Month: December 2020

Management Notes

Goods, Documents of Title to Goods

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Section 2 (4) of the sale of Goods Act defines a Document of title to goods as “A document used in the ordinary course of business as a proof of possession or control of goods authorizing or purporting to authorize either by endorsement or delivery, the possessor of the documents to transfer or to receive the goods thereby represented.”

Essential requirements of a Document of Title to Goods:

  • The mere possession of the document creates a right by law or trade or usage, to possess the goods represented by the Document.
  • Goods represented by documents are transferrable by endorsement and/or delivery of the document. The transferee can take the delivery of the goods in his own right.
  • Bill of Lading, Dock-warrant, Warehouse-keeper certificate, Railway receipt and delivery orders, etc. can be said as the documents of title to goods.

Risk in Advance against Document of Title to goods:

  1. Possibility of Fraud Dishonesty:
  • It may happen that the documents may be forged one or the quantity written within the documents may be fraudulently altered.
  • The shipping and railway authorities too do not testify such documents; they only testify the number of bags or packages received for the purpose of transportation.
  1. Not Negotiable Document:
  • These documents are not negotiable instruments like cheque, bill of exchange and promissory note.
  • Here banker cannot have better title, if the documents are forged or stolen one.
  1. Forgery of Endorsement:
  • “Forgery conveys no title”, therefore, in case of forged endorsement banker cannot assert his right of ownership.
  1. Right of stoppage in transit is with the unpaid seller:
  • If the buyer becomes insolvent before the goods are delivered to him, the unpaid seller can stop the goods in transit.

Precautions to be taken by the banker at the time of Advancing against the documents of title to goods:

  1. Integrity of the customer: In order to avoid risk of fraud the banker should take into account the character, capacity and capital of the customer. Banker should only accept the documents as security from honest, reliable and trustworthy customers.
  2. Certificate of Packing: Banker should always ask for the certificate to ascertain the content of the packages or bags.
  3. Supervise the Packing: the banker should depute a representative to supervise the packing.
  4. No Onerous Condition: If the document of the title to goods contains any onerous remark, it make it unfit to be a security. The banker should avoid to advance against such documents.
  5. Endorsement in Blank: The banker should get the document endorsed in blank, or the liability to pat the freights will be on the part of banker and not of the customers.
  6. Insurance against Risk: The goods must be insured against the risks like Fire and theft for its full value. The banker should ask for the insurance policy before granting advances against such documents.
  7. Special care in realizing the goods: It is advisable on the part of the banker, not to part with the security before repayment of advances.
  8. Other Precautions:
  • Proper examination to ensure the originality and recent origin of the document.
  • Insurer must be a reliable person or firm for the goods in the document.
  • To obtain a general stamped letter for the purpose of Hypothecation.

Documents of Title to Goods

1. Bill of Lading:

  • Meaning: “A document issued by the shipping company acknowledging the receipt of goods to be transported to a specified port. It also contains the conditions for such transportation of goods and full description of the goods, i.e., their markings and contents as declared by the consignor.”
  • Contents/Items in Bill of Lading:
  1. Names of Consignor and consignee
  2. Names of the ports of departure and destination
  3. Name of Vessel
  4. Date of departure and arrival
  5. List of goods being transferred
  6. Number of packages and kind of packaging
  7. Marks and numbers on packages.
  8. Weight of the goods
  9. Freight and amount
  10. Description of goods

  1. Warehouse keeper’s certificate (wharfinger’s Certificate or warehouse Certificate:

“Warehouse receipt means an acknowledgement in writing or in electronic form issued by the warehouse keeper or by his duly authorized representative.” • Warehouse means a store where goods are accepted temporarily for safe keeping. On the receipt of the goods a warehouse keeper gives a certificate known as warehouse keeper’s certificate.

  • Under the Bombay Warehouse Act 1959, the warehouse receipt shall be transferable by endorsement.
  1. Dock- warrant:

“A Dock- Warrant is the document issued by a dock company in exchange of goods received.”

Key points of Dock-warrant;

  1. The document possesses title to goods and the person named in can obtain the possession of the goods stored at the dock.
  2. It is not a receipt, but it is a warranty only.
  3. It can be transferred by endorsement and delivery.

Precautions in the case of Dock-Warrant:

  1. Before advancing against the dock-warrant, the banker must be satisfied with the integrity and the financial condition of the customer.
  2. It is to be verified that the dock company is having the authority of lien on goods or not.
  3. To prevent the unauthorized dealing of the goods, the banker should get himself registered as owner of the goods.

