banking

Question 1

Obligation of paying banker s. 89 of negotiable instruments act

Answer 1

(Only in cases of open cheque. Can only take over the counter under 50k. When
a cheque is handed over to the paying banker, they cross check the details and
signature in their systems and then only after verifying everything, they give the
money over the counter).

1. Paying banker is the banker on which an open cheque or a bearer cheque is
   drawn. According to S. 89, the paying banker must be careful in ascertaining the
   validity and genuineness of the drawer’s signature and make the payment in due
   course according to the apparent tenor (S. 10) of the instrument.

In P. N. Das v. Central Bank of India,

the drawer of the cheque after issuing
a crossed cheque delivered it to the payee and somehow it came into the
possession of a stranger who obliterated the cheque and managed to get the cash payment from the banker by forging drawers signature. The court observed that
crossing protects the cheque from being encashed by wrong person but
sometimes, dishonest person may obliterate or open the crossing so skilfully that
the banker is unable to despite their best effort detect such obliteration and pays
the cheque as an open cheque. The banker would be liable to the true owner under S. 89 only if he did not carry out due diligence and reasonable care and made
payment in due course.

Question 2

Obligation of collecting banker s. 131 of negotiable instruments act

Answer 2

Both
the branches of the bank will be liable. But the main duty will be of the branch
where the cheque is deposited. It has to perform all the formalities before clearing
the cheque. The branch where the account is has to perform the only duty of
clearing the cheque.

Question 3

OBLIGATION AND RESPONSIBILITIES OF BANKER

Answer 3

OBLIGATION AND RESPONSIBILITIES OF BANKER

A. Honour of cheque – Section 138
B. Maintain secrecy / confidentiality- Fiduciary Duty
C. Maintain correct account

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The fundamental obligations of a banker towards its customers are:-
* Banks have an obligation to honour the cheques drawn on it if the customer has
sufficient funds in his account. It is also obliged to honor cheques up to the overdraft
limit of a customer.
* Banker is bound to act as per the directions given by the customer. If directions are
not given the banker should act according to how he is expected to act.
* Care should be taken to make sure that the information given is general and only facts
that are evident should be revealed.
* Banks are obliged to maintain secrecy of their client accounts. There are times when
information may be revealed.
* The obligation of bankers is to maintain proper records.
* The obligation of bankers to give notice before closing the account.

Question 4

SBI v. National Open School Society

Answer 4

In this case, dispute arose when the account of the plaintiff showed balance of 142 lakhs although the actual amount that the plaintiff had was 119 lakhs. The error in maintaining the correct account was on the part of bank officials. The bank later on treated this error as overdraft and also charged interest on overdraft.
The bank also took the difference amount from the other account of the plaintiff in the same bank. The court held that the bank is under obligation to maintain
correct account of customers and it cannot treat the error as overdraft and charge
interest on the amount wrongly credited by the bank. The court also held that
taking the amount from other account in such a case is illegal

Question 5

U.P. State Sugar Corporation v. Sumac
International

Answer 5

held that a fraud in connection
with an unconditional bank guarantee be such that “it vitiates the very
foundation of such a bank guarantee. “No other fraud is good enough to meet
the test, and moreover, the Bank needs to have notice of such fraud. The
Hon’ble Supreme Court held that since the bank pledges its own credit
involving its reputation, it had no defense for declining the payment except in
case of fraud. The Supreme Court further held that the nature of fraud should
be of an “egregious nature as to vitiate the entire underlying transaction.
Further, such fraud must be committed by the beneficiary, and not by
somebody else.

Question 6

RIGHTS OF A BANKER

Answer 6

• Right of Lien
• Right of set-off
• Automatic right of set off
• Right of Appropriation
• Right to charge interest
• Right to charge service charges

Question 7

Right of set-off and automatic set off and appropriation

Answer 7

The right of set-off can be exercised only if there is no agreement express or implied that is
divergent to this right. It can be exercised only after a notice is served on the customer
informing the customer that the banker is going to exercise the right of set-off. To be on the
safe side bankers must take a letter of set-off from the customer authorizing the bank to
exercise the right of set-off without giving him any notice.

AUtomatic set off:
Sometimes the set off will happen automatically, it depends on the situation. In automatic set
off there is no need of permission from the customer. The cases in which automatic set off
can exercise are as follows: In case of the death of the customer.
* When the customer becomes insolvent.
* If a Garnishee order is issued on the customer’s account by court.
* When a notice of assignment of credit balance to someone else is given by the customer to the banker.
* When a bank receives the notice of second mortgage on the securities already charged
to the bank.

Right of Appropriation
In the normal course of business, a banker accepts payments from customers. If the customers
have more than one account or he/she has taken more than one loan, the customer has the
right to direct his banker against which debt the payment should be appropriated/settled. If
the customer does not direct the banker and there is more than one debt outstanding in his/her
name, the bank can exercise its right of appropriation and apply it in payment of any debt.
The banker can apply it against time barred debts also. Once an appropriation has been made
it cannot be reversed.

