Unit -1
Definition
of Banker and Customer – Relationship banker and customer – Special features of
RBI, Banking Regulation Act 1949 – RBI Credit Control Measure – Secrecy of
customer Account.
Introduction
to Banker and Customer
The
relationship between a banker and a customer depends on the activities;
products or services provided by bank to its customers or availed by the
customer. Thus the relationship between a banker and customer is the
transactional relationship. Bank’s business depends much on the strong bondage
with the customer. “Trust” plays an important role in building healthy
relationship between a banker and customer.
Who is Banker ?
The
term banking may define as accepting of deposit of money from the public for
the purpose of lending or investing investment of that money which are
repayable on demand or otherwise and with a draw by cheque, draft or order.
Who is Customer?
A
person who has a bank account in his name and for whom the banker undertakes to
provide the facilities as a banker is considered to be a customer.
Definition for Banker
In 1899, the United
States Supreme Court (Austen) used these words:
"A
banker ... is a trader who buys money, or money and debts, by creating other
debts, which he does with his credit - exchanging for a debt payable in the
future one payable on demand.
"The
first business of a banker is not to lend money to others, but to collect money
from others.
"A
banker (is) a dealer in capital, or, more properly, a dealer in money. He is an
intermediate party between the borrower and the lender. He borrows of one party
and lends to another."
Definition of a Customer:
There is no statutory
definition of a customer, but banks appear to rely upon to recognize a
customer:
For a person to be known as a customer of the
bank there must be either a current account or any sort of deposit account like
saving, term deposit, recurring deposit, a loan account or some similar
relation.
Banker-Customer
Relationship:
Banking is a trust-based
relationship. There are numerous kinds of relationship between the bank and the
customer. The relationship between a banker and a customer depends on the type
of transaction. Thus the relationship is based on contract, and on certain
terms and conditions.
General Relationship:
1. Debtor-Creditor:
When a 'customer' opens an account with a bank, he fills in and signs the
account opening form. By signing the form he enters into an agreement/contract
with the bank. When customer deposits money in his account the bank becomes a
debtor of the customer and customer a creditor. The money so deposited by
customer becomes bank’s property and bank has a right to use the money as it
likes. The bank is not bound to inform the depositor the manner of utilization
of funds deposited by him. Bank does not give any security to the depositor
i.e. debtor. The bank has borrowed money and it is only when the depositor
demands, banker pays. Bank’s position is quite different from normal debtors.
2. Creditor–Debtor: Lending
money is the most important activities of a bank. The resources mobilized by
banks are utilized for lending operations. Customer who borrows money from bank
owns money to the bank. In the case of any loan/advances account, the banker is
the creditor and the customer is the debtor. The relationship in the first case
when a person deposits money with the bank reverses when he borrows money from
the bank. Borrower executes documents and offer security to the bank before
utilizing the credit facility.
Special Relationship:
1. Bank as a Trustee:
As per Sec. 15 of the ‘Indian Trust Act,
1882 ‘A trustee is bound to deal with the trust-property as carefully as a
man of ordinary prudence would deal with such property if it were his own; and,
in the absence of a contract to the contrary, a trustee so dealing is not
responsible for the loss, destruction or deterioration of the trust-property.’
A trustee has the right to reimbursement of expenses (Sec.32 of Indian Trust
Act.).
2. Bailee – Bailor:
Sec.148 of Indian Contract Act, 1872, defines
"Bailment" "bailor" and "bailee". A
"bailment" is the delivery of goods by one person to another for some
purpose, upon a contract that they shall, when the purpose is accomplished, be
returned or otherwise disposed of according to the directions of the person
delivering them.
The person delivering the
goods is called the "bailor". The person to whom they are delivered
is called, the "bailee".
3. Lessor and Lessee:
Sec.105 of ‘Transfer of property Act 1882’ defines
lease, Lessor, lessee, premium and rent. As per the section “A lease of
immovable property is a transfer of a right to enjoy such property, made for a
certain time, express or implied, or in perpetuity, in consideration of a price
paid or promised, or of money, a share of crops, service or any other thing of
value, to be rendered periodically or on specified occasions to the transferor
by the transferee, who accepts the transfer on such terms.”
Definition
of Lessor, lessee, premium and rent:
(1)The
transferor is called the lessor,
(2)The
transferee is called the lessee,
(3)The
price is called the premium, and
(4)The
money, share, service or other thing to be so rendered is called the rent.”
The relationship between the bank and
the customer is that of lessor and lessee. Banks lease (hire lockers to their
customers) their immovable property to the customer and give them the right to
enjoy such property during the specified period i.e. during the office/ banking
hours and charge rentals. Bank has the right to break-open the locker in case
the locker holder defaults in payment of rent. Banks do not assume any
liability or responsibility in case of any damage to the contents kept in the
locker. Banks do not insure the contents kept in the lockers by customers.
4.
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”.
