank account and collect the cheque through
his banker. In either case, the identity of the payee or the person who has obtained
payment can easily be established.
Crossing may be done generally or specially. A generally crossed cheque is
payable to any bank while a specially crossed cheque is payable only to the banker
to whom it is crossed.
General Crossing: It is defined under Section 123 of the Negotiable Instruments
Act as follows: “Where a cheque bears across it face an addition of the words ‘and
company’ or any abbreviation thereof, between two parallel transverse lines, or two
parallel transverse lines simply, either with or without the words ‘not negotiable’ that
addition shall be deemed a crossing, and the cheque shall be deemed to be crossed
generally”.
Special Crossing: It is defined in Section 124 of the Negotiable
Instruments Act as follows: “Where a cheque bears across its face an addition of the
name of a banker, either with or without the words ‘Not Negotiable’ that addition
shall be deemed a crossing and the cheque shall be deemed to be crossed specially,
and to be crossed to that banker”.
Restrictive Crossing: Besides the above two types of statutory crossing, in recent
years the practice of crossing cheques with the words “account payee” or “account
payee only” has sprung up. Such a crossing is termed as ‘restrictive crossing’.
Restrictive crossing is only a direction to the collecting banker that the
proceeds are to be credited only to the account of payee named in the cheque. In
case the collecting banker allows the proceeds to be credited to some other account,
it may be held liable for wrongful conversion of funds. It does not in any way affect
the paying banker, who has simply to see that the cheque has been presented it for
payment by any bank in case of general crossing and by the particular bank (named
in crossing) in case of special crossing. It is under no duty to ascertain that the
cheque is in fact collected for the account of the person named as payee.
DOUBLE CROSSING: When a cheque bears two separate special crossings, it is said
to have been doubly crossed. According to Section 127 “where a cheque is crossed
specially to more than one banker, except when crossed to an agent for the purpose
of collection, the banker on whom it is drawn shall refuse payment thereon”.
Example:
BANK OF INDIA
TO
PUNJAB NATIONAL BANK
AS AGENT FOR COLLECTION

Opening of crossing: Cancellation of crossing of a cheque is called opening of


crossing. The cancellation can be done only by the drawer of the cheque. The
drawer after cancellation of crossing will put his signature and write ‘Pay Cash’ on
the cheque.

Who can cross a cheque:


1. The drawer: The drawer can make general, special or restrictive crossing on
a cheque before issuing it.
2. The holder: (i) Where a cheque is uncrossed, the holder may cross it
generally or specially.
(ii) Where a cheque is crossed generally the holder may cross it specially.
(iii) Where a cheque is crossed generally or especially the holder may add the
words ‘not negotiable’.
3. The banker: Where a cheque is crossed specially, the banker to whom it is
crossed may again cross it especially to another banker to work as its agent for
collection.

PAYING BANKER:
A banker on whom a cheque is drawn should pay the cheque when it is
presented for payment.

Precautions before Honouring a Cheque:


In order to safeguard his position, the paying banker has to observe the
following precautions before honouring a cheque.
I. Presentation of the cheque:-
First of all, a paying banker should note whether the presentation of the cheque
is correct. It can be found out by paying attention to the following factors:

a) Type of the cheque:-


Before honouring a cheque, he must find out the type to which it belongs. Cheques
may generally be of two types – open or crossed. If it is an open one, the payment may be
made at the counter. If it is crossed, the payment must be made only to a fellow banker.
If it is specially crossed, the payment must be specifically made to that banker, in whose
favour it has been crossed. If there are ‘A/c Payee’ and ‘Not Negotiable’ crossings, the
paying banker need not worry, as they are the directions only to the collecting banker.

b) Branch:-
Then the paying banker should see whether the cheque is drawn on the branch
where the account is kept. If it is drawn on another branch, without any prior arrangement,
the banker can safely return the cheque.

c) Account:-
Even in the same branch, a customer might have opened two or more accounts.
For each account, a separate cheque book would have been issued. Hence, the paying
banker should see that the cheque of one account is not used for withdrawing money from
another account.

d) Banking hours:-
The paying banker should also note whether the cheque is presented during the
banking hours on a business day. Payment outside the banking hours does not amount to
payment in due courses.

e) Mutilation:-
If the cheque is torn into pieces or cancelled or mutilated, then, the paying banker
should not honour it. He should return the cheque for the drawer’s confirmation.
II. Form of the Cheque:-
Before honoring a cheque, a banker should see the form of the cheque and find out
whether it is regular or not.

a) Printed form:-
The cheque must be in the proper form. It must satisfy all the requirements of law.
The customer should draw cheques only on the printed leaves supplied by the bakers, failing
which, the banker may refuse to honour it.

b) Unconditional order:-
The cheque should not contain any condition. If it is a conditional one, the paying
banker’s position will become critical and he may not honour it.

c) Date:-
Before honouring a cheque, the bank must see whether there is a date on the
instrument. If it is undated, it cannot be regarded as a valid instrument. If a cheque is ante
dated, it may be paid if it has not become stale by that time. A cheque which is presented
after six months, from the date of its issue is a state one. If a cheque is post-dated, he
should honour it only on its due date.

d) Amount:-
The next important precaution is that the banker should see whether the amount
stated in the cheque, both in words and figures, agree with each other. Supposing, there is
a difference in the amount stated in words and figures, then, the banker can take any one
of the following courses available to him:-
i) he can dishonour the cheque with a memorandum “words and figures differ,” or
ii) he can honour the amount stated in words, or
iii) he can honour the smaller amount.

e) Material alteration:-
A paying banker should be very cautious in finding out the alterations that may
appear on a cheque. If there is any material alteration, the banker should return it with a
memorandum “ Alteration requires drawer’s confirmation”.
III. Sufficient Balance:-
There must be sufficient balance to meet the cheque. If the funds available are not
sufficient to honour a cheque, the paying banker is justified in returning it. So, before
honoring a cheque, he must check up the present state of his customer’s account.

“Any change in an instrument which causes to speak a different language in legal


effect from that which it originally spoke or which changed the legal identity or character of
the instrument either in its terms or in the relation of parties thereto is a material
alteration”.

Examples of material alterations are as follows:


 Alteration of the date of the cheque. By altering the date a fraudulent holder can
secure payment of a post-dated cheque or a stale cheque, which a banker is not
authorized to make.
 Alteration of the place of payment.
 Alteration of amount of the cheque.
 Alteration in the names of the parties or the relationship between them or affecting
their legal status.
 The substitution of the word ‘bearer’ in place of ‘order’ in the cheque.
 An alteration of the crossing on a cheque.

IV. Signature of the Drawer:-


The next important duty of a paying banker is to compare the signature of his
customer found on the cheque with that of his specimen signature. If he fails to do so and
if he pays a cheque, which contains a forged signature of the drawer, then, the payment will
not amount to payment in due course. Hence, he cannot claim protection.