Question 8

Right to charge interest anbd service charge

Answer 8

The banker has an implied right to charge interest on the advances granted to its customer.
Bankers generally charge interest monthly, quarterly or semiannually or annually. There may
be an agreement between the banker and customer in this case the manner agreed will decide how interest is to be charged.

Right to charge service charges
* Banks charge customers a particular amount if their balance is below a predetermined
amount, for the usage of ATMs and withdrawals.
* Banks are free to charge these but the Reserve Bank of India expects banks to advise
their customers of these charges at the time of opening an account and advise them
when changes are being made.

Question 9

BANKER’S LIEN

Answer 9

Lien- means the right of the creditor to retain the goods and securities owned by the
debtors until the debt due from him is repaid. It confers upon the creditor the right to retain the debtor’s security and not the right to sell it.
Meaning of Lien and Pledge –
In case of a pledge, the creditor enjoys the right of sale.
A banker’s right of lien is more than “General lien.” The banker also enjoys the privileges of
the pledge and can dispose of the securities after giving proper notice to the customer. if there
is default by the customer. Such a right of lien thus resembles a pledge and is usually called
an implied pledge.

Special Features of a Banker’s Right of General Lien
1) The banker possesses the right of general lien on all goods and securities entrusted to him
in his capacity as a banker and in the absence of a contract inconsistent with the right of lien.
Thus, he cannot exercise his right of general lien if –
a) the goods and securities have been entrusted to the banker as a trustee or an agent of the
customer; and
b) a contract – express or implied – exists between the customer and the banker which is
inconsistent with the banker’s right of general lien.

2) A banker’s lien is similar to an implied pledge: As noted above the right of lien does not
confer on the creditor the right of sale but only the right to retain the goods till the loan is
repaid. In case of pledge the creditor enjoys the right of sale. A banker’s right of lien is more
than a general lien. It confers upon him the power to sell the goods and securities in case of
default by the customer. Such right of lien thus resembles a pledge and is usually called an
‘implied pledge’.

EXCEPTION TO RIGHT OF GENERAL LIEN:
1. Safe custody deposits.
2. Right of General Lien becomes that of Particular Lien
3. Securities left with the banker negligently.
4. Securities held in Trust.
5. right of set-off and not lien on money deposited

Question 10

CITY UNION BANK LTD vs THANGARAJAN

Answer 10

The respondent had two FDs with the bank- of rs
10,000, and other of 10,000. He wanted to transfer one FD to Vijaya bank. The city union bank
rejected his application to transfer the FD to Vijaya bank. Also freezed both his FDs. respondent was liable to the extent of 2,500.

HELD:
: The bank gets a general lien in respect of all securities of the customer including
negotiable instruments and FDRs, but only to the extent to which the customer is liable. If the
bank fails to return the balance, and the customer suffers a loss thereby, the bank will be
liable to pay damages to the customer. The trial court further observed that the Bank has got a
lien in respect of the property of its borrowers. But, however, when the debtor had got a fixed
deposit and that he owes amount to the Bank, both of them have got to be taken into
consideration and after deducting the amount, due to the Bank, the Bank is bound to return
the balance amount to its customer.

Instead of adopting the said course, the Bank has filed the suit for recovery of the amount.
The fact that the Bank filed the suit would amount to giving up/ waiving up his right of lien
and therefore, the Bank is not entitled to withhold the fixed deposit amount. Retaining the
customer’s properties beyond his liability is unauthorized and would attract liability to the
bank for damages.

Question 11

STEPHEN VS CHANDRA MOHAN

Answer 11

The first respondent pledged some ornaments and, on their security, secured a loan from where h the petitioner is the manager, after
executing an agreement also. The bank demanded the amount back and the first respondent
remitted the same. But the ornaments were not returned by “the petitioner for the reason that
a loan transaction by another person for which the first respondent stood surety was not discharged.

HELD: The petitioner was only acting
according to the terms of the agreement. Treating the ornament as security for another
transaction coming within the purview of the agreement does not involve dishonest use or
disposal in violation of a contract touching on the discharge of the trust.

Question 12

TYPES OF BANK GUARANTEES

Answer 12

1. Financial guarantees= The customer normally will have an option to furnish a bank guarantee in lieu of cash security, so that his working funds are not unnecessarily blocked
   - Guarantee for Payment of Customs duty = e guarantee covers custom duty in arrears to the Customs Department
   - Shipping Guarantee= Shipping guarantee is issued to the shipping company to release the goods by the shipping companies on the basis of bank guarantee.
2. Performance Guarantee:
   issued on behalf of a service contractor, and the bank has to discharge the financial liability of the contract agreed in the guarantee, if the contract is partly or fully not performed by the customer.

