LAW OF BANKING

1) CLASSIFY BANKS. DISCUSS THE VARIOUS FUNCTIONS PERFORMED BY THE

COMMERCIAL BANKS IN INDIA
Commercial banks are the most important components of the whole banking system.A
commercial bank is a profit-based financial institution that grants loans, accepts
deposits, and offers other financial services, such as overdraft facilities and electronic
transfer of funds.

According to Culbertson,

“Commercial Banks are the institutions that make short make short term bans to
business and in the process create money.”

In other words, commercial banks are financial institutions that accept demand deposits
from the general public, transfer funds from the bank to another, and earn profit.

Commercial banks play a significant role in fulfilling the short-term and medium- term
financial requirements of industries. They do not provide, long-term credit, so that
liquidity of assets should be maintained. The funds of commercial banks belong to the
general public and are withdrawn at a short notice; therefore, commercial banks prefers
to provide credit for a short period of time backed by tangible and easily marketable
securities. Commercial banks, while providing loans to businesses, consider various
factors, such as nature and size of business, financial status and profitability of the
business, and its ability to repay loans.

Commercial banks are of three types, which are as follows:

(a) Public Sector Banks:
Refer to a type of commercial banks that are nationalized by the government of a
country. In public sector banks, the major stake is held by the government. In India,
public sector banks operate under the guidelines of Reserve Bank of India (RBI), which
is the central bank. Some of the Indian public sector banks are State Bank of India (SBI),
Corporation Bank, Bank of Baroda, Dena Bank, and Punjab National Bank.

(b) Private Sector Banks:

Refer to a kind of commercial banks in which major part of share capital is held by
private businesses and individuals. These banks are registered as companies with
limited liability. Some of the Indian private sector banks are Vysya Bank, Industrial
Credit and Investment Corporation of India (ICICI) Bank, and Housing Development
Finance Corporation (HDFC) Bank.

(c) Foreign Banks:

Refer to commercial banks that are headquartered in a foreign country, but operate
branches in different countries. Some of the foreign banks operating in India are Hong
Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank,
Standard & Chartered Bank, and Grindlay’s Bank. In India, since financial reforms of
1991, there is a rapid increase in the number of foreign banks. Commercial banks mark
significant importance in the economic development of a country as well as serving the
financial requirements of the general public.

Functions of Commercial Banks:

Commercial banks are institutions that conduct business for profit motive by accepting
public deposits for various investment purposes.

The functions of commercial banks are broadly classified into primary

functions and secondary functions, which are shown in Figure-1:

The functions of commercial banks (as shown in Figure-1) are discussed as

follows:
(a) Primary Functions:
Refer to the basic functions of commercial banks that include the following:
(i) Accepting Deposits:
Implies that commercial banks are mainly dependent on public deposits.

There are two types of deposits, which are discussed as follows:

(1) Demand Deposits:
Refer to kind of deposits that can be easily withdrawn by individuals without any prior
notice to the bank. In other words, the owners of these deposits are allowed to withdraw
money anytime by simply writing a check. These deposits are the part of money supply
as they are used as a means for the payment of goods and services as well as debts.
Receiving these deposits is the main function of commercial banks.

(2) Time Deposits:

Refer to deposits that are for certain period of time. Banks pay higher interest on rime
deposits. These deposits can be withdrawn only after a specific time period is completed
by providing a written notice to the bank.

(3) Advancing Loans:

Refers to one of the important functions of commercial banks. The public deposits are
used by commercial banks for the purpose of granting loans to individuals and
businesses. Commercial banks grant loans in the form of overdraft, cash credit, and
discounting bills of exchange.

(b) Secondary Functions:

Refer to crucial functions of commercial banks. The secondary functions can be
classified under three heads, namely, agency functions, general utility functions, and
other functions.

These functions are explained as follows:

(1) Agency Functions:
Implies that commercial banks act as agents of customers by performing
various functions, which are as follows:
(i) Collecting Checks:
Refer to one of the important functions of commercial banks. The banks collect checks
and bills of exchange on the behalf of their customers through clearing house facilities
provided by the central bank.

(ii) Collecting Income:

Constitute another major function of commercial banks. Commercial banks collect
dividends, pension, salaries, rents, and interests on investments on behalf of their
customers. A credit voucher is sent to customers for information when any income is
collected by the bank.
(iii) Paying Expenses:
Implies that commercial banks make the payments of various obligations of customers,
such as telephone bills, insurance premium, school fees, and rents. Similar to credit
voucher, a debit voucher is sent to customers for information when expenses are paid by
the bank.

