Recent scenario in India relating to Banking Frauds and Current Policy of the Government

Introduction 

In general financial system and Banking business, in particular, are passing through a period of  substantial structural transformation. Banks in particular face daunting challenges because of  technological development and rapidly changing business scheme. Currently, the activities of the  Banking Sector and its growth since nationalization or more specifically, after the economic  reforms initiated by the Government of India during the previous century have changed the  topography of the Indian economy. As a consequential process, the Indian Banking sector is at an  exciting point in its evolution.  

The term ‘Banking Fraud’ or ‘bank fraud’ because it is employed interchangeably, has received  only a few attempts at its definition, largely thanks to the rationale way that Banking Frauds has  been defined as, legislators or experts of the field as a distinct and imminent problem. In the  Black’s Law Dictionary, the meaning of ‘bank fraud’ is adopted from an American Legislation as,  “The criminal offence of knowingly executing or attempting to execute, a scheme or artifice to  defraud a financial organization or to get property owned by or under the control of a financial  organization, using false or fraudulent pretences, representations or promises.”  Authors on banking including even those who are writing books specifically on the issue of  Banking Frauds have not attempted to define Banking Fraud, rather have tried to give the broaden  the outline of Banking Frauds by enumerating different instances of frauds in the banking sector.  The Indian legislature tried to describe 'bank fraud' by introducing the 1995 Criminal Law (Second  Amendment) Bill in the Lok Sabha to establish 'bank frauds' as a separate offence under the Indian  legal code, 1860, as follows, “Whoever dishonestly or fraudulently removes or conceals or  transfers or causes to be transferred any property in his custody or control which is subject to any  form of a security interest created in favour of any bank without the express or implied consent or  concurrence of such banks or he furnishes any statement which is fake in any material particular  to any bank concerning any property which is in his custody or control and which is either subject  to any form of interest in favour of any bank or which is given by him to any bank to be made  subject to any security interest in favour of the bank shall be punished.”  

This proposed legislative definition of ‘bank fraud’ dealt with solely with the frauds concerning security interest, which is a serious fraud causing huge losses to banks. However, this proposed  definition lacked the comprehensiveness or maybe the scope for inclusion of varied dimensions of  Banking Frauds which is desired of an evolving definition. 

Banking Frauds 

The word 'Banking Scam' involves two components, namely banking and scam. Beginning with  simple money-changing as per it’s the earliest traced history, the term ‘banking’ has today found  synonym with five main functions of accepting deposits, lending, investment, repayment and  facilitating of withdrawal of money. In common words, 'fraud' can be an act of dishonesty to gain benefit by causing others to lose out. Legally speaking, ‘fraud’ refers to a falsehood of fact by an  individual or his agent who himself doesn’t believe the statement to be true, made to deceive 

another party, and making him enter into a contract based on a lie. Thus, ‘fraud’ may be a very  wide term which incorporates any behaviour by which one person intends to realize a dishonest  advantage over another. It signifies not only an act of commission but also an act or omission  which is intended to cause wrongful gain to one person and wrongful loss to another. 

Accordingly, ‘Banking Fraud’ may be a broad term won’t signify all kinds of frauds committed in  the banking industry. It may be committed with accounts, negotiable instruments, loans, securities  or the other banking service. It may be pulled done by customer, employee and outsider or by the  bank itself, or by two or more of parties. A common term to explain all such frauds is ‘Banking 

Fraud’. Banking frauds could also be committed by way of concealment, embezzlement, breach  of trust, theft, cheating, forgery, falsification of accounts, conspiracy etc.  

The recent Reserve Bank of India (RBI) report said:  

Indian banking industry detected Rs 71,500 crore worth of frauds in the fiscal year 2018-2019.  Overall, 3,766 fraud incidents were detected in FY19, a 15 per cent increase from a year ago, while  the losses incurred increased by 80 per cent from the previous year, while FY18 saw the foremost  infamous banking fraud in India's history, where Nirav Modi snatched nearly Rs 13,000 crores  from Punjab commercial bank in February 2018."In terms of area activities, advance fraud was the  predominant share of the overall amount involved in fraud in 2018-19, while the proportion of off 

balance-sheet fraud declined from a year earlier," according to RBI's annual report released on  Thursday. Another point of concern for regulators and policymakers came from the very fact that  it took banks a mean of nearly 2 years to detect frauds. High frauds identified above Rs. 52,000  crores worth of fraud is graded as major frauds. To curb this menace, the financial institution said  that it's in talks with various agencies including the Ministry of Corporate Affairs to make an  interlinked database for fraud monitoring. Further, the regulators said that analytic engines of  banks and user interface of fraud registry would be improved to create a more robust monitoring  system. The RBI, within the report, said that they also subjected 57 banks through IT examination  to see their cybersecurity preparedness and compliances.  

As per the RBI, bank frauds are often classified into three broad categories: deposit related frauds,  advances related frauds and services related frauds. 

Deposit Related Frauds, which wont to be significant in terms of numbers but not in size, have  come down significantly in recent years, due to a replacement system of payment, and introduction  of cheque truncation system (CTS) by commercial banks, use of electronic transfer of fund, etc.  advances related fraud still be a serious challenge in terms of the amount involved, nearly 67 per 

cent of the total amount involved in frauds over last 4 years, posing a direct threat to the financial  stability of banks. With the ever-increasing use of technology within the banking industry, cyber  frauds have proliferated and are getting even more sophisticated in terms of the use of novel  methods. As well, as frauds related to documentary credit have surfaced causing concern thanks  to their implications on trade and related activities.  

