LLB Banking Notes

Law Students Federation
LL.B. Notes
5th Semester

My Fair Garden, Flat # 103, Beside Ohris, Petrol Bunk, Hyderabad.
Abdul Kareem, 7799224814
Law of Banking & Negotiable Instruments

Q1. Explain Historical background of development of banking system with specific reference
to banking regulation act.
Ans. Bank means to collect first bank was established in England in 1640 during the period of
king Charles II & it was known as Bank of England. This bank had functions to accept
deposit of the people & make them payment whenever they demand it. Later on 1850
commercial bank was established in America. The result of bank was better & therefore
in 1890 BHARATH BANK was established in India. Later on more banks come by
different names such as Industrial bank, commercial bank & money transaction bank.
In 1934 reserve bank act was passed in India. Reserve bank had powers to print
& circulate currency notes in addition to these reserve bank have to give license to open
more banks after independence there is rapid growth of banking sector in India.
Therefore it is called as BANKS ARE BACK BONE of Indian economy.
Kinds of banks:- There are different kinds of banks which develop in India & these
banks are as follows.
1. Private bank:- Private bank can be established by minimum 7members & maximum
50members, these founder members makes investment to start the bank.
2. Public bank:- In public bank there are minimum 7members & maximum there is no
limit, public bank collect by allotment of shares.
3. Government bank:- In 1969 the then prime minister Indra Gandhi nationalized 14
private banks, again in 1971 there was nationalization of 6more banks. Nationalization
means private banks were taken over by government, private banks were given loan
only to rich people, after banks nationalization every common men can be barrow loan
according to procedure.
4. Co-Operative bank:- There are many banks established by people of particular caste
& religion & these are called as Co-Operative banks. It includes urban co-operative bank
& rural co-operative banks.
5. Industrial finance bank:- These banks advance loan for the purpose of industries.
These loans are given for long term & also these bank give subsidy for new industries.
6. Housing development bank:- These bank advance loan for construction of house in
rural & urban areas.
7. Foreign bank:- Central government has given license to foreign country banks to start
business in India because of these banks local people gets employments & government
gets taxes.
Law Students Federation; My Fair Garden, Flat # 103, Beside Ohris, Petrol Bunk, Hyderabad. Abdul Kareem, 7799224814 Page 1


Banking Regulation Act 1949:- In order to regulate the banking regulation act 1949 &
made following provisions.
1. Any bank to be open by obtaining license from reserve bank of India.
2. Every bank has to deposit percentage of amount as deposit in reserve bank, which is for
security of small depositor up to 1lakh rupees.
3. Reserve bank has to be follows policy decision of finance ministry of India.
4. In order to open new branches permission of reserve bank is necessary.
5. Audit of every bank to be done by auditor who is charted accountant & copy of audit
report can be send to reserve bank every year.
6. Bank can also collect capital by allotment of shares.
7. Every bank to hold annual general meeting & get approval of balance sheet of profit &
loss account.
8. There is no need for government bank to hold meeting.
9. There should be elections of directors of the bank.
10. In government bank directors are appointed by government.
These are details about development of banks in India & banking regulation act
1949.


Q2. Explain role of banking business & its importance in modern times in economy of the
country.
Ans. Banking business includes different types of transaction carried by bank after
introduction of information technology again there is rapid development in banking
business, it can be summarized by as follow.
1. Opening of new account;- Bank open new account according to procedure such as
fulfill application form, to affix photos, to give introduction by account holder & to
enclosed documents of identity proof & residence proof.
2. Issue of passbook:- Bank will issue passbook to account holder, in passbook there
are entries relating to deposit, withdraw & interest paid by banker. It is called as credit &
debit account.
3. Issue of cheque book:- Banker may issue cheque book to account holder on his
demand, he can issue cheque to any party for payment.
4. Collection of cheque amount:- Bank may accept cheque of any other bank deposited
by customer, bank may send cheque for clearance & collect your money from other bank
& deposit in the account.
5. Issue of demand draft:- When anybody makes payment of money & commission then
bank issue DED. DD may be issued in name of any party (or) legal person.
6. Loan advancement:- Bank may advance loan by taking security for lawful purpose.
Loan may be given for education, hospital expenses, to purchase property, for
construction, for business, industry, it is given by pledge of articles such as gold loan is
also given by mortgage of immovable property, bank may also take surety to advance
loan.
7. Bank guarantee:- Bank may give guarantee which is accepted by any party, these
guarantee is given after taking security from the party.
8. Fixed deposit bond (FD):- Bank accept fixed deposit for particular term, after expiry of
the term payment is made with interest called as maturity of the bond, before maturity
also bond can be cancelled & bank make payment by relating interest.
9. ATM Card:- Banker issue ATM card on request of customer there is pin code no of
ATM card by using pine code no customer can draw money round the clock.
10. Credit card:- Bank may issue credit card on request of customer & purchasing can be
done by using credit card up to its limit.
11. Debit card:- In debit card customer makes payment by using the card.
12. Bank insurance:- Bank also accept the insurance of customer according to procedure.
13. Online payment:- On instruction of customer bankers also makes online payment
such as payment of insurance, payment of electricity bills, payment of taxes.
These are details about importance of banking business in modern times.


