Unit 1

1.Describe elaborately the historical development of banking system in india .

Ans.
The Historical Development of the Banking System in India
The Indian banking system has undergone a remarkable transformation from ancient rudimentary
money lending practices to a sophisticated, technology-driven financial network. Its development has
been shaped by political changes, economic reforms, and institutional innovations. Understanding the
historical evolution of banking in India helps trace the foundation of its current structure and its role
in national economic growth.
1. Ancient and Medieval Period (Before 18th Century)
Banking in India can be traced back to the Vedic period (2000–1400 BCE). Ancient texts like the
Manusmriti and Arthashastra refer to money lending and credit systems.
 Moneylenders (Seths, Sahukars) acted as early bankers.
 Hundi System: An indigenous financial instrument similar to a modern bill of exchange used for
trade finance.
 Temples often served as safe places for storing wealth and provided loans.
 Banking remained informal and unregulated, primarily based on trust and community
reputation.
During the medieval period, especially under the Mughal Empire, banking expanded due to trade and
commerce. Merchants across the country used hundis for inland remittances, enabling financial
integration without a centralized institution.

2. Pre-Independence Era (18th to 1947)

The modern banking system began with British colonial influence.
Early European Banks
 Bank of Hindustan (1770): Established in Calcutta by Alexander & Co., it was the first bank in
India, although it failed in 1832.
 General Bank of India (1786) and Bank of Calcutta (1806) followed.
Presidency Banks
 Bank of Calcutta (1806), later renamed Bank of Bengal, was one of the three Presidency Banks
along with:
o Bank of Bombay (1840)
o Bank of Madras (1843)
 These banks primarily served British business interests.
 In 1921, they merged to form the Imperial Bank of India, a precursor to the State Bank of India.
Indigenous and Swadeshi Banks
 The Swadeshi Movement (1906–1911) catalyzed the establishment of Indian-owned banks
like:
o Punjab National Bank (1894)
o Bank of India (1906)
o Canara Bank (1906)
o Indian Bank (1907)
o Bank of Baroda (1908)
 These banks aimed to serve Indian entrepreneurs and promote self-reliance.
Despite these developments, banking was elitist and urban-centric. Rural areas depended heavily on
informal sources like moneylenders.
3. Post-Independence Period (1947–1991): Nationalization and Expansion
Establishment of RBI (1935, nationalized in 1949)
 The Reserve Bank of India (RBI) was established under the RBI Act of 1934 and became the
central bank in 1935.
 After independence, it was nationalized in 1949.
 RBI assumed a regulatory and developmental role in Indian banking.
Banking Regulation Act, 1949
 This act empowered the RBI to regulate, supervise, and develop commercial banks.
 It laid the legal foundation for India's banking structure.
Nationalization of Banks
 First Phase (1969): 14 major private banks were nationalized under Prime Minister Indira
Gandhi to ensure:
o Wider branch network
o Rural credit availability
o Mobilization of savings
 Second Phase (1980): 6 more banks were nationalized, raising public sector dominance to over
90%.
Establishment of Regional Rural Banks (1975)
 RRBs were created to provide banking services to rural and agricultural sectors.
 Co-operative banks also grew significantly to support the rural economy.
Development Financial Institutions (DFIs)
 Institutions like NABARD (1982) and SIDBI (1990) were established to finance agriculture and
small-scale industries.
Achievements
 Massive branch expansion
 Increased rural penetration
 Priority sector lending norms
Limitations
 Bureaucratic inefficiency
 Political interference in lending
 Rising non-performing assets (NPAs)

4. Liberalization and Reform Era (1991–2010)

The economic reforms of 1991 marked a turning point in Indian banking.
Narasimham Committee Reports
 Narasimham Committee I (1991) and II (1998) recommended:
o Reducing statutory pre-emption (CRR, SLR)
o Allowing entry of private banks
o Strengthening prudential norms
o NPAs recognition and provisioning
New Private Sector Banks
 Banks like HDFC Bank (1994), ICICI Bank (1994), and Axis Bank (1993) were established.
  Improved efficiency and customer service standards.
Technological Advancements
 Core banking solutions, ATM networks, and online banking started gaining popularity.
 Indian Financial System Code (IFSC) and Electronic Fund Transfers (EFTs) were introduced.
Capital Market Integration
 Banks began to offer demat accounts, investment advisory, and wealth management services.

5. Contemporary Banking Era (2010–Present)

Financial Inclusion and Digital Push
 Pradhan Mantri Jan Dhan Yojana (PMJDY, 2014): Massive financial inclusion scheme leading to
over 400 million bank accounts.
 Unified Payments Interface (UPI) revolutionized retail payments.
 Mobile banking, NEFT, RTGS, and internet banking gained traction.
Emergence of New Banking Models
 Small Finance Banks (SFBs): e.g., AU Small Finance Bank, Equitas
 Payments Banks: e.g., Paytm Payments Bank, India Post Payments Bank
 Targeted low-income groups and unbanked regions.
Mergers and Consolidation
 To strengthen the public sector, the government merged several PSU banks:
o Example: SBI merged with its associate banks in 2017.
o In 2019–20, banks like PNB, Canara, and Union Bank merged with smaller PSBs.
Rise of Fintech
 Collaboration between banks and fintechs has led to innovations in:
o Lending (peer-to-peer platforms)
o Digital KYC
o AI-driven customer service
Current Challenges
 Managing NPAs
 Cybersecurity threats
 Ensuring equitable credit distribution
 Regulatory compliance

Conclusion
The Indian banking system has journeyed from informal money lending practices to a globally
integrated, tech-savvy financial ecosystem. With significant government intervention, policy reforms,
and technology adoption, banking in India has become more inclusive, efficient, and customer-
centric. However, challenges remain in terms of asset quality, rural credit delivery, and digital literacy.
The future of Indian banking lies in leveraging fintech innovations, strengthening governance, and
deepening financial inclusion to foster sustainable economic growth.

2.Explain how many types of banks in india and write their functions .
Ans.
Types of Banks in India and Their Functions
Introduction
The banking system in India is the backbone of the nation's economy. It acts as a bridge between
savers and borrowers, mobilizing funds for productive uses and promoting financial inclusion. Over
time, India's banking structure has evolved into a multi-tiered system with diverse types of banks,
each performing specific functions catering to varied economic segments. Understanding the types of
banks and their roles is essential for grasping the broader financial architecture of India.
The Indian banking system is broadly classified based on ownership, function, target sector, and
nature of services provided. All banks in India are regulated by the Reserve Bank of India (RBI),
which serves as the central monetary authority.
Broad Classification of Banks in India
Banks in India can be broadly classified into two main categories:
1. Scheduled Banks
2. Non-Scheduled Banks
Under these, further subdivisions exist based on their area of operations, ownership, and objectives.

1. Scheduled Banks
Scheduled Banks are those listed in the Second Schedule of the Reserve Bank of India Act, 1934.
They adhere to specific norms laid out by the RBI and are eligible for refinancing from the central
bank.
Types of Scheduled Banks:
a) Commercial Banks
These are profit-oriented banks that offer a wide range of financial services, including accepting
deposits, offering loans, and facilitating credit creation. They dominate the Indian banking sector and
operate in both urban and rural areas.
Sub-types of Commercial Banks:
i. Public Sector Banks (PSBs)
 Owned and managed by the Government of India.
 Majority of shares (more than 50%) are held by the government.
 They have a widespread branch network even in remote areas.
Examples:
 State Bank of India (SBI)
 Punjab National Bank (PNB)
 Bank of Baroda
Functions:
 Accept deposits and provide loans.
 Implement government schemes like MGNREGA, PMJDY.
 Priority sector lending.
 Provide agricultural and rural credit.
ii. Private Sector Banks
 Majority stake is held by private shareholders.
 These banks are more technology-driven and focus on profitability and efficiency.
Examples:
 HDFC Bank
 ICICI Bank
  Axis Bank
Functions:
 Offer retail and corporate banking services.
 Provide customized loans and investment services.
 Digital banking, credit cards, and wealth management.
iii. Foreign Banks
 Incorporated outside India but operate branches within the country.
 Cater to the financial needs of multinational companies, HNIs, and foreign trade businesses.
Examples:
 HSBC
 Citibank
 Standard Chartered
Functions:
 Foreign currency transactions.
 International trade financing.
 Cross-border payment and remittance services.
iv. Regional Rural Banks (RRBs)
 Established in 1975 to serve rural areas.
 Jointly owned by the Central Government (50%), State Government (15%), and a Sponsor Bank
(35%).
Examples:
 Baroda UP Bank
 Karnataka Vikas Grameena Bank
Functions:
 Provide credit and banking facilities to small and marginal farmers, artisans, and rural workers.
 Accept deposits from rural populations.
 Promote rural development and agricultural growth.
b) Small Finance Banks (SFBs)
Introduced by the RBI in 2015, SFBs are niche banks aimed at financial inclusion by offering banking
services to underserved and unbanked segments.
Examples:
 AU Small Finance Bank
 Ujjivan Small Finance Bank
 Equitas Small Finance Bank
Functions:
 Offer savings and deposit products.
 Provide microloans to small businesses, farmers, and daily wage earners.
 Enable rural and semi-urban customers to access credit and savings facilities.
c) Payments Banks
Launched as part of the RBI's financial inclusion agenda in 2015, these banks offer limited services,
primarily focused on low-income households and migrant workers.
Examples:
 Paytm Payments Bank
 Airtel Payments Bank
  India Post Payments Bank
Functions:
 Accept deposits up to ₹2 lakh per individual.
 Provide online and mobile banking services.
 Facilitate UPI, IMPS, and NEFT transactions.
 Sell third-party insurance and pension products.
 Do not offer loans or issue credit cards.

2. Non-Scheduled Banks
Non-Scheduled Banks are not listed under the Second Schedule of the RBI Act. These are smaller
cooperative or local area banks that do not meet the minimum capital and reserve requirements as
stipulated by the RBI.
Examples:
 Some local cooperative banks.
 Community-level banking institutions.
Functions:
 Provide basic financial services at the grassroots level.
 Serve local businesses and self-help groups.
 Operate in unorganized sectors and support micro-enterprises.

3. Cooperative Banks
Cooperative banks function on the principles of cooperation, mutual help, and democratic decision-
making. These banks are registered under the Co-operative Societies Act and serve both rural and
urban areas.
Types of Cooperative Banks:
a) Urban Cooperative Banks (UCBs)
 Operate in urban and semi-urban areas.
 Serve small traders, self-employed individuals, and low-income groups.
Functions:
 Provide small loans for business and consumption.
 Accept savings and fixed deposits.
 Offer micro-financing options.
b) Rural Cooperative Banks
 Three-tier structure:
o State Cooperative Banks (SCBs) at the top
o District Central Cooperative Banks (DCCBs) in the middle
o Primary Agricultural Credit Societies (PACS) at the base
Functions:
 Offer short and medium-term credit for agriculture.
 Provide seasonal finance for crops, seeds, fertilizers.
 Facilitate credit delivery at village-level through PACS.

4. Development Banks / Specialized Financial Institutions (DFIs)

Development banks are created to provide long-term finance to specific sectors like agriculture,
industry, infrastructure, and export-import trade. These banks do not accept public deposits but raise
funds through bonds, equity, and loans from other financial institutions.
Major Development Banks:
a) NABARD (National Bank for Agriculture and Rural Development)
 Apex bank for rural development.
 Provides refinancing to cooperative and regional rural banks.
Functions:
 Finance rural infrastructure.
 Support SHGs, farmer producer organizations (FPOs).
 Implement rural innovation and agri-business models.
b) SIDBI (Small Industries Development Bank of India)
 Promotes micro, small, and medium enterprises (MSMEs).
Functions:
 Offers loans for technology upgrades, skill development.
 Refinancing of term loans.
 Financial literacy and entrepreneurship promotion.
c) EXIM Bank (Export-Import Bank of India)
 Specializes in supporting foreign trade.
Functions:
 Provides export credit, guarantees, and advisory services.
 Supports Indian companies in overseas ventures.
 Facilitates global business partnerships.
d) NHB (National Housing Bank)
 Promotes housing finance institutions.
Functions:
 Provides refinance to housing finance companies and banks.
 Supports affordable housing schemes.
 Monitors housing finance sector for stability and growth.

