Introduction to Banking

Mishu TripathiAssistant Professor-Finance

History of Banking in India-Phase I

• Three presidency banks were established in Calcutta

(1806) in Bombay (1840) and in Madras (1843)

• In the early part of 20th century, on account of the

Swadeshi movement a number of joint stock banks were

established by Indians like Bank of India, Bank of

Baroda and Central Bank of India.

• In 1921 the three presidency banks were merged and the

Imperial Bank of India was created

• During the period 1900 to 1925 many banks failed, and

hence a Central Banking Enquiry Committee formed in

1929 to trace the reasons for the failure of such banks.

• The Reserve Bank of India Act was passed in 1934

and the RBI came into existence in 1935 and RBI was

nationalised in 1949

• The Banking Regulation Act,1949 gave wide powers to

RBI to act as the regulator for banks in India

Phase II

• In 1955 State Bank of India became the

successor to the Imperial Bank of India ,under

the State Bank of India Act,1955.

• In 1959 State Bank of India (Subsidiary Banks)

Act was passed to enable SBI to take over State

Associated banks as SBI’s subsidiaries

• In 1969 the Government of India nationalised 14

major commercial banks having deposits of Rs.50

crore or more

• In 1975 Regional Rural Banks were established under

RRB Act 1976, which was preceded by RRB

Ordinance in 1975

• In 1980 six more commercial banks were

nationalised, with a deposit of Rs.200 crore or more

Banking Progress in India-Phase III

• In the liberalised, privatised and globalised environment, banks operating in India have diversified their banking activities by offering Banking facilities like:–Merchant banking–ATMs/Credit Cards/Internet banking/Mobile

Banking–Factoring–Third Party Services

*Time is more important than money

What is Banking and its

functions???

Definition of a Bank

• The banking is defined as “accepting for the purpose of lending or investment, of deposit of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft and order or otherwise”

Features of the Bank1. Accepting money/deposits from the public

2. Lending or investing the money so collected.

If the purpose of accepting of deposit is not to lend or invest, the business is not called banking business.

The money so accepted is repayable on demand.

The money so deposited can be withdrawn by the approved modes as specified by bank.

Accepting deposits

Accepting deposits is the prime function of a

commercial bank.

They generally accept 3 types of deposits

1. Current Deposits

2. Savings Deposits

3. Term Deposits

Current Deposits/Current Account

• Current Deposits/Current Account is also

known as demand deposit as any amount can

be withdrawn at any time by drawing a cheque

or giving the cheque favouring the payee.

• No interest is allowed on these.

• In fact bank charges incidental charges depending on the volume of transactions, which was earlier, calculated on the basis of number of folios used. 

• If the depositor keeps huge balance in the account, the bank is ready to waive the charges, as it is costless deposit for the bank.

• The bank also charges cheque book issuing charges on per leaf basis.

Who can open Current Account

1. Individuals of sound mind and who have attained

majority.

2. Two or more individuals in their joint names.

3. Proprietary Concerns (Sole Proprietorships)

4. Partnerships Firms

5. Hindu Undivided Families

6. Companies

7. Clubs, Societies, Associations, Committees, Schools etc

8. Trusts

9. Executors

10. Administrators

11. Government and Semi-Government Bodies, Local Authorities etc.

• Based on the current account variant you choose, you will be

eligible for a host of services at free/concessional rates. 

• Companies, firms and other business entities primarily use this

account.

KNOW YOUR CUSTOMER- KYC

• Know your customer norms are applicable

to all customer accounts. It deals with not

only to identify the customer but also

to understand the activities of the customer,

to ensure that the operations in the customer

account/s is/are for genuine purpose

KYC RULESThe main rules are –

1. Customer identification

2. Ceiling and monitoring of cash transactions

3. Internal Control Systems

4. Prevention of Terrorism Finance

5. Identification and Reporting of Suspicious Transactions

6. Adherence to Foreign Contribution Regulation Act (FCRA), 1976

7. Record Keeping

8. Training of staff and management

Savings deposits/Savings Bank Account

• This account is designed to promote savings

among the households.

