BANKING AND INSURANCE (1) .Docx New
BANKING AND INSURANCE (1) .Docx New
BANKING AND INSURANCE (1) .Docx New
III B.COM CA
S.SELVI
Unit – I
Unit – II
Unit – III
Unit – IV
Legal dimension of Insurance : Insurance Act, 1938 – Life Insurance Act , 1956 – General
Insurance Business Act, 1932 – Consumer Protection Act,1986.
Unit - V
IRDA - Mission - Composition of Authority - Duties, Powers and Functions - Powers of
Authority - Duties, Powers and Functions- Powers of Central Government in IRDA
Functioning.
UNIT-I
ORIGIN OF BANKING
The word, ‘Bank’ is said to have derived from the French word ‘Banco’ or ‘Bancus’ or ‘Bank’
or ‘Banque’ which means, a ‘bench’. In fact the early Jews in Lombardy transacted their
Banking business by sitting on benches. When their business failed, the benches were
broken and hence the word ‘bankrupt’ came into vogue.
Another common held view is that the word ‘bank’ might be originated from the
German word ‘Bank’ which means a joint stock fund of course bank essentially deals with
funds. In due course, it was Italianized into ‘banco’, Franchised into ‘bank’ and finally
Anglicized into ‘bank’. This view is most prevalent even today.
DEFINITIONS
1. BANKING:
The Banking Regulation Act’ which gives a statutory definition to the term banking
According to section 5(b) of the act ‘banking’ means:
“The accepting for the purpose of lending or investment of deposits of money from
the public repayable on demand or otherwise, and withdrawal by cheque, draft, order or
otherwise”.
BANKER:
Dr. Herbert L.Hart defines a banker as “one who in the ordinary course of business
honours cheques drawn upon him by persons from and for whom he receives money on
current account.
According to Sir John Paget, “no person or body corporate or otherwise, can be a
banker who does no (1) take deposits accounts, (2) take current accounts, (3) issue and
pay cheques, and (4) collect cheques crossed and uncrossed, for his customers.
CUSTOMER:
The term ‘customer’ of a bank is not defined by law. Ordinarily a person who has an
a/c in a bank is considered its customers thus; to constitute a customer the following
essential requisites must be fulfilled.
i) A bank a/c – savings, current or fixed deposit – must be opened in his name by
making necessary deposit of money and
ii) The dealing between the banker and the customer must be of the nature of
banking business.
A customer of a banker need not necessarily be a person. A firm, joint stock Company a
society or any separate legal entity may be a customer.
CLASSIFICATION OF BANKS:
Today is the age of specialization and w can find specialization in all fields including
banking. The banks have specialized in a particular line of finance. Various types of banks
have developed to suit the economic development and requirements of the country. The
principal banking institutions of a country may be classified into the following types.
I. Central Banks II. Commercial Banks
III. Industrial or Development Banks IV. Exchange Banks
V. Co-operative Banks. VI. Land Mortgage Bank.
VII. Indigenous Banks VIII. Savings Banks
IX Supranational Bank X. International Bank
i. Central Bank:
Central Bank is the bank of a country – a nation. Its main function is to issue
currency known as ‘Bank Notes’. This bank acts as the leader of the banking system and
money market of the country by regulating money and credit. These banks are the bankers
to the government, they are bankers’ banks and the ultimate custodian of a nations foreign
exchange reserves. The aim of the Central Bank is not to earn profit, maintain price stability
and to strive for economic development with alround growth of the country. There is now
hardly any country, which does not have a Central Bank of its own. It acts as a great engine
of growth of a State. In India, the RBI was established in 1935 and this Bank has since been
functioning as the Central Bank of the country (this is not to be confused with ‘Central Bank
of India’, which is only a commercial bank). The Central Bank of different countries is known
by different names like Reserve Bank in India, Bank of England in U.K Federal Reserve
System in U.S.A., etc.
ii) Commercial Banks:
A bank, which undertakes all kinds of ordinary banking business is called a
commercial bank. It is so called because it so called because it provides money and credit
for public and grand short-term loans, and advances. They supply working capital to
industries and enable them to carryon production and manufacturing activities. They grant
loans and advances on the stocks of agricultural commodities, industrial goods, etc., they
discount internal and foreign bills and thereby finance the International trade. They also
perform certain agency services such as collection of cheques, dividends, interest on
investments, issue of drafts, letter of credit, Traveler’s Cheques, Investment Advisory
Services, etc.,
iii) Industrial Bank or Financial Institutions
An industrial Bank is one which specializes by providing loans and fixed capital to
industrial concerns by subscribing to share and debenture issued by public companies. They
play an important role in the establishment and growth of industries. The block capital
required for the acquisition of fixed assets, etc., is supplied by investment banks. They
provide long-term loans and credits for period varying between 5 and 15 years for
industries to acquire fixed assets. They may serve as catalytic agents in mobilization of
capital in other forms of assistance such as, underwriting, guarantee, etc., these banks are
nowadays grouped as ‘Development Financial Institutions’.
