General Banking
(Operation)
WHAT IS BANKING:
Banking
is defined in section 5(b) of the BR Act as the acceptance of deposits of money
from the public for the purpose of lending or investment and repayable on
demand or otherwise and withdrawable by cheque, draft, and order or otherwise
Under sec 49A of BR Act, no
person other than a Bank is authorized to accept deposits withdrawable by
cheque
Section
8 of BR Act prohibits a Banking company from engaging directly or indirectly in
trading activity and undertaking trading risks.
Who is Customer :
Not defined by any act.
Anyone conducting banking
transaction with a bank is a bank customer.
KYC
Guidelines issued by Reserve Bank of India, defines the customer as a person or
entity that maintains an account and/or has a business relationship with bank,
one on whose behalf the account is maintained ( i.e. the beneficial owner)
beneficiaries of transactions conducted by professional intermediaries, such
stock brokers, Chartered Accountants, Solicitors etc, any person or entity
connected with a financial transaction which can pose significant reputational
or other risks to the bank say a wire transfer or issue of high value demand
draft as a single transaction.
DUTIES OF A BANKER
TOWARDS HIS CUSTOMERS:
1. Duty
of secrecy
2.
Duty to honor Cheques
3.
Duty to submit periodical statements
4.
Duty to collect Cheques / bills
Duty of secrecy : It is mandatory as per
section 13 of Banking Companies
(Acquisition and Transfer of Undertaking) Act -1970.
Circumstances where disclosure is authorized by law:-
1. Order of the court.
2. Disclosure as per Income tax Act
–1961and Gift Tax Act 1958.
3. Criminal Procedure Code 1973.
4. Other Acts giving similar power
to authorities like 1) CBI 2) Custom
Authorities 3) Central Excise Authorities.
4) Sales tax Authorities.
5. Foreign Exchange Management Act
6. Companies Act -1956
7. Reserve Bank of India Act –1934
etc.
Circumstances where disclosure
is permitted as per banking practices:--
1.
Disclosure to another bank to supply credit information / opinion on Customers
when requested by another bank to be supplied on IBA `s format, in general
terms, without fixing bank’s signatures and in coded words as supplied by IBA
among banks.
2.
Disclosure as per express or implied consent of the customer.
3. Disclosure in public interest.
The
obligation to maintain secrecy continues even if the account is closed or
customer expires. In case of unauthorized disclosure, the customer can sue the
bank for damages and any third party who relies on such information and
suffered loss can sue the bank if the information turns out to be false.
Duty to honour
Cheques:
As
per Section 31 of NI Act, a bank is bound to honour his customer’s Cheques if
the following three conditions are fulfilled.
1. There must be sufficient balance
in the account
2. The
balance must be properly applicable for the payment of the cheque.
3. The
bank must be duly required to pay the amount
However this obligation to honor
Cheques stands extinguished upon receipt of
a) Garnishee order b)
Income Tax Attachment Order
GARNISHEE ORDER
A
garnishee order is an attachment order issued by a competent court under
section 60 of civil procedure code (Rule 46 of Order XXI of schedule) at the
request of a creditor to attach his debtor’s funds in the hands of a Banker.
A
garnishee order is issued in two stages, first an order Nisi and then an order
Absolute
Banker
– Garnishee; Person approached the court - judgment creditor and person whose
funds are to be attached - Judgment Debtor.
Order
Nisi
·
An
order Nisi requires the banker to explain as to why the funds of the depositors
should not be attached
·
On
receipt of order Nisi the bank is bound to stop operation in the depositors
account
·
Bank
must immediately inform the customer about the receipt of the order.
Order
Absolute
·
After
receipt of the explanation from the bank the court may issue order Absolute.
·
On
receipt of an order Absolute the bank should pay the amount to the court.
·
Production
of pass Book/ Deposit receipt not necessary for making such payment
·
Amount
of the Garnishee Orders.
·
A
Garnishee order usually does not mention the amount. In case, no amt is
mentioned, the entire balance to be attached. If issued for specific amount
only that amount to be attached
Accounts
to be attached
·
Garnishee
order extends only to those accounts, which are held in the same capacity in
which the order is issued.
·
If
the order is in the name of A and the account is in the name of a partnership
firm where A is a partner the firm account cannot be attached.
·
If
the order is in the name of a partnership firm, not only the firm account but
also the balance in the individual partner’s account can be attached.