• This is mainly for non-commercial transactions.

• Companies, firms and other business entities are

prohibited to open such accounts.

Who can open Savings Account

1. An individual in his/her own name

2. Individuals in their joint names with suitable repayment

instructions

3. Minor represented by parent/guardian

4. Minor students above 10 years

5. Clubs, Societies, Associations, Trusts, Executors,

Educational Institutions, Administrators, HUF, etc.

Documentation Required

• One passport size photograph

• Identity Proof

• Address Proof

• PAN number or form 60/61 is a must for

opening the account.

Savings Account• The depositor earns interest, which at present is 4%, and

the rate of interest is governed by RBI directive and is same in all the banks.

• Earlier interest is paid on the minimum balance in the account from 10th of the month to last day of the month.

• From 1st of April 2010 the interest is paid based on daily balance in the account.

• There are restrictions on number of withdrawals in a year.

• Banks issue certain cheque leaves free: 60 cheque leaves free in a year and Rs 5 per cheque leaf beyond that. 

• There is a restriction for maintaining minimum

balance in the account, which is fixed at the

discretion of the bank.

• Quarterly Average Balance - Rs 250/- at Rural

Branches and Rs 500/- at semi urban Branches and

Rs 1,000 in Metro and urban branches.

• Non-maintenance of QAB attracts a service

charge of Rs 75/- per quarter.

• The balance can be withdrawn by issuing cheques or one

can have ATM/Debit Card.

• Depositor can give standing instructions to transfer funds

from the account to his other accounts like recurring deposit

every month for which the charges have to be paid.

•  Banks have the system of transferring any sum above the

stipulated amount to a term deposit of the desired period to

enable the depositor to avail of higher rate of interest.

Term deposit• While opening the term deposit one has to state the

period for which the deposit is required and the rate of interest on deposit is dependent on period of deposit.

• At present the deposit rate varies from 8.25-9.10%• The minimum period at present is 7 days and

maximum is 10 years.• The bank prescribes the rules for premature

withdrawals and charges penalty for premature withdrawal.

• If the depositor wants funds for short term, temporarily or the maturity of deposit is just near, he can opt for a loan against the security of such deposit.

• The quantum of loan can be 90% of deposit inclusive of interest.

• While the depositor continues to earn interest on his deposits, he has to pay interest on the loan raised, which is higher than the rate of deposit.

Different schemes of term deposits

1. Monthly interest scheme.

2. Half yearly interest scheme.

3. Reinvestment plan wherein the interest earned on deposit at the end of each quarter /half year is deemed to be invested and the depositor earns interest on principal and interest.

Recurring deposit

• It is classified as term deposit and the depositor opts for depositing a fixed amount every month for a stated number of months. The rate of interest is same as in the case of fixed deposit.

• At the request of depositor the bank will debit the customers operative account for the credit of recurring deposit every month.

• The depositor can withdraw the balance prematurely or can raise a loan at the security of recurring deposit.

Tax deduction at source on interest (TDS)

• Banks are statutorily required to deduct income tax (@ 10%+ 3 % education cess on tax so calculated) if the interest paid or accrued in all the deposits of a particular depositor exceeds Rs 10000/ in a financial year.

• If the depositor does not furnish his PAN, in that case the bank will deduct TDS at 20% + 3% education cess on tax deducted.

• There is no TDS on Savings Bank Account.•  Banks will not deduct TDS in case the depositor gives a

declaration in Form 15 G (15 H for senior citizens) in duplicate stating that the tax on estimated income of the recipient for the financial year will be NIL. 

Introduction for opening a bank account

• For opening an account particularly operating account in a bank, bank requires the customers to bring introduction from a customer known to the bank.

•  Banks incur great risk if they open an account without proper introduction.

• Nomination is also encouraged.

• The second most primary function of a

commercial bank is to ‘Lend’.