  1. Railway Receipt:

It is a document issued by the Railway authority acknowledging the receipt of the goods for the purpose of transportation to a space specified therein.

It cannot be transferred by endorsement and delivery.

Precautions to be taken by the banker in case of Railway Receipt:

  1. Documentary bill of well–established parties only should be accepted/discounted.
  2. To examine the authenticity of the railway receipt, banker should examine it carefully.
  3. The railway receipt should be endorsed in favour of bank. (bank should be made consignee by endorsement)
  4. There should not be any alteration in the receipt other than the competent authority.
  5. The goods must be covered by the insurance against fire, theft and damage in transit.
  6. The banker should accept only ‘Freight Paid’ railway receipt, as banker would ot be paying any freight due.
  7. To ensure the validity and the availability of the goods the date of the receipt should be checked carefully.
  8. Advance should not be granted in case if the receipt contains the information regarding the damaged goods or defective packing.
  9. Delivery Order:
  • Delivery order is an order issued by the owner of the goods to the warehouse keeper to deliver the goods to a particular person.
  • According to the Uniform Commercial Code, “A delivery order refers to an order given by an owner of a goods to a person in possession of the warehouse keeper directing that person to deliver the goods to a person named in the order.”
  • it is the document issued by the transporter or the carrier of the goods directly if they have their own office at the destination. The holder of the delivery order must either take delivery of the goods or obtain a receipt or warrant from warehouse keeper or get his title of goods registered in the books of the warehouse keeper.
Management Notes

Loans against Collateral Securities

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Loans Against Securities is available in the form of an overdraft facility which is pledged against financial securities like shares, units and bonds. Loan Against Shares/Bonds/Mutual Funds is basically a loan wherein you pledge the securities you have invested in as collateral against the loan amount. A Loan Against Securities is the best way to make your investments work harder and smarter for you.

Eligibility

When taking out a loan against securities, you are essentially borrowing from yourself. Having that said, still, need certain eligibility criteria to be met before the loan is sanctioned.

Take a look at some of the basic criteria.

  • You need to be an Indian resident
  • You can only qualify if you have attained 21 years of age
  • You must be either self-employed or a salaried employee with a regular income source

Required Documents

You need following documents to avail a loan against securities from Fullerton India.

  • Application form
  • All KYC documents including PAN Card, Identity Proof, Address Proof
  • Passport-sized photographs
  • Original Insurance Policy or Financial Security that you intend to pledge as collateral
  • Deed of Assignment

For Self-Employed Individuals and non-professionals:

  • Proof of business continuity by providing any one of these documents – Shop and Establishment Certificate/Tax registrations-VAT/Service tax/GST registrations
  • Proof of firm constitution via submission or either of these documents – MOA/AOA/Partnership Deed/GST Registration Certificate/Form 32 for knowing the latest directors
  • Audited financials for the last 3 years
  • Tax Audit Report for the last 3 years – Form 3CB + 3CD in case of proprietorship and partnerships and Form 3CA + 3CD in case of Companies
  • Latest VAT/GST/Service Tax returns for the current financial year
  • The breakup of all secured and unsecured loans
  • As on date List of Directors and Shareholding Pattern
  • Sanction letters for any existing loans with corresponding statements reflecting EMIs for the last year
  • Business Account Statements for the last 1 year

For Salaried Individuals:

  • Last 3 months salary slips
  • Form 16
  • Proof of Employment in case your present employer does not match with your Form 16 information
  • Last 6 months bank statements that reflect any existing EMI repayment and salary
Management Notes

Loans against Insurance Policies

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Loans against insurance policies can only be availed in case one pledges specific traditional policies like money back and endowment policies. Besides having a savings component, these policies also have a life cover component which makes it acceptable to banks. In order to avail a loan on an insurance policy, the policy must acquire a surrender value. The amount sanctioned for the loans is usually 85% to 90% of the policies surrender value.

Insurance policies are now being considered as valuable collaterals for banks after LIC of India confirmed that banks are the biggest lenders of personal loans. LIC apart, several other life insurers such as Edelweiss Tokio Life and ICICI Prudential Life in addition to many other banks including HDFC Bank, ICICI Bank and the State Bank of India grant loans to customers against insurance policies.

Loans against insurance policies are sanctioned only when traditional policies such as money back and endowment policies are pledged. These policies have life cover in addition to savings elements that make them acceptable to banks. Unit-linked insurance plans and term insurance covers are usually not accepted as collateral.

