Ultimate Revision Summary — Banking Law

All 5 units · 25 answers condensed · Memory-aid mnemonics for every topic

Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Expand All

Introduction to Banking Law

Banking evolution, RBI, banker-customer relationship, KYC & AML

Origin, Growth & Development of Banking

Mnemonic — PIE-NLR: Presidency Banks → Imperial Bank → SBI (1955) | Establishment of RBI (1934/35) | Nationalisation (1969: 14 banks, 1980: 6 banks) | LPG Reforms (1991) | Reforms (Narasimham Committee)

Three Presidency Banks: Bank of Bengal (1806), Bank of Bombay (1840), Bank of Madras (1843) — merged into Imperial Bank of India (1921)
SBI: Imperial Bank nationalised as State Bank of India in 1955 under SBI Act
RBI: Established 1 April 1935 under RBI Act, 1934; nationalised in 1949
Nationalisation: 1969 — 14 banks (deposits > Rs. 50 crore); 1980 — 6 banks (deposits > Rs. 200 crore)
Banking Regulation Act, 1949: Defines "banking" S.5(b) and "banking company" S.5(c)
Narasimham Committee (1991 & 1998): Recommended LPG reforms — liberalisation, privatisation, globalisation
Types of banks: Commercial, Cooperative, Development (NABARD, SIDBI), Specialised (EXIM), Payment Banks, Small Finance Banks

Reserve Bank of India — Functions & Role

Note Issuance: Sole authority to issue currency notes (except Re. 1 coins by GoI). Minimum Reserve System since 1957
Banker to Government: Manages public debt, handles government receipts/payments, adviser on financial matters
Banker's Bank: Lender of last resort, maintains CRR/SLR reserves, clearing house
Credit Control: Quantitative (Bank Rate, Repo/Reverse Repo, CRR, SLR, OMO) + Qualitative (Margin, Rationing, Moral Suasion, Direct Action)
Supervision: Licensing, inspection, control on management, branch expansion — S.22, S.35, S.36 BR Act
Developmental Role: Priority sector lending, NABARD, financial inclusion, payment systems

Banker-Customer Relationship

Debtor-Creditor: Primary relationship — bank is debtor (owes deposit), customer is creditor. Reverses when customer takes loan
Who is a "customer"? No statutory definition — one who has an account with the bank. Commissioners of Taxation v. English Scottish and Australian Bank
Bailor-Bailee: When bank keeps valuables in safe deposit locker or safe custody
Principal-Agent: When bank collects cheques, pays bills, buys securities on behalf of customer
Trustee-Beneficiary: When customer deposits money for specific purpose — bank holds as trustee
Mortgagor-Mortgagee: When customer pledges property as security for loan

KYC Norms & Anti-Money Laundering

Mnemonic — CDRM: Customer Identification | Due Diligence | Risk categorisation (Low/Medium/High) | Monitoring suspicious transactions

KYC: Know Your Customer — mandatory under RBI Master Circular and PMLA 2002
Four pillars: Customer Acceptance Policy, Customer Identification, Transaction Monitoring, Risk Management
PMLA 2002: Prevention of Money Laundering Act — criminalises money laundering; establishes FIU-IND for reporting
Suspicious Transaction Reports (STR): Filed with FIU within 7 days of detection
e-KYC: Aadhaar-based electronic verification — instant account opening

Rights & Obligations of Banker and Customer

Banker's rights — LAS: Lien (general lien S.171 ICA) | Appropriation (Clayton's Case) | Set-off (combine accounts)

General Lien: S.171 Indian Contract Act — banker can retain securities until debt paid. Wider than particular lien
Right of Set-off: Combine two accounts of same customer — debit balance adjusted against credit balance
Right of Appropriation: Clayton's Case (Devaynes v. Noble) — first in, first out rule for appropriation
Duty of Secrecy: Tournier v. National Provincial & Union Bank (1924) — banker must not disclose customer information. Exceptions: law compulsion, public duty, bank's interest, customer's consent
Duty to Honour Cheques: Must pay if properly drawn, sufficient funds, within banking hours
Customer's duties: Draw cheques carefully, inform of forgery promptly, not overdraw without arrangement

