unit 1 of banking and Insurance law, Study notes of Banking and Finance

Download unit 1 of banking and Insurance law and more Study notes Banking and Finance in PDF only on Docsity! Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) E-Notes Unit 1: BANKING SYSTEM IN INDIA A. Kinds of Banks and their Functions Types of banks Functional classification 1.Commercial banks/Deposit banks: Banks accept deposits from public and lend them mainly for commercial purposes for comparatively shorter periods are called Commercial Banks. They provide services to the general public, organizations and to the corporate community. They are oldest banking institution in the organized sector. Commercial banks make their profits by taking small, short-term, relatively liquid deposits and transforming these into larger, longer maturity loans. This process of asset transformation generates net income for the commercial bank. Many commercial banks do investment-banking business Page 1 of 39 Class& Section : BALLB/BBALLB VII-A (A+B+C) Subject Name : Banking & Insurance Law Subject Code : LLB409 (A) Faculty : Mr. Yashasvi Singh Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) although the latter is not considered the main business area. The commercial banking system consists of scheduled banks (registered in the second schedule of RBI) and non-scheduled banks. Features of Commercial banks are • They accepts deposits on various accounts. • Lend funds to organizations, trade, commerce, industry, small business, agriculture etc by way of loans, overdrafts and cash credits. • They are the manufacturers of money. • They perform many subsidiary services to the customer. • They perform many innovative services to the customers. 2. Industrial banks/Investment banks Industrial banks are those banks which provide fixed capital to industries. They are also called investment banks, as they invest their funds in subscribing to the shares and debentures of industrial concerns. They are seen in countries like US, Canada, Japan, Finland, and Germany. In India industrial banks are not found. Instead, special industrial finance corporations like IFC and SFC have been set up to cater to the needs of industries. Features of Industrial Banks are: • Participate in management. • Advise industries in making right investment Page 2 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) b. HISTORY OF BANKING IN INDIA ORIGIN AND DEVELOPMENT OF BANKING The banking history is interesting and reflects evolution in trade and commerce. It also throws light on living style, political and cultural aspects of civilized mankind. The strongest faith of people has always been religion and God. The seat of religion and place of worship were considered safe place for money and valuables. The history of banking begins with the first prototype banks of merchants of the ancient world, which made grain loans to farmers and traders who carried goods between cities. This began around 2000 BC in Assyria and Babylonia. In olden times, people deposited their money and valuables at temples, as they are the safest place available at that time. The practice of storing precious metals at safe places and loaning money was prevalent in ancient Rome. However, modern Banking is of recent origin. The development of banking from the traditional lines to the modern structure passes through Merchant bankers, Goldsmiths, Moneylenders and Private Banks. Merchant Bankers were originally traders in goods. Gradually they started to finance trade and then become bankers. Goldsmiths are considered as the men of honesty, integrity and reliability. They provided strong iron safe for keeping valuables and money. They issued deposit receipts (Promissory notes) to people when they deposit money and valuables with them. The goldsmith paid interest on these deposits. Apart from accepting deposits, Goldsmiths Page 5 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) began to lend a part of money deposited with them. Then they became bankers who perform both the basic banking functions such as accepting deposit and lending money. Moneylenders were gradually replaced by private banks. Private Banks were established in a more organised manner. The growth of Joint stock commercial banking was started only after the enactment of Banking Act 1833 in England. India has a long history of financial intermediation. The first bank in India to be set up on modern lines was in 1770 by a British Agency House. The earliest but short-lived attempt to establish a central bank was in 1773. India was also a forerunner in terms of development of financial markets. In the beginning of 18 th century, British East India Company launched a few commercial banks. Bank of Hindustan (1770) was the first Indian bank established in India. Later on, the East India Company started three presidency banks, Bank of Bengal (1806), Bank of Bombay (1840) and Bank of Madras (1843) these bank were given the right to issue notes in their respective regions. Allahabad bank was established in 1865 and Alliance Bank in 1875. The first bank of limited liability managed by Indians was Oudh Commercial Bank founded in 1881. Subsequently, the Punjab National Bank was established in 1894. In the Beginning of the 20th century, Swadeshi movement encouraged Indian entrepreneurs to start many new banks in India. Another landmark in the history of Indian banking was the formation of Imperial bank of India in 1921 by amalgamating 3 presidency banks It is the Imperial Bank which performed some central banking functions in India. A number of banks Page 6 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) failed