Evolution of Banking
Evolution of Banking
Introduction :
Banking is an integral part of the modern economy. But the nature and functions of modern banks
have evolved over a long period of time. The idea of banking evolved with the idea of
money.Banking business is mainly linked to lending. Moneylender is to be found in every society-
1.1 Origin of Banking :
ancient or modern; advanced or backward. The ten commandments of Moses, Quoran,
Manusmrity, Kautilya’s Arthashastra all have references to moneylenders and rate of interest.
Modern banks also undertake foreign exchange transactions. The priests in temples took
advantage of the sanctity of the temples, collected people’s savings and did lending business. In the
middle ages, banking business was carried by the individuals. Then came partnership and today in
all countries banking is carried out by joint stock companies and is regulated by the Government.
It is seen that banking transactions have been taking place since last number of years. Even it is
evidenced that the banking system was prevailing at the time of Babilon culture. The banks were
in existence in Rome also. It was said that in the year 1171, the authorities of Venice had taken loan
from the people for meeting the expenses of war and the arrangements for repayment were also
made by them. Such loan was called as ‘Mot’ in Italian language. The meaning of mot in German
language is ‘bank’. In those days, there was German rule in many parts of Italy. Afterwards, in
Italian language it was called as banco. The German word bank means a joint stock fund. This word
bank was Italianised into banco when the Germans were masters of a great part of Italy. Afterwards
in France and England this word was used. It is seen that since 1646 the word ‘bank’ has been used
in the articles. Later on there were many banks who started using the word bank in their names. e.g.
Bank of Milan. However, there are some philosophers according to whom the Italian word ‘banco’
means table. In the old days, the money lenders used to do banking transactions by keeping tables
in the market and so the word ‘bank’ has been evolved.
1.2 Bank :
1.2.1 Meaning :
The word ‘Bank’ has been derived from the Latin word ‘bancus’ or ‘banque’. The meaning of it in
English is a bench. The early bankers transacted their business at benches in a market place.
According to some authorities, the word bank was originally derived from German word bank. It means
a joint stock fund. This word later on was called as ‘banco’ in Italy when a great part of Italy was
ruled by the Germans.
A bank is a financial institution which deals with deposits and advances and other related services.
It receives money from those who want to save in the form of deposits and it lends money to those
who need it. A bank is a financial institution and a financial intermediary that accepts deposits and
channels those deposits into lending activities, either directly by loaning or indirectly through capital
markets. A bank is the connection between customers that have capital deficits and customers with
capital surpluses.
Due to their influence within a financial system and an economy, banks are generally highly regulated
in most countries. Most banks operate under a system known as fractional reserve banking where they
hold only a small reserve of the funds deposited and lend out the rest for profit. They are generally
subject to minimum capital requirements which are based on an international set of capital
standards, known as the Basel Accords.
1.2.2 Definitions :
1) F.E. Perry :
“The bank is an establishment which deals in money, receiving it on deposit from customers,
hounouring customer’s drawings against such deposits on demand, collecting cheques for
customes and lending or investing surplus deposits until they are required for repayment.”
2) Walter Leaf :
“A banker is an institution or individual who is always ready to receive money on deposits to be
returned against the cheques of their depositors.”
3) Dr. Herbert L. Hart :
“A banker is one who in the ordinary course of his business, honours cheques drawn upon him by
persons from and for whom he receives money on current accounts.”
5) The Indian Banking Companies Act, 1949 :
“Banking means the acceptance 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”.
1.2.3 Characteristics / Features of Bank :
Characteristics of a bank can be given as follows :
1) Dealing in Money :
Bank is a financial institution which deals with other people's money i.e. money given by
depositors.
2) Individual / Firm / Company :
A bank may be a person, firm or a company. A banking company means a company which is in the
business of banking.
3) Acceptance of Deposit :
A bank accepts money from the people in the form of deposits which are usually repayable on
demand or after the expiry of a fixed period. It gives safety to the deposits of its customers. It also
acts as a custodian of funds of its customers.
4) Giving Advances :
A bank lends out money in the form of loans to those who require it for different purposes.
5) Payment and Withdrawal :
A bank provides easy payment and withdrawal facility to its customers in the form of cheques and
drafts. It also brings bank money in circulation. This money is in the form of cheques, drafts, etc.
