1. Explain the components of Indian money market.

The Composition of the Money Market -The money market is not a single homogeneous market but it is composed of several submarkets, each one of which deals in different types of short-term credit. Call Money Market. The call money market refers to the market for extremely short-period loans. Bill brokers (i.e., those who buy bills) and dealers in the stock exchange require financial accommodation for short period to finance their customers trading on margin and their own holding of securities and this financial accommodation is provided by the banks. The money advanced by banks to bill brokers and stock exchange dealers is lent up to seven days but more often it is lent for day or for overnight only. Acceptance market. The acceptance market refers to the market for bankers acceptance which arises out of trade-both home and foreign transactions. In the London money market, there are specialist firms known as accepting houses which accept bills drawn on them by traders instead of drawing on the true debtors. The accepted or guaranteed by a well-known acceptance house or bank can be easily sold or discounted in the market. In the past, the acceptance market was a prominent section of the London money market. However, its importance has declined considerably now. Bill Market. The bill market or the discount market refers to the market in which short-dated paper or bills are brought and sold. In the past, the most important type of short-dated paper in the London money market was the commercial bill which used to finance both foreign trade and internal trade. The commercial bill market declined in importance in the market which has become the most important part money market all over the world. 2. What is Branch Banking? Explain the advantages and disadvantages. BRANCH BANKING.In the branch banking system, every bank, as a single legal catity having one board of directors and one group of shareholders, operates through a network of branches throughout the country. Advantages of Branch Banking. Proper distribution of capital. The most important merit of a branch banking system is that it transfers capital from regions which have a surplus to those regions which require capital. There are two merits in such transfer of capital between areas: (1) capital is put to the most productive use and thus is made to contribute to increased output and national income of the country and (b) interest rates tend to be uniform throughout the country. 2) Diversification of deposits and assets. Since the branch banking system covers a wide geographical area, there are greater possibilities of diversification affecting both deposits and assets. Deposits are received from all areas. Particularly from areas where saving are plenty. At the same time, loans and advances are made in those areas where there is scarcity of money and where interest rates are high. 3) Loans and advances made on merit. Under branch banking, loans and advances are made purely on merit and not on other considerations. The branch manager is not influenced by personal or local considerations in the granting of loans. Moreover. In the case of refusal to a particularly influential but a creditworthy customer, the branch manager can always throw the responsibility refusal on the head office.4) Large financial resources. The great merit of the branch banking system lies in the advantages derived from large financial resources. The requirement large customers can be easily met by the branch banking system. Loans and advances on a more liberal scale can be made.(5) Efficiency in management. The branch banking system makes for great efficiency in management. First of all the best men may be recruited for management. Branch managers can be carefully trained and supervised with greater opportunity for promotion for those who show good promise. Secondly, the advantages of first class business efficiency at headquarters will be available branches. Disadvantages of Branch Banking. The critic of the branch banking system point out that many of the above advantages are not realised in practice and that some of the above advantages are available under the unit banking system also. One demerit of the branch banking system is that there is much red tape and delay which arises from the lack of sufficient authority to branch managers. In the case of any large loan, the branch managers have to refer to the head office and these then results in delay. Secondly, the branch managers may not be familiar with local conditions and with the special problems and difficulties of local borrowers. Thirdly, the funds of a particular locality may not be available for the development of that area but may be used elsewhere. Fourthly, the branch banking system leads to concentration of enormous financial resources in the hands of a small number of men. Such a monopoly power is a constant source of danger to the community. 3. Explain the features of Negotiable Instruments. ESSENTIAL CHARACTERISTICS OF NEGOTIABI INSTRUMENT 1) Transferability: The basic future of a negotiable instrument is that it is easily transferable from person to person by mere delivery or by endorsement and delivery. In the case of bearer instrument, the property passes be mere instrument, it pass by endorsement and delivery. Though transferability is an essential feature of a negotiable instrument, but all transferable instruments are not negotiable instruments, but all negotiable instruments are transferable. 2) Good title to the transferee(Negotiability): A person who takes delivery of a negotiable instrument in good faith and for value (i.e. a holder in due course) get a better title than the transferor has got. A person who takes a negotiable instrument from another person, who had stolen it from somebody else, will have absolute and undisputable title to the instrument, provided he has received the same for value and in good faith without knowing that the transferor was not the true owner of the instrument. That is, a bona fide transferee for value is not affected by a defect of the title on the part of the transferor or of any of the previous holders of the instrument. 3) Right of Action: The holder of a negotiable instrument being a holder in due course gets the right of action to sue upon the instrument in his own name. Every instrument, apart from the three instruments, viz. promissory note, bill of exchange and cheque which will satisfy all the above three features can be called as negotiable instrument. Therefore, any instrument which entitles a person to a sum of money and which possesses the characteristic of negotiability is a negotiable instrument. PRESUMPTIONS AS TO A NEGOTIABLE INSTRUMENT 1)Every negotiable instrument is drawn, accepted and endorsed, made or transferred for consideration. 2) The date it bears on it is the date on which it is drawn or made. 3) Every transfer of the instrument is made before its maturity. 4)The instrument is

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accepted within a reasonable time after its date and before its maturity. 5) The endorsements appearing upon a negotiable instrument are in order in which they appear thereon. 4. Explain the features of Fixed Deposit Receipt. FIXED DEPOSIT ACCOUNT. The main features of fixed deposit are as under: 1)It is a certain sum of money kept with the banker for a specified period e.g. 15 days to five years or more. It is withdrawn able only after the maturity of the fixed periods or subject to so many days notice as the case may be. Often bankers permit the customers to withdraw their money prior to expiry of the fixed period as a sort of convenience and in such cases interest is fore-gone or premature repayment is allowed on a loan basis. 2) On the deposit being made, the banker issues deposit acknowledging the claim o f the customer on the bank. 3) The general relationship between banker and customer in respect of fixed deposit is that of debtor or creditor. The deposit cannot be deemed to be held in trust. 4) Not negotiable: Fixed deposit receipt is not a negotiable instrument. The banker should not pay the fixed deposit to any third party even if it bears the signature of the depositor for a mere endorsement of fixed deposit does not make it negotiable. The depositor has to execute assignment deed and notify to the bank in case he wants to transfer the deposit receipt to any one else. 5) Fixed deposit accounts may be opened in the name of minors and they can give valid discharge for the deposit amount repaid to them. 5. Explain the different kinds of Cheque Crossing CROSSING OF CHEQUES - Crossing of cheques: meaning and object of crossing of cheques: Crossing of cheque means drawing two parallel transverse lines on the left hand top corner of a cheque. Crossing on a cheque is a direction to the paying banker by the drawer that payment should not be made across the counter. TYPES OF CROSSING - There are two types of crossing: (A) General crossing (B) Special crossing General Crossing: According to Section 123 of the Negotiable Instruments Act, 1881. Where a cheque bears across its face an addition of the words and company or any abbreviation therefore, between two parallel transverse lines, or of 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 (B) Special Crossing: Section 124 defines special crossing as follows: Where a cheque bears across its face an addition of the name of a banker 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. 6. What are the essential requisites of a cheque? The drafting of cheques includes the following: Dating of Cheques: A cheques should be properly dated if it is to be honoured. If a cheque having no date is presented to the bank, the cheque will be returned with the remark should bear the date. In case a cheque st has not been dated by a drawer, any holder can insert a date. If a cheque dated 1 February 2002 bears at the foot the following words: Must be presented for payment on or before February 1the banker can dishonour such a cheque, if the cheque is presented st after 1 February 2002. Payee: Where a cheque is not payable a bearer, the payees name must be written, or otherwise indicated with certainty. A normal cheque is one in which there is a drawer, a drawer bank and a payee or no payee but bearer (Sir John Paget). A cheque may be drawn payable to or to the order of the drawer. Amount of the Cheque: The amount to be paid to the payee must be clearly stated, both in words and figures. No blank space should be left before and after the amount stated in words and figures. If the drawer leaves blank spaces carelessly before or after the words and figures, thus facilitating the alteration of the amount, and if the banker pays the amount as altered, the latter is entitled to debit the customers account with the amount actually paid. Signature: The cheque must be signed by the drawer himself or by the person authorized by him. If the drawer happens to be illiterate, cheques can be drawn by means of the thumb impression of the drawer duly witnessed by a person known to the banker, preferably in the presence of the banker himself. Delivery: In order that the drawer of a cheque may be held liable thereon, he must have handed over the instrument, complete in all respects, to the payee with the intention that the proceeds thereof shall be paid to him or his order or to bearer. Unless the cheque is properly delivered, the drawer dos not become liable thereon. 7. What is Pass Book? Give its specimen. PASS BOOK The pass book is a replica of the customers account in the banks ledger. The pass book need not be presented along with the cheque for payment. The pass book may be sent periodically to the bank and the bank enters all the transactions as found in its own book in the pass book. The customer may compare the entries in the pass book with those in his own cash book and intimate to the bank any discrepancies so that they may be set right.The pass book is small handy book which contains the record of transactions in debits and credits between a banker and his customer. So, the bank pass book enables a client to check up his accounts to his satisfaction and find out any discrepancy. It also contains rules and regulation governing current and saving accounts.If there is any discrepancy, the customer should bring it to the notice of the bank and get it corrected. Entries in the pass book will be made only by the banker and the customer should not make any entry therein. When a pass book is lost, the banker will issue a duplicate. This will be marked duplicate. For issuing a duplicate pass book banker collects some charges from the customer. Where a pass book is complete with entries, the banker will issue a continuation pass book . In the first page of a specimen form of a pass, we find the following: Date Particulars Withdrawals Deposits Balance Initials Dr Cr

8. Define the term Banker and Customer.

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Definition of Banker. Dr. Herbert L. Hart, the author of the well knows treatise on Law of Baking says, A banker is one who in the ordinary course of his business, honours cheques drawn upon him by persons from and for whom he receives money on current accounts. According to this definition, the essential function to enable a person or firm or institution to be regarded as a banker or a bank, is that of receiving current deposits against which cheques may be drawn. (1) Take deposit accounts, (2) take current accounts, (3) issue and pay cheques, and (4) collect cheques crosses or uncrossed, for his customers. Customer: A customer is a person with whom the banker has some regular and formalized banking business. The important feature in this regard is the nature of the transactions and not the frequency of transactions. The dealing with the banker should be of a banking nature and regular in order to make a person a customer of the banker. Some casual services rendered by a banker to a person which are not of a banking nature could not entitle that person to be treated as customer. In the case of new customer, bankers do take considerable care in order to verify the bona fides of the customer before they allow him to open an account. 9. Explain the different types of loans and advances provided by commercial banks. CLASSIFICATION OF LOANS AND ADVANCES According to the Banking regulations Act, 1949, the loans and advances granted by banks can be broadly classified into (i) secured and (ii) unsecured advances. 1) Cash Credit 2) Overdraft 3)Loans 4) Discounting of Bill of Exchange. Cash Credit: under this system, the banker permits his customers to borrow money up to a particular limit against the security of tangible assets or guarantees. The customer withdraws cash from this account as and when he needs funds and deposits any amount of money which he finds surplus with him. The cash credit account is thus an active and running account to which deposits and withdrawals may be made frequently. Overdraft: when a current account holder is permitted by the banker to draw more than what stands to his credit, such an advance is called an overdraft. This arrangement of overdraft facility may be extended to the current account holders either on giving some collateral security or on the personal security of the borrower. Loans: sanctioning of a specified lump sum amount by the banker to a customer is called a loan. Once a loan is sanctioned and transferred to the customers current account, the customer is required to pay interest on the full amount irrespective of the fact that the amount is used or not A loan once repaid in full or in part cannot be withdrawn again by the borrower unless the banker sanctions a fresh loan. This is the aspect which differentiates it from the cash credit. Discounting of bill of Exchange: advances are also given by discounting of bills of exchange. Under the scheme of Bill of Exchange the holder of the bill will receive payment mentioned therein on the maturity of the bill is not able to wait till the date of maturity and requires cash urgently, he can sell at a discount. 10. Explain the functions of Commercial Banks FUNCTIONS OF COMMERCIAL BANKSAccording 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 withdraw able by cheque, draft, order or otherwise. The business of commercial bank is primarily to hold deposits and make loans and investments with the object of securing profits for its shareholders. Receiving deposits from the public. An important 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. It accepts deposits from every class and from every source and in all cases, without exception, it undertakes to repay the money, either in part or in full, in legal tender money. Deposits are of various types-demand deposits, savings deposits and fixed deposits. Making loans and advances. The second major function of a commercial but is to make loans and advances but 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. The most common way of lending is by overdraft facilities i.e., allowing the borrower to overdraw his current account and also through discounting bills of exchange. On the one hand, the depositors are granted facilities not only to protect their surplus funds but also for safe investment and, on the other, the merchants and the manufacturers are enabled to obtain adequate funds for their operations. The bank is thus a middlemen or an intermediary mobilising the savings of the people on the side, and using only those who should be allowed to borrow, the commercial bank helps in the development of those industries and occupations which performs the most useful service to the community. Use of the Cheque system. Apart from these two major functions, a commercial bank performs a number of other useful functions to the community. For instance, it has developed the cheque system, under which the depositors are given the right to withdraw from their deposits any amount, at their convenience by means of cheques. While the currency note is legal tender money, the cheque serves only a limited circle but is much more convenient and safe. The cheque system is the most developed credit instrument known to manTransfer of funds. Another function of a 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 miscellaneous functions performed by a commercial bank includes the provision of safety vaults or lockers to keep valuable articles of customers in safe custody, acting as agents for its customers to buy and sell gold and silver and securities on their behalf, making and receiving payments on behalf of its depositors and issuing letters of credit and travellers cheques for the convenience of its customers and, in general performing all functions which will bring in profits. 11. Explain the various Credit Control methods of Central Bank Control of credit is an important function of all central banks. It is through the control of credit that a central bank hopes to carry out its monetary policy. Various weapons or methods are available to a central bank to control credit creation and contraction by commercial banks. Bank Rate Policy Whenever a commercial bank needs additional cash, it can obtain the same from the Reserve Bank of

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India. Either the scheduled bank rediscounts some of its securities with RBI or it may borrow from the latter against these securities. In either case, RBI accommodates a scheduled bank. For this service rediscounting and giving advance-RBI charges interest at a rate which is known as the Bank Rate at the Discount Rate. Open-market Operations Deliberate and direct buying and selling of securities and bills in the money market by the central bank, on its own initiative, is called open-market operations. The theory of openmarket operations is as follows: In periods of inflationary situation when bank credit should be contracted, RBI will sell in the market first class bills in its possession. Buyers of these bills, whether they are scheduled banks themselves or others, make payments to the RBI through scheduled banks. Since the latter hold certain reserves with RBI, payment by scheduled banks to RBI actually means reduction in the size of the cash reserves held by scheduled banks with RBI. Reduction of cash reserves forces scheduled banks to reduce their loans and advances and at the same time to refuse further loans. Thus, excessive demand for goods and services based on bank loans, and which is responsible for inflationary conditions, will be reduced. Accordingly, inflationary pressure will be checked. Cash Reserve Ratio (CRR) Originally, the principle of requiring member-banks to maintain a minimum percentage of their time and demand liabilities with the central bank began in the United States of America. India adopted it in 1935 under the Reserve Bank of India Act, 1934. Minimum cash reserve requirements were fixed for three important reasons: to ensure the liquidity and solvency of individual scheduled banks and of the banking system as whole; to provide the central bank with supply of deposits for local operations; and To influence and ultimately restrict scheduled banks extension of credit. Margin Requirements A scheduled bank will never lend up to the full amount of the value of a security but lends something lower. Suppose, a security is worth Rs. 1,000, the bank may lend up to Rs. 700 and keep a margin of Rs. 300. The bank is said to keep a 30 per cent margin as a cushion against the decline in the value of the security. Scheduled banks may be directed by RBI to fix higher or lower margins. Suppose, scheduled banks are ordered to keep 40 per cent margin while lending, then they can lend up to 60 per cent of the value of a security. If the margin is raised to 100 per cent they ca lend nothing. Regulation of Consumer Credit Originally used in the USA since the beginning of World War II, regulation of consumer credit is now used extensively in many countries. During World War II, an acute scarcity of goods was felt and the position was worsened in the USA by the system of bank credit to consumers to enable them to buy durable and semidurable consumer goods through instalment buying. 12. What are the functions of Reserve Bank of India? FUNCTIONS OF THE RESERVE BANK OF INDIA (RBI) As the central bank of the country, the Reserve Bank of India performs both the traditional functions of a central bank and a variety of developmental and promotional functions. The Reserve Bank of India Act, 1934, confers upon it the powers to act as note-issuing authority, baker to the government and bankers bank. The Banking Regulation A ct, 1949, confers vast powers on RBI to control the Indian banking system and the money market in India. Reserve Bank as Noteissuing Authority The Indian currency consists of one- rupee note and coins (including subsidiary coins) issued by the Government of India and bank notes issued by RBI. As required by Section 38 of the RBI Act, 1934, the Government of India put into circulation one-rupee coins and note through RBI only. RBI has the sole right to issue all currency notes in India. The note issued by RBI and the one-rupee notes and coins issued by the Government are unlimited legal tender. RBI also bears the responsibility of exchange currency notes and coins into those of other denominations as required by the public. Reserve Bank as Banker to Government According to Section 20 of RBI Act, 1934 it is obligatory for RBI to transact government business including the management of the public dept of the Union. Section 21 requires the Central Government to entrust RBI all its money, remittances, exchange and banking transactions in India and, in particular, deposit free of interest, all its cash balances with the Bank. In terms of Section 21-A, the Reserve Bank performs similar functions on behalf of the State Governments. The Bank has entered into agreements with the Central and State Governments for carrying on these functions. Reserve Bank as Bankers Bank Reserve Bank is the banker to the bankscommercial banks, co-operative banks and Regional Rural Banks (RRBs) This relationship is established once the name of a bank is included in the Second Schedule to the Reserve Bank of India Act, 1934. Such banks are called the scheduled banks. A Scheduled Bank is a bank included in the Second Schedule to the Reserve Bank of India Act, 1934. The Reserve Bank is empowered to include in the Second Schedule the name of a bank which carries on the business of banking in India and which satisfies certain conditions laid down in Section 42(6). Reserve Banks as Lender of the Last Resort As the banker to the banks, RBI not only keeps the cash balances of scheduled banks but also acts as the lender of last resort. Under Section 17 of RBI Act, 1934, scheduled banks can get accommodation from RBI in times of need or financial stringency. RBI provides this accommodation to scheduled banks in two ways, viz, a) rediscounting eligible bills offered by scheduled banks; and b) Loans and advances to scheduled banks against certain securities. Reserve Bank as Controller of Credit RBI is the controller of all bank credit in the country. As such it has the power to influence the volume of credit created by banks in India. It can do so by: a) changing the bank rate, b) through open market operations, and c) Through changing the statutory cash reserve ratio and the statutory liquidity requirements. 13. Explain the different types of Endorsements. DEFINITION OF ENDORSEMENT Endorsement is derived from the Latin term dorsum, meaning upon the back which indicates that the usual place of an endorsement is on back of the instrument. KINDS OF ENDORSEMENTS According to the Negotiable Instruments Act, 1881, endorsement may take any of the following terms: 1.General or Blank Endorsement: if the endorser just puts his signature without specifying the name of the name of the endorsee, the endorsement is said to be blank.(Section 16) The effect of such an endorsement makes the instrument payable to bearer even though originally payable to order and negotiation takes place at mere delivery. 2.Special or Full Endorsement: If the name of the endorsee is specified in whose favour it is being endorsed, along with the signature of the endorser, the endorsement is called endorsement in full (Section 16). If in the above illustration the words pay to A Kumaran ossr pay to A. Kumaran or order are made, such endorsement is called endorsement in full. If such an endorsement