(2) General Utility Functions:

Include the following functions:
(i) Providing Locker Facilities:
Implies that commercial banks provide locker facilities to its customers for safe keeping
of jewellery, shares, debentures, and other valuable items. This minimizes the risk of
loss due to theft at homes.

(ii) Issuing Traveler’s Checks:

Implies that banks issue traveler’s checks to individuals for traveling outside the
country. Traveler’s checks are the safe and easy way to protect money while traveling.

(iii) Dealing in Foreign Exchange:

Implies that commercial banks help in providing foreign exchange to businessmen
dealing in exports and imports. However, commercial banks need to take the permission
of the central bank for dealing in foreign exchange.

(iv) Transferring Funds:

Refers to transferring of funds from one bank to another. Funds are transferred by
means of draft, telephonic transfer, and electronic transfer.

(3) Other Functions:

Include the following:
(i) Creating Money:
Refers to one of the important functions of commercial banks that help in increasing
money supply. For instance, a bank lends Rs. 5 lakh to an individual and opens a
demand deposit in the name of that individual.

Bank makes a credit entry of Rs. 5 lakh in that account. This leads to creation of demand
deposits in that account. The point to be noted here is that there is no payment in cash.
Thus, without printing additional money, the supply of money is increased.
(ii) Electronic Banking:
Include services, such as debit cards, credit cards, and Internet banking.
Types of Credit Offered by Commercial Banks:
A commercial bank offers short-term loans to individuals and organizations in the form
of bank credit, which is a secured loan carrying a certain rate of interest.

There are various types of bank credit provided by a commercial bank, as

shown in Figure-2:

Bank Loan:
Bank loan may be defined as the amount of money granted by the bank at a specified
rate of interest for a fixed period of time. The commercial bank needs to follow certain
guidelines to extend bank loans to a client. For example the bank requires the copy of
identity and income proofs of the client and a guarantor to sanction bank loan. The
banks grant loan to clients against the security of assets so that, in case of default, they
can recover the loan amount. The securities used against the bank loan may be tangible
or intangible, such as goodwill, assets, inventory, and documents of title of goods.

The advantages of the bank loan are as follows:

a. Grants loan at low rate of interest

b. Involves very simple process of loan granting

c. Requires minimum document and legal formalities to pass the loan

d. Involves good customer relationship management

e. Consumes less time because of modern techniques and computerization

f. Provides door-to-door facilities

In addition to advantages, the bank loan suffers from various imitations,
which are as follows:
a. Imposes heavy penalty and legal action in case of default of loan

b. Charges high rate of interest, if the party fails to pay the loan amount in the allotted
time

c. Adds extra burden on the borrower, who needs to incur cost in preparing legal
documents for procuring loans

d. Affects the goodwill of the organization, in case of delay in payment

Cash Credit:
Cash credit can be defined as an arrangement made by the bank for the clients to
withdraw cash exceeding their account limit. The cash credit facility is generally
sanctioned for one year but it may extend up to three years in some cases. In case of
special request by the client, the time limit can be further extended by the bank.

The extension of the allotted time depends on the consent of the bank and past
performance of the client. The rate of interest charged by the bank on cash credit
depends on the time duration for which the cash has been withdrawn and the amount of
cash.

The advantages of the cash credit are as follows:

a. Involves very less time in the approval of credit

b. Involves flexibility as the cash credit can be extended for more time to fulfill the need
of the customers.

c. Helps in fulfilling the current liabilities of the organization

d. Charges interest only on the amount withdrawn by the customer. The interest on cash
credit is charged only on the amount of cash withdrawn from the bank, not on the total
amount of credit sanctioned.

The cash credit is one of the most important instruments of short-term financing but it
has some limitations.
These limitations are mentioned in the following points:
a. Requires more security for the approval of cash

b. Imposes very high rate of interest

c. Depends on the consent of the bank to extend the credit amount and the time limit

Bank Overdraft:
Bank overdraft is the quickest means of the short-term financing provided by the bank.
It is a facility in which the bank allows the current account holders to overdraw their
current accounts by a specified limit. The clients generally avail the bank overdraft
facility to meet urgent and emergency requirements. Bank overdraft is the most popular
form of borrowing and do not require any written formalities. The bank charges very
low rate of interest on bank overdraft up to a certain time.