Thus an agent is a person, who acts
for and on behalf of the principal and under the latter’s express or implied
authority and the acts done within such authority are binding on his principal
and, the principal is liable to the party for the acts of the agent.
Banks collect cheques, bills, and
makes payment to various authorities viz., rent, telephone bills, insurance
premium etc., on behalf of customers. . Banks also abides by the standing
instructions given by its customers. In all such cases bank acts as an agent of
its customer, and charges for these services. As per Indian contract Act agent
is entitled to charges. No charges are levied in collection of local cheques
through clearing house. Charges are levied in only when the cheque is returned
in the clearinghouse.
5.
As a Custodian: A custodian is a person who acts as
a caretaker of something. Banks take legal responsibility for a customer’s
securities. While opening a demat account bank becomes a custodian.
6.
As a Guarantor: Banks give guarantee on behalf of
their customers and enter in to their shoes. Guarantee is a contingent
contract. As per sec 31,of Indian contract Act guarantee is a " contingent
contract ". Contingent contract is a contract to do or not to do
something, if some event, collateral to such contract, does or does not happen.
About
RBI
Reserve Bank of India (RBI) is
India’s central bank. It controls the monetary policy concerning the national
currency, the Indian rupee. The basic functions of the RBI are the issuance of
currency, to sustain monetary stability in India, to operate the currency, and
maintain the country’s credit system.
What
is RBI?
RBI is an institution of national
importance and the pillar of the surging Indian economy. It is a member of the
International Monetary Fund (IMF).
·
The concept of Reserve
Bank of India was based on the strategies formulated by Dr. Ambedkar in his
book named “The Problem of the Rupee – Its origin and its solution”.
·
This central banking
institution was established based on the suggestions of the “Royal Commission
on Indian Currency & Finance” in 1926. This commission was also known as
Hilton Young Commission.
·
In 1949, the Reserve Bank
of India was nationalized and became a member bank of the Asian Clearing Union.
·
RBI regulates the credit
and currency system in India.
·
The chief objectives of
the RBI are to sustain the confidence of the public in the system, protect the
interests of the depositors, and offer cost-effective banking services like
cooperative banking and commercial banking to the people.
Objectives
of the RBI
The primary goals of the RBI
according to the Preamble of the same are as follows.
·
To regulate the issue of
Banknotes.
·
To secure monetary
stability in the country.
·
To meet the economic
challenges by modernising the monetary policy framework.
·
The primary focus of the
RBI is to supervise and undertake initiatives on behalf of the financial sector
which consists of financial institutions, commercial banks, non-banking
financial companies. A few critical efforts of the RBI are to restructure bank
inspections and fortifying the role of statutory auditors in the banking
system.
Functions
of the RBI
The following are the functions of
the Reserve Bank of India under various authorities.
Supervisory
and Regulatory Authority
·
To set specific
parameters for the banks in the country. This would include financial
operations within which the banking and financial systems are to function.
·
To protect the interests
of every investor and offer economic and cost-efficient banking services to the
public.
Monetary
Authority
·
To formulate and
implement the monetary policies of the country.
·
To maintain stability in
the prices across all the sectors along with the objective of growth.
·
Currency Authority
·
To issue, exchange or
destroy currency that is not fit for circulation.
·
To provide adequate
currency notes and coins of the standard quality to the public.
Foreign
Exchange Management
·
To oversee the Foreign
Exchange Management Act, 1999.
·
To facilitate the
external trade and development of the foreign exchange market in the country.
Other
Functions
·
To promote and perform
promotional functions to support national banking and other financial
objectives.
·
To offer banking
solutions to the Central and State Governments.
·
To act as a banker for
the Central and State Governments.
·
To be the Chief Banker to
every bank across the country and maintain all the banking accounts of every
scheduled bank.
Banking
Regulation Act, 1949
Introduction
Banking Regulation Act, 1949 is an
Act that provides a framework for regulating the banks of India. The Act came
into force on 16th March 1949. This Act gives RBI the power to control the
behaviour of banks. This Act was passed as Banking Companies Act, 1949. It did
not apply to Jammu and Kashmir until 1956. This Act monitors the day-to-day
operations of the bank. Under this Act, the RBI can licence banks, put
regulation over shareholding and voting rights of shareholders, look over the
appointment of the boards and management, and lay down the instructions for
audits. RBI also plays a role in mergers and liquidation.
Objectives
of the Banking Regulation Act, 1949
The
objectives of the Banking Regulation Act are stated below:
·
To meet the demand of the
depositors and provide them security and guarantee.
·
To provide provisions
that can regulate the business of banking.
·
To regulate the opening
of branches and changing of locations of existing branches.
·
To prescribe minimum
requirements for the capital of banks.
·
To balance the
development of banking institutions.
Features
of the Banking Regulation Act, 1949
The
Act has been divided into five parts comprising 56 sections.
The
main features of the Act are mentioned below:
·
Non-banking companies are
forbidden to receive money deposits that are payable on demand.