during the first half of the 20th Century. It affected the people’s belief and faith in Banks. By independence, India had a fairly well developed commercial banking system in existence. In 1951, there were 566 private commercial banks in India with 4,151 branches, the overwhelming majority of which were confined to larger towns and cities. Savings in the form of bank deposits accounted for less that 1 per cent of national income, forming around 12 per cent of the estimated saving of the household sector. The Reserve Bank of India (RBI) was originally established in 1935 by an Act promulgated by the Government of India, but as a shareholder institution like the Bank of England. After India's independence, in the context of the need for close integration between its policies and those of the Government, the Reserve Bank became a state - owned institution from School of Distance Education Banking & Insurance. It was during this year that the Banking Regulation Act was enacted to provide a framework for regulation and supervision of commercial banking activity. By independence, India had a fairly well developed commercial banking system in existence. Reserve bank of India was nationalized in the year 1949. The enactment of the Banking Companies Act 1949 (Later it was renamed as Banking Regulation Act) was a bold step in the history of banking in India. In 1955, Imperial Bank of India was nationalized and renamed as State bank of India (SBI). The SBI started number of branches in urban and rural areas of the country. In 1967, Govt introduced the concept of social control on banking sector. Nationalization of 14 commercial banks in 1969 was a revolution in the Page 7 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) i. Reserve Bank of India Act 1934 The Reserve Bank of India is now the apex financial institution of the country, which is entrusted, with the task of controlling, supervising, promoting, developing and planning the financial system. RBI is the queen bee of the Indian financial system, which influences the commercial banks’ management in more than one way. The RBI influences the management of commercial banks through its various policies, directions and regulations. Its role in banking is unique. In fact, the RBI performs the four basic functions of management, viz., planning, organizing, directing and controlling in laying a strong foundation for the functioning of commercial banks. RBI possesses special status in our country. It is the authority to regulate and control monetary system of our country. It controls money market and the entire banking system of our country. A central board of directors governs Management the Reserve Bank’s affairs. The Government of India in keeping with the Reserve Bank of India Act appoints the board. The organization structure of RBI consists of a Central Board and Local Board. Central Board: The general supervision and control of the bank’s affairs is vested in the Central Board of Directors that consists of 20-member team including a Governor, 4 Deputy Governors and 15 Directors (of which 4 are from local boards, and one is a finance secretary of Central Government). All these persons are appointed or nominated by Central Govt. The chairperson of the Board and its Chief Executive authority is the Governor. Governors and Deputy Governors hold office for Page 10 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) such a period as fixed by Central Government not exceeding 5 years and are eligible for reappointment. Directors hold office for 4 years and their retirement is by rotation. As a matter of practical convenience, the Board has delegated some of its functions to a committee called the Committee of the Central Board. It meets once in a week, generally Wednesdays. There are sub committees to assist committees such as building committee and staff subcommittee. Local Board: For each regional areas of the country viz., Western, Eastern, Northern and Southern, there is a Local Board with headquarters at Bombay, Calcutta, New Delhi and Madras. Local boards consist of 5 members each appointed by the Central Government. The functions of the local boards are to advise the central board on local matters and to represent territorial and economic interests of local cooperative and indigenous banks; advice on such matters that may generally be referred to them and perform such duties as the Central Board may delegate to them. The Central office of the RBI, located at Mumbai is divided into several specialized departments. The main departments are: 1. Issue Department: - It arranges for the issue and distribution of currency notes among the different centers of the country. 2. Banking Department: - It deals with Government transactions and maintains the cash reserves of the commercial banks. 3. Department of Banking development: - It is concerned with the development of banking facilities in the unbanked and rural areas in the country. Page 11 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) 4. Department of Banking operations: - This department supervises and controls the working of the banking institutions in the country. 5. Non-Banking Companies Department: - It regulates the activities of nonbanking financial companies existing in the country. 6. Agricultural credit Department: - This department studies the problems connected with the agricultural credit in the country. 7. Industrial finance Department: - It is concerned with the provision of finance to the industrial units in the country. 8. Exchange control Department: - The entire business of sale and purchase of foreign exchange is conducted by this department. 