5. Central Bank – Reserve Bank of India (RBI)

The RBI, established in 1935, is India's central banking institution. It supervises all other banks and
acts as the apex regulatory and monetary authority.
Key Functions of RBI:
1. Monetary Policy Implementation:
o Controls inflation and liquidity via tools like Repo Rate, CRR, SLR.
2. Currency Issuer:
o Sole authority to issue currency notes (except ₹1 which is issued by the Government of
India).
3. Banker to the Government:
o Manages government accounts and public debt.
4. Foreign Exchange Management:
o Regulates Forex market under FEMA.
o Maintains foreign currency reserves.
 5. Regulation and Supervision of Banks:
o Issues licenses.
o Sets capital adequacy norms.
o Conducts audits and inspections.
6. Promotion of Financial Inclusion:
o Oversees schemes like PMJDY, UPI, Direct Benefit Transfers (DBT).

3.What are the social control measures followed by banking system in india ?
Ans.
Social Control Measures Followed by the Banking System in India

The banking system is not merely a commercial institution aiming for profits—it is also a crucial
vehicle for socio-economic transformation. In India, especially after independence, the government
recognized the need to align the banking system with national development goals, such as poverty
alleviation, rural development, industrial growth, and equitable distribution of resources. To ensure
that banking institutions fulfill these objectives, the Government of India introduced the concept of
"Social Control on Banks" in 1967.
The social control mechanism was a pre-nationalization reform intended to ensure that banks serve
broader economic interests rather than just the profit motives of a few industrialists or capitalists.
This essay examines the origin, objectives, measures, and impact of social control in Indian banking,
and how it paved the way for the eventual nationalization of banks.

1. Background and Need for Social Control

a) Pre-1967 Scenario
Before social control was introduced, the Indian banking system was largely dominated by private
ownership, with a few business houses controlling significant portions of banking capital. This led to:
 Concentration of credit in the hands of a few large industrialists.
 Neglect of priority sectors like agriculture and small-scale industries.
 Urban-centric banking with limited rural outreach.
 Little accountability to national economic planning or social goals.
This scenario resulted in a misallocation of financial resources, which ran counter to the Five-Year
Plans and development agendas of the Indian government. There was an urgent need to regulate and
reorient banks toward public welfare, leading to the concept of social control.

2. Introduction of Social Control (1967)

The Government of India introduced "Social Control on Banks" in December 1967 with the objective
of ensuring that the banking system supports planned economic development. The concept was a
middle path between total government ownership and complete private control.
Definition
Social control refers to the regulatory and supervisory measures imposed by the government to
ensure that banks operate in the interest of the general public and support the economic and social
priorities of the nation.
Legislative Framework
The Banking Laws (Amendment) Act, 1968 was passed to implement social control measures
effectively.

3. Objectives of Social Control

The primary goals of imposing social control on banks were:
1. Prevent monopolization of credit by a few large business houses.
2. Ensure equitable distribution of credit among various sectors, including agriculture, small
industries, and export-oriented enterprises.
3. Strengthen bank governance by including experts and public interest representatives on bank
boards.
4. Increase transparency in bank operations.
5. Align banking practices with national planning and economic development goals.
6. Lay the groundwork for more inclusive and development-oriented banking.

4. Major Social Control Measures Introduced

a) Reconstitution of Bank Boards
 Boards of directors of commercial banks were restructured to include:
o Experts in areas like agriculture, rural development, economics, and industry.
o Representatives of the RBI and Ministry of Finance.
o Members with experience in cooperative movements and public administration.
 The aim was to dilute the influence of industrialists and bring in professionals who could guide
banks in fulfilling national objectives.
b) Credit Planning and Allocation
 The Reserve Bank of India (RBI) was empowered to direct banks to align their credit
disbursement with national priorities.
 RBI formulated credit guidelines that required banks to:
o Allocate a certain percentage of credit to priority sectors like agriculture, small
industries, and exports.
o Avoid over-lending to a few large corporate entities.
c) Creation of a Credit Authorisation Scheme (CAS)
 Introduced in 1965 (pre-social control) and later strengthened.
 Required banks to seek RBI approval for sanctioning large loans above a specific threshold.
 This prevented reckless and biased lending and ensured that big-ticket loans were subject to
scrutiny.
d) Statutory Liquidity Requirements (SLR) and Cash Reserve Ratio (CRR)
 These tools were used by RBI to control liquidity in the banking system.
 Ensured that banks maintained adequate reserves and did not divert funds to speculative or
non-essential activities.
e) Rural Branch Expansion
 Though not strictly part of social control, the banks were encouraged to expand their branch
network into semi-urban and rural areas, which had been largely ignored earlier.
 Set the stage for financial inclusion in later years.
f) Increased Government Oversight
 The RBI was given enhanced powers to:
 o Inspect banks regularly.
o Monitor credit disbursement patterns.
o Impose penalties for non-compliance with social control directives.

5. Evaluation of Social Control: Achievements and Limitations

Achievements:
 Awareness and accountability increased among banks regarding their public responsibilities.
 Diversification of loan portfolios: Banks began lending to sectors they had previously ignored.
 Expertise in governance: Professionals brought in valuable insights to bank operations.
 Laid the foundation for future reforms such as priority sector lending norms and branch
expansion policies.
Limitations:
 Banks still remained privately owned, limiting the effectiveness of directives.
 Industrial houses continued to influence credit decisions despite the reconstitution of boards.
 Lack of enforcement mechanisms to ensure compliance.
 Did not substantially increase credit flow to rural and weaker sectors.
These limitations made it evident that social control without ownership control would not be
enough to bring about the desired transformation.

6. Transition to Bank Nationalization (1969)

Recognizing the limitations of social control, the government took a more drastic step: the
nationalization of 14 major commercial banks on 19 July 1969, followed by the nationalization of 6
more banks in 1980. This shift marked a new era in Indian banking, with:
 Full government ownership.
 Direct control over resource allocation.
 Mandated priority sector lending.
 Rural and semi-urban branch expansion.
Social control measures thus served as a stepping stone to nationalization, helping build consensus
and prepare the institutional framework for state ownership.

7. Post-Nationalization Social Control Practices

Even after nationalization, several social control mechanisms continued to operate, now with more
authority and institutional backing.
a) Priority Sector Lending (PSL) Norms
 Banks are required to lend a specified percentage (currently 40%) of their Adjusted Net Bank
Credit (ANBC) to priority sectors, including:
o Agriculture
o Micro and small enterprises
o Education
o Housing
o Social infrastructure
b) Lead Bank Scheme (LBS)
 Introduced in 1969 to coordinate banking and development activities in districts.
  Each district assigned a Lead Bank responsible for preparing credit plans and coordinating with
local authorities.
c) Directed Lending and Interest Subvention
 Certain sectors (like agriculture) enjoy subsidized interest rates, with the difference
compensated by the government.
 Encourages lending to socially important but commercially less lucrative sectors.
d) Financial Inclusion Initiatives
 Social control principles extended into modern programs like:
o PM Jan Dhan Yojana
o Mudra Loans
o Self Help Group (SHG)–Bank Linkage
o Digital banking for the poor and unbanked

8. Role of RBI and Government in Continuing Social Control

RBI Initiatives:
 Monitors and enforces PSL targets.
 Conducts regular audits and performance reviews.
 Issues circulars and policy directives to align banking with social objectives.
Government Policies:
 Designs schemes for inclusive banking.
 Provides capital support and recapitalization for PSBs.
 Uses banks as channels for welfare disbursement and subsidies.

The concept of social control in Indian banking emerged from the need to redirect banking resources
from narrow profit motives toward broader national development goals. It marked the first
institutional attempt to democratize access to finance and lay the foundation for inclusive growth.
Although it had limitations, social control measures succeeded in reshaping the philosophy of Indian
banking and paved the way for the more transformative move of bank nationalization.
Even today, the core principles of social control—equity, inclusiveness, rural development, and
financial justice—continue to influence banking policy. As India’s economy grows and digitizes, these
principles must be adapted, not abandoned, to ensure that banking continues to serve the people
and the nation at large.

4.Differenciate in between nationalisation and privatisation of bank in india .

Ans.

Nationalisation vs. Privatisation of Banks in India

Banking is one of the most crucial sectors in any economy, acting as a conduit for financial
intermediation and economic development. In India, the banking sector has undergone significant
structural changes, especially through the processes of nationalisation and privatisation. These
reforms have shaped the financial ecosystem by altering the ownership pattern, operational
strategies, and public policy alignment of banks.
While nationalisation represented a shift toward state ownership and control, privatisation marked
a transition to market-oriented reforms and private ownership. This essay provides an in-depth
comparative analysis of both processes, highlighting their objectives, implementation, impact, and
implications for the Indian banking system.

1. Meaning and Definition

Nationalisation of Banks
Nationalisation refers to the process by which the government takes over private enterprises and
brings them under state ownership and control. In the context of banking, it means the transfer of
ownership of private banks to the government, thereby transforming them into public sector banks.
Definition:
Nationalisation of banks is the process through which the government acquires a controlling interest
in private banks to ensure that banking services align with national economic and social priorities.
Privatisation of Banks
Privatisation is the process of transferring the ownership and control of public sector banks into the
hands of private individuals, companies, or entities. This can occur through disinvestment, strategic
sale, or reducing the government’s stake below 51%.
Definition:
Privatisation of banks refers to the transfer of ownership, management, and control from the
government to private players to enhance efficiency, competitiveness, and market responsiveness.

2. Historical Context
A. Nationalisation of Banks in India
Phase I – 1969
 On 19 July 1969, the government under Prime Minister Indira Gandhi nationalised 14 major
private commercial banks with deposits above ₹50 crores.
 Objective: Align banking with social objectives such as poverty alleviation, rural development,
and financial inclusion.
Phase II – 1980
 6 more private banks were nationalised.
 With this, nearly 90% of banking business in India came under government control.
Total 20 banks were nationalised in two phases. Over time, many of them merged with other banks.
Major Nationalised Banks:
 State Bank of India (already nationalised in 1955)
 Punjab National Bank
 Bank of Baroda
 Canara Bank
 Bank of India
B. Privatisation of Banks in India
Privatisation started in the post-liberalisation era (after 1991). The Narasimham Committee
recommended reducing government control and encouraging private sector participation.
Key Milestones:
 1991 onwards: Private players like ICICI Bank, HDFC Bank, Axis Bank were allowed to operate.
 1994: RBI issued guidelines for new private banks.
  2000s–Present: Progressive disinvestment in public sector banks.
Privatisation of Public Sector Banks:
 Though not fully privatised, the government has reduced its stake in several PSBs below 51%.
 Recent Union Budgets have proposed strategic disinvestment in select PSBs (e.g., IDBI Bank,
Indian Overseas Bank).

3. Objectives
Aspect Nationalisation Privatisation
Reduce inequalities and promote inclusive
Social Equity Encourage competition and efficiency
growth
Government Enable the state to direct credit to priority
Minimize bureaucratic interference
Control sectors
Economic Support Five-Year Plans and rural Boost innovation and technology-led
Planning development services
Financial Protect depositor interests and prevent Encourage capital infusion and
Stability failures improved risk management
Banking Expand banking to unbanked regions and Target market-driven and profitable
Penetration low-income groups customer segments

4. Implementation Strategy
Nationalisation Implementation:
 Enacted through ordinances and later Acts of Parliament.
 Compensation paid to former owners.
 Government appointed new board members and restructured management.
 Branch expansion was mandated, especially in rural areas.
Privatisation Implementation:
 Conducted through strategic disinvestment, IPOs, FPOs, and market sales.
 RBI issued licensing guidelines for private banks.
 The government retained regulatory oversight through RBI.
 Public-private partnerships and foreign investment allowed.

6. Advantages
Advantages of Nationalisation:
1. Financial Inclusion:
Massive rural branch expansion brought banking to millions of Indians.
2. Social Development:
Supported agriculture, SMEs, education, and housing through targeted lending.
3. Controlled Credit Flow:
Prevented credit concentration in the hands of a few.
4. Employment Generation:
Created secure jobs in banking across the country.
5. Economic Planning:
Allowed the government to channel funds toward developmental projects.
Advantages of Privatisation:
1. Increased Efficiency:
Market discipline improved productivity and service quality.
2. Capital Mobilization:
Private banks attract domestic and foreign capital easily.
3. Technology Integration:
Led to innovations like net banking, mobile banking, UPI, etc.
4. Customer-Centric Approach:
Better grievance redressal, customized financial products.
5. Healthy Competition:
Enhanced performance standards across the sector.