These banks are very popular in Germany and Japan. In India, we have several
Industrial Finance Corporation in addition to the “Industrial Development Bank of India”.
Both, Development Financial Institution and Commercial banks, nowadays, finance
infrastructure development activities, which include construction of transport facilities,
building of power-supply stations, etc.,
NEW SERVICES
The banks have introduced a number of new services with the accent on deposit
mobilization and grant of credit to weaker sections of society during recent years. Some of
the important new services are as follows:
Schemes for Deposit Mobilization: A large number of new schemes
have been introduced for deposit mobilization. Some of these schemes are as
follows:
Housing Deposit Scheme: These Schemes are suitable for those wishing to
acquire or construct their own houses. Account holders have to deposit money in
installments for a fixed period at earning an attractive rate of interest.
With the setting up of the National Housing Bank on July 9th 1988, a spurt is
expected in the building activity. The National Housing Bank has introduced with effect
from July 1 st
1989, this scheme is called Home Loan Account Scheme (HLAS) with the co-
operation of scheduled banks.
Automatic extension Deposit Scheme: Depositors make a lump sum payment
and deposits can be automatically renewed for any term as desired after the
specified period.
Personal Loan Scheme: The Scheme has been introduced during the last one
decade. Under the scheme individuals, either employed or engaged in business and
having a steady income, are granted loans grant loans to technocrats, technologists,
technicians and entrepreneurs to set up small-scale industrial units.
Schemes for Agriculturists: A large number of schemes have been
introduced by banks to help agriculturists. They provide short-term loans for
financing seasonal agricultural operations including purchase of inputs. Medium-
term loans are provided for purchase of equipment such as tractors, agricultural
machinery and pump sets, sinking wells, etc. Long-term loans are provided for
purchase of land and other assets of long-term durability. Some of the banks have
adopted certain villages for providing credit facilities for all productive purposes in
the villages adopted. Many of the banks have launched schemes for financing farm-
based activities such as poultry, dairy farming, etc. They have also started providing
loans to fishermen for purchase, construction and mechanization of boats.
Financing of Road Transport Operations and other small Borrowers:
Loans are granted for purchase of vehicles i.e. taxis, scooters, trucks,
rickshaws to road transport operators, on hypothecation of the vehicle concerned.
Self-employed persons like doctors, lawyers, architects, etc., are also granted loans
to start or expand trade or vocation. Some banks have also introduced schemes for
granting of educational loans to deserving students for graduate and post-graduate
courses in India and for higher studies abroad.
Credit Transfer System: As a result of increased customer expectations many
banks have introduced schemes for free remittance of funds by their customers
subject to certain conditions. One of such schemes of charge amounts up to a
specified limit at a time from one branch of the bank for credit to any personal
account with any of its branches. Similarly, under another scheme known as ‘Special
Cheque Transfer Scheme’, cheques up to a certain amount drawn on any personal
account can be collected, negotiated at par for the payee of the last endorsee.
Credit Cards: The Credit Cards System in India is rather a new concept. Of course,
in the West, credit cards are slowly replacing the real money as a medium of
economic transactions in day to day living. The Indian banks which have ventured
into the credit cards scheme are Andhra Bank, Central Bank of India, Bank of
Baroda, Bank of India, Canara Bank, Indian Overseas Bank, Punjab National Bank
and State Bank of India etc. A credit card is a unique scheme in which one uses a
little card and special cheques in place of money. Hence, instead of paying for things
in cash, one can pay for them with credit card. Credit cards are issued to valued
constituents as identification cards. On presentation of the cards, the constituent
can encash his cheques drawn on his account at any of the officers of the bank
issuing the credit card up to a specified amount for a specified period. The cheques
issued by him are also accepted for payments by several institutions viz. Airlines,
hotels, departmental stores, etc. There is no restriction on the number of
withdrawals or on the amount which one can withdraw at one time.
Rural / Green Cards: Dena Bank and a number of other banks are now
offering ‘Green Cards’ to farmers to provide them production credit to buy agriculture
inputs without repeated visits to them. Under this scheme of ‘green card’ of ‘rural
card’, and agriculturist with a good track record is issued a card to avail credit facility
within indicated limits for three years. He can present special cheques issued along
with a card at anyone of the designated branches convenient to him. The Branch
Manager after comparing his signatures on the card makes cash payments or issues
a bank draft at par in the name of dealer of fertilizer, seeds, pesticides etc. Of
courses, there is a risk of misusing this facility, hence, it is necessary that the banks
should issue such cards only to farmers with good past records. Corporation Bank
issues two types of rural cards, one for crop loans and the other for consumption
loans.
Travellers Cheques: Travellers cheques are issued by banks to avoid the risk
of loss or inconvenience in having to carry large amount of cash while traveling.
These cheques are issued in suitable denominations and are encashable at any office
of the bank.
Travel Agency Work: A few banks have started travel agency work for their
clients such as securing of passage, accommodation in hotels, providing general
travel information, etc. Some banks arrange reservation of tickets for a small charge
for their customers only.
