What every Indian should know about Banking Laws, is subject to the point of view from one wants to look at the subject. There are banking practices, which are governed by the laws of the land. There are RBI guidelines and then there are Banks own code of conduct, and all of these are important aspects to understand Banking system and the laws governing them. To concise this vast subject, I would restrict this article only to the view of a banking customer. The various areas of banking offering that impacts them from a legal standpoint. To add to it, I will give retrospect of what to expect from RBI guidelines and give an example of the code of conduct laid by one of the largest public sector bank of India.
The age of modern banking goes back to late eighteenth century. Bank of Hindostan was one of the first to be established in the year 1770. It was the State Bank of India, which laid the foundation of modern banking in India post-independence in 1955. SBI was the amalgamation of 3 banks funded by the pre independence presidency government, namely Bank of Bengal, Bank of Madras and Bank of Bombay. As for the central banking authority (or may be referred as statutory body), for long Presidency Banks acted in this position, till in 1935 Reserve Bank Of India (RBI), took over the position, after the 1934 Reserve bank of India act was passed.
Although RBI was formed in April 1935, it was nationalised only in January 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948. Also in 1949, banking regulation act was enacted to give RBI power to regulate, control and inspect all Indian Banks. The two other major event worth a note in the history of modern year of banking are the nationalisation of 14 largest commercial banks in 1969, through banking companies bill. Later another set of 4 banks were merged, taking the count to 20. At this point more than 90% of all banking business in India was controlled by Govt. of India. Later in the 1990’s, post government liberalisation policies, a host of private players got an entry into India banking scenario under strict guidelines of RBI, with a regular scrutiny of ensuring the guidelines are met and any irregularities may lead to the disqualification of their licences.
To understand the various aspects of the banking laws, the view that we would go through is more customer centric. In order to do that we need to first understand the various roles that the bank plays and who would be qualified to be defined as their customer. Subsequently we can look at the laws that governs such relationship.
The Bank in summary plays the following roles, corresponding to the respective customers:
To understand these relationships better, we need to understand the meaning of Banking Company and who are its customers.
A company that transacts the business of Banking in India would be known as a Banking Company under the section 5 (b) of the Banking Regulation Act of 1949. The following would be the features of a Banking company.
(i) Dealing in money: The banks accept deposits from the public and advance the same as loans to the needy people. The deposits may be of different types – current, fixed, savings, etc. accounts. The deposits are accepted on various terms and conditions.
(ii) Deposits must be withdrawable: The deposits (other than fixed deposits) made by the public can be withdrawable by cheques, draft or otherwise, i.e., the bank issue and pay cheques. The deposits are usually withdrawable on demand.
(iii) Dealing with credit : The banks are the institutions that can create credit i.e., creation of additional money for lending. Thus, “creation of credit” is the unique feature of banking.
(iv) Commercial in nature: Since all the banking functions are carried on with the aim of making profit, it is regarded as a commercial institution.
(v) Nature of agent: Besides the basic function of accepting deposits and lending money as loans, bank possesses the character of an agent because of its various agency services.
A customer on the other hand would be a person or a legal entity who has accounts in the bank. Since the term customer is not defined by law, hence various view of banking experts and legal judgements are reviewed in order to qualify the term.
According to Dr. Hart, “a customer is one who has an account with a banker or for whom a banker habitually undertakes to act as such.” Supporting this viewpoint, the Kerala High Court observed in the case of Central Bank of India Ltd. Bombay vs. V.Gopinathan Nair and others (A.I.R.,1979, Kerala 74) : “Broadly speaking, a customer is a person who has the habit of resorting to the same place or person to do business. So far as banking transactions are concerned he is a person whose money has been accepted on the footing that banker will honour up to the amount standing to his credit, irrespective of his connection being of short or long standing.”
For the purpose of KYC policy, a ‘Customer’ is defined as:
– a person or entity that maintains an account and/or has a business relationship with the bank;
– one on whose behalf the account is maintained (i.e. the beneficial owner);
– beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and
– any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction.