Endorsement:-
Before honouring a cheque, the banker must verify the regularity of endorsement, if
any, that appears on the instrument. It is more so in the case of an order cheque, which
requires an endorsement before its delivery. For instance, if there is per pro endorsement,
the banker must find out the existence of authority. Failure to do so constitutes negligence
on the part of the paying banker.

Legal Bar:-
The existence of legal bar like Garnishee Order limits the duty of the banker to pay
cheque.
Minor Precautions:-
A paying banker should look into the following minor details also, before honouring a
cheque;

a) He must see whether there is any order of the customer not to pay a cheque.
b) He must see whether there is any evidence of misappropriation of money. If so, the
cheque should be returned eg., breach of trust.
c) He must see whether he has got any information about the death or insolvency or
insanity of his customer. Failure to note those instructions will land him in trouble.

Circumstances Under Which A Cheque Can Be Dishonoured:

a) Countermanding:-
 Countermanding is the instruction given by the customer of a bank requesting
the bank not to honour a particular cheque issued by him. When such an order is
received, the banker must refuse to pay the cheque.
 Countermanding, in order to be really effective, must be in writing. The written
mandate should contain all the details of the cheque, viz, date number of the
cheque, name of the payee and the amount.
 If a customer informs by telephone or telegram regarding the stopping payment
of a cheque, the banker should diplomatically delay the payment, till written
instructions are received.
 The drawer alone has the right to countermand the payment of a cheque. In
case a cheque is lost by a holder, he should stop payment of that cheque only
through its drawer. It is so because, a banker is always answerable only to the
drawer, in the case of dishonour of a cheque.
 In the case of a draft, its purchaser has no right to countermand its payment.
Any countermanding instruction given to one branch is not effective, as a notice
given to another branch.

If a banker, by mistake, honours a countermanded cheque:

a) the payment does not amount to payment in due courses.


b) He will have to answer for having disobeyed his customer’s mandate.
c) He has no right to debit his customer’s account with the amount of the countermanded
cheque.
d) He may have to dishonour the customer’s subsequent cheques for want of funds in the
account.
Therefore, countermanding instructions, once received, must be kept as a constant record.
A ‘stopped payment’ register may be maintained for ready reference.

b) Upon the receipt of notice of death of a customer:-


Death puts an automatic end to the contractual relationship between a banker and
his customer. When a banker receives written information form an authoritative source,
(preferably from the nearest relatives) regarding the death of a particular customer, he
should not honour any cheque drawn by that deceased customer.

c) Upon the receipt of notice of insolvency:-


Once a banker has knowledge of the insolvency of a customer, he must refuse to pay
cheques drawn by him. Usually, the banker will be served with a notice of the presentation
of petition upon which he can take necessary action.

d) Upon the receipt of notice of insanity:-

Where a banker receives notice of a customer’s insanity, he is justified in refusing


payment of the cheque drawn by him. The banker should make a careful note, when the
lunacy order is received.

e) Upon the receipt of notice of Garnishee Order:-

Garnishee Order refers to the order issued by a court attaching the funds of the
judgement debtor (ie, the customer) in the hands of a third party (ie the banker).

f) Upon the receipt of notice of assignment:-

The bank balance of a customer constitutes an asset and it can be assigned to any
person by giving a letter of assignment to the banker. Once an assignment has been made,
the assignor has no legal rights over the bank balance and therefore, if any cheque is drawn
by him, the banker should refuse to honour it.

g) When a breach of trust is intended:-

In the case of a trust account, mere knowledge of the customer’s intention to use the
trust funds for his personal use, is a sufficient reason to dishonour his cheque.

h) Defective title:-
If the person who brings a cheque for payment has no title is defective, the banker
should refuse to honour the cheque presented by him.

i) Other grounds:-
A banker is justified in dishonoring a cheque under the following circumstances also:

If a cheque is :

1) a conditional one,
2) drawn on an ordinary piece of paper
3) a stale one
4) a post dated one
5) mutilated
6) drawn on another branch where the account is not kept.
7) Presented during non-banking hours.
8) If the words and figures differ.
9) If there is no sufficient funds,
10) If the signature of the customer is forged,
11) If the endorsement is irregular, and
12) If a crossed cheque is presented at the counter.

STATUTORY PROTECTION TO A PAYING BANKER

Supposing, a paying banker pays a cheque which bears a forged signature of the payee
or endorsee, he is liable to the true owner of the cheque. But, it is quite unjustifiable to
make the banker responsible for such errors. It is so because; he is not expected to know
the signature of the payee or endorsee.
Statutory Protection Under Indian Law:-

To claim protection under Sec.85, the banker should have fulfilled the following
conditions:-

1) he should have paid an order cheque.


2) Such a cheque should have been endorsed by the payee or his order
3) It should have been paid in due courses.

Order Cheque:-

The statutory protection has been extended to an order cheque. Example of an


order cheque is “pay to X or order”. When such a cheque is paid by the banker, he is
entitled to get protection. Endorsement is a must for an order cheque and so protection is
mainly extended to an order cheque.

Endorsement by payee or his order:-

Protection cannot be claimed if such a cheque is not endorsed by a payee or any


third party.

PAYMENT IN DUE COURSE

“Payment in due course means payment in accordance with the apparent tenor of
the instrument, in good faith and without negligence, to any person in possession thereof
under circumstances which do not afford a reasonable ground for believing, that , he is not
entitled to receive payment of the amount therein mentioned”.

This concept of payment in due course has three essential features:

a) Apparent tenor of the instrument:-


To avoid of the statutory protection, the payment should have been made according to
the apparent tenor of the instrument. The apparent tenor refers to the intention of the
parties as it is evident from the face of the instrument.

b) Payment in good faith and without negligence:-


Good faith forms the basis for all banking transactions, and so, it is taken for
granted. As regards negligence, the banker may sometimes be careless in his duties
which constitutes as act of negligence. If negligence is proved, the banker will lose the
statutory protection given under sec.85

Example:

a) payment of a crossed cheque over the counter


b) payment of a post-dated cheque before maturity
c) failure of verify the regularity of an endorsement.

c) Payment to a person who is entitled to receive payment:-

The banker should have made the payment to the ‘holder’ of the instrument. In other
words, the banker must see that the person, who presents the cheque, is in possession of
the instrument and he is entitled to receive the amount of the cheque.

Sec 8 of the N.I. Act defines a holder as “the holder” of a promissory note, bill of
exchange or cheque, means any person entitled, in his own name, to the possession thereof
and to receive or recover amount due thereon from the parties thereto”.