Gift Cheques: These cheques are artistically designed in attractive
folders and covers. The purchaser of the gift cheque need not be an account holder
with that bank or any other bank to avail of that service. The cheque is collectable
at par at all the offices of the issuing banks in India.
Lock-box and Night Safe Service: In case of lock-box service a box is
kept at the branch of the bank in which the customers lodge the cheques and other
remittances after the bank’s office hours. The bank collects them the next day and
passes the necessary entries. It obviates the need for the customers to go to the
bank during the customers’ own office hours and thus saves time for them. At some
banks efforts have also been made to offer night safe facilities whereby the
customers, particularly the traders, can lodge their cash overnight.
Services after Banking Hours: In order to provide service to the customers after
banking hours some banks have introduced “Emergency Vouchers Scheme”. These
vouchers, which are sold free of any extra charge, are encashable at the bank’s
branches during office hours and selected Petrol Stations after office hours. A
number of banks have started morning and / or evening banking facilities in
residential areas.
Other Services: These services include such as tax assistance, executor and
trustee, merchant banking services, etc. Since these services are of a high specified
nature, only a few banks provide them.
Meaning of bank:
According to the banking regulation act 1949, “Banking means the accepting for the
purpose of lending or investment of deposits of money from the public repayable on
demand or otherwise and withdrawal by cheque draft order or otherwise.
Functions:
1. Demand deposits:
It is also known as current accounts are those which can be withdrawn by the
depositor at any time by means if cheques. The bank does not pay any interest on
demand deposits.
2. Savings deposits:
Savings deposits are those deposits on which the bank pays a certain percentage
of interest to the depositors but the bank places certain restrictions on withdrawal. For
example they may not be withdrawn more than once or twice a week or more than a
fixed sum if money at a time.
3. Fixed deposits:
These deposits are made for specific periods and can be withdrawn only at the
expiry of the specific periods.
Transfer of funds:
Another function of commercial bank is to provide facilities for transfer of funds from
one part of the country to another or from one country to another. This may be done either
by the cheque itself or through a bank draft. Any amount of money can be transferred
cheaply by these methods.
\Other functions:
Other functions performed by a commercial banks include the provision of safety
locker to keep jewellery and valuable documents of customers in safe custody, acting as
agents for customers to buy and sell securities on their behalf making and receiving
payments on behalf of its depositors. The convenience of the customers’ and in general
performing all functions which bring in profits.
I. Types of Financing:
1.Take out Financing.
2. Revolving Credit Facilities.
3.Evergreening of loan.
4.Syndicated loan.
5.Bridge loan.
6.Consortium Finance.
7.Preferred Financing.
8.Non-Fund Based Business.
NEGOTIABLE INSTRUMENTS
Meaning of Negotiable instruments.
A Negotiable instruments is a transferable document which satisfies certain
conditions.These instruments pass freely from hand to hand.
Definition:
“Negotiable Instruments means promissory note, bill of exchange or cheque
payable either to order or to bearer.”
Characteristics of Negotiable instruments.
1.Easily Transferable
2.Title Free From Defects
3.Right to sue
4.No Notice to transfer
5.Presumptions
6.Credit of the party.
CHEQUE
Meaning: A Cheque, under Section 6 of the Negotiable Instruments Act, is “a bill
of exchange drawn on a specified banker and not expressed to be payable otherwise
than on demand”.
Definition: Section 5 defines a bill of exchange as “an instrument in writing
containing an unconditional order, signed by the maker, directing a certain person to
pay a certain sum of money only to, or to the order of a certain person or to the
bearer of the instrument”.
Thus, a cheque is a species of bill of exchange with two qualifications fulfilled:
First, the cheque should always be drawn upon a banker, and
Secondly, it is always payable on demand.
The person who writes the cheque is the ‘drawer’, the person to whom it is
expressed to be payable is the ‘payee’ and the bank on which the cheque is drawn is
the ‘drawee’.
CROSSING:
A cheque may be either an open cheque or a crossed cheque. Crossing is an
indication appearing on the face of the cheque that it should be paid only through a
banker; it is usually done by drawing two parallel lines on the face of the cheque.
Crossing has been evolved to prevent wrongful persons from obtaining payment on a
cheque. An open cheque is payable to any person who presents it and it would be
very difficult to locate the payee at a later date. Any person who comes into
possession of a lost or stolen cheque may obtain payment and decamp without
leaving a trace. A crossed cheque is payable only through a banker. The payee
should have an account with any bank through whom the cheque is collected. Or he
should endorse it to a person having a bank account and collect the cheque through
his banker. In either case, the identity of the payee or the person who has obtained
payment can easily be established.
Crossing may be done generally or specially. A generally crossed cheque is
payable to any bank while a specially crossed cheque is payable only to the banker
to whom it is crossed.