·
If
the order is in the name of individual it would extend any account maintained by
him in the name of a firm as sole proprietor
·
Accounts
held by a person as a trustee (Trust Accounts) are not attached by a Garnishee
order issued in individual name
Accounts
not attached
Deceased person’s account
Insolvent person’s account
INCOME – TAX ATTACHMENT
ORDER
(As per 226(3) of IT Act, 1961)
It
can attach SB, CD term deposit (payable on maturity), proceeds of collection
items to be credited to account
Even though the order is received in a single name,
it attaches balance (pro rata) in any joint account maintained by such person)
Even
the amount deposited after the receipt of order, it is attachable
No
need to insist upon presentation of Deposit Receipt to make payment
Garnishee order
|
Attachment order
|
Issued
by court
|
issued
by IT Dept
|
Usually
amount not mentioned
|
Amount
mentioned
|
Deposits
held at the time of receipt of order
|
same and
future credits
|
Proceeds
of instruments on collection not attached
|
attached
|
If
issued in single name joint a/c not attached
|
Attached
pro rata
|
Issued
in joint names, balance in individual attached
|
same
|
A/c of
deceased/ insolvent cannot be attached
|
Are
attachable
|
Right of general lien-
Right of creditor to retain goods and securities(of
debtor) in his possession is called lien
It gives power to retain not to sell
Right is lost when possession is lost
Banker lien is general lien and implied pledge so
banker as a exception can sell good and securities after giving the debtor a
reasonable notice Deposit balance is neither good nor securities so right to lien is not
applicable so only right of set off is
available over the deposit balance of its debtor Bank can exercise lien on the goods and securities belonging to
guarantor when debt is due for payment Not barred by law of limitation and also applicable to time barred debt Bank can sell gold ornaments by
exercising right of general lien to liquidate
the loan account
Right
of set off-
Right to adjust credit balance of one account and
debit balance of other account of customer to arrive net sum due is right of
set off.
Pre-condition of this right -Balances are certain not contingent , due
for payment, held in same capacity and prior notice to the customer is given.
Right of set off can
be exercised on the happening of death,lunacy,insolvency of the customer,
dissolution of firm, liquidation of company and on receipt of GO/ITO
Also available for
time barred debts and deposit balance in other branches of the bank.
Clayton
case( devayanas vs noble states)
It speaks about
rule of appropriation in running accounts like cash credit and over draft
Rule of
appropriation is laid down in Indian contract act sections 59-61
As per this rule
cash credit account is considered as a new loan and each deposit of the loan as
a repayment of the same in order in which it is made
In order to avoid
this rule banker should stop the operation of the account in case of death/retirement/insolvency
of partner/guarantor/joint account holder
Type
of customers:
Minors:
Minor
is a natural person who has not completed the age of 18 years.( Section
3 of Indian Majority Act 1875)
Section
11 to 14 Indian Contract Act, a minor is incompetent to enter into a valid
contract.it is void ab-initio i.e. from the very beginning.
A
contract made by a minor during his minority cannot be ratified by him even
after his attaining majority since agreement made by a minor is void.
Section
26 of NI Act provides that a Minor may draw, endorse, deliver and negotiate a
cheque so as to bind all parties except himself
In
case of term deposit the maturity date of the deposit should be not earlier
than the date on which the minor attains majority. In such cases, relaxation
has been allowed for accepting deposits beyond 10 years.
A
guardian means a lawful guardian and includes natural guardian by court of law
under sec 7 (1) of the Guardian and wards Act 1890.
Natural
Guardian of a
minor differs from community to community and is governed by a personal law to
which the minor is subject as under.
As
per sec 6 of the Hindu minority and Guardianship Act, 1956, Hindu minor’s
natural guardian is always her/his father so long as the father is alive. After
the death of the father, the mother can also act as natural guardian step
mother/ step father cannot act as natural guardian
Under
the Muslim law, Muslim minor’s natural guardian in the order of preference is
as follows: Father, Executor appointed by fathers Will, Grandfather, Executor
appointed by Grandfather Will. A mother of a Muslim minor is not a natural
guardian of her child. If there is no guardian in any of the four categories
above, then guardian will have to be appointed by the court.
Roman
Catholic and Parsis the natural guardian of a minor child is father during his
lifetime and after him, the mother
Testamentary
Guardian-Guardian
appointed by the will of minor’s father is called testamentary guardian. Such
guardian acts only after the death of father & mother of the minor child.
PARTNERSHIP
FIRM
It
is the relationship between persons agreed to share profits of the business
carried on by all or any one of them acting for all (Indian partnership act
1932)
Number
of partners: Minimum 2. Maximum 10 in
case of banking business and 20 in case of others. ,If
number of partners exceed the statutory limit it will be an illegal
association.