PROTECTION OF A BEARER CHEQUE

Protection to a crossed cheque:-

Originally, this protection was extended only to open cheques. Now, this has been
extended to crossed cheques also. Sec. 128 of the N.I. Act gives protection in respect of
crossed cheque to the drawer as well, provided, it comes into the possession of the payee.

Sec 128 of the Act runs as follows “ where a banker on whom a crossed cheque, is
drawn has paid the same in due course, the banker paying the cheque and (in case such
cheque has come to the hands of the payee) the drawer thereof, shall respectively be
entitled to the same rights and be placed in the same position in all respects, as they would
respectively be entitled to and placed in, if the amount of the cheque had been paid to and
received by the true owner

thereof”.

Protection to a Materially Altered Cheque:-

Protection to a Draft:
Protection has been extended to drafts drawn by one office of a bank of the same
bank.

This was made possible by the amendment of Sec 84 in 1930.

When a Banker acts both as paying and Collecting banker:-

When a banker acts both as a collecting banker and a paying banker, it would be as
a collecting banker that a decision would be taken. In worshipful carpenter’s company vs.
British Mutual Banking Company Ltd., it was held that the statutory protection is available
only when a bank acts for a paying banker and not as both paying and collecting banker.

Holder in Due Course:-

Sec 9 of the N.I. Acts lays down that ‘ holder due course’ means “any person, who
for consideration became the possessor of a promissory note, bill of exchange or cheque if
payable to bearer, or the payee or endorsee thereof”.

Thus a holder in due course is the person i) who receives an instrument innocently
9ie., in good faith and without negligence), and ii0 who has paid value for the same, iii)
who has received the instrument before its maturity iv) who is in possession of the
instrument as a bearer or payee or endorsee.

RIGHTS AND PRIVILEGES OF A HOLDER IN DUE COURSES:-

The following are some of the important rights and privileges of a holder in due course:-

1. He obtains a better title to the instrument than that of a true owner.


2. The defective title of the previous endorsers (if any) will not adversely affect his rights.
3. He can pass on a better title to others, since, once the instrument passes through his
hands, it is purged of all defects.
4. Until the instrument is finally discharged, every part to that instrument is liable to him.
5. Even the drawer of a negotiable instrument cannot claim invalidity of the instrument
against him.
6. His claim cannot be denied on the ground that the payee has no capacity to endorsee.
7. The principle of estoppels is applicable against the endorser to deny the capacity of
previous parties.
Recovery of Money paid by Mistake:

Since, in a bank thousands of transactions take place every day, it is quite natural
that mistakes do occur. By mistake, a banker may pay money to a wrong person. Can a
banker recover money paid by mistake? The law on this subject is not yet clear. As a
general rule, a person who has committed a mistake has every right to rectify the same.
But, in rectifying the mistake, he should not bring any disadvantages to a party. In the
same way, a banker can recover the money paid by mistake without adversely affecting the
other party.

Money can be recovered:-

Under the following circumstances, money wrongly paid can be recovered.

1. Money received in bad faith is recoverable:-


When a person receives money by mistake in bad faith, knowing that he is not entitled
to receive that money, then, the banker is entitled to recover the same.

2. Money paid under a mistake of fact is recoverable:-


If the mistake is a mistake, of fact, then, the money wrongly paid is recoverable.

3. Mistake between the party paying and the party receiving:-


If the mistake is between the party paying and the party receiving, then, the money is
recoverable.

Money cannot be Recovered:-

1. Money paid under a mistake of law is not recoverable:-


Ignorance of law is no excuse. When a banker pays money mistaking law, he cannot
recover it.

2. Money paid on a negotiable instrument to an innocent holder is not recoverable:-


When money is paid by mistake on a negotiable instrument to a holder in due course, it
cannot be reclaimed after a lapse of time.

3. when a person, who receives money in good faith by mistake, alters his position relying
upon it, need not return the same.
COLLECTING BANKER

A collecting banker is one who undertakes to collect the amount of a cheque for his
customer from the paying banker.

Banker as a holder for value:-

In collecting a cheque, the banker can act in two capacities namely

1) as a holder for value, and


2) 2) as an agent for collection.
The banker would be regarded as a holder for value:

1. If he allows his customers to withdraw money before cheques paid in for collection are
actually collected and credited.
2. If any open cheque is accepted and the value is paid before collection, and /or
3. If there is a reduction in the overdraft account of the customer before the cheque is
collected and credited in the respective account.
In all these cases, the banker acquires a personal interest.

If the banker acts as holder for value, his rights will be the same as those of a holder
in due courses. Thus, according to Sir. John Paget “ apart from the question of forged
endorsement, if the customer has either no title to the cheque or his title is defective, the
banker is the holder in due course with a good independent title against all the prior parties
on the cheque”. The title of the holder in due course is superior to that of the true owner.

A banker as an Agent:-

In practice, no banker credits a customer’s account even before a cheque is


collected. He collects a cheque on behalf of a customer. So, he cannot acquire any of the
rights of a holder for value. He has to act only as an agent of the customer. This is so
because; he cannot have a title better than that of the customer himself. So, a collecting
banker cannot choose the capacity in which he wants to act as his discretion. He will be
regarded only as an agent. So, during collection, if a banker, in his capacity as an agent,
collects a cheque which belongs to some other person, to the account of his customer, he
will be held liable for “conversion” of money received.

CONVERSION:

‘ Conversion’ is a wrongful interference or meddling with the goods of another.


Conversion may be committed innocently. Conversion is a wrong that renders the person
committing it personally liable. This liability exists even when a person acts merely as an
agent.

A banker’s liability:-
Hence, if a collecting banker, however innocent he may be, has converted the goods
of another, he will be held personally liable. This liability exists because the banker is acting
as an agent and not as a holder of value.

Statutory Protection:-

According to sec. 131 of the N.I. Act, “ A banker who has in good faith and without
negligence, received payment for a customer of a cheque, crossed generally or specially to
himself, shall not, in case the title to the cheque proves defective, incur any liability to the
true owner of the cheque, by reason only of having received such payment”.

The above statutory protection is available to the collecting banker only if he fulfills
the following conditions:-

1. The cheque he collect must be crossed cheque.


2. He must collect such crossed cheques only for his customer as an agent and not as a
holder for value.
3. He must collect such crossed cheque in good faith and without negligence.
1. Crossed cheques only:-
Statutory protection can be claimed by a collecting banker only for crossed cheques.
It is so because, in the case of an open cheque, it is to absolutely necessary for a person
to seek the service of a bank. So, a banker when collecting an open cheque, in which
his customer has no title, becomes liable for conversion.

2. Collections on behalf of customers as an agent:-


The above protection can be claimed by a banker only for those cheques collected by
him as agent of his customers. If he acts as a holder for value, he will sequire a
personal interest in them, and so, he cannot claim protection under sec.131. so also, if
he collects a cheque for a person other than a customer, he will not be protected. That
is, if the stranger(other than the customer) for whom he collects a cheque has no title
then the banker will be liable for conversion.