Question 13

LETTERS OF CREDIT

Answer 13

A Letter of Credit is issued by a bank at the request of its customer (importer) in favour of the
beneficiary (exporter). Due to the geographical proximities of the importers and the exporters, banks are involved in LC transactions to avoid default in payment (credit risks). determined. It’s economic effect is to introduce a bank as an underwriter where it assumes the credit risk of the buyer paying the seller of goods.

Letters of Credit Parties:-
1. Applicant (importer) requests the bank to issue the LC
2. Issuing bank (importer’s bank which issues the LC) [also known as Opening banker
of LC]
3. Beneficiary (exporter)

Different types of banks:
* Opening bank (a bank which issues the LC at the request of its customer [importer])
* Advising bank (the issuing banker’s correspondent who advices the LC to
beneficiary’s banker and/ or beneficiary)
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* Negotiating bank (the exporter’s bank, which handles the documents submitted by the
exporter. The bank also finances the exporter against the documents submitted under
a LC)
* Confirming bank (the bank that confirms the credit)

Question 14

LETTER OF UNDERSTANDING

Answer 14

A Letter of Understanding or LOU is a formal text that sums up the terms and understanding
of a contract which mostly has been negotiated up to this point only in spoken form. It
reviews the terms of an agreement for a service, a project or a deal and is often written as a
step before a more detailed contract is issued.
In international banking system, Letter of Undertaking (LOU) is a provision of bank
guarantee, under which a bank allows its customer to raise money from another Indian bank’s
foreign branch in the form of a short-term credit.
The LOU serves the purpose of a bank guarantee. However, to be able to raise the LOU, the
customer is supposed to pay margin money to the bank issuing the LOU and accordingly, he
is granted a credit limit.

Question 15

Powers of Reserve Bank of India (RBI)

Answer 15

Inspect the bank and its books and accounts (section 35(1)
* Examine on oath any director or other officer of the bank (section 35(3)
* Cause a scrutiny to be made of the affairs of the bank (section 35(1A)
* Give directions to secure the proper management of the bank (section 35A
* Call for any information of account details (section 27(2)
* Determine the policy in relation to advances by the bank (section 21)
* Direct special audit of the bank (section 30(1B) and,
* Direct the bank to initiate insolvency resolution process in respect of a default,
under the Provisions of Insolvency and Bankruptcy Code, 2016 (section
35AA)

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The Reserve Bank of India Act,1934 was enacted to constitute the Reserve Bank of India
with an objective :-
a) regulate the issue of bank notes
b) for keeping reserves to ensure stability in the monetary system
c) to operate effectively the nation’s currency and credit system

Question 15

Procedure for issuance of Letter of credit

Answer 15

1. Buyer and the seller enters into contract to conduct business.
2. The seller wants a Letter of Credit to guarantee payment.
3. Buyer applies to his bank (issuing bank) for a letter of credit in favour of the seller.
4. The buyers bank approves the credit risk of the buyer, issues and forwards the credit to the advising or confirming bank.
5. The advising bank will authenticate the credit and forward the original credit to the seller.
6. The seller ships the goods and receives all the documentary requirements from the carrier of goods.
7. Seller presents the required documents to the advising bank to be processed for payment.
8. Advising bank examines the documents for compliance with the terms and conditions of the LC, if the documents are correct the advising bank will claim the fund from the issuing bank by forwarding the documents to the issuing bank.
9. The issuing bank forwards the document to the buyer, the buyer receives the goods and makes the payment to the issuing bank.

Question 15

PNB SCAM

Answer 15

PNB discovered that at least 2 individuals, from its Brady House branch in Mumbai
repeatedly issued Letters of Undertaking (LoU) to Nirav Modi’s companies and their banks
without following the processes, without securing cash reserve or collateral and without
recording the transactions in the bank’s core banking software, the system on which the
bank’s financial transactions are run and recorded

For raising the LOU, the customer (importer) is supposed to pay margin money to the bank
that issues the LOU and accordingly, they are granted a credit limit. But in Nirav Modi’s case,
neither was there a credit limit, nor did he ever give any margin money.

Once the letter of credit is acknowledged and accepted, the lender (foreign branch of Indian
bank) transfers money to the nostro account of the bank that has issued the LoU. In this case,
Nostro account is the Punjab National Bank’s account held in another bank in a foreign
country for the purpose of holding foreign currency. And the money is transferred by AB to
supplier of PNB’s customer via a nostro account that PNB holds in AB in abroad. The credit
is ideally meant for short-term only. In the Nirav Modi-Mehil Choksi case, the term of loan
was allegedly extended far beyond what is prescribed as per the rule book

Question 16

RBI corporate governance

Answer 16

(i) Disclosure and transparency,
requires routine reporting of financial transactions of the bank to RBI, not abiding= heavy fines, cancellation of license to operate as bank

(ii) Off-site surveillance,
- on site surv. also done by rbi annually. The off-site surveillance prepares RBI to take timely remedial action before things get out of control.