Q3. What is relationship of bankers & customer as creditor, debtor, trustee, beneficiary,
bailor, bailee, specified in banking law.
Ans. Bankers have different relations with customers depend on nature of transactions, these
relations can be explained as follows.
1. Bankers as creditor:- Bankers is creditor when it advance loan to a customer, if

customer makes default to repay the loan amount then bank can file recovery suit &
obtain decree against the customer, property of customer is attached & sold by public
auction for recovery of loan amount.
2. Banker as a debtor:- When customer have deposited money in his account (or) taken
fixed deposit bond then banker is Debtor. When customer demands his money then
banker have to make payment. If banker refuses payment without any reason then
customer can file case & claim damages.
3. Banker as a trustee:- Banker is like a trustee because bank should not reveal account
details of one person to any other person, bank have to maintain secrecy of transaction
of every customer, bank have to show details when there is order of court (or) to her
authorities.
4. Bankers as beneficiary:- There is benefit to bank from all customers when loan is
sanctioned then bank take interest for DD bank takes commission, for cheque book bank
takes charges, for ATM card bank takes commission, when cheque is dishonor then
banker collect penalty, therefore banker is benefited & it is beneficiary.
5. Banker as bailor:- Banker is like a bailor, when bank advance loan for vehicle such as
Auto, Car, Truck, then possession is given to customer, document of vehicle are in name
of bank. If customer makes default to pay the installments then banker can take away
the vehicle without order of court.
6. Banker as bailee:- When bank advance loan then there is hypothecation of the goods
if gold loan is taken then possession gold is given to banker if goods are given in
possession then it Is called as hypothecation & banker is bailee, goods are released
after payment of loan amount & interest.
These are details about role of the banker as creditor, debtor, trustee, bailor,
bailee & beneficiary in banking law.


Q4. Explain the provision of cheque & its kinds, what are grounds of dishonor of cheque &
remedies available against dishonor.
Ans. Cheque is issued by the bank only to account holder on his demand, there are no. of
leaves in a cheque book, & it is issued after making entries in bank record by issue of
cheque account holder can make payment to any party (or) legal person, every bank
issue separate printed proforma of cheque.
Content of cheque:- Cheque is printed & its contents following details.
1. There is name of the bank.

2. There is date.
3. There is space for writing name.
4. There is space for signature.
Cheques have to be issue by interesting complete details.
Kinds of cheques:- Following are different kinds of cheques.
1. Bearer cheque:- In these cheque there is no crossing name of the bearer of the
cheque is mentioned he can present the cheque in respective bank & gets payment on
demand banker have right to ensure identity before payment, anybody can present & get
the amount at counter.
2. Crossed cheque:- In crossed cheque 2parallel lines are drawn at left corner of the
cheque. In parallel lines it can be written as a/c payee (or) payees a/c & (or) company.
These cheque have to be deposited in the account of any bank by account holder & after
clearance he can draw money, banker deposit amount in his account, these cheque can
be passed on to any other party by making enforcement on back side of the cheque.
3. Not negotiable cheque:- there is also crossed cheque but in parallel lines words are
written as NOT NEGOTIOABLE, these cheque have to be deposited in respective
account, it cannot be passed on to any other party by endorsement.
4. Bankers cheque:- These cheque is issued by bank after accepting amount &
commission, there is signature of bank officer on these cheque, it is like a DD & after
there is no scope to dishonor banker cheque.
5. Pre dated cheque:- These cheque is having earlier date, these cheque have to be
deposited in account within 3months period, after 3months pre dated cheque is not valid.
6. Post dated cheque:- There is future date on post dated cheque that cheque can be
deposited on particular date (or) after that within 3months period, it cannot be deposited
before date.
7. Legal person cheque:- These cheque is issued in name of legal person, such as
company, corporation, institution, it can be deposited in respective account, it can be
draw by authorized officer.
8. Multi lated cheque:- Meaning of multilated is pasted cheque banks should not accept
multi lated cheque folded cheque is valid.