The surrender value must be acquired by the policies if the applicant is to gain eligibility or the loan. The policy must be assigned in favour of the insurer, and usually, the amount of money granted by insurance companies is 85% to 90% of the surrender value. The rate of interest charged by LIC is 10% and it has to be paid on a half-yearly basis.

The repayment tenures are very flexible and LIC also provides customers with a choice of making only interest payments, with a provision for the deduction of the loan amount from the claim amount when it is time to settle the loan. The repayment procedure and interest rates will differ based on the bank or lender from whom you wish to take out the loan. The interest rates, however, are comparatively lower than those charged by banks for secured loans. They are also considerably lower than rates associated with personal loans.

Why are Loans against Insurance policies gaining Prominence

Top up Loans are becoming increasingly popular among a large section of customers who seek personal finance services. The flexibility offered in terms of repayment in addition to the fact that the loan amount can be deducted from the claim amount has been attracting customers, especially those who are in financial turmoil. Even customers with relatively low credit scores find it to be a convenient option as the eligibility criteria for availing this kind of loan are fairly easy to meet. The loan is also sanctioned fairly quickly once the application is submitted, usually within seven days, and in case of the death of the policyholder during the tenure of the loan, the dependents wont be the only beneficiaries of the policy.

The bank or lender can choose to deduct the loan amount as well as interest from the proceeds. Customers are recommended to purchase term cover in order to protect the interests of their families. Based on the age, life insurance company and policy tenure, online term plans are less expensive options. Also, customers are advised to Secured Loans from their insurers instead of approaching banks to hand over their policy as collateral.

Customers who intend to utilise the whole amount they borrow should approach their insurer, but if funds are required on an on-and-off basis and the loan is viewed as a means to up their liquidity, they may consider approaching banks that provide overdraft facilities against policies.

Benefits of taking a Loan Against Insurance

High Loan Value

Take a loan up to Rs. 10 crore, to finance a diverse range of needs. Be it the purchase of new premises for your business, a merger with another organisation or buying a high-value property, this loan can help you attain various personal and professional goals with equal ease.

Dedicated Relationship Manager

Get access to a dedicated Relationship Manager who will offer 24-hour support, all days of the week. Hence, you need not travel long distances to the branch, to seek answers to your doubts.

Easy Repayments

By taking a Loan Against Insurance, make repayments easily. You also benefit from relaxed prepayment and foreclosure terms, so you don’t have to pay any additional charges.

Easy online application

With a loan Against Insurance, you can enjoy a simple online application process. Upon approval, the amount will be credited directly to your bank account.

Easy eligibility criteria

This loan features simple eligibility criteria. If you are a salaried or self-employed resident citizen of India, of 21 years of age or more, you can apply for this loan. However, you need to ensure that the value of your insurance is at least Rs.10 lakh, and that you have regular income.

Hassle-free access to your account

You can monitor and track all your loan-related details easily, and view interest statements, principal statements and account balance, by simply logging in to the customer portal with your allotted user ID and password.

Minimal documentation

You don’t have to take on the hassle of submitting several documents when applying for this loan. You can speed up the application process by submitting only basic documents such as ID proof, address proof, document proof of the insurance policy, and a passport size photograph.

Flexi Loan facility

A flexi-loan facility is best for individuals needing finance unexpectedly, or on a periodic basis. You can use this facility to make multiple withdrawals from your total sanctioned amount, and pay interest only on the amount utilised. You can also choose to pay interest-only EMIs and repay principal at the end of tenor.

Note: Age and Amount differ for each Loan Provider

Management Notes

Loans against Real Estate

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Salaried individuals

You can easily avail a Loan against Property from any floan provider if you meet the following criteria:

  • You should be between 33 to 58 years of age.
  • You should be a salaried employee in an MNC, a private company or the public sector.
  • You should be a resident of India.

Self-employed individuals

You are eligible for a Loan against Property for Self Employed with quick loan disbursal within 4 days if you meet the following criteria

  • You should be between 25 to 70 years of age.
  • You should be a self-employed individual with a regular source of income
  • You should be a resident of India residing in the following cities

Note: Age Subject to change

Management Notes

Precautions to be taken while Advancing Loans Against Securities

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On granting advances certain precautions are necessary.

Purpose of the loan: The repayment mostly depends upon the purpose for which the loan is obtained. To a borrower who is engaged in speculation, the chances of loss are greater. As such the loss will have to be shared by the banker. So, advances should not be allowed for speculative purposes.