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is made, the banker should make payment either to the endorsee or to his order. The instrument having such endorsements shall be negotiated by means of endorsement and delivery. 3. Conditional Endorsement: It is an endorsement under which the endorser lays down some condition to be fulfilled by the payee before making the payment. This type of endorsement involves a special problem because, according to the definition of a cheque, it is an unconditional order payable on demand. That is, cheque cannot be made payable on the happening of certain conditions and therefore it ceases to be a cheque. For example, endorsement pays to X after he signs the enclosed receipt. 4.Sans Recourse Endorsement: In this case, the endorser makes it clear to the endorsee that the endorser would not be liable in case the instrument is dishonoured. This means that further recourse cannot be taken against the endorser. For example: Pay to X without recourse to me. 5. Restrictive Endorsement: Restrictive endorsement, by written words, restricts the right of further negotiation. In this case, an endorser specifies that the banker should pay the amount to a particular endorsee only. Example: Pay to X only. 6. Partial Endorsement: If endorsement is made for the part of the amount of the instrument, it is called partial endorsement. But such an endorsement is not valid. 14. Who is a Collecting Banker? Explain his important functions The term Collecting Banker refers to function of receiving cheques by a banker from customers for the purpose of collecting the proceeds and crediting them to the respective customers account. In other words, the banker who is deputed to collect the amount of the cheque from another banker is called the collecting banker. Thus, collecting banker can be describes as a link between the payee of a cheque and its drawee. Banker duty and agency Functions: While collecting a cheque for a customer, the relationship between the baker and the customer is converted into the agent and customer. As an agent he has certain duties to be performed as stated below: 1.Presentment of cheque without delay: It is the duty of the bank to present the cheques for payment without delay. It must be presented to the drawee bank within a reasonable period of time. In case the collecting banker should present the cheque the next day after receiving the same. In case of outstation cheques, he should mail them to the drawee banker on the day after it is received by him. Reasonable time depends upon the circumstances of each case Reasonable time is determined having regard to: a) The nature of the credit instrument, b) Usage of trade and bankers, c) Facts of a particular case. 2.To serve notice of dishonour: In case a cheque is returned to the collecting banker without payment for one reason or the other, the banker must serve a notice of dishonour on his customer to enable the latter to claim the amount from previous parties including the drawer. If the banker fails to send such notice within reasonable time, he will; be liable to the customer for any loss suffered by him as a result of such omission on the part f the banker. 3.Duty to make over the proceeds: In crediting the proceeds of a draft paid into the bank for collection, to the account of the customer there should not be any delay on the part of the collecting banker. The draft should be issued strictly in accordance with the instructions of the customer. Of the banker is negligent in this behalf, he would be held liable. in Bank of Bihar Limited vs. Tata Scob Dealers, Calcutta Limited, it was held that the bank was negligent in having sent the draft by ordinary post. The drafts should therefore be sent by registered post only or according to the instructions given to the collecting banker. 15. Briefly explain the Provision of Banking Regulation Act dealing with licensing of Banks. LICENSING OF BANKING COMPANIES Section 22 of the Banking Regulation Act, 1949 contains a comprehensive system of licensing of banks by the Reserve Bank of India (RBI). This section makes it essential for every banking company to hold a license issued by RBI. The Reserve Bank is required to conduct an inspection of the books of the banking company issue a license, if it is satisfied that the following conditions are fulfilled: a) that the company is or will be in a position to pay its present or future depositors in full as their claims accrue; b) that the affairs of the company are not being, or are not likely to be, conducted in a manner detrimental to the interest of its present or future depositors; c) that the general character of the proposal management of the company will not be prejudicial to the public interest or the interests of its depositors; d) that the company has adequate capital structure and earning prospects; e) that the public interest will be served the grant of a license to the company to carry on banking business in India; f) that having regard to the banking facilities available in the proposed principle area of operations of the company, the potential scope for expansion of banks already in existence in the area and other relevant factors, the grant of license would not be prejudicial to the operation and consolidation of the banking system consistent with monetary stability and economic growth. G) Any other condition the fulfilment of which, in the opinion of the Reserve Bank, is necessary to ensure that the carrying on of banking business in India by the company will not be prejudicial to the public interest or the interests of the depositors. In case of granting a licence to a banking company incorporated outside India, besides the above-mentioned conditions, the following additional conditions (sub-section 3A) must also be fulfilled, viz. 1. the carrying on of banking company business by such company in India will be in the public interest; 2. that the Government or law of the country in which it is incorporated does not discriminate in any way against banking companies registered in India, and 3. That the company complies with all the provisions of the Act applicable to such companies Opening of Branches Section 23 requires every banking company (Indian as well as foreign) to take RBIs prior permission for opening a new place of business in India or to change the location of an existing place of business in India. Similar permission is also necessary for Indian banks for opening a new place of business outside India. But for (i) a change of location within the same city, town or village (both in India and abroad), and (ii) opening of a temporary place of business for a maximum period of one month within a city, where the banking company already has a place of business, for the purpose of providing banking facilities to the public on the occasion of an exhibition, a conference or a mela, etc. no permission is required. RBI takes into account the following factors in deciding the application of the bank for opening branches: 1. the financial condition and history of the company, 2. the general character of its management, 3. the adequacy of its capital structure and earning prospects, and 4. Whether public interest will be served by the opening/change of location of the place of business. If RBI is satisfied by an inspection or otherwise about the above-mentioned factors, permission is granted by RBI. 16.What are the services offered by commercial banks to customers?

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A "commercial bank" is what is commonly referred to as simply a "bank". The term "commercial" is used to distinguish it from an "investment bank," a type of financial services entity which, instead of lending money directly to a business, helps businesses raise money from other firms in the form of bonds (debt) or stock (equity). The primary operations of banks include: 1. Keeping money safe while also allowing withdrawals when needed 2. Issuance of checkbooks so that bills can be paid and other kinds of payments can be delivered by post 3. Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase a home, property or business) 4. Issuance of credit cards and processing of credit card transactions and billing 5. Issuance of debit cards for use as a substitute for checks 6. Allow financial transactions at branches or by using Automatic Teller Machines (ATMs) 7. Provide wire transfers of funds and Electronic fund transfers between banks 8. Facilitation of standing orders and direct debits, so payments for bills can be made automatically 9. Provide overdraft agreements for the temporary advancement of the Bank's own money to meet monthly spending commitments of a customer in their current account. 10. Provide internet banking system to facilitate the customers to view and operate their respective accounts through internet. 11. Provide Charge card advances of the Bank's own money for customers wishing to settle credit advances monthly. 12. Provide a check guaranteed by the Bank itself and prepaid by the customer, such as a cashier's check or certified check. 13. Notary service for financial and other documents 17. What are the functions of central banking? The important functions of Central Banks are as follows:- 1- Sole right of note issue - The Central Bank in every country, now, has the monopoly note issue. The issue of notes is governed by certain regulation which is enforced by the state. 2-Banker to the state - A Central Bank acts as a banker to the government. It holds cash balances of the government free of interest. 3-Banker's bank - The central bank acts as a banker to the commercial banks. 4-Banker's clearing house - The Central Bank acts as a clearing house for the settlement of mutual obligations of different commercial banks. If a difference exists, it is paid by a cheque drawn on the banks accounts carried at the Central Bank. 5-Lendor to the last resort - The Central Bank helps the member banks in times of crisis. 6Financial agent - The Central Banks act as financial agents for the government. It is an agent for the government in purchasing and selling of gold and foreign exchange. 7-Effective monetary policy - The aim of the government is to create employment in the country, resist undue inflation and achieve a favorable balance of payment. 8-External functions - The Central Bank also performs a number of external functions 1. Supervision of the banking system: Central bank supervises the banking system of the country. Central may be responsible for banking system. They collect information from commercial bank and take necessary decision by two ways- a) bank examine and b) bank regulation 2. Advising the government on monetary policy: The decision on monetary policy may be taken by the central bank. Monetary policy refers to interest rates and money supply. The central bank will corporate with the government on economic policy generally and will produce advice on monetary policy and economic matters, including all the statistics. 3. Issue of banknotes: The central bank controls the issue of banknotes and coins. Most payment these day do not involve cash but cheques, standing order, direct debit, credit cards and so on. Nevertheless, cash is important as bank's cash holdings are a constraint on creation of credit, as we have seen. 4. Acting as banker to other banks: The Central bank will act as banker to the other banks in the country. As well as holding accounts with international bodies like IMF World bank. It is a common habit for the central bank to insist that the other banks hold noninterest bearing reserves with in proportion to their deposit. 5. Acting as banker to government: Normally a central bank acts as the government's banker. It receives revenues for Taxes and other income and pay out money for t6he government's expenditure. Usually, it will not lend to the government but will help the government to borrow money by the sales of its bill and bonds. 6. Raising money for the government: The government Treasury bill and bond markets are covered by the central bank. While sometimes the treasury or ministry of finance handle 18. Narrate the advantages of unit banking. Unit banking system has the following advantages: 1. Local Development: Unit banking is localized banking. The unit bank has the specialised knowledge of the local problems and serves the requirements of the local people in a better manner than branch banking. The funds of the locality are utilised for the local development and are not transferred to other areas 2. Promotes Regional Balance: Under unit banking system, there is no transfer of resources from rural and backward areas to the big industrial commercial centres. This tends to reduce regional in balance. 3. Easy Management: The management and supervision of a unit bank is much easier and more effective than that under branch banking system. There are less chances of fraud and irregularities in the financial management of the unit banks. 4. Initiative in Banking Business: Unit banks have full knowledge of and greater involvement in the local problems. They are in a position to take initiative to tackle these problems through financial help. 5. No Monopolistic Tendencies: Unit banks are generally of small size. Thus, there is no possibility of generating monopolistic tendencies under unit banking system. 6. No Inefficient Branches: Under unit banking system, weak and inefficient branches are automatically eliminated. No protection is provided to such banks. 7. No diseconomies of Large Scale Operations: Unit banking is free from the diseconomies and problems of large-scale operations which are generally experienced by the branch banks. 19. Point out the defects and difficulties of commercial banks in India. A b s e n c e o f p r o p e r r e c o r d s : I t b e c o m e s d i f f i c u l t t o a s c e r t a i n t h e t o t a l indebtness of some farmers because of the absence of proper records of landrights, which creates problem of over financing or problem of recovery.2. Difficulty in verifying actual utilisation of loans: There is often misuse of funds in case of medium term loans. This creates difficulty in verif ying theactual utilisation of funds. For e.g. in case of pump sets the dealer would sell an old set instead of new one for which bank would sanction him the loan. Farmer would get additional cash to serve his short- term needs.3 . D i f f i c u l t y i n judging the creditworthiness: Due to lack of intimateknowledge of the character of the borrower it is d i f f i c u l t t o j u d g e t h e i r creditworthiness.4. Lack of sufficient supervision: There is no sufficient supervis ory staff inthe bank as a result there is misuse of loans, which plugs in loopholes.

A well-developed money market is a necessary pre-condition for the effective implementation of monetary policy. The central bank controls and regulates the money supply in the country through the money market. However, unfortunately, 21 BTL Page 6 of 61

the Indian money market is inadequately developed, loosely organised and suffers from many weaknesses. Major defects are discussed below:
1. Dichotomy between Organised and Unorganised Sectors:The most important defect of the Indian money market is its division into two sectors: (a) the organised sector and (b) the unorganised sector. There is little contact, coordination and cooperation between the two sectors. In such conditions it is difficult for the Reserve Bank to ensure uniform and effective implementations of monetary policy in both the sectors. 2. Predominance of Unorganised Sector: Another important defect of the Indian money market is its predominance of unorganised sector. The indigenous bankers occupy a significant position in the money-lending business in the rural areas. In this unorganised sector, no clear-cut distinction is made between short-term and long-term and between the purposes of loans. These indigenous bankers, which constitute a large portion of the money market, remain outside the organised sector. Therefore, they seriously restrict the Reserve Bank's control over the money market, 3. Wasteful Competition: Wasteful competition exists not only between the organised and unorganised sectors, but also among the members of the two sectors. The relation between various segments of the money market are not cordial; they are loosely connected with each other and generally follow separatist tendencies. For example, even today, the State Bank of Indian and other commercial banks look down upon each other as rivals. Similarly, competition exists between the Indian commercial banks and foreign banks. 4. Absence of All-India Money Market: Indian money market has not been organised into a single integrated all-Indian market. It is divided into small segments mostly catering to the local financial needs. For example, there is little contact between the money markets in the bigger cities, like, Bombay, Madras, and Calcutta and those in smaller towns. 5. Inadequate Banking Facilities: Indian money market is inadequate to meet the financial need of the economy. Although there has been rapid expansion of bank branches in recent years particularly after the nationalisation of banks, yet vast rural areas still exist without banking facilities. As compared to the size and population of the country, the banking institutions are not enough. 6. Shortage of Capital: Indian money market generally suffers from the shortage of capital funds. The availability of capital in the money market is insufficient to meet the needs of industry and trade in the country. The main reasons for the shortage of capital are: (a) low saving capacity of the people; (b) inadequate banking facilities, particularly in the rural areas; and (c) undeveloped banking habits among the people. 7. Seasonal Shortage of Funds: A Major drawback of the Indian money market is the seasonal stringency of credit and higher interest rates during a part of the year. Such a shortage invariably appears during the busy months from November to June when there is excess demand for credit for carrying on the harvesting and marketing operations in agriculture. As a result, the interest rates rise in this period. On the contrary, during the slack season, from July to October, the demand for credit and the rate of interest decline sharply. 8. Diversity of Interest Rates: Another defect of Indian money market is the multiplicity and disparity of interest rates. In 1931, the Central Banking Enquiry Committee wrote: "The fact that a call rate of 3/4 per cent, a hundi rate of 3 per cent, a bank rate of 4 per cent, a bazar rate of small traders of 6.25 per cent and a Calcutta bazar rate for bills of small trader of 10 per cent can exist simultaneously indicates an extraordinary sluggishness of the movement of credit between various markets." The interest rates also differ in various centres like Bombay, Calcutta, etc. Variations in the interest rate structure is largely due to the credit immobility because of inadequate, costly and time-consuming means of transferring money. Disparities in the interest rates adversely affect the smooth and effective functioning of the money market. 9. Absence of Bill Market: The existence of a well-organised bill market is essential for the proper and efficient working of money market. Unfortunately, in spite of the serious efforts made by the Reserve Bank of India, the bill market in India has not yet been fully developed. The short-term bills form a much smaller proportion of the bank finance in India as compared to that in the advanced countries. 20. Analyse the reasons for backwardness of the Indian Money market. There are many factors responsible for low agricultural productivity (backwardness of agriculture) which has been summarized below: 1. Small Size of Holdings: The agricultural productivity is low due to small size of holdings. Indeed small size of the farm fails to provide profitable employment to the farmers. In our country average size of holdings is 1.8 hectares while in developed countries like U.S.A. it is 122 hectares. Apart from this, subdivision and fragmentation of holdings is another obstacle in the way of low agricultural productivity. In this small size of holdings the scientific cultivation with latest techniques is almost impossible. 2. Vicious Circle of Poverty: To a greater extent, the vicious circle of poverty is also responsible for the poor performance of agriculture. The vicious circle of poverty takes the following form in agricultural sector: The crucial deficiencies in Indian agriculture relate to land, capital and management, etc. which in turn hampers the agricultural productivity. 3. Indebtedness: Another reason for low agricultural productivity is the indebtedness of the farmers. To perform the social ceremonies a farmer has to borrow from moneylender at a very high rate of interest. Unproductive borrowings do not add to his income and he always remains under debt. Consequently, the farmer fails to avail incentives to improve the agricultural production. 4. Inadequate Irrigation Facilities: Indian farmer is almost dependent on climatic conditions for irrigation. Monsoons are irregular. Only a few farmers avail the facilities of irrigation from various sources such as canals, tube wells, etc. Moreover these facilities are found in some areas and where these are available, they are not fully utilized. The result is that the produce is of bad quality and results in low productivity. 5. Lack of Adequate Finance: Availability of finance is the basis of every industry. The supply of finance is inadequate in case of Indian agriculture. Money is required for short period as well as for long period in order to improve the agricultural production. According to All India Rural Credit Survey Committee, in 1950-51 more than 90 per cent of the total agricultural credit was advanced by the moneylenders. The co-operative societies accounted for about 3 per cent respectively. 6. No Scientific Methods of Cultivation: The ignorance and conservation of Indian farmer also results in the poor performance of agriculture. They do not know the importance of modern technology. Still, seeds are sown by wooden ploughs. Poor quality of seeds yields poor quantity of crops. 7. Lack of Marketing Facilities: The defective marketing system also poses difficulties to the farmers. The farmers do not get a due reward from the sale of his produce. The middleman takes away portion of their profits. Unless farmers are guaranteed fair and remunerative prices there is little inducement for agricultural output to increase. Indian marketing has no facilities of godowns and warehousing where the cultivators may keep their produce for a better price. Moreover, they lack transportation facilities. This results in low price of the produce. 8. Agricultural Research: Undoubtedly, a huge amount of money is spent on agricultural research; still the fruits do not reach to the poor cultivators. There is a lack of co-ordination between laboratory and the farm. 9. Lack of Productive Investment:

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Investment in jewelry, trade and money lending seems to be more attractive. Therefore, there is less investment in land improvement. In the absence of productive investment in agriculture, there is little scope for expanding production. 10. Social Factors: In our country, poor performance of agriculture is also found due to the operation of various socio economic factors. Illiteracy, ignorance, superstition and conservative outlook stands in the way of the adoption of modern technology. As such, farmers are against the use of bone manure and chemical fertilizer. Besides, they are prejudiced against killing of monkeys and rats at the farm. 11. Natural Calamities: Another reason of low productivity of Indian agriculture is that crops worth crores of rupees are destroyed every year due to floods and other natural calamities. The soil erosion has been regarded as creeping death of the farm. 12. Poor Livestock: The quality of livestock is very inferior and they are thin and feeble. On account of their poor quality, they are needed in more quantity which adds unnecessary burden on the poor cultivators. Malnutrition is another cause for the degeneration of cattle in our country. As a result, they suffer from one disease or the other. 13. Land Policy and Legislation: The piece-meal character of land reform policy and its legislation is greatly, responsible for the backwardness of agriculture. Excessive reliance on the administrative machinery has adversely affected agricultural development, unnecessary delay in implementation and uncertainty about the rights on land has tended to diminish land productivity. 21. Explain the role of commercial banks in Economic Development Commercial banks play an important and active role in the economic development of a country. If the banking system in a country is effective, efficient and disciplined it brings about a rapid growth in the various sectors of the economy. 1. Banks promote capital formation 2. Investment in new enterprises 3. Promotion of trade and industry 4. Development of agriculture 5. Balanced development of different regions 6. Influencing economy activity 7. Implementation of Monetary policy 8. Monetization of the economy 9. Export promotion cells 1. Banks promote capital formation: Commercial banks accept deposits from individuals and businesses, these deposits are then made available to the businesses which make use of them for productive purposes in the country. The banks are, therefore, not only the store houses of the countrys wealth, but also provide financial resources necessary for economic development. 2. Investment in new enterprises: Businessmen normally hesitate to invest their money in risky enterprises. The commercial banks generally provide short and medium term loans to entrepreneurs to invest in new enterprises and adopt new methods of production. The provision of timely credit increases the productive capacity of the economy. 3. Promotion of trade and industry: With the growth of commercial banking, there is vast expansion in trade and industry. The use of bank draft, check, bill of exchange, credit cards and letters of credit etc has revolutionized both national and international trade. 4. Development of agriculture: The commercial banks particularly in developing countries are now providing credit for development of agriculture and small scale industries in rural areas. The provision of credit to agriculture sector has greatly helped in raising agriculture productivity and income of the farmers. 5. Balanced development of different regions: The commercial banks play an important role in achieving balanced development in different regions of the country. They help in transferring surplus capital from developed regions to the less developed regions. The traders, industrialist etc of less developed regions are able to get adequate capital for meeting their business needs. This in turn increases investment, trade and production in the economy. 6. Influencing economic activity: The banks can also influence the economic activity of the country through its influence on a. Availability of credit b. The rate of interest If the commercial banks are able to increase the amount of money in circulation through credit creation or by lowering the rate of interest, it directly affects economic development. A low rate of interest can encourage investment. The credit creation activity can raise aggregate demand which leads to more production in the economy. 7. Implementation of Monetary policy: The central bank of the country controls and regulates volume of credit through the active cooperation of the banking system in the country. It helps in bringing price stability and promotes economic growth with in the shortest possible period of time. 8. Monetization of the economy: The commercial banks by opening branches in the rural and backward areas are reducing the exchange of goods through barter.The use of money has greatly increased the volume of production of goods. The non monetized sector (barter economy) is now being converted into monetized sector with the help of commercial banks. 9. Export promotion cells: In order to increase the exports of the country, the commercial banks have established export promotion cells. They provide information about general trade and economic conditions both inside and outside the country to its customers. The banks are therefore, making positive contribution in the process of economic development. 22. Describe how the Private Sector banks offer precious services rather than public sector banks. Private And Public Banks Banks have been broadly divided into private and public.A private bank is that in which there are but few partners, and these attend personally to its management. A public bank is that in which there are numerous partners or shareholders, and they elect from their own body a certain number, who are intrusted with its management.The business of banking consists chiefly in receiving deposits of money, upon which interest may or may not be allowed; in making advances of money, principally in the way of discounting bills; and in affecting the transmission of money from one place to another. Banks in metropolitan cities are usually the agents of the banks in smaller communities and charge a commission on their transactions.The disposable means of a bank consist of - First, the capital paid in by the partners, or shareholders. Second, the amount of money deposited by their customers. Third, the amount of notes they are able to keep out in circulation. Fourth, the amount of money in the course of transmission - that is, money they have received, and are to repay, in some distant place, at a future time.These disposable means are employed - First, in discounting bills. Second, in advances of money in the form of cash credits, loans, or overdrawn accounts. Third, in the purchase of government or other securities. Fourth, a part is kept in the banker's till, to meet the current demands. Of these four ways of employing the capital of a bank, three are productive, and one is unproductive. The discounting of bills yields interest; the loans, and the cash credits, and the overdrawn accounts, yield interest; the government securities yield interest; the money in the till yields no interest. The expenses of a bank may be classified thus: Rent, taxes, and repairs of the building or premises in which the business is carried on; salaries of the officers;stationers' bills for books, paper, notes, stamps, etc.; incidental expenses, as postage, light, heat, etc.The profits of a bank are that portion of its total receipts - including discount, interest, dividends, and commission - which exceeds the amount of the expenses. Banks as Commercial Institutions. In commercial language a bank is a repository, or an establishment, for the purpose of receiving the money of individuals;either to keep it in security, or to improve it by trafficking in goods, bullion, or bills of exchange;and, as stated above, it may be either of a public or of a private nature. A public bank is generally regulated by certain laws, enacted by the government of the nation or state, which constitute its charter, limit its capital, and establish the rules by which it is to conduct business. A private bank, on the other hand, is merely a contract among individuals, for carrying on a trade in money and bills;