As far because the credit risk cares, 16 out of 60 banks, 26.5 per cent market share, weren't ready  to cover their expected losses from their current framework. RBI states that NPA’s from retail  banking is just 2 per cent; whereas NPA’s from corporate banking is 36 per cent. Given the scale  of corporate banking transactions, banks must adopt a strong post-sanction and facilities  disbursement monitoring system and lookout for early signs of stress in borrower accounts. 

Reason for higher Advance Related Frauds in public sector banks and rising NPA’s: Higher  advance related frauds of above Rs.1 crore loans, 87 per cent of the total amount involved in loan  worth Rs. 1 crore in value, in public sector banks as compared to private sector banks, 11 per cent  of the total amount involved, could be due to the proportion of the loan advanced by both PSB’s  (~70 per cent) and private sector banks (~ 30 per cent) especially in large and long gestation  projects like infrastructure, power or mining sectors. Also, a higher number of fraud cases reported  by PSB’s 65 per cent of the total, as compared to PVB’s, 19 per cent of the total, may be attributed  to stringent oversight of CVC in PSB’s. It may also be due to a possible underreporting of loans  on the part of the PVB’s, evidenced by RBI’s measures to curb such practices in recent times.  

Current Policy of the Government 

The prime role of Central Bank is to act as a banker to the Government and also banker to the  banks. It is traditional for a financial institution to take care of the deposit accounts of the govt also  as banks. Having to operate the currency and the credit system of the country to its advantage, the  Reserve Bank of India has also taken up the responsibility of various parts of the financial market.  This is the reason for the extended jurisdiction of the Bank beyond the banking sector and that has been reflected in the extension of its Current account facility to non-bank entities.  

Objective and Evolution of the Current account Facility with the Reserve Bank of India 

Objectives of Current accounts: The current accounts maintained by the Bank are of four types – a) Principle Account – The Current account maintained by a scheduled bank with the Bank at the  centre at which the bank furnishes its fortnightly returns;  

b) Secondary Account – The Current account that a bank is allowed to open at a centre where it  maintains the ‘Principle Account’;

c) Subsidiary Account – The Current account maintained with the Bank at any centre except where  the bank has ‘Principle Account’; 

d) Current Account – The account in which the money may be withdrawn without notice. 

Evolution of the Current account Facility: Initially the Bank maintained deposit accounts of only banks and Governments. Then over time, other non-bank entities have been admitted into the  Current account system for some other purposes as well. These include: 

a) All non-bank entities who are not members of the Clearing House 

b) Primary and Satellite dealers and dedicated Gilt funds facilitating the development of the  Government securities market considered critical for the growth of the financial sector as a whole  

c) Institutions like National Securities Clearing Corporation Ltd. (NSCCL) promoted by National  Stock Exchange for handling an increasing volume of financial transactions, particularly after the  liberalisation of financial market and introduction of a screen-based trading system for capital  market transactions.  

Thus, as on a date, a wide variety of financial and non-financial entities are maintaining Current  account with the Bank. 

The facility of Current Account with the Bank was initially extended to Scheduled commercial  banks to facilitate the fulfilment of their statutory obligation, settlement of their clearing house  positions and transactions with the Bank or Government, Scheduled banks and Government of  India were the first entities that were given this facility. However, over time diverse entities like  State Governments, insurance companies, financial institutions, mutual funds, Primary Dealers,  etc., were added to this facility. The main advantage in having Current account with the Bank is  the fast and risk-free transfer of funds at almost zero cost. The part of the Bank has also seen  change leading to the Bank taking measures for the development of the money market,  Government Securities market, etc.  

Conclusion  

All in all, Banking Frauds constitute a considerable percentage of white-collar offences being  probed by the police. Unlike ordinary thefts and robberies, there are lakhs and crores of rupees in  the amount misappropriated in those offences. Bank fraud is a federal crime in many countries,  described as a scheme to acquire property or money from any federally insured financial institution  and also the government's various policies to control banks in the public sector. 

Doing this assignment, I have come to understand that the problem of banking frauds has increased  due to various reasons like introduction of e-banking, neglect of bank procedure due to various  competition, the new techniques of cheating among the employees of banks and customers etc. the  crime of fraud and forgery is not limited to metropolitan cities now but also the cases of fraud and 

forgery are increasing crime in banks of big and small cities. Therefore, there must be proper  check and balance on the working of banks to avoid fraud and forgery. The aims and objectives  are important to be achieved by putting efforts to make changes in nature, culture, ideology,  psychology, mortality and mentality of unscrupulous fraudulent customers and borrowers and  corrupt bank officials. 