7. Disadvantages
Disadvantages of Nationalisation:
1. Political Interference:
Loan waivers and directed lending led to rising NPAs.
2. Operational Inefficiency:
Bureaucratic red tape, overstaffing, and low accountability.
3. Profitability Issues:
Social obligations often outweighed commercial considerations.
4. Corruption and Mismanagement:
Cases of favoritism and fraud due to lack of transparency.
Disadvantages of Privatisation:
1. Profit over Purpose:
Tends to ignore financial inclusion and weaker sections.
2. Job Insecurity:
Tendency toward contractual hiring and downsizing.
3. Service Disparities:
Focused on urban centers, neglecting rural and low-income groups.
4. Risk Exposure:
Aggressive lending may lead to asset quality problems (e.g., YES Bank crisis).

8. Impact on the Economy

Nationalisation Impact:
 Increased rural bank branches from 1,443 (1969) to over 35,000 (2020+).
 Agricultural credit rose significantly.
 PSBs accounted for over 70% of total banking business for decades.
 Fostered economic stability during crises (e.g., global recession of 2008).
Privatisation Impact:
 Private banks now hold ~36% market share in terms of assets (as of 2023).
 Rapid growth in fintech, mobile banking, and retail credit.
 Higher returns on equity and lower NPAs compared to PSBs.
 Intensified competition led to better customer services.
9. Key Policy Reports and Recommendations
Narasimham Committee (1991 & 1998):
 Recommended reducing the number of PSBs.
 Called for private and foreign bank participation.
 Suggested capital adequacy norms and asset classification.
P J Nayak Committee (2014):
 Advised separating ownership and regulatory roles of the government.
 Suggested forming a Bank Investment Company (BIC) for holding PSB stakes.

10. Government’s Current Position

In recent years, the government has shown a strong inclination toward privatisation:
 2021–22 Union Budget: Announced plans to privatise two public sector banks.
 IDBI Bank: Government stake reduced; strategic disinvestment in progress.
 Bank Consolidation: Several PSBs merged to create stronger entities before potential
privatisation.
Unit 2
1.Describe elaborately powers and functions of R.B.I .
Ans.
Powers and Functions of the Reserve Bank of India under the Banking Regulation Act, 1949

The Reserve Bank of India (RBI), established under the Reserve Bank of India Act, 1934, serves as the
central bank of India. However, its powers concerning commercial banks are primarily derived from
the Banking Regulation Act, 1949. This Act provides a legislative framework for the regulation,
supervision, and control of commercial banking institutions in India. It empowers the RBI to act as a
regulator, supervisor, and protector of the banking system to ensure financial stability and public
confidence in the sector.

Overview of the Banking Regulation Act, 1949

The Banking Regulation Act, 1949 was enacted to consolidate and amend the laws relating to
banking companies. It extends to the whole of India and applies to all banking companies. The Act has
been amended several times to address emerging issues in banking regulation and to confer broader
powers upon the RBI.

Powers of RBI under the Banking Regulation Act, 1949

The powers of the RBI under the Act can broadly be classified into the following categories:
1. Regulatory and Supervisory Powers
a) Licensing of Banks (Section 22)
The RBI has the exclusive power to issue licenses to banking companies to carry on banking business
in India. Without a license from the RBI, no company can operate as a bank.
b) Control over Management (Sections 10, 10A, 10B)
The RBI has the authority to ensure that only fit and proper persons are appointed as directors and
chief executives of banks. It can remove or disqualify persons from management if they are found to
be not acting in the bank’s or public interest.
c) Capital Structure Regulation (Section 12)
The RBI can prescribe the minimum paid-up capital and reserves that a banking company must
maintain. This ensures the financial soundness of banks.
d) Branch Licensing (Section 23)
RBI’s prior approval is mandatory for opening new branches or relocating existing ones. This enables
the RBI to regulate the geographical spread of banking services.

2. Prudential Norms and Financial Regulations

a) Maintenance of Cash Reserve Ratio (CRR) (Section 42 of RBI Act, linked)
Banks are required to maintain a certain percentage of their net demand and time liabilities (NDTL) as
CRR with the RBI. This serves as a monetary policy tool to regulate liquidity.
b) Regulation of Statutory Liquidity Ratio (SLR) (Section 24)
RBI directs banks to maintain a specific portion of their assets in liquid form, such as government
securities. This strengthens banks' solvency and liquidity positions.
c) Control over Advances (Section 21)
The RBI has the power to determine the policy regarding advances made by banks. It can issue
directions about:
 The purposes for which advances may be made,
 Margins to be maintained,
 Maximum limits for credit,
 Rate of interest charged.
These powers help the RBI maintain credit discipline and prevent overexposure to risk.

3. Supervisory and Inspection Powers

a) Inspection and Audit (Section 35)
The RBI may inspect the books of accounts of any banking company to ensure compliance with the
provisions of the Act and to evaluate financial soundness. The RBI can also direct a special audit in
public interest.
b) Submission of Returns (Section 27)
Banks are required to submit periodic returns and statements to the RBI regarding their assets,
liabilities, income, and expenditure. This enables effective monitoring and early detection of
irregularities.
c) Power to Call for Information (Section 26 and 29)
The RBI can demand any information from banks and examine their balance sheets and profit and
loss accounts.

4. Corrective and Enforcement Powers

a) Moratorium and Reconstruction (Sections 45, 45Y, 45Z)
In cases where a bank is unable to meet its obligations, the RBI can apply to the central government
to impose a moratorium. It can also prepare schemes for the reconstruction or amalgamation of weak
banks to protect depositors' interests.
b) Winding up of Banks (Section 38)
RBI can apply to the High Court for the winding up of a banking company if it is unable to pay its debts
or if its continuation is detrimental to depositors.
c) Imposition of Penalties (Section 46)
The RBI can initiate prosecution and impose penalties for non-compliance with its directives,
mismanagement, or fraudulent activities.

5. Governance and Policy Directions

a) Direction Issuance Power (Section 35A)
The RBI may issue directions to banking companies generally or to any bank in particular, in the public
interest, to prevent the affairs of the bank from being conducted in a manner prejudicial to the
interests of the depositors.
b) Appointment of Additional Directors (Section 36AB)
In public interest or to prevent the affairs of a bank from being mismanaged, RBI may appoint
additional directors for a period not exceeding three years.

6. Consumer Protection and Resolution Mechanism

RBI also has a role in redressal of grievances through mechanisms like the Banking Ombudsman
Scheme (now merged under the Integrated Ombudsman Scheme). Though this is not directly from
the Act, it complements its regulatory oversight function.

Recent Amendments and Developments

Over the years, the Banking Regulation Act has been amended to address modern banking
challenges. Notably:
 In 2020, the Act was amended to bring co-operative banks under the regulatory supervision of
the RBI.
 RBI was given enhanced powers to undertake resolution and reconstruction of stressed banks
without requiring moratorium.

Judicial Interpretation and Case Laws

 K.K. Adoor v. Reserve Bank of India (1970): The Supreme Court held that the RBI’s directions
under Section 35A are binding and can be enforced for public interest.
 T.R. Varma v. RBI: Upheld the RBI’s authority to supersede bank boards in case of
mismanagement or failure to comply with regulations.

The Reserve Bank of India plays a pivotal role in maintaining the health and stability of the banking
system through its powers under the Banking Regulation Act, 1949. These powers span across
licensing, regulation, supervision, enforcement, and corrective actions. By acting as a guardian of the
financial system, the RBI ensures that the interests of depositors are safeguarded, and the banking
system remains robust and efficient. As the banking sector evolves with technological advancements
and global linkages, the RBI’s powers continue to adapt to meet emerging regulatory needs.

2.What is the monetary and credit policy of banks ?

Ans.
Monetary and Credit Policy of Banks under the Banking Regulation Act, 1949

The Banking Regulation Act, 1949 is the principal legislation that governs banking companies in India.
One of the most important aspects of this Act is its facilitation of the monetary and credit policy
framework of the Reserve Bank of India (RBI). The monetary and credit policy is an essential
instrument for regulating the money supply, credit flow, inflation control, and overall economic
stability. The Act empowers the RBI to formulate and implement this policy, which directly impacts
the functioning and operations of commercial banks in India.

Understanding Monetary and Credit Policy

Monetary Policy
Monetary policy refers to the process by which a central bank (in India, the RBI) manages money
supply and interest rates to achieve macroeconomic objectives such as:
 Price stability (inflation control),
 Economic growth,
 Employment generation,
 Exchange rate stability,
 Financial system stability.
Credit Policy
Credit policy is a subset of monetary policy. It involves guidelines issued to banks regarding the
quantum, direction, and purpose of credit to regulate the availability and cost of credit in the
economy. It influences lending practices, interest rates, and sectoral allocation of credit.

Legal Basis under the Banking Regulation Act, 1949

The Banking Regulation Act, 1949, provides statutory powers to the RBI to regulate banking activities
and implement the monetary and credit policy. Relevant provisions include:

Key Sections Related to Monetary and Credit Policy

1. Section 21 – Control over Advances
This is one of the most significant provisions of the Act. Under this section, the RBI is empowered to:
 Determine the policy in relation to advances made by banks,
 Give directions as to:
o Purposes for which advances may be made,
o Margins to be maintained,
o Maximum amount of advances or guarantees that can be made to a single borrower or
group,
o Rate of interest and other terms and conditions.
This section is the backbone of RBI's credit control mechanism, allowing the central bank to direct
the flow of credit to priority sectors and restrict lending to speculative or non-productive sectors.

2. Section 35A – Power to Issue Directions

RBI can issue directions to banks in public interest or in the interest of banking policy. This allows
dynamic and flexible implementation of monetary and credit policies depending on the prevailing
economic conditions.

3. Section 22 and Section 23 – Licensing and Branch Expansion

Although indirectly related, the power to control licensing and branch expansion helps RBI regulate
the geographical and sectoral spread of credit, especially towards financial inclusion and priority
sector lending.

4. Section 24 – Statutory Liquidity Ratio (SLR)

Banks are mandated to maintain a prescribed percentage of their Net Demand and Time Liabilities
(NDTL) in the form of cash, gold, or approved government securities. SLR is used as a tool to control
credit expansion and ensure liquidity.

5. Section 42 of RBI Act – Cash Reserve Ratio (CRR)

Although part of the RBI Act, CRR plays a vital role in the credit policy. CRR is the percentage of NDTL
that banks must maintain with the RBI. Higher CRR reduces lendable resources, thus controlling
inflation and credit growth.

Tools of Monetary and Credit Policy (Implemented via the Act)

The RBI uses both quantitative and qualitative instruments of credit control. The Banking Regulation
Act provides legal backing to these tools.
1. Quantitative Tools
a) CRR (Cash Reserve Ratio)
Used to regulate the money supply and liquidity in the economy.
b) SLR (Statutory Liquidity Ratio)
Helps in maintaining solvency and limiting the availability of funds for lending.
c) Bank Rate
Long-term rate at which RBI lends to commercial banks; influences other interest rates.
d) Open Market Operations (OMO)
Buying and selling of government securities to regulate liquidity.
e) Repo and Reverse Repo Rate
Repo (Repurchase) Rate is the rate at which RBI lends to banks; Reverse Repo is the rate RBI pays to
banks for their deposits. These rates influence short-term interest rates and liquidity.

2. Qualitative Tools
These are selective and aim at controlling the direction of credit:
a) Credit Rationing
RBI can set limits on credit facilities for specific sectors.
b) Moral Suasion
RBI uses persuasion and communication with banks to implement policy objectives.
c) Directives under Section 21
Specifying credit allocation for sectors like agriculture, small-scale industries, housing, etc.

Impact of Monetary and Credit Policy on Banks

1. Interest Rate Management
The credit policy affects the lending and deposit rates of commercial banks. RBI’s policy rates
influence the Marginal Cost of Funds-based Lending Rate (MCLR).
2. Credit Allocation
Policies such as Priority Sector Lending (PSL) ensure that banks extend credit to agriculture, MSMEs,
and weaker sections.
3. Liquidity Management
CRR, SLR, and OMO regulate the liquidity position of banks and ensure stability.
4. Risk Management
By setting exposure limits and margin requirements, the RBI ensures banks manage credit risk
effectively.