·
Non-banking risks are
reduced by prohibiting trading by banking companies.
·
Maintaining minimum
capital standards.
·
Regulation on the
acquisition of shares of banking companies.
·
Power of the Central
Government to make schemes for the banks.
·
Provisions regarding
liquidation proceedings for banking companies.
Important
provisions of the Banking Regulation Act, 1949
Some
important provisions of the Act are stated below:
Business
which can be undertaken by the banking companies
Under Section 6(1), a banking company
may be involved in the business of borrowing or lending money; buying or
selling bills of exchange, promissory notes, coupons, drafts, bills of lading,
railway receipts, warrants, debentures; buying or selling of foreign exchange;
dealing stock, funds, shares, debentures, bonds; carrying on agency business
such as clearing and forwarding of goods; conducting the business of guarantee
and indemnity, etc.
Prohibition
of trading
Trading is prohibited under Section 8
of this Act.
No banking company shall directly or
indirectly deal in the buying or selling, or bartering of goods except when it
is selling the goods kept in its security. The bank should also not engage in
any trade or buy, sell or barter goods except for bills of exchange received
due to collection or negotiation.
Management
of bank
The bank should not employ or be
employed by the managing partner as stated under Section 10 of the Act. The
bank should also not employ a person who has been adjudicated insolvent or
whose remunerations depend on the profits of the company. At least 51% of the
total members of the board must have professional experience in matters such as
accountancy, agriculture, rural economy, banking, cooperation, economics,
finance, law, small-scale industry, etc. The term of the office of the director
should not be more than eight years.
Limitations
on nature of subsidiary companies
A banking company should not form a
subsidiary company unless the formed company is for an undertaking of a
business or written permission was obtained from the Reserve Bank of India. The
banking company can hold shares of an amount of more than thirty percent of the
paid-up share capital of the company or its own paid-up capital.
Licensing
of banking companies
No banking company can carry out
business in India unless it has obtained a license from the RBI. RBI can hold
the inspection of books before granting the license. RBI can also cancel the
license if the company stops carrying on banking business in India.
Opening
of new and transfer of existing branches
Every banking company must obtain the
permission of RBI before opening a new branch or transferring the existing
branch to a different city, town, or state. No banking company incorporated in
India shall open a new branch outside India without the prior permission of
RBI. However, a new branch can be opened for a temporary period not exceeding
one month.
Accounts
and balance-sheet
The banking companies shall prepare a
balance sheet and profit and loss account on the last working day.
Inspection
RBI can cause the inspection of the
banking company and must state its report to the company. The directors of the
banking company must submit all books, accounts, or documents for inspection.
CREDIT
CONTROL METHODS OF RBI
It is one of the important function
of RBI for controlling supply of money or credit. There are 2 types of methods
employed by the RBI to control credit creation:
Quantitative method
Qualitative method
Quantitative
method:
Bank
rate: It is the rate of interest at which
central bank lends funds to commercial banks. During excess demand or
inflationary gap, central bank increases bank rate. Borrowings become costly
and commercial banks borrow less from central bank. During deflationary gap
central bank decreases the bank rate. It is cheap to borrow from the central
bank or the part of the commercial banks which in turn the Commercial banks
also decreases their lending rates.
Open
market operations: The open market
operations means buying and selling of bonds and shares by RBI is open market.
It is also called buying and selling of government security by the central bank
from the public and commercial banks.
Sale
of securities
At the time of inflation the RBI
starts selling of government securities in the market. The resources of
commercial bank are reduced and they are not in a position to lend more to the
business community. This reduces the investment and aggregate demand.
Purchase
of securities
At the time of deflation the RBI
starts buying securities from open market. The reserves of commercial banks are
raised and they lend more investment, output income and aggregate demand starts
rising.
Legal
Reserve Requirement: It is another method of
RBI for controlling credit or supply of money. It includes 2 types of methods
such as:
Cash
Reserve Ratio (CRR): It is the ratio of bank
deposits that commercial bank has to keep with the central bank. At the time of
inflation the RBI increases the rate of CRR, similarly at the time of deflation
RBI decreases the rate of CRR.
Statutory
Liquidity Ratio (SLR): Every bank required to
maintain a fixed percentage of its assets in the form of cash or other liquid
assets called SLR. At the time of inflation the RBI increases the SLR,
similarly at the time of deflation RBI decreases the rate of SLR.
Qualitative
method:
Margin
requirements: It is the difference between the
market value of loan and the security value of loan. At the time of inflation,
the margin requirement value decreases by RBI for discouraging people and
commercial banks for approaching more and more amount of loan. On the other
hand, at the time of deflation the RBI increases the value of margin just to
encourage issuing of more amount of loan to the commercial banks and general
public.
Moral
suasion: It refers to written or oral advices
given by central bank to commercial banks to restrict or expand credit.