Anugraha Sundas 

Jogesh Chandra Chaudhuri Law College, Calcutta University

Nature of Securities and Risks Involved

Introduction 

Banking law is a broad term for laws that looks after working of the banks and other financial  institutions. The banks must adhere to a myriad of federal, state, district and even local regulations.  Lawyers perform numerous tasks that relate to creating, following and enforcing regulations. The  Banking Regulation Act of 1949 is a law which controls all the banking firms in India. On 16th  March when it came into force it was passed as the Banking Companies Act, 1949 and later on it  changed to Banking Regulation Act on 1st March 1966. The Act lays out a foundation under which  commercial banking in India is administered and controlled. The Act also gives the Reserve Bank  of India (RBI) the ability to authorize banks, have to dictate over shareholding and voting rights  over shareholders, superintend the appointment of the boards and management, manage the  functions of banks, provide instructions for audits, influence suspension, amalgamation and  liquidation etc. In Jammu and Kashmir, it came to force from 1956, and later it became applicable  for only banking companies. But again in 1965, it was amended to make it applicable to regulate  cooperative banks and to make new changes.  When the American economy enlarged in the 20th century, lawmakers became anxious about the  impact that banks have on the economy. When banks face struggles, the consumers and the public  are the ones who get widely affected. Lawmakers initiate banking regulations to make sure that  banks perform regulations in a lawful and translucent way. Banking regulations vary habitually,  and they remain tendentious. 

The enactment of banking law is diversified and expansive. There are hundreds and thousands of  regulations. Banks must start to determine how regulations appeal to them. Whether you want to  initiate regulations, accomplish them or bring an accusation of transgressions. There is a wide  range of possibility accessible for individuals given this area of practice. 

Banking law is an area where the attorneys who have a large amplitude to retain and keep track of  information exercises. If an individual enjoys reading technical information then that individual  might enjoy banking law. In this task, my topic is – Nature of Securities and Risks involved. The  above-mentioned topic has made me curious and longing to dive deeper into all the information  available. Hoping my task will help you gain a better understanding of Banking Laws in India and  the topic mentioned above. 

Nature of Securities 

There have been many debates regarding the nature of securities. There are two schools of thought:  One school of thought has classified them as property and the other school of thought has classified  them as obligations. There is a difference in the interest because certain rules of law applicable to  the assets that are classified as property but they do not apply to obligations.  In the article “The Legal Nature of Securities – Inspirations from Comparative Law” written by  Eva Michele, he argues that securities are neither property nor obligations. According to the 18th  and 19th century, German and English scholarship the securities are assets of their kind and they  are referred to as circulating rights. The securities are assets invented by market participants and  they have been created to circulate in liquid markets. Securities make it easier for the issuers to  raise money from the public.  

The rules which govern the securities of banking laws are developed in a way which focuses to  facilitate the purpose and also makes the circulation of them cost-efficient. This has resulted in  rules that allocate the legal risk involved within the transfer far away from the purchaser of such  securities. In this article, the writer Eva Micheler has made an argument that by categorizing  securities as assets of their types but which are different from tangibles and intangibles helps us to  explain the rule more properly. The writer has put forward the case of Hunter v Moss (1944), this  is an English trusts law case from the Court of Appeal concerning the certainty of subjects matter  necessary to form a trust. Similarly in Commissioner of Income Tax, Kolkata v. Smifs Securities  Limited: In this case, the assessee had claimed Rs 54, 85,430 as depreciation on goodwill. The  origin of such goodwill was given as – By the scheme of amalgamation of YSN Shares and  Securities (P) Ltd. that is the amalgamating company, with Smifs Securities Ltd. – which was  sanctioned by the High Courts of Bombay and Calcutta – effect from 1-4-1998, assets and  liabilities of YSN Shares and Securities (P) Ltd. were transferred to the company.  

The excess consideration paid by the assessee over the value of net assets acquired of YSN Shares  and Securities (P) Ltd. should be considered as goodwill arising on amalgamation. It was claimed  that the extra consideration was paid towards the reputation which the YSN Shares and Securities  (P) Ltd. was amusing to retain its existing clientele. The assessing officer held that goodwill wasn't  an asset falling under Explanation 3 to Section 32(1) of the tax Act, 1961. The expression ‘asset’  shall mean – a) tangible assets as in buildings, machinery, plant or furniture whereas b) intangible  assets means patents, copyrights, trademarks, licenses, franchises or any other business or  commercial rights of similar nature. Under these circumstances, they are of the view that goodwill  is an asset under Explanation 3 to Section 32(1) of the act. The assessing officer concluded that no  amount was paid on account of goodwill. This case dealt with intangible rather than tangible  property. The concurrent findings of facts recorded by the authorities that the assessee was entitled  to claim a deduction in the course of business under Section 36(1) Act. The civil appeal filed by  the Department stands dismissed with no order on costs. 

Risks Involved  

Risk is a quantifiable plausibility of loss or less than expected returns. Banks have been working  endlessly to modify the framework of technology and there are a rapid change and development  in the banking environment. The banking industry has endorsed the importance of Operational risk  in moulding the risk profiles of financial institutions. Developments as in using more highly  automated technology, growth of e-commerce, larger-scale mergers and assets that test the  viability of newly desegregated systems, there is an emergence of banks as large volume service  providers, the increased pervasiveness of outscoring and greater use of financing technique that  reduces market and credit risk but that creates increased Operational Risk.  

In the article – “Operational Risks involved in Banking Industries” written by M Rajendran, he  mentions about many risks such as – financial risk, financial risk in banking sectors, operational  risk, methods of measuring operational risk and alleviation of operating risking banking sectors. 

