Module -1

Introduction to
Banking Laws
 Why regulate Banks?
 Institutions of Public Interest

 Guardians of Public Money

 Trustees of Depositors interest

 Facilitators of Economic Growth

 Providers of Corporate Finance

 Holders of Financial Stability

 TWO MAIN OBJECTIVES
 To Preserve Systemic Stability

 Protection of Depositors
 Laws applicable for Banking Companies

 The Banking Regulation Act,1949

 The RBI Act, 1934
 The Negotiable Instruments Act, 1881
 The Bankers Books Evidence Act 1891
 The SARFAESI Act
 The Banking Companies Acquisition and Transfer of Undertakings
Act, 1969& 1970
 State Bank of India Act, 1955 and its rules
 Banking - S.5(b) of 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, and order or otherwise.
 United Dominions Trust Ltd v. Kirkwood [1966 ]
2QB431( CA)
 (i) Acceptance of money
Stability,
 ii) Honour cheques
Soundness and
 (iii) keep current accounts Probibity is also
required to
Issue: Whether UDT Ltd did constitute a
engage in the business of banker
‘banking’ for the purpose of
availing protection as a
banker ?

Three Judges , three

UDT Had reputation, but it did judgements – Lord
not maintain current account , Diplock, Lord Denning
hence not a bank. and Lord Harman
Lord Denning MR
 Bank of Chettinad Ltd of Colombo v. IT Commrs
of Colombo[1966] 2QB431

“ Banker is one who carries on as his principal

business the accepting of deposits of money
on current account or otherwise , subject to
withdrawal by cheque, draft or Order.
 •

• Multiple institutions/
entities are engaged
in financial activities.
Are they all banks?
Banking Company – Engaged in the
business of Banking (Section5(C)
 What are the business of Banking Companies?

Only those permitted under section 6 of the Banking Regulation

Act,1949
 Answer the following questions
1. State the differences between a banking company
and a non-banking company?
2. Whether Co-operative banks are regulated under
Banking Regulation Act?
3.Explain ‘Systemic Risk’
4.What are the businesses in which a bank may
engage in?

Keep your answers ready !

Session- 2
Law of Banking
 Can you state three features of
Banking Companies?
 Whether the definition of 'banking company'
contained in Section 5(c) of the Banking Regulation
Act, 1949 covers cooperative banks registered
under the State law and also multi-State co-
operative societies under the Multi-State Co-
operative Societies Act, 2002 ?

 Ref : Pandurang Ganpati Chaugule vs.

Vishwasrao Patil Murgud Sahakari Bank
Limited MANU/SC/0429/2020
Whether Chit Fund Business is covered under
Section 6 of the Banking Regulation Act, 1949?

[ Union of India (UOI) and Ors. vs. Margadarshi

Chit Funds (P) Ltd. and Ors.MANU/SC/0798/2017-
 Whether following activities regulated
by RBI?

Investment Bankers

Merchant Bankers
An investment bank is a financial services
company or corporate division that engages
in advisory-based financial transactions on
behalf of individuals, corporations, and
governments. ... Unlike commercial banks and
retail banks, investment banks do not take
deposits.
Eg.,
Goldman Sachs
Morgan Stanley.
JP Morgan Chase
A merchant bank is a
company that
conducts underwriting, loan
services, financial advising,
and fundraising services for
large corporations and high
net worth individuals.
 Is it necessary to use the word banking
in the name of Banking Company?

Ref. Sec.7 of B.R.Act,1949

Whether subsidiary of a bank can

use the word baking/bank/banking
company in its name?
Constitutional validity of banking companies?

Bank is a Subject under Entry 45, VII

Schedule, List -1 (Union List)
Co-operative societies engaged in banking
business are governed by respective co-
operative societies legislations and is in the
state list, Entry 32 , VII schedule.[ Art.43 –B
and Part IX- B of Indian Constitution ]
 Answer the Problem:

Canara Bank has established a Business School to

train Bank Managers and the said bank is responsible
for the supervision, administration and management of
the Business School.

Whether the above given activity is covered under

Section 6 of the Banking Regulation Act, 1949?
Evolution of Banking
Regulation –Topic-2 module-1
 History of Banking Regulation

Pre-independence stage
Post Independence stage
Nationalization of Banks
Introduction of Financial Sector Reforms
IT revolution in Banks
Indian Banking Law is based on English Banking Law

 Banking law in general is part of the law merchant or as it is sometimes known as

lexmercatoria

1694
First Banking Act
in England
 Act 6 of 1840 represented the
earliest attempt to regulate the
law relating to bill of exchange
and promissory notes.
 In 1866 a bill to codify the law
relating to negotiable instrument
was drafted and in the year 1881
Negotiable instrument Act was
passed
Answer the following( Ref. Reading material-
2)
1) "If anyone became bankrupt, debts owed to the state had
priority over other creditors". Similarly, there is also a reference to
"Interest on commodities loaned" – Which book contained these
two statements?
Kautilya Arthashastra

2) The roots of commercial banking in India can be traced back to

the early eighteenth century when the Bank …………..was
established in June 1806 – which was renamed as Bank of Bengal
in January 1809.

3) Bank of Bengal was established for ………………

4) This was followed by the establishment of the Bank of Madras in July 1843, as a
joint stock company, through the reorganization and amalgamation of four
banks………..name all four banks?

5) The three Presidency Banks, as these were then known, were amalgamated in
January 1921 to form the …………………………..

6) What were the three fold Roles of Imperial bank of India ?

7) With the formation of the Reserve Bank of India in 1935, some of the
central banking functions of the …….. were taken over by the RBI

8) and subsequently, the ……………………, set up in July 1955, assumed the other
functions of the Imperial Bank and became the successor to the Imperial Bank of
India.

9) The ……were regulated and governed by their

Royal Charter, the East India Company and the
Government of India of that time.
10) Company law was introduced in India way back in
……, it did not apply to the banking companies.

11) Prior to 1949, the banking companies, in common with

other companies, were governed by the …………which
itself was a comprehensive re -enactment of the earlier
company law of 1850.
12) Thebanking crisis of 1913, however, had revealed
several weaknesses in the Indian banking system,
……………………………resulting in large-scale bank
failures, What were the weaknesses?
Ans: The low proportion of liquid assets of the banks and connected
lending practices, resulting in large-scale bank failures
13) The Act vested in the Reserve Bank the responsibility
relating to licensing of banks, branch expansion, liquidity
of their assets, management and methods of working,
amalgamation, reconstruction and liquidation. Important
changes in several provisions of the Act were made from
time to time, designed to enlarge or amplify the
responsibilities of the RBI or to impart flexibility to the
relative provisions, commensurate with the imperatives of
the banking sector developments. Name the Act?
14) Till March 1966, the Reserve Bank had practically no role in relation to the functioning
of the …………………….

15) The basic rationale for exercising fairly close regulation and supervision of banking
institutions, all over the world, is premised on the fact that the banks are …………….. for
several reasons.

16) State the reasons for banks being special?

The banks accept uncollateralized public deposits, are part of the payment and settlement system, enjoy the
safety net of deposit insurance funded by the public money, and are an important channel for monetary
policy transmission. Thus, the banks become a keystone in the edifice of financial stability of the system –
which is a “public good” that the public authorities are committed to provide. Preventing the spread of
contagion through the banking system, therefore, becomes an obvious corollary of regulating the banks to
pre-empt any systemic crisis, which can entail enormous costs for the economy as a whole. This is particularly
so on account of the inevitable linkages that the banks have by virtue of the nature of their role in the
financial system

17 ) The ……become a keystone in the edifice of financial stability of the system

18) Ensuring ………………….and
……………………the banking system, therefore,
becomes a predominant objective of the financial
regulators.
 1969 –Two major steps in
Banking Regulation Reasons for Social Control

 The objective of social control was about

• Social Control on making banking sector accessible in areas

Banking Companies
where these services were not accessible.
 To regulate and direct the banks to ensure
• Nationalization of 14 fair governance so as to avoid bank
collapse.
Major Banks  To supervise management of banks and
Credit policy of commercial banks
 Re constitute the board of directors
 To impose restrictions on loans to related
parties.
 1. Setting up of a National Credit Council - (1967)

Social
National Credit Council set up to provide a forum to discuss and assess credit
priorities on an all India basis. Council was to assist RBI and government to
allocate credit.(NCC is dissolved since nationalization of Commercial banks).

Control What were the functions of NCC?

on Banks 2. Introducing of legislative controls by amending the banking regulation

 Licensing

led to  Nature of permissible business by banks

 Market Capitalisation
 Branch expansion
 Appointment of Board of Directors
 Amalgamation and Winding up – Supervision of RBI
Nationalization of Banks?
 “The reason for nationalizing banks was to sync the
banking sector with the goals of socialism adopted
by the Indian government after independence. RBI’s
history points that the idea to nationalize banks and
insurance companies germinated as early as 1948,
in an All India Congress Committee report. The
insurance sector was nationalized in 1956 with the
formation of Life Insurance Corporation of India”

Read more
at: https://www.bloombergquint.com/opinion/why-
indira-gandhi-nationalised-indias-banks
 Bank Nationalization