The integrity of the borrower: The banker should ascertain that the borrower is trustworthy, honest and a man of sufficient experience in his business. Such a precaution is necessary to avoid fraudulent dealings. For example, when a customer offers 100 bags of paddy, as security it is impossible to inspect each and every bag. He has to rely on the honesty of the borrower.

Further, he should see whether the borrower has adequate practical experience in his business. An experienced businessman is conversant with risks and the profitable areas of the business. An inexperienced one may incur a loss and be a potential risk.

Nature of the commodity: The banker should have a working knowledge of some of the special features of the commodities offered as security. The commodities which could be disposed of easily, the quality of goods which are not subject to deterioration and price of goods which are almost steady should be preferred by a banker as security.

Knowledge of different markets: A banker should be conversant with the markets for different commodities. This is essential to regulate the margin for the goods according to the price prevailing in the market. Failure to have knowledge of the market will put him at the mercy of the borrower who may inflate the value to get more advances.

Ascertain the title of owner: Before accepting goods as security, the banker should ascertain the title of the borrower to the goods by inspection of the original invoice or cash memos.

Proper storage: The banker should select godowns which are pucca built and safe in every way for the storage of goods. The roof and flooring should be situated near the bank so that the bank’s representative can have direct and free access to them at any time. All goods stored in bags or bales should be so arranged as to facilitate inspection easily. A careful selection should be made of go down keeper and watchmen. They should be honest and possess a high sense of responsibility.

Creation of charge by Pledge and Hypothecation: A banker may create a charge over the goods either by pledge or hypothecation. In the pledge, the goods or title thereto is delivered to the banker. In hypothecation, neither possession nor goods are transferred to the banker. So, a written undertaking from the borrower should be obtained that the goods are not charged to any bank and will not be charged till the agreement continues with the bank.

Rented go down: If the borrower makes use of a rented go down, the bank must obtain an undertaking from the owner of the building stating that the bank has a prior lien. This is necessary because at times the building owner may have a prior claim for rent due and the position of the banker will be at stake.

Insurance up to the full market value: Goods should be insured against all known risks up to their full market value. The relative insurance policies should be held by the bank.

Management Notes

Companies Bank Account

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One of the first steps undertaken after incorporating a private limited company is opening of the current account in the name of the Company. A company can open one or more current account in any bank and is required to transact business. The procedure for opening private limited company bank or current account along with the documents required.

Current Account for Private Limited Company

Opening a current account for a private limited company is easier than the opening of the current account for a sole proprietorship firm as a company is a registered legal entity by law. Therefore, once a company is incorporated, a bank account can be opened in the name of the business with just a few documents, unlike proprietorship wherein the existence of the sole proprietorship must be established through various tax registrations. As per Reserve Bank of India’s KYC norms, the following are the documents necessary to open a current account in the name of the Company:

  • Certificate of incorporation and Memorandum & Articles of Association;
  • Resolution of the Board of Directors to open an account and identification of those who have authority to operate the account;
  • Power of Attorney granted to its managers, officers or employees to transact business on its behalf (if applicable);
  • Copy of PAN allotment letter;
  • Copy of the telephone bill;

Documents Required for Opening Company Current Account

Based on the above RBI KYC norms, various banks have formulated procedures and list of documents required to open a company current account. The following is an extensive list of documents mandatory for opening a current account in the name of the Company:

  • Certificate of Incorporation of Company
  • Board resolution for opening a current account
  • Memorandum of Association (MOA) & Articles of Association (AOA)
  • Latest list of Directors as per the bank’s format
  • Registered office address proof of the company (Only required if different from the address mentioned in the Certificate of Incorporation)
  • Identity proof of all Directors / Authorized Signatories
    • PAN card of Director
    • Passport
    • Voter Identity Card
    • Driving License
    • Aadhaar card issued by Unique Identification Authority of India (UIDAI)
    • Senior Citizen Card issued by State/Central Govt
    • Fisherman Identity card issued by State/Central Government
    • Arms License
  • Proof of appointment of current director/s (in case Board of Directors has changed over time)
  • Proof of resignation of Director/s (in case Board of Directors has changed over time)
  • PAN Card of the company or PAN Card Application Acknowledgement (for New Companies which are less than 90 days)
  • Share Holding Pattern of the company as per the bank’s format
Management Notes

Definition of Banker and Customer

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“Banker” and “Customer” are foundational, each carrying specific implications for rights, responsibilities, and expectations.