This study directs to extend on the different characteristics of online banking risks and also the  risk management methods employed in mitigating these risks. The rapid improvement in online  banking also holds threats as well as opportunities and robustness. The study of risks involved  emphasizes more on various aspects of online banking risks. Those risks are – strategic risks,  transaction risk, reputation risk, compliance risk, information security risks, credit risk, internet  rate risk, liquidity risk, price risk, and foreign exchange risk. As there is a vast hi-tech improvement  and also the ongoing rivalry between available banking organizations and latest participants have  sanctioned for an immeasurable range of banking products and services so that they are available  and they can be distributed to retail and wholesale clients via an electronic allotment channel which  is referred to as online banking. The risks involved in online banking should not only be recognized  but also be attended to and controlled by banking establishments. the banking establishments  should vigilantly handle the risks according to the elementary attributes and also challenges of  online banking services. The risk management principles that stay applicable for online banking  activities ought to be personalized modified and in some exceptional cases, they are enlarged to  deal with explicit risk management challenges. The attributes of online banking activities are  fashioned by these challenges. Applying the comprehensive risk management prerequisites in the  region of online banking may be counter-productive. The only reason being that these would  immediately be old-fashioned because of the rapid change and developments related to hi-tech.  The “Risk Management Principles” adjacent as total prerequisites. 

However, some examine that the organizations of outsourcing relationships, security control and  legal and reputational risk management require comprehensive values.  

We’ve often heard people say that “profit is a reward for risk-bearing” and this is nowhere truer  than in the case of the banking industry. The banking industry is exposed to various types of risks  and a successful banker is the one that can tranquillize these risks and generate remarkable returns 

for the shareholders consistently. A successful banker can mitigate risk by correctly identifying  the risks first. The reason as to why these risks arise and what kind of damage the risk can cause.  The major types of risks faced by every bank are as follows – 

a) Credit Risks 

Credit Risk is defined as the risk that arises from the non-payment of the loans by borrowers.  Credit risks are also defined as risks of not receiving payments from borrowers and banks also  include the risk of delayed payments under credit risks.  

Often these risks are caused when the borrower gets bankrupt. However, these risks can be avoided  only if the bank conducts a thorough check and sanctions loans only to those individuals and  businesses that are not likely to get bankrupted. Since the banks would be unaware when an  individual or a business would become insolvent; hence the credit rating agencies provide adequate  information to the banks to make informed decisions in this regard.  

Credit Risks completely depends on the profitability of the banks and therefore are extremely  sensitive to it. There would be a great impact on the profitability of the bank if the credit risk rises  by a small amount. Since the profitability of the banks gets widely affected even with a small  amount of rising in the credit risk, the banks have come up with a broad variety of measures. For  instance, banks always hold a certain amount of funds in reserves to lessen such risks.  

When a loan is being sanctioned, a certain amount of money is appropriated to the provision  account. Banks have started using tools like structured finance to lessen such risks. The process  which helps the banks to remove the concentrated risks from the banks' books and diffuse it  amongst the various investors in the capital market is known as Securitization.  

The unpaid loans will always be a by-product of conducting the banking business. So, the modern  banks after realizing this are prepared to handle the situation without becoming insolvent until a  catastrophic loss occurs. 

b) Market Risks 

Banks not only make loans but they also hold an important portion of securities. Banks encounter  various forms of market risks. For instance, suppose the banks are holding a large amount of equity  then they are exposed to equity risk. Banks also hold foreign exchange so they are exposed to  foreign risks. In the same way, banks lend against commodities like gold, silver, and real estate  which exposes them to commodity risks as well.  As mentioned above banks hold a portion of securities and some of these securities are held  because of the treasury operations of the banks, that is, as a means to park money for the short 

term. Nevertheless, banks also hold many securities as collateral based on which banks give loans  to their customers. The business of banking is therefore coiled with the business of capital markets. The financial derivatives used by the banks are freely accessible for sale in any financial market.  Banks simply use hedging contracts to be able to mitigate market risks. Banks use contracts like  forwards, options and swaps. Banks are capable of eliminating market risks from their balance  sheet. 

c) Operational Risk 

Operational risk takes place because of failed business processes in the banks' daily activities.  Banks often conducts massive operations to be profitable. Hence, to maintain consistent internal  processes on such a large scale is an extremely difficult task. Examples of operational risk would come with payments credited to the incorrect account or  executing an incorrect order while dealing within the markets. None of the departments in a bank  are immune to operational risks. One of the main reasons for operational risk to arise is mainly  because of hiring the wrong people. The other reason for operational risk to occur is if there is a  breakdown of the information technology systems. Some of the reasons leading to catastrophic  errors might be a lapse in the internal processes. For instance, Barings Bank ended up bankrupt  because it failed to implement appropriate internal controls. One trader was ready to bet such a lot  within the derivatives market that the equity of Barings Bank was exhausted and therefore the bank  simply ceased to exist. 

d) Liquidity Risk 

Liquidity Risk is another quite risk that's inherent within the banking business. Liquidity risk is  that risk that the bank will not be able to meet its obligations if the depositors come in to withdraw  their money. In this system, only half of the deposits received are held back as reserves and the  rest is used to create loans. Hence, if all the depositors would come together to withdraw their  money, the bank would not have enough money. So this situation is called “Bank Run”. This  incident of banks running out of money has happened countless times over the history of modern  banking. Banks, these days does are not very concerned about liquidity risk because they have the  backing of the central bank as in Reserve Bank of India. If the situation of ‘bank run’ arises in on  a particular ban, the central bank transfers all its resources to the affected bank. Therefore,  depositors can be paid back when they demand their deposits. This gives the depositors confidence  in the banks' finances. The modern banks have gone through the situation of the bank run.  Nevertheless, none of them has become bankrupt due to a bank run because of the established of  central banks.  

e) Business Risk 

The banking industry is advanced and diversified. Banks today have a wide variety of programmes  from which they have to choose. One such programme is that banks need to focus their resources 

on obtaining their strategic goal in the long run.  However, there is a risk that a particular bank may choose a wrong strategy and because of this  wrong choice, the banks may suffer losses and may end up being collapsed. For instance, the case  of banks such as Washington Mutual and Lehman Brothers. These banks chose the subprime route  to growth. Their strategy was to be the preferred lender to people who have less than perfect credit  scores. However, the entire area of subprime lending went bust and since these banks had heavy  exposures to such loans, they suffered dire consequences too. Banks have no possible way to reduce the risks that are created by following inappropriate business 

objectives.  