Recent Developments
1. Flexible Inflation Targeting (FIT) Framework
Under the amended RBI Act, RBI now follows a flexible inflation targeting regime, with a target of 4%
inflation ±2%. The Monetary Policy Committee (MPC) plays a central role in rate-setting.
2. Accommodative Stance during COVID-19
RBI used an accommodative policy stance with low repo rates, moratoriums, and liquidity infusion
measures to support growth.
3. Digital Credit and NBFCs
RBI is increasingly focusing on credit governance in digital lending and Non-Banking Financial
Companies (NBFCs), with implications under the same policy framework.

Challenges in Implementation
 Transmission lag between policy rate changes and actual impact on credit availability.
 Global economic volatility affecting domestic monetary effectiveness.
 Structural issues in banking like NPAs and weak balance sheets.
 Ensuring financial inclusion while maintaining financial discipline.

Conclusion
The monetary and credit policy is one of the most powerful instruments used by the Reserve Bank of
India to influence the economy. The Banking Regulation Act, 1949 provides the legal framework for
these policies, especially through Section 21, which empowers the RBI to regulate the lending
activities of banks. Through a combination of quantitative and qualitative tools, RBI ensures optimal
allocation of credit, maintains price and financial stability, and promotes inclusive economic growth.
As the financial system evolves, RBI’s policy-making also adapts to incorporate new challenges,
including digital lending, inflation volatility, and global interconnectedness.
3.What is the licensing process of bank in india ?.
Ans .
Banking plays a vital role in the economic development of a country. To maintain
a sound and efficient banking system, it is crucial to regulate the entry of banks into the financial
sector. In India, the licensing of banks is governed by the Banking Regulation Act, 1949, which
provides a legal framework for the establishment and regulation of banking companies. The Reserve
Bank of India (RBI), as the central banking authority, is empowered to issue licenses to banks and
oversee their operations.

Legal Framework for Licensing of Banks

The Banking Regulation Act, 1949, lays down specific provisions regarding the licensing of banks in
India. The primary legal provisions relevant to the licensing process include:
1. Section 22 – Licensing of Banking Companies
Section 22 of the Banking Regulation Act mandates that:
“No company shall carry on banking business in India unless it holds a license issued by the Reserve
Bank of India under this section.”
Thus, the operation of any bank—whether new or existing—requires prior authorization from the RBI.

Types of Banks Requiring a License

The following types of banks need a license from the RBI under Section 22:
 Scheduled Commercial Banks (including Public Sector and Private Sector Banks)
 Small Finance Banks (SFBs)
 Payments Banks
 Foreign Banks operating in India
 Co-operative Banks (as amended by the Banking Regulation (Amendment) Act, 2020)

Objectives of Licensing
The licensing process serves several key purposes:
 To ensure the financial soundness and stability of banks,
 To regulate entry into the banking system,
 To protect the interests of depositors,
 To promote efficient allocation of financial resources.

Conditions for Grant of License under Section 22

According to the RBI, the following conditions must be satisfied before a license is granted:
1. The company is or will be in a position to pay its present and future depositors in full as their
claims accrue.
2. The affairs of the company are not being conducted in a manner detrimental to the interests
of depositors.
3. The general character of the management is not prejudicial to public interest.
4. Adequate capital structure and earning prospects.
5. The public interest will be served by the grant of license.
6. The bank must have adequate infrastructure and technological support.
7. The bank should comply with RBI’s policy and strategic objectives.

Licensing Process – Step-by-Step

The RBI follows a detailed and structured process for issuing bank licenses. The key stages include:
1. Submission of Application
The applicant company must submit an application in the prescribed format (Form III) under Rule 11
of the Banking Companies Rules, 1949, along with supporting documents such as:
 Memorandum and Articles of Association,
 Details of promoters and directors,
 Business plan and model,
 Proposed capital structure,
  Financial projections.
2. Evaluation of Application
RBI examines the application on various parameters including:
 Promoters’ background and integrity,
 Capital adequacy (minimum paid-up capital requirement),
 Geographic and sectoral strategy, especially for differentiated banks,
 Financial viability of the proposed bank,
 Compliance with statutory and prudential norms.
3. Fit and Proper Criteria for Promoters and Directors
The RBI assesses the “fit and proper” status of the promoters and board members. Criteria include:
 Financial soundness,
 Integrity and reputation,
 No criminal records or history of default.
4. In-Principle Approval
If the RBI is satisfied with the application, it may grant an “in-principle” license valid for 18 months.
During this period, the applicant must fulfill certain conditions such as:
 Infusion of minimum capital,
 Appointment of key personnel,
 Setting up the required infrastructure.
5. Grant of Final License
Once the conditions under in-principle approval are fulfilled, the RBI grants the final license under
Section 22(1), allowing the bank to commence business.

Capital Requirements (as per RBI Guidelines)

 Universal Banks: Minimum paid-up capital of ₹500 crore.
 Small Finance Banks (SFBs): ₹200 crore.
 Payments Banks: ₹100 crore.
(These figures may be updated through RBI circulars from time to time.)

Recent Regulatory Developments

1. Licensing of Co-operative Banks (Post-2020 Amendment)
The Banking Regulation (Amendment) Act, 2020 brought co-operative banks under RBI’s licensing
and supervisory regime. Now, co-operative banks too must obtain a license from RBI to operate
legally.
2. On-Tap Licensing
RBI introduced the on-tap licensing system for universal and small finance banks, allowing eligible
entities to apply for a banking license at any time, instead of waiting for specific windows.
3. Digital Banking Licenses
Although not covered under Section 22 directly, the RBI is considering a framework for Digital Banks,
which will also fall under its licensing powers once formalized.

Grounds for Rejection or Cancellation of License

RBI may reject or cancel a license under the following circumstances:
 Failure to comply with licensing conditions,
  Insolvency or inability to pay depositors,
 Violation of RBI guidelines or the Banking Regulation Act,
 Engagement in activities detrimental to public interest.
Example: In 2021, RBI canceled the license of Mapusa Urban Co-operative Bank, Goa, for its
deteriorating financial condition and failure to comply with regulatory requirements.

Judicial Support to RBI’s Licensing Power

The judiciary has upheld RBI’s discretion in granting licenses in several cases:
 T.R. Varma v. Reserve Bank of India
The court held that RBI’s decision to reject a banking license in public interest is valid and not
arbitrary.
 K.K. Adoor v. RBI (1970)
Emphasized that Section 22 gives RBI wide discretion, provided it is exercised reasonably and in
public interest.

Conclusion
The licensing of banks in India is a critical regulatory function governed by Section 22 of the Banking
Regulation Act, 1949. The RBI plays a central role in ensuring that only those entities which are
financially sound, professionally managed, and aligned with national economic goals are allowed to
operate as banks. The licensing process is rigorous, involving evaluation of promoters, capital
adequacy, business plans, and adherence to public interest. Through its licensing function, the RBI
safeguards depositors’ interests, promotes healthy competition, and ensures stability in the Indian
financial system .

5. Explain amalgamation , suspension and winding up of banking companies in india .

Ans .
The Banking Regulation Act, 1949 was enacted to regulate and supervise
banking companies in India. While the Act empowers banks to operate within a regulated
framework, it also provides for protective measures in case a bank becomes unsound or fails to
conduct its affairs properly. Three critical aspects in this regard are:
 Amalgamation of banking companies,
 Suspension of business, and
 Winding up of banking companies.
These provisions are intended to protect public interest, ensure financial stability, and safeguard
depositors' money.

1. Amalgamation of Banking Companies

Definition
Amalgamation refers to the process where one banking company merges with another, either
voluntarily or by an order of the Reserve Bank of India (RBI) or the Central Government, subject to
certain conditions. It can be a tool for restructuring and strengthening the banking sector.
Legal Provisions: Section 44A of the Banking Regulation Act
Section 44A of the Act provides the legal framework for voluntary amalgamation of banking
companies.
Voluntary Amalgamation Process
When two banking companies agree to amalgamate:
1. A scheme of amalgamation is prepared by the boards of both banks.
2. The scheme must be approved by:
o Two-thirds in value of shareholders of each banking company (present and voting),
o Subsequently, submitted to the Reserve Bank of India for final approval.
3. Upon approval, the RBI may sanction the scheme, and it becomes legally binding.
4. The assets, liabilities, and management of the amalgamated company are transferred as per
the scheme.
RBI-Initiated Amalgamation (Under Section 45)
In cases of a weak or failing bank, RBI can prepare a scheme for:
 Amalgamation with another stronger bank, even without shareholders' consent, in public
interest.
✅ Example: The amalgamation of Lakshmi Vilas Bank with DBS Bank India Ltd. in 2020 was
executed under Section 45, as the bank faced serious financial stress.

2. Suspension of Banking Business

Definition
Suspension refers to a temporary halt in banking operations when a bank is unable to meet its
obligations or is facing a financial crisis. It acts as a preventive measure before the situation leads
to liquidation.
Legal Provisions: Section 37 of the Banking Regulation Act
According to Section 37:
 A banking company, temporarily unable to meet its obligations, may apply to the High Court
for a moratorium (temporary suspension of operations).
 The High Court may grant a moratorium for up to six months, extendable upon RBI’s
recommendation.
Conditions for Suspension
 The bank must demonstrate temporary liquidity problems, not permanent insolvency.
 The application must be supported by a report from the Reserve Bank of India affirming that
the suspension is in public interest and beneficial for depositors.
Purpose of Suspension
 To allow time for restructuring, merger, or other corrective measures.
 To prevent panic among depositors.
 To protect the interests of creditors and depositors.

📝 Note: During suspension, banks cannot accept or repay deposits unless allowed by court.

3. Winding Up of Banking Companies

Definition
Winding up is the process of liquidating a banking company when it is no longer financially viable.
It involves selling off its assets, paying off debts, and distributing the remaining assets among
shareholders.
Legal Provisions: Sections 38 to 44 of the Banking Regulation Act
Grounds for Winding Up (Section 38)
RBI may apply to the High Court for winding up of a banking company on the following grounds:
1. The bank fails to comply with the requirements of the Act.
2. The bank is unable to pay its debts.
3. The bank has ceased to carry on banking business.
4. The continuance of the bank is prejudicial to depositors' interest.
5. Insolvency or negative net worth.
Procedure for Winding Up
1. RBI petitions the High Court for winding up.
2. The High Court may appoint an official liquidator to manage the winding-up process.
3. The liquidator takes charge of the bank’s assets and liabilities.
4. Depositors are given priority in the repayment of dues.
5. The balance, if any, is distributed among other creditors and shareholders.
Special Role of RBI (Sections 38 and 39)
 RBI plays an active role in assessing the financial condition of the bank.
 It submits reports and can recommend reconstruction instead of liquidation.
 RBI can also assist in speedy realization of assets through settlement schemes.

✅ Example: The winding up of Punjab and Maharashtra Co-operative Bank (PMC Bank) was
considered after financial irregularities were discovered. Eventually, it was resolved through
merger with Unity Small Finance Bank in 2021.

Priority of Payments in Winding Up

Under Section 43A, certain payments are given statutory priority, such as:
1. Salaries and wages of employees,
2. Deposits up to a prescribed limit,
3. Government dues,
4. Secured creditors,
5. Unsecured creditors.

Judicial Decisions
 T.R. Varma v. Reserve Bank of India
The court upheld RBI’s discretion in deciding whether a bank should be amalgamated or wound
up.
 Reserve Bank of India v. Peerless General Finance
Confirmed that the RBI has the responsibility and authority to ensure that banks function in a
sound and healthy manner.

Recent Developments and Reforms

 The Banking Regulation (Amendment) Act, 2020 brought urban co-operative banks under the
same resolution framework, enabling RBI to take timely action in case of financial distress.
 The RBI has started using prompt corrective action (PCA) and resolution frameworks to avoid
reaching suspension or winding-up .
The Banking Regulation Act, 1949 provides a comprehensive legal framework for handling crisis
situations in banks through amalgamation, suspension, and winding up. These mechanisms are
essential to ensure that financial instability in one bank does not affect the overall banking system.
 The Reserve Bank of India plays a central role in each of these processes to safeguard depositors'
interests, maintain public confidence, and ensure systemic stability. With increasing complexity in
banking operations, these provisions are more relevant than ever in ensuring a robust and
responsive banking regulatory regime in India.