Deposits & Accounts

Types of deposits, special customers, nomination, passbook, garnishee orders

Types of Deposits

Mnemonic — SCFR: Savings (limited withdrawals, interest) | Current (unlimited, no interest) | Fixed (lump sum, fixed term, higher interest) | Recurring (monthly installments)

Demand Deposits: Savings A/c (limited withdrawals + interest) and Current A/c (unlimited withdrawals, no interest — for businesses)
Time Deposits: Fixed Deposit (lump sum for fixed period, higher interest) and Recurring Deposit (monthly instalments for fixed period)
DICGC Insurance: Deposits insured up to Rs. 5 lakh per depositor per bank (including principal + interest)
Interest rates: RBI deregulated savings rate (currently ~2.7-3.5%); FD rates set by individual banks
Premature withdrawal: Allowed with penalty (0.5-1% deduction from applicable rate)

Accounts of Special Customers

Joint Account: Operated by all jointly, or "either or survivor" mode. Death of one — survivor can operate; balance to legal heirs
Minor: Cannot enter valid contract (S.11 ICA). Account opened by natural/legal guardian. Mohori Bibee v. Dharmodas Ghose — minor's agreement void ab initio
Insolvents: Upon adjudication, Official Assignee/Receiver takes over estate. Bank freezes account, pays only to OA
Lunatics: Court of Wards manages — bank operates only on court orders. If customer becomes lunatic, bank stops operations on notice
Companies: Board resolution required. Ultra vires borrowing void — bank must verify memorandum/articles
Partnership Firms: All partners are agents — any can operate. Death/insolvency of one dissolves firm unless otherwise agreed

Nomination & Settlement of Deceased Claims

Mnemonic — NCS: Nomination (S.45ZA-ZF BR Act) | Claim settlement (simplified below Rs. 5 lakh) | Succession certificate (above limit)

Nomination: S.45ZA BR Act — depositor can nominate one person to receive deposits on death
Nominee ≠ Owner: Nominee is only a custodian — legal heirs are actual owners. Nominee holds in trust for heirs
Simplified procedure: For deposits up to Rs. 5 lakh — bank may settle with legal heirs without succession certificate
Above Rs. 5 lakh: Succession certificate or probate of will required
Locker nomination: S.45ZC — similar nomination facility for safe deposit lockers

Passbook — Evidentiary Value

Remember: Passbook = prima facie evidence, NOT conclusive proof. Bank can rectify errors. Estoppel applies if customer is silent.

Settled Account: Entries constitute a settled account between bank and customer — prima facie evidence of transactions
Estoppel: If customer receives passbook, examines entries, and remains silent — deemed to have accepted. Chatterton v. London & County Bank
Bank's right to rectify: Bank can correct errors — wrong credit can be reversed. Not conclusive or binding
Not negotiable: Passbook is not a negotiable instrument — cannot be transferred

Garnishee Order & Attachment

Two-stage process: Order Nisi (show cause, temporary freeze) → Order Absolute (final, bank must pay judgment creditor)

Garnishee order: Court order directing bank (garnishee) to pay customer's deposit to judgment creditor
Order Nisi: Preliminary — bank shows cause why it should not pay. Account frozen to extent of order
Order Absolute: Final — bank pays from customer's account to judgment creditor
Joint accounts: Garnishee order against one holder does NOT attach joint account — only individual accounts
Limitations: Cannot attach trust funds, government deposits earmarked for specific purpose, or deposits held as security

Loans, Advances & Credit Control

Credit facilities, RBI credit control, pledge, hypothecation, mortgage, lien

Types of Credit Facilities

Mnemonic — LOCB: Loans (term) | Overdraft (excess drawings) | Cash Credit (against stock/security) | Bills Discounting (pre-maturity payment)

Term Loans: Lump sum for specific purpose — short (< 1 yr), medium (1-5 yr), long (> 5 yr). Fixed repayment schedule
Overdraft: Customer draws more than account balance up to agreed limit. Interest on actual amount overdrawn
Cash Credit: Running account facility against pledge/hypothecation of goods/stock. Interest on daily outstanding
Bills Discounting: Bank buys bill before maturity at discount. Bill amount collected on due date from drawee
Secured vs Unsecured: Secured = backed by collateral. Unsecured = personal guarantee only (higher interest, stricter criteria)