(iii) Prompt Corrective Action.
RBI while promoting corporate governance in banks in India has RBI has set trigger points on the basis of CRAR, NPA and ROA. On the basis of trigger points set by RBI, the banks have to follow ‘structured action plan also called mandatory action plan’. Beside mandatory action plan RBI has
discretionary action plans too. The main reason for classifying the rule-based action points into Mandatory and Discretionary is that some of the actions are essential to restore the financial health of banks must be mandatorily taken by the bank while other actions will be taken at the discretion of RBI depending upon the profile of each
bank.

Question 17

CAMELS RATING SYSTEM

Answer 17

“Capital adequacy=
Capital Adequacy
Examiners assess institutions’ capital adequacy through capital trend analysis. To get a high capital adequacy rating, institutions must also comply with interest and dividend rules and practices.

Asset quality, Management,
Earnings, Liquidity, and
Sensitivity= Examiners assess an
institution’s sensitivity to market risk by monitoring the management of credit concentrations.
In this way, examiners are able to see how lending to specific industries affects an institution

Question 18

RBI february 2018 circular

Answer 18

The loan is taken by the company on its assets from the bank. When the
asset is not performing because they become doubtful and NPAs (Non
performing Assets) from doubtful become bad loans.
Before the period of 90 days, they are called Stressed Assets. Stressed
assets= NPAs + restructured loans + Written off Assets.

Question 19

types of assets

Answer 19

Sub-standard Assets-If borrower fails to repay the instalment, interest on
principal or principal for 90 days the loan becomes NPA and it is termed as Special Mention Account (SMA). If it remains SMA for a period less
than or equal to 12 months it is termed as Substandard Assets.

Loss Assets-If the loan is not repaid even after it remains substandard for
more than three years it would be called as loss Asset.
Written Off Assets-Written off assets are those on which the bank or
lender doesn’t count the money borrower owes to it.

Question 20

dharani sugars case

Answer 20

regarding the 2018 feb circular:
controversial circular issued by RBI on 12th February 2018 titled resolution of stressed assets
which instructed the lenders to take defaulting companies into proceedings immediately after 180 days of default.

HELD: RBI while issuing directions to banks can act only within the tenets laid down by central
government. This means that RBIs power can only be exercised after specific authorisation by the central government. The SC invalidated
the entire circular and essentially stated that the circular will have no effect in law. It is believed by the experts that from a regulatory point
of view the judgement certainly dilutes the power of India’s banking regulators as it.

 The Supreme Court held that the RBI can issue directions to a banking company to initiate insolvency resolution process under the IBC only in accordance with section 35AA of BR Act, which require (i) authorisation from the
Central Government; and (ii) occurrence of a specific default. Thus, powers conferred under section 35AA of BR Act to refer defaulters under the IBC cannot be exercised by RBI unless the conditions mentioned therein are
satisfied which shows that abundant caution has been exercised while introducing this section.

Question 21

functions of RBI

Answer 21

 Monetary Authority:
Formulates, implements and monitors the monetary policy.
 Regulator and supervisor of the financial system:
Prescribes broad parameters of banking operations within which the country’s banking and financial system
- Manager of Foreign Exchange
 Issuer of currency:
 Regulator and Supervisor of Payment and Settlement Systems:

Question 22

section 7 of RBI act

Answer 22

Management.— central govt may give directions to the bank after consultatin w bank governer for PUBLIC interest

[35AA. Power of Central Government to authorise Reserve Bank for issuing directions to banking companies to initiate insolvency resolution
process.—
Section 35AB. Power of Reserve Bank to issue directions in respect of stressed assets. –
(1) Without prejudice to the provisions of section 35A, the Reserve Bank may, from time to time, issue directions to any banking company or
banking companies for resolution of stressed assets.
(2) The Reserve Bank may specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for
appointment to advise any banking company or banking companies on resolution of stressed assets.

Question 23

BASEL NORMS

Answer 23

Basel III is a continuation of the three pillars along with additional requirements and safeguards. For example, Basel III requires banks to have a minimum amount of common equity and a minimum liquidity ratio. Basel III also includes additional requirements for what the Accord
calls “systemically important banks,” or those financial institutions that are considered “too big to fail.”
 The final Basel III framework includes phase-in provisions for the output floor, which will start at 50% on Jan. 1, 2023,
rising in annual steps of 5% and be fully phased-in at the 72.5% level from January 2028. These 2023 onward measures have been referred to as Basel 3.1 or Basel IV.

Question 24

role of RBI in prompt corrective action and issues

Answer 24

In governance-related actions, the RBI can supersede the board under Section 36ACA of the Banking Regulation (BR) Act, 1949. Amendment to Section 45 of the BR Act enables the Reserve Bank to
reconstruct or amalgamate a bank, with or without implementing a moratorium, with the approval of the Central government.
 The RBI, as part of its mandatory and discretionary actions, may also impose appropriate restrictions on capital expenditure, other than for technological upgradation within Board approved limits,
under the revised PCA.