6) Agency and Utility Services :
A bank provides various banking facilities to its customers. They include general utility services and
agency services.
7) Profit and Service Orientation :
A bank is a profit seeking institution having service oriented approach.
8) Ever increasing Functions :
Banking is an evolutionary concept. There is continuous expansion and diversification as regards
the functions, services and activities of a bank.
9) Connecting Link :
A bank acts as a connecting link between borrowers and lenders of money. Banks collect money
from those who have surplus money and give the same to those who are in need of money.
10) Banking Business :
A bank's main activity should be to do business of banking which should not be subsidiary to any
other business.
11) Name Identity :
A bank should always add the word "bank" to its name to enable people to know that it is a bank and
that it is dealing in money.
1.3 Evolution of Banking in Other Countries :
1.3.1 Evolution of Banking in Europe :
The banking business is as old as authentic history. However, the early banking practices were in no
way similar to the modern banking practices. There is evidence of the existence of banking in most
of the ancient civilisations of the world. As early as 2,000
B.C. Babylonions had developed a system of banks. Although the business of banking is as old as
authentic history, banking institutions have since then changed in character and content very much,
evolution of banking in Europe means the history of banking in the following European countries.
1) Banking in Greece and Rome :
In ancient Greece and Rome the practice of granting credit was widely prevalent. In Rome, the
bankers were called Argentarii, Mensarii or Callybistoe. The banks were called
Tabernoe Argentarioe. Some of the banks carried business on their own account and others were
appointed by the Government of receive the taxes. They used to transact their business on similar
lines as those of the modern bankers. People used to settle their accounts with their creditors by
giving a cheque or draft on the bank. If the creditor had also an account at the same bank, the account
was settled by an order to make the transfer of such money from one name to another. To pay money
by a draft was known as prescribere and rescribere, and the draft was known as attribution. These
bankers also received deposits and lend money. Loan banks were also common in Rome. From these
loan banks, the poor citizens received loans without paying interest. They lend money for a period of
three or four years on the security of land.
The bankers preserved their deposits fully at first, but later began to use them for their own
purposes, creating deposits and granting credits out of nowhere. Since the canonical law banned
the charging of interest on loans, bankers would instead pay “penalties” for “delays” in payment and in
effect pay interest on a disguised loan, and justified any misappropriations on this basis. Fractional
reserve banking has created periods of growth, followed by an economical crisis and failure of
banks.
The authorities failed to enforce sound banking practices, and often granted banks a government
license to operate with a fractional reserve, while taking advantage of easy loans to finance
governments and public officials. Some rules created government banks to reap the profits. But
banks were still required to guarantee deposits.
2) Italy :
During the early periods, although the banking business was mostly done by private individuals,
may countries established public banks either for the purpose of facilitating commerce or to serve
the Government one of such banks was the Bank of Venice. It was established in 1157. It is
supposed to be the most ancient bank. Originally, it was not a bank in the modern sense being simply
an office for the transfer of the public debt.
And it was in Florence, where the growing banking industry gained great importance by the
fourteenth century. From that time have the bankers begun to misuse a portion of their deposits,
inevitably causing a boom and a recession. This recession was triggered not only by, Neapolitan
princes’ massive withdrawal of funds, but also by England’s inability to repay its loans and the
drastic fall in the price of Florentine government bond. The public debt was financed by these
speculative new loans created. A general crisis of confidence occurred, causing the most important
banks to fail between 1341 and 1346. The recovery did not come until after the plague.
The powerful Medici bank initially didn’t accept demand deposits. Later on, their reserve ratio
gradually worsened, and by its end dropped even below 10 percent. The bank was ruined by the end of
the 14th century like its competitors, and all of its assets fell into the hands of creditors.