3. In good faith and without negligence:-


In order to get the protection under this Section, a collecting banker must act in
good faith and without negligence. This applies to the whole transaction form the
receipt of the cheque from the customer to the receipt of the proceeds from the paying
banker. The question of good faith is not very material because, joint stock banks do
not act otherwise than in good faith.

DUTIES OF A COLLECTING BANKER


1. Exercise reasonable care and diligence in his collection work:-
When a banker collects a cheque for his customer, he acts only as an agent of the
customer. As an agent he should exercise reasonable care, diligence and skill in
collection work. He should observe almost care when presenting a cheque or a bill for
payment.

2. Present the cheque for collection without any delays:-


The banker must present the cheque for payment without any delay. If there is
delay in presentment, the customer may suffer losses due to the insolvency of the
drawer or insufficiency of funds in the account of the drawer or insolvency of the banker
himself. In all such cases, the banker should bear the loss.

3. Notice to customer in the case of dishonour of a cheque:-


If the cheque, he collects, has been dishonored, he should inform his customer
without any delay. The N.I. Act has prescribed a reasonable time for giving the notice is
dishonour. If he fails to do so, and consequently, any loss arises to the customer, the
banker has to bear the loss.

4. Present the bill for acceptance at an early date:-


Sec 61 of the N.I. Act a bill of exchange must be accepted. Acceptance gives an
additional currency to the bill because, the drawee becomes liable thereon form the date
of acceptance.

If a banker undertakes to collect bills, it is his duty to present them for acceptance at
any early date. Sooner a bill is presented and got accepted, earlier is its maturity.

However presentment for acceptance is excused in the following cases:

a) Where a bill is payable on demand.

b) Where the drawee is either a fictitious person, dead, insane or bankrupt or a


person having no capacity to enter into a contract,

c) Where, inspite of a reasonable diligence on the part of the banker, the presentment
cannot be affected.

d) Where, although the presentment is not quite regular, the drawee has refused to
accept it on some other ground.
5. Present the bill for payment:-
The banker should present the bills for payment in proper time and at proper place, if
he fails to do so and if any loss occurs to the customer, then, the banker will be liable.
According to sec. 66 of the N.I. Act a bill must be presented for payment on maturity.
As per Sec 21 sight bills are payable on demand. Sec 22 lays down that the maturity of
the bill is the date on which it is due for payment, to which, 3 days of grace are added.

6. Protest and note a foreign bill for non-acceptance:-


In case of dishonour of a bill by non-acceptance or non-payment, it is the duty of the
collecting banker to inform the customer immediately. Generally he returns the bill to
the customer. In the absence of specific instructions, collecting bankers do not get the
inland bills noted and protested for dishonour. If the bill in question happens to be a
foreign bill, the banker should have it protested and noted by a notary public and then
forwarded it to the customer.

UNIT-III
Insurance

Meaning of insurance
Insurance may be defined as a form of contract between two parities whereby one
party agrees to compensate the other party against a loss (which may or may not arise)
against a payment of a consideration premium.
Definition of insurance:
Functional definition:
The insurance is a co operative device to spread the risk, the system to spread the
risk over a number of persons who are insured against the risk the principal to share the
loss of each other member of the society on the basis of probability of loss to their risk,
and the method to provide security against losses.
Contractual definition:
The insurance thus is a contract whereby
a) Certain sum, called premium is changed in consideration
b) Against the said conside4ration, a large sum is guaranteed to be paid by the insurer
who received the premium.
C) The payment will be made in a certain definition sum
d) The payment is made only upon a contingency
Functions of insurance
The functions of insurance can be studied into two parts they are
1. Primary functions
2. Secondary functions

Primary functions:
1. Insurance provides certainty:

Insurance provides certainty of payment at the uncertainty of loss. The


uncertainty by better planning and administration. But the insurance relieves the
person from such difficult task. In other words, there are uncertainty of happening of
time and amount of loss. Insurance removes all these uncertainty and the assured is
given for certainty of payment of loss.
2. Insurance provides protection:

The main function of the insurance is to provide protection against the probable
chances of loss. The insurance guarantees the payment of loss and thus protects the
assured from sufferings.
3. Risk sharing:

The risk is uncertain and therefore the loss arising from the risk is also
uncertain. When risk takes place, the loss is shared by all the persons who
are exposed to the risk.
Secondary functions:
1. Prevention of loss:

The insurance joins bands with those institutions which are engaged in
preventing the losses of the society because the reduction in loss caused
lesser payment to the assured and so mores saving is possible which will
assist in reducing the premium.

2. It provides capital:

The insurance provides capital to the society. The accumulated funds are
invested in productive channel. The industry the business and individual are benefitted
by the investment and loans of the insurers.
3. It improves efficiency:

The insurance eliminated worries and miseries of losses at death and destruction
of property. The carefree person can devote his body and soul together for better
achievement which improves his efficiency.
4. It helps economic progress:

The insurance by protecting the society from huge losses of damage destruction and
death provides and initiative to work bard for the betterment of the masses.

Nature of insurance:
The main characteristics that are observed in fire, life and marine insurance.
Sharing of risk
Insurance is a device to share the financial losses which might befall on a individual
or his family on the happening of a specified event. The event may be the death of the
heads of the family in life insurance, marine-perils in marine insurance fire in fire insurance.
Co-operative device:
The essential feature of every insurance plan is the co-operation of large number of
persons who in effect agree to share the financial loss arising due to a particular risk which
is insured. Thus it is a co-operative device.

Value of risk:
The risk is evaluated before insuring to charge the amount of share of an insured
consideration or premium. If there is any expectation of more loss, higher premium may be
charged. So the probability of loss is calculated at the time of insurance.
Payment at contingency:
The payment is made at a certain contingency insured. If the contingency occurs,
payment is made; otherwise no amount is given to the policy holder.
Amount of payment:
The amount of payment depends upon the value of loss occurred due to the
particular insured risk provided insurance is there up to that amount.
Large number of insured persons:
To adjust the loss suffered large number of persons should be insured. The co-
operation of a small number of persons may also be insurance but it will be limited to
similar area. To make the insurance cheaper, it is essential to insure large number of
persons or property because the loss suffered is adjusted by that amount.