Direct
Action: Sometimes the RBI directly takes action
against the commercial banks. It takes action to such type of commercial banks
who are not following the rules regulation of RBI. It cancels their
registration or nationalization of commercial banks.
Rationing
of credit: It is the related to limiting the amount
of credit, which is issued by all the commercial banks. RBI fixes the size of
issuing the credit according to the requirement of the country.
Secrecy
of Customer Account
Secrecy is required in the matter of
Banker- Customer relationship. Secrecy of customer accounts is an obligation on
the banks, although it wasn’t recognised till 1924. Banks have to be careful
about the fact that account details of one customer shall not be disclosed to a
third party [Gangaram Infotech v. Dena Bank (2002) 2 BC 726 (Kar)]. There is a
great possibility that disclosure of matters related to the customer’s
financial position may cause considerable harm to his credit and business.
Thus, it is required that the banker must not disclose the condition of
customer’s accounts except on reasonable and proper occasions and the
obligation to observe secrecy does not end even with the closing of the
customer’s account in the respective banks.
The question that pops up now is that
what is to be regarded as a reasonable and proper occasion? Compulsion by law
to disclose the information can be one of such occasions. A banker is under
obligation to disclose particulars of his customer’s account when it is
compelled by the court to do so. There are various other provisions in various
statutes such as Section 131 of Income Tax Act, 1961; Section 37 of the Wealth Tax
Act, 1957; Section 94 of the Code of Criminal Procedure; Section 4 of the
Banker’s Book Evidence Act, 1891 etc. which provide for similar powers as are
vested in a Civil Court when trying a suit in respect of (a) discovery and
inspection, (b) enforcing the attendance of any person including any officer of
a bank and examining him on oath, (c) compelling the production of books of
account and other documents, and (d) issuing commissions.
There are many other exceptions to
the banker’s obligation of secrecy. Firstly, in cases where the customer has
given his banker as a reference. In such cases the banker will be fully
justified to answer all trade references invited by the customers. Secondly,
when an overdraft is guaranteed, the guarantor has the right to be informed of
the extent of his liability and the banker is justified in disclosing to him
the condition of the customer’s account so far as it is necessary for this
purpose. Thirdly, a banker will not make himself liable for any slander or
libel, if he divulges the state of his customer’s accounts when he is under a
public duty to disclose, in case of danger of treason to the state. Lastly,
when the protection of the banker’s own interests legally requires it, he will
not make himself liable by disclosing the state of his customer’s account.
Even though secrecy is one of the
major duties of the banks nowadays and one could not think of transacting with
any bank in case of its absence, this obligation of a banker to maintain the
secrecy of information of his customer was not recognized until the Tourneir v.
National Provincial and Union Bank of England [(1924) 1 KB 461] took place in
1924. Until then, there was no conclusive or effective judgement on the
question of
Unit-II
Bank Pass book – Collecting Banker –
Banker Lien. Opening of account -Special types of customer – types of deposit
Meaning
of Pass Book
Pass
Book is a record of transactions taken place between a banker and customer. It
is called “Pass Book” as it passes between the banker and customer, whenever
transactions are taking place. It is a conclusive evidence of banking
transactions.
Customer
depends on the Pass Book entries to know his account balance and act for
further transactions. Customer should
bring the Pass Book to the bank at time of each transaction. Banker will update
the Pass Book, by entering the transaction taken place.
Customer
has a right to point out the mistake in the Pass Book at any time. According to
Sir John Paget “The proper functioning of a Pass Book is to constitute a
conclusive and unquestionable record of transactions between the banker and the
customer and it should be recognized as such”.
Contents
of a Bank Pass Book
The First Page of a bank pass book
usually contains two fold information:
• Details of the bank, issuing Pass Book
• Details of the Account Holder
Details
of Bank
• Name of
the Bank
• Name of
the issuing branch
• Address
of the issuing branch
•
Telephone No of the issuing branch
• Email
ID of the issuing branch
• IFSC
code of the issuing branch
• MICR
code of the issuing branch (Stands for Magnetic Ink Character Recognition
- Enables Collection of Cheques)
• IFSC
– Stands for Indian Financial System Code, which enables money transfer from
one bank to another
Details
of Customer
• Name of
the Account Holder
• Address
of the Account Holder
• Photo
of the Account Holder
•
Customer ID of Account Holder
• Account
No of the Account Holder
• Date of
opening of account
• Name of
the Nominee, if any
•
Nomination registration details
From next page onwards, the details of transaction are
recorded. The format of a bank Pass Book, will enable us to understand Pass
Book, in a complete sense. Initial payment into the account would be the first
transaction in a Pass Book.