Conclusion 

This assignment has helped me widen my views and broaden my understanding of the mentioned  topic. It has also helped me discover the nature of securities and the various types of risks that are  involuntarily included and how it can be avoided. The risks involved in banking are not only for  the banks but also for those investing in the bank and borrowing from it.  To summarize, I would like to restate that banking law is a broad term for laws that looks after the  working of the banks and other financial institutions. 

Anugraha Sundas 

Jogesh Chandra Chaudhuri Law College, Calcutta University

Customers Duties towards his Banker

 Introduction 

We only hear about the ideal concepts like ‘Customer is the King’, ‘Customer’s Delight’ etc.  everywhere but no one talks about the duties and responsibilities of a bank customer.  The Banking and Finance Institutions Act 1989 (BAFIA 1989) does not provide any definition  about the customer. However, a customer of the bank can be  

defined as the one who has an account with the bank with the condition where the relationship  between them is one which duration is the essence. The definition can be justified in some cases,  for instance: Ladbroke v. Todd (1994). 

Ladbroke v. Todd – In this case, the plaintiff had drawn a cheque and sent it to the payee by post.  The letter was stolen and the thief took it to the defendant, who is a banker, and used it to open an  account. In doing so, he forged the payee’s endorsement. The defendant believed him to be the  payee because he was not introduced to the bank and no references were obtained. The defendant  opened the account and the cheque was specially cleared at the request of the thief, and he drew  out the proceeds the very next day. When the plaintiff discovered the fraud, he brought an action  against the defendant for conversion. The question raised was whether the account having been  opened by payment in all the cheques to be collected, the defendant could be properly regarded as  having received payment for a customer.  

Since the account was already opened when the cheque was collected, a payment for a customer  was received. The drawer thereupon sent another cheque to the real payee and took an assignment  of his rights in the stolen cheque and as holders of the cheque or as assignees brought an action  against the bank to recover the proceeds collected by the bank as money and received to their use.  Evidence had been given that it was the general practice of bankers to obtain a satisfactory  introduction or reference. The banker had acted in good faith but was guilty of negligence in failing  to take reasonable precautions to safeguard the interests of the true owner of the cheque, and thus  had placed himself outside the protection of Section 82 of the 1882 Act. The banker would are  entitled to the protection of the section as having received payment for a customer, but had lost it  due to his want of ordinary care. The relation of banker and customer began as soon as the first  cheque was handed to the banker for collection, and not when it was paid. 

Duties of Customer

To exercise reasonable care in drawing cheque - In absence of express agreement to the contrary,  customer’s duty is limited to refrain from drafting a cheque in such a manner as to facilitate fraud  or forgery. Customer must take care of the fraudulent alterations of cheques which might result in  the loss of the banker. Thus, the customers have to exercise due care in drawing cheques to prevent  any fraud from taking place. 

Court Case: Grindlays Bank International Limited v. Nahar Investments Limited The banker, Grindlays Bank International Limited, is the respondent who was sued by Nahar  Investments Limited. The respondent’s employee, Daya overdrew money from respondents  account with the appellant. Daya withdrew a sum of total K 5,000 for her use and she has  committed fraud by taking all this money from the Bank of Zambia. The respondents suit the  appellant for recovering the sum of K 5,000 plus the interest. The result approved the overdraft  since the company belonged to the non-Zambians and the exchange control regulation required  such approval. The High Court found that the appellant had been negligent in allowing a fraudulent  employee of the respondent to overdraw on the latter’s account resulting in a loss which must be  borne by the appellant. 

To disclose forgery 

Customer has to disclose to the bank any forgery immediately upon his discovery of such forgery  to enable the bank to take adequate precautions against future loss. A customer owes no wider duty  of care to the bank in the overall management and operation of the bank account. 

Court Case: Tai Hing Cotton Mill Ltd v. Liu Chong Hing Bank. 

This Company has a current account in the bank and approximately 33 cheques were withdrawn  from the bank with the total amount of HK $ 5.5 million. The money drawn is bear with the  signature of Mr Chen who is the managing director of the company and who is the authorized  signatories to its cheques. The cheques are debited to the company’s current account but indeed  the cheques were not signed by Mr Chen instead they were forged by an account clerk, Leung  Wing Ling. Therefore, the customer has to disclose the forgery to the banker so it can enable the  banker to take adequate precautions against future loss. Leung Wing Ling, the accounting clerk  opened an account in the real suppliers’ name and persuaded Mr Chen to sign cheques for them  by submitting forged documents as proof of transactions to him. 