3) Spain :
As early as 1349, the business of banking was carried on by the drapers of Barcelona. There it was
subject to official regulation. The drapers were not allowed to commence this business until they
had given sufficient security. During 1401, a public bank was established in Barcelona. It used to
exchange money, receive deposits and discount bills of exchange, both for the citizens and for the
foreigners. During 1407, the Bank of Genoa was established. The bank of Amsterdam was
established in 1609 to meet the needs of the merchants of the city. It accepted all kinds of specie on
deposits. These deposits could be withdrawn on demand or transferred from the account of one
person to another. The bank also adopted a plan by which a depositor received a kind of certificate
entitling him to withdraw his deposit within six months. These written orders, in course of time,
came to be used in the same manner as the modern cheques. It is interesting to note that most of the
European banks now in existence were formed on the model of the Bank of Amsterdam.
The Fuggers were financiers from 1485 to 1560 and are known as a particularly important banking
family in Southern Germany. Dutch bankers played a central role in establishing banking in the
Northern German city states. Berenberg Bank is the oldest private bank in Germany, established in
1590 by Dutch brothers, Hans and Paul Berenberg in Hamburg. The bank is still owned by the
Berenberg dynasty.
5) Holland :
Throughout 17th century, precious metals from the New World, Japan and other locales have been
channeled into Europe,with corresponding price increases. Thanks to the free coinage, the Bank of
Amsterdam, and the heightened trade and commerce, Netherlands attracted even more coin and
bullion. These concepts of Fractional-reserve banking and payment systems went on and spread to
England and elsewhere.
During the Civil War the National Bank Act of 1863 was passed.This created national banks,
which issued circulating notes that had to be backed by U.S. government securities. An amendment
to the Act required taxation on state bank notes but not on national bank notes, effectively creating
a uniform currency for the nation. Despite taxation on their notes, state banks continued to flourish
because of the growing popularity of demand deposits, which had taken hold during the Free
Banking Era.
5) 1873-1907 : Financial Panics Prevail :
Although the National Bank Act of 1863 established some measure of currency stability for the
growing nation, bank runs and financial panics continued to plague the economy. In 1893 a banking
panic triggered the worst depression the United States had ever seen,and the economy stabilized
only after the intervention of financial mogul J.P. Morgan.It was clear that the nation’s banking and
financial system needed serious attention.
6) 1907 : A Very Bad Year :
In 1907, a bout of speculation on Wall Street ended in failure, triggering a particularly severe
banking panic. J.P. Morgan was
again called upon to avert disaster. By this time most Americans wanted reform of the banking system,
but the structure of that reform was cause for deep division among the country’s citizens.
Conservatives and powerful “money trusts” in the big Eastern cities were vehemently opposed by
“progressives.” But there was a growing consensus among all Americans that a central banking
authority was needed to ensure a healthy banking system and provide for an elastic currency
7) 1908-1912 : The Stage is Set for a Decentralised Central Bank :
The Aldrich-Vreeland Act of 1908, passed as an immediate response to the panic of 1907, provided
for emergency currency issues during crises. It also established the National Monetary Commission
to search for a long-term solution to the nation’s banking and financial problems. Under the
leadership of Sen. Nelson Aldrich, the commission developed a banker-controlled plan. William
Jennings Bryan and other progressives fiercely attacked the plan; they wanted a central bank under
public, not banker, control.The 1912 election of Democrat Woodrow Wilson killed the
Republican Aldrich plan, but the stage was set for the emergence of a decentralised central bank.
8) 1914 : Open for Business :
Before the new central bank could begin operations,the Reserve Bank Organizing Committee,
comprised of Treasury Secretary William McAdoo, Secretary of Agriculture David Houston, and
Comptroller of the Currency John Skelton Williams,had the arduous task of building a working
institution around the bare bones of the new law. But by Nov. 16,1914,the 12 cities chosen as sites
for regional Reserve Banks were open for business,just as hostilities in Europe erupted into World
War I.
9) 1935 : More Changes to Come :
The Banking Act of 1935 called for further changes in the Fed’s structure, including the creation of
the Federal Open Market Committee (FOMC) as a separate legal entity, removal of the Treasury
Secretary and the Comptroller of the Currency from the Fed’s governing board, and the
establishment of members’terms at 14 years. Following World War II,the Employment Act
added the goal of promoting maximum employment to the list of the Fed’s responsibilities. In 1956
the Bank Holding Company Act named the Fed as the regulator for bank holding companies, and
in 1978 the Humphrey- Hawkins Act required the Fed chairman to report to Congress twice
annually on monetary policy goals and objectives.