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and the responsibility of the partners is usually the only security of those who transact business with it.Banks then are properly commercial institutions which by affording credits, or issuing notes, as the representative of money, enable merchants, with greater facility, to buy and sell commodities, at home or abroad. The produce of one country is thus exchanged with that of another, by means of a medium to which an ideal value is attached; hence the great utility of banking establishments in all commercial countries. A private cector is an economy is made up af all businesses and firms owned by ordinary members of the general public.It also consist af all the private households in which people live..,whereas, public sector is an economy is owned and controlled by a government . It consist of government businesses and firms ,and goods and services provided by the government,such as the national health service,state education,jobs,roads,public parks nad law and order Public sector banks are now not anymre less than the private sector banks.they are also up to the mark and level of the private sector banks,no doubt it will take some more time to come compeletely up to that level. Public Sector bank means any Government Sector Bank/Institute that goes public... means that issues it share to general public.. It also has a greater share of government(more than 50%) so that the main motto of social welfare other than Maximising Profit remains.Where as Private Sector Banks are those Banks where the management is controlled by Private individuals and Government does not have any say in the management of these banks.Maximising profit is the basic motto. public sector banks are those banks run under the control of government and their prime motive is the welfare of the general public . whereas private sector banks are those banks run by the private individuals and their prime motive is to earn profits a public sector bank also looks for funding developmental work in the country as the government has a majority share in it. the first objective would always be to make profit. every organization whether private or public is here to make profits so that it could justify their existence.but public sector banks involves public also. public here means common people like us. 23. Discuss the credit control methods by Central Bank The various methods or instruments of credit control used by the central bank can be broadly classified into two categories: (a) quantitative or general methods, and (b) qualitative or selective methods. 1. Quantitative or General Methods: The methods used by the central bank to influence the total volume of credit in the banking system, without any regard for the use to which it is put, are called quantitative or general methods of credit control. These methods regulate the lending ability of the financial sector of the whole economy and do not discriminate among the various sectors of the economy. The important quantitative methods of credit control are: (a) bank rate, (b) open market operations, and (c) cash-reserve ratio. 2. Qualitative or Selective Methods: The methods used by the central bank to regulate the flows of credit into particular directions of the economy are called qualitative or selective methods of credit control. Unlike the quantitative methods, which affect the total volume of credit, the qualitative methods affect the types of credit extended by the commercial banks; they affect the composition rather than the size of credit in the economy. The important qualitative or selective methods of credit control are; (a) marginal requirements, (b) regulation of consumer credit,(c) control through directives,(d) credit rationing,(e) moral suasion and publicity, and (f) direct action. 24. Describe how the Private Sector banks offer precious services rather than public sector banks A private cector is an economy is made up af all businesses and firms owned by ordinary members of the general public.It also consist af all the private households in which people live..,whereas, public sector is an economy is owned and controlled by a government . It consist of government usinesses and firms ,and goods and services provided by the government,such as the national health service,state education,jobs,roads,public parks nad law and order Public

sector banks are now not anymre less than the private sector banks.they are also up to the mark and level of the private sector banks,no doubt it will take some more time to come compeletely up to that level..Public Sector bank means any Government Sector Bank/Institute that goes public... means that issues it share to general public.. It also has a greater share of government(more than 50%) so that the main motto of social welfare other than Maximising Profit remains.
Where as Private Sector Banks are those Banks where the management is controlled by Private individuals and Government does not have any say in the management of these banks.Maximising profit is the basic motto. public sector banks are those banks run under the control of government and their prime motive is the welfare of the general public . whereas private sector banks are those banks run by the private individuals and their prime motive is to earn profits a public sector bank also looks for funding developmental work in the country as the government has a majority share in it. the first objective would always be to make profit. every organization whether private or public is here to make profits so that it could justify their existence.but public sector banks involves public also. public here means common people like us. Private And Public Banks Banks have been broadly divided into private and public.A private bank is that in which there are but few partners, and these attend personally to its management. A public bank is that in which there are numerous partners or shareholders, and they elect from their own body a certain number, who are intrusted with its management. The business of banking consists chiefly in receiving deposits of money, upon which interest may or may not be allowed; in making advances of money, principally in the way of discounting bills; and in affecting the transmission of money from one place to another. Banks in metropolitan cities are usually the agents of the banks in smaller communities and charge a commission on their transactions.The disposable means of a bank consist of - First, the capital paid in by the partners, or shareholders. Second, the amount of money deposited by their customers. Third, the amount of notes they are able to keep out in circulation. Fourth, the amount of money in the course of transmission - that is, money they have received, and are to repay, in some distant place, at a future time.These disposable means are employed - First, in discounting

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bills. Second, in advances of money in the form of cash credits, loans, or overdrawn accounts. Third, in the purchase of government or other securities. Fourth, a part is kept in the banker's till, to meet the current demands. Of these four ways of employing the capital of a bank, three are productive, and one is unproductive. The discounting of bills yields interest; the loans, and the cash credits, and the overdrawn accounts, yield interest; the government securities yield interest; the money in the till yields no interest. The expenses of a bank may be classified thus: Rent, taxes, and repairs of the building or premises in which the business is carried on; salaries of the officers; stationers' bills for books, paper, notes, stamps, etc.; incidental expenses, as postage, light, heat, etc. The profits of a bank are that portion of its total receipts - including discount, interest, dividends, and commission - which exceeds the amount of the expenses. Banks as Commercial Institutions. In commercial language a bank is a repository, or an establishment, for the purpose of receiving the money of individuals;either to keep it in security, or to improve it by trafficking in goods, bullion, or bills of exchange;and, as stated above, it may be either of a public or of a private nature. A public bank is generally regulated by certain laws, enacted by the government of the nation or state, which constitute its charter, limit its capital, and establish the rules by which it is to conduct business. A private bank, on the other hand, is merely a contract among individuals, for carrying on a trade in money and bills; and the responsibility of the partners is usually the only security of those who transact business with it.Banks then are properly commercial institutions which by affording credits, or issuing notes, as the representative of money, enable merchants, with greater facility, to buy and sell commodities, at home or abroad. The produce of one country is thus exchanged with that of another, by means of a medium to which an ideal value is attached; hence the great utility of banking establishments in all commercial countries. 25. What is the role of banks in export promotion? There are various functions of the Reserve Bank of India. Besides, other important functions the Reserve Bank of India plays the role of Monetary Authority and Manager of Foreign Exchange. As the Monetary Authority aims to maintain price stability and ensure adequate flow of credit to productive sectors and being the Manager of Foreign Exchange, it seeks to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. In India exports have played a major role in accelerating the economic growth of the country. The initiatives taken by Reserve Bank of India and Government of India have contributed to the impressive increase in our exports. Export Credit is an important factor which helps exporters in executing their export orders efficiently. Export finance is granted in rupees as well as in foreign currency. The RBI has taken some measures to enable timely and hassle free flow of credit to the export sector which includes rationalization and liberalization of export credit interest rates, flexibility in repayment/prepayment of pre-shipment credit, special financial package for large value exporters, export finance for agricultural exports, Gold Card Scheme for exporters etc. The RBI has granted freedom to the Banks to get funds from abroad without any limit for exclusively for the purpose of granting export credit in foreign currency. This has enabled banks to increase their lending capacity under export credit in foreign currency. 26. What are the instruments of monetary policy of a Central Bank? Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.[1] Monetary theory provides insight into how to craft optimal monetary policy. Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve policy goals). It is important for policymakers to make credible announcements. To achieve this low level of inflation, policymakers must have credible announcements; that is, private agents must believe that these announcements will reflect actual future policy. 27.Distinguish between Unit banking and Branch banking. Unit banking refers to a single bank which renders services and operates without any branches anywhere. This kind of banking system is common in the USA. Restrictive branching laws encourage large numbers of small, independently owned state banks, and large multibank holding companies owning numerous unit banks. Branching laws in most states have been eased in the last several years, permitting geographic expansion and branch banking .Unit banking operate one full banking services. Branch banking center or financial center refers to a single bank which operates through various branches in a city or in diferent locations or out of the cities. This kind of banking system is common in India. e.g. State Bank of India. It offers a wide array of face to face service to its customers Today, branches may also take the form of smaller offices within a larger complex, such as a shopping mall.Services provided by a branch include cash withdrawals and deposits from a demand account with a bank teller, financial advice through a specialist, safe deposit box rentals, bureau de change, insurance sales (where it is allowed by law), etc.Other financial institutions reduce their costs by having no branches and are sometimes known as virtual banks. Branch Banking -1. Efficient,trained and supervised. 2. Larger financial resources in each branch. 3. Delay in Decision-making as they have to depend on the head office. 4. Funds are transferred from one branch to another.Underutilisation of funds by a branch would lead to regional imbalances 5. Exists as improper use of power and authority exist 6. Division of labour is possible and hence specialisation possible 7. High competiton with the branches 8. Shared by the bank with its branches 9. Not possible and hence bad

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debits are high 10. Proper distribution of capital and power. 11. Rate of interest is uniformed and specified by the head office or based on instructions from RBI. 12. Deposits and assets are diversified,scattered and hence risk is spead at various places. 13. Less Operational freedom. 14. Loans and advances are based on merit,irrespective of the status . Unit Banking 1. Less trained skilled and supervised. 2. Larger financial resources in one branch 3. Time is saved as Decision-making is in the same branch. 4. Funds are allocated in one branch and no support of other branches.During financial crisis,unit bank has to close down.hence lead to regional imbalances or no balance growth 5. Proper checks are taken up.no misuse of Mismanagement 6. Specialisation not possible due to lack of trained staff and knowledge 7. Less competition within the bank 8. Less competition within the bank 9. Possible and less risk of bad debts 10. No proper distribution of capital and power. 11. Rate of interest is not uniformed as the bank has own policies and rates. 12. Deposits and assets are nt diversified and are at one place,hence risk is not spread. 13. More Operational freedom. 14. Loans and advances can be influenced by authority and power. 28.Define and mention the components of the money market. A financial market that works as a conduit for demand and supply of debt and equity capital. It channels the money provided by savers and depository institutions (banks, credit unions, insurance companies, etc.) to borrowers and investees through a variety of financial instruments (bonds, notes, shares) called securities. A capital market is not a compact unit, but a highly decentralized system made up of three major parts: (1) stock market, (2) bond market, and (3) money market. It also works as an exchange for trading existing claims on capital in the form of shares. The money market is the market where highly liquid, low-risk, short-term debt is traded. It enables corporations and other organizations to earn income on surplus cash by lending it to other institutions that need short-term funds. Participants Money market participants are large institutions such as domestic and foreign banks, the U.S. Treasury, federal agencies, corporations, insurance companies and pension funds. Securities Money market securities have maturities of one year or less and include Treasury bills, federal agency securities, negotiable bank certificates of deposit, bank deposit notices, bankers' acceptances, short-term participations in bank loans, municipal notes, commercial paper, federal funds, Eurodollars and repurchase agreements. Economic Impact The money market provides a mechanism for the U.S. Treasury to fund large quantities of debt and for the Federal Reserve Bank to carry out open market operations. Thus, activity in the money market influences interest rates, the growth in the money supply and the shape of the yield curve. Transactions Billions of dollars exchange hands each day in the money market, with participants typically trading in multimillion-dollar blocks. Individual Investors Individuals can participate in the money market indirectly by purchasing mutual funds or certificates of deposit, which pool investors' funds and, in turn, invest them in the money market. 29. What are the precautions given to a paying banker? Precautions to be Taken by a Paying Banker Meaning of a Paying Banker Precautions: Nature of the Cheque, Branch, Reference to the Account, Working Hours, Unmutilated, Dating, Amount of the Cheque, Material Alteration, Balance in the Account, Signature of the Drawer, Printed Forms, Regularity of Endorsement . 3. Circumstances of Dishonour Countermanding Notice of Death Notice of Insolvency Notice of Assignment Garnishee Order Prohibitive Order from Govt. Department Trust Account Signature Difference Other Conditions: condition,stale,post-dated,damaged,presentation after cash hours,forgery of signature, irregular endorsement . 4. Statutory Protection to the Paying Banker Sec 85 (1)- order cheques- payment in due course[Sec 10] Sec 85 (2)- bearer cheque-payment in due course Payment in due course: apparent tenor,good faith, without negligence, person in possession . 5. Holder in Due Course (Sec 9) Consideration Possessor of bearer cheque or payee or endorsee of order cheque Before the amount became payable No reason to suspect the title of the endorser Privilege : Good title, claim on parties, transfer good title . 6. Collecting Banker Meaning Holder for Value Agent of the customer Rights of a collecting banker as a holder for value Liabilities of a banker as a holder for value . 7. Duties of a Collecting Banker Prompt presentation Prompt Credit to Customers Account Prompt Notice of Dishonour GENERAL DUTIES: Proper opening , collection for customer only, regularity of endorsement,title of the customer, multiple accounts, crossing, no suspicious circumstances. 8. Conversion Lack of good faith Forged cheque Has full knowledge of a defective title of the customer Cheque has not negotiable crossing An account payee cheque is collected to a third party. 9. Statutory Protection to Collecting Banker Sec 131: -Goodfaith & without negligence -Payment for a customer -Crossed cheques -agent for collection -Prior crossing 30. Mention the circumstances under which a banker is justified in refusing payment of a cheque drawn on him. The banking operations of any business depend upon the nature of business. The business of banking consists in acceptance, either for the purpose of lending and/or investment, of the deposits payable on demand or otherwise on demand and withdrawable by cheque, order or otherwise. The major functions of banks are (1) to mobilise the deposits from the public (2) to utilise activity, the banks make profits for themselves. Section 138 of the Negotiable Instruments Act, 1881: Dishonour of cheque for insufficiency etc., of funds in the account.Where any cheque drawn by a person on an account maintained by him with the banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an arrangement made with that bank, such person shall be deemed to have committed an offence and shall, be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to one year, or with fine which may extend to twice the amount of the cheque, or with both: When a bank can refuse the payments on a Cheque: When the cheque is undated When the cheque is stale. A cheque is stale if it has not been presented for payment for six months from the date mentioned When the instrument is unclear or not free from reasonable doubt When the cheque is postdated and presented it for payment before the date When the customers funds are not properly applicable to the payment of the cheque by the customer

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When the customers account is overdrawn When a garnishee order or other legal order from the court attaching the customers account has been served on the bank. If the attachment is on a single person then a joint account cannot be attached by the garnishee order. Credits to the account subsequent to a garnishee order are not attachable. Trust accounts cannot be attached by a garnishee order whereas a partnership account can be. A banker with a prior right of set-off is not bound by a garnishee order. If the garnishee order is received after presentation and debiting the cheque to the account but before payment, the bank can technically pay the cheque, but it would be better to refuse payment. If the cheque is received through clearing and the garnishee order is received before the time specific for return of cheques, the cheque should be returned. If the cheque has been credited to another persons account and then the garnishee order is received, the credit can be cancelled and the cheque returned unpaid provided that the account holder has not been advised of the credit. When the customer has died or been declared as insolvent or a lunatic When the cheque contains material alterations or irregular signature When the notice of closure of account has been served on the bank When the customer has countermanded payment When there is an ambiguity in the material part of the cheque When there is a difference between the amount of the cheque in words and in figures In case of Irregular endorsements When the cheque is mutilated When the signature of the drawer has been fake. To make a person liable for the offence as under the section, the following points required to be proved. (1) The cheque should have been dishonoured for the reason of insufficiency of funds lying in the account of the drawer or for the reason that it exceeded the arrangement. (2) The cheque so dishonoured was paid for the discharge, in whole or in part, of any debt or other liability.(3) The cheque so dishonoured must have been presented to the banker within a period of six months from the date on which it is drawn or within the period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier.(4) The payee or the holder in due course of the cheque should have issued the notice within fifteen days of the receipt of information from the bank regarding the return of the cheque.(5) Such notice should specifically make the allegation of the dishonouring of the cheque for the reason of insufficiency of funds and the notice should also specify that the notice so issued is by virtue of section 138 of the Act.(6) The notice should contain the date, the number the cheque is bearing, the name of the banker the cheque is drawn upon, the amount for which the same is drawn and the date of the issue of the cheque in case of the post-dated cheque or the anti-dated cheque.(7) The notice should also mention the consequences the accused may be held liable to face and notice should make specific demand of the amount of the cheque.(8) The drawer of the cheque so dishonoured should have failed to make the payment within a period of fifteen days from the date of receipt of such notice by him.(9) The complaint should have been failed within a period of one month from the expiry of fifteen days after the receipt of the notice by the drawer.(10) Such complaint should have been made be the payee or the holdr in due course, only in writing.(11) The complaint should have been filed before at least the Metropolitan Magistrate or a Judicial Magistrate of the First class. 31.Elaborate the impact of Nationalisation of commercial banks in India.

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. Nationalization Impact 1. The quality of credit assets fell because of liberal credit extension
policy. 2. Political interference has been as additional malady. 3. Poor appraisal involved during the loan meals conducted for credit disbursals. 4. The credit facilities extended to the priority sector at concessional rates. 5. The high level of low yielding SLR investments adversely affected the profitabilityof the banks. 6. The rapid branch expansion has been the squeeze on profitability of banksemanating primarily due to the increase in the fixed costs. 7. There was downward trend in the quality of services and efficiency of the banks 32.Define cheque. Explain the different types of crossing of cheques. A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it contains the electronic image of a truncated cheque and a cheque in the electronic form. If you have a savings bank account or current account in a bank, you can issue a cheque in your own name or in favour of others, thus directing the bank to pay the specified amount to the person named in the cheque. Definition The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. The four main items on a cheque are 1. Drawer, the person or entity who makes the cheque 2. Payee, the recipient of the money 3. Drawee, the bank or other financial institution where the cheque can be presented for payment 4. Amount, the currency amount Features of a cheque 1. A cheque should be in writing

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and properly signed by the drawer. 2. A cheque contains an unconditional order. 3. A cheque issued on a specified banker only. 4. The amount specified is always certain and should be clearly mentioned both in figures and words. 5. The payee of a cheque is always certain. 6. A cheque is always payable on demand. 7. The cheque should bear a date otherwise it is invalid and shall not be honored by the bank. Types of Cheque Generally speaking, cheques are of four types, they are; 1. Open cheque 2. Crossed cheque 3. Bearer cheque 4. Order cheque. Open cheque: A cheque is called Open Cheque when it is possible to get cash over the counter at the bank. The holder of an open cheque can do the following: 1) Receive the payment over the counter at the bank 2) Deposit the cheque in his own account 3) ass it to someone else by signing on the back of a cheque. Crossed cheque: Open cheque is subject to risk of theft so it is dangerous to issue such cheques. But this risk can be avoided by issuing other types of cheque called Crossed cheque. The payments of such cheques are not made over the counter at the bank. It is only credited to the bank account of the payee. A cheque can be crossed by drawing two transverse parallel lines across the cheque, with or without writing Account payee or Not Negotiable on it. Bearer cheque: A Bearer cheque is one which is payable to any person who presents it for payment at the bank counter. A bearer cheque can be transferred by mere delivery of it and it doesnt require endorsement. Order cheque: An Order Cheque is one which is payable to a particular person. In such a cheque instead of the word bearer the word order may be written. The payee can transfer an order cheque to someone else by signing his or her name on the back of it. Marked cheques In some cases a cheque will be marked or certified by the banker on whom it is drawn as good for payment. This marking does not lead to the acceptance but is very similar and protects the person to whom the cheque is issued against the cheque being refused for payment later. An open cheque is one that can be paid by a paying banker across its counter. Crossing of Cheques Crossing is an instruction or order given to the paying banker that the cheque should not be paid across the counter but through a banker. Payment of a crossed cheque can only be collected through a banker. Crossing is done by drawing two parallel lines across the face of the cheque with or without the addition of certain words such as Account payee or Not Negotiable. Who can cross a cheque Three parties can cross a cheque, they are; Drawer the drawer can cross the cheque generally or specially. Holder If the drawer has not crossed the cheque, the holder can cross it generally or specially. Banker Where a cheque is crossed specially, the collecting banker may cross it again to another banker as it is an agent for collection, this is called double special crossing. Types of crossing there are two ways of crossing cheque. They are; 1)General 2) Special General Crossing Putting two traverse lines across the face of the cheque with or without the words & co or the words non negotiable is called General Crossing. Where a cheque is crossed generally, the banker on which it is drawn must pay it through a banker. Cheques that are crossed generally and payable to order must be collected only on proper endorsement by the payee. Special crossing If the drawer writes specific instructions within the two traverse lines such as to which bank it should be paid is called special crossing. The purpose of a special crossing is to pay it if it is presented though a specific banker such as at XYZ Bank. Some cheques are crossed account payee. This is a restrictive crossing that the cheque must be paid to the account of a particular person. It is also a warning to the collecting banker to make sure that the cheque is to be deposited in the account of a specific depositor. The paying banker needs to ensure that it bears no other endorsement than that of the payee. Not Negotiable Cheques In this type of cheque the principle of nemo dat quod non habet (nobody can pass on a title better than what he himself has) will be applicable. The title of the transferee would be vitiated by the defect in the title of the transferor. The transferee cannot claim the right of a holder in due course by proving that he purchased the instrument in good faith. Account payee Cheques Account payee is an instruction to the collecting banker that he must collect the amount of the cheque for the benefit of the payees account only and nobody else. This crossing does not limit the transferability but in practice these are not transferred as the collecting banker had to credit the payees account. The Reserve Bank (RBI) has also stated that these should not be credited to anyone elses account. It has also stated that account payee cheques of third parties should not be collected. Double crossed Cheques. These kinds of cheques are to be collected by the banker specified. It cannot be crossed again as the purpose of the first is frustrated by the second crossing. This is only allowed if the bank to which it is crossed does not have a branch at the paying bankers place. Crossing of Cheque Holder of a cheque can cross it or add to the existing crossing Banker to whom it is crossed can cross it again. Cheque crossings can be opened by the drawer by cancelling the crossing with his signature Negotiable Instruments Act particularly states what amounts to a crossing. A cheque with the words not negotiable without the two traverse lines is not a crossed cheque. The traverse lines are essential for a crossing. If a cheque bears a single line it is not a crossed cheque. It is assumed that the banker on whom it is drawn has made payment to a banker who acts for the true owner of the cheque, though in fact the amount of the cheque might not reach the true owner. In short the banker is protected. Wrong payment of a crossed cheque If a crossed cheque is wrongly paid, the banker is liable to the true owner for any loss occurred to him.Protection on uncrossed cheques If the banker pays an uncrossed cheque in due course, he is authorized to debit the account of his customer with the amount so paid irrespective of the genuineness of the endorsement on the cheque.