1970 &1980
14 6

Find out the list of banks

nationalized during 1970& 1980
Nationalisation of Banks
Reasons for Nationalisation of Banks
1. Prevent Concentration of Wealth and  All India Bank Officers
Confederation v. Union of India-
Economic Powers AIR 1989SC2045
2. Branch Expansions even to rural areas  R.C. COOPER V. Union of India
AIR 1970 SC 564
3. Neglect of agriculture, small industries,
and other deserving sectors
4. Various malpractices
5. Change in business management of
banks
 R.C Cooper v. Union of India
AIR 1970 SC 564
Arguments for Nationalization of Banks Arguments Against Nationalization
 Government to obtain control over the banks  Compensation to the shareholders by
state
 Protection of depositors interest and promote public
confidence in Banking institutions  Loans to agriculture is risky and is less
remunerative
 Prevention of concentration of wealth among few.
 State capitalism is not socialism
 Ensure financial stability
 Nationalization may not curb monopoly
 Banks to lend priority sectors
and abuse of power
 Banking in rural areas
 Standardization of Banking Services
Land mark case in the History of
Supreme Court
 Rustom Cavasjee Cooper and Ors v. Union of India (UOI)
 Hon'ble Judges/Coram:
 A.N. Grover, A.N. Ray, C.A. Vaidialingam, G.K. Mitter, I.D. Dua, J.C. Shah,
J.M. Shelat, K.S. Hegde, P. Jaganmohan Reddy, S.M. Sikri and Vashishtha
Bhargava, JJ.
 Counsels:
 For Appellant/Petitioner/Plaintiff: N.A. Palkhivala, M.C. Chagla, A.J. Raja,
N.N. Palkhivala and R.N. Bannerjee, Advs

 For Respondents/Defendant: Niren De,, Attorney-General, Jagadish

Swarup,, Solicitor-General, M.C. Setalvad, C.K. Daphtary, and R.H. Dhebar,
Advs.
Statutes enabled acquisition of the
undertaking of banking companies
 The Banking Companies( Acquisition and Transfer of Undertakings)Act,1970
&
 1980
Why Bank Nationalisation was
challenged?
 Rustom Cavasjee Cooper—held shares in the Central Bank of India Ltd.,
the Bank of Baroda Ltd., the Union Bank of India Ltd., and the Bank of India
Ltd., and had accounts--current and fixed deposit --with those Banks : he
was also a director of the Central Bank of India Ltd. By petitions he claimed
a declaration that the Banking Companies (Acquisition and Transfer of
Undertakings) Ordinance 8 of 1969 promulgated on July 19, 1969, and the
Banking Companies (Acquisition and Transfer of Undertakings) Act 22 of
1969 which replaced the Ordinance with certain modifications impair his
rights guaranteed under Articles 14, 19 and 31 of the Constitution, and are
on that account invalid.
Answer the following

 Why was nationalization of Banks

preferred over Social Control of
Banks?
Mega Merger (2020)Among Nationalised banks
Overview of Categories of Banks in India
 Scheduled banks?

A scheduled bank, in India, refers to a bank which

is listed in the 2nd Schedule of the Reserve Bank
of India Act, 1934. Banks not listed under
this Schedule are called non-scheduled banks.
Scheduled banks are usually private, foreign and
nationalized banks operating in India
Ref : section 42 of RBI Act,1934
 3 Topics

1. RBI and Its Role

2. Functions of RBI
3. RBI and Commercial Banks
 Role of RBI

 Regulates
The Banking Regulation Act, 1949

Commercial Banks
 Supervises The Reserve Bank of India Act , 1935
 Controls
 Role of RBI as a Regulator of
Commercial Banks -
 RBI Exercises the following regulatory powers under the Banking Regulation Act, 1949
1. Maintenance of Reserve Fund (Sec.17) :
2. Maintain Cash Reserve ( Sec 18)
3. Restrictions on loans and advances by Commercial banks ( Sec.20)
4. Licensing of Banking Companies ( Sec. 22)
5. Opening of new branches by banks( Sec. 23)
6. Maintenance of Percentage of Assets Sec 24, 25)
7. Submission of Monthly returns to RBI( Sec. 27)
8. Approval of Auditors of banking company by RBI
9. Inspection of commercial banks by RBI( Sec. 35)
 10 ) Power of Reserve Bank to give Directions (Sec.35A)
 11)Powers and Functions of RBI(Section 36 of Banking Regulation Act, 1949)
 12)Power of RBI to Control over management
 13 )Supersession of Board of Directors of banking company
 14)Power to order amalgamation of banks (Sec. 44 A, 45 )
Why regulate banking companies?
 RBI Control over Banks in India

 RBI controls the activities of commercial banks by virtue of the powers vested in it under the Banking
Regulation Act,1949 and the Reserve Bank of India.
1. Licensing of commercial banks- Section 22 of the Banking Regulation Act,1949 – Refer the criteria
for issuing license by RBI
2. Power to Inspect Commercial Banks – Section 35 of the Banking Regulation Act,1949
3. Management Control by RBI – Section 35B of the BR Act,1949 – approval of RBI is necessary for the
appointment or re-appointment or termination of an appointment of a chairman, managing or
whole- time director.
4. Power to supersede the board of directors of banking company – RBI may takeover the
management of a banking company , if the business is carried out in a manner prejudicial to the
interest of bank or depositors( As per banking laws Amendment Act,2012)
5. Power to control volume of Credit : RBI is empowered to control the
volume of credit through the use of bank rate, open market operations,
variable reserve requirements, apart from impounding of deposits beyond
a certain level.
6. Power of Selective Credit Control? : Under section 21 of the Banking
Regulation Act,1949, RBI has been given a power to control advances
granted by commercial banks. This power is known as the power of
Selective Credit Control
As on Today
Is there is a need for separate banking regulation?
Joseph Kuruvilla Vellikunnel v. RBI 1962 AIR 1371

 “ For the present we only wish to emphasize that banking companies

cannot be compared with other companies. The ordinary companies deal
with the money of the stockholders, who own a share in the assets, who
appoint their own Directors, for better or for worse, and whose liability is also
limited.
 The banking companies are in an entirely different class, as they deal with
the money of the depositors who have no security except the solvency of
the banking company and its sound dealings with their money. Ex facie, the
banking companies must be regulated somewhat differently, and the
interests of the depositors must be paramount and the winding up of such
companies depends upon other considerations, chief among which is the
desire to pay off the creditors as far as possible in full or at least equitably” .
 Reserve Bank of India Act
 Total Number of Sections- [58G]
 Schedule- 2
 Preamble to the Act read as follows:
 An Act to constitute Reserve Bank of India
Whereas it is expedient to constitute a Reserve Bank for India to regulate the issue of Bank notes
and the keeping of reserves with a view to securing monetary stability in [India] and generally to
operate the currency any credit system of the country to its advantage; And whereas in the
present disorganization of the monetary system, it is not possible to determine what will be suitable
as a permanent basis for the Indian monetary systems of the world; But whereas it is expedient to
make temporary provision on the basis of the existing monetary system, and to leave the question
of the monetary standard best suited to India to be considered when the international monetary
position has become sufficiently clear and stable to make it possible to frame permanent
measures;
Scheme of the RBI Act

 The Act is divided into four chapters;

 the first chapter dealing with definitions, characteristic of most if not all
Indian Acts;
 the second with the incorporation, share capital, management and
business of the Bank;
 the third with central banking functions, and
 the fourth with general provisions relating to the Reserve fund, auditing,
returns and kindred questions
 And Two Schedules
 The Reserve Bank is a shareholders' bank free from any political influence.
 RBI-A large Public Trust
 A Reserve Bank is not a Department of State but rather a large public trust, and the
greatest possible care must be taken not to allow sectional interests, even banks
themselves, to be represented on the Central Board of Directors.
 For this reason the share holders cannot be allowed entirely to elect from shareholders the
Board. The limitation- of voting power to ten votes prevents undue influence on the Board by
those holding large blocks of share
Profits distribution is also limited

 The profits, too, of the shareholders have to be limited, as the Bank must not
be conducted primarily from the view point of dividends, and this limitation
prevents the Directors from being unduly influenced by this-the return to be
paid on the capital of the Bank
Free from Government Influence

 A careful balance has been kept between the various influences likely to
bear on the management of the Bank-Government and private.
 If Government had a controlling influence over the Bank there are ways by
which powerful interests in India to-day may try to enforce their wishes
Status of RBI ?

 RBI is a statutory body set up by the RBI Act as India's Central Bank. It is a
statutory regulatory authority to oversee the functioning of the banks and
the country's banking sector. Under Section 35A of the Banking Regulation
Act, RBI has been given powers to issue any direction to the banks in public
interest, in the interest of banking policy and to secure proper
management of a banking company. It has several other far-reaching
statutory powers.
[Reserve Bank of India and Ors. vs. Jayantilal N. Mistry and Ors.
MANU/SC/1463/2015]
RBI –Not a fiduciary

 RBI is supposed to uphold public interest and not the interest of individual
banks. RBI is clearly not in any fiduciary relationship with any bank. RBI has
no legal duty to maximize the benefit of any public sector or private sector
bank, and thus there is no relationship of 'trust' between them. RBI has a
statutory duty to uphold the interest of the public at large, the depositors,
the country's economy and the banking sector. Thus, RBI ought to act with
transparency and not hide information that might embarrass individual
banks. It is duty bound to comply with the provisions of the RTI Act and
disclose the information sought by the Respondents herein
[Reserve Bank of India and Ors. vs. Jayantilal N. Mistry and Ors. (16.12.2015 -
SC) : MANU/SC/1463/2015]
 Though originally privately owned, since nationalization in 1949, the Reserve
Bank is fully owned by the Government of India.
Acts administered by Reserve Bank of
India
 Reserve Bank of India Act, 1934
 Public Debt Act, 1944/Government Securities Act, 2006
 Government Securities Regulations, 2007
 Banking Regulation Act, 1949
 Foreign Exchange Management Act, 1999
 Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (Chapter II)
 Credit Information Companies(Regulation) Act, 2005
 Payment and Settlement Systems Act, 2007
 Payment and Settlement Systems Regulations, 2008 and Amended up to 2011 and BPSS
Regulations, 2008
 The Payment and Settlement Systems (Amendment) Act, 2015 - No. 18 of 2015
 Factoring Regulation Act, 2011
 II. Other relevant Acts
 Negotiable Instruments Act, 1881
 Bankers' Books Evidence Act, 1891
 State Bank of India Act, 1955
 Companies Act, 1956/ Companies Act, 2013
 Securities Contract (Regulation) Act, 1956
 State Bank of India Subsidiary Banks) Act, 1959
 Deposit Insurance and Credit Guarantee Corporation Act, 1961
 Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
 Regional Rural Banks Act, 1976
 Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980
 National Bank for Agriculture and Rural Development Act, 1981
 National Housing Bank Act, 1987
 Recovery of Debts Due to Banks and Financial Institutions Act, 1993
 Competition Act, 2002
 Indian Coinage Act, 2011 : Governs currency and coins
 Banking Secrecy Act
 The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003
 The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act,
1993
Main Functions