• In fact lending and accepting deposit are

bread and butter of a commercial banks.

Advancing of Loans

Loans are given for• Consumption • Trade and Commerce• Agriculture• Small Scale Industries (SSIs) • Industrial Loans • Export or Imports • Vehicle • Housing and • you name and bank will tailor make the scheme

to suit the class of borrowers 

• Loans may be fund based or non-fund based (wherein bank guarantee or LC is issued)

• Loan may be fixed duration- term loans In this case a fixed amount is given.

• These loans are given to acquire some assets like, machinery, land and buildings, car, house etc.

• This is repayable in equated monthly/quarterly/yearly installments along with monthly interest

• The assets purchased out of bank finance are taken as security. 

• Loans may be in the form of running account - cash credit or overdraft.

• “Working capital needs” means funds required to meet day to day working of the borrower like buying raw materials, day – to- day expenses, wages and salaries etc.  

• Therefore to meet the needs of working capital (day to day requirement) amount given by a bank is in the form of running account.

•  The bank fixes the limit of the borrower. The borrower can withdraw the amount as per his requirements mainly for purchasing of goods, payment of expenses and sale proceeds is deposited by him.

• The bank charges interest on the balance drawn by the borrower and not on the limit fixed. This way the borrower will be paying interest for the amount withdrawn and for the period it is withdrawn.

• A trader receives bill of exchange or cheque in

settlement of his claim from the debtor. 

• The banker discounts or purchases the bills or

cheques of their customers and provide him with

funds which can be used by the borrower for meeting

his working capital requirements.

Bills Discounting/Cheque Discounting

• Example: • ‘A’ a trader has sold goods to a trader ‘B’ at Delhi for Rs 1 lac.•  B’ has given a cheque to ‘A’ for Rs 1 lac for settlement of his dues. The

cheque is drawn at Delhi.•  If ‘A’ deposits the same in his account it will take about 10 to 15 days

for the cheque to be cleared as the cheque will be treated as outstation.•  If ‘A’ is in urgent need of funds he can request his banker to purchase

the cheque. •  The bank depending on the nature of dealing of ‘A’ will purchase the

cheque and after deducting bank’s charges known as discount charges, give credit to ‘A’.

•  Bank will send the cheque to Delhi for collection and after it is realized, clears its entry.

•  If the cheque is returned, bank will recover from ‘A’.• This way the trader gets credit against their outstandings.

Bills Discounting/Cheque Discounting

• Loans given by the banks are classified as secured, unsecured or partly secured. 

• If the banks have not taken any security then it is called unsecured (clean loan).

Examples of unsecured loans are:

1. Agriculture loans

2. Educational loans etc

• In the case of unsecured loans the banker relies on

the credit worthiness of the borrower and take one

or more guarantor to ensure safety of the advance.

• Secured loans are those loans against which the

banker holds some security. 

• Partly secured loans are those where the value of

security does not fully cover the amount of loan

taken

• Bankers generally do not finance the full amount of the asset to be purchased but asks the borrower to bring a margin which varies from 10 to 15% depending on the type of security and the credit worthiness of the borrower.

• The purpose of taking margin is to cover the fall in the value of security and also the increase in the amount of outstanding of the borrower on account of interest, if the borrower does not pay any amount.

Purpose Security

Car/Vehicle Loan Car/Vehicle

Housing Loans House

Machinery Loans Machinery

Television/ Refrigerator Loans

Television/ Refrigerator

Inventory Inventory

Some Examples of Secured Loans

• In the case of Bank Guarantee the bank undertakes to pay the stated amount to the beneficiary of bank guarantee in case of default in meeting the obligation.

• Example: Suppose ‘A’ wants to get a machine manufactured from ‘B’ for Rs 10 lac.

• They are not regularly dealing with each other as machines are not bought everyday. The machine is suitable only for ‘A’ and may not be of any use to any body else.