WHO
IS A COLLECTING BANKER
Meaning
of Collecting Banker:-
According to Sir. John Paget, one of the main
functions of a banker is “Collecting cheques crossed or uncrossed for
its customer”
In the ordinary course of any business, people used to
buy and sell products, services, raw materials, semi-finished goods and even
events. For settlement of the purchases, everybody used to issue cheques, for,
cash payment is not passible in all situations. Another reason is that it is
not safe to deal in cash always. Sometimes, the seller offers credit to the
buyer. In modern business world even buyers and sellers in very remote areas
are transacting with each other because of the colossal development in the
field of communication. So, everyone cannot pay cash, one to one, and the use
of cheques, bill of exchanges and other modes of electronic payments are made
necessary.
So, when cheques
and bills of exchange
become the more preferred mode of trade payments and others, the
necessity of a mediator, with knowledge and expertise, to collect that money
for the true owner of the cheque is also felt much. He is the Collecting
Banker.
A Collecting Banker undertakes to collect cheques,
drafts, bills, pay orders, traveller’s
cheque, Letter of credit, dividend warrants, debenture
interest etc, on behalf of the customer.
For collecting these documents, the collecting banker
used to charge some commission. The Rate of this collection commission for
local cheques, outstation cheques etc, are fixed on the guidelines of Reserve
Bank of India, then and there.
Documents
that a banker collects:-
a) Cheques
- Local
Cheques [Inter-Bank (means among various banks), Intra-Bank (means with in a
bank]
- Outstation
Cheques (Inter-Bank, Intra-Bank)
b) Drafts
(Inter-Bank, Intra-Bank)
c) Bills of
Exchange
- Documents
against payment
- Documents
against acceptance
- Foreign
bills
d) Pay orders /
Gift cheques e) Traveller’s cheque
f) Letter of
credits
g) Dividend
warrants
h) Interest
certificates (for debentures, bonds etc)
Banker
Lien
Lien means the right of the creditor to retain the
goods and securities owned by the debtors until the debt due from him is
repaid. It confers upon the creditor the right to retain the debtor’s security
and not the right to sell it.
A banker’s right of lien is more than “General lien.”
It confers upon him the power to sell the goods and securities in default by
the customer. Such a right of lien thus resembles a pledge and is usually
called an implied pledge.
The banker thus enjoys the privileges of the pledge
and can dispose of the securities after giving proper notice to the customer.
Opening
of Bank Account
1.
Opening of a Bank Account
Opening
Savings Bank Account- Normally, a banker will
not open an account in favour of a stranger. Any person who wishes to open a
savings account has to be introduced by another savings account holder of the
same branch. Even a minor is allowed to open a saving account.
Opening
Current Account - In the case of current account, it cannot be
opened by any person unless he is introduced by another current account holder
of the branch. The current account holder has to give a letter of introduction
in favour of the person intending to open the current account.
Opening
Fixed Deposit Account and Recurring Deposit –
For opening a fixed deposit account, the banker does not impose any condition.
But he normally accepts fixed deposits from known persons and the fixed deposit
account is opened only by deposit cash or in case of cheques only after
realization of cheques. The same rule applies for recurring deposit also.
STEPS
IN OPENING ACCOUNTS
1.
Obtaining Letter of Introduction
The first and the foremost step in
opening an account for a new customer is to obtain a letter of introduction
from the person who wants to open an account. A letter obtained by a banker
from a prospective customer before a banker can open an account in the name of
the prospective customer is known as ‘letter of introduction’. The purpose of
obtaining this type of a letter enables the banker to ascertain the genuineness
of applicant.
2.
Application Form
After obtaining a letter of
introduction, the banker supplies an application form according to the type of
account, which the customer wants to open the application form contains the
rules and regulations of the bank with the terms and conditions of deposit. The
application form is to be filled in and handed over to the banker. The
applicant furnishes all details about himself including the name, nomination,
address, etc,.
3.
Specimen Signature
After the application form duly
filled in, the banker obtains the specimen signature of the new customer in a
separate card called ‘specimen signature’ card.
4.
First Transaction
After obtaining the specimen
signature of the new customer, the banker open the new account by obtaining
cash from the new customer. This marks the first transaction between the new
customer and the banker. The relationship between the banker and customer
begins after this transaction.
5.
Issue of Cheque, Pay-in –slip, and Passbook
`The
banker issues pay-in-slips, cheque
book, and passbook
immediately after successfully
completing the first transaction with the customer. The cheque book supplied to
the customer usually contains
ten or twenty
blank forms. These
leaves are used
for making payments. A cheque
book contains a requisition slip which helps to get a new cheque book.
Pay-in-slip or credit voucher are
forms used to pay coins, notes, bills, and cheques to the
credit of customer’s account. Each
slip should be signed by the customer or the person who has
prepared it on his behalf. For
correct accounting, name, account number, date, and the amount of the customer
should be clearly mentioned. Customer will receive a duplicate slip or
counterfoil with a signature and the rubber stamp of the banker. It is an acknowledgement
to the customer that cash, etc,. have been duly received. The initials of the
cashier in counterfoil do not in any way mean that the cheques, etc., are in
order.
6.