1. Monetary Authority:
 Formulates, implements and monitors the monetary policy
 Objective: maintaining price stability while keeping in mind the objective of
growth.
2. Regulator and supervisor of the financial system:
 Prescribes broad parameters of banking operations within which the
country's banking and financial system functions.
 Objective: maintain public confidence in the system, protect depositors'
interest and provide cost-effective banking services to the public.
3. Manager of Foreign Exchange
 Manages the Foreign Exchange Management Act, 1999.
 Objective: to facilitate external trade and payment and promote orderly
development and maintenance of foreign exchange market in India.
4. Issuer of currency:
 Issues and exchanges or destroys currency and coins not fit for circulation.
 Objective: to give the public adequate quantity of supplies of currency
notes and coins and in good quality.
5. Developmental role
 Performs a wide range of promotional functions to support national
objectives.
 Regulator and Supervisor of Payment and Settlement Systems:
 Introduces and upgrades safe and efficient modes of payment systems in
the country to meet the requirements of the public at large.
 Objective: maintain public confidence in payment and settlement system
 Related Functions
 Banker to the Government: performs merchant banking function for the
central and the state governments; also acts as their banker.
 Banker to banks: maintains banking accounts of all scheduled banks.
6. Subsidiaries
 Fully owned: Deposit Insurance and Credit Guarantee Corporation of India
(DICGC), Bharatiya Reserve Bank Note Mudran Private Limited
(BRBNMPL), Reserve Bank Information Technology Private Limited (ReBIT)
 Role and Functions of RBI
 Visit RBI website and read
https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RWF15012018_FCD40172E
E58946BAA647A765DC942BD5.PDF
 https://www.youtube.com/watch?v=J89wllbbMEE
Over view of Functions and Services of Commercial
Banking Companies
 Functions of Commercial banks
1. Receiving of money on deposit
2. Lending of money
3. Issuing of various credits[ Letter of Credit, Bank Guarantee etc]
4. Agency services[ Collection and Payments of Bills etc]
5. Miscellaneous General Utility Services [ Collection of Interest on securities, Credit cards
etc]
 Module-II
Banking
Regulation Act
Answer the Question
• Whether writ petition can be filed against a Private banking
company?
(Federal Bank Ltd. V. Sagar Thomas and Ors. AIR2003SC4325)

• Whether business carried on by a banking company is discharging

public function and Is it therefore state under Art. 12?
Already Covered
• Purpose and Need ?
• Why regulate banking companies?
• Differential treatment of banking companies vis-à-vis NBFCs
• Power of RBI in regulating commercial banks
 Reasons for development of banking
regulations
• Statement of Objects and Reasons

• Till 1949 Part XA of the Indian Companies Act, 1913 regulated banking
companies

• Difference in the objective of Companies law and banking legislation

• Mushrooming of banks
Reasons for development of banking
regulations
• The Central Banking Enquiry Committee recommended separate legislation for
banks
• Reason for recommendation:
• Control mushroom growth of banking companies
• Manage inadequate capital issues
• Control dishonest management
• Restrict speculative business
• Accordingly bill was introduced in 1948, passed in 1949
History and purpose
• The Banking Companies Act, 1949 was passed to consolidate and
amend the law relating to banking companies

• The need was felt due to

1. Abuse of powers by persons controlling some banks
2. Absence of measures for safeguarding the interest of depositors in
particular

• 1966 name of the Act changed to Banking Regulations Act, 1949

Interpretation of the Act
• The Act to be read along with Companies Act and any other law in
force affecting banking companies
• The Act regulates functioning of banking companies and corporations
and is not meant to codify law of banking. The amendment includes
banking.
Application of the Act
• Three kinds of banks
1. Private Sector Banks
2. Nationalized banks, regional rural banks and any subsidiaries(
Where the respective legislations are silent)
3. Co-operative banks
• The whole of Banking Regulation Act except Sec 56 applies to all the
Banking Companies which are not nationalised.
Application of the Act
• Sec 51 of the Act read with Sec 3(5) of the Banking Companies
(Acquisition and Transfer of Undertakings) Acts provides for
sections applicable to nationalise banks
• Co-operative Banks-
Applies to co-op banks with paid up share capital and reserves
of value more than 1 lakh,
Applies to all State co-op banks and Central co-op banks
General Features of Banking Regulations Act
1. Definition of Banking to include all kinds of deposit receipts
2. Prohibiting Non-Banking Companies from accepting deposits
repayable on demand
3. Avoiding non-banking risks by prohibiting trade
4. Prescribe minimum capital standards
5. Limitations on payment of dividends
6. To control foreign banks in India
7. System of licensing for banks and branches
General Features of Banking Regulations Act
8. Special balance sheet and periodical return to be called by RBI
9. Inspection of books by RBI
10. CG empowered to take action against banks for mismanagement
11. RBI to closely regulate banks
12. Expeditors procedure for liquidation
13. Imperial Banks to be included in regulations
14. Power of RBI to aid banking companies in case of emergency
Meaning of Banking Business
• Sec 5 (b) and 5 (c)- definition of banking

• Sec 6- permitted business of banks

• Sec 7- Name of a banking company

• Sec 8 and 9
• Sec 49 A- prohibitions on receiving deposits
Control and Management

• Part II- working of the company

• Sec 10, 11 12
• Sec 17, 18 along with Sec 42(1) of RBI act
• Sec 19
• Sec 21, 21A- H P Krishna Reddy vs Canara Bank
• Sec 22 and 23
Control and Management
• Part II A- appointment of management
Acquisition of undertaking of banking
companies
• Part II C- Sec 36 AE
1. Report of RBI
2. Reasons:
i. Failure to comply with 21/35A
ii. Interest of depositors
iii. Interest of banking policy
iv. Imposing credit
Suspension of business and winding up
• Part III
• Sec 37- Suspension
Meaning of moratorium
Application by the banking company
Due to temporary inability to pay off debts
Fixed period upto 6 months
RBI Report
Suspension of business and winding up
• Sec 38 to 44
• Sec 38
1. Winding up by HC
2. Winding up on application by RBI
a) RBI application under Sec 37 or Sec 38
b) Sec 38 (3) (a), (b)
• Prafulla Chandra Sinha vs Chotanagpur Bank Association Ltd.
• Sec 44- Voluntary winding up
Special provisions for speedy disposal of
winding up proceedings
• Part III A

• Inserted through an amendment in 1953

• Sec 45 B,45C, 45D, 45F and 45N

• Sec 45 Q- Power to inspect
Amalgamation and restructuring of banks
• Sec 44 A- Procedure