32. Why do banks prefer to keep excess reserves during depression period?

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33.

What are the limitations of credit creation?

Theoretically, the banking system can create unlimited amount of credit through expansion of deposits. However, in reality, the powers of banks to create multiple credit or deposits are subject to a number of limitations as explained below: 1. Amount of Cash: The extent of credit creation primarily depends upon the amount of cash possessed by the banks. Larger the amount of cash with the banking system, greater will be the credit creation, and vice versa. In the words of Crowther, "The bankers' cash is the level with which the whole gigantic system is manipulated." Thus, the power to create credit is limited by the bank's cash. 2. Cash-Reserve Ratio: The size of credit multiplier is inversely related to the cash-reserve ratio. The higher the cash-reserve ratio, the smaller will be the volume of credit creation and vice versa. 3. Leakages: The actual credit creation by the banking system may be considerably smaller than the potential credit creation due to certain leakages. There are at least two such leakages in the credit creation process: (i) Excess Reserves; The banks may not be willing to utilise their surplus funds for granting loans and may decide to maintain excess reserves. Such a situation arises (a) when there are fear of significant rise in future interest rates or (b) when the economy is heading towards a recession. The greater the excess reserves, the smaller the credit multiplier. (ii) Currency Drains: The credit creation multiplier mechanism assumes that the amounts of loans granted by the banks return to them by way of new deposits. However, the public may not keep the whole amount of loans in the banks and may withdraw some cash to hold it with themselves. This cash withdrawal or currency drain reduces the power of the banks to create credit. 4. Availability of Borrowers: Banks create credit by means of loans and advances. Therefore the extent of credit creation depends on the availability of borrowers. If there are no borrowers, there will be no credit creation. 5. Availability of Securities: Bank loans are granted against securities. In the words of Crowther, "the bank does not create money out of thin air; it transmutes other forms of wealth into money." Thus, the power of the bank to turn other assets into money (i.e. to create credit) is restricted by the availability of good securities. 6. Credit Policy of Other Banks: All banks may not adopt the same credit policy. If some banks decide not to utilise their full capacity for credit creation and keep large cash reserves, the credit creation in the country will be limited to that extent. 7. Banking Habits: Development of banking system and the banking habits of the people also influence the extent of credit creation. If people prefer to make transactions through cash and not by cheques, the banks will be left with a smaller cash and there will be lesser credit creation. Banking habits, in turn, depend upon the development of banking system. In the developed economics due to the large expansion of banking facilities, the banking habits are more conductive to credit creation than in developing economics. 8. Business Conditions:Credit creation is further limited by the nature of business conditions. During depression, when due to low profit expectations businessmen do not come forward to borrow from banks, credit creation will be very small. On the other hand, during the period of business prosperity, the profit expectations are high, the businessmen approach the banks for loans and there will be greater credit creation. Hence credit creation will be smaller during depression and larger during business prosperity. 9. Monetary Policy: The extent of credit creation largely depends upon the monetary policy of the central bank of the country. The central bank has the power to influence the money supply in the country. It can use various methods of credit control to influence the banks to expand and contract credit.
34. How do banks create deposits?

Bankers know how to create money out of thin air. In fact, banks are money factories. Banks exist to make money. You might think that banks are in business to provide services such as banking accounts and loans to their customers. It's true that banks provide essential financial services. However, the reason that the banks provide such services is that banks need money to use as raw material to create more money. Where does this money come from? It comes from customer deposits. In other words, it comes from the money you and I deposit into the bank. Notice very carefully, banks "create" money. It's not simply that banks "earn" profits when they provide bank services and loans. Banks actually "create" new money that did not exist before. Here is an example of how banks create money. You deposit $100,000 into a one-year Certificate of Deposit at 5% interest. The bank now can use your money to create loans. The Federal Reserve sets the reserve rate for the
bank from 3-10%. A 3% reserve rate means that the bank must keep 3% of the $100,000 on reserve and can loan the remaining 97%. A 10% reserve rate means that the bank must keep 10% of the $100,000 on reserve and can loan the remaining 90%. For our example, let's assume that the reserve rate is 10%. This allows the bank to loan $90,000 of your $100,000 deposit. So, the bank

makes Loan #1 of $90,000 and keeps $10,000 on reserve. This is the critical point where the bank creates money. So, if you want more money, think the way bankers think. Ask how you can use money to create more money.
35. Examine the legal significance of crossing of cheques

Crossing of Cheques

The cheque system has now become one of the wheels in the machinery of business. But, at times an open cheque payable across a bank's counter lends itself to fraud and forgery by unscrupulous persons causing loss either to the bank or to the 21 BTL Page 14 of 61

customer. With a view to avoiding such risk and protecting the owner of the cheque, the system of crossing of cheques has been introduced where by the holder of an open cheque directs the paying bank to carryout his mandate in particular way. Thus, a crossed cheque is one on the face of which two transverse parallel lines have been drawn with or without certain words in them Purpose of crossing of cheques: Crossing is mainly used to safeguard the cheque against theft, fraud and other tampering. Naturally, a crossed cheque becomes much safer than an open or uncrossed cheque. It can be easily traced into whose hands the money has been paid. Even if it is lost by the payee, he dose not stand to lose anything because the finger can not collect the amount at the counter unless he has an account in the drawee bank that was named in the special crossing.

Any cheque bearing two parallel transverse lines is deemed to be a crossed cheque (Section 123). The legal effect of such crossing is that the paying bank is not supposed to pay the cheque across the counter but only to a bank. There are two types of crossing: general and special. 1.1 General Crossing Drawing two parallel transverse lines on the face of the cheque with or without the words Not Negotiable, or drawing two parallel lines and writing words like & Co. or any abbreviation in between the lines with or without the words Not Negotiable is known as general crossing. 1.2. Special Crossing Writing the name of the bank in between such transverse lines or simply writing the name of the bank on the face of the cheque would mean Special Crossing. Such crossing could be with or without the words Not Negotiable. The legal implication of such crossing is that the paying banker is bound to pay the proceeds to the so named bank only. A cheque, which is not originally crossed, can be crossed either generally or specially by the holder. Similarly, the holder can convert the generally crossed cheque into specially crossed cheque. He can also add words like Not Negotiable. When a cheque is specially crossed, the banker, to whom it is crossed, can again cross it especially to another banker who is acting as his agent for collection. Advantages of Crossing The advantages of crossing a cheque to the customer, paying bank and collecting bank could be summarized as under: i. A customer, in the event of a fraud, can trace the person to whom the cheque was paid since the paying banker has to perforce pay to a banker alone. ii. The payment of a crossed cheque amounts to payment in due course, i.e., the drawer would be placed in the same position as if the cheque was paid to the true owner. iii. A paying banker (Section 128) is similarly entitled to the benefit of payment in due course, i.e., he gets a right to debit the customers account even though the amount is not paid to the true owner. iv. A collecting banker is entitled to get protection under Section 123 if only he collects a crossed cheque.

1. The effect of crossing of cheque is that the payment of this cheque can be made by the drawee banker to some other banker as agent of the holder or to the customer of the drawee bank, and the payee or the holder there of cannot obtain case from the drawee bank. When a cheque is crossed, no one can case it at the counter of the drawee bank, except a customer of the drawee bank or another bank. The amount can be either deposited with the drawee bank for the credit of his customer's account, or have the drawee bank pay its proceeds to another bank for the credit of his account which the holder has with such other bank through the local clearing house.
36. What are the conditions necessary to constitute a customer of a bank?

1. Bank offers a variety of products and services to meet your banking needs. These Terms and Conditions are a supplement to other information and disclosure documents governing your account. These conditions apply to all bank accounts of the
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Customer with the Bank irrespective of the currency and type of the bank account (including savings or current accounts). The list of documents required for opening a bank account by the Customer is defined by the Bank and may be amended from time to time. Time periods for implementation of transactions are defined by the Bank unless otherwise provided under these General Terms and Conditions, other documents approved by the Bank or legal acts. 2. If sufficient funds are not available on the bank account of the Customer for implementing the instructions of the latter, the Bank shall have the right to make payment from the Customer bank account at its discretion. The paid amounts shall be considered as loan provided to the Customer with respective amount from the day of making such payment on terms agreed between the Bank and the Customer: such loan is subject to immediate repayment by the Customer if the Bank and the Customer do not agree otherwise and interest may be accrued and/or service charges may be applied on such loan. Interest shall accrue on daily basis on the debit balance of the bank account. Irrespective of the currency of the bank account the interest shall be paid in AMD. Where the respective interest amount is debited from foreign currency bank accounts of the Customer, the Bank shall be entitled to convert the respective amount into AMD at the respective exchange rate of the Bank as of the debiting date and charge the respective amount. 3. For specific types of bank accounts, the Bank may at its discretion provide to the Customer a cheque book. The Customer shall exercise due care when drawing any cheque and shall be bound by the conditions as may be amended by the Bank from time to time. 4. The Bank may issue a savings passbook for specific types of bank accounts and such bank accounts shall be governed by "Rules for Passbook Savings Bank Accounts" printed in the passbook. Those rules apply in addition to these General Terms and Conditions. The Bank recommends that the Customer presents the passbook regularly to the Bank for making updates. The data reflected in the passbook shall be deemed to be a valid notice of transactions conducted on the bank account. It is the responsibility of the Customer to check the accuracy of entries in the savings passbook and notify the Bank of any errors therein within 30 days of the date of such statement. The Bank shall not be held liable for any losses due to unawareness of the transactions by the Customer resulting from the failure by the latter to update his/her passbook. 5. The Bank will provide to the Customer a monthly statement for bank accounts in the manner stipulated by the Law or agreed with the Customer. The Bank is not obliged to provide a monthly statement to the Customer if no debit/credit has been made from/to the respective bank account during the given month. Information reflected in the statement shall be deemed to be a valid notice of transactions conducted on the bank account. It is the responsibility of the Customer to check the accuracy of the statement and notify the Bank of any errors therein within 30 days of the date of such statement. The Bank shall not be held liable for any losses incurred by the Customer due to errors, theft, loss or for disclosure of information which may arise in connection with the postal delivery of the statements. 6. The Bank shall be entitled without further authorization of the Customer or prior notification to the Customer to debit from the bank account all taxes subject to levy by the Bank in accordance with the legislation of RoA. 7. Bank accounts with zero balances may be closed by the Bank after three months- for bank accounts of individuals and after six months- for bank accounts of sole entrepreneurs. 8. Deposits and withdrawals may be made at any branch of the Bank in the Republic of Armenia subject to availability of satisfactory evidence of identity or via the Bank's ATM Card, including by the use of any on-site or off-site Automated Teller Machine (ATM) of the Bank. 9. Conversion from one currency to another shall be made at the Bank's respective exchange rate as regularly defined by the Bank. By giving a respective instruction to the Bank for effecting a transfer from a bank account in one currency to a bank account in another currency (including through ATM), the Customer undertakes and confirms that he/she agrees to the conversion of currency at the exchange rate defined by the Bank. 10. The Customer agrees that the Bank is entitled to make a currency conversion transaction at the exchange rate defined by itself in order to credit the Customers respective bank account with amounts transferred/paid in favour of the Customer in other currency. 11. The Bank is authorized to debit the bank account of the Customer for all cheques, payment instructions duly signed in accordance with the current signing authority provided to the Bank on signature card or other forms accepted by Bank. 12. The Customer agrees to indemnify the Bank against any expenses and losses incurred by the Bank with respect to implementation of Customer's instructions and the Bank shall be entitled to debit the Customer's bank accounts with any such amounts. 13. The Bank shall accept the payment instructions on the days and at the time defined by itself. The payment instructions received on any other day and at other time during the day shall be deemed to be received on the next
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working day following the day of receipt. For processing the payment instructions, the Bank shall be entitled to request from the Customer additional information/approval related to the instruction and shall process the Customer instruction only upon receipt of such information/approval. If it is not possible to receive the additional information/approval from the Customer the Bank reserves the right to decline to process the Customer instruction. The Customer shall be advised on non-acceptance of the payment instruction verbally and/or in writing. The Bank is not obliged to notify the Customer on receipt of payment instruction on payment of funds to the Customer. 14. Acting only as the Customer's collection agent, the Bank may agree to accept, but without assuming any responsibility for their payment, cheques, bank drafts, and similar payment instruments drawn or endorsed in favour of the Customer for deposit to bank account. For this purpose, the Bank's offices, correspondents or other agents appointed by the Bank shall be deemed to be the Customer's agents. 15. The Bank or its agents shall not be held liable for the loss, damage or dishonour of a cheque or other instrument or for the failure to credit, late payment or presentation, validity, any delay in crediting the bank account or non payment and return of cheques, payment instructions, bank drafts or other instruments through the fault of the Customer. The Bank or its agents shall not be held liable for any loss of the Customer due to suspending the transfer of funds or freezing the funds transferred based on the Customers payment instructions in accordance with the legislation of foreign states. The Bank or its agents shall process all transactions on best effort basis in compliance with local regulations. 16. Proceeds of cheques or other instruments shall be available for withdrawal by the Customer within one month after collection of the amounts of cheques or other instruments by the Bank. 17. The rate of interest payable on respective bank account shall be displayed at the Bank's branches, the Banks website and/or publicized in any other way and may equal 0% or any other percentage. Interest accrued on any bank account are paid in Armenian Drams irrespective of the currency of bank account. 18. Bank Accounts maintained for Minors shall be operated by the parents or legally appointed guardian until the Minor attains the age of 18. The Minors between the age of 14-18 are entitled to open bank accounts and dispose the funds available on such bank accounts in accordance with the Law without the consent of parents or guardians. 19. The Bank shall have the right at any time to use the funds available on the bank accounts of the Customer with the Bank (irrespective of the currency) for the satisfaction of any indebtedness of the Customer to the Bank irrespective of currency and its legal ground, as well as charge/record the amount of Customers indebtedness from/on respective bank account of the Customer. For the purposes of such set-off, the Bank is authorized, if necessary, to exchange various currencies available on different bank accounts of the Customer at the exchange rate defined by the Bank for the respective currency and charge the respective amount. The Customer hereby agrees, that for the purpose of satisfaction of any indebtedness of the Customer to the Bank (irrespective of the currency and its legal ground) the Bank may request other banks operating in territory of the Republic of Armenia to debit the amounts of Customer indebtedness from the Customer bank accounts with those banks and transfer these amounts to the Bank. 20. In the event of death, incapacity, insolvency or bankruptcy (or other analogous, event or proceedings) of the Customer the Bank shall not be liable for any dealings on the bank account unless and until the Bank has received written notice of the same together with other satisfactory documentary evidence as determined by the Bank. In case of receiving a valid notice, the Bank shall suspend all dealings on the bank account until a duly appointed successor or court appointed officer has been suitably empowered to deal with the bank account. 21. The Customer may close the bank account by giving prior written notice at any time to the Bank after payment of all moneys due to the Bank at the time of such closing of the bank account. The Bank may on the bases of court orders or resolutions of the Central Bank terminate or suspend dealings on the bank account in the manner stipulated in the RoA legislation without filing a prior notice to the Customer or presenting a justification. The Bank shall have the right to close the bank account of the Customer at its discretion, if the legal acts or conditions set forth herein have been breached by the latter. 22. Any written demand or communication of the Bank shall be made in the manner and based on contact details agreed with the Customer. In case of sending notifications via post or document delivery service the Customer will be deemed to be duly advised on the date of providing the respective communication or other similar document by the Bank to the postal service or the company carrying out document delivery. The Customer shall advise the Bank without delay of any change in address, residency status, and/ or in the information and documents submitted to the Bank. If the Customer fails to advise the Bank on any such change the Bank shall not be liable for any loss incurred by the Customer as a result of making transactions with bank account based on the documents/information available at the Bank.
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Bank Deposit 1. The conditions set forth herein govern the relations between the Bank and the person or persons (the Customer) signing any sample bank deposit opening form approved by the Bank in addition to the provisions related to bank accounts. 2. The rate of interest payable on bank deposit shall be displayed at the Bank's branches, at the Banks web-site and/or in any other way. The interest rate defined by the Bank at the moment of opening of a term deposit shall remain unchanged during the entire period of the deposit agreement unless provided otherwise for particular types of deposits. The interest on each deposit is payable upon maturity of the deposit or as otherwise agreed. Any interest payable on the deposit, irrespective of its currency, shall be paid in Armenian Drams. 3. The term deposits of the Customers shall be paid at the first demand of the depositor. 4. In case of early termination of the term deposit agreement at the request of the Customer or due to other reason beyond the control of the Bank the payable interest shall be calculated at the rate agreed between the Bank and the Customer. Electronic Banking Services 1. The conditions set forth herein govern all transactions effected by the ATM Card (the Card) issued by the Bank to the Customer. 2. The Card shall remain the property of the Bank, and the Customer shall surrender the Card to the Bank immediately upon request. The Bank may withdraw at any time all rights and privileges of the Customer pertaining to the Card. 3. The Card and Personal Identity Number (PIN) are issued to the Customer entirely at the Customer's risk, and the Bank shall bear no liability whatsoever for any loss/damage arising from the use of the Card and PIN however caused unless the cause is the result of an act or error of the Bank. 4. The Customer shall at all times remain liable for any transactions made by use of the Card and shall indemnify the Bank for all loss/damage however caused by unauthorized use of the Card or PIN. 5. The Customer shall exercise due care to prevent the Card and details of the PIN being lost or stolen and shall notify the Bank immediately and confirm in writing any loss or theft. The Bank cannot be held responsible in case of a lost or stolen card/PIN is used prior to receipt of written notice of loss. 6. The Bank's record of transactions processed by the use of the Card shall be deemed to be a documentary evidence of the transactions. 7. The Bank shall debit the Customer's bank account with the amount of any withdrawal/transfer effected by use of the Card. Transactions effected in foreign currencies shall be effected at the exchange rate as determined by the Bank on the day of such transaction. 8. The Bank shall debit the Customer's bank account with all expenses related to the issuing, maintenance of the Card and, if necessary, any replacement thereof. 9. Cash withdrawals from other Bank's ATMs may be subject to a cash withdrawal fee fixed by the Bank. 10. The Customer shall not disclose the PIN to any other persons without the prior written consent of the Bank. 11. The Bank shall not be liable for any loss or damage arising directly or indirectly from any malfunction/failure of the Card or ATM, temporary insufficiency of funds in such machines or other similar reason (irrespective of the fact which bank appears to be the owner or lessee of the subject ATM). 12. Any cash or cheque deposited by use of the Card shall only be credited to the Customer's bank account after verification by the Bank, after which such deposits shall be regarded as having been received by the Bank and credited to the Customer's bank account. 13. The Customer shall be jointly and severally responsible for all transactions processed by the use of the Card issued to one or more of the holders of joint bank account. 14. The Card shall be immediately returned to the Bank in the event of the Customer's death or closure of the bank account. 15. Use of the Card in cases of making any change to these General Terms and Conditions will constitute acceptance without reservation by the Customer of such change. 37. Bank & Customer General relationship

A banker, in course of his day to day business, enters into different kinds of relationship with his customers and clients. These relationships may be broadly categorized as (a) General Relationship and (b) Special Relationship.
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The general relationship between a banker and customer differs depending on the basis of types of dealing they undertake between themselves. Banker-customer is contractual relationship. Generally the following are the major forms of relationships between a banker and his customers: (1) Debtor-Creditor, (2) Principal-Agent, (3) Trustee-Beneficiary, (4) Bailor-Bailee and (5) Lessor-Lessee. (1) Debtor-Creditor: The general relationship between a banker and customer (account holder) is that of a debtor and creditor. If the customer's account shows credit balance, the bank is debtor and customer is creditor. On the other hand, if the account of the customer is overdrawn, the relationship is just the reverse and here the customer is the debtor. (2) Principal-Agent: All modern banks provide agency services to their customers. When a bankers buys or sells securities on behalf of his customer, he performs an agency function. Similarly, when he collect cheques, bills, interest and dividend etc. or when he pays insurance premium from the customers account, as per his instruction, he acts as an agent. (3) Trustee-Beneficiary: Many times a banker is in the position of a trustee. A trustee is one who holds property for the benefit of a person or beneficiary. The banker is a trustee when a customer deposits his valuables and securities for safe custody. In this case, the customer continues to be the owner and is entitled to the same goods and valuables as he deposited. The banker can not use the articles kept for safe custody anyway he likes. He can not return equivalent goods in place of the original one. Here the legal position of a banker as a trustee is quite different from that of debtor and creditor. For example, in the event of bank's liquidation, securities and valuables held by the bank as trustee are not available for distribution to the general creditors. Fund, if any, coming to the hands of the bank as a trustee must also be applied for specific purpose as the trust deed indicates. (4)Bailor-Bailee: When a bank advances money to a borrower, the goods of the borrower may be brought under the control of a bank (pledge). Such goods are called pledged goods. In this case, the relationship between a customer and a banker in respect of the goods under pledge is of a bailor and bailee. (5) Lessor-Lessee: In case of locker operation, the relationship between the banker and customer is lessor-lessee. Here the banker is Lessor and customer is Lessee

The commercial banks are now not confined to local banking. They are fast changing into global banking i.e, understanding the global customer, using latest information technology, competing in the open market with high technology system, changing from domestic banking to investment banking etc. The commercial bank are now considered the nerve system of all economic development in the country. What is virtual banking? Providing the banking services through extensive use of information technology without direct recourse to the bank by the customer is called virtual banking. The origin of virtual banking can be traced to the 1970,s with the installation of ATMs.