9. Legal Department: - The main function of this department is to give legal advices to the other departments of RBI. 10. Department of Research and Statistics: - This department is concerned with conducting research on problems relating to money, credit, finance, production etc. Objectives of RBI Prior to the establishment of the Reserve Bank, the Indian financial system was very inadequate because of the inherent weakness of the dual control of currency by the Central Government and of credit by the Imperial Bank of India. 11 The Preamble to the Reserve Bank of India Act, 1934 spells out the objectives of the Reserve Bank as: “to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.” The important objectives are: Page 12 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) Serving as banker of other banks D. Controlling credit E. Controlling foreign exchange operations. ii) Banking Regulations Act, 1949 Banking Regulation Act, 1949 - The Banking Regulation Act, 1949 is a legislation in India that regulates all banking firms in India. Passed as the Banking Companies Act 1949, it came into force from 16 March 1949 and changed to Banking Regulation Act 1949 from 1 March 1966. It is applicable in Jammu and Kashmir from 1956. Initially, the law was applicable only to banking companies. However, 1965 it was amended to make it applicable to cooperative banks and to introduce other changes. The Act provides a framework using which commercial banking in India is supervised and regulated. The Act supplements the Companies Act, 1956. Primary Agricultural Credit Society and cooperative land mortgage banks are excluded from the Act. The Act gives the Reserve Bank of India (RBI) the power to license banks, have regulation over shareholding and voting rights of shareholders; supervise the appointment of the boards and management; regulate the operations of banks; lay down instructions for audits; control moratorium, mergers and liquidation; issue directives in the interests of public good and on banking policy, and impose penalties. In 1965, the Act was amended to include cooperative banks under its purview by adding the Section 56. Cooperative banks, which operate only in one state, are formed and run by the state government. However, RBI controls the licensing and regulates the business operations. The Banking Act was a supplement to the previous acts related to banking. Page 15 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) Structure of the organized banking sector in India. d. Bank Nationalization & Social control over Banking Bank Nationalization Banking in India, in the modern sense, originated in the last decade of the 18th century. Among the first banks were the Bank of Hindustan, which was established in 1770 and liquidated in 1829–32; and the General Bank of India, established in 1786 but failed in 1791. The largest bank, and the oldest still in existence, is the State Bank of India (SBI). It originated as the Bank of Calcutta in June 1806. In 1809, it was renamed as the Bank of Bengal. This was one of the three banks founded by a presidency government; the other two were the Bank of Bombay in 1840 and the Bank of Madras in 1843. The three banks were merged in 1921 to form the Imperial Bank of India, which upon India's independence, became the State Bank of India in 1955. For many years, the presidency banks had acted as quasi-central banks, as did their successors, until the Reserve Bank of India was established in 1935, under the Reserve Bank of India Act, 1934. In 1960, the State Banks of India was given control of eight state-associated banks under the State Bank of India (Subsidiary Banks) Act, 1959. These are now called its associate banks. In 1969, the Indian government nationalized 12 major private banks; one of the big bank was Bank of India. In 1980, 6 more banks that are private were nationalized. These nationalized banks are the majority of lenders in the Indian economy. They dominate the banking sector because of their large size and widespread networks. Social control over banking. Concept Of Social Banking - The traditional self-centered, Page 16 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) profit-oriented commercial banking concept is fading and a modem socio- economic role is emerging because of a revolution of expectations of the society on the role and responsibilities of business community as a whole. A commercial bank can no more be considered a strictly economic institution trading in money. The ‘social control’ over banks imposed for the first time in 1967 has evolved into the philosophy of ‘social banking’. A bank is now expected to meet the growing needs of not merely the rich and urban class of people, the organized industrial and commercial ventures and people who have sound security to offer, but also to cater to the various types of needs of ‘masses’, most of whom live below the poverty line. It is also expected to sponsor innovative non-banking social welfare schemes to improve the quality of life of the society as a whole. In short, there is a shift from traditional concept of ‘class banking’ to the modem concept of mass banking. Banks have to act as a catalyst of ‘economic growth with social justice’ banks is expected to make a direct rather than an indirect attack of the problem of poverty and to eradicate the various social ills afflicting the society. The development of the concept of ‘social banking’ is a natural corollary of the development of the concept of ‘social responsibilities’ of other types of businesses. The societal demands on business houses to assume a social role justifies a similar