Returns, Inspections, Winding Up

 CAMEL Model

·         Capital Adequacy

·         Asset Quality

·         Management

·         Earning appraisal

·         Liquidity and

·         Systems and Controls

OSMOS – Off-site Monitoring and Surveillance

RBI ensures that banks operate within set norms by conducting on-site inspections and off-site monitoring.

On-site inspection is followed by Supervisory Letter

Quarterly on-site visits are undertaken in respect of newly licensed banks during first year.

Frequency of First Tranche Returns(March 1996) is monthly / quarterly / half-yearly.

Second Tranche of OSMOS returns cover Liquidity and Interest rate exposures were introduced in July 1999

Under Section 37 of the BR Act, a moratorium order can be issued by the High Court for a maximum total period of Six Months.

When a banking company is placed under moratorium under Section 45 of BR Act, the RBI must prepare a scheme for reconstruction of the company or amalgamation with any other bank.

An order for winding up a banking company can be issued by The High Court.

Regulation and Control on Deployment of Funds (144)

Regulation and Control on Deployment of Funds (144)

·         The Present CRR and SLR requirement are 3% and 25% respectively.

·         New prudential Accounting Norms cover Capital Adequacy, Income Recognition, Asset Classification and Provisioning

Capital Adequacy

Income Recognition and Asset Classification / Provisioning

·         No income can be taken to Profit and Loss account if the interest / installment in a borrower account remains unpaid for a period of more than two quarters from the ‘past due’ date. The account has to be designated as NPA.

·         Banks are required to classify accounts according to its performing or non-performing. While interest on performing assets can be taken to P & L, interest on NPA cannot be taken to P & L

·         Banks has to make provisions for NPA.  Longer the NPA, higher the

provisioning.

Deregulation of Interest Rates

Post-Reforms Regulation of Banks

On-site Inspections and Off-Site Surveillance

Asset – Liability Management

Prudential Regulatory Measures

An advance is required to be classified as NPA if it is interest / installment is not received for 90 days.

Reserve bank has also laid down Prudential Exposure Limits under which a bank cannot lend in excess of 15% of its paid-up capital and free reserves to a single borrower and 40% to a group of borrowers.

The first Tranche of OSMOS returns

DSB1	Monthly report on Asset Liability and Off Balance Sheet Exposures
DSB2	Quarterly report on Capital Adequacy
DSB3	Quarterly Operating Results
DSB4	Monthly report on Asset Quality
DSB5	Quarterly Report on Large Credits
DSB6	Quarterly Report on Connected Lending
DSB7	Half-Yearly Report on ownership and Control

The Second Tranche of OSMOS returns
DSB 8	Monthly Return on Structural Liquidity
DSB 9	Monthly Report on Interest Rate Sensitivity
DSB 10	Monthly Report on Sensitivity to Interest Rates – Forex
DSB 11	Monthly Report on Maturity and Positio
DSB 12	Quarterly  Report on  Operations  of  subsidiaries,  Associates,  Joint
	Ventures

Various Types of Account

Minor

Minor means a person who is below 18 years of age

According to the Indian Contract Act, a minor is under a legal incapacity to enter into a contract and therefore any contract with minor is void. Thus minor has to have a guardian of his person and property.

·         Whether a minor can draw a valid cheque – Section 26 of the NI Act provides that minor may draw, endorse, deliver and negotiate a negotiable instrument and so minor can draw a cheque. Ordinarily balances in such accounts are subject to a maximum specified amount and that the age of the minor is above 13 years. The account can be continued when the minor attains the majority. It is advisable to take a confirmation of balance in the account signed by him immediately on attaining majority

·         Whether he would, on attaining majority be bound by the withdrawals made by him when he was a minor – yes.

·         No Loan /Overdraft can be given to minor. This is because, a minor can make others liable on the Negotiable Instrument, but he himself cannot be made liable.

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·         Even though a minor is not competent to contract, he can be appointed and act as agent for another person competent to contract. That is he can be agent of his father, but he will not be personally liable for what he does on behalf of the major.

·         A minor below age of 7 can not open an account independently

·         Under Section 30 the Indian Partnership Act, a minor can be admitted to the benefits of the partnership. But the minor is not liable personally for the debts of the firm.

Lunatics

Joint Hindu Family

Joint Account Holders (207)

A joint account is an account opened by two or more persons Insanity of a joint account holder Insolvency of the Joint account Holder

Death of a Joint account Holder As the mandate taken for the operation of the account also deals with survivorship, on the death of one of the joint account holders, the survivors are entitled to the whole amount both under the law of devolution applicable to joint owners and by the customer of bankers. Where the mandate is operation by joint signatures and if one of them dies, the balance is payable (or recoverable from if debit balance) to the survivor and the legal heirs of deceased (or recoverable from estate of deceased in case of debit balance).

Accounts in the Name of Joint Hindu Families (JHF) The members of the family are called coparceners and the eldest male member is the manager or the Karta. When an account in the name of the JHF is opened all the adult coparceners are to sign the Account opening form, even though the Karta would operate on the account.

Accounts in the Name of Partnership Firms (106)

A partner has no authority to give a guarantee on behalf of the firm and if such guarantee is to be given, it should be signed by all partners.