General Crossing: It is defined under Section 123 of the Negotiable Instruments
Act as follows: “Where a cheque bears across it face an addition of the words ‘and
company’ or any abbreviation thereof, between two parallel transverse lines, or two
parallel transverse lines simply, either with or without the words ‘not negotiable’ that
addition shall be deemed a crossing, and the cheque shall be deemed to be crossed
generally”.
Special Crossing: It is defined in Section 124 of the Negotiable
Instruments Act as follows: “Where a cheque bears across its face an addition of the
name of a banker, either with or without the words ‘Not Negotiable’ that addition
shall be deemed a crossing and the cheque shall be deemed to be crossed specially,
and to be crossed to that banker”.
Restrictive Crossing: Besides the above two types of statutory crossing, in recent
years the practice of crossing cheques with the words “account payee” or “account
payee only” has sprung up. Such a crossing is termed as ‘restrictive crossing’.
Restrictive crossing is only a direction to the collecting banker that the
proceeds are to be credited only to the account of payee named in the cheque. In
case the collecting banker allows the proceeds to be credited to some other account,
it may be held liable for wrongful conversion of funds. It does not in any way affect
the paying banker, who has simply to see that the cheque has been presented it for
payment by any bank in case of general crossing and by the particular bank (named
in crossing) in case of special crossing. It is under no duty to ascertain that the
cheque is in fact collected for the account of the person named as payee.
DOUBLE CROSSING: When a cheque bears two separate special crossings, it is said
to have been doubly crossed. According to Section 127 “where a cheque is 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 thereon”.
Example:
BANK OF INDIA
TO
PUNJAB NATIONAL BANK
AS AGENT FOR COLLECTION
PAYING BANKER:
A banker on whom a cheque is drawn should pay the cheque when it is
presented for payment.
b) Branch:-
Then the paying banker should see whether the cheque is drawn on the branch
where the account is kept. If it is drawn on another branch, without any prior arrangement,
the banker can safely return the cheque.
c) Account:-
Even in the same branch, a customer might have opened two or more accounts.
For each account, a separate cheque book would have been issued. Hence, the paying
banker should see that the cheque of one account is not used for withdrawing money from
another account.
d) Banking hours:-
The paying banker should also note whether the cheque is presented during the
banking hours on a business day. Payment outside the banking hours does not amount to
payment in due courses.
e) Mutilation:-
If the cheque is torn into pieces or cancelled or mutilated, then, the paying banker
should not honour it. He should return the cheque for the drawer’s confirmation.
II. Form of the Cheque:-
Before honoring a cheque, a banker should see the form of the cheque and find out
whether it is regular or not.
a) Printed form:-
The cheque must be in the proper form. It must satisfy all the requirements of law.
The customer should draw cheques only on the printed leaves supplied by the bakers, failing
which, the banker may refuse to honour it.
b) Unconditional order:-
The cheque should not contain any condition. If it is a conditional one, the paying
banker’s position will become critical and he may not honour it.
c) Date:-
Before honouring a cheque, the bank must see whether there is a date on the
instrument. If it is undated, it cannot be regarded as a valid instrument. If a cheque is ante
dated, it may be paid if it has not become stale by that time. A cheque which is presented
after six months, from the date of its issue is a state one. If a cheque is post-dated, he
should honour it only on its due date.
d) Amount:-
The next important precaution is that the banker should see whether the amount
stated in the cheque, both in words and figures, agree with each other. Supposing, there is
a difference in the amount stated in words and figures, then, the banker can take any one
of the following courses available to him:-
i) he can dishonour the cheque with a memorandum “words and figures differ,” or
ii) he can honour the amount stated in words, or
iii) he can honour the smaller amount.
e) Material alteration:-
A paying banker should be very cautious in finding out the alterations that may
appear on a cheque. If there is any material alteration, the banker should return it with a
memorandum “ Alteration requires drawer’s confirmation”.
III. Sufficient Balance:-
There must be sufficient balance to meet the cheque. If the funds available are not
sufficient to honour a cheque, the paying banker is justified in returning it. So, before
honoring a cheque, he must check up the present state of his customer’s account.
Endorsement:-
Before honouring a cheque, the banker must verify the regularity of endorsement, if
any, that appears on the instrument. It is more so in the case of an order cheque, which
requires an endorsement before its delivery. For instance, if there is per pro endorsement,
the banker must find out the existence of authority. Failure to do so constitutes negligence
on the part of the paying banker.
Legal Bar:-
The existence of legal bar like Garnishee Order limits the duty of the banker to pay
cheque.
Minor Precautions:-
A paying banker should look into the following minor details also, before honouring a
cheque;
a) He must see whether there is any order of the customer not to pay a cheque.
b) He must see whether there is any evidence of misappropriation of money. If so, the
cheque should be returned eg., breach of trust.
c) He must see whether he has got any information about the death or insolvency or
insanity of his customer. Failure to note those instructions will land him in trouble.
a) Countermanding:-
Countermanding is the instruction given by the customer of a bank requesting
the bank not to honour a particular cheque issued by him. When such an order is
received, the banker must refuse to pay the cheque.