Definition of a Banker

A banker, in the traditional sense, is an individual or entity that is engaged in the business of banking. This involves accepting deposits from the public, granting loans for various purposes, and offering financial services that range from investment advice to asset management. Bankers operate within institutions such as banks, credit unions, or savings and loan associations.

The role of a banker extends beyond mere transaction processing; they act as financial intermediaries, advisors, and risk assessors. They play a critical role in the economy by facilitating the flow of capital, providing liquidity, and managing risk through diversified loan portfolios. Their decisions can influence lending rates, investment strategies, and even economic stability.

Definition of a Customer

A customer, in the banking context, refers to an individual or entity that engages the services offered by a bank. Customers can range from private individuals to businesses and other organizations that maintain deposits, borrow funds, or utilize other financial services provided by the bank. The relationship between a customer and a banker is contractual, governed by the terms and conditions stipulated in the opening and operation of an account or service.

Customers expect certain standards from their banks, including the safeguarding of deposited funds, the provision of fair and reasonable access to credit, and the respectful handling of their personal information. They rely on banks to provide financial services that are secure, efficient, and in line with their economic needs.

Legal Framework

The relationship between a banker and a customer is fundamentally a legal one, predicated on both statutory and common law. In many jurisdictions, this relationship is defined and regulated by a combination of banking regulations, financial oversight, and consumer protection laws.

At its core, the legal relationship is one of debtor and creditor. When a customer deposits money into a bank account, the bank typically becomes a debtor to the customer; conversely, when a customer borrows money, the customer becomes the debtor. This dynamic illustrates the fluidity and reciprocal nature of the banking relationship.

Rights and Responsibilities

Banker’s Rights and Responsibilities

  • Confidentiality:

Bankers are required to keep customer information confidential, disclosing it only in circumstances that are legally mandated or where the customer has given permission.

  • Duty of Care:

Bankers must exercise reasonable care and skill in their dealings with customers. This includes making prudent decisions in the management of accounts and providing advice.

  • Compliance:

Bankers are bound to comply with all relevant laws and regulations, including those related to anti-money laundering (AML), know your customer (KYC) protocols, and financial reporting.

Customer’s Rights and Responsibilities

  • Right to Fair Treatment:

Customers have the right to be treated fairly and ethically by their banks, which includes clear communication of terms, fees, and access to dispute resolution mechanisms.

  • Responsibility to Provide Accurate Information:

Customers must provide accurate and timely information to their banks, including changes in their financial status or personal details.

  • Obligation to Comply with Terms:

Customers are obliged to adhere to the terms and conditions of any accounts or services they use, which includes the timely repayment of loans.

Modern Dynamics

The evolution of technology has dramatically transformed the banker-customer relationship. Digital banking platforms, mobile apps, and online services have increased accessibility, allowing customers to perform many banking activities independently, without direct interaction with a banker. This shift has implications for the traditional roles of both parties. Bankers are now more focused on managing larger portfolios, developing fintech solutions, and maintaining cybersecurity. Customers, on the other hand, enjoy greater autonomy and convenience but also face new risks related to data security and electronic fraud.

Management Notes

General and Special Features of Relationship

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The opening of an account with a banker, and the banker’s acceptance for such opening of account gives rise to a ‘contractual relationship‘. The relationship between the banker and customer is, generally, like a ‘Commercial Transaction‘. The relationship between a banker and a customer is the foundation on which mutual duties, liabilities and privileges are being built. An understanding of these terms is essential.

Debtor-Creditor Relationship: When a customer (debtor) deposits money with a bank (creditor), the customer becomes a lender and the bank becomes borrower. As such, the relationship is that of a debtor and creditor. It is a general relationship between banker and his customer. Some important points to note in Debtor-Creditor Relationship are,

  • The banker is the debtor of the customer with the obligation to honor his customer’s cheque drawn upon his balance.
  • When the banker lends money to his customer, the customer becomes the debtor and the banker, the creditor.

Banker as an agent: Generally, bankers render agency services for their customers. They pay insurance premium, electricity bills, taxes, etc. They collect interest on investments, dividends on shares, collect cheques, etc. Bankers act as per the ‘Standing instructions’ of their customers. For these services, the banker charges a nominal commission from the customer. The banker, by providing these services acts as an agent and the customer who gives the standing instructions, acts as a principal. Hence, the relation of banker and customer is that of agent and principal as far as these services are concerned.