Unit 3
1.Explain the definition and characteristics of banker and customer in india .
Ans
The relationship between a banker and a customer is foundational to the operation of
the banking sector in India. Governed by several laws, the most prominent legal framework is the
Banking Regulation Act, 1949, which outlines the role, functions, and legal recognition of banks in
India. However, the Act does not explicitly define the term "customer", leading to reliance on judicial
interpretations and customary banking practices. This answer analyzes the statutory provisions, legal
interpretations, and essential characteristics of both banker and customer in the Indian context.

Definition of Banker
Statutory Definition
Under Section 5(b) of the Banking Regulation Act, 1949, a banking company is defined as:
“any company which transacts the business of banking in India.”
Further, Section 5(c) defines banking as:
“accepting, for the purpose of lending or investment, of deposits of money from the public, repayable
on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.”
From this definition, a banker is understood to be a company (usually a scheduled bank) engaged in
the business of banking, i.e., accepting deposits and providing withdrawal facilities through various
instruments.
Essential Functions of a Banker
Based on the above, a banker:
1. Accepts deposits from the public.
2. Lends or invests the money so received.
3. Allows withdrawals by instruments like cheques, drafts, etc.
This function distinguishes a banker from other financial institutions like NBFCs (Non-Banking
Financial Companies), which may accept deposits or lend money but may not offer chequing facilities.

Definition of Customer
Unlike the term "banker", the Banking Regulation Act does not define "customer". Therefore,
reliance is placed on judicial decisions and traditional banking practices.
Judicial Interpretation
In Ladbroke & Co. v. Todd (1914) and later in Central Bank of India v. Gopinath Nair, it was held that:
“A person becomes a customer when he opens an account with a bank.”
So, a customer is:
 Any person who maintains an account (savings, current, or fixed) with a bank.
 Someone who utilizes one or more banking services, even without maintaining an account
(though this is a broader interpretation).
Types of Customers
  Individual Customers – Savings/Current account holders.
 Corporate Customers – Companies maintaining accounts and availing banking services.
 Government Entities – Using banking for transactions.
 Occasional Customers – Persons using demand draft, remittance or other services without
maintaining an account.

Characteristics of a Banker
1. Licensed Entity:
o A banker must be a company licensed under Section 22 of the Banking Regulation Act,
1949.
o Only licensed entities can carry out banking business legally in India.
2. Acceptance of Deposits:
o The primary function of a banker is to accept public deposits.
3. Obligation to Repay:
o A banker must repay the deposits on demand (subject to terms and conditions).
4. Dealing in Money and Credit:
o Bankers facilitate credit creation through loans, overdrafts, and discounting bills.
5. Cheque Facilities:
o Banks allow the withdrawal of money via cheques or electronic instruments, a key
distinguishing feature.
6. Engaged in Additional Services:
o Includes locker facilities, foreign exchange, internet banking, investment services, etc.
7. Regulated by RBI:
o All banks are regulated and supervised by the Reserve Bank of India under the RBI Act,
1934 and the Banking Regulation Act, 1949.

Characteristics of a Customer
1. Account Relationship:
o A person becomes a customer once an account is opened.
o The relationship continues as long as the account is active or services are used.
2. Transactional Nature:
o A customer may engage in various transactions: deposits, withdrawals, remittances, etc.
3. Contractual Relationship:
o The relationship is governed by a contract, either express or implied.
o Terms and conditions (T&Cs) play a significant role in defining obligations.
4. Rights and Duties:
o A customer has the right to:
 Deposit/withdraw funds.
 Avail of various banking services.
o Duties include:
 Maintaining minimum balance.
 Providing accurate information.
 Abiding by bank’s terms.
5. KYC Compliance:
 o A customer must comply with Know Your Customer (KYC) norms as per RBI guidelines to
prevent fraud and ensure transparency.
6. Types of Relationships:
o Debtor-Creditor: When a customer deposits money, the bank becomes a debtor.
o Creditor-Debtor: When the customer takes a loan, the bank becomes a creditor.
o Agent-Principal: When the bank pays/collects cheques on behalf of the customer.
o Bailor-Bailee: When a customer uses locker facilities.

Legal Framework Governing Banker-Customer Relationship

In addition to the Banking Regulation Act, 1949, the relationship is governed by:
 Indian Contract Act, 1872 – Contractual obligations.
 Negotiable Instruments Act, 1881 – Cheques, promissory notes, etc.
 RBI Act, 1934 – Regulatory oversight by the central bank.
 Information Technology Act, 2000 – Applicable to digital transactions.

In Indian banking law, while the Banking Regulation Act, 1949 provides a statutory definition of a
banker, the concept of a customer is shaped largely by legal interpretation and practice. The banker-
customer relationship is multifaceted—defined by trust, legal obligations, and financial transactions.
Understanding this relationship is vital not just for regulatory compliance but also for ensuring
smooth banking operation .

2.Explain the types of customer and bank accounts in Indian banking system .
Ans.
The Indian banking system plays a crucial role in the economic development
of the country. The relationship between a bank and its customer is foundational to this system.
While the Banking Regulation Act, 1949 provides the statutory framework for banking operations in
India, it does not explicitly define all types of customers and accounts. Over time, judicial
interpretations, RBI guidelines, and standard banking practices have helped categorize the types of
customers and accounts in the Indian banking context. This answer provides a comprehensive
analysis suitable for a semester exam.

I. Types of Customers in Indian Banking System

Although the Banking Regulation Act, 1949 does not define a “customer,” a customer is generally
understood to be a person who maintains an account or uses the services of a bank. Based on legal
status and nature of operations, customers in India can be categorized as follows:
1. Individual Customers
These are natural persons who open bank accounts for personal use such as saving money, availing
loans, or making transactions.
 Examples: Salaried employees, pensioners, students, homemakers, etc.
 Common accounts: Savings account, fixed deposits, recurring deposits.
2. Sole Proprietors
These are single-owner businesses that operate under the individual’s name or a business name.
 The individual and the business are legally the same.
 Account types: Current accounts mainly; sometimes savings accounts for individual operations.
3. Partnership Firms
These are associations of two or more individuals conducting business with a view to profit, as
governed by the Indian Partnership Act, 1932.
 Banks require a partnership deed and KYC documents of all partners.
 Operate primarily through current accounts.
4. Companies
These include both private and public limited companies registered under the Companies Act, 2013.
 Banks require incorporation certificate, Memorandum and Articles of Association (MoA & AoA),
board resolution, etc.
 Operate current accounts, cash credit, overdrafts, term loans, etc.
5. Trusts and NGOs
These include public and private trusts, religious institutions, and non-profit organizations.
 Require trust deed, registration certificates, and trustee KYC.
 May operate both current and savings accounts.
6. Hindu Undivided Family (HUF)
A legal entity under Hindu law consisting of a family headed by a Karta.
 The Karta manages the family account on behalf of the family members.
 KYC of Karta and HUF PAN is required.
7. Government Bodies and Public Sector Undertakings (PSUs)
Includes central and state government departments, ministries, and government-owned companies.
 These customers operate through special current accounts.
 Require government authorization and treasury control.
8. Non-Resident Indians (NRIs) and Foreign Nationals
These are customers residing outside India but maintaining accounts in India.
 NRIs can open NRE, NRO, and FCNR accounts as per RBI guidelines.
 Require passport, visa, and proof of overseas address.

II. Types of Bank Accounts in Indian Banking System

Bank accounts in India are classified based on the purpose, nature of operation, and the type of
customer. The major types are:
1. Savings Account
 Purpose: To encourage saving among individuals.
 Features:
o Interest-bearing (currently 3–4% p.a. in most banks).
o Limited number of monthly withdrawals (depending on bank policy).
o Minimum balance requirement (varies by bank).
 Eligibility: Individuals, HUFs, NRIs, trusts, etc.
 Regulation: Governed by RBI guidelines and the Banking Regulation Act, 1949 (Section 5(b)).
2. Current Account
 Purpose: Meant for business entities with frequent and large volume transactions.
 Features:
o No interest paid.
o Unlimited transactions.
o Requires higher minimum balance.
 o Overdraft facilities available.
 Eligibility: Companies, firms, government bodies, NGOs, etc.
3. Recurring Deposit Account
 Purpose: For regular monthly savings over a fixed period.
 Features:
o Fixed monthly installments.
o Interest similar to fixed deposits.
o Premature withdrawal allowed with penalty.
 Suitable for: Salaried individuals, students, small savers.
4. Fixed Deposit Account (Term Deposit)
 Purpose: Lump sum deposit for a fixed period with higher interest.
 Features:
o Interest rates higher than savings accounts.
o Tenure ranges from 7 days to 10 years.
o Premature withdrawal may attract penalty.
o Can be renewed automatically or on instruction.
5. NRI Accounts
Special accounts designed for Non-Resident Indians (NRIs):
(a) NRE Account (Non-Resident External)
 Rupee-denominated.
 Fully repatriable.
 Tax-free interest in India.
(b) NRO Account (Non-Resident Ordinary)
 Rupee-denominated.
 Used for managing income earned in India.
 Interest taxable.
(c) FCNR Account (Foreign Currency Non-Resident)
 Maintained in foreign currency.
 No exchange rate risk.
 Interest is tax-free.
6. Demat Account
Although not a traditional bank account, Demat accounts are offered by banks to hold securities and
shares in electronic format, regulated by SEBI.
7. Special Accounts
(a) Jan Dhan Accounts
 Under the Pradhan Mantri Jan Dhan Yojana (PMJDY).
 Zero balance accounts for financial inclusion.
 Linked with Aadhaar, DBT (Direct Benefit Transfer).
(b) Basic Savings Bank Deposit (BSBD) Account
 No minimum balance requirement.
 Part of RBI’s financial inclusion guidelines.
 Limited number of withdrawals and services.

Regulatory Framework
The Banking Regulation Act, 1949, along with other regulations, provides the legal structure for banks
and their dealings with customers:
Key Provisions of the Act:
 Section 5(b) – Defines “banking” and outlines the basic functions of a banker.
 Section 6 – Specifies permissible business activities for banks.
 Section 22 – Licensing of banking companies by the Reserve Bank of India (RBI).
 RBI Guidelines – RBI issues circulars and directions on KYC, types of accounts, interest rates,
etc.
Other Relevant Laws:
 Reserve Bank of India Act, 1934
 Prevention of Money Laundering Act (PMLA), 2002
 Negotiable Instruments Act, 1881
 Indian Contract Act, 1872
Understanding the types of customers and accounts is vital to grasping the structure and functioning
of the Indian banking system. The Banking Regulation Act, 1949, in coordination with RBI guidelines,
provides the legal and operational framework for categorizing customers and tailoring banking
products accordingly. Whether it is an individual opening a savings account or a multinational
company operating a current account, the banking system in India has evolved to serve diverse
customer segments with a variety of accounts, promoting both inclusion and financial stability.
3.Describe the rights, duties and obligations of banker and customer .
Ans.
The relationship between a banker and a customer is fundamentally based on trust,
contract, and statutory provisions. The Banking Regulation Act, 1949, along with the Indian Contract
Act, 1872, the Negotiable Instruments Act, 1881, and various RBI guidelines, governs this
relationship. It gives rise to mutual rights, duties, and obligations which are essential for ensuring a
smooth and legally compliant banking system. This answer provides a comprehensive and analytical
overview of the rights and duties of both bankers and customers in the Indian context.

I. Rights of a Banker
1. Right to Charge Interest and Commission
 A banker has the right to charge interest on loans and commission for services provided.
 The rate of interest should be agreed upon or notified, and must comply with RBI regulations.
2. Right of General Lien
 Under Section 171 of the Indian Contract Act, 1872, a banker has a general lien over the
customer's securities or goods in its possession, except for specific trust deposits.
 This means the bank can retain securities until the dues are cleared.
3. Right of Set-off
 If a customer has multiple accounts with a bank, the bank can set off a debit balance in one
account with the credit balance in another, provided the accounts are in the same name and
capacity.
 The customer must be informed before exercising this right.
4. Right to Close Account
 A bank may close an account by giving reasonable notice to the customer.
 Usually exercised in cases of inactivity, suspicion of fraud, or misuse of account.
5. Right to Refuse Payment
 A banker can refuse to honor a cheque if:
o There are insufficient funds.
o The cheque is post-dated or stale.
o The drawer's signature does not match.
o There is a stop payment instruction.