The advantages of the bank overdraft are as follows:

a. Involves no documentation for the extension of overdraft amount

b. Imposes nominal interest on the overdraft amount

c. Charges fee only on the amount exceeding the account limit

The disadvantages of the bank overdraft are as follows:

a. Incurs high cost for the clients, if they fail to pay the amount of overdraft for a longer
period of time

b. Hampers the reputation of the organization, if it fails to pay the amount of overdraft
on time

c. Allows the bank to deduct overdraft amount from the customers’ accounts without
their permission

Discounting of Bill:
Discounting of bill is a process of settling the bill of exchange by the bank at a value less
than the face value before maturity date. According to Sec. 126 of Negotiable
Instruments, “a bill of exchange is an unconditional order in writing addressed by one
person to another, signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at fixed or determinable future time a sum certain in
money to order or to bearer.”

The facility of discounting of bill is used by the organizations to meet their immediate
need of cash for settling down current liabilities.

Conditions laid down by the bank for discounting of bill are as follows:
a. Must be intended to specific purpose

b. Must be enclosed with the signature of the two persons (company, bank or reputed
person)

c. Must be less than the face value

d. Must be produced before the maturity period.

2) EXPLAIN THE CONCEPT OF EVOLUTION OF BANKING SYSTEM IN INDIA. HOW BANKS ARE PLAYING A
MAIN ROLE IN THE ECONOMIC DEVELOPMENT
Concept of Banking
Banks are institutions that accept various types of deposits and use those
funds for granting loans. The business of banking is that of an intermediary
between the saving and investment units of the economy. It collects the
surplus funds of millions of individual savers who are widely scattered and
channelize them to the investor.
Development of Banking in India
The history of banking dates back to the thirteenth century when the
first bill of exchange was used as money in medieval trade. There was no
such word as ‘banking’ before 1640, although the practice of safe-
keeping and savings flourished in the temple of Babylon as early as 2000
B.C. Chanakya in his Arthashastra written in about 300 B.C. mentioned
about the existence of powerful guilds of merchant bankers who received
deposits, advanced loans and issued hundis (letters of transfer). The Jain
scriptures mention the names of two bankers who built the famous
Dilwara Temples of Mount Abu during 1197 and 1247 A.D.
The first bank called the ‘Bank of Venice’ was established in
Venice, Itlay in 1157 to finance the monarch in his wars. The bankers of
Lombardy were famous in England. But modern banking began with the
English goldsmith only after 1640. The first bank in India was the ‘Bank of
 Hindustan’ started in 1770 by Alexander & Co. an English agency house in
Calcutta which failed in 1782 with the closure of the agency house. But
the first bank in the modern sense was established in the Bengal
Presidency as the Bank of Bengal in 1806.
History apart, it was the ‘merchant banker’ who first evolved the
system of banking by trading in commodities than money. Their trading
activities required the remittances of money from one place to another.
For this, they issued ‘hundis’ to remit funds. In India, such merchant
bankers were known as ‘Seths’.
The next stage in the growth of banking was the goldsmith. The
business of goldsmith was such that he had to take special precautions
against theft of gold and jewellery. If he seemed to be an honest person,
merchants in the neighborhood started leaving their bullion, money and
ornaments in his care. As this practice spread, the goldsmith started
charging something for taking care of the money and bullion. As evidence
for receiving valuables, he issued a receipt. Since gold and silver coins
had no marks of the owner, the goldsmith started lending them. As the
goldsmith was prepared to give the holder of the receipt an equal
amount of money on demand, the goldsmith receipts became like
cheques as a medium of exchange and a means of payment.
The next stage in the growth of banking is the moneylender. The
goldsmith found that on an average the withdrawals of coins were much
less than the deposits with him. So he started advancing the coins on loan
by charging interest. As a safeguard, he kept some money in the reserve.
Thus the goldsmith-money-lender became a banker who started
performing the two functions of modern banking that of accepting
deposits and advancing loans.
In India our historical, cultural, social and economic factors have
resulted in the Indian money market being characterized by the existence
of both the unorganized and the organized sectors.