• Sec 44B- Restrictions on compromises

• Can a banking companies pay dividend?
Restrictions on loans and advances
• Ref: S. 20
Power of Reserve Bank to control advances by
banking companies
• S. 21
Power of the Reserve Bank to give directions
• Ref: 35A
Power of Central Government to authorize Reserve Bank for issuing
directions to banking companies to initiate insolvency resolution
process
• Section 35AA
• The Central Government may, by order, authorize the Reserve Bank
to issue directions to any banking company or banking companies to
initiate insolvency resolution process in respect of a default, under
the provisions of the Insolvency and Bankruptcy Code, 2016 (31 of
2016). Explanation- For the purposes of these section, “default” has
the same meaning assigned to it in clause (12) of section 3 of the
Insolvency and Bankruptcy Code, 2016.
 Whether cooperative banks and multi cooperative
banks can take recourse under SARFAESI Act?
• Pandurang Ganpati Chaugule vs. Vishwasrao Patil Murgud Sahakari Bank
Limited MANU/SC/0429/2020
• The issue arises whether the definition of 'banking company' contained in
Section 5(c) of the Banking Regulation Act, 1949 covers cooperative banks
registered under the State law and also multi-State co-operative societies under
the Multi-State Co-operative Societies Act, 2002 Consequently, (i) whether
cooperative banks at State and multi-State level are co-operative banks within
the purview of the SARFAESI Act? and (ii) whether provisions of the SARFAESI Act
apply to the co-operative banks registered under the MSCS Act?
• Section 56(c)(i)(cci) is contained in Part V of the BR Act, 1949, and was brought
into force on 1.3.1966. It defines 'co-operative bank' to mean a 'state co-
operative bank,' a 'central co-operative bank,' and a 'primary co-operative bank.'
By the notification issued in 2003, the co-operative bank was brought within the
class of banks entitled to seek recourse to the provisions of the SARFAESI Act.
scope of Entry 45 List I
• ICICI Bank Limited v. Official Liquidator of APS Star Industries Limited and
Ors. MANU/SC/0782/2010 : (2010) 10 SCC 1,
• Wherein it was emphasised that even if a company was doing different
businesses in addition to Clause (a) to (o) of Section 6(1), it would remain a
banking company as long as it was performing the core banking functions
Under Section 5(b). The core banking function is the sine qua non for being
regulated by the BR Act, 1949. Therefore, 'banking' in Entry 45 of List I is
essentially meant to be confined to 'core banking business'. At the time
when the Constitution of India was promulgated, a well-defined and well-
established meaning of the expression 'banking' prevailed in the form of
the definition of 'banking' Under Section 5(b) of the BR Act, 1949. The
same expression was borrowed by the Framers of the Constitution of India,
and same meaning was to be given to the expression 'banking' in the Entry
as defined in the BR Act, 1949.
IL and FS Financial Services Ltd. vs. SKIL Infrastructure Limited and Ors.
MANU/MH/0331/2020
• The non-compliance of the directions issued by the Reserve Bank may result in prosecution/or levy of
penalty under Section 46, but it cannot result in invalidation of any contract by the bank with the
third party. If the contention of the Custodian is accepted it will result in invalidation of agreements by
the banks, even where the third parties may not be aware of the directions which are being violated.
• To give an example if the Reserve Bank by confidential circulars fixes the limit in excess of which the
banks cannot give any loan but, without informing the third party, the bank while exceeding its limit
gives a loan which is then utilized by the bank's customer. It will be inequitable and improper to hold
that as the directions of the Reserve Bank had not been complied with by the bank, the grant of loan
cannot be regarded as valid and, as a consequence thereof, the customer must return the amount
received even though he may have utilized the same in his business. Yet another instance may be
where the bank advances loan by charging interest at a rate lower than the minimum which may have
been fixed by the Reserve Bank, in a direction issued under Section 36 (1)(a). As far as the customer is
concerned, it may not be aware of the direction fixing them minimum rate of interest.
• Can it be said, in such a case, that the advance of loan itself was illegal or that the bank would be
entitled to receive the higher rate of interest? In our opinion it will be wholly unjust and inequitable to
hold that such transactions entered into by the bank with a customer, which transactions are otherwise
not invalid, can be regarded as void because the bank did not follow the directions or instructions
issued by the Reserve Bank of India.
 Chanda Deepak Kochhar vs. ICICI Bank Limited and
Ors. MANU/MH/0386/2020
• The Petitioner was working as a Managing Director with the ICICI Bank. The
Petitioner was terminated from service. The Reserve Bank India communicated its
approval to the termination. The Petitioner has challenged the termination order
and has prayed for consequential reliefs.
• Petitioner in this case challenged the applicability of Section 35B(1)(b) of Banking
Regulation Act, 1949, as ICICI Bank Ltd is a private sector bank not a state under
Art.12.
• The Writ Petition is maintainable. The amendment to challenge the order of Reserve
Bank is allowed, and order allowing amendment is not challenged. The services of
the Petitioner are governed by a statute, more particularly Section 35B(1)(b) of the
Banking Regulation Act. The Reserve Bank granting approval for termination
directly affects the rights of the Petitioner, and therefore such order is justiciable in
writ jurisdiction. The impugned order of Reserve Bank shows that the approval is
granted ex-post facto when Section 35B(1)(b) postulates prior permission.
Whether the rate of Interest charged by the
banks are subject to judicial review?
• Ref Section 21A
• H.P Krishan Reddy v. Canara bank (AIR 1985 KAR 1277)
( Rate of Interest charged by the bank was challenged as excessive while recovering loan from the
petitioner)
• S. 21A has, however, no bearing on the jurisdiction of Courts to give relief to an aggrieved party
when it is established that the Bank in a particular case has charged interest in excess of the limit
prescribed by the Reserve Bank of India. The Reserve Bank has enormous power to control
advances to be made by Commercial Banks. The Reserve Bank has power to prescribe or regulate
the interest rate structure on advances or other financial accommodation to be made by
Commercial Banks. S. 46(4) of the Banking Regulation Act confers power on the Reserve Bank to
impose penalty for contravention of its order, rule or direction. The interest charged by Banks on
transactions should therefore be in conformity with the rate prescribed by the Reserve Bank.
Banks are bound to follow the direction or circular issued by the Reserve Bank in that behalf. If, in
any case, it is proved that the Bank has charged interest in violation of the direction of the
direction of the Reserve Bank, the Court could give relief to the aggrieved party notwithstanding
S. 21A of the Banking Regulation Act. The interest charge beyond the rate prescribed by the
Reserve Bank would be illegal and void. We cannot, therefore, allow the claim of the Bank on
quarterly rests on agricultural loans.
 Peerless General Finance and Investment Co. Ltd.
and Another vs. Reserve Bank of India, (AIR 1962
SC 1033)
• Whether RBI is authorized to issue guidelines to regulate the Chit business
entities? ( Whether Chit business is covered under section 6 of Banking
Regulation Act)
• Thus, the R.B.I. occupies place of pre-eminence to ensure monetary
discipline and to regulate the economy or the credit system of the country
as an expert body. It also advices the Government in public finance and
monetary regulations. The banks or non-banking institutions shall have to
regulate their operations in accordance with, not only as per the provisions
of the Act but also the rules and directions or instructions issued by the RBI
in exercise of the power thereunder.....
 Power of RBI to regulate Banking companies
• Section 21 of Banking Regulation Act states that if the Reserve Bank is satisfied that it is
necessary or expedient in public interest or in the interests of depositors or banking policy
so to do, it may determine the policy in relation to advances to be followed by banking
companies generally or by any banking company in particular and the banking company
concerned, as the case may be, shall be bound to follow the policy as so determined.
• Section 22 of the Banking Regulation Act states that no company can carry on banking
business in India, unless, it holds a license in this behalf issued by the Reserve Bank.
Section 22(4) of the Banking Regulation Act empowered the Reserve Bank to cancel the
license of the banking company granted to carry on banking business, in the facts and
circumstances stated therein.
• Section 35 of the Banking Regulation Act conferred the powers on the Reserve Bank to
carry on statutory inspection of books of accounts of any banking company or cause a
scrutiny into the affairs of a banking company. Section 35-A of the Banking Regulation Act
confers the powers on the Reserve Bank to issue directions to banking companies in
general or any banking company in particular in the public interest or in the interest of the
banking policy or to prevent the affairs of the banking company being conducted in a
manner detrimental to the interest of its depositors or in a manner prejudicial to the
banking company etc.
 Validity of Master Circulars issued by RBI

• The power conferred by Sections 21(Licensing) and 35A(Inspection) of the Banking

Regulation Act, 1935 is coupled with duty to act. Reserve Bank of India is prime banking
institution of the country entrusted with a supervisory role over banking and conferred
with the authority of issuing binding directions, having statutory force, in the interest of
public in general and preventing banking affairs from deterioration and prejudice as also to
secure the proper management of any banking company generally. Reserve Bank of India
is one of the watchdogs of finance and economy of the nation. It is, and it ought to be,
aware of all relevant factors, including credit conditions as prevailing, which would invite
its policy decisions........

• Deccan Chronicles Holdings Limited and Ors. vs. The Union of India and Ors.
MANU/TN/0660/2014( RBI Circular issued under SARFAESI dealing with asset classification
was challenged as unconstitutional. Also difference between SARFAESI ACT AND Banking
Regulation Act, 1949)
Scope of Banking Policy under Section 5(Ca)
• Definition of Banking Policy under Section 5(ca) of the Banking Regulation
Act is rather wide and extensive. Such a policy is to be evolved by Reserve
Bank of India in the interest of Banking System or monetary stability or
sound economic growth, having due regard to the interests of the
depositors, the volume of deposits, other resources of the Bank, the need
for equitable allocation and the efficient use of deposits and resources. It
only means that the control of the Reserve Bank of India is all pervasive.
Any other interpretation would defeat the very object of Act No. 10 of
1949. The Reserve Bank of India Act is made in public interest and with a
mandatory duty to formulate a statutory, comprehensive and formal
structure of banking regulations and supervisions.

• Deccan Chronicles Holdings Limited and Ors. vs. The Union of India and
Ors. (08.05.2014 - MADHC) : MANU/TN/0660/2014
Sajjan Bank Ltd v. RBI AIR 1957 MAD-RAMACHANDRA IYER J.
• ( Refusal of RBI to issue Licence to Sajjan Bank Ltd was challenged as unconstitutional
and the power of RBI to issue licence under section 22 of Banking Regulation Act was
challenged).
• The licensing itself is vested in a statutory authority which is itself a central banking
institution concerned both with the currency and credit operation in the country. The
Reserve Bank of India was established with a view to fostering the banking business and
not for impeding the growth of such business.
• The powers vested in it under section 22 are not ones invested with a mere officer of the
bank. The standards for the exercise of the power have been laid down in section 22 itself
The Reserve Bank is a non-political body concerned with the finances of the country.
• When a power is given to such a body under a statute which prescribes the regulations of a
banking company it can be assumed that such power would be exercised so that genuine
banking concerns could be allowed to function as a bank while institutions masquerading
as banks or those run on unsound lines or which would affect the interests of the public
could be weeded out.
• The power given is regulated by the statute and being entrusted to a statutory body which
is itself regulating the credit of the country the nature of the power its exercise after the
investigation prescribed by the statute invests it with a quasi-judicial character.
Module-III
TOPIC-1 - TYPES OF BANKING CUSTOMERS AND TYPES OF BANK ACCOUNTS
 1.Opening of new accounts
2.Special type of customers- minors, married
women.
3. Joint accounts

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07-10-2021
 Who is a Customer?

Duration Theory : Sir John Paget

1. There must be some recognizable course or habit of dealing between the customer and the
banker.
2. The transaction must be in the form of regular banking business
Modern Theory: Ladbroke v.Todd (1914): Justice Baithache, “ The relation of a banker and
customer begins as soon as the first cheque is paid in and accepted for collection and not merely
when it is paid”
 CIT v. English Scottish and Australian Bank(1920)TLR “ The word customer signifies a relationship in
which duration is not of the essence…”
 Single transaction may constitute a Customer: Savoury and Co. Ltd v. Lloyds Bank Ltd.,(1932) “ A
customer is one who has an account with a banker or for whom a banker habitually undertake
to act as such”

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 Central Bank of India v. V.Gopinathan Nair(1970), “ Customer is the person who has the habit of
resorting to the same place or person, to do the business. So far as the banking transactions are
concerned he is a person whose money has been accepted on the footing that , the banker will
honour up to the amount standing to his credit, irrespective of his connection being of short or
long standing”.
1. Bank account is the nexus to create a relation of banker and customer.
2. Relationship between banker and customer must arise out of Contract- Mutual consent and
competency are essential to establish a contractual relationship.