II. Duties and Obligations of a Banker

1. Duty to Honor Cheques
 If there is sufficient balance and no legal restriction, the bank must honor customer’s cheques
promptly.
 Wrongful dishonor can result in damage to the bank's reputation and legal action.
2. Duty of Confidentiality
 A banker must maintain confidentiality of the customer’s account and transactions.
 Exceptionally, disclosure is permitted:
o Under compulsion of law (e.g., court order).
o With customer’s consent.
o When public interest requires it.
o To protect the bank’s own interest.
3. Duty to Exercise Reasonable Care
 A bank must exercise reasonable care and skill in handling customer accounts and processing
instructions.
 Negligence may lead to legal liability.
4. Duty to Maintain Proper Records
 Accurate and updated records must be maintained as per RBI norms and the Income Tax Act
for audit and regulatory purposes.
5. Duty to Comply with KYC and AML Guidelines
 Banks must ensure customer identity verification as per Know Your Customer (KYC) and Anti-
Money Laundering (AML) guidelines.
 Obligation under the Prevention of Money Laundering Act (PMLA), 2002.
6. Duty to Follow Customer Instructions
 Banks are required to execute transactions strictly as per customer instructions.
 Unauthorized transactions or ignoring instructions may lead to claims for compensation.

III. Rights of a Customer

1. Right to Operate Account Freely
 Customers can deposit, withdraw, transfer, and use banking services without unreasonable
restrictions, subject to RBI guidelines.
2. Right to Privacy
 Customers have a right to privacy of their financial information under bank-client
confidentiality.
 Violation of this may result in legal consequences for the bank.
3. Right to Receive Fair Service
 Customers are entitled to fair, transparent, and efficient service, including:
 o Account opening and closure.
o Loan disbursement.
o Complaint redressal.
4. Right to Nominate
 Under Banking Companies (Nomination) Rules, 1985, customers can nominate a person to
receive deposits in case of their death.
5. Right to Know Charges
 Customers must be informed about fees, interest rates, penalties, and changes in terms.
6. Right to Redress Grievances
 Customers can approach:
o Bank’s grievance cell.
o Banking Ombudsman under RBI’s integrated ombudsman scheme.
o Consumer courts.

IV. Duties and Obligations of a Customer

1. Duty to Maintain Sufficient Balance
 Customers must ensure adequate funds in the account before issuing cheques or initiating
transactions.
2. Duty to Provide Accurate Information
 During account opening or availing services, correct KYC documents and personal details must
be furnished.
3. Duty to Check Bank Statements
 Customers are expected to review their account statements and report discrepancies
promptly.
4. Duty to Use Bank Facilities Responsibly
 Must not misuse bank accounts for illegal or fraudulent activities.
 Cheque books and cards should be used responsibly.
5. Duty to Notify Changes
 Changes in address, contact details, or signature must be communicated immediately.
6. Duty to Pay Charges and Dues
 Any agreed service charges, interest on loans, or penalty amounts must be paid as per contract.
The banker-customer relationship is a mix of contractual, fiduciary, and statutory obligations,
governed largely by the Banking Regulation Act, 1949, and supplemented by RBI directives and other
laws. The banker’s rights such as lien, set-off, and charging fees are balanced with duties like
confidentiality and care. Similarly, customers enjoy rights to privacy and fair treatment, but must also
fulfill their duties like maintaining adequate balance and providing accurate information.
A clear understanding of these rights and obligations helps in maintaining trust and ensuring smooth
operation of the banking sector in India.

4.short note
a. Banking fraud

Ans. Banking fraud poses a serious threat to the stability, integrity, and trust in the financial
system of any country. In India, the term "fraud" is not defined explicitly under the Banking
Regulation Act, 1949, but various provisions under this Act, as well as Reserve Bank of India (RBI)
guidelines, the Indian Penal Code (IPC), and the Prevention of Corruption Act, help in identifying,
reporting, and penalizing banking frauds.
Banking fraud involves dishonest or fraudulent activities by either customers, bank employees, or
third parties that result in loss of money or reputation to the bank or its stakeholders.

Relevant Provisions under the Banking Regulation Act, 1949

While the Act does not provide a direct definition of "fraud", it contains sections that deal with
misconduct and malpractices related to banking operations:
1. Section 35 – Inspection
 This section empowers the Reserve Bank of India to inspect any banking company.
 If fraudulent activity is found during inspection, the RBI can take action against the bank or its
officers.
 It also includes the power to demand the production of books and accounts.
2. Section 36 – Power of RBI to Give Directions
 RBI can issue directions to banking companies to ensure proper functioning.
 In case of fraud, RBI may direct the bank to take corrective action.
3. Section 46 – Penalties for False Statements and Wilful Misapplication of Funds
 This is the most important section related to fraud under the Act.
 Section 46(1) penalizes:
“Any person who willfully makes a false statement in any return, balance sheet, or other document
shall be punishable with imprisonment up to 3 years and/or fine.”
 Section 46(2) penalizes:
“Any person who, being an officer of a banking company, wilfully misapplies funds or commits breach
of trust, shall be deemed to have committed criminal breach of trust.”
 This section forms the legal basis for initiating action against fraudulent activities in banks.

Types of Banking Frauds (As per RBI Classification)

The Reserve Bank of India classifies frauds in banks into the following broad categories:
1. Loan/Advance Related Frauds
 Misrepresentation by borrowers (fake financials, inflated collateral).
 Wilful default or diversion of funds.
 Example: Vijay Mallya case – loans taken under false pretenses from multiple banks and later
defaulted.
2. Internet and Cyber Frauds
 Phishing, online banking fraud, fake websites, hacking.
 Fraudsters gain unauthorized access to banking systems.
3. Cheque and Bill Frauds
 Use of forged or stolen cheques.
 Kiting (issuing cheques without sufficient funds).
4. Cash Transaction Frauds
 Manipulation of bank cash books by employees.
 Misappropriation of deposited cash.
5. Forgery and Document Frauds
  Submission of fake documents like property papers, identity proofs, or financial statements.

Example of a Banking Fraud Case

Punjab National Bank (PNB) – Nirav Modi Scam (2018)
 Nature of Fraud: Fraudulent issue of Letters of Undertaking (LoUs) by PNB officials without
proper authorization or collateral.
 Amount Involved: Over ₹13,000 crore.
 Modus Operandi:
o Nirav Modi and associates used fake LoUs to get credit from foreign banks.
o PNB officials misused SWIFT systems to send messages without entries in CBS (Core
Banking System).
 Legal Action:
o Cases filed under Section 420 (cheating), Section 467 (forgery), and Section 120B
(criminal conspiracy) of IPC.
o Section 46 of the Banking Regulation Act invoked to examine the bank's accountability.

Preventive Measures and RBI Guidelines

1. RBI Master Directions on Fraud – 2016
 Banks must:
o Report frauds of ₹1 crore and above to RBI within 21 days.
o Categorize frauds based on their origin and method.
o Conduct forensic audits for large-value frauds.
2. Creation of Fraud Monitoring Cell
 Banks must set up an internal Fraud Monitoring Cell for early detection and reporting.
3. Know Your Customer (KYC) Compliance
 Prevents identity fraud and money laundering.
 KYC norms mandated under RBI guidelines and PMLA, 2002.
4. Internal Audits and Risk Management
 Regular internal audits, reconciliation of records, and staff rotation minimize fraud risk.
Banking frauds, while not directly defined under the Banking Regulation Act, 1949, are
dealt with through its various penal and regulatory provisions, especially Section 46. The RBI,
through its master circulars and inspection powers, plays a vital role in the detection, reporting, and
mitigation of such frauds. With the increasing use of technology, cyber frauds and digital
manipulation have also become significant areas of concern. Timely detection, customer awareness,
strict regulation, and prosecution are key to reducing the menace of banking fraud in India.

b. insurance of banking deposits

Ans .
Deposit insurance is a vital mechanism to protect bank depositors and maintain
public confidence in the banking system. In India, deposit insurance is governed under the broader
framework of the Banking Regulation Act, 1949, but the actual insurance operations are managed by
a statutory body called the Deposit Insurance and Credit Guarantee Corporation (DICGC). This
insurance system ensures that depositors do not lose their money in case a bank fails or goes into
liquidation.
Legal Framework
1. Banking Regulation Act, 1949
While the Banking Regulation Act, 1949 does not directly provide deposit insurance, it creates the
legal environment necessary for safeguarding depositors' interests. Notable sections include:
Section 45
 Allows for moratorium, reconstruction, or amalgamation of weak banks.
 During such proceedings, depositors' interests are protected by RBI intervention and DICGC
payouts.
Section 36AC and 36AD
 Empower RBI to apply to the Central Government for suspension or winding up of a bank.
 Deposit insurance comes into play when a bank is ordered to be liquidated or closed.
2. Deposit Insurance and Credit Guarantee Corporation Act, 1961
 The DICGC Act, 1961 is the primary legislation governing deposit insurance in India.
 DICGC is a wholly owned subsidiary of the Reserve Bank of India (RBI).
Key Provisions under DICGC Act:
 Section 16(1): Every insured bank shall pay a premium to DICGC for insuring deposits.
 Section 16(1A): If a bank fails, DICGC will pay the depositors up to the insured limit.
 The amount is reimbursed through the bank's liquidator or administrator.

Example of Deposit Insurance in Practice

PMC Bank Crisis (Punjab & Maharashtra Co-operative Bank, 2019)
 Nature of Crisis: The bank suffered huge losses due to fraudulent lending to a real estate firm.
 Impact: RBI imposed restrictions on withdrawals.
 DICGC Action: In 2021, DICGC paid out deposit insurance of ₹5 lakh per depositor.
 Over ₹3,800 crore was disbursed to lakhs of small depositors.
This is a practical example of how deposit insurance protects small depositors when a bank is unable
to return money.

Procedure for Claim Settlement

1. RBI places a bank under moratorium or liquidation.
2. DICGC obtains depositor data from the liquidator or administrator.
3. Amounts up to ₹5 lakh are processed and paid within 90 days from the date of notification.
4. Depositors do not need to apply individually—claims are settled directly through the liquidator
or administrator.

Benefits of Deposit Insurance

 Promotes financial stability.
 Boosts public confidence in the banking system.
 Encourages savings and participation in formal banking.
 Protects vulnerable small depositors, especially in cooperative banks.

Limitations of Deposit Insurance

 Maximum coverage is limited to ₹5 lakh, which may not fully protect high-value depositors.
  It does not prevent fraud, only mitigates its financial impact.
 Delayed payouts may occur due to procedural or legal delays in liquidation.
Although the Banking Regulation Act, 1949 itself does not directly cover deposit insurance, it
sets the legal framework for regulating banks and protecting depositors. The actual mechanism is
implemented by the Deposit Insurance and Credit Guarantee Corporation (DICGC) under a separate
Act. With the current ₹5 lakh limit per depositor, the system plays a crucial role in protecting small
savers and maintaining trust in the Indian banking system, especially in times of crisis.

c. Banking ombudsman
Ans .
In a developing economy like India, where millions of people rely on banking services, the
protection of consumer rights is essential. To resolve customer grievances efficiently and affordably,
the Reserve Bank of India (RBI) introduced the Banking Ombudsman Scheme in 1995 under the
authority of the Banking Regulation Act, 1949. The Ombudsman mechanism serves as an alternative
dispute resolution system that offers speedy redress of complaints against banks and ensures
consumer protection.

Legal Basis of Banking Ombudsman

Section 35A of the Banking Regulation Act, 1949
This is the statutory provision that empowers the Reserve Bank of India to issue directions to
banking companies in public interest or to regulate banking operations.
Section 35A: "The RBI may, in the public interest or to secure proper management of any banking
company, issue directions to banking companies generally or to any banking company in particular."
Using this power, the RBI introduced the Banking Ombudsman Scheme, which is a quasi-judicial
authority for resolving customer complaints.