Challenges and Issues Regarding PCA:
 PCA is an exceptional action and impacts the rating of the bank as well as consumer confidence. This is detrimental in the long run as it impacts the credit history of the bank and raises questions about
its management.
 PCA can accelerate the loss of market share and cause further decline of the position of the public sector banks in the financial system in favour of private banks and foreign banks.
 PCA is seen by the government as hindering economic growth therefore is arguing for easier lending policies by relaxing the PCA norms and aligning them to global norms.
 The tussle between RBI and government can negatively impact the image of India as an investment destination.

Question 25

Section 6 – Forms of business in which banking companies may engage and sec 8

Answer 25

Lending/Borrowing of money with/ without security, issuing travellers’ cheque, buying &
selling foreign exchange notes, deposits vaults, collecting & transmitting of money &
securities, buying bonds and other securities on the behalf of customers.
* Transacting and carrying on every kind of guarantee & indemnity business.
* Selling, managing & realizing any property which comes in possession of the bank in
procedure of settlements of claims.
* Executing and undertaking of trusts
* Other works which are advancements of main purpose of the company or incidental
* A form of business that is defined by the Central Government in its issued notification

SEC 8 As per law, banking companies cannot indirectly or directly deal or trade-in selling and
buying or bartering goods. This is an exemption if the security is held or given. In addition to
this, banking companies cannot involve in any bartering, selling, buying, or trading of goods
except if bills of exchange have been received for negotiation or collection.

Question 26

PUNJAB NATIONAL BANK LTD. VS COMMISSIONER OF INCOME-TAX

PNB vs CIT

Answer 26

Section 9 of the Banking Companies Act, 1949, prohibits a bank from acquiring immovable
property otherwise than for the purpose of its own business. The building in question was
acquired by the bank for its own business. In fact, it is the head office of the bank. There is a
provision in the Banking Companies Act that if a bank holds immovable property and uses
the same otherwise than for its business, then the same has to be sold. Nevertheless, when a
bank does not hold property for business purposes and a portion of the same is unused, i.e.,
lying idle, we do not think that this provision prevents a bank from letting out that portion. A
bank may have a very large building of which a portion may belying quite free and not
required, and it would not be right to say that the bank cannot let out that portion and if it
does let it out, then has it to sell the building ? A reasonable construction of the section would
be that the building is used for business purposes, but the extra portion can be let out.

Section 9 - Disposal of Non-Banking assets
Banks cannot hold any property for more than 7 years for the purpose of settlements of debts
or obligations. Such time limit of 7 years can be extended by the Reserve Bank of India for
another 5 years, if it thinks appropriate.

Question 27

can banks give loans to their directors and stuff?

Answer 27

Section 20 of Banking Regulation Act, 1949 (BR Act, 1949) prohibits banks from
granting any loan or advance to any of its directors, or any firm where the director is . interested as partner, manager, employee or guarantor

wever, banks can give loan to Chief Executive Officer/ Whole Time Directors for
purchasing of car, personal computer furniture, constructing/acquiring a house for
personal use, festival advance and credit limit under credit card facility.
* Commercial banks can grant loans and advances to the Chief Executive Officer/ Whole
Time Directors, without seeking prior approval of RBI.
However, the interest rate charged on such loans cannot be lower than the rate charged on
loans to the bank’s own employees. Apart from the specified loans, no other loan can be sanctioned to directors.

Question 28

Section 22 - Conditions for Licensing of Banking Companies

Answer 28

No company can carry on banking business in India unless it holds a license issued by the
Reserve Bank of India.
Before granting any license, the Reserve Bank may have to be satisfied:
- The company is or will be in a position to pay its present or future depositors in full as their claims accrue.
- he affairs of the company are not being, or are not likely to be, conducted in a manner detrimental to the interests of its present or future depositors
- The company has adequate capital structure and earning prospects
* The public interest will be served by the grant of a license to the company to carry on
banking business in India.
Additional Conditions for foreign Banks
Before granting any banking license to a company incorporated outside India, the RBI may
seek fulfillment of following additional conditions:
* The carrying on of banking business by such company in India will be in the public
interest
* The Government or law of the country in which it is incorporated does not
discriminate in any way against banking companies registered in India

Section 23- Restrictions on opening of new, and transfer of existing, places of business
- If a bank wants to open a new branch, they need RBI’s permission.
- Permission for a temporary place for less than 30 days does not require the permission of
RBI. If it is more than 30 days then permission is required.

Question 29

cancellation of banking license

Answer 29

If the company ceases to carry on banking business in India; or
* If the company at any time fails to comply with any of the conditions imposed upon it
under sub-section 1 of Section 22 of the Banking Regulation Act, 1949

However before cancelling a license on the ground that the banking company has failed to
comply with or has failed to fulfill any of the conditions referred to therein, the Reserve
Bank, unless it is of opinion that the delay will be prejudicial to the interests of the
company’s depositors or the public, shall grant to the company on such terms as it may
specify, an opportunity of taking the necessary steps for complying with or fulfilling such
condition.
Any banking company aggrieved by the decision of the Reserve Bank cancelling a license
under this section may, within thirty days from the date on which such decision is
communicated to it, appeal to the Central Government.