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 6
Special Type of Customers & Special
Rules
1. Minor
2. Married Woman
3. Pardanashin Woman
4. Illiterate Persons
5. Lunatics
6. Trustees
7. Executors and Administrators
8. Joint Hindu Family
9. Partnership Firm
10. Registered Companies
11. Clubs , Societies and Charitable institutions

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Opening of Account-
Banker’s Role
What is the standard of care to be taken by
a Bank in opening an account?

 In the Practice and Law of Banking by H.P. Sheldon, 11th Edition, in

Chapter five at page 64 it is said:
 “Before opening an account for a customer who is not already known to
him, a banker should make proper preliminary inquiries. In particular, he
should obtain references from responsible persons with regard to the
identity, integrity and reliability of the proposed customer. If a banker does
not act prudently and in accordance with current banking practice when
obtaining reference concerning a proposed customer, he may later have
cause for regret”.

07-10-2021
 M.L. Tannan in Banking Law and
Practice in India
18th Edition at page 198 says:
 Before opening a new account, a banker should take certain precautions and must
ascertain by inquiring from the person wishing to open the account, if such person is
unknown to the banker, as to his profession or trade as well as the nature of the account
he proposes to open.
 By making necessary inquiries from the reference furnished by the new customer, the
banker can easily verify such information and judge whether or not the person wishing to
open an account is a desirable customer. It is necessary for a bank to inquire, from
responsible parties, given as references by the customer, as to the latter's integrity and
respectability, an omission of which may result in serious consequences not only for the
banker concerned, but also for other bankers and the general public.

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Indian Overseas Bank vs. Industrial Chain
Concern MANU/SC/0228/1989

 If the Banker was negligent in following up the references given at

opening of account and subsequently cheques etc. are collected for the
customer paid into that account and those happened to be someone
else the Bank may be liable for conversion, unless protected by law.
[In the instant case, Sethuraman having been known to the Manager who
gave the introduction, there was no violation of any instruction or Rules].

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Indian Overseas Bank vs. Industrial Chain
MANU/SC/0228/1989

 Fictitious bank account opened in appellant's bank in name of

respondent's firm due to which respondent suffered loss. Whether
appellant was negligent?
 Test is whether bank followed Rules or instruction or not ?
 Court found there was no violation of Rules - no evidence of any notice so
as to arose suspicion on part of bank while accepting cheque. Bank not
negligent in opening account or accepting cheque.

07-10-2021
 In Ladbroke & Co. v. Todd (1914) 30 TLR 433, the plaintiff drew a cheque and sent it to the payee
by post. The letter was stolen and the thief took it to the defendant, a banker, and used it for the
purpose of opening an account for the purpose which he forged the payee's endorsement. The
defendant accepted believing him to be the payee. He was not introduced to the Bank and no
references were obtained. The defendant opened the account and the cheque was specially
cleared at the request of the thief, and he drew out the proceeds on the next day.
 On the discovery of the fraud the plaintiff brought an action against the defendant for
conversion

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 It was held that the banker had acted in good faith, but was guilty of
negligence in not taking reasonable precautions to safeguard the
interests of the true owner of the cheque and that therefore he had put
himself outside the protection of Section 82 of the Bills of Exchange Act,
1882.
 Baithache,J. also said that the banker would have been entitled to the
protection of the section as having received payment for a customer,
but had lost it owing to his want of due care. It was also held that the
relation of banker and customer began as soon as the first cheque was
handed in to the baker for collection, and not when it was paid.

07-10-2021
 14

 In Turner v. London and Provincial Bank (1903) 2 L D A B 33, that the

customer had given a reference on opening the account and that this was
not followed up and the same was held to be negligence.

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 15
Protection to the paying banker

 131. Non-liability of banker receiving payment of cheque. - A banker who

has in good faith and without negligence received payment for a
customer of a cheque crossed generally or specially to himself Will not, in
case the title to the cheque proves defective, incur any liability to the true
owner of the cheque by reason only of having received such payment.
 Explanation - A banker receives payment of a crossed cheque for a
customer within the meaning of this section notwithstanding that he
credits his customer's account with the amount of the cheque before
receiving payment thereof.

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 16

 In Lloyds Bank Ltd. v. E.B. Savory and Company (1983) AC 201, the bank was held
to be negligent (depriving it of the protection of Section 82 of Bill of Exchange Act
1882) not to ask a customer though respectively introduced the name of his
employer and in the case of a married woman the name of her husband's
employer.
[This is a case where a fraud had arisen through an employee stealing cheques from
his employer and placing them into the credit of his account. Had the bank known
his employer, enquiries would have been made.]

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 Underwood v. Bank of Liverpool (1924) 1 K.B. 775, was a case of a Director
paying into his own private account cheques in favour of the company
duly endorsed by himself as sole Director and as such distinguishable on
facts.

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Bapulal Premchand v. Nath Bank Ltd. AIR 1946 Bom. 482,
Chagla J,

 “ There was no absolute and unqualified obligation on a bank to make inquiries about a proposed
customer and that modern banking practice required that a customer should be properly
introduced or the bank should act on the reference of some one whom it could trust.
 Therefore, perhaps in most cases it would be wiser and more prudent for a bank not to accept a
customer without some reference.
 [ In that case the manager of the defendant-bank accepted the reference of the cashier Modi
and also in fact made certain inquiries of Modi as to the position and status of the customer, It was
held that it was not obligatory upon the defendant-bank to make any further inquiries about his
customer and in having failed to make any such further inquiries in his Judgment they were not
guilty of negligence. In the instant case the Manager himself gave the introduction”] .

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 19
MINOR – Why special?

 https://rbidocs.rbi.org.in/rdocs/notification/PDFs/OBAC060514F.PDF

 A savings bank account may be opened in the single name of a minor and may be operated
upon by minor, if he/she has completed the age of-10-years and is able to read and write.
Maximum balance to the credit of such account should not exceed at any time Rs.1,00,000/-
.For accounts of minors above-14-years,there is no limit to maximum balance.
 A savings bank account may be opened in the name of minor jointly with his/her natural
guardian i.e. father or guardian i.e. mother or both.

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Answer the following 20

1. If the guardian dies before the minor attains majority, whether the balance can be paid
to the minor?
2. Whether Banker can recover from the minor, if an overdraft or advance is granted to a
minor?
3. If an advance is granted to a minor on the guarantee of the third party, can such
person be liable if the minor default? [ Ref: Whether s.128 can be invoked by the
creditor? ]
 S. 26 of Negotiable instruments Act, 1881- Minor may draw, endorse or negotiate a
cheque or bill of exchange, But he cannot be held liable on such cheque or bill.
 Whether Kids account is available ?What is the maximum amount in kids account?

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 21

 https://m.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?Id=4321&Mode
 Above link provide information relating to various types of accounts.

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 22
Married Woman

 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:
I. If the loan is taken with the consent or authority of the husband and
II. If the debt is taken for the supply of necessaries of life to the wife, in case
the husband defaults in supplying the same to her.

07-10-2021
 23

 The husband shall not be liable to the debt 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.

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 24
Pardanashin Woman

 A Pardhanashin 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 :
I. Any contract entered into by her might have been subject to undue influence ; and
II. The same might not have been made with her free will and with full understanding of what
the contract actually means.
 Thus a contract entered into by a pardanashin woman is not a contract free from all defects.
 Bankers are expected take utmost care in opening account in the name of a pardanashin
woman.

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 25
Illiterate Persons

 Illiterate persons cannot sign their names and hence bankers take their
thumb impressions as a substitute for signature , and also a copy of their
recent photograph, attested by a first class magistrate, for the purpose of
identification.

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 26
Lunatics – Are they competent to
contract

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 27
Trustees

 Who is a trustee?
 What is a trust? ( Ref: S.3 of Indian Trust Act)
 Who is a beneficiary?
 Trust Deed and its implications in opening the account?
 Bankruptcy or death of trustees and its consequence on bank accounts of beneficiary?

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 Executors and Administrators 28

 Is there a difference between Executors and administrators?

 What are the rules to be followed in an account operated by executors and administrators?
1. Executor should be permitted to operate the account of the deceased after he has obtained the probate from
the court.
2. In case of two or more persons are appointed as executors or administrators, they shall have joint interest in the
estate of the deceased.
3. Banker should not permit transfer of funds from estate account to the personal account of the executor.
4. On the death of executor, his powers are vested in surviving executors( , if there are two or more executors
appointed).
5. Banker cannot exercise his right of set-off against the credit balance in the executors personal account in
respect of a debit balance in the account of the deceased.
6. Executors are made jointly and individually liable for advances taken from the bank before the probate or letter
of administration is made .

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 29
Joint Hindu Family

 Karta has an implied authority to take loan, execute necessary contract

and pledge the securities for the business of the family
 The principles of law which govern borrowing by the karta of HUF was
stated by court in Ram Dayal and &Others v. Bhanwarlal and Ors( AIR
1973 Raj 173) as follows;
 1. Manager of HUF has power to alienate for value joint family property, so
as to bind the interest of both adult and minor coparceners in the
property, provided that the alienation is made for legal necessity or for the
benefit of the estate.
 2. Burden of proving the legal necessity is on the alienee(Transferee)

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 30
Partnership Firm in Banking
Transactions

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 31

 Two essential conditions to be satisfied for creation of partnership firstly that

there should be agreement to share profits as well as losses secondly
business must be carried on by all or any of them acting for all.( S.4)

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 32
Registration optional

Capacity, Power and Authority of

partners
Partnership Deed –The main
document 07-10-2021
 33
Status of Partnership Account

 Raw Prakash Goel v. Chandra Prakash Goel & Anr. AIR 2007 SC 1517,
 “When a partner dies and the partnership comes to an end. It is not only
right but also the duty of the surviving partner to realize the assets for the
purpose of winding up of the partnership affairs including the payment of
the partnership debts. However, it is true that in a general sense the
executors or administrators of the deceased partner may be said to have
a lien upon the partnership assets in respect of his interest in the
partnership and taking the partnership account."