Let us now look into various Banking relationships along with its legal conformities:
As a Banker, there are certain obligations that are laid by the law that it has to follow. These are:
(a) Disclosure of Information required by Law. A banker is under statutory obligation to disclose the information relating to his customer’s account when the law specially requires him to do so. The provisions are:
(i) Under the Income- Tax Act, 1961. According to Section 131, the income tax authorities possess the same powers as are vested in a Court under the Code of Civil Procedure, 1908, for enforcing the attendance of any person including any offer of banking company or any offer thereof, to furnish information in relation to such points or matters, as in the opinion of the income-tax authorities will be useful for or relevant to any proceedings under the Act. The income –tax authorities are thus authorized to call for necessary information from the banker for the purpose of assessment of the bank customers. Section 285 of the Income- tax Act, 1961, requires the banks to furnish to the Income-tax Officers the names and addresses of all persons to whom they have paid interest, mentioning the actual amount of interest paid by them.
(ii) Under the Companies Act, 1956. When the Central Government appoints an Inspector or to investigate the affairs of any joint stock company under Section 235 or 237 of the Companies Act, 1956, it shall be the duty of all officers and other employees and agents (including the bankers) of the company to-
(a) produce all books and papers of, or relating to, the company, which are in their custody or power, and
(b) otherwise to give the Inspector all assistance in connection with investigation which they are reasonably able to give (Section 240). Thus the banker is under an obligation to disclose all information regarding the company but no of any other customer for the purpose of such investigation (Section 251).
(iii) By order of the Court under the Banker’s Books Evidence Act, 1891. When the court orders the banker to disclose information relating to a customer’s account, the banker is bound to do so. In order to avoid the inconvenience likely to be caused to the bankers from attending the Courts and producing their account books as evidence, the Banker’s Books Evidence Act, 1891, provides that certified copies of the entries in the banker’s book are to be treated as sufficient evidence and production of the books in the Courts cannot be forced upon the bankers. According to Section 4 of the Act, “a certified copy of any entry in a banker’s book shall in all legal proceedings be received as prima facie evidence of the matters, transitions and accounts therein recorded in every case where, and to the same extent, as the original entry itself is now by law admissible, but not further or otherwise.” Thus if a banker is not a party to a suit, certified copy of the entries in his book will be sufficient evidence. The Court is also empowered to allow any party to legal proceedings to inspect or copy from the books of the banker for the purpose of such proceedings.
(iv) Under the Reserve Bank of IndiaAct,1934. The Reserve Bank of India collects credit information from the banking companies and also furnishes consolidated credit information from the banking company. Every banking company is under a statutory obligation under Section 45-B of the Reserve Bank. The Act, however, provides that the Credit information supplied by the Reserve Bank to the
banking companies shall be kept confidential. After the enactment of the Reserve Bank of India (Amendment) Act, 1974, the banks are granted statutory protection to exchange freely credit information mutually among themselves.
(v) Under the Banking Regulation Act, 1949. Under Section 26, every banking company is requiring to submit a return annually of all such accounts in India which have not been operated upon for 10 years. Banks are required to give particulars of the deposits standing to the credit of each such account.
(vi) Under the Gift Tax Act, 1958. Section 36 of the Gifts Tax Act, 1958, confers on the Gift Tax authorities powers similar to those conferred on Income- Tax authorities under Section 131 of the Income Tax Act.
(vii) Disclosure to Police. Under Section 94 (3) of the Criminal Procedure Code, the banker is not exempted from producing the account books before the police. The police officers conducting an investigation may also inspect the banker’s books for the purpose of such investigations (section 5. Banker’s Books Evidence Act).
(viii) Under the Foreign Exchange Management Act, 1999, under section 10. Banking companies dealing in foreign exchange business are designated as ‘authorized persons’ in foreign exchange. Section 36, 37 and 38 of this Act empowers the officer of the Directorate of Enforcement and the Reserve Bank to investigate any contravention under the Act.
(ix) Under the Industrial Development Bank of India Act, 1964. After the insertion of sub-section 1A in Section 29 of this Act in 1975, the Industrial Development Bank of India is authorized to collect from or furnish to the Central Government, the State Bank, any subsidiary bank, nationalized bank or other scheduled bank, State Co-operative Bank, State Financial Corporation credit information or
other information as it may consider useful for the purpose of efficient discharge of its functions. The term ‘credit information’ shall have the same meaning as under the Reserve Bank of India Act,1934.