Countermanding, in order to be really effective, must be in writing. The written
mandate should contain all the details of the cheque, viz, date number of the
cheque, name of the payee and the amount.
If a customer informs by telephone or telegram regarding the stopping payment
of a cheque, the banker should diplomatically delay the payment, till written
instructions are received.
The drawer alone has the right to countermand the payment of a cheque. In
case a cheque is lost by a holder, he should stop payment of that cheque only
through its drawer. It is so because, a banker is always answerable only to the
drawer, in the case of dishonour of a cheque.
In the case of a draft, its purchaser has no right to countermand its payment.
Any countermanding instruction given to one branch is not effective, as a notice
given to another branch.
Garnishee Order refers to the order issued by a court attaching the funds of the
judgement debtor (ie, the customer) in the hands of a third party (ie the banker).
The bank balance of a customer constitutes an asset and it can be assigned to any
person by giving a letter of assignment to the banker. Once an assignment has been made,
the assignor has no legal rights over the bank balance and therefore, if any cheque is drawn
by him, the banker should refuse to honour it.
In the case of a trust account, mere knowledge of the customer’s intention to use the
trust funds for his personal use, is a sufficient reason to dishonour his cheque.
h) Defective title:-
If the person who brings a cheque for payment has no title is defective, the banker
should refuse to honour the cheque presented by him.
i) Other grounds:-
A banker is justified in dishonoring a cheque under the following circumstances also:
If a cheque is :
1) a conditional one,
2) drawn on an ordinary piece of paper
3) a stale one
4) a post dated one
5) mutilated
6) drawn on another branch where the account is not kept.
7) Presented during non-banking hours.
8) If the words and figures differ.
9) If there is no sufficient funds,
10) If the signature of the customer is forged,
11) If the endorsement is irregular, and
12) If a crossed cheque is presented at the counter.
Supposing, a paying banker pays a cheque which bears a forged signature of the payee
or endorsee, he is liable to the true owner of the cheque. But, it is quite unjustifiable to
make the banker responsible for such errors. It is so because; he is not expected to know
the signature of the payee or endorsee.
Statutory Protection Under Indian Law:-
To claim protection under Sec.85, the banker should have fulfilled the following
conditions:-
Order Cheque:-
“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 a reasonable ground for believing, that , he is not
entitled to receive payment of the amount therein mentioned”.
Example:
The banker should have made the payment to the ‘holder’ of the instrument. In other
words, the banker must see that the person, who presents the cheque, is in possession of
the instrument and he is entitled to receive the amount of the cheque.
Sec 8 of the N.I. Act defines a holder as “the holder” of a promissory note, bill of
exchange or cheque, means any person entitled, in his own name, to the possession thereof
and to receive or recover amount due thereon from the parties thereto”.
Originally, this protection was extended only to open cheques. Now, this has been
extended to crossed cheques also. Sec. 128 of the N.I. Act gives protection in respect of
crossed cheque to the drawer as well, provided, it comes into the possession of the payee.
Sec 128 of the Act runs as follows “ where a banker on whom a crossed cheque, is
drawn has paid the same in due course, the banker paying the cheque and (in case such
cheque has come to the hands of the payee) the drawer thereof, shall respectively be
entitled to the same rights and be placed in the same position in all respects, as they would
respectively be entitled to and placed in, if the amount of the cheque had been paid to and
received by the true owner
thereof”.
Protection to a Draft:
Protection has been extended to drafts drawn by one office of a bank of the same
bank.
When a banker acts both as a collecting banker and a paying banker, it would be as
a collecting banker that a decision would be taken. In worshipful carpenter’s company vs.
British Mutual Banking Company Ltd., it was held that the statutory protection is available
only when a bank acts for a paying banker and not as both paying and collecting banker.
Sec 9 of the N.I. Acts lays down that ‘ holder due course’ means “any person, who
for consideration became the possessor of a promissory note, bill of exchange or cheque if
payable to bearer, or the payee or endorsee thereof”.
Thus a holder in due course is the person i) who receives an instrument innocently
9ie., in good faith and without negligence), and ii0 who has paid value for the same, iii)
who has received the instrument before its maturity iv) who is in possession of the
instrument as a bearer or payee or endorsee.
The following are some of the important rights and privileges of a holder in due course:-
Since, in a bank thousands of transactions take place every day, it is quite natural
that mistakes do occur. By mistake, a banker may pay money to a wrong person. Can a
banker recover money paid by mistake? The law on this subject is not yet clear. As a
general rule, a person who has committed a mistake has every right to rectify the same.
But, in rectifying the mistake, he should not bring any disadvantages to a party. In the
same way, a banker can recover the money paid by mistake without adversely affecting the
other party.
3. when a person, who receives money in good faith by mistake, alters his position relying
upon it, need not return the same.
COLLECTING BANKER
A collecting banker is one who undertakes to collect the amount of a cheque for his
customer from the paying banker.
1. If he allows his customers to withdraw money before cheques paid in for collection are
actually collected and credited.