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 34
Section 20. Extension and restriction of
partner's implied authority:

 The partners in a firm may, by contract between the partners, extend or

restrict the implied authority of any partner. Notwithstanding any such
restriction, any act done by a partner on behalf of the firm which falls within
his implied authority binds the firm, unless, the person with whom he is
dealing, knows of the restriction or does not know or believe that partner to
be a partner.

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 35
Firms account should always be
opened in the name of the firm

 Banker should take a letter signed by

all the partners
 Notice can be given to withdraw the
authority

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 36

 Surjit Singh and others v. Ram Ratan Sharma  Ref: S.19 of Partnership Act,1932
AIR 1975 Gau14- There is implied mutual
agency to each of the partners of a
registered partnership firm.
 Implied authority does not extend to open an  Liability of the partner is unlimited
account.
 Borrowing Power of a Partner is limited

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 37
Status of Bank Account in case of

 Death of the partner?

 Retirement of a Partner?
 Insolvency of a Partner?

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 38
Company accounts and Bankers
Obligations
 Nature of a company- Separate Legal Person
 Certificate of Incorporation
 Memorandum of Association
 AOA
 Copy of Board Resolution
 Borrowing Powers of the Company
 Registration of Charges

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Module-IV
Banker-Customer Relationship
Banker-Customer relationship: Statutory
reliefs
 The consumer Protection Act, 2019
 The banking ombudsman scheme 1995 was introduced by the reserve bank of India so that it
could provide the redressal to whatever grievances arose in the services of the bank, loans, and
advances as well as other matters(Sec35A of Banking Regulation Act).
 What is the nature of Banker-Customer
relationship?
 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.
Definition of a ‘BANKER’

The Banking Regulations

Act (B R Act) 1949 does not
define the term ‘banker’
but defines what banking
is?

As per Sec.5 (b) of the

B R Act “Banking'
As per Sec. 3 of the means accepting, for
Indian Negotiable the purpose of lending
Instruments Act 1881, or investment, of
the word “banker deposits of money
includes any person from the public
acting as banker and repayable on demand
any post office savings or otherwise and
bank”. withdrawable by
cheque, draft, order or
otherwise."
Banker…..

According to Sec. 2 of the Bill of Exchange Act, 1882, ‘banker includes a body of persons, whether
incorporated or not who carry on the business of banking.’

Sec.5(c) of BR Act defines "banking company" as a company that transacts the business of banking in India .
Since a banker or a banking company undertakes banking related activities,

The meaning of banker or a banking company from Sec 5(b) as a body corporate that:
(a) Accepts deposits from public.

(b) Lends or

(c) Invests the money so collected by way of deposits.

(d) Allows withdrawals of deposits on demand or by any other means.

 Who is a ‘Customer’?
 The term Customer has not been defined by any act. The word ‘customer’ has been derived from the
word ‘custom’, which means a ‘habit or tendency’ to-do certain things in a regular or a particular
manner’.
 In terms of Sec.131 of Negotiable Instrument Act, when a banker receives payment of a crossed cheque
in good faith and without negligence for a customer, the bank does not incur any liability to the true
owner of the cheque by reason only of having received such payment. It means that to become a
customer account relationship is must. Account relationship is a contractual relationship.
 Classification of Relationship
 The relationship between a bank and its customers can be broadly categorized in to General Relationship
and Special Relationship.
 Sec 5(b) of Banking Regulation Act, states that bank’s business hovers around accepting of deposits for
the purposes of lending.
 Thus the relationship arising out of these two main activities are known as General Relationship.
 In addition to these two activities banks also undertake other activities mentioned in Sec.6 of Banking
Regulation Act. Relationship arising out of the activities mentioned in Sec.6 of the act is termed as special
relationship.
 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.
 Anindita Jena & anr. v. General Manager & anr. MANU/OR/0229/2011
 Default in payment by ‘A’ to ‘X’. X filed a suit to recover the amount before DRT. DRT issued the
direction to ‘Y’ bank where ‘A’ was employed to withhold PF and Gratuity and to pay the same
to satisfy the debt due to X. A was also a customer of Y bank. A filed a suit to stay the order of
DRT in recovering PF and Gratuity.
Court held that :
 "Amount admissible on account of provident fund dues is not part of remuneration or wages
arising out of contract of employment but is liability on employer by virtue of beneficial
provisions of law.“
 The relationship between the

C.R. Dash, L. Mohapatra J.,
“The P.F. & gratuity amount payable to Petitioner has its bearing on the
relationship between the Petitioner No.1 & the Opp. Party Bank as the
employee & employer.
 The liability of Petitioner No.1, on the other hand, as the debtor arises
out of relationship between the two as the debtor & creditor. The Opp.
Party Bank being the creditor would have no authority to appropriate the
gratuity & P.F. amount of Petitioner No.1 towards any outstanding loan
even on the basis of assignment or charge created by him (Petitioner
No.1), for that purpose had the employer of Petitioner No.1 been one
other than the Opp. Party Bank because of the statutory bar under
different social security legislations as discussed supra. On the same
analogy, the Opp. Party Bank being the employer & the creditor in the
present case could not have paid the P.F. & gratuity amount as the
employer in its right hand to lay its left hand over the same being the
creditor, leaving the hands of Petitioner No.1 blank in between. The Opp.
Party Bank being the employer could not have adjusted its liability with
the, liability of the Petitioner No.1 as a debtor of the Bank. Such
adjustment of liabilities, if approved, shall strike at the very objectives
of different social security legislations”.
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. 3 of Indian
Trust Act, 1882 ‘ A "trust" is an obligation
annexed to the ownership of 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.’ Thus trustee is the holder of
property on behalf of a beneficiary.
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.).
Bank as a Trustee
 In Indian Bank v. Blue Jaggers Estates Limited MANU/SC/0570/2010 :
2010(8) SCC 129, the Hon'ble Supreme Court underscored the primacy
of a bank as a trustee of public funds and held it was bounden duty
of bank to recover the amount by adopting all legally permissible
methods.
 In Shanti Prasad Jain's case MANU/SC/0250/1962 : [1963]2SCR297 ,
the account was opened with German bank with a stipulation that the
said Mr. Jain was not to operate the said account except for the
purpose specified and the bank was informed of the arrangement
under which the deposit was made. It was held by Venkatarama Aiyar
J. that, in the circumstances, the bank had only custody of the
money as if it was a stakeholder with liability to hand to over to the
person who would become entitled to it under the arrangement. It
was held by the court that the moneys so held by the bank under a
special arrangement could not constitute a relationship of debtor and
creditor but constituted the
 AIR1962SC1003New Bank of India Ltd. v. Pearey Lal

 Facts : The customer had paid certain amounts to the registered office of the bank at
Lahore for the purpose of transmitting the same to a branch of the bank which was
proposed to be opened at Calcutta with an intention to obtain fixed deposits from the
Calcutta branch of the bank subject to issuing necessary instructions in that behalf. The
amounts were transmitted to the Calcutta branch.
 The branch of the bank was opened. No instructions were issued by the applicant for issue
of "fixed deposit".
 A moratorium was issued prohibiting the bank from making any payment. A scheme was
sanctioned by the East Punjab High Court under which the depositors were to be paid 70%
of the deposits. The Calcutta branch of the bank had unilaterally issued fixed deposit
receipts in favour of the respondents without any instructions of the respondent so to do.
 It was held by the apex court that the transaction was one of entrustment of the
amount to the bank for transmission to Calcutta and the bank held the said amount as a
trustee throughout. It was held by the court that the said deposit was not an ordinary
or general deposit. It was held that the applicant was entitled to receive the entire
amount from the bank and the relationship constituted was not that of debtor and
creditor as would ordinarily be constituted when a customer opens an account with the
bank in the ordinary course of banking business.
 In case of trust banker customer relationship is a special contract. When a
person entrusts valuable items with another person with an intention that
such items would be returned on demand to the keeper the relationship
becomes of a trustee and trustier.
 Customers keep certain valuables or securities with the bank for safekeeping
or deposits certain money for a specific purpose (Escrow accounts) the banker
in such cases acts as a trustee.
 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".
 Banks secure their advances by obtaining tangible securities.
 In some cases physical possession of securities goods (Pledge), valuables,
bonds etc., are taken. While taking physical possession of securities the bank
becomes bailee and the customer bailor. Banks also keeps articles, valuables,
securities etc., of its customers in Safe Custody and acts as a Bailee. As a
bailee the bank is required to take care of the goods bailed.
 In this case, gold ornaments and jewellery were entrusted for
the safe custody to the bank but while returning the same to
the legal representative of the bailee, it was found that
quantum of ornaments and jewellery were less - There was
sufficient evidence to prove the amount of moveable property
entrusted to the bank - On the question as to duty of bailer
under Section 148 of the Contract Act, 1872, it was ruled that
the bank was liable for safe custody of goods entrusted to it and
Therefore, the bank was liable to return the property or to
make the good the cost thereof.
Jagdish Chandra Trikha vs. Punjab National Bank and
Ors.(24.10.1997 - DELHC): MANU/DE/1243/1997
 Loan advanced by appellant bank on pledging of goods by respondent -
bank assumed role of bailee in respect of goods pledged - bailee is
bound to take such care of goods as a prudent man would take of his
own goods - some goods stolen during bailment - bailee not absolved
unless it be shown that he took care of goods as prudent person -
allegation of goods lost and destroyed when under custody of receiver
- bailee never approached Court to take action against receiver for
not discharging his function properly - receiver also not cross-
examined during his evidence - appellant entitled to recover loan
amount from respondent after adjusting the value of goods pledged.
 Punjab National Bank v. Lakshmi Industrial and Trading Co. (P.) Ltd.
and Ors. (08.09.2000 - ALLHC) : MANU/UP/0605/2000
3. 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.
 Deputy Commissioner of Income Tax, Chennai vs. T. Jayachandran (24.04.2018
- SC) : MANU/SC/0447/2018
 Mr. Jayachandran was a stock broker for Indian Bank. He as a broker was
specifically engaged by Bank for purchase of securities and that Bank had
included interest money too in consideration paid, for purpose of taking
demand drafts in favour of PSUs. Evidence led by other bank officials pointed
out that price of securities itself were fixed by bank authorities and as per
their directions Respondent had purchased securities at market price and
differential amount was directed to be used for taking demand drafts from
bank itself for paying additional interest to PSUs.
 Assessing Officer raised demand with regard to sum payable to Public Sector
Units(PSUs) while holding that Respondent had not acted as broker in
transactions carried out for Indian Bank rather as independent dealer and said
amount was liable to be assessed as income of Respondent.
 Respondent preferred appeal before Commissioner for Income Tax (Appeals)
which was allowed. Appellant filed appeal before Tribunal which was allowed
and held that amount received at hands of Respondent was income of
Respondent. Meanwhile criminal proceedings which were initiated with
respect to present transactions against Respondent was decided by Court.
 Court, while acquitting Respondent observed that relationship between
Indian Bank and Respondent was that of principal-agent and with regard to
transactions in question Respondent acted in capacity of broker and not as
individual dealer.
 4. 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.
 5. Guarantor: Banks give guarantee on behalf of their customers and enter in to
their shoes. Guarantee is a contingent contract.
S. 126 - A ‘contract of guarantee’ is a contract to perform the promise, or
discharge the liability, of a third person in case of his default. The person who
gives the guarantee is called the ‘surety’; the person in respect of whose default
the guarantee is given is called the ‘principal debtor’, and the person to whom
the guarantee is given is called the ‘creditor’. A guarantee may be either oral or
written. —
Om Parkash Laceria v. Punjab National Bank
MANU/HP/0854/2017
 The petitioner was appointed as a Clerk-cum-Cashier with the respondent-Bank in
the year 1978 and thereafter, finally came to be promoted to Class-I category in
the year 2005. The son of the petitioner took loan from the respondent-Bank and
the petitioner stood guarantor for the same.
 The grievance of the petitioner is twofold - (i) that without initiating proceedings
against the principal debtor, the respondent-Bank cannot proceed against the
petitioner simply being the guarantor for the loan amount; and (ii) that the retiral
benefits of the petitioner cannot be withheld after his retirement on 28.2.2011.
 Decide ?
 BlueOrchard Microfinance Fund v. Share
Microfin Limited MANU/AP/0305/2015