The duties and responsibilities of a bank customer 

A customer must always remember some things. They are as follows:-

1) The foremost duty of a customer is to comply with the KYC norms that have now become  universal. KYC – which stands for Know Your Customer may be a process followed by a financial  organization or an entity to gather the small print to determine the identity of a client. It was  introduced by the Reserve Bank of India (RBI) to prevent financial frauds like money laundering,  identity theft and illegal transactions.  

2) The customer must cooperate with the bank by following all the rules and regulations, without  asking for an exemption. 

3) The customer must remember his/her bank account number. The account number is  synonymous with his/her name, for all practical purposes because he/she is identified more by the  account number than anything else in the bank.  

4) The customer must remember to sign the same each time and his/her signature must always  match with the specimen signature scanned and uploaded in the bank’s computers. However, the  customer is entitled to change his/her specimen signature once in a few years.  

5) The customer has to bring his/her Passbook and also Cheque book whenever he/she visits the  bank in person. It will save the time of the banker as well as himself/herself.  

6) When the customer visits the bank for completing some unfinished job for the second time, the  customer should carry all the relevant papers and documents in a full set, without fail.  

7) The customers who enjoy Cheque book facility must not ask for a withdrawal form or a loose  cheque because in the CBS environment it will be difficult to oblige them, especially when they  want cash withdrawal. CBS which stands for Core Banking Solution may be a banking industry  that helps customers to access their funds and other transactions from any of the member branches,  no matter where he/she maintains his/her account.  

8) The customer must remember of his bank’s business hours and shall not unnecessarily trouble  the banker to suits his requests outside the business hours; this is often because the customers,  upon their requests, are provided with Debit Card and Internet Banking Facility which is free of  cost, almost by all the banks. Therefore, a customer can meet most of his/her financial needs by  these facilities even when the bank is closed.  

9) The customer is expected to know the distinction between the ‘Home Branch’ and other  branches of the same bank because there are certain functions that can only be carried out at the  ‘Home Branch’. For instance, insurance of a new Cheque book or a Debit card, account closure,  change of address etc. In case of a non-Home Branch, several restrictions exist for payment of  cash to a third party, limits are imposed on withdrawal of cash by oneself, sending RTGS (Real 

Time Gross Settlement) or payment of taxes etc. The customer must find out the nature of  restrictions from the Home Branch and always remember them.  

10) The customer is expected to behave decently and politely when he/she is inside a bank or when  he/she contacts the bank over phone or email. The customer must behave properly especially when  he/she contacts the bank over the phone. The customer must be very specific on his/her query and  end the conversation within a few minutes because the banker has several restrictions in prolonging  the conversation unnecessarily. If necessary, the customer must visit the branch in-person to satisfy  his/her needs, as all the needs cannot be fulfilled through a phone call or an email.  

11) For withdrawal of large sums of cash, premature cancellation of a term deposit of huge value,  issuance of TDS certificate etc. advance intimation to the bank is necessary. TDS as in Tax  Deducted at Source is one of the tax-collecting method used in India. It is governed under the  Indian tax Act 1961 and managed by Central Board of Direct Taxes (CBDT). The customer must  approach the right person that is the banker, for attending to his/her particular need. He/she shall  not expect all the bank staff to perform all the kind of job at a time. Similarly, the customer must  approach the right branch/office for his/her special needs. 

12) The customer is predicted to know that the bank is merely there to fulfil genuine banking needs  and thus, the bank cannot act as his/her finance manager or accountant. For some special needs  like investment and tax counselling, the customer must approach his/her auditor or the other  competent professional only.  

13) One of the most important things that a customer has to remember is that he/she cannot expect  the bank to offer a solution to the problems faced by him/her elsewhere.  

14) Whenever there is an acute shortage of staff in the bank due to the absence of many staff at a  time, on the grounds of leave, transfer, training etc., the customer must cooperate with the staff  present and learn to adjust without showing impatience, irritation and anger on them.  

15) The customer shall not attempt to skip the queue while many other customers are waiting for  the same reason, such as withdrawal, cash payment, tax remittance etc. 

16) The customer shall not demand any privilege or concession or service to which he is not  entitled, as per the bank rules. However, the customer may seek clarification from the banker  regarding his/her disqualification in this regard.  

17) Once the director has given his oral approval for any credit proposal, the customer must submit  all the required papers and documents, neatly sorted and arrange without submitting them in  piecemeal. In this way, a lot of time will be saved and it will also obviate dissatisfaction and  complaints. 

18) Having accepted all the terms and conditions of sanction of a loan or advance, the customer  must sincerely and honourable comply with them in time.

19) Finally, the customer must realize that the banker is also a human being and they have their  limitations. Therefore, the customer must treat the banker as his/her equal and in doing so the  customer will get spontaneous respect from all of them. 

Conclusion 

Doing this assignment I have come to a better comprehension that, a banking person is a person  or entity that maintains an account or has business relationships with the bank and the duties of  the customer towards his banker is not only to present the cheque and negotiable instruments  during the business hours of the bank but in case of any disagreement within the statement,  customers should inform the bank. Whenever photographs of customers are required by the bank  it is the responsibility of the customer to give them. The customer must present the instrument of  credit within the due time from the date of issue. The cheque should be carefully filled by  customers. If the cheque book is lost or stolen, the customer has to inform the bank. If the customer  notices any forgery in the amount of cheque, he/she should inform it to the bank immediately.  Customers should clear all the dues on the particular time. The customers have to read the MITC  which stands for Most Important Terms and Conditions. It is related to banking products or  services. MITC mostly contains all the information and rules that we need to know about a product  or service offered by a bank. 

