STUDY MATERIAL PROFESSIONAL PROGRAMME BANKING LAW AND PRACTICE MODULE 3 ELECTIVE PAPER 9.1 ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003 tel 011-4534 1000, 4150 4444 fax +91-11-2462 6727 email [email protected] website www.icsi.edu i © THE INSTITUTE OF COMPANY SECRETARIES OF INDIA TIMING OF HEADQUARTERS Monday to Friday Office Timings – 9.00 A.M. to 5.30 P.M. Public Dealing Timings Without financial transactions – 9.30 A.M. to 5.00 P.M. With financial transactions – 9.30 A.M. to 4.00 P.M. Phones 41504444, 45341000 Fax 011-24626727 Website www.icsi.edu E-mail [email protected] Laser Typesetting by AArushi Graphics, Prashant Vihar, New Delhi, and Printed at Tan Prints/July 2014 iiii BANKING LAW AND PRACTICE Company Secretaries have a pivot role to play in the Banking and Financial Sector. A Company Secretary can work as a compliance officer in a banking and financial institution and play an important role in ensuring compliance to complicated legal, regulatory and supervisory issues all the time, transcending various spheres of banking operations. So, in order to build the capacity of Companies Secretaries to work as a compliance officer in Banks and to provide them a specialized knowledge in Banking laws and practice, a paper on Banking Laws and Practice has been added as an elective paper. The students who want to pursue their career in Banking and financial sector may chose this subject. The syllabus and content of this paper has been developed in joint association of Indian Institute of Banking and Finance and the syllabus covers most of the aspects from gamut of banking. The objective of including this paper is to give a specialized knowledge of law and practice relating to banking. An attempt has been made to cover fully the syllabus prescribed for each module/subject and the presentation of topics may not always be in the same sequence as given in the syllabus. Candidates are also expected to take note of all the latest developments relating to the subjects covered in the syllabus by referring to RBI circulars, financial papers, economic journals, latest books and publications in the subjects concerned. Although due care has been taken in publishing this study material, yet the possibility of errors, omissions and/ or discrepancies cannot be ruled out. This publication is released with an understanding that the Institute shall not be responsible for any errors, omissions and/or discrepancies or any action taken in that behalf. Should there be any discrepancy, error or omission noted in the study material, the Institute shall be obliged if the same are brought to its notice for issue of corrigendum in the e-bulletin Student Company Secretary. In the event of any doubt, students may write to the Directorate of Academics in the Institute for clarification at [email protected]. There is open book examination for this Elective Subject of Professional Programme. This is to inculcate and develop skills of creative thinking, problem solving and decision making amongst students of its professional programme and to assess their analytical ability, real understanding of facts and concepts and mastery to apply, rather than to simply recall, replicate and reproduce concepts and principles in the examination. iii SYLLABUS MODULE III, ELECTIVE PAPER 9.1: Banking Law and Practice (100 Marks) Level of Knowledge: Expert Knowledge Objective: To acquire specialized knowledge of law and practice relating to Banking Detailed Contents: 1. Overview of Banking System 2. Regulatory Framework and Compliances A. Provisions of RBI Act 1935, Banking Regulation Act 1949, Prevention of Money Laundering Act, 2002. B. Government and RBI’s Powers Opening of New Banks and Branch Licensing Constitution of Board of Directors and their Rights Banks Share Holders and their Rights CRR and SLR Concepts Cash- Currency Management Winding up - Amalgamation and Mergers Powers to Control Advances - Selective Credit Control – Monetary and Credit Policy Audit and Inspection Supervision and Control - Board for Financial Supervision – its Scope and Role Disclosure of Accounts and Balance Sheets Submission of Returns to RBI, Corporate Governance. 3. Legal Aspects of Banking Operations Case Laws on Responsibility of Paying and Collecting Banker Indemnities or Guarantees - Scope and Application – Obligations of a Banker - Precautions and Rights - Laws relating to Bill Finance, LC and Deferred Payments - Laws Relating to Securities - Valuation of Securities - Modes of Charging Securities - Lien, Pledge, Mortgage, Hypothecation etc. - Registration of Firms/Companies - Creation of Charge and Satisfaction of Charge. 