Insurance is not gambling:


The insurance serves indirectly to increase the productivity of the community by
eliminating worry and increasing initiative. By getting insured his life and property he
protects himself against risk of loss. If he does not get his property or life is insured he is
gambling with his life on property.
Insurance is not charity:
Charity is given without consideration but insurance is not possible without premium.
It is a profession because it provides adequate sources at the time of disasters only by
charging a nominal premium for the service.
Principles of insurance:
Principles of co-operation:
Insurance is a co operation device. If one person is providing for his own losses, it
cannot be strictly insurance because in insurance the loss is shared by a group of persons
who are willing to co-operate. The persons of a group were willingly used to share the loss
at the time of damage.
Principles and theory of probability:
The loss in the shape of premium can be distributed only on the basis of theory of
probability. The chances of loss are estimated in advance to affix the amount of premium.
The insurance on the basis of past experience, present conditions and future prospects fixes
the amount of premium. Without premium no co-operation is possible and premium cannot
be calculated without the help of theory of probability and consequently no insurance is
possible. So these two principles are the two main legs of insurance.
Marine insurance:
It is the oldest form of insurance. If the ship was lost the loan and interest were
forfeited. The contract of insurance was made a part of the contract of carriage fright was
fixed according to season and was expected to be reasonable in the case of marine
transport which was then very much at the mercy of winds and elements.

Fire insurance:
Fire insurance is developed in present form. The fire insurance got momentum in
England after the great fire in 1666 when the fire losses were tremendous. The losses
suffered by fire is been relieved by the fire insurance policy if we had taken such policy on
our goods or property.
Life insurance:
This insurance made its first appearance in England in 16 th century. Life insurance is
the insurance where the life of a individual person is insured and if there is an contingency
of death unfortunately such unbearable loss to the family by giving the insured money from
the premium paid by the individual person.

Kinds of insurance:
Business point if view:
Life insurance:
Life insurance is different from other insurance in the sense that the subject matter
of insurance is life of human being. The insurer will pay the fixed amount of insurance at the
time of death or at expiry of certain period.
General insurance:
This insurance includes property insurance, liability insurance and other forms of
insurance. Fire and marine insurances are strictly called property insurance.

Social insurance:
This social insurance is to provide protection to the weaker section of the society who
is unable to pay the premium for adequate insurance. Example pension plans, disability
benefits.
Risk point of view:
Property insurance:
1. Marine insurance:

Marine insurance provides protection against loss of marine perils. The marine
perils are collision with rock or ship attacks by enemies’ fire and capture by
pirates etc. so marine insurance insures ship cargo and freight.
2. Fire insurance:
Fire insurance covers risks of fire with the help of the insurance the losses arising
due to fire are compensated and the society is not losing much.
Miscellaneous insurance:
The property goods, machine, furniture, automobile, valuable, articles etc… can be
insured against the damage or destruction due to accident or disappearance due to theft.
3. Liability insurance:
The general insurance also includes liability insurance whereby the insured is liable
to pay the damage of property or to compensate the loss.
4. Other forms:
Besides the property and liability insurances there are certain other insurances which
are included under general insurance. Eg export credit insurances state employees
insurance.
Kinds of insurance:
1. Personl insurance:
This insurance includes insurance of human life which may suffer loss due to death
accident and disease. It is further classified into life insurance, personal accident and health
insurance.
2. Property insurance:
The property of an individual and of the society is insured against the loss of fire and
marine perils.
3. Liability insurance:
The liability insurance covers the risks of third party, compensation to employees,
liability of the automobile owners and reinsurances.
4. Guarantee insurance:
The guarantee covers the loss due to dishonesty, disappearance and disloyalty of the
employers or second.
Role and importance of insurance:
Uses to an individual:
Insurance provides security and safety:
The insurance provides safety and security against the loss on a particular event. It
also provides security against the loss on earning at death or in olden age, at fire, at
damage etc.
Insurance protects mortgaged property. At the death of the owner of the mortgaged
property, the property is taken over by the lender of the money will be deprived of the uses
of the property.
Insurance affords peace of mind:
The security wish is the prime motivating factor. By insurance a person gets a piece
of mind where he is relieved of his tension, stress of maintaining his family or business.
Insurance eliminates dependency:
It gives a way to survive without depending on others. If head of the family is dead,
there will more destruction so they will have a dependence on relations but insurance
eliminates as we can manage ourselves.

Life insurance encourages savings:


There are some polices which combines savings and insurance. The saving in
insurance has some merits they are systematic saving is possible deposited premium is not
withdrawn easily.
Life insurance provides profitable investment:
Individuals unwilling or unable to handle over their own funds have been pleased to
find an outlet for their investment in life insurance policies. Endowment, multipurpose,
deferred annuities, policies are better for investment life insurance policies.
Life insurance fulfills the needs of a person:
Family needs:
Death is uncertain but time is uncertain. Every person must fulfill the essential needs
of his family or else there won’t be any use of running a family. In order to do such things
there must be some life insurance amount to assists us.
Old-age needs:
The provision for old age is required where the person is surviving more than his
earning period. Life insurance provides old-age funds along with the protection of the family
by issuing various policies.
Readjustment needs:
At the time of reduction in income whether by loss or by employment disability or
death adjustment in the amounts.
Special needs:
There are special requirement of the family which is fulfilled by the earning member
of the family. If the member becomes disable to earn the income due to the old age or
death.
Clean up workers funds:
After death, ritual ceremonies pymt of wealth taxes and income taxes comes to help
for meant the meeting these requirements.
Uses to business:
Uncertainty of business losses is reduces:
In every field a huge number of properties are employed with the slight negligence
the property may be turned into ashes. New construction or new establishment is possible
only when it is fully insured. It reduced uncertainty.
Business efficiency is increased with insurance:
When the business is free from botheration of losses, the owner will certainty devote
more time to the business which increases more efficiency.
Key man indemnification:
Key man is that particular man whose capital expertise experience energy which
make him most valuable asset in the business.
Enhancement of credit:
The business can obtain loan by pledging the policy as collateral for the loan. The
insured persons are getting more loan due to certainty of payment at their deaths.
Business continuation:
In any insurance the business will not suffer from discontinuation like death of
partner in partnerships. As there is easy flow of capital financed by insurance the business
continuation is attained.
Welfare of employees:
The welfare of employees must be taken care by the employer. Such policies are
available in life insurance such as provisions for old age and for disability, pension plans etc.

Uses of societies:
Wealth of the society is protected:
The loss of particular wealth is protected with the help of insurance. Life insurance
provides loss of human wealth. This enhances the protection thus the society is safely
protected.
Economic growth of the country:
For the economic growth of the country, insurance provides strong hand and mind,
protection against loss of property and adequate capital to produce more wealth.
Reduction in inflation:
The insurance reduces the inflationary resource in two ways.
i) Extracting money in supply to the amount of premium collected.

ii) By providing sufficient funds for production narrow down the inflationary gap.