Creditor (i.e., customer) demanding payment:  Under a commercial debt, the liability of the debt arises only at the maturity of the debt i.e., on the due date. The debtor i.e., the banker is to pay the debt on the maturity date. The customer must demand in writing for repayment, only then, will the payment be made to the customer.

Banker as a bailee: Bailee is one who posses goods or articles on behalf of the owner (called bailor) of the goods. According to the Sec. 148 of Indian Contract Act. a bailment is the delivery of goods by one person to another for some purpose, upon a contract, that they shall, when the purpose is accomplished, be returned or otherwise deposited off according to the directions of the person delivering them. In other words, when customer leaves with the banker some valuables for safe custody in the safe deposit vaults or lockers, the banker performs the functions of the bailee and the relationship between the banker and the customer in such a case is that of a bailee and the bailor.

Banker as a Trustee: A trust is a relation between two persons by virtue of which one of them (called trustee) holds property vested in him for the benefit of the other (called beneficiary). For example. if a customer deposits securities or other valuables with the banker for safe custody, he acts as a trustee of his customer. The customer continues to be the owner of the valuables deposited with the banker. The legal position of the banker as a trustee differs from that of a debtor of his customer. In the event of bank’s liquidation, such trust properties held by the banker are not available for the distribution to general creditors of the bank.

Proper place and time of demand: The demand by the creditor (i.e., depositor) must be made at the proper place and in proper time. A commercial bank has a large number of branches. His / her demand for withdrawal of amount from the deposited funds must be made at the branch where the account has been opened in his / her name during the business hours.

Not time barred: The deposits with a bank are not time – barred on the expiry of three years as the case with ordinary debt. The Law of Limitation Act does not apply to a banking debt.

Bank as an executor: Where a customer appoints a banker as his executor and leaves property through a will, the banker has to administer the property according to the terms of the will after the death of such customer. Where no will is written by the deceased, the court may appoint the banker as administrator. In such a case the banker has to distribute the property of the deceased according to the suggestion laws applicable.

Banker as an Attorney: The customer may grant a special power of attorney to his banker to transact certain dealings on his behalf. The banker is the attorney of the customer in such cases.

Banker has a right to combine accounts: If a customer has two or more accounts in his / her name at the same branch and in the same capacity, a banker as a debtor can exercise his right to combine those accounts into one.

A banker has no right to close the account: A banker as a debtor has no right to close the account of its creditor (depositor-customer) at any time without the prior permission from him / her.

A banker as a creditor: If a banker disburses loan and overdraft, it assumes the role of a creditor and the customer assumes the role of a debtor.

The following are the special relationships between banker and customer :

  • Banker’s obligation to honor the cheques,
  • Banker’s lien
  • Banker’s duty to maintain secrecy of customer’s accounts and
  • His right in respect of combining accounts
  • Banker’s Right to Set-off

Explanation

  1. Obligation to honor cheques: According to Sec. 31 of the Negotiable Instruments Act, 1881, every banker must honor the cheques drawn on it by a customer, provided:
  • The customer has sufficient amount of balance to his account with the banker
  • the funds are properly applicable to the payment of such cheque
  • the banker has been duly required to pay
  • the cheque has been presented to the banker within a reasonable time (i.e., within six months) after the apparent date and of its issue
  • no prohibition order of the court or any other competent authority (e.g., income tax) is standing against the account of the customer.
  1. Banker’s Lien: A lien may be defined as the right to retain property belonging to a debtor until he is discharged of his debt due to the retainer (creator) of the property. The banker’s lien refers to the right of banker over such of his customer’s securities as may come into his possession in the ordinary course of business. According to Sec.171 of the Contract Act, a banker has a general lien on cash, cheques, bills of exchange and securities deposited with him.