Grounds of dishonor of cheque:- Dishonor of cheque can be done non acceptance
(or) non payment on following points.
1. When there is insufficient balance in the account.
2. When maturity period of cheque is over.
3. When amount in words & figure is different.
4. When specimen signature does not tally.
5. When there is alteration (or) overwriting on the cheque.
6. When it is joint signature cheque & one of the party did not sign it.
7. When party who has issue cheque made stop payment.
Remedies for dishonor:- Remedies is available to effected party under section 138 of
negotiable instrument act.
1. Party have to issue notice to make payment within 1month period from the date of
dishonor.
2. After expiry of 1month case have to be file within 1month period in court having
jurisdiction.
3. Judge makes hearing of both sides.
4. When charges are proof then judge can give imprisonment up to 2years (or) fine up to
double the amount of the cheque (or) both.
5. Party can make appeal in superior court.
6. These is compoundable offence & parties can make settlements.
These is details about cheque its kinds, grounds of dishonor & remedies available
effected party.


Q5. Explain the term negotiable instrument & its kind. Distinguish between promissory notes
& bill of exchange & bill of exchange & cheque.
Ans. Negotiable means transferable & instrument means document. A document which can
be converted into money is called as Negotiable Instrument. There are 3kinds of
negotiable instrument.
Promissory notes:- Promissory note is printed proforma (or) document executed

between parties, promissory note contain following details.
1. There is title as promissory note.

2. There is name of the creditor.
3. There is name of debtor.
4. Amount is mentioned in words & figures.
5. Rate of interest is mentioned.
6. Period for which loan is given is mentioned & it should not be more than 3years.
7. Renewal of promissory note is allowed.
8. There is signature of debtor.
9. It is attested by witnesses.
10. Signature is taken on revenue stamps.
If debtor makes default then creditor can file case by enclosing promissory note &
obtain decree from court & attach the property of debtor to recover the loan with interest.
Bill of exchange: In bill of exchange there are 3parties & these are drawer, drawee,
payee. Bill of exchange includes draft banker cheque & pay order, following are the
points relating to bill exchange.
1. Payment is done in one bank called as drawer.

2. There is name of the payee.
3. Bankers take commission to issue bill of exchange.
4. It is on bank proforma.
5. There is name of the bank, date, name of the person, name of the drawee & signature of
bank officer.
6. Payee can take money on demand if it is bearer DD.
7. If it is crossed DD then payee can deposit in the account & draw money.
Cheque:- Cheque is in proforma of the bank cheque is issued by account holder,

cheque contains following details.
1. There is printed name of the bank.
2. Date & year is mentioned.
3. There is name of payee.
4. There is amount in words & figures.
5. There is signature of account holder & it should be specimen signature.
6. Cheque can be bearer cheque (or) cross cheque.
7. Validity period of cheque is 3months.


Promissory note Bill of exchange
There are only 2parties in promissory note There are parties in bill of exchange & they
& they are promissor & promisee are drawer, drawee, & payee.
There is signature of promiss (or) debtor There is signature of relevant officer on bill
on promissory note. of exchange.
There is rate of interest specified on There is no rate of interest on bill of
promissory note. exchange.
Limitation period of promissory note is Limitation period of bill of exchange is
3years. 3months.
Bill of exchange Cheque

There is commission on bill of exchange There is no commission on cheque except
bankers cheque.
There is signature of bank officer on bill of There is signature of account holder on the
exchange. cheque.
There is payment of amount in advance in There is no need of advance payment but
bill of exchange. there should be amount in the account
when cheque comes for enchashment.
Bill of exchange is on proforma of the Cheque is on proforma issued by banker to
bank. the party having account in the bank.
There is no scope for dishonor of bill of Cheque may be dishonor on various
exchange. grounds by the banker.
This is details about kinds of negotiable instrument & distinction between

promissory note & bill of exchange & bill of exchange & cheque in negotiable instrument
act 1881.