PAY-IN-SLIP BOOK
The pay-in-slip book is a book that
contains printed slips with perforated counterfoils to be filled in by the
depositor or his agent at the time of depositing cash, cheques, drafts,etc., to
the credit of his account. Usually every bank prescribes and supplies free of
cost separate pay-in- slips for
depositing cash and cheques
and drafts.
7.
‘DONATIO MORTIS CAUSA’
‘Donatio mortis causa’ means a gift
made in contemplation of death. The gift is said to be made by a person who
owns any movable property and who is very ill and believes that he is going to
die. This is a peculiar gift as it has a condition that it will come into
operation if only the donor actually dies of the illness. But if he recovers
from the illness, the gift is to be returned.
Types
of Customer
Under the Banking Act, 'customer' has
nowhere been defined. Ordinarily, a
customer is anyone who has a bank account, whether savings or current, and who
indulges in banking transactions regularly. The following are the types of
special customers of banks: • Minors
• Married Woman • Paradanashin Woman • Illiterate Persons • Lunatics • Joint Hindu Families • Trustees • Partnership • Liquidators • Co-operative Societies All these special
customers have a little bit of risk involved with their bank account opening.
Therefore, the bankers are supposed to exercise special care while opening
their accounts
Special
Classes of Customers
MINOR
A person under the age of 18 years is
years is a minor; if a guardian of his person or property or both has been
appointed by a court or if the superintendence of his property or both has been
assumed the age of 18 years, he remains minor till he completes the age of 21
years.[7] According to the Indian Contract Act, 1872, a minor is not capable of
entering into by a minor is void. The banker should, therefore, be very careful
in dealing with a minor and take the following precautions
OPENING THE ACCOUNT
The banker may open a savings bank account, not a current account in the name
of a minor since in case of an overdraft the minor does not have any personal
liability. The savings bank account may be opened in any of the following ways:
• In the name of the minor himself. • In the joint names of the minor and
his/her guardian. • In the name of guardian in the following way “ABC, natural
guardian of XYZ”. Section 26 of Negotiable Instruments Act provides that a
minor may draw, endorse, deliver and negotiate a negotiable instrument. In case
of the minor can operate the account only jointly with his or her guardian
while in case of the account is to be operated by the guardian on behalf of the
minor. In cases the minor must have at least attained the age of 12 years and
should be in a position to read or write English, Hindi or Regional language.
DATE
OF BIRTH At the time of opening of the account of
minor, the bank should record the date of birth of the minor as disclosed by
his or her guardian.
DEATH
OF THE MINOR GUARDIAN In the event of death of
a minor the money will be payable to the guardian. In case the guardian dies
before the minor attains majority and the account is a joint account or to be
operated by the guardian only, the money should be paid by the bank to the
minor or attaining majority or to some person appointed by the court as his
guardian.
MINOR
AS A PARTNER A minor can be admitted to the
benefit of partnership with the consent of all the partners but he will not be
liable for the losses or debts of the firm. Within six months after majority he
should repudiate the liability as partner otherwise he will be liable as a
partner.
PROVISIONS REGARDING LEGAL GUARDIANSHIP OF A
MINOR
• Natural guardian
• Testamentary guardian
• Guardian appointed by the Court The
first two types of guardians are governed by the provisions of the Hindu
Minority and Guardianship Act, 1956, whereas a guardian is appointed by a court
under the Guardians and Wards Act, 1890.
RESERVE
BANK'S DIRECTIVES Reserve bank of India
has advised the banks to allow opening of minors accounts with mother as
guardian. Thus, banks are now permitted to open account of minor in the
guardianship of the mother, even if the father of the minor is alive.
MARRIED
WOMAN A married woman is competent to enter
into a valid contract. The banker may, therefore, open an account in the name
of a married woman. In case of a debt taken by a married woman, her husband
shall not be liable except in the following circumstances: • If the loan is
taken with his consent or authority; and • If the debt is taken for the supply
of necessaries of life to the wife, n case the husband defaults in supplying
the same to her. The husband shall not be liable for the debts taken by his
wife in any other circumstances. The creditor may in that case recover his debt
out of the personal assets of the married woman.While granting a loan to a
married woman, the banker should, therefore, examine her own assets and ensure
that the same are sufficient to cover the amount of the loan.
PARADANASHIN
WOMAN A paradanashin woman observes complete
seclusion in accordance with the custom of her own community. She does not deal
with the people, other than the members of her own family. As she remains
completely secluded, a presumption in law exists that: • Any contract entered
into by her might have been made with her free will and with full understanding
of what the contract actually means. • The same might not have been made with her free will and with full
understanding of what the contract actually means. The banker should, therefore
take due precaution in opening an account in the name of a paradanashin woman.
As the identity of such a woman cannot be ascertained, the banker generally
refuses to open an account in her name.