Conditions required for the banker to exercise general lien

  • The securities and goods must come to his hands in his capacity as a banker.
  • The banker should have obtained the possession of the securities and goods lawfully.
  • The goods or securities should not have been entrusted to the bank for a specific or special purpose.
  • The goods and securities, held by the bank shall stand in the name of borrower only and not jointly with others.
  • There must be no arrangement either express or implied that is inconsistent with the banker’s right to lien.
  1. Secrecy of Customer’s Accounts: It is an obligation on the part of a banker to maintain secrecy about the customer’s accounts. The banker must not disclose any information pertaining to the customer to anyone. But there are certain exceptions. They are,
  • Where such disclosure is required by law
  • Where such disclosure is in public interest to disclose
  • Where the interest of the bank require such disclosure
  • Where disclosure is made by the express or implied consent of the customer; and
  • Where such disclosure is permissible on account of banking practices.
  1. Banker’s Right to Combine Accounts: The banker has a right to combine several accounts kept by the customer at the same branch or different branches of the bank (Garnet V. Mc Kervan). The banker however, cannot combine the personal account of a customer with a joint account of a customer and some other person. Customer has no right to treat two accounts as one.
  2. Banker’s Right to Set-Off: The banker can adjust a debit balance to a customer’s account with any balance standing to the customer’s credit. While doing so, the banker gives due notice to the customer. To exercise the right of set-off the following conditions should be fulfilled;
  • The debts are certain and are due. The right cannot be exercised against future debt / or contingent debts.
  • The debit and credit balances are of the same person in the same capacity.
  • There should not be any express or implied agreement to the contrary.
  1. Banker’s Right of Appropriation: As a part of ordinary banking business, the banker receives deposits of money from his customer. The customer has the right to dictate as to which account a particular amount is to be credited where he has more than one account and / or loan account. In case the customer has not appropriated, i.e., not indicated his account to which the said amount is to be credited, the creditor is at liberty to apply the payment to any debt owed by the debtor including to a debt barred by limitation.
  2. Banker has a right to claim incidental charges: Every banker has a right to claim incidental charges on unremunerative accounts of a customer, e.g., collection charges, remittance charges for drafts, etc.

The relationship would come to an end under the following circumstances or conditions.

  • If the customer dies;
  • If the customer becomes an insolvent;
  • If the customer becomes an insane;
  • If the customer closes his account;
  • If the banker closes the customer’s account
  • If the court orders the bank to close the customer’s account

Management Notes

Know Your Customer (KYC) Norms for Banking Services, Reasons, Documents, Challenges

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Know Your Customer (KYC) norms are mandatory guidelines issued by the Reserve Bank of India (RBI) to prevent money laundering, fraud, and financing of illegal activities. Under KYC, banks are required to verify the identity, address, and financial background of their customers before opening accounts or providing banking services. Customers must submit documents such as Aadhaar, PAN, Passport, Voter ID, or Driving License for verification. KYC ensures transparency in financial transactions, strengthens customer confidence, and helps in monitoring suspicious activities. It is also essential for digital banking, mobile wallets, and online transactions. Regular KYC updates are required to maintain account activity and regulatory compliance in India.

Reasons of Know Your Customer (KYC) Norms:

  • Preventing Money Laundering

KYC norms help banks verify the identity of customers, ensuring that financial transactions are legitimate. By collecting accurate personal and financial information, banks can detect and prevent money laundering activities, where illegally earned money is funneled through the banking system to appear legal. This protects the financial system from misuse, reduces the risk of criminal activities, and ensures compliance with Indian laws such as the Prevention of Money Laundering Act (PMLA), 2002.

  • Preventing Fraud and Illegal Activities

KYC helps banks identify and authenticate customers, minimizing the risk of fraudulent accounts and identity theft. It ensures that services are provided to genuine individuals or entities and prevents misuse of banking facilities for terrorist financing, scams, or illegal transactions. By maintaining verified records, banks can track suspicious activities and take timely action. KYC strengthens trust between banks and customers, ensuring that the Indian banking system remains safe, transparent, and secure for all users.

  • Regulatory Compliance

KYC is mandatory under RBI and government regulations, making it essential for banks to comply with the law. Adhering to KYC norms ensures that banks follow legal and statutory requirements, avoiding penalties, legal actions, or reputational damage. It also helps in implementing government financial schemes and monitoring large transactions. Proper KYC documentation ensures transparency, accountability, and adherence to India’s financial regulations, thereby protecting both banks and customers from legal and operational risks.

  • Enhancing Customer Transparency

KYC norms improve transparency by maintaining accurate customer records, including identity, address, and financial background. This allows banks to monitor account activity, detect unusual transactions, and provide tailored financial services. Transparency builds trust, ensures responsible banking behavior, and helps customers access loans, investments, and other banking products efficiently. In India, accurate KYC records also facilitate government initiatives like direct benefit transfers, financial inclusion programs, and digital payment adoption.

  • Supporting Financial Inclusion

KYC norms help bring unbanked and underbanked populations into the formal financial system. By verifying identities and creating proper records, banks can provide access to savings accounts, credit, insurance, and digital payment services. KYC ensures that financial inclusion programs, such as Pradhan Mantri Jan Dhan Yojana, reach the intended beneficiaries. It empowers individuals to participate in the economy safely and securely, contributing to equitable growth and strengthening India’s overall banking ecosystem.