Anugraha Sundas 

Jogesh Chandra Chaudhuri Law College, Calcutta University

Contract between Banker and Customer

 Introduction 

Banking today isn't what it had been some years back. In present-day banking, the law has become  an important subject. Every issue of publications such as Current Law comprises new and exciting  cases on banking law. Periodically there are more cases on topics such as documentary credits than  on specific aspects of the law of contract such as breach. The legislature has also been singularly  active.  

The relationship between a banker and customer tries to point out the general relationship that  exists between them. The rights and duties of the Banker and Customer arise due to the general  relationship. The relationship between them is primarily is that of Creditor and Debtor, Fiduciary,  Bailer-Bailee, Pawnee-Pawner, Mortgagee-Mortgager, Lessee-Lesser, Guarantor-Guarantee.  Banker also acts as an agent or trustee of his customer. It also deals with special classes of  customer, for instance, Minors, Married Woman, and Lunatics.  

There is no such adequate definition of the term ‘banker’ nor is there any genuine definition of  ‘customer’. However, the banker must know what accounts for a customer. The customer must have a bank account through the intention to open an account may be adequate. Sometimes the  banker carries out a sequence of isolated transactions for a person. For instance, the collection of  cheques for someone who has no account and the payment to the person of the proceeds after  clearance does not make that person a customer. Therefore, a valid definition of the customer  would be – “A person who has an account or an account in consideration”, where the banker has  agreed to open an account if the customer has requested. When a person walks into a bank and  asks to open an account, that person is making an offer to enter into a contract and if the banker  agrees to open the account, that means the person has legally accepted the offer and therefore a  binding contract is initiated. However, the banker would want to be fully satisfied that the person  will be a suitable customer before committing himself. Hence, the customer needs to provide the  banker with a personal introduction, by taking and following up reference or making some form  of enquiry. Under banking law, banking confidentially is a cardinal principle. The very relationship  between a banker and customer is based on this principle of confidentiality. Every legal system  recognises its significance but fails to address the issue comprehensively so that the interest can  be protected by legal enforcement. 

The main banking function was and is to supervise other people’s money and lending a part of it.  Eventually, these functions were extended and new ones were added to it. This has resulted in the  complete dependence of commerce upon banking in the modern money economy. Therefore, the  termination of the banker’s activity, even for a day or two, would completely paralyse the  economic life of a nation. In short – the banking system has surmised ‘blood vessel of the economy  of the country’. These days the bankers have to deal with a large number of matters. The main 

relation of a banker and customer depends upon the service given by the banker. The primary  function of a banker is to render several services to his customer.  

Definition 

Bank or Banker 

According to the provisions of sections 5(b) and 5(c) of the Banking Regulation Act 1949 as to  banking and baking company respectively, banking business is the common approach of a bank  and a bank or a banker is the one who does banking business. The RBI as in the Reserve Bank of  India defines a modern bank. The Federal Reserve Bank of India is that the financial institution, 

which controls the difficulty and provides of the Indian rupee. Reserve Bank controls the entire  Banking system in India. RBI plays a vital role in the development strategy of the Government of  India. Banks organize the borrowing and lending work (credit) of the community and, they lend  their funds (capital) and borrowed funds and their credit to a person engaged in trade, agriculture,  manufacturing and other industries. They supply the part of the medium of exchange in the form  of banknotes or cheques.  

Customer 

According to Dr Hart, “A customer is one who has an account with a banker or for whom banker  habitually undertakes to act as such.” Supporting this point of view, the Kerala High Court has  observed a similar case – that is in the case of Central Bank of India Ltd. Bombay v. V.Gopinathan  Nair.  

Central Bank of India Ltd. Bombay v. V. Gopinathan Nair The judgement of the court was  delivered by Raghavan, C.J; - The first of these appeals are by the first defendant, the drawee bank  of a draft for Rs. 4000/- taken by the plaintiff at its Alleppey branch payable to Pw. 2, the proprietor  of Hurry Das Audiy, at the New Market branch of the bank at Calcutta. The draft was sent by the  plaintiff to his friend, Pw.1; but it was intercepted in transit by the third defendant, a customer of  the second defendant Bank and the Shambazar branch of the second defendant collected the draft  from the first defendant. The plaintiff filed the suit for recovery of the amount against defendants  1 to 3, and all the courts including a Judge of this court in the second appeal held the defendants 1  and 3 liable. The appeal is against the decision and the third defendant did not contest.  

The trial Court dismissed the suit against the second defendant, but the lower appellate court and  the second appellate Judge held the second defendant liable and the A.S.A No.12 of 1969 is against  that decision. The decision of the second appellate Judge is reported as Central Bank of India Ltd.  Bombay v. V. Gopinathan Nair (AIR. 1970 ker.74). The lower appellate court and the second  appellate Judge held that the second defendant was liable too. The three courts including the  learned second appellate Judge have held that the first defendant is also liable. The first defendant  claims protection under S. 85A of the Negotiable Instruments Act. in the absence of the scrutiny  the second defendant could not claim that the bank was not negligent in collecting the amount of  the draft, and the negligence of the bank at the time of opening the account and its negligence in  allowing the third defendant to operate the account improperly was only secondary and they also 

added the negligence of the second defendant. In this view, the second defendant is liable. This  case A.S.A No.12 of 1969 was dismissed with costs. Therefore, a customer is defined as – A  person or an entity that maintains an account or has a business relationship with the bank. A person  on whose behalf the account is maintained, that is known as a beneficial owner. The one who has  either current or a deposit account or in the absence of it, some relation with the bank in the  ordinary course of business, that can be seen as banking business.  