• If ‘B’ asks ‘A’ to pay the cost of machine of Rs 10 lac before ‘B’ starts manufacturing the machine.

• ‘A’ may not give because of fear if ‘B’ does not manufacture or delay he will lose the money and have to litigate the matter for recovery.

Bank Guarantee

• On the other hand if ‘B’ starts manufacturing and later on ‘A does not take delivery and does not pay, ‘B’ will suffer a great loss.

• To mitigate the hardship ‘B’ asks ‘A’ to arrange for a bank guarantee in his favour for Rs 10 lacs.

• In the Bank guarantee the bank will undertake to make payment to ‘B’ if he delivers the machine to ‘A’

• In Bank Guarantee document, the conditions and date of delivery etc will be clearly written. 

• Bank will charge its commission for issuing bank guarantee.• Bank is not parting with the funds when they issue bank

guarantee.• But bank has to part with the funds if ‘A’ does not pay when

the machine is delivered.  • Banks issue Bank guarantee to their credit worthy borrowers

and after taking suitable security. 

• M/s ABC Ltd. an exporter of shirts to USA receives and order from M/s XYZ from USA.

•  In the normal course they have two options:• One is to ask M/s XYZ to send the money in advance so

that the shirt may be sent.• This may not be accepted by the importer i.e. M/s XYZ as

if M/s ABC does not send the shirts, they will suffer. There is risk on the part of importer.

• Second option is to send the shirts and wait for the payment.

• The importer M/s XYZ may delay or not send the payment or may even reject the goods leading to litigation in USA.

• The risk is on the part of exporter. 

Letter of Credit (L/C)

• To mitigate the problem the exporter will request the importer to send a letter of credit from a reputed bank who will guarantee payment if the export is made and all the conditions governing the export is complied with.

• This way the bank is undertaking to make payment. Bank is substituting the credit of borrower with his own credit.

• This way neither the exporter will suffer due to lack of clarity on the credit worthiness of the importer nor the importer will suffer as the payment will be made only after the export has been done and all the conditions are complied with.

• This is called non-fund based facility.

Principles of Lending

“Lending is an art not a science.”

• This maxim indicates that there are no set rules or formulae to appraise loan applications providing cent percent results.

•  Appraisal, by whatever methods, can never be an exact or automatic process.

•  It will always remain more of an art than a science and it is through experience that a person becomes proficient in the art of lending.

Factors in Lending

Systematic study of various factors shall help a

banker in working out the feasibility of the

project and evaluating credit worthiness of the

borrower although the risk can never be fully

eliminated in lending.

5Ms

• Man

• Material

• Market

• Machine and

• Money

Under these five heads we shall examine various

other aspects related to them.

Man

The foremost and the most important aspect of

appraisal is the man behind the scene i.e., the

management.

• The Character

• Competence and

• Capital

Character: Will he repay the loan?• In banking parlance, character is usually

associated with the record of past payments of the party with the banker other creditors.

• If past financial record is not good, it is better to drop the proposal even if good security is available.

• A banker can bear with borrower who is not able to pay because of circumstances beyond his control but he cannot do with a borrower who is not willing to pay.

• In the absence of past record one has to see other traits of a borrower like frankness, reasonableness, patience, attitude towards risk and other entrepreneurial qualities.

• An experienced banker can draw conclusions during the course of an interview.

 Competence: Can he repay the loan?

1. Managerial Competence 

• It is a decisive factor influencing the failure or

success of an enterprise.

• Fluctuating availability of supplies, changing

technology, rising prices, shifting tastes and

stiff competition enlarge the role of

management decision in success.

• In the era of competition the evaluation of the earning

process and projections is not very reliable and the tendency

to depend merely on the analysis of financial statements may

not be free from risk unless supplemented by managerial

competence.

• No lender can possibly foresee all the future circumstances

that will affect the fortune of the borrower. But if he is

satisfied by the superior ability of the management, he can

reduce the risk to a great extent.

• Appraisal of management is the touch-stone of credit

analysis.