Impact on insurance on LPG industry


Liberalization
Introduction
The journey of insurance process in India is now over seven years old. The first
major milestone in this journey has been the passing of insurance regulatory and
development authority act 1999. This along with amendment to the insurance act 1983, LIC
& GIC acts paves the way for the entry of private players and possibly the privatization of
the hitherto public monopolies LIC & GIC. Opening up of insurance to private sector
including foreign participation has resulted into various opportunities and challenges.
Concept of insurance
Insurance is a boon to business concerns. Insurance provides short range and long
range relief. The short-term relief is aimed at protecting his insured from loss of property
aimed at protecting his insured from loss of property and life by distributing the loss
amongst large number of persons through the medium of professional risk bearers such as
insurers. It enable a businessman to face an unforeseen loss and therefore, he need not
worry about the possible loss. The long range object being the economic and industrial
growth of the country by making an investment of huge funds available with insurers in the
organized industry and commerce.
Life insurance:
Life insurance in particular provides protection to household against the risk of
premature death of its income earning member. Life insurance in modern times also
provides protection against other liberalization risks such as that of longevity and risk of
disabled and sickness.
The products provide for longevity pensions and annuities non-life insurance provides
protection against accidents, property damage and other liabilities. Non-life insurance
contracts are typically shorter in duration as compared to life insurance contracts.
Liberalization of insurance:
The comprehensive regulation of insurance business in India was brought into effect
with the enactment of the insurance act 1983. It tried to create a strong and powerful
supervision and regulatory authority in the controller of insurance with powers to direct,
advise, investigate, register and liquidate insurance companies et. However consequent
upon the nationalization of insurance business, most of the regulatory functions were taken
away from the controller of insurance and vested in the insurers themselves.
The government of India in 1993 had set up a high powered committee by
R.N.Malhotra, former governor reserve bank of India, to examine the structure of the
insurance industry and recommend changes to make it more efficient and competitive
keeping in view the structural changes in other parts of the financial system on the country.
Impact of liberalization:
While nationalized insurance companied have done commendable job in extending
volume of the business opening up of insurance sector private player was a necessity in the
context of liberalization of financial sector. Of traditional infrastructural and semipublic
goods industries such as banking, airlines, telecom, power etc. have significant private
sector presence, continuing state monopoly in provision if insurance was indefensible and
therefore.
Privatization:
1. Privatization if insurance was eliminated the monopolistic business of life insurance
Corporation of India. It may help to cover the wide range of risk in general insurance
and also in life insurance. It helps to introduce new range of products.

2. It would also result in better customer services and help improve the variety and
price of insurance products.

3. The entry of new players would speed up the speed of both life and general
insurance. It will increase the insurance penetration and measured of density.

4. Entry of private players will ensure the mobilization of funds that can be utilized for
the purpose of infrastructure development.

5. Allowing of commercial banks into insurance business will help to mobilization of


funds from the rural areas because of the availability of vast branches of the banks.

6. Most important not the least tremendous employment opportunities will be created in
the field of insurance which is a During problem of the presence day today issues.

Globalization:
The characteristics features of their business make insurance companies the biggest
investors in log gestation infrastructure development projects in all development
aspirating nations. This is the most compelling reason why private sector and foreign
companies which will spread the insurance habit in the societal and consumer interest
are urgently required in this vital sector of the economy. Opening up of insurance to
private sector including foreign participation has resulted into various opportunities and
challenges in India.
Impact of globalization
While nationalized insurance companies have done a commendable job in extending
the volume of the business opening up insurance sector to private players was a
necessity in the context of globalization of financial sector. It traditional infrastructural
and semipublic goods industries such as banking, airlines, telecom, power etc. have
significant private sector presence, continuing a state of monopoly in provision of
insurance was indefensible and therefore the globalization of insurance has been done.
Its impact has to be seen in the form of creating various opportunities and challenges.
___________________________________________________________________

UNIT-IV

LEGAL DIMENSIONS OF INSURANCE ACT:


INSURANCE ACT-1938:
Features of insurance Act 1938:
1. Applicatin:
This act applies to all kinds of insurance. Assessments on or dividing
insurance business is prohibited.

2. Prohibition:
According to sec 2-c of the Act, there is prohibition of transaction of insurance
business by certain persons.
Requirements as to capital

a) Section 6:
No insurer incorporated after or who contained carrying on the business of life
insurance in the states whether solely or in connection with any other
business after the 20th day of January.

Voting powers:

The voting powers of every shareholder of any public company as foresaid in all
cases be strictly proportionate to the paid up amount of the shares held by him.
Maintenance of register of members:

A public company shall maintain in addition to the register of members to be


maintained under the companies Act. The personal details must be registered and declared
within 14 days from the receipt of such declaration.

Deposits:
To prevent the growth of insurers of small financial resources or speculative
concerns the Act provided for registration of all insurers and a substantial deposit with the
reserve bank.
Section 7

Every insurer must be registered and not being an insurer specified in sub-
clause (iii) of clause (i) of section 2 shall be in respect of the insurance business carried on
by him in India, deposit and keep deposited in the RB (Reserve Bank).

Registration

Section 3:
According to this section A person should not commence any class of
insurance business after commencement of this Act. If he does
Section 2-A

On receipt of an application for registration and after making such inquiry as


he deems fit the controller is satisfied if they follow the instructions.

Section 2-4

The controller shall cancel the registration of an insurer either wholly are in so
far as it is related to a particular class of insurance business. Controller will give notice of
his decision not more than two months before termination.

Submission of returns:

It is said to be the submission of returns including the foreigner returns to


submit all the quinquennial in a prescribed form within a state period.

Section 14:

There are various provisions such as audited accounts, balance sheet,


actuarial reports must be furnished as returns to the controller.
Section 16-2:
The insurer, established outside India, shall within the time specified in sub
section (10) of section 15, furnish to the controller four certified copied in the English of
every balance sheet, account abstract, report and statement prohibition of rebating,
restriction of commission and listening of agents

Section 40:

There is prohibition of payment by was of commission of otherwise for


procuring business. No person shall after the expiry of six months from the commencement
of this Act. No insurance agent shall be paid or contract to be paid by way of commission.

40-A limitations of expenditure on commission:

a. Where the policy grants an immediate annuity or a deferred annuity in


consideration of a single premium
b. Where the policy grants a differed annuity in consideration of more than one
premium 7.5 of the fist years premium.
c. In any other case 35% of the 1st years premium.

Section 41 prohibition at rebates:

Any person making default in complying with the provisions of this section
shall be punishable with fine which may extend to Rs.500.
Section 42 (licensing of insurance Agents):

The controller or an officer authorized by him in this behalf shall in the


prescribed manner the payment of that form shall not more than 10 rupees.
42—2
A license issued under this section shall entitle the holder to act as an
insurance agent for any insurer.

42—3
A license issued here shall remain as a force for a period of 3 years only from
the date of issue.