demand on the banking industry also. Business does not operate in a vacuum. It encompasses all sections of the society. It is not distinct and separate from it ‘rather it is part of it’. It is as much, a part of the society as a human being is and in today’s interactive system, ‘business cannot escape from society and society cannot exist without business’ Page 17 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) negligence for a customer, the bank does not incur any liability to the true owner of the cheque by reason only of having received such payment. It obviously means that to become a customer account relationship is must. Account relationship is a contractual relationship. It is generally believed that any individual or an organization, which conducts banking transactions with a bank, is the customer of bank. However, many persons do utilize services of banks, but do not maintain any account with the bank. Thus, bank customers can be categorized in to four broad categories as under: • Those who maintain account relationship with banks i.e. existing customers. • Those who had account relationship with bank i.e. Former Customers. • Those who do not maintain any account relationship with the bank but frequently visit branch of a bank for availing banking facilities such as for purchasing a draft, encashing a cheque, etc. Technically, they are not customers, as they do not maintain any account with the bank branch. • Prospective/ Potential customers: Those who intend to have account relationship with the bank. A person will be deemed a 'customer' even if he had only handed over the account opening form duly filled in and signed by him to the bank and the bank has accepted it for opening the account, even though no account has actually been opened by the bank in its books or record. The practice followed by banks in the past was that for opening account there has to be an initial deposit in cash. However, the condition of initial cash deposit for opening the account appears to have been dispensed with the opening of ‘No Frill’ account by banks as per directives of Reserve Bank of India. ‘No Frill’ Page 20 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) accounts are opened with ‘Nil’ or with meager balance. The term ‘customer’ is used only with respect to the branch, where the account is maintained. He cannot be treated as a ‘customer' for other branches of the same bank. However with the implementation of’ ‘Core Banking Solution’ the customer is the customer of the bank and not of a particular branch as he can operate his account from any branch of the bank and from anywhere. In the event of arising any cause of action, the customer is required to approach the branch with which it had opened account and not with any other branch. ‘Know Your Customer’ Guidelines and Customer: As per ‘Know Your Customer’ guidelines issued by Reserve Bank of India, customer has been defined as: A person or entity that maintains an account and/or has a business relationship with the bank; one on whose behalf the account is maintained (i.e. the beneficial owner); Beneficiaries of transactions conducted by professional intermediaries, Stock Brokers, Chartered Accountants, Solicitors etc. as permitted law, Any person or entity connected with a financial transaction, which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction. Banker-Customer Relationship: - Banking is a trust-based relationship. There are numerous kinds of relationship between the bank and the customer. The relationship between a banker and a customer depends on the type of transaction. Thus, the relationship is based on contract, and on certain terms and conditions. These relationships confer certain rights and obligations both on the part of the banker and on the customer. However, the personal relationship between the bank and its customers is the long lasting relationship. Some banks even say that they have generation-to-generation banking relationship with their customers. The banker customer relationship Page 21 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) is fiduciary relationship. The terms and conditions governing the relationship is not be leaked by the banker to a third party. Classification of Relationship: The relationship between a bank and its customers can be broadly categorized in to General Relationship and Special Relationship. If we look at Sec 5(b) of Banking Regulation Act, we would notice that bank’s business hovers around accepting of deposits for the purposes of lending. Thus, the relationship arising out of these two main activities are known as General Relationship. In addition to these two activities, banks also undertake other activities mentioned in Sec.6 of Banking Regulation Act. Relationship arising out of the activities mentioned in Sec.6 of the act is termed as special relationship. General Relationship: 1. Debtor-Creditor: When a 'customer' opens an account with a bank, he fills in and signs the account opening form. By signing the form, he enters into an agreement/contract with the bank. When customer deposits money in his account, the bank becomes a debtor of the customer and customer a creditor. The money so deposited by customer becomes bank’s property and bank has a right to use the money as it likes. The bank is not bound to inform the depositor the manner of utilization of funds deposited by him. Bank does not give any security to the depositor i.e. debtor. The bank has borrowed money and it is only when the depositor demands, banker pays. Bank’s position is quite different from normal debtors. Banker does not pay money on its own, as banker is