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The principal types of virtual banking services include automated teller machines (ATMs), phone banking and most recently internet banking. With the increasing use of internet banking there is greater reliance now on information technology and the decrease of physical bank branches to deliver the banking services to the customer.

12. What role is played by commercial banks in the Indian Money Market? Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. Explain the components of Indian money market. What is Branch Banking? Explain the advantages and disadvantages. Explain the features of Negotiable Instruments. Explain the features of Fixed Deposit Receipt. Explain the different kinds of Cheque Crossing What are the essential requisites of a cheque? What is Pass Book? Give its specimen. Define the term Banker and Customer. Explain the different types of loans and advances provided by commercial banks. Explain the functions of Commercial Banks Explain the various Credit Control methods of Central Bank What are the functions of Reserve Bank of India? Explain the different types of Endorsements. Who is a Collecting Banker? Explain his important functions Briefly explain the Provision of Banking Regulation Act dealing with licensing of Banks. What are the services offered by commercial banks to customers? What are the functions of central banking? Narrate the advantages of unit banking. Point out the defects and difficulties of commercial banks in India. Analyze the reasons for backwardness of the Indian Money market. Explain the role of commercial banks in Economic Development. Describe how the Private Sector banks offer precious services rather than public sector banks Describe how the Private Sector banks offer precious services rather than public sector banks Discuss the credit control methods by Central BankWhat is the role of banks in export promotion? What is the role of banks in export promotion? What are the instruments of monetary policy of a Central Bank? Distinguish between Unit banking and Branch banking. Define and mention the components of the money market. What are the precautions given to a paying banker? Elaborate the impact of Nationalisation of commercial banks in India. Define cheque. Explain the different types of crossing of cheques. Why do banks prefer to keep excess reserves during depression period? What are the limitations of credit creation? How do banks create deposits? Examine the legal significance of crossing of cheques What are the conditions necessary to constitute a customer of a bank? Bank & Customer General relationship

BANKING LAW

1.

Explain the origin & development of banking in India.

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2. 3. 4.

What are the objectives & achievements of bank nationalization in India? State the argument for & against nationalization What are the main functions of banks?

5. Who is a banker and customer? Explain the general relationship between banker & customer. OR The relation between a banker and a customer is that of a debtor and a creditor. Explain. 6. Explain the special relationship between banker & customer. OR What is the special relationship arising out of general relationship between a banker and a customer. OR What are the rights and obligations of a banker towards a customer? 7. 8. What are the obligations of a banker? Explain the bankers right of general lien.

9. What are the circumstances under which a disclosure by banker is justified? OR Bankers duty of secrecy is not absolute. Explain. 10. Who are the bankers special customers? Explain the precautions to be taken by the banker in opening and operating their accounts. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. What are the functions of commercial banks? What are the functions of the Reserve Bank of India? Explain the management, powers and constitution of the Reserve Bank of India. Explain the role of Reserve Bank in economic development. In what way does the Reserve bank exercise control over the commercial banks? Explain the Reserve banks licensing function. Write a short of Regional Rural Banks Write a note on Central Co-operative banks. What are the advantages & disadvantages of unit & branch banking? What are the differences between schedule & non-schedule banks? What are the rights of a banker against surety?What are the precautions to be taken by the banker? Explain the concepts of guarantee & indemnity What are the precautions to be taken by the banker in the case of hypothecation? What are the differences between lien & hypothecation? What are the differences between hypothecation & pledge? Write a note of secured & unsecured loans
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27. 28. 29. 30.

Write a note on fixed deposits Write a note on current account Write a note on savings bank account Write a note on recurring account.

1. Explain the origin & development of banking in India.

Banking was in existence in India during the Vedic times (2000 BC to 1400 BC). Money lending was regarded as an old art and was practiced in the early Aryan days. Rina (debt) is often mentioned in the Rig Veda reflecting a normal condition prevalent in the Vedic Society. The transition from money-lending to banking must have occurred before Manu-he states that a sensible man should deposit his money with a person of good family, good conduct, well-acquainted with law, wealth and honorable. There are references to lending and banking in the two epics namely Ramayana & Mahabharata. During that period banking had become a full fledged business More details pertaining to money lending in the Sutra period (7th century to 2nd century) are available from the Jatakas (Buddhist writings). Jatakas establish the existence of seths (money lenders) and contain several stories of Kings receiving financial help from the guilds. From these accounts it is evident that money lending, banking and trading were interlinked. In the Buddhist period even the Brahmins & Kshatriyas started taking banking as a business. Bills of exchange came into use in this period. The banking business was being carried out even in the Smriti period and the Smritis explained the methods of regulation of interest. The tradition from money-lending to banking appears to have taken place in the 2nd or 3rd century AD. During This period, people were enjoined upon to make deposits with respectable bankers. This period is characterized as one in which the activities of the bankers/money lenders were well controlled and regulated. Rules for safeguarding the interest of borrowers were introduced. Kautilya in his Arthashastra which was written in the Maurya period in the 4th century mentioned the maximum rate of interest which could be charged by the lenders. The bankers during this period was known as Shakuras and Mahajans There is no live account of indigenous banking from the 6th to 16th century but some stray evidence is found. During the Moghul period indigenous banking was in its prime. There was hardly any village without its money-lender or Sharoff who financed trade and commerce. The system of currency and coinage rendered money lending a highly profitable business. The British came to India in the 17th century. The East India company established its Agency houses in Bombay, Calcutta & Madras. These agency houses were the combination of trade & banking in India. Bank of Hindustan- Appendage of Alexander & Co.1st bank under European direction Established in 1771 at Cal. Collapsed due to failure of parent company Bengal bank was established in 1784 21 BTL Page 22 of 61

General Bank of India was established in 1786. It was the 1st joint stock company with limited liability Presidency banks were established in Calcutta, Bombay & Madras. It amalgamated into the Imperial bank in 1921. In 1865 Allahabad Bank was set up under European management In 1875 Alliance Bank of Shimla was started Oudh Commercial bank was the 1st purely Indian management joint bank. Swadeshi movement stated in 1905 and the period from 1906 to 1913 was a period of boom for Indian Banking. The Bank of Burma was established in 1904. Bank of India, Bank of Rangoon & Indian Specie Bank was established in 1906 Some of the important banks which were established later were Bank of India, Central Bank of India, Bank of Baroda, etc.

2. What are the objectives & achievements of bank nationalization in India?

Objectives-

According to the Banking Companies Act, 1970, the aim of nationalization of banks in India is to control the heights of the economy and to meet progressively and serve better the needs of development of the economy in conformity with national policy and objectives. 1. The elimination of concentration of economic power in the hands of a few 2. diversification of the flow of bank economic credit towards priority sectors such as agriculture, small industry and exports, weaker sections and backward areas 3. fostering of new classes of entrepreneurs, so as to create, sustain and accelerate economic growth 4. professionalisation of bank management 5. providing adequate training as well as reasonable terms of service to bank staff 6. extending banking facilities to unbanked rural areas and semi rural areas to mobilize savings of people to the largest possible extent and to utilize for productive purposes 7. to curb the use of bank credit for speculative and other unproductive purposes 8. to bring banks under the control of RBI

Achievements

1. Accelerated branch expansion in rural and backward regions- in 1969 bank branches in rural areas accounted to only 22.5% of the total number of branches. Today branches in rural areas account to 52% 2. Deposit mobilization-after nationalization banks attract deposits from different sections by means of attractive deposit schemes 3. Finance to priority sectors- In 1969 the total credit given to priority sectors like agriculture, small industries and rural development was only 2% of total bank credit. By 2006-2007 in increased to around 40% of total credit 4. Increase in total transactions-the total deposits which was 4,664 crores in 1969 increased to 38.30 trillion 5. Differential rate of interest-to provide credit to weaker sections of the society at very low rate of interest, banks came out with Differential Rate of Interest scheme in 1972 6. Profit making-after nationalization, banks are making profits in addition to achieving economic and social objectives. 21 BTL Page 23 of 61

7. Safety-the government has given importance to safety of the banks. The RBI exercises tight control over banks and safeguards depositors interest 8. Developmental functions- after nationalization, banks provide assistance for the progress of agriculture, rural development, industry, trade and other developmental plans of the government 9. Advances under self-employment scheme-public sector banks play a significant role in promoting self employment through advances to unemployed through various schemes of the government like IRDP,JGSY, etc

3. State the argument for & against nationalization

For 1. It would enable the government to obtain all the large profits of the banks as its revenue 2. Nationalization would safeguard interests of public and increase their confidence thereby bringing about a rapid increase in deposits. Thus preventing bank failures 3. It would remove the concentration of economic power in the hands of a few industrialists 4. It would help in stabilizing the price levels by eliminating artificial scarcity of essential goods 5. It would enable the baking sector to diversify its resources for the benefit of the priority sector. 6. Eliminates wasteful competition and raises the efficiency of the working of banks 7. enables rapid increase in the number of banking offices in rural & semi-urban areas & helped considerably in deposit mobilization to a great extent 8. necessary for the furtherance of socialism and in the interest of community 9. Enables the Reserve Bank to implement its monetary policy more effectively 10. It would replace the profit motive with service motive 11. It would secure standardization of banking services in the country 12. Would check the incidence of tax evasion and black money 13. Through pubic ownership and control, banks function like other public utility services by catering to the financial need of the common man. 14. Like other countries, India should also get profit by nationalizing her banking industry. 15. Essential for successful planning and all-round progress of the national economy, community development and for the welfare of the people.

Against 1. Nationalization involves huge amounts to be paid as compensation to the shareholders adding to the financial burden of the government. 2. Extending loans to agriculture and small scale industries is risky and less remunerative and may weaken the economic viability of these institutions 3. It may not lead to socialism as State capitalism is not socialism 4. It may reduce the efficiency of these banks as political interference will impair the smooth working of these institutions 5. It is not the remedy for growth of monopoly and the concentration of wealth and power as the root cause for them lies in the existing economic system 6. Other countries like Sweden, Finland, Denmark etc have privately run banks and are running smoothly 7. Control of RBI and government authorities make the bank officials scared to take decisions and it adversely affects the bank services 8. The rapid extension of banking into the rural ad semi-urban areas has often been cited as a major factor affecting the earning capacity of banks 9. Inter-state rivalries and policies would raise their ugly heads, damaging the present sound banking system. 10. Banks were not at all responsible for the evasion of taxes or for creation of black money. It was the product of an irrational tax-structure, high deficit financing and corrupt public administration. 11. Bank nationalization should follow and precede nationalization of all major trades and industries of the country 12. Inflation is caused by unsound monetary and fiscal policies and nationalization of banks cannot solve this problem 21 BTL Page 24 of 61

13. Rapid expansion of branches has increased establishment costs and reduced the quality of supervisory and managerial staff 14. Malpractices in privately owned banks can be checked by adopting appropriate monetary and fiscal policies and through efficient supervision, nationalization is not necessary 15. Public control leaves the doors of banks open for corruption and favoritism. Delays and lethargy in work are common in public sector undertakings.

4. What are the main functions of banks?

There are four types of banking services. They are as follows1) Central banking services. 2) Commercial banking services. 3) Specialized banking services. 4) Non-banking financial services. The various functions of each of the following banks are-

Central banking services The central bank of any country1) Issues currency and bank notes. 2) Discharges the treasury functions of the Government. 3) Manages the money affairs of the nation and regulates the internal and external value of money. 4) Acts as banker to the govt. 5) Acts as bankers bank.

Commercial banking services Commercial banking services include1) Receiving various types of deposits. 2) Lending various types of loans. 3) Extending some non-banking customer services like facilities of locker, rendering services in paying directly house rent, electricity bills, share calls, insurance premium etc

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Specialized banking services They are estd for definite specialized banking services like 1) Industrial banks to lend long term loans and working capital for industrial purposes. 2) Land mortgage banks for granting loans on equitable mortgage. 3) Rural credit banks for generating funds for extending rural credit. 4) Developmental banks to support any developmental activities. These types of banks accept all types of deposits but mobilize the amount in its specially focused area.

Non-banking financial services Many banks are established for carrying out non banking financial services. Mutual funds are institutions accepting finances from its members and investing it in long term capital of companies both directly in primary market as well as indirectly in the capital market. Financial institutions acting as portfolio managers receive funds from the public and manage the funds for or on behalf of its depositors. They undertake to manage the funds of the principal so as to generate maximum return.

Explain the role of banks in promoting economic development.

Banks play a very significant role in the economic development of the country. Banking system as a whole has an imp influence on the tempo of economic activity. The economic importance of banks are1) Banks mobilize the small, scattered and idle savings of the people and make them available for productive purposes. They help the process of capital formation.

2) By offering attractive interests on the savings of the people deposited with them banks promote the habit of saving in them. 3) By accepting the savings of the people banks provide safety and security to the surplus money of the customers. 4) Banks provide a convenient and economical mean of transfer of funds from one place to another. Even cheques are used for the movement of funds from one place to another. Banks help the movement of funds from one region where they are not very useful to regions where they can be more usefully employed. By moving funds from one place to another banks contribute to the economic development of backward regions. Banks influence the rate of interest in the money market, through the supply of money. They exercise a powerful influence on the interest rate in money market.

5)

6)

7) Banks help trade, commerce, industry and agriculture by meeting their financial requirements. Without the financial assistance the growth of trade and commerce industry would have been very slow. 8) Banks direct the flow of funds into collective channels while lending money. They discriminate in favour of essential activities as against non-essential activities. Thus they encourage the development of right type of activities which the society desires. 21 BTL Page 26 of 61

9)

Banks help the industrious, the prudent, the punctual, the honest and discourage the dishonest by not giving finance for wrongful purpose. Thus banks act as public conservator of commercial activities.

10) Banks serve as the best financial intermediaries between the borrowers and the lenders. 11) Through the process of creation of money, banks acquire control over the supply of money in the country. Through their control over supply of money they influence economic activities, employment, income and general price level in the economy. 12) Banks monetize the debts of others that is cover t the debts of others into money by exchanging bank deposits in return for securities. Thus a strong and a sound banking system is indispensable for the economic development of any country.

5. Who is a banker and customer? Explain the general relationship between banker & customer. OR The relation between a banker and a customer is that of a debtor and a creditor. Explain.
The relationship between a banker and a customer is of great significance. It depends upon the services rendered by the banker to the customer.

Definition of banker

According to section 3 of the NI Act, 1881, banker includes any person acting as a banker and any post office savings bank. According to section 5(b) of 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 withdrawable by cheque, draft, order or otherwise. To sum up a banker is who 1) Take deposit account 2) Take current accounts 3) Issue and pay cheques 4) Collect cheques crossed and uncrossed for his customers. Money lender is not considered as a banker as mere lending does not constitute banking business. Banker is an institution which borrows money by accepting deposits from the public for the purpose of lending to those who are in need of money.

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Definition of customer

The term customer is not defined by law. Ordinarily, a person who has an account in a bank is called a customer. Acc to Dr. Hart, a customer is one who has an account with a banker or for whom a banker habitually undertakes to act as such. Thus to constitute a customer, the following essential requisites must be fulfilled: 1) He must have some sort of an account. 2) Even a single transaction constitutes a customer. 3) The dealing must be of a banking nature. A customer need not be a person. A firm, joint stock company, a society or any separate legal entity may be a customer. Explanation to section 45-Z of the BR Act clarifies that a customer includes a Government department and a corporation incorporated by or under any law.

Relationship between a banker and customer

Relation of a debtor and a creditor The general relationship between banker and a customer is that of a debtor and a creditor i.e. borrower and lender. In Foley v. Hill, Sir John Paget remarks, the relation of a banker and a customer is primarily that of debtor and creditor, the respective positions being determined by the existing state of account. Instead of the money being set apart in a safe room, it is replaced by the debt due from the banker. The money deposited with him becomes his property, and is absolutely, at his disposal, and, save as regards the following of the trust funds into his hands, the receipt of money by a banker from or on account of his customer constitutes him merely the debtor of the customer with super added obligation to honour his customers cheques drawn upon his balance, in so far the same is sufficient and available. In Shanthi Prasad Jain v. Director of Enforcement, Foreign Exchange Regulation, the SC held that the banker and customer relationship in respect of the money deposited in the account of a customer with the bank is that of a debtor and a creditor. On the opening of an account a banker assumes the position of a debtor. The money deposited by the customer with the bank is in legal terms lent by the customer to the banker who males use of the same according to his discretion. The creditor has the right to demand back his money from the banker, and the banker is under an obligation to repay the debt as and when he is required to do so. A depositor remains a creditor of his banker so long as his account carries a credit balance. But he does not get any charge over the assets of his debtor/banker and remains an unsecured creditor of the banker. Since the introduction of deposit insurance in India in 1962 the element of risk of the depositor is minimized as Deposit Insurance and Credit Guarantee Corporation undertakes to insure the deposits upto a specified amount. Bankers relation with the customer is reversed as soon as the customers account is overdrawn. Banker becomes creditor of the customer who has taken a loan from the banker and continues in that capacity till the loan is repaid. As the loans and advances granted by a banker are usually secured by the tangible assets of the borrower, the baker becomes a secured creditor of his customer.

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Various legal relationships of banker and customer

2) Agent and Principal- Sec.182 of The Indian Contract Act, 1872 defines an agent as a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done or who is so represented is called the Principal. One of the important relationships between a banker and customer is that of an agent and principal. The banker performs various services of the customer, where he acts as the agent. Buying and selling securities of customer Collection of cheques, bills of exchange, promissory notes on behalf of customer Acting a trustee, executor or representative of a customer Payment of insurance premium, telephone bills etc.