(a) Unorganized Sector: The unorganized sector comprises moneylenders and

indigenous bankers which cater to the needs of a large number of people
especially in the rural areas. They have been meeting the financial
requirements of the rural populace since times immemorial. Their
importance can be gauged from the fact that Jagat Seths, hereditary
bankers of the Nawab of Bengal, were recognized even by Aurangzeb and
the East India Company who were compelled to borrow from them also
publicly honored them.
 The indigenous bankers are different from the proper banks in a
number of ways. For instance, they combine banking activities with trade
whereas trading is strictly prohibited for banks in the organized sector.
They do not believe in formalities or paper work for making deposits or
withdrawing money. In fact, since a substantial percentage of their
clientele is illiterate, they frequently take a thumb impression of their
customers on a blank paper. Even if they use a ‘Hundi’ as a negotiable
instrument yet it will not be indicated on its face whether the
transaction is supported by valuable consideration or it is merely as a
result of mutual accommodation. The rate of interest charged by them
fluctuates directly with the need of the borrower and may sometimes be
as high as 300 percent! They are insulated from all type of monetary and
credit controls as they fall outside thy purview of RBI. Though they are
still the major source of funds for small borrowers, but now their market
has started shrinking because of the fast expansion of branches of banks
in the unorganized sectors.
Banking Sectors

The spectrum of needs and requirements of individuals, organizations and

sectors of the economy is very vast and diverse. Banks have come up with a
whole range of banking products and services to suit the requirements of
their clients. Banking sectors include corporate banking, international
banking and rural banking.
Corporate Banking: Cooperative banking typically serves the
financial needs of large corporate houses- both domestic and
multinational-public sectors and governments. However, traditionally
banks had primarily been focusing on production based activities and
financed working capital requirements as well as term loans to
corporates due to following reasons:
· From the beginning till the pre-reform era, business houses
were heavily dependent on banks for their financial needs. The
capital markets were not well developed, joint ventures norms
had not been liberalized, mergers and acquisitions were not the
preferred route and numerous restrictions were placed on
raising finance from overseas markets.
 · The banking institutions too showed a preference for
providing credit to the corporates. This way their paper work
was markedly reduced as the numbers of clients were less. Not
only the workload was eased but also the risk involved was
considerably less as corporate borrowings were made against
collaterals after verifying their capacity for repayment.
· The government had also earmarked priority sectors, and as
such banks had to comply with the targets allotted to them.
After liberalization, many corporates could not face the
competition and went into the red. Economic downturn and
recessionary environment resulted in poor performance of many
borrowers. As a direct consequence of all these, the NPAs of banks
started mounting. However, according to the RBI annual report of
2005-06, the credit demand by the corporate sector has turned robust
on the back of strong industrial performance. Furthermore, banks are
expected to have greater financing opportunities in the area of
project finance, especially in the infrastructure sector, given the
conversion of two major financial institutions into banks. Banks have
been focusing mainly on syndication of debt to ensure wider
participation in project finance and wholesale leading segment.
Features
Corporate banking serves the need of corporates, those having a legal
entity. They offer business current accounts, make commercial loans,
participate in syndicated lending and are active in inter-bank markets
to borrow/lend from/ to other banks. Many banks offer structured
products, capital market services and corporate solutions. Corporate
banking involves comparatively fewer borrowers and the account size
is usually large and sometimes it can turn into billions of dollars.
Services
I. Corporate banking services include:
II. Working capital and terms loans, overdrafts,
bill discounting, project financing.
III. Cash management both short term holdings of
cash as well as funds held for longer periods.
IV. Financing of exports and imports including
export credit arrangements.
 V. Project finance
VI. Transmission and receipt of money.
VII. Handling foreign currency and hedging against
changes in value.

In recent times, there has been a marked shift from corporate to

retail banking. The major reason for avoiding corporate accounts is
the mounting non-performing corporate accounts. Difficulty in pricing
the services and high risks involved are some of the other reasons for
overlooking corporate accounts. However this is very lucrative
segment provided care is taken in identifying and focusing on selected
business segments and catering to their requirements, e.g. for the SME
segment, credit is paramount whereas for big corporates, customized
solutions are needed. Systematic account planning process can help to
identify the profitable customers, and pricing of services can help the
bank to get rid of asset quality problem. Most developed nation’s
banks have separate corporate bank divisions which help them to
avoid the pitfalls of one size fits all
policies.