2. If any open cheque is accepted and the value is paid before collection, and /or
3. If there is a reduction in the overdraft account of the customer before the cheque is
collected and credited in the respective account.
In all these cases, the banker acquires a personal interest.
If the banker acts as holder for value, his rights will be the same as those of a holder
in due courses. Thus, according to Sir. John Paget “ apart from the question of forged
endorsement, if the customer has either no title to the cheque or his title is defective, the
banker is the holder in due course with a good independent title against all the prior parties
on the cheque”. The title of the holder in due course is superior to that of the true owner.
A banker as an Agent:-
CONVERSION:
A banker’s liability:-
Hence, if a collecting banker, however innocent he may be, has converted the goods
of another, he will be held personally liable. This liability exists because the banker is acting
as an agent and not as a holder of value.
Statutory Protection:-
According to sec. 131 of the N.I. Act, “ A banker who has in good faith and without
negligence, received payment for a customer of a cheque, crossed generally or specially to
himself, shall not, in case the title to the cheque proves defective, incur any liability to the
true owner of the cheque, by reason only of having received such payment”.
The above statutory protection is available to the collecting banker only if he fulfills
the following conditions:-
If a banker undertakes to collect bills, it is his duty to present them for acceptance at
any early date. Sooner a bill is presented and got accepted, earlier is its maturity.
c) Where, inspite of a reasonable diligence on the part of the banker, the presentment
cannot be affected.
d) Where, although the presentment is not quite regular, the drawee has refused to
accept it on some other ground.
5. Present the bill for payment:-
The banker should present the bills for payment in proper time and at proper place, if
he fails to do so and if any loss occurs to the customer, then, the banker will be liable.
According to sec. 66 of the N.I. Act a bill must be presented for payment on maturity.
As per Sec 21 sight bills are payable on demand. Sec 22 lays down that the maturity of
the bill is the date on which it is due for payment, to which, 3 days of grace are added.
UNIT-III
Insurance
Meaning of insurance
Insurance may be defined as a form of contract between two parities whereby one
party agrees to compensate the other party against a loss (which may or may not arise)
against a payment of a consideration premium.
Definition of insurance:
Functional definition:
The insurance is a co operative device to spread the risk, the system to spread the
risk over a number of persons who are insured against the risk the principal to share the
loss of each other member of the society on the basis of probability of loss to their risk,
and the method to provide security against losses.
Contractual definition:
The insurance thus is a contract whereby
a) Certain sum, called premium is changed in consideration
b) Against the said conside4ration, a large sum is guaranteed to be paid by the insurer
who received the premium.
C) The payment will be made in a certain definition sum
d) The payment is made only upon a contingency
Functions of insurance
The functions of insurance can be studied into two parts they are
1. Primary functions
2. Secondary functions
Primary functions:
1. Insurance provides certainty:
The main function of the insurance is to provide protection against the probable
chances of loss. The insurance guarantees the payment of loss and thus protects the
assured from sufferings.
3. Risk sharing:
The risk is uncertain and therefore the loss arising from the risk is also
uncertain. When risk takes place, the loss is shared by all the persons who
are exposed to the risk.
Secondary functions:
1. Prevention of loss:
The insurance joins bands with those institutions which are engaged in
preventing the losses of the society because the reduction in loss caused
lesser payment to the assured and so mores saving is possible which will
assist in reducing the premium.
2. It provides capital:
The insurance provides capital to the society. The accumulated funds are
invested in productive channel. The industry the business and individual are benefitted
by the investment and loans of the insurers.
3. It improves efficiency:
The insurance eliminated worries and miseries of losses at death and destruction
of property. The carefree person can devote his body and soul together for better
achievement which improves his efficiency.
4. It helps economic progress:
The insurance by protecting the society from huge losses of damage destruction and
death provides and initiative to work bard for the betterment of the masses.
Nature of insurance:
The main characteristics that are observed in fire, life and marine insurance.
Sharing of risk
Insurance is a device to share the financial losses which might befall on a individual
or his family on the happening of a specified event. The event may be the death of the
heads of the family in life insurance, marine-perils in marine insurance fire in fire insurance.
Co-operative device:
The essential feature of every insurance plan is the co-operation of large number of
persons who in effect agree to share the financial loss arising due to a particular risk which
is insured. Thus it is a co-operative device.
Value of risk:
The risk is evaluated before insuring to charge the amount of share of an insured
consideration or premium. If there is any expectation of more loss, higher premium may be
charged. So the probability of loss is calculated at the time of insurance.
Payment at contingency:
The payment is made at a certain contingency insured. If the contingency occurs,
payment is made; otherwise no amount is given to the policy holder.
Amount of payment:
The amount of payment depends upon the value of loss occurred due to the
particular insured risk provided insurance is there up to that amount.
Large number of insured persons:
To adjust the loss suffered large number of persons should be insured. The co-
operation of a small number of persons may also be insurance but it will be limited to
similar area. To make the insurance cheaper, it is essential to insure large number of
persons or property because the loss suffered is adjusted by that amount.