Retirement of Partner

Death of Partner: The death of partner has the legal effect of dissolving the firm, as his legal heirs cannot step into his shoes. The surviving partners have the right to carry on the business for the purpose of winding up.

Any cheque presented for payment should be paid only with the consent of the surviving partners

When the account is in debit balance, the operations should be stopped to fix the liability of the deceased partner.

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Insolvency of partner: Insolvency of any partner will result will result in the dissolution of the firm. A cheque signed by such a partner should not be honored without the confirmation from other partners, who may continue to operate the account for winding up the business.

Partnership account and the partner’s private account

Position of a Minor: under Section 30 the Indian Partnership act, a minor can be admitted to the benefits of the membership. He can therefore become a partner and act as a agent on behalf of the other partners of the firm. But the minor is not liable personally for the debits of the firm.

Collecting Banker – Duties and Responsibilities (84)

1.    Protection available to Collecting Banker

Holder For Value – banker parted with funds before collecting the proceeds of the cheque.

2.    Non-liability of a Banker Receiving Payment of a Cheque Requirements of Section 131

Crossed Cheques – No Statutory protection is extended to cheques which are forged.

Collection on behalf of Customers –The collection should be done on behalf of its Customer.

Receive Payment in good faith and without negligence

Where the endorsement on the cheque or the drafts is fictitious and the collecting bank failed to check it, the collecting bank was not protected under section 131.

If Collecting Bank does not confirm the endorsement on the reverse of the cheque the drawee bank would not be entitled to any protection.

Negotiable Instruments

Bankers’ Duties and Responsibilities (76)

The duties of Paying Banker as regards crossed cheques – Section 126 to 129.





126       Where a cheque is crossed generally/specially



127       Crossed specially to more than one banker except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof.



128       Protection to Paying Banker



129       Crossed generally/specially otherwise to the banker shall be liable to true owner of the cheque for any loss he may sustain.





Section 128: Protection to Paying Banker

Section 131: Protection to Collecting Banker

Paying Banker – Duties and Responsibilities

·         Payment Of Cheques

·         Precautions to be taken

1.    Open or Crossed Cheques

2.    Payment at the branch where account stands

3.    Mutilated Cheques

4.    Cheque must be drawn in proper form

5.    Post-dated/Stale

6.    Stale Cheque – A cheque in circulation for an unreasonably long period is said to be stale.

7.    Amount in words and figures should tally: - if it is stated differently in figures and in words, the amount stated in words shall be the amount ordered to be paid.

8.    Payment within banking hours: Section 65 of N.I. Act: Payment of cheques after banking hours are not ‘Payment in Due Course’ and not eligible for protection under section 10 of the N.I. Act.

9.    Alternation :

10. Material Alternation : Section 87 of NI Act

11. Computational Balance : ‘Effects not cleared, Please present again’

12. Endorsements

13. Forged Signature

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Payment of Cheques and Protection to the Paying Banker Section 10, 31, 85,85A, 87, 89, 126 to 130 of N.I. Act

Section
10	Payment In Due Course	Means  payment  in	accordance  with  the
		apparent  tenor of  the  instrument  in  good
		faith and without negligence to any person in
		possession  thereof	under  circumstances
		which do not afford reasonable ground for
		believing  that  he  is  entitled  to  receive
		payment of the amount mentioned.

Holder For Value – where a banker has parted with funds before collecting the proceeds of the cheque from another banker, the banker is holder for value.

Dishonor of Cheques (92)

The cheque is considered to have bounced and the drawer is considered to have committed offence. But when the drawer has intimated the payee that he shall not present the said cheque without his prior consent in that event such cases will not fall within the frame of Sections 138 to 147.

Banking Operations – Negotiable Instruments

Banking Operations – Negotiable Instruments

Where a bill of exchange, promissory note or cheque is transferred to any person, the instrument is said to be negotiated.

	Cheque	Bill Of Exchange
Drawee	Always drawn on a banker	Not necessarily be drawn
		on a banker
Pay ability	Payable on Demand	May   be   payable   on
		demand  or  may  be  on
		future date
Maturity	Grace Period is not allowed	Three days grace period
		given usuance bill.
Crossing	It can be crossed	Cannot be crossed
Notice Of Dishonor	No notice of dishonor given	Notice of dishonor to be
		given to the drawer.and
		other parties entitled to
		receive the notice.,

Crossing Of Cheques

General Crossing (123)

Not Negotiable Crossing (130)

Special Crossing (124) where a cheque bears across its face in addition of the name of the banker either with or without the words ‘Not Negotiable’

Holder

Holder in Due Course

Endorsement Of Cheques

1.    Endorsement in Blank

2.    Endorsement in Full

3.    Conditional Endorsement – In normal circumstances endorser binds himself to pay upon no other condition than on dishonor of the instrument on due notice of dishonor to him.

4.    Restrictive Endorsement – right of negotiation restricted or excluded by the endorsement. If the instrument is Pay to Mr.M.M. Lal only, then Mr.Lal’s right to negotiate is restricted.

5.    ‘Sans Recourse’ Endorsement – Without recourse/liability to me