(B) Retail Banking: With a jump in the Indian economy from

a manufacturing sector, that never really took off, to a
nascent service sector, Banking as a whole is undergoing a
change. A larger option for the consumer is getting
translated into a larger demand for financial products and
customization of services is fast becoming the norm than a
competitive advantage. With the Retail banking sector
expected to grow at a rate of 30% players are focusing
more and more on the Retail and are waking up to the
potential of this sector of banking. At the same time, the
banking sector as a whole is seeing structural changes in
regulatory frameworks and securitization and stringent NPA
norms expected to be in place by 2004 means the faster
one adapts to these changing dynamics, the faster is one
expected to gain the advantage. In this article, we try to
study the reasons behind the euphemism regarding the
Retail-focus of the Indian banks and try to assess how much
 of it is worth the attention that it is attracting. Retail
banking is typical mass-market banking in which individual
customers use local branches of larger commercial
banks. Retail banking is banking that provides direct services to
consumers. Many people with bank accounts have their accounts at
a retail bank and banks that offer retail banking services may also
have merchant and commercial branches that work with
businesses. For people with high net worth and special banking
needs, private retail banking services may be pursued. These offer
a high level of service with a number of options that are not
available to average members of the public. Services offered
include savings and checking accounts, mortgages, personal
loans, debit/credit cards and certificates of deposit
(CDs).The most basic retail banking services include savings
and checking accounts. Most retail banks, however, try to make
themselves into a one stop shop for banking customers. This
increasescustomer retention and loyalty, ensuring that the bank
has a steady supply of customers. Expanding banking services also
provides more opportunities for the bank to turn a profit.

Characteristics of Retail Banking

1. Large Number of Small Customers: Retail banking is
characterized by the existence of a large number of small
customers, who consumes personal banking and small business
services. The essential prerequisite of retail banking is its
orientation towards the consumer whether it is in size, price,
delivery channels or product profile.
2. Multiple Products: A basket of products including flexi deposits,
cards, insurance, medical expenses, auto loans are offered to the
consumers. Besides these, there are a number of value added
services like de-mat accounts, issue of free ATM cards, portfolio
management, payment of water, electricity and telephone bills.
3. Multiple Delivery Channels: To increase penetration and access
banks are not limiting themselves to branches but are making
extensive use of internet, call centres, kiosks, etc.
Origin of Retail Banking: Origin of retail banking in India can be traced
to a number of developments.
1. Financial Sector Reforms and Liberalization: Before opening up of the economy
during the decade of the nineties, corporate banking had been the preferred goal for
bankers. However, after the reforms it no longer remained so. Corporates could now
go in for external commercial borrowings from any internationally recognized bank,
export credit agency, international capital market or supplier of equipment. They
could also opt for mergers and acquisitions. So banks had to look for other avenues
than the corporate sector for growth and expansion.
2. Spreading of Risk: Another consequence of liberalization was industrial
recession, economic downturn, industrial sickness which resulted in failure
of many big corporates. Mounting non-performing assets made banks more
cautious about lending to business houses, and diverting their funds into the
retail segment, as retail banking has the advantage of minimizing the risk
and maximizing the returns. The returns from retail segment are three to
four percent as compared to one to two percent from the corporate
segment.
3. Growth in Banking Technology and Automation of Banking Processes:
Technology has opened up new vistas for the banking industry and redefined
its nature, scope and extent. State-of-the-art electronic technology has
helped to increase penetration through ATMs without opening more
branches. Internet has made possible banking to be done from home.
Telebanking and phone banking are some other new technologies which have
revolutionized banking.
4. Changing profile of Customers: An ever-increasing middle class, with
more disposable income, higher education and a desire for higher standard
of living have fuelled the demand for retail banking services. More and more
people seemed to have embraced the credit culture, and are demanding
consumer goods, holidays, education and a host of other value added
banking services.

(C) Rural Banking: On the birth anniversary of Mahatma Gandhi on

October 2, 1975, Rural Banks were established with a view to stepping up
rural credit. In 1975, the Government of India appointed a working group
under the Chairmanship of M. Narasimham, the Deputy Governor of the
Reserve Bank of India to review the flow of institutional credit to the
people in rural areas. The committee was to study the availability of
institutional credit to the weaker section of the rural population and to
suggest alternative agencies for this purpose. The committee concluded
that the commercial banks would not be able to meet the credit
 requirements of the weaker sections of the rural areas in particular and
rural community in general. The Government accepted the
recommendations of the working group and passed an ordinance in
September 1977 to establish Regional Rural Banks.