During this period the act was passed. The act commences from july1, 1956 and
from the date the act was implemented.
Organization and functions of life insurance

Constitution:

The constitution has corporation: a body corporate, perceptual succession,


and common seal. It consists of an large number of members who can constitute
combined together.

Capital

The capital used for the corporation is 5 crore rupees provided by the central
government for the purpose and the terms and conditions of investing.

Functions of corporation:

According to the functions of corporation is to check whether life insurance


business is carried on outside or inside India. To carry on capital redemption
business, the functions play an important role.

Transfer of services:
All the employees except the chief agent will be vested into new life business.
The salary and terms of employment will remain the same unless the insurance
transfer their services.
Committee of the corporation:
The corporation may constitute such other committees as it may think fit for
the purpose to discharge such of its functions as may be delegated to them.
Authorities
These are two authorities which enhance the efficiency of the insurance

Investments:
It was laid down that 55% of net life liabilities of an Indian or British insurer
should be invested in Indian government and approved securities with at least 25 %
Indian government Rupee securities.

Prohibition of loan: (sec 29-1)

No insurer shall grant loans or temporary advances either on the


hypothecation of property or on personal security or otherwise except loan on
liabilities.

Investigation: sec (33)


The central government may or may not at any time by order in writing
direct the controller or any other person specified in the order to investigate the
affairs.
Duties and powers of controller of insurance:

The duties and powers of controller are discussed under general duties,
special duties, right about investigation.

The life insurance corporation act 1956:


Termination of personal management:

The private management was eliminated on march 21, 1956 and was
replaced by the co operation management governed by the life insurance co
operation act 1956. The management is controlled by the government according to
the section 3 of life insurance act.
Abolition of private ownership:

Number of persons not exceeding 15. The official management of life


insurance continued for 6 months from January 19, 1956 to June 30 1956 company.

a) Managing director
The corporation may appoint one or more managing directors. He can be a
whole time officer and perform his duties efficiently.
b) Zonal managers

The corporation may constitute many zones where the zonal managers are
appointed to taken care of.
Zonal bodies:
a) Zonal board:

The corporation will establish each zone a board. That board will appoint and
number of members to be reviewed. These boards suggest some provisions to
the corporation.
b) Employees of agents relations committee:

Audit
The auditors shall submit their report to the corporation shall also forward a copy of
their report to the central government. Every auditor in the performance of his duties shall
have at all reasonable time access to the books of accounts and other documents of the
corporation.
Actuarial valuation:
There will be an investigation once at least in every 2 years about the activities to
value their financial condition of the corporation.
Annual report of activities:
The corporation will submit the annual report during every last month of the year to
the central government.
Surplus how to be utilized:
The corporation will have a regular investigation which results in proper utilization of
resources if there is any surplus.

Reports to be laid before parliament:


The central government will send the report of accounts, audit, actuaries to be laid
before both houses of parliament.
Investment provisions:
The corporation must hold at least 50% of the total funds in government and
approved securities and the rest in approved investment not more than 15% of the total
funds may be held in the form of other investments.
Provisions pertaining to commission:
The maximum amount of commission or remuneration in any payable form is 35% of
first renewal premium and 5% of renewal commission.
Provisions to policyholder’s rights:
(Sec 37) the central government guarantee’s the payment in cash of the sums
assured by all policies by the corporation including any business declared in respect thereof:
The general insurance business act 1972 (57 of 1972)
An act provide for the acquisition and transfer of shares of Indian insurance
companies and underwriting of other existing insurers in order to serve better the needs of
the company by securing the development of general insurance business in the best interest
of the community and to ensure that the operation of the economic system does not result
in the concentration of wealth to the common detriment, for the regulation and control of
such business and for the regulation and control of such business and for matters connected
therewith or incidental there to.
Formation of general insurance business corporation of India:
1. As soon as may be after the commencement of this act, the central government shall
form a government company in accordance with the provisions of the companies act
to be known as the general insurance corporation of India for the purpose of
superintending, controlling and carrying on the business of general insurance.

2. The authorized capital of the corporation shall be seventy-five crores, divided into
seventy-five lakhs fully paid up shares of one hundred rupees each, out of which
rupees five crores shall be the initial subscribed capital of the corporation.

Functions of corporation:
The functions of corporation shall include
a) The carrying on of any part of the general business if it thinks it desirable to do so.

b) Adding assisting and advising the acquiring companies in the matter of setting up
standards of conduct and sound practice.
c) Advising the acquiring companies in he matter of the investment of their funds.

d) And in the matter of controlling their expense including the payment of commission
and other expenses.

Power of central government to transfer:


The corporation may at any time transfer any officer or employee from an acquiring
company or the corporation to any other acquiring company or the corporation to any other
acquiring company or the corporation as the case many be and the officer or employee so
transferred shall continue to have the same terms and conditions of services as were
applicable to him immediately before such transfer.

Power of central government to issue directions:


The corporation and every acquiring company shall in the discharge of its functions
be guided by such directions in regard to matters of policy involving public interest as the
central government may be.
Power to make rules:
1. The central government may by notification make rules made to carry out the
provisions of this act.

2. In particular and without prejudice to the generally of the foregoing power rules
made under this section may provide for,

a) The manner in which the profits if any and other moneys received by the
corporation may be dealt with;

b) The conditions if any subject to which the corporation and the acquiring
companies shall carry on general insurance business

3. Every rule made under this section, every notification issued under sec 35 shall be
laid as soon as may be after it is made.

Protection of action taken in good faith:


No suit prosecution or other legal proceeding against any officer of the central
government or officer or other employee of the corporation or of the acquiring company for
anything which is in good faith done or indented.
Consumer protection act 1986:
Definition:
Appropriate laboratory:
It means a laboratory or organization recognized by the central government or by a
state government subject to such guidelines as may be prescribed by the central
government in this behalf: or any such laboratory or organization established by or under
any law for the time being in force, which is maintained financed or aided by the central
government or a state government for carrying out analysis or test of any goods with a view
to determining whether such goods suffer from any defect.
Introduction:
Any person paying for goods and services which he uses is entitled to expect that the
goods and services are of a nature and quality promised to him by the seller.
Several existing laws require the consumer to initiate action by way of a civil suit
which involves lengthy legal process proving to be too expensive and time consuming for
ordinary consumers. Therefore the need for a simpler and quicker access to redress to
consumer grievances was felt and accordingly the consumer protection act. 1986 was
enacted.

Objectives of consumer protection act:


1. Right to consumer education:

The right to consumer education is an important right available to the consumers.


Information about the consumer products in the market and for the proper functioning
of the legal system it is the necessary that the knowledge of the availability of a legal
remedy should be so widely explained, advertised and circulated, so that people as a
whole become conscious of their rights.