Credit Control by RBI

Bank Rate: Rate at which RBI lends to commercial banks. Increase = tight money, decrease = easy money
Repo Rate: Rate at which banks borrow from RBI against government securities (short-term). Reverse Repo: Rate at which RBI borrows from banks
CRR: Cash Reserve Ratio — percentage of NDTL kept with RBI in cash. Currently ~4.5%
SLR: Statutory Liquidity Ratio — percentage of NDTL in liquid assets (gold, cash, govt securities). Currently ~18%
OMO: RBI buys/sells government securities in open market to control money supply
Margin: Difference between market value of security and loan amount. Higher margin = less lending
Moral Suasion: RBI persuades banks through advice, warnings, appeals — no legal force
Direct Action: Cancellation of licence, refusal of rediscount, penalties under S.47A BR Act

Pledge — Definition & Essentials

Remember: Pledge = delivery of possession as security. S.172 ICA. Pawnor (borrower) gives to Pawnee (bank).

Definition: S.172 ICA — bailment of goods as security for payment of debt or performance of promise
Essentials: (1) Delivery of possession to pawnee; (2) Goods as security; (3) For debt or promise; (4) Return on repayment
Pawnee's rights: Retain goods until debt paid; right to extraordinary expenses; right to sell on default (reasonable notice required)
Pawnor's rights: Redeem before sale; receive surplus after sale; right to reasonable care of goods
Pledge by non-owner: S.178-179 ICA — mercantile agent, seller in possession, buyer in possession can create valid pledge

Hypothecation & Mortgage

Key distinction: Hypothecation = movable property, possession stays with borrower | Mortgage = immovable property, transfer of interest

Hypothecation: Charge on movable property without delivery of possession — bank has equitable charge. Common for vehicles, machinery, stock
Mortgage: S.58 Transfer of Property Act — transfer of interest in immovable property as security for loan
Types of mortgage: Simple, English (conditional sale), Usufructuary, Anomalous, Equitable, Legal. Equitable mortgage (deposit of title deeds) most common in banking
Registration: Mortgage deed must be registered if above Rs. 100. Equitable mortgage — no registration required
Difference from pledge: In pledge, possession is with bank; in hypothecation, it remains with borrower

Banker's Lien & Right of Set-Off

Remember: Banker has general lien (broader than particular) under S.171 ICA. Set-off = combining two accounts of same customer, same capacity.

General Lien: S.171 ICA — banker can retain all securities deposited until all debts paid. Broader than particular lien
Particular Lien: Only for specific debt — limited to particular transaction
Set-Off conditions: (1) Debts must be certain and due; (2) Same capacity (not trust A/c vs personal A/c); (3) Same customer; (4) No agreement to the contrary
Clayton's Case: Devaynes v. Noble (1816) — FIFO rule for appropriation of payments. First deposits pay off earliest debts

Negotiable Instruments

NI Act 1881 — cheques, crossing, endorsement, paying/collecting banker, S.138

Negotiable Instruments — Definition, Features & Types

Mnemonic — PBC: Promissory Note (S.4 — promise to pay) | Bill of Exchange (S.5 — order to pay) | Cheque (S.6 — bill drawn on bank, payable on demand)

Definition: S.13 NI Act — instrument transferable by delivery (bearer) or endorsement (order), giving good title to bona fide holder
Features: Freely transferable, holder in due course gets better title, presumptions of consideration, date, time of acceptance
Promissory Note (S.4): Unconditional promise in writing to pay certain sum to specified person or bearer
Bill of Exchange (S.5): Unconditional order to pay — involves drawer, drawee, payee. Three parties unlike PN (two)
Cheque (S.6): Bill of exchange drawn on a specified banker, payable on demand only. Valid for 3 months from date
Bearer vs Order: Bearer — transferable by delivery alone. Order — requires endorsement + delivery

Crossing of Cheques

Mnemonic — GS-RNA: General crossing (two parallel lines) | Special crossing (bank name) | Restrictive ("A/c Payee Only") | Not Negotiable (transferee gets no better title) | Account Payee (non-transferable)

General Crossing S.123: Two parallel transverse lines with/without "& Co." — payable only through a bank, not over counter
Special Crossing S.124: Name of specific bank written across face — payable only through that named bank
Restrictive / Account Payee: Words "A/c Payee Only" — cheque cannot be endorsed to another; credited only to named payee's account
Not Negotiable S.130: Transferee does not get better title than transferor — removes negotiability protection
Who can cross? Drawer (any type), holder (general to special), banker (special, for re-collection)
Effect: Crossing is a direction to paying banker — pay only through a bank, not cash over counter. Safety measure against theft/forgery

Endorsement — Definition & Kinds

Mnemonic — BFRCP: Blank (just signature, becomes bearer) | Full / Special (name of endorsee) | Restrictive ("Pay X only") | Conditional (condition attached) | Partial (part amount — invalid!)