(b) Disclosure permitted by the Banker’s Practices and Usages. The practices and usages customary amongst bankers permit the disclosure of certain information under the following circumstances:
(i) With Express or Implied Consent of the Customer. The banker will be will be justified in disclosing any information relating to his customer’s account with the latter’s consent. In fact, the implied term of the contract between the banker and his customer is that the former enters into a qualified obligation with the latter to abstain from disclosing information as to his affairs without his consent (Tourniers vs. National Provincial and Union Bank of India). The consent of the customer may be expressed or implied. Express consent exists in case the customer directs the banker in writing to intimate the balance in his account or any other information to his agent, employee or consultant. The banker would be justified in furnishing to such person only the required information and no more. It is to be noted that the banker must be very careful in disclosing the required information to the customer or his authorized representative. For example, if an oral enquiry is made at the counter, the bank employee should not speak in louder voice so as to be heard by other customers. Similarly, the pass-book must be sent to the customer through the messenger in a closed cover. A banker generally does not disclose such information to the customer over the telephone unless he can recognize the voice of his customer; otherwise he bears the risk inherent in such disclosure. In certain circumstances, the implied consent of the customer permits the banker to disclose necessary information. For example, if the banker sanctions a loan to a customer on the guarantee of a third person and the latter asks the banker certain questions relating to the customer’s account. The banker is authorized to do so because by furnishing the name of the guarantor, the customer is presumed to have given his implied consent for such disclosure. The banker should give the relevant information correctly and in good faith. Similarly, if the customer furnishes the name of the banker to a third party for the purpose of a trade reference, not only an express consent of the customer exists for the discloser of relevant information but the banker is directed to do so, the non – compliance of which will adversely affect the reputation of the customer. Implied consent should not be taken for granted in all cases even where the customer and the enquirer happen to be very closely related. For example, the banker should not disclose the state of a lady’s account to her husband without the express consent of the customer.
(ii) The banker may disclose the state of his customer’s account in order to legally protect his own interest. For example, if the banker has to recover the dues from the customer or the guarantor, disclosure of necessary facts to the guarantor or the solicitor becomes necessary and is quite justified.
(iii) Banker’s Reference. Banker follows the practice of making necessary enquires about the customers, their sureties or the acceptors of the bills from other bankers. This is an established practice amongst the bankers and is justified on the ground that an implied consent of the customer is presumed to exist. By custom and practice necessary information or opinion about the customer is furnished by
the banker confidentially. However, the banker should be very careful in replying to such enquiries. Precautions to be taken by the banker. The banker should observe the following precautions while giving replies about the status and financial standing of a customer:
(i) The banker should disclose his opinion based on the exact position of the customer as is evident from his account. He should not take into account any rumour about his customer’s creditworthiness. He is also not expected to make further enquiries in order to furnish the information. The basis of his opinion should be the record of the customer’s dealings with banker.
(ii) He should give a general statement of the customer’s account or his financial position without disclosing the actual figures. In expressing his general opinion, he should be very cautious—he should neither speak too low about the customer nor too high. In the former case he injures the reputation of the customer; in the latter, he might mislead the enquirer. In case unsatisfactory opinion is to be
given, the banker should give his opinion in general terms so that it does not amount to a derogatory remark. It should give a caution to the enquirer who should derive his own conclusions by inference and make further enquiries, if he feels the necessity.
(iii) He should furnish the required information honestly without bias or prejudice and should not misrepresent a fact deliberately. In such cases he incurs liability not only to his own customer but also to the enquirer.
(c) Duty to the public to disclose: Banker may justifiably disclose any information relating to his customer’s account when it is his duty to the public to disclose such information. In practice this qualification has remained vague and placed the banks in difficult situations. The Banking Commission, therefore, recommended a statutory provision clarifying the circumstances when banks should disclose in public interest information specific cases cited below:
(i) when a bank asked for information by a government official concerning the commission of a crime and the bank has reasonable cause to believe that a crime has been committed and that the information in the bank’s possession may lead to the apprehension of the culprit,
(ii) where the bank considers that the customer’s is involved in activities prejudicial to the interests of the country.
(iii) where the bank’s books reveal that the customer is contravening the provisions of any law, and
(iv)where sizable funds are received from foreign countries by a constituent.
Risks of Unwarranted and Unjustifiable Disclosure. The obligation of the banker to keep secrecy of his customer’s accounts – except in circumstances noted above – continue even after the account is closed.
If a banker discloses information unjustifiably, he shall be liable to his customer and the third party as follows:
(a) Liabilities to the customer. The customer may sue the banker for the damages suffered by him as a result of such disclosure. Substantial amount may be claimed if the customer has suffered material damages. Such damages may be suffered as a result of unjustifiable disclosure of any information or extremely unfavourable opinion about the customer being expressed by the banker.