Question 30

Non-Banking Financial Company (NBFC)

Answer 30

A Non-Banking Financial Company (NBFC) is a company registered under the Companies
Act,
2013 engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or other
marketable securities of a like nature, leasing, hire-purchase, insurance business, chit
business but does not include any institution whose principal business is that of agriculture
activity, industrial activity, purchase or sale of any goods (other than securities) or
providing any services and sale/purchase/construction of immovable property.

Question 31

important regulations of NBFC

Answer 31

1. The NBFCs are allowed to accept/renew public deposits for a minimum period of 12
   months and maximum period of 60 months. They cannot accept deposits repayable on
   demand.
2. NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from
   time to time. The ceiling is 12.5 per cent per annum.
3. The deposits with NBFCs are not insured.
   * The repayment of deposits by NBFCs is not guaranteed by RBI.
4. If an NBFC defaults in repayment of deposit, the depositor can approach NCLT or
   Consumer Forum or file a civil suit in a court of law to recover the deposits.

Question 32

NBFC vs BANK

Answer 32

NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as
given below:
I. NBFC cannot accept demand deposits;
II. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
III. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs,
unlike in case of banks.

In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company can commence or carry on business of a non-
banking financial institution without obtaining a certificate of registration from the Bank and without having a Net Owned Fundsof ₹ Two crore since April 1999

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financial activity as “principal business” : Financial activity as principal business is when a company’s
financial assets constitute more than 50 per cent of the total assets and income from financial assets
constitute more than 50 per cent of the gross income. A company which fulfils both these criteria will
be registered as NBFC by RBI. (They are activities that involve the inflow or outflow of money).
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1. Banking License: Banks are licensed by the central bank or regulatory authority of the country they operate in. This license gives them the authority to accept deposits from the public, which is a crucial function that distinguishes them from NBFCs. NBFCs do not hold a banking license and cannot accept demand deposits like banks.
2. Deposit-taking: Banks can accept demand deposits, which means they can take deposits from customers that can be withdrawn on demand, such as savings accounts and current accounts. NBFCs, on the other hand, cannot accept demand deposits. They rely on other sources of funding, such as borrowing from banks or financial markets, issuing bonds, or raising capital from investors.
3. Regulation: Both banks and NBFCs are regulated by financial authorities, but the regulatory framework may differ. Banks are subject to more stringent regulation due to their role in accepting deposits and their importance to the stability of the financial system. NBFCs are also regulated, but the regulatory requirements may vary depending on the country and the type of activities they are engaged in.
4. Lending Activities: Both banks and NBFCs engage in lending activities, but they may target different customer segments or specialize in different types of loans. NBFCs often cater to niche markets or provide financing to sectors that may be underserved by banks. They may also be more flexible in their lending criteria compared to banks.
5. Access to Central Bank Facilities: Banks have access to central bank facilities, such as the ability to borrow from the central bank in times of liquidity shortages. This access provides banks with an additional source of liquidity and helps maintain stability in the banking system. NBFCs do not have direct access to central bank facilities and rely on other sources of liquidity.

Question 33

Requirements for registration with RBI

Answer 33

it should be a company registered under the companies Act
 It should have a minimum net owned fund of ₹ 2 Cr.

Systemically important NBFCs : NBFCs whose asset size is of ₹ 500 cr or more as per last audited
balance sheet are considered as systemically important NBFCs. The rationale for such classification is
that the activities of such NBFCs will have a bearing on the financial stability of the overall economy.

Question 34

what is a certified copy of bankers book?

Answer 34

With respect to written records, a certified copy means a copy of an
entry in the bankers’ book with a certificate written at the foot of such copy. It
certifies that it is a true copy of the entry and it is contained in ordinary books of
banks, made in the ordinary course of business and the concerned book is still in the
custody of the bank. A copy can also be obtained mechanically or by any other
process that itself ensures the accuracy of the copy, in this case, a certificate to that
effect is also required. These certificates have to be dated and subscribed either by the
principal accountant or the manager of the bank with his name and official title.

//
should be accompanied by a certificate in accordance with section 2(8) and 2A of the Act.
The certificate is to ensure the accuracy and reliability of the entry in banking records. The
printout of entry or copy of such printout along with the certificate by the branch
manager/principal accountant and the person in charge of the computer resource which
generated that entry together makes a “certified copy”. A certified copy of any entry of
banker’s book shall be admissible prima facie as Evidence.