4. Banking Related Laws Law of Limitation - Provisions of Bankers Book Evidence Act -Special Features of Recovery of Debts Due to Banks and Financial Institutions Act, 1993 TDS Banking Cash Transaction Tax Service Tax, Asset Reconstruction Companies, The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, The Consumer Protection Act, 1986, Banking Ombudsman Lok Adalats, Lender’s Liability Act. 5. Banker - Customer Relations The legal relationship between the Banker and Customer, the Multifarious Transactions between them and the Rights and Duties of the Parties springing out of such relationship Nature of Banking Business Legal Nature of Banker-Customer Relationship and their Mutual Rights and Duties Special Categories of Customers, such as Corporations, Partnership Firms, Hindu Joint Families, Unincorporated Bodies, Trusts, Joint Account Holders, Minors, Nominee Accounts, Liquidator, Mercantile Agents, Non-Resident Indians, Foreigners and the Legal Incidence of Each Different Types of Accounts such as Current Accounts, Savings Bank Account and Fixed Deposits Other Transactions between Banker and Customer such as Safe Deposit Vaults, Financial Advice, Letters of Introduction and Other Services Rendered by Banks Special features of the relationship between banker and customer - Their mutual rights and duties - lien - Power to combine different accounts - Secrecy of account. iv 6. Loans and Advances Law, Practice and Policies governing the employment of the funds in the hands of the banker with special reference to the lending banker State Policy on Loans and Advances - Priority sector advances and socio- economic policies - Financial inclusion - Self- Employment Schemes - Women Entrepreneurs - Small Scale Industries - Agricultural Finance, Export Finance, etc. – Micro Finance - How the banker profitably uses the fund - Call loans and loans repayable at short notice - Loans and advances - Overdrafts - Legal control over bank’s deployment of funds. 7. Securities for Banker’s Loans The legal issues involved in and the practice governing the different kinds of securities for banker’s advances and loans Guarantees, pledge, lien, mortgage, charge – subject matters of collateral security Corporate Securities Documents of title to goods Land and Buildings Book debts Life Policies Factoring; Bill Discounting; Bank Guarantees; Letters of Credit; Commercial Papers. 8. Financial Analysis of Banks Introduction; Role of financial analysis in financial management; Techniques of Financial Analysis; DuPont Model of Financial Analysis; Special issues in Financial Analysis of Banking Industry. 9. Financial System Contemporary and Emerging Issues: An Overview Introduction; Role of Financial System; Capital Flow Through Intermediary Financial Institutions; Direct Capital Flow; Primary Market Products; Primary Market Issue Facilitators; Secondary Market; Economic Importance of Financial Markets. 10. International Banking Management International Banking: An Overview, Legal & Regulatory Framework, International Banking Operations Management, Risk Management in International Banking, Special Issues: Technology and International Banking; Globalisation and International Banking; Financial Innovations in International Banking. 11. Electronic Banking and IT in Banks IT in Banking: An Introduction. IT Applications in Banking- Computer-Based Information Systems for Banking; Electronic Banking; Electronic Fund Management, Enabling Technologies of Modern Banking- Electronic Commerce and Banking; Supply Chain Management; Customer Relationship Management; Integrated Communication Networks for Banks Security and Control Systems - Cybercrimes and fraud management Planning and Implementation of Information Systems. 12. Risk Management in Banks Risk Management: An Overview, Credit Risk Management, Liquidity and Market Risk Management, Operational Risk Management, Special Issues- Risk Management Organisation; Reporting of Banking Risk; Risk Adjusted Performance Evaluation Basel III. 13. Ethics and Corporate Governance in Banks Ethics and Business, Corporate Governance, Corporate Social Responsibility, Governance in Financial Sector. v LIST OF RECOMMENDED BOOKS MODULE 3 ELECTIVE PAPER 9.1 : BANKING LAWAND PRACTICE The students may refer to the given books and websites for further knowledge and study of the subject : READINGS 1. M.L.Tannan, revised by : Banking Law and Practice, Wadhwa & Company, Nagpur C.R. Datta & S.K. Kataria 2. A.B. Srivastava and : Seth’s Banking Law, Law Publisher’s India (P) Limited K. Elumalai 3. R.K. Gupta : BANKING Law and Practice in 3 Vols.Modern Law Publications. 