1) Trustee and beneficiary- section 3 of the Trusts Act defines a trustee as one to whom property is entrusted to be administered for the benefit of another called the beneficiary. A banker becomes a trustee under special circumstances. When a customer deposits securities or other valuables with the banker for safe custody, the banker acts as trustee of customer. 2) Bailee and bailor- during certain circumstances banker becomes bailee. When he receives gold ornaments and important documents for safe custody he takes charge of it as bailee and not trustee or agent. He cannot make use of them as he is bound to return the identical articles on demand. 3) Pawnee and pawner- pawn is a sort of bailment in which the goods are delivered to another as a pawn, to be a security for money borrowed. Thus a banker acts as a pawnee where a customer delivers he goods to him to be kept as security till the debt is discharged. The banker can retain the goods pledged till the debt is paid. 4) Mortgagee and mortgagor- the relation between a banker as mortgagee and his customer as mortgagor arises when the latter executes a mortgage deed in respect of his immovable property in favour of the bank or deposits the title deeds of his property with the bank to create an equitable mortgage as security for an advance. 5) Lessee and lessor- when a customer hires a locker in the banks safe deposit vault, the bank undertakes to take necessary precaution for the safety of the articles in the locker. The relation between the parties is that of a lessor and lessee. 6) Guarantor and guarantee- a bank as guarantor gives guarantee to its customer by issuing a letter of credit. It is a kind of credit facility to its customer to facilitate international trade. A bank guarantee contains an undertaking to pay the amount without any demur on mere demand of the principal amount on the ground for non-performance or breach of contract. 7) Fiduciary relationship- every relation of trust and confidence is a fiduciary relation. A banker who receives a customers money is under a duty not to part with it which is inconsistent with the customers fiduciary character and duty. In Official Assignee v. Rajaram Aiyar, it was held that where banks old money for a specific purpose of sending it somebody the money is impressed with trust.

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6. Explain the special relationship between banker & customer. OR What is the special relationship arising out of general relationship between a banker and a customer. OR What are the rights and obligations of a banker towards a customer?
By opening an account with the banker, there will be some rights conferred and obligations imposed to the banker as well as the customer. These rights and duties are reciprocal i.e. the bankers duties are the customers rights and the bankers rights are the customers duties. These rights and obligations are called the special features of relationship between banker and the customer. The special relationship between banker and customer can be presented as under:

General obligations of banker towards customer

Obligation to honour cheques- banker accepts the deposits from the customer with an obligation to repay it to him on demand or otherwise. The banker is therefore under a statutory obligation to honour his customers cheques because, it is recognized under section 31 of the NI Act, 1881The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default. Thus the banker is bound to honour his customers cheques provided the following conditions are fulfilled(a) Sufficient balance in customers account (b) Presentation of cheques within working hours of business (c) Presentation of cheques within reasonable time after ostensible date of its issue (d) Cheques should be presented at the branch where account is kept (e) Fulfilment of requirements of law

Obligation to maintain secrecy and disclosure of information required by law- the banker is under an obligation to take utmost care in keeping secrecy about the accounts of the customers since it may affect his reputation, credit-worthiness and business. It was firmly laid down in Tournier v. National Provincial and Union Bank of England Ltd. in India it was made compulsory after 1970. The duty to maintain secrecy will be continuing even after the account is closed or the death of the customer. This obligation is subject to certain exceptions.

Obligation to keep a proper record of transactions- the banker must keep a proper record of transactions of the customer. If he wrongly credits the account of the customer and intimates him with the same and the customer acts upon 21 BTL Page 30 of 61

the intimation bonafide and withdraws cash the banker cannot contend that the entries were wrongly made. He shall not succeed in recovery of money from the customer.

Obligation to abide by the instructions of the customer- the banker must abide by any express instructions of the customer provided it is within the scope of their banker-customer relationship. In the absence of any express instructions, the banker must according to prevailing usages at the place where the banker conducts his business.

Rights of a banker

Bankers right of general lien- one of the important rights enjoyed by a banker is the right of general lien. Lien means the right of the creditor to retain goods and securities owned by the debtor until the debt due from him is paid. It may either be general or particular. In Brando v. Barnet, it was held that bankers most undoubtedly have a general lien on all securities deposited with them as bankers unless there is an express or implied contract inconsistent with lien. In India sec 171 of the Indian Contract Act confers general lien upon bankers as follows- bankers..may in absence of a contract to the contrary, retain as a security for a general balance of account, any goods bailed to them.

Bankers right of set-off- the right to set off is a statutory right which enables debtor to take into account a debt owing to him by a creditor, before the latter could recover the debt due to him from the debtor. Thus when a customer keeps two or more accounts at the same bank, some of which are overdrawn and some in credit, the bank has a right to combine such accounts and pay the resultant balance. In Halesowen Presscook and Assemblies Ltd v. Westminister Bank Ltd, it was held that a banker has the right to combine two accounts and to set off unless he has made some agreement express or implied to the contrary.

Bankers right for appropriation of payment- when a debtor owes two or more debts to a creditor and he pays some amount which is not sufficient to meet any debt to the creditor appropriation is done. It applies to a banker if the customer has more than one deposit or more than one loan account. In Devaynes v. Noble, famously known as Claytons case, a principle was laid down as to when the customer has current account and deposits and withdraws money frequently the first item on debit side will be discharged by the first item on credit side. The credit entries in the account adjust or set off the debit entries in chronological order.

Bankers right to claim incidental charges- the banker may claim incidental charges on unremunerative accounts such as service charges, processing charges, ledger folio charges, appraisal charges, penal charges and so on.

Bankers right to charge compound charges- a banker has a special privilege to charge compound interest. In Syndicate Bank v. West Bengal Cement Ltd, the adding of unpaid interest due to the principal amount is recognized. However, the SC abolished this in case of agricultural loans in the Bank of India case.

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7. What are the obligations of a banker?

1. Obligation to honour cheques- the banker is under a statutory obligation to honour his customers cheques in the ordinary course of business. If he wrongfully dishonors the cheque, then he is liable to the customer for damages. Thus the banker is bound to honour the customers cheque provided the following conditions are fulfilled(a) Sufficient funds- there must be sufficient funds of the drawer in the hands of the drawee. A banker should be given sufficient time to release the amount of the cheque sent for collection before the said amount can be drawn upon by the customer. The banker can dishonor the cheques if there are insufficient funds. (b) Funds must be properly applicable- a customer might be having several bank accounts in his various capacities. But is essential that the account on which a cheque is drawn must have sufficient funds. If some funds are earmarked by the customer for some specific purpose, they are not available for honouring the cheques. But where the customer has overdraft facility the banker has the obligation to honour the cheque upto the amount of overdraft sanctioned. (c) The banker must be duly required to pay- the banker is bound to honour the cheque only when hi is duly required to pay. The cheque, complete and in order, must be presented before the banker at the proper time. 2. Obligation to maintain secrecy of accounts-The customers account details are recorded in the books of the banker and the true state of his financial dealings are available with the banker. If any of these facts are made known to others, the customers reputation might suffer and he might incur losses also. The banker is therefore under an obligation to take utmost care in keeping secrecy of the details of the customer. However, this rule has exceptions(mention briefly) 3. Obligation to keep a proper record of transaction- the banker must keep a proper and accurate record of all the transactions of the customer. Sometimes, he may commit some wrong.

8. Explain the bankers right of general lien.

Lien means a legal claim to hold property as security. According to Halsbury, lien may be defined as a right in man to retain that which is in his possession belonging to another, until certain demands of the person in possession is satisfied. Lien is of two kinds- 1) specific or particular lien and 2) general lien A particular lien is one which confers a right to retain the goods in connection with a particular debt only while a general lien is a right to retain all the goods or any property of another until all the claims of the holder are satisfied. It extends to all transactions and thus more extensive. Bankers right of general lien One of the important rights enjoyed by a banker is the right of general lien. In Brando v. Barnet, it was held that bankers most undoubtedly have a general lien on all securities deposited with them as bankers unless there is an express or implied contract inconsistent with lien. 21 BTL Page 32 of 61

In India sec 171 of the Indian Contract Act confers general lien upon bankers as follows- bankers..may in absence of a contract to the contrary, retain as a security for a general balance of account, any goods bailed to them. Circumstances for exercising general lien 1) No agreement inconsistent with the right of lien. 2) Property must be possessed in his capacity as a banker. 3) Possession should be lawfully obtained. 4) Property should not be entrusted to the banker for a specific purpose. Incidents of lien- lien attaches to 1) Bills of exchange or cheques deposited for collection or pending discount. 2) Dividend warrants and interest warrants paid to the banker under mandates issued by the customer. 3) Securities deposited to secure specific loan but left in bankers hand after loan is repaid. 4) Securities, negotiable or not, which the banker has purchased or taken up, at the request of customer, for the amount paid.

Exceptions- banker has no general lien 1) On safe custody deposits. 2) On securities or bills of exchange entrusted for specific purpose. 3) On articles lefty by mistake or negligence. 4) On deposit account. 5) On stolen bond. 6) Until due date of the loan. 7) On trust account. 8) On title deeds of immovable properties.

9. What are the circumstances under which a disclosure by banker is justified? OR Bankers duty of secrecy is not absolute. Explain.
The duty of the banker to maintain the secrecy is not an absolute one. It is also subject to certain exceptions. The exceptions were stated in the landmark judgment Tournier v National Provincial Bank Limited. Section 13 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 also allows certain exceptions. 21 BTL Page 33 of 61

1. Disclosure under the compulsion of Law- Bankers obligation to his customer is subject to his duty to the law of the country. The baker would, therefore, be justified in disclosing information to meet the following statutory requirements. (a) Under the Income Tax Act, 1961- Vide Section 131 & 133, Income Tax authorities have powers to call for the attendance of any person or for necessary information from banker for the purpose of assessment of the banks customers. (b) Under the Bankers Books Evidence Act, 1891- a banker may be asked for the Court to produce a certified copy of his customers account in his ledger. (c) Under the Reserve Bank of India,1934- the RBI is empowered to collect credit information from Banking Companies relating to their customers (d) Under the Banking Regulation Act, 1949- every bank is compelled to submit an annual return of deposits which remain unclaimed for 10 years. (e) Under the garnishee order- when a garnishee order nisi is received, the banker must disclose the nature of the account of a customer to the Court. (f) Under the Companies Act, 1956- when the Central Government appoints an inspector to investigate the affairs of any joint-stock company under section 135 or section 137 of the Companies Act, the banker must produce all books and papers relating of the Company. (g) Under CrPC- the police officers conducting an investigation may also inspect the bankers books for the purpose of such investigation.

2. Disclosure in the interest of the public-the following grounds generally fall under this category (a) disclosure of the account where money is kept for extreme political purposes in contravening the provisions of any law (b) disclosure of the account of an unlawful association (c) disclosure of the account of a revolutionary or terrorist body to avert danger to the State (d) disclosure of the account of an enemy in time of war (e) disclosure of the account where sizable funds are received from foreign countries by a constituent.

3. Disclosure in the interest of the bank- the banker may disclose the state of his customers account in order to legally protect his own interest. For example- if the baker has to recover the dues from the customer or the guarantor, disclosure of necessary facts to the guarantor or the solicitor becomes necessary and is justified.

4. Disclosure under the express or implied consent of a customer- the customer may instruct his banker to give some or all other particulars of his account to say, his auditor, in such case banker can disclose. Banker can also disclose to a referee whose name is suggested by the customer. It is implied that the banker can disclose information to the guarantor.

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5. Disclosure under Bankers enquiry- it is an established banking practice to provide credit information about their customers by one bank to another. The customer gives implied consent to this practice at the time of opening the account.

10. Who are the bankers special customers? Explain the precautions to be taken by the banker in opening and operating their accounts.
Banks solicit deposit of money from the members of the public. Any person who is legally capable of entering into a valid contract may apply in the proper way to deposit his money with the bank. A banks special customers are generally minors, married women, illiterate persons, lunatics, blind people, drunkards, insolvents etc who are not competent to open such accounts. There are also impersonal customers like schools, clubs, partnership firm, joint stock companies etc. certain precautions are to be taken by banks while opening accounts in the name of the following customers.

Minor

A minor is a person who has not attained the age of 18 and in case a guardian is appointed, it is 21. Minors are regarded pet children of law. In Mohori Bibi v. Dharmodas Ghose, a minor executed a mortgage for Rs 20000 and received Rs 8000 from the money lender. Subsequently, the minor sued for setting aside the mortgage. The money lender wanted refund of money which he had actually paid. The PC held that an agreement by a minor was absolutely void and therefore, money lender was not entitled repayment of money. Some of the precautions to be taken by the banker on opening and operating account of a minor are1) The banker may open a SB account but not a current account as it incurs no liability to the minor. 2) At the time of opening of account of minor, the bank should record the genuine date of birth of the minor. Banker should insist on to give some schooling record or date of birth as entered in Births and Deaths Register. Minors are allowed to open such accounts when they have completed a particular age say twelve years in some banks and ten years in some others.

3)

4) Banks should prudent to issue cheque books only to minors of, say sixteen or seventeen years of age. 5) Accounts for illiterate minors are not opened in their single name. 6) As a measure of precaution, banks adopt a general rule not to accept deposit exceeding a particular sum.

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7) Since a contract with a minor is void and cannot be enforced against him in Court of law, a minors account should never be allowed to be overdrawn. 8) A guarantee obtained to secure the money borrowed by a minor is also of no avail. However, if the guarantor undertakes to indemnify he will be held liable though borrower is minor.

Lunatics

Lunatics are persons of unsound mind. Lunatics are disqualified from contracting but the disqualification does not apply to contract entered by lunatics during their period of sanity. Following are bankers duty n case of lunatics1) Since a lunatic has no capacity to contract, acc to sec 11 of the ICA, no banker knowingly opens an account in the name of a lunatic. 2) If an existing customer becomes insane, the banker must immediately stop the operation of the account. It is so because, the banker has no right to debit his account for payment made out of his account from the moment, the banker knows the fact of lunacy of customer, the contract between them is void.

3) A banker must not be carried away by hearsay information or rumours. He must get definite information about the lunacy of the customer. 4) If a banker dishonours a cheque in a hurry, without having any proof of lunacy, he will be liable for wrongful dishonour of cheque. It should return all cheques of customers account with the word refer to drawer and not customer insane. It should make careful note of lunacy order. If a third party is authorised to draw on customers account, that authority will cease when the customer becomes insane since when a principal cannot act for himself his agent can no longer act for him. If one party to an account opened in joint names becomes mentally incapable of managing his or her affairs, the banker should not allow either party to operate the account.

5)

6)

7)

Illiterates

An illiterate person is competent to contract and bank may open an account in his name, but special care should be taken by the banker before opening an account. 1) The account of an illiterate person may be opened provided he/she calls the bank personally along with a witness who is known both to the banker and the depositor. 2) A passport size photograph of the illiterate person is identified before the banker in presence of the account holder. The photographs have to be attested by the bank officer/ witness. 3) The left hand thumb impression in case of male illiterate and right hand thumb impression in case of female illiterate are duly attested by some responsible person on the account opening form.

4) One or two identification marks of the depositor should be noted on the account opening form. 21 BTL Page 36 of 61

5) The illiterate person should be provided with a passbook which should also contain an attested photograph of the illiterate person. 6) Normally, no cheque book facility is provided on accounts in the name of illiterate persons. 7) At the time of withdrawal/repayment of deposit account the account holder should attend personally with passbook and attest his/her thumb impression or mark in the presence of an authorised person. 8) The thumb impression of illiterate person on the withdrawal form or cheque (if provided), and on the back of the withdrawal form or cheque should be duly compared with the specimen impression kept by the bank.

Married women The Hindu married women are governed by the Hindu Succession Act and other married women by Indian Succession Act. A banker may open an account in the name of a married woman like any other customer. However, a banker should exercise caution while opening account for the wife of an undischarged insolvent. 1) While opening an account of a married woman, the bank should enquire about her means and circumstances, and if she is living with her husband, something about him and his occupation and position in life, and if he is an employee, the name of the employer. 2) In case she applies for an overdraft, the banker should see that she owns separate property in her own name and precaution should be kept in mind regarding her status and capacity to pay and the purpose for which the borrowings are made. Also he should seek suitable securities preferably on her, which can be attached by the Courts. 3) The banker should always observe that there is credit balance in her account. 4) Banks usually require that a married woman be independently advised by her own solicitor when depositing security for the account of other persons.

5) A married woman may enter into a contract of guarantee and it is enforceable only against her separate estate. 6) In case of an illiterate married woman, her thumb impression should be obtained on the account opening form and on the identification card. Pardhanishin women In case of a pardhanishin woman who remains completely secluded the following presumption exists1) Any contract entered into by her may be subject to undue influence 2) The same might not have been done with free will and with full understanding of what the contract actually means. He banker should therefore due precaution while opening an account in the name of a pardhanishin woman. As the identity of such woman cannot be ascertained the banker generally refuses to open an account in her name.

Joint Hindu families

A JHF or a HUF consists of all persons lineally descended from a common ancestor and included their wives. Following are the precautions to be taken by the banker in opening and operating accounts in the name of HJF. 21 BTL Page 37 of 61

1) The account may be opened in the name of karta or in the name of family business and should be duly introduced. 2) The account opening form should be signed by all adult coparceners, even though the karta would operate the account. The declaration signed by all the members as to who is the karta and who are the other coparceners including minor coparceners should be obtained.

3)

4) If there are minor coparceners, the other adult coparceners should sign for self and as guardians of minors. 5) Authority should be given to the karta to operate the account of all concerned under their joint signature. 6) On attaining majority, the minor coparceners should be asked to join with other coparceners in signing the existing account opening form in ratification of previous transactions. 7) Any member of the HUF can stop payment of a cheque drawn by karta. When the bank receives a notice about any dispute amongst the family members of the HUF, the operations in the account should be stopped till further instructions from a competent court. The burden of proof that loan was taken by karta for purposes beneficial to the family lies on the banker. Thus before granting loans necessary enquiries should be made to ensure it. Otherwise, the bank may not be able to succeed in a suit for recovery of debt.

8)

Agent A person employed to do any act for another, or to represent another in dealings with third persons, is known as an agent for another. The precautions to be taken by a banker in opening and operating account of a customer by an agent are 1) A banker should at once suspend all operations on that account upon hearing or being notified of the principals death, insanity or bankruptcy.

2) The agent must assign the cheque for and on behalf of the principal, so that the third parties would know that he is dealing in a representative capacity. 3) Whenever a bank receives a mandate, it should be recorded in a register, serially numbered, indexed alphabetically, and instructions should be noted in the customers ledger account. In case the agent is authorised to open an account on behalf of the principal, the application should be made to sign by the principal himself, delegating authority to agent to operate the account.

4)

5) The agent should sign in a manner to indicate that he is signing as an agent. 6) The banker should on no account allow the agent, or in fact any person to pay into his own private account, cheques which he has endorsed on behalf another, without satisfying himself that the agent has the authority of the principal to do so.

7) A banker should not allow an agent to overdraw his principals account express with his express authority.

Partnership firm

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A partnership is the relation between the persons who have agreed to share the profits of a business carried on by all or anyone of them acting for all. The banker should take the following precautions while dealing with a partnership firm. 1) The banker should first know the provisions of the Part Act before he opens an account for PF. 2) The banker shall open an account in the name of a partnership firm only when an application is submitted in writing by any one or more partners under sec 19(2)(b) of the Act. Authority to open an account in the name of an individual partner is positively denied. 3) To be on safer side, a banker should get a written request from all the partners jointly for opening an account. 4) The banker should go through the partnership deed and carefully study the objects, capital, borrowing powers etc. he should get a copy of the duly stamped partnership deed. He should enquire about the details of the firm, partners and their powers. If the firm is registered the banker should get a copy of the registration certificate. Dealings with unregistered firms will involve risks. 5) There should be a clear mandate from all the partners. Mandate must be signed by all the parties. 6) The banker should not mix the personal and private accounts of the partners. He has no right to set off and lien over the accounts. No partner has an implied power to sell or mortgage the property of his firm. So in case of mortgage of property, the deed of mortgage should be signed by all the partners.

7)

8) While advancing loans and advances to partnership firm the banks in practice get the loan documents executed by the partners on behalf of the firm as also in their personal capacity. 9) Since a firm stands dissolved on insolvency or insanity of a partner, a cheque signed by an insolvent partner before the date of adjudication should not be paid b the banker without conformation from other partners.

Trust

A trust is an obligation annexed to the ownership of the property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner. While opening accounts in the names of persons in their capacity as trustees, the banker should take the following precautions. 1) The banker should examine the trust deed concerning instructions regarding opening and operating the account contained in the trust deed. In the absence of such instructions, all the trustees may join in opening such account.

2) Instructions regarding limitation on withdrawal in the trust deed, if any, be prominently noted at the ledger head and specimen signature card and withdrawals should be restricted. 3) The banker should note the objects for which the trust has been created so as to facilitate the passing of cheques. 4) A trustee has no individual powers. They must all act together. All must join in signing of cheques. Unless expressly provided otherwise in the trust deed, no trustee can delegate his power to another. If one of the trustees dies or retires, the bank on receiving notice should suspend all operations in the account. However, if the trust deed is silent the bank can let the operations to continue.

5)

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6) In case of breach of trust the bank must see that it does not become a party to the breach. The banker is justified in dishonouring the cheque drawn by a trustee, if intended for breach of trust. 7) If the trustees are authorised to borrow to discharge the functions of the trust, the banker must get specific assets of the trust as security.

11.

What are the functions of commercial banks?

The functions of commercial banks are very vast. Meaning of CB- commercial banking refers to that banking which is concerned with the acceptance of deposits from the public repayable on demand or after the expiry of a short period and the granting of mainly short term credit to trade, commerce and industry through wide networking of branches throughout the country.