Minors
can be admitted to the benefits of the partnership
Registration
is not
necessary. Non registration of
Partnership-firm cannot sue outsiders for recovery of firm’s debt
In case of retirement, if new partner enters, death
of partner or insolvency of partner if firm’s a/c shows debit balance operation
must be stopped immediately to crystallize the liability of each partner and to
avoid the application of Clayton’s rule. We
should close the account and open a new one in the name of a reconstituted
firm.
Clayton’s rule:
It is Rule
of appropriation in running accounts like cash credit and overdraft
account
as per this rule , each withdrawal in a cash credit
account is considered as a new loan & each deposit as a repayment of loan
in order
first debit is
considered to have been discharged by the first credit and accordingly
other entries follow suit in chronological order
LIMITED
LIABILITY PARTNERSHIP
The
Limited Liability Partnership (LLP) is as an alternate to a partnership firm
and a company that provides the benefit of limited liability and allows its
members, the flexibility of organizing their structure as a partnership, based
on a mutually arrived agreement.
Salient features of
LLP Act 2006
The
LLP shall be body corporate and a legal entity separate from its partners. Any
two or more persons, associated for carrying on a lawful business, with a view
to profit, may by subscribing their names to an incorporation document and
filing the same with the Registrar, form a Limited Liability Partnership. The
LLP will have perpetual succession.
The
LLP shall be a separate legal entity, liable to the full extent of its
assets, with the liability of the partners being limited to their agreed
contribution in the LLP which may be of tangible or intangible nature or both
tangible or intangible in nature. No partner would be liable on account of the
independent or un-authorized actions of other partners or their misconduct;
Every LLP shall have minimum two partners
and shall also have at least two individuals as Designated Partners, of whom at
least one shall be resident in India.
The
LLP shall be under an obligation to maintain annual accounts reflecting true
and fair view of its state of affairs. A statement of accounts and solvency
shall be filed by every LLP with Registrar every year. The accounts of LLP
shall be audited, subject to any class of LLPs exempted from this requirement
by Central Govt;
)
The Central Govt shall apply such provisions of the Companies Act, 1956 to
provide inter alia, for mergers, amalgamations, winding up and dissolutions of
LLPs as appropriate, by notification. However, such notifications shall be laid
in draft before each House of
The
Indian Partnership Act, 1932 shall not be applicable to LLPs.
Conversion
From Firm To Limited Liability Partnership (2nd Schedule)
ü
A firm may convert to a limited liability
partnership by complying with the requirements as to the conversion set out in
this schedule.
ü
Upon
such conversion, the partners of the firm shall be bound by the provisions of
this schedule that are applicable to them.
ü
Central
Government may, by order amend, add to
or vary the provisions.
ü
A
firm may apply for conversion to an LLP in accordance with this Schedule if and
only if the partners of the LLP to which the firm is to be converted, comprise
all the partners of the firm and no one else.
A
firm may apply to convert to an LLP by filing requisite documents with the
Registrar.
On
receiving the documents, the Registrar shall, register the documents and issue
a certificate of registration.
There
shall be an LLP vested by the name specified in the certificate of registration
registered under this Act. All movable and immovable property vested in the
firm, all assets, interests, rights privileges, liabilities, obligations
relating to the firm and the whole of the undertaking of the firm shall be
transferred to and shall vest in the LLP without further assurance, act or
deed; and the firm shall be deemed to be dissolved. If earlier registered under
Indian Partnership Act, 1932 it shall be removed from the records.
The
LLP after registration will take all necessary steps, to notify the authority
of the conversion, relating to any property now vested with the LLP.
All
proceedings by or against the firm which are pending in any court or tribunal
or before any authority on the date of registration may be continued, completed
and enforced by or against the LLP.
Any
conviction, ruling, order or judgement of any court, tribunal or other authority
in favour of or against the firm may be enforced by or against the LLP.
Every agreement to which the firm was a party
immediately before the date of registration, whether or not of such nature that
the rights and liabilities there under could be assigned, shallhave the effect
as from that day as if(a) the LLP were a party to such an agreement instead of
the firm(b) for any reference to the firm, there were substituted in respect of
anything to be done on or after the date of registration a reference to the LLP.
All
deeds, contracts, schemes, bonds, agreements, applications, instruments and
arrangements subsisting immediately before the date of registration relating to
the firm or to which the firm is a party, shall continue in force on and after that
date as if they relate to the LLP and shall be enforceable by or against the
LLP as if the LLP were named therein or were a party thereto instead of the
firm.
The
LLP shall ensure that for a period of 12 months commencing not later than 14
days after the date of registration, every official correspondence of the LLP
bears (a) a statement that it was, as from the date of registration, converted
from a firm ( giving name and registration number of that firm) to LLP. (b) Any
LLP which contravenes the above provisions shall be punishable with fine which
shall not be less than Rs.10000 but which may extend to
Rs.1
lac and with a further fine which shall not be less than Rs.50 but which may
extend to Rs.500 for every day after the first day, after which the default
continues.
