Changing Facet of Law relating to Liability of Bankers

Origin of Bank

The word bank is said to be a germanic origin, cognate with the French word banque and the italian word, banca, both meaning bench. In the Roman Age, state owned banks not functioning, but there were private banks which were duly regulated by the government. In the Smriti period which followed the Vedic period and the epic age, banking had become an activity in India and Manu the great law giver speaks about the earning of interest as the business of the vanishes.

The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian banking system can be segregated into three distinct phases. They are as mentioned below:

Phase I- Early phase from 1786 to 1969 of Indian banks

Phase II- Nationalization of banks and Banking Sector reforms up to 1991

Fourteen Banks-

  • Central Bank of India
  • Bank of Maharashtra
  • Dena Bank
  • Punjab National Bank
  • Syndicate Bank
  • Canara Bank
  • Indian Bank
  • Indian Overseas Bank
  • Bank of Baroda
  • Union Bank of India
  • Allahabad Bank
  • United Bank of India
  • UCO Bank
  • Bank of India.

Phase III- New phase of Indian Banking System after 1991

The 21st-millennium era, bankers have to do global business and birth of term 'Universal Banking' is considered to be new responsibility of banking industry.

Banking means

American Definition - by 'banking' we mean the business of dealing in credits and by a bank we includes every person firm or company having a place of business where credits are opened by the deposit or collections of money or currency, subject to be paid or remitted on draft, cheque or order or money is advanced or loaned on stocks, bonds, bullion, bills of exchange, or promissory notes or where stocks, bonds, bullion, bills of exchange or promissory notes are received from discount or sale'.

Japanese Definition - as per the Japanese Bank act of 1927, 'Banks as 'institutions' which carry on operation of giving, as well as receiving credit'.

English Definition - Dr. Herbert l. Hart, says- a banker is one who in the ordinary course of his business honors cheques drawn upon him by person from and for whom he receives money on current accounts.'.

Indian Definition- According to Banking Regulation Act,1949 the 'Banking' means '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'.

Banking should be the primary business of the company even if by reason of certain supervening cause, it is not able for the time being to carry on the work of receiving deposits and of making payments. 

Various statutes relating to banking business

  • Act 6 of 1840 was the first attempt to law relating to banking
  • Negotiable Instruments Act,1881- Promissory Notes, Bill of Exchange, cheques
  • The Bankers Book Evidence Act,1891- Certified copies, Legal Proceedings
  • The Reserve Bank of India Act, 1934 - Reserve Bank of India and its functions
  • The Banking Regulation Act,1949-Banking Business- thoroughly dealt with first time
  • The State Bank of India Act,1955- State Bank of India and its subsidiaries

Recovery of debt due to Banks and Financial Institutions Act, 1993 - Speedier and more efficient mode of recovery of debts

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - to realize long-term assets, manage problem of liquidity, asset liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or reconstruction.

  • Various types of banks
  • Various functions of Banks
  • Primary functions
  • Accepting deposits through various accounts maintained by customers
  • Making loans and advances- loans, cash credit, overdraft, discounting of bills
  • Secondary functions
  • Agency functions- collection of cheques, executing standing instructions
  • Utility functions-safe custody, safety lockers, accepting bills, underwriting, providing information, issue gift cheques
  • Principles of sound lending

Safety: Whenever Bank lends money to any person, the bankers shall have to keep in mind about safety of loan amount. The bankers may take any amount as security to the loan amount. 

Stability: Whenever Bank lends money they have to keep in mind that, the stability of the customer with banks

Credibility: The Bank have to see the credibility of customer, whom they are lending money.

Common Law Concepts

Bankers Lien - A lien is the right of a creditor in possession of goods, securities or any other assets belonging to the debtor to retain them until the debt is repaid, provided that there is no contract express or implied, to the contrary. Curry vs. Missa

Bankers Right of Set off- The right of set off is also known as the right of combination of accounts. A bank has a right to set off a debt owing to a customer against a debt due from him.

Mainly Banks have habit to claim set off against Fixed Deposits, Shares for liabilities of customers.

Claytons Rule- is a common law presumption in relation to the distribution of monies from a bank account.

Mainly useful in the case of partnership firm business- when one partner dies surviving partners would become entitle and liable for assets and liabilities of dead partner.