2. Technical Competence

Capital: What is the owner’s stake in the

business?

Capital indicates the financial resources available at

the borrower’s end. From the banker’s point of view

these resources can be classified into three divisions,

namely, margin, principal security and collateral.

Margin•  Margin is the amount invested by the borrower

himself and is asked for, for providing protection to bankers against a possible decline in value. Thus, margin indicates the owner’s stake, which very often governs his motivation.

• A sound banking proposition requires the presence of some security in order to cover the risk in lending.

• Such security can be of two types: (a) Principal security and (b) Additional security, popularly known as collateral.

The Principal Security

• It is the main security consisting of goods, machinery etc created out of the funds lent.

• It is quite natural that bank will like to create charge over such security in order to secure their advance. The charge can be in the form of pledge, hypothecation, assignment, mortgage, etc. If no charge is obtained, the advance can be considered as clean advance. 

A good security should possess four

qualities, namely: 

• Marketability

• Ascertain ability of value

• Stability of value

• Transferability of ownership

•  When the principal security does not adequately cover the future risks, bankers do insist for collateral as a measure of protection.

• The traditional banking laid lot of emphasis on collateral often paying little attention to other factors. But for small borrowers or small scale industries the approach suggested by the regulators is to go for need based lending rather than security based lending so that a good entrepreneur should not be denied the finance in the absence of security.

The Collateral

• No banker should begin with hypothesis that the repayment of loans shall come by the sale of collateral; rather it should come out of the generation of surplus.

• If the collateral is available, it must be insisted upon as it will discourage the borrower from fraud and also create motivation.

This head include not only availability of raw

material but also other infrastructural facilities

like skilled labour, power or fuel, water,

transport facilities, appropriate technology and

proper location.

Material

• Raw material is one of the basic requirements of an industrial enterprise.

•  The availability of raw material whether imported or indigenous must be properly assessed.

• A prudent lender shall always ensure that the enterprise will be able to get the required raw material at competitive rates.

Raw Material

Skilled Labour

There is no dearth of unskilled labour in any

part of the country. But some enterprises

require highly skilled labour, which may not

be available at all places.

Availability of power and fuel is very much

essential for certain enterprises and in some

industries the requirement is uninterrupted

power.

Power and Fuel

Certain enterprises like chemical unit or a

tannery require abundant supply of water.

Water

• Inadequate transport facilities can adversely

affect an otherwise sound project.

• Certain units, which have railway siding, save

a lot on transportation costs and may fare

better than those with transport bottlenecks.

• Special care should be exercised while

granting loans to projects in remote areas 

Transport Facilities

• Sometimes technical processes are adopted from

abroad without due regard to differences in

climatic, geographical and economic conditions.

• If any imported technical process is involved,

the technology has to be fully examined by a

specialist agency, to ascertain whether it suits

Indian conditions.

Technology

• The success of a project is also dependent on its proper

location, yielding advantages like nearness to the source of

raw material, market, skills, etc. 

• The importance of these aspects shall vary from product to

product depending upon its nature and type. 

• Like cement or steel industry has to be near its raw material. In

the case of sports goods and handicrafts, where skill is very

important the unit should be at a place where skilled labour is

available.

Location

• An examination of this aspect is very important and any

slackness in this regard may prove costly for the lender.

• Even if the borrower is honest and competent and

physical facilities are also available, if the final product

is not saleable, all finance is bound to prove a waste.

• For investigating the marketing potential, an examination

of the following aspects may be required………

Market

The Total Demand and Supply of the Product

• The total demand and supply position of a

product as envisaged by the borrower should

be properly examined.

The Past Trend of Sales and Inventory Hold–Ups

The financial statements of the earlier years

shall reveal the trends of sales, i.e., whether they

are stagnant, increasing or decreasing.

Increasing accumulation of finished goods every

year may also indicate low saleability unless

otherwise explained for.