Fire insurance:
Fire insurance is developed in present form. The fire insurance got momentum in
England after the great fire in 1666 when the fire losses were tremendous. The losses
suffered by fire is been relieved by the fire insurance policy if we had taken such policy on
our goods or property.
Life insurance:
This insurance made its first appearance in England in 16 th century. Life insurance is
the insurance where the life of a individual person is insured and if there is an contingency
of death unfortunately such unbearable loss to the family by giving the insured money from
the premium paid by the individual person.
Kinds of insurance:
Business point if view:
Life insurance:
Life insurance is different from other insurance in the sense that the subject matter
of insurance is life of human being. The insurer will pay the fixed amount of insurance at the
time of death or at expiry of certain period.
General insurance:
This insurance includes property insurance, liability insurance and other forms of
insurance. Fire and marine insurances are strictly called property insurance.
Social insurance:
This social insurance is to provide protection to the weaker section of the society who
is unable to pay the premium for adequate insurance. Example pension plans, disability
benefits.
Risk point of view:
Property insurance:
1. Marine insurance:
Marine insurance provides protection against loss of marine perils. The marine
perils are collision with rock or ship attacks by enemies’ fire and capture by
pirates etc. so marine insurance insures ship cargo and freight.
2. Fire insurance:
Fire insurance covers risks of fire with the help of the insurance the losses arising
due to fire are compensated and the society is not losing much.
Miscellaneous insurance:
The property goods, machine, furniture, automobile, valuable, articles etc… can be
insured against the damage or destruction due to accident or disappearance due to theft.
3. Liability insurance:
The general insurance also includes liability insurance whereby the insured is liable
to pay the damage of property or to compensate the loss.
4. Other forms:
Besides the property and liability insurances there are certain other insurances which
are included under general insurance. Eg export credit insurances state employees
insurance.
Kinds of insurance:
1. Personl insurance:
This insurance includes insurance of human life which may suffer loss due to death
accident and disease. It is further classified into life insurance, personal accident and health
insurance.
2. Property insurance:
The property of an individual and of the society is insured against the loss of fire and
marine perils.
3. Liability insurance:
The liability insurance covers the risks of third party, compensation to employees,
liability of the automobile owners and reinsurances.
4. Guarantee insurance:
The guarantee covers the loss due to dishonesty, disappearance and disloyalty of the
employers or second.
Role and importance of insurance:
Uses to an individual:
Insurance provides security and safety:
The insurance provides safety and security against the loss on a particular event. It
also provides security against the loss on earning at death or in olden age, at fire, at
damage etc.
Insurance protects mortgaged property. At the death of the owner of the mortgaged
property, the property is taken over by the lender of the money will be deprived of the uses
of the property.
Insurance affords peace of mind:
The security wish is the prime motivating factor. By insurance a person gets a piece
of mind where he is relieved of his tension, stress of maintaining his family or business.
Insurance eliminates dependency:
It gives a way to survive without depending on others. If head of the family is dead,
there will more destruction so they will have a dependence on relations but insurance
eliminates as we can manage ourselves.
Uses of societies:
Wealth of the society is protected:
The loss of particular wealth is protected with the help of insurance. Life insurance
provides loss of human wealth. This enhances the protection thus the society is safely
protected.
Economic growth of the country:
For the economic growth of the country, insurance provides strong hand and mind,
protection against loss of property and adequate capital to produce more wealth.
Reduction in inflation:
The insurance reduces the inflationary resource in two ways.
i) Extracting money in supply to the amount of premium collected.
ii) By providing sufficient funds for production narrow down the inflationary gap.
2. It would also result in better customer services and help improve the variety and
price of insurance products.
3. The entry of new players would speed up the speed of both life and general
insurance. It will increase the insurance penetration and measured of density.
4. Entry of private players will ensure the mobilization of funds that can be utilized for
the purpose of infrastructure development.
6. Most important not the least tremendous employment opportunities will be created in
the field of insurance which is a During problem of the presence day today issues.
Globalization:
The characteristics features of their business make insurance companies the biggest
investors in log gestation infrastructure development projects in all development
aspirating nations. This is the most compelling reason why private sector and foreign
companies which will spread the insurance habit in the societal and consumer interest
are urgently required in this vital sector of the economy. Opening up of insurance to
private sector including foreign participation has resulted into various opportunities and
challenges in India.
Impact of globalization
While nationalized insurance companies have done a commendable job in extending
the volume of the business opening up insurance sector to private players was a
necessity in the context of globalization of financial sector. It traditional infrastructural
and semipublic goods industries such as banking, airlines, telecom, power etc. have
significant private sector presence, continuing a state of monopoly in provision of
insurance was indefensible and therefore the globalization of insurance has been done.
Its impact has to be seen in the form of creating various opportunities and challenges.
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UNIT-IV
2. Prohibition:
According to sec 2-c of the Act, there is prohibition of transaction of insurance
business by certain persons.