Need to Establish Regional Rural Banks

The main need and objective of the RBBs was to provide credit and other
facilities to the small and marginal farmers, agricultural laborers and
artisans, who had, by and large, not been adequately served by the existing
credit institutions namely, cooperative banks and commercial banks:
1. Co-operative Banks: So far as the co-operative credit structure is
concerned, it lacks the managerial talent, post credit supervision and the
loan recovery. They are also not in a position to mobilize necessary
resources.
2. Commercial Banks: These banks are mostly centralized in urban areas
and are urban-oriented. Although these can play a crucial role as far as the
rural credit is concerned. For this they have to adjust their methods,
procedures, training and orientation in accordance with the rural
environment. Further, due to high salary structure, staffing pattern and high
establishment expenses their operational cost is also higher. Thus, under
these circumstances, the commercial banks cannot provide credit, to the
weaker sections of the rural areas, at a cheap rate.
3. Need of a New Institution: Thus in accordance with the rural
requirements, the necessity was felt to establish such an institution i.e. a
rural oriented bank which may fulfill credit needs of the rural people
particularly the weaker section. It may also combine the merits of the above
two mentioned institutions, keeping aside their drawbacks. The RRBs, as
subsidization to nationalized banks, are expected in the long run not only to
provide credit to farmers and village industries but also to mobilize deposits
from rural households. They may form an integral part of the rural financial
structure in India.
3) DEFINE THE TERM “BANKER” AND “CUSTOMER” DISCUSS THE SPECIAL FEATURES OF
LEGAL RELATIONSHIP BETWEEN THE BANKER AND CUSTOMER ALONG WITH THE
VARIOUS FORMS OF RELATIONSHIP OF BANKER & CUSTOMER IN E BANKING ALSO .
Banker

A banker is a dealer in capital or more properly a dealer in money. He is an intermediate party

between the borrower and the lender. He borrows from one party and lends to another.
According to Doctor Herbert Hart, a banker or a bank is a person carrying on the business of
 receiving money and collecting data for customers subject to the obligation of honouring
available on their current accounts. According to the banking company's ordinance 1962
banking has been defined as accepting for the purpose of lending or investment of deposits of
money from public repayable on demand or otherwise and withdrawals by cheques, draft or
order

Customer

A customer is a person who maintains a regular account with the bank without taking
into consideration the duration and frequency of operation of his account. To be a
customer for any bank the individual should have an account with the bank. The
individual should deal with the bank in its nature of regular banking business. He should
deal with the bank without consideration of the duration and frequency of operation of
his account. The relationship between banker and customer is of utmost importance. If
is generally studied under the following two heads one is general relationship and
special relationship
RELATIONSHIPS BETWEEN BANKER AND CUSTOMER
It has already been stated that the relationship between the banker and the customer depends on the nature of services
provided by the banker. For example, when an account is opened in a bank, the relationship created is that of debtor
(banker) and creditor (customer). When some valuables are deposited in the safe custody of the banker, the relationship
created is that of trustee (banker) and beneficiary (customer). Let us discuss the different relationships between the banker
and the customer in detail.

Relationship of Debtor and Creditor

. Whenever customer deposits money in a bank, the banker takes a responsibility to return the money as and when
demanded by the customer along with interest. Of course, the customer must fulfill the necessary conditions in demanding
the money.

When a customer deposit money, in a way he lends it to the banker and the banker can use it according to his discretion to
earn profit as much as he can. Moreover, at the time of returning the money, the banker can return the money in any
denominations, not the same coins and notes as deposited by the customer. In this case, the relationship that is created
between the banker and the customer is that of debtor and creditor. The banker is the debtor and the customer is the
creditor.
Features of debtor- creditor relationship

Though the relationship between the banker and the customer is that of debtor and creditor, it is not the general debtor and
creditor relationship. This relationship has certain special features, which we are going to discuss now-

 The demand for repayment of money must be made by the customer (creditor). The customer must make the demand in
proper form i.e. the customer must make the demand for repayment through withdrawable forms, cheques, drafts, order or
otherwise and not verbally or through telephone.
 The customer must make the demand for repayment at a particular branch i.e. the branch where the customer has the
account. However, in case of bank drafts, travellers’ cheques, ATM Cards etc., the bank can pay the money to the customer
at some other branch.
 The customer must make the demand for repayment only during the working days and working hours of the bank. However,
with the advent of technology, this feature is not applicable in all the time.