Evolution of the Banking Ombudsman Scheme

Year Development
1995 Introduction of the first Banking Ombudsman Scheme.
2006 Revised and expanded scope to include new services.
2017 Further revisions to cover more complaint areas.
Integrated Ombudsman Scheme, 2021 launched, replacing previous schemes for banks, NBFCs,
2021
and digital transactions.
The current scheme is Integrated Ombudsman Scheme, 2021, brought under Section 35A of the
Banking Regulation Act, 1949, Section 45L of the RBI Act, 1934, and Section 18 of the Payment and
Settlement Systems Act, 2007.

Who is the Banking Ombudsman?

 A senior official appointed by the RBI.
 Acts as a quasi-judicial authority to resolve complaints related to banking services.
 One ombudsman may be appointed for one or more banks or regions.
 The RBI appoints multiple ombudsmen across the country.
Scope and Powers of the Banking Ombudsman
Types of Complaints Handled
Under the scheme, the ombudsman can hear complaints related to:
1. Non-payment or delay in cheque/draft clearing.
2. Failure to provide promised banking services.
3. Non-adherence to fair practices code.
4. Levying of excessive charges without notice.
5. Mis-selling of insurance or mutual fund products by banks.
6. Non-disbursement of loans despite sanction.
7. Refusal to open deposit accounts without valid reason.
8. Issues with mobile/electronic banking transactions.
Powers of the Ombudsman
 Can summon bank officials and demand documents.
 Can pass awards up to ₹20 lakh for loss suffered.
 Can recommend compensation up to ₹1 lakh for mental harassment.
 The decision is binding on banks if accepted by the customer.

Procedure to File a Complaint

1. First, the customer must lodge a complaint with the bank and wait for a response within 30
days.
2. If unsatisfied or no reply is received, the customer can:
o File a complaint online via RBI’s Complaint Management System (CMS).
o Submit a complaint physically at the Ombudsman office.
3. No fees are charged for filing a complaint.
4. Ombudsman attempts settlement through conciliation or mediation.
5. If unresolved, a formal award or rejection order is passed.

Example of a Banking Ombudsman Case

Case: Delay in Credit of Pension
Facts:
 A senior citizen filed a complaint with the Ombudsman after his pension was not credited on
time for 3 consecutive months.
Ombudsman Action:
 The Ombudsman found that the bank failed to process the pension due to a technical error.
Decision:
 The Ombudsman ordered the bank to:
o Credit the pending amount with interest.
o Pay ₹10,000 as compensation for mental harassment.
Outcome:
 The bank complied, and the pensioner received the dues and compensation without going to
court.

Benefits of the Banking Ombudsman System

 Free of cost: No fee charged from customers.
  Efficient and Quick: Faster resolution compared to regular court procedures.
 Accessible: Online and physical complaint mechanisms available.
 Consumer-Friendly: Protects vulnerable sections like pensioners, rural customers, etc.

Limitations
 Covers only specific types of complaints.
 Binding only on banks, not on the customer unless accepted.
 Cannot handle complaints already in court or consumer forum.
 No appeal process if complaint is rejected, except through Appellate Authority (RBI).

The Banking Ombudsman, empowered under Section 35A of the Banking Regulation Act, 1949,
plays a pivotal role in protecting customers from unfair banking practices and ensuring accountability
in the banking sector. By offering an accessible, low-cost, and time-bound grievance redressal
mechanism, it significantly enhances customer confidence in the Indian financial system. With the
introduction of the Integrated Ombudsman Scheme, 2021, the RBI has further simplified and
broadened the scope of customer grievance redressal in India.

unit 4
1.Define elaborately the meaning ,types and essentials of negotiable instruments .
Ans.
In commercial transactions and banking operations, negotiable instruments
play a vital role in facilitating payments and credit. These instruments are essential tools for
businesspeople, bankers, and individuals who engage in financial dealings. In India, the law relating to
negotiable instruments is governed by the Negotiable Instruments Act, 1881, which lays down the
meaning, types, legal characteristics, and obligations associated with these instruments.

Meaning of Negotiable Instrument

The term "negotiable" means transferable, and "instrument" refers to a written document. Therefore,
a negotiable instrument is a written document that guarantees the payment of a certain sum of
money, either on demand or at a future date, and is transferable by delivery or endorsement.
Statutory Definition [Section 13(1) of the Negotiable Instruments Act, 1881]
“A negotiable instrument means a promissory note, bill of exchange or cheque payable either to
order or to bearer.”
Thus, the Act identifies three main types of negotiable instruments:
 Promissory Note
 Bill of Exchange
 Cheque
In addition to these statutory instruments, there are negotiable instruments by custom or usage
which are also recognized in trade and banking practices.

Features or Characteristics of a Negotiable Instrument

1. Written Document: It must be in writing (handwritten, printed, or electronic under modern
laws).
2. Unconditional Promise or Order: There must be a clear commitment to pay.
 3. Transferability: It can be transferred from one person to another by delivery (if bearer) or by
endorsement and delivery (if order).
4. Right of the Holder in Due Course: A holder in due course gets a better title than the
transferor.
5. Certain Sum of Money: The amount payable must be fixed and certain.
6. Payable on Demand or at a Future Date: It must specify when the amount is payable.
7. Presumptions Under Law [Section 118]: Legal presumptions such as consideration, date, and
signature are in favor of the holder.
8. Negotiability: These instruments are freely transferable and can be encashed by the holder.

Types of Negotiable Instruments

The Negotiable Instruments Act recognizes the following statutory instruments:
1. Promissory Note [Section 4]
A promissory note is a written and signed document by which one party (the maker) promises to pay
a definite sum of money to another party (the payee) or to his order.
Essentials of a Promissory Note:
 Must be in writing.
 Must contain an unconditional promise to pay.
 Must be signed by the maker.
 Payee must be certain.
 Amount must be specific.
 Must be payable in money only.
Example:
“I promise to pay ₹10,000 to Ravi or order on demand.” – Signed: Ramesh

2. Bill of Exchange [Section 5]

A bill of exchange is a written order by one party (the drawer) directing another party (the drawee) to
pay a specified sum to a third party (the payee) or to his order.
Essentials of a Bill of Exchange:
 Must be in writing.
 Must contain an unconditional order to pay.
 Must be signed by the drawer.
 The drawee and payee must be certain.
 Amount must be definite.
 It must be payable either on demand or at a future date.
Example:
“Pay ₹20,000 to Anil or order 30 days after sight.” – Signed: Sunil, addressed to Rajesh.

3. Cheque [Section 6]
A cheque is a specific type of bill of exchange drawn on a bank and payable on demand.
Essentials of a Cheque:
 Must be in writing.
 Must be drawn on a specified banker.
 Must contain an unconditional order to pay.
  Must be payable on demand.
 Must be signed by the drawer.
 Includes both paper and electronic cheques (after 2002 amendments).
Types of Cheques:
 Bearer Cheque
 Order Cheque
 Crossed Cheque
 Post-dated Cheque
 Stale Cheque

Negotiable Instruments Recognized by Usage or Custom (Not Statutory)

Apart from promissory notes, bills of exchange, and cheques, the following are also considered
negotiable by custom:
 Banker’s Draft
 Pay Order
 Treasury Bills
 Dividend Warrants
 Share Warrants
 Government Promissory Notes
These instruments are recognized as negotiable based on trade customs and usage, although they
are not explicitly mentioned in the Act.

Essentials of a Valid Negotiable Instrument

A negotiable instrument must fulfill the following legal essentials:
1. Written Form
 It must be in writing and signed by the person creating it.
2. Signature of the Maker/Drawer
 Must be properly signed to show legal acceptance.
3. Unconditional Promise or Order to Pay
 No conditions should be attached to the payment obligation.
4. Certainty of Amount
 The amount must be clearly specified and not vague.
5. Payable in Money Only
 It cannot involve goods, services, or other forms of value.
6. Payee Must be Certain
 The person to whom the amount is payable must be identifiable.
7. Properly Stamped (if required)
 For some instruments, revenue stamps are necessary under the Indian Stamp Act.
8. Date of Maturity (for certain instruments)
 Bills and promissory notes should mention when payment is due.

Legal Presumptions under Section 118

The Negotiable Instruments Act assumes certain facts unless proven otherwise. These presumptions
include:
  Every negotiable instrument is made for consideration.
 The date mentioned is accurate.
 The instrument was accepted and endorsed in the correct order.
 It was duly stamped and signed.
 The holder is a holder in due course.

Importance of Negotiable Instruments in Banking and Commerce

 Promotes ease of payment and credit extension.
 Minimizes the need to carry physical cash.
 Provides a legal framework for enforcement of financial claims.
 Ensures speedy transferability of funds.
 Facilitates domestic and international trade.
 Builds confidence and trust in financial dealings.
Conclusion - Negotiable instruments, governed by the Negotiable Instruments Act, 1881, are
fundamental tools for facilitating smooth commercial transactions. The **three principal
instruments—promissory notes, bills of exchange, and cheques—**serve distinct purposes but share
common characteristics of transferability, enforceability, and certainty. Their legal recognition, ease
of transfer, and practical utility make them essential to modern business and banking operations.
2.Explain the procedure followed after dishonour of cheque .
Ans .
Cheques are widely used negotiable instruments in business and banking for the
purpose of making payments. However, one of the most common issues in commercial transactions is
the dishonour of a cheque, which not only causes financial loss but also disrupts trust in the banking
and payment system.
To deal with such situations, the Negotiable Instruments Act, 1881 provides a legal remedy under
Section 138 to 147, which allows the payee to take legal action against the drawer of the dishonoured
cheque.

Meaning of Dishonour of Cheque

A cheque is said to be dishonoured when the bank refuses to make the payment to the payee due to
insufficient funds, account closure, payment stopped by drawer, or any other reason. The bank
returns the cheque to the payee along with a “cheque return memo” stating the reason for
dishonour.

Legal Provision for Dishonour of Cheque

Section 138 of the Negotiable Instruments Act, 1881
Section 138 provides for penal consequences if a cheque is dishonoured due to insufficiency of funds
or if it exceeds the amount arranged to be paid by the drawer.
Conditions under Section 138:
 A cheque is drawn by a person on an account maintained by him.
 The cheque is returned unpaid by the bank due to insufficient funds or exceeds the agreed
arrangement.
 The cheque must be issued for the discharge of a legally enforceable debt or liability.
  The cheque must be presented within 3 months from the date of issue or within its validity
period.
 The drawer fails to make payment within 15 days of receiving the legal notice.

Procedure After Dishonour of Cheque

The following is the step-by-step legal procedure to be followed after a cheque is dishonoured:

1. Dishonour Memo by the Bank

When a cheque is deposited and the bank refuses to honour it, the payee receives a “cheque return
memo” from the bank mentioning the reason for dishonour (e.g., "insufficient funds", "stop
payment", "account closed", etc.).

2. Issuance of Legal Notice [Within 30 Days]

As per Section 138(b), once the cheque is dishonoured, the payee must send a written legal notice to
the drawer of the cheque within 30 days from the date of receiving information from the bank about
dishonour.
Contents of the Notice:
 Details of the dishonoured cheque.
 Amount mentioned in the cheque.
 Reason for dishonour.
 A demand for payment of the cheque amount within 15 days.
Purpose: To provide the drawer an opportunity to make the payment voluntarily before initiating
criminal proceedings.

3. Waiting Period of 15 Days [From Date of Receipt of Notice]

After sending the notice, the drawer is given 15 days’ time to make the payment of the cheque
amount.
 If the drawer pays within this period, no legal action is initiated.
 If the drawer fails or refuses to pay, the payee can proceed to file a complaint.

4. Filing of Complaint in Court [Within 1 Month]

As per Section 142(b), if the drawer does not make the payment within 15 days, the payee can file a
criminal complaint under Section 138.
 The complaint must be filed within one month from the expiry of the 15-day notice period.
 It must be filed in a Magistrate’s Court (Metropolitan Magistrate or Judicial Magistrate of First
Class) having jurisdiction.
Documents Required:
 Copy of cheque.
 Cheque return memo.
 Copy of legal notice.
 Postal receipt or acknowledgment of notice delivery.
 Affidavit verifying the complaint.

5. Cognizance by the Court and Summons

Once the court receives the complaint:
 It will examine the complaint and accompanying documents.
 If the court is satisfied that there is a prima facie case, it will issue summons to the drawer.

6. Appearance of the Accused

The accused (drawer) must appear before the Magistrate after receiving summons.
 He may plead guilty or contest the case.
 If he pleads guilty, the court may convict and sentence him.
 If he denies the charges, the case proceeds to trial.