 Petitions filed to wind up Respondent Company for non-payment of alleged debts

due to Petitioner. Petitioner had arranged loan to Respondent through bank as
guarantor .Respondent failed to repay loan . Bank recovered same from Petitioner.
 Thus Petition seeking reimbursement of amount paid to bank by Petitioner. Whether
by nature of agreement between parties, Respondent was indebted to Petitioner.
Held, Petitioner had acted as surety on behalf of Respondent-principal debtor
guarantying debt to creditor-Bank .
 Agreement between parties was contract of guarantee under which petitioner
was entitled to recover loan amount advanced by bank to Respondent and
recovered from Petitioner.
 Termination of relationship between a banker and a customer:
The relationship between a bank and a customer ceases on:
(a) The death, insolvency, lunacy of the customer.
(b) The customer closing the account i.e. Voluntary termination
(c) Liquidation of the company
(d) The closing of the account by the bank after giving due notice.
(e) The completion of the contract or the specific transaction
Bankers Rights
1. Banker’s Lien

 What is lien ?
 Whether the Banker’s have right to lien?
 What is the nature of Banker’s lien?
 Alliance Bank of Simla Ltd v. Ghamandi lal Gaini Lal AIR 1927 Lah.408 – It was
held that general lien confers only on holder the right to retain the goods
until the payment is made out but it does not carry with it the right of sale to
secure the debt or indemnity. It is merely a right to retain goods or chattel
and does not create right as in favour of a pledgee.
Bankers lien on deposits made with
undertaking not to withdraw deposits
 State Bank of Mysore v. Lakshmi Constructions (P)Ltd ,(2001)
103CompCas.258- The question was whether the bank could exercise its
powers of lien on certain deposits, which had been made by two defendants
who were non-residents and had placed deposits in foreign currency with the
bank. Along with the letter written to the bank by these two defendants
undertaking not to withdraw deposits until the loan granted to the company
was fully discharged.
 It was held by the Madras High court that the letter did not create a lien as it
had been stated only that the deposits would not be prematurely withdrawn
by the depositors.
Bankers lien- S. 171

 S. 171. Bankers, factors, wharfingers, attorneys of a High Court and policy-

brokers may, in the absence of a contract to the contrary, retain as a security
for a general balance of account, any goods bailed to them; but no other
persons have a right to retain, as a security for such balance, goods bailed to
them, unless there is an express contract to that effect.
 Bankers Right of General Lien
Vijaya Bank v. Naveen Mechanised
Constructions(P)
Ltd.,(2004)121CompCas.783(Kant.)
 Whether a bank can withhold the money due from subsidiary of another
company from the holding company, despite the holding company discharged
all its liability towards the bank?
 It was held that in the absence of any specific authorisation or lien conferred
upon the bank to retain the security towards the discharge of any debt in
respect of other companies, the bank was not justified in retaining the
security. S.171 is applicable only for the repayment of the debt borrowed by
the same person.
Tilendranath Mahanta v. United Bank of
India AIR 2002 Gau 1
 Court held that under section 171 of the Indian contract Act, bankers lien can
properly arise only over the things which belong to the customer and
which are held by the bank as security. There will be no bailment in case of
fixed deposits or separate accounts as these have not been given to the bank
as security.
Punjab National Bank v. Surendra Prasad
Sing(1992) SC
 Whether the fixed deposits receipts deposited by the guarantor being
adjusted towards debt barred by limitation ?
 Time barred debt does not cease to exist by reason of section 3 of the
limitation Act. The right to enforce the debt can be exercised in any other
manner than by means of a suit. The debt is not extinguished but remedy to
enforce the liability is destroyed. What section 3 refers to is only the remedy
but not the right of the creditors. Such debt continue to subsist so long as it is
not paid. It is not obligatory to file a suit to recover the debt.
N. Santhosh v. Indian Overseas Bank
(2003)115 Comp Cas.616
 The Andhra Pradesh High Court held that the bank cannot withhold payment
to any customer from his/her savings bank account simply on the ground that
it suspects that the money held by such customer is for and on behalf of a
person who owes money to it.
Exceptions to the Right of Lien
Right of lien cannot be exercised by the banker on following circumstances;

1. Safe Custody of Deposits: When a customer deposits his valuables securities ,

documents , ornaments etc, with the banker for safe custody, he entrusts them to the
banker as a bailee or a trustee with the purpose to ensure their safety from theft etc.
A contract inconsistent with the right of lien, therefore, exists.
2. Documents Deposited for special purpose: If a customer sends a bill of exchange or
any other document with the specific instructions to utilise its proceeds for any
specific purpose, a contract inconsistent with the right of lien is presumed to exist.
3. Money Deposited for specific purpose: If a customer deposits money for a specific
purpose, banker cannot exercise his right of lien over it.
4. Securities left with the banker negligently : The banker does not extend lien over
securities deposited in possession by the customer by mistake or by negligence.
5. Securities held in trust : The banker cannot exercise his right of general lien over
securities deposited by the customer as a trustee in respect of his personal loan.
2. Banker’s Right of Set-off

 Right of set-off is a statutory right

 A legal set-off is where there are mutual debts between the plaintiff and defendant, or if either
party sue or be sued as executor or administrator one debt may be set against the other "(S.13
Insolvent Debtors Relied Act 1728)
 Nature of Set-off :
 Nature of Set-off : Halesowen Press Work and Assemblies v. Westminster Bank
Ltd(1970) All ER 33 – Lord Denning has set out the nature and extent of banker’s set
off in the following words;
“ Using this phraseology , the question in this case is , suppose a customer has one
account in credit and other in debit. Has the banker a right to combine the two accounts
so that he can set off debit against the credit, and be liable only for the balance? The
answer to this question is yes, the banker has a right to combine the two accounts
whenever he pleases and to set-off on against the other unless he has made some
agreement express or implied to keep them separate”.
 Conditions for right of set-off
1. Account must be in the same name and in the “same right”
 ‘Same right is meant that the capacity of the account holder in both or all
accounts must be the same’ , i.e , the funds available in one account are held
by him in the same right or capacity in which a debt balance stands in
another account’.

 The underlying principle is that the funds belonging to someone else, but
standing in the name of the accountholder, should not be made available to
satisfy his personal debts.

Eg 1) In case of a sole trader the account in his personal name and that in the
firms name are deemed to be in the same right and hence the right of set-off
can be exercised in case either of the two accounts is having debit balance.
 Eg 2) In case the partners of a firm have their individual accounts as well as the
account of the firm with the same bank, the latter cannot set-off the debt due
from the firm against the personal accounts of the partners. But if the
partners have undertaken to be jointly and severally liable for the firms debt
due to the banker, the latter can set-off such amount of the debt against the
credit balances in the personal accounts of the partners.
 Eg 3) An account in the name of a person in his capacity as a guardian for a
minor is not to be treated in the same right as his own account with the baker.
 Eg 4 ) Funds held in Trust are deemed to be in different rights.
 2) Amount of Debt must be certain
 3) Right may be exercised in the absence of an agreement to the contrary
 4) Banker may exercise his right at his discretion
 5) Banker has the right to exercise the right of set off before the Garnishee
order is made effective
What is a Garnishee Order?