ILLITERATE
PERSONS Illiterate persons cannot sign their
names and hence the bankers taken their thumb impressions as a substitute for
signature, and also a copy of their recent photograph. The application from and
the photograph should be attested by an approved witness. For withdrawing
money, he must attend personally and affix his thumb impression in the presence
of an official of the bank, for the purpose of identification. Auchteronis Co.
vs. Midland Ltd. In this case the court held that a bank does not owe duties to
third parties who are not its customers. Certainly the mere fact that a bank
owes a duty to its customer in connection with a transaction does not mean that
it owes a duty to its customer in connection with a transaction does not mean
that it owes a parallel duty to third
person who may also be interested in the transaction.
LUNATICS
The banker should, therefore, not open an account in the name of a person who
is of unsound mind. But if a banker has discounted a bill duly written,
accepted or endorsed by a lunatic he can realize the money due on the same from
such person except in the circumstances where it is proved that the banker was
aware of the lunacy of the person concerned at the time he discounted the bill.
The banker should suspend all operations on the account of a customer as soon
as he receives the news of his lunacy till he gets the proof of his sanity or
is served with an order of the court. In the case of Shanti Prasad Jai v.
Director of Enforcement Exchange Regulation Act.[14] High court cases in India,
it has been repeatedly held that the banker and customer relationship in
respect of money deposited in the account of
customer with the bank is that of debtor and creditor.
LUNATICS
The banker should, therefore, not open an account in the name of a person who
is of unsound mind. But if a banker has discounted a bill duly written,
accepted or endorsed by a lunatic he can realize the money due on the same from
such person except in the circumstances where it is proved that the banker was
aware of the lunacy of the person concerned at the time he discounted the bill.
The banker should suspend all operations on the account of a customer as soon
as he receives the news of his lunacy till he gets the proof of his sanity or
is served with an order of the court. In the case of Shanti Prasad Jai v.
Director of Enforcement Exchange Regulation Act.[14] High court cases in India,
it has been repeatedly held that the banker and customer relationship in
respect of money deposited in the account of
customer with the bank is that of debtor and creditor.
JOINT
HINDU FAMILIES The concept of joint Hindu Family is
recognized by law. A business, according to law is a distinct heritable asset.
Where a Hindu dies, leaving a business it passes on the heirs. If he leaves
male issues it descends to them and the property becomes joint Hindu Family
property. The members of the family are called co- parceners and the eldest
male member is the manager or the karta. When an account in the name of the JHF
is opened all the adult co- parceners are to sign the account opening form,
even though the karta would operate on the account. In addition, the bankers
also obtain a letter of undertaking signed by all the adult co- parceners
stating that the business carried on by the family through births and deaths
will be advised to the banker. If the business is ancestral, the co- parceners
are liable to the extent of their share in the family property, whereas if the
business is not ancestral, co- parceners will be personally liable for the
family from the bank. The main problem in dealing with a JHF arises in respect
of loans. In the JHF governed by mithakshara law, all the members acquires a
right in the property by birth and this right starts from the date of
conception in the womb and so there is always the danger of a loan being
repudiated by a member who was not even
born on the date of the transactions. The burden of proving this necessity lies
on the banker and the banker has to not only prove the legal necessity, but
also prove that he made reasonable inquiries and was satisfied as to the
existence of the legal necessity. To avoid these and several other
difficulties, some banks requires a Hindu customer opening an account, to
furnish a statement to this effect that the money deposited is his self
acquired property and not that of JHF. • The account should clearly indicate
that it is a JHF. • The JHF letter should be signed by all the co- parceners. •
The letter should clearly indicates the powrs of the karta. • All co- perceners
should sign the documents for loans. • Death/Lunacy/Insolvency of co- perceners
does not dissolve the JHF. It continues till partition of property. TRUSTEES
According to the Indian Trusts Act, 1882, a 'trust' is an obligation annexed to
the ownership of property, and arising out of a confidence responed in and
accepted by the owner, or declared and accepted by him, for the benefit of
another, or of another and the owner Section 3. The person who resposes the
confidence is called the author of the trust. Trustees is the person in whom
the confidence is resposed. The person for whose benefit the trust is formed is
called beneficiary. In the case of New Bank of India v. Union of India[15],
Supreme Court observed that a trustees is generally not entitled to dispose of
or appropriate trust property for his benefit. In the present case the banker
was entitled to dispose of the share and utilities the amount thereof for
adjustment to the loan account if the debtor defaults. This bankers obligation
to transfer back the shares can arise only when the debtor clears dues of the
bank. Hence bank was not considered as trustees. PARTNERSHIP A bank should take
the following precautions in the course of having business dealing with the
firm: • The banker should open an account in the name of partnership firm only
when one or more partners make an application to the effect. • The bank should
ask for a copy of the partnership agreement and thoroughly acquaint itself with
its clauses. • The banker should take a letter signed by all the partners
containing the following: • The name and address of all partners • The nature
of the firms business • The names of the partners authorized to operate the
account in the name of the firm. • The banker should not credit a cheque in the
firms name to the personal account of a partner without enquiring from other
partners.[16] In the absence of any contract to the contrary, a partnership
firm stands dissolved on the death of a partner. In case the firm continues to carry
on the business, the estate of the deceased is not liable for any act of the
firms after his death.
