INTRODUCTION TO BANKINGThe word BANK has been derived from the

German word BANC which means a joint stock firm. While others say that it has been derived from the Italian word BANCO which means a heap or a mound. There is still another group of people who believe that the word Bank has been derived from the Greek word BANQUE which means a bench.

BankerA person who is doing the banking business is called a banker. A banker performs multifarious functions. He deals with others money but with his own mental faculties. A banker is dealing with the field of banking which is highly dynamic, complex and sophisticated and which and which must cater to the ever growing requirements of millions of people belonging to different society.

The bill of exchange Act of 1882 defines the bankers Bankers includes a body of persons whether incorporated or not not who carryon business of banking. According to Macleods View the essential business of a banker is to buy money and debts by creating others debts.

BankingAccording to the Indian Banking Regulation Act1949 a company which transacts the business of banking in India . Banking defined Accepting for the purpose of lending and investment ,of deposits of money from the public, repayable on demand ,order or otherwise and withdraw able by cheque, draft order or otherwise. 1. Acceptance of deposits and ii) Lending or investment of such deposits.

The deposits may be repayable on demand or for a period of time as agreed by the banker and the customer. The characteristics arei) The conduct of current accounts. ii) Payment of cheques on bankers iii) The collection of cheques for customers.

License for BankingIn India , it is necessary to have a license from the RBI under sec.22 of the Banking Regulation Act for commencing or carrying on the business of banking and no company other than the banking company can use the word bank , banker banking as a part of its name. No firm , individual or group of individuals is permitted to use the words bank banking or banking company as a part of the name or for the purpose of business.

Definition of Bankingi) Bank is a manufacturer of credit and machine for facilitating exchange. ii) Bank include any firm, incorporated company or society carrying on banking business and approved by the minister

Function of a bank
i. Raising Funds ii. Lending money iii. Discounting Bills iv. Agency Service v. Miscellaneous Services I. Raising Funds:- A banker is a dealer in credit. He collects the surplus balances of individuals and firms by issuing his own shares and by offering facilities for opening different types of deposit accounts. The lending power of a banker depends largely on the amount he can borrow by way of deposits. Bank deposits are 3 types:- i) Fixed Deposits ii) saving deposits III) current Deposits.

a) Fixed Deposits- the term fixed deposits means deposits repayable after the expiry of a certain period. Which varies from 3 months to 5 years. They are also known as time deposit, which is more commonly used in U.S.A. Customers usually offer their money to earning higher rate of interest. They can withdraw the entire amount on the expiry of the stipulated fixed.

(b) Savings Bank Deposit This type of accounts suited to those who want to deposit their small savings in a bank, which they need to withdraw only occasionally and not everyday or many times a day. The interest allowed on savings bank deposit is certainly lower than that allowed on fixed deposit accounts and calculated on the lowest balance kept during the month. The prevailing interest rates allowed by bank in India on savings bank deposits are 5%.

(c) Home Safe Account The main objective of this account is to promote the habit of savings among children and low income persons. When this account is opened this account is opened, customers are supplied with a toy safe by the bank, which he takes home in which he places money from time to time. The safe is periodically taken to the bank to be opened and the contents are then credited to the customers account. Interest is allowed on the minimum balances of this account as on a saving bank account.

d. Current AccountIn case of a current account, a customer is allowed a deposit or withdraw moneys as and when he likes, he may do so several times a day, if he so chooses. No interest is allowed by banks on Current account deposits. But some banks do allow interest if the balance does not fall below a certain minimum limit. some banks charge 1 or 2 rupees per half year with a view to meeting the expenses of maintaining such an account. A minimum balance of Rs.500 in urban areas and Rs300 in rural areas must be kept.

Other Accounts1. The recurring deposit account, the customer is required to deposit a fixed sum of money every month for specific period of time. After the completion of the specified period , he gets back all his deposits along with the cumulative interest which has a accrued on them. The recurring deposits may vary from 12 months to 5 years or more. The purpose of this account is to encourage customers to save some money. The rate of interest is higher than on savings bank deposits and in some cases higher than on fixed deposit account.

ii). Private deposit accounts:- the sole purpose of which may be to defray expenses of purely personal or private nature special account for special purposes can also be opened with banks, such as a marriage account in which money is regularly deposited and withdrawn only at the time of marriage.