(b) Liabilities to third parties. The banker is responsible to the third parties also to whom such information is given, if –
(i) the banker furnishes such information with the knowledge that it is false, and
(ii) Such party relies on the information and suffers losses.
Such third party may require the banker to compensate him for the losses suffered by him for relying on such information. But the banker shall be liable only if it is proved that it furnished the wrong or exaggerated information deliberately and intentionally. Thus he will be liable to the third party on the charge of fraud but not for innocent misrepresentation. Mere negligence on his part will not make him liable to a third party. The general principles in this regard are as follows:
(1) A banker answering a reference from another banker on behalf of the latter’s constituent owes a duty of honesty to the said constituent.
(2) If a banker gives a reference in the form of a brief expression of opinion in regard to creditworthiness, it does not accept and there is not expected of it any higher duty than that of giving an honest answer.
(3) If the banker stipulates in its reply that it is without responsibility, it cannot be held liable for negligence in respect of the reference.
It is important to briefly look around the legal aspects of certain Banking operations, which are relevant to the customers.
Cheques: Sec 6 of Negotiable Instrument act defines cheque as a bill of exchange drawn on a specified banker and is payable on demand. We are already familiar with the different way to issue a cheque, so without going into the details of with one important fact that all should know is around forgery of cheques. A banker has no legal right to debit a customer in case a cheque has been forged.
Indemnities: Situations where bank has to issue a duplicate instrument of demand to the customer (example a duplicate demand draft), bank ensures necessary protection against any losses through an agreement of indemnity with the customer. This is usually obtained through a form. Section 124 of the Indian Contract Act,1872 defines indemnity as, “ A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a ‘ Contract of Indemnity’.
Guarantees: In order to ensure loan repayments, bank has established method of Guarantees. A contract of guarantee is covered under the Indian Contract Act,1872. Sec 126 defines a guarantee as contract to perform the promise or discharge a liability of a third person in case of his default. There are other form of Guarantees accepted by the bank in terms of tangible assets.
There are host of rules that has been issues by RBI to banks on handling Deposit accounts and Customer complaints. Below are the highlighted ones for each category that is not so popularly known to all:
Importance of Customer Service and Customer Rights , established by RBI under the RBI Act: there is a signifiact importance that is given to customer especially with significant increase in customer both in terms of numbers and expectations. This is evidenced by a series of studies conducted by various committees such as the Talwar Committee, Goiporia Committee, Tarapore Committee, etc., to bring in improvement in performance and procedure involved in the dispensation of hassle-free customer service.
A set of general policies that has been laid by RBI to facilitate better experiences to the customers. These are:
(a) providing infrastructure facilities by branches by bestowing particular attention to providing adequate space, proper furniture, drinking water facilities, with specific emphasis on pensioners, senior citizens, disabled persons, etc.
(b) providing entirely separate enquiry counters at their large / bigger branches in addition to a regular reception counter.
(c) displaying indicator boards at all the counters in English, Hindi as well as in the concerned regional language. Business posters at semi-urban and rural branches of banks should also be in the concerned regional languages.
(d) posting roving officials to ensure employees’ response to customers and for helping out customers in putting in their transactions.
(e) providing customers with booklets consisting of all details of service and facilities available at the bank in Hindi, English and the concerned regional languages.
(f) use of Hindi and regional languages in transacting business by banks with customers, including communications to customers.
(g) reviewing and improving upon the existing security system in branches so as to instil confidence amongst the employees and the public.
(h) wearing on person an identification badge displaying photo and name thereon by the employees.
(i) Periodic change of desk and entrustment of elementary supervisory jobs.
(j) Training of staff in line with customer service orientation. Training in Technical areas of banking to the staff at delivery points. Adopting innovative ways of training / delivery ranging from job cards to roving faculty to video conferencing.
(k) visit by senior officials from Controlling Offices and Head Office to branches at periodical intervals for on the spot study of the quality of service rendered by the branches.
(l) rewarding the best branches from customer service point of view by annual awards/running shield.
(m) Customer service audit, Customer surveys.
(n) holding Customer relation programmes and periodical meetings to interact with different cross sections of customers for identifying action points to upgrade the customer service with customers.
(o) clearly establishing a New Product and Services Approval Process which should require approval by the Board especially on issues which compromise the rights of the Common Person.
(p) appointing Quality Assurance Officers who will ensure that the intent of policy is translated into the content and its eventual translation into proper procedures.