Functions of commercial banks- the functions of CB are numerous. They can be broadly divided into two categories. They are-

1) Primary or basic functions a) Receiving of deposits- deposits constitute the main source of funds for commercial banks. CBs receive deposits from the public on various accounts. The main types of accounts are- fixed, current, savings, recurring (explain lil). Issuing notes/cheques- this function once considered to be the most paying part of bankers business is in modern times performed generally by the central bank. Its importance has dwindles to a large extent in some developed countries where cheque currency has replaced bank notes to a large extent. Lending of funds- it is the main business of CB. Advances form the chief source of profit for CB. Banks lend funds by way of loans, over-drafts, cash credit, discounting of bills. (i) Loan- it is a financial arrangement under which an advance is granted by a bank to a borrower on a separate account called the loan account. A loan may short, medium or long term. It is granted either against collateral securities or against personal security of the borrower. (ii) Over-draft- it is a financial arrangement where a current account holder is permitted by a bank to overdraw his account that is to draw more than the amount standing to his credit upon an agreed limit. (iii) Cash credit- it is a financial arrangement under which a borrower is allowed an advance under a separate account called cash credit limit. Here the borrower can withdraw the amount in installments as and when he needs. (iv) Discounting of bills of exchange- here the bank takes a BOE maturing from an approved customer and pays him and credits his account immediately with the present value of the bill. d) Investment of funds on security- it is one of the imp functions of comm. Banks. They invest a considerable amount of their funds in govt and industrial securities. In India it is required by statute for CB to invest a considerable amount of their funds in securities. 21 BTL Page 40 of 61

b)

c)

e) Creation of money- the various ways of creation of money are(i) By advancing loans (ii) By allowing over draft (iii) By providing cash credit (iv) By discounting BOE (v) By purchasing securities (vi) By purchasing fixed assets The commercial banks are prominent in todays world because they manufacture or create money. The bank deposits are regarded as money coz they perform the same function as money that is they increase the purchasing power of the community and serve as medium f exchange in purchase of goods and services and settlement of debts.

2) Secondary or subsidiary functions- apart from performing the main function the comm. banks also perform a num of secondary functions which may be divided into the following two headsa) Agency services- the services rendered by a bank as the agent of his customer are called agency services. The imp agency services are(i) Collection of money on behalf of customers. (ii) Making payments on behalf of customers. (iii) Purchase and sale of securities on behalf of customers. (iv) Advising customers regarding investments. (v) Acting as trustee, executor, and administrator of customers. (vi) Rendering of merchant banking services. b) Miscellaneous or general utility services- services rendered by banker is not confined only to his customers but also to general public called such as(i) Safe custody of valuables (ii) Dealing in foreign exchange business (iii) Issuing of travellers cheque, travellers letter of credit and circular notes. (iv) Collecting information bout other businessmen for customers. (v) Collection of statistics and data. (vi) Lease financing.

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12.

What are the functions of the Reserve Bank of India?

The Central Bank is the Apex Bank of the country. It is called by different names in different countries. It is the Reserve Bank of India in India. The Reserve Bank of India has been defined in terms of its function. According to Vera Smith, The primary definition of central banking is a banking system in which a single bank has either complete control or a residuary monopoly of note issue. According to A.C.L. Day, a central bank is to help control and stabilise the monetary banking system.

Functions Of RBI:

1) Regulator Of Currency: The Reserve Bank of India is the bank of issue. It has the monopoly of note issue. Notes issued by it circulate as legal money. It has its issued department which issued notes and coins to commercial banks. Reserve Bank of India has been following different methods of note issue in different countries. The monopoly of issuing notes vested in the Reserve Bank of India ensures uniformity in the notes issued which helps in facilitating exchange and trade within the country. It brings stability in the monetary system and creates confidence among the public. RBI can restrict or expand the supply of cash according to the requirements of the economy. Thus, it provides elasticity to the monetary system.

2) Banker, Fiscal Agent and Advisor To The Government: RBI everywhere acts as bankers, fiscal agent and advisor to their respective governments. As banker to the government, the central bank keeps the deposits of the central and state governments and makes payments on behalf of the governments. But it does not pay interest on government deposits. It buys and sells foreign currencies on behalf of the government. It floats loans, pays interest on them, and finally repays them on behalf of the government. Thus it manages the entire public debts. RBI also advices the government on such economic and money matters as controlling inflation or deflation, devaluation or revaluation of the currency, deficit financing, balance of payments etc. Thus it is the custodian of government money and wealth.

3) Custodian Of Cash Reserves Of Commercial Banks: Commercial banks are required by law to keep reserves equal to a certain percentage of both time and demand deposits liabilities with the RBI. It is on the basis of these reserves that the RBI transfers funds from one bank to another to facilitate the clearing of cheques. Thus the RBI acts as the custodian of the cash reserves of commercial banks and helps in facilitating their transactions.

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4) Custody And Management Of Foreign Exchange Reserves: The RBI keeps and manages the foreign exchange reserves of the country. It sells gold at fixed prices to the authorities of other countries. It also buys and sells foreign currencies at international prices. Further, it fixes the exchange rates of the domestic currency in terms of foreign currencies. It holds these rates within narrow limits in keeping with its obligations as a member if IMF and tries to bring stability in foreign exchange rates.

5) Lender Of The Last Resort: By granting accommodation in the form of re-discounts and collateral advances to commercial banks, bill brokers and dealers, or other financial institutions, the RBI acts as the lender of the last resort. It acts as lender of the last resort through discount house on the basis of treasury bills, government securities etc. Thus RBI as lender of the resort is a big source of cash and also influences prices and market rates.

6) Clearing House For Transfer And Settlement: As bankers` bank, the RBI acts as a clearing house for transfer and settlement of mutual claims of commercial banks. Since the RBI holds reserves of commercial banks, it transfers funds from one bank to other banks to facilitate clearing of cheques. To transfer and settle claims of one bank upon others, the RBI operates a separate department in big cities and trade centres. This department is known as clearing house and it renders free service to commercial banks.

7) Controller Of Credit: The most important function of RBI is to control the credit creation power of commercial bank in order to control inflation and deflation pressures within this economy. For this purpose, it adopts quantitative and qualitative methods. These involve selective credit control and direct action. Besides the above noted functions, the RBI in a number of developing countries have been entrusted with the responsibility of developing a strong banking system to meet the expanding requirements of agriculture, industry, trade and commerce.

13. Explain the management, powers and constitution of the Reserve Bank of India.
The Reserve Bank of India was established on 1st April, 1935 under the Reserve Bank of India Act, 1943 as the Central Bank of the country to regulate the issue of bank notes and the keeping of reserves for the stability in India and generally to operate the currency and credit system of the country.

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 Constitution: The bank was established as a shareholder`s bank with an authorized and paid-up capital of Rs. 5 crores divided into shares of Rs. 100 each. After independence, under the Reserve Bank Act, 1948, the bank was nationalized, after paying compensation to the shareholders at the market price of the share.

Management: The affairs if the RBI are managed by the Central Board of Directors consisting of:

Governor and not more than 4 Deputy Governors appointed for a period not more than 5 years. Four Directors, one from each of the four local boards. The other Directors. One Government Official.

All the Directors and the officials are nominated for 4 years each by the Central Government. To look after the affairs there are 4 local Boards, one at each of the cities of Bombay, Calcutta, Delhi and Madras, each Board consisting of 5 members appointed for 4 years by the Central Government.

Functions: Mention the above functions in brief.

Powers:

Power Of RBI To Appoint Chairman Of A Banking Company:

RBI has the authority to appoint Chairman of Banking Company where the office of the Chairman of the Board of Directors appointed on a whole-time basis.

Minimum Paid-up Capital And Reserves:

Every banking company should deposit the prescribed minimum paid-up capital and reserves with the RBI either in cash or in form.

Cash Reserve:

Every banking company, not being a Scheduled Bank, shall maintain in India by way of cash reserves or by way of balance in a current account with the RBI.

RBI Control Over Banking Companies:

The RBI may, by order, require any banking company to call a general meeting of the shareholders of the company within such time, not less than two months from the date of order.

Power Of RBI To Control Advances By Banking Companies:

The RBI may determine the policy in relation to advances to be followed by banking companies generally or by any banking company in particular.

Licensing Of Banking Companies: 21 BTL Page 44 of 61

No company shall carry on banking business in India unless it holds a licence issued in that behalf by the RBI and any such licence may be issued subject to such conditions as the RBI may think fit to impose.

Monthly Returns:

Every bank should submit monthly returns to the RBI in the prescribed form and manner showing its assets and liabilities in India. The RBI has the power to call for other returns and information if required.

Accounts And Balance-Sheet:

At the expirations of each calendar year, every banking company incorporated in India shall prepare, a balance-sheet, profit and loss accounts as on the last working day of the year.

Submission Of Returns:

The accounts and balance-sheet together shall be published in the prescribed manner and three copies thereof shall be furnished as returns to the RBI within three months form the end of the period to which they refer.

Inspection:

The RBI had got the power to inspect the books and accounts of a banking company. After the inspections it sends a copy of it to the concerned bank. The inspection by the RBI may be on its own or under the direction of the Central Government.

Directions:

The RBI may from time to time, issue directions as it deems fit, to a banking company in particular or to the banking companies in general and the banking company or companies shall be bound to comply with such directions

Power To Remove Managerial And other Persons From office:

RBI has to powers to remove managerial and other persons from office of the banking companies, whose conduct is to the interest of the deposits and to secure proper management. RBI also appoints additional directors.

Power Of RBI To Impose Penalty:

The RBI has a wide range of powers of supervision and control over commercial and cooperative banks. The RBI control frauds in entire banking industry in India.

14.

Explain the role of Reserve Bank in economic development.

In developed countries, the role of Central Bank is regulatory. But in a developing economy like that of India, the role of Central Bank is developmental or promotional. The Central Bank is to help in the mobilization of required productive resources and in their efficient allocation. It has to bring about economic development with stability. The RBI has been quite active in the maintenance of a proper atmosphere of economic development and mobilization of financial resources for economic development. The RBI has assisted economic development in the following ways1. Checking inflation- the government budgetary operations, owing to increasing size of government expenditure, generate strong inflationary pressures. It is the responsibility of the monetary authority to restrain these pressures 21 BTL Page 45 of 61

by freezing a part of liquidity thus generated. This, the RBI has been able to do through its pivotal tool-rate of interest. It has made use of other methods of credit control as well. Unless inflation is kept in check, all the development plans are in danger of being upset. 2. Providing development finance- the RBI has helped a great deal in setting up of specialized institutions so that the financial facilities are made available. 3. Agricultural credit-The RBI has made available short term, medium term and long term finance to agriculture through the hierarchical network of co-operative banks and societies. In this connection, the RBI set up two funds (a) National Agricultural Credit(long term operations) Fund (b) National Agricultural Credit(stabilization) Fund These fund loans were given to SCBs & RRBs for agricultural credit and during floods and famines. It has also been instrumental in setting up Agricultural Refiance & Developmental Corporation and more recently Export-Import Bank and the NABARD. 4. Industrial finance-The RBI has also organized industrial finance for both big and small industries to secure all types of loans-short term, medium term and long term. It has helped in the creation of (a) Industrial Finance Corporation of India (b) National Small Industries Corporation (c) State Financial Corporations (d) Industrial Development Bank of India. It has also introduced a scheme of guarantee of bank loans to small industry and till the establishment of Export-Import Bank, also provided refiance to banks for export credit 5. Regulatory credit-When there is an expansion of bank credit, it adds to the active demand for goods and services. This tends to start inflationary spiral. Thus it becomes essential for the monetary authority to stem in and restrain the expansion of bank credit in the interest of sound and healthy economic growth. During the last 5 decades, the RBI has tried to regulate(a) cost of credit (b) quantity of credit (c) purpose or use of credit Conclusion-Thus the RBI has helped to broaden and deepen the structure of institutional finance for accelerating development of the country with itself as the central arch of banking and monetary framework of the country.

15. In what way does the Reserve bank exercise control over the commercial banks?

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The RBI acts as supervisor and controller of banks in India. By virtue of the powers conferred on the RBI by the RBI Act, 1934 and the Banking Regulation Act, 1949, the relationship between the RBI and the commercial banks are very close. The RBI has a 3 fold control over the commercial banks (a) as supervisory & controlling authority over banks 1. Each bank in India is required to obtain license from the RBI before conducting banking business-section 22. The RBI is required to conduct an inspection of the books of the banking company and issue a license, if it is satisfied that all or any of the conditions are fulfilled. The provision is intended to ensure the continuance and growth only of banks which are established or are operating on sound lines and to discourage indiscriminate floating of banking companies 2. According to Section 23 of the Act, no banking-company shall open a new place of business in India or change otherwise than within the same city, town or village, the location of an existing place of business situated in India without obtaining the prior permission of the RBI. 3. It has powers to inspect books and accounts of commercial banks-Section 35 The RBI may on its own initiative or at the instance of the Central government, inspect any banking company and its books and accounts. The Central Governemnt may on the basis of this report direct the company to wind up. 4. RBI may remove managerial an other persons from office-Section 36AA-where the RBI is convinced that a banking company is not conducting its affairs in the public interest, or is conducting them in a manner detrimental to the interests of the depositors, or where the RBI is satisfied that for securing the proper management of the banking company it would be necessary to do so, the RBI may after recording the reasons and by order, remove from office, with effect from a specified date, any chairman, director, chief executive director or other such officer or employee. 5. RBI may appoint additional directors of the banking company-Section 36 AB- in the interest of banking policy or in the public interest or in the interests of the banking company or its depositors, the Bank may, from time to time by order in writing, appoint with effect , one or more persons to hold office as directors of the banking company. 6. It may issue directions to commercial banks and may prohibit banks to enter into particular transactions- Section 36 (b) as controller of credit 1. By changing the statutory liquidity rate- Section 24 of the Banking Regulation Act, 1949 requires that every banking company has to maintain cash, gold or approved securities of an amount not less than 25% of its net demand and liabilities at the close of business everyday. This is called statutory liquidity rate and the RBI is empowered to step up the rate upto 40% 2. The RBI controls credit by changing the statutory reserve maintained by the scheduled banks-section 42 of the RBI Act. 3. Controls credit by changing the bank rate and its policy of granting accommodation to commercial banks 4. It controls credit through its credit monitoring arrangement 5. It controls credit by exercising moral influence on the banks. (c) as banker to the baker As banker to the banks, the RBI acts as the lender of last resort and grant accommodation to the scheduled banks in the following forms1. re-discounting or re-purchasing eligible bills 2. grant loans and advances against securities

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Emergency advances-the RBI advances loans when it is satisfied that the loan is necessary for the purpose of regulating credit in the interest of trade, commerce and industry.

16.

Explain the Reserve banks licensing function.

Section 22 of the Banking Regulation Act, 1949 contains a comprehensive system of licensing of banks by RBI. This section makes it essential for every banking company to hold a license issued by the RBI. The RBI is required to conduct an inspection of the books of the banking company and issue a license, if it is satisfied that all or any of the following conditions are fulfilled1. that the company is or will be in a position to pay its present or future depositors in full as their claims accrue 2. that the affairs of the company are not being or not liked to be, conducted in a manner detrimental to the interests of its present or future depositors; and 3. in case of a foreign bank, the carrying on of banking business by such company in India will be in the public interest and that the Government or law of the country in which it is incorporated does not discriminate in any way against banking companies registered in India and that the company complies with all the provisions of the Act applicable to foreign banks. It is clear from the above that the grant of a license depends upon the maintenance of satisfactory financial position. The provision is intended to ensure the continuance and growth only of banks which are established or are operating on sound lines and to discourage indiscriminate floating of banking companies. To ascertain the position, the inspecting officer of the RBI has to make an estimate of the liquid and other readily realizable assets and also to judge whether the assets are enough to meet the claims of the depositors as and when they arise. The assessment about the whole gamut of operations of the banking company and its organizational set-up is necessary to judge the conditions before the license is granted. According to Section 23 of the Act, no banking-company shall open a new place of business in India or change otherwise than within the same city, town or village, the location of an existing place of business situated in India without obtaining the prior permission of the RBI.

17.

Write a short of Regional Rural Banks

The RRBs are relatively new banking institutions which were added to the Indian banking scene since October 1975 to strengthen the institutional rural credit structure. Prior to that, the then existing credit agencies lacked in meeting the needs of rural masses. A committee under the chairmanship of N.Narasimhan suggested the institutions of RRBs as low cost banking for rural areas should be set up to meet their credit needs. Objectives 1) To identify a specific and functional gap in the present institutional structure. 2) To supplement the other institutional structure. 21 BTL Page 48 of 61

3) To fill the gap within a reasonable period of time. Functions 1) To provide financial facility to small and marginal farmers, agricultural labourers, co-operative societies for agricultural purposes or other purposes related to agriculture. To grant loans and advances to artisans, small entrepreneurs, persons of small means engaged in trade, commerce etc.

2)

3) To relieve the rural masses from the clutches of money lenders. 4) To provide easy credit facility to weaker sections of society. 5) To establish branches in unbanked rural areas. 6) To take the banks to the doorsteps of the poorest people in remote rural areas. Sponsorship Each RRB is sponsored by a nationalized bank known as a sponsoring bank which provides all sorts of helps to these RRBs. The sponsoring bank will assist the RRB in its establishment, recruitment and training of personnel. They may also provide managerial and financial assistance with mutual agreement. Capital resources Each RRB may have an authorized capital of Rs. five crore divided into one lakh shares of Rs. 100 each and issued capital of Rs. 1 crore to improve their viability. Management The management of each RRB is vested in nine members Board of Directors, headed by a Chairman. The chairman is appointed by the Central Govt. The chairman is a paid servant of the sponsoring bank while the members are honorary. Conclusion RRBs are playing an important role as an alternative agency to provide institutional credit. According to RBI the RRBs have fared well in achieving the objective of providing access to weaker sections of society.

18.

Write a note on Central Co-operative banks.

A central co-operative bank is a federation of primary credit societies operating in a specified area, usually a district. All types of primary credit societies, rural and urban are affiliated to it. Some co-operative banks have even individual members, besides the affiliated primary credit societies. A central co-operative bank is located at district head-quarters or in some prominent town in the district. The funds of a central co-operative bank consist of share capital, reserve fund, deposits from members and nonmembers and loans from state co-operative banks. Sometimes, loans are taken even from the commercial banks.

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A central co-operative bank is managed by a board of directors constituted by the representatives of the constituent primary credit societies and individuals of business capacity and influence. Functions Of Central Co-operative Banks:

Its main function is to lend primary credit societies It accepts the surplus funds of one primary credit society and makes it available to another primary credit society, and thus acts as a balancing centre between the primary credit societies. It raises loans from the state co-operative banks and lends the same to the primary credit societies, and thus acts as a link between the state co-operative bank and primary credit societies. It raises deposits from members as well as non-members for the purpose of meeting the credit requirements of the primary credit societies. It exercises general supervision and control over the activities of primary credit societies.

Besides the above functions, it also carries on ordinary commercial banking operations, such as the acceptance of deposits, granting of loans, collection of cheques and bills on behalf of the customer, etc.

19.

What are the advantages & disadvantages of unit & branch banking?

Unit Banking In the unit banking system, the banks operations are generally confined to a single office only. It is a corporation that operates from one office and that is not related to other banks through either ownership or control. USA is the birth place of unit banking. Advantages 3. The funds of the locality are utilized for the local development 4. The management and supervision is much easier and effective 5. There are less chances of fraud and irregularities in the management 6. They are in a better position to solve problems as they know the local problems better. 7. There is no possibility of generating monopolistic tendencies 8. There will be no inefficient banks as weak and inefficient banks are automatically eliminated 9. Unit banking is free from the diseconomics and problems of large scale operations. Disadvantages 1. 2. 3. 4. 5. 6. 7. 8. Cut throat competition. Lack the benefits of specialization and division of labour No banking development in backward areas as banking activity is uneconomical and no bank is opened there Limited resources restrict its ability to face financial crises. There is little possibility of distribution and diversification of risks under the localized unit banking system. The interest rates tend to vary at different places as there is no movement of funds from place to place. The transfer of funds is very expensive as there are no branches at other places. There will be high local pressure and interference which disrupt their normal functioning. 21 BTL Page 50 of 61

Branch Banking Under the branch banking system, a bank operates as a single institution under single ownership with branches spread all over the country. Branch banking developed in Great Britain. Examples- SBI, Barclays. Advantages 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Results in the economy of cash reserves Less risk and greater capacity to meet risks There is proper use of capital. Customers get better and greater facilities. Large scale operation with greater applicability of the division of labour. It is easier and cheaper to transfer funds because branches are spread all over the country. Offers a wide scope for the selection of diverse securities and varied investments, so that a higher degree of safety and liquidity can be maintained. Greater diversification of both deposits and assets because of wider geographical coverage. Mobility of funds from one place to another which in turn brings equality in interest rates. Banking can be extended to under developed areas and this helps in the development of backward regions. It is more convenient for Central Bank or the Government to regulate and supervise.