Relationship between Banker and Customer 

The general relationship between a banker and customer is that of a debtor and creditor. The banker  also acts as agent, trustee or others.  

Relationship as debtor and creditor: When a customer opens an account with the banker, the  banker becomes the debtor of the customer and the customer becomes his creditor. The banker  becomes bound to return an equivalent amount of money, by paying a similar sum to the depositor  when he is asked for it. In the same way, the banker also becomes a creditor, when any of the  customers take a loan or any kind of advances from the bank then the customer becomes the debtor  and the banker becomes the creditor. Therefore, the customer, who is the debtor, is bound to pay  the loan amount to the banker, who is the creditor, on the prescribed period.  

Trustees and Beneficiary: Banker as a trustee and Customer as a beneficiary. Generally, a banker  is a debtor of his customer in respect of the deposits made by the latter, but in certain cases, the  banker also acts as a trustee. A trustee is the one who holds money or assets and performs certain  functions for the benefit of some other person called the beneficiary. For instance, if the customer  deposits securities or valuables with the banker for safe custody, the latter acts as a trustee of his  customers. The customer continues to be the owner of the valuable deposited with the banker.  Therefore, the legal position of the banker as a trustee differs from that of a debtor of his customer.  In the former case, the cash or documents held by him aren't treated as his own and aren't available  for distribution amongst his general creditors just in case of liquidation. 

Agent and Principle: Banker as an agent and Customer as a principal. A banker acts as an agent  of his customer in some ways. For instance, when he buys or sells securities or makes payment of  various dues of his customers, or collects cheques on his behalf. In all these cases, the banker acts  as an agent of his customer.  

Bailor and Bailee: Banker as bailee and Customer as bailor. In addition to the above-mentioned  relations, there exists the relationship of bailment between the banker and the customer. Safe  custody facility is one of the numerous facilities provided by commercial banks. In this case, the  legal relationship of bailment arises between the customer and the banker, whereby customer  depositing with the bank is the bailor and the banks act as the bailee. In cases where the bank does  not charge any fees for such a purpose, then the bank can be termed as gratuitous bailee and in  some case where the fee is charged, the bank becomes the bailee for a reward. Where a bank provides a safe custody facility to the customer, it takes a charge of goods, articles,  securities, belonging to the customer, as a bailee and not as a trustee or an agent.

Special Features of Relationship between Banker and Customer Statutory obligation on  banks in India: 

By opening an account, saving, term deposit accounts of a customer or rendering other services to  the customers, the banker has some statutory duties and obligations – 

1) Obligation to honour cheques having sufficient funds. 

2) Liability to return the dishonoured cheques to the customer. 

Duty of the banker to act as per the direction: 

The banker is sure to act consistently with the directions given by the customer. In the absence of  such directions, according to the usage in the locality and applicable to the matter in the hand, the  banker is also bound to use reasonable skill and diligence in his work otherwise; he is going to be  responsible for damages. 

Duty of bank to maintain secrecy: 

Secrecy is required in the matter of banker and customer relationship. Account details of the  customer cannot be disclosed to a third party. Nobody can seek through a writ petition an enquiry  into commercial transactions between the banker and customer. As in the case of-Kattabomman  Transport Corporation Ltd. v. State Bank of India. It was that this is the duty of the banker towards  the customer about the secrecy of the account. Such duty is the legal duty which arises from the  contract made between them and merely a moral one.  

Termination of Banker and Customer Relationship 

Termination by the Banker: 

Under the Operation of Law – 

* Death of the Customer 

* Insanity of the Customer 

* Insolvency of the Customer 

* Assignment 

* Order of the court 

* Winding up of a company 

* Dissolution of partnership firm 

* Customer of an enemy character 

Termination by the Customer: A customer at his wish can terminate the relationship with the  bank at any time by simply closing his account. The reasons are as follows-

a) If the customer is not satisfied with the services provided by the bank. 

b) When the banker has failed to provide better services to the customers. 

c) When the bank has lost its reputation in the market and the customer feels that this will affect  its economic stability.  

d) When the customer does not agree with the terms of the banker. 

Conclusion 

From the above explanation, I would restate that the meaning and nature of the relationship of  customer and banker is of a contractual basis. For the customer the opening of an account with the  banker gives rise to a ‘contractual relationship’, this gives rise to mutual duties, liabilities and  privileges. While doing this assignment I have been aware of the various rights and duties of the  customers and banker and after providing the different services to the customers by the bank, they  are bound to comply the terms and conditions settled between them, and if any of the party will  breach on the settled terms then the problem of termination arises either by the banker or by the  customer. After breach by any of the party both the party can avail a legal remedy against each  other by filing a complaint in the Consumer Protection Act, Banking Ombudsman scheme, Debt  Recovery Tribunal, SARFAESI, Bankrupt and Insolvency Act. It’s a duty cast upon both – the  banker and the customer to do their job in that manner which will not prejudice to the right of the  other one. 

Anugraha Sundas 

Jogesh Chandra Chaudhuri Law College, Calcutta University