10)1980: Modern Banking Industry Reforms :
The Monetary Control Act of 1980 required the Fed to price its financial services competitively
against private sector providers and to establish reserve requirements for all eligible financial
institutions.The Act marks the beginning of a period of modern banking industry reforms. Following
its passage, interstate banking proliferated, and banks began offering interest-paying accounts and
instruments to attract customers from brokerage firms. Barriers to insurance activities, however,
proved more difficult to circumvent. Nonetheless, momentum for change was steady, and by 1999
the Gramm-Leach-Bliley Act was passed, in essence overturning the Glass-Steagall Act of 1933 and
allowing banks to offer a menu of financial services, including investment banking and insurance
sales
11)1980 to 1990: Deregulation :
Legislation passed by the federal government during the 1980s, such as the Depository Institutions
Deregulation and Monetary Control Act of 1980 and the Garn–St. Germain Depository Institutions
Act of 1982, diminished the distinctions between banks and other financial institutions in the United
States. This legislation is frequently referred to as "deregulation," and it is often blamed for the
failure of over 500 savings and loan associations between 1980 and 1988, and the subsequent
failure of the Federal Savings and Loan Insurance Corporation(FSLIC) whose obligations
were assumed by the Federal Deposit Insurance Corporation (FDIC) in 1989.
In the 16th century, many public banks are established in the countries of Europe. e.g. Bank of
Venice established in the year 1515, Bank of Sweeden established in the year 1556. In the year
1676, banking functions are carried out by the Goldsmiths in England by providing loans to
English rulers. British ruler Charles III refused to repay the loan to the Goldsmiths. This was the
reason for the public distrust of Goldsmith. Public started demand their deposits from the
Goldsmiths. In the same way, the banking business was to be asked to be handed over to the
companies. It was essential for the protection of public money and to regulate rate of interest. It was
resulted in the establishment of the Bank of England in the year 1694. In the year 1700, a right of
issue of notes was given to this bank. It started accepting deposits from public. Joint stock banks
were established in the year 1823. These banks were given permission to do banking business
outside London from 1827. These banks are established on the principle of limited responsibility after
1858. In the beginning of 19th century, the banking business was developed in the other countries
also.
Later on banks were allowed to issue paper notes. In the due course of time, this right was restricted
to the Central Bank only. This is how modern banking has evolved over a long period of time.
1.4 Evolution of Banking in India :
Modern banking as evolved in England was introduced by the British during their rule in India.
Naturally, today’s Indian banking is similar to British banking. However, it does not mean that
banking was unknown to India. The essence of banking is lending for productive purposes. In
fact, India was a major partner in international trading and was a big producer of steel, cloth, spices
and luxurious articles. There are references to rate of interest, security of the loans in the
Manusmrity. Kautilya in the ‘Artha Shastra’ mentions regulation of interest rates, deposits and even
discounting of bills. They were called ‘Hundies’. The big merchants, traders and moneylenders
called ‘Sresthis’ or “Nagarseths” occupied important positions in the Mughal and Maratha courts.
They had efficient courier system, extensive branches all over India and they gave loans to the kings
also.
However, modern banking with its double-entry accounting system and insistence on deposit
mobilisation was introduced by the British. As the British rule extended all over the country, the
stages in evolution in Banking in India. Modern banking also spread driving out the indigenous
banking.
The East India Co., the ruler of lndia, took initiative in establishing Presidency Banks by contributing
20% of their share capital to meet its own demand for funds. Accordingly, Bank of Bengal, Bank of
Bombay and Bank of Madras were established in 1806, 1840 and 1943 respectively.
3) Joint Stock Banks :
In 1884, banks were allowed to be established on the principle of limited liability. In due course, this
encouraged establishment of banks. By the turn of the century, many banks with the initiative of
Indians were established. Punjab National Bank, Allahabad Bank, Bank of Baroda are some of the
banks then established. Many foreigners also came in the field of Indian banking.
4) Imperial Bank of India :
To meet the competition of foreign banks, the three Presidency Banks were amalgamated and a
powerful Imperial Bank of India was established in 1921 with its network of branches all over the
country. This bank was later nationalised in 1955 and it is today’s State Bank of India. This is a
prestigious bank as the Government is its customer.