Relationship of Creditor and Debtor

The relationship between the banker and the customer as debtor and creditor reverses when-

 the customer overdrawn the account; and

 the banker lends money to the customer.
Overdrawing the account: In Unit 9, you have come across that that the current accountholders get overdraft facility from
the bank. Under this facility the accountholder can overdraw his account i.e. withdraw more money than the balance
available in the account. In case the accountholder overdraws the account, the relationship between the banker and the
customer gets the shape of creditor and debtor relationship- the banker is the creditor and the accountholder (customer) is
the debtor. Till the overdrawn amount is returned by the customer, the relationship between the two continues to be of
creditor and debtor. As soon as the overdrawn amount is returned by the customer, the relationship gets its original shape
i.e. banker becomes the debtor and the accountholder becomes the creditor.

Lending money to the customer: When a bank sanctions a loan to a customer, the relationship between the two is that of
the creditor and the debtor. The creditor (banker) charges interest on the loan till it is paid back by the customer. When the
loan is paid back fully, the relationship reverses and gets the original shape of debtor (banker) and creditor (customer)

Relationship of Trustee and Beneficiary

Besides the debtor- creditor relationship between the banker and the customer, some other types of relationships also exist
between the two, depending on the services provided by the bank. One of such relationships is that of trustee and
beneficiary.

Perhaps you are aware that banks provide some services under which the customers can keep their valuables like jewellery,
share certificate etc. in safe custody of the bank. The customer remains the owner of such valuables though they are in the
custody of the banker. In this case the banker acts as trustee and the customer is the beneficiary.

Relationship of Bailee and Bailor

When the customer keeps his valuable in the safe custody of the banker, the banker besides acting as trustee also acts as
bailee. In that case the customer becomes the bailor. If the customer (bailor) suffers any loss due to the negligence of duty
on the part of the banker (bailee), the customer can file a case in the court of law for the recovery of such loss.

Relationship of Agent and Principal

While discussing the agency functions of banks in unit 9, you have come to know that banks as agents collect
cheques, bills, drafts etc. on behalf of the customer. The bank also makes payments of regular nature like,
insurance premium, rent etc. on behalf of the customer. While performing theses functions the bank acts as the
agent of the customer and the customer is the principal. The banker (agent) performs the functions according to
the instructions of the customer (principal) and for this the ba
nker is entitled to get commission from his principal

E-BANKING

RECOMMENDATIONS OF COMMITTEE ONTECHNOLOGY UPGRADATION

The Reserve Bank continued to be involved in shaping thet

e c h no l og y v i s i on o f t he ba nk i ng s ys t em . F o l lo wi n g
t h e recommendations of the Committee on Financial Sector Reforms,(which is popularly
known as the second Narasimham committee),a Committee on Technology Upgradation
was set up by the RBIfor the Banking Sector in 1994. This committee has
representationf r o m b a n k s , G o v e r n m e n t , t e c h n i c a l i n s t i t u t i o n s a n d t h e
R B I . Among other things, this committee looked into issues relating to
•
Encryption of Public Switching Telephone Network (PSTN) lines
•
Admission of electronic files as evidence
•
Record keeping
Modalities for a satellite based WAN for banks and financialinstitutions with the necessary
security systems by banks andother financial institutions, to ultimately develop a sound and
anefficient payments system
•
Methods by which technological upgradation in banks andfinancial institutions
could be effected and in the context
studyt h e f e a s i b i l i t y o f e s t a b l i s h m e n t o f s t a n d a r d s , d e s i g n i n g
payments system backbone and standards relating to security levels, messages and
smart cards.

E-BANKING
The Committee realised the urgent need for training, research anddevelopment activities in the
Banking Technology area. Banks andFinancial Institutions started setting up Technology based
trainingcentres and colleges. However, a need was felt for an apex levelInstitute
which could be a Think-tank and Brain Trust for BankingTechnology.The committee
recommended a variety of payment
applicationsw h i c h c a n b e i m p l e m e n t e d w i t h a p p r o p r i a t e
t e c h n o l o g y upgradation and development of a reliable co
mmunicationnet wor k . T he c omm it t ee als o s u gg es t ed s et
t i n g u p o f a n Information Technology Institute for the purpose of Research
andD e v e l o p m e n t a s w e l l a s C o n s u l t a n c y i n t h e a p p l i c a t i
o n o f technology to the Banking and Financial sector of the country. Asrecommended by
the Committee, IDRBT was established by RBI in 1996 as an autonomous centre for
Development and Researchin Banking Technology at Hyderabad