4. Prof. Clifford Gomez : Banking and Finance - Theory, Law and Practice, PHI Learning Private Limited 5. J.M. Holden : The Law and Practice of Banking, Universal Law Publishing. vi ARRANGEMENT OF STUDY LESSONS Study Lesson No. Topic 1. Overview of Banking System 2. Regulatory Framework and Compliances 3. Legal Aspects of Banking Operations 4. Banking Related Laws 5. Banker - Customer Relations 6. Loans and Advances 7. Securities for Banker’s Loans 8. Financial Analysis of Banks 9. Financial System Contemporary and Emerging Issues: An Overview 10. International Banking Management 11. Electronic Banking and IT in Banks 12. Risk Management in Banks 13. Ethics and Corporate Governance in Banks Annexures vii CONTENTS FINANCIAL, TREASURY AND FOREX MANAGEMENT LESSON 1 OVERVIEW OF BANKING SYSTEM Indian Banking System – Evolution 2 Reserve Bank of India as a Central Bank of the Country 2 State Bank of India and Its associate (Subsidiaries) Banks 2 Nationalization of Banks 3 Regional Rural Banks 4 Local Area Banks 4 New Private Sector Banks 4 Different Types of Banks in India 5 Commercial Banks 6 Co-Operative Banking System 7 National Bank for Agriculture and Rural Development (NABARD) 9 Small Industries Development Bank of India (SIDBI) 9 National Housing Bank (NHB) 10 Export Import Bank of India (EXIM Bank) 10 Functions of Commercial Banks 11 LESSON ROUND UP 12 SELFTEST QUESTIONS 12 LESSON 2 REGULATORY FRAMEWORKAND COMPLIANCES Reserve Bank of India Act, 1934 16 Banking Regulation Act, 1949 16 Setting Up of a New Bank 18 Branch Licensing 19 Branch Authorisation Policy for Commercial Banks 19 New Bank Licensing Policy, 2013 20 Banks’ Share Holders and their Rights 23 Cash Reserve Ratio 24 Statutory Liquidity Ratio (SLR) 26 Currency Chests 28 Currency Printing and Coin Minting 28 viii Page Quantitative/General Credit Control 29 Selective Credit Control 30 RBI as a Controller of foreign Exchange 31 RBI as Banker to the Government 31 RBI as Lender of the Last Resort 31 Monetary and Credit Policy 32 Audit and Inspection of Banking Company 32 Supervision and Control of Banking Companies 34 Board for Financial Supervision 34 Winding Up – Amalgamation and Mergers of Banks 34 Reserve Bank as Liquidator 35 Disclosure of Accounts and Balance Sheets of Banks 36 Submission of Returns to RBI 42 Fraud – Classification and Reporting 43 Corporate Governance 47 Effective Corporate Governance Practices 48 Corporate Governance in Banks 48 Prevention of Money Laundering Act, 2002 (PMLA) 48 Banking Codes and Standards Board of India (BSCSBI) 50 The Banking Ombudsman Scheme 51 LESSON ROUND UP 53 SELFTEST QUESTIONS 54 LESSON 3 BANKER – CUSTOMER RELATIONSHIP Meaning of a Banking Company 58 Relationship as Debtor and Creditor 60 Banker as Trustee 61 Banker as Agent 62 Obligations of a Banker 63 Pass Book and Statement of Account 67 Precautions to Be Taken By the Banker and the Customer 69 Garnishee Order 70 Rights of the Attaching Creditor 73 Rights of a Banker 73 Exceptions to the Right of General Lien 75 ix Page Right of Set-off 76 Right to Charge interest and incidental Charges, Etc. 78 Various Types of Customers 79 Closing of a Bank Account - Termination of Banker-Customer Relationship 82 Various Deposit Schemes 83 Deposits – General 83 Demand Deposits 84 Term Deposits 86 Hybrid Deposits or Flexi Deposits Or Multi Option Deposit Scheme (MODS) 88 Tailor-Made Deposit Schemes 89 Special Schemes for Non-Resident Indians (NRIs) 90 ‘Know Your Customer’ (KYC) Guidelines of the RBI 92 Customer Identification Procedure 93 Customer Identification Requirements 93 Specimen Signature 95 Power of Attorney 96 Closing of a Bank Account - Termination of Banker-Customer Relationship 96 Insurance of Bank Deposits 97 Salient Features of Deposit insurance 97 Nomination 98 Settlement of Claims 98 LESSON ROUND UP 99 SELFTEST QUESTIONS 100 LESSON 4 LEGALASPECTS OF BANKING OPERATIONS Introduction 104 Legal aspects of a Cheque 104 Definition of a Cheque 104 Different Types of Cheques 104 Crossing of a Cheque 105 Cheque Crossed Generally 105 Cheque Crossed Specially 105 Payment of Cheque Crossed Generally Or Specially 105 Cheque Bearing “Not Negotiable” 105 Double Crossing 106 x