5) Establishment of the Reserve Bank of India :
Though there was boom in banking, due to absence of any regulation and facility of timely
assistance there were recurrent bank failures. This resulted in suspicion about banks in the minds of
the people. They stayed away from banks. The need for a separate Central Bank was emphasised
by the Hilton Young Commission. Accordingly, the RBI was established in 1935 to perform all the
functions of a Central Bank. It was modeled on the pattern of the Bank of England. But it did not
have much power of regulation. The period was also critical one due to the great depression and
the subsequent Second World War. The RBI could not do much about banking.
6) Nationalisation of the RBI and the Banking Regulation Act :
These two important steps were taken in 1949. Immediately after independence wide powers of
regulation and control were given to the RBI and by making use of those powers the RBI was
successful in making Indian banking trustworthy. Soon, bank failures became a thing of the past
and India’s banks progressed under the guidance of the RBI. Many malpractices, deficiencies and
drawbacks were sought to be removed by the RBI.
7) Nationalisation of Banks in 1969 and 1980 :
Another significant step was taken in 1969 by nationalising 14 big Indian banks. Then six more
banks were nationalised in 1980. The nationalisation of banks brought about a sea-change in the
policies, attitudes, procedures, functions and coverage of banks. Indian banks are now being
prepared to become international players. These are the stages through which Indian banking
developed.
Structure of Indian banking system can be described as follows :
1.5 Structure of Indian Banking System :
Public Sector Banks Private Sector Banks Urban Co-operative Rural Co-operative
Banks Credit Institutions
State Bank Nationalised Indian Foreign Urban Co-operative State Co-operative Banks Societies
b) The District Co-operative banks at the intermediate level existing at District level.
Functions of Bank
Introduction :
Banking is the life blood of modern commerce. It has played a very important role in the economic
development of all the nations of the world. We can not think modern commerce without banking.
Banking is a business. Like any other business, banks are also profit seeking organisations.
Borrowing and lending constitute the banking business and that these are two basic functions of a
bank. It is to be noted that banking grew out of the need of the people for a safe place of deposit. Later,
the banks realised that their business could be made profitable if they lent out again what was received
by them. Gradually banks started providing many other services to people. These are other
functions which a modern banker performs. All these functions and services may be grouped under
primary functions and secondary functions.
The saving deposit promotes thrift among people. The savings deposits can only be held by
individuals and non-profit institutions. The rate of interest paid on savings deposits is lower than
that of time deposits. The savings account holder gets the advantage of liquidity (as in current a/c)
and small income in the form of interests.But there are some restrictions on withdrawals. Corporate
bodies and business firms are not allowed to open SB Accounts. Presently interest on SB
Accounts is determined by RBI. It is 4.5 per cent per annum. Co-operative banks are allowed to pay
an extra 0.5 per cent on its savings bank deposits.
4) No Frills Account :
A) Concept :
Credit rationing denotes a situation where a large section of loan accounts do not get the loans they
seek. This has serious implications for a developing economy like India. The proposed no-frills
account is a win-win opportunity for banks to cater to such a segment and attract profitable
customers as part of their unsecured campaign.The no frills bank accounts will be an innovative
instrument to introduce the concept of banking to the under-privileged as urged by the RBI in a recent
move to the banking community to introduce the no frills account bring such section of people into the
banking net.
B) Features :
i) Basic Banking Account:
No frills account is a basic banking account.
ii) Low Balance:
The basic characteristic of such account is that it requires either zero or very low balance. Charges
applicable to such accounts are low and services available to such accounts are limited. It means
that it will be an account with limited transaction facilities.
iii) Instrument of Credit Rationing :
Many financial economists believe that it could be an effective instrument to combat credit
rationing and provide the much-needed credit to a large section of the under-privileged population
in the country.
C) Importance:
i) Concept for Large under Privileged Section :
It is a concept expected to introduce the concept of banking to a large section of under-privileged.
ii) Creates Database of Customer :
It will also help the banks to create a database of these customers. The banks, therefore, can prudently
use this information to target the honest customers in their database to cross-sell various unsecured
products.
iii) Win - Win Opportunity :
The no-frills account therefore, is a win-win opportunity for India where the banks attract the
profitable customer as a part of their unsecured compaign.
iv) Access to Credit Market :
A large segment of underprivileged customers get access to the formal credit market without falling
prey to the village moneylender.