Definition S.15: Signing on back of instrument for transferring title — endorser signs, endorsee receives
Blank / General: Only endorser's signature, no endorsee named. Becomes payable to bearer — transferable by delivery
Full / Special S.16: "Pay to X or order" + signature. Specifies endorsee — only X can further endorse
Restrictive: "Pay to X only" — stops further negotiation. X cannot endorse further
Conditional: "Pay X on completion of work" — condition attached. Payer may disregard condition S.52
Partial: Endorsement for part amount — INVALID under S.56 NI Act
Sans Recours: "Without recourse" — endorser excludes personal liability. If instrument dishonoured, endorsee cannot sue endorser

Paying Banker & Collecting Banker

Paying Banker protection: S.85 (payment in due course) + S.128 (order cheque with valid endorsement)
Collecting Banker protection: S.131 (acts as agent, good faith + without negligence)

Paying Banker's Duty: Verify signature, ensure sufficient funds, check endorsements, honour properly drawn cheques
S.85 Protection: Payment in due course of bearer/order cheque discharges bank — even if endorsement forged (good faith + without negligence)
S.128: Paying banker protected for order cheques if endorsed in apparent conformity with rules
Collecting Banker's Duty: Act as agent for customer, present cheque for payment, credit proceeds. Must act in good faith and without negligence
S.131 Protection: Collecting banker not liable for conversion if acts in good faith and without negligence — receives payment for a customer
Negligence: Collecting for non-customer, not verifying identity, ignoring crossed cheque instructions = negligence → loses S.131 protection

Dishonour under S.138 + Material Alteration + Noting & Protest

S.138 timeline: Cheque bounces → 30-day demand notice → payee waits 15 days → if no payment → complaint within 30 days of expiry of 15 days

S.138: Dishonour for insufficiency of funds — criminal offence. Punishment: imprisonment up to 2 years OR fine up to twice the cheque amount, or both
Conditions: (1) Cheque for discharge of legally enforceable debt; (2) Presented within validity; (3) Returned unpaid; (4) Notice within 30 days of dishonour; (5) Drawer fails to pay within 15 days of notice
Complaint: Filed within 30 days after expiry of 15-day notice period. Dashrath Rupsingh Rathod v. State of Maharashtra (2014) — jurisdiction where cheque dishonoured (branch location)
Material Alteration: Any change in date, amount, payee name, or essential particular without consent renders instrument void. Bank must dishonour materially altered cheque
Noting: Certificate by Notary Public recording dishonour — fact, date, reason. Done within reasonable time
Protest: Formal certificate of dishonour issued by Notary Public. Mandatory for foreign bills, optional for inland instruments

Lending, Ombudsman & E-Banking

Lending principles, securities, Banking Ombudsman, E-Banking, DRT & SARFAESI

Good Lending Principles & Precautions

Safety: Most important — right borrower, right purpose, assured repayment. Money in safe hands
Liquidity: Not locked up for long — depositors' money repayable on demand. Short-term lending preferred
Purpose: Must be productive — determines risk level and interest rate
Diversity: "Don't put all eggs in one basket" — spread across agriculture, IT, pharma, education etc.
Profitability: Must cover expenses (rent, salaries, bad loans) and earn surplus at competitive rates
Security: Insurance against default — adequate and easily realizable collateral
PSL: 40% of ANBC for priority sectors — 18% agriculture (8% small farmers), 10% weaker sections
Schemes: PMMY (up to 10L), PMAY-U (housing), CSIS (education 7.5L), DRI (Rs. 15,000 at 4%)
Precautions (5 Cs): Character, Capacity, Capital, Collateral, Conditions