The Stage in the life Cycle•  Normally every enterprise during its lifetime passes

through four stages, namely, infancy, growth, maturity and saturation or decline. During the “infancy” stage the enterprise will have low sales and a lot of teething problems too.

• The financial requirements for long-term investments shall be high and the working capital will also be high as compared to volume of business.  

• This is like an ‘experimental stage ‘ and mortality rate is quite high. 

• But if the project is well planned it will reach

the growth stage during which the sales will

grow very rapidly and an increased plant

capacity will be utilized.  

• This can be called as the exploitation stage and

due to rapid growth of sales the working

capital requirement shall be high at this stage. 

• Once the installed capacity is fully utilized, the enterprise may move to the maturity stage where the sales shall become stagnant, as they cannot be increased in spite of existing demand.

• It affects the competitive strength of the enterprise.

•  Decline may also set in due to appearance of product substitutes or the saturation of demand.

• The efficiency of a good management lies in forestalling the “maturity” or “decline” stage by taking suitable steps in advance.

The scope and Area of market• Some times the enterprise has orders from a

department of the government and they are going ahead on the strength of that, the banker must examine its saleability otherwise also incase the Government department or any company user cancels the order the enterprise should not find it difficult to sell.

• The contract between the parent company with the ancillary unit should be carefully examined.

The Nature of Competition• The competitive position of the enterprise

needs to be examined in detail. This is possible only when details of other enterprises in the industry with regard to capacity utilization, age of plant and machinery, technology adopted, costs, prices etc. are also available.

• These facts if available, shall help in making a comparative study for working out cost advantages and finding out the nature of competition within industry

• Besides examining the present marketing position of the product, the possible future market potential should also be examined.

• Such estimates for future can never be wholly accurate or absolutely reliable. Even in developed countries where adequate data is available and the latest statistical techniques are employed for forecasts, they only prove as probable or at best approximations.

• We can say that very accurate estimation is neither possible nor aimed at, but estimate may still help in approximating the range within which the demand for any product will vary.

• The banks have to examine the installed capacity as compared

to the demand of the product.

• Whether the technology used is appropriate not outdated. It

should be examined that when the need is of low precision, a

high caliber machine with high cost should not be installed,

and vice versa.

• This may be counter productive and uneconomical. The plant

and machinery should have a balanced process with the least

bottlenecks.

Machinery

The money is required for two purposes, i.e., to acquire capital assets, and to meet working capital requirements.

The financial requirements for these two purposes can be partly met by own investment in the form of capital together with reserve funds, if any, and partly by loans and advances from institutional as well as non-institutional sources.

For acquiring capital assets, either long term or medium term loans may be required. These are called term loans.

For working capital purposes, loans are required for a short duration. It is called working capital facilities.

Money

• These are required to acquire capital assets like land and building, plant and machinery.

• Large incorporated bodies will finance these by issuing equity, debts etc but the small firms have to depend on borrowings from banks and other term lending institutions for this purpose.

• In the case of term loans, banks shall have to find out the probability of the borrower being able to meet the interest and the installment of the loan.

Term Loans

• These are required to hold inventory consisting of

raw materials, stores, work in process and the

finished goods and debtors arising out of credit sales

and also to meet other day-to-day obligations and

expenses.

• Some of these expenses are financed by creditors

and also advance from suppliers. The difference is

to be financed.

Working Capital Facilities/Short Term Loan

The banks because of their maturity pattern of deposits, which are mostly payable on demand and even there is provision for premature withdrawal of term deposits, prefer to grant working capital finance in the form of:

1. Cash credit against hypothecation or pledge of stocks.

2. Overdraft

3. Bill discounting facility

4. Loans against Book Debts.

5. Working capital term loans.

6. Non-fund based facilities in the form of letters of credit and bank guarantees.

7. Export finance in the form of pre shipment credit and post shipment credit.

• Banks do not finance whole of the working capital required but the borrower is required to bring in margin, which is generally to the extent of 25% but can be less also. 