5) Time Deposits :
Time deposits are money deposits that cannot be withdrawn for a certain term of period of time
unless a penalty is paid. When the term is over it can be withdrawn or it can be held for another term.
Generally, speaking, the longer the term the better the yield on the money. The rate of deposit is higher
than for savings accounts because the requirement that the deposit be held for a prespecified term
gives bank the ability to invest it in a higher gain financial product class. There are following types
of time deposits.
A) Recurring Deposits :
In recurring deposit, the customer opens an account and deposit a certain sum of money every
month. After a certain period, say 1 year or 3 years or 5 years, the accumulated amount along with
interest is paid to the customer. It is very helpful to the middle and poor sections of the people. The
interest paid on such deposits is generally on cumulative basis. This deposit system is a
useful mechanism for regular savers of money.
B) Fixed Deposits :
The deposits can be withdrawn only after expiry of certain period say 3 years, 5 years or 10 years.
The banker allows a higher rate of interest depending upon the amount and period of time.
Previously the rates of interest payable on fixed deposits were determined by Reserve Bank. Presently
banks are permitted to offer interest as determined by each bank. However, banks are not permitted
to offer different interest rates to different customers for deposits of same maturity period, except
in the case of deposits of Rs. 15 lakhs and above. These days the banks accept deposits even for 15
days or one month etc. In times of urgent need for money, the bank allows premature closure of
fixed deposits by paying interest at reduced rate. Depositors can also avail of loans against Fixed
Deposits. The Fixed Deposit Receipt cannot be transferred to other persons.
C) Flexi Deposits (Auto Sweep) :
Flexi Deposit is a special kind of deposit scheme offered by banks in India, which is a combination
of Demand Deposit and Fixed Deposits. The depositor is able to enjoy both the liquidity of
Savings/Current accounts as well as the high returns of Fixed Deposits.
Mode of Working :
The scheme has two features which effectively combines the benefits of Savings/Current Accounts
and Fixed Deposits. They are as follows :
1) Auto Sweep Facility ( Sweep-In ) :
Balance in excess of a stipulated amount is automatically transferred to an Fixed Deposit for
a default term of one year. Hence, amount in excess of a fixed limit can now earn a substantially
higher rate of return. FDs formed through Auto Sweep carry the interest rate on FD of 1 year,
prevalent on the day of the Auto Sweep. Hence, the Flexi Fixed Deposit scheme has two
components :a Savings/Current Account component, and a Fixed Deposit account component.
2) Reverse Sweep ( Sweep-Out ) :
In case of shortfalls in the Savings account to honour any debit (instruction), e.g. when the
customer wants to withdraw money through cheque or through ATM, balance in the FD to the extent
needed for meeting the shortfall is automatically withdrawn in multiples of Rs. 1000 or any other
amount set by the bank. The remaining balance in the FD continues to earn higher interest at the
original rate applicable to FDs. Hence in case the customer wants to withdraw more than what is
deposited in the Savings account component, the bank would withdraw money from the Fixed
Deposit component. Hence effectively, this scheme is linking of Savings/Current account with a FD.
In many banks, this " linking " is free of cost. Many banks do not allow customers to avail loans
against amount in the FD component of Flexi Fixed Deposit.
Introduction :
The basic function of a banker is accepting money from the public by way of deposits and
deploying the same by means of loans and investments. The relationship between a banker and his
customer begins with the opening of an account by the customer in the bank. Initially all the
accounts are opened with a deposit of money and hence these accounts are called deposits accounts.
To accept deposit from public is an important functions of banks. The banks provide various
facilities and privileges to customers through two types of deposits. They are i) Demand Deposits,
and ii) Time Deposits. These deposits are further classified into savings deposits, current deposits,
fixed deposits etc. All these deposits have special features. The present chapter deals with the
opening and operating of such deposits.