2. Lending of moneyThe 2nd important function of a banker is to lend money. The business of lending is usually done in the form of loans and advances, overdrafts, cash credit and discounting of bill of exchange. Advances by a banker may be either clean advances against personal credit with a second signature on the pronote or against tangible or marketable securities, lodged or pledged with him. Advances generally take 3 forms cash credits, overdrafts and Loans.

1. Cash CreditA cash credit is an arrangement by which a banker allows his customer to borrow money up to a certain limit against either a bond of credit by one or more or against securities. This is the most common mode of borrowing by large commercial and industrial houses in India because of the advantage that a customer need not borrow the whole amount at one time but may draw such amount as he requires at different times. He may deposit in the bank such surplus amount as may be with him for the time being. The banker while granting cash credit has to estimate the amount of the customers requirements. Interest rates on cash credit range from 12.5% to 16.25%.

b. Over draftWhen a customer requires temporary accommodation, he may be allowed to overdrew on his current account, usually against collateral securities and pay interest on the amount actually used by him. Bank charge interest on overdraft.

c. LoansIt is a kind of advance made with or without security. It is given for a fixed period at agreed rate of interest. The amount of loan is usually credited to the credit of customers account who may withdraw from there as per his requirements. The loan may be secured or unsecured.

3. Discounting of Bills:This is the most important form in which banker advances money. In this case the banks credit the accounts of their customers by the amount of bills less any discount or commission charged for such discounting or purchasing of the bills. They play an active and not a passive role in the economic development of the country.

4. Agency ServicesThe services which he generally renders as an agent are:1) Collection and payment of cheques, bills and promissory notes. 2) Execution of standing orders of the customers that is payment of subscription, rent, bills, promissory notes, insurance premium ect. A

3. Collection of dividend and interest:The customer may instruct the issuer of securities that he should pay the interest or dividend that may be declared on them to his own bank. He will thus avoid the trouble of endorsing and paying in such dividend warrants. The banker charge a very small amount for the collection of dividend and interest on behalf of his customer.

4. Purchase and sale of securities5.Remittance of funds- all the big commercial banks have a network of branches through out the country. With this facility banks can conveniently provide the service of transfer of funds from one place to another, remittances of fund by bankare simple, convenient, safe ad inexpensive . 6. Functioning as an executor, trustee or administrator of an estate of a customer. 7. Preparation of income tax returns, claiming of tax refunds and checking of assessment on behalf of the customers.

Banker and customerThe banker- According to H.P Sheldon the function of receiving money from his customers and repaying it by honoring their cheques as and when required in the function, above all functions which distinguishes a banking business from any other business. According to shiras a banker is a person , firm or company having place of business where credits are opened by the deposit or collection of money or currency or subject to be paid or remitted upon draft , cheque or where money is advanced or loaned or stocks, bonds, bullion and bill of exchange or promissory note are received for discount and sale.

The Customer
In banking business customer is not the same as we understand in the ordinary sense of the term. According to D.L WAST a customer is one who has an account with a banker or for whom a banker habitually undertakes to act as such According to k.k. Mathew while elaborating the customers a person whose money has been deposited by the bank on the footing that the bank undertakes to honors cheque up to the amount standing to his credit.

To constitute a customer of the banki. One should have an account with the bank. ii. One should deal with the bank in its nature of regular banking business iii. One should have dealing with the bank with an intention to continue such dealings frequently even though a single transaction with the bank satisfies the test for being a customer of the bank.

Contractual relationship as Debtor and Creditor between the two there is a contractual relationship because of which one becomes debtor and another becomes creditor. The customer is the seller of money and expects from the bank thati. It will keep his money safe. ii. It will return the money so kept as and when required . iii. It will be treated by the bank as investment and these will take something by way of return while keeping the money intact and safe.

In this way the customer becomes the creditor followed by all the privileges which he is expected to enjoy as creditor and the depositor and the bank becomes the debtor and enter into certain obligation. The relationship created between the customer and the banker is different from that a relationship which established between a debtor and creditor arising out of a commercial lending. A bank deposit creates a debtor-creditor relationship on the basis of the following legal term and conditions which bind both the customer and the banker -

1.