Requirements as to capital
a) Section 6:
No insurer incorporated after or who contained carrying on the business of life
insurance in the states whether solely or in connection with any other
business after the 20th day of January.
Voting powers:
The voting powers of every shareholder of any public company as foresaid in all
cases be strictly proportionate to the paid up amount of the shares held by him.
Maintenance of register of members:
Deposits:
To prevent the growth of insurers of small financial resources or speculative
concerns the Act provided for registration of all insurers and a substantial deposit with the
reserve bank.
Section 7
Every insurer must be registered and not being an insurer specified in sub-
clause (iii) of clause (i) of section 2 shall be in respect of the insurance business carried on
by him in India, deposit and keep deposited in the RB (Reserve Bank).
Registration
Section 3:
According to this section A person should not commence any class of
insurance business after commencement of this Act. If he does
Section 2-A
Section 2-4
The controller shall cancel the registration of an insurer either wholly are in so
far as it is related to a particular class of insurance business. Controller will give notice of
his decision not more than two months before termination.
Submission of returns:
Section 14:
Section 40:
Any person making default in complying with the provisions of this section
shall be punishable with fine which may extend to Rs.500.
Section 42 (licensing of insurance Agents):
42—3
A license issued here shall remain as a force for a period of 3 years only from
the date of issue.
During this period the act was passed. The act commences from july1, 1956 and
from the date the act was implemented.
Organization and functions of life insurance
Constitution:
Capital
The capital used for the corporation is 5 crore rupees provided by the central
government for the purpose and the terms and conditions of investing.
Functions of corporation:
Transfer of services:
All the employees except the chief agent will be vested into new life business.
The salary and terms of employment will remain the same unless the insurance
transfer their services.
Committee of the corporation:
The corporation may constitute such other committees as it may think fit for
the purpose to discharge such of its functions as may be delegated to them.
Authorities
These are two authorities which enhance the efficiency of the insurance
Investments:
It was laid down that 55% of net life liabilities of an Indian or British insurer
should be invested in Indian government and approved securities with at least 25 %
Indian government Rupee securities.
The duties and powers of controller are discussed under general duties,
special duties, right about investigation.
The private management was eliminated on march 21, 1956 and was
replaced by the co operation management governed by the life insurance co
operation act 1956. The management is controlled by the government according to
the section 3 of life insurance act.
Abolition of private ownership:
a) Managing director
The corporation may appoint one or more managing directors. He can be a
whole time officer and perform his duties efficiently.
b) Zonal managers
The corporation may constitute many zones where the zonal managers are
appointed to taken care of.
Zonal bodies:
a) Zonal board:
The corporation will establish each zone a board. That board will appoint and
number of members to be reviewed. These boards suggest some provisions to
the corporation.
b) Employees of agents relations committee:
Audit
The auditors shall submit their report to the corporation shall also forward a copy of
their report to the central government. Every auditor in the performance of his duties shall
have at all reasonable time access to the books of accounts and other documents of the
corporation.
Actuarial valuation:
There will be an investigation once at least in every 2 years about the activities to
value their financial condition of the corporation.
Annual report of activities:
The corporation will submit the annual report during every last month of the year to
the central government.
Surplus how to be utilized:
The corporation will have a regular investigation which results in proper utilization of
resources if there is any surplus.
2. The authorized capital of the corporation shall be seventy-five crores, divided into
seventy-five lakhs fully paid up shares of one hundred rupees each, out of which
rupees five crores shall be the initial subscribed capital of the corporation.
Functions of corporation:
The functions of corporation shall include
a) The carrying on of any part of the general business if it thinks it desirable to do so.
b) Adding assisting and advising the acquiring companies in the matter of setting up
standards of conduct and sound practice.
c) Advising the acquiring companies in he matter of the investment of their funds.
d) And in the matter of controlling their expense including the payment of commission
and other expenses.
2. In particular and without prejudice to the generally of the foregoing power rules
made under this section may provide for,
a) The manner in which the profits if any and other moneys received by the
corporation may be dealt with;
b) The conditions if any subject to which the corporation and the acquiring
companies shall carry on general insurance business
3. Every rule made under this section, every notification issued under sec 35 shall be
laid as soon as may be after it is made.
2. Right to safety:
The consumer has been given the right to be assured that the consumer interest
will receive due consideration at appropriate forums. The consumer disputes should be
resolved in a fair and expeditions manner. The consumer protection act, 1986 can forms
to those measures.
4. Right to be heard:
The right to be heard also includes the right to be assured that the consumer
interest will receive due consideration at appropriate forums. The consumer disputes
should be resolved in a fair and expeditions manner. The consumer protection act, 1986
can forms to these measures.
5. Right to choose:
The right to choose means the right to be assured. Whenever possible access to a
variety of goods and services at competitive prices. Fair and effect must be encouraged
in order to provide consumers with the greatest range of choice among products and
services at the lowest price.
6. Right to information:
The consumer has been given the right to be informed by the producer about
the quality, quantity, potency, purity standard and price of goods so as to
protect the consumer against unfair trade practices.
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Unit-v