Q6. What are statutory protections available to paying banker.
Ans. Bank carries multiple functions it accept deposit & also makes payment daily there are
thousands of transactions carried by a bank & therefore some protections are given to
paying banker. These protections are as follows.
1. Opening of account:- Anybody can open account in the bank according to the
procedure, he has to give proof of age, proof of address. If anybody opens bogus
account by producing forged document & do transaction in the account then banker is
having no liability. If his address is false then banker have protection, bank cannot play
the role of police officer to verify the address at the time of opening the account.
2. Endorsement:- A cheque (or) draft can be passed on by endorsement by one party to
other party any no of endorsement can be done & last endorsement can deposit in his
account, if bank find that’s many endorsement are bogus then also bank is not liable,
bank cannot verify signature of endorsement.
3. Payment in bearer cheque:- When bearer cheque is lost & found to irrelevant party
then also he can encash it. In bearer cheque banker have to make payment to person
who produce the cheque, if irrelevant party receive the payment then cheque holder
cannot claim damages, this is statutory protection to paying banker in case of bearer
cheque.
4. No crossing:- When customer demand bearer bill of exchange but banker have
crossed it (or) customer have demanded cross bill of exchange but banker have not
done it, there is no liability of banker & there is statutory protection, if this error is brought
to notice of banker then he has to rectify it.
5. Reasonable duty:- When cheque has been deposited then it should be send for
clearance without causing delay, sometimes there is heavy work & bank cause delay by
few days then there is protection to bankers, customer cannot claim interest for such
period.
6. Material alteration:- When there is alteration done on the cheque which is not visilble
& bankers makes payment of higher amount then there is statutory protection, if
alteration is visible then there is no protection to banker.
7. Closer of account:- Customer have right to close his account in the bank by giving
application, when account is closed then customer have to return unused cheques, if
customer did not return the cheques & these are issued to other parties then banker can
refuse payment because there is no account.
This are details about all statutory protections available to paying bankers in
banking law.


Q7. What are statutory protection available to collecting banker.
Ans. Collecting banker means banks which collect money at the counter (or) accept cheque
for clearance. Bank play the role of agent of the customer, cheque of any bank can be
deposited in the account by customer, following are the statutory protection available to
collecting banker in banking law.
1. Less collection:- When anybody deposit money & amount is heavy then banker my
take time to count the notes, banker may write denomination of the notes, if there is
deposit amount then banker can call the party to make payment of deficit amount, there
is statutory protection to collecting banker.
2. Delay in clearance:- Bank accept cheque of the customer deposited in the account,
clearance of the cheque to done without delay, if reasonable delay caused to send the
cheque for clearance then banker is protected.
3. Wrong entry:- If banker have done entry of collected amount in some wrong account,
then there is statutory protection, when customer bring it the notice of banker then it can
be rectified when customer bring it to notice, there is no liability of banker for mistake in
calculation of interest.
4. Different account:- A customer can open different account such as saving bank
account, current account, if collecting banker deposit money in saving bank account but
banker have deposited in current account then banker is protected.
5. Authorized officer:- In government account money is collected & paid to authorized
officer, if banker makes collections of money & makes payment to nay authorized officer
then banker is protected.
6. Endorsement:- A cheque (or) Draft can be passed to other persons by endorsement,
banker cannot verify signature of endorsers, last endorsee deposit cheque for clearance,
banker collect money & deposit in his account, there is no liability for not verification of
signature of endorser.
7. Deduction of TDS (Tax Deducted at Source):- Banker can deducted TDS on interest
of deposited amount, if income of customer does not comes under taxable limit, then
also banker is not liable for deduction of TDS, customer can claim the amount from tax
department if it is not taxable income.
These are the statutory protection to collecting bankers.


Q8. Brief explain provision of bankers lien & setoff, pledge, title of goods, letter of credit &
bank guarantee.
Ans. Banks carry multiple functions in modern period, it includes following point.
1. Bankers lien (Right of banker):- Lien means right to keep position when there is
mortgage (or) pledge to barrow loan then banker have right to lien.
Ex:- “A” pledge 10toula gold ornament & barrowed 1lakh rupees loan, customer have
paid 99,000/- rupees then also banker have lien on gold ornament for 1,000/- rupees,
bank can keep position of ornament till payment of loan amount with interest.
Ex:- “A” mortgage his house & barrowed 10lakh rupees loan from bank by depositing
original documents of the house, mortgagor have paid 9lakh rupees loan, then also bank
have lien on document of the house for 1lakh rupee unpaid amount.
2. Setoff:- Setoff means adjustment customer have right to give direction to banker for
setoff.
Ex:- “A” is having 80,000/- rupees in current account & 50,000/- in saving bank account,
he can apply for 1lakh rupee DD & mention in the form to deducted 70,000/- from current
account & 30,000/- from saving bank account, banker may do setoff & issue DD of 1lakh
rupee.
Ex:- “A” is having account in bank & there are 1lakh rupee deposit in the account “A”
wants 50,000/- rupees DD from his account “A” can give withdraw slip (or) DD there is
no need to make payment of amount of DD banker may deduct the amount from account
& issue the DD this adjustment in account is called as setoff.
3. Pledge:- Meaning of pledge is giving security of movable articles to barrow loan, it is

also called as PAWN person who give security is called as PLEDGOR (or) PAWNOR &
the person who takes security is called as PLEDGEE (or) PAWNEE banker have
security of the article if debtor makes default then banker can sale pledge article by
public auction & recover the loan amount.
Ex:- “A” kept gold ornament in bank as security & barrowed loan, this is called as pledge
in which “A” is pledgor & bank is pledge.
There is difference between pledge & hypothecation, in pledge article is in
position of pledge in hypothecation documents are in position but article is given to
pledger.
Ex:- “A” purchase a taxi car & barrow loan from bank car is given in position of “A” & he
has to pay installments of loan amount there is right of banker because it is
hypothecation.