7. Trial Proceedings
 Evidence is presented by the complainant (payee), including affidavit and documents.
 The accused is allowed to present his defense.
 Cross-examination and arguments take place.
 The Magistrate finally delivers the judgment.

Punishment under Section 138

If found guilty, the drawer can be punished with:
 Imprisonment up to 2 years, or
 Fine up to twice the amount of the cheque, or
 Both
Additionally, the court may order the compensation to be paid to the complainant under Section 357
of CrPC.

Compounding of Offence [Section 147]

Under Section 147, the offence under Section 138 is compoundable, meaning:
 The complainant and accused can settle the matter mutually at any stage.
 On filing a joint application, the court may allow the compounding of the offence and close the
case.

Important Judicial Precedents

1. M.S. Narayana Menon v. State of Kerala (2006)
Held that once the accused shows there was no legally enforceable debt, the burden shifts to the
complainant to prove it.
2. C.C. Alavi Haji v. Palapetty Muhammed (2007)
Ruled that it is not necessary for the complainant to prove that the drawer received the notice; it is
enough if the notice is properly sent.

Exceptions to Section 138

Section 138 does not apply in the following situations:
 If the cheque was given as a gift or donation (not against a debt).
 If the cheque was issued against a time-barred debt.
 If the cheque was issued as a security.
 If the cheque was post-dated and presented before its due date.
Conclusion
The dishonour of a cheque is a serious offence under the Negotiable Instruments Act, 1881. The law
under Section 138 to 147 ensures that the payee has a clear and time-bound remedy to recover his
money. The legal procedure—from sending a notice to filing a complaint—must be followed strictly
within the prescribed timelines. This provision not only protects the rights of the payee but also
helps in maintaining the sanctity of cheques and the credibility of business transactions in India.
.
4 .short notes
a. parties to negotiable instrument
Ans .

Parties to a Promissory Note

Defined under Section 4 of the Act.
1. Maker
 The person who makes the promise to pay.
 He is primarily liable for payment.

📌 Section Reference: Section 4 – "A promissory note is an instrument in writing... containing an

unconditional undertaking... signed by the maker, to pay a certain sum of money..."
2. Payee
 The person to whom the amount is payable.

🔹 Parties to a Bill of Exchange

Defined under Section 5 of the Act.
1. Drawer
 The person who makes the bill and gives the order to pay.
2. Drawee
 The person on whom the bill is drawn (directed to pay).
 Becomes the acceptor once he accepts the bill.
3. Acceptor
 The drawee who accepts the bill, making himself liable.
4. Payee
 The person to whom the amount is payable.

📌 Section Reference: Section 5 – "A bill of exchange is an instrument in writing... containing an

unconditional order... signed by the maker, directing a certain person to pay..."

🔹 Parties to a Cheque
Defined under Section 6 of the Act.
1. Drawer
 The person who draws the cheque (account holder).
2. Drawee
 The bank on which the cheque is drawn.
3. Payee
 The person named in the cheque to whom the money is to be paid.
📌 Section Reference: Section 6 – “A cheque is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand...”

🔹 Other Common Parties (Relevant to All Instruments)

1. Holder – Section 8
 A person entitled in his own name to the possession of the instrument and to receive the
amount due.
2. Holder in Due Course – Section 9
 A holder who takes the instrument:
o For consideration,
o Before maturity, and
o In good faith.
 Enjoys special protection under the Act.
3. Endorser – Section 15
 A person who signs his name (usually on the back of the instrument) to transfer it to another.
4. Endorsee
 The person in whose favor the instrument is endorsed.

b. holder and holder in due course

Ans. Here’s a detailed explanation of Holder and Holder in Due Course (HDC) under the Negotiable
Instruments Act, 1881, with relevant sections, differences, and key points:

🔹 1. Holder – [Section 8]
📘 Definition (Section 8):
“The holder of a promissory note, bill of exchange or cheque means any person entitled in his own
name to the possession of the instrument and to receive or recover the amount due thereon from
the parties thereto.”
✅ Key Features:
 Has legal ownership of the instrument.
 His name must appear as the payee or endorsee.
 Can sue in his own name to recover the amount.
 May or may not have obtained the instrument for value.

📌 Example:
If a cheque is drawn in the name of Rahul, and he holds it, he is the holder, as he is entitled to receive
the payment.

🔹 2. Holder in Due Course (HDC) – [Section 9]

📘 Definition (Section 9):
“Holder in due course means any person who, for consideration, became the possessor of a
promissory note, bill of exchange or cheque before it became overdue, and without having sufficient
cause to believe that any defect existed in the title of the person from whom he derived his title.”
✅ Key Features:
  Must have obtained the instrument:
o For consideration (not a gift),
o Before the due date,
o In good faith (without knowledge of defects),
 Gets better title than the transferor – even if there were flaws in the original title.
 Enjoys special rights and protections under the Act (e.g., Section 36, Section 42).

📌 Example:
If A gives a cheque to B, and B sells it to C for value, and C receives it in good faith before the due date
— C is a holder in due course.

🔹 Rights of a Holder in Due Course

A Holder in Due Course has special privileges:
1. Right to receive payment even if there are defects in prior endorsements.
2. Presumption of consideration (Section 118).
3. No liability if instrument was originally obtained by fraud (Section 42).
4. Free from defects of title of previous holders.

c. Discharge from liability

Ans. Here's a clear and structured explanation of Discharge from Liability under the Negotiable
Instruments Act, 1881, including relevant sections, types, and examples.

🔹 What is "Discharge from Liability"?

Discharge means release from legal obligation. Under the Negotiable Instruments Act, discharge
from liability refers to situations where the parties to a negotiable instrument (like a cheque,
promissory note, or bill of exchange) are freed from the obligation to pay.
There are two types of discharge:
1. Discharge of the instrument – The instrument itself is discharged, i.e., it is no longer
enforceable.
2. Discharge of one or more parties – Specific parties are released from liability, while others may
still be liable.

🔹 Discharge of the Instrument (Complete Discharge)

Once discharged, no party can be held liable, and the instrument cannot be negotiated further.
📘 Common ways this occurs:
1. By Payment in Due Course – Section 78
 If the instrument is paid in full by the liable party to the holder, it is discharged.
 Payment must be made at or after maturity.

✅ Example: A pays B the amount of a promissory note on its due date. The instrument is discharged.

2. By Cancellation – Section 82(a)

 If the holder intentionally cancels the name of the party (e.g., by striking it out), that party is
discharged.
✅ Example: If the holder crosses out the acceptor’s name on a bill of exchange, the acceptor is
discharged.
3. By Release – Section 82(b)
 If the holder releases a party from liability (through writing or conduct), that party is
discharged.
✅ Example: If B, the holder, agrees in writing not to hold A (the drawer) liable, A is discharged.

4. By Allowing Drawee More than 48 Hours to Accept – Section 83

 If the holder allows the drawee more than 48 hours (exclusive of public holidays) to consider
acceptance, all parties not consenting are discharged.

🔹 Discharge of One or More Parties (Partial Discharge)

Even if the instrument remains valid, some parties may be discharged.
1. By Operation of Law
 Discharge may occur through bankruptcy, insolvency, or death.
2. By Material Alteration – Section 87
 If any material part of the instrument (amount, date, name, etc.) is altered without consent,
the instrument becomes void against those who did not consent.
✅ Example: Changing ₹5,000 to ₹50,000 without approval discharges all non-consenting parties.

3. By Forgery
 If a signature is forged, the forged party is not liable.

✅ Example: If someone forges a drawer’s signature, the drawer is not bound by the instrument.

d. Material alteration
Ans
🔹 What is Material Alteration?
Material alteration refers to any change made to a negotiable instrument (promissory note, bill of
exchange, or cheque) that alters the rights, liabilities, or legal position of any party to the instrument
without their consent.

“Any material alteration of a negotiable instrument renders the same void as against anyone who is a
party thereto at the time of the alteration and does not consent thereto, unless it was made in order
to carry out the common intention of the original parties.”
🔹 What Constitutes a Material Alteration?
A change is material if it affects the legal identity or liability of the instrument. Examples include:
🔹 Effect of Material Alteration
 The instrument becomes void against all parties who did not give consent.
 Parties who agreed to or made the alteration remain bound.
 A Holder in Due Course (Section 9) may still be protected in some cases if the alteration is not
apparent.

🔹 Example:
A draws a bill of exchange for ₹10,000 payable to B.
B changes the amount to ₹50,000 without A’s consent.
→ This is a material alteration, and the instrument becomes void against A.

🔸 Judicial View (Case Law):

Gomathi Vs. Sundaram Finance Ltd. (AIR 1985 Mad 41):
“If the alteration changes the legal effect of the instrument in any way, it is material—even if done
innocently.”
e. Presentment noting and protest
Ans

1. Presentment under the Negotiable Instruments Act

✅ Definition:
Presentment means showing the instrument to the concerned party (maker, acceptor, or drawee) to
either:
 Accept (in case of a bill of exchange), or
 Pay (in case of a promissory note, bill, or cheque).

✅ Example:
If A gives B a cheque, B must present it to the bank (drawee) within a reasonable time to receive
payment. That’s presentment for payment.

🔹 2. Noting – Section 99
📘 Definition:
Noting is the recording by a notary public that a negotiable instrument has been dishonoured (either
non-acceptance or non-payment).
It includes:
 Date of dishonour,
 Reasons (if any),
 Notary’s signature.

✅ Example:
If a bill of exchange is dishonoured due to non-payment, the holder may get it noted by a notary,
who writes the date and reason of dishonour.

🔹 3. Protest – Section 100

📘 Definition:
A protest is a formal notarial certificate stating that a negotiable instrument has been dishonoured.
It is a more formal and detailed version of noting.
It includes:
 Description of the instrument,
 Name of parties,
 Reasons for dishonour,
  Declaration by the notary.

📌 When is Protest Mandatory?

 Mandatory for foreign bills of exchange (Section 104).
 Optional for inland instruments (but recommended if legal action is planned).

✅ Example:
If a foreign bill drawn in London is dishonoured in India, the holder must have it protested under
Section 104 for taking legal action.

F . crossing of cheques
Ans .

🔹 What is "Crossing of a Cheque"?

Crossing means drawing two parallel lines on the face of a cheque with or without additional words
like "A/c Payee" or the name of a bank. It is a direction to the bank that the cheque should not be
paid in cash over the counter, but only to a bank account.
This makes the cheque more secure, as it reduces the risk of theft or misuse.

🔹 Relevant Sections:
Sections 123 to 131 of the Negotiable Instruments Act, 1881 cover the crossing of cheques.

🔹 Types of Crossing
1. General Crossing – Section 123
A cheque is generally crossed if it bears two parallel lines across the face, with or without the words
"and company" or "& Co." or "not negotiable".
🔸 Effect:
The cheque must be presented through a bank, and cannot be encashed directly at the counter.
📘 Example (on cheque):
---------------------
| & Co. |
---------------------

2. Special Crossing – Section 124

A cheque is specially crossed when, in addition to the two lines, the name of a specific bank is
written.
🔸 Effect:
The cheque can be collected only by the named bank (not any other bank).
📘 Example:
-------------------------------
| State Bank of India |
-------------------------------

3. Restrictive Crossing (Not specifically named in Act)

A cheque that is crossed with the words “A/C Payee” or “Account Payee Only” is a restrictive
crossing.
🔸 Effect:
The cheque must be credited to the payee's account only — not transferable.
📘 Example:
-------------------------------
| A/C Payee Only |
-------------------------------
Though not defined under the Act, it is widely accepted in practice and supported by RBI guidelines.

4. Not Negotiable Crossing – Section 130

When the words "Not Negotiable" are written, even if the cheque is transferred, the transferee does
not get better title than the transferor.
🔸 Effect:
It can still be transferred, but the holder doesn’t get more rights than the previous party.

🔹 Banker’s Protection – Section 131

If a banker collects a crossed cheque in good faith and without negligence, it is not liable to the true
owner even if the title of the person who deposited the cheque is defective.
This encourages banks to accept cheques without fear of legal action if they act properly.

✅ Example Scenario:
A gives B a cheque with “A/C Payee – HDFC Bank” written across it.
This is a special restrictive crossing, and:
 It can only be deposited in HDFC Bank.
 It can only be credited to B's account, not to any third party.