Disadvantages 1. Proper supervision and scrutiny become more difficult 2. Suffers from red-tapism and delays on account of inadequate authority of branch managers and the necessity to take permission from head office 3. Dealings become more impersonal 4. Very expensive. Opening of many branches, establishing and maintenance of the branches result in high expenses and may reduce profits. 5. Creates monopoly and leads to the concentration of resources into a few banks. 6. Losses and weakness of some branches affect the other branches too due to adverse linkage effect. 7. Unhealthy competition among the branches of different banks in big cities. 8. Preferential treatment is given to the branches near the head office.

20.

What are the differences between schedule & non-schedule banks?

Indian Commercial Banks are classified into two types. They are: Scheduled Banks. Non-scheduled Banks.

Private sector

Scheduled Bank: Scheduled Banks are those private sector Indian commercial Banks which are included in the second scheduled to the RBI Act, 1934. Foreign banks also are included in the second schedule to the RBI Act. Non-scheduled Bank: Non-scheduled banks are those banks which are not included in the second schedule of the RBI Act. The nonscheduled banks do not enjoy from the RB all the facilities enjoyed by the Scheduled Banks. Difference Between Scheduled Banks And Non-scheduled Banks: 21 BTL Page 51 of 61

Scheduled banks are included in the second schedule of the RBI Act of 1934. On the other hand, non-scheduled banks are not included in the second schedule of the RBI Act. Scheduled banks satisfy tow important conditions, viz., (i) they have paid-up capital and reserves of Rs. 5 lakh or more and (ii) they satisfy the RBI that their affairs are not being conducted to the interests of the depositors. But non-scheduled banks do not satisfy these conditions. Scheduled banks enjoy certain benefits from the RBI, whereas non-scheduled banks do not enjoy those benefits. Scheduled banks are subject to greater degree of control and more obligations than the non-scheduled banks in their day-to-day operations. The number of scheduled banks is more than that of non-scheduled banks. Scheduled banks are, generally, big, whereas non-scheduled banks are, ordinarily, small. Scheduled banks are spread over a large area of the country, whereas non-scheduled banks are confined to a small area. The share capital and reserves of scheduled banks are more than those of non-scheduled banks. Deposits of scheduled banks are more than those of non-scheduled banks. The advances of scheduled banks are also more than those of non-scheduled banks.

Scheduled banks are more important that non-scheduled banks

21. What are the rights of a banker against surety?What are the precautions to be taken by the banker?
Rights of banker against surety 1. Right of lien-the banker can exercise his right of lien on the balance of the account of the guarantor in his possession notwithstanding the fact that his claim under the guarantee is time-barred. Right to exercise a general lien does not arise until a default has been ade by the principal debtor, in which case the banker should immediately inform the guarantor that the former has exercised his lien on the latters money or securities deposited with him. 2. Suretys liability is co-extensive with that of the principle debtor-according to Section 128 of the Indian Contract Act, the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided for by the contract of guarantee. 3. Bankers claim against a bankrupt suretys estate-in the event of the bankruptcy of the surety, the banker is entitled to prove his claim against the estate of the surety. When the banker hears of the death or bankruptcy of the surety he should close the account guaranteed by the surety and if the principal debtor makes a default in the payment of the amount, the banker should at once claim the amount from the legal representative of the deceased or from the Official Receiver of the bankrupt surety. Precautions 1. Advisability of getting the contract of guarantee signed in the bank managers presence-usually bankers require the guarantors to execute the guarantee in the bank managers presence. It is not advisable to allow the customer to take the guarantee form away and himself obtain the signature of the guarantor thereto. This si because, firstly, the guarantors signature may turn out to be a forgery or he may later on allege that he signed in ignorance of the nature of the document and secondly, the guarantor when called upon to discharge his obligation, may put forth the plea that he signed under a misrepresentation. 2.Notice of principal debtors death- the notice of the death of a customer puts an end to his account and consequently te guarantee automatically terminates. The banker should make a formal demand upon the guarantor for repayment of the amount unless it is paid by those in charge of the estate of the deceased. 3.Notice of debtors bankruptcy-a banker should stop the operation on a guaranteed account as soon as he receives notice, actual or constructive, f his debtors bankruptcy. In such a case, the banker should also demand the repayment 21 BTL Page 52 of 61

of the amount due by the surety. The banker need not first resort to the sale of the securities held by him in the account. 4.Notice of lunacy of the debtor or surety-a banker on receipt of reliable notice of the lunacy of the principal debtor or surety should close the account. The lunacy of a surety is to be taken as terminating the guarantee so far as future advances are concerned. Consequently, any advance made by the banker after receipt of the notice of lunacy of his customer is not recoverable from the estate of the lunatic despite the fact that the contract of guarantee may provide for a months notice from the surety for the termination of the guarantee. 5.Change in the condition of the bank-unless it is provided in the contract of guarantee that changes in the constitution of a bank will not affect the guarantee, it will terminate in case the bank having the guarantee in amalgamated with or absorbed by another bank. The guarantee should provide for such contingencies.

22.

Explain the concepts of guarantee & indemnity

Guarantee A guarantee is the most common form of security taken by the bankers to ensure safety of the funds lent. Section 126 of the ICA defines a contract of guarantee as a contract to perform the promises or discharge the liability of a third person in case of his default. Ex: A wanting a loan of Rs.500 induces B to promise C to repay the loan in case of As default. This is a contract of guarantee. It will be seen that there are 3 parties to this contract- A the principal debtor, B the surety and C the creditor. A contract of guarantee is thus a secondary contract the principal contract being between the principal debtor and the creditor himself. The liability of the surety therefore arises only if the principal contract is not fulfilled. Kinds of guarantee 1) Specific guarantee- guarantee given for a single debt is called a specific guarantee and is discharged on repayment of the particular debt it was given to secure. Continuing guarantee- a guarantee extending to series of distinct and separable transactions is said to be continuing guarantee. It can be revoked by the surety at any time.

2)

3) Joint and several guarantee- where two or more persons join in executing a guarantee, their liability may be joint or several or joint and several. In a J and S guarantee each co-guarantor is jointly and severally liable for the debt. 4) Limited guarantee- in limited guarantee, the guarantees have some clauses which either restrict the liability of the guarantor or limit the scope.

Indemnity Contracts of indemnity appear to be analogous to contracts of guarantee. Section 124 defines a contract of indemnity as a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person.

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Ex: A contracts to indemnify B against all the consequences of any proceedings which C may initiate against B. this is a contract of indemnity.

23. What are the precautions to be taken by the banker in the case of hypothecation?
Precautions1. Stocks should be fully insured against fire, theft and other risks 2. The baker must periodically inspect the hypothecated goods and the account books of the borrower should be checked to ascertain the position of stocks under hypothecation 3. The borrower should be asked to submit a statement of stocks periodically giving current position about the stocks and its valuation and declaration that the borrower possesses clear title or person. 4. An undertaking should be obtained from the borrower that he shall not charge the same goods to other bank or person.

5. The banker should also ensure that the borrower is not enjoying similar hypothecation facilities on the same stocks from some other bank. 6. During inspection, if the banker finds that the financial position is weak, it is advisable to get the personal guarantees of directors/officers to strengthen the charge. While granting loans against hypothecation, the banker should obtain a letter of hypothecation containing several clauses to protect his interest. Character, capacity and capital must be thoroughly verified before granting loans on the basis of hypothecation. This facility should be given to genuine and financially sound parties. A name plate of the bank, mentioning that the stocks are hypothecated to it, must be displaced at a prominent place of the hypothecated goods for public notice to avoid the risk of a second charge being created on the same stock.

7.

8.

9.

10. The banker should get the charge registered under Section 125 of the Companies Act, if borrower happens to be a joint stock company.

Section 58(a) of Transfer of Property Act,1882-The transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt or the performances of an engagement which may give rise to pecuniary liability. Transferor- mortgagor Transferee-mortgagee Instrument-mortgage deed 21 BTL Page 54 of 61

Characteristics1. 2. 3. 4. 5. 6. 7. 8. the interest to be transferred is always with respect to a specific property a mortgage implies transfer of interest in a specific immovable property. It does not mean transfer of ownership. if there is more than one owner of an immovable property, each co-owner can mortgage his share the object of mortgaging the property is to give security for the loan to be taken or already taken for performance of an engagement giving rise to pecuniary liability. the mortgage need not always be given the actual possession of the property on repayment of the loan together with interest, the interest in specific immovable property is recovered to the mortgagor in the evnt of non-payment of the loan, the mortgagee has a right to sell the mortgaged property trough the intervention of the Court. an agreement in writing between the mortgagor and the mortgagee is essential for creating a mortgage. The mortgage deed should contain all safety clauses.

Kinds 1. Simple mortgage- in simple mortgage the borrower binds himself personally to pay the mortgage money without giving possession of property. He agrees to pay according to his contract and also gives the banker the right ot sell and adjust the sale proceeds to the mortgage money. But court intervention is necessary for selling the mortgage property. 2. Mortgage by conditional sale-in this mortgage the borrower sells the mortgaged property on the condition that: (a) on default of payment of the mortgage on a certain date the sale shall become absolute (b) on such payment being made the sale shall become void (c) on such payment being made the buyer shall transfer the property to the seller 3. Usufructuary mortgage-in this mortgage the mortgagee gets the possession of the property (physical possession not necessary) and is entitled to recover the rents and profits relating to the property till the loans are repaid. He can also appropriate such rents or profits to interest or payment of mortgage money and partly interest and partly in payment of the mortgage money. 4. English mortgage-the mortgagor makes a personal promise to repay money on a certain due date. Mortgagee is entitled to immediate possession and to retain possession until the money is repaid. The transfer is absolute with all interests and seeking the permission of the Court. 5. Mortgage by deposit of title deeds or equitable mortgage-where a person delivers to a creditor or his agent documents of title to immovable property with the intention to create a security thereon, the transaction is called a mortgage by deposit of title deeds. This mortgage does not require registration. Anamolous mortgage-a mortgage other than any of the mortgages explained above is a anamolous mortgage. Such a mortgage includes a mortgage formed by combination of two or more types of mortgage. It takes various forms based on custom, local usage or contract.

24.

What are the differences between lien & hypothecation?

Lien Hypothecation 1.Possession of securities is transferred to Neither ownership nor possession is the banker transferred to the creditor. Only an equitable charge is created in favour of the creditor. 21 BTL Page 55 of 61

2. No such agreement

3. The borrower holds possession of goods as owner and not as an agent of the bank 4. There is no such constructive possession even of the banker 5. To take possession of the property under lien by way of security directly the baker has to move the Court 6. Lien also creates a charge but it is not so convenient to proceed as in case of hypothecation

The borrower binds himself under an agreement to give possession of the goods hypothecated to the banker whenever the banker requires the borrower to do so The borrower holds possession of the goods not in his own right as the owner of the goods but as an agent of the bank The banker has constructive possession over the hypothecated goods It is essential for the bank to take possession of the hypothecated goods by itself directly. It is convenient device to create a charge over the movable property when transfer of its possession is inconvenient or impracticable

25. What are the differences between hypothecation & pledge?

Hypothecation 1. the possession of the movable property is retained by the owner and certain right in that property are transferred to the person in whose favour the property is hypothecated 2. since the possession of the goods remains with the owner, the hypothecate cannot have the right of lien. He may sell the property in default

Pledge There is delivery of goods from one person to another as security for payment of debt or performance of a promise.

Since the pledge has got the possession of the goods, in the event of default by the pawnor, apart from other rights, the pledge has a right of lien over the goods

1. if an agreement empowers the hypothecate to take possession of the goods and then sell the same in case of default of payment, he can proceed in accordance with the agreement to sell the goods, without intervention of the Court.

26.

Write a note of secured & unsecured loans

Loan is a contract by which property or money is transferred by a lender to a borrower on the promise of the borrower to return the property, or its exact equivalent, at a stated time or on demand.

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The loans and advances granted by banks are broadly classified into 1) Secured advances 2) Unsecured advances

Definition According to section 5(a) of the Banking Regulation Act, 1949, 'a secured loan or advance' means a loan or advance' made on the security of assets, the Market value of which is not at any time less than the amount of such loan or advance; and 'unsecured loan or advance' means a loan or advance' not so secured.

Secured advances The distinguishing features of a secured loan or advance are as follows1) The loan must be made on the security of tangible assets like goods and commodities, lands and buildings, hold and silver, corporate and government securities etc. A charge on any such assets offered as security must be created in favour of the banker. 2) The Market value of such security must not be less than the amount of the loan at anytime till the loan is repaid. If the former falls below the latter, the loan is considered as partly secured.

Unsecured advances They are also called clean loans or advances. The characteristics of unsecured advances are 1) UAs are made on the goodwill and reputation of the customer. 2) They are generally made by way of overdraft facilities. 3) Unsecured advances are made at the discretion of the concerned bank manager himself. 4) Grant of loans depend on the credit worthiness of the borrowers. Such creditworthiness depends on- 1) character 2) capacity 3) capital

What is overdaraft?
Overdraft means allowing the customer to overdraw his account. It is allowed only to current account holders. But some banks allow casual overdraft in savings accounts of Government servants, etc. An overdraft is a running account wherein thy balance goes on fluctuating from debit to credit or vice versa.

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Under an overdraft arrangement, a customer is allowed to draw cheques upto an agreed limit over and above the credit balance in the account. Benefits-The bank provides overdraft facility to its customers to earn interest, and its customers enjoy the overdraft facility in order to develop their business. The overdraft facility is ideal to cover short term requirements. The interest on overdraft is calculated on the amount actually utilized by the debtor-customer at regular intervals and hence it is cheaper than the other loans. There is no restriction on operations in the account and withdrawals and deposits may be upto any number of times. Bankers obligation.-If a bank has agreed to give an overdraft, it cannot refuse to honour cheques or draft within the limit of that overdraft which have been drawn and put in circulation. If the banker refuses any cheque it becomes wrongful dishonor and he will be liable for damages. Customers obligation-where a customer even without any express grant of an overdraft facility, overdraws on his account and the cheques issued by him are honoured, without there being sufficient balance in the account, the transaction amounts to a loan and the customer is bound pay reasonable interest-Bank of Maharashtra v United Construction Co & Ors. Procedure-It is safe course for the banks that they should obtain a letter and a promissory note from the customer in which terms and conditions of the facility including the rate of interest chargeable on the overdraft is given. But written transactions are not necessary all the time. Time period-The period of overdraft is 7 years at maximum. But in practice, the banker grants an overdraft for one year, and renews it every year. Overdraft agreement is a contract-Overdraft arrangement between bank and its customer is a contract and it cannot be terminated by the bank unilaterally even if it is a temporary one.-Indian Overseas Bank, Madras v Narayanprasad Patel Categories2. Secured overdraft- when a party is allowed regular limits against some tangible security, it is known as secured overdraft. Clean overdraft-Overdrafts which are not backed up by any security are called clean or temporary overdrafts. Clean overdrafts are allowed purely on the personal credit of the party. They are allowed for small amounts to meet the partys sudden requirements.

3.

27.

Write a note on fixed deposits

The relation between a banker and his customer begins with the opening of an account by the former in the name of the latter. Initially the accounts are opened with a deposit of money by the customer and hence these accounts are called deposit accounts. Deposits are broadly divided into two kinds- 1) payable on demand (demand deposit) and 2) payable after certain time (time deposit). Demand deposits are- savings and current account. Time deposits are- fixed deposit and recurring deposit.

Fixed account

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The term fixed deposits means deposits repayable after the expiry of a certain period, which ordinarily varies from three months to five years. The fixing of the period enables the banker to invest money or employ it in business without having to keep a reserve and hence are very popular with the bankers. Rate of interest- the banker offers higher rates of interest on fixed deposits as the depositor parts with liquidity for a definite period. The longer the period, the higher will be the rate of interest. FD for senior citizens- RBI has permitted the banks to formulate FD schemes specially meant for senior citizens on which they offer higher and fixed rates of interest. Opening and operation- to open an account the depositor is required to fill in an application form wherin he mentions the amount of the deposit and the period for which the deposit is to be made. He also gives his specimen signature. A fixed deposit receipt is thereafter issued to the depositor acknowledging the same. FD in joint names- FDs can be opened in joint names of two or more persons payable to either or survivor in accordance with the terms of the receipt. The problems faced by the banker before date of maturity are 1) Request for premature repayment by one of the depositor 2) Loan against FDR by one of the depositor 3) Request for duplicate receipt by one of the depositor In all these cases the banker should obtain consent of other depositor/s. Payment before due date- though a FD is payable after expiry of fixed period, banks permit encashment even before due date. In such a case certain interest will be charged for the same. According to the RBI directive banks should not charge the penalty in case of premature withdrawal for immediate reinvestment in another FD for a longer term than the remaining period of the original contract. Overdue deposits- if the receipt is not encashed on the date of maturity, the interest ceases to run from that date. The banks allow interest as per RBI directives, if it is renewed.

28.

Write a note on current account

A current account is a running and active account which may be operated any number of times during a working day. There is no restriction on the number and amount of withdrawals from a current account. As the banker is under an obligation to repay these deposits on demand, they are called deemed liabilities or deemed deposits. To meet the requirement of the current account the banker keeps sufficient reserves against such deposits vis--vis the savings and the fixed deposits. Current accounts suit the requirements of big businessman, joint stock companies, institutions, public authorities, corporations etc. whose banking transactions happen to be numerous per day. Cheque facility is available for the depositors. Bankers obligation- by taking RDs the banker undertakes to honour his customers cheques as long as his account is in credit. The banker may have to suffer loss if he pays a forged cheque, or a cheque contrary to the instructions of his customer (s 129, NI Act). Privileges- a current account carries certain privileges which are not given to other account holders 1) Third party cheques and cheques with endorsements may be deposited in the current account for collection and credit. 21 BTL Page 59 of 61

2) Overdraft facilities are given in case of current accounts only. 3) The loans and advances granted by banks to their customers are not given in the form of cash but through the current accounts. Current accounts thus earn interest on all types of advances granted by the banker.

Interest- normally no interest is paid on current accounts. Rather, the depositors have to pay certain incidental charges to the bank for services rendered by it. Sometimes customers are required to maintain a minimum balance failing which bank charges some commission half yearly thus helping them to earn something on minimum balance kept.

29.

Write a note on savings bank account

Savings accounts are maintained for encouraging savings of households. It is useful to save a part of the current income to meet future needs and also to earn higher incomes from savings. The main characteristics of savings account areRestriction on withdrawals- in pursuance of the objective of savings bank accounts, the banks impose certain restriction on the right of depositor to withdraw money within a given period. The number of withdrawals over a period of six months is limited to 50. A depositor cannot withdraw by withdrawal form a sum smaller than Re 1. The minimum amount of a cheque is Re 5. Restriction on deposits- the customer may deposit any amount in the savings bank account subject to a minimum of Re 5. The banks do not accept cheques or other instruments payable to a third party for the purpose of deposit in the savings account. Minimum balance- banks prescribe the minimum balance that is to be maintained in the SB accounts. For this purpose they take into consideration the cost involved in maintaining and servicing such accounts. Levy specific charges if the minimum balance is not maintained. Payment of interest- the rate of interest payable by the banks on deposits maintained in savings accounts is prescribed by the RBI. Interest is calculated at quarterly or longer rests of period. Cheques- cheque facility is provided to the depositors subject to the condition that he will keep a minimum balance with the bank according to the rules of the bank. Only cheques payable to the customers having SB accounts are collected. Prohibition on savings account- the RBI has prohibited the banks to open a savings account in the name of 1) Trading or business concern, proprietary or partnership. 2) A company or an association. 3) Government departments. 4) Bodies depending upon budgetary allocations for performance of their functions. 5) Municipal corporations/committees. 6) Panchayat samitis. 7) State housing boards.

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30.

Write a note on recurring account.

The banks have in recent years started various daily, weekly, or monthly deposit schemes in order to inculcate the habit of savings on a regular or recurring basis. Generally money in these accounts is deposited in monthly installments for a fixed period and repaid to the depositors along with interest on maturity. These are called as recurring deposits. A depositor opening a RD account is required to deposit an amount chosen by him, generally a multiple of Re 5 or 10, in his account every month for a period selected by him. The period of recurring deposit varies from bank to bank. Generally banks open such accounts ranging from one to ten years. Opening and functioning of account- the RD account can be opened by any person, more than one person jointly or severally, by a guardian in the name of a minor and even by a minor. While opening the account, the depositor is given a pass book which is to be presented to the bank at the time of monthly deposits and repayment of amount. Installments for each month should be paid before the last working day of that month. Accumulated amount with interest will be payable after a month of the payment of the last installment. Rate of interest- the rate of interest on RD stands favourably as compared to the rate of interest on savings bank accounts. According to the directive of the RBI, the interest provided by banks on RD must be in accord with the rates prescribed for various term deposits. The rate of interest is therefore almost equal to that of fixed deposits.

6. Explain the legal significance of FDRs. 8. Give a specimen of a cheque and explain its components.

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