4. Title of goods:- When goods are send to transport then receipt is taken for valuation of
the goods there is called as title of goods. Person who send goods to transport is called
as CONSIGOR & other party who has to take delivery is called as CONSIGNEE, title of
goods is send to consignee & it is called as HUNDI, consignee can produce HUNDI in
bank & barrow loan up to 75% of valuation of the goods, when goods come in transport
then consignee have to pay the loan amount with interest & obtain receipt of payment,
when these receipt is shown in transport then he can get position of the goods, therefore
purpose of Hundi is to get payment in advance when goods are send by transport.
5. Letter of credit:- On demand of customer bank can issue letter of credit, it is relating to
amount in his account, letter of credit is on letter pad of the bank signed by bank officer,
customer can produce letter of credit & issue the cheque & purchase the goods when
cheque is issued with letter of credit then it is acceptable to everybody, if cheque is
dishonor then bank is having liability, banker will not allow to withdraw the amount till
surrender of letter of credit.
Therefore letter of credit is convenient to purchase goods at other places.
6. Bank guarantee:- Bank also give guarantee on behalf of customer bank guarantee
accepted by government department & private parties it includes following points.
 Party has to give security of guarantee amount.
 Bank may issue letter with signature of bank officer.
 These guarantee is addressed to particular party (or) department bank will take
commission one time depend on guarantee amount.
 When security is withdrawn then bank can withdraw guarantee.


Short Questions:-
Q6. Dividend warrant.
Ans.
1. When anybody purchase share of a company then it issue dividend warrant every year.
2. It is depend on net income of the company.
3. If company fails to make income then share holder cannot get dividend warrant.
4. It is sent on address of share holder.
5. It is on company proforma called as pay order.
6. Share holder can deposit dividend warrant in his account.
Q7. Postal order & money order.
Ans. Post office may issue postal order in proforma it is less costly then bank DD, it includes
following points.
1. It is in rupees ten & multiple.

2. It is not exceeding 1,000/- rupees.
3. Post office put the stamp & there is signature of officer who issue it.
4. Amount is printed on it.
5. Post office may take commission on postal order.
6. Party has to write name of the payee.
7. It is having 3months validity.
8. It can be cancelled & put office make payment of face value & not commission.
Money order:- Money order may be send through post office it is of any amount, there
is name of sender & payee, post office charge 5% commission on amount of money
order, postman deliver it in cash to payee & obtain his signature & witness, if he
refugees to accept money order then it is return back to addresses but he cannot get
commission, money order should not exceed 10,000/- rupees amount.
Q8. Traveler cheque.
Ans. This cheque may be obtained by customer by advance payment of amount &
commission it is like a DD. On back side of the cheque there is signature of the customer
& it is attested by bank officer, customer can present traveler cheque in any branch of
that bank & enchashed it, customer have to put similar signature at the time of
enchasment, if it is not used then customer can cancel it in same bank & get his money
without commission, after introduction of ATM cards there is less use of traveler cheque,
it covers the risk of customer.

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These are details about importance of banking business in modern times.

1. Bankers as creditor:- Bankers is creditor when it advance loan to a customer, if

Content of cheque:- Cheque is printed & its contents following details.

1. There is name of the bank.

Kinds of cheques:- Following are different kinds of cheques.

Promissory notes:- Promissory note is printed proforma (or) document executed

1. There is title as promissory note.

1. Payment is done in one bank called as drawer.

Cheque:- Cheque is in proforma of the bank cheque is issued by account holder,

Bill of exchange Cheque

This is details about kinds of negotiable instrument & distinction between

Q6. What are statutory protections available to paying banker.

Q7. What are statutory protection available to collecting banker.

These are the statutory protection to collecting bankers.

3. Pledge:- Meaning of pledge is giving security of movable articles to barrow loan, it is

Q6. Dividend warrant.

Q7. Postal order & money order.

1. It is in rupees ten & multiple.

Q8. Traveler cheque.

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