not required to repay the debt voluntarily. The demand is to be made at the branch where the account exists, in a proper manner, and during working days and working hours. Page 22 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) is called the rent.” Providing safe deposit lockers is as an ancillary service provided by banks to customers. While providing Safe Deposit Vault/locker facility to their customer’s bank enters into an agreement with the customer. The agreement is known as “Memorandum of letting” and attracts stamp duty. The relationship between the bank and the customer is that of lessor and lessee. Banks lease (hire lockers to their customers) their immovable property to the customer and give them the right to enjoy such property during the specified period i.e. during the office/ banking hours and charge rentals. Bank has the right to break-open the locker in case the locker holder defaults in payment of rent. Banks do not assume any liability or responsibility in case of any damage to the contents kept in the locker. Banks do not insure the contents kept in the lockers by customers. 4. Agent and Principal: Sec.182 of ‘The Indian Contract Act, 1872’ defines “an agent” as a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done or who is so represented is called “the Principal”. Thus an agent is a person, who acts for and on behalf of the principal and under the latter’s express or implied authority and the acts done within such authority are binding on his principal and, the principal is liable to the party for the acts of the agent. Banks collect cheques, bills, and makes payment to various authorities’ viz., rent, telephone bills, insurance premium etc., on behalf of customers. . Banks also abides by the standing instructions given by its customers. In all such cases bank acts as an agent of its customer, and charges for these services. As per Indian contract, Act agent is entitled to charges. No charges Page 25 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) are levied in collection of local cheques through clearing house. Charges are levied in only when the cheque is returned in the clearinghouse. 4. As a Custodian: A custodian is a person who acts as a caretaker of something. Banks take legal responsibility for a customer’s securities. While opening a Dmat account bank becomes a custodian. 5. As a Guarantor: Banks give guarantee on behalf of their customers and enter in to their shoes. Guarantee is a contingent contract. As per sec 31, of Indian contract Act guarantee is a “contingent contract ". Contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. It would thus be observed that banker customer relationship is transactional relationship. a. There are numerous kinds of relationship between the bank and the customer. The relationship between a banker and a customer depends on the type of transaction; products or services offered by bank to its customers. The legal relationship between a bank and its customer differs in several important respects from the relationships between most other service providers. In order to answer the question, the essay will begins by describing and analysing the legal relationship between a bank and its customer. After that, it will goes on to compare that between other service providers and their customer. b. The general legal relationship between bank and its customer. The general legal relationship of bank and customer is contractual relationship, started from the date of opening an account. When customer deposits money into his bank account, the bank becomes a debtor of the customer. No new contract is created every time there is a new deposit as the Page 26 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) account is continuing in nature. The banker is not, in the general case, the custodian of money. The money paid into a bank account becomes the property of the bank and bank has a right to use the money as it likes. The bank is not bound to inform the depositor the manner of utilization of funds deposited by him. Bank does not give any security to the debtor (depositor). The bank has borrowed money but does not pay money on its own, as banker is to repay the money upon payment being demanded. Thus, bank’s position is quite different from normal debtors. On the other hand, when the bank lends money to his customer, the relationship between the bank and customer is reversed. Then the bank takes the position as a creditor of the customer and the customer becomes a debtor of the bank. Borrower executes documents and offer security to the bank before utilizing the credit facility. Therefore, the general relationship between bank and its customer is that of a debtor and a creditor. c. On the other hand, the relationship between the customer and the banker can be that of principal and agent. Agent can be defined as a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done or who is so represented is called “the principal". In acting on instructions to make periodical payment or transfer money from customer's account to others, to collect cheques or bills, the bank acted as agent of its customer. Prima facie, every agent for reward is bound to exercise reasonable skill and care in carrying out the instructions of his principal. The standard of care expected is one of an ordinary and prudent banker and not that of a detective. Page 27 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) f. Insurance Company vs. Bank - Similarly, insurance company are different from bank because there is a "special relationship" between the insurance company and the policyholder. The special relationship consists