Documents for Know Your Customer (KYC) Norms:

  • Proof of Identity (POI)

Banks require a valid Proof of Identity to verify the customer’s identity. Acceptable documents include Aadhaar card, PAN card, passport, voter ID, or driving license. This ensures that accounts are opened by genuine individuals and prevents fraud, money laundering, and misuse of banking services.

  • Proof of Address (POA)

A Proof of Address verifies the residential location of the customer. Documents like utility bills, Aadhaar, passport, voter ID, or rental agreement are accepted. Accurate address verification helps banks monitor transactions, maintain customer records, and ensure compliance with RBI regulations.

  • Photograph

Banks require a recent passport-size photograph of the customer. The photograph is attached to account records, KYC forms, and identity documents. It ensures proper identification during transactions, enhances security, and helps prevent impersonation or fraudulent use of banking services.

  • PAN Card (Permanent Account Number)

The PAN card is mandatory for financial transactions above a specified limit. It helps banks track taxable transactions, prevent tax evasion, and comply with Income Tax and RBI regulations. PAN also serves as both identity and proof of address in many banking services.

  • Other Supporting Documents

Depending on the account type or purpose, banks may require employment proof, business registration, or income proof. These documents help in credit assessment, loan approvals, and maintaining detailed KYC records. Proper documentation ensures transparency, compliance, and secure banking operations in India.

Challenges of Know Your Customer (KYC) Norms:

  • High Operational Costs

Implementing KYC norms requires banks to invest heavily in staff, infrastructure, software, and verification processes. Collecting, verifying, and updating documents for millions of customers is resource-intensive. Maintaining secure storage of sensitive information adds to operational costs. These expenses are particularly challenging for small and regional banks. While KYC ensures regulatory compliance, the financial burden can impact profitability. Balancing efficiency, cost, and compliance is a constant challenge for Indian banks, especially in reaching rural or low-income customers where documentation may be incomplete or difficult to verify.

  • Customer Convenience and Resistance

Many customers perceive KYC procedures as time-consuming, complicated, or intrusive. They may resist providing multiple documents or updating information regularly. This can delay account opening, loans, or other banking services. In rural areas, low literacy levels and limited access to identity documents further complicate compliance. Banks face challenges in educating customers about KYC requirements and ensuring smooth onboarding. Ensuring customer convenience while maintaining strict regulatory standards is a delicate balance, especially in India, where a large portion of the population is new to formal banking.

  • Risk of Data Breach

KYC requires storing sensitive personal information like Aadhaar numbers, PAN, and financial details. If not securely managed, this data is vulnerable to cyberattacks, hacking, or internal misuse. Banks must invest in robust cybersecurity infrastructure, encryption, and regular audits to prevent breaches. Any compromise can lead to fraud, identity theft, and legal repercussions. Protecting customer data while complying with KYC norms is a major challenge in India’s rapidly digitizing banking environment. Maintaining trust and ensuring data privacy is critical to the success of KYC implementation.

  • Incomplete or Fake Documentation

Customers sometimes submit incomplete, outdated, or forged documents, making verification difficult. Rural and low-income populations may lack formal identity or address proofs, delaying compliance. Banks must adopt additional verification methods, like in-person verification or digital authentication, which increase costs and time. Fake or manipulated documents also pose legal and financial risks. Ensuring authenticity while maintaining efficiency is a key challenge in India, where varying literacy levels and documentation availability complicate strict adherence to KYC norms.

  • Frequent Regulatory Changes

KYC regulations in India are updated regularly by the RBI, SEBI, and government authorities to prevent fraud and align with international standards. Banks must continuously adapt systems, train staff, and update processes to comply. Frequent changes can lead to operational challenges, increased costs, and confusion among customers. Ensuring seamless implementation while adhering to updated norms is difficult, especially for smaller banks and rural branches. Effective monitoring and staff awareness are essential to maintain compliance and avoid penalties or legal issues.

  • Digital Divide Challenges

With the rise of digital KYC for online banking, mobile wallets, and UPI, customers without smartphones, internet access, or digital literacy face difficulties completing verification. Banks must provide alternative offline methods, which are slower and resource-intensive. Bridging the digital divide while implementing KYC efficiently is a major challenge in India, especially in rural and semi-urban areas. Ensuring inclusivity without compromising regulatory compliance is critical for financial inclusion and trust in the banking system.

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