2.

Demand by the customer for the deposit- it is because the banker accepts deposits from the customer on an express liability that he will honor the repayment demand till the customers deposits lasts and it is also true that unless demanded by the customer banker is not under obligation to repay the money to the customer. Proper place and time of demand-the demand for repayment can be made by the customer on the bank where the deposit is made and that too within specified business hours. If he flouts he runs the risk of compensation ect.

3. Demand in proper manner- the repayment in proper manner signifies that the demand for repayment will be made by cheque, draft or anything which proves the genuineness of the demand of the depositor whose identity must be disclosed and authenticated to the satisfaction of the banker.

2. Special Relationship of a Bailer and a BailerBank is obliged to provide ancillary service to its customer. Under such an obligation the banker accepts the customers valuables, documents, bonds, debentures ect for safe custody. In such a case the customer under Indian Contract act becomes bailer and the banker the bailee. The banker may or may not charge something for providing such a service but he is liable to compensate for any loss to the property in bail with him.

3. Special Relationship as an agent and principalThere is an implicit agent-principal relationship between the two where customer deposit cheques, draft ect for collection. as a agent the bank is also obliged to purchase securities, pay insurance premium, subscriptions of the customer , installment of loan ect. Legally even in the absent of written instruction binds the customer as a principal and the banker as an agent.

4. Special Relationship as a TrusteeThe customers valuables, documents are kept with the banker in trust. All banker is required to provide safety even without actually knowing the contents of valuables, ect and neither exercising any control over them.

Obligations of a Banker
Obligations of a banker can be broadly be studied under the two heads:i. Obligation to honour the cheque ect, ii. Obiligation to maintain secrecy of account. Obligation to honor the cheque etc- the bank is under obiligation to honor the cheques etc. issued by the depositor. It is a legal in india provided the following conditions are satisfied. i) if there is sufficient fund in drawers account. ii) If funds are properly available. iii) If the cheque etc. is in order and according to rules.

Sufficient FundsSufficient funds must be there in account for full payment of the cheque. Banker does not pay in past neither he is to disclose the fund position to anyone except the depositor. funds here means amount standing at the credit of the customer. If effects are not cleared the account does not stand credited. Hence inefficiency of the funds is the sufficient cause for not making the payment. There can also not be any adjustment from another branch or another account standing in the name of the depositor in the absence of any special instruction preferably in writing.

Proper availability of funds Proper availability refers to availability of funds in the specific account which is intended to be debited. Mr. Ram has current account , saving funds account , fixed deposit account and recurring deposit account. He draws on his current account. It has no sufficient funds to enable the banks to honor the cheque . At the same time his other three accounts have sufficient funds.

But the banker cannot the make the payment for want of proper availability of funds. The cheque is in order and as per rules:i. It is drawn by the depositor. ii. It is drawn on the branch where the depositor has the account. iii. It is drawn on the account from which the payment is intended to be made. iv. It is complete in respect of date, amount, payees name, duly signed by those responsible for opearting the account. v. It is presented within the time limit, within banking hours and at the appropriate branch.

Obligation to maintain secrecy of the accountThis is an implied legal obligation of the banker to maintain the secrecy. One of the implied terms of the contract is that the bankers enter into a qualified obligation with their customer to abstain from disclosing information without his consent. Thus the banker is free under this obligation to refuse to discuss any information regarding the account to any one unless there is i) an express willingness of the customer, ii) the law of land compels the banker.

Under the following circumstances banks become free from the obligation1)Legal binding on the bank to reveal. 2)Customs and traditions of the bank may require the bank to divulge certain specific information regarding his customers account. 4)In the banks own interest if revelation becomes necessary.

5)If the revelation is in the public interest. CONSEQUENCES OF WRONGFUL DISHONOUR The bank is under legal obligation to honour the cheque drawn on him. The conditions which are necessary for drawing a cheque against a deposit has to be observed. Banker has no justifications for dishonouring the cheque if all necessary conditions are fulfilled. If the banker does so he runs a legal risk of making good the loss his customer has suffered for such an action.

Section 31 of Indian Negotiable Instruments Act 1881 says that without any valid reason the banker dishonur the cheque drawn on him the customer can sue him for compensation and can also claim damage.