Question 35

Federal Bank Ltd. vs. State of Kerala

Answer 35

The branch of a bank advanced loan against pledge of gold ornaments to the customer. The
customer was unable to repay the amount and in due of the default committed by the customer,
the bank after giving notice to the customer sold the gold in public auction for realisation of
loan. The balance left was credited to the customer. The customer filed a case against the bank
stating that Section 8 of the Banking Regulation Act prohibits the bank in dealing and trading
of goods. The Court explaining the provision stated that- By accepting securities for the
purpose of lending, the bank does not become the owner of the goods, but it can retain the
goods and after giving notice to the pawnor, it can sell the good for realisation of debt and in
doing so, it does not stand in the shoe of a dealer.

Question 36

Difference between deposit taking NBFC and non depositing NBFC?

Answer 36

Deposit-Taking NBFCs:
Definition: Deposit-taking NBFCs are companies that primarily engage in the business of receiving deposits from the public.
Function: They accept deposits under various schemes or arrangements, either in one lump sum or in installments.
Examples: These NBFCs include entities like fixed deposit companies, non-banking financial institutions, and housing finance companies that accept public deposits.
Regulation: Deposit-taking NBFCs are subject to strict regulatory oversight by the Reserve Bank of India (RBI) to protect the interests of depositors.
Non-Deposit-Taking NBFCs:
Definition: Non-deposit-taking NBFCs are companies that do not accept public deposits.
Function: They engage in various financial activities such as lending, leasing, hire-purchase, insurance, and chit business.
Examples: These NBFCs include asset finance companies, microfinance institutions, and investment companies.
Regulation: Non-deposit-taking NBFCs are also regulated by the RBI but with less stringent requirements compared to deposit-taking NBFCs.
In summary, deposit-taking NBFCs accept public deposits, while non-deposit-taking NBFCs do not. Both types serve different purposes and are subject to varying levels of regulatory scrutiny

Question 37

how are secondary peices of evidence etc allowed

Answer 37

Most of the data nowadays are stored electronically on big Servers (M/s
ICICI BANK LIMITED v. KAPIL DEV SHARMA), Clouds, etc.. with the
help of computer programs, making it easily accessible and secure.
Now when these documents are to be submitted in a court as Evidence, it becomes
practically impossible to bring out these Hard-Drives, Servers or data stored on
Cloud pertaining to the concerned party, which is stored along with the data of
many other people. Hence, courts have recognized this need to adapt with
technology and allowed Secondary Evidence to be submitted in cases where
Primary Evidence which is in electronic form is impossible to be produced.

Section 34 of the Indian Evidence Act 1872 elucidates that books of accounts,
including Bank records, which are maintained in the daily course of business in
electronic form or otherwise are relevant (CENTRAL BUREAU OF
INVESTIGATION V/SV.C. SHUKLA & ORS) to be admissible in a court of
law. For establishing liability of a person, however further proof and
Evidence relating the same may have to be submitted.
Section 34 of the Indian Evidence Act 1872 elucidates that books of accounts,
including Bank records, which are maintained in the daily course of business in
electronic form or otherwise are relevant (CENTRAL BUREAU OF
INVESTIGATION V/SV.C. SHUKLA & ORS) to be admissible in a court of
law. For establishing liability of a person, however further proof and
Evidence relating the same may have to be submitted.

Question 38

Objection for Uncertified Banking Records

Answer 38

if any obj has to be raised relating to the admissibility of a banking record, such
objection has to be raised at the time when such record is tendered in Evidence and not after that.

of two types, i.e. (i) an objection that the document
which is sought to be proved is itself inadmissible in Evidence; and (ii) where the objection does not dispute the admissibility of the document in Evidence but is directed towards the mode of proof alleging (R.V.E. Venkatachala Gounder V/S
Arulmigu Viswesaraswami & V.P. Temple & AR).

Type (i) objection can be raised even at a later stage when the document is marked as “an exhibit”, in appeal
or revision. Type (ii) objection has to be raised at the time when that record is
presented for Evidence and not after such record is admitted as Evidence and
marked as an exhibit. This is due to the rule of fair play. Court says that objection
of type (ii) dealing with the mode of proving, should be dealt with, at the first instance because then it would give appropriate time to the submitting party to remove such defect and also they won’t assume that the opposite party is not serious about the mode of proof.
There are two more reasons why a prompt objection won’t be prejudicial to the party tendering Evidence:
 Enables the court to apply its mind on the question of admissibility then
and there.
 The party leading Evidence can ask the court to remove such objection or allow a suitable method of proof.

Question 39

Test -The crucial test to find out whether an objection should be allowed or
not depends on the fact that the defect in question could have been cured at
the stage of marking the document and the party tendering Evidence could
have opted for a regular mode of proof or not?

Answer 39

Hon’ble Supreme Court in Om Prakash v. Central Bureau of Investigation held that inadmissible Evidence would remain inadmissible even if marked as an exhibit or no objection relating to the admissibility was raised.
Banking records are a valid and reliable source of Evidence. However, for ensuring there accuracy, certification method under the provisions of Banker’s Books Evidence Act, 1891 is to be complied with.
While certification process,
this should be kept in mind that the ingredients under section 2(8) of the Act are the only directory and not mandatory, hence a rigid and highly technical attitude will not be of much use while complying with the provision.
If an objection regarding the mode of proof has to be made, it should be at the very stage when such document is tendered in Evidence, before it is marked as an exhibit, and not after that ( M/S ICICI BANK LIMITED V/S KAPIL DEV
SHARMA).