Conversion
From Private Company To Limited Liability Partnership (3rd schedule)
Eligibility: A Co. may convert to LLP if
(a) there is no security interest in its assets subsisting or in force at the
time of application and (b) the partners of the LLP to which it converts
comprise all the shareholders of the company and no one else.(c) Upon such
conversion, the Co., its shareholders, the LLP to which the Co. has converted
and the partners of that LLP shall be bound by the provisions of this schedule
that are applicable to them.
Registration: A Co. may apply to convert to
a LLP by filing with the registrar a statement by all its shareholders in
requisite form giving the name & registration number of the Co.,
COMPANY
Limited
Companies are legal entities under the law. They are viewed as persons
and are entitled to enter into contracts, own property, sue in their own name
and do all acts that an individual may do.
Private
limited company:
is a company which, by its articles restricts transfer of its shares, prohibits
itself from inviting subscription of shares/debentures from public.
Public limited company: Company whose shares can easily be
transferred and does not have such restrictions.
Government Company:
Government owned company where not less than 51% of the share capital is held
by government.
Certificate
of Incorporation: This certificate is issued by
Registrar of Companies. This, in effect, is the birth certificate of the
company. This certificate gives the conclusive proof that all formalities
involved in formation of a company are duly complied with. The original
certificate should be returned to the company and a certified Xerox copy should
be retained.
Certificate
of Commencement of Business: Issued by Registrar
of Companies. Required only in case of public limited companies. A Private
Limited Company is not issued with this certificate as it can commence business
immediately after obtaining certificate of incorporation.
Memorandum
of association: The
promoters of the company submit to the Registrar of Companies two important
documents for registration. They are memorandum of association and articles of
association. After registration these two documents become public documents.
Any person dealing with the company is expected to know their contents and
ensure that the directors and share holders are acting within the scope of
these documents. In case they act beyond the scope of memorandum of
association, they are said to have acted “ultra vires” and company is
not liable on such contracts.
The
memorandum of association of every company contains the following six clauses:
a) Name clause which gives the
name of the company
b) Place clause gives address of
the registered office of the company
c) Objects clause gives the
activities the company can pursue
d) Liability clause gives that the
liability of shareholders is limited
e) Capital clause gives the
maximum capital the company can issue/authorized capital
f) Association clause gives the
consent of the promoters under their signatures that they are desirous of
forming a company
Articles
of association: It contains the rules and regulations
for internal management of the company like the powers of Board of Directors,
Rules for conducting meetings, use of common seal, use of borrowing power, etc.
Resolution
to open and authorize specific persons to operate the account: The resolution
by the Board of Directors must state that the Board has decided to open a
current account with the bank and the names of persons authorized to operate
the account. The copy of resolution should be signed by the chairman of the
meeting and countersigned by the secretary of the company.
TRUST ACCOUNTS
A
trust is said to be created when the ownership of a property is transferred, to
somebody with an obligation to hold and manage the same for the benefit of
another. Usually there are three parties to a Trust viz.
The
person who transfers the property and reposes confidence is called Author or Creator
or Donor of the trust.
The
transferee of the property on whom confidence or trust is reposed is called the
trustee.
The
person for whose benefit the trust is formed is called beneficiary.
JOINT HINDU FAMILY
A
Hindu Undivided Family possesses ancestral properties and carries on ancestral
business.
The family business and assets are managed by
the eldest male member who is called Karta.
All
other male members are called coparceners.
Not
dissolved by death of any coparcener.
A coparcener though not permitted to
operate can countermand the payment of a cheque.
Banker customer relationship –
It depends on the type of transaction –
Type
|
Bank
|
Customer
|
Acceptance of deposit
|
Debtor
|
Creditor
|
OD in SB CD a/c
|
Creditor
|
Debtor
|
Loans
|
Creditor
|
debtor
|
Collection of cheque, bills
|
Agent
|
Principal
|
Carrying out standing instructions
|
Agent
|
Principal
|
Purchase of DD, TT, MT
|
Agent
|
Principal
|
Safe custody of article
|
Bailer
|
Bailee
|
Hiring locker
|
Lesser
|
Lessee
|
TERMINATION OF BANKER CUSTOMER
RELATIONSHIP
ð
The
banker customer relationship stands terminated on:
1. Death of customer
2. Lunacy of the customer
3. Insolvency of the customer
ð
However,
the banker –customer relationship is not affected by reason of:
1. Arrest of the customer
2. Imprisonment of the customer.
3.
Migration of the customer to any foreign country
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