of a combination of elements such as the fiduciary duties insurance companies owe to its policyholders and the duty of good faith and fair dealing inherent in every insurance policy between an insurance company and its policyholder. Among an insurer's fiduciary responsibilities is the duty of disclosure. Insurance companies' duty of disclosure requires that they provide certain information to their prospective and current policyholders, such as the scope and limitations of the insurance coverage being agreed to, the consequences of various events, the responsibilities of the insurance company and all other terms of the insurance policy. When an insurance company failed to meet its duty of disclosure, it is considered an act of bad faith that gives actionable cause to the policyholder to seek relief for any resulting losses. In contrast, the bank is only required to supply the customer with relevant information such as APR calculation, copy of agreement, balance etc. g. Trust Company vs. Bank - A trust company is a corporation organized to perform the fiduciary of trusts and agencies. The "trust" name refers to the ability of the institution's trust department to act as a trustee, who administers financial assets on behalf of customer (settlor). The assets are typically held in the form of a trust, a legal instrument that spells out the beneficiaries and what the money can be spent for. A trustee's power to dispose of the trust property or to arrange the property is subject to the wishes of the customer (settlor). In contrast, the receipt of money on deposit account constitutes the banker a debtor to the depositor but not a trustee of Page 30 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) the customer. Therefore, the customer has no right to inquire into, or question the use of, the money by the banker. A trust involves the administration of assets on behalf of an individual whether he is living or dead. Therefore, the trust arrangement will still be going on after the death of the customer (settlor). However, the relationship between a bank and a customer ceases on the death, insolvency, lunacy of the customer. However, the position is otherwise if the banker assumes the office of trustee. Moreover, a banker is affected by the existence of a trust where an account is opened by a customer acting in the capacity of trustee, or where the banker is on notice that a payment into or out of the account is in breach of trust, or where money is paid to a banker for a particular purpose in circumstances such as to impress the payment with a trust. h. Duty of Confidentiality - One of the similarities between bank and other service providers is that the legal relationship between them and their customers will give rise to a duty of confidentiality. They are disallowed to disclose the information about their customer to third party even when the person is no longer their customer. However, the decision of the Court of Appeal in Tournier v. National Provincial and Union Bank of England enunciated four exceptional cases in which disclosure is justified: (1) Where disclosure is under compulsion of law (2) Where there is a duty to the public to make the information known (3) Where the interests of the bank require disclosure (4) Where the disclosure is made by the express or implied consent of the customer. Other than that, banker and all other service providers are under duty to disclose when it involves in cases of money laundering. Currently, there are two statutes of primary importance in governing the duty of confidentiality: Data Protection Act 1998 and the Human Right Act 1998. Page 31 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) The Data Protection Act 1998 gives effect to European Council Directive 95/46 on the protection of personal information. On the other hand, Article 8 of the Human Rights Act 1998 enshrines the right to respect for private and family life. ii. Contract Between banker & customer DETERMINATION OF CONTRACT BETWEEN BANKER AND CUSTOMER The Banker and its customer may mutually agree to extinguish their rights and obligations under the banking contract and this is expressed in the Latin phrase “Eodem modo quo oritur, eodem modo dissolvitur” which means (what has been Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2008 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) 36 created by agreement may be extinguished by agreement). However, in usual banking practice, such cases of mutual termination are rare. Banking contracts are usually terminated unilaterally. The unilateral termination may either party take the voluntary action of either party closing the account or may result from involuntary occurrences like death, bankruptcy, mental incapacity or winding up of the customer or winding up of the bank; court orders or frustration by an intervening event. A. CLOSURE OF THE ACCOUNT 1. Closure of account by the Customer 2. Closure of the account by the Bank. B. BANKRUPTCY OF A CUSTOMER C. DEATH OF CUSTOMER D. MENTAL INCAPACITY OF THE CUSTOMER E. WINDING UP OF THE CUSTOMER F. WINDING UP OF THE BANK G. LEGISLATION STOPPING THE BANK – CUSTOMER RELATIONSHIP H. GARNISHEE ORDERS Relationship between the bank and the customer The general relationship between a bank and the customer is a contractual Page 32 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) the customer has must be actual and not just constructive (Greenwood v Martin’s Bank [1933]). A customer must also exercise reasonable care when drawing cheques or other payment orders so that the bank is not misled (London Joint Stock Bank ltd v Macmillan [1918]). Under the