Negotiable Instruments Act,1881

Paying Bankers

Section 31- liability of drawee of cheque-when sufficient funds available must make payment

Sections 8,9,10, 85, 85-A, 89, 118 and 128 -Protection to paying bankers

When Bank can refuse payment-countermanding by drawer, death of customer, insolvency of customer, insanity, court order, assignment, knowledge of breach of trust, defect in title, insufficient funds, PDC, Stale Cheque, signature differ, word figure differ, alteration, irregular endorsements

Collecting Bankers

Section 131- payment in good faith and without negligence 

Payment in Due Course

Section 10-according apparent tenor of instrument and good faith without negligence

Conditions - payment on maturity, payment in cash only, payment made to person in possession of instrument, in good faith, as per apparent tenor

Bankers Book Evidence Act, 1891

Bankers Books- Include ledgers, day books, cash-books, account-books and all other records used in the ordinary business of the bank, whether these records are kept in written form or stored in a micro film, magnetic tape or in any other form of mechanical or electronic  data retrieval mechanism, either onsite or at any  offsite location including a back-up or disaster recovery site of both;

Certified Copies - Copies of bankers books with certificate signed by principal accountant or manager of bank, computer printouts, micro films

Effect of amendments by Information Technology Act, 2000

Computer printouts included in the definition of Bankers Book and Computer printouts are to be treated at par certified copy

Reserve Bank of India Act,1934

Bankers Bank-

  • Bank Rate,
  • Open market operations,
  • Cash reserve ratio

Binding force of RBI circulars-

  • Various provisions empowers RBI to issue circulars and guidelines  
  • Central Bank of India case- Supreme Court held- RBI Circulars are mandatory not directory
  • Controlling and guiding authority-45 (A) to 45 (G) credit information- from banks and Financial Institutions
  • Banking Regulation Act, 1949
  • Licencing of Bank- Section 22 (3)- Mandatory to have licence

Forms of business banks can engage in addition to banking business - Section 6

Issuing Demand Drafts & Travelers Cheques, Collection of Cheques, Bills of exchange, Discounting and purchase of Bills, Safe Deposit Lockers, Issuing Letters of Credit & Letters of Guarantee, Sales and Purchase of Foreign Exchange, Custodial Services, Investment services and doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company; any other form of business which the Central Government may, by notification in the Official Gazette, specify as a form of business in which it is lawful for a banking company to engage.

Interest charged by Banks- Section 21- not subjected to scrutiny of court

Directions to bankers-Section 35A- in the interest of public, in the interest of banking business, proper management of banking busines

Reserve Bank of India as Bankers Bank- Provisions of Banking Regulation Act- winding up of banks, Cash reserve, 

Consumer Protection Act,1986 - Consumer Protection Act,1986 is social welfare legislation

Banking Service - is service as per section 2 (1) (o) of C. P. Act, 1986

Deficiency in service - not honouring cheques of customers even sufficient balance available in funds, not honouring Bank guarantee without stating any reason, misappropriation of money by employee of Bank, allow to withdraw huge funds by other than account holder

Various banking services- from operation of Accounts to modern banking services includes businesses in which Bank can engage into under section 6 of Banking Regulation Act, 1949

Banking Ombudsman and consumer complaints-

Banking Ombudsman Scheme 2006 introduce by Reserve Bank of India w.e.f 1/1/06

Banks covered under Ombudsman Scheme-all Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-operative Banks

Various complaints regarding - non-payment, inordinate delay in payment of cheques, non acceptance of coins, small denomination notes, leveling of charges without notice to customer etc.

Criminal Liability of Bankers

Fraud - Dimensions of fraud- contractual, tortuous, criminal

In derry v. Peek, it was stated that :

'Fraud is proved when it is shown that a false representation has been made either knowingly, or without belief in the truth, or recklessly or carelessly, whether it be true or false'.

  • Fraud and banks connections- shares, co-operative banks fraud (scam)
  • Counterfeiting Bank Notes- section 28 of IPC
  • Bank notes are defined- 489A of IPC
  • Cheating, Criminal Breach of Trust, Conspiracy
  • Robbery, Dacoity - FIR registration by Bank officials is important
  • Information Technology Act, 2000

Digital Signature - Section 2(1) (p) of the Information Technology Act, 2000 defines Digital Signature as 'authentication of any electronic record by a subscriber by means of an electronic method or procedure in accordance with the provisions of section 3'

Public key cryptography is the method recognized by the IT Act for the safeguarding of computer documents. (user name and password)

Certifying Authority- appointment by Central Govt.  (presently 7 Certifying Authorities are there in India)

Information Technology Act, 2000, sec. 72 casts an obligation of confidentiality against disclosure of any electronic record, register, correspondence and information, except for certain purposes and violation of this provision is a criminal offence.