• The principle is that the finance should not be excessive so as to give scope for diversion of funds and also should not be less as the enterprise may come to stand still.

Other Services

offered by banks

1. Internet Banking

2. Telephone Banking

3. Mobile Banking

4. On-line trading in shares

5. Bills payment on- line

6. Booking air/ railway tickets on- line

7. Bills payment on-line

8. Cash Management Services

9. On-line remittance facility-RTGS/NEFT etc

10. Sale of third party products – Mutual fund

schemes/insurance

11. Safe Custody

12. Safe deposit vault

13. Depository Services

14. Tax payments on-line

15. Counseling Services

• In today's competitive market place, effective management of cash flows can make the difference between success and failure

• The cash management product usually offers corporate customers fast track cheque collections, speedier release of funds and profitable funds management, at a reasonable cost

• Payments received from buyers and made to suppliers of a corporate client are efficiently processed to optimize cash flow position and to ensure the effective management of business' operating funds

• The flow of receivables and payables can also usually be seen on-line.

Cash Management Services

With a view to adding value to banking services and making available the numerous benefits of depository system to clients, banks in India offer Demat services through either Depositories viz. National Securities Depository Limited (NSDL) or Central Depository Services (India) Ltd. (CDSL) or both by becoming a sub-participant.

Depository Services

The following are the usual objectives of counseling services provided by some banks.

• Advising on gaining access to structured financial system including banking

• Creating awareness among the public about financial management

• Counseling people who are struggling to meet the repayment obligations and helping debt resolution

• Helping in rehabilitation of borrowers in friendly and timely guidance not only to mitigate the immediate stress of the trapped individuals and their households, but also to help to infuse confidence in others who are in distress.

Counseling Services

Relationship between banker and customer

• The relation of debtor and creditor:• The relation of banker and customer is primarily

that of debtor and creditor and the respective position is determined by the state of the account.

• The money deposited in a bank becomes the property of the bank and is absolutely at its disposal.

• The bank has to return the money to the customer on his demanding in a manner as agreed and as per the practice.

• The bank is not required to return the same notes as were accepted.

• The creditor (depositor) must demand payment • In the case of deposit in a bank, the debtor (bank) is

not required to repay the amount on his own. It is essential that the depositor (creditor) must demand the payment of the deposit in a proper manner. If the bank returns the money on its own then the bank will be dishonoring the cheques of the customer.

• According to statutory definition of banking, it is clearly stated that the deposits are payable on demand. This way the relationship of a banker and customer differs from the ordinary relationship of debtor and creditor.

Differences (Relationship of debtor and creditor)

Proper place and time of demand

• The demand by the customer (creditor) must be made at a proper place and at a proper time. A bank may have number of branches but the depositor (creditor) has to make his demand at the same branch unless the bank has agreed to pay money at other places. The demand must be made during banking hours and on working days.

The demand must be made in proper manner

• The demand for money must be made in a proper manner i.e., through cheque or by an order or in a mode, which is of common usage.

• Nowadays the facility of ATMs are available where the amount can be withdrawn without cheques but one have to order the bank through machine after putting his password/PIN.

Banker as Trustee• Trustee is a person who holds valuables,

articles or may be money in trust. Normally in the usual course of banking i.e., accepting deposits, the bank is not a trustee otherwise he has to return the money in the same form, same notes as were accepted by them.

• The example of trustee is that when a customer deposits his securities or other valuables with the bank.

• The position of the bank, whether he is a trustee or debtor depends on the circumstances of each case

• The relationship between the banker and customer as a trustee and beneficiary depends on the specific instruction given by him to the bank regarding the purpose and use of money and documents entrusted to the banker.

Banker as Trustee

Banker as agent

• When a banker buys or sells securities on behalf of his customer, he performs an agency function. Similarly, when he collects cheques, dividends, bills or promissory notes on behalf of his customer, he acts as his agent.

• Besides he may also act in other agency capacities, for example, as trustee, attorney, executor, correspondent or a representative.