If a record submitted is inadmissible, it will remain inadmissible whether an objection was raised or not, or whether it was marked as an exhibit.

Question 40

Kapil dev v ICICI

Answer 40

‘Defendant’) approached the Plaintiff
bank for financing of the purchase of a vehicle under loan cum hypothecation scheme
for a sum of Rs.4,18, 000/-. The Defendant agreed to repay the loan amount in 60 equal
monthly instalments. Various cheques were issued by the Defendant for payment of the instalments, which
were dishonoured/returned unpaid

lower court dismissed this because the bank did not file the ORIGINAL load document (which is obviously witht he defenedant) and instead filed the photocopy

: The filing of original documents is a requirement under law for a particular reason
i.e., the originals constitute primary evidence and copies constitute secondary
evidence. In most commercial transactions, the documents are not even disputed. The requirement of filing original documents ought to be insisted upon only when the
parties actually dispute the documents which are on record. The Court
ought to bear in mind that original documents are required when allegations as to their genuinity or existence are raised and not in a technical manner in all situations.
// Thus, in case the statements of accounts
exhibited on record are accompanied by certificate as envisaged under Section 2A of
the Bankers’ Books Evidence Act, the statements of accounts would be admissible inevidence.

An objection as to the person exhibiting the said statements of account i.e.
an objection to the mode of proof and not admissibility, has to be taken at the time of
exhibition of the documents.

Therefore if certified copies of the statements of accounts have been exhibited as per the requirement of Section 2A of the Act, the statement of account would be admissible and in case no objection to the witness proving the same is taken at the time when the document is exhibited, the document would be validly read in evidence.

However, if the statements of accounts have been exhibited without the necessary certificate as contemplated under Section 2A of the Act, the same being inadmissible in evidence, even in the absence of an objection taken as to the mode of proof during trial, this Court cannot read the same in evidence even though marked as an exhibit.”

Question 41

defining bankers books including amendment

Answer 41

Earlier the definition of bankers’ books only contained
ledgers, daybooks, cash books, accounts books as well as other books used in the
ordinary course of business in a bank. After the amendment, it includes records stored
in microfilm, magnetic tape or any other form of mechanical or electronic data
retrieval mechanism

//
Section 2(8)(b): certified copy which
includes a printout of any entry that is stored in microfilm, magnetic tape or any other
form of mechanical or electronic data retrieval mechanism that itself ensures the
accuracy of such printout as a copy of the entry

Question 42

Radheshyam G. Garg vs. Safiyabai Ibrahim Lightwalla

Answer 42

Radheshyam G. Garg vs. Safiyabai Ibrahim Lightwalla) held that when a certificate is signed by an agent of bank, validating the records
to be a true copy of the original entry in records, which were maintained in usual course of
business and were kept in custody of the bank, then in such cases the court should not adopt a
hyper-technical view and should not focus on all the conditions provided for certification
under section 2(8) of the Act because the detailed ingredients mentioned in the definition
clause are only of directory in nature and not mandatory.

Question 43

payment banks

Answer 43

ndia currently has 6 Payment Banks namely, Airtel Payment Bank, India Post
Payment Bank, Fino, Paytm Payment Bank, NSDL Payment Bank and Jio Payment
Bank.
They are differentiated and not universal banks.
* These operate on a smaller scale.
* It needs to have a minimum paid-up capital of Rs. 100 cr
* Minimum initial contribution of the promoter to the Payment Bank to the paid
up equity capital shall at least be 40% for the first five years from the commencement of its business.

Activities That Can Be Performed By Payment Banks
* Payment banks can take deposits up to Rs. 2,00,000. It can accept demand deposits in
the form of savings and current accounts.
* The money received as deposits can be invested in secure government securities only
in the form of Statutory Liquidity Ratio (SLR). This must amount to 75% of the
demand deposit balance. The remaining 25% is to be placed as time deposits with
other scheduled commercial banks.
* Payments banks will be permitted to make personal payments & receive cross border
remittances on the current accounts.
* It can issue debit cards.

Question 44

paid up share capital for normal bank and small scale bank and nbfc

Answer 44

minimum paid-up capital of Rs 200 crore, which must increase to Rs 300 crore within three years of starting operations. As of May 2020, the RBI also requires small finance banks (SFBs) to have a minimum paid-up equity capital of Rs 200 crore, with the exception of SFBs converted from Urban Cooperative Banks (UCBs)

The minimum net-owned funds (NOF) for a non-banking financial company (NBFC) in India is ₹10 crores as of October 1, 2022. This was previously ₹2 crores, but the Reserve Bank of India (RBI) increased it in 2022