Securities for Advances — Kinds & Precautions

Mnemonic — LGDSL: Land (not preferred, illiquid) | Goods (oldest, 2/3 of advances) | Documents of Title | Stock Exchange Securities | Life Insurance Policies

Land: Valid but not preferred — time-consuming verification, valuation difficulty, not readily realizable
Goods: Oldest form (2/3 secured advances). Merits: easily valuable, liquidable. Demerits: fraud, deterioration, price fluctuation
Documents of Title: Bills of lading, railway receipts. Reliable but non-negotiable, risk of alteration
Stock Exchange Securities: Easy title, marketable, earn dividend/interest. Risk: price fluctuation, fake certificates
Life Insurance Policies: Tangible, guaranteed surrender value, no price risk. Risk: premium default
Goods precautions: Verify quality/quantity, proper storage/insurance, regular inspection, adequate margin
Land precautions: Title verification (30 years minimum), encumbrance check, approved valuation, registered mortgage, insurance
Pledge vs Hypothecation: Pledge = possession with bank; Hypothecation = possession with borrower

Banking Ombudsman

Mnemonic — TFPCY (Rejection grounds): Time-barred (1 year) | Frivolous/vexatious | Pending in court | Complainant didn't approach bank | Yet to get 30-day bank reply

Who: Quasi-judicial authority appointed by RBI — senior official (CGM rank+), 3-year tenure
Cost: Completely FREE for complainant
Pre-condition: Approach bank first → if bank rejects or doesn't reply within 30 days → then Ombudsman
Award: Up to Rs. 20 lakh + compensation up to Rs. 1 lakh for mental agony
Grounds: Cheque delays, charges without notice, loan complaints, ATM/card/internet banking issues, fair practices violation
Rejection: Time-barred (1 year), frivolous, pending in court, didn't approach bank, already settled
Appeal: To Deputy Governor RBI within 30 days (+30 days extension)
2021: Integrated Ombudsman Scheme — "One Nation, One Ombudsman" — merged banking + NBFC + digital payment schemes

E-Banking Services & Recent Trends

RTGS: Real Time Gross Settlement — instant inter-bank transfer (since March 2004). Min Rs. 2 lakh. Maintained by RBI
NEFT: National Electronic Funds Transfer — half-hourly batches. 24/7 since December 2019
ECS: Electronic Clearing Service — bulk payments. ECS Credit (salary/pension) + ECS Debit (EMI/bills)
ATM: 24/7 — withdrawal, balance, mini-statement, fund transfer, bill payment
Internet Banking: Online — fund transfer, bill payments, loan applications. Secured by encryption + OTP
Mobile Banking / UPI: Smartphone apps + UPI (game changer) + IMPS (instant). UPI = virtual payment address
POS: Card swipe at retail — customer debited, retailer credited. Contactless NFC, QR codes
Cards: Credit (post-paid), Debit (from account), Smart (chip-stored value), Traveller's (pre-paid travel)
Challenges: Security (hacking/phishing), rural infrastructure, customer awareness, cost for small banks

DRT & SARFAESI Act

DRT: RDDBFI Act 1993 — 39 DRTs + 5 DRATs — claims Rs. 20 lakh+
SARFAESI: NPA → 60-day notice → possession → 30-day public notice → sell → recover → return excess

DRT: Established under RDDBFI Act 1993 for speedy debt recovery — bars civil courts (except SC/HC)
Composition: 39 DRTs (Presiding Officer) + 5 DRATs (Chairperson). Jurisdiction: Rs. 20 lakh+ claims
DRT Powers: Beyond CPC — cross-suits, counterclaims, interim orders, attach property, appoint receiver
DRT Procedure: Application → Written statement → Hearing → Judgment (30 days) → Recovery Certificate (15 days) → Recovery Officer executes
SARFAESI 2002: Recovery WITHOUT court — 3 pillars: Securitisation, Reconstruction (ARCs), Enforcement of security
SARFAESI Process: NPA (90 days overdue) → 60-day notice under S.13(2) → take possession → 30-day public notice → auction → recover → return excess
Borrower's Rights: Adequate notice, fair valuation, balance proceeds, humane treatment (recovery agents: 7 AM - 7 PM only)
2016 Amendments: Time limits, uniform procedures, cases at bank branch jurisdiction

End of Banking Law Ultimate Revision Summary — 25 answers across 5 units.

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