ACCOUNTS
IN THE NAME OF LIQUIDATORS A liquidator is a person
appointed by the court to wind up the affairs of a company. His business is to
realize the company's assets and apply funds thus collected in repayment of
debts and distribute the balance among shareholders. He has power to borrow
money on the security of the company's assets and to draw endores and accept
instruments on behalf of the company. While exercising such powers, the
liquidator is free personal liability. Every official liquidator is required to
maintain a personal ladges account with RBI or SBI or any Nationalized Bank in
terms of the court order.
CO
– OPERATIVE SOCIETIES These are established
under Co – operative socities act in force in various states. They are governed
by their respective rules and by – laws. Before opening the accounts, these
have to be scrutinized to see if there are any restrictions on opening bank
accounts. In some states, the co- operative societies cannot open accounts with
commercial banks without permission from the registrar of co- operative
societies and the registrar may also impose certain conditions like maximum
balances. All such conditions should be observed while opening and operating
the accounts.
Types
of Deposits
Savings
Account
·
A savings account can be
opened with a bank or financial institution, to earn interest on the balance
maintained.
·
This account should be
opened with the objective of storing money in electronic form. These days, most
savings accounts can be used for multiple purposes like paying bills, quick
transactions, easy credit, etc.
·
It offers high liquidity
and is very popular among the masses. It does, however, have cash withdrawal
and transaction limits to promote digital payments.
·
Banks provide an interest
rate that is only slightly higher than inflation, so it is not very optimal for
investment. The interest provided by Public sector bank is only 4%, however,
some of the private banks like Yes Bank and Kotak Bank offers interest between
6-7%.
·
Some banks also offer
special savings accounts for the various sections of society, like women,
senior citizens, children, etc. Each come with their own interest rates and
withdrawal limits.
·
To choose appropriate
savings to account for yourself, it is best that you research well these types
before you make your decision.
Recurring
Deposit
·
It is a special type of
term deposit where you do not need to deposit a lump sum savings rather a
person has to deposit a fixed sum of money every month (which can be as low as
Rs 100 per month).
·
You should choose a
recurring deposit when you want to inculcate the habit of saving regularly and
you don’t have a lump-sum amount to set aside.
·
The interest rates on
these accounts range from 5% – 7%, and varying rates are offered to senior
citizens. These accounts have maturities ranging from 6 months to 120 months.
·
You can also give a
standing order to the bank to withdraw a fixed sum of money from your saving
account on every fixed date and the same is credited to the RD account.
However, the bank may charge some penalty for delay in paying the installments.
·
Another unique feature of
this account is that you can take a loan worth 80-90% of your deposit by using
this deposit itself as collateral.
·
There are no premature
withdrawals allowed in the account, but for a penalty, you can close the
account before the maturity date of the deposit.
Current
Account
·
A current account is a
special type of account that has lower restrictions than a savings account when
it comes to withdrawals and transactions.
·
It is also known as a
demand deposit account and it is meant for businessmen to conduct their
business transactions smoothly.
·
These accounts should only
be opened by you if you are a small business person who has multiple monetary
transactions on a daily basis.
·
These are the most liquid
deposits and there are no restrictions on the number and the number of
transactions in a day.
·
Banks also offer overdraft
facilities on these, i.e., they let account-holders withdraw more money than
there is in the account.
·
Moreover, there is no
minimum balance required to be maintained here, unlike other bank accounts.
·
With the advancement of
digital payments, banks also offer the best online banking facilities to these
accounts, which has helped them contribute more to developing businesses in the
economy.
·
A disadvantage of these
accounts is that banks do not pay any interest on these accounts. Also, these
accounts also charge hefty fees for their services and maintenance.
Fixed
deposit
·
A fixed deposit (FD) is
an investment avenue offered by banks, financial institutes, and Non-Banking
Financial Companies (NBFCs)_that offers guaranteed returns with an interest
rate ranging between 5%-9%.
·
It gives higher interest
than a regular savings account and offers a wide range of tenures ranging from
7 days to 10 years.
·
You should try out a
fixed deposit account when you want to build your habit of investing but your
risk appetite is quite low since it offers guaranteed returns.
·
You may or may not have a
separate bank account to open a fixed deposit with the bank. These days, banks
also offer FDs which allow for tax exemptions of up to ₹1,50,000 per year under
section 80C of the Income-tax Act, 1961.
·
Another benefit with FDs
is that all interest amounts below ₹40,000 are tax-free. Interest amounts above
₹40,000 are subjected to Tax Deducted at Source (TDS).
·
Just like a recurring
deposit, you cannot make any premature withdrawals, but you can prematurely
shut down the deposit. You may be charged some penalty in case of early closure
of the FD account.