Right to Information Act,2005

This act is meant to give to the citizens of India access to information under control of public authorities to promote transparency and accountability in these organisations.

Obligations of RBI and other public sector banks to provide information - RBI also places in public domain its instructions relating to banking, finance, foreign exchange and other related subjects.

All public sector banks and other institutions constituted by an act of parliament or owned and controlled by the government are public authorities within the meaning of the above act and are required to comply with the provisions of the act.

Some of the obligations of public banks-

  • The particulars of its organization, functions and duties
  • The powers and duties of its officers and employees
  • The procedure followed in the decision making process, including channels of supervision and accountability
  • The norms set by it for the discharge of its functions
  • The rules, regulations, instructions, manuals and records, held by it or under its control or used by its employees for discharging its functions.
  • A statement of the categories of documents that are held by it or under its control.
  • Modern banking system
  • Computerization of banking industry
  • One of the recommendations of Talwar Committee on Banking service

Internet Banking -

The following banking transactions can be done through the internet banking:

  • Access and view your account (s) to keep transactions and balance status.
  • Make account enquiry by transaction type/ between dates/by amount etc.
  • Request for transfer of funds between your account (s) at the host branch.
  • Request for third party transfer of fund from your account (s) at host branch.
  • Request for issue of cheque books.
  • Request for stop payment of cheque.

Incentives provided by banks would dissuade customers from visiting physical branches, and thus get used to the convenience of arm-chair banking.

Citi Bank Case - 1994 first reported case of hacking of internet banking

Modern banking system

Virtual Banking - Virtual banking denotes the provisions of banking and related services through extensive use of information technology without direct recourse to the bank by the customer. The origin of virtual banking in the developed countries can be traced back to the seventies with the installation of Automated Teller Machine (ATM).

Types of virtual banking services-

  • Automated Teller Machines (ATM’s),
  • Shared ATM Networks (CASHTREE.INFINIT),
  • Electronic Funds Transfer at Point of Sale (EFTPOS),
  • Smart Cards Stored Value Cards, Phone Banking and more recently,
  • SMS banking.

Core Banking is normally defined as the business conducted by a banking institution with its retail and small business customers.

Normal core banking functions will include deposit accounts, loans, mortgages and payments. Banks make these services available across multiple channels like ATMs, Internet Banking, and branches.

Modern Banking System

Universal Banking is a multi-purpose and multi-functional financial supermarket (a company offering a wide range of financial services e.g. stock, insurance and real-estate brokerage) providing both banking and financial services through a single window.

Since the early 1990s structural changes of profound magnitude have been witnessed in global banking systems. Large scale mergers, amalgamations and acquisitions between the banks and financial institutions resulted in the growth in size and competitive strengths of the merged entities. Thus, emerged new financial conglomerates that could maximize economies of scale and scope by building the production of financial services organization called Universal Banking.

As per the World Bank, "In Universal Banking, large banks operate extensive network of branches, provide many different services, hold several claims on firms (including equity and debt) and participate directly in the Corporate Governance of firms that rely on the banks for funding or as insurance underwriters".

Conclusion

A sound and effective banking system is the backbone of an economy.

To facilitate the introduction of cheque truncation in India, the definition of presentment in the Negotiable Instruments Act, 1881 would have to be amended to permit electronic presentment of data or image of the cheque. The Reserve Bank may be empowered to frame Regulations on Cheque Truncation by suitable amendment to the Reserve Bank of India Act, 1934. Appropriate changes may accordingly be incorporated in the Clearing House Regulations and Rules as well.

In the near future, the biggest concern of a bank will be to implement best practices and solutions in the compliance area.

Customers expect the bank to offer value-added service with the technology support. Hence, section 6 of B.R. Act needs to be amended.

To conclude, the banking environment has become extremely competitive and challenging. The computerization and modernization of the Bank’s operations continued to receive required focus and as of now the computerized branches cover 85% of total business of the Bank and this level is expected to rise to 95% by the turn of the current fiscal.

 

Published in Corporate Law
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