 The concept of 'Garnishment' has been introduced in civil procedure code by the
amendment Act, 1976 This term has been derived from the French word ‘Garnir'
which means to warn or to prepare.
 Garnishee Order is an order passed by an executing court directing or ordering a garnishee not to
pay money to judgment debtor since the latter is indebted to the garnisher (decree holder).
 It is an Order of the court to attach money or Goods belonging to the judgment debtor in the
hands of a third person.
 The third party is known as 'Garnishee' and the court's order is known as Garnishee Order. It is a
remedy available to the Decree holder. This Order may be made by the Order of the court to
holders of funds, i.e. a third party that no payments have to be made until the court authorizes
them. The purpose of the Order is to protect the interest of the Decree holder. This is an Order
served upon a garnishee requiring him not to pay or deliver the money or property of the debtor
(defendant) to him and/or requiring him to appear in the court and answer to the suit of the
plaintiff to the extent of the liability to defendant.
 In simple words the garnishee is the person who is liable to pay a debt to a judgment debtor or to
deliver any movable property to him. Besides Judgment Debtor and decree Holder, Garnishee is a
third person in whose hands debt of the judgment debtor is kept.(India: A Glance On Provision Of
– "Garnishee Order "by Shivanand Singh,Singh & Associates,)
Set off in Joint Account

 A debt owed by two or more persons jointly cannot be set of against a debt
owed by the creditor to one of the debtor. If however, the joint debtors
liability is also several , a right to set off is available.

 Bank can set of a fixed deposit against the depositors dues on loan account.
 3. Right of Appropriation( Rule in
Clayton’s case)
 Under Sec. 59 of the Indian Contract Act, 1872, it is stated that if the debtor owes
several debts to the creditor, and makes a payment to any of them and later
requests the creditor to apply the payment to the discharge of a particular debt. If
the creditor agrees to this request, he is bound by such appropriation.
 Question of appropriation arises only when a debtor owes to or more different debts
to the same creditor and he pays some amount which is not sufficient for the
discharge of whole debts.
 Sec 59 to 61 of ICA provide for appropriation ;
 Appropriation by Debtor(Sec59)
 Appropriation by Creditor( Sec 60)
 Appropriation by the Law (Sec 61)
What is Right of Appropriation?

 In the course of his/her (customer) usual business, banker receives money for his
customer. If the latter has more than one account or has taken more than one loan
from the banker, the question of appropriation of money subsequently deposited
by him naturally arises. In such cases he has the right to direct the banker to
appropriate the amount to either of the two accounts.
 Eg; if a customer has taken an overdraft(Current account) and also posses a credit
balance in another account( SB Account), he may direct the banker at the time of
depositing any sum, to the credit the same to any of the two accounts specified by
him. In the absence of any such direction from the customer, the banker shall have
the right to appropriate the payment to any debt or account according to his
discretion. He should inform the customer accordingly.
 If the customer has a single account and he deposits and withdraws money from it
frequently, the order in which the credit entry will set off the debit entry is the
chronological order as decided in the famous Clayton’s case.
Rule in Clayton’s case ( Devyans v.
Noble,(1816) I Mer 529.
 A Firm of bankers known as Devaynes, Davies, Noble &Co had 5 partners.
Devaynes , senior partner died and the surviving partners carried business under
the same name. Executors of the deceased partner objected to the continuance of
the name of Devayanes in the firm’s name. After a year firm became bankrupt
and various classes of creditors of the firm had placed their claim against the
estate of Devayanes, the deceased partner.
 N Clayton was one of those creditors who continued to deal with the surviving
partners by making payments to and receiving payments from the firm. At the
time of the death of Devayanes, Clayton’s balance was 1713 pound. During the
next few days he withdrew several times and thus the balance was reduced to 453
pounds. Thereafter surviving partners paid more than 1713 pounds to him and
subsequently his deposits with the firm execeed the amount withdrawn by him.
And thus the credit balance was larger than the amount which was due to him at
the time of the death of Devaynes.
 Clayton Claimed the amount of 453 pond was owed to him from the estate of the
deceased partner.
 He had two contentions;
1) The withdrawals from the account after the death of the partner were paid out of the
deposits made in the same period and thus
2) The credit balance standing at the time of partners death was recoverable from the
deceased partners assests
 Arguments of Clayton were not accepted by the court and clayton’s claim was rejected.
 Sir William Grant M.R observed the General Rule of appropriation as follows;
“ This is a case of banking account, where all the sums paid in from one blended fund, the parts
of which have no longer any distinct existence……… In such a case there is no room for any
other appropriation than that which arises from the order in which the receipts and payments
take place and are carried into the account. Presumably it is the sum first paid in, that is first
drawn out. It is the first item on the debit side of the account that is discharged or reduced by
the first item on the credit side”.
Differences between Set off and
Appropriation
 Right of appropriation is covered under Indian Contract Act. If the debtor does not
make any appropriation at the time when he makes a payment, the right of
appropriation devolves on the creditor and he may exercise that right until the
very last moment and need not declare his intention in express terms.
 The bank's right of setoff is an equitable right that has a distinguished and
venerable lineage. The legal source of setoff is not known. The banker's right of
setoff, to apply a debtor-depositor's funds in his commercial account against the
debtor's matured debts to the bank, is based on practical business.
 Setoff by a creditor would remain restricted to allowable claims
 Right of appropriation can extend to any amount received during the course of a
business.
( This is in addition to the discussion held under each topic separately)
Special Features of Relationship
between Banker and Customer
1. Obligation to honour cheques
a) There must be sufficient funds
b) It must be properly applicable to the cheque
c) Banker must be duly applicable to pay
d) Cheques must have been presented within working hours
e) Presentment of cheques within reasonable time
f) Presentment of cheque at the branch where account is kept
2. Obligation to maintain secrecy of
accounts
 1. Disclosure of information required by Law
 2. Disclosure permitted by bankers practices and usages
3. Obligation as to recovery of loans
BANKER’S Duty of
Confidentiality
 The bank's duty of confidentiality covers all customers' information about
themselves and their accounts obtained by the bank, irrespective of the
information source and for as long as the banker-customer relationship exists.
 There are many logical reasons for obliging the banks to keep customers'
confidential data private before, during, and after their relationship.
 First of all, information provided to the bank before the beginning of the
contractual agreement is possibly the same information that is provided by the
customer after that agreement has been initiated; consequently such
information falls under the duty of confidentiality.
 Secondly, information provided to the bank at any period during the banker-
customer relationship does indeed fall under the bank's duty of
confidentiality according to the common law definition of confidence
 Thirdly, in practice, there is nothing to prevent banks from
submitting an explicit duty to the customer to inhibit the
disclosure of specific information, even if such information
theoretically is not within the ambit of the bank's duty of
confidentiality.
 Fourthly, the customer's right of privacy must certainly be
respected and a most important aspect of a person's rights is the
right to keep his/her information private.
 There is the further possibility that disclosure of any confidential
information after the termination of the banker-customer
relationship may cause loss or damage to the person.
 Finally, a customer's confidential
information could be of a
commercially sensitive nature,
and disclosure might adversely
affect his/her subsequent business
or commercial activities.
 Given the above factors, it seems
that the bank's duty of
confidentiality should be
maintained indefinitely, even after
the customer's death, as long as the
law does not indicate a specific
time for the termination of the
duty.
Indian Laws and Duty of Confidentiality
 Disclosure of credit information received by the Reserve Bank of India (RBI) is
prohibited under Section 45E of the Reserve Bank of India Act, 1934.
 The obligation of fidelity and secrecy to customers is enshrined in Section 44 of
the State Bank of India Act, 1955,
 Section 13 of the State Bank of India (Acquisition and Transfer of Undertakings)
Act, 1980,
 Section 29 of the Credit Information Companies (Regulation) Act, 2005 (CIC Act),
and
 Section 3 of the Public Financial Institutions Act, 1983.
 Similarly, the Payment and Settlement Systems Act, 2007 (PSS Act) imposes
privacy obligations on payment system providers which manage online payment
and settlement systems such as NEFT, RTGS, etc. Section 22 of the PSS Act
prohibits system providers from disclosing the existence or contents of any
document or part of any information given to them by a system participant (i.e.,
a customer)
 RBI’s recent “Master Circular on Mobile Banking Transactions in India” states
that “technology used for mobile banking must be secure and should ensure
confidentiality”.
 It also requires banks to institute adequate risk control measures to manage
the risk of breach of customer confidentiality and secrecy.
 Finally, the RBI’s “Guidelines on Cyber Security Framework in Banks” requires
banks to take appropriate steps in preserving the confidentiality of customer
information, and to ensure that such confidentiality is not compromised in
any situation.
Credit Information Commission Act&
Confidentiality
 Section 19 of the CIC Act mandates every credit information company to
take steps to ensure that the credit information maintained by it is
accurate and complete, and duly protected against any loss or unauthorized
access or use or unauthorized disclosure.
 Section 22 of the CIC Act prohibits unauthorized access to credit information,
and prescribes a monetary fine for any unauthorized access in breach of the
provisions of the CIC Act
 Information Technology (Reasonable Security Practices and Procedures and
Sensitive Personal Data or Information) Rules, 2011 (SPDI Rules or the Rules)
were introduced to create a more robust system for protection of sensitive
personal data or information (SPDI).
 The judicial recognition of the need for data privacy in the banking sector can
be seen in the case of Punjab National Bank v Rupa Mahajan Pahwa (IV
(2015) CPJ 620 (NC)), in which Punjab National Bank had issued a duplicate
passbook of a joint savings bank account, held between the petitioner and
her husband, to an unauthorized person.
 The Delhi State Consumer Disputes Redressal Commission, while awarding
compensation to the petitioner, held that there was a deficiency on the part
of the bank in issuing the passbook and passing on some other information
which was not to be disclosed to another person.
A bank's duty of confidentiality is not
absolute
And is subject to four exceptions, identified in Tournier

 Disclosure by compulsion of law;

 Disclosure under duty to the public interest;
 Disclosure under the bank's own interest and
 Disclosure under the customer's approval.
Types of Bank Accounts and Nature of Banker-
Customer Relationship