2. Right to safety:

The consumer has a right to be protected against marketing of goods which


are hazardous to life and week cement is dangerous to life as well as to property.
3. Right to seek redressed

The consumer has been given the right to be assured that the consumer interest
will receive due consideration at appropriate forums. The consumer disputes should be
resolved in a fair and expeditions manner. The consumer protection act, 1986 can forms
to those measures.
4. Right to be heard:

The right to be heard also includes the right to be assured that the consumer
interest will receive due consideration at appropriate forums. The consumer disputes
should be resolved in a fair and expeditions manner. The consumer protection act, 1986
can forms to these measures.
5. Right to choose:

The right to choose means the right to be assured. Whenever possible access to a
variety of goods and services at competitive prices. Fair and effect must be encouraged
in order to provide consumers with the greatest range of choice among products and
services at the lowest price.

6. Right to information:

The consumer has been given the right to be informed by the producer about
the quality, quantity, potency, purity standard and price of goods so as to
protect the consumer against unfair trade practices.

_____________________________________________________________

Unit-v

Introduction about IRDA

Insurance Regulatory and Development Authority introduced in 1999 along with


three schedules containing amendments to the Insurance Act, 1938, LIC Act 1956 and GIC
Act,1972 and was passed.
Preamble of IRDA Act
“An Act to provide for the establishment of an authority to protect the interest of
insurance policies, to regulate, promotes and insure orderly growth of the insurance orderly
growth of the insurance industry and for matters connected therewith and incidental
thereto”.
Composition of Authority:
The Authority shall consist of the following members namely:
1. Chairperson
2. Not more than five whole-time members and
3. Not more than four part-time members.
To be appointed by the Central Government from amongst persons of ability, integrity
and standing who have knowledge or experience in life insurance, General insurance,
actuarial science,finance,economics,law,accountancy,administration or any discipline which
would in the opinion of the Central Government be useful to the authority.

Duties, Powers and functions of Authority in IRDA: IRDA Provides:


1. Duty to regulate, promote and ensure orderly growth of the insurance business and
re-insurance business.
2. Without prejudice to the generality of the provisions contained in sub sections (1),
the powers and functions of the Authority shall include:
(i) Issue of the applicant a certificate of
registration,renew,modify,withdraw,suspend or cancel such registration;
(ii) Protection of the interests of the policyholders in matters concerning
assigning of policy nomination by policyholders,concerning assigning of policy
nomination by policyholders, insurable interest, settlement of insurance claim,
surrender value of policy and other terms and conditions of contracts of
insurance.
(iii) Specifying requisite qualifications, code of conduct and practical training for
intermediary or insurance intermediaries and agent5s;
(iv) Specifying the code of conduct for surveyors and loss assessors;
(v) Promoting efficiency in the conduct of insurance business;
(vi) Levying fees and other charges for carrying out the purposes of this Act.
(vii) Control and regulation of the rates,advantages,terms and conditions that may
be offered by insurers in respect of general insurance business not so
controlled and regulated by the Tariff Advisory Committee under section
44(U) of the Insurance Act, 1938(4 of 1938)
(viii) Regulating investment of funds by insurance companies.
(ix) Regulating maintenance of margin of solvency
(x) Supervising the functioning of the Tariff Advisory Committee.
(xi) Specifying the percentage of premium income of the insurer to finance
schemes for promoting and regulating professional organizations referred to
in clause (vi);
(xii) Specifying the percentage of life insurance business to be undertaken by the
insurer in the rural or social sector;
(xiii) Excersing such other powers as may be prescribed.
Powers and Functions of Central Government in IRDA Functioning.
Power of Central Government to Issue Directions:
The Central Government is empowered to take action without prejudice to the foregoing
provisions of this Act, The decision of the Central Government, whether a question is one of
policy or not, shall be final.
Power of Central Government to Supersede Authority
(1)If at any time the Central Government is of the opinion:
(a) That, on account of circumstances beyond the control of the Authority, it is unable to
discharge the functions or perform the duties imposed on it by or under the provisions of
this Act
(b) That the Authority has persistently defaulted in complying with any direction given by
the Central Government under this Act
©That Circumstances exist which render it necessary in the public interest to do so, Central
Government may, by notification and for reasons to be specified therein, supersede the
Authority for such period, not exceeding six months, as may be specified in the notification
and appoint a person to be the Controller of Insurance.
2.Upon the publication of a notification under sub-section (1) superseding the Authority:
(a)The Chairperson and other members shall, as from the date of suppression, vacate their
offices as such;
(b) All Properties owned or controlled by the Authority shall until the Authority is
reconstituted under sub-section (3), vest in the Central Government.
3.The Central Government Shall reconstitute the Authority by a fresh appoi8ntment of its
Chairperson and other members and i8n such case any person who had vacated his office
under clause (a) of sub-section (2) shall not be deemed to be disqualified for
reappointment.
4.The Central Government shall cause a copy of the notification issued under sub-section
(1) and a full report to any action, to be laid before each House of Parliament at the
earliest.
5.The Authority shall furnish to the Central Government at such time and in such form and
manner as may be prescribed.
6. No suit, prosecution or other legal proceedings hall be against the Central Government or
any officer of the Central Government.

Power to make Rules


(1) The Central Government may, by notification, make rules for carrying out the
provisions of this Act.
(2) Regulations may provide for all or any of the following matters namely.
(a) The salary and allowances payable under sub-section (1) of Section 7
(b) The allowances to be paid to the part-time members Sec(@) of Section 7
(c) The form of annual statement of accounts to be maintained by the authority
under sub-section (1) of sec17.
(d) Any other matter which is required to be, or may be, prescribed, or in respect of
which provision is to be or may be made by rules.

Establishment of Insurance Advisory Committee.


The Authority may, by Notification establish with effect from such date as it may
specify in such Notification, a Committee to be known as the Insurance Advisory
Committee. The Insurance Advisory Committee shall consist of not more than
twenty-five members excluding ex-officio members.
Power to make Regulations.
The regulations may provide for all or any of the following matters namely,
(a) The time and places of meetings and quorum
(b) The transaction of business at its meeting under sub-section (4) of Section 10;
(c) The powers and functions which may be delegated to committees of the
members under sub-section (2) of section 23; and
(d) Any other matter which is required to be, or may be, specified by regulations or
in respect of which provision is to be or may be made by regulations.
Rules and Regulations to be laid before parliament.
Every rule and regulation made under this Act shall be laid as soon as may be
after it is made, “(30) days which may be comprised in one session or in two or
more successive sessions.
Power to Remove Difficulties.
(1) If any difficulty arises in giving effect to the provisions of this Act, the Central
Government may, by order published in the Official Gazette.
(2) Every order made under this section shall be laid, as soon as may be after it
is made, before each House of Parliament.
_________________________________________________________________________