Payment Services Regulations 2009, a customer is liable for all losses arising from the unauthorised use of a ‘payment instrument’ if they have intentionally or with ‘gross negligence’ failed to comply with their statutory obligations. This would include failing to comply with the terms and conditions of the use of the payment instrument, failing to notify the bank without ‘undue delay’ of its loss, theft, or unauthorised use, or failing to take reasonable steps to keep the security features of the payment instrument safe. Banks should specify the steps they expect customers to take in their pre-contract information. The Financial Conduct Authority has indicated that a contractual term which bans the customer from writing down or recording a password or PIN goes beyond ‘reasonable steps’ and is unlikely to be enforceable. India has a law specifically focused on consumer protection (Consumer Protection Act 1986) but that is not explicitly for consumers of the financial sector. Matrix for financial consumer protection: 1. Banking Codes the standards Bureau, India, (BCSBI) or the fair practices code followed by respective banks. 2. The in- house complaint redressal mechanism set by banks 3. Ombudsman office 4. Courts of law The various functions and the roles of different institutions may be overlapping at times. Where the customer chooses to complain depends on customer’s ease, location. Consumer protection act 1986 Under this Act, Section 2(1) (o) defines what service is and “deficiency” is defined under Section 2(1) g. banking service is also covered under the various services mentioned under this Act. Banking Service” here Page 35 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) can include receiving of deposits, payment of premium, money lending, locker facilities etc. Deficiency in respect of such services provided by bank can be brought before Consumer forums. As per section 2(1) (d), Consumer includes a person who avails or hires a service for consideration. Hence, any person who owns an account in bank or takes a service form bank can file complaints under this act for “deficiency” or regarding unfair practices by the banks. Consumer courts not only compensate for the defect but also for the mental agony suffered or harassment faced. Listed are the few deficiencies in banking services as laid down by consumer commissions and courts of law: Refusing or holding back the amount that was due on fixed deposit after maturity Delay in the payment of amount on term deposits after maturity Dishonor of cheques because of mistake or negligence by bank. Dishonoring of demand drafts because of omission by bank officials. Refusing grant of loans without any bonafide reason Causing undue delay in discharging installments of loan Charging interest at higher rate than what has been specified in loan agreement. Failure in returning securities even after the loan is repaid. Bank’s failure to honour guarantee, if demand was as per guarantee. Liability is on bank if articles in locker are lost loss to customers due to unavailability of securities in bank premises Closing bank account without any instructions in that regard from the account holder Refusing cheque book facility to customer just because of the fact that the minimum balance has not been maintained Failure of bank cashier to account for money deposited at the counter with him(vicarious liability) Rude behavior of bank officials resulting in discomfort or mental agony to customers Without even demanding repayment giving notice to “face the auction or make payment”. Failure at returning the dishonored cheque Page 36 of 39 Chanderprabhu Jain College of Higher Studies & School of Law An ISO 9001:2015 Certified Quality Institute (Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi) Banking Ombudsman Scheme As an alternate mechanism for dispute resolution, this scheme launched in 1995 had been modified by RBI to bring under its ambit the growing number of grievances. Banking Ombudsman is a senior person appointed by RBI. Since then it is being used as a primary forum for dispute resolution. It is not bound by any precedent and in some cases is not bound by procedural laws and hence the decisions are as per the specific cases. In addition, banking ombudsman offices create awareness camps, exhibitions, advertisements etc. However, there also exists the fact that the scheme is limited to just 27 grounds (including internet banking) and hence it is needed to expand its scope. The scheme is fully managed by RBI. At present, there are 15 offices in the country where complaint can be launched because of deficiency. Now customer can lodge complaint under BOS if banks do not adhere to the lenders fair practices code or to the code issued by BCSBI that is Code of bank commitment to customers. BCSBI brought out two sets of codes, Code of bank’s commitment to the customers and other to the Micro or small enterprises. However, in spite of the fact that these codes have now been adopted by banks and have been in existence for such a considerable amount of time, the quality of service provided still requires a lot. This is something very apparent from the numerous complaints received in the country under Banking Ombudsman scheme. Charter of the Customer Rights This is a recent step taken by RBI regarding consumer protection. It includes various principles listed as follows: Right to Fair Treatment: Right to treatment of courtesy is with both the service provider as well as with the financial customers. In addition, no customer should be discriminated on grounds of age, gender, caste, religion or physical abilities. Page 37 of 39