3.1.3. Identification :
The question of obtaining introduction and references for a customer to establish identity is
important as various benefits accrue to the banker. The banker can confirm the integrity and
respectability of the customer. This would minimise the probable risk of the applicant desiring for
bad purpose to obtain possession of a cheque book and misusing of cheques to cause damage and
loss to the payee and endorsee who part with goods and services of value in exchange of worthless
cheques. Personnel of bad moral characters apt to commit frauds upon a bank which would lead to
unsound banking practices to handle their accounts. If the prospective customer is reputable, the
possibilities of frauds are reduced. Failure to obtain introduction / reference on the part of a banker
shows negligence. So for statutory protection under section 131 of the Negotiable Instrument Act, the
banker should act in good faith and without negligence in this case. At the identification point great
care must be exercised when relying on any cards / letters or documents offered for identification.
Importance :
i) The banker is in a position to confirm the integrity and respectability of the
customer.
ii) It minimises the risk of the applicant opening a bank account with intend to commit
offences such as money laundering, fraud etc.
iii) It is a written assurance given by the introducer.
iv) If the prospective customer is reputable the possibilities of frauds are reduced.
3.1.4. Introduction :
It is absolutely necessary for a bank to verify the identity of the customer and satisfy itself that he is
credit worthy. Many times accounts in bogus names are opened and financial crimes are committed
through the accounts. Recommendation from the account holder of the same branch should be
insisted. His full name, account number and signature should be verified.
A) Ways of Introduction :
The applicant may be introduced to the bank in any of the three ways :
i) A respectable person, either a customer of the same branch of the bank or who is
known to the staff of the branch introduces him by signing on the application form itself along with
his full address.
ii) The applicant may give the name of any respectable person or that of another bank as
referee. The bank enquires from the said referee about the integrity, honesty, respectability and
financial standing of the applicant and his past experience in dealing with the applicant. If reply is
not received from the referee, the bank should not open the account unless satisfactory introduction
is given otherwise.
iii) As per the guidelines given by the RBI, banks can accept pass books or postal
identification cards or identity cards of armed forces, police, government department or passports for
identity of persons.
B) Importance :
i) The bank can have protection of law when an account holder issues fraudulant or
stolen cheques or bills of exchange.
ii) In case of issue of overdraft or payment by mistake, such introduction protects the
bank from loss.
iii) If a cheque book is issued to fraudulant person / customer there is possibility of
commission of offences such as issue of cheques with fraudulant intention etc.
3.1.7. Nomination :
In case of death of an account holder, the problem of whom to pay the balance arises. Now-a-days
banks take nomination in writing in case of all accounts. In case of the death of an account holder
the bank pays the money to the nominee and closes the account. A nomination made by a depositor
in the prescribed manner will confer the nominee right to receive the amount of deposit from the
bank. The nominee shall be entitled to all the rights of the depositor. The depositor may amend or
cancel nomination in a prescribed manner.
Importance :
i) In case of death of account holder the problem of whom to pay the balance does not
arise.
ii) Bank can pay the money to the right person whose name is given as nominee in the
bank opening form.
iii) It confers the nominee's right to recieve the amount of deposit from the bank.
The word operate in relation to a bank account means that the customer deposits further sums of
3.2. Procedure for Operating Deposit Account :
money and cheques etc., into the bank and withdrawas money according to his need or
convenience. A special feature of banking business is that each and every transaction of money
with the customer is supported by a separate slip or document. A customer is, therefore, required to
make use of pay in slips for depositing money and withdrawal slip of cheques for withdrawing
money from the bank. The operation of deposit accounts involve the following procedure.
2) The objects of the company an, except in the case of trading corporations, the State or
States to whose territories the objects extendThe amount of share capital with which the company
proposes to be registered, and the division thereof into shares of a fixed amount.Articles of
Association:The 'Articles of Association' may be defined as the regulations framed for the internal
management of the company, and by which the objects and powers of the company are carried
into effect. A public company limited by shares may, or may not, register the 'Articles of
Association' alongwith the 'Memorandum of Association'. In case it does not register the Articles,
Tab!e - A of Schedule-I of the Company Act will automatically apply. However, private
companies limited by shares, an unlimited company or a company limited by guarantee, must
register its 'Articles of Association' alongwith the 'Memorandum of Association'. In the case
of a new company the banker should see whether the first directors are named in the 'Articles of
Association'. This will enable him to see, whether or not, the company has a legal entity.