Introduction
Banking law plays a critical role in regulating financial transactions, ensuring stability in banking institutions, and protecting the interests of customers. The Negotiable Instruments Act, 1881 (NI Act) governs the use of financial instruments like cheques, promissory notes, and bills of exchange.
This article explores the development of banking, banker-customer relationships, key banking laws, negotiable instruments, and related liabilities with landmark cases that have shaped banking jurisprudence in India.
1. Nature and Development of Banking
Banking has evolved from ancient money-lending practices to modern financial institutions that facilitate economic transactions.
A. Definition of Banking
As per Section 5(b) of the Banking Regulation Act, 1949, banking means:
- Accepting deposits from the public
- Lending money or making investments
- Providing financial services like fund transfers, credit issuance, etc.
B. Evolution of Banking in India
- 1770: First bank in India, Bank of Hindostan.
- 1806-1921: Formation of Presidency Banks (Bank of Bengal, Bank of Bombay, Bank of Madras).
- 1935: Establishment of the Reserve Bank of India (RBI).
- 1949: Nationalization of major private banks under the Banking Companies Act, 1949.
- 1991-Present: Liberalization led to entry of private and foreign banks.
Landmark Case: Keshavlal Khemchand & Sons v. Union of India (1958)
Facts: Question on whether a moneylender is a banker.
Court Ruling: A moneylender is not a banker as he does not provide banking services to the public.
2. Relationship Between Banker and Customer
A. Definition of Banker and Customer
- A banker is an entity providing banking services.
- A customer is anyone with an account or financial dealings with the bank.
B. Types of Accounts
- Savings Account – Interest-bearing account for regular transactions.
- Current Account – Non-interest account used by businesses for daily transactions.
- Fixed Deposit (FD) – Deposit for a fixed period earning interest.
- Recurring Deposit (RD) – Monthly fixed deposits for a specific period.
C. Contract Between Banker and Customer
- Based on principal-agent and debtor-creditor relationships.
- Bank’s duty: To honor cheques, maintain secrecy, and exercise due diligence.
- Customer’s duty: Provide correct information and maintain a minimum balance.
D. Banker’s Lien
- The right of a bank to hold a customer’s property for unpaid dues.
- Judicial Precedent: Punjab National Bank v. Jugal Kishore (1988) – A bank can sell pledged securities if a customer defaults.
E. Banking Instruments
Includes:
- Cheques
- Demand Drafts
- Promissory Notes
- Bills of Exchange
F. Banking Services
- Online Banking
- Loans & Credit Facilities
- Foreign Exchange Services
- Investment Advisory
3. Laws Regulating Banking Business
A. Banking Regulation Act, 1949
- Governs licensing, operations, and regulation of banks in India.
- Empowers RBI to supervise banking institutions.
B. Reserve Bank of India Act, 1934
- Establishes RBI as India’s central bank.
- RBI regulates monetary policy, foreign exchange, and liquidity.
C. Foreign Exchange Management Act, 1998 (FEMA)
- Regulates foreign currency transactions.
- Aims to prevent illegal foreign exchange dealings.
4. Negotiable Instruments: Meaning and Kinds
A Negotiable Instrument (NI) is a written document guaranteeing payment of money.
A. Types of Negotiable Instruments (Section 13 of NI Act, 1881)
- Promissory Note – A written promise to pay a sum to a specific person.
- Bill of Exchange – A written order directing a third party to pay money.
- Cheque – An order to a bank to pay money to a person.
Landmark Case: K. Bhaskaran v. Sankaran Vaidhyan Balan (1999)
Facts: Involved a bounced cheque under Section 138 of the NI Act.
Court Ruling: Established that jurisdiction for cheque dishonor cases includes the place where:
- The cheque was presented.
- The bank returned the cheque.
- The demand notice was sent.
5. Indorsement, Negotiability, and Assignability
- Indorsement: The act of signing a negotiable instrument to transfer rights.
- Negotiability: Allows the instrument to be transferred freely.
- Assignability: The right to transfer ownership of the instrument.
Landmark Case: Canara Bank v. Canara Sales Corporation (1987)
Court Ruling: A bank can be held liable for fraud if it fails to verify endorsements on cheques.
6. Holder and Holder in Due Course
- Holder: Any person entitled to receive payment.
- Holder in Due Course (HDC): A holder who acquires an instrument for value, in good faith, and without defects.
- HDC has better legal protection than a regular holder.
7. Rights and Liabilities of Paying and Collecting Banker
A. Paying Banker
A banker responsible for honoring valid cheques. Liabilities include:
- Wrongful dishonor of cheques.
- Payment on a forged cheque.
B. Collecting Banker
A bank that collects payments on behalf of customers. Liabilities include:
- Failure to verify endorsements.
- Negligence in collection duties.
Landmark Case: Indian Overseas Bank v. Industrial Chain Concern (1990)
Court Ruling: A collecting banker must exercise due diligence when handling cheques.
8. Dishonour of Negotiable Instruments & Criminal Liability of Drawer
A. Dishonour of Cheques (Section 138 of NI Act, 1881)
A cheque is dishonoured when the bank refuses to pay due to insufficient funds or other reasons.
B. Legal Consequences of Cheque Dishonour
- Demand notice within 30 days to the drawer.
- 15-day period for the drawer to pay the amount.
- Criminal prosecution if payment is not made.
Landmark Case: M/S. Modi Cements Ltd. v. Kuchil Kumar Nandi (1998)
Court Ruling: Even post-dated cheques can attract liability under Section 138.
C. Protection of Collecting Banker
- Under Section 131 of NI Act, a collecting banker is protected if they act in good faith and without negligence.
Landmark Case: Jugalkishore v. Raw Cotton Co. Ltd. (1955)
Court Ruling: Reinforced good faith protection for bankers.
Conclusion
Banking law is a dynamic field that governs financial transactions, ensuring trust and legal protection for both banks and customers. The Negotiable Instruments Act, 1881, plays a crucial role in ensuring the smooth functioning of payment systems. Landmark cases have further clarified the rights, liabilities, and duties of bankers and customers, strengthening banking jurisprudence in India.